The ratings agency lowered its long and short term counterparty credit ratings on HBOS to A+/A-1 from AA-/A-1+.
S&P says HBOS is less well-positioned to manage the deteriorating operating environment than AA rated global peers.
Nigel Greenwood, credit analyst at S&P, says: “The main differentiating factor in our view is credit risk. This reflects the sizable role for both specialist and high LTV mortgages in HBOS’ mortgage book and its weaker profile corporate book.
“We also note that earnings may be constrained by higher funding costs.”
Shares in HBOS have plummeted to lows of 139p per share today amidst fears over the soaring cost of borrowing.
The tumble in value comes after the UK’s biggest lender suffered a 32% drop in share prices yesterday, when shares were priced at a low of 180p per share.
A spokesman for HBOS says: “Following events in the US in the last few days, world stock markets, including UK bank stocks, have experienced significant volatility.
“The group continues to access the wholesale money markets where appropriate. HBOS has taken a cautious view on the outlook for the securitisation markets for some time and has adapted its business plan accordingly. That is why the group’s objective is to grow deposits faster than assets.”
He adds: “HBOS has a strong capital base. The group has the strongest capital ratio, a key measure of financial strength, of all the major UK domestic banks. HBOS is a strong bank.”
HBOS says it currently has £258bn in deposits, with deposits increasing by 12% over the first half of this year.