Fitch upgraded Yorkshire Building Society covered bonds from AA+ to AAA yesterday (Thursday), following an upgrade of the financial institution on Wednesday that was part of various rating actions on UK building societies.

Yorkshire was upgraded from BBB+ to A-, on stable outlook, while Skipton was also upgraded, from BBB+ to A-, and four other building societies affirmed.

“Over the past year, they have all benefited from cheaper funding costs, from a gradual improvement in the UK operating environment, and from a recovery in the housing market,” said Fitch, noting improvements in the building societies’ figures and capital ratios.

Fitch said that the covered bond rating is based on Yorkshire’s Issuer Default Rating (IDR), an IDR uplift of zero, a Discontinuity Cap (D-Cap) of 4 (moderate risk), and an Asset Percentage (AP) of 83.7%. The rating agency noted that this level of contractual AP is higher than the 85% AAA breakeven AP, according to its analysis.

The account bank for the programme is HSBC Bank plc, which is rated AA-/F1+, but Fitch noted that programme documents only require the account bank to have a short term IDR of F1, which does not meet its counterparty criteria under which a long term IDR of A and short term IDR of F1 are necessary to support a covered bonds’ rating at AAA.

“However, Fitch would review the covered bonds rating should YBS decide to transfer the role of account bank to the building society itself,” it said.

Fitch said it expects to communicate the AAA credit loss and breakeven overcollateralisation components in further detail within the next three months after reviewing updated cover pool and performance data.

“The agency notes that there may be scope of improvement in the breakeven AP after the review of the updated cover pool in Fitch’s asset and cashflow models,” it added.