London, 12 November 2019 -- Moody's Investors Service ("Moody's") today took rating actions on 15
UK banks and building societies. The action reflects Moody's
view that the operating environment is likely to weaken, given deteriorating
institutional capacity and commitment to fiscal discipline in the UK,
together with a worsening economy. This follows the change in outlook
on the UK sovereign debt rating to negative from stable, which the
rating agency announced on 8 November 2019 (Moody's changes outlook on
UK's rating to negative from stable, affirms Aa2 rating; https://www.moodys.com/research/--PR_396604).
For all the affected lenders, Moody's affirmed the baseline
credit assessments (BCA) and all ratings and assessments. For eight
banks and building societies the rating agency changed the outlook on
the long-term deposit and senior unsecured debt rating (where applicable)
to negative from stable, for two to stable from positive,
and for one it changed the outlook to negative from positive, while
for four banks and building societies the outlook remained unchanged:
negative (one lender), stable (one), or positive (two).
The ratings and outlooks of all other rated banks and building societies
that are domiciled in the UK or in the Crown Dependencies are unaffected
by today's rating action.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_205156
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Today's action on UK banks and building societies was triggered
by Moody's view that (1) UK public institutions have weakened,
as they have struggled to cope with the magnitude of policy challenges
that they currently face, including those that relate to fiscal
policy; and (2) the UK's economic and fiscal strength are likely
to be weaker going forward, and more susceptible to shocks than
previously assumed by the rating agency.
These risks, if materialised, are credit negative for banks;
a weaker operating environment will be credit negative for UK lenders,
affecting their asset quality and profitability.
In particular, the net interest margins of many UK lenders have
been progressively eroded by a prolonged period of low interest rates;
furthermore, and especially following the ring-fencing of
large UK banks, the residential mortgage market has become increasingly
competitive, further reducing the margins for banks. The
impact of the compression in the net interest margins is greater for those
lenders that are highly concentrated in the residential mortgage sectors
such as the building societies, but also banks such as Santander
UK plc and Clydesdale Bank PLC. Other lenders such as Lloyds Bank
plc have been able to partly offset the negative pressure on the margins
for residential mortgages thanks to the greater diversification of their
earnings being also driven by consumer credit, which has higher
risks but also higher returns, lending and provision of fee-based
services to corporates, asset management, and/or insurance.
Following years of moderate economic growth and low unemployment,
the cost of risk of UK banks is low in the European context; in the
first nine months of 2019, the five largest UK banks, which
have a 47% combined market share for loans in the country,
reported an average 30 basis points annualised cost of risk, which
is low. Furthermore, following years of restructuring,
problem loans are low, at just 1.7% of gross loans
for the five UK banks as of end-June 2019. From this low
point, however, the agency expects the cost of risk to rise,
albeit moderately, as economic growth slows further.
Moody's does not have any particular governance concern for the
banks and building societies included in this action, and does not
apply any corporate behaviour adjustments to them.
FACTORS THAT COULD LEAD TO AN UPGRADE / DOWNGRADE
Upgrades to the banks' ratings is unlikely; however, an affirmation
of the UK's sovereign debt rating, and an unchanged operating
environment in the UK, could lead to a return to a stable outlook
for the long-term deposit and senior unsecured debt rating outlooks
affected by today's action, or a reversal to positive outlook
for those moved to stable from positive.
Conversely, a deterioration of the banks' operating environment
in the UK could lead to a downgrade of the BCAs and ratings for those
banks with a negative outlook on their long-term deposit and senior
unsecured debt ratings. The downgrade of the UK sovereign debt
ratings could also lead to a downgrade of the long-term deposit
and senior unsecured debt ratings for Lloyds Bank plc, Nationwide
Building Society, and Santander UK plc.
