Sainsbury's Bank -- Moody's assigns Baa1 long-term deposit rating to Sainsbury's Bank with stable outlook and Baa2 to proposed subordinated debt issuance

Rating Action: Moody's assigns Baa1 long-term deposit rating to Sainsbury's Bank with stable outlook and Baa2 to proposed subordinated debt issuanceGlobal Credit Research - 30 Aug 2022London, August 30, 2022 -- Moody's Investors Service ("Moody's") has assigned first-time ratings and assessments to Sainsbury's Bank (SB) including a Baseline Credit Assessment (BCA) and an Adjusted BCA of baa1, long- and short-term bank deposit ratings of Baa1 and Prime-2, as well as long- and short-term Counterparty Risk Assessments (CR Assessment) of A3(cr) and Prime-2(cr) and long- and short-term Counterparty Risk Ratings (CRRs) of Baa1 and Prime-2. Moody's has also assigned a Baa2 rating to SB's proposed subordinated notes issuance.The outlook on the long term deposit ratings, as well as the issuer outlook, is stable.RATINGS RATIONALESB's ratings are based on its baa1 BCA and Moody's assessments of moderate loss given failure under the rating agency's Advanced Loss-Given-Failure analysis. SB's BCA itself is based on the bank's predominantly unsecured lending operations which are balanced by its capitalisation and recovering and diverse profitability that includes a large share of fee based income. The Bank's BCA is also buttressed by its high levels of deposit funding and its moderate but sufficient levels of liquid asset holdings.SB is the wholly owned subsidiary of J Sainsbury plc (J Sainsbury), the United Kingdom's second largest supermarket company and parent of other holdings such as Nectar, Tu, Habitat and Argos Limited. The bank provides financial services to group customers which include credit cards, savings and loans, travel money and car, home, pet, travel and life insurance. The bank also provides financial services to customers of Argos Limited, a J Sainsbury group company, through its own wholly owned subsidiary Home Retail Group Card Services Limited (AFS). As of year-end 2021, the bank had a loan book of £5.3 billion on a consolidated basis, 31% of which was credit card loans, 39% of which was unsecured consumer loans and 15% were loans to Argos' customers. In line with the bank's strategy to focus on the group customer base, while 15% of loans is mortgages, this book is now in run off.Given its exposure to primarily prime unsecured consumer lending, Moody's notes that the bank's asset risk is elevated, with problem loans to gross loans of 3.4% in 2021 (3.8% in 2020, 3.2% in 2019). However, the bank also held provisions that averaged 4.0% of gross loans from 2019-2021 and provide a strong buffer against asset risk. According to the rating agency, the bank's operations targeting demonstrably better credit quality SB's group and Nectar reward system customers helps to offset some of its asset risk generated by the somewhat higher risk AFS customer base. The bank's capitalisation at 15.6% of tangible common equity over risk weighted assets (RWA) as measured by Moody's, also buffers against asset risk as well as providing a platform for loan growth. The rating agency also notes that AFS has a transfer policy arrangement with Argos Limited that governs the relationship between two parties and ensures a fixed return on assets for AFS.In terms of profitability, Moody's expects the bank's ratio of net income to tangible assets to improve from 2021 levels of 0.3% as it grows its loan book and benefits from rising rates on its more short-term loan exposures. SB also benefits from having a strong share of its revenues coming from fee income services which in 2021 accounted for almost a third of total revenues.Although certain fee income streams such as from travel money and ATM usage have yet to return to pre-pandemic levels, they will likely continue to recover into 2022 and 2023. SB also relies on sticky deposit funding which it sources through its own platform and broker or aggregator websites which in 2021 accounted for almost 80% % of total funding. At the same time the bank's market funding which was 16.6% of tangible banking assets in 2021, is mainly Bank of England funding lines and is well covered by the bank's liquid asset holdings, equivalent to 14.9% of tangible banking assets.SB does not benefit from affiliate support, resulting in an Adjusted BCA in line with the BCA. Nevertheless, SB's BCA of baa1 also reflects the risks related to the close link with its parent company. SB's credit standing could be weakened given that the shared branding and overlapping customer base between the two entities expose the bank to reputational risk, potentially leading to adverse credit events, such as deposit outflow at the bank, in the event of severe credit problems at J Sainsbury plc.SB's deposit ratings derive from Moody's expectation that the bank's balance sheet will grow moderately over the outlook horizon and that the bank will not issue sufficient amounts of subordinated liabilities to provide additional protection to its depositors. As a result, there is a moderate loss-given-failure under Moody's Advanced Loss-Given-Failure (LGF) analysis resulting in no uplift for the long-term deposit ratings from the bank's Adjusted BCA. The bank's CRR similarly follows moderate loss-given-failure under Moody's Advanced LGF analysis, resulting in no uplift from the BCA and a low probability of government support. The CR Assessment is positioned one notch above the BCA and is driven by the banks' BCA and by the volume of subordinated instruments likely to shield counterparty obligations from losses.The bank's subordinated debt rating is positioned one notch below the BCA. This reflects the possibility of losses to subordinated creditors at the point of non-viability and subsequently the agency's expectation of high loss severity for this instrument under its Advanced LGF analysis, due to the limited volume of debt and protection from more subordinated instruments and residual equity.While Moody's does not have any particular governance concerns for SB, the bank's expected loan and strategic growth plans will depend on strong corporate governance and risk management. Therefore, it remains a key credit consideration and requires ongoing monitoring.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe bank's deposit ratings could be upgraded if there is an issuance of a sufficient amount of subordinated debt to provide incremental loss absorbing cushion to senior creditors. SB's BCA could face upward pressure through improving asset risk and capital and accompanied with a notably lower overlap with its parent's operations. An upgrade of the BCA would lead to an upgrade of the bank's subordinated debt rating.SB's BCA and deposit ratings could be downgraded if asset risk worsens significantly, and profitability does not recover strongly in the higher rate environment. A shift away from its deposit funded model and a decrease in liquid assets could also pressure the bank's ratings. A significant deterioration of its parent's creditworthiness would also lead to a downgrade of the bank's BCA and deposit ratings. A downgrade of the BCA would lead to a downgrade of the bank's subordinated debt rating.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.At least one ESG consideration was material to the credit rating action (s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Farooq Khan Vice President - Senior Analyst Financial Institutions Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London, E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Laurie Mayers Associate Managing Director Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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