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S&P downgrades Nationwide over commercial impairments

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Standard & Poor’s has downgraded Nationwide’s long-term counterparty credit rating from A+ to A over impairments on its commercial loan book and high leverage.

It has affirmed its A-1 short-term counterparty credit rating, with the outlook negative, and has lowered its rating on Nationwide’s dated subordinated debt to BBB from BBB+ and our ratings on its junior subordinated debt to BBB- from BBB.

While the mutual’s residential mortgage book continues to perform well – arrears of three months or more accounted for 0.7 per cent of its book against an industry average of 1.9 per cent – S&P says it’s a different story on its commercial loan book.

Nationwide reported over £450m of commercial real estate lending impairment charges in April and the ratings agency expects the high impairment charges to continue for the next two years.

From a capital point of view, S&P says that while Nationwide reported a core tier one ratio of 12.3 per cent, higher than many UK banks or mutuals, it says Nationwide’s capitalisation is ”not as strong as its regulatory ratio implies”.

The ratings agency uses a risk-adjusted capital framework to assess institution’s capital, with firms assessed as ’adequate’ having an RAC ratio of 7 per cent.

S&P says the mutual currently has an RAC score of 6 per cent. While it thinks Nationwide will hit the 7 per cent mark in the next two years it says the high impairment charges from its commercial loan book and the fact it continues to lend at a high volume by comparison to the rest of the market, means it has been slow to do so.

But it expects this to improve in the next 18-24 months, in particular with the successful conclusion of discussions with the Prudential Regulation Authority which will see it issue core capital deferred shares, a new instrument for mutual building societies, to boost capital.

It says: ”The downgrade reflects our view that Nationwide’s overall loss experience is no longer materially superior to peers and that its balance sheet leverage is high. The effect of this is that our combined view of Nationwide’s capital and earnings and risk position is now a neutral factor for the rating, having previously been a positive.”

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