Affirms the Baa1 senior unsecured rating of holding company Investec plc
Paris, February 01, 2019 -- Moody's Investors Service (Moody's) today upgraded the baseline credit
assessment (BCA) and adjusted BCA of Investec Bank plc (IBP) to baa1 from
baa2. The rating agency also upgraded IBP's long-term
deposit and counterparty risk ratings (CRR) to A1 from A2, its senior
unsecured MTN ratings to (P)A1 from (P)A2, as well as its long-term
counterparty risk assessment (CR Assessment) to A1(cr) from A2(cr).
Furthermore, Moody's affirmed IBP's short-term deposit
and programme ratings, and short-term CRR, at Prime-1,
as well as its short-term CR Assessment at Prime-1(cr).
The rating agency also affirmed the ratings on the senior unsecured debt
and Additional Tier 1 Capital Securities of holding company Investec plc
at Baa1 and Ba2(hyb), respectively.
The outlook on IBP's long-term deposit ratings, and
on Investec plc's long-term senior unsecured debt ratings,
has been changed to stable from positive.
A full list of affected entities and their ratings can be found at the
end of this press release.
RATINGS RATIONALE
RATIONALE FOR THE BCAs
The upgrade of IBP's BCA to baa1 from baa2 reflects (i) the bank's
successful de-risking of the balance sheet as its legacy assets
continue to run-off; (ii) the shift in composition of its
revenues towards lower lending risks and more stable revenue streams,
primarily in the lower risk wealth management segment; and (iii)
IBP's sound capitalization and strong liquidity buffers.
IBP has continued to shift its business mix towards lower risk activities,
and to run down its legacy assets, which further reduced to GBP189
million (net) at end-September 2018 (2% of the net loan
book) from GBP256 million (net) at 1 April 2018. The shift
in risk appetite can be evidenced by the evolution of net lending collateralized
by property, which represented GBP1.6 billion (16%
of net core loans and advances) as at 30 September 2018, with 10%
of net core loans and advances relating to commercial real estate and
6% relating to residential real estate. This compares with
a total GBP3.7 billion of net lending collateralized by property
as at 31 March 2010 (52% of net core loans and advances).
IBP reported loans classified as Stage 3 of 4.2% of gross
core loans and advances to customers at end-September 2018,
down 31% compared to 1 April 2018. Moody's expects
such stock of impaired loans to further decrease over the outlook period,
given that the legacy portfolio made up 50% of Stage 3 gross loans
at end-September 2018.
Moody's believes that the reshaping of IBP's business model,
with a greater focus on lower risk activities that generate more stable
fee and commission income, is a positive for bondholders.
The wealth management business diversifies income sources and, due
to its stickiness and lower expected earnings volatility, serves
as a "shock absorber" against potential losses arising from
IBP's lending and investing activities. In the six months ending
30 September 2018, operating income from Investec's Wealth and Investment
(W&I) division accounted for 30% of IBP's total operating income
before impairments, in comparison with less than 2% in 2011.
IBP's level of capitalization remains adequate, with a TCE/RWA
(Tangible Common Equity % Risk-Weighted Assets) ratio of
12%, which positions IBP solidly amongst its UK peers,
when taking into account that IBP uses the standardized approach for calculating
Pillar 1 capital requirements. Moody's also considers liquidity
to be one of the main credit strengths of IBP, comfortably exceeding
regulatory requirements, with a liquidity coverage ratio (LCR) of
339% (IBP, solo basis, as reported to the Prudential
Regulation Authority) as at 30 September 2018.
RATIONALE FOR THE LONG-TERM RATINGS
IBP and Investec plc are subject to the UK implementation of the EU Bank
Recovery and Resolution Directive (BRRD), which Moody's considers
to be an Operational Resolution Regime. Therefore, Moody's
applies its Advanced Loss Given Failure (LGF) analysis to the issuers
and their liability structures.
Moody's Advanced LGF analysis indicates that IBP's deposits and
senior unsecured debt are likely to face extremely 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 substantial volume of deposits themselves.
This results in a preliminary rating assessment (PRA) of a1, three
notches above the BCA.
The senior unsecured debt issued by Investec plc is likely to face moderate
loss-given-failure, owing to the loss absorption provided
by the subordinated debt issued by IBP. Moody's previously
incorporated an appraisal of Investec Asset Management (IAM)'s potential
market value to Investec plc at a time of market stress. However,
on 14 September 2018, Investec plc announced that it expected to
demerge and publicly list IAM on the London Stock Exchange during the
second half of 2019. Moody's considers that the transaction,
which may result in Investec plc becoming a minority shareholder of IAM,
will reduce the holding company's residual equity-at-failure.
