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Fitch Upgrades Virgin Money to 'BBB+', Outlook Stable
January 20, 2014 / 2:51 PM / 4 years ago

Fitch Upgrades Virgin Money to 'BBB+', Outlook Stable

(The following statement was released by the rating agency) LONDON, January 20 (Fitch) Fitch Ratings has upgraded Virgin Money plc's (VM) Long-term Issuer Default (IDR) to 'BBB+' from ‘BBB’, Short-term IDR to 'F2' from ‘F3’ and Viability Rating (VR) to 'bbb+' from ‘bbb’. The Outlook is Stable. The agency has also affirmed the Support Rating at ‘5’ and its Support Rating Floor at ‘No Floor’. The upgrades reflect Fitch’s opinion that the bank’s earnings will continue to improve, while its asset quality and funding profiles will remain sound and that liquidity and capitalisation, while declining from high levels, will remain solid. The ratings also reflect Fitch’s expectation that expansion will continue at a controlled pace and that the bank’s public disclosure will improve. KEY RATING DRIVERS VM’s Long and Short-term IDRs are driven by its standalone credit profile as reflected in its VR. Fitch believes that support by the authorities or by the group’s ultimate shareholders in case of need cannot be relied upon. Consequently, we do not factor extraordinary support into its IDRs. Fitch expects the bank’s standalone credit profile to improve on higher profitability over the medium term following improvements to the balance sheet. The bank’s net interest margin should be boosted by growth in new low-risk, residential mortgage loans with wider margins, and the consolidation of a new higher-yielding credit card loan portfolio. Costs are likely to remain fairly flat due to the current scalability of its operations. Fitch expects mildly positive operating profits in 2013 to have been boosted by capital gains from the sale of its share in its credit card partnership with MBNA, as part of its buyback from MBNA of a portion of the existing VM credit card portfolio. While asset quality, on-balance sheet liquidity and capitalisation are likely to weaken we do not expect such deterioration to be material enough to adversely affect the ratings. Mortgage arrears are currently low: the original loan book acquired from Northern Rock on 1 January 2012 had virtually no arrears; new lending policies have been prudent; and low base rates in the UK have generated a fairly benign environment for mortgage performance. However, as newer loans season (both mortgage and credit card lending) and as base rates rise, arrears will increase but we expect them to remain below average industry levels in the medium-term. Reported regulatory ratios are strong with the capital base comprising entirely of core Tier 1 capital, which simplifies capital expectations under the Basel III regime. Ratios are likely to moderate as a result of projected loan growth but to remain in line with the bank’s prudent risk appetite. Liquidity is higher than the industry average and partly reflects management’s conservative attitude to liquidity. VM’s public disclosure is fairly weak. However, this is likely to improve as VM moves towards its preparations for an initial public offering. RATING SENSITIVITIES The IDRs and VR may be downgraded should asset quality unexpectedly deteriorate to the extent that it erodes capital, particularly if VM’s pre-impairment operating profit remains weak. Negative rating pressure may also result if capital, liquidity and funding deteriorate more quickly than expected, as a result of weak earnings and excessive asset growth, whether organically or through acquisitions. The SR and SRF are sensitive to changes in assumptions around the propensity or ability of the authorities or the shareholders to provide timely support to the bank, neither of which is expected by Fitch. Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Vanessa Flores Associate Director +44 20 3530 1515 Committee Chairperson James Longsdon Managing Director +44 20 3530 1076 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012 and 'Evaluating Corporate Governance', dated 12 December 2012; are available on at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance 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.

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