Fitch Ratings-London-21 November 2008: Fitch Ratings has today taken various rating actions on nine UK building societies. The actions include downgrades of the Long-term Issuer Default ratings (IDR) of three building societies and the Short-term IDR of three building societies. The agency has changed the Outlook for the Long-term IDR of three societies to Negative from Stable and downgraded the Individual rating of five societies. All ratings of two societies, Coventry Building Society (CBS) and Leeds Building Society (Leeds) are affirmed. The ratings and rating drivers are detailed below. Fitch will issue a separate commentary on the ratings of the covered bonds issued by the different building societies.
Overall, the rating actions reflect Fitch's view that the prospects for the UK economy have deteriorated rapidly in recent months. In particular, economic growth has weakened significantly and unemployment is likely to continue rising. UK house prices have fallen by about 15% in the past year and Fitch now expects them to fall by a total of 30% from the peak in October 2007 over the next two years.
"Rising unemployment and the decline in house prices will lead to larger impairment charges for all UK building societies," says Matthew Taylor, Senior Director in the Financial Institutions team at Fitch. "Anaemic economic growth and dislocated financial markets contribute additional strains."
Fitch's concerns are greatest for societies with large exposures to specialist mortgages, and for high loan to value (LTV) loans. Concentration in commercial mortgage lending and recent rapid loan growth constitute additional areas of risk. However, the agency also acknowledges that building societies' loan portfolios benefit from being secured on residential housing, a historically safe form of lending. The majority of building society funding comes from retail savers, a traditionally stable form of funding. In addition, for the building societies included in this review, capitalisation is at least reasonably strong and is not a cause of concern. During 2008, all building societies have been holding significantly higher levels of liquid assets. In 2008, Fitch expects that the building societies will be impacted by impairments arising from exposure to Icelandic banks and other extraordinary charges, and operating profit for the current financial year will be lower for all rated societies and much depleted at one or two institutions.
Britannia Building Society:Long-term IDR downgraded to 'A-' (A minus) from 'A', Outlook NegativeShort-term IDR downgraded to 'F2' from 'F1'Individual rating downgraded to 'C' from 'B/C' Support rating affirmed at '3'Support Rating Floor affirmed at 'BB+'Senior unsecured notes downgrade to 'A' from 'A+'Subordinated notes and permanent interest-bearing shares downgraded to 'BBB+' from A-
The downgrade of Britannia Building Society's (Britannia) Long-term and Short-term IDR, and Individual Rating reflect Fitch's concerns about likely deterioration in its credit risk. In the context of the rapidly worsening UK economic outlook, the agency considers that the high LTV portion of lending in certain components of the specialist mortgage book is vulnerable. In Fitch's opinion these mortgages are more likely to suffer from losses as unemployment rises and the proportion of negative equity in these loans increases. The Negative Outlook reflects Fitch's opinion that Britannia will be challenged to generate enough pre-impairment operating profit in a tougher economic environment to absorb larger credit impairment charges. However, Fitch recognises Britannia's high quality member mortgage book which accounts for almost half of the group's total loans and the lower risks in portions of the specialist mortgage book. Fitch notes too management's success in improving cost efficiency. The large capital base and customer franchise contribute positively to the ratings. Britannia could experience a further downgrade if asset quality deteriorates significantly and credit impairment charges absorb operating profit to a level weaker than its 'A-' (A minus) rated peers.
Chelsea Building Society:Long-term IDR downgraded to 'A-' (A minus) from 'A'; Outlook StableShort-term IDR affirmed at 'F1'Individual rating downgraded to 'B/C' from 'B' Support rating affirmed at '3'Support Rating Floor affirmed at 'BB'Senior unsecured notes downgraded to 'A' from 'A+'Subordinated notes downgraded to 'BBB+' from 'A-'
Chelsea Building Society's (Chelsea) downgrade reflects the increased risks from its specialist lending in the more difficult economic environment. Chelsea has expanded its buy-to-let (BTL) book significantly over the past two years, with a noticeable portion related to flats and loans initially above 90% LTV. The society has also built a small commercial book during 2008, which has substantial exposure to London. Chelsea has also disclosed a significant exposure of GBP55m related to Icelandic banks. Recovery prospects for this exposure are uncertain and an impairment charge is expected to absorb a significant portion, if not all, of 2008 profits. The Stable Outlook partly reflects Chelsea's good asset quality in its majority prime residential book.
