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Rating Action:

Moody's assigns Baa2/P-2 deposits and issuer ratings to Virgin Money plc; outlook stable

26 Jun 2017

London, 26 June 2017 -- Moody's Investors Service has today assigned Baa2 long-term deposits and issuer ratings, and Prime-2 short-term deposits and issuer ratings, to Virgin Money plc. The outlook on the long-term ratings is stable. Moody's also assigned a Counterparty Risk Assessment (CR Assessment) of A3(cr)/Prime-2(cr) as well as a baa2 baseline credit assessment (BCA) and baa2 Adjusted BCA to the bank. This is the first time Moody's has assigned credit ratings to Virgin Money.

Virgin Money's baa2 BCA reflects the bank's: (1) low asset risk, demonstrated through strong asset quality metrics; (2) Moody's view that capitalisation is strong, albeit expected to decline as the bank continues to grow; and (3) high reliance on deposit funding, resulting in limited refinancing risk. These strengths are balanced against Virgin Money's: (1) risks related to rapid expansion and high loan growth; and (2) limited business diversification, with residential mortgages being the bank's main source of revenues and credit exposure.

The Baa2 long-term deposits and issuer ratings are underpinned by: (1) the bank's baa2 BCA; (2) the results of Moody's Advanced Loss Given Failure (LGF) analysis, reflecting the rating agency's view that the bank's junior depositors and senior creditors face moderate loss-given-failure, leading to no uplift from the BCA; and (3) a low probability of government support.

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

RATINGS RATIONALE

STRONG ASSET QUALITY METRICS, ALTHOUGH SIGNIFICANT LOAN GROWTH

Moody's views Virgin Money's asset risk as a rating strength for the issuer, driven by Virgin Money's low levels of problem loans -- 0.4% of gross loans at the end of 2016, below peers -- and focus on relatively low-risk mortgages.

Virgin Money's rapid credit growth over the past few years presents downside risk, however, with the overall loan portfolio growing by 92% from 2012 to 2016 and credit card balances growing by 213% from 2013 to 2016. Although Moody's expect the pace of growth to slow down somewhat over the next two years, loan growth will likely remain higher than the market average.

Virgin Money's business was historically built around acquired assets, having acquired Northern Rock's good assets selected under State Aid rules in 2012 and a portfolio of Virgin Money branded cards from MBNA in 2013 and 2014. Moody's generally views non-organic growth as a source of risk, because loans not generated under own underwriting standards can sometimes hide unexpected asset risk. The rating agency notes that the Northern Rock assets have performed well since 2012 and the proportion of lending stemming directly from acquisitions has declined significantly over the past two years because of amortisation and refinancing of the acquired loans, as well as high organic loan growth. Moody's expects this trend to continue and risks related to acquired loans to reduce over the coming years.

Moody's nevertheless expects that the bank's problem loan ratio will increase going forward, driven by the seasoning of recent lending and growth in the credit card book. The credit card book, close to reaching its GBP3 billion target size, will likely contribute disproportionally to higher levels of problem loans, as credit card lending generally displays materially higher levels of impairments than mortgages.

Virgin Money's business activities are currently limited to retail banking operations, resulting in a one-notch negative qualitative adjustment in respect of business diversification, similar to peers.

STRONG CAPITALISATION, ALTHOUGH EXPECTED TO DECLINE AS THE BANK CONTINUES TO GROW

While Moody's expects Virgin Money's capital position to decline going forward, the rating agency views the current capital levels as strong and adequate in the context of the bank's growth ambitions. Under Moody's definitions, Virgin Money had a Tangible Common Equity (TCE) / Risk Weighted Assets (RWA) of 21.0% and TCE / Tangible Assets of 4.6% at the end of 2016, above most peers. Moody's expects Virgin Money's capital ratios to decline as its risk-weighted assets and balance sheet increase and Virgin Money continues to distribute dividends.

MODERATE PROFITABILITY, BUT EXPECTED TO IMPROVE

Overall, profitability is a relative weakness for Virgin Money, partly reflecting its high proportion of low-risk mortgages. The bank's historic returns have also been diluted because of a high cost base, partly inherited with the acquisition of Northern Rock's good assets and due to further start-up and investment costs.

Net income relative to tangible banking assets -- as calculated by Moody's -- was 0.32% for the 2012--2016 period. Moody's expects profitability and the cost-to-income ratio to improve as the bank gains scale and further implements its strategy. As the bank's balance sheet increases, it will benefit from improved operating leverage as it takes advantage of a relatively lean underlying cost structure: the bank has fewer branches than some of its peers, a modern IT infrastructure, and no legacy or conduct issues.

However, Moody's also expects that Virgin Money's revenues and costs will face some headwinds, such as the persistent low interest environment and the increasing competitive landscape in the UK banking industry.

