London, 01 August 2018 -- Moody's Investors Service ("Moody's") has today
affirmed all ratings of TSB Bank plc (TSB) and TSB Banking Group plc (TSB
Group). The outlook on TSB's Baa2 long-term deposit and
issuer ratings and TSB Group's Baa3 long-term issuer rating
was changed to negative from stable. Moody's has also affirmed
TSB's baseline credit assessment (BCA) and adjusted BCA at baa2,
as well as its Counterparty Risk Assessment (CR Assessment) at A3(cr)
/ Prime-2(cr).
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
Moody's affirmed TSB's baa2 BCA reflecting the bank's:
(i) high quality loan portfolio; (ii) strong capital and leverage
metrics; (iii) expected low levels of profitability given high cost
base and unexpected customer redress and IT remediation costs stemming
from problems incurred during its migration to the parent's IT platform;
(iv) low reliance on wholesale funding; (v) adequate liquidity buffers;
and (vi) downside risks related to potential long-term effects
of the failed IT migration.
TSB's baa2 BCA exceeds the BCA of its parent, Banco Sabadell,
S.A. (Sabadell, deposit rating Baa2, senior
unsecured debt Baa3, positive, ba2), by three notches.
This differential reflects the very limited connections between the two
institutions, plans to retain the TSB brand name, and expectations
that the UK Prudential Regulation Authority will continue to ensure that
TSB maintains adequate solvency and liquidity positions before any dividends
are allowed to be paid.
The affirmation of the Baa2 long-term bank deposit and issuer ratings
of TSB, as well as the Baa3 issuer rating and subordinated debt
rating of TSB Group are underpinned by (i) TSB's baa2 BCA; (ii) the
results of Moody's Advanced Loss Given Failure (LGF) analysis,
leading to no uplift for TSB's ratings and a negative one-notch
difference from the BCA for TSB Group's ratings; and (iii)
a low probability of government support.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlooks reflect the downside risk to TSB's franchise
as a consequence of the bank's prolonged IT issues following its
IT migration. In April 2018, TSB migrated its IT system to
that of its parent, Sabadell, and has since recognised GBP176
million in post-migration costs related to customer compensation,
additional resources, and foregone income because of waived overdraft
fees and interest charges. The result has been a GBP107 million
pre-tax loss during the first half of the year, reducing
the Common Equity Tier 1 (CET1) ratio to 19.2% at the end
of June 2018 from 20.0% at the end of 2017.
While Moody's recognises that the majority of the post-migration
costs are temporary in nature, the negative outlook reflects medium-term
risks to the franchise and the possibility of a related regulatory penalty.
The IT migration issues has compelled TSB to focus on remediation instead
of growth, potentially resulting in a drop in market share,
as well as likely reduction in revenues, as net interest margins
in the mortgage market continue to fall. Furthermore, the
negative outlooks also reflect Moody's view that additional IT remediation
related costs and tail-risk stemming from potential regulatory
action could affect profits in a future period.
WHAT COULD CHANGE THE RATING UP/DOWN
The bank's BCA could be upgraded following improvements in the bank's
asset risk, capital levels, and/or profitability, combined
with an upgrade of the BCA of its parent, Sabadell. A positive
change in TSB's BCA would likely lead to an upgrade of all ratings.
TSB's deposit and issuer ratings could also be upgraded if the bank were
to issue significant amounts of long-term debt, including
structurally subordinated debt issued through its holding company.
TSB's BCA could be downgraded (i) if further negative financial and reputational
impacts following the IT migration materially affects its franchise positioning
and profitability beyond Moody's current expectations; (ii)
if there were to be a material deterioration in solvency or liquidity
metrics; (iii) or following a downgrade in Sabadell's BCA.
A downward movement in TSB's BCA would likely result in downgrades to
all ratings. TSB's deposit and issuer ratings could also be downgraded
in response to a reduction in the volume of deposits or debt that could
be bailed in, which would increase loss-given-failure
for depositors.
Any increase in the linkages between TSB and its parent, in the
absence of an upgrade of Sabadell's BCA, could result in negative
rating pressure for TSB's ratings.
LIST OF AFFECTED RATINGS
Issuer: TSB Banking Group plc
Affirmations:
.... LT Issuer Rating (Local Currency),
Affirmed Baa3, outlook changed to Negative from Stable
.... Subordinate Regular Bond/Debenture (Local
Currency), Affirmed Baa3
Outlook Actions:
....Outlook, Changed To Negative From
Stable
Issuer: TSB Bank plc
Affirmations:
.... Adjusted Baseline Credit Assessment,
Affirmed baa2
.... Baseline Credit Assessment, Affirmed
baa2
.... LT Issuer Rating (Local Currency),
Affirmed Baa2, outlook changed to Negative from Stable
.... LT Deposit Rating (Local Currency),
Affirmed Baa2, outlook changed to Negative from Stable
.... ST Deposit Rating (Local Currency),
Affirmed P-2
.... LT Counterparty Risk Assessment,
Affirmed A3(cr)
.... ST Counterparty Risk Assessment,
Affirmed P-2(cr)
.... LT Counterparty Risk Rating (Local and
Foreign Currency), Affirmed Baa1
.... ST Counterparty Risk Rating (Local and
Foreign Currency), Affirmed P-2
Outlook Actions:
....Outlook, Changed To Negative From
Stable
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Aleksander Henskjold
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
