OREANDA-NEWS. Fitch Ratings has revised N M Rothschild & Sons Limited's (NMR) Outlook to Positive from Stable. Its ratings have been affirmed at Long-term Issuer Default Rating (IDR) 'BBB+', Short-term IDR 'F2' and Viability Rating (VR) 'bbb+'. A full list of rating actions is available at the end of this rating action commentary.

The revision of the Outlook to Positive primarily reflects NMR's progress in winding down its legacy assets and our expectation that tail risk from legacy exposures could become immaterial over the next 12-24 months considering NMR's adequate earnings generation. Simultaneously, progress in winding down legacy assets, largely UK commercial real estate, should further improve NMR's capitalisation and leverage metrics. In addition, NMR's global financial advisory (GFA) franchise has proven to be fairly resilient throughout economic cycles.

The sale of NMR's leasing subsidiary Five Arrows to Paragon Bank PLC announced on 2 October 2015 will upon completion further reduce NMR's balance sheet usage and overall exposure to credit risk.

KEY RATING DRIVERS
VR, IDRs AND SENIOR UNSECURED DEBT
NMR's IDRs are driven by the bank's standalone strength as reflected in its VR. NMR's VR is underpinned by the bank's solid and profitable UK and European independent GFA franchise, which benefits from NMR being part of the wider Rothschild group (which also includes its French sister bank, Rothschild & Cie Banque, rated A/Stable/a). NMR's adequate leverage and capitalisation and its sound funding and liquidity are also key positive rating drivers.

NMR's GFA division generates the bulk of the company's revenue and operating profit. The contribution of its other business lines, largely debt fund management following the announced disposal of its leasing subsidiary, remains limited. This means that NMR's earnings base remains strongly correlated to capital market conditions despite sound earnings diversification with GFA by advisory type (M&A, debt advisory, equity advisory), sector and geography. NMR has demonstrated an ability to swiftly adjust its cost base and to ensure adequate revenue in previous periods of adverse market conditions, while the bank's capital provides an additional cushion should this ever be required.

While NMR's appetite for credit risk is limited, weak asset quality in its legacy exposures continues to weigh on its ratings. However, the bank has made solid progress in winding down its UK commercial real estate and leveraged finance exposures, its main legacy assets. Gross legacy loans accounted for 66% of Fitch core capital (FCC) at end-March 2015 (compared with 244% at end-March 2012). Unreserved impaired legacy loans stood at 11% of FCC at end-March 2015 compared with 30% at end-March 2012. While NMR's growing debt fund management business will create fund counterparty risk due to European retention rules, this should remain moderate.

NMR's adjusted business model has sharply reduced its funding needs (its loan book halved since end-March 2012) and its retail deposit business, launched in 2009, has added diversity and a longer tenor to its funding base. Liquidity is sound with both NMR's internal liquidity guidance and liquidity coverage ratios comfortably exceeding regulatory minima.

Capitalisation and leverage metrics have been improving in line with NMR winding down its legacy loan book and are adequate for NMR's current risk profile. While internal capital generation is sound, dividend pay-out ratios are high. Projected risk-weighted asset growth is limited and we expect NMR to maintain capital and leverage ratios broadly at current levels.

NMR is a fully owned subsidiary of Rothschild & Co (formerly Paris-Orleans) the Paris-based holding company of the Rothschild group. This means that NMR's disclosure and reporting requirements are less extensive than those of its listed peers but family ownership has also resulted in a stable management team and distinct corporate culture, which allows NMR to better pursue its long-term objectives.

The programme ratings of Rothschild Continuations Finance PLC (RCF), a fully-owned subsidiary of NMR, are driven by an unconditional and irrevocable guarantee by NMR. The ratings are equalised with NMR's IDRs.

SUPPORT RATING AND SUPPORT RATING FLOOR
NMR's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect our view that while support from the authorities is possible, it cannot be relied upon.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The rating of RCF's perpetual subordinated notes is based on the guarantee provided by NMR. In line with Fitch's criteria, RCF's subordinated upper Tier 2 notes are rated three notches below NMR's VR, reflecting their relative subordination (one notch) to senior unsecured obligations and incremental non-performance risk characteristics (two notches).

RATING SENSITIVITIES
VR, IDRs AND SENIOR UNSECURED DEBT
A further significant reduction in NMR's exposure to both gross and net legacy assets in conjunction with stable or improved earnings, capitalisation and leverage metrics could lead to an upgrade of NMR's VR and IDRs. Given NMR's continued reliance on its GFA division for revenue generation, any upside potential would be limited to one notch. While its debt fund management business has reported adequate profitability improvements, it is in our view unlikely to materially improve NMR's earnings diversification in the medium-term.

Given the Positive Outlook, downside pressure on NMR's ratings is currently limited. However, NMR's ratings remain sensitive to any damage to its reputation or franchise, which would impair its ability to attract new GFA business. An inability to swiftly adjust its cost base to falling fee levels in a more adverse market environment, resulting in weaker financial flexibility, would also be rating-negative.

NMR's compensation ratio remains high relative to many of its peers but we view this as a feature of the company's advisory profile. A materially greater appetite for credit risk in its debt fund management business or a weakening of the group's liquidity profile would also put pressure on NMR's ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR
There is limited upside due to NMR's small domestic franchise and the reduced willingness from the UK authorities to support banks.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings for the programme and subordinated issue are sensitive to a change in NMR's VR.

The rating actions are as follows:

N M Rothschild & Sons Limited
Long-term IDR: affirmed at 'BBB+'; Outlook revised to Positive from Stable
Short-term IDR: affirmed at 'F2'
VR: affirmed at 'bbb+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Rothschild Continuations Finance PLC
Senior unsecured programme rating affirmed at 'BBB+'/ 'F2'
Hybrid debt (guaranteed by NMR): affirmed at 'BB+'.