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Rating Action:

Moody's downgrades ratings of EFG Bank and EFG International; outlook negative

10 Jun 2016

EFG Bank's baseline credit assessment downgraded by one notch to baa1

Frankfurt am Main, June 10, 2016 -- Moody's Investors Service has today downgraded EFG Bank AG's (EFG Bank) long-term deposit ratings to A1 from Aa3, following the downgrade of EFG Bank's baseline credit assessment (BCA) and adjusted BCA to baa1 from a3. Concurrently, the rating agency downgraded EFG International AG's (EFGI or the group) issuer ratings to A3 from A2 and its non-cumulative preferred stock rating (Bons de Participation) to Ba1(hyb) from Baa3(hyb). The outlook on the long-term ratings is negative.

Furthermore, Moody's downgraded the long-term Counterparty Risk Assessments (CR Assessment) of EFG Bank and EFGI to A1(cr) from Aa3(cr). The rating agency has affirmed EFG bank P-1 short-term deposit ratings as well as the bank and the group's P-1(cr) short-term CR Assessment.

The downgrade of EFG Bank and EFGI's ratings reflects a weakening of the credit metrics of both entities, as a result of the announced acquisition of Swiss-based private bank BSI Group (BSI unrated; BSI AG: deposits A3 positive, BCA ba1).

The negative outlooks on the bank and the group's long-term ratings reflects Moody's view that elevated risk exists regarding assets under management (AuM) attrition at BSI, as well as integration risks, which are likely to persist over an extended timeline.

Today's rating action concludes Moody's review for downgrade, initiated on 25 February 2016, following EFGI's announcement of the acquisition of BSI.

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

RATINGS RATIONALE

-- DOWNGRADE OF EFG BANK'S BASELINE CREDIT ASSESSMENT

The downgrade of EFG Bank's BCA and adjusted BCA by one notch to baa1 reflects Moody's assessment that the bank's credit profile will weaken noticeably following the completion of the acquisition of BSI. In particular, the rating agency expects capital ratios to decline significantly. Furthermore, the downgrade reflects the short- to medium-term challenges on the bank and the group's capital generation capacity. This is because its earnings will likely be compressed owing to restructuring and integration costs in 2016 and 2017.

On 11 May 2016, EFGI raised CHF295 million of capital in a rights offering from existing shareholders and the market to finance the BSI acquisition, well below the CHF500 million that it was aiming for when the deal was announced. To compensate for the lower capital raising, EFGI will issue additional shares to Brazil's Banco BTG Pactual S.A (BTG; deposits Ba3 negative, BCA ba3), including AT1 instruments. In its assessment, the rating agency also takes into account meaningful indemnities and the escrow account negotiated with BSI's current owner, BTG, to cover for BSI's numerous legal and litigation risks, mitigating additional pressure on EFG Bank and EFGI's capital ratios.

Moody's believes that EFG Bank and EFGI are increasingly unlikely to sustain the anticipated level for combined AuM. This is because of the rating agency's expectation of higher-than-anticipated AuM outflows following 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). As a result, the rating agency anticipates that the combined group's earnings and capital generation strengths will remain below previous expectations when the transaction was announced.

At the same time, Moody's expects mitigating effects from the purchase price reduction for BSI, which will decline due to the announced fines and penalties according to EFGI's announcement dated 24 May 2016. Furthermore, the Swiss regulator's (FINMA) approval of the planned BSI take-over by EFGI and its obligation to accelerate the integration of BSI into EFGI has meaningfully increased deal certainty, and constitutes an important milestone prior to the expected closing of the transaction in Q4 2016. FINMA has further ordered that BSI must be immediately dissolved after the integration of BSI into EFGI has been completed.

As a result of these considerations, Moody's has assessed the financial strength of the combined entity in today's rating action. Post the absorption of BSI by EFGI, which Moody's expects to occur by mid-2017, the rating agency expects EFGI's franchise to stabilize despite the risk of shorter-term client defections that may have a negative impact on the combined entity's deposit base and/or AuM and thus, ultimately, its earnings generation capacity. While Moody's does not anticipate the private bank's low balance-sheet risk profile to change, restructuring and integration costs for BSI will likely negatively impact EFG Bank and EFGI's short- to medium-term earnings capacity. Moody's expects the positive effects from a combined private banking platform to become visible only in 2018.

