UK banks’ creditworthiness still pressured-Moody’s

The British banking sector's creditworthiness is set to remain under pressure for the next 12-18 months, as rising bad debts on the back of a weak economy weigh on lenders' profits, credit rating agency Moody's said.

"Moody's maintains its negative outlook for credit conditions for the UK banking sector," Moody's said in a report published on Monday.

"We expect the sustained weakness of the macroeconomic environment to continue to feed into higher loan arrears with ensuing pressures on profitability."

However, the agency said it did not expect to make many downgrades to banks' credit ratings over the next 12-18 months, as the sector's current ratings largely reflect the risks it faces.

Moody's said banks' creditworthiness had also been bolstered by about 120 billion pounds ($198.6 billion) in fresh capital since the onset of the financial crisis in 2007.

The agency estimates that banks face further losses from bad loans and asset writedowns of 130 billion pounds, but said this could rise as high as 250 billion pounds if the UK economy were to contract by significantly more than the 3-4 percent pencilled in for 2009 under its "base case" forecasts.

Britain's lenders also face rising regulatory costs as the government draws up tougher capital rules for the sector, while some may be forced to sell assets to win European Union approval for the financial support they have received from the state, Moody's warned.

Credit ratings from Moody's and other agencies have a critical influence on banks' ability to borrow, with downgrades making debt finance more expensive. ($1=.6041 Pound)