OREANDA-NEWS. Fitch Ratings has affirmed Close Brothers Group's (CBG) and its wholly owned banking subsidiary Close Brothers Limited's (CBL) Long-Term Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks. Their Viability Ratings (VRs) have been affirmed at 'a'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, VRS AND SENIOR DEBT

CBG's and CBL's IDRs, VR and senior debt ratings reflect the group's stable and resilient business model which is based on secured lending, short-maturity loans, small ticket size and a longer maturity profile of funding compared to lending. This strategy has enabled the group to mitigate the higher risk nature of the bank's SME loan book and report a strong performance through the cycle.

CBG, the holding company, runs several businesses out of separate subsidiaries, of which the largest by assets and earnings is the banking one, CBL. Other group subsidiaries operate in asset management and securities trading but are smaller in importance in terms of capital usage and profit generation. However, they are cash generative, and in Fitch's opinion, do not pose significant additional risk to the group. CBL and CBG's ratings are aligned given the absence of double leverage at CBG, and the high fungibility of capital and liquidity between the parent and the bank.

The group's securities business, Winterflood Securities Limited, is a leader in market making European stocks, including being the largest UK market maker for retail brokers (by number of UK stocks covered) and has been consistently profitable over the years. Asset management, undertaken through Close Asset Management Holdings Limited, had GBP9.9bn of total client assets in FY16. After undergoing a complete restructuring, it has reported a fourth year of profits and is undergoing a gradual and measured expansion.

The group's main operating subsidiary, CBL, provides asset, insurance premium, invoice, motor and property finance and benefits from the high margins available in these segments. CBL's track record is strong and risk is mitigated by the secured nature of lending, management's expertise and generally conservative underwriting standards and controls. Some risk could stem from the fast loan book growth over the past four years, although CBL's business model implies growing counter-cyclically, to benefit during periods of low credit supply in the market. We expect growth rates to moderate as competition among lenders returns.

The bank's asset quality has continued to improve since the moderate deterioration it suffered during the crisis thanks to the favourable operating environment in the UK, completions and repayments of property loans extended before January 2009 and write-offs in the property and asset finance books. Loan impairment charges (LICs) fell to about 0.6% of average loans in FY16, which compares with an average loss rate over the past 25 years of 1.5%. Credit losses are compensated by strong margins, and LICs only consumed approximately 14% of pre-impairment profit in FY16. We believe reserve coverage of impaired loans is adequate given the secured nature of lending, while the unreserved part accounts for a low proportion of Fitch Core Capital.

Capitalisation is adequate for CBG's credit profile, with a fully loaded Basel III ratio of 13.5% and a leverage ratio of 10.2% at end-FY16. Capital is supported by strong internal capital generation. CBL has historically kept its CET1 ratio at around 11-11.5%, upstreaming the excess capital to the group.

The bank's funding is reasonably diversified comprising retail deposits (sourced online), corporate deposits, secured and unsecured debt and bank facilities. Liquidity risk is mitigated by the maturity of term funding being longer than that of lending. (FY16: weighted average of 31 and 14 months, respectively). The group maintains a strong liquidity buffer, comprising GBP1bn of Bank of England reserves and certificates of deposits (12% of total assets) at FY16, which Fitch believes it needs to maintain given the low proportion of deposits that can be considered core at the bank. The bank has access to the Bank of England contingency liquidity facilities.

Senior unsecured debt is issued through CBG and through an issuing vehicle Close Brothers Finance Plc. Debt issued through Close Brothers Finance Plc is guaranteed by CBL.

SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)

The group's SR and SRF reflect Fitch's view that senior creditors cannot rely on extraordinary support from the UK authorities in the event the group becomes non-viable due to its low systemic importance, and because in our opinion, the UK has implemented legislation and regulations that provide a framework that is likely to require senior creditors to participate in losses for resolving the group.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT

CBG and CBL's VR, IDR and senior debt ratings are primarily sensitive to a structural deterioration in profitability, through tighter margins and higher loan impairment charges, and weaker asset quality. This could be caused by a material weakening of the operating environment in the UK if the economic effect of the UK's decision to leave the EU is particularly severe.

Negative pressure on CBL's and CBG's ratings could arise if management increases its risk appetite, which could be in the form of aggressive lending growth in relatively new niches, reducing the gap between funding and loan maturity or continuing strong loan growth despite increases in competition, which may imply lower margins. The ratings would also be sensitive to weakening capitalisation, deterioration in asset quality and/or a weaker funding and liquidity position. Upside potential is limited given the relatively higher risk, albeit well-managed, businesses in which it is involved.

CBG and CBL's ratings are broadly sensitive to the same factors. However, for CBG the continued absence of double leverage is also a key rating consideration.

SUPPORT RATING AND SUPPORT RATING FLOOR

An upgrade of the group's SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support its banks or building societies. This is highly unlikely, in Fitch's view.

The rating actions are as follows:

Close Brothers Group plc

Long-Term IDR affirmed at 'A'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Viability Rating affirmed at 'a'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

GBP200m senior unsecured debt, XS0486241382, affirmed at 'A'

Close Brothers Limited

Long-Term IDR affirmed at 'A'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Viability Rating affirmed at 'a'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Close Brothers Finance plc

Senior unsecured EMTN programme ratings, guaranteed by CBL, affirmed at 'A'/'F1'

GBP300m senior unsecured debt, XS1080948265, guaranteed by CBL, affirmed at 'A'