UPDATE: Moody's Cuts UK Banking System Outlook To Negative From Stable

LONDON (Alliance News) - Credit rating agency Moody's Investors Service on Tuesday cut its outlook for the UK banking system to negative from stable, as it warned that the improved operating environment and banks' stable financial fundamentals will not fully offset the negative credit implications of changes to shield UK taxpayers from future bank failures.

Moody's also said the change of outlook is due to plans to introduce a ring-fence around the deposits of people and small businesses in order to separate them from the banks' investment banking and wholesale activities. Moody's expects the structural changes needed to have significant

implementation costs over a multi-year period.

The report focuses on the rating factors impacting the six largest rated UK institutions - HSBC Holdings PLC, Royal Bank of Scotland Group PLC, Barclays PLC, Lloyds Banking Group PLC, Santander UK and building society Nationwide - which account for 93.6% of active current accounts.

"The key driver of the change in outlook to negative for the UK banking system is that the UK government is now able to finalise the secondary legislation to implement the structural reforms relating to the UK resolution and bail-in regime and the related ring-fencing framework," said the author of the report, Carlos Suarez Duarte, a Moody's vice president and senior analyst.

Moody's also warned that UK banks face continued exposure both to conduct and litigation charges and to other costs that might constrain profitability and erode capital.

Nevertheless, Suarez Dante said he expects the standalone baseline credit assessments of most UK banks to remain stable because of the country's stronger economic growth prospects, as well as a number of other factors.

"[We] expect the standalone baseline credit assessments of most UK banks to remain stable because of the country's stronger economic growth prospects, improving asset quality and capital ratios, stable funding and liquidity metrics and strengthening profitability and efficiency ratios", Suarez Duarte said.

Moody's also noted that improved credit fundamentals of most UK banks - mainly asset quality, earnings and capital - have put them in a stronger position to withstand unexpected shocks, such as a house price correction.

"In addition, a gradual increase in interest rates over the next two to three years, in line with our central forecast, also will help reduce the risk of a correction by dampening mortgage loan growth while also improving some banks' profitability metrics," Suarez Duarte added.

By Samuel Agini; samagini@alliancenews.com; @samuelagini

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