Moody's expects £130bn in further losses for UK banks

Discussion in 'Wall St. News' started by ASusilovic, Sep 14, 2009.

  1. This may put a bit of a dent in the recent rally in London - Moody’s said on Monday that UK banks still have a way to go as far as losses are concerned.

    Britain’s banks are likely to record losses of at least £130bn, on top of the £110bn they’ve booked since 2007, the rating agency said. Here’s the statement in full, any emphasis FT Alphaville’s:

    London, 14 September 2009 — The fundamental credit outlook for the UK banking system remains negative, reflecting the weakness of the domestic macroeconomic environment and its likely continuing effect on the UK banks’ financial performance, says Moody’s Investors Service in its new Banking System Outlook on the UK.

    Moody’s negative outlook for the UK banking system expresses the rating agency’s view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.

    Moody’s expects the sustained weakness of the UK macroeconomic environment to continue to feed through into higher loan arrears with ensuing pressure on profitability and capital from higher loan loss provisions and the raised cost of funding, as well as uncertainty regarding the effect of certain regulatory developments.

    “Since the start of the global financial sector crisis in 2007, the UK banking sector has absorbed losses of around GBP110 billion on loans and securities by the end of 2008, and has raised or arranged around GBP120 billion of new capital by the middle of 2009. Moody’s current rating levels incorporate its estimates of further losses of around GBP130 billion from the loan books and securities portfolios of rated UK financial institutions, on the basis of its assumptions about the performance of key asset classes, earnings and available capital,” says Elisabeth Rudman, Moody’s lead analyst for the UK banking system.

    These developments have underpinned the change in the weighted average bank financial strength rating (BFSR) of rated UK banks to C- from B over the past 12 months and the weighted average senior debt and deposit rating to Aa3 from Aa1. The ongoing pressure on earnings and capital remains the rating agency’s key analytical focus for UK financial institutions. However, Moody’s does not expect a large number of further rating downgrades in the UK over the next 12-18 months, given that it has already incorporated estimates of these risks into its ratings.

    “Importantly, government support has provided a certain amount of stability to the banking sector through large-scale capital injections, credit guarantees and support for depositors. This has resulted in relatively little change to senior debt and deposit ratings, which Moody’s expects to remain stable throughout the crisis,” explains Ms. Rudman.

    However, Moody’s says that the banks will continue to face many challenges over the next couple of years as they work their way through the problems on their balance sheets. Apart from the asset quality problems and pressure on capital, UK banks face pressures on their profitability (due to the higher cost of deposits and wholesale funding) and depressed revenues. Moreover, Moody’s expects regulation and government intervention to remain a key driver for developments in the UK banking sector over the next one-to-three years. EU requirements could potentially lead to significant changes in the franchises of large banks that have received state aid.

    As a result, Moody’s may need to adjust the ratings of individual institutions that perform worse than under its base-case scenario. The rating agency adds that consolidation, particularly in the building society sector, could drive further rating changes. “Moody’s is already taking a conservative view on future developments in the economy,” says Ms. Rudman. “However, in the event of the downturn becoming significantly worse than its base-case scenario (which incorporates a 40% peak-to-trough house price fall, 60% peak-to-trough commercial property price fall and GDP contraction of 3%-4% in 2009), Moody’s could implement further downgrades of the BFSRs and possibly also the senior debt ratings of some institutions,” Ms. Rudman cautions.

    Furthermore, Moody’s says that any explicit or implicit reduction of the currently extraordinarily high probability of state support, at a time when the intrinsic strength of banks is still low, may result in Moody’s further downgrading banks’ senior debt and deposit ratings.
  2. Mvic


    Translation: Darling/King, we have you by the short hairs, don't even think of pulling back now.
  3. Lethn


    Is Moody American? If so I'm calling him out on BS because we haven't done any bailouts since there was a rage over it when they happened.

    We're probably going to have a dip but I doubt it will be anything as bad as what America is going through.