OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed EFG International's (EFGInt) and its main operating subsidiary EFG Bank's Viability Ratings (VR) at 'a' and their Long-term Issuer Default Ratings (IDR) at 'A'. The Outlook on both Long-term IDRs is Stable. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS

IDRS AND VRS
EFGInt's ratings are aligned with EFG Bank's. Fitch assesses the group on a consolidated basis because the credit profiles of the individual group entities cannot be meaningfully disentangled. This is because of the high cohesion between the entities in strategy, governance and risk management, resulting in ordinary support being available to EFG Bank from other group companies. For EFGInt, the rating equalisation takes into account its role as the holding company and the absence of double leverage.

The IDRs and VRs reflect the group's company profile as a globally operating private bank with a well-diversified franchise and overall moderate risk appetite. The ratings are also based on the group's solid liquidity and adequate capitalisation, but also material exposure to operational and conduct and litigation risks as a wealth manager.

The group has a well-established and diversified wealth management franchise with CHF84.2bn assets under management (AuM) at end-2014. EFGInt has completed the repositioning it started in 2011, since when it has simplified its business model by concentrating on its core private banking activities. As a result it has been delivering sound recurring underlying profitability, which we expect to continue given its business model.

Similar to most private banks, EFGInt has moderate exposure to on-balance sheet risks, reflecting its conservative risk appetite. The loan book is fairly short-term and almost exclusively collateralised or secured. Nonetheless, we believe that EFGInt's risk appetite remains higher than its higher-rated peers due to its fairly sizeable residential mortgage loan book and its large portfolio of US life insurance policies.

We believe that EFGInt's main risks are operational and reputational. The bank's profitability was dented by material litigation provisions in 2014, when it made CHF39.6m legal and professional charges, of which CHF30m were related to the US Department of Justice (DoJ) programme for Swiss banks. EFGInt intends to reach a non-prosecution agreement under the DoJ programme related to US tax matters. We expect financial settlement to be the most likely outcome of the US tax matters, and the ultimate financial cost for the bank to be easily manageable based on current information.

We consider EFGInt's capitalisation adequate. The group reported a 14.2% fully-applied Basel III common equity tier 1 (CET1) ratio at end-2014, and we expect leverage and capitalisation to remain sound. Management targets a CET1 ratio of above 12% and a total capital ratio in the high teens.

EFGInt's underlying profitability has remained adequate and improved, but its performance has been affected by large conduct costs that have depressed overall returns. We expect the negative effect of the Swiss franc appreciation since January 2015 on the bank's profitability to be moderate, and earnings should be helped by increasing revenue if market volatility leads to more client-driven transactions. However, we believe that achieving its target 75% cost/income ratio will be challenging.

SUPPORT RATING AND SUPPORT RATING FLOOR
EFGInt's and EFG Bank's Support Ratings (SR) and Support Rating Floors (SRF) reflect our view that support from the Swiss authorities cannot be relied upon, primarily because of the advanced state of resolution legislation in Switzerland. In addition, we believe that EFGInt's role as the holding company of a private banking group means that sovereign support is less likely. EFG Bank's SR and SRF also reflect the bank's large size within the EFG group, which means that it would be difficult for the rest of the group to provide extraordinary support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
EFGInt's bons de participations are rated five notches below the holding company's VR to reflect their fully discretionary coupon deferral and high loss severity.

The Tier 2 notes issued by EFG International (Guernsey) Limited and EFG Funding (Guernsey) Limited and guaranteed by EFGInt, are rated two notches below EFGInt's VR to reflect high loss severity given the notes' permanent and full point-of non-viability write-down feature.

RATING SENSITIVITIES

IDRS AND VR
EFGInt's and EFG Bank's IDRs and VRs are primarily sensitive to a change in the bank's strategy that could result in an increase in risk appetite, which we currently do not expect. The ratings would also come under pressure if the bank suffers a large loss, which could arise from the operational and reputational risks inherent in its business model.

An upgrade of the ratings would be contingent on improved profitability and capitalisation, without an increase in risk appetite, which we do not expect in the near future.

EFGInt's and EFG Bank's IDRs and VRs are also sensitive to changes in the group structure that would reduce the group's ability to provide ordinary support to EFG Bank. EFGInt's IDR and VR could be notched from EFG Bank's if double leverage at the holding company increases or if fungibility of capital and funding within the group decreases.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of EFGInt's and EFG Bank's SRs and an upward revision of their respective SRFs are unlikely, given the Swiss regulatory environment and the group's business profile.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
As both the bons de participations and the Tier 2 notes are notched off EFGInt's VR, their ratings are primarily sensitive to changes in EFGInt's VR. The ratings are also sensitive to changes in their notching, which in the case of the bons de participations could arise if their non-performance risk increases materially, for instance as a result of materially higher regulatory capital requirements.

The rating actions are as follows:

EFG International
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'
Fiduciary certificates (ISIN XS0204324890) backed by preferred shares affirmed at 'BB+'

EFG Bank
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 assigned at 'No Floor'

EFG Funding (Guernsey) Limited
Basel III-compliant Tier 2 subordinated debt affirmed at 'BBB+'

EFG International (Guernsey) Limited
Basel III-compliant Tier 2 subordinated debt affirmed at 'BBB+'