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Fitch Revises Rothschild & Cie Banque's Outlook to Negative; Affirms IDR at 'A'
June 13, 2017 / 1:27 PM / 5 months ago

Fitch Revises Rothschild & Cie Banque's Outlook to Negative; Affirms IDR at 'A'

(The following statement was released by the rating agency) PARIS, June 13 (Fitch) Fitch Ratings has revised Rothschild & Cie Banque's (RCB) Outlook to Negative from Stable. At the same time, Fitch has affirmed the bank's Long-Term Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1' and Viability Rating at 'a'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND VR The Outlook revision reflects Fitch's view that the activities of Banque Martin Maurel (BMM) that are to be integrated into RCB could result in a higher risk appetite. Fitch expects RCB's underwriting standards to remain low-risk. However, if the bank does not reduce higher-risk lending activities undertaken by BMM, which include lending to medium-sized corporates, this would indicate an increased risk appetite and ultimately result in a downgrade of the ratings. RCB's ratings are based on the bank's leading franchise in advisory services in France, a stable business model that includes some diversification from asset-gathering activities, the bank's resilient profitability and a sound funding profile. The ratings also take into consideration the negative impact of the integration of BMM on asset quality and RCB's moderate size. RCB is the market leader in mergers and acquisitions (M&A) advisory business in France in terms of number of deals. The bank provides advice to a client base that ranges from large corporates to SMEs and is particularly strong in advising on asset sales. RCB is also present in other European countries, mainly in Germany, Italy and Spain, through a partnership with another Rothschild & Co group entity. RCB's franchise in private banking is adequate and will be reinforced by the integration of BMM, expected on 1 July 2017, which is well-established in the south east of France. RCB's business model, although dominated by financial advisory activities, has proven fairly stable and benefits from some diversification provided by asset-gathering activities. RCB is also developing its debt restructuring and advisory business as well as equity advisory, which provide some diversification from the M&A business. RCB's risk appetite has been modest, in Fitch's view, partly driven by the partnership structure of the bank, which leaves general partners personally liable for its liabilities. RCB's lending activities are fairly limited, essentially to Lombard loans. BMM has more significant lending activities than RCB as it also extends housing loans to private banking clients and corporate loans. The combined loan book will include a majority of low-risk Lombard and housing loans, but the merged bank's asset quality will be weaker than RCB's standalone asset quality, which benefited from the absence of any material volume of impaired loans. We view favourably the strong involvement of the Rothschild family in the management and strategic decisions of RCB. This supports a key priority of the bank, which is to avoid any damage to the family name. RCB's profitability has been resilient and strong throughout the years, with financial advisory traditionally constituting the bulk of RCB's profit before tax. The performance of this activity has proved resilient, given the focus on a large number of smaller transactions compared with the big M&A players. RCB's capital ratios are lower than those of purely private banking peers, but they are commensurate with the moderate risk profile of the bank. The capital base is small in absolute terms, and net income is fully distributed to the partners, a consequence of RCB's legal partnership structure. RCB is largely funded by deposits gathered through its private banking activities, providing it with a stable funding source. The bank manages its liquidity carefully, and the bulk of its assets are short-term. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that any external support to RCB, if needed, would be uncertain. Fitch views support from the French authorities as unlikely given the recent resolution legislation and the bank's lack of systemic importance. RCB is fully controlled by Rothschild & Co, which is a listed financial company regulated by the French banking authority and mainly owned by the French and English branches of the Rothschild family. RCB would look to Rothschild & Co or its shareholders for support. Fitch believes that it is the Rothschild family's priority to uphold the reputation of all family companies and that resources would be made available to support RCB, to the best of the family's ability, should the need arise. RATING SENSITIVITIES IDRS AND VR The ratings would likely be downgraded if RCB does not maintain its low-risk appetite. Fitch expects the bank to align its underwriting standards, after the integration of BMM, with RCB's traditionally low-risk appetite. Failure to reduce risk appetite, including in the bank's corporate loan book, could result in a downgrade. The bank's ratings are also sensitive to deterioration in asset quality or in capitalisation. A tarnishing of the Rothschild reputation and loss of franchise would put negative pressure on RCB's ratings. RCB's small capital base constrains upside to its ratings. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of RCB's Support Rating and upward revision of its Support Rating Floor would be contingent on a positive change in the French sovereign's propensity to support its banks and in the systemic importance of RCB. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: Long-Term IDR: affirmed at 'A'; Outlook revised to Negative from Stable Short-Term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contacts: Primary Analyst Francois-Xavier Deucher, CFA Director +33 1 44 29 92 72 Fitch France S.A.S 60 rue de Monceau 75008 Paris Secondary Analyst Julien Grandjean Analyst +33 1 44 29 91 41 Committee Chairperson Christian Scarafia Senior Director +44 203 530 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. 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