Fitch affirms Northern Rock at BBB+
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Fitch Ratings has affirmed Northern Rock’s long and short-term Issuer Default Ratings at BBB+ and F2 respectively.
It has also affirmed NR’s Individual rating at C, support rating at 2 and support rating floor at BBB. The outlook for the long-term IDR is stable.
Fitch says the long and short-term IDRs and individual rating reflect the bank’s low level of credit and market risks, moderate size, anticipated return to profitability and strong capital position.
They also reflect its solid but reduced franchise in the UK mortgage and savings markets and the challenges in developing and benefiting from this franchise, as well as the monoline nature of its business.
When practicable, Fitch expects the UK government to return NR to the private sector. Fitch believes a sale could occur, among other considerations, when NR is close to reporting underlying profitability. New management is in place and has revamped the bank’s business model, risk controls and procedures.
On January 1 2010, NR was spun off from the former Northern Rock which changed its name to Northern Rock Asset Management.
NR executes all new business and benefits from a £11bn residential mortgage book, which was free of impairments in January 2010, and £17.6bn of customer deposits. At end-June 2010, impaired loans represented 0.01% of loans. NRAM manages XNR’s legacy assets and wholesale funding.
NR plans to expand its mortgage lending by seeking out remunerative, low-risk segments of the market.
Although the planned new lending is small compared with the sums administered by XNR, Fitch believes that material challenges exist with regard to developing and maintaining a strong franchise and competitive position for the bank, which could easily constrain growth in funding, mortgage loans and profitability.
Consequently, it may be difficult for the bank to achieve its target of an acceptable level of profitability in the near term from its low-risk mortgages. However, by extending low-risk loans, loan impairment charges should be small.
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