Liechtensteinische Landesbank AG

Transcription

1 CREDIT OPINION 29 April 216 Liechtensteinische Landesbank AG First-time ratings reflect LLB's strong capitalisation and sound liquidity and funding profile New Issue Summary Rating Rationale RATINGS Liechtensteinische Landesbank AG Domicile Liechtenstein Long Term Rating A Type LT Bank Deposits Outlook Stable Please see the ratings section at the end of this report for more information.the ratings and outlook shown reflect information as of the publication date. Contacts Michael Rohr VP-Senior Credit Officer michael.rohr@moodys.com Alexander Hendricks, CFA Associate Managing Director - Banking alexander.hendricks@moodys.com We assign A/Prime-1 long- and short-term deposit ratings and Aa3/Prime-1 long-and short-term issuer ratings to Liechtensteinische Landesbank AG (LLB). We further assign a Aa1(cr)/Prime-1(cr) long- and short-term Counterparty Risk Assessment (CR Assessment) as well as an baseline credit assessment (BCA) and adjusted BCA to LLB. LLB s A long-term deposit ratings and Aa3 long-term issuer ratings reflect (1) the bank s BCA and adjusted BCA; (2) the result of our Advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes in resolution, and which provides two notches of rating uplift to LLB s deposit ratings and one notch of rating uplift to its issuer ratings; and (3) one additional notch of rating uplift from government support from the Principality of Liechtenstein (unrated). The bank's BCA reflects (1) LLB's generally solid financial fundamentals, which display a strong ability to absorb losses through capital; (2) a sound liquidity and funding profile displaying limited dependence on confidence-sensitive wholesale funding sources; and (3) the economic environment in Liechtenstein and Switzerland (Aaa stable) to which LLB is mostly exposed. The BCA further takes into account operational and litigation risks resulting from the bank s private banking operations as well as LLB s asset quality that is below its peer group average. Exhibit 1 Rating Scorecard - Key Financial Ratios Carola Schuler Managing Director Banking carola.schuler@moodys.com Source: Moody's Financial Metrics

2 Credit Strengths Solid capital adequacy ratios Limited reliance on wholesale funding sources Strong liquidity position Credit Challenges Manage asset quality risks in LLB's geographically concentrated mortgage-loan book Challenging market environment characterised by low interest rates and intense competition Strategic adjustments to the private banking franchise pose execution risks Rating Outlook The outlook on LLB's long-term ratings is stable Factors that Could Lead to an Upgrade An improved and sustained higher profitability level, for example because of sustained growth of assets under management (AuM) through net new money inflows as well as strong investment performance Lower reputational and franchise risks as a result of a reduction of challenges related to bank secrecy and stricter regulation A further meaningful and sustained reduction of LLB's problem loan ratio Significantly higher volumes of senior unsecured (and/or subordinated) debt, such that it provides a higher rating uplift under our LGF framework Factors that Could Lead to a Downgrade Material deterioration in asset quality, especially if owing to a marked slowdown in the Liechtenstein or Swiss real-estate markets A prolonged weakening of LLB's recurring earnings power and operating efficiency Erosion of the bank's asset and wealth management franchise Large fines relating to the ongoing investigations by the U.S. Department of Justice (DoJ) into the bank s former Swiss private banking business that significantly exceed the bank's existing specific reserves Acquisitions that are unduly aggressive from a commercial, financial or operational risk viewpoint An increase in the expected loss severity, for example because of a reduction of loss-absorbing instruments, resulting in lower rating uplift from our LGF analysis This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history April 216

3 Key Indicators Exhibit 2 Liechtensteinische Landesbank AG (Consolidated Financials) [1] Total Assets (CHF billion) Total Assets (USD billion) Tangible Common Equity (CHF billion) Tangible Common Equity (USD billion) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross loans / Due to customers (%) Avg [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for average calculation Source: Moody's Financial Metrics Detailed Rating Considerations Asset risks mitigated by solid capital adequacy ratios LLB has a higher problem loan ratio (2.6% as of year-end 215) compared with its closest Liechtenstein and Swiss regional banking peers. Partly because of conservative accounting practices as well as legacy loan exposures, LLB's exposure to regional corporate and SME loans entails significantly higher problem loan ratios if compared to that of its traditional mortgage loans. However, LLB's risk management and controls allow for adequate assessments of the bank's inherent asset quality risk, aided by a fair degree of diversification in the bank's corporate loan book. LLB's mortgage-loan book, which is concentrated in Liechtenstein and in the mid-eastern parts of Switzerland (Linth region), grew by a compound average growth rate of 4.8% during , to CHF9.6 billion. This rapid growth has increased the bank's susceptibility to potential shocks from the domestic real-estate markets or during a prolonged period of weaker economic growth in Liechtenstein and/or Switzerland, and could thus weaken the bank's capital buffers in an adverse scenario. However, the loan book is highly granular, with a low loan-to-value (LTV) ratio compared with similarly rated European banking peers, and only a smaller proportion of LLB's mortgage assets displays LTV ranges above 8% (median LTV 54%). Our overall Asset Risk score of ba has been adjusted downwards by three notches from the initial score to reflect the bank s high concentrations in the Liechtenstein and Swiss real-estate markets as well as litigation risks resulting from the ongoing investigations into former LLB (Schweiz) AG by the DoJ as a Category 1 institution. This also captures typical risks applicable to all private banking activities such as a high sensitivity to reputational, legal and operational risk. These risks are largely mitigated by LLB's strong common equity Tier 1 (CET1) capital ratio of 2.6% as of 31 December 215 (yearend 214: 18.3%) as well as its low leverage (balance-sheet leverage ratio of 8.4% as of year-end 215). LLB is classified as a domestic systemically relevant financial institution according to the Liechtenstein Financial Markets Authority's definition and must maintain a total capital ratio of at least 13.%. Despite these high ratios, we have adjusted our assigned a Capital score downwards by one notch from the unadjusted scorecard outcome. This reflects the bank s limited accumulation of capital on an absolute basis over the past years, as well as the bank s ambition to seek acquisitions that could reduce the bank s CET1 ratio. On a positive note, we take account of the high quality of the bank's capital and our expectation that LLB will not change its earnings retention policy (4-6% payout ratio). We therefore anticipate that LLB will significantly exceed its minimum Tier 1 capital ratio target of 14% in 216 and potentially beyond April 216

