London, 16 July 2021 -- Moody's Investors Service ("Moody's") has today
taken rating actions on six building societies. The actions reflect
the change in Moody's view on the operating environment in the United
Kingdom ("UK", Aa3 stable), driven by the rating
agency's expectations for a stronger than initially expected economic
recovery and, on balance, more favorable conditions for the
UK retail banking sector.
For five affected lenders, Moody's affirmed the Baseline Credit
Assessments ("BCA"), deposit, senior unsecured,
junior senior unsecured and subordinated (where applicable) ratings and
changed the outlook on the long-term deposit and senior unsecured
debt ratings to stable from negative. Moody's downgraded
the BCA and some ratings and assessments for one building society,
while changing the outlook on the long-term deposit ratings to
stable from negative.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL450665
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 six building societies in the UK reflects Moody's view
that the UK's operating environment will continue to strengthen,
despite the continued uncertainty from Brexit and the ongoing coronavirus
pandemic. Moody's now expects the UK's GDP to return
to pre-crisis levels by the end of 2022, as its strong vaccination
program lays the ground for a recovery through easing of social restrictions.
The stabilised operating environment is a credit positive for UK banks
and building societies, supporting their asset quality and profitability.
In particular, while Moody's expects moderate deterioration
in UK building societies' asset quality as government-support
measures are phased out, the rating agency notes that UK lenders
took substantial provisions for expected credit losses in 2020,
thus increasing coverage levels for both performing and non-performing
loans.
Moody's view on the building societies sector's profitability
reflects the expected near term improvement in their profitability from
lower cost of funding through central bank facilities and from stronger
demand for mortgages, counterbalanced by anticipated renewal of
competition and the resulting pressure on net interest margins over the
medium term.
In addition, the rating actions reflect Moody's expectation
that building societies' capitalisation, liquidity,
and funding metrics will remain in line with the affected issuers'
current standalone assessments. All building societies included
in the rating action have strong risk-based capitalisation,
a stable and granular deposit base and solid liquidity positions,
but at the same time, a lack of business diversification with their
earnings highly dependent on retail interest income.
RATINGS RATIONALE FOR INDIVIDUAL BUILDING SOCIETIES
RATIONALE FOR RATING AFFIRMATIONS WITH A STABLE OUTLOOK
COVENTRY BUILDING SOCIETY
Moody's affirmed the a3 BCA and all ratings and assessments of Coventry
Building Society (Coventry), reflecting (1) its strong asset quality,
with a long track record of conservative underwriting standards,
with the portfolio focused on high-quality prime mortgages;
high risk-based capital ratios, but also low nominal leverage;
fairly diversified wholesale funding profile, and solid, but
weaker-than-peer profitability; (2) the outcome of
Moody's Advanced Loss Given Failure (LGF) analysis, indicating low
loss-given-failure for depositors and senior bondholders,
resulting in a one-notch uplift from the BCA; and (3) Moody's
assessment of a low probability of government support from the Government
of the UK, resulting in no uplift from the BCA. The outlook
on the long-term deposit and senior unsecured ratings was changed
to stable from negative.
YORKSHIRE BUILDING SOCIETY
Moody's affirmed the baa1 BCA and all ratings and assessments of Yorkshire
Building Society (Yorkshire), reflecting (1) its solid and consistent
profitability, with well-managed asset quality, as
well as its fairly diversified wholesale funding profile, with established
market access; (2) the result of Moody's Advanced LGF analysis,
indicating low loss-given-failure for depositors and senior
bondholders, resulting in a one-notch uplift from the BCA;
and (3) the assessment of low probability of support from the Government
of the UK, resulting in no uplift from the BCA. The outlook
on the long-term deposit and senior unsecured ratings was changed
to stable from negative.
LEEDS BUILDING SOCIETY
Moody's affirmed the baa1 BCA and all ratings and assessments of Leeds
Building Society (Leeds), reflecting (1) its solid core profitability
with stronger-than-peer efficiency, high capital levels,
but also a relatively high proportion of buy-to-let and
shared ownership loans in its loan portfolio; (2) Moody's Advanced
LGF analysis, indicating low loss-given-failure that
results in a one-notch uplift from the BCA; and (3) a low
probability of support from the Government of the UK, which does
not result in any uplift. The outlook on the long-term deposit
and senior unsecured ratings was changed to stable from negative.
