UK Banks Risks Credit Ratings Downgrade In Case Of A ‘No-Deal Brexit’ Scenario

According to an influential agency, UK banks are facing a potential ratings downgrade once the United Kingdom withdraws from the European Union without a deal in March 2019.

According to a report published today, S&P Global said that lenders in the United Kingdom are all set for a “stable” performance in the coming years. However, it said that it could be knocked off its course by a “disruptive Brexit.”

The report said that the present ratings for UK banks are “unlikely to be consistent with a disruptive Brexit accompanied by a severe economic shock.” It warned that the agency would likely “lower outlooks and/or ratings if we thought a materially adverse scenario were becoming increasingly certain”.

Various ratings agencies hold considerable power within the City, with some investors and pension funds restricted to holding only those investments that are above a certain grade.

The primary credit analyst of the British banking sector at S&P Global, Richard Barnes, said that the potential ratings downgrades would indicate the “impact on the real economy” of a “no deal” Brexit.

The analysis of the S&P suggests that the ratings actions will be limited once the government agrees with a transitional trade arrangement carrying through to the end of at least 2020. However, it said that a worsening outlook regarding the possibility for a disruptive departure is hanging over the banking sector.

In their base case scenario, the analysts disclose that “moderate GDP growth and low unemployment” will possibly continue in the coming years, retaining the low level of loan impairments that are currently reported by various banks.

However, a “no deal” Brexit implies a “clear downside risk” to the economic outlook of the United Kingdom, with the possibility of ratings action reflecting much more difficult funding conditions. Such a move would likely lower the ratings for domestically focused banks by atleast a notch.

S&P has already upgraded various big British banks this year, including the debt-issuing subsidiaries of Lloyds Banking Group, the UK arm of AIB Group, and the Royal Bank of Scotland.