But the revision comes as a consequence of S&P’s earlier decision to revise the UK’s outlook to negative, based on the systemic importance of the society to the UK.
Since the UK government is viewed as supportive of its banking system, there is a moderately higher likelihood that Nationwide would receive extraordinary support.
Consequently, Nationwide and the UK’s credit outlooks are viewed as inherently linked, meaning that a downgrade of one notch to the UK’s long-term rating would result in the same principle being applied to the society.
S&P notes another contributing factor; namely that Nationwide’s risk adjusted ratio capital is in decline due to the net actuarial loss in its employee pension scheme.
The core Tier 1 ratio was 12.4 per cent as of 30 September 2102 but Nationwide is now less likely to bring its RAC ratio into the 7 per cent to 7.5 per cent range within the next 12 months.
The note from S&P says: “Nationwide’s RAC ratio before diversification/concentration adjustments was 6.7 per cent at April 4, 2011, declined to 6.4 per cent at Sept. 30, 2011, and further reduced to 6.1 per cent at April 4, 2012, primarily due to a net actuarial loss in the employee pension scheme.”
This gap between the core Tier 1 ratio and the RAC ratio reflects a significant difference in the risk-weights applied to residential mortgages. If the RAC ratio does not rise to 7 per cent within the next 12 months, S&P warns it could revise its capital and earnings score to “moderate” from “adequate”.