PRINCIPALITY BUILDING SOCIETY
Moody's affirmed the baa2 BCA of Principality Building Society (Principality)
and the Baa2 long-deposit and senior unsecured debt ratings,
reflecting (1) the society's solid core financial performance and the
continued progress in reducing its legacy second-charge loan portfolio,
but also the existence of a commercial loan book, comprising residential
and commercial property exposures, which exposes the society to
increased risks as a result of the business disruption and economic shocks
caused by the coronavirus crisis; (2) the assessment of moderate
loss given-failure, following Moody's Advanced LGF analysis,
which does not provides an uplift from the BCA; and (3) low probability
of government support from the Government of the UK, which also
results in no uplift from the BCA. The outlook on the long-term
deposit and senior unsecured ratings was changed to stable from negative.
In the same rating action, Moody's downgraded Principality's
Counterparty Risk (CR) Ratings to A3/P-2 from A2/P-1,
reflecting the rating agency's view on the society's long-term
liability structure, following a full repayment of Permanent Interest-Bearing
Shares (PIBS) in June 2020.
Moody's affirmed all other ratings and assessments of Principality.
WEST BROMWICH BUILDING SOCIETY
Moody's affirmed the ba3 BCA and all ratings and assessments of West Bromwich
Building Society (West Brom), reflecting (1) its solid capitailisation
and liquidity, but also weaker-than-peer asset quality
from a substantially reduced, but still sizeable commercial loan
portfolio and improving, but still weak profitability; (2)
Moody's Advanced LGF analysis, indicating moderate loss-given-failure
which does not provides an uplift from the BCA; and (3) low probability
of support from the Government of the UK, which does not result
in any uplift. Moody's affirmed the Ca(hyb) rating of West
Brom's PIBS on an expected loss basis. The outlook on the
long-term deposit ratings was changed to stable from negative.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The affected long-term deposit, senior unsecured debt,
subordinate debt, CR Ratings and CR Assessments and junior senior
unsecured ratings could be upgraded following an improvement in the standalone
creditworthiness of the building societies, or following a significant
increase in the stock of more junior bail-in-able liabilities.
For West Brom, the PIBS could be upgraded if the society resumes
interest payments or the prospects for recovery improve significantly.
The affected ratings and assessments could be downgraded following a substantial
deterioration in the standalone creditworthiness of the building societies
or following a significant reduction in the stock of bail-in-able
liabilities.
RATIONALE FOR A RATINGS DOWNGRADE
NOTTINGHAM BUILDING SOCIETY
Moody's downgraded Nottingham Building Society's (Nottingham) BCA
by one notch, to baa3 from baa2. The downgrade in the BCA
resulted in a one-notch downgrade of the long-term deposit
ratings to Baa3 from Baa2, while the short-term deposit ratings
were downgraded to P-3 from P-2. The society's
long-term CR Assessment was downgraded to Baa1(cr) from A3(cr)
and the long-term CR Rating was downgraded to Baa2 from Baa1.
The short-term CR Assessment and CR Ratings were affirmed at P-2(cr)
and P-2, respectively.
The downgrade of the BCA reflects Moody's view that Nottingham's
profitability will remain weaker than peers', given structural challenges
stemming from the society's limited scale. Nottingham's
BCA of baa3 also reflects the society's strong asset quality,
with the loan book concentrated in high-quality prime mortgages,
as well as its solid capitalisation, particularly given the low
risk profile of the loan portfolio. Although Nottingham recently
announced a strategic overhaul to reduce its cost base and accelerate
digital transformation to fund more rapid growth, the rating agency
considers that the society still faces material challenges in order to
reposition its business model and to achieve a higher and sustainable
level of profitability.
Nottingham's ratings and assessments reflect (1) its BCA of baa3;
(2) Moody's Advanced LGF analysis, indicating moderate loss-given-failure
which does not provides an uplift from the BCA; and (3) a low probability
of support from the Government of the UK, which does not result
in any uplift. The outlook on the long-term deposit ratings
has been changed to stable from negative.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Nottingham's BCA could be upgraded if the society successfully executes
on its stated strategic initiatives (including acceleration of digital
capabilities to attract savings from a broader demographic), as
evidenced by improved profitability and operating efficiency, with
continuing strong asset quality, as well as solid capitalisation.
Nottingham's BCA could be downgraded if the society fails to accomplish
its strategic goals, which would potentially lead to the erosion
of its franchise and the resulting shrinkage of the loan book and the
society's income.
All ratings and assessments would be upgraded or downgraded with a change
in the BCA.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology
published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are all solicited credit
ratings. Additionally, the List of Affected Credit Ratings
includes additional disclosures that vary with regard to some of the ratings.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL450665
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:
• EU Endorsement Status
• UK Endorsement Status
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Disclosure to Rated Entity
• Lead Analyst
• Releasing Office
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
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.
Anna Sherbakova
Asst Vice President - 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
Laurie Mayers
Associate Managing Director
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
