London, 26 August 2009 -- Moody's Investors Service has today confirmed the Aa3 senior debt
and deposit ratings as well as the C- Bank Financial Strength Ratings
("BFSR") of Abbey National plc ("Abbey") concluding
the rating agency's reassessment of the issuer's stand-alone
credit worthiness and the benefit of both systemic and parental support
assumptions. Abbey's dated subordinated debt was upgraded
to Baa1 from Baa3. Junior subordinated Upper Tier 2 and cumulative
Tier 1 securities were upgraded to Baa2 from Baa3 and Ba1 respectively,
and non-cumulative Tier 1 securities were upgraded to Baa3 from
Ba1. All these ratings now carry a negative outlook. Short
term ratings were affirmed at Prime-1.
In a related rating action, Moody's affirmed the E+ BFSR
of Alliance & Leicester ("A&L") and also confirmed
the Aa3 senior debt and deposit ratings which benefit from a guarantee
by Abbey. A&L's dated subordinated debt was upgraded
to Baa3 from Caa1; junior subordinated Upper Tier 2 debt was upgraded
to Ba2 from Caa2; cumulative Tier 1 securities were upgraded to Ba3
from Caa3, and non-cumulative preferred securities were upgraded
to B1 from Caa3. The outlook on A&L's guaranteed senior
debt and deposit ratings is negative in line with the outlook of Abbey's
ratings, while the outlook on its BFSR and all of the subordinated
and hybrid instrument ratings is positive. Short term ratings were
affirmed at Prime-1.
Today's rating confirmations and upgrades of Abbey and A&L ratings
reflect Moody's updated view on the probable scenarios facing these
two lenders, as well as the pace and progress of integration between
the two UK banks. As part of the review analysis, Moody's
also updated its loss and earning scenarios for the combined UK banking
operations, and revised its view on the likelihood of support for
the banks from their parent, Santander (Banco Santander S.A.
rated Aa2/B-/Negative). Moody's rating actions conclude
the review for downgrade on all of Abbey's and A&L's ratings
that was initiated on April 14, 2009.
The rating actions for both Abbey and A&L reflect a reassessment of,
and improvement in, the central scenario that Moody's is assuming
in relation to these credits. In the prior rating actions of April
2009, our central scenario included a substantial risk of a capital
shortfall at one or both banks, and a substantial risk of a restructuring
event, consistent with actions occurring with other UK lenders at
that time, which would have resulted in losses being imposed on
junior creditors. The risk of loss was greater for creditors of
A&L, for which the probability of a restructuring event was
higher due to its substantially weaker condition.
Today, our central scenario anticipates increased integration between
Abbey and A&L, as well as a higher likelihood of support from
Santander. This updated view is supported by the accelerated pace
of engagement between Abbey and A&L, as evidenced by rapid developments
in organization combinations, operational coordination, network
consolidation and common branding. An increased likelihood of support
is evidenced by the use of the name "Santander" for the common branding.
The increased integration supports a greater alignment of ratings between
Abbey & A&L, and the increased likelihood of parental support
contributes to higher ratings overall.
Moody's also notes that its concerns about potential additional
credit losses which prompted its review of the two banks' financial
strength ratings have been substantially allayed by its analysis of the
more detailed portfolio data which they have recently shared with the
rating agency.
The reduced concern about additional credit losses and the positive impact
of the accelerated integration is most visible in the positive outlook
on A&L's BFSR and in the multi-notch uplift from the
previous low standalone ratings of A&L's subordinated and hybrid
ratings, as the credit profile of A&L's debt instruments
becomes increasingly aligned with that of Abbey.
RECENT DEVELOPMENTS
Since its merger with Abbey in January 2009, the integration of
A&L into Abbey is progressing at a more rapid pace than originally
expected by Moody's. Gains from centralized funding,
cost and margin management are already apparent in notably stronger net
interest margins for A&L which have improved considerably from FYE
2008. A&L's first half 2009 profits as reported in the
Santander group results were GBP137 million. This compares to its
profit before tax of only GBP2 million for the same time last year as
well as losses before tax for the full year 2008 of nearly GBP1.3
billion. Abbey's net profits before tax also rose by over
30% from a year earlier and its underlying cost-to-income
ratio improved from 50% (Abbey standalone) to 41% (Combined)
from a year earlier. The speed and progress of the integration
is also highlighted by the progress in rebranding of both A&L and
Abbey under the "Santander" umbrella to be completed within
the next year.
In addition, Moody's has recently received more granular data
on the treasury books of both Abbey and A&L. The analysis of
the new data, along with the banks' proactive sale of some of their
more risky treasury assets have prompted Moody's to reduce its expected
credit loss estimates of these assets by nearly one-third compared
to its earlier estimates.
These developments underpin Moody's increased expectation of parental
support for Abbey and A&L from Santander: The fast-progress
in integration makes a reversal of Santander's strategy towards
its UK operations more costly as the consolidated Abbey accounts for nearly
30% of the group's assets and is the cornerstone for Santander's
UK foothold.
