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Fitch Downgrades Clydesdale Bank to 'BBB+'; Assigns CYBG plc IDRs
February 9, 2016 / 3:34 PM / 2 years ago

Fitch Downgrades Clydesdale Bank to 'BBB+'; Assigns CYBG plc IDRs

(The following statement was released by the rating agency) LONDON, February 09 (Fitch) Fitch Ratings has downgraded Clydesdale Bank PLC's Long-term IDRs to 'BBB+' from 'A' and Short-term IDR to 'F2'from 'F1' and removed them from Rating Watch Negative (RWN). Fitch has also downgraded Clydesdale Bank's Support Rating to '5' from '1' and removed it from RWN and assigned it a Support Rating Floor (SRF) of 'No Floor'. Fitch has assigned the same ratings to the bank's newly-created UK-based holding company CYBG plc. The Outlooks are Stable. Fitch has also downgraded the Long-term IDRs of Clydesdale Bank Investments Limited (CYBI, previously known as NAGE) to 'BBB+' from 'A' and its Short-term IDR to F2' from 'F1' and removed them from RWN and downgraded its Support Rating to '5' from '1'. The Outlook is Stable. Fitch has subsequently withdrawn all of CYBI's ratings as they are no longer relevant to Fitch's coverage. Fitch has assigned final ratings to CYBG's issue of Additional Tier 1 and Tier 2 debt. A full list of rating actions is at the end of this rating action commentary. The downgrade of Clydesdale Bank's IDRs follows the demerger on 8 February 2016 of Clydesdale Bank's parent company, CYBG from its Australian banking parent, National Australia Bank Limited (NAB; AA-/Stable/F1+). In our view, the demerger removes the provision of any potential future extraordinary support for Clydesdale and for CYBG (over and above an indemnity covering legacy conduct costs). The IDRs are therefore now based on the UK group's standalone financial profile, as defined by its VR. We placed the IDRs and Support Ratings on RWN on 11 May 2015, when NAB announced its demerger plans (see 'Fitch Puts Clydesdale Bank's IDRs on RWN, Affirms VR at 'bbb+'', dated 11 May 2015 at www.fitchratings.com). CYBG is the holding company of the CB group and is the entity listed on the London and Sydney stock exchanges. It is also intended that it will serve as the group's resolution entity should this be necessary in the future. KEY RATING DRIVERS IDRS and VR CYBG and CB's IDRs and VR reflect the group's low risk profile, sound asset quality, adequate impairment reserves, healthy liquidity and improved capitalisation. We believe that there might be some pressure on its funding profile without its ordinary shareholder's support, as well as some operational risk from the demerger but we believe these to be manageable. The bank's medium-term profitability prospects are improving on the back of a renewed expansion plan and also thanks to an indemnity provided by NAB for legacy conduct costs. The bank's underlying profitability is modest and will be impinged further for the next two years by investment and restructuring costs. Net income has been affected by large scale conduct remediation costs and fines, to the extent that the bank has been reporting losses since 2012. Underlying profitability has been subjected to a book of low yielding tracker mortgage loans and business loans to SMEs. However, these are slowly being replaced by higher yielding mortgages. Furthermore, NAB will cover additional one-off conduct costs up to GBP1.1bn under an indemnity guarantee. CB's capitalisation has been reinforced with capital injections from NAB in 2014 and 2015. NAB's aim was to increase CBYG's common equity Tier 1 (CET1) ratio to just over 13% prior to the demerger and this has been achieved. This capital level provides a management buffer over regulatory minimum requirements, which we believe to be necessary for CYBG in re-launching the bank as a standalone entity. CYBG's asset quality is healthy, with low level of arrears. CB's under-performing commercial real estate (CRE) loan portfolio was transferred (at a loss) to NAB in 2012 and arrear levels have remained modest since then. The proportion of defaulted loans (defined as IFRS impaired loans plus loans which are over 90 days past due but not impaired) was 1.4% at end-September 2015, the bank's accounting year-end. CB relied quite heavily on its parent NAB for funding in the past. However, intra-group funding has been reducing as the bank has partly replaced former parental wholesale funding with secured funding and customer deposits. NAB retains a small amount of CB secured funding, which will mature over the next two years and which CYBG/CB will have to replace in the market but we believe that its access to the secured funding market will enable it to replace maturing debt. Its standalone access to the unsecured markets remains untested. The parent, NAB is still supporting CYBG by investing in its announced additional Tier 1 and Tier 2 securities. The bank's current liquidity position is strong, with strong buffers held over minimum regulatory requirements. CYBG's ratings are equalised with those of CB because of the high importance CYBG will play in the group, similar regulation being applicable to both companies (the UK's PRA regulates CYBG and CB on a consolidated basis), the lack of holding company double leverage and the very limited materiality of its non-bank subsidiaries. CB's dividends and interest payments are the main source of income for CYBG as CB's assets represented 99% of CYBG's total assets at end-FY15. SUPPORT RATING AND SUPPORT RATING FLOOR CB's and CBYG's Support Ratings and Support Rating Floors indicate our view that in the case of failure, they cannot rely on external sources of support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by CYBG PLC are notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance risk and relative loss severity. Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries. CYBG's fixed rate reset perpetual subordinated contingent convertible notes are additional Tier 1 (AT1) instruments with fully discretionary interest payments and are subject to conversion into CYBG's ordinary shares on breach of a consolidated 7% CRD IV CET1 ratio, which is calculated on a "fully loaded" basis. The securities are rated five notches below CYBG's 'bbb+' VR. The securities are notched twice for loss severity to reflect the conversion into common shares on a breach of the 7% fully loaded CET1 ratio trigger, and three times for incremental non-performance risk relative to the VR. The notching for non-performance risk reflects the instruments' fully discretionary coupons, which Fitch considers as the most easily activated form of loss absorption. Under the terms of the securities, the issuer will be subject to restrictions on interest payments if it has insufficient distributable items, is insolvent or fails to meet the combined buffer capital requirements that are being gradually introduced from January 2016. Potential other factors are a breach of the minimum regulatory leverage ratio. CYBG's fully loaded Basel III CET1 ratio at 30 September 2015 was 13.2%, providing it with a buffer of around GBP1.1bn for the 7.0% CET1 ratio trigger, although non-performance in the form of non-payment of interest would likely be triggered before reaching 7%, most likely by breaching the bank's regulatory combined buffer requirements. Fitch has assigned 100% equity credit to the securities. This reflects their full coupon flexibility, the ability to be converted into ordinary shares before the bank becomes non-viable, their permanent nature and their subordination to all senior creditors. RATING SENSITIVITIES IDRS and VR CYBG's and CB's IDRs and VRs are primarily sensitive to a change in Fitch's assumptions around their moderate risk appetite. The ratings could be downgraded if the bank increases its exposure to higher risk sectors materially as a result of its expansion, or if asset quality deteriorates faster than expected. They are also sensitive to continued losses over and above those that are indemnified by NAB, such as greater conduct costs than anticipated or protracted operational costs relating to setting up a standalone banking group. Upside potential is limited in the medium term given CB's constrained profitability and execution risks associated with the bank's restructuring programme. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES As the subordinated debt rating is notched down from CYBG's VR, the rating is primarily sensitive to any change in the VR. The securities' ratings are also sensitive to any change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance or loss-severity relative to the risk captured in CYBG's VR. With respect to the AT1 securities, this could arise from a change in Fitch's assessment of capital management at CYBG, reducing the holding company's flexibility to service the securities or an unexpected shift in regulatory buffer requirements, for example. HOLDING COMPANIES CYBG's VR and IDRs are sensitive to CYBG maintaining either no or a modest amount of holding company double leverage. A material increase in holding company double leverage or if the role of the holding company changes, CYBG's VR and IDR could be downgraded. Together with the creation of separately capitalised subsidiaries, over time further expected debt issuance by CYBG could change the relative position of creditors of different group entities, which would be reflected in different entity ratings, including the holding company's VR and IDRs. The rating actions are as follows: Clydesdale Bank Long-term IDR: downgraded to 'BBB+' from 'A'; off RWN; Outlook Stable Short-term IDR: downgraded to 'F2' from 'F1'; off RWN Viability Rating: affirmed at 'bbb+' Support Rating: downgraded to '5' from '1'; off RWN Support Rating Floor: assigned 'No Floor' CYBG Long-term IDR: assigned 'BBB+'; Outlook Stable Short-term IDR: assigned 'F2' Viability Rating: assigned: 'bbb+' Support Rating: assigned '5' Support Rating Floor: assigned 'No Floor' Additional Tier 1 debt: assigned 'BB-' Tier 2 Debt: assigned 'BBB' CYBI Long-term IDR: downgraded to 'BBB+' from 'A'; off RWN, Outlook Stable and withdrawn Short-term IDR: downgraded to 'F2' from 'F1'; off RWN and withdrawn Viability Rating: affirmed at 'bbb+' and withdrawn Support Rating: downgraded to '5' from '1'; off RWN and withdrawn Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Marc Ellsmore Analyst +44 20 3530 1438 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 20 Mar 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=999251 Solicitation Status here Endorsement Policy here ail=31 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 WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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