Fitch cuts Lloyds TSB and RBS credit ratings

Ratings agency Fitch cut the credit score of bailed-out lenders Lloyds TSB and Royal Bank of Scotland today, saying the Government had become less likely to give them further financial support.

Fitch's downgrade of Lloyds and RBS followed a similar move last week from rival Moody's, which also cited a reduced likelihood of additional state assistance for the banking sector.

"Support dynamics are changing in the UK," Fitch said.

"The banking system is not only large relative to the UK economy, but there is also more advanced political will to reduce the implicit support for the country's banks."

Rating agencies had been widely expected to downgrade British banks amid signs the Government's commitment to supporting them has waned.

The Independent Commission on Banking's recommendation in September that banks ring-fence their retail units from riskier investment banking operations and hold more capital overall, has also been seen as negative for their credit rating.

Lloyds and RBS are 41 per cent and 83 per cent state-owned, respectively, after receiving billions of pounds aid during the 2008 financial crisis.

Fitch also placed rival bank Barclays on "rating watch negative," signalling it too might be downgraded, citing exposure to volatile, market-sensitive business activities.

RBS and Lloyds shares were down 3.8 per cent and 2.5 per cent respectively.

Fitch's decision - which led to further falls for banking shares on the London Stock Exchange - reflects moves by the Government to shift risk away from taxpayers and on to creditors but could see the cost of borrowing for the affected financial institutions increase.

But Fitch said Lloyds and RBS had shown steady improvement in their risk profiles and prospects over the past two years and they should achieve higher ratings in the medium term.

Lloyds, which is 40.2% owned by the taxpayer, said last week that it did not expect Moody's decision to hit funding costs, while RBS, which is 83% state-owned, said it was "disappointed" by the move.

Manthos Delis, analyst from Cass Business School, said: "There is always a possibility that a forecast becomes self-fulfilling and spreads to the economy.

"We must understand that a downgrade by one basis point should not imply grave danger for British banks, but it should be taken as a wake-up call for action."

Reuters