Moody’s downgrades Santander UK and 16 Spanish banks

Moody’s has downgraded Santander UK and 16 Spanish banks, including Santander’s parent company Banco Santander, due to concerns about the banks’ credit-worthiness and the Spanish government’s ability to provide support.

Santander UK’s rating fell one notch to A2, while Banco Santander’s rating was cut by two notches to A3.

Five Spanish banks saw their ratings cut by one notch, three banks saw their ratings cut by two notches and nine banks by three notches.

The short-term ratings for 13 Spanish banks have also been downgraded between one and two notches, triggered by the long-term ratings changes.

Moody’s says the downgrades reflect adverse operating conditions, reduced creditworthiness of the Spanish sovereign, rapid asset-quality deterioration, with non-performing loans to real-estate companies rising rapidly and restricted market funding access.

Moody’s says: “Partly due to market tensions, Spanish banks have increased their European Central Bank borrowings by more than six times since June 2011, to the highest level in absolute terms among euro area banking systems as of April 2012.

“The availability of three-year funds from the ECB has mitigated near-term funding stress. However, significant central bank reliance raises the issue of how Spanish banks will be able to reduce their ECB funding reliance over time. Whilst Spanish banks have deleveraged in 2011 by not fully renewing maturing loans, the scope for further deleveraging is unclear.”

European markets feel sharply on Friday morning on the back of the decision as well as the ongoing concerns in Greece.