May 26, 2016 / 3:37 PM / a year ago

Fitch Upgrades Skipton Building Society to 'A-'; Stable Outlook

(The following statement was released by the rating agency) LONDON, May 26 (Fitch) Fitch Ratings has upgraded Skipton Building Society's (SBS) Long- and Short-Term Issuer Default Ratings (IDRs) to 'A-'/'F1' from 'BBB+'/'F2' and Viability Rating to 'a-' from 'bbb+'. Fitch has also affirmed its Support Rating at '5' and Support Rating Floor at 'No Floor'. The Outlook on the Long-Term IDR is stable. The upgrade reflects Fitch's view that the society's business model has improved with a more balanced mortgages and savings business, complemented with estate agency activities. The upgrade also reflects management's success in further improving the society's risk profile while building up capitalisation and further improving asset quality following the implementation of the society's strategy. KEY RATING DRIVERS IDRs, VRs AND SENIOR DEBT 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. They are, however, constrained by a limited franchise and the concentration of its business on the UK housing market. Asset quality has improved and now compares well with its UK peers. Following a number of divestments, credit, market and operational risks have, in our view, diminished. Some risk resides in its legacy loan books of specialist mortgages (self-certified, sub-prime or near-prime sectors); however, the performance of these books has remained adequate as a result of a benign economic environment. While these may begin to suffer larger losses when base rates rise, they are now sufficiently seasoned for these losses to be manageable. The society no longer has any appetite for specialist mortgages or commercial loans and both these books are in run-off. Profitability is average for the sector, benefiting from low funding costs and very low loan impairment charges, but remains subject to developments in the highly competitive UK mortgage market. SBS's earnings are more diversified than other building societies through its estate agency subsidiary, Connells, which provided it with an earnings cushion when profitability of the mortgages and savings business plummeted in 2009. Efficiency is low on a consolidated basis, although this is mainly the result of the consolidation of Connells. The mortgages and savings business' efficiency ratios are in line with the sector average. Due to strong internal capital generation, SBS's capitalisation is sound. We believe that the society maintains solid buffers over regulatory minimum requirements. Ratios have benefited from the sale of non-core investments and while Connells is currently considered 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 sources from the Bank of England. Funding is obtained mostly from customer savings. Access to the wholesale market is more limited than some of its larger peers, consisting mostly of secured funding sources. Fitch does not expect a significant change to this funding mix although some debt issuance is expected through its recently updated EMTN programme. 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. 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 Skipton. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES SBS'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. 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. RATING SENSITIVITIES IDRs, VRs AND SENIOR DEBT SBS's IDRs, VR and senior debt ratings are primarily sensitive to an increase in the society's risk appetite, which Fitch does not expect. A sharp increase in lending to higher-risk segments, including commercial real estate, or higher loan-to-value lending, could put pressure on its ratings. The ratings would also come under pressure if SBS fails to maintain sound capitalisation. 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 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 Skipton's 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 upgraded to 'A-' from 'BBB+'; Outlook Stable Short-Term IDR upgraded to 'F1' from 'F2' Viability Rating upgraded to 'a-' from 'bbb+' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Senior unsecured debt and programme rating upgraded to 'A-'/'F1' from 'BBB+'/'F2' Subordinated dated debt upgraded to 'BBB+' from 'BBB' PIBS upgraded to 'BB+' from 'BB' 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 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=1005164 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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