Ratings agency Moody’s has downgraded the UK banking sector from stable to negative saying balance sheet improvements are not coming fast enough to replace lower levels of liquidity support.
In particular, Moody’s senior analyst and vice president Carlos Suarez Duarte said that incoming legislation providing additional protection to retail and small business deposits - allowing the government to step back from active intervention - would impact on the risk borne by creditors.
The change also reflected the continuing shadows cast by ongoing regulatory liabilities. Lloyds last week put aside another £600 million to cover PPI losses, taking its total bill to £10.4 billion.
Unveiling a bumper set of results recently, RBS chair Ross McEwan also played down expectations that the bank had turned a corner, saying it was ‘managing down a slate of significant legacy issues’.
‘This includes significant conduct and litigation issues that will likely hit our profits going forward,’ added McEwan.
Suarez Duarte added: 'In addition to the resolution and bail-in regime, UK banks' also face continued exposure both to conduct and litigation charges and to other costs that might constrain profitability and erode capital.'
While shifting expectations on the UK banking sector downward in aggregate he added that improved asset quality, earnings and capital were likely to mean increasing diversity in the sector.
‘Against the backdrop of the finalisation of structural reforms, we expect the standalone baseline credit assessments of most UK banks to remain stable because of the country's stronger economic growth prospects.
‘In addition, a gradual increase in interest rates over the next two to three years, in line with our central forecast, will also help reduce the risk of a correction by dampening mortgage loan growth while also improving some banks' profitability metrics.’