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.