Bradford & Bingley's ability to generate earnings "has been compromised and will remain under pressure for the foreseeable future", according to the ratings agency DBRS.

Bradford & Bingley's ability to generate earnings "has been compromised and will remain under pressure for the foreseeable future", according to the ratings agency DBRS.

The agency yesterday downgraded the long-term senior debt and deposits rating of the beleaguered bank from A to BBB (high), and its commercial paper rating to R-2 (high) from R-1 (low), while placing all its ratings "under review with negative implications".

The BBB (high) rating is one notch up from the basic BBB because DBRS believes that "in the aftermath of the explicit external support for Northern Rock and the continued disruption of the financial markets, support for larger banks is now more likely following the various actions set in place by the various banking authorities to ensure stability in the UK banking system".

The ratings agency commented that accelerating house price deflation and the weakening UK economy would continue to have a significant impact on the credit performance of Bradford & Bingley's loan book, further pressuring earnings. It said that any significant weakening of asset quality would mean Bradford & Bingley's capital position might be further stressed, even after its £400m rights issue.

Bradford & Bingley yesterday published the supplementary prospectus for the rights issue, which has already cut the price from 82p to 55p, and said it was going "according to plan". The shares lifted 2.25p to 47.5p.

But DBRS commented on the bank's reduced financial flexibility caused by what it called "the increased propensity to utilise secured borrowings and the resulting increasingly encumbered balance sheet, which reduces credit protection of the unsecured borrower".

It added: "Moreover, recent market events have caused additional financial pressures. Finally, the downgrade takes into consideration DBRS's opinion that the company's underlying earnings power will be constrained in the near term by reduced origination volumes, potentially reduced volumes in the buy-to-let property market and higher credit and funding costs."

Arrears and credit impairments were likely to continue to rise through the rest of 2008, and the acquired loans which accounted for 20% of the portfolio were performing markedly worse than Bradford & Bingley's own loans.

"Liquidity remains stressed, and recent market events further reduce the company's liquidity cushion," the agency says. "However, short-term liquidity has been bolstered by Bradford & Bingley's access to the Bank of England's special liquidity scheme."