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Fitch Affirms ZKB's IDR at 'AAA'/Stable; VR at 'a+'
October 24, 2017 / 10:30 AM / a month ago

Fitch Affirms ZKB's IDR at 'AAA'/Stable; VR at 'a+'

(The following statement was released by the rating agency) LONDON, October 24 (Fitch) Fitch Ratings has affirmed Zuercher Kantonalbank's (ZKB) Long-Term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook, Short-Term IDR at 'F1+', Viability Rating (VR) at 'a+' and Support Rating at '1'. KEY RATING DRIVERS IDRS ZKB's IDRs and Support Rating are based on institutional support from the Canton of Zurich (AAA/Stable), the bank's guarantor and sole owner, and are equalised with the canton's IDRs. The Canton guarantees all of ZKB's non-subordinated liabilities according to a specific cantonal law (ZKB Law). ZKB's balance sheet is large relative to the canton's budgetary resources but Fitch believes the bank's stable business model and strong capitalisation would trigger manageable recapitalisation needs in a realistic stress scenario. Given ZKB's domestic systemically relevant bank (D-SIB) status, we expect that the Swiss central bank would provide liquidity to ZKB in case of need. The canton's guarantee does not explicitly ensure timely support, but Fitch believes that support, if necessary, would be provided in a timely fashion, given ZKB's high importance for the canton and the potential repercussions of a failure for the Swiss financial sector. ZKB's strategic importance to the canton is underpinned by the bank's mandate as a cantonal bank, which requires the bank to concentrate its activities on the Canton of Zurich, with limited nationwide or international activities. The Canton of Zurich is also required to have a cantonal bank according to the cantonal constitution. As a D-SIB, ZKB must prepare a contingency plan to be approved by FINMA and the canton in its capacity as the sole potential contributor of capital support. The plan could require the canton to commit a large volume of contingent capital relative to its own resources. However, we do not expect this to jeopardise the canton's ratings or trigger a reassessment of our support assumptions underpinning ZKB's IDRs. VR ZKB's VR reflects the bank's stable and resilient business model, sound profitability, strong asset quality, conservative risk appetite, and strong funding and capitalisation. The VR also benefits from ZKB's leading deposit and residential mortgage lending franchise in the Canton of Zurich, where the bank's operations are concentrated. This geographic concentration is mitigated by Zurich's economic strength as Switzerland's largest economic region. ZKB's main risk stems from a large exposure of property loans in Zurich', which is mitigated by the bank's sound credit underwriting standards, with moderate loan-to-value ratios. We believe that ZKB could comfortably absorb the credit losses arising from a moderate fall in property prices. ZKB's profits have been fairly stable through the economic cycle but are under pressure from negative interest rates. As with most of its main competitors, the bank has responded by adjusting pricing in mortgage lending but it has not started to charge negative rates on deposits, except for short-term funds from some large corporates. A significant share of ZKB's large cash balance at Swiss National Bank is subject to the negative rates. The integration of Swisscanto's asset management activities, which ZKB fully acquired in 2015, has helped revenue diversification, increasing the proportion of fees as a revenue source. Trading income also continues to contribute a material proportion of operating income as the bank has good franchises in some trading segments. We expect ZKB's cost base to remain higher and less flexible than many peers' given the cantonal mandate, despite synergies from the integration of Swisscanto. We expect loan impairment charges (LICs) to increase only moderately as releases from loan loss reserves are likely to decrease. LICs should remain low in the near term, helped by the borrower-friendly interest rate environment and a resilient Swiss economy as Fitch expects moderate GDP growth to continue in the next two years. ZKB's end-June 2017 CET1 ratio of 15.7% reflects the high regulatory capital requirements imposed on Swiss global and domestic SIBs. Internal capital generation is adequate, even though ZKB typically distributes about half of its net income to the canton and its municipalities. The CHF575 million undrawn portion of its endowment capital committed by the canton supports the VR as we would view a drawdown as ordinary institutional support. ZKB's funding is underpinned by a large and mostly granular deposit base despite some concentrated corporate deposits. Client funds account for over half of non-equity funding and cover almost the full volume of client loans. Wholesale funding needs are moderate. RATING SENSITIVITIES IDRS ZKB's IDRs and Support Rating are primarily sensitive to changes in the bank owners' ability or propensity to support the bank. A downgrade of the Canton of Zurich's IDRs would result in a downgrade of ZKB's IDRs. An increase in the canton's contingent liabilities, which are dominated by ZKB, could put pressure on the canton's and thus ZKB's IDRs. For instance, sustained growth of the bank's balance sheet in excess of the canton's GDP growth or a multi-notch downgrade of ZKB's VR could signal a higher likelihood of support requirements for the canton. ZKB's IDRs and Support Rating are also sensitive to changes to ZKB's relationship with the canton, especially if the ZKB Law is amended in a way that would weaken the guarantee's effectiveness or cast doubt on the timeliness of support. However, we view this scenario as unlikely in the foreseeable future. VR The VR is primarily vulnerable to large property-related losses that could arise from a sharp drop of property prices in Zurich. However, Fitch does not expect significant house price correction in Zurich in the near term. The ratings would also come under pressure if the bank increases its risk appetite, which could be indicated by higher loan growth or by greater exposure to interest rate risk in the banking book. ZKB's sound capitalisation and profits could absorb a material fine related to a settlement with the US authorities over the bank's legacy US off-shore private banking clients. However, a settlement amount materially above our expectations could reduce ZKB's financial flexibility and damage the bank's reputation, and thus put pressure on the VR. Contact: Primary Analyst Krista Davies Director +44 20 3530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Maria Shishkina Associate Director +44 203 530 1379 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) 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. 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