Coventry Building Society:Long-term IDR: affirmed at 'A'; Outlook StableShort-term IDR: affirmed at 'F1'Individual rating: affirmed at 'B' Support rating: affirmed at '3'Support Rating Floor: affirmed at 'BB'Senior unsecured notes: affirmed at 'A+'Subordinated notes and permanent interest bearing shares: affirmed at 'A-' (A minus)
The ratings assigned to Coventry Building Society (CBS) have been affirmed since Fitch believes that, together with Leeds Building Society, CBS's asset quality is stronger than other peers in the sector. CBS continued to perform well in H108 and expects to make a moderate full-year profit in 2008 even given the difficult operating environment. CBS is one of the few building societies that follow the Basel II internal-ratings based approach to credit risk, which has contributed to a noticeable improvement in risk management.
Leeds Building Society:Long-term IDR affirmed at 'A'; Outlook StableShort-term IDR affirmed at 'F1'Individual rating affirmed at 'B' Support rating affirmed at '3'Support Rating Floor affirmed at 'BB'Senior unsecured notes affirmed at 'A+'Subordinated notes and permanent interest bearing shares affirmed at 'A-' (A minus)
The ratings of Leeds Building Society (Leeds) were affirmed and reflect its solid capital base, good profitability and cost management, as well as the society's small credit risk which is reflected in its relatively small proportion of specialist lending and the focus on lower LTV-lending. However, they also reflect its moderate size, limited geographical diversification, and a slightly larger risk appetite in its commercial lending than similar rated peers. In Fitch's view, Leeds' strong cost efficiency and low credit risk profile should help the society to withstand the negative impact of an economic downturn on its profitability, asset quality and capital.
Newcastle Building Society:Long-term IDR downgraded to 'A-'(A minus) from 'A'; Outlook StableShort-term IDR affirmed at 'F1'Individual rating downgraded to 'B/C' from 'B' Support rating affirmed at '3'Support Rating Floor affirmed at 'BB'Senior unsecured notes downgraded to 'A' from 'A+'Subordinated notes and permanent interest bearing shares downgraded to 'BBB+' from 'A-' (A minus)
The downgrade of Newcastle Building Society (Newcastle) reflects its relatively small size and profitability, and inherent concentration risk emanating from some of its larger exposures. However, the Stable Outlook incorporates the excellent asset quality of the society's mortgage book at end-September 2008 and sound capitalisation. Newcastle's residential mortgage portfolio does not include any sub-prime or self-certified lending and only very little higher LTV exposures. BTL lending is limited, at less than 8% of total lending at end-September 2008. Lending to housing associations (21%) remains low-risk, with no history of arrears. The quality of Newcastle's commercial lending (13%) is good, with no exposure in arrears of three months or more at end-September 2008, but risks have increased as a result of the weaker economic backdrop.
Principality Building Society:Long-term IDR affirmed at 'A-' (A minus), Outlook revised to Negative from StableShort-term IDR downgraded to 'F2' from 'F1'Individual rating affirmed 'B/C' Support rating affirmed at '3'Support Rating Floor affirmed at 'BB'Senior unsecured notes affirmed at 'A' Subordinated notes and permanent interest bearing shares affirmed at 'BBB+'
The downgrade of Principality Building Society's (Principality) Short-term rating and the revised Negative Outlook on the Long-term IDR reflects Fitch's continuing concerns regarding the second charge and commercial books. Management expects that Principality's pre-impairment operating profit should benefit from the low interest rate environment. However, Fitch believes rising unemployment and falling house prices are likely to lead to large loan impairment charges, especially in view of the high original LTVs in the second charge mortgage book. One of the main concerns regarding the commercial book remains concentration which Fitch considers large in proportion to the society's earnings. The 'B/C' individual rating still reflects Principality's good capitalisation and adequate profitability, its good franchise in Wales and the more conservative prime owner-occupied lending which makes up the majority of the loan book. The Long-term IDR could be downgraded if asset quality starts to deteriorate more rapidly, absorbing a larger proportion of pre-impairment operating profit than its 'A-' (A minus) rated peers.
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November 21, 2008 06:22 ET (11:22 GMT)

Publié le 21 novembre 2008 Copyright © 2008 Dowjones