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“Although the UK continues to face the prospect of low medium-term economic growth, Moody’s does not expect a deterioration in the operating environment” said the company in a statement.
It is the first time since the 2008 financial crisis that Moody’s has upgraded the outlook for the sector.
The agency added that the move was boosted by improvement in asset quality and capital ratios, driven by more stringent capital requirements.
“Unemployment has not increased as much as in previous recessions, thereby contributing to a stabilisation in banks’ asset quality,” said Moody’s.
“Overall, we believe that British banks are sufficiently well-capitalised to absorb expected losses from both our central and adverse stress scenarios”.
However, Moody’s has maintained a negative outlook on the long-term debt and deposit ratings of large UK banks.
The credit ratings agency also warned that profitability will continue to be pressured by low interest rates, regulation costs and a heightened level of conduct-related scrutiny.
“Regulatory changes will continue to create uncertainty for banks as new rules are gradually enforced.”
In June, firms from China, Russia and the United States officially launched a new credit rating company in Hong Kong to challenge the current industry leaders (Moody’s, Standard and Poor’s, and Fitch Ratings) and promote reforms in the global rating system.