UK Building Society Profitability Weighed by Competition, Lower Rates –Fitch
UK building societies’ profitability will weaken in 2025 due to increased competition, lower interest rates and higher savings costs, Fitch Ratings says, following its affirmation of the Long-Term Issuer Default Ratings of five UK building societies.
However, Fitch expect adequate profitability, supported by very low loan impairment charges, reasonable cost control and modest structural hedging income.
It said the ratings of Coventry Building Society, Leeds Building Society, Skipton Building Society and Yorkshire Building Society (all A-) and Principality Building Society (BBB+), all with Stable Outlooks, reflect their stable and low-risk (albeit undiversified) business models and strong financial profiles.
The revision of Coventry’s outlook to stable from negative reflects reduced risks to capitalisation and leverage, and reasonable progress with its integration of The Co-operative Bank.
Fitch expects the societies’ net interest margins to generally weaken further towards pre-2022 levels as interest rates are falling. However, structural hedging reinvestments, particularly at the larger societies, will support income.
“We expect transformation programmes to increase investment but also to support medium-term cost efficiency”. It stated loan impairment charges are very low, reflecting the low-risk, largely secured loan books, and are likely to remain easily absorbable.
According to Fitch, asset quality has been resilient to rising interest rates and macroeconomic uncertainties in recent years, reflecting conservative underwriting standards.
Average loan-to-value (LTV) ratios across the societies’ mortgage loan portfolios are low but increasing with new lending at higher LTVs.
“We forecast the impaired loans ratio to only modestly weaken over the next two years and stay below 2% for all societies. This assumes a reduction in interest rates that should reduce pressure on borrowers.
“We expect the societies to target lending in new product offerings, including for first-time buyers and limited company buy-to-let. However, this could be challenged by the competitive mortgage lending market and thin asset margins”.
Capitalisation and leverage ratios are likely to remain solid across the societies, reflecting low-risk business models and internal capital generation. Funding and liquidity profiles are supported by stable retail savings deposit bases and contingent liquidity access from the Bank of England, if required.
The societies have largely repaid outstanding Term Funding Scheme with additional incentives for SMEs (TFSME) using existing large buffers of liquidity or by replacing it with deposits and wholesale funding issuances (mainly secured notes).
Funding costs are likely to stay higher than major bank peers’ given a greater share of savings deposits and societies’ appetite to provide member benefits.
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