4 Adequate profitability and efficiency maintained despite challenging market environment and strategic adjustments to the private banking franchise If interest rates remain low for a prolonged period, LLB's profitability metrics will decrease as a result of the repricing of higher-yielding (largely mortgage-loan) assets into lower rates and rising hedging costs from payer swaps, although we would not expect a significant drop in profitability. In addition, sustained and intense competition and a potential macroeconomic slowdown, coupled with a gradual deterioration in the bank's asset quality (leading to a higher cost of risk), might put pressure on LLB's future earnings. As a result, we have assigned a b Profitability score, one notch below the ba1 unadjusted scorecard outcome. LLB s profitability benefits from its commission-generating off-balance-sheet asset and wealth management business and the positive effect that this has on its net income/total assets ratio. That said, the bank's earnings are partly dependent and thus sensitive to activities in and the performance of international capital markets. In an adverse environment, this dependence may adversely affect LLB s net fee and commission income generation capacity, while the low interest-rate environment will further reduce net interest income. During 215, LLB's AuM decreased by 9% to CHF45.6 billion (214: CHF5.2 billion), largely driven by the sale of swisspartners Group (unrated) with CHF3.3 billion of AuM. In recent years, LLB has underperformed peers because of persistent net outflows owing to (1) ongoing tax investigations into the bank s former Swiss business; and (2) the closure of its Swiss operations and related re-alignment of its other cross border franchises. As of 19 June 215, LLB s 74%-owned Swiss subsidiary Bank Linth LLB AG (unrated) and the DoJ reached a non-prosecution agreement under which Bank Linth LLB AG paid USD4.2 million. This followed earlier announcements under which swisspartners Group paid USD4.4 million in 214 and under which LLB Vaduz paid USD23.8 million for its Liechtenstein operations in 213, both reaching a non-prosecution agreement. Potential charges relating to LLB s former subsidiary LLB (Schweiz) AG are still pending; future payments might exceed the bank's existing specific reserves relating to the remaining investigation (CHF18.1 million after taxes as of year-end 215). For 215, LLB reported net income (audited IFRS) of CHF86.3 million, up 2% compared to 214. The result was driven by approximately CHF9 million of net gains from the sale of swisspartners Group as well as a strong recovery in trading income, partly offset by a meaningful decline in financial investment fair value gains. We note the continued high volatility in the bank s trading and financial investment income, driven by fair value and currency swings affecting the bank s hedging and financial investment book. The results were further affected by the Swiss National Bank's decision to abandon the Swiss franc's peg to the euro and subsequently introduce negative interest rates in January 215, putting pressure on net interest income, decreasing by CHF4.2 million or 3% compared to 214. At the same time, risk costs remained very low (CHF6. million in 215 versus CHF1.8 million in 214). Furthermore, LLB's cost base significantly declined, even when excluding the effects from the sale of swisspartners Group. We expect that the bank (and the group) will continue adhering and working towards a strict cost discipline, despite the announcement of investments into further growth as part of the banks 'StepUp 22' programme. Strong liquidity position and limited reliance on wholesale funding sources are key credit strengths LLB's robust liquidity management and profile are key credit strengths, supporting its BCA. The bank's unadjusted Funding Structure score of benefits from sizeable volumes of client deposits, which totalled 79% of total liabilities as of year-end 215. LLB holds a high cash proportion (CHF2.6 billion) as well as a relatively large and high-quality interbank and financial investment portfolios (CHF5.7 billion as of 31 December 215, essentially consisting of government and other highly-rated bonds) to mitigate any potential pressure on its highly liquid balance sheet that might result from unexpectedly large client deposit outflows. We consider this to constitute a very balanced profile, as reflected in the bank's unadjusted a1 Liquid Resources score. Therefore, our overall assigned Combined Liquidity score is. LLB's sizeable exposures to Liechtenstein and Switzerland determine its Strong+ Macro Profile Operating from Liechtenstein and Switzerland, LLB s market environment offers a very high degree of economic, institutional and fiscal strength and very low susceptibility to event risk. As a result, LLB's credit profile remains driven by the Liechtenstein and Swiss operating environment and reputation as trusted global private banking centers, despite being exposed to various other global jurisdictions. LLB's Macro Profile therefore stands at Strong April 216

