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Fitch Affirms Yorkshire Building Society at 'A-'; Stable Outlook
May 8, 2017 / 2:01 PM / 7 months ago

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

(The following statement was released by the rating agency) LONDON, May 08 (Fitch) Fitch Ratings has affirmed Yorkshire Building Society's (YBS) 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. Fitch has assigned a 'A-(dcr)' Derivative Counterparty Rating (DCR) to YBS as part of its roll-out of DCRs in western Europe and the US. DCRs are issuer ratings and express Fitch's view of an issuer's relative vulnerability to default under derivative contracts with third-party, non-government counterparties. 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, DCR, VR AND SENIOR DEBT RATINGS YBS's ratings reflect the society's low risk profile, healthy asset quality, and adequate liquidity and capitalisation in relation to its risk profile. The ratings also reflect Fitch's view that the society's business model is constrained by its limited franchise compared to larger UK retail peers and the society's concentration on UK mortgage assets. The society's risk appetite remains conservative, and its mortgage book consists of low-risk, owner-occupied and buy-to-let loans. Lending is generally at moderate loan-to-value (LTV) ratios although the society has shown a greater appetite for higher-LTV loans than some of its higher rated peers through its lending to first-time buyers. Higher-LTV lending represents a small proportion of total loans, however, and is manageable for the society given stringent underwriting standards and sound risk limits. Commercial lending remains low as a proportion of total assets and are fragmented and diversified across the UK. Asset quality benefits from the benign UK economic environment and low interest rates, and the society reported a low end-2016 impaired loans ratio of 0.69%. Sector concentration arises from YBS's focus on UK residential lending, with asset quality sensitive to developments in domestic economic conditions. This risk is mitigated by the society's conservative underwriting standards. YBS has an adequate performance track record but operating revenue relies on net interest income, which remains under pressure given low interest rates and heightened competition in the mortgage market. The society is working to reduce its cost base and, following associated restructuring costs in the next years, we expect cost efficiency to improve in the medium term, which will support performance. Fitch considers the society's funding and liquidity profile as solid and stable. YBS is mainly deposit-funded but has also issued wholesale funding in the form of unsecured and secured senior debt, and subordinated debt, and has accessed the government's Funding for Lending Scheme and intends to access the Term Funding Scheme. YBS'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. Liquidity buffers are high-quality and mostly composed of cash at the Bank of England, UK government bonds and treasury bills, and YBS also benefits from access to contingent sources from the Bank of England. Fitch considers capital adequate for the society's ratings, with sound levels above regulatory minimum requirements on both a risk-weighted and a non-risk weighted basis. The reported CET1 ratio and leverage ratio stood at 14.9% and 5.1% respectively at end-2016 (2015: 14.5% and 5%) and the reported CET1 ratio is set to improve further as a result of the society's planned adoption of the internal ratings based approach by end-2018. Capital is generated through retained earnings and, in our view, should be maintained higher than minimum requirements given the society's limited access to external capital. A DCR has been assigned to YBS because the society acts as derivative counterparty to Fitch-rated transactions. The DCR is at the same level as the Long-Term IDR because derivative counterparties have no definitive preferential status over other senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR YBS'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 YBS's subordinated debt is notched down from the VR reflecting Fitch's assessment of their 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, reflecting two notches for their deep subordination and two notches for incremental non-performance risk in the form of potential non-payment of coupon. The society's convertible Tier 2 debt is notched down twice from the VR: once for loss severity to reflect the conversion into profit participating deferred shares on breach of the trigger, and once for incremental non-performance risk. RATING SENSITIVITIES IDRS, DCRs, VR AND SENIOR DEBT RATINGS YBS'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 is unlikely because 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. The DCR is primarily sensitive to changes in YBS's Long-Term IDR. 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 YBS. 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' Derivative Counterparty Rating: assigned at 'A-(dcr)' Senior unsecured debt and programme rating: affirmed at 'A-'/'F1' Subordinated dated debt: affirmed at 'BBB+' Permanent Interest-Bearing Shares: affirmed at 'BB+' Convertible notes: affirmed at 'BBB' Contact: Contact: Primary Analyst Krista Davies Director +44 20 3530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Aabid Hanif Associate Director +44 20 3530 1786 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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. 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