-- 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.
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.
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.
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
Ratings Score Snapshot
Issuer Credit Rating A+/Negative/A-1
Business Position Adequate (0)
Capital and Earnings Adequate (0)
Risk Position Strong (1)
Funding and Liquidity Average and Adequate (0)
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 Affirmed; CreditWatch/Outlook Action
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+
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