Ratings agency’s downgrade for three mutuals

Yorkshire Building Society was downgraded from A- to BBB+, Skipton was cut from A- to BBB and Leeds was cut from A to A-.

Fitch said the downgrades reflected its downward revision of the macro-economic outlook for the UK.

It added that weaker economic trends are likely to place pressure on the societies’ profits in the short to medium term.

Fitch said the Skipton downgrade reflected concerns about “the extremely low profitability in its core business”, adding that most of Skipton’s businesses posted a pre-tax loss in the first half, as well as its reliance on estate agency earnings.

“Despite the inclusion of the estate agency business, group profitability remains low and is not expected to substantially improve in the near term.

“Fitch does not consider estate agency earnings provide adequate diversification of earnings given their dependence on the UK property market.

“Overall, the weak profitability renders the society vulnerable to unexpected shocks.”

It warned that it may downgrade Skipton again if there is asset quality deterioration which leads to further pressure on earnings.

Fitch said the downgrade of Yorkshire Building Society’s ratings reflected “its weaker asset quality and some additional sensitivity to a deteriorating economic environment given its proportion of high loan-to-value lending”.

Fitch said that although this risk is mitigated by adequate performance and fair value adjustments already taken against equity, profitability will remain under pressure in the short to medium term, or at least until the economy recovers and base rates rise.

The Leeds downgrade reflected the society’s weaker asset quality compared to peers, particularly impairments arising out of its commercial loan book. “In light of the UK economic recovery outlook, Leeds remains vulnerable to the changing environment, predominantly because of its outstanding commercial loan book,” the agency said.

It added that Leeds’ profitability is resilient but it does not believe these positives will mitigate downward economic pressures.