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Rating Action:

Moody's confirms the ratings of CYBG and upgrades Virgin Money's deposit and issuer ratings, outlook positive

14 Dec 2018

Paris, December 14, 2018 -- Moody's Investors Service (Moody's) today confirmed the baseline credit assessment (BCA) and adjusted BCA of Clydesdale Bank plc (Clydesdale) at baa2. The rating agency also confirmed Clydesdale's long-term deposit ratings at Baa1, long-term counterparty risk ratings (CRR) at A2, short-term CRR at Prime-1, long-term counterparty risk assessment (CR Assessment) at A2(cr), and short-term CR Assessment at Prime-1(cr). The short-term deposit ratings were affirmed at Prime-2. Furthermore, Moody's assigned a Baa3 issuer rating to CYBG PLC, the holding company of Clydesdale, and confirmed its Baa3 subordinated debt rating.

Concurrently, Moody's upgraded Virgin Money plc's (VM plc's) long-term deposit ratings to Baa1 from Baa2, long-term issuer rating to Baa1 from Baa2, senior unsecured MTN programme rating to (P)Baa1 from (P)Baa2, long- and short-term CRR to A2/Prime-1 from Baa1/Prime-2, long- and short-term CR Assessment to A2(cr)/Prime-1(cr) from A3(cr)/Prime-2(cr). In addition, the rating agency confirmed VM plc's BCA and adjusted BCA at baa2 and its subordinated MTN programme rating at (P)Baa3. The short-term deposit rating and issuer ratings were affirmed at Prime-2. Finally, the rating agency confirmed Virgin Money Holdings (UK) plc's (VMH's) Baa3 long-term issuer rating, Prime-3 short-term issuer rating, Baa3 senior unsecured debt rating, (P)Baa3 senior unsecured MTN programme rating, and (P)Baa3 subordinated MTN programme rating.

The outlook on Clydesdale's long-term deposit ratings, VM plc's long-term deposit rating and long-term issuer ratings, and VMH's long-term issuer ratings and senior unsecured debt rating has been changed to positive from ratings under review. The outlook on CYBG's long-term issuer ratings is positive.

This rating action concludes the review initiated on 21 June 2018.

A full list of affected entities and their ratings can be found at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE BCA OF CLYDESDALE

The confirmation of Clydesdale's BCA reflects (i) the strengthened financial profile of the combined entity; (ii) potential for synergy realisation from the Virgin Money merger over the next three years, balanced against the cost to achieve these synergies and risks related to further payment protection insurance (PPI) claims that already provided for; (iii) elevated operational risks related to the Virgin Money merger; and (iv) improved loan-book granularity in the pro-forma combined loan book, set against a narrower overall business focus.

The BCA of Clydesdale is based on the pro-forma combined financials of CYBG and Virgin Money. The financial profile based on the combined entity is stronger than that of Clydesdale prior to the merger, mainly driven by a more favourable capital assessment, given that the risks to capital of further PPI claims are diluted by (i) the addition of Virgin Money's strong capital base, and (ii) the limited remaining period to make a claim (August 2019). Moody's estimates a pro-forma combined tangible common equity ratio of around 19% at the end of September 2018, taking into account that the banks moved over to an internal ratings based approach for calculating risk-weighted assets and including VMH's high-trigger additional Tier 1 securities. The capital assessment nonetheless still incorporates some residual risk related to PPI claims during the period until August 2019 should current provisions prove insufficient.

The combined entity also offers improved profitability compared to CYBG on a standalone basis to reflect the addition of Virgin Money, offering more stable returns given the more limited effect of legacy conduct issues and the potential for cost savings, which CYBG estimates at GBP120 million per year by the end of the 2021 fiscal year. Moody's profitability assessment also incorporates the cost to achieve these synergies and the risks that they may take longer than initially expected to be realised.

Combining CYBG and Virgin Money will however increase operational risks for CYBG particularly during the 2020-2021 integration period. These risks arise from the combination of the two banks' balance sheets and the migration of client accounts to common platforms before the entities are merged into a single bank. At that point, Moody's expects that the bank will operate the majority of its operations under the Virgin Money brand name with single platforms for retail mortgages, credit cards and SME lending. Moody's also factors in risks related to executing staff rationalisation following the merger.

Moody's views the combined loan book as having increased granularity, thereby partially mitigating some of the idiosyncratic risks that the rating agency factored in to its assessment for the separate entities, such as the historically rapid loan growth of Virgin Money . However, while CYBG on a stand-alone basis had a wider asset class diversification through its SME loans that accounted for 23% of lending at the end of September 2018, the combined entity will be more retail-oriented. Moody's expects that the combined entity's loan book will be 83% mortgage lending and 5% credit cards. Because the combined entity will focus on retail mortgages and retail unsecured lending, Moody's incorporates a one-notch negative adjustment for business diversification, in line with other UK retail banks with a similar focus.

RATIONALE FOR THE BCA OF VIRGIN MONEY PLC

The confirmation of VM plc's baa2 BCA reflects the largely unchanged stand-alone financials for VM following the merger with CYBG during the period it remains a standalone subsidiary of Clydesdale Bank plc. Therefore, the BCA continues to reflect the bank's (1) low asset risk, demonstrated through strong asset quality metrics; (2) strong capitalisation; and (3) limited refinancing risk. These strengths are balanced against VM plc's (1) risks related to its rapid expansion and historic high loan growth; and (2) limited business diversification, with residential mortgages being the main source of revenue and credit exposure.

