Fitch Ratings has affirmed
The IDR is driven by SGH's 'a' Viability Rating (VR).
Fitch has withdrawn
Key Rating Drivers
SGH is the holding company for
SGH's and San
SGH's business diversification has remained fairly limited, despite plans to increase the contribution of SME and corporate banking. Following the implementation of ring-fencing regulation in the
SGH's risk appetite is fairly conservative. As a result, loan growth has been lower than peers' as the group has focused on owner-occupied mortgage loans, at low loan-to-value (LTV) ratios. Although the group has some appetite for consumer lending, SGH focuses on auto finance, where it benefits from the security of the underlying vehicle. Buy-to-let mortgages, which SGH views as higher risk, do not account for a large proportion of mortgage loans. We do not expect the group to loosen its underwriting standards significantly to gain market share.
Asset quality is healthy, and the group's 1.35% impaired loans ratio at end-9M21 compares well with peers'. Asset quality has benefited from large government support to borrowers since the start of the pandemic. We do not expect impaired loans to exceed 2% of gross loans in the medium term.
While we view consumer lending as a higher-risk asset class that is more volatile through the cycle, auto finance, which accounts for most of SGH's consumer-finance exposure, has benefited from global new car shortages, which have supported used-car values and therefore the value of the collateral securing these exposures.
Like other
SGH's common equity Tier 1 (CET1) ratio increased to 16.6% at end-9M21 as it benefited from the sale of CIB assets to Santander's
SGH benefits from a large base of low-cost current account deposits, which help the group to maintain acceptable margins on its low-risk loan book. It also benefits from proven independent access to wholesale-funding markets and ordinary support from Santander. Liquidity is prudently managed and benefits from access to the
San
San
The Short-Term IDRs of 'F1' for SGH and its rated subsidiaries are the lower of two options mapping to the respective Long-Term IDRs, as our assessment of the group's funding and liquidity profile does not warrant a higher Short-Term IDR.
SHAREHOLDER SUPPORT RATINGS (SSR)
We have assigned a 'bbb+' SSR to SGH and San
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings are primarily sensitive to changes in the VR, which could be downgraded if economic disruptions are worse than our assumptions. A downgrade could be triggered if we expect the Stage 3 loan ratio to increase above 3% without a clear path to reduction.
San
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the VR is unlikely within the rating horizon given our current assessment of the key rating drivers. However, over the longer term the ratings could be upgraded if SGH's business model becomes more diversified and comparable to those of higher-rated
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SUBORDINATED DEBT AND HYBRID SECURITIES
The ratings of all subordinated debt and hybrid securities issued by SGH and San
SGH's additional Tier 1 capital securities are rated four notches below the group's VR to reflect above-average loss severity risk (two notches) and higher risk of non-performance as coupon payments are fully discretionary (two notches). Dated lower Tier 2 instruments are notched down twice from the VR for above-average loss severity.
Legacy Tier 1 securities issued by San
Legacy upper Tier 2 securities are rated three notches below San
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings of subordinated debt and hybrid securities are primarily sensitive to changes in the VRs from which they are notched. Additional Tier 1 and other discretionary Tier 1 instruments are also sensitive to Fitch changing its assessment of the probability of their non-performance relative to the risk captured in the VR. This could occur if there is an adverse change in capital management or flexibility, or an unexpected unfavourable shift in regulatory buffers. Tier 2 subordinated debt ratings are also sensitive to an adverse change in Fitch's assessment of loss severity in default.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of SGH's and San
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
SFS's IDRs are based on support from SGH. SFS's 'a' SSR is in line with SGH's IDR and reflects SGH's strong propensity to support SFS, given SFS's role in the group, and a strong ability to provide support, given SFS's small size. We uplift SFS's
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
SFS's ratings are primarily sensitive to changes in SGH's IDRs. They are also sensitive to a reduction in SGH's propensity to support SFS, which we do not expect. A downgrade of SGH's IDRs would likely result in a similar downgrade to SFS's IDRs.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of SGH's IDRs would likely result in a similar upgrade to SFS's IDRs.
VR ADJUSTMENTS
The operating environment score of 'aa-' is at the lower end of the range because it is constrained by the
The capitalisation and leverage score of 'a' has been assigned below the implied 'aa' score, due to the following adjustment reason: historical and future metrics (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
SGH's and San
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
(C) 2022 Electronic News Publishing, source