Standalone BCA upgraded to a2 from a3
London, 07 May 2015 -- Moody's Investors Service has today upgraded the long-term
deposit rating of Close Brothers Limited (CBL) to Aa3 from A3 and its
short-term deposit rating to Prime-1 from Prime-2.
Concurrently, Moody's has assigned a Counterparty Risk Assessment
(CR Assessment) of Aa2(cr)/Prime-1(cr) to CBL.
This follows the upgrade of the bank's baseline credit assessment
(BCA) to a2 from a3, driven by its improved asset-quality
profile. It also incorporates the implementation of Moody's
new bank rating methodology, particularly the advanced Loss Given
Failure (LGF) analysis, which provides a further two-notch
benefit to the bank's long-term deposit rating.
Moody's has furthermore upgraded the long-term issuer and
senior unsecured rating for Close Brothers Group PLC (CBG) to A3 from
Baa1. CBG's Prime-2 short-term issuer rating
was unaffected by this rating action.
The outlook is stable on all long-term ratings for CBL and CBG.
This rating action concludes the review for upgrade on CBL's BCA
and deposit ratings and on CBG's long-term issuer and senior
unsecured debt rating, initiated on 17 March 2015.
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
RATIONALE FOR UPGRADING CBL's BCA TO a2 FROM a3
The upgrade in CBL's BCA, which is assessed using CBG's
consolidated financial metrics, mainly reflects the bank's
improved asset quality profile as a result of more benign credit conditions
in the UK (Aa1 stable) and further reductions in the bank's legacy
property portfolio, which includes some poor-quality assets.
Moody's notes, however, that the bank's relatively
small loan portfolio of GBP5.5 billion at end-January 2015
included exposure to certain sectors that are cyclical by nature and therefore
sensitive to changes in the UK economic environment. These,
together with risks associated with its securities business increase the
group's overall asset risk.
The bank's a2 BCA is also supported by four main factors.
First, CBL has seen a further increase in its already strong profitability
levels, underpinned by high-margin and mostly secured lending,
improving its capital generation capacity and, in turn, providing
it with a good degree of protection against asset-quality deterioration
that might materialise in the future. The combination of high profitability
and cost control also leads to high operational efficiency levels.
Second, CBL has a strong funding structure underpinned by a 'borrow
long / lend short' strategy giving rise to limited refinancing risk
and its ample high-quality liquidity buffer mitigates short-term
liquidity stresses, in Moody's view.
Third, the bank has a good track record of performance stability
over various economic cycles, which in Moody's view is indicative
of a strong management team, conservative lending criteria and effective
controls and risk management.
Lastly, the bank has a strong capital position compared to rated
peers which, coupled with the relatively short duration of its loan
portfolio, makes the business resilient to stress.
UPGRADE OF THE CBL'S DEPOSIT AND CBG'S ISSUER AND SENIOR UNSECURED
RATINGS
Moody's said that the upgrades of CBL's long-term deposit
rating to Aa3 from A3, its short-term deposit rating to Prime-1
from Prime-2 and CBG's long-term issuer and senior
unsecured ratings to A3 from Baa1, derive from the upgrade in the
BCA and the introduction of the rating agency's Loss Given Failure
(LGF) analysis.
Moody's applies its LGF analysis to CBG because it is domiciled
in the UK, which it considers as an operational resolution regime,
following the introduction of the EU Bank Resolution and Recovery Directive
(BRRD). The rating agency's standard assumptions, which are
applied to CBG, assume: (1) residual tangible common equity
at failure of 3% of tangible banking assets, (2) losses post-failure
of 8% of tangible banking assets, (3) junior wholesale deposits
of 26% of the bank's total deposit book, (4) a 25%
run-off in junior wholesale deposits, (5) a 5% run-off
in preferred deposits, and (6) a 25% probability of deposits
being preferred to senior unsecured debt. Under these assumptions,
CBL's deposits are likely to face very low loss-given-failure,
due to the loss absorption provided by subordinated debt and, potentially,
by senior unsecured debt should deposits be treated preferentially in
a resolution, as well as the volume of deposits themselves.
