Fitch Affirms Nationwide Building Society's Ratings

Thu Jul 24, 2014 12:45pm EDT

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(The following statement was released by the rating agency) LONDON, July 24 (Fitch) Fitch Ratings has affirmed Nationwide Building Society's (Nationwide) Long-term and Short-term Issuer Default Ratings (IDR) and Viability Rating (VR) at 'A'/F1'/a', respectively. Nationwide's Support Rating (SR) and Support Rating Floor (SRF) are affirmed at '1' and 'A'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS - IDRs and VR Nationwide's VR, and hence IDRs, are driven by its well performing loan book, composed mostly of prime residential mortgage loans (71.5% of total loans at YE14) funded by a large and stable retail deposit base. It has been able to build these as a result of its sound franchise in the UK mortgage and savings markets and strong brand recognition. Losses on its prime residential loan book have been minimal throughout the recent economic cycle and loan impairment charges (LICs) were almost nil in FY14. The society is generally risk averse and is managed by an experienced team. However, expansion into commercial real estate (CRE) lending resulted in significant LICs for at least the past three years. The society still has a large book of non-performing CRE loans, exposing capital to further unexpected negative movements in real estate prices. However, the wind-down of this book is being achieved at a faster than initially envisaged pace and at around carrying value. Furthermore the outlook for this sector appears to have stabilised, and Fitch expects LICs in this division to have peaked. Very low risk weightings of its prime residential mortgage lending, combined with the issuance of a new form of capital for mutuals, the Core Capital Deferred Shares (CCDS), have allowed the society to report strong risk-weighted capital ratios at YE14. Leverage, at 3.3% calculated on a CRD IV basis, was boosted after the issuance of GBP1bn of Additional Tier 1 (AT1) securities (with a 7% trigger) at the beginning of 2014 and is now in line with the UK's other major banks. On-balance sheet liquidity is reducing and weaker than its peers' but still solid and in line with regulatory requirements. Internal capital generation has improved as a result of very cheap funding costs and improved yields during the year. Overall, net interest margins are fairly high within the mutual sector, particularly given the very low base rates. Income was helped by very strong volumes growth during the year but growth for FY15 is expected to be lower reflecting a slowdown in the demand. RATING SENSITIVITIES - IDRS AND VR Given Nationwide's geographic and business concentrations, Fitch views its natural VR range to be within the 'a' category. An upgrade in the VR to 'a+' in the short term is not Fitch's base case given continued pressure on capital from unreserved loans and continued regulatory risk in relation to leverage, which may put its prime residential mortgage model at risk. Negative rating pressure on the VR is also not Fitch's base case but may arise if the society fails to meet its targeted reduction in its CRE loans, or if there is an increased risk profile within its loan book, either by an aggressive rise in lending to riskier sectors or with higher loan to values. Nationwide is less exposed to business model risk resulting from the future implementation of ring-fencing; as a building society it will be subject to separate legislation than the other major UK banks. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR Nationwide's SR and SRF reflect Fitch's view that, as a systemically important financial institution in the UK, support from the UK authorities (AA+/Stable), in case of need, is extremely likely. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The SR and SRF are sensitive to a change in Fitch's assumptions about the ongoing availability of extraordinary sovereign support made available to the society. Changes in assumptions could be driven by a reduction either in the sovereign's ability (for example, triggered by a downgrade of the UK's sovereign rating) or propensity to provide such support. In either case, this would result in a downward revision of the society's SRF. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for systemically important banks and other systemically important financial institutions in the UK (and more broadly in the EU), as demonstrated by a series of legislative, regulatory and policy initiatives at UK and EU levels. We expect the EU's Bank Recovery and Resolution Directive (BRRD) to be implemented into national legislation later in 2014 or in 1H15. In Fitch's view, these regulatory developments will increase the likelihood of senior debt losses in banks if they fail solvability assessments. Fitch expects to then downgrade Nationwide's SR to '5' and revise its SRF to 'No Floor'. The timing at this stage is likely to be some point in late 2014 or in 1H15. As Nationwide's SRF does not drive its Long-term IDR, its IDRs will not be affected by this rating action. RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND HYBRID RATINGS Nationwide's subordinated debt and hybrid securities are notched down from Nationwide's VR reflecting a combination of Fitch's assessment of their incremental non-performance risk relative to the VR (up to three notches) and assumptions around loss severity (one or two notches). Nationwide's subordinated debt is notched down once from Nationwide's VR. The Permanent Interest Bearing Securities (PIBS) are rated four notches below Nationwide's VR, reflecting two notches for their deep subordination and two notches for incremental non-performance. The AT1 securities are rated five notches below Nationwide's VR, of which two notches for loss severity to reflect the conversion into CCDS on breach of the trigger, and three notches for non-performance risk. The ratings are primarily sensitive to changes in Nationwide's VR. The full list of rating actions is as follows: Nationwide Long-term IDR: affirmed at 'A' ; Stable Outlook Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior unsecured long-term debt, including programme ratings and member deposits: affirmed at 'A' Commercial paper and short-term debt, including programme ratings: affirmed at 'F1' Lower Tier 2: affirmed at 'A-' Permanent interest bearing securities: affirmed at 'BBB-' Subordinated Additional Tier 1 instruments: affirmed at 'BB+' Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Maria Rivas Director +44 20 3530 1163 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 4429 91 74 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, "Assessing and Rating Bank Subordinated and Hybrid Securities Criteria", dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.