LYG Lloyds Banking Group Plc

Moody's Investor Service on Tuesday lowered its outlook on the U.K.'s banking system to negative and cut its outlook on certain individual institutions, moves that follow its downgraded view of the country's credit rating after U.K. citizens voted to leave the European Union.

A negative outlook generally means there is a 1-in-3 chance of a downgrade in 12 to 18 months.

"We expect lower economic growth and heightened uncertainty over the U.K.'s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions for U.K. financial institutions," said Laurie Mayers, associate managing director at Moody's, resulting in reduced profitability.

Moody's cut its outlook on eight banks—Barclays, HSBC, Santander U.K., Coventry Building Society, Leeds Building Society, Nationwide Building Society, Nottingham Building Society and TSB Bank—to negative from stable. It lowered its view on Lloyds Bank and Principality Building Society to stable from positive.

The firm said that it believes that there will be little short-term liquidity implications for U.K. banks given the extensive contingency planning preparations by the Bank of England, regulators and the banks themselves. Still, it warned that the wholesale borrowing market for U.K. banks would likely become more volatile, resulting in a higher premium on debt issuance.

"This could make funding plans more challenging and further erode net interest margins, but the overall impact should be limited," Moody's said.

Moody's backed its view on several financial firms. For the Royal Bank of Scotland Group Plc, Skipton Building Society, West Bromwich Building Society and Yorkshire Building Society, "the potential impact of the referendum result on these institutions is outweighed by more firm-specific credit considerations," Moody's said.

On Friday, the ratings firm said the U.K.'s economic growth could be "materially weaker," given uncertainty about trade relationships and economic policy. But Moody's affirmed the U.K.'s existing credit rating at Aa1, the second highest available.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com

(END) Dow Jones Newswires

June 28, 2016 16:55 ET (20:55 GMT)

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