UK Banks credit profile

UK Banks credit profile tumbles somewhat

LONDON (Standard & Poor's) Jan. 28, 2010--We no longer classify the United
Kingdom (AAA/Negative/A-1+) among the most stable and low-risk banking systems
globally, Standard & Poor's Ratings Services noted in a report titled "Banking
Industry Country Risk Assessment: United Kingdom" published today on
RatingsDirect. This is due to our view of the country's weak economic
environment, the reputational damage we believe has been experienced by the
banking industry, and what we see as the high dependence on state-support
programs of a significant proportion of the industry.

We placed the U.K.'s banking system in Group 3 out of our 10 Banking Industry
Country Risk Assessment (BICRA) groups on Dec. 21, 2009, which primarily
reflects our view of relatively high leverage in the U.K. economy and the
losses the industry could bear during the deleveraging process. (For more
information, see "U.K. BICRA Revised Downward To Group 3 From Group 2 Due To
High Leverage In The Economy And Weak Earnings Prospects".) The scale ranges
from Group 1 (strongest) to Group 10 (weakest). The macroeconomic and banking
industrywide factors that affect the BICRA influence all bank counterparty
credit ratings in the U.K.

"In our opinion, the weak U.K. economy will continue to hinder the credit
profile of the U.K. banking industry. This reflects the sharp decline in
economic output and our expectation that the unwinding of the high level of
debt (of the government, households, and certain industrial segments) will
weigh heavily on relative economic growth prospects and banks' financial
performance," said Standard & Poor's credit analyst Nigel Greenwood.

We believe this factor affects the profile of the U.K. banking system more
than it influences the banking systems of most other major mature market
economies in Europe and around the world, notably Canada, France, and Germany
in BICRA Groups 1 and 2.

"In our opinion, the near collapse of a number of financial institutions
damaged the reputation of the U.K. banking system. This led to wide-ranging
state support, including significant government stakes in two of the four
major banking groups. We note that there is a wide dispersion in credit
quality among U.K. banks and that some banks did not require direct government
support," added Mr. Greenwood.

In our view, enhanced regulatory oversight and reform of the framework for
financial stability remains incomplete. Eventually, higher capital and
stronger liquidity requirements may affect the industry's risk profile
positively but, in our opinion, medium-term earnings prospects for the sector
are weak.

The U.K. banking system is concentrated, which helps pricing and efficiency,
and extensive and diversified overseas operations support the credit profile
of three of the four major banking groups. We consider that competition has
reduced as a result of significant ownership changes over the past two years
and retrenchment. Despite the dominance of the major lenders, the U.K. system
has a track record of being both open and attractive to new lenders.
Representing a major financial pool, we consider that the U.K. market will
remain appealing.

The risk appetite of the U.K. banking system is likely to remain constrained
for the foreseeable future. We consider that the financial profile of the
industry will likely only improve gradually as the economy recovers. At the
same time, the U.K. banking industry is likely to undergo profound regulatory
and structural changes over the next several years. If, in our view, these
changes render the industry less prone to excessive credit expansion and more
resilient to economic shocks, we could raise the U.K.'s BICRA classification.
Conversely, the BICRA could be lowered if the U.K. economy fails to strengthen
due to persistent budget deficits and continued imbalances.

The report is available to RatingsDirect on the Global Credit Portal
subscribers at www.globalcreditportal.com and RatingsDirect subscribers at
www.ratingsdirect.com.  If you are not a RatingsDirect subscriber, you may
purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail
to research_request@standardandpoors.com. Ratings information can also be
found on Standard & Poor's public Web site by using the Ratings search box
located in the left column at www.standardandpoors.com.  Alternatively, call
one of the following Standard & Poor's numbers: Client Support Europe (44)
20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708;
Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7)
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