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Fitch Affirms Close Brothers at 'A'; Outlook Stable
September 11, 2017 / 4:26 PM / in 2 months

Fitch Affirms Close Brothers at 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 11 (Fitch) Fitch Ratings has affirmed Close Brothers Group's (CBG) and wholly owned subsidiary Close Brothers Limited's (CBL) Long-Term Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks. Their Viability Ratings (VR) have been affirmed at 'a'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VRS AND SENIOR DEBT CBG's and CBL's ratings reflect the resilient and diversified business model of the Close Brothers group, strong franchise in its chosen sectors, consistent track record of performance through different economic cycles, sound asset quality, solid capitalisation, and adequate funding and liquidity. They also reflect an appetite for higher-yielding, higher-risk segments and the reliance of the group on the UK, which limits its ability to diversify. CBG, the holding company, runs a number of businesses out of separate subsidiaries, the largest of which by assets and earnings contribution is its banking arm, CBL. CBL's business model is distinctive, based predominately on secured, short-term and high margin lending across a number of sectors including asset, insurance premium, invoice, motor and property finance. Customer relationships are built on CBL's longstanding presence in these sectors and a high-touch, relationship-driven service. This results in solid pricing power and strong and recurring client relationships. Revenue streams are fairly diversified with the group's asset management and securities trading businesses generating around a quarter of group income. We do not believe that either business poses material risk to the group. The group's securities business, Winterflood Securities Ltd (Winterflood), is a leading market-maker in UK and European stocks offering trade services to retail brokers and institutional clients. Although revenue is susceptible to market volatility Winterflood has been consistently profitable over the years, operating on a fairly low-risk model and flexible cost base. Asset management is carried out through Close Asset Management Holdings Limited, which provides a full range of advice, investment and self-directed services to private clients. The business is small in size (GBP10.2 billion of total client assets in 1H17) but is growing, albeit conservatively, following a period of restructuring. CBL's and CBG's ratings are aligned given the absence of double leverage at CBG, and the high fungibility of capital and liquidity between the parent and the bank. Asset quality is sound and compares well with peers'. Asset quality metrics have been improving since the last global financial crisis, underpinned by a benign operating environment, low interest rates and the deleveraging of legacy property loans. Our assessment of asset quality reflects the group's high reliance on collateral-based lending, sound underwriting standards and adequate loan loss reserve coverage. It also factors in an above- average exposure to more cyclical sectors such as commercial property development and focus on niche non-conforming products, such as asset finance. Capitalisation is adequate for CBG's risk profile and is in line with similarly rated peers'. The group's fully-loaded CET 1 ratio is comfortably above minimum regulatory requirements although it fell 90bps to 12.6% at end-1H17 due to an increase in the risk weights (from 100% to 150%) assigned to property development loans following guidance from the European Banking Authority. We expect CBG's capital ratios to remain stable over the medium-term, supported by strong internal capital generation. Leverage is strong with a regulatory ratio of 10.3% at end-1H17. Funding is stable and reasonably diversified with the majority of funding sourced through retail (online) and corporate deposits. CBG's loans/deposit ratio (end-1H17: 136%) has been increasing and is high compared with similarly rated UK peers'. The rise has been driven by the issuance of wholesale funding in the form of senior and subordinated debt, flat deposit growth and drawdowns under the government's Funding for Lending Scheme and Term Funding Scheme. Liquidity is strong with high-quality liquidity buffers comprising mostly cash at the Bank of England, UK government bonds and treasury bills. CBG also benefits from access to contingent sources from the Bank of England. Senior unsecured debt is issued through both CBG and an issuing vehicle Close Brothers Finance Plc. Debt issued through Close Brothers Finance Plc is guaranteed by CBL. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) The group's SR and SRF reflect Fitch's view that senior creditors cannot rely on extraordinary support from the UK authorities in the event the group becomes non-viable due to its low systemic importance, and because in our opinion, the UK has implemented legislation and regulations that provide a framework that is likely to require senior creditors to participate in losses for resolving the group. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt issued by CBG is notched down from its VR in accordance with Fitch's assessment of non-performance risk and loss severity. Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries. RATING SENSITIVITIES IDRS, VRS AND SENIOR DEBT CBG's and CBL's VR, IDR and senior debt ratings are primarily sensitive to a structural deterioration in profitability, through tighter margins, higher loan impairment charges, and weaker asset quality. Negative pressure on CBL's and CBG's ratings could arise if a change in strategy occurs which would, in our view, change the stability of the business model. Additionally, if management increases its risk appetite, which could be in the form of aggressive lending growth in new niches, reducing the gap between funding and loan maturity or continuing strong loan growth despite increases in competition, which may imply lower margins. The ratings would also be sensitive to weakening capitalisation and deterioration in asset quality. Furthermore, a weaker funding and liquidity position would also bring downward pressure to the ratings. Upside is limited given the higher-risk, albeit well-managed, businesses in which it is involved. CBG's and CBL's ratings are broadly sensitive to the same factors. However, for CBG the continued absence of double leverage is also a key rating consideration. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the group's SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support the country's banks or building societies. This is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES As the subordinated debt rating is notched down from CBG's VR, the rating is primarily sensitive to a change in the VR. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance or loss-severity relative to the risk captured in CBG's VR. HOLDING COMPANIES CBG's VR and IDRs are sensitive to CBG maintaining either no or a modest amount of holding company double leverage. A material increase in holding company double leverage, or a change to the role of the holding company, could result in a downgrade of CBG's VR and IDRs. The rating actions are as follows: Close Brothers Group plc Long-Term IDR affirmed at 'A'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' GBP175 million Tier 2 notes, XS1548943221, affirmed at 'A-' Close Brothers Limited Long-Term IDR affirmed at 'A'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Close Brothers Finance plc Senior unsecured EMTN programme ratings, guaranteed by CBL, affirmed at 'A'/'F1' GBP300 million senior unsecured debt, XS01080948265, guaranteed by CBL, affirmed at 'A' GBP250 million senior unsecured debt, XS01506033239, guaranteed by CBL, affirmed at 'A' Contact: Primary Analyst Marc Ellsmore Associate Director +44 20 3530 1438 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Aabid Hanif Associate Director +44 20 3530 1786 Committee Chairperson Redmond Ramsdale Senior Director +44 20 3530 1836 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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