SPECIFIC ANALYTICAL FACTORS FOR THE AFFECTED BANKS
BARCLAYS BANK UK PLC
Moody's affirmed the BCA and all ratings and assessments of Barclays
Bank UK PLC (Barclays Bank UK), reflecting (1) robust capitalisation,
stable earnings from its retail and SME businesses, moderate asset
risk as well as limited exposure to wholesale funding, resulting
in a BCA of a3; (2) low loss-given-failure for depositors
of Barclays Bank UK, resulting in a one-notch uplift from
the BCA; and (3) a further one-notch of uplift given moderate
probability of government support.
The affirmation of Barclays Bank UK's BCA also takes into account
social risk considerations. The bank has incurred substantial provisions
related to the mis-selling of payment protection insurance (PPI).
Moody's expects PPI charges to gradually reduce to zero; nevertheless,
as the bank continues to process the information requests that it received
until the 29 August 2019 deadline for UK consumers to claim compensation,
PPI-related charges could remain volatile until at least the end
of 2020.
Moody's changed the outlook on Barclays Bank UK's long-term
deposit ratings to negative from stable, reflecting a weakening
operating environment in the UK.
CLYDESDALE BANK PLC
Moody's affirmed the BCA and all ratings and assessments of Clydesdale
Bank PLC (Clydesdale Bank) and its holding company Virgin Money UK PLC
(Virgin Money UK), reflecting (1) good capitalisation and the potential
for revenue and cost synergies over the next three years, but also
limited business diversification, execution risks from its merger,
and weak profitability, resulting in a BCA of baa2; (2) low
loss-given-failure for depositors and senior bondholders
of Clydesdale Bank, resulting in a one-notch uplift from
the BCA, and high loss-given-failure for the senior
bondholders of the holding company Virgin Money UK, resulting in
ratings one notch below the BCA; and (3) low probability of government
support, which does not result in any uplift.
The affirmation of Clydesdale Bank's BCA also takes into account
social risk considerations. The bank has incurred substantial provisions
related to the mis-selling of payment protection insurance (PPI).
Moody's expects PPI charges to gradually reduce to zero; nevertheless,
as the bank continues to process the information requests that it received
until the 29 August 2019 deadline for UK consumers to claim compensation,
PPI-related charges could remain volatile until at least the end
of 2020.
Moody's changed the outlook on Clydesdale Bank's long-term
deposit ratings, and on Virgin Money UK's senior unsecured
debt rating to stable from positive, because a weakening operating
environment in the UK offsets the potential for a stronger financial profile
following a successful execution of the integration with Virgin Money
PLC, which transferred most of its assets and liabilities to Clydesdale
Bank on 21 October 2019.
CLOSE BROTHERS LIMITED
Moody's affirmed the BCA and all ratings and assessments of Close
Brothers Limited and its holding company Close Brothers Group plc (Close
Brothers Group), reflecting (1) a solid track record over economic
cycles, strong capital and leverage, strong profitability
and short duration of assets, resulting in a BCA of a2; (2)
very low loss-given-failure for depositors and senior bondholders
of Close Brothers Limited, resulting in a two-notch uplift
from the BCA, and high loss-given-failure for the
senior bondholders of the holding company Close Brothers Group,
resulting in ratings one-notch below the BCA; and (3) low
probability of government support, which does not result in any
uplift.
Moody's changed the outlook on Close Brothers Limited's long-term
deposit ratings, and on Close Brothers Group's senior unsecured
debt rating to negative from stable, reflecting a weakening operating
environment in the UK.
COVENTRY BUILDING SOCIETY
Moody's affirmed the BCA and all ratings and assessments of Coventry
Building Society (Coventry), reflecting (1) strong asset quality
and a high risk-based capital ratio, but also lower-than-peer
leverage ratio, as well as the society's historically high
growth rate in mortgage lending, which is partly mitigated by a
strong track record of conservative underwriting standards, resulting
in a BCA of a3; (2) low loss-given-failure for depositors
and senior bondholders, resulting in a one-notch uplift from
the BCA; and (3) low probability of government support, which
does not result in any uplift.
