Moody's sees no early end to UK banks' bad debts

THE BRITISH clearing banks' bad debt charges will not begin to return to normal until the second half of next year, according to a study released yesterday by Moody's, the New York credit rating agency.

Moody's cast a shadow over the results season, which starts next week, by saying the clearers would suffer protracted losses because of high exposure to property and 'stubborn' recession in the UK.

The combination would leave bad debt charges high throughout this year and well into 1993, said the agency, which assigns ratings to the bond issues of the main British banks as a guide to investors. The ratings have a significant impact on the interest rates at which banks can borrow in the markets.

Lawrence Pellecchio, the Moody's analyst who wrote the report, hinted at further downgradings of credit ratings of some clearers, but said these would not be large. The weakness of the clearers' earnings may be of greater concern for equity investors than fixed-income investors, he added.

Standard & Poor's, the rival credit rating agency, has downgraded Barclays and NatWest to two ranks below the top level status of triple-A, but Moody's has dropped them only one level.

The report hinted they may not be demoted further, saying there was a sound long-term credit outlook for the large UK banks.

However, the agency also believed there had been a long-term change in the banking industry, leading to greater competition. This had developed alongside the short-term cycle caused by the recession.

So unlike past recessions, the end of the current downturn may not lead to a restoration of triple- A status. Mr Pellecchio said the UK was overbanked, and would remain intensely competitive.

Bank managements would increasingly move into other financial service markets such as insurance. He also saw more potential for consolidation. Smaller building societies may combine to create 'formidable rivals' for the large banks.

The British banks were fundamentally strong, so Mr Pellecchio did not believe their credit strength would be seriously compromised by the problems ahead, which included the need to cut costs.

They also had an advantage over US banks. Despite heavy property lending, they had been less involved in loans against specific projects. Foreign banks had been responsible for much of the project lending in the UK.