S&P to Review Sovereign, Bank and Other Ratings Impacted by Brexit

Following the United Kingdom's (U.K.) referendum decision to leave the European Union ("Brexit"), S&P Global Ratings said today that it would be reviewing the ratings potentially affected by the referendum result.

Despite the "leave" vote, any exit will likely be a drawn-out process while treaties or other arrangements are negotiated between the U.K. and the EU regarding their future dealings. As we have stated over the last several months, certain ratings may be affected sooner including the sovereign rating on the U.K. as well as the ratings on entities directly linked to the U.K. sovereign rating.

SOVEREIGN RATING

As we stated in our recent research update on the U.K. (April 29, 2016), a vote to leave would, in our view, deter investment in the economy, decrease official demand for sterling reserves, and put the U.K.'s financial services sector at a competitive disadvantage compared with other global financial centers. We stated that a vote to leave could affect growth performance, external funding, and the public balance sheet, adding that--depending on the circumstances and consequences of a leave vote--we could lower the rating by more than one notch if we believed that the U.K.'s institutional strength and ability to formulate policy conducive to sustainable growth were negatively affected.

BANKS

As we have previously stated, the leave vote has no immediate impact on the ratings on U.K. domestic commercial banks. We see the effects of a leave vote on these banks as indirect, arising from potential adverse consequences for economic activity, new business volumes, asset prices, and demand for U.K.-related debt. U.K. banks' liquidity buffers provide a sizable cushion against market volatility as does the Bank of England's previously announced contingency measures to ensure sufficient banking system liquidity. That said,
volatility may interrupt wholesale debt issuance and affect the values of financial assets in the near term.

In the coming weeks, we will closely assess developments and update U.K. commercial bank ratings as necessary. Since mid-2015, we have not included government support in our U.K. commercial bank ratings. As such, any changes in the U.K. sovereign credit rating would not automatically affect such ratings.

INSURANCE

The leave vote is not expected to lead to rating actions on U.K. insurers.

We see the insurance sector as less exposed to the leave vote than the rest of the financial sector. While representing about one-third of the U.K.'s very substantial financial services net export surplus, the insurance sector is far more reliant on trade with non-EU countries--especially the U.S. The sector is also a very limited recipient of inward investment.

The nature of any future trading relationship between the U.K. and the EU is yet to be established. However, even in the absence of any trade agreements or passporting rights, we believe that U.K. insurers operating in the EU could, through appropriate planning, continue their businesses largely uninterrupted. The same would apply for EU insurers who currently trade in the U.K. through branches.

The period of uncertainty while treaties or other arrangements are negotiated between the U.K. and the EU could weigh on insurers' investment returns and possibly on the rate of future economic growth. However, we do not now believe that these potential issues are likely to lead to immediate rating actions on insurers.

NON-FINANCIAL CORPORATES

The credit implications for U.K. corporates of an exit from the EU would vary considerably by company and industry, with many of the decisive parameters unlikely to be determined until withdrawal terms are settled. This is likely to take several years.

While we expect considerable foreign exchange volatility, a slowdown in inbound foreign direct investment, a weakening of real estate markets, and some loss of business and consumer confidence in the immediate aftermath of the leave vote, we believe that longer-term credit performance will mostly depend on medium-term domestic and global economic performance and specific arrangements for goods and services trade, regulation, taxation, competition policy, and freedom of movement. A curtailment in corporate investment in the U.K. over the medium term is a key concern as that would likely weaken innovation, slow improvements in operating efficiency and, ultimately, impair the competitiveness of British manufacturing and service industries versus peers abroad.

U.K. PUBLIC FINANCE

Many of our ratings on U.K. local governments and other public bodies benefit from our assumption that the U.K. government would be willing and able to provide extraordinary support to avoid a payment default by such bodies. That assumption extends to sectors, such as social housing, where many of our ratings include one notch or more for government support and mirror that of the sovereign. Highly rated U.K. local governments are in a similar situation. Therefore, while any direct impact from a leave vote is likely to be modest and only materialize over time, we are likely to lower the ratings on a number of these bodies following a sovereign downgrade.

STRUCTURED FINANCE

We do not expect an immediate impact on the ratings on U.K. structured finance products. However, we expect an uncertain time, possibly as long as several years, for the U.K. and Europe. The macroeconomic reaction to the exit is going to be the main factor that could potentially impact the ratings. Specifically regarding commercial real estate, depending upon the market's reaction, the exit could simply lead to a slight dip in U.K. migration or could involve some corporate office diversification toward Europe. We expect any impact will be mostly felt in London in the office-space market, with some small potential effect on residential housing.

COVERED BONDS

As previously stated, the leave vote will not directly affect our credit analysis of the underlying collateral backing U.K. covered bonds. Furthermore, a possible depreciation of sterling will not, in our view, alter the capacity of covered bond issuers to meet their payment obligations.

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