London, 19 July 2012 -- Moody's Investors Service has today downgraded the bank deposit ratings
of Close Brothers Limited (CBL) to A3/P-2 from A2/P-1.
The standalone credit profile of CBL was adjusted to a3 from a2.
The senior unsecured debt and long-term issuer ratings of Close
Brothers Group plc (CBG), the bank's holding company,
were downgraded to Baa1 from A3. The Prime-2 short-term
rating of CBG was unaffected by this action. The outlook is negative.
This concludes the review initiated on February 23, 2012.
RATINGS RATIONALE
The downgrade primarily reflects the high loan growth that the bank has
recorded in recent years. According to the CBL and CBG accounts
the loan portfolio grew organically by 19% in the year to end-July
2010, by 18% in the year to end-July 2011 and by a
further 9% in the six month period to end-January 2012.
The downgrade also reflects the bank's exposure to any further deterioration
in the UK economy, especially given its focus on lending to SMEs.
Moody's generally views high loan growth rates as a cause for concern
given the potentially negative impact that this can have on asset quality
and on the funding profile, however these concerns are mitigated
to a certain degree in the case of CBL by some of the factors below,
and this has limited the downgrade to one notch. These factors
include: (i) the short-term nature of much of the loan book
means that the bank has limited exposure to lending from the pre-2009
period and that potential issues with lending since then may already have
materialised; and (ii) the high lending margins that provide a cushion
against higher provision costs. Moody's also notes positively
the steps taken by the bank towards improving its risk management processes
and structure.
The A3/P-2 ratings of CBL also continue to reflect its consistently
strong financial performance when compared to similarly rated peers,
that the vast majority of the bank's lending is secured, the stable
funding base that includes both longer term deposits and committed bank
funding, and the strong capital position including CBL's core
tier 1 ratio of 10.9% at end-January 2012,
as detailed in the CBG interim accounts. In addition the ratings
incorporate the elevated impaired loans although we note that the level
of impaired loans has improved recently, especially in the property
finance loan book.
The negative outlook reflects the challenging UK economy and the continued
high loan growth. Moody's expect that loan growth at CBL
will begin to reduce as the UK economy recovers and other players begin
to increase their lending, and that the improving asset quality
trends will continue. If neither of these occur then the ratings
could come under further pressure.
The senior unsecured debt and long-term issuer rating of CBG have
been downgraded to Baa1 from A3. The one notch differential between
CBL (the operating bank) and CBG reflects (i) the structurally subordinated
position of the holding company; and (ii) that the risk profile of
Winterflood (the other main subsidiary), given the vulnerabilities
inherent in a capital markets business, is not of sufficient strength
to mitigate the structural subordination. As a result the ratings
of CBG are likely to move in line with those of CBL.
WHAT COULD CHANGE THE RATING UP/ DOWN
There is currently no upward rating pressure following the downgrade.
Further downward pressure on the ratings could come from further high
loan growth, or a further weakening in the UK economy. In
addition any reversal of the recently improving trend in asset quality,
or an increased reliance on market funding, potentially as a result
of lending growth continuing to outpace deposit growth could lead to negative
rating pressure.
AFFECTED RATINGS
The following ratings have been downgraded:
Close Brothers Ltd:
Bank Deposit Ratings to A3/P-2 from A2/P-1
Bank Financial Strength Rating to C from C+ (mapping to a3 on the
long-term scale, from a2)
Close Brothers Group:
Senior Unsecured Rating to Baa1 from A3
Long-term Issuer Rating to Baa1 from A3
Close Brothers Finance:
Senior Unsecured Rating to A3 from A2
Senior Unsecured Programme Rating to (P)A3 from (P)A2
Subordinated Programme Rating to (P)Baa1 from (P)A3
Junior Subordinated Programme Rating to (P)Baa2 from (P)Baa1
Short-term Rating to (P)P-2 from (P)P-1
The following ratings have been affirmed:
Close Brothers Group:
P-2 Short-term Issuer Rating
The methodology used in these ratings was Moody's Consolidated Global
Bank Rating Methodology published in June 2012. 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 relevant 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 relevant 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 relevant 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.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
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uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
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Ross Abercromby
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
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Johannes Wassenberg
MD - Banking
Financial Institutions Group
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Moody's downgrades Close Brothers Ltd to A3/P-2
