RBS shares sink, S&P cuts credit rating

LONDON (Reuters) - Credit ratings agency S&P cut its rating on Royal Bank of Scotland (RBS.L) on Monday, citing earnings and further writedown risks, just as its shares tumbled 20 percent as Europe's banks were hit by deepening gloom.

Standard & Poor's Ratings Services cut its long- and short-term credit ratings on RBS to 'A+/A-1' from 'AA-/A-1+'.

"A combination of mixed earnings prospects, deteriorating credit risk in its key geographies, and difficult market conditions in which to complete its capital transformation plan leaves RBS less well positioned than some of its major global peers," said S&P credit analyst Nigel Greenwood.

The downgrade emerged as RBS shares closed down 20.5 percent at 146 pence, their lowest close since 1997. The DJ Stoxx European bank index .SX7P fell 9 percent, its biggest fall on record, after more banks were rescued over the weekend to highlight the deteriorating market conditions, analysts said.

The S&P downgrade will increase RBS's costs of funding, but analysts said long-term wholesale funding markets are effectively closed at present.

"It's not good for sentiment, but in terms of the rise in funding costs it shouldn't have too much of an impact," one analyst said.

S&P's Greenwood said RBS's liquidity and funding profile were not particularly vulnerable, but the risks of lower revenue at its investment bank arm, more credit-related writedowns and rising bad debts in Britain, the United States and Ireland were all negative.

Britain's second biggest bank could also struggle to reach a 4 billion pound ($7 billion) capital increase which it is targeting from disposals given the challenging markets, he said. [nWNA5830]

(Reporting by Steve Slater; Editing by Paul Bolding)