UK banks’ shameful record may affect return to credit-worthiness, ratings agency warns

The series of scandals that have hit British banks in recent months has damaged their prospects for restoring credit-worthiness, a leading ratings agency has warned.

Libor-rigging, compensation for mis-sold payment protection insurance and interest-rate swaps to small businesses, money laundering allegations and IT failures will reduce earnings for the rest of 2012 and into 2013, Standard and Poor’s (S&P) said.

While Britain’s banks have “come a long way” in strengthening their balance sheets since the financial crisis, recent first-half results suggest the banks’ recovery is slower than expected due to one-off charges such as fines and compensation bills.

The report comes as US authorities summoned three British banks – Royal Bank of Scotland, HSBC and Barclays – for questioning over rate-rigging.

The banks were among seven that were handed legal notices demanding they assist in an inquiry by the attorneys general of New York and Connecticut.

The move raises fears over future penalties and further damage to the already battered reputation of Britain’s banks, with several other legal cases in multiple countries looking at the manipulation of Libor.

Barclays declined to comment, while HSBC and RBS both referred to statements made with their half-year results acknowledging ongoing investigations.

Details of the subpoenas were not given, but the legal notices are effectively requests for information backed with the force of the law.

Libor – the London interbank offered rate – is used to set the interest rates on trillions of dollars in contracts around the world, including mortgages and credit cards.

Overseen by the British Bankers’ Association, Libor is a self-policing system that relies on information global banks submit themselves.

The S&P report said: “Prolonged political, public, and regulatory pressures as a 
consequence of continued mis-steps and governance failures could strain our assessment of some UK banks’ business positions.”

The mis-selling of payment protection insurance is on course to be the costliest financial scandal in British financial history.

The combined cost to the UK’s high street banks hit £10 billion in recent weeks and could escalate.

PPI claims volumes remain “unpredictable” and there are uncertainties regarding the compensation costs, S&P said in its report.

Shockwaves were sent through the banking industry at the end of June when US and UK regulators landed Barclays with a £290 million fine for manipulating Libor.

S&P said: “We anticipate material regulatory penalties for some of the other banks involved in the industry-wide investigation.”

Libor “could be a significant drag on statutory earnings over future periods”.

S&P added: “While we believe that these issues have made post-crisis recovery more challenging for certain institutions, they do not, at this time, lead us to fundamentally alter our view of industry-wide creditworthiness.”