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Fitch downgrades seven mutuals

Fitch Ratings has downgraded seven large UK building societies as the economy falls into recession.

Britannia, Chelsea, Newcastle, Principality, Skipton, West Bromwich and Yorkshire were all downgraded, while Coventry and Leeds’ assets were merely reaffirmed by the rating agency.

Fitch’s concerns are greatest for societies with large exposures to specialist mortgages, and for high loan to value loans. Concentration in commercial mortgage lending and recent rapid loan growth constitute additional areas of risk.

It says the rating actions reflect it’s view that the prospects for the UK economy have deteriorated rapidly in recent months. In particular, economic growth has weakened significantly and unemployment is likely to continue rising.

Fitch senior director in the financial Institutions team Matthew Taylor says: “Rising unemployment and the decline in house prices will lead to larger impairment charges for all UK building societies.

“Anaemic economic growth and dislocated financial markets contribute additional strains.”

The agency admits that the building society model tends towards security, and says many have been hit by extraneous events over the last few months.

Fitch says it downgraded Britannia, which could be set to merge with the Co-Operative Bank, thanks to the high LTVs on its Platform book, which could lead to higher impairment charges. The downgrade of Yorkshire also reflects the stress on some of its riskier higher LTV and broker-introduced borrowers through its Accord book. Fitch says it could downgrade these societies further if their books deteriorate more.

Chelsea’s downgrade is down to its forays into the London buy-to-let market. It has also been subjected to a £55m loss at the hands of the Icelandic bank crash. Newcastle was downgraded by Fitch purely thanks to its stature as a lender, even though it has a strong mortgage book.

Principality has been downgraded thanks to its exposure to the second charge market through Nemo. It has also got a large exposure to commercial mortgages, which are losing quality as property prices fall.

Amber Home Loans is the reason for Skipton’s downgrade by Fitch. As a specialist lender it has a higher percentage of high LTV mortgages. West Bromwich’s specialist buy-to-let lending is also to blame for the downgrade, but it may be safe thanks to its refocus on traditional mutual lending.

Coventry and Leeds did not receive downgrades – in fact Fitch commented the fact that Coventry is set to reveal end of year profits and Leeds has a solid capital base.

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