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Fitch Downgrades BHF-Bank to 'BBB-', Outlook Negative
February 26, 2014 / 5:02 PM / 4 years ago

Fitch Downgrades BHF-Bank to 'BBB-', Outlook Negative

(The following statement was released by the rating agency) FRANKFURT/LONDON, February 26 (Fitch) Fitch Ratings has downgraded BHF-Bank AG's (BHF) Long-term Issuer Default Rating (IDR) to 'BBB-' from 'A-' and Viability Rating (VR) to 'bbb-' from 'bbb'. The Outlook on the Long-term IDR is Negative. All ratings have been removed from Rating Watch Negative (RWN). The rating actions follow the joint announcement of Kleinwort Benson Group Limited (KBG, not rated) and its parent RHJ International (RHJ, not rated) that the German financial regulator, BaFin, has confirmed that it has no objections to their proposed acquisition of BHF-BANK from Deutsche Bank AG (A+/Stable). The IDRs were placed on RWN on 7 July 2011 following the announcement that Deutsche Bank had entered into exclusive negotiations with RHJ regarding a potential sale of BHF to KBG. BHF's IDRs were previously based on the likelihood of support from Deutsche Bank. According to RHJ, the acquisition is subject to certain conditions prior to closing, which is expected to take place before the end of March 2014. KEY RATING DRIVERS -VR AND IDRs The one-notch downgrade of the VR and the downgrade of the IDRs and the Negative Outlook reflect the loss of a strong parent as a potential funding, capital and liquidity provider. BHF's robust and de-risked balance sheet has limited the downgrade of its VR to one notch and kept its IDR just within investment grade. BHF's Long-term IDR is based on its VR, which balances prudent risk-taking, a sound funding and liquidity profile and good capitalisation with uncertainty surrounding its ability to generate sustainable profit while preserving its low risk profile. During the next one to two years, the ratings will primarily be driven by the strategy management adopts under the new ownership to improve profitability. BHF has successfully de-risked its balance sheet with substantial support from Deutsche Bank. This includes the reduction of its financial markets activities, as well as new measures taken to improve efficiency. BHF's business model has increasingly been oriented towards private banking and asset management, which currently generate the bulk of revenue, but revenue will need to increase to maintain the bank as a viable business in the medium term. BHF's earnings have been held back by the prolonged sale process. Under the new ownership, Fitch understands that BHF will increase its loan portfolio to its 2012 level but does not plan to change its customer profile. An increased loan portfolio should boost earnings but will inevitably somewhat reduce BHF's liquidity and capitalisation. BHF's relatively small size for a western European corporate lender necessitates a niche merchant banking franchise to remain competitive, which inevitably means some concentration risk. Fitch believes that BHF's new owner's intentions regarding BHF's strategy, positioning and restructuring are supportive, although potential benefits from cross-fertilisation among the wealth management activities of KBG and BHF's broader product range are not quantifiable at this stage. RATING SENSITIVITIES - VR and IDRs The Negative Outlook reflects the delicate balancing act BHF faces in building its established customer base. It also reflects some uncertainty around corporate governance given the new shareholder structure. Having four core shareholders should ensure checks and balances on each other, but any transactions with the owners will be an area of focus for the rating. BHF's VR and IDRs and VR remain sensitive to the evolution of its business model and any expansion into riskier businesses. Failure to restore profitability or indications of a weakening of its franchise would be negative rating factors. BHF's VR and IDRs could also be downgraded if its capitalisation materially worsened or its liquidity position significantly weakened. Fitch does not expect the new owners to conduct an aggressive dividend policy given our understanding that the majority shareholder views BHF as a strategic investment which is a cornerstone of its European wealth management strategy. Upside potential for BHF's IDRs and VR depends on a material improvement of its recurring earnings without taking undue risks and establishing a solid track record under the new ownership. KEY RATING DRIVERS AND SENSITIVITOES - SUPPORT RATING AND SUPPORT RATING FLOOR BHF's Support Rating of '5' and 'No Floor' Support Rating Floor reflect Fitch's view that the probability of sovereign or institutional support from its new owners for BHF, although possible, cannot be relied upon. BHF is more than twice the size of RHJ's current balance sheet and RHJ's equity at end-June 2013 of EUR531.5m is not much larger than that of BHF. KBG's wealth management activities, of which BHF will become part, were loss making in 1H13. BHF's Support Rating was previously based on the likelihood of support from Deutsche Bank. The rating actions are as follows: Long-term IDR downgraded to 'BBB-' from 'A-'; off RWN Outlook Negative Short-term IDR downgraded to 'F3' from 'F2'; off RWN Viability Rating downgraded to 'bbb-' from 'bbb'; off RWN Support Rating downgraded to '5' from '1'; off RWN Support Rating Floor assigned at 'NF' Contact: Primary Analyst Michael Dawson-Kropf Senior Director +49 69 768076 113 Fitch Deutschland GmbH Taunusanlage 17, 60325 Frankfurt am Main Secondary Analyst Patrick Rioual Director +49 69 7680 76 123 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014 is available at 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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