Upgrades rating of the Additional Tier 1 issued by Santander UK Group Holdings to Ba1 (hyb) from Ba2 (hyb)
Paris, January 08, 2019 -- Moody's Investors Service (Moody's) today affirmed the baseline credit
assessment (BCA) and adjusted BCA of Santander UK plc (Santander UK) at
a3, as well as the notional BCA and adjusted BCA of the holding
company Santander UK Group Holdings plc (Santander UK Group Holdings).
The rating agency also affirmed Santander UK's long-term deposit
and senior unsecured debt ratings at Aa3, long-term counterparty
risk ratings (CRR) at Aa2, short-term CRR at Prime-1,
long-term counterparty risk assessment (CR Assessment) at Aa2(cr),
and short-term CR Assessment at Prime-1(cr). The
short-term deposit ratings were affirmed at Prime-1.
Furthermore, Moody's affirmed Santander UK Group Holdings'
Baa1 senior unsecured debt ratings, and upgraded the Additional
Tier 1 (AT1) High Trigger Contingent Convertible Perpetual Preferred Securities
issued in June 2015 by Santander UK Group Holdings to Ba1 (hyb) from Ba2
(hyb).
The outlook on Santander UK's long-term deposit and senior
unsecured ratings, and Santander UK Group Holdings' long-term
senior unsecured debt ratings has been changed to positive from stable.
A full list of affected entities and their ratings can be found at the
end of this press release
RATINGS RATIONALE
RATIONALE FOR THE BCAs
The affirmation of Santander UK's a3 BCA reflects (1) its strong
franchise in UK mortgage and saving products; (2) its solid earnings
generation capacity and low earnings volatility; and (3) its robust
capital levels. The BCA also incorporates the bank's (1) rising
asset risk through increasing exposure to small and medium-sized
corporates; (2) expected pressures on revenues and asset risk due
to the weakening UK operating environment and (3) ongoing reliance on
wholesale funding, although somewhat mitigated by a sizeable liquid
assets buffer.
The a3 notional BCA of Santander UK Group Holdings is aligned with the
a3 BCA of Santander UK and reflects the predominance of Santander UK within
the UK sub-group (with customer loans expected to be about GBP199
billion under Santander UK compared to GBP0.3 billion under its
sole sister company Abbey National Treasury Services plc at year-end
2018).
RATIONALE FOR THE LONG-TERM RATINGS
Santander UK is subject to the UK implementation of the EU Bank Recovery
and Resolution Directive (BRRD), which Moody's considers to
be an Operational Resolution Regime. Therefore, Moody's applies
its Advanced Loss Given Failure (LGF) analysis to the issuer and its liability
structure.
Moody's Advanced LGF analysis indicates that Santander UK's deposits
are likely to face very low loss-given-failure, due
to the loss absorption provided by subordinated debt and, potentially,
by senior unsecured debt should deposits be treated preferentially in
a resolution, as well as the substantial volume of deposits themselves.
This results in a preliminary rating assessment (PRA) of a1, two
notches above the BCA.
Santander UK's senior unsecured debt, issued by the bank,
is also likely to face very low loss-given-failure,
due to the loss absorption provided by its own volume and the amount of
debt subordinated to it. This results again in a PRA of a1,
two notches above the BCA.
The senior unsecured debt issued by Santander UK Group Holdings is likely
to face high loss-given-failure due to the small amount
of debt subordinated to it. Moody's assumes that EU senior
holding company obligations benefit from the subordination of both holding
company and bank-issued subordinated instruments. However,
Moody's believes that EU holding company senior unsecured debt is
economically junior to bank senior unsecured debt, based on the
agency's forward-looking view that EU holding company senior
unsecured debt, although legally pari passu to bank debt,
will through down- streaming eventually fund bank senior unsecured
debt which is contractually, structurally or statutorily subordinated
to operating company external senior debt. This results in a PRA
of baa1 for the senior unsecured debt issued by Santander UK Group Holdings,
one notch below the BCA.
Moody's believes there is a moderate probability of government support
for Santander UK's deposits and senior debt, resulting in a one-notch
uplift to the PRAs, and long-term deposit and issuer ratings
of Aa3. Moody's considers the probability of government support
for holding company liabilities to be low, leading to long-term
issuer and senior unsecured ratings of Baa1 for Santander UK Group Holdings.
RATIONALE FOR THE OUTLOOKS
The positive outlooks on Santander UK's long-term deposit and senior
unsecured debt ratings and Santander UK Group Holdings' senior unsecured
debt rating reflect Santander UK's expected issuance plans given its informative
MREL target of 27.2% of RWAs. When confirmed,
this would provide additional protection for the bank's senior unsecured
debt and deposits, and for the holding company's senior unsecured
debt, and could lead to higher ratings over the outlook horizon.
RATIONALE FOR THE ADDITIONAL TIER 1
The upgrade of the Additional Tier 1 (AT1) High Trigger Contingent Convertible
Perpetual Preferred Securities issued in June 2015 by Santander UK Group
Holdings to Ba1 (hyb) from Ba2 (hyb) reflects Moody's approach to
the rating of high trigger contingent capital securities, where
Moody's rates to the lower of a model-based outcome and the
bank's non-viability security rating, which is positioned
based on Moody's advanced Loss Given Failure analysis.
