European banks face further downgrades

By This Is Money
Updated: 02:52 EDT, 6 June 2011

Europe's embattled banks are facing further downgrades from the major credit ratings agencies, putting additional strain on the sector as it tries to recuperate in the wake of the financial crisis.

Looking to future: Downgrades could make the European banking sector less risky in the long term

According to the latest closely-watched quarterly review from the Bank for International Settlements, increased scrutiny on ratings agencies Moody's, Fitch and Standard & Poor's following their failures in the run up to the global financial meltdown has prompted them to make significant changes to the way they assess banks.

It found all three agencies considered the 'creditworthiness of large European and US banks to have worsened materially since the onset of the crisis' and warned ongoing revisions to the agencies' methods seemed 'likely to lead to further downgrades in the banking sector'.

Such downgrades could 'put strain on the sector' in the short term, BIS said, reducing the ability of banks to raise capital just as they emerge from the crisis with weakened balance sheets and the need to meet stricter requirements, the report said.

However, such moves could also make the banking sector a less risky investment proposition in the longer term, leading to a healthier situation, BIS added.

A further warning in the report appeared to be aimed at policy makers, such as the government and Bank of England. It said their credibility could be called into question if credit ratings were at odds with official statements.

The report also recommended the method ratings agencies used to assess banks should no longer be derived in isolation but reflect the industrial, financial and economic context of the banking business.

The BIS report comes amid reports that the sale of 620 Lloyds and Northern Rock branches could begin within a fortnight as investment banks put the finishing touches to sale documents.

Potential bidders for the £4.4bn of assets include Virgin Money, Lord Levene's venture NBNK, National Australia Bank and private equity firm JC Flowers - raising the prospect of a new name emerging in high street banking.

Meanwhile, Stephen Hester, chief executive of taxpayer-owned Royal Bank of Scotland, has been courting rich Middle East sovereign wealth funds.

Hester is reported to have visited the Gulf region last week for a meeting with investment funds in Dubai, Qatar, Abu Dhabi and Kuwait as the government prepares to sell down the taxpayer's 83% shareholding.

A decision on the sale rests with UK Financial Investments, the body which handles taxpayers' holdings in RBS and Lloyds, in which the state owns a 41% stake.