Moody's said the operating environment remained negative for British banks which, themselves, were better placed in some respects than European Union rivals more directly hit by the euro zone debt crisis.

Senior vice president Elisabeth Rudman also told Reuters in an interview Moody's would not necessarily cut British bank ratings again.

In the UK, the banks have considerably strengthened their capital levels and liquidity levels. It means the UK banks are relatively well-placed with regards to their peers in Europe.

But the operating environment which they are in is extremely challenging and we think it will remain so.

In October, Moody's cut its ratings on part state-owned banks Lloyds and Royal Bank of Scotland , and also downgraded Spanish group Banco Santander's Santander UK unit, Co-Operative Bank, Nationwide Building Society and seven smaller building societies.

NEGATIVE RISKS REMAIN

Rudman said negative risks for British banks were rising unemployment and the possibility of an economic recession, along with the ongoing European debt crisis.

We have a negative outlook on the system. It is similar to most banking systems in Europe and many banking systems globally ... Any kind of rise in unemployment will feed through to banks' profitability and asset quality.

Lloyds and RBS shares were both down 1.1 percent in mid-morning trade, outperforming bank stocks elsewhere in Europe.

Italian lender UniCredit , which has set a chunky discount on a 7.5 billion euro (5.7 billion pound) rights issue, was down 10 percent, while Deutsche Bank was down 4.6 percent.

Britain's so-called Big Four banks -- Barclays , HSBC <0005.HK>, Lloyds and RBS -- were due to report 2011 results in late February and early March.

Cavendish Asset Management fund manager Paul Mumford said the sector looked better placed than European rivals.

On the whole, the UK banking sector's results should not be too bad. They have built up their capital levels and their bad debt provisions are falling away. In terms of risk versus reward, the reward element is better than a year ago because so much of the bad news is out of the way, he said.

Rudman said it would take time to see if Lloyds had resolved uncertainties over its management, following chief executive Antonio Horta-Osorio's return to work after sick leave. In November, Moody's had said it could cut its ratings on Lloyds.

(Reporting by Sudip Kar-Gupta; Editing by David Cowell and Dan Lalor)