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Fitch Affirms Skipton Building Society at 'A-'; Outlook Stable
May 8, 2017 / 2:06 PM / 4 months ago

Fitch Affirms Skipton Building Society at 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 08 (Fitch) Fitch Ratings has affirmed Skipton Building Society's (SBS) Long- and Short-Term Issuer Default Ratings (IDRs) at 'A-'/'F1' and Viability Rating (VR) at 'a-'. The Outlook on the Long-Term IDR is Stable. The rating actions are part of Fitch's periodic review of the UK Building Societies. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, VR AND SENIOR DEBT RATINGS SBS's IDRs, VR and senior debt ratings reflect the society's conservative risk appetite, healthy asset quality, solid capitalisation, sound funding and strong liquidity. The ratings also reflect the society's limited franchise and the concentration of its business on the UK housing market. Asset quality is healthy and compares well with its UK peers. The recent sale of the society's nonperforming legacy specialist mortgages (including self-certified, sub- and near-prime lending) further improves the society's asset quality. We believe that some risk remains in the performing legacy loan portfolios, as these portfolios may begin to suffer larger losses when base rates rise, but this should be manageable. The society no longer has any appetite for specialist mortgages or commercial loans, and both these books are in run-off. SBS's profitability is in line with peers'. Its profitability is under pressure from the highly competitive UK mortgage market, but benefits from low funding costs and very low loan impairment charges. The society's reported net interest margin has declined from a high of 140bps in 2014 to 116bps in 2016 and we expect it to fall further as a result of the persistently low interest rates in the UK. SBS's earnings are more diversified than other building societies' through its estate agency subsidiary, Connells. Cost efficiency of the mortgages and savings business is in line with the sector average. However, as the result of the consolidation of Connells, SBS's consolidated efficiency ratios are weaker. SBS's capitalisation and leverage are sound and benefit from the society's strong internal capital generation. Capital ratios are maintained, with solid buffers over regulatory minimum requirements. SBS's fully loaded common equity tier 1 ratio increased to 23.9% at end-2016, from 16.8% at end-2015, but the improvement was mainly the result of the society's first-time adoption of the internal ratings-based (IRB) approach; under the standardised approach SBS's end-2016 CET1 ratio would have been 17.3%. While Fitch considers Connells strategic for the group, we view it as an additional potential source of capital, in case of need. Liquidity is strong, with liquidity buffers mostly composed of cash at the Bank of England, UK government bonds and treasury bills. It also benefits from access to contingent liquidity from the Bank of England. Funding is mainly composed of customer savings. The society also uses wholesale funding, but this source is less important than for some of SBS's larger peers and consists mostly of secured funding. Fitch does not expect a significant change to this funding mix, although the society is looking for ways to diversify its wholesale funding base, with expected issuances of covered and senior debt in the medium-term. SBS's strong liquidity drives the society's 'F1' Short-Term IDR, which is the higher of the two Short-Term IDRs that map to the society's Long-Term IDR. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) SBS's SR and SRF reflect Fitch's view that senior creditors cannot rely on extraordinary support from the UK authorities in the event the society becomes non-viable given UK legislation and regulations that provide a framework that is likely to require senior creditors to participate in losses after a failure and because of the society's low systemic importance. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES SBS's subordinated debt is notched down from the VR, reflecting Fitch's assessment of incremental non-performance risk relative to the VR and loss severity. Legacy Lower Tier 2 subordinated debt is notched down once from the VR for loss severity. The permanent interest- bearing shares (PIBS) are rated four notches below the VR: two notches for loss severity and two notches for incremental non-performance risk in the form of potential non-payment of coupon. RATING SENSITIVITIES IDRs, VR AND SENIOR DEBT RATINGS SBS's IDRs, VR and senior debt ratings are primarily sensitive to structural deterioration in profitability through tighter margins and higher loan impairment charges, and weaker asset quality. This could be caused by a material weakening of the operating environment in the UK if the economic environment deteriorates substantially following the UK's decision to leave the EU. The VR and IDRs could also come under pressure if the society increases its risk appetite, for example, through a sharp increase in lending to higher-risk segments, including commercial real estate or higher loan-to-value lending, or if its capitalisation weakens materially, none of which Fitch currently expects. An upgrade of the VR would require a longer track record of consistent performance through the economic cycle. In addition, Fitch views the society's business model, which is concentrated on the UK residential mortgage lending and savings market, as less diversified than that of its more highly rated UK peers. SUPPORT RATING AND SUPPORT RATING FLOOR Fitch does not expect any changes to the SR and the SRF given the low systemic importance of the building society, as well as the legislation in place that is likely to require senior creditors to participate in losses for resolving SBS. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings are primarily sensitive to changes in the VR from which they are notched. The ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the VR. The ratings are also sensitive to a change in Fitch's assessment of each instrument's loss severity, which could reflect a change in the expected treatment of liability classes during a resolution. The rating actions are as follows: Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt and programme rating: affirmed at 'A-'/'F1' Subordinated dated debt: affirmed at 'BBB+' Permanent Interest-Bearing Shares: affirmed at 'BB+' Contact: Primary Analyst Krista Davies Director +44 20 3530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Joanna Drobnik, CFA Director +44 20 3530 1318 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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