TEXT-Fitch affirms Close Brothers at 'A', outlook stable

Fri Nov 23, 2012 12:06pm EST

Nov 23 - Fitch Ratings has affirmed Close Brothers Group's (CBG) and its
wholly owned banking subsidiary Close Brothers Limited's (CBL) Long-Term Issuer
Default Ratings (IDR) at 'A' with Stable Outlooks. Their Viability Ratings (VRs)
have been affirmed at 'a'. A full list of rating actions is at the end of this
rating action commentary.

RATING ACTION RATIONALE
The IDRs and VRs reflect the bank's strong position in niche markets where it
has been generating strong margins, and growing quickly because of limited
competition. Fitch views these markets, especially property finance, as higher
risk, which is reflected in high impaired loans ratios but the risk is largely
mitigated by good management of these loans.

The bank grew its loan book rapidly in FY12, particularly in the property, motor
and asset finance sectors. Fitch notes that the bank tightened its lending
criteria against real estate loans in 2009 and re-focussed on the UK and
geographic areas it knows well. Loan-to-value ratios remain low. Most of the
group's impaired loans arose from the asset finance and remaining legacy
(pre-2009) property books. No additional new impairments have been generated on
the post-2009 property loans.

The maturity of funding and loans is generally well matched at the bank despite
a shortening of the average funding maturity in FY12 following a recent motor
finance securitisation of c.GBP500m. Funding has become more diversified since
2009 but while customer term deposits have increased, there is still some
reliance on wholesale markets.

The group has three business lines (banking, asset management and securities
trading), which has diversified its revenue streams. Nonetheless, operating
profit is generated mostly by the bank. The group's securities trading business
is a cyclical business and its underlying performance was affected by the lack
of investor risk appetite. Asset management remained loss-making in FY12 but the
restructuring phase has largely been completed and the business is expected by
Fitch to become profitable in FY13-FY14.

RATING DRIVERS AND SENSITIVITIES
The group and the bank's VRs and IDRs are high when viewed in light of the
riskiness of the loan portfolio and very fast growth seen over the past two
years. The ratings are therefore sensitive to continued strong growth over an
extended time period, which will put pressure on the bank's funding and
capitalisation. They are also sensitive to a deterioration in the performance of
the loan book, although this is not Fitch's base case scenario.

Fitch also views a narrowing mismatch between the maturity profile of its
funding and of its assets as a negative rating driver. This could result from
either a shorter maturity profile of its funding or from the extending maturity
of its assets. Another trigger for a downgrade could be if the asset management
business remains a drain on profits or if the weakening of the securities
business becomes structural rather than cyclical.

Upward potential for the ratings is limited given CBG's and CBL's relatively
small niche businesses.

SUSBIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES
CBG and CBL's ratings are equalised because of the absence of double leverage at
the group and the high fungibility of capital and liquidity between the parent
and the bank, in line with Fitch's criteria. A large increase in double leverage
could result in a notching of the ratings of the group and those of the bank.

The rating actions are as follows:

Close Brothers Group
Long-Term IDR affirmed at 'A'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'a'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'NF'
Senior unsecured debt affirmed at 'A'

Close Brothers Limited
Long-Term IDR affirmed at 'A'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'a'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'NF'
Senior unsecured EMTN programme ratings affirmed at 'A'/ 'F1'

Additional information is available on 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 16
August 2012, and 'Rating FI Subsidiaries and Holding Companies', dated 10 August
2012, are available at www.fitchratings.com.

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
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