DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Nationwide Building Society (Nationwide or the Society), including its A (high) Long-Term Issuer Rating and its R-1 (middle) Short-Term Issuer Rating. The trend on all ratings is Stable. Nationwide’s Intrinsic Assessment (IA) is A (high), while its Support Assessment remains SA3.
KEY RATING CONSIDERATIONS
The confirmation of Nationwide’s A (high) Long-Term Issuer Rating and the maintenance of the Stable trend reflects the strength of the Society’s domestic retail franchise in the UK and its robust market share positions in residential mortgage lending and savings products. The ratings incorporate Nationwide’s solid balance sheet, with high levels of risk-weighted capital and its well-managed funding and liquidity profile, including a substantial retail deposit base. The credit quality of Nationwide’s mortgage book, which represents the majority of overall lending, has remained consistently strong and unaffected by the pandemic to date. The Society’s profitability has also remained satisfactory despite the challenging operating environment.
An upgrade of the LT ratings is unlikely in the near term given the still challenging operating environment. An upgrade would require a stronger financial performance track record while maintaining a resilient credit profile and solid capital levels.
The Long-Term ratings would be downgraded if the Society’s profitability and asset quality metrics experience a sustained deterioration or if there is an increase in risk appetite.
Franchise Combined Building Block (BB) Assessment: Strong/Good
Nationwide’s significant and well-entrenched franchise in the UK is an important factor for the ratings. Nationwide is the UK’s largest building society with a substantial high street presence across the UK with significant market shares of approximately 12.5% in mortgages, 9.4% in savings/deposits and 10.2% in current accounts at end-FY21. As a building society, Nationwide is predominantly a residential mortgage lender and deposit taker, however, it also offers a wider range of retail banking products similar to the large commercial banks.
Earnings Combined Building Block (BB) Assessment: Moderate
Reflecting its mutual ownership structure, Nationwide targets profit optimisation in order to maintain a sound financial position but also offer long-term value to its members. Profitability levels improved in FY21 (the financial year to April 4) mainly due to an increased net interest margin (NIM) but also good cost discipline and a low cost of risk. Statutory total income increased by 7.8% Year-on-Year (YoY) to GBP 3.3 billion in FY21 largely due to the improved NIM. Results in FY21 benefitted from significantly lower retail funding costs, which combined with higher margins on new mortgage lending resulted in the NIM increasing to 1.21% in FY21, up from 1.13% in FY20, and driving net interest income to increase by 12% to GBP 3,146 million. With expenses down, according to plan, supporting a lower cost-to-income ratio (67.5% in FY21 vs. 75.9% in FY20) and lower loan loss provisions relative to FY20 (equivalent to a cost of risk of 9 bps in FY21 and 10 bps in FY20), the Society’s statutory profit before tax (PBT) increased to GBP 823 million in FY21 up from GBP 466 million in FY20.
Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Nationwide as having a solid risk profile, which is underpinned by a large conservatively-underwritten UK mortgage book, with arrears remaining at low levels and broadly stable. Nonetheless, we anticipate that the Society's asset quality indicators could be affected by the economic consequences of the COVID-19 pandemic once the government and banks' support measures are removed. Nationwide’s business model is highly correlated to the UK mortgage market and UK economy. However, DBRS Morningstar notes unemployment and residential real-estate have performed better than expected at the beginning of the pandemic, and UK household balance-sheets remain in good condition, supported by expansionary fiscal and monetary policy responses.
Overall, the Society’s asset quality indicators remain sound with the Stage 3 ratio at 0.9% at end-FY21. Payment deferrals significantly declined to GBP 1.4 billion at end-FY21 which represents about 0.7% of total mortgage balances at end-FY21 from a peak of GBP 32.9 billion and GBP 28.6 billion at end-FY20. DBRS Morningstar also notes that the average loan to value of the total mortgage portfolio was 56% in FY21 (58% in FY20) as house prices increased, partly driven by the stamp duty waiver until end-June 2021.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
We view Nationwide's funding profile as supported by a well-established position in deposit gathering and good access to wholesale capital markets. In line with its strategy and applicable regulations, Nationwide remains predominantly retail funded. In FY21, deposit balances increased by 6.7% YoY to GBP 170.3 billion. As a result, the loan to deposit ratio (including shares, other deposits and amounts due to customers) improved to 115.3% at end-FY21 from 122.4% at end-FY20 with lending largely stable given the continued run-off of the closed book. Meanwhile, the average 12-month Liquidity Coverage Ratio strengthened to 159% at end-FY21, up from 152% at end-FY20. Nationwide's net stable funding ratio (NSFR) was 141% at end-FY21, up from 134% at end-FY20.
Capitalisation Combined Building Block (BB) Assessment: Strong/Good
The leverage ratio requirement represents the binding capital constraint for Nationwide, however the Society reported a leverage ratio of 5.4% at end-FY21, up from 4.7% at end-FY21, mainly due to the issuance of GBP 0.7 billion of AT1 instruments in June 2020, and comfortably above the regulatory requirement of 3.6%.
At end-FY21, Nationwide’s transitional Common Equity Tier 1 (CET1) increased to 36.4%, compared to 31.9% at end-FY20 and 32.2% at end-FY19 based on risk-weighted assets (RWAs) that accounted for about 13% of total assets at end-FY21, reflecting its large portfolio of low risk-weighted residential mortgages. DBRS Morningstar notes that the revision of residential mortgage IRB models combined with the finalisation of Basel III reforms over 2023 – 2028, will contribute to a significant increase in risk-weighted assets (RWAs) and a similarly significant decline in capital ratios. The combined impact of the IRB models’ revision and finalised Basel III reforms is likely to result in the CET1 ratio reducing by approximately half compared to current levels over a number of years. This impact is before organic earnings in the period to 2028 which will partly mitigate the reduction in the CET1 ratio and will still position Nationwide well relative to peers although still positioning Nationwide well relative to peers.
The Society’s MREL resources were equal to 8.5% of the UK leverage ratio exposure at end-FY21, which is above the 2021 loss-absorbing regulatory requirement of 6.85%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/382570
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in GBP unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883
The sources of information used for this rating include Nationwide Building Society Annual Report & Accounts 2021, Nationwide Building Society Annual Results Presentation for the 12 months to 4 April 2021, Nationwide Building Society Climate-Related Financial Disclosures 2021, Bank of England’s Term Funding Scheme published 11 March 2020 and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/382569
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: January 25, 2001
Last Rating Date: September 1, 2020
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