OREANDA-NEWS. February 12, 2016. Fitch Ratings has affirmed BHF-Bank AG's (BHF) Long-term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook and Short-term IDR at 'F3'. The Viability Rating (VR) has been affirmed at 'bbb-'.

A full list of ratings actions is at the end of this commentary

KEY RATING DRIVERS -VR AND IDRs
BHF's Long-term IDR is based on its VR. The VR is underpinned by our expectation that the France-based Oddo et Cie (Oddo, BBB-/Stable) will be successful in acquiring BHF. Oddo launched a take-over offer for BHF's parent company in January 2016. Fitch believes that stable ownership by a strategic owner with expertise in asset management and private banking would support and complement BHF's current business strategy. We expect that under a new ownership, BHF's efficiency should improve. However, potential benefits from synergies and cooperation are not quantifiable at this stage.

We expect that Oddo's management will concentrate on quickly integrating BHF given the significance of the acquisition for Oddo. This should underpin BHF's company profile as it will bring stability to the bank's franchise. Oddo currently owns a 42.9% stake in BHF Kleinworth Benson Group. Oddo announced that it had secured to reach a stake of at least 54.2% in BHF Kleinworth Benson Group through the firm commitment of contribution from other shareholders. BHF Kleinwort Benson's Board has recommended to its shareholders to accept the takeover bid. The acceptance period ended on 11 February and the final result of the transaction will be announced on 17 February 2016.

Our expectation that the acquisition by Oddo will proceed and that the new owner will integrate BHF quickly is an important driver of the VR because we believe that without the improvements that we expect from the new owner, BHF's VR would be under pressure. There are uncertainties surrounding BHF's ability to generate sustainable profit while preserving its overall adequate risk profile under its current set-up. We understand from BHF Kleinwort Benson's trading update covering the nine months to 30 September 2015 that BHF-BANK is expected to achieve targeted profitability in 2017 but that performance in the near term will be impacted negatively by restructuring. Missing modest profitability targets is putting pressure on BHF's VR. BHF's phase-in Common Equity Tier 1 (CET1) ratio dropped to 14.1% at end-1H15, from 14.7% at FYE-14. Basel III deductions, specifically shortfalls in pension provisions and intangible assets also contributed to the reduction of BHF's capital ratios.

SUPPORT RATING AND SUPPORT RATING FLOOR
BHF's Support Rating (SR) and Support Rating Floor (SRF) primarily reflect Fitch's view that support for BHF as a non-systemic bank is unlikely. We also believe that legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for banks in the European Union. The BRRD-Umsetzungsgesetz, which requires 'bail in' of creditors in banks under resolution before an insolvent bank can be recapitalised with state funds came into force on 1 January 2015 and the Single Resolution Mechanism (SRM) providing resolution tools and mechanisms started on 1 January 2016. As a result, Fitch believes that extraordinary external support from the sovereign in the event that BHF becomes non-viable - while possible - can no longer be relied upon.

RATING SENSITIVITIES - VR AND IDRs
BHF's VR and IDRs remain sensitive to the success of the expected acquisition by Oddo. If Oddo is not successful in acquiring BHF, we would most likely downgrade BHF's VR and IDR as we believe that this could put pressure on the bank's franchise given further uncertainty over its future and would make improvements in profitability more difficult.

SUPPORT RATING AND SUPPORT RATING FLOOR
A revision of BHF's SRF would require an increased propensity of the sovereign to provide support to the bank, which we believe is unlikely.

An upgrade of the bank's SR following an acquisition by Oddo is unlikely. We believe that although the new owner would have a high propensity to provide support, Oddo's ability to provide extraordinary support would be limited. We expect that BHF would account for about 65% of the combined entity's total assets after the acquisition and above 50% of the group's combined equity which means that it would be difficult for Oddo to provide support to such a large subsidiary.

The rating actions are as follows:

Long-term IDR affirmed at 'BBB-'; Stable
Short-term IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'