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 as the largest building society in the UK and its strong market share positions in residential mortgage lending and savings products. The ratings also incorporate Nationwide’s strong balance sheet, with high risk-weighted capital ratios 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 in recent years, meanwhile the Society’s profitability has improved in FY22 mainly due to increasing net interest income. Nevertheless, DBRS Morningstar also notes that Nationwide’s risk profile could experience stress as reflected by higher Stage 2 loans in consumer lending due to the increasingly challenging UK macroeconomic environment.
An upgrade of the LT ratings is unlikely given the deteriorating operating environment. However, an upgrade would require a stronger financial performance track record while maintaining solid profitability, sound asset quality and robust capital levels.
A sustained and material deterioration in profitability and asset quality would lead to a downgrade of the Long Term ratings.
Franchise Combined Building Block (BB) Assessment: Strong/Good
Nationwide is the UK’s largest building society, with total assets of GBP 272.4 billion at end-FY2022 (Financial year ending April 2022). The society has a well-established franchise in the UK, as evidenced by market shares of around 12.4% in mortgages, 9.4% in savings/deposits and 10.3% in current accounts in FY2022. As a building society, Nationwide is predominantly a residential mortgage lender and deposit taker, but also offers a wider range of retail banking products similar to the large commercial banks.
Earnings Combined Building Block (BB) Assessment: Moderate
As a mutual organisation, Nationwide targets profit optimisation rather than maximisation, with the aim to instead maximise its social impact for its members and the overall community. Nevertheless, Nationwide’s profit increased substantially in FY22 mainly due to a higher net interest margin (NIM) and loan impairment reversals, with profit after tax reaching GBP 1,252 million in FY22 up from GBP 618 million in FY21. Statutory total income increased by 17.7% year-on-year (YoY) to GBP 3.9 billion at end-FY22 largely thanks to increased mortgage lending and improved net interest margins (NIM). Net results in FY22 benefitted from the increase in the base rate by the Bank of England which resulted in higher NIM of 1.26% in FY22, up from 1.21% in FY21 and 1.13% in FY20. Net interest income increased by 13.2% YoY to GBP 3,562 million. Nationwide's underlying cost-to-income (excluding amortization on specific intangible items and costs related to historic frauds) was 57.8% in FY22, down from 67.5% in FY21 reflecting the higher revenues as operating costs remained flat. The Society released GBP 27 million related to loan impairments in FY22, compared to loan loss loan provisions of GBP 190 million in FY21, mainly attributed to improved economic outlook and house price growth in the period to 4 April 2022.
Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Nationwide as having a solid risk profile, underpinned by a largely conservatively underwritten UK residential mortgage book. Nonetheless, the Society’s asset quality metrics could be affected by high inflation and increasing interest rates which will put a strain on UK household finances. Nevertheless, Nationwide’s asset quality indicators remain sound with a Stage 3 ratio of 0.8% at end-FY22 down from 1.0% at end-FY21. The average LTV of the prime residential mortgage stock was 51%, and 71% for new lending, reflecting the Society’s support for first time buyers. Lastly the CRE book is focused on lower-risk social housing, with a very marginal exposure to CRE (GBP 0.6 billion or 0.2% of total assets).
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
We consider Nationwide’s funding profile to be sound, supported by a firmly established position in deposit collection and good access to wholesale capital markets. In line with its strategy and regulations, Nationwide remains predominantly retail funded. Retail deposit balances increased by around GBP 7.7 billion to GBP 178 billion up 4.4% YoY, with the Society reporting a loan-to-deposit ratio (including shares, other deposits and amounts due to customers) of 113.6% at end-FY22 down from 115.3% at end-FY21 and 122.4% at end-FY20. Wholesale funding accounted for 28.8% of total funding at end-FY22. Nationwide reported an average 12-month Liquidity Coverage Ratio of 183% at end-FY22, up from 159% at end-FY21, and an NFSR ratio of 146%.
Capitalisation Combined Building Block (BB) Assessment: Strong/Good
The Society’s capitalisation is solid. Nationwide reported a CET1 ratio of 24.1% at end-FY22 a significant decrease compared to 36.4% at end-FY21, mainly driven by an increase in risk-weighted assets of GBP 18.9 billion which was due to regulatory changes that came into effect on January 1, 2022. In addition, the reversal of the software amortisation benefit became a capital deduction from January 2022, and as a result further decreased the CET1 ratio by 100 bps. However, excluding regulatory changes, the Society’s CET1 ratio would be 40.5% at end-FY22 reflective of solid profit growth.
Nationwide’s CET1 ratio of 24.1% is still positioned very well relative to peers and is comfortably above the minimum requirement of 11%. The UK leverage ratio, which is the binding capital constraint for Nationwide, was 5.4% at end-FY22, well in excess of the regulatory capital requirement of 3.6%. Additionally, the Society’s MREL resources were equal to 8.4% of the UK leverage ratio exposure at end-FY22, which is above the 2022 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/400754
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
We consider the social subfactor ‘social impact of product and services’ to be relevant to the rating of Nationwide, but does not affect the overall rating or trend assigned to Nationwide. As a building society, Nationwide is a mutual organisation and is focused on maximising the social impact for its members rather than maximising profit. As such, the Society invests heavily in the UK society and has committed at least 1% of pre-tax profits to good causes focused on housing.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in GBP unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) - https://www.dbrsmorningstar.com/research/398692/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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Morningstar Inc. and Company Documents, Nationwide Building Society Annual Report & Accounts 2022, Nationwide Annual Results Presentation for the 12 months ended April 4, 2022, Nationwide Pillar 3 Disclosure 2022, Nationwide Climate-Related Financial Disclosures 2022. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/400753
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: Elisabeth Rudman, Managing Director, Head of European FIG – Global FIG
Initial Rating Date: 01/25/2001
Last Rating Date: 08/03/2021
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