Bank shares fall as Moody's downgrades 12 UK financials

Shares in RBS and Lloyds fell today as Moody’s downgraded the senior debt and deposit ratings of 12 UK financial institutions, and said it expects the government will allow some smaller institutions to fail.

The move concludes a Moody's review of the financial sector which began in May after several major UK banks received government bailout cash.

Among the companies downgraded were Lloyds TSB (A1 from Aa3), Santander UK (A1 from Aa3) and RBS (A2 from Aa3).

Shares in Lloyds dropped 3.2% to 35p while RBS has slipped almost 3.5% to 24p. London's FTSE was 0.3% lower shortly before 10:30am.

Moody's said it had reassessed the support environment for banks, which had seen support for five large institutions reduced by between one and three notches.

“Actions already taken by UK authorities have significantly reduced the predictability of support over the medium to long term,” it said.

“Moody's believes 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 is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government.”

The ratings agency also assigned a negative outlook to the senior debt and deposit ratings of the banks that still incorporate two or more notches of systemic support.

The rating actions include a one-notch downgrade of Lloyds TSB (to A1 from Aa3), Santander UK (to A1 from Aa3), Co-Operative Bank plc (to A3 from A2), and a two-notch downgrade of RBS (to A2 from Aa3) and Nationwide Building Society (to A2 from Aa3), as well as downgrades of one to five notches of seven smaller building societies.