November 27, 2017 / 5:09 PM / a year ago

Fitch Affirms KAS Bank at 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 27 (Fitch) Fitch Ratings has affirmed KAS Bank N.V.'s Long- and Short-Term Issuer Default Ratings (IDRs) at 'A-' and 'F2', respectively. The Outlook on the Long-Term IDR is Stable. At the same time the agency has affirmed its Viability Rating (VR) at 'a-'. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS VR AND IDRs The ratings are driven by the franchise of KAS Bank as a post-trade securities services provider to institutional investors, primarily in the Netherlands, and its low risk appetite. KAS Bank's monoline business model and geographically concentrated customer base are rating constraints. The ratings also factor in a high, albeit well-managed, exposure to operational risk and some earnings volatility. The bank has sound risk-weighted capitalisation but a small capital base for its rating level. KAS Bank is a niche player, with an established franchise as a securities services provider mainly to Dutch pension funds and insurance companies. Its independent status and primary focus on the specific needs of its fairly narrow customer base differentiate it from larger, global, competitors. Fitch expects the bank to maintain critical mass in its core asset administration business. Its knowledge of local reporting and regulatory requirements enables it to provide tailor-made value-added reporting services to its customers. Management is experienced and has a track record of coherent strategy. Transparency and independence, combined with a low risk profile, are important values for the bank. Fitch views KAS Bank's risk appetite as low. Credit risk is very low and stems mainly from the bank's intraday collateralised settlement-related facilities. Exposure to operational risk is high, reflecting the bank's reliance on efficient IT systems. KAS Bank outsources its mainframe and, since 2016, its IT services to its main outsourcer. We believe that the outsourcing is well-controlled and view it positively given that KAS Bank's small size would not enable the bank to develop state-of-the-art systems on its own. Outsourcing agreements are tight and further client on-boarding and upscaling will be more cost-efficient. In addition, further process improvement and automation are reducing operational complexity and enhancing system efficiency. KAS Bank's profitability in 9M17 benefitted from reduced costs resulting from the IT outsourcing and ongoing staff reduction. The cost-to-income ratio improved to 79%, close to the bank's target range of 70%-77%. We expect some further improvement, although the bulk of the cost-cutting under the bank's restructuring programme has been achieved. Modest profitability remains a rating weakness. In addition, ongoing consolidation in the Dutch pension fund and insurance market puts some pressure on revenue, but we expect the bank's strategic focus on organic growth in asset administration and reporting services to partly offset this. KAS Bank's regulatory ratios are well above regulatory requirements. Its common equity Tier 1 ratio was at 35% at end-June 2017. Capitalisation should be viewed in the context of KAS Bank's high exposure to operational risks, and a small equity base makes the bank vulnerable to shocks. Leverage is fairly high, with a tangible equity/tangible asset ratio of around 4% at end-June 2017, and fluctuates in line with customer deposits as the balance sheet is liability-driven; however, assets are generally short-term. The bank's Short-Term IDR of 'F2' is the lower of the two options mapping to an 'A-' Long-Term IDR. This is driven by our view that although KAS Bank's liquidity is sound, it is not outperforming similarly rated peers'. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that KAS Bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. RATING SENSITIVITIES VR AND IDRs An upgrade of the ratings is unlikely due to KAS Bank's fairly limited franchise and monoline business model in a global context and the bank's small equity base compared with similarly rated peers'. The ratings are primarily sensitive to significant operational loss event that could cause reputational damage and pressure business volume and revenue. A weakening of profitability would also be rating-negative. SUPPORT RATING AND SUPPORT RATING FLOOR KAS Bank's Support Rating and Support Rating Floor are primarily sensitive to legislative changes at national and European levels, increasing the propensity of sovereigns to support institutions such as KAS Bank. While not impossible, this is not expected by Fitch. The rating actions are as follows: Long-Term IDR affirmed at 'A-'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'a-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No floor' Contact: Primary Analyst Konstantin Yakimovich Director +44 20 3530 1789 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Fernando Sanchez Analyst +44 20 3530 1221 Committee Chairperson Bjorn Norrman Senior Director +44 20 3530 1330 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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