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Rating Action:

Moody's affirms Bank Julius Baer's and Julius Baer Group's ratings, outlook changed to stable

05 Dec 2016

Bank Julius Baer's a2 baseline credit assessment (BCA) also affirmed

Frankfurt am Main, December 05, 2016 -- Moody's Investors Service (Moody's) has today affirmed Bank Julius Baer & Co. Ltd.'s (BJB; the bank) Aa2/P-1 long- and short-term deposit ratings and A2 long-term issuer ratings and changed the outlook on the long-term ratings to stable from negative. The rating agency further affirmed the bank's Aa3(cr)/P-1(cr) Counterparty Risk Assessment (CR Assessment) as well as its a2 baseline credit assessment (BCA) and a2 Adjusted BCA.

Furthermore, Moody's affirmed Julius Baer Group Ltd.'s (JBG; the group) A3 long-term issuer rating and changed the outlook to stable from negative. The group's A3 subordinated debt rating as well as the Baa3(hyb) ratings assigned to the group's high-trigger additional Tier 1 (AT1) securities were also affirmed.

Please refer to the end of this press release for a list of all affected ratings.

RATINGS RATIONALE

--RATIONALE FOR THE STABLE OUTLOOK

The assignment of a stable outlook to BJB's and JBG's ratings takes account of the bank's as well as the group's higher earnings-generation capacity and thus both institutions' stronger ability to withstand external shocks following the successful integration of Merrill Lynch's International Wealth Management (IWM) business outside the United States.

The stable outlook further captures BJB's and JBG's reduced sensitivity to reputational, legal and operational risks as reflected in the tax settlement agreement with the U.S. Department of Justice. With related settlement provisions and additional bolt-on acquisitions having been digested in 2015 and during the first half of 2016, the rating agency now believes capital ratios to have reached their trough and grow from the levels reached in H1 2016 (JBG phase-in Tier 1 capital ratio of 15.9%). The group's Tier 1 ratio has additionally been strengthened by the successful issuance of SGD325 million (CHF230 million) high-trigger AT1 securities in October 2016.

Moreover, Moody's believes that BJB's and JBG's appetite for further acquisitions has abated for now, reducing the risk of exposing the bank and/or group to larger integration risks. The stable outlook also captures continued profit pressures on the bank and the group during an extended period of low (and in part negative) interest rates, upwards pressure on the Swiss franc, and continued client caution in the face of global macroeconomic uncertainty.

--RATINGS AFFIRMATION

The decision to affirm BJB's a2 BCA, and thus all of the bank's and group's ratings, reflects Moody's view of a continued sound earnings-generation capacity supporting BJB's and JBG's capital build-up over the coming years.

During the first ten months of 2016, JBG's total assets under management (AuM) rose to a record CHF327 billion from CHF300 billion as of year-end 2015. Moody's therefore believes that revenues will continue to benefit from the sustained higher AuM level, offsetting pressure from (1) continued low client trading activity negatively affecting brokerage margins; and (2) the persistently low interest rate environment. This will help offset challenges to the bank's and the group's cost base originating from the strong Swiss franc as well as ongoing growth investments over the next 12-18 months, specifically as the group continues hiring front office staff and seeks to further streamline its information technology as well as enhance the digitisation of its product offers.

Continued sound profitability should support BJB's and JBG's capital adequacy metrics and thus further create capital buffers to mitigate unforeseen risks that are generally related to private banking and wealth management operations, including legal risks. In this regard, the new capital floors announced earlier in 2016 (minimum phase-in BIS common equity Tier 1 (CET1) capital ratio of 11% and minimum phase-in Tier 1 capital ratio of 15%) signal the bank management team's thrive to focus more on the organic development of its existing global businesses rather than the use of funds to make further acquisitions, thereby improving BJB's and JBG's efficiency metrics and maintaining their now higher profitability levels in a challenging market environment.

