OREANDA-NEWS. Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) of Brown Brothers Harriman & Co. (BBH) and its subsidiaries at 'A+' and 'F1', respectively. Fitch has also affirmed BBH's Viability Rating (VR) at 'a+'. The Rating Outlook remains Stable.

These rating actions were taken in conjunction with Fitch's U. S. trust and processing bank peer review. A full list of rating actions is at the end of this release.

KEY RATINGS DRIVERS

VR AND IDR

The affirmation of BBH's VR and IDRs reflects the company's long history of conservative management, its consistent operating track record, low-risk balance sheet, and solid capital and liquidity position. The ratings also reflect BBH's solid business franchise in custody, focusing on financial institution and asset manager clients.

BBH's ratings are one notch lower, at 'A+/F1', than the three other trust and processing banks. This difference reflects BBH's smaller scale and comparatively less financial flexibility as a privately held partnership than the larger, publicly traded companies.

The high ratings for all trust and processing banks (including BBH) reflect a business model with higher barriers to entry and sticky customer relationships due to high fixed technology and switching costs. This makes entry for new competitors very difficult and creates long-term advantages for the existing service providers.

Fitch views BBH's partnership structure as the key component of its conservative risk culture, which has allowed the company to remain profitable throughout challenging credit conditions historically. Each partner is jointly and severally liable for the firm's obligations, which Fitch believes aligns the partners' interests with those of BBH over the long term. BBH's investment portfolio quality remains sound. Securities rated 'AAA' or 'AA' were 72% of total holdings at year-end 2015. Similarly, the loan quality of the commercial lending portfolio has been pristine, with minimal losses to date.

Despite recent pressure on BBH's operating results due to the low interest rate environment, the company's pre-tax return on equity (ROE) has remained solid from a credit perspective and is in line with long-term averages. Revenue pressure from low rates has been offset by ongoing strength in custody due to new business wins. Fitch believes BBH's business model is very sensitive to higher short-term interest rates, along with higher volatility in foreign exchange (FX) markets. As such, Fitch expects a meaningful acceleration in BBH's earnings once some of the regulatory and compliance costs the firm is currently incurring level off and the company begins to benefit from higher short-term interest rates.

At this time, Fitch does not believe the affirmative Brexit vote will overly impact BBH's business, though it could change the way BBH conducts business with some of its European clients.

Fitch views BBH as conservatively capitalized, especially considering the low-risk nature of its assets. The company's capital levels compare favorably to its trust and processing bank peers. The tangible equity capital ratio was 13.2% and the Tier 1 ratio was 16.2% at year-end 2015. Additionally, BBH's balance sheet has ample liquidity, with cash and securities comprising 53% of assets and a loan to deposit ratio of 45% at year-end 2015, though these metrics are slightly weaker than peers. Fitch considers BBH's custody deposits to be core and sticky in nature given the long-term nature of these relationships and high switching costs.

Given BBH's unique charter and relatively small size, BBH is not subject to regulatory requirements that its trust and processing peers may be subject to. These include the Supplemental Liquidity Ratio (SLR), Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Basel III operational risk weightings and potential minimum debt requirements. Fitch believes this gives BBH some additional flexibility in managing its balance sheet and product mix relative to peers.

SUPPORT RATING AND SUPPORT RATING FLOOR

BBH's Support Rating (SR) of '5' reflects Fitch's view that external support cannot be relied upon. The Support Rating Floor (SRF) of 'No Floor' reflects Fitch's view that there is no reasonable assumption that U. S. government support would be forthcoming to BBH.

RATING SENSITIVITIES

VR AND IDR

Fitch believes that BBH's ratings are solidly situated at their current rating levels. BBH's ratings are constrained by its relatively lesser scale and revenue diversity compared to some of the larger custody banks. Upward rating momentum is limited by elevated operational risk inherent in the trust and processing bank business model. However, it is possible that over a very long-term time horizon there is some potential upside to current ratings. This would be predicated on increasing scale and revenue diversity, particularly through increasing the revenue contribution from the asset management segment.

Fitch believes the most significant risk to BBH is a large operational or technological event that causes significant reputational damage and causes clients to leave the firm. BBH has a good track record of performance and minimal operational losses, and Fitch considers these risks to be well managed. That said, negative rating action could be driven by an operational loss or similar event result in a fine, loss, or revenue reduction equivalent to 5% of annual revenue or more.

Finally, BBH and its peer trust and processing banks are beginning to be at risk of certain technology potentially being disruptive to its business, though Fitch views this as likely over a very long-term time horizon. Blockchain, or distributed ledger, is an electronic means of settling, reconciling, and reporting on transactions, which is the core of BBH and its peer banks' businesses.

While Fitch believes it is highly probable that BBH and its peer trust and processing banks will jointly work to harness this technology to drive efficiencies across their respective platforms, over a long period of time a technology company may offer a blockchain solution that causes clients to leave BBH for their core custody business. Due to BBH's size, its ability to invest in research and development for such technology may be limited relative to its larger peers. At present, Fitch views this risk as well outside of the Rating Outlook horizon.

SUPPORT RATING AND SUPPORT RATING FLOOR

An upward revision of the SR and SRF would be contingent on a positive change in the U. S. government's propensity to support its banks. While not impossible, Fitch views this as highly unlikely.

Fitch has affirmed the following ratings:

Brown Brothers Harriman & Co.

--Long-term IDR at 'A+'; Outlook Stable;

--Short-term IDR at 'F1';

--Viability Rating at 'a+';

--Support Rating at '5';

--Support Floor at 'NF'.