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Rating Action:

Moody's affirms ratings of EFG Bank and EFG International; outlook changed to stable

22 May 2017

EFG Bank's baseline credit assessment affirmed at baa1

Frankfurt am Main, May 22, 2017 -- Moody's Investors Service (Moody's) has today affirmed EFG Bank AG's (EFG Bank) A1/P-1 long- and short-term deposit ratings and changed the outlook on the long-term deposit ratings to stable from negative. The rating agency also affirmed the bank's A1(cr)/P-1(cr) Counterparty Risk Assessment (CR Assessment) as well as its baa1 baseline credit assessment (BCA) and baa1 Adjusted BCA.

Furthermore, Moody's affirmed EFG International AG's (EFGI, or the group) A3 long-term issuer ratings and changed the outlook to stable from negative. Concurrently, the rating agency affirmed the group's Ba1(hyb) non-cumulative preferred stock rating ratings.

The affirmation of EFG Bank and EFGI's ratings reflects the stabilization in both entities' credit profiles, because the strengthening of their capitalization mitigates existing, material legal risks in relation to the acquisition of Swiss-based private bank BSI Group (unrated). The stable outlook on the bank's and the group's long-term ratings reflects Moody's view that remaining integration risks from the BSI Group acquisition are manageable, including the agencies' expectation of limited incremental outflow of assets under management (AuM) from prior BSI customers.

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

RATINGS RATIONALE

-- AFFIRMATION OF EFG BANK'S BASELINE CREDIT ASSESSMENT

The affirmation of EFG Bank's BCA and Adjusted BCA at baa1 reflects Moody's assessment that remaining legal risks, including material litigation risks in relation to the acquisition of Swiss-based private bank BSI Group, are mitigated by a strengthening of the bank's and the group's capitalization. Manageable incremental AuM attrition will lead to a stabilization in the bank's standalone credit profile, while the full positive effects from integrating the BSI private banking platform will only become visible in 2019.

The decision to affirm EFG Bank's BCA takes into account Moody's view that meaningful indemnities exist in order to protect EFG Bank and EFGI from significant legal and litigation risks. These indemnities are negotiated with BSI's former owner, Brazil's Banco BTG Pactual S.A. (BTG; deposits Ba3 stable, BCA ba3) and provide some protection for the bank's and the group's current level of capitalization. At year-end 2016, EFGI's CET1 ratio improved to 18.2% from 12.4% in 2015, reflecting the successful capital raising of CHF454 million in order to finance the BSI transaction; and the mitigating effects from the purchase price reduction for BSI, which declined to CHF784 million compared to EFG's initial estimate of CHF1.3 billion. The lower purchase price mainly reflects AuM attrition at BSI and the decline in EFGI's share price. However, the final purchase price is still subject to final agreement between the related parties. In addition, Moody's anticipates that EFG Bank's capital has improved following the completion of the legal integration of BSI's Swiss business into EFG Bank AG, which became effective 7 April 2017.

Following the closing of the BSI acquisition in November 2016, Moody's expects a stabilization of EFG Bank's and EFGI's private banking franchise, because a large part of expected client departures and AuM attrition have already materialized. At end-March 2017, EFGI reported combined AuM of around CHF141 billion, a further reduction of around CHF4 billion compared with end-2016, and significantly lower than the estimated combined AuM base of CHF171 billion at deal announcement in February 2016. The announcement of fines and other significant measures imposed on BSI by the Swiss and Singapore regulators on 24 May 2016 in relation to the Malaysian money-laundering case (1MDB) triggered significant outflows.

The affirmation is further supported by EFG Bank's strong liquidity and liability-driven balance sheet which also benefited from the legal integration of BSI's Swiss business into EFG Bank. Following the transfer, Moody's estimates that customer deposits account for around 80% of the combined entity's assets. Despite the addition of meaningful customer loans from BSI, Moody's considers EFG Bank's low balance-sheet risk profile to remain unchanged because a sizeable portion of new loans relate to Swiss mortgages.

