DBRS Confirms Nationwide at AA (low); Trend Revised to Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Nationwide Building Society (Nationwide or the Society), including its AA (low) rating for Long-Term Senior Debt and Deposits. The trend on all long-term ratings has been revised to Stable from Negative. The trend on the R-1 (middle) Commercial Paper rating remains Stable and the Intrinsic Assessment (IA) remains at A (high). Given Nationwide’s position as the UK’s largest mutual and a leading provider of savings products and residential mortgage lending, DBRS views Nationwide as systemically important within the U.K. (categorised as SA-2) and the ratings incorporate one notch of uplift from the IA for systemic support.

The change in the trend to Stable reflects the progress the Society has made in increasing its capital and leverage ratios, as well as its success in improving its earnings. Nationwide’s capitalisation improved significantly in the year to April 4, 2014, following the successful issuance in 4Q13 of GBP 550 million of Core Capital Deferred Shares (CCDS, a common equity tier 1 capital instrument which is consistent with mutuality). The CCDS issuance, together with the improved earnings and a reduction in risk weighted assets, led to the Society’s fully-loaded Common Equity Tier 1 (CET1) ratio increasing to 14.5% at April 4, 2014, from 9.1% at April 4, 2013. The Society’s CRDIV leverage ratio also improved substantially to 3.3% in the year to April 4, 2014, from 2.2% at April 4, 2013. Nationwide made additional progress in the quarter ending June-2014, with a combination of higher profits and deleveraging of the commercial real estate (CRE) book leading to a further increase in the leverage ratio to 3.7%, as well as a 180 basis points (bps) increase in the CET1 ratio to 16.3%. Importantly these improvements meant that the Society was able to meet the PRA’s (Prudential Regulatory Authority) adjusted leverage ratio requirement of 3% well ahead of the end-2015 deadline.

Nationwide’s earnings generation improved significantly in the year to April 4, 2014, and this is also a key factor in the change in the trend to Stable. In the year to April 4, 2014, the Society recorded a statutory profit before tax (PBT) of GBP 677 million, up over 300% year-on-year (YoY), while underlying PBT (statutory PBT adjusted for charges related to the Financial Services Compensation Scheme (FSCS), restructuring costs, the bank levy and fair value losses from derivatives and hedge accounting) increased 113% to GBP 924 million, driven primarily by a substantial increase in net interest income to GBP 2.40 billion (2013: GBP 1.98 billion). In addition, in the quarter ending June-2014 the Society provided further evidence of continued progress with good income growth helping reported underlying PBT to increase 117% YoY to GBP 263 million. On a statutory basis in the quarter the Society reported PBT of GBP 253 million. DBRS also views positively the ongoing improvements in the Society’s net interest margin (NIM) which in the year to April 4, 2014 improved to 1.25%, from 1.02% in 2013, and in the quarter to end-June 2014 improved further to 1.47%.

Nationwide’s A (high) IA continues to reflect the strong domestic retail franchise, which is underpinned by its solid positions in residential mortgage lending and saving products. Additionally the Society has been successful in further improving its current account franchise in recent years, and as of June 2014 the Society’s market share of current accounts had improved to 6.4%, up from 5.7% as of April 4, 2013. The ratings also incorporate the solid credit quality of the society’s mortgage book which has consistently proven to be significantly better than the industry average credit performance and this is reflected in the Society’s ability to absorb the cost of credit through sufficient pre-impairment income (IBPT) generation. Liquidity and funding remain solid and well-managed, underpinned by the substantial retail deposit base.

The ratings are unlikely to see upward pressure in the medium term, given the already high level of the ratings and the need for Nationwide to further demonstrate the ability to deliver strong, stable net earnings. Further diversification of the franchise would also likely be required before the ratings could be upgraded. Downward rating pressure would most likely be driven by an unexpected deterioration in the UK housing market, if DBRS were to perceive any weakening of the franchise, or if the risk profile were to increase.

Notes:
All figures are in GBP (British Pound) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: December 9, 1998
Most Recent Rating Update: September 12, 2013

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.