Rating action follows the change in the Macro Profile Switzerland to Strong (+) from Very Strong (-)
Frankfurt am Main, January 21, 2020 -- Moody's Investors Service, (Moody's) has today taken
rating actions on six Swiss financial institutions, prompted by
the rating agency's change of the Macro Profile of Switzerland (Aaa stable)
to Strong (+) from Very Strong (-). A detailed analysis
of Switzerland's Macro Profile is available under the following link:
http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1198076.
"Today's rating actions reflect Switzerland's exceptionally high and persistently
rising private sector debt - to which both corporates and households
contribute - an indicator for stronger economic imbalances and
a key vulnerability in an adverse scenario, which is only partly
mitigated by high households' wealth", says Alexander Hendricks,
an Associate Managing Director at Moody's.
Among the actions taken today by Moody's on the affected banks are the
following:
- Affirmation of Banque Heritage SA's (Banque Heritage) Baa1
long-term deposit ratings with stable outlook. Affirmation
of the bank's baa3 Baseline Credit Assessment (BCA) and Adjusted
BCA.
- Downgrade of Berner Kantonalbank AG's (BEKB) long-term
deposit rating to Aa2 from Aa1, and of BEKB's senior unsecured
ratings to A2 from A1; outlook remains stable. Downgrade of
BEKB's BCA and Adjusted BCA to a2 from a1.
- Downgrade of Clientis AG's (Clientis) long-term
deposit ratings to A2 from A1; outlook remains stable. Downgrade
of Clientis' BCA and Adjusted BCA to baa1 from a3.
- Affirmation of EFG Bank AG's (EFG Bank) A1 long-term
deposit ratings with stable outlook. Affirmation of the bank's
baa1 BCA and Adjusted BCA.
- Affirmation of EFG International AG's (EFGI) A3 long-term
issuer ratings with stable outlook.
- Affirmation of Valiant Bank AG's (Valiant) A1 long-term
deposit ratings; outlook remains stable. Affirmation of the
bank's a3 BCA and Adjusted BCA.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_205816
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
CHANGE IN THE MACRO PROFILE SWITZERLAND TO STRONG (+) FROM VERY STRONG
(-) REFLECTS INCREASING ECONOMIC IMBALANCES AS CAPTURED IN MOODY'S
CREDIT CONDITIONS FACTOR
Moody's rating methodology for banks includes an assessment of each individual
country's operating environment, expressed as a country-specific
Macro Profile, which is designed to capture system-wide factors
that are predictive of the propensity of banks to fail. The Weighted
Macro Profile assigned to each bank informs its Financial Profile,
which is a key input factor for the determination of each bank's BCA.
Moody's has changed the Macro Profile of Switzerland to Strong (+)
from Very Strong (-) to reflect the country's exceptionally high
and persistently increasing private sector debt, an indicator for
stronger economic imbalances and a key vulnerability in an adverse scenario.
The rating agency considers that weakening credit conditions in Switzerland,
including ongoing growth in private sector debt-to-GDP from
already comparably high levels globally present an increasing risk to
Swiss bank's asset quality and profitability. Both the corporate
sector as well as private households contribute to the increased economic
leverage.
The rating agency acknowledges that significant household assets exists
in the form of property and financial assets but cautions that current
valuations are subject to material correction in an adverse scenario and
could prove to be a less of a buffer than perceived. While Moody's
also recognizes that the pace of house price appreciation has somewhat
moderated in recent years and that initiatives have been taken by the
regulatory authorities and the banks on a continuous basis, the
resilience of borrowers' financials to a serious economic downturn has
not been tested at these levels of private sector indebtedness.
SPECIFIC ANALYTICAL FACTORS FOR THE AFFECTED BANKS
-- Banque Heritage SA
The affirmation of Banque Heritage's long-term deposit ratings
at Baa1 reflects the affirmation of the bank's BCA and Adjusted BCA at
baa3 as well as the unchanged two notches of rating uplift from Moody's
Advanced Loss Given Failure (LGF) analysis.
