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Rating Action:

Moody's affirms West Bromwich Building Society's deposit rating at B1; outlook stable

25 Sep 2015

Standalone BCA upgraded to b1 from b2

London, 25 September 2015 -- Moody's Investors Service has today affirmed West Bromwich Building Society's (West Brom) long term deposit rating at B1. The senior unsecured debt rating assigned to the society's MTN programme has been affirmed at (P) B1 and will be withdrawn.

At the same time, the agency upgraded the society's standalone baseline credit assessment (BCA) to b1 from b2, while the pref. stock non-cumulative rating was upgraded to Caa1 (hyb) from Caa2 (hyb). The subordinated debt ratings were also upgraded one notch. The subordinated debt rating assigned to the society's MTN programme has been upgraded to (P) B2 from (P) B3 and will be withdrawn. The short term ratings have been affirmed at Not Prime and the short term debt ratings will be withdrawn.

Concurrently, the rating agency affirmed the society's Counterparty Risk Assessment (CR Assessment) at Ba2(cr)/NP(cr).

RATINGS RATIONALE

---RATIONALE FOR THE UPGRADE OF THE BCA

Moody's says that the upgrade of West Brom's BCA is driven by its improvements in asset quality, solvency and profitability metrics. Although the society's credit fundamentals continue to remain weak compared to rated peers, the agency notes that West Brom has made substantial progress toward a more sustainable business model and expects this positive trend to continue in the outlook period.

West Brom's asset quality is rapidly improving: according to Moody's calculations, the problem loan ratio, calculated as problem loans on gross loans, declined to 5.5% as of March 2015 (March 2014: 7.6%), mainly driven by a reduction of the society's exposure to commercial lending and helped by the ongoing favourable operating environment.

Even though West Brom's capital position is adequate, as highlighted by a tangible common equity (TCE) over risk weighted assets of 14.8% as of March 2015, Moody's notes that the society's TCE remains modest when compared to its asset risk: problem loans as percentage of the sum of TCE and loan loss reserve is still high at 54.6% at end-March 2015, although significantly declined from the previous year (end-March 2014: 73.6%)

After six years of losses, West Brom returned to profitability, as calculated by Moodys, in the twelve months to March 2015, primarily because of lower provisioning for credit losses and lower funding costs, recording a net income over tangible assets of 0.19%. While this ratio substantially improved compared to the -0.11% of the previous year, this is not yet at the same level of the other rated building societies. Moody's expects West Brom's profitability to improve in the outlook period, although from weak levels.

The society increased its reliance on wholesale funding over the last year: market funds on tangible banking assets (TBA) increased to 12.7% as of March 2015 from 8.5% in March 2014, mainly driven by higher usage of interbank funding. In addition, the loan-to-deposit ratio, measured as gross loans over customer deposits, went up to 113% in March 2015 (March 2014: 108%). In Moody's view, this ratio is relatively high, considering West Brom's lack of market access and the declining trend of its customer deposits.

Despite maintaining a liquidity buffer in excess of regulatory requirements, the society's liquidity profile further weakened over 2014, with liquid assets as a percentage of TBA dropping to 12.9% as of end-March 2015 from 13.6% in March 2014 (March 2013: 16.8%), primarily due to a decrease in balances held with the Bank of England. However Moody's believes that the society's liquidity position will remain at adequate levels over the outlook period.

---RATIONALE FOR THE DEPOSIT AND SENIOR UNSECURED DEBT RATINGS

The affirmation of West Brom's long-term deposit and senior unsecured debt ratings at B1 are based on the society's BCA and the results of Moody's Advanced Loss Given Failure (LGF) Analysis. The MTN programme of the society is no longer in use and there is no debt outstanding under it. Therefore the ratings will be withdrawn.

West Brom is subject to an Operational Resolution Regime through the UK implementation of the EU Bank Resolution and Recovery Directive. Moody's has used the following assumptions: residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and a 25% probability of deposits being preferred to senior unsecured debt. Particular to West Brom and the UK building societies, the rating agency assumes the proportion of deposits considered junior at 10%, relative to its standard assumption of 26%, due to their largely retail-oriented depositor base.

Based on the society's balance sheet structure at end-March 2015, Moody's Advanced LGF Analysis indicates that West Brom's deposits are likely to face moderate loss-given-failure, due to the loss absorption provided by the Permanent Interest Bearing Shares (1.3% of tangible banking assets), as well as the volume of junior deposits themselves (5.5%). This suggests a Preliminary Rating Assessment (PRA) of b1, in line with the BCA.

In the previous analysis, based on end-September 2014 data, the PRA was b1, one notch above the BCA. The change in the notching was triggered largely by a change in the classification of the society's debt. In its interim end-September 2014 report, West Brom classified as "debt securities" an amount that the agency believed to be senior unsecured debt and, as such, bail-in-able. In the annual report as of end-March 2015, the issuer changed the classification of this debt, disclosing that these funds were interbank funding in the form of repo due to credit institutions. Since Moody's considers repo funding as not bail-in-able debt, the deposits no longer benefit from the additional notching. Hence now the PRA of the junior deposits is in line with the society's BCA.

Moody's assumption of a low probability of government support for West Brom's junior depositors results in no uplift to the PRA and into a deposit rating of B1.

---RATIONALE FOR THE STABLE OUTLOOK

The outlook is stable, reflecting Moody's view that West Brom's continued reduction in the commercial lending portfolio should result in improved asset quality metrics. This, in turn, should enhance the society's capital and profitability due to lower provisioning for credit losses.

WHAT COULD CHANGE THE RATINGS UP/DOWN

West Brom's BCA could be upgraded due to: i) significant improvements in asset quality metrics beyond the agency's expectations; ii) continuous improvement in the profitability ratios; iii) ability to regain access to wholesale markets; and iv) full restoration of a sustainable business model. A positive change in the building society's BCA would likely affect all ratings. West Brom's deposit and senior debt ratings could also be upgraded if the building society were to issue significant amounts of senior and/or subordinated long-term debt.

West Brom's BCA could be downgraded in the event of a notable economic slowdown in the UK, resulting in significant asset quality deterioration and impacting the society's capital levels. A downward movement in West Brom's BCA would likely result in downgrades to all ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dany Castiglione
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Nicholas Hill
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms West Bromwich Building Society's deposit rating at B1; outlook stable
No Related Data.
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