IMPACT ON ABBEY'S RATINGS
(i) BFSR: Moody's believes that the remaining substantial
risks relating to A&L's business have been sufficiently captured
by the two-notch downgrade of Abbey's consolidated stand-alone
BFSR in April from C+ to C- (mapping to a baseline credit
assessment of Baa2). Therefore the BFSR was confirmed at the C-
level, albeit with a negative outlook to reflect the remaining uncertainties
about the loss content of the consolidated Abbey's portfolio,
future integration challenges, and the negative outlook on the ratings
of its parent, Santander.
(ii) Senior unsecured debt & deposit ratings: The Aa3 ratings
were also confirmed with a negative outlook. These ratings incorporate
a significant uplift from the baseline credit assessment which is largely
due to the expectation of very high probability of government support
during this time of exceptional stress on the UK banking system.
As a result of the acquisition of A&L and the deposits and branch
network of Bradford & Bingley, we believe that Abbey is gaining
a significance in the UK banking system that resembles that of other systemically
important financial institutions such as Nationwide (rated Aa3/C-).
At the same time, we incorporate a high likelihood of parental support
from Santander. The negative outlook on Abbey's long term
ratings reflects the negative outlook on its BFSR as well as the negative
outlook on the BFSR of its parent Santander (B-, outlook
negative).
(iii) Subordinated and hybrid ratings: The upgrade of Abbey's
subordinated and hybrid instruments reflects the increased likelihood
that creditors of these instruments would benefit from parental support,
if needed, due to the diminished risk of a restructuring event .
The alignment of the ratings of Cumulative Upper Tier 2 and Cumulative
Tier 1 securities at Baa2 recognizes their similar risk profile under
a going concern assumption. The non-cumulative preference
shares are rated one notch lower than cumulative instruments to reflect
potential higher incidence and severity of loss due to their non-cumulative
interest feature.
IMPACT ON A&L's RATINGS
(i) BFSR: A&L's E+ BFSR (mapping to a baseline credit
assessment of B1) was affirmed, reflecting the fact that Moody's
remains cautious about the potential magnitude of losses contained in
A&L's balance sheet, and is concerned that these may exceed
the absorption capacity of A&L's stand-alone capital
and profitability. Additional capital support from either Abbey
or Santander may be necessary. At the same time, the positive
outlook indicates that over time the franchise value, funding costs,
and operating efficiency should all improve over time as a consequence
of the closer integration into Abbey and Santander.
(ii) Senior debt ratings: A&L's long-term debt and deposit
ratings were confirmed Aa3 with a negative outlook to be consistent with
the ratings of similar instruments of Abbey and because there exists an
unconditional and irrevocable cross-guarantee for all senior debt
and deposits between the two banks.
(iii) Subordinated and hybrid ratings: Moody's believes that
the subordinated and hybrid debt ratings of A&L should become increasingly
aligned to Abbey's subordinated and hybrid ratings as the integration
proceeds. The change in Moody's central scenario, whereby
it now anticipates fuller integration between Abbey and A&L,
as opposed to a restructuring event, is most pronounced with these
ratings. However, Moody's also reflects in its analysis the
view that the intrinsic higher risk profile of A&L still warrants
a distinction between its subordinated ratings and that of Abbey's.
This reflects the potential higher probability of default (indicated by
the lower stand-alone assessment of A&L) and potentially higher
loss severity (because creditors have recourse to assets of A&L only),
and is apparent in the 2-notch differential between Abbey's and
A&L's subordinated debt ratings. Moody's believes that,
at this time, the more junior instruments of A&L with their
interest deferral mechanisms are more exposed to A&L's intrinsic
risks, as reflected in their wider notching differential from the
junior subordinated debt of Abbey.
The positive outlook on these instruments indicates the potential further
upward rating pressure over the next year should the integration continue
at this pace. The ultimate rating level either at the same level
as Abbey's debt or slightly lower will depend on the ultimate level
of integration and alignment of the risk profile for creditors of both
institutions.
The last rating action on Abbey was on April 14, 2009 when the bank's
BFSR was downgraded to C- from C+ and its long term debt and
deposit ratings were put on review for downgrade.
The last rating action on Alliance & Leicester was on April 14,
2009 when the bank's BFSR was downgraded to E+ from C+
and its long term debt and deposits were put on review for downgrade.
The principal methodologies used in rating the entities are "Bank
Financial Strength Ratings: Global Methodology" and "Guidelines
for Rating Bank Junior Securities", which can be found on
www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory. Other
methodologies and factors that may have been considered in the process
of rating the issuer can also be found in the Credit Policy & Methodologies
directory.
Abbey National plc had total assets of GBP231 billion as of 2008 and is
headquartered in London, UK Alliance & Leicester had total assets
of GBP77 billion as of 2008 and is headquartered in London, UK.
London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Marjan Riggi
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's confirms Abbey and Alliance & Leicester's Aa3 senior ratings; upgrades subordinated debt and hybrids
