The financial services sector is starting to feel the effects of the Brexit decision as Moody’s Investors Service Inc. has changed its outlook on the banking system in the U.K. to negative from stable, citing the uncertainty flowing from the recent vote in favour of leaving the European Union (EU).
The credit-rating agency announced on Tuesday that it has also lowered the outlooks on its ratings for 12 of the U.K.’s major banks and building societies. These actions reflect Moody’s belief that the vote will end up reducing the profitability of the affected financial services firms.
“We expect lower economic growth and heightened uncertainty over the U.K.’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions for U.K. financial [services] institutions,” says Laurie Mayers, associate managing director with Moody’s, in a statement. “This will be negative for banks’ credit fundamentals, as reflected in today’s rating actions.”
The credit-rating agency expects that “there will be little short-term liquidity implications for U.K. banks given the extensive contingency planning preparations by the Bank of England, regulator and the banks themselves. However the wholesale borrowing market for U.K. banks will likely be more volatile, resulting in a higher premium on debt issuance.”
Specifically, Moody’s changed the outlooks on the ratings of numerous firms to negative from stable, including Barclays PLC, HSBC Holdings PLC, Santander U.K., along with several building societies. The outlooks for Lloyds Bank PLC and Principality Building Society were dropped to stable from positive. It also affirmed the existing ratings on these 12 firms, along with four others, which didn’t have their outlooks revised. (Moody’s believes that firm-specific considerations outweigh the potential impact of the referendum result for these institutions.)