The downgrade reflects their view that Nationwide's overall loss experience is no longer materially superior to peers and that its balance sheet leverage is high. The effect of this is that their combined view of Nationwide's capital and earnings and risk position is now a neutral factor for the rating, having previously been a positive. They primarily compare Nationwide's asset quality with other U.K. banks and building societies.
Nationwide reported over £450 million of commercial real estate lending impairment charges in the year to April 4, 2013, and they expect the high impairment charges to persist in this portfolio over the next two years.
These impairment charges have hindered Nationwide's internal capital generation. As a result, they have revised down their assessment of its risk position to "adequate" from "strong."
Standard & Poor's have acknowledge that Nationwide's £136 billion gross residential mortgage book (85% of gross loans on April 4, 2013), has performed relatively well and they expect it to continue to do so. Only 0.7% of Nationwide's total residential mortgage book was three months or more in arrears on April 4, 2013, better than the 1.9% industry average.
Their expectation is that Nationwide will improve over the next 18-24 months owing to better earnings. They expect an improvement to be supported by stronger underlying operating profit, helped by higher net interest margins as retail deposit funding costs come down and asset re-pricing continues.
The negative outlook primarily reflects the negative trend that they have assigned to U.K. banking industry risk.
