03 December 2019

Financial Times: Moody’s cuts outlook on UK banking system from stable to negative

Moody’s has reduced its outlook on the UK banking system from stable to negative, saying Brexit uncertainty has eroded “the country’s growth prospects” while low interest rates are hitting lenders’ profitability.

The credit rating agency warned that the “deteriorating” operating environment for UK lenders was “weighing on their asset quality and profitability”.

Meanwhile “persistently low interest rates and increased mortgage market competition” had dented net interest margins — a metric that tracks the difference in banks’ cost of funding and the rates they charge to borrow.

“The UK’s economy is weakening, making it more susceptible to shocks, and prolonged uncertainty over Brexit has reduced the country’s growth prospects,” said Laurie Mayers, associate managing director at Moody’s.

Profits have already fallen at several big banks this year, and executives have acknowledged that the pressures are likely to continue. Nationwide, the country’s second-largest mortgage lender, last month became the latest business to say it would have to rein in new mortgage lending in some areas as margins come under sustained pressure.

Mortgage market competition — encouraged by new regulations that left HSBC and Barclays with billions of pounds in excess liquidity that can only be used in the UK — has driven some smaller banks to move towards riskier lending. Economic uncertainty has also reduced demand for commercial loans, while provisions for bad debts have begun to increase, albeit from a low base.

The decision by Moody’s on Tuesday to reduce its outlook suggested negative ratings were “more likely on average” over the next year and a half, the group said. [...]

Full article on Financial Times (subscription required)

© Financial Times