Sept. 14 (Bloomberg) -- U.K. banks are less than half way through posting 240 billion pounds ($398 billion) of losses on loans and securities, a reflection of the country’s economic weakness, according to Moody’s Investors Service Ltd.

British banks are likely to record losses of at least 130 billion pounds, in addition to 110 billion pounds lost since the beginning of the credit crisis in 2007, Moody’s said in a report today.

The company “expects the sustained weakness of the U.K. macroeconomic environment to feed through into higher loan arrears with ensuing pressure on profitability and capital,” it said.

British taxpayers have provided about 1.4 trillion pounds of support to banks, becoming the biggest shareholder of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, while seeking to shore up capital eroded by writedowns. British banks have raised about 120 billion pounds of capital from the beginning of the credit crisis to mid-2009, Moody’s said.

“We have been underweight on the banks for some time,” said Dave Bradbury who helps manage $6 billion at Canada Life Ltd. in London. “We are still worried about bad debts and the possible need to raise more money.”

Standard & Poor’s last month estimated British banks would record 97 billion pounds of loan losses from 2009 to 2011, with bad debts peaking in 2010. The estimate was for domestic loans and didn’t include the overseas operations of banks, like the U.S. units of HSBC and RBS.

Depressed Revenue

Banks face pressure on capital, along with depressed revenue and profitability, from the higher costs of attracting deposits and wholesale funding, Moody’s said. Further ratings downgrades are unlikely because the company has already incorporated risks, it added. Moody’s maintained its “negative” outlook for British banks.

The company’s “base case scenario” anticipates a 40 percent peak-to-trough decline in British house prices and a 60 percent drop in commercial property, the report said. The highest losses will come from commercial real estate lending, where values have fallen 26 percent in the past 12 months, said the report. RBS and Lloyds are the most “exposed” to the construction and property sector, said Moody’s.

“Our analysis indicates there is a need for more capital in the banking system,” said Senior Credit Officer Elisabeth Rudman in an interview. Moody’s rating are based on the expectation that “high levels of systemic support” will continue, she added.

Spanish Loans

Provisions for bad loans at Lloyds, the U.K.’s biggest mortgage lender, have already peaked said Chief Executive Officer Eric Daniels last month. The bank had provisions of 13.4 billion pounds in the first-half. Lloyds and RBS, have agreed to insure about 575 billion pounds of toxic and other risky assets with the government.

Government support has resulted in little change to senior debt and deposit ratings, which are expected to remain stable, Moody’s said.

Separately, Spanish banks may be understating the true level of underperforming loans by 30 percent, an analyst at Credit Suisse Group AG said today.

Bad credit on the books of the banks may still reach 150 billion euros ($218 billion), in 2010, Santiago Lopez, an analyst based in Madrid wrote in a report.

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Last Updated: September 14, 2009 07:43 EDT