Nationwide’s Long-Term AA Ratings Unaffected by Acquisition of Dunfermline Building Society

DBRS has commented today that Nationwide Building Society’s (Nationwide, the Society, or the Group) ratings, including its AA Long-Term Senior Debt & Deposits rating, are unaffected by the Society’s acquisition of certain assets and liabilities from Dunfermline Building Society (Dunfermline). The trend on all ratings, excluding Commercial Paper and Debt Guaranteed by HM Treasury, remains Negative.

DBRS positively views the announcement of the acquisition of Dunfermline as this transaction further underpins Nationwide’s already strong franchise. Although this transaction is small, in terms of absolute size, and as it relates to Nationwide in its entirety, the addition of the branches and deposits of Dunfermline further strengthens the Group’s share of retail deposits and, importantly, extends Nationwide’s franchise within Scotland, where it nearly doubles its branch network. The acquisition includes Dunfermline’s GBP 2.4 billion of retail deposits, 34 branches and retail sites (and all related employees), and Dunfermline’s GBP 1.0 billion prime mortgage lending book. In addition, the U.K, government will provide Nationwide GBP 1.6 billion for the acquisition. Post-acquisition the combined Group will have around 900 branches, a member base of 15 million and a very respectable 11% market share of U.K. retail deposits.

The transaction takes place under the “special resolution regime” contained in the Banking Act 2009, which provides the U.K. Tripartite authorities the ability to transfer some or all of the business of a distressed institution to a third party by order. As such, the Bank of England introduced an order on 30 March 2009 to transfer certain of the assets and liabilities of Dunfermline to Nationwide. DBRS views the U.K. government facilitation as an affirmation of the strength of Nationwide and further supports DBRS’s view that Nationwide is a Critically Important Banking organisation (CIB) in the U.K.

As with any acquisition, there is a degree of integration risk; especially given that Nationwide continues to integrate its recent acquisitions of the Cheshire and Derbyshire building societies. However, DBRS takes comfort from Nationwide’s demonstrated ability to successfully integrate past acquisitions that enhance the Group’s franchise.

DBRS’s ratings on Nationwide reflect its position as the largest building society in the U.K. Nationwide has a top tier positioning in both the savings and mortgage-lending markets, which are the foundation of its strong franchise. Nationwide’s ratings are also supported by its solid earnings generation ability, good asset quality, solid funding profile and strong capital ratios. Offsetting these strengths is the Society’s sizeable exposure to the weakened U.K. housing market and expected reduced profitability in the near term due to the current challenging operating conditions.

The rating trend remains Negative, reflecting DBRS’s concerns regarding the impact of the anticipated difficult operating environment for mortgage lenders in the United Kingdom.

The applicable methodologies are, Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.