Fitch downgrades RBS but Lloyds improves

Rating agency Fitch has downgraded the Royal Bank of Scotland Group’s long and short-term issuer default rating (IDR) from A to BBB+, a reflection of its belief that the likelihood of government intervention to aid senior creditors of UK banks has “substantially reduced”.

Fitch’s view has been modified by EU bail-in regulations. The agency said in a statement: “In line with its expectations announced in March last year and communicated regularly since then, Fitch believes legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for senior creditors of UK banks, in line with developments at the EU level.

“Following the revision of our expectation for state support, the IDRs of RBSG are now driven by the bank’s standalone creditworthiness as expressed in its Viability Rating (VR).”

Fitch adds that the outlook default rating is “stable”. The decision includes the same downgrade for RBS plc and NatWest.

In better news Lloyds Banking Group has seen its long-term IDR improve to A+ from A. Fitch said: “…we believe that the risk of default on senior obligations, as measured by the long-term IDRs, is lower than the risk of the banks failing, as measured by their VRs.

“This is because of the large buffer of ‘qualifying junior debt’ within the group which could be made available to protect senior obligations from default in case of failure, either under a resolution process or as part of a private sector solution (ie, distressed debt exchange) to avoid a resolution action.”

Meanwhile Fitch downgraded Lloyd’s support rating (the agency’s view of the likelihood “extraordinary support) from 5 to 1. The same decision has been made for Standard Chartered Bank while Santander UK sees a adjustment move from 1 to 2. Fitch said: “The Support Rating is sensitive to both a change in the strategic importance of San UK to its parent, which is currently not envisaged, and Banco Santander’s ability to provide such support.”

Photo (cropped): Elliott Brown, Flickr