Fitch downgrades Nationwide's outlook to negative

30 October 2009 12:43 pm | By Nicola York

Fitch says it is concerned that the building society has not sufficiently diversified geographically or in terms of business streams and says its asset quality is likely to weaken.

It says that new mortgage business volumes have remained low which is preventing the society from re-pricing its assets as quickly as its liabilities.

Fitch also says operating profits were depressed by a sharp increase in loan impairment charges which relate to a large three year charge for the Financial Services Compensation Scheme and deterioration in the society’s commercial property loan book.

Fitch’s financial institutions team director Andrea Jaehne says: “The Negative Outlook on Nationwide’s Long-term IDR reflects Fitch’s concerns that pressure on operating profit may intensify, throwing into relief the more limited financial flexibility inherent in a building society.

“Fitch believes the society’s asset quality is likely to show modest signs of weakening from its robust position given the agency’s moderate economic outlook for the UK - Nationwide’s main operating market.”

The ratings agency says the economic environment is likely to remain challenging in the UK over the next 12 months. It expects the Bank of England’s base rate to rise in early 2011 and says that as a result, Nationwide’s residential mortgage book could experience further significant stress while pressure could intensify on its commercial book.

Fitch expects the society’s operating profitability to be positive but subdued for 2010 and 2011. The agency says that Nationwide’s financial flexibility to absorb potential charges is limited compared with its ‘AA-’ peers, especially given its restricted ability to raise capital by virtue of its mutual status.

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