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Rating Action:

Moody's downgrades issuer ratings to A3 for Bank Julius Baer and to Baa1 for Julius Baer Group

28 Feb 2020

Frankfurt am Main, February 28, 2020 -- Moody's Investors Service, (Moody's) has today downgraded several ratings of Bank Julius Baer & Co. Ltd. (BJB; the bank) and Julius Baer Group Ltd. (JBG; the group). The rating agency downgraded BJB's long-term issuer ratings to A3 from A2 and its long-term deposit ratings to Aa3 from Aa2; the outlook on these ratings is stable. Concurrently, the rating agency downgraded the bank's Baseline Credit Assessment (BCA) and Adjusted BCA to a3 from a2 and affirmed BJB's short-term deposits ratings at P-1.

Furthermore, Moody's downgraded JBG's issuer rating to Baa1 from A3 with stable outlook. The rating agency also downgraded the group's low-trigger Additional Tier 1 (AT1) securities to Baa3(hyb) from Baa2(hyb), and affirmed JBG's high-trigger AT1 securities at Baa3(hyb).

Today's actions were triggered by an announcement of the Swiss Financial Market Supervisory Authority (FINMA) dated 20 February 2020, saying that Julius Baer had significant shortcomings in anti-money laundering (AML) procedures and imposing several measures to remediate findings, including changes to the group's renumeration and disciplinary policy, strengthening its compliance and banning large acquisitions until meeting regulatory expectations.

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

RATINGS RATIONALE

-- DOWNGRADE OF BASELINE CREDIT ASSESSMENT

The key driver for today's downgrade of BJB's BCA to a3 from a2 reflects Moody's evaluation of the control issues and problems revealed by FINMA, including significant shortfalls in the bank's and the group's overall corporate governance practices in relation to identification and avoidance of money laundering, but also the broader implications around the risk culture and supervisory practices. Moody's considers that the prolonged and complex nature of the remediation procedures will consume a significant amount of bank resources and managerial focus.

Moody's assessment of BJB's standalone credit strength now incorporates a one-notch negative adjustment for corporate behavior, reflecting that the bank and the group exhibited a more aggressive risk appetite on a broad set of risk categories than previously anticipated, including its management of regulatory risk. Therefore, the rating agency believes that the combination of the aforementioned challenges and mitigating factors is more commensurate with a BCA of a3, compared to a2 previously.

As a result of its investigation, FINMA identified systematic failings to comply with due diligence as required under the Swiss Anti-Money Laundering Act, including violations of reporting requirements. The findings relate to two cases in the bank's Latin America business, covering a period from 2009 to early 2018. The Swiss regulator further revealed deficiencies in the bank's know-your-customer (KYC) processes and a lack of proper transaction monitoring. Further shortfalls related to inadequate organization and risk culture, including misplaced incentives which encouraged breaches of AML obligations. BJB and JBG are prohibited from major acquisitions which increase operational risks and organizational complexity, until the group is fully compliant with all FINMA measures.

In its assessment of the various supervisory findings, Moody's recognizes that the bank and the group have already taken a number of steps to address its board and executive level governance and control and specifically its money laundering and KYC process controls deficiencies. These actions underpin the a3 BCA of BJB along with its solid capital, very low on-balance-sheet lending risks, as well as strong liquidity and deposit-driven funding profile.

-- RATIONALE FOR ACTIONS ON DEPOSIT, ISSUER AND HYBRID INSTRUMENT RATINGS

The downgrade of BJB's long-term deposit and issuer ratings reflects the downgrade of its BCA and unchanged results from Moody's Advanced Loss Given Failure (LGF) analysis, which takes into account the severity of losses faced by different liability classes in resolution.

For BJB's deposits, the analysis results in an extremely low loss-given-failure, resulting in three notches of rating uplift, reflecting the substantial volume of deposits and the high volume of subordinated debt protecting deposit holders in the unlikely event of failure or resolution.

For BJB's A3 issuer ratings, the LGF analysis results in a moderate loss-given-failure and an unchanged positioning inline with its Adjusted BCA.

For JBG's Baa1 issuer rating, the LGF analysis results in a high loss-given-failure and an unchanged positioning one notch below the BJB's Adjusted BCA.

The downgrade of JBG's low-trigger AT1 ratings to Baa3(hyb) from Baa2(hyb) follows the downgrade of BJB's BCA, as per Moody's notching guidelines for junior securities.

