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• Moody's says societies are under severe financial pressure
• Building societies dismiss report as over pessimistic
Building societies holding the accounts of millions of British savers were savagely downgraded to near junk-bond status by ratings agency Moody's today.
In a shock warning that the sector is heading for potentially massive losses from the housing market crash, Chelsea Building Society, which has around half-a-million savers and 90,000 mortgage borrowers, saw its bank financial strength rating (BSFR) slide from C to E+. West Bromwich, the seventh largest society with £9.6bn in assets, fell from C- to E+.
Britannia, Newcastle, Norwich and Peterborough, Principality, Skipton, and Yorkshire building societies were all downgraded from ratings in the C band to the riskier D band.
Moody's blamed the downgrades on an assessment that the global financial crisis will lead to "significantly higher credit losses than previously anticipated", particularly in the buy-to-let and self-cert markets, which it said are likely to come under "considerable pressure".
It tested the societies on a base scenario that house prices in Britain will fall by 40% from peak to trough, and concluded that such falls will place severe pressure on the lenders' capital positions.
The societies reacted furiously to the move. A spokesman for Chelsea Building Society said the ratings agency was overreacting after its own failure to spot the unfolding credit crisis in 2007-08.
He said: "Your money is safe at the Chelsea. There is no suggestion that the society is in any difficulty. This is a knee-jerk reaction by Moody's to the situation it found itself in last year. We are a £14bn organisation with £4.5bn in liquid assets."
Chelsea said it had passed the stress tests set by the Financial Services Authority (FSA) and had benefited from strong savings inflows over the past year. In addition, it said its arrears and repossessions had stabilised in recent months.
Capital concerns
The Moody's report was compiled by Marjan Riggi, the agency's lead analyst for UK mortgage lenders. He said: "The key concerns for mortgage lenders in the UK remain the amount of capital available to absorb the upcoming losses, especially those arising from specialist loan books (typically self-certified loans, buy-to-let loans, second-lien loans, or purchased loans), and commercial real estate loans where concentration risks are high."
The giant of the building society sector, Nationwide, saw its rating reduced from B to C-. Moody's also reduced the rating of Alliance & Leicester to E+ from C+, despite the bank now being part of Santander.
The Building Societies Association said the methodology used by Moody's was "over pessimistic". Spokeswoman Rachel Le Brocq said: "We are very surprised and disappointed with the downgrades. It is based on a very pessimistic house price scenario. Savers should not be worried. The societies have weathered the storm of the financial crisis better than other institutions and are fundamentally strong, although not of course immune."
Norwich and Peterborough's chief executive, Matthew Bullock, said the society is "awash with cash" after a particularly successful Isa season. He said the society's buy-to-let lending was just 12% of the total and was performing in line with the main residential business.
"Our arrears and repossessions actually fell last month," he said. "We have had our stress testing by the FSA and they are very comfortable that we have enough capital. We feel this Moody's report is about a lowering of most boats in the harbour."
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