Fitch Ratings has affirmed
A full list of rating actions is below.
Key Rating Drivers
Profitable Wealth Management Franchise:
Successful Strategic Execution: EFG continues to improve its cost efficiency through initiatives to improve operational efficiency, including staff efficiencies. The improved operational leverage has strengthened the business model. The divestiture of low-margin business segments and geographies that do not fit within the strategy is now complete. As a result, the business model is increasingly focused on the bank's core competencies and its more profitable activities, resulting in higher earnings despite lower assets under management (AUM).
Decreasing Legacy Risks: The acquisition of
Good Asset Quality: Credit risk appetite is moderate, and EFG's loan book mainly consists of well-collateralised Lombard loans. Unlike some more traditional wealth management peers, EFG also has portfolios of commercial mortgages. We view commercial loans as higher risk, but this portfolio is not large enough to affect our overall asset quality assessment. The impaired loans ratio did not increase materially in 1H23 (end-2022: 1.5%), and we expect it to remain around the same level in 2023 and 2024, despite deteriorating global economic conditions, due to the strong creditworthiness and prudent underwriting of the wealth management mortgages and Lombard loans.
Structurally Improved Profitability: Profitability improved significantly in 1H23, despite market-driven decreases in AUM, which reduces fee income. The group's ongoing cost-efficiency programme has helped mitigate lower fee income. EFG also benefited more from higher interest rates than peers given its higher proportion of net interest income.
Sound Capitalisation: The group's consolidated common equity Tier 1 (CET1) ratio of 17.3% at end-1H23 was sound. The ratio increased by about 190bp on
Sound Liquidity: At end-1H23, EFG had a consolidated liquidity coverage ratio of 203%, and high-quality liquid assets represented about 36% of total assets. The group is predominantly funded by deposits and has relatively limited funding needs, resulting in a loans/deposits ratio below 50%.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A sustained and significant reversal in profitability could result in a downgrade. The ratings could also be downgraded if the CET1 ratio, now calculated under IFRS, falls below the group's 12% management floor without the prospect to quickly restore it above this level. An increase in operational risks, such as legal risks that could significantly reduce capitalisation, could also weigh on the ratings.
EFG's VR and IDR could be downgraded if the bank does not make further progress in reducing double leverage at the holding company. They could also be downgraded if there is an increase in cash-flow mismatches or other indications of less prudent liquidity management at the holding company level. We could also downgrade them if the eventual release of capital from BSI is not sufficient to reduce double leverage below 120%.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade would require a structural improvement in profitability without increasing risk appetite, a material and sustained reduction in Stage 3 loans, and the maintenance of larger capital buffers with lower volatility.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Junior Subordinated Debt: EFG's additional Tier 1 (AT1) notes are rated four notches below the VR to reflect their fully discretionary coupon deferral and deep subordination.
Government Support Rating (GSR):
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Junior Subordinated Debt: The AT1 notes' rating is primarily sensitive to changes to EFG's VR and would be downgraded if EFG's VR was downgraded. It is also sensitive to changes in their notching, which could arise if their non-performance risk increases materially, for example, if buffers above mandatory coupon omission points shrink to below 100bp.
GSR: An upgrade of the GSR is unlikely given the presence of resolution legislation in
VR ADJUSTMENTS
The business profile score has been assigned above the implied score due to the following adjustment reason: business model (positive)
The funding & liquidity score has been assigned below the implied score due to the following adjustment reason: deposit structure (negative)
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevant Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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