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Fitch Affirms Clearstream Banking and Euroclear Bank; Outlooks Stable
September 27, 2017 / 2:02 PM / 22 days ago

Fitch Affirms Clearstream Banking and Euroclear Bank; Outlooks Stable

(The following statement was released by the rating agency) LONDON, September 27 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Luxembourg-based Clearstream Banking SA (Clearstream) at 'AA' and Belgium-based Euroclear Bank at 'AA+'. The Outlooks are Stable. Clearstream's and Euroclear Bank's Viability Ratings (VR) have been affirmed at 'aa' and 'aa+', respectively. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS VRs, IDRS AND CLEARSTREAM's COMMERCIAL PAPER RATING Clearstream's and Euroclear Bank's ratings reflect the banks' leading franchises in the international post-trade securities services industry, in particular in settlement and custody services, as well as their very strong financial metrics. The ratings take into account the banks' resilient revenue bases despite secular challenges in the settlement industry, their very low appetite for and exposure to credit risk, adequate investments in control frameworks to ensure sound operational risk controls, prudent liquidity management and strong capitalisation. Regulatory developments and technological challenges in the global settlement industry mean that investments in technology and ancillary businesses such as fund management services and notably collateral management have become more important for international central securities depositories (ICSDs). In our opinion, Clearstream and Euroclear Bank are well placed to operate in this competitive environment as both banks have made good progress in supplementing their strong core franchises by strengthening ancillary businesses. The banks' ratings assume that further diversification will be gradual and earnings-accretive. Clearstream's and Euroclear's revenues are susceptible to changes in client transaction volumes and asset prices. However, their revenue bases are well-diversified by fee type and benefited in 2016 and 1H17 from generally favourable equity and bond markets. Net interest income is negatively affected by low average interest rates in their core markets but is prone to benefit from any gradual interest rate increases, notably in the eurozone. The banks' cost bases are well-managed, with incremental investments primarily focussed on ensuring system resilience and strengthening ancillary business lines. Clearstream and Euroclear Bank's risk appetites are very low, resulting in very strong risk profiles. Both banks are mainly exposed to operational risk including system failures and fraud. Risk controls are very strong and investments in risk management, including cyber resilience, are a management priority. Management teams have a high degree of depth and relevant expertise for the banks' specialised businesses. Euroclear Bank has a strong corporate culture with high risk awareness. Clearstream is highly integrated into the Deutsche Boerse group, including in terms of the risk management framework, which we view as solid. To date, both banks' track record of avoiding operational losses has been strong. Credit risk exposure is very low as both neither bank grants credit facilities to commercial counterparties except intraday, collateralised credit lines to facilitate settlement for clients. Uncollateralised credit exposure is small and largely relates to sovereign counterparties and to a lesser extent strongly-rated commercial banks. The latter will disappear with regulatory changes under the EU's Central Securities Depositories Regulation (CSDR), which from 2018 will require ICSDs to collateralise all non-sovereign credit exposures. Liquidity management reflects the short-term nature of both banks' balance sheets and is prudent. Liquidity needs are largely intra-day and transaction driven. The one-notch rating differential between Clearstream and Euroclear Bank largely reflects Clearstream's capitalisation, which in our view is slightly weaker than Euroclear Bank's. Euroclear Bank's strong capitalisation has a high influence on its VR and IDRs. In addition, Clearstream's capital management has to be viewed within the context of the Deutsche Boerse group, which in our opinion typically has a strong focus on returns to shareholders, usually resulting in relatively high dividend pay-out ratios at Clearstream. Regulatory capital at both banks is small in absolute terms considering their business volumes, but they maintain healthy margins above minimum regulatory requirements. Clearstream's commercial paper rating is aligned with its Short-Term IDR. SUPPORT RATING AND SUPPORT RATING FLOOR As licensed banks, both Clearstream and Euroclear Bank are subject to the EU Bank Resolution and Recovery Directive (BRRD). The BRRD provides a resolution framework whereby it is likely senior creditors will be required to participate in losses, if necessary, instead of or ahead of the bank receiving sovereign support. We believe that while sovereign support for Clearstream and Euroclear Bank is possible, it cannot be relied upon. The Support Rating of '5' and Support Rating Floor of 'No Floor' of Euroclear Bank reflect Fitch's view that senior creditors cannot rely on receiving extraordinary support from the sovereign if Euroclear Bank becomes non-viable. In our view, Clearstream would first look to its parent, Deutsche Boerse AG, for support. We believe that support from Deutsche Boerse AG is extremely likely given Clearstream's core position within Deutsche Boerse group and Fitch's assessment of Deutsche Boerse group's ability to support