KBRA UK (KBRA) releases a research report on the UK building society sector. KBRA believes the overall creditworthiness of the sector remains resilient despite continuing challenges related to Brexit, the post-pandemic recovery, and Russia’s invasion of Ukraine, all of which weigh on the UK economy. Headwinds in the housing market will present challenges to building societies. However, most are well prepared and should weather the storm with strong credit profiles.

Key Takeaways

• UK building societies, particularly the large and the better-performing small and midsize societies, have sound credit profiles, supported by strongly performing mortgage books, stable funding, strong liquidity, and generally solid capitalisation and leverage.
• KBRA believes that the sector can absorb the continuing macro pressures. However, the societies are vulnerable to a downturn in the housing market, rising unemployment, and increasing cost of living, given the institutions’ undiversified business models.
• Profitability of building societies is modest but, in KBRA’s view, adequate on a risk-adjusted basis. In coming quarters, the sector’s profitability is expected to be pressured by still relative low net interest margin (NIM), increased loan impairment charges (LICs), and a likely slowdown in mortgage lending.
• KBRA expects the sector’s asset quality to deteriorate over the coming quarters as the implications of higher interest rates, inflationary pressure, and the full withdrawal of fiscal support measures feed through to the economy and customers’ affordability. Asset quality remained strong throughout the pandemic thanks to wide-ranging government support for UK borrowers.
• Forthcoming challenges and risks to profitability and asset quality are mitigated by building societies’ generally sound capitalisation, ample liquidity, and stable funding. Further, societies’ generally conservative loan-to-value (LTV) ratios should also help to mitigate loan losses.

Click here to view the report.

Related Publications

• UK Building Societies: Steady Performance Despite Economic Headwinds
• 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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