The affirmation of Banque Heritage's baa3 BCA reflects the bank's strong
capital and liquidity profile, with funding predominantly stemming
from customer deposits and liquid resources that represent more than half
of its assets. Moody's assessment incorporates the effects
from the Banque Heritage's merger with Sallfort Privatbank AG,
which somewhat reduces the bank's single-name and geographical
concentration risks, but does not have an immediate effect on its
unchanged weak profitability and moderate credit risks, mainly related
to corporate lending operations in Uruguay. The rating agency's
assessment of Banque Heritage's standalone creditworthiness is constrained
by its small size, which partially limits its profitability potential,
litigation risks, material key person and corporate governance risks,
arising from overlap of family ownership and representation in key management
positions as well as the bank's elevated risk appetite for acquisitions
which exposes the institution to a higher vulnerability of its reputation
and franchise than is common for a private wealth manager. Governance
risks are reflected in a two-notch downward adjustment from the
bank's financial profile.
The stable outlook reflects Moody's expectation that Banque Heritage will
successfully manage the merger with Sallfort Privatbank AG, which
became effective 30 June 2019, not engage in any sizeable acquisition
and not be exposed to unexpected losses, and that the liability
structure remains broadly unchanged.
-- Berner Kantonalbank AG
The downgrade of BEKB long-term deposit ratings to Aa2 from Aa1
and senior unsecured ratings to A2 from A1 reflects the downgrade of the
bank's BCA and Adjusted BCA to a2 from a1; an unchanged result from
Moody's Advanced LGF analysis; and an unchanged one notch rating
uplift from (local) government support for BEKB, because of the
majority ownership by the Canton of Berne and the bank's important role
in the region.
The downgrade of BEKB's BCA to a2 reflects the challenges the bank faces
in the prolonged low interest-rate environment as well as the emerging
risks in the banks' operating environment from the high leverage of the
private sector. The a2 BCA reflects the bank's very strong
capitalization and sound asset quality but also its very high focus on
residential mortgage lending in Switzerland, which results in tail
risks from potential shocks in the Swiss real estate market. BEKB's
moderate profitability is undermined by a rather defensive funding structure
that contains about 72% deposits, aggravated by further pressured
asset margins in the more adverse interest rate environment. The
rating agency acknowledges prudent mitigating factors, such as a
granular and secured lending portfolio outside of regional hotspots in
Switzerland and generally conservative lending criteria. Moody's
does not have any particular governance concerns for BEKB and does not
apply any corporate behavior adjustment to the bank.
The stable outlook reflects the rating agency's expectation of a
limited dynamic in BEKB's key credit metrics, in line with
the development within the past years and an overall unchanged funding
structure.
-- Clientis AG
The downgrade of Clientis' long-term deposit ratings to A2
from A1 reflects the downgrade of the bank's BCA and Adjusted BCA to baa1
from a3; and an unchanged result from Moody's Advanced LGF analysis,
which continues to yield two notches of rating uplift for deposits from
the baa1 Adjusted BCA.
The downgrade of Clientis' BCA to baa1 reflects the challenges the
bank faces in the prolonged low interest-rate environment as well
as the emerging risks in the banks' operating environment from the high
leverage of the private sector. In particular, the rating
agency considers the extreme business focus of Clientis on residential
mortgages as vulnerability, because it provides the bank only a
very limited degree of diversification benefits in case of a change in
business climate for this asset class and source of revenues. Clientis'
undiversified income stream is now reflected in a qualitative adjustment
for lack of business diversification.
The baa1 BCA reflects its strong capitalisation, good asset quality
as well as its sound funding profile, supported by sizeable deposits,
driving the bank's low market funding dependence and the bank's
modest profitability. The rating agency considers the group's contractual
structuring of its support framework as a relative weakness, which
continues to result in a negative qualitative adjustment from the financial
profile. Moody's continues to believe that elements of the cross-liability
mechanism, in particular some restrictions on the fungibility of
capital but also the limited absolute number of member banks that result
in concentration risk, do not match the standards of some other
cooperative or mutual banking groups in Europe. Moody's does not
have any particular governance concerns for Clientis and does not apply
any corporate behavior adjustment to the bank.
