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19 May 2011
London, 19 May 2011 -- This press release corrects and replaces the press release issued on 19
May 2011. The hybrid indicator (hyb) has been added to all junior
subordinated and Tier 1 debt ratings.
The revised press release follows below:
Moody's Investors Service has today upgraded the subordinated, junior
subordinated and Tier 1 instrument ratings of Santander UK plc ("Santander
UK" ). The upgrade of these junior debt instruments follows a change
in the standalone rating to Baa1(hyb) from Baa2 (hyb), both of which
are mapped from the bank's standalone bank financial strength rating of
C-, which has been affirmed. Accordingly, the
bank's "adjusted" standalone rating (which includes parental support)
was upgraded from A3 to A2; the subordinated and junior debt instruments
are notched off this adjusted standalone rating and have thus been upgraded
to A3, Baa1 (hyb), and Baa2 (hyb) from Baa1, Baa2 (hyb)
and Baa3 (hyb) respectively.
The change in BFSR outlook to stable from negative and the higher standalone
ratings within the C- BFSR category reflect the improvement in
Santander UK's standalone financial profile, and a reduced likelihood
of the rating moving lower over the medium term. The debt/deposit
ratings of Aa3/P-1 remain unchanged. The negative outlook
on the longterm ratings of Aa3 also remain unchanged.
Moody's says that the stabilization of Santander UK's rating outlook and
the upgrade of its standalone ratings to Baa1(hyb) from Baa2(hyb) reflect
the improvement in the bank's financial fundamentals reflected in:
1) a stronger capital position, 2) consistent and improving profitability,
3) strong efficiency and 4) the stabilization of its asset quality over
the last two years.
Santander UK's capital levels improved significantly with Tier 1 ratio
increasing from 9.5% at YE2009 to 14.8% at
YE2010, mainly as a result of a GBP4.46billion injection
of capital from the bank's parent Banco Santander S.A.,
but also from earnings retention of approximately GBP750million.
Even though, a good portion of this capital injection is set aside
for the purchase of RBS branches in 2012, Moody's believes that
Santander UK's capital levels are adequate against our estimated losses
and compare favourably with other UK peers.
Furthermore, the bank's earnings performance has been strong both
relative to its peers and when considering the tough operating environment
in the UK, said Marjan Riggi, a Vice-President-Senior
Credit Officer at Moody's and the lead analyst for the bank. Profit
before tax for YE 2010 increased by 12% from last year to GBP2,141million
mainly as a result of higher interest income and lower administrative
and impairment costs. Key drivers behind this increase in net interest
income were improving margins (1.91% at YE2010 versus 1.76%
at YE2009) on existing mortgage loans which benefited from customers reverting
to higher rate standard variable rates, as well as better margins
on new lending. In addition, expenses were marginally lower
for 2010 (GBP1,793 million versus GBP1,848 in 2009) and the
bank continues to be one of the most efficient banks in the UK with cost-to-income
ratio at 41% at YE2010 compared to 42% in YE2009,
and 50% at YE2008.
Santander UK's loan portfolio is made up of mostly prime mortgage loans
(85% of total assets) with average indexed LTV of approximately
51%. The arrears in this portfolio improved from 1.52%
in 2009 to 1.41% in 2010 and are considerably below the
Council of Mortgage Lenders' industry average of 2.1%.
This trend is in line with other mortgage lenders in the UK and suggests
that the peak in arrears may have been reached. The improvement
in arrears was also reflected in lower overall impairment provisions which
decreased from GBP842 million in 2009 to GBP712 in 2010. Moody's
cautions, however, that a combination of higher interest rates
and unemployment could put upward pressure on arrears and this is a consideration
in our scenario analysis of expected losses versus capital levels going
Santander UK's has significantly reduced its exposure to structured related
assets embedded in the Alliance & Leicester portfolios (acquired in
2008) as well, by deleveraging these assets and by a general improvement
in liquidity of such securities in the past year. Moody's expected
losses associated with this exposure is now negligible.
Moody's notes, that in addition to the improved financial fundamentals
listed above, Santander UK's retail and corporate franchise continue
to strengthen both organically and through previous and planned acquisitions.
