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TEXT-S&P revises Nationwide Building Society outlook to negative
December 18, 2012 / 4:00 PM / 5 years ago

TEXT-S&P revises Nationwide Building Society outlook to negative

Overview
     -- On Dec. 13, 2012, Standard & Poor's revised its outlook on the United 
Kingdom 'AAA' long-term sovereign credit rating to negative from stable. 
     -- Nationwide Building Society's risk-adjusted capital (RAC) ratio, 
according to our measures, has declined, primarily due to a net actuarial loss 
in the employee pension scheme.
     -- As a result of both factors, we are revising our outlook on the 
long-term rating on Nationwide to negative from stable.
     -- We are affirming our 'A+/A-1' ratings on Nationwide.
     -- The negative outlook on Nationwide reflects both the negative trend in 
the RAC ratio and our view that if we lowered the long-term rating on the U.K. 
to 'AA+', we would henceforth only factor one notch for potential 
extraordinary government support into the long-term rating on the society. 

Rating Action
On Dec. 18, 2012, Standard & Poor's Ratings Services revised its outlook on 
Nationwide Building Society to negative from stable. At the same time, we 
affirmed our 'A+/A-1' long- and short-term counterparty credit ratings.

Rationale
The outlook revision reflects that on the United Kingdom 'AAA' long-term 
sovereign credit rating (see "Outlook On United Kingdom Revised To Negative; 
'AAA/A-1+' Ratings Affirmed," published Dec. 13, 2012 on RatingsDirect on the 
Global Credit Portal). 

The 'A+' long-term rating on Nationwide incorporates two notches for potential 
future support from the U.K. government. This reflects our view of the society 
as highly systemically important to the U.K. and the U.K. government as 
"supportive" of its banking system. We therefore consider that there is a 
"moderately high" likelihood that Nationwide would receive extraordinary 
support from the U.K. government. 

Our assessment of Nationwide's stand-alone credit profile (SACP), its systemic 
importance, and the supportive stance of the U.K. government has not changed. 
However, in accordance with our criteria (see table 22 of "Banks: Rating 
Methodology And Assumptions," published Nov. 9, 2011), if the U.K. was 
downgraded to 'AA+' we would henceforth factor into the rating on Nationwide 
one notch, instead of two, for systemic support. 

The outlook revision also reflects our view that the adverse trend in 
Nationwide's risk-adjusted capital (RAC) ratio, according to our measures, has 
lowered the likelihood that it will rise into the 7.0%-7.5% range within the 
next 12 months. Nationwide's RAC ratio before diversification/concentration 
adjustments was 6.7% at April 4, 2011, declined to 6.4% at Sept. 30, 2011, and 
further reduced to 6.1% at April 4, 2012, primarily due to a net actuarial 
loss in the employee pension scheme. The gap between the RAC ratio and the 
core Tier 1 ratio (which was 12.4% as of Sept. 30, 2012) mainly reflects a 
significant difference in the risk-weights applied to residential mortgages. 
If the RAC ratio does not rise to 7% within the next 12 months, we could 
revise our capital and earnings score to "moderate" from "adequate", as our 
criteria define these terms. 

Standard & Poor's bases its ratings on Nationwide on the society's 'bbb+' 
anchor. The ratings also reflect our view of its business position, which we 
assess as "adequate" due to the society's stable franchise and relatively 
cautious strategic approach, partly offset by its concentration in U.K. retail 
financial services. We view capital and earnings as "adequate" since we think 
there is still scope for the RAC ratio to rise into the 7.0%-7.5% range in the 
coming 12 months on the back of modest growth in lending and savings, a 
gradual improvement in its net interest margin, and the tapping of markets in 
2013 with a new core capitalization instrument. Our assessment of its risk 
position is "strong", reflecting Nationwide's large residential mortgage 
portfolio, which, in our opinion, has a materially more favorable risk profile 
than the industry average. We view funding as "average" and liquidity as 
"adequate," due to the society's large, stable retail deposit franchise and 
the strengthening of its liquidity buffer.

Outlook
The negative outlook reflects the outlook on the U.K. 'AAA' long-term 
sovereign credit rating. If we lowered the rating on the U.K. by one notch, we 
would expect to lower the long-term rating on Nationwide by one notch. A 
combination of both a lower assessment of capital and earnings and a lowering 
of the rating on the U.K. would result in a one-notch downgrade of Nationwide.

The negative outlook also reflects our view that the adverse trend in 
Nationwide's RAC ratio, according to our measures, has lowered the likelihood 
that it will rise into the 7.0%-7.5% range within the next 12 months.

We could additionally lower the ratings on Nationwide if we lowered its SACP 
as a result of a revised assessment of Nationwide's risk position to 
"adequate" from "strong". This could follow a material deterioration in asset 
quality metrics, mainly in the commercial property loan portfolio. We 
acknowledge the recent negative performance trends in this portfolio and the 
more significant provisioning requirements. In addition, potential 
deterioration in the investment securities portfolio, or the employee pension 
fund, could lead to a negative rating action.

We do not consider a positive rating action as likely over the outlook 
horizon, but consider that it could occur in time if Nationwide's increasing 
revenue diversification causes us to revise our assessment of its business 
position upward.

Ratings Score Snapshot
Issuer Credit Rating        A+/Negative/A-1

SACP                        a-
Anchor                    bbb+
Business Position            Adequate (0)
Capital and Earnings        Adequate (0)
Risk Position                Strong (1)
Funding and Liquidity        Average and Adequate (0)

Support                    +2
GRE Support                0
Group Support                0
Sovereign Support            +2

Additional Factors            0

Related Criteria And Research
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 
Nov. 9, 2011
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010
     -- Research Update: Outlook On United Kingdom Revised To Negative; 
'AAA/A-1+' Ratings Affirmed, Dec. 13, 2012
     -- Industry Report Card: Exceptional Items Are Becoming A Recurring Theme 
For U.K. Banks, Aug. 16, 2012
     -- Nationwide Building Society, Jan. 30, 2012


Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Nationwide Building Society
 Counterparty Credit Rating             A+/Negative/A-1    A+/Stable/A-1
 Certificate Of Deposit                 A+/A-1           

Nationwide Building Society
 Senior Unsecured                       A+                 
 Subordinated                           BBB+               
 Junior Subordinated                    BBB                
 Commercial Paper                       A-1                

Law Debenture Intermediary Corp. PLC (The)
 Junior Subordinated                    BBB                

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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