The stable outlook reflects the rating agency's expectation of a
limited dynamic in Clientis' key credit metrics, in line with
the development within the past years and an overall unchanged funding
structure.
-- EFG Bank AG
-- EFG International AG
The affirmation of EFG Bank's A1 long-term deposit ratings
as well as EFGI's A3 long-term issuer ratings reflects the
affirmation of the bank's BCA and Adjusted BCA at baa1 as well as the
unchanged results from Moody's Advanced Loss Given Failure (LGF) analysis.
The affirmation of EFG Bank's baa1 BCA reflects its sound capitalisation,
which compensates for tail risks from significant valuation risk from
an investment in life insurance policies and nonperforming loans that
are unusually high for a Swiss private bank, and strong liquidity,
with funding predominantly stemming from deposits and liquid resources
that represent around half of its assets. Moody's assessment
incorporates private banking business model-inherent low to moderate
credit risks for EFG Bank as well as for EFGI, its listed holding
company, and reflects that both entities are exposed to market and
operational risks, including remaining legal risks. However,
Moody's does not have any particular governance concerns for EFG
Bank and EFGI, and does not apply any corporate behavior adjustment.
The stable outlook reflects Moody's expectation that the intrinsic credit
strength of both entities will remain stable at the current level and
that potential litigation risks are appropriately covered.
-- Valiant Bank AG
The affirmation of Valiant's A1 long-term deposit ratings
reflects the affirmation of the bank's a3 BCA and Adjusted BCA; and
an unchanged result from Moody's Advanced LGF analysis, which continues
to yield two notches of rating uplift for deposits from the a3 Adjusted
BCA.
The affirmation of Valiant's a3 BCA reflects an overall stable trend
in Valiant's key credit metrics, which Moody's expects to be sustained.
The BCA takes into account both the very high focus of the bank on residential
mortgage lending in Switzerland, which results in tail risks from
potential shocks in the Swiss real estate market but also prudent mitigating
factors, such as a high collateralization and generally conservative
lending criteria in combination with an overall sound capitalization.
The rating agency considers Valiant's exceptionally strong business
focus on residential mortgages as vulnerability, because it provides
the bank only a very limited degree of diversification benefits in case
of a change in business climate for this asset class and source of revenues.
Valiant's undiversified income stream is now reflected in a negative
qualitative adjustment for lack of business diversification.
The a3 BCA further considers Valiant's shift in funding profile with the
bank diversifying its funding base, in part through issuing covered
bonds, which slightly increases the bank's reliance on confidence-sensitive
market funding. The higher dependence on capital markets is largely
mitigated by its strong deposit franchise. Moody's does not have
any particular governance concerns for Valiant and does not apply any
corporate behavior adjustment to the bank.
The stable outlook reflects the rating agency's expectation of a
limited dynamic in Valiant's key credit metrics, in line with
the development within the past years and an overall unchanged funding
structure.
WHAT COULD CHANGE THE RATINGS UP / DOWN
Upward pressure on the banks' ratings could result from an upgrade of
an issuer's BCA or if the rating uplift from Moody's Advanced LGF analysis
improves; the latter would for example be possible if a bank issued
material volumes of subordinated debt instruments.
A BCA upgrade could result from a significant and sustainably improved
profitability in combination with either a more diversified business model
or a reduction of reputational, legal and operational risks.
Further, lower recourse to market funding and higher liquid resources
could impact the issuer's BCA positively.
Downward pressure on the banks' ratings could mostly result from a downgrade
of the BCA, partly also due to fewer notches of rating uplift from
the rating agency's Advanced LGF analysis, for example because the
funding profile shifts towards liability classes that are bail-in
remote.
A bank's BCA could be downgraded if the bank's credit standards
are softened, credit quality weakens and non-performing loan
volumes were to rise, in case of a deterioration in capitalization
or if profitability weakens beyond Moody's current expectations,
or if the bank's meaningfully reduce their liquidity positions in
an effort to stabilize profits. Further, a BCA downgrade
could result from a material erosion of a bank's franchise.
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
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.
Christina Holthaus
Analyst
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
