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July 21 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Rothschild & Cie Banque's (RCB) Long-term Issuer Default Rating (IDR) at 'A' with a Stable Outlook. Its other ratings were affirmed at Short-term IDR 'F1', Viability Rating (VR) 'a', Support Rating '5' and Support Rating Floor 'No Floor'.
KEY RATING DRIVERS -VR AND IDRS
RCB's ratings are driven by its standalone credit profile, as reflected in the VR, which is based on RCB's excellent advisory position in France, robust and experienced management, low risk profile, strong profitability, lack of debt and healthy capital ratios. The VR also factors in its modest size, fairly narrow product offering and its business concentration in France.
RCB remains a market leader in mid-cap M&A business in France, due to the strong expertise of the bank's experienced executives, and its solid network of contacts. The lack of conflict of interest is a key competitive advantage for RCB and mitigates reputation and legal risks that often arise with larger investment banks. Asset management (AM) is an important source of revenue diversification for RCB.
RCB has a very low risk appetite. The general partners' personal wealth can be accessed to cover the bank's liabilities, which is a strong incentive to maintain a low risk profile. Fitch also considers the involvement of unlimited liability partners in the decision-making and oversight processes as being aligned with the interests of creditors and therefore not a negative rating driver.
RCB's balance sheet is low-risk and highly liquid. The bank takes no proprietary positions, and market risk is minimal. Well-controlled operational and reputational risks are paramount given the importance of avoiding reputational damage to the business model and the Rothschild name.
RCB's profitability remained strong even during depressed business cycles. In 2013, the tough operating environment translated into declining merger and acquisition business volume, which were compensated by increasing asset management revenue. Operating return on average assets and equity ratios remained high in 2013, a trend which Fitch expects to continue throughout 2014 given improved prospects for M&A activities. RCB's ability to adjust its cost base to revenue to remain profitable and to generate solid cash flow is a crucial factor for its ratings and will be closely monitored by Fitch.
RCB has no financial debt (i.e. excluding deposits) and only minimal pay-out requirements. In addition, the bank maintains a comfortable liquidity buffer. RCB's capital base is sufficient, given its low risk profile, despite being low in absolute terms.
RATING SENSITIVITIES - VR AND IDRS
Fitch views RCB's size and business concentration as constraints to upside potential for its ratings. Conversely, any tarnishing of the Rothschild reputation and loss of franchise would put negative pressure on RCB's ratings.
In addition, lower revenue diversification, for example linked to material outflows of assets under management, or failure to address shrinking revenue by adjusting costs could have negative implications for the ratings. Moreover, RCB's ratings would be sensitive to a lower rating of its sister bank (N M Rothschild & Sons Limited, BBB+/Stable), as this could weigh on RCB's capital ratios.
KEY RATING DRIVERS AND RATING SENSITIVITIES - SUPPORT RATING
The bank's Support Rating reflects Fitch's view that any external support to RCB, if needed, would be uncertain.
RCB is fully-controlled by Paris-Orleans (PO), a listed financial company regulated by the French banking authority and 58%-controlled by the French and English Rothschild family. RCB would look to PO or its shareholders for support if needed. Fitch believes that it is the Rothschild family's priority to uphold the reputation of all family companies and that resources would be made available to support RCB, to the best of the family's ability, should the need arise.
However, in Fitch's opinion, such external support cannot be relied upon given the difficulties associated with evaluating private family fortunes. In addition, Fitch views support from French authorities as unlikely. We do not expect our view of support to change.