OREANDA-NEWS. Fitch Ratings has affirmed Nationwide Building Society's (Nationwide, A/Stable/F1) GBP12.6bn equivalent mortgage covered bonds at 'AAA' with a Stable Outlook.

KEY RATING DRIVERS
The rating is based on Nationwide's Long-term Issuer Default Rating (IDR) of 'A', an unchanged IDR uplift of zero, an unchanged Discontinuity Cap (D-Cap) of 4 notches (moderate risk) and the 87.0% asset percentage (AP) that Fitch takes into account in its analysis. This AP which provides more protection than the 92.0% 'AAA' breakeven AP, supporting a 'AA' tested rating on a probability of default (PD) basis and a 'AAA' rating after factoring in a two-notch recovery uplift. The Stable Outlook on the covered bonds' rating reflects that on the issuer.

The 92.0% 'AAA' breakeven AP, corresponding to a breakeven overcollateralisation (OC) of 8.7%, is unchanged since September 2014. The asset disposal loss component of 10.3% remains the main driver due to the maturity mismatches between the cover pool and the covered bonds (11.1 years versus 6.2 years), which create the need for a stressed asset sale to meet timely payments of the bonds should the recourse against the cover pool be enforced. This is followed by the 'AAA' credit loss of 4.5%, which is better than its peers. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 4.4% due to the excess spread in the programme.

The D-Cap is unchanged at 4 notches. The weakest link remains the liquidity gap and systemic risk, systemic alternative management, and privileged derivatives components. Fitch notes that Nationwide's covered bond programme has an account bank remedial period of 30 business days versus the 30 calendar days outlined in the agency's counterparty criteria. However, Fitch has not adjusted the D-Cap assessment because the issuer has confirmed it will amend its documentation to mitigate counterparty risk and to be in line with Fitch's criteria (see 'Fitch: D-Cap Unchanged in Regulated UK Covered Bond Programmes on Account Bank Review' dated 28 July 2015 at www.fitchratings.com).

The IDR uplift is unchanged at zero. This is because Nationwide's senior unsecured debt to total adjusted assets (excluding insurance assets and derivatives) ratio is below 5%, reflecting lower protection for covered bonds in case of a bank's resolution. Fitch recognises the importance of Nationwide as a residential mortgage and deposit-taking institution in the UK market. However, based on the relatively small size of its assets to the UK's total banking system, no IDR uplift is assigned under "relative ease of and motivation for alternative resolution methods to liquidation".

In its analysis, Fitch relies on an AP of 87.0%, which is used in the asset coverage test and disclosed in the programme's investor reports.

RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) Nationwide's IDR is downgraded by two or more notches to 'BBB+' or below; or (ii) the number of notches represented by the IDR uplift and the D-Cap is reduced to 2 or lower; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 92.0%.

On 22 September 2015, Fitch published an exposure draft detailing proposed revised criteria for estimating losses on UK residential mortgage pools mainly applicable for analysis of UK RMBS and covered bond transactions. Following the review period and consideration of responses received, we expect to finalise and publish the criteria in November 2015. In the meantime, Fitch applies its existing criteria.

The Fitch breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.