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

The one-notch downgrade of EFG Bank and EFGI's long-term ratings follows the one-notch downgrade 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 expectation 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 volumes of deposits as well as the high volume of 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 its baa1 adjusted BCA. However, the negative outlook on EFGI's issuer rating also reflects the possible lower relative volume of subordinated liabilities resulting from the combination of EFG Bank and BSI AG's balance sheets.

The Ba1(hyb) ratings of EFGI's Tier 1 hybrid capital instrument (Bons de Participation) are 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 (at a fixed price).

-- NEGATIVE OUTLOOK REFLECTS REMAINING INTEGRATION RISKS FROM THE BSI ACQUISITION

The negative outlook assigned to EFG Bank and EFGI's long-term ratings reflects Moody's assessment of risks that could develop from the proposed combination with BSI, specifically regarding the longer-term complexities of fully integrating a global private banking franchise of the same size into EFGI (and EFG Bank). In addition, the negative outlook also takes into account additional integration and reputational risks for EFG Bank and EFGI, which are not covered under the negotiated indemnity caps with BTG, as well as the potential for significantly lower AuM acquired from BSI following the recent announcements on 24 May 2016.

Over the next 12-18 months, Moody's will continue to assess the transaction details including the group's post-acquisition capitalization and any measures that EFG Bank and EFGI have taken or will propose to conduct in order to improve their capital, as well as leverage ratios towards levels more commensurate with their closest private banking peers. Furthermore, the rating agency will assess any visible or foreseeable effects that the acquisition could have on the bank and the group's client business, specifically with regards to the evolution of AuM and/or any key client or relationship officer defections that could negatively affect EFG Bank's and/or EFGI's franchise stability.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

There is no upward pressure on the bank and the group's long-term ratings as expressed by the negative outlook.

EFG Bank's BCA could be upgraded if the acquisition was not completed. Conversely, unforeseen risks from the transformational nature of the transaction on all parts of the enlarged group represents considerable integration and execution challenges that could put further downward pressure on EFG Bank's standalone BCA and thus its deposit ratings.

An upgrade of EFGI's issuer rating would likely follow an upgrade of EFG Bank's BCA. A downgrade of EFGI's issuer ratings would likely arise from a downgrade of EFG Bank's BCA and/or if the volume of senior debt/structured notes or subordinated instruments falls meaningfully such that it no longer provides additional loss absorption. This may result in no rating uplift under Moody's Loss Given Failure framework for the combined entity of EFG Bank and BSI AG compared to one notch of rating uplift on EFGI's issuer ratings at present.

LIST OF AFFECTED RATINGS

EFG Bank AG:

The following ratings and rating inputs for EFG Bank have been downgraded after being on review for downgrade:

- Baseline credit assessment (BCA) and adjusted BCA to baa1, from a3

- Long-term bank deposit ratings (local and foreign currency) to A1 negative from Aa3 rating under review

- Long-term Counterparty Risk Assessments (CR Assessment) to A1(cr), from Aa3(cr)

The following ratings and rating inputs for EFG Bank have been affirmed:

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

- Short-term Counterparty Risk Assessment (CRA) at Prime-1(cr)

EFG International AG:

The following ratings and rating input for EFGI have been downgraded after being on review for downgrade:

- Long-term issuer ratings (local and foreign currency) to A3 negative from A2 rating under review

- Foreign-currency non-cumulative preferred stock (Bons de Participation) to Ba1(hyb), from Baa3(hyb)

- Long-term Counterparty Risk Assessment to A1(cr), from Aa3(cr)

The following rating input for EFGI has been affirmed:

- Short-term Counterparty Risk Assessment at Prime-1(cr)

The outlooks on the issuers changed to negative from rating under review.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings 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
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 downgrades ratings of EFG Bank and EFG International; outlook negative
No Related Data.
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