Moody’s declares that UK Banks ready for a new crisis
UK banks ready for new crisis, Moody’s declares
Britain’s banks are strong enough to withstand a fresh financial crisis and are poised for a surge in profits, Moody’s has said as it upgraded its outlook on the sector from negative to stable.
Philiip Aldrick By Philip Aldrick12:57PM BST 10 Jul 2013Comments25 Comments
The ratings agency claimed that UK lenders were far stronger than their European peers, thanks in part to demands by the regulators for more capital and to own up to their hidden or potential losses. Improving economic growth will also help reduce bad debts, Moody’s said.
“We believe that UK banks are sufficiently well capitalised to absorb expected losses from both our central and adverse stress scenarios,” it said.
“Once the large UK banks execute their capital plans to address the additional buffer recently imposed by the Prudential Regulation Authority, Moody’s believes that UK banks will be well capitalised for the risks they face and will compare favourably to their European peers.”
The PRA recently told UK lenders to raise £13.4bn more in capital to cover their risks by early next year at the latest.
The upgrade may signal a watershed moment for Britain’s banks. They have been rebuilding their loss-absorbing capital buffers and boosting liquidity since the depths of the crisis in 2008. Bonuses and dividends have been restrained, and billions of pounds of bad debt has been written off.
With the worst of the redress now completed, 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”.
The state-backed banks, Lloyds Banking Group and Royal Bank of Scotland, are also moving back into profit. The Government may even try to sell some of the state’s £20bn investment in Lloyds later this year. A review into whether RBS should be broken up may delay its return to profitability, though.
Profits at Britain’s bank have been held back by compensation clams for mis-selling scandals and regulatory pressure to clear their books of bad debts. But the result has been a stronger banking system, Moody’s said.
“Regulatory changes will continue to create uncertainty for banks as new rules are gradually enforced. However, in the long term, Moody’s expects UK systemic risk will be reduced by higher capital requirements, including significant loss-absorbing and counter-cyclical capital buffers.”
Risks to profitability remain from “low interest rates, the increasing costs of prudential regulation and a heightened level of conduct-related scrutiny, which could lead to additional one-off regulatory charges”, Moody’s warned.
But that will be offset by improvements in the economy. Among the reasons Moody’s gave for the change in outlook, were “the UK’s increasingly stable economic outlook despite its low growth prospects [and] the consequent improvement in the outlook for asset quality”.
The “negative” outlook on the long-term debt and deposit ratings of large UK banks was maintained, reflecting the authorities’ plans for creditors rather than taxpayers to support banks in the future.