In yet another move by ratings agencies likely to roil markets, HBOS has been cut by S&P. Given the fact that HBOS is the biggest loser to date in the European banking sector in the wake of Lehman’s collapse. This cannot be seen as good news.
Standard & Poor’s said Tuesday it is lowering its long-term counterparty credit ratings on British bank holding company HBOS PLC to reflect the increased risk posed by the weak operating environment and slumping British housing market.
S&P said it is cutting ratings on HBOS and its main operating subsidiary Bank of Scotland to ‘A+’ from ‘AA-‘, the fourth-highest investment grade. The outlook remains stable, said S&P.
“The rating action reflects Standard & Poor’s opinion that HBOS’ financial profile is less well positioned to manage the deteriorating operating environment than ‘AA’ rated global peers,” analyst Nigel Greenwood said in a statement.
The main differentiating factor is credit risk, said Greenwood.
“The U.K. housing and mortgage markets are in a period of “severe strain” and are unlikely to recover in the near term, said the analyst.
HBOS is more exposed than its peers because its British mortgage book accounts for more than half its total loan book, he said.
Earnings may also be hurt by lower revenue from the company’s corporate investments, which weakened “considerably” in the first half.
Recent initiatives to raise capital, including a 4 billion pound rights issue, were welcome moves from a credit rating perspective, said Greenwood. However, the rights issue was achieved without strong support from existing shareholders, suggesting financial flexibility is weak, he said.
The cost of protecting HBOS debt with credit default swaps surged Tuesday. HBOS’ five-year CDS widened by 150 basis points, according to IFR Markets, a service of Thomson Reuters.
I said the following just yesterday:
The question remains what the response by the Bank of England will be. The BoE and the European Central Bank seem less likely to bail out failing institutions than the Fed, although Northern Rock was eventually bailed out by the BoE and is now a British taxpayer liability. It must be worrying for the likes of HBOS to know that even the Fed let Lehman Brothers fail.
All eyes have been on the Fed, the U.S. Treasury and the SEC. We may be about to find out how the BoE, the Chancellor and the FSA handle crisis.
See also: Credit Crisis Timeline for a full list of writedowns by institution and a timeline of the credit crunch.