-- AFFIRMATION OF EFG BANK'S AND EFGI'S LONG-TERM RATINGS

The affirmation of EFG Bank and EFGI's long-term ratings follows the affirmation of the bank's BCA and Adjusted BCA. The notching applied to EFG Bank and EFGI's rated liabilities under Moody's Advanced Loss Given Failure (LGF) analysis remains unchanged following today's rating action and takes into account the rating agency's assessment of EFG Bank and BSI AG's combined balance sheet.

EFG Bank's A1 deposit ratings continue to benefit from an extremely low loss-given-failure reflecting the high volume of deposits and subordinated debt classes protecting deposit holders in the unlikely event of failure or resolution, leading to three notches of rating uplift from its baa1 Adjusted BCA.

For EFGI's A3 issuer ratings, Moody's LGF analysis indicates a low loss-given-failure for EFGI's senior debt instruments, reflecting the volume of senior debt outstanding and the cushion through equity and subordinated liabilities available at the holding company level, leading to one notch of rating uplift from EFG Bank's baa1 Adjusted BCA.

The Ba1(hyb) ratings of EFGI's Tier 1 hybrid capital instrument (Bons de Participation) remain positioned three notches below the bank's baa1 Adjusted BCA reflecting additional loss severity notching and its non-cumulative coupon-skip mechanism, which is based on a balance-sheet loss trigger as well as optional conversion language at the issuer's discretion.

-- STABLE OUTLOOK REFLECTS MANAGEABLE RISKS FROM THE BSI ACQUISITION

The stable outlook on EFG Bank and EFGI's long-term ratings reflects Moody's assessment of manageable remaining integration risks in relating to the acquisition of BSI, specifically regarding limited incremental AuM attrition over the next 12 to 18 month. The stable outlook also takes into account that potential litigation risks for EFG Bank and EFGI are appropriately covered under the negotiated indemnity caps with BTG.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

An upgrade of EFG Bank's and EFGI's long-term ratings could be triggered by an upgrade of the bank's BCA subject to (1) a meaningful reduction in contingent liabilities from pending litigation cases; (2) higher capital ratios and an improving leverage ratio; and (3) a sustained improvement in profitability.

An upgrade of EFGI's long-term issuer ratings could also be triggered by significant issuance of bail-in-able debt instruments to an extent that it would reduce expected losses and therefore result in higher notches of rating uplift; however, this does not apply to EFG Bank's deposit ratings, which already benefit from the highest possible uplift from Moody's LGF analysis.

A downgrade of EFG Bank's and EFGI's long-term ratings would likely arise from a downgrade of EFG Bank's BCA, which could be caused by (1) unexpected litigation charges that exceed Moody's current expectations; (2) a sustained weakening in the bank's and the group's capitalization; (3) a material, prolonged erosion in assets under management, as well as client or advisor attrition; and (4) additional commercially or financially aggressive acquisitions. A downgrade could also result from a material reduction in the volume of outstanding senior unsecured debt or subordinated instruments such that these instruments face a higher expected loss, resulting in lower rating uplift under Moody's Loss Given Failure framework.

LIST OF AFFECTED RATINGS

The following ratings and rating inputs were affirmed:

EFG Bank AG:

- Baseline credit assessment (BCA) at baa1

- Adjusted BCA at baa1

- Long-term bank deposit ratings (local and foreign currency) at A1, outlook changed to stable from negative

- Long-term Counterparty Risk Assessments (CR Assessment) at A1(cr)

- Short-term bank deposit ratings (local and foreign currency) at P-1

- Short-term CR Assessment at P-1(cr)

Outlook Action:

- Outlook changed to stable from negative

EFG International AG:

- Long-term issuer ratings (local and foreign currency) at A3, outlook changed to stable from negative

- Non-cumulative preferred stock (foreign-currency) at Ba1(hyb)

- Long-term CR Assessment to A1(cr)

- Short-term CR Assessment at P-1(cr)

Outlook Action:

- Outlook changed to stable from negative

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.

Swen Metzler
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
Client Service: 44 20 7772 5454

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

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

No Related Data.
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