S&P: "We No Longer Classify The U.K. Among The Most Stable And Low-Risk Banking Systems"

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Standard & Poors slams the U.K. in yet another preview of the imminent downgrade. The just released report has some of the harshest language from the rating agency on the island nation to date:

Standard & Poor's Ratings Services no longer classifies the United Kingdom (AAA/Negative/A-1+) among the most stable and low-risk banking systems globally due to our view of the country's weak economic environment, the reputational damage we believe has been experienced by the banking industry, and what we see as the high dependence on state-support programs of a significant proportion of the industry.

And because S&P, due to a chronic case of testicular lack of fortitude, will be the last to actually notch the United Kingdom, what it has done is to downgrade the country in its Banking Industry Country Risk Assessment group.

We therefore place the U.K.'s banking system in Group 3 out of our 10 Banking Industry Country Risk Assessment (BICRA) groups, which primarily reflects our view of relatively high leverage in the U.K. economy and the losses the industry could bear during the deleveraging process. BICRA rankings integrate our view of the strengths and weaknesses of a country's banking system compared with those of other countries, ranging from Group 1 (strongest) to Group 10 (weakest). Banking systems ranking similarly to the U.K. also include the U.S., Austria, Chile, and  Portugal. The macroeconomic and banking industrywide factors that affect the BICRA influence all bank counterparty credit ratings in the U.K.

In our opinion, the weak U.K. economy will continue to hinder the credit profile of the U.K. banking industry. We believe this factor affects the profile of the U.K. banking system more than it influences the banking systems of most other major mature market economies in Europe and around the world, notably Canada, France, and Germany in BICRA Groups 1 and 2. Household debt in particular is high, relative to disposable income. We expect that systemwide domestic nonperforming and impaired loans will peak in 2010 and remain elevated through 2011. In our opinion, credit demand in the U.K. will remain muted, and banks' net interest margin will continue to be narrow due to the low interest rate environment. The U.K. banking industry will, in our view, have limited opportunity in 2010 and 2011 to increase earnings to absorb high credit loss charges.

And some more harsh language:

In our opinion, the near collapse of a number of financial institutions damaged the reputation of the U.K. banking system. This led to wide-ranging state support, including significant government stakes in two of the four major banking groups. We note that there is a wide dispersion in credit quality among U.K. banks and that some banks did not require direct government support. In our view, enhanced regulatory oversight and reform  of the framework for financial stability remains incomplete. Eventually, higher capital and stronger liquidity requirements may affect the industry's risk profile positively but, in our opinion, medium-term earnings prospects for the sector are weak.

Here are the key weaknesses as seen by S&P:

  • Significant level of debt in the economy, particularly that of households, could lead to high credit losses.
  • Weak economic environment favors high impairment charges and low credit demand.
  • Poor near-term earnings prospects.
  • Reputational damage we identify arising from severe problems in the banking industry in 2007-2009.

Read full report here