5 Notching Considerations Loss Given Failure While not yet formally subject to the European Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM), we expect that Liechtenstein will introduce legislation or other tools in-line with the BRRD recommendations. Our expectations are based on public comments as well as the national government's and regulator's track record of mirroring EU banking regulations in prior years. We therefore apply our Advanced LGF analysis to LLB, considering the risks faced by the different debt and deposit classes across the liability structure at failure. We assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured debt. These ratios are in line with our standard assumptions. For LLB s deposits, our Advanced LGF analysis indicates a very low loss-given-failure, leading to two notches of LGF rating uplift from the bank s adjusted BCA, prior to government support. The very low loss-given-failure is owing to the significant volume of junior deposits that are available to absorb losses once equity has been wiped out in an unlikely resolution process. For LLB s issuer ratings, or its hypothetical senior unsecured debt, our Advanced LGF analysis indicates a low loss-given-failure, leading to one notch of rating uplift from LLB s adjusted BCA, considering potential discretionary preference of deposits in a resolution and the probability of a distressed exchange, which is more likely to be imposed upon bondholders than depositors. Government Support We assign one notch of additional rating uplift to LLB's long-term ratings resulting from government support from the Principality of Liechtenstein. This reflects our assumption of a moderate probability of such support to be forthcoming in the event of a stress scenario, taking account of the majority ownership by the Principality (57.5%) as well as LLB's importance to the domestic deposittaking market and sizeable national market shares as a domestic systemically relevant financial institution. We therefore consider government support to be extended to LLB despite the high likelihood that a restrictive resolution framework will be implemented in Liechtenstein. We further recognise the importance of wealth management activities for the Liechtenstein economy and the detrimental impact that major financial problems, which we do not expect, at one of the country's larger banks and asset managers could have for the overall perception of the country, and subsequently for similar businesses, their employees and fiscal revenues. Issuer Profile LLB is majority-owned by the Principality of Liechtenstein. It operates as a universal bank in Liechtenstein and Switzerland (through Bank Linth LLB AG) and also has a sizeable private banking and asset management business. The Principality of Liechtenstein guarantees all of the bank s savings account deposits and medium-term notes (cash bonds or Kassenobligationen ) domiciled in Liechtenstein. LLB was established in 1861 as the National Interest and Credit Institution in the Sovereign Principality of Liechtenstein. In 1923, the bank was granted a certain level of autonomy, along with an unlimited state guarantee and exemption from taxation. In 1955, the financial institution was renamed the Liechtensteinische Landesbank and transformed from a rural, locally rooted savings and mortgage bank into a universal bank with international clients. In 1993, LLB was listed on the SIX Swiss Exchange, and the government stake was reduced to 57.5%. In 27, LLB acquired the majority (74.2%) of the Swiss regional bank Bank Linth AG, which was rebranded Bank Linth LLB AG and is now one of the leading banks in Eastern Switzerland. As of 31 December 215, LLB reported total assets of CHF19.7 billion (EUR 18. billion) and AuM of CHF45.6 billion (EUR 41.7 billion) April 216

6 Rating Methodology and Scorecard Factors Exhibit 3 Liechtensteinische Landesbank AG Macro Factors Weighted Macro Profile Strong + 1% Historic Ratio Macro Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver #2 Solvency Asset Risk Problem Loans / Gross Loans 2.7% ba Geographical concentration Litigation risk Capital TCE / RWA 21.1% aa1 a Expected trend Profitability Net Income / Tangible Assets.4% ba1 b Expected trend Financial Profile Factor Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Instrument Class Counterparty Risk Assessment Deposits Senior unsecured bank debt a3 5.6% Extent of market funding reliance 36.% a1 a1 Stock of liquid assets Loss Given Failure notching Additional notching Aa1 a1-a3 Preliminary Rating Assessment a (cr) a1 Government Support notching Local Currency rating Aa1 (cr) A Aa3 Foreign Currency rating -A Aa3 Source: Moody's Financial Metrics Ratings Exhibit 4 Category LIECHTENSTEINISCHE LANDESBANK AG Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating ST Issuer Rating -Dom Curr Moody's Rating Stable A/P-1 Aa1(cr)/P-1(cr) Aa3 P-1 Source: Moody's Investors Service 6 29 April 216

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8 8 Contributors CLIENT SERVICES Torsten-Alexander Thebes Associate Analyst Americas Asia Pacific April 216 Japan EMEA