UK Banks Face Moody's Review After Brexit

The fallout in financial markets from the UK's decision to leave the EU is likely to deepen on Tuesday when a top credit ratings agency weakens its sentiment toward Britain's biggest banks.

Sky News has learnt that Moody's has signalled to a number of the largest UK lenders that it ‎plans to revise the outlook for their credit ratings from positive or stable to negative.

News (Other OTC: NWSAL - news) of Moody's plan, on which the agency declined to comment on Monday night,‎ comes just hours after rival Standard & Poor's stripped the UK of its coveted triple-A rating and Fitch also downgraded the sovereign.

The moves underline the growing ‎reverberations of last week's referendum result through the British financial system.

City sources ‎pointed to a report published by Moody's in March, in which it warned that Brexit could have a significant impact on banks' non-performing loan levels.

"Similarly, weaker growth would likely be reflected in lower demand from UK customers for credit, weighing on revenues and margins," it said.

Moody's also warned that any "reduction in access to the single market, including restrictions on banks' ability to 'passport' into other EU countries, could hit profits by increasing the cost of doing business across borders".

Banking sources suggested the ratings agency would revise its outlook for the major UK lenders rather than placing them under review for immediate downgrades owing ‎to the scale of uncertainty about Britain's future trading arrangements with the EU.

Placing the companies on negative outlook‎ is a precursor to a possible downgrade of their ratings, which would make borrowing money in the debt markets more expensive.

It (Other OTC: ITGL - news) was unclear on Monday whether all five of the UK's biggest banks would be the subject of the outlook revision by Moody's.

The agency said three months ago that Brexit's impact on British banks would be most pronounced for those with cross-border operations, implying that Barclays (LSE: BARC.L - news) , HSBC and Royal Bank of Scotland (LSE: RBS.L - news) are likely to be most affected.

Shares (Berlin: DI6.BE - news) in Barclays and RBS‎ closed down 17% and 15% respectively on Monday as fears about the consequences of Brexit intensified.

A number of investment banks, including Jefferies and JP Morgan, downgraded the UK banks during the course of the day, citing a likely reduction in their ability to pay dividends to shareholders amid weaker economic growth.

George Osborne, the Chancellor, said he had ‎spoken to the heads of a number of financial institutions including banks during the weekend in an attempt to formulate a plan aimed at reassuring markets.

Moody's, which last Friday put the UK on negative outlook following the vote for Brexit, is also likely to turn its attention to a further swathe of corporate and local authority issuers.