Research: Rating Action: Moody’s assigns Baa3 filing rating to Gatehouse Bank for the first time, stable outlook

London, July 25, 2022 — Moody’s Investors Service (“Moody’s”) today assigned Gatehouse Bank Plc (Gatehouse Bank) an inaugural Baa3/Prime-3 senior deposit rating in local and foreign currencies. At the same time, Moody’s assigned Baa2/Prime-2 ratings, counterparty risk (CRR) ratings, Baa1(cr)/Prime-2(cr) counterparty risk (CR) ratings, baa3 basic credit (BCA) and a baa3 BCA rating adjusted to the bank. The outlook for long-term deposit ratings is stable.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

ALLOCATION OF MCR AND ADJUSTED MCR

Gatehouse Bank’s baa3 BCA reflects the bank’s role as a growing Islamic-compliant bank in the UK. Its diverse customer base in many countries provides access to mortgages beyond the highly competitive UK market, while its asset management services support growth in fee income, supplementing income from the retail secured loan portfolio and recently launched asset-backed financing. The bank has a strong capital base, providing a strong loss-absorbing cushion, which Moody’s expects to maintain through planned capital injections. BCA is further supported by the bank’s good liquidity profile, which benefits primarily from retail deposit funding with moderate reliance on wholesale funding, as well as a liquidity facility from its largest shareholder, Kuwait Investment. Authority (KIA).

At the same time, the BCA is limited by the bank’s exposure to house price fluctuations, mitigated to some extent by cautious underwriting. In addition, the bank’s semi-international footprint, sometimes in economies with weaker creditworthiness than the UK, increases risks to borrowers’ debt servicing capacity. As a result, Moody’s uses a Strong’s weighted average macroeconomic profile to assess the bank’s operating environments, one notch below the UK’s Strong+. Moody’s is also applying a downward qualitative adjustment under Corporate Behavior due to the changing business model and the bank’s relatively short track record. Additionally, the rating agency applies a second downward qualitative adjustment under the business diversification factor reflecting that the bank is primarily a mortgage lender, making its sources of income highly correlated to the UK property market.

Governance is very relevant for all banks. Moody’s has no particular governance issues with Gatehouse Bank. Nonetheless, corporate governance remains a key consideration in credit and requires ongoing monitoring, as is the case for all financial institutions.

Moody’s assigns an adjusted BCA in line with the bank’s BCA reflecting the absence of a majority shareholder, resulting in the lack of affiliate support incorporated into the ratings.

ASSIGNMENT OF BANK LONG-TERM DEPOSIT RATINGS, CRRS AND CR ASSESSMENTS

Gatehouse Bank is domiciled in the United Kingdom, a jurisdiction subject to the UK implementation of the European Union’s Bank Recovery and Resolution Directive (BRRD), which Moody’s considers an operational resolution regime. Accordingly, the Bank’s Baa3 long-term deposit ratings reflect the adjusted BCA of baa3 and the application of Moody’s Advanced Loss Given Default (LGF) analysis to its liabilities.

Like other deposit-funded retail banks, Moody’s uses its standard assumptions, including 10% of deposits considered junior. Given the low volume of the junior deposit base and subordinated debt subject to bail-in, LGF analysis indicates that the bank’s deposits are likely to suffer moderate losses in the event of default. This does not result in any increase in adjusted BCA for that instrument. Moody’s assumption of a low likelihood of government support for the bank’s creditors, as the bank is not a systemically important institution, does not result in a rating upgrade.

Gatehouse Bank’s CRRs and its CR ratings are respectively one notch and two notches above the baa3 adjusted BCA, reflecting the loss-absorbing cushion in the event of default provided by more junior instruments.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

The improvement in long-term deposit ratings could be driven by an improvement in the bank’s BCA or as a result of a significant increase in its sources of bailout funding. An upgrade of the bank’s BCA could be triggered by an improvement in asset risk and profitability, as well as the realization of a longer operating history, product offering and expanded clientele.

A deposit rating downgrade could be driven by a downgrade in the bank’s BCA or as a result of a significant decrease in its sources of bail-in-able funding, currently provided by its non-retail deposits. A deterioration in the bank’s BCA could also be driven by a significant deterioration in its solvency and liquidity.

LIST OF AFFECTED RATINGS

Issuer: Gatehouse Bank Plc

..Assignments:

….Long-term counterparty risk ratings, assigned Baa2

….Short-term counterparty risk ratings, assigned P-2

….Long-term bank deposits, allocated Baa3, outlook Stable

….Short-term bank deposits, allocated P-3

….Assessment of long-term counterparty risk, assigned Baa1(cr)

….Assessment of short-term counterparty risk, assigned P-2(cr)

….Basic credit rating, assigned baa3

….Adjusted base credit rating, assigned baa3

..Outlook action:

….Outlook assigned Stable

MAIN METHODOLOGY

The main methodology used in these ratings is the Methodology for Banks published in July 2021 and available on https://ratings.moodys.com/api/rmc-documents/71997. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the announced credit rating metric(s) described above.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Arif Bekiroglu
Vice President – Senior Analyst
Financial Institutions Group
Moody’s Investors Service Ltd.
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Laurie Mayer
Associate General Manager
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

Release Office:
Moody’s Investors Service Ltd.
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Customer service: 44 20 7772 5454

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