Moody’s Raises Outlook of U.K. Banking System on Impairments

Moody’s Investors Service raised its outlook of the U.K. banking system to stable, citing improving profitability and lower impairments after lenders stepped up efforts to clean up balance sheets and raise capital ratios.

Moody’s increased the outlook from negative, according to an e-mailed statement today. The ratings firm said that it maintains a negative outlook on the long-term debt and deposit ratings of large U.K. banks, “reflecting its view that the U.K. authorities will continue to take steps to reduce the level of systemic support over the medium term.”

British banks have sold assets and eliminated jobs to bolster earnings and meet tougher capital rules aimed to make them more resilient in future financial crises. Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc have all said that sales of businesses and retained profits mean they won’t need to raise money from equity investors.

“We believe that U.K. banks are sufficiently well capitalized to absorb expected losses from both our central and adverse stress scenarios,” the ratings company said. “Moody’s expects profitability to recover from its very low levels, reflecting the improvement in asset quality and already high levels of provisions for conduct-related costs.”

Capital Shortfall

Moody’s said the upgrade also reflects an “increasingly stable economic outlook.” While U.K. lenders continue to face “the prospect of low medium-term economic growth,” the firm said it doesn’t expect “a deterioration in the operating environment.” Banks will be “well capitalized for the risks they face” once they meet the Prudential Regulation Authority’s buffer requirements, according to the report.

The PRA, the Bank of England’s new banking supervisor, last month outlined 13.4 billion pounds ($20 billion) that lenders must raise by the end of 2013 to withstand possible losses on loans, fines and other risks. It had previously found a capital shortfall of 27.1 billion pounds.

“In the long term, Moody’s expects U.K. systemic risk will be reduced by higher capital requirements, including significant loss-absorbing and counter-cyclical capital buffers,” it said. “The stable outlook for the system is compatible with the stable outlook on the standalone credit assessment of most U.K. banks.”

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