This method captures the credit risk associated with the distance to trigger
breach and the credit risk of these securities' non-viability
component, which also captures the risk of coupon suspension on
a non-cumulative basis. The model based outcome suggested
a rating of Ba1 (hyb). This is one notch below the bank's
non-viability security rating of Baa3 (hyb).
The principal of the security would be fully and permanently written-down
if Santander UK Group Holdings' fully loaded consolidated Basel III Common
Equity Tier 1 (CET1) capital ratio fell below 7%. Santander
UK Group Holdings had a CET1 capital ratio of 13.1% at end-September
2018.
Moody's had historically reflected the risk that Santander UK might
be more willing to allow the trigger breach to occur, than had it
issued a security that converted to equity which would have diluted the
parent's control, by applying an additional negative notch
to the model outcome. Today's upgrade is driven by the removal
of this additional notch, given Moody's view that the bank
has a strong incentive to avoid triggering of any breach and that the
regulatory environment for UK banks is in practice unlikely to facilitate
such differentiation. The notching applied to this instrument is
consistent with the approach applied to instruments with similar features,
and comparable distance to the conversion trigger, issued by other
UK banks.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Santander UK's BCA could be upgraded if the bank: (1) shows
a structural reduction in its reliance on market funding; (2) maintains
its strong asset quality despite growth in its SME and corporate lending
portfolio; and (3) continues to maintain its strong solvency profile
through internal capital generation. A positive change in Santander
UK's BCA would likely affect all ratings.
Santander UK's deposit and senior debt ratings could also be upgraded
if its holding company were to issue or confirmed plans to issue significant
amounts of long-term debt in line with its interim and final MREL
requirements.
Santander UK's BCA could be downgraded due to: (1) an unexpected
significant deterioration in its asset quality metrics; (2) a material
weakening in profitability, which would reduce the bank's going-concern
loss-absorption capacity; or (3) a deterioration in the bank's
funding and liquidity position, including a further reduction in
the quantity or quality of its liquidity buffer. A downward movement
in Santander UK's BCA would likely result in downgrades of all ratings.
Santander UK's long-term senior unsecured debt and deposit ratings
could also be downgraded in case of a reduction in the volume of debt
that could be bailed in, which would increase loss-given-failure
for these instruments.
LIST OF AFFECTED RATINGS
..Issuer: Santander UK plc
Affirmations:
.... Adjusted Baseline Credit Assessment,
Affirmed a3
.... Baseline Credit Assessment, Affirmed
a3
....Counterparty Risk Assessment, Affirmed
Aa2(cr)
....Counterparty Risk Assessment, Affirmed
P-1(cr)
....Counterparty Risk Rating, Affirmed
Aa2
....Counterparty Risk Rating, Affirmed
P-1
....Issuer Rating, Affirmed Aa3 ,
Changed to Positive from Stable
....Bank Deposit Rating, Affirmed Aa3
, Changed to Positive from Stable
....Bank Deposit Rating, Affirmed P-1
....Senior Unsecured Regular Bond/Debenture,
Affirmed Aa3 , Changed to Positive from Stable
....Junior Subordinated Regular Bond/Debenture,
Affirmed Baa2 (hyb)
....Subordinate Regular Bond/Debenture,
Affirmed Baa1
....Pref. Stock Preferred Stock,
Affirmed Baa2 (hyb)
....Pref. Stock Non-cumulative
Preferred Stock, Affirmed Baa3 (hyb)
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)Aa3
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)P-1
....Subordinate Medium-Term Note Program,
Affirmed (P)Baa1
....Senior Unsecured Commercial Paper,
Affirmed P-1
....Junior Subordinate Shelf, Affirmed
(P)Baa2
....Senior Unsecured Shelf, Affirmed
(P)Aa3
....Subordinate Shelf, Affirmed (P)Baa1
Outlook Actions:
....Outlook, Changed To Positive From
Stable
..Issuer: Santander UK Group Holdings plc
Affirmations:
.... Adjusted Baseline Credit Assessment,
Affirmed a3
.... Baseline Credit Assessment, Affirmed
a3
.... Issuer Rating, Affirmed Baa1 ,
Changed to Positive from Stable
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1 , Changed to Positive from Stable
....Subordinate Regular Bond/Debenture,
Affirmed Baa1
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)Baa1
....Subordinate Medium-Term Note Program,
Affirmed (P)Baa1
....Multiple Seniority Medium-Term
Note Program, Affirmed (P)P-2
....Pref. Shelf Non-cumulative,
Affirmed (P)Ba2
....Senior Unsecured Shelf, Affirmed
(P)Baa1
....Subordinate Shelf, Affirmed (P)Baa1
Upgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Ba1 (hyb) from Ba2 (hyb)
Outlook Actions:
....Outlook, Changed To Positive 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.
Roland Auquier
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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 France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
