Tweet
The credit ratings agency Fitch today downgraded its ratings of nine UK building societies, saying falling house prices and the worsening economy were likely to hit profits in the mutual sector.
The agency said it was particularly concerned about societies with large exposures to specialist mortgages such as sub-prime and buy-to-let loans, and those that had offered high loan-to-value (LTV) deals.
The outlooks for the Principality, West Bromwich and Yorkshire building societies have all been downgraded from stable to negative, while the outlook for Britannia Building Society has been held at negative. Fitch also downgraded the long-term issuer default ratings (IDR) of three building societies, including Chelsea and the Britannia.
The ratings indicate the likelihood of a society defaulting on a loan, and a lower rating makes it more expensive for an organisation to borrow money.
Despite the downgrades Fitch said there were still positives in the building society sector.
"Building societies' loan portfolios benefit from being secured on residential housing - a historically safe form of lending. The majority of building society funding comes from retail savers - a traditionally stable form of funding.
"In addition, for the building societies included in this review, capitalisation is at least reasonably strong and is not a cause of concern."
Several small societies have been forced to seek mergers with larger rivals this year as a result of the continued fall out from the credit crunch. Nationwide agreed to merge with the Derbyshire and Cheshire building societies after the pair racked up losses during the first half of the year.
More recently, Yorkshire rescued the Barnsley building society after it emerged the smaller organisation had lost £10m in the Icelandic banking crisis.
However, a spokeswoman for the Building Societies Association said the downgradings would not necessarily lead to more mergers.
"Ratings are aimed at the wholesale market - individual savers should not be concerned. All of the societies remain of investment grade," she said.
Fitch said it had downgraded the outlook for Yorkshire - the UK's third largest society - because of its "riskier higher LTV and broker-introduced borrowers". These larger loans are more likely to result in negative equity if the housing market falls by 30% from its peak, as Fitch expects.
The change in Principality's outlook is due to the number of commercial mortgages on its books, while West Bromwich is downgraded because of its exposure to buy-to-let lending.
Chelsea Building Society's IDR has been downgraded from A to A- because of its strategy of offering buy-to-let loans, often on flats. It also offered landlords mortgages of more than 90% of the property's price.
The society also had £55m invested in Icelandic banks and if it is unable to recover that money its profits for 2008 could be entirely wiped out, Fitch said.
guardian.co.uk © Guardian News & Media Limited 2008 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
