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Rating Action:

Moody's affirms St. Galler Kantonalbank's Aa1 long-term ratings; outlook stable

03 Sep 2013

Bank financial strength rating affirmed at C+/a2; outlook changed to negative

Frankfurt am Main, September 03, 2013 -- Moody's Investors Service has today affirmed St. Galler Kantonalbank's Aa1 long-term debt and deposit ratings and Prime-1 short-term ratings. At the same time, the rating agency affirmed St. Galler Kantonalbank's standalone bank financial strength rating (BFSR) of C+, equivalent to a baseline credit assessment (BCA) of a2.

However, Moody's changed the outlook to negative (from stable) on the BFSR, reflecting that the bank's standalone profile is under increasing pressure from uncertainties regarding the development of the Swiss mortgage markets and the restructuring of private banking activities within the bank. The outlook on the long-term ratings remains stable.

St. Galler Kantonalbank's senior subordinated debt ratings continue to be rated one notch below its adjusted BCA of a2, and were thus affirmed at A3. The outlook on these ratings was changed to negative from stable, following the negative outlook on the BFSR.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

-- LONG-TERM RATINGS BENEFIT FROM THE OWNER'S STATUTORY GUARANTEE

Today's affirmation of St. Galler Kantonalbank's Aa1 ratings with a stable outlook reflects Moody's unchanged assumption of a very high probability of regional local government support from the Canton of St. Gallen (unrated) in case of need, which is based on the majority ownership and statutory guarantee by the Canton of St. Gallen as well as the canton's financial capacity. In addition, Moody's recognises the bank's high importance in the regional economy. The rating agency's overall assessment of a very high probability of regional local government support and a low probability of systemic support continues to result in four notches of uplift of the long-term senior ratings to Aa1 from St. Galler Kantonalbank's a2 BCA.

-- AFFIRMATION OF THE BFSR

The affirmation of the bank's standalone C+ BFSR / a2 BCA reflects St. Galler Kantonalbank's (1) significant role within the canton's economy; (2) relatively low risk profile as well as limited exposures to perceived 'hot spots' and luxury segments within the Swiss real-estate market; (3) ability to generate sufficient profits in order to cover both expected losses and a high degree of unexpected losses without compromising its franchise stability; and (4) solid capitalisation with a Tier 1 ratio of 13.4% and a total capital ratio of 15.5% as of end-June 2013.

-- RATIONALE FOR THE NEGATIVE OUTLOOK ON THE BFSR

Moody's says that the change in outlook to negative reflects that the bank's standalone profile is under pressure from uncertainties regarding the development of the Swiss mortgage markets and the restructuring of private banking activities within the bank. The following factors drive the negative outlook:

(1) The bank's above-average residential mortgage-loan growth over recent years, leading to increased susceptibility to shocks under a scenario of a significant slowdown in the Swiss housing market;

(2) Execution and franchise risks associated with the bank's planned restructuring of its niche private banking business (formerly HypoSwiss); and

(3) The continued challenging operating environment, characterised by net interest margin compression and low interest rates, which constrain the group's profitability prospects.

St. Galler Kantonalbank's mortgage-loan book grew by a compound average growth rate of 5.5% during the period 2007-12, to CHF19.1 billion. In Moody's view, this rapid growth has increased the group's susceptibility to shocks potentially emanating from the domestic real-estate markets or during a prolonged period of weaker economic growth in Switzerland and thus has the potential to weaken the bank's capital buffers. At the same time, Moody's notes that St. Galler Kantonalbank's capital buffers -- under Moody's adverse scenario of a significant downturn in the domestic real-estate markets -- would be sufficient to preserve the group's aggregate capitalisation above the regulatory intervention level (11.0% total capital ratio).

Furthermore, Moody's believes that St. Galler Kantonalbank will face significant challenges in its efforts to successfully restructure and integrate HypoSwiss. In addition to persistent challenges for the private banking industry in general -- which include intensifying competition and continued subdued client-risk appetite, leading to lower transaction and fee volumes -- the rating agency also notes that execution risk, as regards the planned integration, may further impair the bank's niche private banking franchise and the development of managed assets. The performance challenges of this segment have the potential to intensify the bank's earnings pressure resulting from the persistent low interest rates and fierce competition.

WHAT COULD MOVE THE RATINGS UP/DOWN

The negative outlook reflects the lack of upward pressure on the bank's standalone C+ BFSR. However, upward pressure could develop following (1) improved geographical diversification; (2) reduced credit concentrations; and/or (3) a marked and sustainable improvement in risk-adjusted levels of recurring profitability and efficiency.

Challenges for the standalone BFSR may arise from (1) material asset-quality deterioration beyond levels that are consistent with the bank's risk-absorption capacity, especially if this is based on a marked slowdown in the Swiss real-estate market; (2) a sustained weakening of its recurring earnings power and levels of operating efficiency, especially if caused by any greater loss in market share or an erosion of the bank's asset and wealth management franchise; (3) vulnerability to potential litigation charges or penalties (potentially relating to alleged tax evasion by their clients) which may be significant compared with the bank's net profits or capital base; and/or (4) an increase in the bank's risk appetite.

St. Galler Kantonalbank's long-term debt and deposit ratings could be downgraded if Moody's were to conclude that (1) the commercial and financial profile of the Canton of St. Gallen has weakened; and/or (2) there is a growing likelihood that the canton's guarantee for St. Galler Kantonalbank may be removed or reduced, implying a significant reduction of the rating agency's very high probability of support assumptions currently factored into the bank's deposit ratings. However, Moody's regards this as unlikely in the medium-term.

LIST OF AFFECTED RATINGS

St. Galler Kantonalbank:

The following ratings were affirmed:

- Long-term bank debt and deposit ratings at Aa1

- Short-term bank debt and deposit ratings at Prime-1

- BFSR at C+

- Subordinated debt ratings at A3

The following ratings carry a stable outlook:

- Long-term bank debt and deposit ratings at Aa1

The following ratings carry a negative outlook:

- C+ BFSR

- A3 subordinated debt ratings

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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
Vice President - Senior Analyst
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

Moody's affirms St. Galler Kantonalbank's Aa1 long-term ratings; outlook stable
No Related Data.
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