OREANDA-NEWS. Fitch Ratings has affirmed Leeds Building Society's (LBS) Long - and Short-Term Issuer Default Ratings (IDR) at 'A-'/'F1', Viability Rating (VR) at 'a-', Support Rating at '5' and Support Rating Floor at 'No Floor'. The Outlook is Stable.

The rating actions are part of Fitch's periodic review of the UK Building Societies.

KEY RATING DRIVERS

IDRS, VR AND SENIOR DEBT RATINGS

LBS's IDRs, VR and senior debt rating reflect the society's overall moderate risk profile, sound and consistent profitability, strong internal capital generation, adequate asset quality, solid capitalisation, and sound funding and liquidity. They are, however, constrained by a limited franchise and the concentration of its business on the UK housing market.

Our assessment of risk appetite takes into account the society's focus on its core residential mortgage loans and savings business. However, it also reflects LBS's presence in higher - yielding but higher-risk specialist segments, such as shared-ownership, which are under-served by larger banks and where competition is lower.

Asset quality has improved as a result of a benign economy and further reductions in the society's legacy exposures, which include commercial lending in the UK and mortgages extended in Spain and Ireland. These exposures have resulted in an impaired loans/gross loans ratio that is slightly higher than peers', although buy-to-let and shared ownership loans have performed well in recent years. We consider the society's loan book to be of higher risk than that of similarly-rated peers, due to an above-average appetite for lending to sectors we view as more vulnerable to a deteriorating operating environment.

LBS's sound profitability is derived from the composition of its loan book, which includes an element of higher-yielding niche exposures, and from its good cost efficiency. We expect operating profitability to have reached its maximum, with mortgage loan yields tightening from increased competition and funding costs likely to have bottomed. Earnings sources are undiversified.

Due to strong internal capital generation, LBS' capitalisation is solid on both a risk-weighted basis and a non-risk weighted basis. We believe that the society maintains solid buffers over regulatory minimum requirements. The society's fully-loaded CRD IV CET1 ratio was 15.5% at end-2015, calculated under the standardised approach, while the leverage ratio was 5.5% at the same date.

Liquidity is strong with liquidity buffers composed of cash at the Bank of England, UK government bonds and placements with supranationals. The society also benefits from access to contingent funding from the Bank of England and the European Central Bank through its Irish branch. Funding is obtained mostly from a stable customer base. The society also has accessed wholesale markets, with covered bonds, RMBS and senior unsecured debt outstanding. LBS's strong liquidity drives the society's 'F1' Short-Term IDR, which is the higher of the two Short-Term IDRs that map to the society's Long-Term IDR.

SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)

LBS's SR and SRF reflect Fitch's view that senior creditors cannot rely on extraordinary support from the UK authorities in the event the society becomes non-viable. In our opinion, the UK has implemented legislation and regulations that provide a framework that is likely to require senior creditors to participate in losses for resolving LBS.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

LBS's subordinated debt is notched down from the VR reflecting Fitch's assessment of their incremental non-performance risk relative to the VR and loss severity. The permanent interest - bearing shares (PIBS) are rated four notches below the VR, reflecting two notches for their deep subordination and two notches for incremental non-performance risk in the form of potential non-payment of coupon.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT RATINGS

LBS's IDRs, VR and senior debt ratings are primarily sensitive to an increase in the society's risk appetite, which Fitch does not expect. A sharp increase in lending to higher-risk segments, including commercial real estate, or higher loan-to-value lending, could put pressure on its ratings. The ratings could also come under pressure if profitability weakens, which could result from a material increase in LICs on its higher-yielding loan portfolio, or a permanent reduction in cost efficiency. The ratings would also come under pressure if LBS fails to maintain sound capitalisation.

An upgrade of the VR is unlikely because Fitch views the society's business model, which is concentrated on the UK residential mortgage lending and savings market, as less diversified than that of its more highly rated UK peers.

The VR and IDRs could also be affected by materially adverse developments following the UK decision to leave the EU. Fitch believes earnings and asset quality reached cyclical highs in 2015 and the ratings are resilient to a moderate weakening of these factors. However, a negative rating action could be triggered by a severe and structural deterioration of the UK operating environment, leading to material downward pressure on profitability, through tighter margins and higher LICs, and weaker asset quality. In particular, weaker prospects for specialist lending would put LBS's ratings under pressure given the society's exposure to these segments.

SUPPORT RATING AND SUPPORT RATING FLOOR

An upgrade of LBS' SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support its banks or building societies. This is highly unlikely, in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings are primarily sensitive to changes in the VRs from which they are notched. The ratings are also sensitive to a change in Fitch's assessment of each instrument's loss severity, which could reflect a change in the expected treatment of liability classes during a resolution.

The rating actions are as follows:

Long-Term IDR affirmed at 'A-'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Senior unsecured debt and programme rating affirmed at 'A-'/'F1'

PIBS: affirmed at 'BB+'