The affirmation of JBG's high-trigger AT1 securities at Baa3(hyb) reflects Moody's approach to rate these securities to the lower outcome of either (1) a model-based outcome, or (2) the positioning of a non-viability security. Moody's assessment takes into account BJB's a3 BCA, as well as the group's capitalization, as expressed by its Common Equity Tier 1 (CET1) ratio of 14.0% at the end of 2019.

-- RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation of moderate financial implications from the revealed shortfalls in corporate governance on the bank's and the group's financial profile and franchise over the next 12-18 months. Moody's believes that potential customer outflows and impaired franchise, which would result from risk management and corporate governance shortfalls, will be balanced by BJB's and JBG's strong financial profiles. In addition, remedial measures which the group has already initiated will help reduce reputational and operational risks, such as reduced confidence of customers, investors and counterparties.

The stable outlook also reflects the rating agency's expectation of a largely stable funding structure, which results in unchanged rating uplift from Moody's Advanced LGF analysis.

WHAT COULD CHANGE THE RATING UP/DOWN

BJB's and JBG's ratings could be upgraded following an assessment by the rating agency that the corporate governance risks have materially receded. A rating upgrade could also be triggered in the unlikely event that the group manages towards significantly improved capitalization ratios and achieves materially higher profitability, while not increasing its risk appetite. Further, BJB's and JBG's issuer ratings could be upgraded if higher volume of senior unsecured debt or subordinated instruments results in additional rating uplift, as assessed in Moody's Advanced LGF analysis.

BJB's and JBG's ratings could be downgraded if Moody's observes a material weakening in the bank's financial profile, in particular if caused by lower profitability or capitalization, or in case of material client outflows. Moreover, the ratings could be downgraded if the group relapses in terms of governance, control functions or compliance, along with any indications of a renewed aggressive strategy resulting in heightened credit or operational risks. The ratings could further be downgraded if Moody's Advanced LGF analysis results in fewer notches of rating uplift, for example if the bank's or the group's volumes of deposits or senior unsecured debt dropped significantly.

LIST OF AFFECTED RATINGS AND RATING INPUTS

Issuer: Bank Julius Baer & Co. Ltd.

..Downgrades:

....LT Bank Deposits (Local & Foreign Currency), Downgraded to Aa3 from Aa2, Outlook remains Stable

....LT Issuer Ratings (Local & Foreign Currency), Downgraded to A3 from A2, Outlook remains Stable

....Adjusted Baseline Credit Assessment, Downgraded to a3 from a2

....Baseline Credit Assessment, Downgraded to a3 from a2

....LT Counterparty Risk Ratings (Local & Foreign Currency), Downgraded to A2 from A1

....LT Counterparty Risk Assessment, Downgraded to A1(cr) from Aa3(cr)

..Affirmations:

....ST Bank Deposits (Local & Foreign Currency), Affirmed at P-1

....ST Counterparty Risk Ratings (Local & Foreign Currency), Affirmed at P-1

....ST Counterparty Risk Assessment, Affirmed at P-1(cr)

Outlook Action:

....Outlook remains Stable

Issuer: Bank Julius Baer & Co. Ltd., Guernsey Branch

..Downgrades:

....LT Counterparty Risk Ratings (Local & Foreign Currency), Downgraded to A2 from A1

....LT Counterparty Risk Assessment, Downgraded to A1(cr) from Aa3(cr)

....LT Issuer Ratings (Local & Foreign Currency), Downgraded to A3 from A2, Outlook remains Stable

..Affirmations:

....ST Counterparty Risk Assessment, Affirmed at P-1(cr)

....ST Counterparty Risk Ratings (Local & Foreign Currency), Affirmed at P-1

Outlook Action:

....Outlook remains Stable

Issuer: Julius Baer Group Ltd.

..Downgrades:

....LT Issuer Rating (Local Currency), Downgraded to Baa1 from A3, Outlook remains Stable

....Preferred stock non-cumulative rating (low-trigger AT1) (Local Currency), Downgraded to Baa3(hyb) from Baa2(hyb)

..Affirmations:

....Preferred stock non-cumulative rating (high-trigger AT1) (Foreign Currency), Affirmed at Baa3(hyb)

Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019. 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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, CFA
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

Alexander Hendricks, CFA
Associate Managing Director
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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