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

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

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings reflects Nationwide's solid domestic retail franchise as the largest building society in the UK, its sound funding and liquidity position that is underpinned by a solid retail deposit base, as well as its sound capital position with ample capital cushions over minimum regulatory capital ratios, which remain at the higher end of its peer group following the completion of acquisition of Virgin Money UK PLC (Virgin Money). The credit ratings also consider Nationwide's sound asset quality, with low levels of impaired loans, and its resilient profitability despite recent pressure on earnings driven by interest rate cuts and higher cost of retail deposits, which is partly supported by good cost discipline and low cost of risk.

The credit ratings also take into account Nationwide's low business diversification given its focus on mortgages. Morningstar DBRS views that although the completion of Virgin Money's acquisition in October 2024 adds some diversification into consumer and business loans, Nationwide will mostly remain focused on mortgages. Morningstar DBRS expects asset quality to remain sound, despite Virgin Money's slightly higher risk profile, and the Group's combined net interest margin (NIM) to modestly improve, given the higher proportion on consumer and business loans at Virgin Money, which have higher margins. The integration of Virgin Money into the Nationwide group is expected to be gradual and over multiple years, which in Morningstar DBRS' view should help mitigate execution risks.

The Society's IA of A (high) has been assigned at the midpoint of the IA Range to reflect Nationwide's credit fundamentals and performance are commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
An upgrade of the credit ratings would require a sustained material improvement in profitability and a significantly higher franchise and revenue diversification whilst maintaining sound asset quality and robust capital levels.

A downgrade of the credit ratings would occur if there were material missteps or operational issues, particularly resulting from the integration of Virgin Money. In addition, significant deterioration in profitability levels and/or asset quality would result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Building Block (BB) Assessment: Strong/Good
Nationwide is the UK's largest building society, with total assets of GBP 282.4 billion as of the end of September 2024, with market shares of around 12.6% in mortgages, 9.6% in retail deposits, and 9.7% in current accounts on 30 September 2024. Whilst the Society is predominantly a residential mortgage lender and retail deposit taker, it also offers a wider range of retail banking products similar to the large UK commercial banks. Following the completion of the Virgin Money acquisition on 1 October 2024, Nationwide reinforced its position as the second largest provider of mortgages and retail deposits in the UK after Lloyds Banking Group and gained market shares in retail deposits to also become the second largest provider of retail deposits in the UK. The acquisition would initially bring some diversification through Virgin Money's business lending and consumer business, particularly in credit cards. Following the completion of the acquisition, Nationwide and Virgin Money have entered an 18-month strategic review; although, Virgin Money will remain a separate entity for a while as the integration will be gradual over multiple years.

Earnings Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS views Nationwide's earnings generation as resilient. Nationwide reported a statutory net profit of GBP 421 million on the six months ended 30 September 2024 (H1 2024/25), down circa 42% year over year (YOY), primarily driven by lower net interest income, which was down 11% YOY, reflecting the impact of recent interest rate cuts, strong mortgage competition, and higher cost of customer deposits. Results were supported by lower YOY operating expenses and loan loss provisions. Nationwide's NIM was 1.50% in H1 2024/25, down from 1.56% in F2024 and 1.66% in H1 2023/24. Nationwide's NIM should benefit from the integration of Virgin Money, which had an NIM of 1. 98% for the twelve months to September 2024. Nationwide's statutory cost-to-income ratio was 54.9% in H1 2024/25, weaker than the 44.2% in H1 2023/24, largely reflecting the lower revenues. The statutory cost of risk was 0 basis points (bps), supported by lower loan loss provisions and some releases of provisions in mortgages as a result of improved economic assumptions under its risk models.

