Standalone BCA affirmed at baa1
London, 09 August 2018 -- Moody's today affirmed all ratings and assessments of Skipton Building
Society (Skipton), including its baa1 standalone baseline credit
assessment (BCA), and changed the outlook on the society's
Baa1 long-term deposit and senior unsecured debt ratings to positive
from stable.
A full list of ratings affected by this action is at the end of this press
release.
RATINGS RATIONALE
-- RATIONALE FOR THE AFFIRMATIONS
Moody's said that the affirmation of Skipton's baa1 BCA reflects
the society's improved asset quality as represented by a low stock
of problem loans, strong risk-weighted capital, and
stable retail funding base, as well as expected earnings pressure
despite the contribution to earnings from the Connells estate agency business.
In 2017 Skipton reported a low stock of impaired loans, equivalent
to 0.39% of the society's loan book. This ratio
represents a material improvement compared with previous years; at
the peak of the crisis, in 2009, 4.9% of Skipton's
loan book was impaired, a proportion which steadily fell over the
following eight years. In particular, Skipton's problem
loan ratio declined by almost 0.5pp in 2017, reflecting the
sale of a GBP220 million portfolio of bad loans that led to an extraordinary
cost of GBP15 million.
Capital and leverage is Skipton's main strength, according
to Moody's. The society's Tangible Common Equity (TCE)
over risk-weighted assets is one of the highest in the sector at
32%. This in part reflects low risk weights following the
introduction of internal rating-based (IRB) models to calculate
credit risk, but also the recent disposal of a portfolio of loans
with higher risk. Through a combination of low growth and retained
earnings, Skipton's unweighted TCE over tangible banking assets
ratio rose to 5.9% in December 2017 from 5.7%
a year prior, one of the highest such ratio amongst rated UK building
societies.
Profitability has remained broadly stable, with an average return
on tangible assets of 0.6% over the last three years.
The society's above-average profitability, compared
to its building society peers, reflects the benefit to its earnings
levels and stability from the Connells real estate agency and property
management business, which Skipton fully owns. In recent
years Connells has provided, on average, around 40%
of the society's consolidated pre-tax income. This
earnings stream provides some additional loss-absorption capacity.
Nevertheless, Skipton remains structurally dependent on the state
of the UK housing market across all of its main activities. This
is a key constraint for Skipton's BCA, as for other building
societies.
In line with other building societies, Skipton remains largely funded
via stable retail deposits, another key strength, said Moody's.
At end-2017, market funds represented less than 12%
of the society's tangible banking assets, comparing favourably
to peers. In 2018, Skipton has increased its participation
in the Bank of England's Term Funding Scheme (TFS) by GBP1 billion;
the society has already started to repay this funding, and will
gradually replace it with a combination of secured funding and deposits.
The affirmations of Skipton's Baa1 long-term deposit and
senior unsecured debt ratings reflect the affirmation of the standalone
BCA, as well as unchanged moderate loss-given-failure
assumptions under Moody's advanced Loss Given Failure analysis,
and the agency's unchanged estimate of a low probability of government
support, neither of which provide uplift from the standalone BCA.
-- RATIONALE FOR THE POSITIVE OUTLOOK
Moody's said that the positive outlook reflects Skipton's
positive momentum in reducing asset risk and improving its risk-adjusted
capitalization.
FACTORS THAT COULD LEAD TO AN UPGRADE
Skipton's BCA could be upgraded following evidence of stable or
improved profitability and asset risk.
The society's deposit and senior unsecured debt ratings could be
upgraded following an upgrade of the BCA, or a material increase
in the stock of bail-in-able unsecured debt.
FACTORS THAT COULD LEAD TO A DOWNGRADE
The probability of a downgrade is currently low, as indicated by
the positive outlook. Skipton's ratings could be affirmed
and the outlook changed to stable from positive if the society's
loan book deteriorates or profitability materially declines.
LIST OF AFFECTED RATINGS
Issuer: Skipton Building Society
..Affirmations:
....Adjusted Baseline Credit Assessment,
affirmed baa1
....Baseline Credit Assessment, affirmed
baa1
....Long-term Counterparty Risk Assessment,
affirmed A1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Long-term Counterparty Risk Ratings,
affirmed A2
....Short-term Counterparty Risk Ratings,
affirmed P-1
....Long-term Bank Deposits,
affirmed Baa1, outlook changed to Positive from Stable
....Short-term Bank Deposits,
affirmed P-2
....Senior Unsecured Regular Bond/Debenture,
affirmed Baa1, outlook changed to Positive from Stable
....Senior Unsecured Medium-Term Note
Program, affirmed (P)Baa1
....Subordinate Medium-Term Note Program,
affirmed (P)Baa2
..Outlook Action:
....Outlook changed to Positive from Stable
PRINCIPAL METHODOLOGY
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.
Edoardo Calandro
Vice President - Senior 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
