Jul 11, 2013
London, July 10th 2013 - The outlook for the UK's banking system has been changed to stable from negative, says Moody's Investors Service in a report published today. The outlook change reflects: (1) the UK's increasingly stable economic outlook despite its low growth prospects; (2) the consequent improvement in the outlook for asset quality; (3) continuing improvements in capital ratios driven in part by more stringent capital requirements; (4) an expectation that improvements in funding and liquidity metrics will be maintained over the outlook period; and (5) improving profitability and efficiency ratios due to lower impairments.
The report, entitled "Banking System Outlook: United Kingdom", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
Although the UK continues to face the prospect of low medium-term economic growth, Moody's does not expect a deterioration in the operating environment. Moreover, unemployment has not increased as much as in previous recessions, thereby contributing to a stabilisation in banks' asset quality.
Despite the downside risk posed by some banks' commercial real estate (CRE) concentrations and exposure to peripheral European economies, Moody's expects the aggregate level of impairments to continue to decline and non-performing loans to stabilise at around 5% for the system as a whole. Overall, we believe that UK banks are sufficiently well-capitalised to absorb expected losses from both our central and adverse stress scenarios. Once the large UK banks execute their capital plans to address the additional capital buffer requirements recently imposed by the Prudential Regulation Authority (PRA), Moody's believes that UK banks will be well capitalised for the risks they face and will compare favourably to their European peers.
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. However, bank profitability will continue to be pressured by 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.
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.
Moody's notes that it expects liquidity and funding to remain at strong levels, even with some reduction in the quantity and quality of liquidity buffers, coupled with a continued reduction in reliance on short-term wholesale funding.
The stable outlook for the system is compatible with the stable outlook on the standalone credit assessments of most UK banks. However, Moody's maintains a negative outlook on the long-term debt and deposit ratings of the large UK banks, reflecting its view that the UK authorities will continue to take steps to reduce the level of systemic support over the medium term in light of the UK and other EU governments' preferences for burden-sharing with creditors to finance bank resolutions.
Re-disseminated by The Asian Banker