S&P downgrades StanChart ratings outlook on annual loss

LONDON, Feb 26 (Reuters) - Ratings agency Standard & Poor's (S&P) downgraded its outlook for Standard Chartered (HKSE: 2888.HK - news) on Friday in a sign of mounting pressure on the bank after it posted its first annual loss for 26 years on Tuesday.

S&P said it was putting the bank's long-term credit ratings on creditwatch with negative implications, meaning it may lower the lender's ratings one notch when it has completed its review.

The change in Standard Chartered's outlook came after the bank reported a substantial decline in its revenues and rising losses from bad loans, S&P said.

"We see elevated uncertainty over the bank's ability to defend its competitive position, manage its risk exposure, and recover its profitability over the next two to three years," the agency said in a note on the rating outlook change.

StanChart (HKSE: 2888-OL.HK - news) 's 5-year credit default swaps (CDS) traded at 203 basis points on Friday afternoon, cheaper than Thursday's close of 213 basis points, according to data provider Markit (NasdaqGS: MRKT - news) , but still implying a rating for the bank far below S&P's A- rating.

Credit default swaps are a form of insurance that help protect against losses if the underlying company becomes unable to pay back its debts.

They are also used as bets on such an outcome by traders. Bets on the likelihood of defaults by European banks have increased in recent weeks amid fears over prolonged low interest rates.

A model calculated by S&P's Capital IQ unit using credit default swaps shows that traders in those CDS markets are pricing Standard Chartered as if it were "junk" rated BB+, a full four notches below its actual rating.

Other banks have seen similar moves. BBB+ rated Deutsche Bank has been hit hard in recent weeks and is being treated as if it had a weaker, BB+ rating, according to the S&P model.

Standard Chartered executives have said they are baffled by the high cost of insuring against a default by the bank.

"There is simply no rational reason for our CDSs to be trading at the kinds of elevated levels that they are," Chief Executive Bill Winters told analysts on Tuesday.

StanChart's shares weathered the ratings outlook downgrade, holding on to gains on Friday to trade up 8.5 percent at 432.5 pence per share by 1613 GMT. (Reporting by Lawrence White and Marc Jones; editing by David Clarke (Toronto: CKI.TO - news) )