More UK bank rating pressure possible -Moody's

By Richard Barley

LONDON, May 30 (Reuters) - UK banks may face further pressure on their debt ratings this year as the credit crisis continues, Moody's Investors Service warned on Friday, although most institutions can manage the downturn at current rating levels. "Moody's has a negative outlook for the direction of credit conditions in the UK banking system," the ratings agency said in a report, warning that an economic downturn combined with high consumer debt levels will lead to more bad debts and lower profitability for lenders. "Meanwhile the global credit crisis continues to lead to significant writedowns for some of the larger UK banks and funding stresses for smaller institutions," Moody's said.

"Although we believe most entities can manage the downturn at current rating levels, some further adjustments of ratings are possible in 2008," the agency said.

However, Moody's said it still considered the overall financial strength of the UK banking sector to be strong.

The UK banking system came under intense scrutiny last year after Northern Rock had to be rescued by the Bank of England as the interbank lending market froze up.

Some banks have announced large rights issues to shore up their balance sheets and all institutions face sharply higher funding costs compared with pre-crisis levels.

"The liquidity crisis at Northern Rock -- and the subsequent time it took regulators and governments to finalise their response to such a crisis -- has led to a sharp re-focus on the liquidity planning of UK institutions and stability of their funding sources," Moody's said.

"Notwithstanding this incident, our analysis suggests that the liquidity position of the major UK banks remains stable and well diversified."

Moody's said that the five largest UK banks -- Barclays (BARC.L), Royal Bank of Scotland (RBS.L), HSBC (HSBA.L), Lloyds TSB (LLOY.L) and HBOS HBOS.L -- had announced writedowns of around 17 billion pounds ($33.5 billion) so far.

"It is ... very difficult to independently assess the adequacy of writedowns and the likelihood of further writedowns on the basis of public information," Moody's said. "We expect banks to continue to be affected by the credit crisis through 2008."

Moody's had said it had run stress tests on mortgage lenders' exposure to house price declines, and that as a result it did not expect the quality of portfolios to deteriorate so much as to eat into core capital.

It added that those mortgage lenders that did not have strong retail deposit bases had put into place additional funding measures that should enable them to weather the difficulties in the capital markets. (Editing by Paul Bolding)