Fitch warns on outlook for UK mutual lenders

LONDON, July 22 (Reuters) - Rating agency Fitch warned on Tuesday of rising arrears for British building societies, especially for lenders exposed to specialist, higher-risk mortgages amid a deteriorating economy.

Fitch said it had cut its ratings on Principality Building Society, West Bromwich Building Society and Yorkshire Building Society by a notch each and revised its outlook for larger rival Britannia, Britain's 12th-largest mortgage lender, to negative. "Fitch considers that, from an unsustainably low level, loan impairment charges will rise, dampening operating profit," it said in a statement.

"Fitch believes the most vulnerable building societies are those that have the greatest exposure to specialist mortgages, high loan-to-value residential mortgage loans, concentration in commercial mortgage lending and recent rapid loan growth."

It said mutuals benefit from traditionally stable retail funding from savers, while loan portfolios were secured on typically secure residential housing, but said recent growth had increased vulnerability.

Principality, downgraded to A- from A, is exposed to second charge loans, or loans secured on the borrower's home, and Fitch warned of increased defaults but also of more severe losses than previously expected.

West Bromwich was also downgraded to A- on the back of its rapid growth in buy-to-let and commercial lending.

Yorkshire, which has grown its broker-introduced business and could also see investment writedowns, was downgraded to A.

(Reporting by Clara Ferreira-Marques; editing by Elaine Hardcastle)