Concludes review initiated 24 May 2011
London, 07 October 2011 -- Moody's Investors Service has today downgraded the senior debt and
deposit ratings of 12 UK financial institutions and confirmed the ratings
of 1 institution. This concludes its review of systemic support
assumptions from the UK government for these institutions initiated on
24 May 2011.
The downgrades have been caused by Moody's reassessment of the support
environment in the UK which has resulted in the removal of systemic support
for 7 smaller institutions and the reduction of systemic support by one
to three notches for 5 larger, more systemically important financial
institutions. According to Moody's, announcements made,
as well as actions already taken by UK authorities have significantly
reduced the predictability of support over the medium to long-term.
Moody's believes that the government is likely to continue to provide
some level of support to systemically important financial institutions,
which continue to incorporate up to three notches of uplift. However,
it is more likely now to allow smaller institutions to fail if they become
financially troubled. The downgrades do not reflect a deterioration
in the financial strength of the banking system or that of the government.
In addition, the rating agency has assigned a negative outlook to
the senior debt and deposit ratings of the banks that still incorporate
two or more notches of systemic support, to reflect the likelihood
of a further reduction in the availability of systemic support over the
medium to long term.
The rating actions include a one-notch downgrade of Lloyds TSB
Bank plc (to A1 from Aa3), Santander UK plc (to A1 from Aa3),
Co-Operative Bank plc (to A3 from A2), a two-notch
downgrade of RBS plc (to A2 from Aa3) and Nationwide Building Society
(to A2 from Aa3); and downgrades of one to five notches of 7 smaller
building societies. The ratings of Clydesdale Bank were confirmed
at A2 (negative outlook). As outlined in the May press release,
we have reviewed the standalone ratings of all entities prior to concluding
on the debt ratings. A separate announcement today covers the upgrade
of the standalone rating of Co-Operative Bank to C- (mapping
to Baa1 on the long-term debt scale) from D+ and earlier announcements
cover the upgrades of the standalone ratings of Santander UK, Nationwide,
Yorkshire, and Principality Building Societies.
A detailed summary of the rating actions and the current levels of systemic
support for UK financial institutions is available here http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_136526.
Separate announcements will follow on entities included in the May 24th
review, but not concluded in this action: this includes certain
subsidiaries of RBS and Lloyds, as well as Bank of Ireland (UK).
RATINGS RATIONALE
LEVELS OF SYSTEMIC SUPPORT: UK FINANCIAL INSTITUTIONS FALL INTO
THREE GROUPS
Moody's reassessment assumes a decrease in the probability that
the UK government would provide future support to financial institutions
if needed. This follows ongoing guidance from the UK Tripartite
authorities (the Bank of England, the Financial Services Authority
and the Treasury) that the government is more likely in the future to
make greater use of its resolution tools to allow burden sharing with
senior bondholders. "Therefore, Moody's has lowered
the amount of support it incorporates into the institutions' ratings
to reflect the overall weakening support environment," adds Rudman.
The rating downgrades position the ratings of UK financial institutions
into three groups:
Banks with a very high likelihood of support: two to three notches
of systemic uplift.
This group includes the four large clearing banks, which have large
market shares of loans and deposits, a significant share of the
clearing system and also (in the case of RBS, Barclays and HSBC)
have complex large cross-border trading and derivative books .
The notches of support uplift have been reduced (i) to three from four
for Lloyds; and (ii) to three from five for RBS. There is
no change to the ratings of Barclays and HSBC, which maintain the
existing levels of three and two notches of rating uplift, respectively.
Banks with a moderate or high likelihood of support: one notch of
systemic uplift.
This group consists of Nationwide, Santander UK, Co-operative
Bank and Clydesdale Bank. These institutions have nationwide networks
and a smaller, but still important, role in the payments system.
Nationwide and Santander have large market shares of nationwide deposits
and loans, which places them in the category of "high"
likelihood of support. However, the simpler business model
of all these institutions means they are relatively "more straightforward"
to resolve and therefore support is limited to one notch.
Institutions with a low or no likelihood of support: no systemic
uplift.
This group consists of the smaller rated building societies. Those
affected by today's rating action are Newcastle, Norwich &
Peterborough, Nottingham, Principality, Skipton,
West Bromwich and Yorkshire. Moody's considers that there
is insufficient certainty surrounding the likelihood and extent of support
available over the medium-term to the senior creditors of rated
building societies smaller than Nationwide, which all have very
small nationwide market shares. Therefore, there is no rating
uplift incorporated for systemic support from their respective standalone
credit strength ratings.
STANDALONE FINANCIAL STRENGTH
The downgrades do not reflect a deterioration in the financial strength
of the banking system or that of the government. In fact,
the standalone ratings of 5 institutions have been upgraded in separate
announcements made today (Co-Operative Bank) and over the past
few months (Nationwide, Santander UK, Yorkshire, and
Principality ). These institutions are primarily those that have
seen some improvement in their credit profile in the past 12 months and
where we have also concluded that the institution is unlikely to be directly
affected by any further material deterioration in the European financial
markets -- primarily, smaller, domestically-focused
institutions with limited reliance on wholesale funding.
However, these improvements in standalone financial strength have
not been sufficient to offset all of the downward rating pressure from
lower systemic support.
REGULATORY ASPECTS
The UK Tripartite authorities (the Bank of England, the Financial
Services Authority and the Treasury) have provided ongoing guidance that
banks that fail in the future should not expect capital injections from
the public purse.
Moody's still incorporates some rating uplift into the ratings of
large and medium-sized institutions due to the greater challenges
the authorities would face in enabling the smooth resolution of these
entities. However, Moody's considers that the likelihood
of small financial institutions receiving capital injections in case of
need is sufficiently uncertain to lead us to remove any systemic uplift
from the ratings of these institutions.
Recent steps towards enabling the resolution of failed banks --
without access to the public purse -- include the FSA's
publication in August of a consultation paper on Recovery and Resolution
Plans (RRPs), together with a discussion paper on resolution.
In addition, even though the September proposals of the Independent
Commission on Banking (ICB) do not have an immediate rating impact on
UK banks, they are 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. Nevertheless, we recognise
that the authorities do not yet have all the necessary tools to effect
the orderly resolution particularly of the largest, most complex
banks, and many of the measures being considered (RRPs, ring-fencing)
could take years to implement. Consequently, we still incorporate
a very high level of support in the ratings of the largest banks and moderate
level of support in the ratings of medium-sized banks.
WHAT COULD CHANGE THE RATINGS
Those ratings that continue to benefit from systemic support remain sensitive
to any further changes in Moody's support assumptions or the credit
quality of the UK government (rated Aaa with a stable outlook).
All of the ratings are subject to changes of these banks standalone financial
strength ratings. Please refer to www.moodys.com
for a more detailed discussion of each institution's credit profile.
THE METHODOLOGY USED
The methodologies used in this rating were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology, published in March 2007. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not an auditor
and cannot in every instance independently verify or validate information
received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure page
on our website www.moodys.com for further information.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Elisabeth Rudman
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Johannes Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades 12 UK financial institutions, concluding review of systemic support
