BRITANNIA Building Society has been downgraded by a ratings agency amid fears mortgage lenders could be hit by losses due to the housing market slump.

The Leek-based mutual has seen its bank financial strength rating moved down to D+ from C by Moody's Investors Service.

Britannia was one of 10 building societies to be downgraded at the same time – a move which has caused outrage in the sector.

The business hit back at the decision, pointing out it is still A-rated for credit and arguing that the agency's prediction of a possible 40 per cent fall in house prices is too extreme.

The other societies downgraded by Moody's were the Chelsea, Coventry, Nationwide, Newcastle, Norwich and Peterborough, Principality, Skipton, West Bromwich and Yorkshire.

Moody's said it will continue to review Britannia's ratings on the back of its proposed merger with Co-operative Financial Services, which members are currently voting on.

The agency's report reads: "The review will focus on the impact of the near-term merger and the extent to which the strength of Co-operative Financial Services can offset some of the intrinsic challenges that Britannia is facing."

Marjan Riggi, lead analyst for UK mortgage lenders, added: "These rating actions reflect Moody's concern that the current economic crisis in the UK and, indeed, globally will lead to significantly higher credit losses than previously anticipated, particularly among the residential and commercial real estate assets, to which these mortgage lenders and building societies have a highly concentrated exposure."

But a spokesman for Britannia, which employs about 2,000 people at its Cheadle Road headquarters, said: "Britannia has retained its A-rated credit status, one of few societies now to hold the grade.

"We also remain A-rated by the other two key rating agencies, Fitch and Standard & Poor. Our recent financial results, current business model, and future merger with the Co-operative Financial Services place us apart in the building society sector and we are glad this has been recognised.

"The house price prediction Moody's has used is a far bleaker forecast than we have seen and has even been labelled extreme by some commentators.

"Despite this, Britannia would still be one of the higher performing societies in the sector.

"Moody's measures far exceed all Financial Services Authority and Government stress tests that financial institutions must meet, including managing a severe drop in UK house prices."

A spokesman for the Building Societies Association said it is "surprised and disappointed" by the downgradings.

He said: "The analysis Moody's has undertaken is based on a very pessimistic house price scenario.

"They are working on a huge fall in prices and even with the recent declines we are still an awful long way from that.

"People shouldn't read too much into this, especially as it is not actually targeted at individual savers – it's very much for the wholesale end of the market."

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