The rating actions follow our review of the ratings on SanUK. The stand-alone credit profile of SanUK is unchanged at ‘bbb+'. However, we have revised upward our assessment of the bank’s capital and earnings to “adequate” from “moderate” and revised downward our assessment of the bank’s risk position to “adequate” from “strong”, as our criteria define these terms. The rest of the factors driving the bank’s SACP remain unchanged. The unchanged SACP reflects our view that SanUK’s creditworthiness has so far remained resilient despite the pressures elsewhere in the Santander group.
Under our bank rating methodology, to determine the rating on overseas bank subsidiaries, such as SanUK, we apply notches of uplift over and above the subsidiary’s own stand-alone credit profile (SACP) for either group support or extraordinary domestic government support, whichever leads to the higher outcome. We continue to regard SanUK as a “core” subsidiary of Banco Santander. Nevertheless, we factor into the long-term rating on SanUK two notches of uplift for potential future U.K. government support, which leads to a higher outcome.
These two notches derive from our unchanged assessment of SanUK’s “high” systemic importance to the U.K., which primarily reflects the bank’s very strong market position in U.K. residential mortgages and savings. In our view, its financial prospects are primarily linked to the U.K. environment in which it operates, rather than the fortunes of the wider group. We note that SanUK has no structural reliance on group funding and is self-supporting from a liquidity standpoint. Furthermore, we believe that SanUK’s status as a regulated entity, supervised intensively by the U.K. Financial Services Authority, would likely limit it from providing support to the parent that would impair its own financial strength. We also understand that SanUK would be unlikely to be legally drawn into the parent’s bankruptcy proceedings, should this occur.
Our revised assessment of the bank’s capital and earnings reflects our updated view that the Standard & Poor’s risk-adjusted capital (RAC) ratio will remain in the 7.5%-8.0% range through the two-year rating horizon. It was 7.3% at end-2011. Previously, we had expected the ratio to move back into the 6%-7% range. Our projected RAC ratio takes into account restrained organic growth, and assumes that SanUK will maintain its current dividend policy, without intending to repatriate the GBP4.5 billion capital injected in 2010 by Banco Santander, which was largely intended to support the now-discontinued plan to acquire certain assets from The Royal Bank of Scotland (RBS; A/Stable/A-1).
Our revised assessment of SanUK’s risk position reflects our view that the bank’s capital and earnings position adequately captures its ability to deal with the risks it undertakes. We also note SanUK’s announced step up in provisioning on its legacy corporate portfolio and our view of the risk to asset quality from the difficult economic environment prevailing in the U.K. Within our assessment of the bank’s risk position, we acknowledge SanUK’s minimal exposure to the rest of the group, which we expect to continue, and SanUK’s return to a strategy of cautious organic growth, now that the RBS deal has been discontinued.
We consider SanUK’s business position to be “adequate” (as defined by our criteria), as we consider that the bank’s mortgage and savings franchise has remained resilient in the face of adverse news flow around the parent. The termination of the deal to acquire certain branches and related assets from RBS has no significant negative implications for SanUK, in our view, other than the fact that the bank may now take longer to develop a more diversified business, and that it is less underweight in commercial and corporate banking compared with the largest U.K. banks.
We view the bank’s funding as “average” and liquidity as “adequate” due to the bank’s stable deposit franchise and restrained use of short-term wholesale funding. We note that SanUK has no structural reliance on group funding and is self-supporting from a liquidity standpoint. We note that credit spreads (and so the marginal cost of funding) for SanUK have widened in recent months, compared with major U.K. peers, but consider the impact to be limited.
In line with our methodology, we analyzed whether SanUK is an “insulated subsidiary”, as defined by our group rating methodology, and we concluded it is not (for more information, see “Rating A Financial Institution Subsidiary Above Its Bank Parent,” published Oct. 10, 2012). While we believe it meets many of the requirements, we think that as a confidence-sensitive, largely deposit-funded institution, SanUK’s financial prospects are not highly independent of the fortunes of the parent, even though there is no structural funding linkage between SanUK and Banco Santander. Additionally, it is not clear to us whether the “independent trustee” role identified in our criteria exists in this case.
The negative outlook reflects the possibility of a negative rating action if, in our view, the weakening credit profile of Banco Santander jeopardizes SanUK’s funding prospects or poses a significant threat to its confidence-sensitive deposit base. The negative outlook also captures the potential contagion risk from the wider group, which could affect SanUK’s business position concerning decisions about how the business is run locally, or if the association with its Spanish parent puts the bank in a disadvantageous situation, compared with its U.K. peers. Any such event could lead us to lower the SACP for SanUK and so the ratings.
An outlook revision back to stable could occur if we see that pressure at Banco Santander is easing and potential strain on SanUK’s SACP is materially reducing.
Ratings Score Snapshot
Issuer credit rating A/Negative/A-1
Business Position Adequate 0
Capital and Earnings Adequate 0
Risk Position Adequate 0
Funding Average 0
GRE Support 0
Group Support 0
Sovereign Support +2
Additional Factors 0
Related Criteria And Research
-- Research Update: Banco Santander S.A. And Some Subsidiaries Ratings Affirmed Despite Spain’s Rising Economic Risk; Outlooks Negative, Nov. 23, 2012
-- Research Update: Santander UK ‘A/A-1’ Ratings Placed On CreditWatch Negative Following Banco Santander Downgrade, Oct. 16, 2012
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Ratings Affirmed; CreditWatch/Outlook Action
Santander UK PLC
Counterparty Credit Rating A/Negative/A-1 A/Watch Neg/A-1
Certificate Of Deposit A/A-1 A/Watch Neg/A-1
Santander UK PLC
Senior Unsecured A A/Watch Neg
Subordinated BBB BBB/Watch Neg
Junior Subordinated BBB- BBB-/Watch Neg
Preferred Stock BBB- BBB-/Watch Neg
Preference Stock BBB- BBB-/Watch Neg
Abbey National Capital Trust I
Preferred Stock* BBB- BBB-/Watch Neg
Abbey National North America LLC
Commercial Paper* A-1 A-1/Watch Neg
Abbey National Treasury Services PLC
Senior Unsecured* A A/Watch Neg
Commercial Paper* A-1 A-1/Watch Neg
Abbey National Treasury Services PLC (Hong Kong branch)
Certificate Of Deposit* A A/Watch Neg
*Guaranteed by Santander UK PLC.