Fitch Affirms Close Brothers at 'A'; Outlook Stable

Tue Nov 19, 2013 12:26pm EST

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(The following statement was released by the rating agency) LONDON, November 19 (Fitch) 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 (IDRs) 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. KEY RATING DRIVERS - IDRS, VRS AND SENIOR DEBT, CBG's ratings are underpinned by the strong stable performance and proven track record in niche markets of its largest operating subsidiary, CBL. The ratings of CBL and CBG are aligned, in line with Fitch's criteria, due to the absence of double leverage and the high fungibility of capital and liquidity between the parent and the bank. Other group subsidiaries operate in asset management and securities trading but their operations are small compared with those of CBL. CBL's loan book is extended to higher risk, specialised industries in which the bank's management is highly experienced. It also tends to be backed by strong collateral, is generally fragmented and of short maturity. Nonetheless, Fitch views the very fast loan book growth in FY10-FY12 with some concern, although we understand that CBL tends to grow counter-cyclically, as it takes advantage of the tighter supply of credit during times of stress to grow. Growth moderated in FY13, as supply in the market eased, but remained relatively high at +13% year-on-year. Capitalisation was not pressured by loan growth in 2013 given the highly profitable nature of its business model. Strong profitability increased the group's Core Tier 1 ratio to a comfortable 13.3% at FYE13. CBL reported 4.3% of gross loans as impaired at FYE13, slightly lower than the previous year as a result of both loan growth and the recovery and write off of old legacy loans. New loans continued to perform well. Most of the group's impaired loans arose from the asset finance and remaining legacy (pre-2009) property books. Impairment reserves cover about 30% of impaired loans, reflecting the secured nature of lending. This figure is generally lower than the market but has proved sufficient in the past. Margins in CBL's niche markets are high, reflecting the higher risk nature of its loans and pricing in the higher than average loan impairment charges. Pre-tax profit growth at the group remained strong in FY13. Most of the group's profitability continues to be generated by CBL, although there has been some improvement in its securities and asset management segments. The group has significantly diversified its funding base since 2009 with an increasing proportion of customer deposits. While there is still some dependence on wholesale markets, the risk is mitigated by the maturity of term funding being generally longer than that of lending (FYE13: weighted average of 26 and 13 months respectively). Liquidity is strong with a cushion of reserves with the central bank and gilts at 14.4% of total assets at FYE13. RATING SENSITIVITIES - IDRS, VR, SENIOR DEBT Fitch believes that there is limited upside potential for CBL's ratings given the higher risk, but well-managed businesses, in which it is involved. Negative pressure could arise from weakening capitalisation or liquidity, a significant increase in leverage, a stronger focus on a single source of funding, or an increase in risk appetite. The ratings of CBG and CBL are broadly sensitive to the same factors. However, for CBG the continued absence of any double leverage is also a consideration. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR Fitch does not rely on the possibility of possible extraordinary support being made available to the group by the UK government in its ratings. Fitch does not expect any change in its Support Rating and Support Rating Floor. 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' Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Natalia Shakhina Analyst +44 20 3530 1577 Committee Chairperson Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, and 'Evaluating Corporate Governance', dated 12 December 2012; are available on at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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