CREDIT OPINION 1 December 16 Clientis AG Semiannual update Update Summary Rating Rationale We assign A long-term-deposit ratings to Clientis AG (Clientis), with positive outlook. We also assign P-1 short-term deposit ratings and a Baa1(cr)/P-(cr) Counterparty Risk Assessment. Its baseline credit assessment (BCA) and adjusted BCA are positioned at baa1. RATINGS Clientis AG Domicile Berne, Switzerland Long Term Debt Not Assigned Type Not Assigned Outlook Not Assigned Long Term Deposit A Type LT Bank Deposits - Fgn Curr Outlook Positive 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. The deposit ratings reflect: (1) the bank's baa1 BCA and adjusted BCA; () the result of our Advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by different liability classes in resolution, resulting in two notches of rating uplift to Clientis' deposit ratings but no uplift to its CR Assessment; and (3) the low likelihood of Clientis receiving government support, leading to no government support uplift. The baa1 BCA takes into account: (1) the group's strong capitalisation and good asset quality; () its limited confidence-sensitive market funding; and (3) improving liquidity. It remains constrained by earnings pressure resulting from persistently low interest rates and a competitive domestic banking market. The BCA, which is based on Clientis' group consolidated financials, also reflects Clientis' contractual support framework amendments that became effective early 16 and which improved the group's cohesion and long-term stability. Because Clientis' framework still falls short of comparable cooperative or mutual banking groups in Europe, we apply a negative qualitative adjustment to the BCA. Contacts Andrea Wehmeier 49-69-773-78 VP-Senior Analyst andrea.wehmeier@moodys.com Exhibit 1 Rating Scorecard - Key Financial Ratios Alexander Hendricks, 49-69-773-779 CFA Associate Managing Director - Banking alexander.hendricks@moodys.com Carola Schuler 49-69-773-766 Managing Director Banking carola.schuler@moodys.com Source: Moody's Financial Metrics
Credit Strengths Capital ratios are strong, consisting of high-quality instruments High loan book granularity and limited exposure to real-estate 'hot spots' benefit asset quality Improving liquidity position Credit Challenges Profitability and efficiency ratios are weak but improving The cross-guarantee scheme has been improving, however, falls short of comparable mechanisms of other co-operative or mutualist banking groups Rating Outlook Clientis' long-term deposit ratings carry a positive outlook, reflecting our expectation that Clientis will be able to sustain and further improve its financial profile. It is driven both by the expectation of improving liquidity, capitalisation and asset quality, as well as the strengthening of the group's cohesion, which includes the cross-liability scheme and the updated contractual framework. Factors that Could Lead to an Upgrade An upgrade of Clientis' long-term deposit ratings would be likely in the event of: (1) an upgrade of the bank's BCA; and/or () an increase in uplift resulting from our LGF analysis. Upward pressure on the bank's BCA could result from a combination of: (1) a marked and sustainable improvement in the bank's risk-adjusted efficiency and profitability levels; () a sustainable improvement in liquidity; and/or (3) a further improvement in capitalisation, increasing creditor protection. Our Advanced LGF analysis could result in higher notches of rating uplift if Clientis issues significant volumes of senior unsecured and/ or subordinated debt classes, providing a higher protection to depositors, which could lead to one additional notch of rating uplift. Factors that Could Lead to a Downgrade A downgrade of Clientis' long-term deposit ratings could be triggered following: (1) a downgrade of the BCA; and/or () a reduction in rating uplift as a result of our LGF analysis. A downgrade of Clientis' BCA is currently unlikely, given the positioning of the BCA at the lower end of the range as reflected in the positive outlook. However, it could come under downward rating pressure as a result of a combination of the following factors: (1) gradual market share erosion caused by competitive pressures or strategic differences within the group or further exits of member banks, although we consider this highly unlikely at present; () material asset quality deterioration, especially if following a marked slowdown in the Swiss real-estate market; and/or (3) an increase in the bank's risk appetite, especially if Clientis expands its balance sheet more aggressively without properly addressing the group's funding and liquidity profile challenges. A downgrade of Clientis' deposit ratings could also arise if the volume of deposits falls meaningfully, resulting in a lower rating uplift under our LGF framework. 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 www.moodys.com for the most updated credit rating action information and rating history. 1 December 16
