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Barclays, RBS, HSBC Little Changed After Moody’s Lowers Ratings

June 22, 2012

Barclays, RBS, HSBC Rise After Moody’s Lowers Credit Ratings

The logo of the Royal Bank of Scotland Group Plc (RBS) is displayed outside the company's headquarters in London. Photographer: Simon Dawson/Bloomberg

U.K. bank stocks were little changed after Moody’s Investors Service cut the credit ratings of the country’s four largest lenders, partly because of the risks associated with their capital markets businesses.

The FTSE 350 Banks index (F3BANK) fell less than 0.1 percent in London trading. Royal Bank of Scotland Group Plc fell 0.1 pence to 243.2 pence and Barclays Plc (BARC) fell 0.8 percent to 200.7 pence. Lloyds Banking Group Plc (LLOY) advanced 0.6 percent to 31.39 pence, while HSBC Holdings Plc (HSBA) climbed 0.6 percent.

“The credit rating downgrades by Moody’s had been anticipated for some time, while the scale of the downgrades put through were in line with market expectations,” Gary Greenwood, an analyst at Shore Capital, said in a note to clients today. “We don’t think these downgrades will have a material impact on U.K. bank funding costs or lending capacity.”

None of the financial firms was cut more than Moody’s had forecast when it announced the review in February. HSBC, Europe’s largest bank, was lowered one grade instead of two. Barclays was lowered two steps, and Edinburgh-based RBS was cut one level, in line with Moody’s forecasts.

Lloyds’s main banking unit, Lloyds TSB Bank Plc, was separately downgraded a step, Moody’s said in a statement late yesterday. The company cited Lloyds’s reliance on wholesale funding and sensitivity to the shrinking British economy.

The actions are part of a Moody’s review of about 100 European banks and eight non-European firms with large capital- market businesses. The firm cut the ratings of 15 banks yesterday, including Credit Suisse Group AG and Morgan Stanley. The downgrades could raise borrowing costs and make banks to increase collateral.

Opaque Risks

“What triggered the review was the banks’ exposure to capital-market operations,” Johannes Wassenberg, a managing director at Moody’s covering European banks, said in a telephone interview today. “Their opacity of risks, the sensitivity of the funding and interconnectedness of their activities constitutes a more significant tail-risk than to other banks.”

The review, due in May, was delayed because Moody’s wanted to ensure it did a “robust analysis,” Wassenberg said. “We have had negative outlooks for these banks for some time and clearly, as risk increased, we had to reassess our ratings.”

RBS said in a statement today it disagreed with Moody’s decision, describing it as “backward-looking.”

It “does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile,” RBS said in the statement. “Nonetheless, the group believes the impacts of this downgrade are manageable.”

‘Material Effect’

Lloyds, Britain’s biggest mortgage lender, said Moody’s decision to cut its longer-term senior debt rating one step to A2 from A1 won’t have a “material effect” on its funding costs and market capacity.

The downgraded banks fell into three categories, Moody’s said. HSBC is in a group of lenders that have “shock absorbers” in the form of earnings from other businesses, such as consumer or commercial banking. The second group, including Barclays, has less loss-absorption capacity because capital markets account for a larger share of revenue, Moody’s said.

The third group includes banks such as RBS, which are restructuring their operations and have legacy assets to sell or run down, the ratings company said.

“This downgrading demonstrates that, without their retail operations, large financial conglomerates aren’t sustainable and their risky investment banking activities put retail depositors and customers at risk.” Ismail Erturk, senior lecturer in banking at Manchester Business School in Northern England, said in an e-mailed statement.

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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