By YE2010, Santander UK had residential mortgage market share of
13.9% in the UK (up from 13.5% in 2009 and
12.9% in 2008). Its gross lending share was 18%
for 2010. Furthermore, loan balances for SME, a key
area of growth focus for the bank, increased by 26% to GBP8.5
billion and given its planned acquisition of 318 of RBS branches by early
2012, the bank is poised to increase its share of SME and corporate
banking to 9%. Santander UK's net deposit growth was approximately
GBP9.6 billion in 2010 which compares favourably with other mortgage
lenders in the UK most of whom have had difficulty raising deposits at
reasonable prices. The bank's bank account stock share has also
improved and was 9.1% at YE2010, versus 8.9%
at YE2009 and 8.5% at YE2008.
Moody's added, that Santander UK has a good and improving funding
profile when compared to non-mutual banks in the UK, with
loan to deposit ratio of 123% at YE2010 (vs. 126%
at YE2009, and 136% at YE2008). Its wholesale funding
remains well-diversified and its access to unsecured and secured
funding markets has been largely uninterrupted throughout the financial
crisis. Furthermore, Santander UK has a liquidity portfolio
comprising of high-quality assets with maturity, sector and
currency diversification . Moody's regards the bank's mostly retail-funded
balance sheet, solid and well-established wholesale funding
as well as its conservative liquidity book as factors which underpin its
current C- BFSR.
Santander UK's C- BFSR mapped to a Baa1 long term rating,
is based on the bank's solid and improving franchise in the UK as well
as its earnings stability and strong cost efficiency, which compare
favourably with that of its larger peers. The ratings also incorporate
the relatively good credit performance of Santander UK's mortgage portfolio
as well as its strong risk-adjusted profitability, sound
liquidity profile and good capital ratios.
Key concerns for Santander UK's BFSR are, a) the challenges posed
by the integration of RBS branches as well as the related potential risks
in the fast growing SME portfolio which the bank's management has targeted
for further expansion, b) customer service issues which could impair
its ability to strengthen its franchise in the UK, and c) the downside
risks to the overall asset quality which may stem from continued pressure
on the UK economy.
The upgrade of the bank's subordinated and junior subordinated ratings
respectively by one notch to A3, Baa1 (hyb) and Baa2 (hyb),
are in line with the upgrade of Santander UK's "adjusted" baseline credit
assessment (BCA) ratings to A2 from A3. The "adjusted" BCA do not
incorporate systemic support in the U.K, however they do
reflect two notches of parental support from the bank's parent,
Banco Santander S.A. (Aa2/B-/negative).
Moody's notes, that at this time, the senior debt ratings
of Santander UK remain unchanged at Aa3/P-1. This is due
to the incorporation of a high probability of government support during
the financial crisis for systemically important banks as well as a high
likelihood of parental support from the bank's parent, Banco Santander
S.A. which is rated Aa2/B- with a negative outlook.
As a result, Santander UK now benefits from a total of four notches
of uplift from the baseline standalone rating (two notches from parental
support and two notches from systemic support), whereas the unchanged
Aa3 rating previously incorporated three notches of uplift from systemic
support. The decision to leave the long-term debt rating
unchanged is in line with our announcement on 7 April 2011 that we will
be reassessing systemic support for UK financial institutions over the
next few weeks; this reassessment could result in a further decrease
of systemic support included in the debt and deposit ratings of Santander
The principal methodologies used in this rating were Bank Financial Strength
Ratings: Global Methodology published in February 2007, and
Incorporation of Joint-Default Analysis into Moody's Bank Ratings:
A Refined Methodology published in March 2007.
Headquartered in London, United Kingdom, Santander UK had
total assets of GBP303 billion at FY2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and confidential
and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
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Moody's Investors Service may have provided Ancillary or Other Permissible
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Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
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The date on which some Credit Ratings were first released goes back to
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VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
Correction to Headline and Text, 19 May 2011 Release: Moody's upgrades Santander UK's subordinated, junior subordinated and Tier 1 debt ratings; outlook on standalone ratings stabilised
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JOURNALISTS: 44 20 7772 5456
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