M&G fund manager Richard Woolnough says UK banks are facing downgrades as part of a wave of credit rating cuts in the European banking sector set to deepen the eurozone crisis.
Speaking at a Fidelity FundsNetwork investment forum on Friday, Woolnough said he is maintaining an underweight position to financials in the team’s bond funds in light of further trouble to come in the European banking sector. Woolnough currently manages £18bn of assets across three funds at M&G. He runs the £7.4bn optimal income fund as well as the £6bn corporate bond and £4.8bn strategic corporate bond funds.
He said: “There has been a wave of downgrades of Italian and Spanish banks. The French banks, German banks and the UK banks are all going to get downgraded. As they get downgraded, it is harder for them to fund themselves. Banks cannot fund themselves without government support.
“There is a wave of downgrades to come, which is why we have a big sectoral underweight to financials.”
His warning follows the downgrades of Italian and Spanish banks last week. Last Monday, Moody’s downgraded the long-term debt and deposit ratings for 26 Italian banks. The ratings agency cited the country’s recession and rising bad debt levels as justification for the downgrades.
The agency also downgraded 16 Spanish banks, including Banco Santander, the eurozone’s largest bank and its UK arm, last Thursday.
Woolnough explains that bondholders are less likely to get a fair share of money back when there is a run on a bank, as they are not shareholders.
He said: “When there is a run on the bank as a bondholder, we do not get our fair share back of our investment. We do not get our fair share because we don’t vote.
“I do not want to lend to institutions where not only the risk of default is high, but when it goes wrong I get nothing back or not my fair share back.”
Experts warn that downgrades of UK banks are likely to push up mortgage rates due to the increased cost of credit.
In October, Moody’s downgraded 12 UK banks and building societies following a reassessment of Government support for financial institutions.