Moody's changed the outlook on Coventry's long-term
deposit and senior unsecured debt ratings to negative from stable,
reflecting a weakening operating environment in the UK and the agency's
expectations of continued pressure on the society's profitability.
LEEDS BUILDING SOCIETY
Moody's affirmed the BCA and all ratings and assessments of Leeds
Building Society (Leeds), reflecting (1) strong capitalisation and
sound funding structure, but at the same time heightened credit
risk stemming from the society's rapid expansion of its loan portfolio,
which is not fully seasoned, resulting in a BCA of baa1; (2)
low loss-given-failure for depositors and senior bondholders,
which results in a one-notch uplift from the BCA; and (3)
low probability of government support, which does not result in
any uplift.
Moody's changed the outlook on Leeds' long-term deposit
and senior unsecured debt ratings to negative from stable, reflecting
a weakening operating environment in the UK and the agency's expectations
of continued pressure on the society's profitability.
LLOYDS BANKING GROUP PLC
Moody's affirmed the BCA and all ratings and assessments of Lloyds
Banking Group plc (LBG), reflecting (1) low asset risk, stable
core earnings and strong current levels of capital, which are,
however, more susceptible to deterioration in a stress scenario
than that of most of its peers because of the group's exposures to unsecured
consumer loans and buy-to-let mortgages, resulting
in a BCA of a3; (2) moderate loss-given-failure for
senior bondholders, which does not result in any uplift from the
BCA, and high loss-given-failure for the subordinate
bondholders, resulting in ratings one-notch below the BCA;
and (3) low probability of government support, which does not result
in any uplift, reflecting the loss-absorbing nature of the
wholesale bonds issued by holding companies.
The affirmation of LBG's BCA also takes into account social risk
considerations. The bank has incurred substantial provisions related
to the mis-selling of payment protection insurance (PPI).
Moody's expects PPI charges to gradually reduce to zero; nevertheless,
as the bank continues to process the information requests that it received
until the 29 August 2019 deadline for UK consumers to claim compensation,
PPI-related charges could remain volatile until at least the end
of 2020.
Moody's changed the outlook on LBG's senior unsecured debt
to negative from stable, reflecting a weakening operating environment
in the UK.
-- LLOYDS BANK PLC
Moody's also affirmed the BCA and all ratings and assessments of
Lloyds Bank plc (Lloyds Bank), reflecting (1) low asset risk,
stable core earnings and stable funding, as well as weak leverage
and the rating agency's expectation that loan impairments will increase,
resulting in a BCA of a3; (2) very low loss-given-failure
for depositors and senior bondholders, resulting in a two-notch
uplift from the BCA, and high loss-given-failure for
the subordinate bondholders, resulting in ratings one-notch
below the BCA; and (3) moderate probability of government support
for depositors and senior unsecured debt, resulting in a further
one-notch uplift.
The affirmation of Lloyds Bank's BCA also takes into account social
risk considerations. The bank has incurred substantial provisions
related to the mis-selling of payment protection insurance (PPI).
Moody's expects PPI charges to gradually reduce to zero; nevertheless,
as the bank continues to process the information requests that it received
until the 29 August 2019 deadline for UK consumers to claim compensation,
PPI-related charges could remain volatile until at least the end
of 2020.
Moody's changed the outlook on Lloyds Bank's long-term
deposit and senior unsecured debt ratings to negative from stable,
reflecting (1) a weakening operating environment in the UK, and
(2) a potentially more limited capacity of the UK government to support
the bank in case of need, as indicated by the negative outlook on
the UK's sovereign debt rating.
NATIONWIDE BUILDING SOCIETY
Moody's affirmed the BCA and all ratings and assessments of Nationwide
Building Society (Nationwide), reflecting (1) a very low stock of
problem loans, very high risk-weighted capital ratios,
stable revenues, negative pressure on margins and concentration
of revenue and risks in UK residential mortgages, resulting in a
BCA of a3; (2) very low loss-given-failure for depositors
and senior bondholders, resulting in a two-notch uplift from
the BCA, and high loss-given-failure for the junior
senior unsecured and subordinate bondholders, resulting in ratings
one-notch below the BCA; and (3) moderate probability of government
support only for depositors and senior unsecured debt, resulting
in a further one-notch uplift.
