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Rating Action:

Moody's assigns Ba2 Counterparty Risk Rating to West Bromwich Building Society and affirms its deposit ratings at Ba3; outlook remains positive

27 Jun 2018

Counterparty Risk Assessments downgraded to Ba1(cr)/Not Prime(cr)

London, 27 June 2018 -- Moody's Investors Service today assigned Ba2 long-term local- and foreign-currency Counterparty Risk Ratings (CRRs) to West Bromwich Building Society (West Brom), as well as Not Prime (NP) short-term local- and foreign-currency CRR. At the same time, Moody's affirmed West Brom's long-term local- and foreign-currency deposit ratings of Ba3, its short-term local- and foreign-currency deposit ratings at NP, and the ratings on its Permanent Interest Bearing Shares (PIBS) at Ca(hyb). The rating agency also downgraded West Brom's Counterparty Risk Assessment (CR Assessment) to Ba1(cr)/NP(cr) from Baa3(cr)/Prime-3(cr).

The outlook on the long-term local- and foreign-currency deposit ratings remains positive.

A list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

Moody's Counterparty Risk Ratings (CRRs) are opinions of the ability of entities to honour the uncollateralized portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operating functions.

The Ba2 CRR takes into account (1) West Brom's ba3 BCA; (2) low loss-given-failure under Moody's advanced loss given failure analysis; and (3) a low probability of government support.

The affirmation of West Brom's Ba3 long-term local- and foreign-currency deposit rating continues to reflect (1) the Society's BCA of ba3; (2) moderate loss-given-failure under Moody's advanced Loss Given Failure analysis; and (3) a low probability of government support.

West Brom's BCA of ba3 continues to reflect its (1) good and stable capitalisation following the LME; (2) solid retail funding base; and (3) comfortable liquidity position. The BCA also takes into account the Society's (1) high stock of problem loans, mainly driven by the declining legacy commercial lending portfolio; and (2) weak but improving profitability and efficiency levels.

Moody's also downgraded the Society's CR assessment to Ba1(cr) from Baa3(cr), reflecting the decreased subordination protecting West Brom's counterparty obligations following a reduction in deposits and the redemption of 88% of its permanent interest bearing shares (PIBS) as part of the 10 April 2018 conclusion of West Brom's liability management exercise (LME). The deposit reduction follows the GBP350 million Residential Mortgage-Backed securitisation (RMBS) issuance in January 2018 (https://www.moodys.com/research/--PR_378593) and GBP461 million total Term Funding Scheme (TFS) drawings at 28 February 2018, the scheme closing date, of which GBP237 million was drawn in the Society's latest fiscal year.

Based on West Brom's liability structure as of 31 March 2018, adjusted for the outcome of the LME, bail-in-able liabilities subordinate to counterparty obligations totalled 9.0% of tangible banking assets, providing a cushion against default in the form of junior deposits, Tier 2 notes, remaining PIBS, and residual equity. This level of subordination corresponds to two notches of uplift for the CR Assessment from the Society's baseline Credit Assessment (BCA) of ba3.

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they: (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default; and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. Moody's CR Assessment captures the probability of default on certain senior obligations, rather than expected loss. Therefore, the rating agency focuses purely on subordination and take no account of the volume of the instrument class.

The CR Assessment for West Brom does not benefit from any government support, in line with Moody's support assumptions on the deposit ratings, given its small, simple balance sheet and lack of systemic importance.

The affirmation of the Ca(hyb) PIBS rating reflects that the agency's view that West Brom is unlikely to pay interest to the remaining PIBS holders over the next 12-18 months and that the earliest the notes can be called is 2021.

WHAT COULD CHANGE THE RATINGS UP

West Brom's BCA could be upgraded as a result of (i) continued improvements in its asset quality metrics; (ii) strengthened capitalisation; and/or (iii) a track record of stable profitability, demonstrating a sustainable business model. A positive change in the Society's BCA would likely lead to an upgrade of its deposit ratings. West Brom's deposit ratings could also be upgraded if, after regaining access to unsecured wholesale markets, the Society were to issue significant amounts of senior unsecured debt and/or subordinated long-term debt, reducing loss-given-failure for depositors.

The PIBS could be upgraded if West Brom resumed interest payments or the prospects for recovery improved significantly.

WHAT COULD CHANGE THE RATINGS DOWN

West Brom's BCA could be downgraded if the Society's asset quality or capital position deteriorated. A downward movement in the BCA of the Society would result in a downgrade to its deposit ratings. West Brom's deposit ratings could also be downgraded in response to a reduction in the volume of debt or deposits that could be bailed in, which would increase loss-given-failure for depositors.

LIST OF AFFECTED RATINGS

Issuer: West Bromwich Building Society

..Affirmations:

....Long-term Bank Deposits (Local and Foreign Currency), affirmed Ba3 Positive

....Short-term Bank Deposits (Local and Foreign Currency), affirmed NP

....Preferred Stock Non-cumulative (Local Currency), affirmed Ca(hyb)

..Downgrades:

....Long-term Counterparty Risk Assessment, downgraded to Ba1(cr) from Baa3(cr)

....Short-term Counterparty Risk Assessment, downgraded to NP(cr) from P-3(cr)

..Assignments:

....Long-term Counterparty Risk Rating (Local and Foreign Currency), assigned Ba2

....Short-term Counterparty Risk Rating (Local and Foreign Currency), assigned NP

..Outlook Action:

....Outlook remains Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in June 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

No Related Data.
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