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Announcement:

Moody's: Outlook for UK Banking System Remains Negative

Global Credit Research - 13 Dec 2010

London, 13 December 2010 -- Moody's Investors Service says it is maintaining its negative outlook for the UK banking system based on (i) the uncertain trajectory of the UK economy and the resulting downside asset-quality risks; (ii) the high level of wholesale funding refinancing that is required over the next few years; and (iii) the declining systemic support for the banking system from the UK government. This outlook expresses Moody's expectations for the fundamental credit conditions in the UK banking system over the next 12-18 months and is explained in detail in the rating agency's new Banking System Outlook report on the UK.

"The credit environment remains challenging for UK banks due to an unusually broad range of likely outcomes, which are skewed towards the downside," says Elisabeth Rudman, a Moody's Vice President -- Senior Credit Officer and author of the report. The level of non-performing loans is likely to remain elevated in the coming quarters as consumer indebtedness remains considerably high, and Moody's expects that loan growth will remain subdued. Moreover, the full impact of the fiscal austerity package on the economy and unemployment is unlikely to materialise by the second half of 2011. In addition, although Moody's expects the current problems in Ireland and other peripheral European economies to have a direct impact on profitability only, rather than capital levels, these issues are exacerbating the tough environment for UK banks.

The substantial amount of bank debt (approximately GBP215 billion of rated term debt) that will mature in 2011 and 2012 represents the second major challenge that informs Moody's negative outlook on UK banks. "While Moody's acknowledges that banks have plans to improve their funding profiles, their ability to execute these plans will depend on continued access to international debt markets," explains Ms. Rudman.

The third key challenge facing UK banks is the likelihood of declining systemic support. Following the substantial support provided by the UK government to its banking system during the financial crisis, Moody's notes that the UK Tripartite authorities have been vocal in their resolve to ensure that tax payers are not required to support banks in any future crises. As well as allowing junior debt holders to absorb losses in certain cases over the past two years, they have made clear their intention to introduce further mechanisms that can be used for the resolution of large, complex banks. "In response to this declining systemic support, Moody's expects to adjust the level of support that is incorporated in its senior debt ratings for banks over the next one to two years," says Ms. Rudman. "The level of downward pressure on senior debt ratings will, in many cases, hinge on the speed of the recovery of banks' stand-alone financial strength relative to the speed of the authorities in implementing these mechanisms."

However, Moody's report also notes that there has been progress in stabilising the financial strength of the banking system over the past couple of years. Although the six largest UK banks have reported a high level of loan losses and credit market write-downs since 2008, they have also strengthened their balance sheets with higher levels of capital and liquidity.

According to Moody's, a return to a stable outlook for the overall UK banking system would require (1) progress towards more normal credit conditions, including normalised monetary policy; (2) stronger bank funding profiles (including repayment of government-guaranteed debt and Bank of England facilities); (3) lower levels of non-performing loans; and (4) greater clarity over the likely outcome of the government-appointed Independent Commission on Banking, which is reviewing the structure of the UK banking system and will be publishing its recommendations in September 2011.

Moody's report, entitled "Banking System Outlook: UK", is available on www.moodys.com

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1020; Daniel Kolter in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7 495 228 60 60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-3758-1350; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Classen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 237 9536; or visit our web site at www.moodys.com

London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's: Outlook for UK Banking System Remains Negative
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