January 22, 2013 / 3:17 PM / 5 years ago

TEXT-S&P affirms Virgin Money's 'BBB+/A-2' ratings

Overview
     -- On Jan. 18, 2013, Virgin Money PLC announced the acquisition of GBP1 
billion of credit card receivables from MBNA Ltd., part of Bank of America 
Corp. 
     -- The acquisition and planned growth of its on-balance-sheet credit card 
assets does not adversely affect our view of Virgin's overall risk appetite.  
     -- We are therefore affirming the 'BBB+/A-2' ratings on Virgin. 
     -- The stable outlook reflects our expectation that Virgin's 
pre-diversification risk-adjusted capital ratio will decline, but will remain 
above 10% due to modest retained earnings over the near term and relatively 
rapid loan portfolio growth. 

Rating Action
On Jan. 22, 2013, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' 
counterparty credit ratings on Virgin Money PLC. The outlook is stable.  

Rationale
The affirmation reflects our belief that the strategic rationale for the 
transaction of GBP1 billion of credit card receivables from MBNA Ltd. (MBNA) is 
sound, and that the consequent growth in risk-weighted assets (RWAs) does not 
materially weaken Virgin's capital position at this time. In our view, the 
acquisition should help Virgin to protect the future economic benefit of its 
successful joint venture with MBNA in light of Bank of America's announced 
intention to exit the European card business. The acquisition also helps to 
diversify Virgin's product portfolio, provides opportunities for 
cross-selling, and lays the foundation for future organic growth, in our view. 

We continue to view Virgin's capital and earnings as "strong." We expect the 
risk-adjusted capital (RAC) ratio before diversification adjustments will 
decline from 12.1% at Jan. 1, 2012 to the 10%-10.5% range, that is, modestly 
above the 10% level over the next two years. This decline is based on our 
expectation that: (a) Retained earnings over the near term will be modest, but 
will gradually improve as the net interest margin is boosted by the 
acquisition and policy measures such as the U.K. government's Funding for 
Lending (FLS) scheme; and (b) RWAs will increase both due to the acquisition 
and as the group expands net lending organically in line with its business 
plan. We expect future management actions relating to organic and inorganic 
growth to be consistent with maintaining Virgin's current capital position. 

We also continue to view the group's risk position as "adequate," reflecting 
Virgin's strong asset quality with a focus on prime residential mortgages 
(given the high quality of mortgages that were transferred from the old 
Northern Rock) and its conservative risk appetite. The assessment also 
reflects our view of Virgin's expected growth in exposures over the two-year 
outlook horizon. We consider the acquisition of the credit card portfolio to 
be consistent with our view of Virgin's conservative risk appetite. We 
understand that the MBNA credit card portfolio is known to Virgin management 
owing to its long-standing association with MBNA. We also understand that the 
acquired portfolio has outperformed the industry in terms of delinquency rates 
and that underwriting criteria for new business remains stringent. Finally, 
operational and execution risk of the acquisition is mitigated to a large 
extent by the servicing agreement with MBNA whereby all acquired accounts will 
continue to be serviced by MBNA until early 2014.

We base our ratings on Virgin on our view of its consolidated group credit 
profile (GCP). The consolidated group comprises Virgin Money's legacy 
businesses and the acquired Northern Rock business, which was renamed Virgin 
Money PLC. The GCP of the enlarged Virgin Money business reflects its 'bbb+' 
anchor, "weak" business position, "strong" capital and earnings, "adequate" 
risk position, "average" funding, and "adequate" liquidity, as our criteria 
define these terms. The GCP before factoring in the likelihood of 
extraordinary government support (unsupported GCP) is 'bbb'. The supported GCP 
is one notch higher than the unsupported GCP, reflecting the moderate 
likelihood of extraordinary government support due to the group's moderate 
systemic importance and our assessment of the U.K. government as "supportive," 
as defined in our criteria. The long-term counterparty credit rating on Virgin 
is the same as the GCP, reflecting our view that Virgin is "core" to its 
parent, Virgin Money Holdings (U.K.) Ltd.

Outlook
The stable outlook reflects our expectation that the group's 
pre-diversification RAC ratio will decline, but will remain above 10% given 
its modest near-term retained earnings and planned growth in RWAs. The stable 
outlook also reflects our belief that the group's development will continue to 
proceed according to plan and that the enlarged entity will gradually 
strengthen its franchise. 

We could lower the ratings if the group suffers sustained losses or we see it 
move toward a more aggressive capital policy, which would lead us to revise 
down our assessment of capital and earnings. The ratings could also come under 
pressure if we observe a material increase in its risk appetite, leading to a 
downward revision of our risk position assessment. Finally, we could lower the 
ratings if we consider that the group's current "moderate" systemic importance 
could reduce based on our view of evolving regulation and evidence of limited 
support for similar institutions.

Although unlikely in the near term, we could raise the ratings if the group 
continues to successfully execute its business plan, develops a track record 
of stable revenue growth, and gains market share in the retail banking market, 
while maintaining a low risk profile. This could lead us to raise our 
assessment of its business position.

Ratings Score Snapshot
Issuer Credit Rating      BBB+/Stable/A-2

Group Credit Profile      bbb 
 Anchor                   bbb+
 Business Position        Weak (-2)
 Capital and Earnings     Strong (+1)
 Risk Position            Adequate (0)
 Funding and Liquidity    Average and Adequate (0)

Support                   +1
 GRE Support              0
 Group Support            0
 Sovereign Support        +1
Additional Factors        0

Related Criteria And Research
     -- Virgin Money PLC, Nov. 27, 2012

Ratings List
Ratings Affirmed

Virgin Money PLC
 Counterparty Credit Rating             BBB+/Stable/A-2    
 Certificate Of Deposit                 BBB+/A-2           



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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