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Global Credit Research - 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
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.
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.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
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.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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.
Moody's has changed Coventry's outlook from Negative to Stable
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