Moody's Investors Service downgraded its ratings on nine Portuguese banks on Friday, citing the increased asset risk linked to their holdings of Portuguese government debt and the sovereign downgrade of Portugal in July.

The ratings agency downgraded by one or two notches the senior debt and deposit ratings of nine banks and the standalone ratings of six of them.

In early trading, Portugal's top listed bank Millennium bcp fell 1.7 percent.

Shares in BES fell 0.8 percent and Banco BPI dropped 0.6 percent, before erasing early losses, but still underperforming the Stoxx Europe banking index which was up around 1 percent.

All three saw their standalone ratings and debt and deposit ratings cut.

Moody's said it expected a further deterioration of Portuguese banks' domestic asset quality due to a weak economic growth outlook and government austerity measures, as well as liquidity strains due to a lack of access to wholesale funding.

Debt-laden Portugal is enacting painful tax hikes and spending cuts under a 78 billion euro EU/IMF bailout designed to shore up its public finances and restore investor confidence.

Banks have to boost their capital ratios under the bailout terms after becoming overly dependent on ECB funding.

Moody's cut its credit rating on Portugal by four notches to Ba2 in July.

The key driver for the downgrades of most banks' debt and deposit ratings is Moody's assessment of the deterioration of their unsupported financial strength, the ratings agency said on Friday.

It has a negative outlook on Portugal's banks.

Moody's said if recapitalisation and deleveraging plans for Portuguese banks were successful they would help restore confidence in the Portuguese banks.

However, Moody's believes that these plans face significant implementation risks, it said.

The six banks whose standalone ratings and debt and deposit ratings were cut are the state-controlled Caixa Geral de Depositos, top listed bank Millennium bcp, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Caixa Economica Montepio Geral.

Among the top listed banks, Moody's cut Millennium bcp's standalone rating by two notches to B1 -- which is four notches below investment grade -- citing concerns over its high reliance on wholesale funds, its exposure to Greece via its Greek subsidiary and weak profitability.

Its rival BES was downgraded by two notches to Ba3 on concerns that BES's business model may be particularly affected by Portuguese banks' loss of market access, while Banco BPI was cut to Ba2, thus losing its lowest investment grade mark, due to its direct exposure to Greece, Moody's said.

Moody's has the lowest rating on Portugal's debt among the top raters. Standard & Poor's ratings agency earlier this week affirmed Portugal's BBB-minus rating at the bottom of the investment grade range with a negative outlook.

All of the banks' ratings carry a negative outlook by Moody's with the exception of Banco Portugues de Negocios, which has a developing outlook on all of its ratings. it said.

Banco Internacional do Funchal (Banif) and Banco Portugues de Negocios had their debt and deposit ratings downgraded as a consequence of the weaker Portuguese sovereign.

The debt ratings downgrade of Espirito Santo Financial Group followed the lower rating of its operating company, BES.