Moody's: U.K. Lenders Facing Ratings Cuts

Credit rating agency Moody's may cut its rating on 14 British lenders, including Lloyds and Royal Bank of Scotland, because British regulators appear less willing to bail out banks in the future.

The companies which could be downgraded by Moody's include Santander's <SAN.MC British operations, Bank of Ireland UK, Co-Operative Bank, and Nationwide Building Society, the agency said on Tuesday.

Moody's said the move had been widely expected and did not indicate a weakening in either government finances or the banks.

"The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government," said Elisabeth Rudman, a Moody's Senior Credit Officer and lead analyst for a number of UK banks.

"It has been initiated in response to ongoing guidance from the UK authorities (the Bank of England, the Financial Services Authority and the Treasury) that banks that fail in the future should not expect capital injections from the public purse."

Shares in Britain's banks were broadly in line with European peers, while sterling recovered from an initial dip.

Moody's also said Coventry Building Society, Newcastle Building Society, Norwich & Peterborough Building Society, Nottingham Building Society, Principality Building Society, Skipton Building Society, West Bromwich Building Society and Yorkshire Building Society, were at risk of being cut.

Among Britain's other listed banks, the rating agency kept a "negative" outlook on HSBC's ratings and cut guidance for future Barclays ratings moves to "negative" from "stable".

Lloyds shares were down 1.2 percent at 0924 GMT and Barclays fell by 1 percent while HSBC and RBS gained 0.1 percent. Overall, Britain's FTSE 350 banking index was down 0.1 percent while the European sector as a whole was flat.

Canaccord Genuity analyst Cormac Leech said the Moody's statement was not that surprising given moves by regulators around the world to avoid a repeat of the credit crisis, when taxpayers had to step in to rescue troubled banks.

"It is a clear objective of the regulators to not have to bail out financial institutions going forward," said Leech.

LESS WILLING TO GIVE BAILOUTS?

Moody's had already said in April that it could downgrade Britain's smaller banks as it assessed how they would fare without a tacit understanding that the government would always bail them out if they got into trouble..

Regulators and politicians across Europe are drawing up reforms that would allow some banks to fail in future, in a bid to avoid a repeat of government bailouts of 2008 that cost taxpayers billions of euros.

Proposals drawn up by the European Commission could provide a framework for bank failures in future, including making senior bondholders or investors holding the highest ranking forms of bank debt, take losses.

In Britain, the government has set up an Independent Commission on Banking (ICB) to look into how to make the banking sector safer and more competitive and how to deal with banks considered too big to fail.

In an interim report in April, the ICB said the top UK banks should ring-fence their retail arms from riskier trading operations and hold more capital to protect taxpayers from future crises.

Moody's analyst Rudman said the ICB's investigation which is due to be concluded by September, was one of several macroeconomic and regulatory uncertainties affecting UK banks, and she kept a "negative" outlook on the sector as a whole.

"In many ways, the banks are in better shape than they were before the credit crisis, but it's still a very difficult environment," Rudman told Reuters. "There has been some stabilisation in bad loan charges, but it may be that we will see the pace of that reduction slow down."

The UK government has also sought to tie the banks into fixed targets for loans to small businesses.

The deal, known as "Project Merlin", saw the banks pledge to lend out more money and curb excessive payouts to staff, but on Monday the Bank of England said the banks had fallen short of their lending targets for the first quarter.

(Additional reporting by the London Forex Team)

(Editing by Paul Hoskins and Jane Merriman)