DBRS Morningstar Confirms Nationwide’s Long-Term Issuer Rating at A (high), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Nationwide Building Society (Nationwide or the Society), including its A (high) Long-Term Issuer Rating and its R-1 (middle) Short-Term Issuer Rating. The trend on all ratings is Stable. Nationwide’s Intrinsic Assessment (IA) is A (high), while its Support Assessment remains SA3. See a full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the ratings reflect Nationwide’s solid domestic retail franchise as the largest building society in the UK, its sound capital position with ample capital cushions over minimum regulatory capital ratios, and its well-managed funding and liquidity profile that is underpinned by a solid retail deposit base. Nationwide’s profitability improved in FY23 due to higher net interest income on the back of higher interest rates, and asset quality remains resilient despite the challenging macroeconomic environment. The ratings also consider that whilst the full impact of rising interest rates and high inflation is yet to materialise in asset quality, Nationwide’s solid capital buffers make it well positioned to cope with the challenging environment.

CREDIT RATING DRIVERS
An upgrade of the Long-Term ratings would require a stronger financial performance track record while maintaining solid profitability, sound asset quality and robust capital levels.

A downgrade of the Long-Term ratings would be driven by a sustained and material deterioration in profitability and asset quality.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong/Good
Nationwide is the UK’s largest building society, with total assets of GBP 271.9 billion at end-FY2023 (Financial year ending April 4, 2023). The Society has a well-established franchise in the UK, with 3.75 million committed members and market shares of around 12.2% in mortgages, 9.6% in savings/deposits and 10.4% in current accounts in FY2023. While the Society is predominantly a residential mortgage lender and deposit taker, it also offers a wider range of retail banking products similar to the large UK commercial banks.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Nationwide’s earnings generation as good, and benefitting from the repricing of assets in the current higher interest rate environment. As a mutual organisation, Nationwide targets profit optimisation rather than maximisation in order to maintain a sound financial position and also to be able to offer long-term value to its members. Nationwide reported a statutory net profit of GBP 1.66 billion in FY23, up 33% year-on-year (YOY) largely reflecting strong growth in net interest income on the back of the higher interest rate environment. As a result, the Society’s net interest margin (NIM) increased to 1.57% in FY23, up from 1.26% in FY22 and 1.21% in FY21. Nationwide’s underlying cost-to-income ratio was 49.7% in FY23, an improvement from 57.8% in FY22 mainly due to higher revenues which offset operating costs increasing by 4% YOY due to higher inflation and staffing costs. In FY23, Nationwide reported GBP 126 million in loan loss provisions due to the continued macroeconomic uncertainty, compared to GBP 27 million of loan loss releases reported in FY22. Cost of risk, as calculated by DBRS Morningstar, increased to 6 bps in FY23 up from -1.3 bps in FY22 which is in line with pre-pandemic figures.

Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers Nationwide to have a solid risk profile, underpinned by the sound quality of its UK mortgage book and conservative underwriting standards, with past due mortgages and unsecured lending remaining at low levels. While the economic environment has weakened, Stage 3 loans remained resilient for the Society and accounted for only 0.71% of gross loans at end-FY23, down from 0.81% at end-FY22. Nevertheless, there has been a significant increase in Stage 2 loans, accounting for 17.8% of the Society’s total gross loan portfolio at end-FY23 up from 8.8% at end-FY22. The significant increase was mainly due to internal model adjustments to reflect the higher interest rate environment which is increasing household debt affordability risk. The average LTV of the prime mortgage stock was 54%, and 71% for new lending, reflecting Nationwide’s support for first-time buyers.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Nationwide’s funding profile is sound, supported by a solid position in the domestic deposit market and good access to wholesale capital markets. In line with its strategy and the applicable regulations, Nationwide remains predominantly retail funded. Customer deposits (member deposits) increased by around GBP 9.2 billion to GBP 187.1 billion in FY23, up 5% YOY, with the Society reporting a ratio of net loans to deposits (including shares, other deposits and amounts due to customers) of 110% at end-FY23 compared to 114% at end-FY22 and 115% at end-FY21. Wholesale funding accounted for 23.6% of total funding at end-FY23 with short-term funding accounting for a moderate 11% of total retail funding. Nationwide reported an average 12-month Liquidity Coverage Ratio (LCR) of 180% and an average net stable funding ratio (NSFR) of 147% at end-FY23, both well above the minimum requirement of 100%.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
Nationwide has a solid capitalisation position. At end-FY23, the Society reported a CET1 ratio of 26.5%, up from 24.1% at end-FY22, mainly due to solid earnings generation along with a decrease in risk weighted assets. Nationwide’s current capital buffer of 15% places them very comfortably above the minimum requirement of 11.5% and compares well relative to peers. The UK leverage ratio, which is the binding capital constraint for Nationwide, was 6.0% at end-FY23, up from 5.4% at end-FY22 and well in excess of the Society’s minimum requirement of 4.0%. Finally, Nationwide’s MREL resources were equal to 8.8% of the UK leverage ratio exposure at end-FY23, which is above the 2023 loss-absorbing regulatory requirement of 7.2%

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/417573

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors
We consider the social subfactor ‘social impact of product and services’ to be relevant to the rating of Nationwide, but does not affect the overall rating or trend assigned to Nationwide. This is reflected in a positive uplift of the franchise grid grades. As a building society, Nationwide is a mutual organisation and is focused on improving the social impact for its members rather than maximising profit. For example, in May 2023 Nationwide announced the Fairer Share Programme in which GBP 340 million of the Society’s profit will be shared as direct cash payments to eligible members.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023) - https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:

All figures are in GBP unless otherwise noted.

The principal methodology is the Global Methodology for Ratings Banks and Banking Organisations (22 June 2023) - https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Nationwide Building Society Annual Report and Accounts 2023, Nationwide Annual Results Presentation For the 12 months ended 4 April 2023, Nationwide Building Society Pillar 3 Disclosure 2023, Nationwide Building Society Climate-related Financial Disclosures 2023. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/417574

This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 25 January 2001
Last Rating Date: 1 August 2022

DBRS Ratings Limited
1 Oliver’s Yard 55-71 City Road, 2nd Floor, London ECY 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.