Share prices slide after credit-rating agency Moody's downgrades 12 UK banks.
Leading credit-rating agency Moody's (NYSE: MCO.US) has downgraded the credit ratings of a dozen UK banks and financial firms. Predictably, bank share prices fell following this announcement.
The thumbs-down from Moody's
Moody's reason for lowering these firms' credit ratings was 'due to the withdrawal of implied Government support from the banking sector'.
In other words, without explicit, systemic state support for the likes of Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), Moody's considers these banks' debts and bonds to be less secure than before.
However, Moody's left the ratings of Barclays (LSE: BARC) and HSBC (LSE: HSBA) untouched. Here's how bank share prices fell following this news (from steepest to shallowest fall):
| Bank | Share price (p) | % fall |
|---|
| Royal Bank of Scotland | 23.5 | 3.5 |
| Lloyds Banking Group | 34.7 | 3.3 |
| Barclays | 164.5 | 2.0 |
| HSBC | 506.7 | 0.6 |
RBS, which is 83% taxpayer-owned, had its rating cut by two notches, as did Nationwide BS. Lloyds (41% taxpayer-owned) lost one notch, as did Santander UK.
As well as these two listed banks, Moody's downgraded Nationwide BS and Santander UK, the British arm of leading Spanish bank Banco Santander (NYSE: BNC.US).
Too big to fail?
This suggests that, three years after the collapse of Lehman Brothers in September 2008, Moody's believes the UK government is no longer willing to offer a blanket guarantee to British banks.
In some ways, this is good news, because banks' risks should fall squarely on their shareholders and bondholders and not British taxpayers. If the UK government is moving away from supporting 'too big to fail' banks, then this can be seen as a good thing.
Indeed, it may discourage the bigger banks to accelerate their ongoing programmes to reduce risk and leverage by increasing capital ratios and shrinking balance sheets. This 're-sizing and re-risking' of banks should help to lower the risk of future public bailouts, which is an important step for both banks and the nation.
Three tiers of support
Moody's placed British banks and building societies into one of three categories, as follows:
| High likelihood of support |
| Barclays, HSBC, Lloyds, RBS |
| Moderate or high likelihood of support |
Clydesdale Bank, Co-operative Bank,
Nationwide BS ,Santander UK |
| Low or no likelihood of support |
Newcastle BS, Norwich & Peterborough BS,
Nottingham BS, Principality BS, Skipton BS,
West Bromwich BS, Yorkshire BS |
RBS hits back
In many ways, British's biggest banks are much less likely to need capital injections than their European counterparts. This is because they are less exposed to dodgy euro-zone bonds from the likes of Greece and Portugal.
Hence, RBS came out with all guns blazing. In a stock-market announcement this morning, the bank argued that it "has made significant progress in strengthening its credit profile since 2008."
RBS stated that, from 2008 to mid-2011, its loan-to-deposit ratio had fallen from 154% to 114%, and liquidity reserves of £155 billion exceed short-term wholesale funding of £148 billion. Also, non-core assets have fallen by 57% to £113 billion and its Core Tier 1 capital ratio has climbed to 11.1%.
RBS goes on to state that "both Standard & Poor's and Fitch Rating Services have upgraded RBS's stand-alone rating by two notches in the past 18 months."
Even so, RBS's balance sheet is clearly weaker than, say, HSBC's, which is why the global bank enjoys a far higher credit rating than RBS!
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