Clydesdale rating hit by bad debt fears

Published on Tuesday 28 July 2009 21:36

A DETERIORATING UK economic outlook yesterday saw the Clydesdale Bank slapped with a credit rating downgrade while other banks remained steady.

Ratings agency Standard & Poor's (S&P) said the bank would face rising losses on its loans, particularly in its commercial portfolio.

S&P said the lender, which is owned by National Australia Bank (NAB), could post negative earnings this year because of the losses, which are on the rise as the recession tightens its grip on the UK economy.

"The negative outlook reflects our view of Clydesdale's very difficult operating environment that will, we believe, increasingly challenge profitability in the near-to-medium term," S&P said.

The ratings agency said it anticipates that Clydesdale's mortgage book will continue to perform better than other lenders in the market. But the performance of its commercial loans – which include exposures to the recession-hit property and construction sectors – was expected to suffer in line with other lenders.

Earlier this month, Clydesdale reported a first-half loan loss charge of 168 million this year. S&P forecast that these losses would continue to rise until 2010.

Income at the bank was also forecast to come under pressure from low interest rates, the need to hold greater levels of liquid assets and higher wholesale funding costs. The bank said it plans to raise AUS$2.75 billion (1.36bn) from investors as a buffer against rising bad debts.

S&P added: "We expect that a stable market position, good capitalisation, and balanced rates on loan and deposit growth will support the bank's overall creditworthiness."

NAB has 2.6 million customers in the UK through Glasgow-based Clydesdale, which incorporates the Yorkshire Bank brand.

In response to the downgrade, Clydesdale said it was "pleased" that its funding and deposit positions had been recognised.

The Clydesdale's long-term rating was reduced to A+ while the short-term was downgraded to A-1. The maximum rating in the S&P system is AAA, indicating the lowest risk, BBB is moderate risk and marks in the C bracket show high risk.

Clydesdale said despite the downgrade, its ratings "continue to compare favourably against our peers".

"The negative outlook is simply a reflection of the deteriorating market conditions all UK banks are operating in," the lender added.

"While strong in its own right, Clydesdale's ratings reflect parental support from NAB, one of the strongest banks in the world and one of just a handful to have maintained a top-flight long-term rating of AA."

Only Clydesdale Bank and Yorkshire Building Society had their credit ratings lowered following S&P's review of UK banks this week. Ratings for the UK's four largest banks – Barclays A+/A-1; HSBC (AA-/A-1+), Lloyds Banking Group (A/A-1) and RBS (A/A-1) remained unchanged.

The downgrade came as the International Monetary Fund estimated that the UK will suffer an increasing level of consumer debt turned sour as customers are hit by rising unemployment and credit difficulties in the recession.