DBRS Confirms Nationwide at A (high), Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Nationwide Building Society (Nationwide or the Society), including its A (high) Long-Term Senior Debt and Deposits rating. The trend on all ratings is Stable. The Intrinsic Assessment (IA) for Nationwide is A (high), whilst the support assessment remains SA3. As a result, the Society’s final ratings are positioned in line with the IA.

Nationwide’s ratings and the Stable trend reflect the strength of the Society’s 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, strengthened capital position, 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.

Nationwide’s earnings generation strengthened further in the year to April 4, 2016, with the Society recording statutory profit before tax of GBP 1.28 billion, an increase of 23% year-on-year (YoY). This improvement principally reflected solid net interest income growth, which offset an 8% increase in costs. The Society also reported a 17% YoY increase in profit after tax to GBP 985 million in the year to April 4, 2016, supported by a 71% YoY decrease in impairment charges. DBRS does not expect Nationwide’s profitability ratios to be at the top-end of the peer group, given the Society’s mutual status and operating model, however DBRS will continue to closely monitor the Society’s profitability, especially given the weaker performance in the quarter to June 2016 which saw a 17 basis point (bps) decrease in the net interest margin (NIM), compared to the year to April 4, 2016 NIM of 1.52%. This was due to the impact of competition in the mortgage market.

The asset quality of Nationwide’s residential mortgage portfolio, which accounted for 91% of total loans at April 4, 2016, continues to be a key rating strength, reflecting the Society’s sound risk management approach and low risk appetite. At April 4, 2016, the prime residential mortgage portfolio had an impaired loan ratio of only 0.28%, whilst the performance of the ‘Specialist’ book (comprising buy-to-let, self-certification and other non-standard mortgage lending) continued to improve, with an impaired loan ratio of 1.28%, down from 5.36% at April 4, 2010. Nationwide has also continued to make progress in deleveraging its commercial real estate (CRE) exposure, with the total balance down 26% YoY, net of new lending, to GBP 3 billion. As a result, the number of impaired loans continued to decrease, down 72% YoY, to GBP 171 million at April 4, 2016, helping to improve the CRE impaired loan ratio, to 5.68%, vs. 15.0% at April 4, 2015.

Nationwide also benefits from solid funding, supported by the Society’s significant retail deposit franchise, which at April 4, 2016 accounted for approximately 73% of total funding. In addition, the Society has continued to improve the maturity profile of its wholesale funding, with 59% having a residual maturity in excess of one year at April 4, 2016, up from 53.3% a year before. Nationwide’s liquidity position is also solid, with the Society reporting a Liquidity Coverage Ratio (LCR) of 142.6% at April 4, 2016, and a Net Stable Funding Ratio (NSFR) of 127.9%, both well in excess of current and future minimum requirements.

Nationwide continues to strengthen its capital position, through internal capital generation and the continued deleveraging of CRE assets. At April 4, 2016, Nationwide reported a fully-loaded Common Equity Tier 1 (CET1) ratio of 23.2%, an increase of 340 bps from a year before, and a leverage ratio of 4.2%, an increase of 10 bps YoY, leaving the Society well-placed relative to UK banking peers. Nationwide made further progress in the quarter ending June-2016, with higher profits leading to a 20 bps increase in the Society’s fully-loaded CET1 ratio to 23.4%.

DBRS notes that the vote in favour of the United Kingdom leaving the European Union (Brexit) on 23 June 2016 is likely to have a negative impact on the large UK banks. For Nationwide this impact is most likely to be realised through a deterioration in macroeconomic conditions. For further information on DBRS’s view on Brexit, please see: DBRS: Brexit Negative for Large UK Banks.

RATING DRIVERS
Upward pressure on the ratings is unlikely given the already high rating level. Increased franchise and earnings diversification, whilst maintaining a prudent risk profile, would likely be required before the ratings could be upgraded.

Negative pressure could result from a failure to maintain an acceptable level of consistent profitability, a significant deterioration in the UK housing market, if DBRS were to perceive any weakening of the franchise, or if the risk profile increased.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Critical Obligations Rating (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, the Building Societies Association, the Prudential Regulation Authority and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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 historical default rates published by the European Securities and Markets Authority (“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, Senior Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: December 9, 1998
Most Recent Rating Update: February 4, 2016

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