Moody's maintained a negative outlook on Nationwide's long-term
deposit and senior unsecured debt ratings, reflecting (1) a weakening
operating environment in the UK; (2) margin erosion in the UK residential
mortgage market; (3) the risk that the society issues less debt than
envisaged under its current funding plan, resulting in lower protection
for senior unsecured debt and deposits in the medium term, as already
incorporated in the current negative outlook; and (4) a potentially
more limited capacity of the UK government to support the bank in case
of need, as indicated by the negative outlook on the UK's
sovereign debt rating.
NOTTINGHAM BUILDING SOCIETY
Moody's affirmed the BCA and all ratings and assessments of Nottingham
Building Society (Nottingham), reflecting (1) strong asset quality
and capitalisation, weak profitability compared to peers,
a solid and stable funding and liquidity profile, but also geographical
concentration in the Midlands and untested ability to access wholesale
debt market, resulting in a BCA of baa1; (2) moderate loss-given-failure
assessment for depositors, which does not result in any uplift;
and (3) low probability of government support, which also does not
result in any uplift.
Moody's changed the outlook on Nottingham's long-term
deposit ratings to negative from stable, reflecting a weakening
operating environment in the UK, and the agency's expectations
of continued pressure on the society's net interest margin and profitability,
exacerbated by its limited scale, which places Nottingham at a competitive
disadvantage.
PRINCIPALITY BUILDING SOCIETY
Moody's affirmed the BCA and all ratings and assessments of Principality
Building Society (Principality), reflecting (1) progress in reducing
its legacy loan portfolio, thus improving its asset risk profile,
which partially mitigates continued profitability pressures, as
well as the society's strong capitalisation, and on the other
hand, geographical concentration in Wales, resulting in a
BCA of baa2; (2) moderate loss-given-failure assessment
for depositors and senior bondholders, which does not result in
any uplift; and (3) low probability of government support,
which also does not result in any uplift.
Moody's maintained a stable outlook on Principality's long-term
deposit and senior unsecured debt ratings reflecting the agency's
expectation that the society will continue to reduce its legacy book while
maintaining its strong capitalisation and solid funding profile.
THE ROYAL BANK OF SCOTLAND GROUP PLC
Moody's affirmed all ratings of The Royal Bank of Scotland Group
plc (RBSG), reflecting (1) its high levels of capitalisation,
solid retail and commercial bank earnings despite net interest margin
and conduct cost pressures, as well as good levels of liquidity
resulting in a BCA of baa2; (2) moderate loss-given-failure
for its senior unsecured creditors, resulting in no uplift to the
senior unsecured debt rating; and (3) low probability of government
support, which does not result in any uplift to the senior ratings.
The affirmation of RBSG's BCA also takes into account environmental
risk considerations. RBSG is exposed to some high-carbon
emission sectors, which are prone to environmental risks.
In 2018 power and oil and gas amounted to 1.2% of the group's
lending exposures. However, RBSG's exposures are well-diversified
geographically and on a single name basis. The BCA also incorporates
social risk considerations. The bank has incurred substantial provisions
related to the mis-selling of payment protection insurance (PPI).
Moody's expects PPI charges to gradually reduce to zero; nevertheless,
as the bank continues to process the information requests that it received
until the 29 August 2019 deadline for UK consumers to claim compensation,
PPI-related charges could remain volatile until at least the end
of 2020.
Moody's maintained a positive outlook on RBSG's long-term
senior unsecured debt ratings. Moody's believes that the
group continues to make progress in restructuring, with this likely
to be largely completed by the end of 2020.
