RBS and Lloyds may face credit-ratings cut

The tougher regulatory backdrop in the UK could trigger a ratings cut for up to 14 financial institutions, including the Royal Bank of Scotland and its part-nationalised peer, Lloyds, the credit ratings agency Moody's warned yesterday.

In a sweeping move, the agency put Lloyds, RBS and 12 other lenders including Santander UK on review for a possible ratings downgrade. But Moody's said that its caution was not due to questions about their financial health or that of the Government's, but on indications that if things were to go wrong again the bailouts seen during the credit crunch may not be as forthcoming. Ratings cuts could drive up the cost of funding for the banks, as investors take a dimmer view of their credit worthiness.

"The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the Government," Moody's analyst Elisabeth Rudman said.

"It has been initiated in response to ongoing guidance from UK authorities (the Bank of England, the Financial Services Authority and the Treasury) that banks that fail in the future should not expect capital injections from the public purse."

Others placed on review included Bank of Ireland's UK arm, the Co-operative Bank, Coventry Building Society, Newcastle Building Society, Norwich and Peterborough Building Society, Nottingham Building Society, Principality Building Society, Skipton Building Society, West Bromwich Building Society, Yorkshire Building Society and Clydesdale Bank.

The agency also changed its outlook for Barclays to negative from stable, and affirmed the negative outlook on HSBC to reflect regulatory moves that would see senior debt holders share the burden in the event of problems. But the two were not put on review for a possible downgrade.

The review will take about three months, Moody's said. The agency also said it expected to factor in some level of support in the ratings for the major banks, because "regulators do not currently have all the tools to resolve such institutions without causing financial instability". Responding to the move, Joseph Dickerson, an analyst at Execution Noble, highlighted that "the capital position of the UK banks is among the best in Europe".

He added: "The broader message... is that the cost of senior debt is likely to rise as burden-sharing elements make their way into structures from 2013 onward."