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

Tyler Durden's picture

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

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Cindy_Dies_In_The_End's picture

"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"


I guess they need to "pretend harder" like we do in the USA.



Instant Karma's picture

UK, Spain, Greece, Japan, US....there seems to be systemic risk re-asserting itself as Sovereign risk. Just like Tyler et al have said. Oddly, the US Dollar is the place to be as the risk trade in unwound, and you can't even hide in gold and other precious metals, as they currently trade as risk assets as well. On the other hand, with various markets closer to oversold than neutral, it's hard to go short here, either stocks, commodities, or foreign currencies. So, trading from the short side, you sell the blips and buy the dips, minding the overbought/oversold indicators. I'm liking to be short the Euro, Silver, and Emerging markets after they bounce substantially. China (FXI) has already rolled over through its 50 and 200 dma, while EEM and EWZ follow. FXE is tanking beneath 1.40. Now, I need a vicious bounce to sell into. I await in cash, which, by luck of birth, is in US Dollars.

Cindy_Dies_In_The_End's picture

Oh boy, prepared to be junked by Metal Bugs in 3..2..

Hephasteus's picture

Metal bugs will only junk you if you come out and say something blatantly wrong and then assert that it's a certainty without any possible chance of parole.

Rusty_Shackleford's picture

Real "metal bugs" LOVE dollar rallies.

GlassHammer's picture

So if we all get a downgrade does that mean nothing changes because we are all equally terrible?

PS. The stern wording in this letter reminds me of the UN.

Anonymous's picture

The new "Axis of Evil"

SDRII's picture

Uk is odd man out in Europe and Perhps a nice lamb for the US (dollar flight - with of course an implicit wink and nod). Japan also looks to be the odd man out - china reproachment coming? Awaiting the article from Pritchard on how the Uk will just print its way out while the Euro will drown on the weight of the PIIGS

Anonymous's picture

"you can't even hide in gold and other precious metals, as they currently trade as risk assets as well."

The GATA Perspective: The CFTC actively ignores blatant manipulation of the silver and gold markets on the CRIMEX. JPM and others shorts are doing it on behalf of TPTB.

Use this as an opportunity to buy the physical. Screw the paper.

Anonymous's picture

Gold is like air and sex: Not important until you can't get any...

Rusty_Shackleford's picture

When the real disaster strikes, the time to prepare will have passed.

Anonymous's picture

How true!

carbonmutant's picture

Sound like its time for S&P to exercise some more "forbearance and delay in the announcement of a downgrade."

Anonymous's picture

By Bugs B,
Visit SA AFTER WORLD CUP! Buy your ticket now! while you can!
and live forever in luxury at 1/3 cost of Northern Hemisphere

Helen Burns's picture

In practical terms I agree to the author of some article I found by http://www.mp3hunting.com SE saying that the only way you can be certain that another bank crisis is not going to happen, is to separate the solvent parts of the banks away from the risker parts. Treat the risker parts just like any other business when they fail. However unless this was adopted by the whole World it would put the Countries which do this at a great disadvantage. There is so much competition to have a financial Capital that I doubt this will happen. The secret is not in more regulation but better regulation. More competition in the market by splitting the big banks up and returning them into private hands. The regulation failed on many levels and a return to the regulation before the FSA would actually be sufficient.

sun1's picture

I have to admit that I have never heard about this information I have noticed many new facts for me. Thanks a lot for sharing this useful and attractive information and I will be waiting for other interesting posts from you in the nearest future.keep it up. car insurance quote