(The following statement was released by the rating agency)
LONDON, July 24 (Fitch) Fitch Ratings has affirmed Nationwide
(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
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
charges (LICs) were almost nil in FY14.
The society is generally risk averse and is managed by an
However, expansion into commercial real estate (CRE) lending
significant LICs for at least the past three years. The society
still has a
large book of non-performing CRE loans, exposing capital to
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
value. Furthermore the outlook for this sector appears to have
Fitch expects LICs in this division to have peaked.
Very low risk weightings of its prime residential mortgage
with the issuance of a new form of capital for mutuals, the Core
Deferred Shares (CCDS), have allowed the society to report
capital ratios at YE14. Leverage, at 3.3% calculated on a CRD IV
boosted after the issuance of GBP1bn of Additional Tier 1 (AT1)
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
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
RATING SENSITIVITIES - IDRS AND VR
Given Nationwide's geographic and business concentrations, Fitch
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
may put its prime residential mortgage model at risk. Negative
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
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
implementation of ring-fencing; as a building society it will be
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
financial institution in the UK, support from the UK authorities
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
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
support for systemically important banks and other systemically
financial institutions in the UK (and more broadly in the EU),
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
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
Nationwide's subordinated debt and hybrid securities are notched
Nationwide's VR reflecting a combination of Fitch's assessment
incremental non-performance risk relative to the VR (up to three
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
Nationwide's VR, reflecting two notches for their deep
subordination and two
notches for incremental non-performance. The AT1 securities are
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
non-performance risk. The ratings are primarily sensitive to
The full list of rating actions is as follows:
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
deposits: affirmed at 'A'
Commercial paper and short-term debt, including programme
ratings: affirmed at
Lower Tier 2: affirmed at 'A-'
Permanent interest bearing securities: affirmed at 'BBB-'
Subordinated Additional Tier 1 instruments: affirmed at 'BB+'
+44 20 3530 1191
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
+44 20 3530 1163
Olivia Perney Guillot
+33 1 4429 91 74
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
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Additional information is available on www.fitchratings.com
Applicable criteria, "Global Financial Institutions Rating
Criteria", dated 31
January 2014, "Assessing and Rating Bank Subordinated and Hybrid
Criteria", dated 31 January 2014, are available at
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Assessing and Rating Bank Subordinated and Hybrid Securities
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