Actions conclude review announced on 15 February 2012
Paris, June 15, 2012 -- Moody's Investors Service has today downgraded Oddo & Cie's
standalone bank financial strength rating (BFSR) by one notch to D+
from C- and lowered the corresponding standalone credit assessment
to ba1 from baa2. This prompted the downgrade of the long-term
debt and deposit ratings by two notches to Ba1. The outlook is
stable and the short-term rating was lowered to Not Prime from
Prime-2.
The key drivers for today's downgrades are (i) weakened profitability
and vulnerability to further downward pressure on revenues due to exposure
to capital markets through its brokerage and asset-management businesses;
and (ii) Moody's reassessment of the inherent vulnerabilities of
its capital markets-oriented businesses, which, amidst
the highly uncertain current European operating environment, render
the bank susceptible to changes in client confidence, which could
in turn weaken its risk profile.
Moody's notes several mitigating factors. These include (i)
substantial reserves of liquid assets relative to its size, which
means that Oddo can withstand a lack of access to market funding for well
over 12 months, without a material impact on its business;
(ii) sizeable capital resources which provide a substantial buffer against
potential unexpected losses; and (iii) low vulnerability to asset-quality
deterioration due to a relatively small loan book.
Today's rating actions on Oddo's BFSR and long-term
debt and deposit ratings conclude the review initiated on 15 February
2012, see "Moody's reviews ratings for European Banks", 15
February 2012
(http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914).
For additional information on bank ratings, please refer to the
webpage containing Moody's related announcements: http://www.moodys.com/bankratings2012.
Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143136
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
The lowering of the BFSR and the long-term rating was primarily
driven by the following considerations.
-FIRST DRIVER ---WEAKENED PROFITABILITY
Moody's says that Oddo's core profitability has weakened sharply
in recent years. This is a function of difficult business conditions
that principally affect its asset management, brokerage and investment
banking operations. Although Oddo has integrated several opportunistic
acquisitions -- most recently Banque d'Orsay and Banque
Robeco -- so far, these have not significantly boosted
profitability beyond generating one off gains. Higher funding costs
have also affected the group's metal-trading business,
for example. The group has targeted a reduction in its cost base
to adapt to the more difficult environment; however, despite
a recent improvement, the benefits from this initiative will require
time to take effect and in the meantime earnings will likely remain weak,
in Moody's view.
-SECOND DRIVER --- CAPITAL MARKETS BUSINESSES
ARE SENSITIVE TO CLIENT CONFIDENCE
Moody's has reassessed its view of the risks inherent to capital
market businesses. As a result, we consider that Oddo's
capital markets franchises are intrinsically more sensitive to changes
in client confidence than retail-based operations. Whilst
the recent acquisitions have bolstered its asset-management and
private banking activities, inflows and hence fees are also likely
to be sensitive to customer sentiment and product performance.
Oddo's activities are far smaller than those of the global capital
markets players; however, Moody's considers that Oddo's
activities in this area introduce a level of complexity and dynamism into
the group's risk profile that counterparties find difficult to monitor,
given the limited public disclosure of the performance of these activities.
Moody's therefore believes that amidst the highly uncertain current
European operating environment, which renders the bank susceptible
to changes in investor confidence, the vulnerability and confidence
sensitivity of Oddo's franchise has increased.
MITIGATING FACTORS
Moody's notes certain mitigating factors. Firstly,
Oddo has substantial reserves of liquid assets relative to its size,
with cash and short-term deposits of EUR756 million accordingg
to audied 2011 financials (one third of its non-derivative assets)
and does not engage in meaningful maturity transformation, having
an excess of short-term assets over its wholesale liabilities (notably
EUR150 million of senior debt maturing in October 2013). The loan
book is small and illiquid assets are financed with the bank's own
equity. As such, it can withstand a lack of access to market
funding for well over 12 months, without a material impact on its
business.
Secondly, it has substantial capital resources, with a Tier
1 ratio of 16% according to audited 2011 financials, and
a leverage ratio (non-derivative tangible assets-to-tangible
equity) of 13x. This provides a substantial buffer against potential
unexpected losses.
Thirdly, its loan book is relatively small, and it insures
some of its trading counterparty risk; this implies that it has low
vulnerability to asset-quality deterioration.
RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS
The long-term debt and deposit ratings were downgraded by two notches
to Ba1, in line with the BCA. The ratings purely reflect
the firm's intrinsic creditworthiness, and in the absence
of parental or government support, which we consider unlikely to
materialise given Oddo's small scale and low systemic importance.
RATIONALE FOR STABLE OUTLOOK
The stable outlooks on all ratings express Moody's view that currently
foreseen risks to creditors are now reflected in these ratings.
Nevertheless, negative rating momentum could develop if conditions
deteriorate beyond current expectations. Specifically, Moody's
has factored into the ratings an increased risk of an exit of Greece from
the euro area, but this is currently not Moody's central scenario.
If a Greek exit became Moody's central scenario, further rating
actions on European banks could well be needed.
RATINGS RATIONALE -- SUBORDINATED DEBT
The ratings on the dated subordinated obligations of Oddo were downgraded
by two notches to Ba2, one notch below the standalone credit assessment.
WHAT COULD MOVE THE RATINGS UP /DOWN
The outlook on the long-term ratings is stable. Upward pressure
on Oddo's BFSR and standalone credit assessment could arise from
(i) heightened diversification and scale in key franchises; and/or
(ii) a reduction in volatility of earnings over time. An upgrade
of the BFSR would result in an upgrade of the deposit / debt ratings.
Downwards pressure on Oddo's BFSR and standalone credit assessment could
be triggered by:
- An inability to improve efficiency and profitability metrics
in the medium term;
- Material weakening in key franchises;
- Any substantial outflow of client funds and/or an attrition of
private or institutional clients;
- A weakened ability to generate earnings from its franchises,
e.g. in asset management, as a result of a continued
poor performance of stock markets or a change in the regulatory or competitive
landscape;
- Evidence of an increase in risk appetite or weakness in risk
controls; and/or
- An acquisition leading to a material reduction in capital ratios
or an increased risk profile.
A lowering of the standalone credit assessment would lead to a downgrade
of the long-term ratings, in the absence of increased assumptions
for potential external support.
METHODOLOGIES
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: Global
Methodology published in March 2012. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143136
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
Releasing Office
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Nicholas Hill
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Financial Institutions Group
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Carola?Schuler
MD - Banking
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Releasing Office:
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Moody's downgrades Oddo to Ba1/NP/D+ from Baa2/P-2/C-; outlook stable
