Moody's downgrades 12 UK financial institutions

Moody's has downgraded the senior debt and deposit ratings of 12 UK financial institutions, including Lloyds and RBS.

The rating actions include a one-notch downgrade of Lloyds (to A1 from Aa3), Santander UK (to A1 from Aa3), Co-Operative Bank (to A3 from A2), a two-notch downgrade of RBS (to A2 from Aa3)  and Nationwide Building Society (to A2 from Aa3).

Barclays and HSBC escaped downgrades with their ratings remaining at A1 and Aa2 respectively.

It has also downgraded seven smaller building societies between one to five notches of seven smaller building societies; Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire.

'There is insufficient certainty surrounding the likelihood  and extent of support available over the medium-term to the senior  creditors of rated building societies smaller than Nationwide,' Moody's warned.

The downgrades concludes Moody's review of systemic support assumptions from the UK government for these institutions initiated on 24 May 2011. They were triggered by its reassessment of the support environment in the UK which has resulted in the removal of systemic support for the smaller institutions. 

Moody's said announcements made, as  well as actions already taken by UK authorities have significantly reduced the predictability of support over the medium to long-term.

'It is more likely now to allow smaller institutions to fail if they become financially troubled,' Moody's said.

The ratings agency does believe that the government is likely to continue to provide some level of support to systemically important financial institutions, which continue to incorporate up to three notches of uplift. However, it feels the government is more likely now to allow smaller institutions to fail if they become financially troubled.

Moody's stressed the downgrades did not reflect a deterioration in the financial strength of the banking system or that of the government. It pointed out that the standalone rating of five institutions have been upgraded in separate announcements today (Co-Operative Bank, Nationwide, Santander UK, Yorkshire and Principality) on the back of an improvement in their credit profiles.