S&P says to review UK banks, Fitch sees pressure

By Richard Barley

LONDON, June 3 (Reuters) - Standard & Poor's, fresh from downgrading some of the biggest Wall Street banks, said it would review its ratings of UK banks and building societies during June, though it did not expect wide-ranging changes.

Separately rival credit rating agency Fitch said it expected major British banks to remain under pressure through 2008 and further negative ratings actions were possible.

UK banks have been hit hard by the global credit crisis, with concerns about their exposure to the housing market, writedowns on structured finance portfolios and pressure on earnings all weighing on their stock and bond prices.

Lenders are scaling back their activities and also seeking to strengthen balance sheets strained by the liquidity crunch that arose last year.

S&P said on Tuesday it had already taken negative ratings actions on institutions that had been particularly affected by more difficult funding conditions and structured credit writedowns, but that now a continued slowdown in the economy appeared inevitable, leading to its review.

"The forthcoming review will assess the ability of each rated institution to cope with a sharper deterioration in impairment losses and revenue growth than we have assumed in our current ratings," S&P said in a statement.

"At this stage we do not expect wide-ranging rating or outlook changes," it said.

The agency said this was because UK banks and building societies had entered the economic downturn with generally robust profitability and satisfactory capitalisation. It said lenders had already tightened underwriting standards in anticipation of a tougher economic environment.

S&P on Monday downgraded Lehman Brothers LEH.N, Merrill Lynch MER.N and Morgan Stanley (MS.N) in a sweeping move that hit the companies' shares. The agency said it believed there was potential for more write-offs, although not on the same scale as in the past few quarters.

Early on Tuesday the agency affirmed its ratings on Deutsche Bank (DBKGn.DE), Credit Suisse (CSGN.VX) and UBS (UBSN.VX), although it said the outlook was negative for each of them.

FITCH SEES PRESSURE

Fitch said the big five UK banks -- HSBC (HSBA.L), Royal Bank of Scotland (RBS.L), Barclays (BARC.L), HBOS HBOS.L and Lloyds TSB (LLOY.L) -- faced weaker earnings prospects in 2008.

"2008 will prove a challenging year for the major UK banks, given the weakened prospects for the wholesale and investment banking markets and the continuing volatility of the financial sector," said Cynthia Chan, a director in Fitch's financial institutions group.

The agency said however it viewed positively efforts by banks such as RBS and HBOS to raise capital. It said Barclays was likely to seek to strengthen its capital position in the near-term, possibly by issuing equity, but that Lloyds and HSBC were unlikely to raise new equity.

For S&P's full statement on the UK banks, please double click on [ID:nWLA4269]. For Fitch, please double click on [ID:nWLA4263]. (Editing by Sue Thomas)