Moody's turns negative on UK bank sector

Moody's has stamped a negative credit outlook on the UK banking sector, warning that it faces major challenges as the economy hits a downturn.

Britain's banks face pressures from rising bad debts, lower lending volumes and falling profitability over the next 12 to 18 months, the credit rating agency says in a report today.

A sharp slowdown in personal consumption and falling house prices will be at the heart of the problems, Moody's said.

The UK joins Spain in receiving a negative outlook. By contrast, Italy's banks are regarded as "stable".

"Certainly the UK is fairly high up in the list of systems where we think there are more stresses coming forward," said Elisabeth Rudman, the senior credit officer at Moody's.

The credit crisis is continuing to cause bit write-downs of structured credit exposures for bigger UK banks and funding strain for smaller lenders, Moody's said. The agency warned that banks with thin capital ratios were ill-prepared for the tougher times ahead.

Royal Bank of Scotland, HBOS and Bradford & Bingley have all announced rights issues to shore up their depleted capital buffers against losses.

Moody's singled out Barclays as the bank left exposed if it did not raise capital. Barclays said it could end the first half of this year with a core tier one capital ratio below 5 per cent compared with the ratios of more than 6 per cent targeted by RBS and HBOS.

"Barclays may choose for their own reasons to say that is a capital level they wish to go forward with but we think it would give them more flexibility if they had a higher capital level," Ms Rudman said.

Moody's has cut ratings on nine UK lenders, including Barclays and Alliance & Leicester. Ms Rudman said the agency could make further ratings cuts this year.