OREANDA-NEWS. Fitch Ratings has upgraded Investec Bank plc's (IBP) Long-term and Short-term Issuer Default Ratings (IDRs) to 'BBB'/'F2' from 'BBB-'/F3' and its Viability Rating (VR) to 'bbb' from 'bbb-'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary.

The upgrade of the IDRs and VR reflects the progress IBP has made in running down its legacy assets and reducing the concentration of its loan book towards property lending. Balance sheet deleveraging, as well as an increased focus on less capital-intensive activities have improved the bank's profitability, and have reduced tail risks. At the same time, funding and liquidity have remained sound.

KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT
IBP's IDRs are driven by the bank's standalone strength, as reflected in its VR. This in turn considers the bank's sound liquidity and capital profile, improving profitability, reducing problematic loans and a realigned business model focussing on capital-light businesses, such as wealth management, advisory and transactional banking. Despite these improvements, IBP's risk appetite in its more balance sheet-intensive specialist banking division remains higher than that of similarly rated peers, in our view. We consider this factor of higher importance when reaching the bank's overall VR.

Since the crisis, IBP has successfully managed to rebalance its loan portfolio and shrink its legacy portfolios, making asset performance more predictable. It has reduced its exposure to commercial real estate and its appetite for higher risk structured corporate assets, although these remain high compared with peers. Asset impairment has reduced and reserve coverage of impaired loans is prudent.

As a result of the repositioning of its businesses, we expect the bank's profitability to improve. Revenues have become more diversified and given the bank's focus on wealth management, recurring and predictable in nature. Costs are high, partially due to the business model, rendering profitability at the bank just average. However, loan impairment charges have fallen and are not expected to reach the highs seen during the crisis, although given the higher risk nature of its assets we believe they are likely to remain at the higher end of the spectrum. Furthermore, given IBP's sizeable exposure to equity and other more volatile investments, we believe some valuation movements in the bank's income statement are likely.

Funding and liquidity are managed prudently. IBP has consistently maintained a large on-balance sheet liquidity buffer. Its healthy funding profile is diversified and has improved over recent years with a longer maturity profile of the deposit book. IBP has no reliance on wholesale funding; nevertheless it maintains access to the wholesale markets through senior and subordinated, secured and unsecured bond issuance.

Capitalisation is adequate for its risk profile. The recent increase has been the result of the accretive impact of the strategic disposals executed during 2014 and 2015, although in our view it is likely that part of these gains will be paid back as dividends over time. Given its prudent risk weighting of assets, its leverage is low compared with other UK banks.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by IBP are all notched down from its 'bbb' VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Subordinated (lower Tier 2) debt is rated one notch below IBP's VR to reflect the incremental loss severity of this type of debt when compared with average recoveries. The junior subordinated debt securities are rated three notches below IBP's VR to reflect the incremental loss severity risk of these securities when compared with average recoveries (one notch from the VR) as well as high risk of non-performance due to the discretionary, albeit often constrained, coupon deferral features of this instrument (an additional two notches).

KEY RATING SENSITIVITIES - IDRS, VR AND SENIOR DEBT
Should the bank continue to rebalance its business model towards lower capital intensive business, its earnings should improve. Combined with an improvement in asset performance, while maintaining its sound capital and funding profile, this could lead to an upgrade of IBP in the medium term.

Negative rating pressure would also arise from a material deterioration of IBP's capital ratios, or if loan impairment charges were significantly higher than expected or if there are large losses in the investment portfolio. Evidence of an increase in risk appetite and/or a weakening of the bank's liquidity and funding profile could also put pressure on the ratings.

Due to the dual listing company structure between Investec plc, the UK holding company, and Investec Limited, the South African holding company, we believe that IBP's ratings are correlated with the group's banking operations in South Africa, Investec Bank Limited (BBB-/Stable/F3). The two holding companies operate as a single economic enterprise and are bound by contractual agreements and mechanisms. Their shareholders have common economic and voting interests as if it were a single company (i.e. equivalent dividends on a per share basis and joint electorate and class right voting). However, creditors are ring-fenced to either entity and there are no cross guarantees between the companies. Investec plc and Investec Ltd. are run with the same board of directors.

We understand that since 2002, the UK regulator has placed a 'ring-fence' around the UK operations of the business, which limits the fungibility of capital and liquidity across the two entities. However, we believe that common reputational and organisational risks, as well as common management and culture, could place a limit on the rating differential between the two banks lower down the rating scale. Negative pressure on the ratings therefore could arise from a downgrade of Investec Bank Limited to below investment grade.

KEY RATING SENSITIVITIES- SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital are primarily sensitive to any change in IBP's VR. See 'Global Bank Rating Criteria' at www.fitchratings.com for more detail on the criteria applied.

The rating actions are as follows:

Investec Bank plc
Long-term IDR upgraded to 'BBB' from 'BBB-'; Outlook Stable
Short-term IDR upgraded to 'F2' from 'F3'
VR upgraded to 'bbb' from 'bbb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
Junior subordinated debt (ISIN: XS0283613437) upgraded to 'BB' from 'BB-'
Senior unsecured certificates of deposit Long-term and Short-term ratings upgraded to 'BBB'/'F2' from 'BBB-'/'F3'
Senior unsecured EMTN Programme Long-term and Short-term ratings upgraded to 'BBB'/'F2' from 'BBB-'/'F3'
Subordinated debt (ISIN: XS0593062788) upgraded to 'BBB-'from 'BB+'.