LOW RELIANCE ON WHOLESALE FUNDING AND COMFORTABLE LIQUIDITY BUFFERS

Moody's views Virgin Money's funding profile as good, given the bank's limited reliance on wholesale funding and comfortable liquidity position.

Virgin Money has relatively low refinancing risk. At the end of 2016, the major funding source for the bank was deposits (84% of reported liabilities -- mostly retail deposits) and secured wholesale funding. However, Moody's expects the bank's use of wholesale funding to increase, as Virgin Money borrows more in the wholesale markets to support its asset growth.

Virgin Money reported GBP4.2 billion of high quality liquid assets (HQLA) at the end of 2016, ample given Virgin Money's funding needs: at the end of 2016, HQLA represented 89% of outstanding wholesale funding and it covered more than seven times the bank's short-term portion of wholesale funding.

VIRGIN MONEY'S BCA IS SUPPORTED BY THE UK'S VERY STRONG- MACRO PROFILE

As a domestic UK bank, Virgin Money's operating environment is influenced by the United Kingdom (Aa1 negative); its Macro Profile is thus aligned with that of the UK at Very Strong-. UK banks benefit from operating in a wealthy and developed country, with a very high degree of economic, institutional and government financial strength, as well as very low susceptibility to event risk. The main risks to the system now stem from the economic uncertainty resulting from the UK's decision to leave the European Union (EU) and the high level of indebtedness of UK households, which are thus sensitive to changes in interest rates.

RATIONALE FOR THE LONG-TERM DEPOSITS AND ISSUER RATINGS

Virgin Money is domiciled in the UK, a jurisdiction that is subject to the EU Bank Recovery and Resolution Directive (BRRD), which Moody's considers an Operational Resolution Regime. Moody's assumes 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 assigns a 25% probability to deposits being preferred to senior unsecured debt. These are in line with Moody's' standard assumptions. Particular to Virgin Money and most retail-focussed lenders in the UK, Moody's assumes the proportion of deposits considered junior to be 10%, relative to the standard assumption of 26%, due to their largely retail-oriented deposit bases.

Given the above, Moody's considers that Virgin Money's deposits and senior unsecured debt are likely to face moderate loss-given-failure, due to the limited loss absorption provided by the modest amount of senior unsecured debt and junior deposits outstanding. This results in a Preliminary Rating Assessment for deposits and for senior unsecured debt at the same level as its BCA, baa2. Since Moody's considers the probability of government support for Virgin Money's senior liabilities to be low, because of its limited interconnections with other financial institutions and relatively small size, the rating does not incorporate any uplift from government support, and the final deposits and issuer ratings are therefore positioned at Baa2.

RATIONALE FOR THE COUNTERPARTY RISK ASSEMENTS

As part of today's rating action, Moody's also assigned a CR Assessment of A3(cr)/Prime-2(cr) to Virgin Money, two notches above the baa2 BCA. The CR Assessment is driven by the banks' BCA and by the amount of subordinated instruments likely to shield counterparty obligations from losses.

Moody's CR Assessment is an opinion of how counterparty obligations are likely to be treated if a company fails and is distinct from debt and deposit ratings, in that it: (1) considers only the risk of default rather than the likelihood of default and the expected financial loss suffered in the event of default; and (2) applies to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

RATIONALE FOR THE STABLE OUTLOOK

The outlook reflects the agency's view that, despite its expectations of some deterioration in asset quality, as loan growth slows, and in capitalisation, due to continued growth, that credit fundamentals will remain consistent with the baa2 BCA.

WHAT COULD MOVE THE RATING -- UP/DOWN

An upgrade of the bank's deposits and issuer ratings could be triggered by the issuance of senior or subordinated debt instruments, which would reduce expected loss for depositors and senior unsecured creditors. An upgrade in the BCA, driven by improved levels of profitability, improved levels of diversification, and stabilisation of growth rates at closer to market levels could also lead to an upgrade of all ratings.

A downgrade of Virgin Money's BCA could be driven by a material deterioration in the bank's asset quality or demonstration of a materially more aggressive risk appetite. Negative pressure could also arise from significant deterioration in the bank's profitability metrics, capitalisation and liquidity metrics.

LIST OF ASSIGNED RATINGS

Issuer: Virgin Money plc

Assignments:

....LT Issuer Rating (Local & Foreign Currency), Assigned Baa2, Outlook assigned Stable

....ST Issuer Rating (Local & Foreign Currency), Assigned P-2

....LT Bank Deposits (Local Currency), Assigned Baa2, Outlook assigned Stable

....ST Bank Deposits (Local Currency), Assigned P-2

....Adjusted Baseline Credit Assessment, Assigned baa2

....Baseline Credit Assessment, Assigned baa2

....LT Counterparty Risk Assessment, Assigned A3(cr)

....ST Counterparty Risk Assessment, Assigned P-2(cr)

Outlook Action:

...Outlook, assigned Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. 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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