The affirmation of the Ba2(hyb) rating assigned to the Investec plc high-trigger
Additional Tier 1 securities is based on the likelihood of Investec plc's
capital ratio reaching the conversion trigger, the probability of
a group-wide failure, and its loss severity. Moody's
assesses these probabilities using a model-based approach which
incorporates the group's credit profile, its most recent Common
Equity Tier 1 (CET1) ratio of 10.1% as at 30 September 2018
and qualitative considerations, particularly with regard to how
the bank may manage its CET1 ratio on a forward-looking basis.
Moody's rates these notes to the lower of the model-based outcome
and Investec plc's non-viability security rating, which considers
the risk of coupon suspension on a non-cumulative basis.
RATIONALE FOR OUTLOOK
The stable outlook on IBP's long-term deposit ratings reflects
Moody's view that (i) expected further improvements in asset risk
and profitability will be consistent with a baa1 BCA; and (ii) ratings
and assessments are already at the maximum positive notching allowable
under Moody's advanced LGF.
The stable outlook on Investec plc's senior unsecured debt rating
reflects Moody's expectation that the demerger and separate public
listing of IAM will materialize and lead to reduced protection for creditors,
consistent with no LGF uplift from the PRA.
WHAT COULD CHANGE THE RATINGS UP/DOWN
IBP's BCA could be upgraded if the bank improved its profitability metrics
while maintaining sound asset quality, which would likely lead to
an upgrade of IBP's and Investec plc's long-term ratings
and assessments. Given that these ratings and assessments are already
at the maximum positive notching allowable under Moody's advanced
LGF approach, an upgrade of the Counterparty Risk Assessment,
deposit and senior unsecured debt ratings is not possible through further
issuance of bail-in-able liabilities alone.
Investec plc's senior unsecured rating could also be upgraded if
the demerger and separate public listing of IAM did not take place as
announced, leading to no material reduction in the holding company's
residual equity at failure.
Moody's could upgrade Investec plc's AT1 securities if Investec
plc's CET1 ratio were to increase substantially, creating a larger
buffer to the 7% trigger point.
IBP's BCA could be downgraded if impairments significantly increased
through new lending or there were a deviation from IBP's current strategy
of reducing risk and the volatility of its earnings, which would
likely lead to a downgrade of IBP's and Investec plc's long-term
ratings and assessments. The deposit and senior unsecured debt
ratings could also be downgraded due to a change in the liability structure,
if there were a material reduction in the volume of bail-in-able
wholesale debt and/or institutional deposits increasing their loss-given
failure.
Investec plc's AT1 securities could be downgraded if Investec plc's
CET1 ratio were to fall below 10%.
LIST OF AFFECTED RATINGS
Issuer: Investec plc
..Affirmations:
....Long-term Issuer Rating,
affirmed Baa1, outlook changed to Stable from Positive
....Short-term Issuer Rating,
affirmed P-2
....Senior Unsecured Regular Bond/Debenture,
affirmed Baa1, outlook changed to Stable from Positive
....Senior Unsecured Medium-Term Note
Program, affirmed (P)Baa1
....Preferred Stock Non-cumulative,
affirmed Ba2(hyb)
..Outlook Actions:
....Outlook changed to Stable from Positive
Issuer: Investec Bank plc
..Upgrades:
....Long-term Counterparty Risk Ratings,
upgraded to A1 from A2
....Long-term Bank Deposits,
upgraded to A1 Stable from A2 Positive
....Long-term Counterparty Risk Assessment,
upgraded to A1(cr) from A2(cr)
....Baseline Credit Assessment, upgraded
to baa1 from baa2
....Adjusted Baseline Credit Assessment,
upgraded to baa1 from baa2
....Senior Unsecured Medium-Term Note
Program, upgraded to (P)A1 from (P)A2
....Subordinate Regular Bond/Debenture,
upgraded to Baa2 from Baa3
....Subordinate Medium-Term Note Program,
upgraded to (P)Baa2 from (P)Baa3
..Affirmations:
....Short-term Counterparty Risk Ratings,
affirmed P-1
....Short-term Bank Deposits,
affirmed P-1
....Short-term Deposit Note/CD Program,
affirmed P-1
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Commercial Paper, affirmed P-1
....Other Short Term, affirmed (P)P-1
..Outlook Actions:
....Outlook changed to Stable from Positive
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
August 2018. 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 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.
Roland Auquier
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
