Portugual banks cut after sovereign downgrade

LISBON, July 14 (Reuters) - Moody's Investors Service on Wednesday cut the ratings of eight Portuguese banks by between one and two notches and mostly with a negative outlook, a day after a two-notch downgrade of the country's sovereign debt.

In a statement, the ratings agency cited "the government's reduced ability to support its banks" and the fact that top banks have issued debt backed by state guarantees since the onset of the global crisis in 2008.

All rated government-backed debt issues of Portuguese banks have been downgraded to A1 from Aa2, with a stable outlook, in line with the Portuguese government's debt rating [ID:nLDE66C0ND].

Moody's cut the rating of the country's largest bank, the state-run Caixa Geral de Depositos, by just one notch to A1/Prime-1, with a stable outlook, saying the bank continues to benefit from very strong systemic support due to its size and its status as a wholly state-owned bank.

However, the country's largest listed bank, Millennium bcp (BCP.LS), suffered a two-notch downgrade to A3/Prime-2 with a negative outlook, which Moody's attributed to the bank's weaker financial strength compared with higher-rated peers.

Still, the agency noted that BCP "benefits from a very high likelihood of systemic support in case of need".

Another top listed bank, BES (BES.LS), was downgraded by one notch to A2/Prime-1, also with a negative outlook, as was Banco BPI (BBPI.LS) -- the country's third-largest bank.

Smaller banks Montepio and Banif were both downgraded two notches to Baa3/Prime-3 from Baa1/Prime-2.

Moody's said the impact of the lower government rating on banks' ratings has not been identical as banks with a higher standalone rating such as BES and BPI are less affected thanks to a stronger financial flexibility allowing them to offset the impact of lower systemic support.

BCP shares were 1.4 percent lower in afternoon trading, largely in line with the European banking sector .SX7P, down 1.3 percent, while BES was off 2.1 percent and BPI off 0.6 percent.

Investors are now focused on how banks will fare in the Europe-wide stress tests on major lenders due for publication later this month. [ID:nLDE66C088]

On Monday, Treasury Secretary Carlos Pina told Reuters tests performed so far pointed to a "solid and robust" banking system without capital problems. [ID:nLDE66B0VU] (Reporting by Andrei Khalip; Editing by David Cowell)