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Fitch Affirms Schroders plc at 'A+'; Outlook Stable
June 7, 2017 / 8:27 PM / 6 months ago

Fitch Affirms Schroders plc at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 07 (Fitch) Fitch Ratings has affirmed Schroders plc's (Schroders) Long- and Short-Term Issuer Default Ratings (IDR) at 'A+' and 'F1' respectively. The Outlook on the Long-Term IDR is Stable. These rating actions were undertaken as part of Fitch's global peer review of traditional investment managers. For more information on the peer review, see 'Fitch Completes Traditional Investment Manager Global Peer Review' dated 7 June 2017. KEY RATING DRIVERS IDRS The IDRs of Schroders primarily reflect its well-established and diversified international investment management franchise, strong leverage and profitability metrics, resilient and stable profitability, sound investment performance and a robust risk management framework. The ratings also take into account the sensitivity of Schroders' profitability to sudden market volatility due to an above-average exposure to equity products, incremental credit and liquidity risks in the wealth management business and fairly high operating leverage due to a staff-intensive business model. Schroders' franchise, centred on the institution's well-established UK, European and Asian equities businesses and regionally diversified institutional and intermediary distribution channels, is a rating strength. At end-2016, equity assets under management (AuM, up 18% yoy) accounted for 39% of Schroders' GBP386 billion AuM with solid growth in fixed income (up 36% yoy; 20% of AuM), multi-asset (up 23%; 24%), wealth management (up 25%; 13%) and other AuM (4%; including real estate), improving AuM diversification during the year. Globally, Schroders' franchise is less strong in the important US market (Americas AuM accounted for 15% at end-2016) although steps have been taken in 2016 and 1H17 to increase the US presence, notably by entering into a strategic relationship with Hartford Funds. Its wealth management franchise was strengthened in 1H17 through the acquisition of the wealth management business of C. Hoare & Co., adding GBP2.5 billion in AuM. Schroders' investment performance compares well with peers' and has generally outperformed benchmark returns. In 2016 and 2015, 74% and 72% of products respectively, outperformed their relevant benchmarks over three years compared with management's target of 60%. Net new money inflows remained positive in 2016 (GBP1.1 billion compared with GBP13 billion in 2015) with net outflows in intermediary channel equities being offset by robust net inflows elsewhere. Schroders' AuM base is granular with limited reliance on individual funds or investors. Schroders' revenue base is of good quality (performance fees are negligible) and profitability metrics compare well with peers'. Costs are well-managed and cost efficiency metrics are adequate and within management targets (compensation/net revenue ratio of 44% in 2016 compared with a target range of 45% to 49%). Fitch-defined operating profit improved in 2016 to GBP541 million (from GBP533 million in 2015) as a result of higher average AuM and cost control. Operating profit in 2016 was significantly affected by the depreciation of sterling where the positive effect on operating revenue outweighed the negative effect on the cost base. Management fee margins declined to 48 bps (2015: 51 bps) and Schroders is expanding its higher-margin businesses to counteract the industry-wide margin pressure, for example, by building up a private assets business (where it acquired Adveq, a Swiss-based private equity business; closing expected in 2H17). At end-2016, Schroders did not have any outstanding debt and as a result, all relevant leverage and funding metrics compare favourably with peers'. Due to its wealth management activities (accounting for 10% of pre-tax profit before exceptional items in 2016) and its bank subsidiaries, Schroders is regulated by the UK Prudential Regulation Authority (PRA) and has to comply with higher regulatory capital requirements than most peers. Schroders' regulatory capital base (GBP2,265 million at end-2016) consists entirely of core Tier 1 capital, resulting in a solid common equity Tier 1 ratio of 34.5% at end-2016). We assess Schroders' risk management framework as strong. Its risk governance framework is well-established. Its seed capital exposure, while increasing (by about 42% yoy), remains moderate (GBP325 million at end-December 2016). Its remaining investment capital (GBP1,059 million at end-2016) mainly comprises investment grade bonds. Client loans in its wealth management business are almost exclusively secured, mostly by liquid assets and insurance policies and, to a lesser extent, by European real estate. A Long-Term IDR of 'A+' can correspond to two possible Short-Term IDRs. In Schroders' case, Fitch has assigned a 'F1' Short-Term IDR, based primarily on the strength of the company's liquidity profile, which is viewed as consistent with, but not stronger than, the company's overall credit risk profile. The Stable Outlook on Schroders' Long-Term IDR reflects our expectation that the institution will be able to report adequate profitability in most market conditions while maintaining strong leverage, liquidity and capitalisation. RATING SENSITIVITIES IDRS Ratings in the 'AA' category are typically difficult for investment managers to achieve given the sensitivity of investment managers' profitability to falling asset values as well as the declining benefits of asset class diversification in times of severe market stress (when asset classes tend to be more correlated). This currently limits upside to Schroders' IDRs. Nevertheless, a strengthening of Schroders' US franchise leading to improved diversification as well as general AuM growth improving operating efficiency could over time be rating-positive. Downward pressure on Schroders' ratings is limited but could result from a materially higher balance sheet risk appetite, material and sustained net outflows, for instance, as a result of asset under-performance, an adverse operational or reputational event, or a substantial and sustained increase in balance sheet or cash flow leverage. Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Nalini Kaladeen Director +44 20 3530 1806 Committee Chairperson Julie Solar Senior Director +1 312 368 5472 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: Additional information is available on Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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