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Rating Action:

Moody's has changed Coventry's outlook from Negative to Stable

13 Sep 2010

London, 13 September 2010 -- Moody's Investors Service has today changed the outlook on the Bank Financial Strength ("BFSR") and debt/deposit ratings of Coventry Building Society ("Coventry") from Negative to Stable. The C- Financial Strength Rating now maps to a standalone rating of Baa1 on the long-term scale, upgraded from the previous mapping of Baa2. Accordingly the Baa3 subordinated ratings and the Ba2 junior subordinated ratings were upgraded to Baa2 and Ba1 respectively. Coventry's deposit and financial strength ratings of A3/P-2/C- were affirmed.

RATINGS RATIONALE

Marjan Riggi VP/Senior Credit Officer and Moody's lead analyst for Coventry, said that the society's standalone financial strength had stabilised during the last 18 months demonstrated by its consistently improving financial performance. The positive trends include: a) good asset quality performance relative to peers, especially of its buy-to-let book which accounts for over 1/5 of its portfolio and has performed better than originally expected, b) solid earnings performance for both 2009 and 1H2010 (2009 profit before tax of GBP56 million, more than double the amount in 2008, and 1H2010 profit before tax of GBP43.5 million up by 20% from 1H2009) which given constraints on the society's interest margins have been particularly noteworthy, c) strong retention of capital with core Tier 1 capital improving to GBP622 million at 1H2010 from GBP550 million at 1H2009 (core Tier 1 ratio for the society was 26.9% at 1H2010-as reported under IRB basis), and d) consistently improving cost to income ratio (40.5% at 1H2010 versus 45.4% in 1H2009). In addition, despite strong competition in both funding and lending markets for the building societies in the UK, Coventry has managed to increase both its net retail deposits as well as its net lending (increase of 6.7% in net retail balances and 6.9% in net lending as at FYE2009) further strengthening its franchise as the third largest building society in the UK.

Moody's notes that the Coventry, like most building societies in UK, has a strong liquidity profile with nearly 100% of loans being funded with retail deposits. However, relative to its size and franchise in the UK banking system, the society's access to wholesale funding markets is of note among its peers, with an unsecured note issuance in October 2009 for GBP350 million and a total covered bond issuance of GBP2.0 billion in 2008 which further support the society's already strong liquidity profile.

Moody's added that Coventry recently completed its legal merger with Stroud & Swindon ("S&S"), which should improve the society's geographic reach and create synergies for the combined entity to some extent (S&S's assets represent 15% of Coventry's assets before the merger). The integration of the two societies is on track but some execution risk remains in terms of integrating the relatively weaker S&S into the Coventry and managing its operations. Potential losses from S&S' purchased loan books, particularly its sub-prime and self-certification mortgages, were a cause for concern at the time of the merger announcement. However, the Coventry is fair-valuing the impact of such loans on its capital base and unless the fair-value of such loans is underestimated, no further losses from the S&S book of loans against the capital of the combined entity are expected; also noting that the asset quality of the S&S has indeed improved since the end of 2009 .

On the upgrade of the standalone rating to Baa1, Moody's said that that the Baa1 is consistent with the upper end of C- BFSR range (C- maps into both Baa1 and Baa2 on the long-term scale) and reflects the improvement in the Coventry's intrinsic financial strength. Accordingly, because Moody's subordinated and junior subordinated ratings are notched off our standalone ratings, their ratings were upgraded by one notch to Baa2 and Ba1 respectively.

Coventry's current C- BFSR reflects its good regional franchise, which has been strengthened by the merger with S&S, its stable management, strong and improving deposit base and capital levels, its strong cost efficiency, and earnings performance in the last 18 months as well as its relatively good asset quality and strong liquidity profile. The ratings also take into account the Coventry's low net interest margins which to some extent hampers its ability to replenish capital. We note, however, that the society's good performance in deposit retention and inflows have had the effect of pressuring its margins somewhat. The stable outlook on the Coventry's ratings reflect its strong and improving capital levels, the resilience of its earnings, which should withstand some downward pressure on its asset quality that may stem from the uncertain timing of the economic and housing recovery in the UK, as well as continued constraints in the credit and funding markets which may pressure the society's financial performance in the medium term.

The principal methodologies used in rating these issuers were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the ratings Methodologies Sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodology Sub-directory on Moody's website.

The last rating action on the Coventry was on February 11, 2010, when the ratings of its PIBS were downgraded from Ba1 to Ba2.

Coventry, headquartered in Coventry, United Kingdom, had total assets of GBP19.4 billion at end-June 2010. Stroud & Swindon is headquartered in Stroud, United Kingdom, and had total assets of GBP2.7 billion at end-December 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

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MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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

London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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Canary Wharf
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Moody's has changed Coventry's outlook from Negative to Stable
No Related Data.
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