TEXT-S&P affirms Virgin Money's 'BBB+/A-2' ratings
Overview -- On Jan. 18, 2013, Virgin Money PLC announced the acquisition of GBP1 billion of credit card receivables from MBNA Ltd., part of Bank of America Corp. -- The acquisition and planned growth of its on-balance-sheet credit card assets does not adversely affect our view of Virgin's overall risk appetite. -- We are therefore affirming the 'BBB+/A-2' ratings on Virgin. -- The stable outlook reflects our expectation that Virgin's pre-diversification risk-adjusted capital ratio will decline, but will remain above 10% due to modest retained earnings over the near term and relatively rapid loan portfolio growth. Rating Action On Jan. 22, 2013, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' counterparty credit ratings on Virgin Money PLC. The outlook is stable. Rationale The affirmation reflects our belief that the strategic rationale for the transaction of GBP1 billion of credit card receivables from MBNA Ltd. (MBNA) is sound, and that the consequent growth in risk-weighted assets (RWAs) does not materially weaken Virgin's capital position at this time. In our view, the acquisition should help Virgin to protect the future economic benefit of its successful joint venture with MBNA in light of Bank of America's announced intention to exit the European card business. The acquisition also helps to diversify Virgin's product portfolio, provides opportunities for cross-selling, and lays the foundation for future organic growth, in our view. We continue to view Virgin's capital and earnings as "strong." We expect the risk-adjusted capital (RAC) ratio before diversification adjustments will decline from 12.1% at Jan. 1, 2012 to the 10%-10.5% range, that is, modestly above the 10% level over the next two years. This decline is based on our expectation that: (a) Retained earnings over the near term will be modest, but will gradually improve as the net interest margin is boosted by the acquisition and policy measures such as the U.K. government's Funding for Lending (FLS) scheme; and (b) RWAs will increase both due to the acquisition and as the group expands net lending organically in line with its business plan. We expect future management actions relating to organic and inorganic growth to be consistent with maintaining Virgin's current capital position. We also continue to view the group's risk position as "adequate," reflecting Virgin's strong asset quality with a focus on prime residential mortgages (given the high quality of mortgages that were transferred from the old Northern Rock) and its conservative risk appetite. The assessment also reflects our view of Virgin's expected growth in exposures over the two-year outlook horizon. We consider the acquisition of the credit card portfolio to be consistent with our view of Virgin's conservative risk appetite. We understand that the MBNA credit card portfolio is known to Virgin management owing to its long-standing association with MBNA. We also understand that the acquired portfolio has outperformed the industry in terms of delinquency rates and that underwriting criteria for new business remains stringent. Finally, operational and execution risk of the acquisition is mitigated to a large extent by the servicing agreement with MBNA whereby all acquired accounts will continue to be serviced by MBNA until early 2014. We base our ratings on Virgin on our view of its consolidated group credit profile (GCP). The consolidated group comprises Virgin Money's legacy businesses and the acquired Northern Rock business, which was renamed Virgin Money PLC. The GCP of the enlarged Virgin Money business reflects its 'bbb+' anchor, "weak" business position, "strong" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. The GCP before factoring in the likelihood of extraordinary government support (unsupported GCP) is 'bbb'. The supported GCP is one notch higher than the unsupported GCP, reflecting the moderate likelihood of extraordinary government support due to the group's moderate systemic importance and our assessment of the U.K. government as "supportive," as defined in our criteria. The long-term counterparty credit rating on Virgin is the same as the GCP, reflecting our view that Virgin is "core" to its parent, Virgin Money Holdings (U.K.) Ltd. Outlook The stable outlook reflects our expectation that the group's pre-diversification RAC ratio will decline, but will remain above 10% given its modest near-term retained earnings and planned growth in RWAs. The stable outlook also reflects our belief that the group's development will continue to proceed according to plan and that the enlarged entity will gradually strengthen its franchise. We could lower the ratings if the group suffers sustained losses or we see it move toward a more aggressive capital policy, which would lead us to revise down our assessment of capital and earnings. The ratings could also come under pressure if we observe a material increase in its risk appetite, leading to a downward revision of our risk position assessment. Finally, we could lower the ratings if we consider that the group's current "moderate" systemic importance could reduce based on our view of evolving regulation and evidence of limited support for similar institutions. Although unlikely in the near term, we could raise the ratings if the group continues to successfully execute its business plan, develops a track record of stable revenue growth, and gains market share in the retail banking market, while maintaining a low risk profile. This could lead us to raise our assessment of its business position. Ratings Score Snapshot Issuer Credit Rating BBB+/Stable/A-2 Group Credit Profile bbb Anchor bbb+ Business Position Weak (-2) Capital and Earnings Strong (+1) Risk Position Adequate (0) Funding and Liquidity Average and Adequate (0) Support +1 GRE Support 0 Group Support 0 Sovereign Support +1 Additional Factors 0 Related Criteria And Research -- Virgin Money PLC, Nov. 27, 2012 Ratings List Ratings Affirmed Virgin Money PLC Counterparty Credit Rating BBB+/Stable/A-2 Certificate Of Deposit BBB+/A-2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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