Moody’s Cuts Outlook for U.K. Banks, Citing Brexit Concern

(Bloomberg) --

British banks have worked hard to bolster their finances since the global crash a decade ago, but Brexit might be about to undo their good work, according to a warning from Moody's Investors Service.

The ratings firm cut its outlook on British lenders to negative from stable, citing factors including the “prolonged uncertainty over Brexit” and its impact on economic growth over the next two years.

“The operating environment for U.K. banks is deteriorating, weighing on their asset quality and profitability,” Moody's said in a report published Tuesday. “Our base case is that the U.K. and the European Union will ultimately reach a free-trade agreement, but it is increasingly unlikely that any such deal will substantially mitigate the negative economic impact of Brexit.”

Moody's said the worsening economic environment more than outweighs positive trends, such as the lenders' strong capital position and the wind-down of costs linked to the payment protection insurance scandal.

The ratings company also cited the persistence of low interest rates, as well as the increased competition in the mortgage market that has eroded net interest margins. The mortgage price war has been a side effect of Britain's so-called ring-fencing regulation, which legally separates investment banking from retail, deposit-taking business, and has trapped some of the biggest banks' excess capital inside the U.K.

To contact the reporter on this story: Harry Wilson in London at hwilson57@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Keith Campbell

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