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The credit ratings agency Fitch downgraded nine UK building societies yesterday, 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 sub-prime mortgages, buy-to-let loans and high loan-to-value (LTV) deals.
The outlooks for the Principality, West Bromwich and Yorkshire building societies have been downgraded from stable to negative, while the outlook for Britannia has been held at negative. Fitch also downgraded the long-term issuer default ratings (IDR) of three building societies, including Chelsea and the Britannia.
This rating indicates the likelihood of a society defaulting on a loan, a lower rating makes it more expensive for that organisation to raise funds. Despite the downgrades, Fitch said there were still positive factors in the mutual sector. These include loan portfolios, which benefit from being secured on residential properties - historically a safe form of lending. The majority of building society funding comes from retail savers, which is 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," Fitch said.
Several small societies have been forced to seek mergers with larger rivals amid the fall out from the credit crunch. Nationwide agreed to take over the Derbyshire and Cheshire building societies. More recently, Yorkshire rescued the Barnsley building society after it emerged that the smaller society had lost £10m in the Icelandic banking crisis.
A Building Societies Association spokeswoman said the downgrades would not necessarily lead to mergers. "Ratings are aimed at the wholesale market; individual savers should not be concerned. All societies remain of investment grade."
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". Such 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 its commercial mortgages, while West Bromwich is downgraded because of its exposure to buy-to-let lending. Chelsea building society's IDR has been downgraded because of its buy-to-let loans, often on flats. Moreover, it had invested £55m in Icelandic banks and if it is unable to recover this money its entire profits for 2008 could be wiped out, Fitch said.
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