BJB and JBG further continue to benefit from a liability-driven balance sheet, characterised by a large customer deposit base that continuously funds more than 70% of total assets. Although this may create challenges with regard to the bank's and the group's leverage ratio requirements, this low market-funding dependence -- coupled with substantial volumes of high-quality liquid assets -- remains a key credit strength.

--SUBORDINATED DEBT AND HYBRID CAPITAL

Moody's affirmed the rating of JBG's senior subordinated debt (LT2) at A3, which is one notch below BJB's a2 Adjusted BCA reflecting (1) the instrument's actual subordination in the group's capital structure; (2) the absence of "point-of-non-viability" clauses; (3) the instrument's structural subordination, because it is issued by the holding company; and (4) Moody's current assessment of the Swiss regulatory framework in respect of this debt class.

Moody's also affirmed JBG's hybrid securities (non-cumulative preferred stock) at Baa3(hyb), four notches below BJB's a2 Adjusted BCA. The Baa3(hyb) ratings assigned to the 'high trigger' undated deeply subordinated AT1 notes issued by JBG reflect our approach to the rating of 'high trigger' securities, where we rate to the lower of a model-based outcome and a non-viability security rating. This captures the credit risk associated with the distance to trigger breach and the credit risk of these securities' non-viability component.

WHAT COULD CHANGE THE RATINGS UP/DOWN

There is currently no upward pressure on BJB's or JBG's long-term ratings as expressed by the stable outlook.

An upgrade of BJB's long-term ratings is likely to follow an upgrade of the bank's BCA subject to: (1) higher capital ratios meaningfully exceeding the levels of its closest Swiss private banking peers; (2) significant reduction in high leverage at BJB level (leverage ratio of 5% and above); and (3) sustained reduction in our assessment of typical risks associated to the bank's and the group's business model.

In addition, upward pressure on the bank's issuer ratings might evolve if our Advanced LGF analysis resulted in higher notches of rating uplift for BJB's issuer ratings, driven by significant issuance of senior unsecured debt or subordinated instruments. This does not apply to BJB's deposit ratings, which already benefit from the highest possible uplift from our LGF analysis.

A downgrade of BJB's long-term ratings is likely to follow a downgrade of the bank's BCA subject to: (1) potential unexpected litigation charges that exceed our expectations for charges connected with typical private wealth-management lawsuits (tax cases or reputational cases); (2) capital reductions or outflows that lead to a sustained Tier 1 capital ratio of below 15%; (3) a material, prolonged erosion in assets under management (AuM), as well as client or advisor attrition; (4) a significant decline in pre-tax profits; and/or (5) additional commercially or financially aggressive acquisitions.

In addition, downward pressure on the bank's debt and deposit ratings might evolve if our Advanced LGF analysis resulted in fewer notches of rating uplift for BJB's issuer and deposit ratings, driven by significantly lower volumes of senior unsecured debt instruments.

LIST OF AFFECTED RATINGS

The following ratings and rating inputs were affirmed:

Bank Julius Baer & Co. Ltd.:

- Long-term local-currency bank deposit rating of Aa2, outlook changed to stable from negative

- Short-term local-currency bank deposit rating of Prime-1

- Long-term local- and foreign-currency issuer ratings of A2, outlook changed to stable from negative

- Long-term Counterparty Risk Assessment of Aa3(cr)

- Short-term Counterparty Risk Assessment of Prime-1(cr)

- BCA and Adjusted BCA of a2

Bank Julius Baer & Co. Ltd., Guernsey branch:

- Long-term local- and foreign-currency issuer ratings of A2, outlook changed to stable from negative

- Long-term Counterparty Risk Assessment of Aa3(cr)

- Short-term Counterparty Risk Assessment of Prime-1(cr)

Julius Baer Group Ltd.:

- Long-term local-currency issuer rating of A3, outlook changed to stable from negative

- Long-term local-currency senior subordinated debt rating of A3

- Long-term foreign-currency preferred stock non-cumulative rating (high-trigger AT1) of Baa3(hyb)

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael Rohr
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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