Bloomberg News

Lloyds, RBS Cut by Fitch on Declining Government Support

October 13, 2011

(Updates with shares at close in seventh paragraph.)

Oct. 13 (Bloomberg) -- Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, two of Britain’s government-backed lenders, had their credit ratings cut by Fitch Ratings, which said the U.K. is less likely to provide support in future.

Lloyds’s and RBS’s long-term issue default ratings were lowered two steps to A from AA-, the ratings company said in a statement today. Fitch reduced its support rating floors --which measure the likelihood of government support -- for systemically important British banks to A from AA-and A+.

Chancellor of the Exchequer George Osborne said last week the government is trying to move away from guaranteeing the country’s biggest banks. Lenders are under pressure from regulators to raise capital that’s been depleted by writedowns of Greek and other European peripheral sovereign debt. Fitch follows Moody’s Investors Service, which downgraded 12 British lenders, including RBS and Lloyds on Oct. 7, and also cited a lessening of government support.

“Support dynamics are changing in the U.K.,” Fitch said. There is “more advanced political will to reduce the implicit support for the country’s banks, building on the Banking Act 2009 and, more recently the various policy recommendations of the Independent Commission on Banking.”

The government-sponsored Commission on Banking last month recommended banks insulate their consumer units from their investment banking divisions to make taxpayer support less likely in the event of a failure.

Risk Profile

“This is clearly going to change the risk profile a bit and increase the costs of debt for banks,” said Neil Smith, a banking analyst at WestLB AG in Dusseldorf. Removing the need for government to intervene in a crisis has “been seen coming for quite some while. It’s not specific to Lloyds or RBS necessarily; it’s affecting all banks.”

Barclays Plc led declines among banks in London, falling 14.4 pence, or 7.4 percent, to 173.2 pence. Edinburgh-based RBS dropped 6.4 percent to 24.16 pence and London-based Lloyds slipped 5.5 percent to 34.26 pence.

At least 66 of Europe’s biggest banks would fail a revised European Union stress test and need to raise about 220 billion euros ($302 billion) of additional capital, Credit Suisse AG analysts said today. RBS would need the most at about 19 billion euros, analysts led by Carla Antunes-Silva wrote in a note to clients today.

--With assistance from Gavin Finch in London. Editors: Jon Menon, Edward Evans.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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