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12 Oct 2010
London, 12 October 2010 -- Moody's Investors Service has today changed the outlook on the D-
bank financial strength ratings ("BFSR") of Principality Building
Society ("Principality") from negative to positive.
In the same rating action, the outlook on the debt ratings of Baa2/P-2
were changed from negative to stable. The outlook on the junior
subordinated debt rating (PIBS) of B3 were also changed to positive from
negative in line with the outlook on the BFSR. The D- BFSR,
mapping to a standalone rating of Ba3 on the long-term scale as
well as the Baa2 /P-2 senior debt and deposit ratings were affirmed.
Marjan Riggi, VP/Senior Credit Officer and Moody's lead analyst
for Principality, said that the change in the BFSR outlook to positive
follows the consistent improvements in the society's earnings performance
as well as its management of the riskier exposures in its loan portfolio,
particularly of its commercial and second-charge loans.
The positive trends include: a) steadily improving net interest
margin over the last 18 months despite a challenging low interest rate
environment--net interest margins of 1.69%
in FYE2009 and 1.38% in FYE2008 are one of the strongest
in the building society sector; b) consistent earnings performance
supported by strong net interest margins and good management of arrears
(pre-provision income of GBP55.2million in FYE2009 vs.
GBP46.2million in FYE2008); c) positive trend in cost-to-income
ratio (52.1% in FYE2009 vs. 58.0% in
FYE2008 and 64.4% in FYE2007); and d) good asset quality
performance in comparison to peers, especially of its commercial,
buy-to-let and prime (excluding the second-charge
prime lending) portfolios, which account for approximately 85%
of its total loan portfolio and have performed better than originally
expected. Furthermore, despite strong competition among the
UK building societies and banks for customer deposits, Principality
increased its net retail customer deposits over the FYE2009 (6.6%
growth in net retail deposits), further strengthening its franchise
in the region.
Moody's notes that Principality, like most building societies
in the UK, has a strong liquidity profile, with 100%
of its gross loans being funded by its retail deposits. The retail
deposit funding is underpinned by the society's strong Welsh franchise,
with its extensive branch network, and strong brand name.
Moody's stated that the positive outlook on Principality's
D- BFSR reflects its strong regional franchise, improving
earnings performance and good asset quality which have been particularly
resilient in the face of the downturn in the UK economic environment.
The positive outlook also take into account Principality's capital
base, which although relatively small compared to some of the larger
building societies, provides adequate buffer to withstand potential
losses arising from its loan portfolio, under Moody's forward
On changing the outlook on the senior debt ratings from negative to stable,
Moody's commented that Principality's current Baa2 debt ratings
benefit from 4 notches of uplift from its standalone debt rating of Ba3.
This incorporates a significant amount of extra-ordinary systemic
support which was reflective of our assumption for a much higher probability
of support to UK banks and building societies during the financial crisis.
However, as the standalone credit strength of the society improves
and the UK gradually recovers from the recession, Moody's
will accordingly remove the extra-ordinary support from the senior
debt ratings of banks and building societies and will move toward a "normalised"
level of support within our "low-support country" framework
(see Moody's Special Comment titled "Phasing Out Extraordinary
Support Assumptions from UK Bank Ratings, published March 2010).
Therefore, we expect that an upgrade of Principality's BFSR
will not necessarily lead to an upgrade of its senior debt/deposit rating
which is reflected in the change of the outlook on these ratings to stable
rather than positive.
The change in outlook of the subordinated debt ratings to positive from
negative is in line with our notching practice for subordinated debt ratings
in the UK which are linked to the standalone debt ratings and do not incorporate
any systemic support.
Moody's further commented that highlighted by the positive outlook
on the BFSR, continued improvement in Principality's asset
quality and consistency in the society's earnings performance and
capital retention would put positive pressure on the ratings. On
the other hand, if the expected losses from the society's
loan book were to deteriorate beyond our forward loss scenarios,
or if concentration of its riskier commercial portfolio increases beyond
its current levels this could put downward pressure on the ratings.
Moreover, a material reduction in its profitability and efficiency
ratios could also put downward pressure on the ratings.
The principal methodologies used in rating this issuer 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 Principality was on 3 July 2009, when
the rating on its dated subordinated debt was downgraded to B3 from B1.
Principality, headquartered in Cardiff, Wales, had total
assets of GBP6.3 billion as at end-June 2010.
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
VP - Senior Credit Officer
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 the outlook on Principality's BFSR to Positive
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London E14 5FA
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