DBRS takes various rating actions on Britannia following Merger with Co-operative Bank

DBRS has today taken various rating action on Britannia (formally known as Britannia Building Society) and the Co-operative Bank following the recently completed merger of the two entities. DBRS has placed all ratings of Britannia, including its “A” Long-Term Senior Debt rating, Under Review with Developing Implications. Further, DBRS has assigned its “A” Long-Term Senior Debt & Deposits rating to Co-operative Bank p.l.c (the Bank) this rating has also been placed under Review with developing implications. Concurrently, Britannia’s Deposit rating has been withdrawn.

The rating action follows the completed merger of Britannia Building Society with The Co-operative Bank p.l.c, which is in turn a wholly owned subsidiary of The Co-operative Financial Services (CFS). The combination of Britannia and the CFS creates a business with c. GBP 70 billion of assets, c. GBP 29.2 billion of customer deposits, some nine million customers, and over 300 branches and 20 corporate banking centres across the U.K. The newly assigned Issuer, Long-Term Debt & Deposits rating of the Co-operative Bank p.l.c. reflects the strong franchise of the combined entity, the diversified balance sheet, its sound funding and liquidity profile, solid capitalisation, and noteworthy earning generation ability. Although business is expected to continue to trade under both the Britannia and The Co-operative Bank brands for the foreseeable future, the legal entity of the combined businesses is The Co-operative Bank. As a result of the merger, Britannia will cease to exist as a legal entity.

DBRS’s Review with Developing Implications recognises the positive aspects to the merger, which include an expanded customer base, a broader product offering, wider customer distribution, a reduced reliance on wholesale funding, and the potential benefits of the combination of two already strong franchises. Moreover, as a result of the merger, Britannia’s balance sheet will be marked to fair value, thereby removing much of the volatility from the combined entity’s balance sheet, however the extent of the marks have yet to be announced. Conservative market-marks will help insolate Britannia’s balance sheet from the impact of the current market deterioration. Offsetting the benefits of the merger is an increased share of the U.K. property and consumer market at a time of ongoing deterioration in the U.K. economy and the property market. This risk, however, is factored in the current rating and the diversification gained by the merger helps offset this risk. Nonetheless, a further marked deterioration in the U.K. economic environment or property values could add pressure to the ratings, especially should financial performance weaken. Further, as with any merger, integration risks pose a short-term challenge. However, given the acumen of the management team, the proven track records of successful integrations, the extensive preparation undertaken prior to the merger and the strength of Co-operative and Britannia franchises, DBRS believes integration risk will be well-managed and the benefits of the merger will be apparent in the mid-term.

During the review process, DBRS will ascertain the full balance sheet impact of the merger on the new entity, including its capital position. Moreover, the review will focus on the affect of the merger on the earnings power of the combined businesses and the development of cost synergies, which should ultimately be achieved over time. The Under Review Developing reflects DBRS’s overall positive view of the merger, given DBRS’s opinion that both the size and scale and the positive attributes of the merger, as discussed above, clearly outweigh the risks associated with the transaction. The developing direction of the review indicates that upon concluding this review, the ratings may be upgraded or confirmed at the current level, with positive momentum reflected in a revision of the trend to either Stable or Positive.

Lastly, concurrent with the merger, the Permanent Interest Bearing Securities (PIBs) issued by Britannia have been converted to Perpetual Subordinated Bonds, as such the ratings of the PIBS have been withdrawn. In accordance with its standard notching policy, DBRS has assigned its BBB (high) rating to the Perpetual Subordinated Bonds. This rating has also been placed under Review with Developing implications.

Note:
All figures are in GBP unless otherwise noted.

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.