Clearstream. This underpins the affirmation of Clearstream's SR at '1'. . EUROCLEAR INVESTMENTS - IDRS AND LONG-TERM DEBT RATING Fitch has affirmed the IDRs and debt rating of Euroclear Investment SA (EINV). EINV's 'AA' Long-Term IDR is notched down once from Euroclear Bank's Long-Term IDR, which we have used as the anchor rating due to Euroclear Bank being by far Euroclear's largest operating entity. Luxembourg-based EINV is fully-owned by Euroclear plc (Eplc), the UK-incorporated and Switzerland-domiciled holding company of Euroclear. EINV is the 99.9% owner of Belgium-based Euroclear SA (ESA), which in turn owns Euroclear Bank as well as Euroclear's domestic central securities depositories (CSDs). At end-2016, Euroclear Bank accounted for 88% of Euroclear's group assets. The one notch difference between EINV's and Euroclear Bank's Long-Term IDRs principally reflects that EINV is not under direct supervision of Euroclear's lead regulator, the National Bank of Belgium. In our view, this gives Euroclear Bank's management somewhat more flexibility in EINV's capital and liquidity planning compared with the group's directly regulated entities. EINV's double leverage ratio was 98% at end-2016, comfortably below Fitch's typical threshold of 120% for adding an additional notch for high double leverage. Based on management projections that Fitch deems achievable, both interest cover and principal repayment capacity at EINV (on a stand-alone basis) remain adequate during the bond's 10 year tenor. This also supports limiting our notching to one notch. The rating of EINV's senior unsecured debt is rated in line with EINV's Long-Term IDR as the debt represents direct, unsubordinated, unsecured and unconditional obligations of EINV. RATING SENSITIVITIES VRs, IDRS AND CLEARSTREAM'S COMMERCIAL PAPER RATING The Stable Outlooks on Clearstream's and Euroclear Bank's Long-Term IDRs reflect Fitch's opinion that due to their dominant franchises both banks should be in a position to continue generating sound profitability while maintaining their current low risk profile and making the required investments to ensure technology platforms and risk management systems keep pace with regulatory and industry-wide changes. Upside potential is limited, given Clearstream's and Euroclear Bank's already high ratings. Due to their high volume business models and considerable reliance on robust IT systems, operational risk is a key rating sensitivity, in particular considering the banks' low absolute volume of capital. Outsized operational losses, reputational damage causing a sustained drop in revenue, inability to adapt to regulatory changes, weakening capitalisation or a higher risk appetite could all lead to negative rating action. While maintaining sound risk-weighted capital ratios is relevant for the banks' ratings, a reduction in the banks' absolute capital base would put pressure on their ratings. Clearstream's commercial paper rating would be downgraded if Clearstream's Short-Term IDR was downgraded. Euroclear Bank's Long-Term IDR is two notches above the Long-Term IDR of the Belgian sovereign (AA-/Stable). Because there is little direct Belgian risk in the bank's balance sheet, Euroclear Bank is significantly less exposed to sovereign-associated reputation, business and operational risks than Belgian commercial banks. A sovereign downgrade into the 'A' category could trigger a downgrade of the bank's ratings because in accordance with Fitch's criteria the potential uplift of bank ratings above the sovereign in the eurozone is typically limited to a maximum of two notches. SUPPORT RATING AND SUPPORT RATING FLOOR Euroclear Bank's SR and SRF are primarily sensitive to legislative changes at the national and European level, increasing the propensity of sovereigns to support institutions like Euroclear Bank without imposing losses on senior creditors. While not impossible, this is not expected by Fitch. Clearstream's SR is primarily sensitive to any perceived change in the propensity and ability of Deutsche Boerse AG to support Clearstream. EUROCLEAR INVESTMENTS - IDRS AND LONG-TERM DEBT RATING EINV's IDRs and long-term debt rating are primarily sensitive to a change in Euroclear Bank's IDRs. In addition, the ratings are sensitive to material changes in Euroclear's dividend upstream policies negatively affecting EINV's interest cover and repayment capacity during the tenor of the bond. Any intragroup transaction reducing EINV's repayment capacity at maturity of the bond or increasing EINV's double leverage would also be rating-negative. An equalisation of Euroclear Bank's and EINV's ratings is unlikely given EINV's lightly-regulated status as intermediate holding company within the Euroclear group. The rating actions are as follows: Clearstream Banking Long-Term IDR: affirmed at 'AA'; Outlook Stable Short-Term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'aa' Support Rating: affirmed at '1' Commercial paper: affirmed at 'F1+' Euroclear Bank Long-Term IDR: affirmed at 'AA+'; Outlook Stable Short-Term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'aa+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Euroclear Investments SA Long-Term IDR: affirmed at 'AA'; Outlook Stable Short-Term IDR: affirmed at 'F1+' Long-term debt rating (ISIN: XS1529559525): affirmed at 'AA' Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analysts Olivia Perney Guillot Senior Director +33 144 299 174 Silvana Gandolfo Associate Director +44 20 3530 1301 Committee Chairperson Mark Young Managing Director +44 20 3530 1318 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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