RBS credit rating takes a hit amid fears of bail-out No2

Royal Bank of Scotland was dealt a major blow yesterday when its credit rating was cut to reflect the reduced likelihood of further government support in any financial crisis.

RBS had its rating cut by two notches by Moody’s Investor Service at the same time as other major British financial institutions had their debt down- graded.

Lloyds TSB, Santander UK, the Co-operative Bank and Nationwide were among those to have their credit ratings cut on yet another gloomy day for the economy.

The move was reflected in shares of both RBS and Lloyds Banking Group, which were among the FTSE 100’s biggest fallers, down 3.6 per cent and 3.4 per cent respectively in afternoon trading yesterday.

Seven UK building societies were among the 12 firms downgraded.

Analysts and investors closely watch the ratings that firms such as Moody’s put on the creditworthiness of companies and governments.

These ratings influence heavily the amount of interest that companies and governments pay to borrow money.

The widely expected downgrades reflect moves by the government to shift risk away from taxpayers and on to creditors. But it could see the cost of borrowing for the affected financial institutions increase.

The downgrade came amid reports that there is growing nervousness in Whitehall that the UK government may have to inject more capital into RBS, which has already benefited from a £45 billion taxpayer-funded bail-out.

Rumour of another bail-out suggested that a fresh cash injection was on its way as part of the European effort to recapitalise the banking system on the continent.

However, RBS played down those suggestions, dismissing them as “speculation” and arguing that the bank already had a further £8bn contingency capital commitment from the Treasury.

The Chancellor said he was sure the banks were well funded, while Lloyds also defended its record on improving their finances.

George Osborne said UK banks were in better shape than many of their European rivals, which face bigger losses on holdings of peripheral eurozone debt.

Nevertheless, yesterday’s downgrade came as a disappointment to RBS, which has made great play of its efforts under chief executive Stephen Hester to get back on its own two feet.

The bank has been winding down its toxic assets, many of which it inherited from ABN Amro during RBS’s ill-advised takeover of the Dutch bank. There has also been a drive to close down non-core businesses. RBS has pulled out of 27 countries in the past two years, removing small businesses that appeared to be there mainly for flag-waving purposes.

There has also been high- profile advertising campaigns to win back the trust of customers and more emphasis placed on the bank’s retail business rather than its investment arm.

However, the bank’s efforts still have major obstacles to overcome.

Poor publicity was generated by the mis-selling scandal, which has resulted in many of the major banks being forced to set up multi-million-pound funds to compensate customers mis-sold payment-protection insurance.

The writedowns on Greek government bonds and on Irish loans led to RBS recording a pre-tax loss of £678 million in the second quarter of this year.

Last night RBS said the bank had made “significant progress” in strengthening its credit profile since 2008.

A spokesman said: “We are disappointed that Moody’s have not acknowledged the progress we have made in strengthening the bank’s credit profile. We do, however, see the removal of implicit government support for the UK banking sector as being a necessary and important step forward as the sector returns to standalone strength.

“RBS has already completed its wholesale funding requirements for 2011 and continues to make excellent progress in strengthening key balance sheet measures in the second half to date.”

RBS suffered a two-notch cut to A2 from Aa3 while Lloyds TSB, a division of the taxpayer-funded Lloyds Banking Group, went down one notch from Aa3 to A1.

Spanish bank Santander had its UK business downgraded by one notch, to A1 from Aa3, while Nationwide Building Society suffered a two-notch cut, to A2 from Aa3.

Other institutions downgraded were Co-operative Bank and the building societies Newcastle, Norwich & Peterborough, Nottingham, Principality, Skipton, West Bromwich and Yorkshire.

The rating cuts did not concern HSBC, Barclays or Standard Chartered, Moody’s said.

Lloyds said that it believed Moody’s was reflecting what was already understood in the market, and that it would “have minimal impact on our funding costs”.

Nationwide said that the Moody’s announcement was part of an industry-wide review, and “not a reflection of Nationwide’s business model”.

The building society said in a statement: “Nationwide remains one of the strongest and best capitalised financial organisations in the UK”.