Fitch Affirms Banque Pictet at 'AA-'; Outlook Stable
The rating actions are part of Fitch's periodic review of Swiss private banks.
KEY RATING DRIVERS
IDRS AND VR
Banque Pictet's ratings are driven by our assessment of the financial strength of the consolidated Pictet Group, of which Banque Pictet is the Geneva-based banking subsidiary and its main operating entity.
We view Banque Pictet's company profile as one of two factors of higher importance in assessing the bank's VR and IDR. Banque Pictet has a sound franchise in wealth management, supported by a long track record and diversified geographical presence, and is complemented by Pictet Group's profitable asset management division. The group as a whole had CHF437bn assets under management (AuM) and custody at end-2015, which places it as one of Switzerland's largest pure wealth and asset managers.
Its scale should allow it to further streamline and digitalise its operations, thus enabling it to manage operating expenses while fulfilling growing compliance requirements. However, the nature of Pictet's business and the group's focus on a limited number of business lines constrains diversification and the VR.
Our assessment of the group's company profile further factors in the fairly stable nature of the group's private banking revenue, which is primarily fee-based, and generated by sound AuM growth across business divisions. Profitability also benefits from some diversification stemming from the group's well-established asset management business and asset services division, which provides custody and execution capabilities to the group's clients.
We view Banque Pictet's risk appetite as low, a factor which we also consider to be of higher importance for the ratings. On-balance sheet credit exposure is limited and arises mainly from the bank's highly rated securities portfolio, largely related to liquid sovereign and supranational bonds. While the loan book saw strong 11% yoy growth in 2015, we do not expect this to result in a material increase in credit risk given that the vast majority is in the form of Lombard lending, collateralised by securities. The bank applies conservative haircuts to lending values, which are offered as an ancillary product to private banking clients.
We expect the bank to continue delivering strong and consistent earnings. Net fee and commission income account for the bulk of the group's revenues, and in 2015 rose 3% yoy. Net interest income also increased, partly reflecting higher loan balances and mitigating the pressure arising from low interest rates. We expect operating expenses to remain well - controlled, despite the pressure of additional regulatory initiatives.
Given its private banking focus and as for most of its peers, we view operational risk as a key risk for Banque Pictet. The bank continues to face a possible financial penalty linked to the US Department of Justice's (DoJ) investigation concerning US-related accounts, potentially linked to tax-related offenses. While the timing and financial impact of any settlement is inherently difficult to predict, we expect any fine to be manageable for the group due to its strong earnings capacity and ample capital buffer over minimum requirements.
Market risk is low and well-controlled.
Management has been stable, with strong succession planning in place. The bank is owned and managed by six partners, who have been successful in implementing the group's long-term strategy. However, the structure has resulted in some weaknesses in transparency and corporate governance.
Banque Pictet's capital base is solid and comprises both Common Equity Tier 1 (CET1) capital and a subordinated loan from the holding company, which qualifies as eligible additional Tier 1 capital. The group's consolidated CET1 ratio stood at 22.9% at end-2015, which provides it with sufficient flexibility to absorb unexpected losses.
Fitch believes that capital and liquidity are easily transferable among the operating entities of the group, subject to regulatory limits. This ensures that ordinary capital support from the parent for Banque Pictet would be available, which underpins its ratings. The large proportion of liquid and mainly short-term assets on Banque Pictet's balance sheet supports the group's strong liquidity.
SUPPORT RATING AND SUPPORT RATING FLOOR
Banque Pictet's Support Rating and Support Rating Floor reflect our view that support from the Swiss authorities cannot be relied on, primarily because of the group's low systemic importance. The group caters to an affluent international client base and does not have a retail deposit franchise in Switzerland. Should Banque Pictet require extraordinary support, we expect it to be provided from the partners' private wealth, but such support is not factored into our ratings.
RATING SENSITIVITIES
IDRS AND VR
The Stable Outlook on Banque Pictet's ratings reflects our expectation that the group will continue to generate resilient fee-based earnings without materially increasing its risk appetite, and that any potential legal settlement will have a manageable impact on the group's capitalisation.
The ratings are primarily sensitive to structural deterioration of the group's earnings capacity, which could arise as a result of a loss of franchise, larger-than-expected AuM outflows linked to client tax regularisation or structural increases in operating expenses. The ratings are also sensitive to rapid loan growth accompanied by significant adverse changes in underwriting standards, which could indicate a higher risk appetite.
Should the impact from potential legal settlements erode capitalisation without credible plans to restore it swiftly, this would put Banque Pictet's ratings under pressure.
Given Banque Pictet's high ratings relative to peers' and the challenges facing the sector, upside remains limited.
SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of Banque Pictet's Support Rating and an upward revision of the Support Rating Floor is unlikely, given the group's low systemic importance.
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