TEXT-Fitch cuts Oddo's IDR to 'BBB-'
Oct 3 - Fitch Ratings has downgraded Oddo et Compagnie's (Oddo) Long-Term Issuer Default Rating (IDR) to 'BBB-' from 'BBB+', Short-Term IDR to 'F3' from 'F2' and Viability Rating (VR) to 'bbb-' from 'bbb+'. The Outlook on the Long-Term IDR is Negative. A full list of rating actions is at the end of this comment. RATING ACTIONS RATIONALE The downgrades of Oddo's IDRs and VR reflect Fitch's view that Oddo's franchise and earnings generation have been negatively affected by the tougher operating environment, particularly for the investment banking (IB) division. It is not clear to Fitch whether Oddo can establish a viable IB franchise in the medium term. Oddo has recently acquired two small companies that focus on asset management and private banking. RATING DRIVERS AND SENSITIVITIES - IDR and VR Oddo's IDRs and VR reflect the bank's niche franchise, small size and weak profitability in the IB division. They also take into account the bank's prudent risk-taking approach, sound liquidity and adequate capital. Several of Oddo's IB businesses are suffering from overall lower volumes in the industry. Moreover, Oddo's lack of scale means that some of its IB businesses are not profitable. In H112, Oddo managed to reduce costs through synergies with entities acquired in 2010 and 2011 (Robeco, Banque d'Orsay) and headcount reduction in less profitable businesses. However, cost reduction may not be sufficient to offset Oddo's weak revenue generation. The IB industry as a whole is in a process of change without much transparency around how developments will play out. In Fitch's view, Oddo's small franchise makes it particularly vulnerable to such changes. Fitch considers Oddo's ownership to drive a prudent risk-taking approach. Philippe Oddo (one of the two unlimited partners) is personally liable for any loss, and around one-third of Oddo's employees hold 30% of the bank's capital. Moreover, Oddo maintains cautious liquidity management and relatively low leverage, in line with its ambition to remain an independent financial institution. The bank runs an ample liquid asset portfolio, which largely covers its relatively modest short-term funding needs. The Negative Outlook on Oddo's Long-Term IDR reflects Fitch's concerns that the prevailing difficult operating environment is likely to continue weighing on both the bank's IB and asset management revenue generation. Any further deterioration in Oddo's recurring profitability, or indication of a weakening of its IB franchise, could result in a downgrade of Oddo's IDRs and VR. A similar rating action could be taken if the bank's capital level materially worsened or its liquidity position materially decreased. Upside potential for the IDRs and VR is not expected. RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR Fitch considers that the probability of sovereign or institutional support for Oddo, although possible, cannot be relied upon, resulting in a '5' Support Rating and a 'No Floor' Support Rating Floor This is not expected to change. RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT The lower Tier 2 subordinated debt issued by Oddo is notched off Oddo's VR in accordance with Fitch's criteria 'Rating Bank Regulatory Capital and Similar Securities'. Therefore, lower Tier 2 debt's rating has been downgraded to 'BB+' from 'BBB' and is sensitive to any change in Oddo's VR. Subordinated lower Tier 2 debt is rated one notch below Oddo's VR to reflect below average loss severity of this type of debt when compared to average recoveries. The rating actions are as follows: Long-Term IDR: downgraded to 'BBB-' from 'BBB+'; Negative Outlook Short-Term IDR: downgraded to 'F3' from 'F2' Viability Rating: downgraded to 'bbb-' from 'bbb+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: downgraded to 'BBB-' from 'BBB+' Subordinated (Lower Tier 2) debt (FR0010494419): downgraded to 'BB+' from 'BBB' Commercial paper: downgraded to 'F3' from 'F2' Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Evaluating Corporate Governance', dated 13 December 2011, 'Rating Bank Regulatory Capital and Similar Securities', dated 15 December 2011; 'Investment Manager and Alternative Funds Criteria', dated 23 December 2011 and 'Securities Firms Criteria', dated 15 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria Evaluating Corporate Governance Rating Bank Regulatory Capital and Similar Securities Investment Manager and Alternative Funds Criteria
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