May 26, 2016 / 3:32 PM / a year ago

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

(The following statement was released by the rating agency) LONDON, May 26 (Fitch) Fitch Ratings has affirmed Yorkshire Building Society's (YBS) Long- and Short-Term Issuer Default Ratings (IDR) at 'A-'/'F1', Viability Rating (VR) at 'a-', Support Rating at '5' and Support Rating Floor at 'No Floor'. The Outlook on the Long-Term IDR is Stable. KEY RATING DRIVERS IDRS, VR and SENIOR DEBT RATINGS The IDRs, VR and senior debt ratings reflect the society's conservative risk appetite, healthy asset quality, solid capitalisation and sound funding and liquidity. They are however, constrained by a limited franchise and the society's concentration on UK mortgage assets. Asset quality has improved and now compares well with the society's UK peers. Furthermore, progress in the integration of the society's acquisitions is resulting in a gradual decline in operational risks. Risk appetite remains low, with a focus on low-risk prime residential mortgage lending. Its exposure to legacy commercial real estate and specialist loans is now negligible. Commercial loans remain low as a proportion of total assets and are fragmented and diversified across the UK. YBS has expressed a greater appetite for higher loan-to-value (LTV) ratio loans than some of its higher-rated peers. Although mortgages with an LTV of over 90% continue to account for a small proportion of total loans, Fitch expects the figure will increase, given the society's intention to maintain its offering to first-time buyers. The society has risk limits in place for loans above 90% LTVs. Profitability has proved sustainable despite a low interest rate environment and a fairly undiversified income stream. It has been decreasing recently as a result of lower releases of past years' fair value adjustments and because of higher costs related to the society's strategic investment programme. Fitch expects margins to have reached maximum levels with mortgage loan yields suffering from increased competitive pressure and funding costs to have bottomed. As a result, we expect operating profit to decline initially, but earnings should start to benefit in the medium-term from tighter control over costs. Fitch considers capital adequate for the society's ratings, with sound levels on both a risk-weighted basis (YBS uses the standardised approach for credit and operational risk) and a non-risk weighted basis. The reported CET1 ratio and leverage ratio stood at 14.5% and 5% respectively at end-2015. 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. Fitch considers the society's funding and liquidity profile as solid and stable. YBS is mainly deposit-funded, but has also accessed wholesale funding through the government's Funding for Lending Scheme (FLS) and through unsecured and secured senior and subordinated debt. Its liquidity levels remain sound, including high quality assets placed at the Bank of England. Encumbrance is moderate and contingency funding sources are more than adequate. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) 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. In our opinion, the UK has implemented legislation and regulations that provide a framework that is likely to require senior creditors to participate in losses for resolving the society. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The society's subordinated debt is notched down from the VR, reflecting a combination of Fitch's assessment of their incremental non-performance risk relative to the VR and assumptions around loss severity. Lower Tier 2 subordinated debt is notched down once from the VR for loss severity. The permanent interest-bearing securities (PIBS) are rated four notches below the VR, reflecting two notches for loss severity and two notches for incremental non-performance risk. The society's convertible debt is notched down twice from the VR, once for loss severity and once for incremental non-performance risk. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT RATINGS YBS's IDRs, VR and senior debt ratings are sensitive to a material weakening in operating profitability which could cause the society to either raise its risk appetite (for example by increasing lending to higher-risk segments such as higher LTVs, commercial or personal unsecured lending) or reduce internal capital generation. The Short-term IDRs would likely be downgraded if the currently strong access to liquidity weakens, which is not our expectation. An upgrade of the VR is unlikely because Fitch views the society's business model, which concentrates on UK residential mortgage lending and savings, as less diversified than that of its more highly rated UK peers. The VR and IDRs could be affected by a material change in the operating environment, for example were there to be material economic and financial market fallout from any decision by the UK to leave the EU. 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 or building societies. This is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings are primarily sensitive to changes in the VRs from which they are notched. 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+' PIBS: affirmed at 'BB+' Convertible notes affirmed at 'BBB' Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Joanna Drobnik, CFA Director +44 20 3530 1318 Tertiary Analyst Aabid Hanif Associate Director +44 20 3530 1786 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=1005162 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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