Doubts on Australian parent company's commitment to UK subsidiaries
Moody's has cut long-term bank deposit and senior debt rating down from A1 to A2 for both the Clydesdale Bank and Yorkshire Bank, both owned by National Australia Bank (NAB).
The downgrade follows statements made by NAB executive director for finance, Mark Joiner last week,pointing to a possible sale or floatation of the groups' UK operations.
But Joiner also ruled out a fire sale of the Clydesdale and Yorkshire banks, saying it was a "rotten time" to sell, given the weakness in the markets.
"We would prefer to own the asset, raise the returns and exit a few years later, or IPO it. There are options", he said.
Moody's Investor Service said its downgrade "reflects a reduction in Moody's view of the likelihood of parental support for Clydesdale from its parent National Australia Bank".
It added the lower rating remained on review and may be downgraded further and Clydesdale's prime short-term bank deposit and debt rating has also now been placed on review.
Moody's said: "In [our] view the discussion about a potential sale of Clydesdale raises questions about the long-term strategic commitment of NAB to the UK market."
David Thorburn, chief executive of NABUK, hit out at the downgrade.
He said: "We are disappointed at the outcome of Moody's review, particularly when they acknowledge NAB as a supportive parent to our UK business.
"Strong in our own right, we remain part of one of the strongest banking groups in the world.
"We are fully committed to retaining our strong capital, funding and liquidity positions."
NAB recently rejected a £2 billion bid for its UK operations by private equity firm Sun Capital, which it said was too low.
NBNK Investments, a new banking venture set up by former Lloyds of London chairman, Lord Levene, had also expressed an interest in buying the Clydesdale and Yorkshire banks.
However NBNK Investments withdrew from negotiations after failing to agree a price.
It has now formally tabled a £1.5 billion bid for the 632 branches Lloyds Banking Group has been forced to sell by the European Commission as a result of its £17 billion UK Government bailout.
The Lloyds branch sale had also attracted early interest from NAB, though it withdrew its interest in the auction in the early stages.
NAB chief executive Cameron Clyne said organic growth of its UK operations remains a primary focus for the group.
He said: "There has been much speculation in the UK about potential mergers and acquisitions in the past 12 months, and how our UK business may fit in with this, but in all cases this has been driven by other parties who are considering divesting or acquiring."
Under Moody's long-term rating system, Clydesdale and Yorkshire have dropped to its second lowest A rating of seven listed standards in its A rates for long term bond quality.
Similar rating tables from Standard and Poor's and Fitch put the investment quality at A, in the upper medium grade, below high grade and premium.