DBRS Maintains Nationwide IA at A (high); AA (low) Senior Ratings remain Under Review Negative

DBRS Ratings Limited (DBRS) has today maintained Nationwide Building Society’s (Nationwide or the Society) intrinsic assessment (IA) at A (high). The Society’s Long-Term Senior Debt & Deposits ratings remain at AA (low) Under Review with Negative Implications (URN), with the URN reflecting the action taken on 20th May 2015 to review the systemic support assumptions of 38 European Banking Groups.

This action follows a detailed review of the Society’s performance and outlook. Nationwide’s IA reflects the Society’s strong domestic retail franchise, which is underpinned by its solid positions in residential mortgage lending and savings products. The ratings also incorporate the Society’s improving profitability, sound and well-managed funding and liquidity profile, which is supported by the substantial retail deposit base, as well as the solid credit quality of the Society’s mortgage book, which has consistently proven to be significantly better than the industry average credit performance.

In maintaining Nationwide’s IA at A (high), DBRS also recognises the continued strengthening of the Society’s earnings generation and capitalisation, as well as the substantial progress made in deleveraging its commercial real estate (CRE) portfolio which totalled GBP 4 billion at April 4, 2015, down 48% year-on-year (YoY). The reductions reflect the sale of over GBP 1.6 billion of non-core CRE loans and the reduction of other CRE by GBP 2.2 billion through repayments and managed workouts. As a result, the number of impaired loans decreased 80% YoY, to GBP 608 million at April 4, 2015, resulting in a significantly improved impaired loan ratio for this portfolio of 15% (vs. 39.5% in 2014). With Nationwide’s residual non-core CRE loans totalling GBP 1.8 billion at April 4, 2015, or 0.9% of total assets, DBRS notes that the Society’s focus has now turned to developing a low risk commercial loan portfolio.

Nationwide’s earnings generation strengthened further in the year to April 4, 2015, with the Society recording a statutory income before provisions and taxes (IBPT) of GBP 1.4 billion an increase of 17% YoY. This improvement principally reflected strong income growth, which offset a 6% increase in costs. The Society also reported a 53% YoY increase in net profit to GBP 839 million in the year to April 4, 2015, as a result of a 34% decrease in impairment charges. In the quarter ending June-2015, the Society continued to demonstrate progress in strengthening its profitability. On an underlying basis, Nationwide reported profit before tax (PBT) of GBP 400 million, an increase of 52% YoY, with Society’s NIM up 16 basis points (bps) as a result of lower funding costs.

Nationwide’s capital ratios have also increased substantially as a result of improved profits, and the Society’s progress in deleveraging its CRE and out of policy treasury assets. At April 4, 2015, Nationwide reported a fully loaded Common Equity Tier 1 (CET1) ratio of 19.8%, an increase of 530 basis points (bps) YoY and a leverage ratio of 4.1%, an increase of 70 bps YoY, leaving the Society well-placed relative to UK banking peers. Nationwide made further progress in the quarter ending June-2015, with the combination of higher profits and the deleveraging of the CRE book leading to a 100 bps increase in the Society’s fully-loaded CET1 ratio to 20.8%, and a 10 bps increase in the leverage ratio to 4.2%.

While Nationwide has made considerable progress, downward pressure on the IA could be driven by a failure to maintain an acceptable level of consistent profitability, an unexpected deterioration in the UK housing market, if DBRS were to perceive any weakening of the franchise, or if the risk profile increased. Upward pressure on the IA is unlikely in the medium term given the Society’s already high rating level. Further diversification of the franchise would also likely be required before the ratings could be upgraded.

Concurrently, DBRS has withdrawn its Commercial Paper rating on Nationwide and assigned an R-1 (middle) Short-Term Debt and Deposits rating to Nationwide, which reflects DBRS’s view of the Society’s short-term debt and deposit liabilities (i.e. maturing within 1 year).

The Society’s Long-Term Senior Debt and Deposits ratings remain URN due to DBRS’s review of the systemic support assumptions for a number of European Banks initiated on 20th May 2015. The review reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Currently, Nationwide has a support assessment of SA-2, which results in a one-notch uplift from Nationwide’s IA of A (high) to the final rating of AA (low). During the review period DBRS is considering whether to change the support designation of a number of European banks from SA-2 to SA-3, which is the category for banks in countries where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. Such a conclusion would lead to the removal of any uplift and a downgrade of the senior ratings for any affected banks. The review is expected to be completed in September.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other methodologies used include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include 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

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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: Roger Lister
Initial Rating Date: December 9, 1998
Most Recent Rating Update: 20 May 2015

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