TEXT-Fitch publishes criteria on rating financial institutions above the sovereign

Wed Dec 12, 2012 5:01am EST

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(The following statement was released by the rating agency)

Dec 12 - Fitch Ratings has published a criteria report on the rating of financial institutions (FIs), i.e. banks or other financial service companies, above the sovereign. The report is expected to result in very few, if any, rating changes.

The report explains under what circumstances Fitch rates FIs above the sovereign of the country in which they are domiciled and how Fitch determines the extent of possible uplift for an FI rating above the sovereign rating. The criteria apply to both local currency (LC) and foreign currency (FC) ratings. The report updates and replaces the criteria report "Rating Financial Institutions Above the Local Currency Sovereign Rating" of December 2011.

Fitch will rate an FI above the sovereign when both of two conditions hold. First, Fitch must expect that an FI would be likely to retain the capacity to service its obligations following a sovereign default. Second, the agency must believe that the defaulted sovereign would probably not impose restrictions on the FI's debt service. However, close links typically limit the potential rating uplift of FIs above sovereigns.

An FI's debt-servicing capacity may survive a sovereign default either because of its intrinsic strength or because of external support. In the case of support, Fitch must view the owner's commitment as sufficiently robust to withstand the market dislocations and subsidiary impairment that may accompany a sovereign default. Potential uplift of support-driven FI ratings above the sovereign is usually limited to two notches.

To be rated above the sovereign based on stand-alone strength, an FI (usually a bank) must have a very strong (in the context of the domestic market) all-round credit profile. However, funding franchise and deposit stability are particularly important. Geographical diversification outside the home country may also support a higher rating. Uplift above the sovereign based on an FI's stand-alone strength is usually limited to one notch, although this could increase to two notches for exceptionally strong entities.

Even where an FI's debt-servicing capacity remains intact, potential sovereign intervention can limit rating uplift. Transfer and convertibility risks, reflected in Country Ceilings, cap FC Issuer Default Ratings (IDRs) of issuers (whether FIs or other entities) at between zero and three notches above the sovereign. Potential limitations on servicing LC obligations (e.g. deposit freezes) can also constrain uplift for FIs' LC IDRs.

Link to Fitch Ratings' Report: Rating Financial Institutions Above the Sovereign http://

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696373

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