Risk Building Block (BB) Assessment: Strong/Good
Nationwide's risk profile is solid, underpinned by the sound quality of its UK mortgage book and conservative underwriting standards, with impaired loans (Stage 3 loans) remaining at low levels. Virgin Money has a higher risk appetite compared with Nationwide, with higher Stage 3 loans and higher cost of risk. Nationwide's asset quality has remained sound despite the challenging operating environment and higher than historically level of interest rates. Stage 3 loans remained resilient for the Society, totalling GBP 1,673 million, stable from the end of F2024, although slightly higher than GBP 1,502 million at the end of F2023, mainly driven by buy-to-let mortgages. Total Stage 3 loans accounted for 0.76% of gross loans at the end of H1 2024/25, broadly in line with the year before. Virgin Money has Stage 3 loans of GBP 1,155 million at the end of September 2024. Although, Morningstar DBRS anticipates the Group's combined Stage 3 loan ratio is expected to slightly deteriorate to around 1% according to Morningstar DBRS' calculation, a level that Morningstar DBRS would still view as comparing well with domestic and international peers.

Funding and Liquidity Building Block (BB) Assessment: Strong/Good
Nationwide has a sound funding profile, partly underpinned by strong market shares in retail deposits that is supported by its mutual status, leading to a sticky customer deposit base. Total Customer deposits (member deposits plus other deposits) went up by 5% in H1 2024/25 from the end of F2024, with the Society reporting a ratio of net loans to deposits (including shares and other deposits) of 106% at the end of H1 2024/25 (108% at the end of F2024). Virgin Money will add around GBP 70 billion of customer deposits, whilst the net Loan to Deposit (LTD) ratio is expected to remain broadly similar. Nationwide's wholesale funding is well-diversified by instrument, currency, and maturity. Refinancing risk is moderate, and Nationwide's liquidity remains strong. At the end of H1 2024/25, on-balance sheet liquid and investment assets were GBP 50.7 billion, slightly increased from GBP 47.1 billion at the end of F2024. The average 12-month liquidity coverage ratio was strong at 186% at the end of H1 2024/25 (191% at the end of F2024), whilst the average Net Stable Funding Ratio was 151%, unchanged from the end of F2024, both remained well above the minimum requirements.

Capitalisation Building Block (BB) Assessment: Strong/Good
Nationwide's capital position is solid, supported by resilient earnings generation. Nationwide reported a Common Equity Tier 1 (CET1) ratio of 19.5% at the end of December 2024, down from 28.4% at the end of September 2024 because of the acquisition of Virgin Money. As a result, although the capital buffer over the minimum requirement of 12.7% has decreased, it remains ample at 680 bps. At the end of December 2024, the leverage ratio decreased to 5.2% from 6.5% at the end of F2024, partly driven by the acquisition of Virgin Money; although, it remains significantly higher than the minimum requirement of 4.3%. Morningstar DBRS still considers Nationwide's capital position as solid, with regulatory ratios that remain at the higher end of its peer group.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/450773.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Social (S) Factors
The subfactor Social Impact of Product and Services is relevant to the credit ratings of Nationwide but does not affect the overall credit rating or trend assigned to Nationwide. This subfactor reflects that Nationwide operates as a mutual organisation whereby the social aspect of its activities strengthens the overall franchise. As a building society, Nationwide is a mutual organisation and is focused on maximising social impact and long-term value for its members rather than maximising profit, which is supportive of client retention and stickiness. Nationwide distributed GBP 2,194 million in F2024 (F2023: GBP 1,055 million) and GBP 1,300 million in H1 2024/25 to its members via Member Financial benefits and its Fairer Share Programme.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024 https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.

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

The sources of information used for these credit ratings include Morningstar, Inc. and company documents. Other sources include Nationwide Building Society Interim results 2024-2025, Nationwide Building Society Interim results presentation 2024-2025, Nationwide Annual Report ended 4 April 2024, Nationwide Building Society Pillar 3 Disclosure Q3 2024-2025. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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

Morningstar DBRS 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. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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/450772.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Maria Rivas, Senior Vice President, Sector Lead, European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director, Global Financial Institution Ratings
Initial Rating Date: 2 February 1994
Last Rating Date: 28 March 2024

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