KBRA Europe Releases Research – UK Building Societies: Steady Performance Despite Economic Headwinds

Kroll Bond Rating Agency Europe Limited (KBRA) releases an updated research report on the UK building society sector. KBRA believes the overall creditworthiness of the sector remains resilient despite continuing COVID-related pressures and post-Brexit developments weighing on the UK economy.

Key Takeaways

• UK building societies, particularly the large and better-performing midsize or small societies, entered the pandemic from a strong starting point, underpinned by their sound capitalisation, ample liquidity, stable funding, and healthy asset quality.
• KBRA believes the sector is able to absorb the continuing pressure from the pandemic. However, the societies are vulnerable to rising unemployment and a downturn in the housing market, given the institutions’ undiversified business models and the uncertainty around the underlying economic impacts of the crisis.
• The sector’s already modest profitability has been further challenged in 2020 by lower net interest margin (NIM), reduced mortgage lending volumes, large loan impairment charges, and high operating costs. However, NIM improvement was seen in the second half of the year due to higher demand for mortgages resulting in wider spreads on new loans and lower competition in the savings market.
• The wide-ranging government support for UK borrowers cushioned the pandemic’s impact on asset quality across the banking system. However, the inevitable withdrawal of government support schemes is expected to weaken the sector’s asset quality and put the societies’ underwriting standards to the test.
• That said, the challenges and risks to profitability and asset quality are mitigated by the building societies typically having sound capitalisation, ample liquidity, and stable funding.

Click here to view the report.

Related Publications

• UK Building Societies Vulnerable but Supported by Sound Financial Profiles
• Coronavirus (COVID-19): Implications for the UK Mortgage Market
• Coronavirus (COVID-19): UK Building Societies Remain Resilient
• UK RMBS: Market Uncertainty, BTL Demand to Remain
• UK Building Societies: Vital to UK Housing Market

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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