Co-op receives mixed messages from Moody’s

RATINGS agency Moody’s has announced that it has downgraded its debt rating on Manchester’s Co-operative Bank to A3 (two notches below a “Prime” rating) from A2.

The downgrade was due to an overall assessment of the UK’s banking sector, during which Moody’s downgraded the debt repayment prospects of 12 of the country’s financial institutions.

Moody’s said that it had reassessed the likely levels of systemic support that banks and building societies might expect to receive from the government.

It said that announcements made and action taken by the government had “significantly reduced the predictability of support over the medium-to-long term”, which has affected banks of all sizes but put some of the smaller banks and building societies at greater risk.

The agency, which is one of three major worldwide credit rating bodies, said that the government is more likely now to allow smaller institutions to fail if they become financially troubled”.

Its statement indicated that this was an issue of policy rather than one of necessity.

“The downgrades do not reflect a deteririoration in the financial strength of the banking system or the government,” the agency said.

Despite this, the agency also announced that it had upgraded the Co-op’s financial strength rating to a C- from a D+.

It cites an improvement of the bank’s capital position following an injection of funding from the wider Financial Services business, improvements in its funding and liquidity profile, a stronger performance from its loan book, which had been better than the agency’s previous assumptions.

The 12 institutions to receive downgrades were the Co-operative, Lloyds TSB, Santander, RBS and Clydesdale banks were also downgraded, alongside building societies such as Nationwide, West Bromwich, Skipton and Yorkshire.