OREANDA-NEWS. The 2016 outlook for UK building society ratings is stable, based on the low risk business models of most societies, and limited opportunities for diversification, says Fitch Ratings. UK building societies' ratings are driven by their standalone creditworthiness, as defined by their Viability Ratings.

The stable rating outlook indicates that we see only limited opportunities for upgrades of VRs in 2016 and the timing will depend the removal of tail risk in legacy specialist exposures at individual societies. We do not envisage any downgrades during 2016.

We maintain a stable outlook for the sector, underpinned by the supportive operating environment and reflecting the low risk, well-collateralised asset profile and better prospects for profitability. Risks related to the overall indebtedness of UK households and their vulnerability to rising base rates counterbalance these positive developments.

Fitch expects UK building societies' operating profitability to remain stable in 2016 with possible benefits from rising base rates possibly shifting into 2017. Cost pressure is likely to continue from increasing regulatory requirements and the need to invest in digital services. While we expect the societies to continue to report a diminishing stock of impaired assets, we believe that the loan impairment charges hit a cyclical low in 2015 and are likely to increase moderately from 2016 when base rates start to rise.

In our view, the societies are well capitalised and we do not anticipate significant pressure in the sector to further increase capital levels in 2016. Some societies will need to monitor their leverage ratio closely as minimum requirements are implemented and as buffers begin to be applied.

Liquidity has been strong for a number of years and we do not expect any significant changes in 2016; funding profiles are likely to remain conservative with some additional wholesale funding diversification being achieved by the societies with active wholesale programmes.