Key Indicators Exhibit Clientis AG (Consolidated Financials) [1] Total Assets (CHF billion) Total Assets (EUR billion) Total Assets (USD billion) Tangible Common Equity (CHF billion) Tangible Common Equity (EUR 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 (%) 6-16 1-15 1-14 1-13 1-13 Avg. 13.8 1.8 14. 18..9.4 7.3 11.3 11.3 1.8 13.5 1.4 13.5.9 18. 7.9.6.3 8. 1.9 1 1.9 1.5 1.4 1.5.9 17.3 1..6.3 79.1 9.3 8. 1.9 1.8 1.5 14.4.9 1.3 17.1 1.9.7.3 77.7 8.9 8.1 1.6 15.3 1.7 16.7 1.3 1.5 17. 1.8 1.4.8.4 75.5 8.7 6.4 1.3 -.64.14-4.14 -.54.4-4.4 5 17.66 9.95 5.76.45 76.55 9.85 9.5 11.95 [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [3] Basel II; LOCAL GAAP [4] Compound Annual Growth Rate based on LOCAL GAAP reporting periods [5] LOCAL GAAP reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & LOCAL GAAP reporting periods have been used for average calculation Source: Moody's Financial Metrics Detailed Rating Considerations HIGH LOAN BOOK GRANULARITY AND LIMITED EXPOSURE TO REAL-ESTATE HOT SPOTS BENEFIT ASSET QUALITY, SUPPORTED BY HIGH-QUALITY CAPITAL RATIOS Clientis a1 Asset Risk score captures the group's relatively low susceptibility to potential shocks from the domestic real-estate markets or from a prolonged period of weaker economic growth in Switzerland. This also incorporates risks from the high stock of mortgage loans relative to the bank's total loan volume (94% of as of half-year 16), as well as risks from the persistently low interest-rate environment. We expect that Clientis will be able to manage the pace and extent of a potential deterioration in its sound asset quality indicators. This assessment is based on the bank's subdued loan growth over the past few years, which resulted in an almost flat development of its mortgage loan book amounting to CHF1 billion as of half-year 16. Moreover, Clientis' mortgages are predominantly in areas where property markets do not show signs of overheating. Furthermore, at year-end 15, the stock of impaired loans stood at CHF99.4 million or.9% of total gross loans (14: CHF119.9 million, %; 13: CHF135 million or %). In our view, Clientis will remain equipped with an ample capital cushion, considering: (1) the relatively low-risk nature of the group's highly collateralised retail mortgage book; and () the revised liability scheme of the Clientis group and its member banks. As a Category 4 institution in accordance with the Swiss Financial Market Supervision Authority (FINMA), Clientis group must maintain a total capital ratio of 1.3% as of end 19. As of half-year 16, the group's reported common equity Tier 1 (CET1) ratio was 17.8%, stable compared with year-end 15, but up from 17.% at year-end 14. Clientis' capital does not include hybrid capital instruments. Furthermore, the continued high retention rate of around 8% demonstrates the group's strong focus on robust internal capital generation. Our assigned Capital score of aa reflects this strength. PROFITABILITY AND EFFICIENCY RATIOS ARE RELATIVELY WEAK, MITIGATED BY THE BANK'S ACTIVE HEDGING STRATEGY ADDING TO EARNINGS STABILITY In the long term, Clientis has the potential to yield benefits from the closer operational and business integration of its member banks, which could prompt efficiency gains in order to help preserve profitability in a very low interest-rate environment. At this stage, 3 1 December 16
however, we have adjusted the bank's Profitability score downwards to ba3, reflecting the bank's low level of earnings, as well as our anticipation of earnings pressure in the next 1 to 18 months. Clientis' profitability measures are already at the low end of the range compared to international standards. While the profitability measures reflect the group's lower-risk nature to a certain degree, they also reflect the relatively high operating cost base of the Clientis group, owing to higher depreciation costs stemming from the implementation of a new IT platform, which was completely absorbed in 15. Clientis' management is currently working on expanding its reach to other regional banks, aiming to add additional banks to its 'model bank' platform and/or fully integrate them within the Clientis group in the medium term, which in our view would enable to group to raise further efficiencies and scale effects. For the half-year 16, the Clientis group (consisting of 15 banks) reported a significantly improved net income of CHF3.5 million (HY 15: CHF3.3 million). Net interest income grew to CHF8. million (HY15: CHF77.5 million), comparing favourably with some other regional banking groups, as a result of Clientis' continued effective interest-rate hedging policy. Stable fee and commission income of CHF1 million further contributed to the solid result, further supported by significantly lower depreciation and amortisation (CHF5.9 million compared to CHF11million as of HY15). DEPENDENCE ON WHOLESALE FUNDING COULD EXPOSE THE GROUP TO FUNDING RISKS IN AN ADVERSE SCENARIO Clientis benefits from a large base of stable retail deposits (7% of total liabilities as of half-year16), because of its well-entrenched local retail franchises. Moreover, gross loans constituted 86% of the group's balance sheet as of the same date. However, 15 saw a sharp improvement in the bank's liquid assets level, driven primarily by higher deposits with the central bank, a common factor for Swiss banks. Likewise, the loan-to-deposit ratio of 11% as of half-year 16 (14: 13%) - after taking into account medium-term promissory notes ( Kassenobligationen ) indicates higher dependence on wholesale funds compared with that of its domestic peers. However, the secured and longer-term nature of the sourced market funds -- as well as the bank's stable client deposits -- mitigate the bank's vulnerability to our highly adverse scenario of a prolonged disruption in wholesale funding markets that could necessitate business volume reductions and therefore potentially lead to franchise impairments. We have reflected these considerations in the bank's a1 Funding Structure score and its baa3 Liquidity Resources score. STRONGER COHESION OF MEMBER BANKS - BUT LIMITED COMMITMENT UNDER LIABILITY SCHEME LEADS TO QUALITATIVE ADJUSTMENT OF BCA We have reduced the bank's Financial Profile score by one notch, overall assigning a baa1 BCA, at the low end of the range, indicating upward pressure on the group's fundamental credit. This adjustment reflects Clientis' sector set-up, despite