October 15, 2015 / 4:27 PM / 2 years ago

Fitch Affirms Clearstream Banking and Euroclear Bank

(The following statement was released by the rating agency) LONDON, October 15 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Clearstream Banking, Luxembourg (CBL) at 'AA' and of Euroclear Bank at 'AA+'. The Outlook on the Long-Term IDRs of both banks is Stable. CBL's and Euroclear Bank's Viability Ratings (VR) have been affirmed at 'aa' and 'aa+' respectively. At the same time, Fitch has downgraded the Support Rating (SR) of Euroclear Bank to '5' from '1' and revised the Support Rating Floor (SRF) to 'No Floor' from 'A-'. In addition, it has revised to 'No Floor' (from 'A-') and simultaneously withdrawn the Support Rating Floor of CBL. This reflects our view that the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) are sufficiently progressed to provide a framework for resolving banks that are likely to require senior creditors participating in losses, if necessary, instead of, or ahead of, a bank receiving sovereign support. In this context Fitch also anticipates further progress on the resolution framework for financial market infrastructures, which is relevant given the Clearstream and Euroclear groups' leadership positions in post-trade securities services. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS VRs AND IDRs CBL's and Euroclear Bank's ratings reflect the banks' leading position in the international post-trade securities services industry, in particular in settlement and custody services, resulting in a fairly resilient revenue base. The ratings also reflect a very low appetite for and exposure to credit risk, sound operational risk control frameworks, prudent liquidity management and sound capitalisation. Both the Clearstream and Euroclear groups are in our view well-placed to adapt to the evolving settlement industry, including regulatory changes. Both groups benefit from a wide franchise in terms of products and markets they cover and have been strengthening their collateral management and fund management services in recent years. We assume that this diversification will continue to be managed prudently and will support profit generation. The banks' profitability depends to a large degree on transaction volumes and assets under custody, both of which have increased in line with generally favourable stock and bond markets recently, supporting the two banks' sound profitability. Both groups also have their cost base tightly under control. CBL and Euroclear Bank's risk profile and risk appetite are very low. Both banks are mainly exposed to operational risk, but risk controls are very strong and sophisticated. Management teams have a high degree of depth and relevant expertise given the specific nature of these groups' businesses. Euroclear Bank has a strong corporate culture with high risk awareness. CBL is highly integrated into the Deutsche Boerse group, including in terms of the risk management framework, which we view as solid. To date, their track record of avoiding operational losses has been strong. Credit risk is very low and largely relates to intraday, collateralised credit lines to facilitate settlement for clients. Liquidity management reflects the short-term nature of both banks' balance sheet and is prudent. The liquidity needs are largely intra-day and transaction driven. CBL's capitalisation, both in terms of ratios and absolute size is slightly weaker than Euroclear Bank's. This is reflected in the one-notch difference between Euroclear Bank's and CBL's ratings. In addition, for CBL, capital management at its ultimate parent, Deutsche Boerse AG, has been fairly tight with a strong focus on returns to shareholders. While regulatory capital at both banks is small in absolute terms considering their business volumes, both banks maintain a healthy margin above minimum regulatory requirements. SUPPORT RATING AND SUPPORT RATING FLOOR Both CBL and Euroclear Bank are subject to the EU BRRD, including bail-in requirements from 1 January 2016 in both Belgium and Luxembourg. As a result, we believe that while sovereign support for CBL and Euroclear Bank is possible, it can no longer be relied upon. Consequently, Euroclear Bank's SR has been downgraded to '5' from '1'and both Euroclear Bank's and CBL's SRFs revised to 'No Floor' from 'A-'. In Fitch's view, CBL would first look to Deutsche Boerse AG for support. Hence, CBL's SR has been affirmed at '1' based on our view that institutional support from its ultimate owner, Deutsche Boerse AG, is extremely likely given CBL's core position within the Deutsche Boerse group and Fitch's assessment of the Deutsche Boerse group's ability to provide support to CBL. RATING SENSITIVITIES VRs AND IDRs The Stable Outlook reflects our expectation that CBL's and Euroclear Bank's broad franchises will allow them to continue reporting sound profitability while maintaining an unchanged low risk profile. Given the already high ratings, upside potential for the ratings is limited. Downward pressure on the ratings would arise from outsized operational losses, reputational damage causing a sustained drop in revenue, adverse regulatory changes, weakening capitalisation or a higher risk appetite. 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. In addition, a significant operational loss would likely cause reputational damage and pressure on business volumes and revenue which would also be ratings-negative. Inability to adjust their business models to the changing regulatory environment could also put pressure on the banks' ratings. 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. Euroclear Bank's Long-Term IDR is above the Long-Term IDR of the Belgian sovereign (AA/Stable), as there is little direct Belgian risk in the bank's balance sheet. This means that Euroclear Bank is significantly less exposed to sovereign-associated reputation, business and operational risks than Belgian commercial banks. A downgrade of Belgium's ratings would not automatically trigger a downgrade of Euroclear Bank's ratings, but could do so in a more extreme scenario where the risk of the bank's franchise coming under pressure increases. SUPPORT RATING AND SUPPORT RATING FLOOR Euroclear Bank's SR and SRF as are primarily sensitive to legislative changes at national and European level, increasing the propensity of sovereigns to support institutions like Euroclear Bank. While not impossible, this is not expected by Fitch. CBL's SR is primarily sensitive to any perceived change in the propensity and ability of Deutsche Boerse AG to support CBL. The rating actions are as follows: Clearstream Banking, Luxembourg (CBL) Long-Term IDR: affirmed at 'AA'; Outlook Stable Short-Term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'aa' Support Rating: affirmed at '1' Support Rating Floor: revised to 'No Floor' from 'A-'; withdrawn 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: downgraded to '5' from '1' Support Rating Floor: revised to 'No Floor' from 'A-' Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Olivia Perney Guillot Senior Director +33 144 299 174 Committee Chairperson Erwin Van Lumich Managing Director + 34 93 323 8403 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Financial Market Infrastructure Company Rating Criteria (pub. 20 Mar 2015) here Global Bank Rating Criteria (pub. 20 Mar 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=992352 Solicitation Status here Endorsement Policy here ail=31 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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