June 13, 2014 / 3:40 PM / 3 years ago

Fitch Affirms EFG International and EFG Bank at 'A'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, June 13 (Fitch) Fitch Ratings has affirmed EFG International's (EFGInt) and its main operating subsidiary EFG Bank's Viability Ratings (VR) at 'a' and their Long-term Issuer Default Ratings (IDR) at 'A'. The Outlook on both Long-term IDRs is Stable. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS - IDRs and VRs EFGInt's ratings are aligned with EFG Bank's as Fitch assesses the group on a consolidated basis. This is because of the high cohesion between the entities in strategy, governance and risk management, resulting in ordinary support being available to EFG Bank. For EFGInt specifically, the equalisation also takes into account the absence of double leverage at the holding company level. The IDRs and VRs reflect the group's sound business profile, with a well-diversified private banking franchise, and overall moderate risk appetite. They also factor in its improved capitalisation, solid liquidity and acceptable profitability. Nonetheless, Fitch considers that EFGInt remains, similar to other private banks, exposed to significant operational and reputational risk, which is also reflected in its ratings. The group has a well-established and diversified wealth management franchise. Since 2011, EFGInt has simplified its business model by concentrating on its core private banking activities and has been able to deliver sound recurring underlying profitability. Similar to peers, its core private banking business benefits from fairly low revenue volatility through the cycle. While the bank remains exposed to ongoing pressure on the Swiss offshore private banking business, we believe this is offset by its satisfactory international footprint and existing onshore businesses. Similar to most private banks, EFGInt has a moderate risk appetite. Its underwriting standards are prudent, and the bulk of its balance sheet consists of high quality, fairly short-term and/or collateralised assets. Nonetheless, we believe that EFGInt's risk appetite remains higher than its higher-rated peers due to its fairly sizeable residential mortgage loan book (CHF3bn or 14% of assets) and its large portfolio of US life insurance policies (CHF692m carrying value at end-2013). We consider EFGInt's main risks are operational and reputational, as underlined by recent litigation and regulatory charges booked by the bank as well as its participation in the US Department of Justice (DoJ) programme for Swiss banks. EFGInt intends to reach a non-prosecution agreement under the DoJ programme related to US tax matters. In Fitch's view the US offshore market was never a strategically important segment for EFGInt as the bank's Americas business line predominantly targets clients in Latin America. While Fitch expects that a financial settlement is the most likely outcome, the ultimate cost for the bank is difficult to estimate based on current information. Nonetheless, the agency believes the bank's satisfactory earning retention capacity, sound capital base and ability to de-risk quickly its fairly short-term balance sheet would provide some buffer in case of a sizeable settlement. EFGInt has since 2012 considerably improved the quantity and quality of its capital base, among other things, by disposing of its structured products subsidiary (now Leonteq), by selling treasury shares and by buying back most of its hybrid capital (bons de participations). As a result, we now view EFGInt's capitalisation and management's capital ratio targets as being in line with most of its private banking peers. Management targets a CET1 ratio of above 12% and a total capital ratio in the high teens. EFGInt has since 2011 improved its underlying profitability, largely by simplifying its operations and reducing its cost base. This has helped the bank's financial flexibility in a period of subdued revenue generation. Nonetheless, its profitability targets, including a 75% cost/income ratio, will be challenging to achieve given limited client risk appetite and in the absence of both higher interest rates and higher net new money inflows than in 2013. RATING SENSITIVITIES - IDRs and VRs EFGInt's and EFG Bank's IDRs and VR are primarily sensitive to any change in the bank's strategy that could result in an increase in risk appetite, which we currently do not expect. The ratings would also come under pressure if the bank suffers large single-event losses, which could arise from operational and reputational risks inherent in its business model. A material improvement in recurring profitability that would allow the bank to strengthen internal capital retention further, together with a reduction in balance sheet risks could over time put positive pressure on the bank's ratings. KEY RATING DRIVERS - SUPPORT RATING and SUPPORT RATING FLOOR Given its private banking profile, extraordinary support for EFGInt from the Swiss authorities, while possible, cannot be relied upon and this is reflected in its Support Rating of '5' and Support Rating Floor of 'No floor'. EFG Bank's '5' Support Rating reflects uncertainty over the availability of support given the dominance of the bank within EFGInt. Since EFG Bank represents by far the largest asset within EFGInt, we consider substantial extraordinary support for EFG Bank from other parts within EFGInt, should it ever be needed, is uncertain. We still believe ordinary support (for example by way of moderate reallocations of capital) within the group as likely, which supports the equalisation of EFGInt's and EFG Bank's IDRs and VRs. RATING SENSITIVITIES - SUPPORT RATING and SUPPORT RATING FLOOR A revision of EFGInt's Support Rating and Support Rating Floor is unlikely, given the bank's business profile. A revision of EFG Bank's Support Rating is also unlikely given the relative size of EFG Bank within the EFGInt group. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRIDS EFGInt's bons de participations are rated five notches below its VR to reflect the fully discretionary coupon deferral and loss severity. Basel III-compliant Tier 2 notes, issued by EFG International (Guernsey) Limited, and EFG Funding (Guernsey) Limited, are rated two notches below EFGInt's VR in accordance with Fitch's applicable criteria, primarily reflecting the notes' permanent and full point-of non-viability write-down feature. RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRIDS As both the bons de participations and the Tier 2 notes are notched from EFGInt's VR, their ratings are primarily sensitive to any changes in EFGInt's VR. The rating actions are as follows: EFG International 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 'No Floor' Fiduciary certificates (ISIN XS0204324890) backed by preferred shares affirmed at 'BB+' EFG Bank Long-term IDR affirmed at 'A'; Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '5' EFG Funding (Guernsey) Limited Basel III-compliant Tier 2 subordinated debt affirmed at 'BBB+' EFG International (Guernsey) Limited Basel III-compliant Tier 2 subordinated debt affirmed at 'BBB+' Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Francois-Xavier Marchand Associate Director +33 144 29 91 46 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1003, Email: Elaine.Bailey@fitchratings.com; 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 31 January 2014, are available on www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria 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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