having strengthened the group's cohesiveness by widening the cross-liability mechanisms and ensuring group membership through legally binding membership commitments. However, some elements of the support scheme, in particular the limited fungibility of capital do not match the standards of other cooperative or mutual banking groups in Europe. We use Clientis' group accounts for the baseline credit assessment, including its consolidated capitalisation level; the group is the regulated entity and Clientis AG enjoys intervention rights with regards to the individual members risk management and other key business aspects like liquidity. For Clientis group, however, the joint capital support for the 15 individual members is contractually limited, a contrast to the legal framework for instance for the cooperative groups in Switzerland and France, that includes a joint and several liability scheme. Hence, we apply a one notch qualitative adjustment to reflect key differences, in particular restrictions to full capital fungibility, that leads to a more limited capital cushion for investors compared to the mentioned groups. Compared with other cross-guarantee schemes we also see a higher concentration risks because of the relatively low overall number of participating banks, which exposes the group and its support capacity more vulnerable to the financial performance of a limited number of member banks. 4 1 December 16
Notching Considerations LOSS GIVEN FAILURE (LGF) ANALYSIS Clientis is subject to Swiss banking regulation, which we consider an Operational Resolution Regime. We therefore apply our Advanced LGF analysis, 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 5% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and assign a 1% probability to deposits being preferred to senior unsecured debt (as reflected in the de facto case in the waterfall below), thereby reflecting depositor preference by law in Switzerland. Our LGF analysis indicates a very low ''loss-given-failure'' for Clientis' A rated deposits, leading us to position its Provisional Rating Assessment two notches above the Adjusted BCA. GOVERNMENT SUPPORT We believe that the probability of government support for Clientis in the event of stress is ''low'', given the bank's relatively small national market shares in key banking products and its relative importance to the country's banking system. Therefore, Clientis' deposit ratings do not benefit from government support uplift. 5 1 December 16
Rating Methodology and Scorecard Factors Exhibit 3 Clientis AG Macro Factors Weighted Macro Profile Very Strong - Financial Profile Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver # Solvency Asset Risk Problem Loans / Gross Loans 1.% aa a1 Sector concentration Capital TCE / RWA 18.% aa1 aa Risk-weighted capitalisation Profitability Net Income / Tangible Assets.4% ba ba Earnings quality Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 1.9% a1 a1 Market funding quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets 1% baa3 baa3 Quality of liquid 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 Balance Sheet Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Preference shares (bank) Senior unsecured holding company debt Dated subordinated holding company debt Junior subordinated holding company debt Preference shares (holding company) Equity Total Tangible Banking Assets 6 1% 1 December 16 a1 a a3 a3 a -1-1 Aaa a-baa1 baa1 baa1 in-scope (CHF) 3,344 9,853 7,91,56 9 % in-scope 4.% 71.3% 5.8% 18.5% 1.5% at-failure (CHF) 4,349 8,848 6,97 1,91 9 % at-failure 31.5% 64.% 5.1% 13.9% 1.5% 415 13,81 3.% 1% 415 13,81 3.% 1%
Debt class Counterparty Risk Assessment Deposits Instrument Class Counterparty Risk Assessment Deposits De jure waterfall De facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe jure De facto notching guidance notching Assessment volume + ordination volume + ordination versus subordination subordination BCA 3.% 3.% 4.5% 4.5% baa1 (cr) 18.4% 3.% 18.4% 4.5% a Loss Given Failure notching Additional Preliminary Rating notching Assessment baa1 (cr) a Government Local Currency rating Foreign Support notching Currency rating Baa1 (cr) -A A Source: Moody's Financial Metrics Ratings Exhibit 4 Category CLIENTIS AG Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Moody's Rating Positive A/P-1 baa1 baa1 Baa1(cr)/P-(cr) Source: Moody's Investors Service Profile The decentralised Clientis group was formed in 3 and currently consists of 15 legally independent banks and their central institution Clientis AG, which is owned by the independent banks. Clientis AG guarantees the liabilities of all 15 legally independent banks, which in turn must provide financial support to Clientis AG in case of need. The group has a geographical presence in the German- and French-speaking parts of Switzerland, and displays national market shares of.8% in deposits and % in mortgage loans as of year-end 15. This positions the group as a clear niche player in the local/rural Swiss banking market, characterised by meaningful regional market positions, and a fairly loyal local retail and small and medium-sized enterprise clientele. The group holds total assets of CHF13.5 billion as of December 15 and serves approximately, customers through its regional network of approximately 7 branches and focuses its offer on traditional universal banking services. Output of the Baseline Credit Assessment Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 7 1 December 16
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9 Contributors CLIENT SERVICES Perrine Bajolle Associate Analyst Americas 1-1-553-1653 Asia Pacific 85-3551-377 1 December 16 Japan 81-3-548-41 EMEA 44--777-5454