VM plc's adjusted BCA of baa2 reflect Moody's view that the level of support from Clydesdale is very high. This also takes into account the rating agency's expectation that Clydesdale and VM plc will fully merge their assets and liabilities following completion of the Financial Services and Markets Act (FSMA) Part VI asset transfer process by the end of 2019. At this time, the bank will operate under a single banking license.

RATIONALE FOR LONG-TERM RATINGS

CYBG and Virgin Money are subject to an Operational Resolution Regime through the UK implementation of the EU Bank Recovery and Resolution Directive (BRRD). Therefore, Moody's applies its Advanced Loss Given Failure (LGF) analysis to the issuers and their liability structures. Because the two operating entities will fully merge through the FSMA Part VII asset transfer process, Moody's has used a forward-looking view of the combined consolidated balance sheet as the basis for its LGF analysis.

Based on the combined liability structure and Moody's forward-looking expectation of issuance volumes needed by CYBG to meet its future minimum requirement for own funds and eligible liabilities (MREL), the depositors and senior unsecured creditors of the combined operating bank are likely to face low loss-given-failure, resulting in Preliminary Rating Assessments (PRAs) of baa1, one notch above the adjusted BCA of Clydesdale and VM plc.

Moody's does not expect the combined entity to benefit from government support, thereby resulting in deposit ratings, senior unsecured debt ratings, and issuer ratings aligned with the PRA at Baa1.

RATIONALE FOR THE OUTLOOKS

The positive outlooks reflect the potential for a stronger financial profile of the new group if it is able to execute its business and integration plans and contain the execution- and operational risks arising during the merger of its operations and platforms with those of Virgin Money.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Clydesdale's BCA could be upgraded if the risks related to the merger with Virgin Money reduce, e.g. post-FSMA Part VII; and/or profitability improves while risks related to conduct charges diminish. An upgrade to the BCA would likely result in an upgrade of all Clydesdale and CYBG ratings.

Clydesdale's BCA could be downgraded due to further legacy conduct costs beyond what is already factored into the current BCA, and/or weaker-than-expected profitability. A downward movement in the BCA would likely result in a downgrade of all Clydesdale and CYBG ratings.

An upgrade or downgrade to Clydesdale's BCA would also likely lead to a corresponding ratings change for VM plc and VMH's ratings.

Clydesdale's and VM plc's deposit ratings, as well as VM plc's issuer ratings and senior unsecured MTN programme ratings, could also be upgraded if the group were to issue substantial amounts of unsecured debt beyond Moody's expectations, thereby decreasing the loss-given-failure for creditors. Conversely, if the group issues materially less MREL-eligible debt relative to the rating agency's expectations, the same ratings could be downgraded owing to higher loss-given-failure for creditors.

LIST OF AFFECTED RATING

Issuer: Clydesdale Bank plc

..Confirmations:

....Long-term Counterparty Risk Ratings, confirmed at A2

....Short-term Counterparty Risk Ratings, confirmed at P-1

....Long-term Counterparty Risk Assessment, confirmed at A2(cr)

....Short-term Counterparty Risk Assessment, confirmed at P-1(cr)

....Baseline Credit Assessment, confirmed at baa2

....Adjusted Baseline Credit Assessment, confirmed at baa2

....Long-term Bank Deposits, confirmed at Baa1, outlook changed to Positive from Rating under Review

..Affirmations:

....Short-term Bank Deposits, affirmed P-2

..Outlook Actions:

....Outlook changed to Positive from Rating under Review

Issuer: CYBG PLC

..Confirmation:

....Subordinate Regular Bond/Debenture, confirmed at Baa3

..Assignments:

....Long-term Issuer Ratings, assigned Baa3 Positive

..Outlook Actions:

....Outlook changed to Positive from No Outlook

Issuer: Virgin Money Holdings (UK) plc

..Confirmations:

....Long-term Issuer Ratings, confirmed at Baa3, outlook changed to Positive from Ratings under Review

....Short-term Issuer Ratings, confirmed at P-3

....Senior Unsecured Regular Bond/Debenture, confirmed at Baa3, outlook changed to Positive from Ratings under Review

....Senior Unsecured Medium-Term Note Program, confirmed at (P)Baa3

....Subordinate Medium-Term Note Program, confirmed at (P)Baa3

..Outlook Action:

....Outlook changed to Positive from Rating under Review

Issuer: Virgin Money plc

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to A2 from Baa1

....Short-term Counterparty Risk Ratings, upgraded to P-1 from P-2

....Long-term Counterparty Risk Assessment, upgraded to A2(cr) from A3(cr)

....Short-term Counterparty Risk Assessment, upgraded to P-1(cr) from P-2(cr)

....Long-term Bank Deposits, upgraded to Baa1 from Baa2, outlook changed to Positive from Rating under Review

....Long-term Issuer Ratings, upgraded to Baa1 from Baa2, outlook changed to Positive from Rating under Review

....Senior Unsecured Medium-Term Note Program, upgraded to (P)Baa1 from (P)Baa2

..Confirmations:

....Baseline Credit Assessment, confirmed at baa2

....Adjusted Baseline Credit Assessment, confirmed at baa2

....Subordinate Medium-Term Note Program, confirmed at (P)Baa3

..Affirmations:

....Short-term Bank Deposits, affirmed P-2

....Short-term Issuer Ratings, affirmed P-2

..Outlook Actions:

....Outlook changed to Positive from Rating under Review

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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.

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

No Related Data.
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