-- NATIONAL WESTMINSTER BANK PLC
Moody's affirmed the BCA and all ratings and assessments of National
Westminster Bank plc (NWB), The Royal Bank of Scotland plc (RBS),
and Ulster Bank Limited (UBL), reflecting (1) moderate asset risk,
good and stable profits from the retail and business banking activities,
high capitalisation, high level of deposit funding and good levels
of liquidity, resulting in a BCA of baa1; (2) very low loss-given-failure
for its depositors, resulting in a two-notch uplift from
the BCA; and (3) a further one-notch of uplift given moderate
probability of government support.
The affirmation of NWB's BCA also takes into account social risk
considerations. The bank has incurred substantial provisions related
to the mis-selling of payment protection insurance (PPI).
Moody's expects PPI charges to gradually reduce to zero; nevertheless,
as the bank continues to process the information requests that it received
until the 29 August 2019 deadline for UK consumers to claim compensation,
PPI-related charges could remain volatile until at least the end
of 2020.
Moody's maintained a positive outlook on the NWB's,
RBS's and UBL's long-term deposit and issuer ratings.
Moody's believes that the group continues to make progress in restructuring,
with this likely to be largely completed by the end of 2020.
SANTANDER UK PLC
Moody's affirmed the BCA and all ratings and assessments of Santander
UK plc (Santander UK), non-ring-fenced bank Santander
Financial Services plc, and their holding company Santander UK Group
Holdings plc (Santander UK Group), reflecting (1) the group's
low stock of problem loans, good risk-weighted capitalisation
and low earnings, but also a weak leverage ratio and profitability
under pressure, resulting in a BCA of a3; (2) very low loss-given-failure
for depositors and senior bondholders of Santander UK, resulting
in a two-notch uplift from the BCA, and high loss-given-failure
for the senior bondholders of the holding company Santander UK Group,
resulting in ratings one-notch below the BCA; and (3) moderate
probability of government support for Santander UK's depositors
and senior debt, resulting in a further one-notch uplift.
Moody's changed the outlook on Santander UK's long-term
deposit and senior unsecured debt ratings, and on Santander UK Group's
senior unsecured debt ratings to negative from positive, reflecting
a weakening operating environment in the UK. For Santander UK's
long-term deposit and senior unsecured debt, the outlook
change also reflects a potentially more limited capacity of the UK government
to support the bank in case of need, as indicated by the negative
outlook on the UK's sovereign debt rating.
SKIPTON BUILDING SOCIETY
Moody's affirmed the BCA and all ratings and assessments of Skipton
Building Society (Skipton), reflecting (1) a low stock of problem
loans, strong capital and stable retail funding, but also
margin pressure and structural dependence on the UK housing market,
resulting in a BCA of baa1; (2) moderate loss-given-failure
for depositors and senior bondholders; and (3) low probability of
government support, which does not result in any uplift.
Moody's changed the outlook on Skipton's long-term
deposit and senior unsecured debt ratings to stable from positive,
because a weakening operating environment in the UK offsets the society's
reduced asset risk.
YORKSHIRE BUILDING SOCIETY
Moody's affirmed the BCA and all ratings and assessments of Yorkshire
Building Society (Yorkshire), reflecting (1) strong asset quality,
lower-than-peer mortgage lending growth rate and limited
exposure to buy-to-let lending, in addition to its
solid capitalisation, resulting in a BCA of baa1; (2) low loss-given-failure
for depositors and senior bondholders, resulting in a one-notch
uplift from the BCA, and high loss-given-failure for
the junior senior bondholders, resulting in ratings one-notch
below the BCA; and (3) low probability of government support,
which does not result in any uplift.
Moody's changed the outlook on Yorkshire' long-term
deposit and senior unsecured debt ratings to negative from stable,
reflecting a weakening operating environment in the UK, and the
agency's expectations of continued net interest margin pressure.
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
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_205156
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Person Approving the Credit Rating
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
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.
Edoardo Calandro
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