This results in a Preliminary Rating Assessment (PRA) for CBL's deposit
of Aa3, two notches above the a2 BCA. The upgrade of the
firm's long-term deposit ratings to Aa3, reflecting
a strengthening of its credit standing and the LGF analysis, have
led to the upgrade of the bank's short-term deposit rating
to Prime-1 from Prime-2.
CBG's senior unsecured creditors are likely to face high loss-given
failure, as the holding company has limited senior unsecured and/or
junior liabilities. This results in a PRA for CBG's senior
unsecured creditors of A3, one notch below the a2 BCA of CBL,
from which these ratings are ultimately derived.
Moody's judges the probability of support from the UK public authorities
for the group's creditors to be low, and as such it does not
include any uplift based on government support in its ratings.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on CBL's long-term deposit rating and
on CBG's issuer and senior unsecured ratings reflects Moody's
view that the positive trends in the firm's credit fundamentals
are now fully reflected in the bank's BCA, from which these
ratings are derived.
RATIONALE FOR THE CR ASSESSMENT
As part of today's actions, Moody's has assigned CR
Assessment to CBL of Aa2(cr)/Prime-1(cr). The CR Assessment,
which is not a rating, reflects an issuer's probability of
defaulting on certain bank operating liabilities, such as covered
bonds, derivatives, letters of credit and other contractual
commitments. In assigning the CR Assessment, Moody's
evaluates the issuer's standalone strength and the likelihood,
should the need arise, of affiliate and government support,
as well as the anticipated seniority of counterparty obligations under
Moody's Loss Given Failure framework. The CR Assessment also
assumes that authorities will likely take steps to preserve the continuity
of a bank's key operations, maintain payment flows,
and avoid contagion should the bank enter a resolution.
WHAT COULD CHANGE THE RATING -- UP/DOWN
CBL's high rating relative to its UK rated peers, and the
still-elevated growth rate of CBL's loan book, imply
limited upward potential for the bank's ratings. Downward
pressure on the ratings could materialise from continued above-average
loan-book growth combined with greater than expected asset quality
deterioration, which could materialise for example in the event
of a very severe downturn in the UK economy. A reversal in the
improving profitability trend and a weakening of the group's funding
and liquidity profile could also be negative for the ratings.
LIST OF AFFECTED RATINGS
..Issuer: Close Brothers Limited
....Adjusted Baseline Credit Assessment ,
Upgraded to a2 from a3
....Baseline Credit Assessment , Upgraded
to a2 from a3
....Long-Term Bank Deposits,
Upgraded to Aa3 Stable from A3 Rating Under Review
....Short-Term Bank Deposits,
Upgraded to Prime-1 from Prime-2 Rating Under Review
....Assigned Counterparty Risk Assessment
of Aa2(cr)/Prime-1(cr).
..Issuer: Close Brothers Group PLC
....Long-Term Issuer Rating,
Upgraded to A3 Stable from Baa1 Rating Under Review
....Senior Unsecured Rating, Upgraded
to A3 Stable from Baa1 Rating Under Review
..Issuer: Close Brothers Finance PLC
....BACKED Senior Unsecured Rating,
Upgraded to Aa3 Stable from A3 Rating Under Review
....BACKED Senior Unsecured Medium-Term
Note Program, Upgraded to (P)Aa3 from (P)A3 Rating Under Review
....BACKED Other Short-Term Rating,
Upgraded to (P)Prime-1 from (P)Prime-2 Rating Under Review
Outlook Actions:
Outlook, Changed To Stable From Rating Under Review
..Issuer: Close Brothers Limited
..Issuer: Close Brothers Group PLC
..Issuer: Close Brothers Finance PLC
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
March 2015. 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 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 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 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 rating action, and
whose ratings may change as a result of this 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.
Andrea Usai
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Nicholas Hill
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's upgrades Close Brothers Limited's bank deposit ratings to Aa3/Prime-1; outlook stable
