Fitch Affirms Brown Brothers Harriman & Co. at 'A '; Outlook 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 RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Fitch Ratings has affirmed the Long- and Short-term Issuer Default Ratings (IDRs) for Brown Brothers Harriman & Co. (BBH) at 'A+' and 'F1', respectively. The Rating Outlook is Stable
BBH, a privately held partnership, remains one notch lower at 'A+/F1' compared to the three other trust and processing banks given its smaller scale and comparatively less financial flexibility than the larger, publicly traded companies. The high rating for all the trust banks (including BBH) reflect a business model with high barriers to entry and sticky customer relationships, which would be extremely difficult for a new entrant into the marketplace to replicate.
BBH's ratings are supported by its long history of conservative management, consistent operating track record, low-risk balance sheet, and solid capital and liquidity position. Ratings also reflect BBH's solid franchise in global custody, focusing on financial institutions and asset managers as custody clients.
Fitch believes that company's partnership structure is the key component of its conservative risk culture, which has allowed it to remain profitable throughout the various credit downturns. Each partner is jointly and severally liable for the firm's obligations, which motivates partners to take actions that preserve the long-term value of the firm. Further, while there has been significant pressure on BBH's results amid the protracted low interest rate environment coupled with a period of extremely low volatility, the company's pre-tax return on equity (ROE) has still remained good from a credit perspective, and in line with long-term averages.
Offsetting the strengths is an elevated level of operational risk inherent in the trust and processing business model. Fitch believes that the main threat to BBH's business would be from a large technological mishap or operational loss that is idiosyncratic resulting in reputational damage causing clients to run off. Fitch does believe these risks are well-monitored and controlled, but also acknowledges that they are inherently difficult to predict and quantify. As such, a large occurrence at BBH would likely prompt Fitch to review ratings to determine if a negative rating action was appropriate.
Fitch expects revenues and margins will continue to be impacted by low interest rates and competitive pressures, but expense reduction efforts and increased contribution from the investment and wealth management business should help BBH's margins remain steady in 2015. BBH's business model is very sensitive to higher short-term interest rates, whenever that may occur, as well as higher volatility, particularly in the 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 as soon as the company begins to benefit from higher short-term interest rates or increased FX volatility, or both simultaneously.
Operating results for 2014 were slightly weaker, although consistent with other industry peers, as BBH is facing increased headwinds from the continued low interest rate environment which is impacting net interest margin, weaker FX trading income from lower trading volume, and increased pricing pressure in the institutional custody business. To combat these headwinds, BBH has heightened focus on expense discipline. This has included optimizing the company's respective workforces as well as improving efficiencies and streamlining operations through significant technology investments. While the results to date have been mixed, as much of the expense savings noted above have been offset by significant additional expenditures on regulatory and compliance functions and personnel, Fitch believes that the groundwork for good positive operating leverage has been laid for BBH.
RATING SENSITIVITIES
IDR, VR, AND SENIOR DEBT
Fitch believes that BBH's ratings are solidly situated at their current rating levels with a Stable Rating Outlook. BBH's ratings are constrained by its relatively lesser scale and revenue diversity compared to some of the larger custody banks. However, it is possible that over a very long-term time horizon there is some potential upside to current ratings. This could be predicated on increasing scale and revenue diversity, particularly through increasing the revenue contribution from the asset management segment.
Ratings could be lowered if BBH were to incur higher than expected losses in the underlying loans and investment portfolio, and/or if material losses from operational errors or litigation were to occur. In addition to the operational risks noted earlier in this release, there are some key risks from currently evolving regulatory changes that could impact the BBH and its rates.
Given BBH's unique charter and relatively small size, BBH is not subject to regulatory requirements such as the Supplemental Liquidity Ratio (SLR), Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Basel III operational risk weightings and potential minimum debt requirements that its trust and processing peers may be subject to.
SUPPORT RATING AND SUPPORT RATING FLOOR
BBH has an SR of '5' and a SRF of 'No Floor' as the firm is not designated as a G-SIFI, so it would not likely have a potential minimum debt requirement.
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'
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