RBS, Lloyds Cut by Moody’s on Declining Government Support
Moody’s Investors Service cut the senior debt and deposit ratings of 12 British lenders including Royal Bank of Scotland Group Plc (RBS) and Lloyds Banking Group Plc (LLOY), saying the government would be less likely to provide support in the event of failure.
Lloyds TSB Bank Plc, Santander UK Plc and Co-Operative Bank Plc had their ratings lowered one step by Moody’s, while RBS and Nationwide Building Society were cut two levels. Seven smaller building societies were cut from one to five levels, the rating company said in a statement today. Clydesdale Bank was confirmed at A2, with a negative outlook.
“Moody’s has pulled the trigger a little early,” said Michael Symonds, a credit analyst at Daiwa Capital Markets Europe Ltd. said in a note today. “The escalation of the sovereign and banking crisis” will “result in a broad government-backed recapitalization of the continent’s banks,” he said.
The Bank of England, the Financial Services Authority and the Treasury have provided guidance that banks that fail in the future shouldn’t expect a taxpayer-funded bailout, Moody’s said. The government-sponsored Independent Commission on Banking’s report published last month is “credit-negative for bondholders longer-term as they indicate that new structures, such as ring- fencing, could be introduced to aid resolution and allow senior bondholders to share the burden of bank failure,” the service said.
“Moody’s reassessment assumes a decrease in the probability that the U.K. government would provide future support to financial institutions if needed,” Moody’s said in the statement.
RBS, which rose 7.8 percent yesterday, traded down 3 percent to 23.62 pence, while Lloyds was down 3.4 percent to 34.66 pence. The stocks have declined by 40 percent and 47 percent respectively this year.
“The equity market is already ahead of Moody’s as viewing sovereigns as weak and therefore sovereign support to banks as being weak,” said Alex Potter, an analyst at Berenberg Bank in London. “This is predicated purely on the change of assumptions from Moody’s on support from the U.K. government; this is nothing to do with saying RBS itself is weaker.”
RBS said it has made “significant progress” in strengthening its credit profile since 2008, and reducing its loan-to-deposit ratio to 114 percent from 154 percent, in a separate statement. The bank gained 45.5 billion pounds of taxpayer aid to lift its capital following the 2008 banking crisis.
“One of the reasons they’re doing this is they think the British government is moving in the direction of trying to get away from guaranteeing the biggest banks in Britain,” Chancellor of the Exchequer George Osborne told BBC Radio 4’s “Today” program. “In other words, trying to move away from the too big to fail problem.”
Lloyds said “it is important to note that both the standalone rating and short-term ratings remain unchanged,” in an e-mailed statement. “This change will have minimal impact on our funding costs”.
RBS said it is one of the most strongly capitalized banks in Europe following a newspaper report saying it might need extra capital after a new round of European Union stress tests.
“The design of any new application of the EU stress tests is completely up in the air,” RBS said in an e-mailed statement following the story in the Financial Times. “Any analysis of how any bank will be affected is nothing more than speculation.”
European lenders may need as much as 200 billion euros ($269 billion) of additional capital, according to the International Monetary Fund’s European head Antonio Borges.
“RBS reported an 11.1 percent Core Tier 1 capital ratio as at 30 June 2011, which places us among the strongest capitalized banks in Europe,” the bank said.
In Europe and elsewhere “there is a desire to ensure that if there are problems at banks in the future, that it’s also debt holders and not just equity holders and subordinated bondholders that share that pain, and that’s what we’re reflecting in our ratings here,” Elisabeth Rudman, senior vice president at Moody’s, said in a telephone interview. “It’s not that we think they’ll let these banks fall apart in a crisis.”
RBS had a five-grade increase in its ratings because of implicit government support and Lloyds had a four-level benefit, which Moody’s has lowered, though not eliminated, she said.
For the customer-owned building societies, “these institutions are smaller, to resolve and do an orderly wind- down,” said Rudman. “That’s why we decided with these smaller institutions, we’re not including any systemic support into the debt rating.”
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