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Moody's Investors Service Inc.

Moody's Affirms Principality Building Society's Credit Ratings Amid Positive Outlook

Strategic Insights

— 1 min read

Moody's Investors Service has affirmed Principality Building Society's (Principality) credit ratings, citing the organization's resilient performance, asset quality, and capitalization. The positive outlook on the long-term deposit ratings reflects Moody's expectation of continued strong performance in the next 12-18 months, driven by decreasing interest rates and stabilized profitability.

Key Takeaways:

  • Moody's affirmed Principality Building Society's Baa1 long-term and P-2 short-term foreign and local currency deposit ratings, as well as its Baa3 long-term junior senior unsecured rating and baa2 Baseline Credit Assessment (BCA) and Adjusted BCA.
  • The ratings affirmation reflects Principality's resilient performance in terms of asset quality and capitalization, supported by a good funding profile and improving profitability.
  • The organization's lack of business diversification and dependence on retail interest income are balancing factors against its strengths.
  • Problem loans to gross loans have remained relatively stable at 0.9% of gross loans at the end of December 2024, despite increasing interest rates and a high portion of buy-to-let and commercial real estate exposures in its lending book.
  • Principality reported a Common Equity Tier 1 (CET1) of 19.8% at the end of December 2024, supported by its improving profitability.
  • The Baa1 long-term deposit ratings are based on: (1) Principality's standalone BCA of baa2; (2) Moody's Advanced Loss Given Failure (LGF) analysis, indicating low loss-given-failure with a one-notch uplift; and (3) a low probability of government support from the Government of the UK, resulting in no uplift.
  • The positive outlook on the long-term deposit ratings reflects Moody's expectation of continued strong performance in the next 12-18 months, driven by decreasing interest rates and stabilized profitability.
  • An upgrade to Principality's deposit and junior senior unsecured ratings could occur following an upgrade in its BCA due to improvement in asset quality and commercial loan portfolio, as well as a strong and sustainable rise in profitability.

Statistics:

  • Problem loans to gross loans: 0.9% (December 2024)
  • Common Equity Tier 1 (CET1): 19.8% (December 2024)
  • Return on Tangible Assets: 0.3% (December 2024)
  • Baseline Credit Assessment (BCA): baa2
  • Adjusted BCA: baa2
  • Loss Given Failure (LGF) rating: low

Sources:

  • Moody's Ratings, [Principality Building Society] https://ratings.moodys.com/rmc-documents/432741
  • Moody's, Banks Methodology, published in November 2024, available at https://ratings.moodys.com/rmc-documents/432741.

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