N&P reassures customers following Moody’s credit rating downgrade

CUSTOMERS of the Norwich & Peterborough Building Society were today reassured that there was nothing to worry about after it featured among 12 UK financial institutions to have their credit rating slashed.

Lloyds Banking Group, Santander UK, Royal Bank of Scotland and the Co-operative Bank, together with Nationwide and seven other building societies saw their credit ratings cut by Moody’s Investor Service which said the decreased likelihood of government backing made them less credit-worthy.

A spokesman for N&P said that downgrade underlined the importance of the merger with the Yorkshire Building Society on November 1.

“N&P customers can be reassured that this is a very good example of why our merger with the organisation with the financial strength of Yorkshire Building Society is important,” she said. “We were expecting this to happen.

“Moody’s action is all about their view of what the Government would do if a financial institution failed. There are now organisations which are considered too big to fail and what they are saying is some of the smallest building societies the Government would let fail. We are going to be part of the second largest building society.”

“We are not going to fail. There is not change to our position but it emphasises the merger is still a good idea because it brings us together with another very strong financial institution.”

The N&P spokesman also stressed that the Financial Services Authority deposit compensation limit protected savings of up to �85,000.

The Ipswich Building Society does not feature in Moody’s report as it does not normally raise money in the market, relying largely on its savers’ deposits to fund its lending, and so it has never applied for a credit rating from agency’s such as Moody’s

Chief executive Paul Winter said: “Although classed by Moody’s as smaller institutions, the seven building societies involved in the downgrade are all very large compared with us.

“Applying for a rating is a very expensive process and for people like ourselves it isn’t worth it.”

It was also important to understand that today’s announcement by Moody’s reflected a change in the regulatory framework, in particular the likelihood of Government support in the event of future collapses in the financial sector, and did not indicate any deterioration in the financial position of the institutions affected by the downgrade.

The move by Moody’s, which triggered a fall in banking shares on the London Stock Exchange this morning, means the cost of borrowing for the affected financial institutions is likely to increase.

RBS, which saw its shares drop more than 3%, also came under pressure after a report in the Financial Times suggested it could require a further bailout from the Government.

The bank said it was “disappointed” that Moody’s had not acknowledged its progress in strengthening its finances since 2008.

Moody’s stressed its review did not reflect a deterioration in the financial strength of the banking system or the government. The move reflects a shift in Government policy to transfer risk from taxpayers to creditors, rather than deepening problems within the banks.

Elisabeth Rudman, senior vice president of the financial institutions group at Moody’s, said: “Moody’s has lowered the amount of support it incorporates into the institutions’ ratings to reflect the overall weakening support environment.”

Moody’s said the downgrade comes after Government support was removed for the seven small institutions, which include the Norwich & Peterborough, Principality and Yorkshire building societies.

Elsewhere, support was reduced for the larger “more systemically important” institutions including Lloyds and RBS.

While the Government is “likely to continue to provide some level of support” to those banks, it is also “more likely now to allow smaller institutions to fail” if they become financially troubled.

Lloyds, Santander and Co-op Bank have had their ratings downgraded one notch, RBS and Nationwide a two-notch revision, while the seven building societies saw ratings cut by between one and five places.

However, Moody’s said on the basis of stand-alone financial strength, five institutions - Co-op, Nationwide, Santander and Yorkshire and Principality building societies - have had their ratings increased.

Taxpayer-backed Lloyds, which is 40.2% state-owned, stressed that its stand-alone rating had not changed.

A Lloyds spokesman said: “It is important to note that both the stand-alone rating and short-term ratings remain unchanged. We believe this change will have minimal impact on our funding costs.”

Meanwhile, it is understood RBS, which is 83% owned by the taxpayer, could be liable for another bailout if it fails a rerun of European banking stress tests.

RBS, which received the biggest bailout of the 2008 financial crisis, could see its protective cash buffers fall below regulators’ requirements after exposure to eurozone debt is taken into account.

RBS has reduced its exposure to debt-laden nations including Greece and Italy, but it is feared that once so-called “haircuts” - effectively write-offs - are given, the bank will fail to keep up.