Jan 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Clydesdale Bank Plc a€™s (CB) Long- and Short-term Issuer Default Ratings (IDR) at a€˜Aa€™ and a€˜F1a€™, respectively. The Outlook on the Long-term IDR is Stable. Fitch has also affirmed CB’s Viability Rating (VR) at ‘bbb+’ and its Support Rating (SR) at ‘1’.
KEY RATING DRIVERS - IDRS AND SR
The bank’s IDRs reflect Fitch’s belief that there is a high probability of support from its 100% parent National Australia Bank, if required, based on demonstrated support over the past three years, most recently in 2012 when NAB acquired most of CB’s under-performing commercial real estate (CRE) loan portfolio. This is despite its limited strategic importance to NAB in Fitch’s view, given its fairly small size in relation to the group and own branding in a non-core geography. NAB has stated that it is likely to sell CB in the medium term. The two-notch difference between CB’s and NAB’s IDR reflects its low strategic importance but also Fitch’s view that support will continue to be provided until a buyer is found.
RATING SENSITIVITIES - IDRS AND SR
The Outlook on CB’s Long-term IDR reflects the Outlook on the parent. Changes in CB’s IDRs and the SR would reflect changes to Fitch’s view of NAB’s propensity or ability to support CB and/or a change in ownership. A change in NAB’s ability to support would be signalled by a change in NAB’s Long-term IDR.
KEY RATING DRIVERS - VR
CBa€™s a€˜bbb+a€™ VR is driven by the banka€™s sound asset quality and adequate impairment reserves, following the transfer of the underperforming CRE book to NAB in 2012, as well as its healthy funding and liquidity and acceptable capitalisation. The ratings also consider CBa€™s weak earnings which Fitch expects will slowly recover, hindered by low interest rates and regulatory uncertainty, especially with regard to conduct charges. Fitch expects capitalisation to remain broadly stable and in line with NABa€™s ratios. At end-2013, CB’s Fitch core capital (FCC) ratio was 9.6%.
Asset quality is sound, with a Fitch-calculated non-performing loan (NPL) ratio of 1.3% at end-2013 and loan loss reserve coverage of 79.6%. Liquidity is strong with over 20% of assets held in either cash or liquid securities.
The VR is also underpinned by a high level of ordinary support from NAB, as reflected by the absence of common dividends since 2007. The VR also considers CB’s low, albeit recovering, profitability and some vulnerabilities of its SME lending to the weak UK economic outlook.
RATING SENSITIVITIES - VR
The bank’s VR is sensitive to a change in Fitch’s assumptions regarding asset quality and earnings potential which could negatively affect financial performance and weaken the bank’s capital. Significant asset quality deterioration in CB’s SME lending leading to a sustained weakening of earnings and FCC ratios could result in a downgrade of the VR. Upside potential is limited in the medium-term given CB’s constrained profitability and moderate operational risks associated with the bank’s restructuring programme.