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British banks face an abyss: Credit Suisse

British banks face a severe deterioration in conditions through the first quarter of next year that could renew strain on capital and leave Royal Bank of Scotland facing a loss this year and next, a leading analyst said.

“Things are getting worse, faster than we thought,” Jonathan Pierce, analyst at Credit Suisse, said in a note Thursday entitled “Staring into the abyss?”

The deterioration in this quarter and in the first quarter of 2009 “will be relatively severe” as the global credit crisis affects markets and the economy, he said.

RBS is the analyst's favorite UK bank stock, but it is unlikely to see much good news for some time.

“We think the bank will generate a loss at a group level in 2008, and wouldn't rule out losses for next year as well,” Pierce said.

RBS warned Tuesday it faced more writedowns and rising bad debts this quarter, which could drag it to its first ever full-year loss.

“Recent trading statements demonstrate -- if evidence were needed -- that the credit cycle has turned sharply,” Pierce said. “The tightening in credit availability in the last few months bodes badly for economic and bank-related news in the coming months, and conditions have, if anything, got worse since government support was announced in October.”

That means poor news on bad debts from the third quarter is likely to get a lot worse, and funding being provided from the government is also costing banks more than had been expected.

Credit Suisse cut its 2009 and 2010 earnings forecasts by a further 40% and said the threat of higher bad debts created further substantial risks to forecasts and could reignite concerns about capital “at one or more of the banks.”

“We continue to assume no dividend payments in 2009 and 2010, regardless of the government preference shares,” Pierce added. (Reuters)