Fitch Affirms Investec Bank plc at 'BBB'; Outlook Stable
KEY RATING DRIVERS
IDRs, VR AND SENIOR DEBT
IBP's IDRs, VR and senior debt ratings reflect the bank's appetite for lending to and investing in higher-risk asset classes, the risk of which is partly counterbalanced by its strong liquidity and capital buffers over regulatory requirements. Nonetheless, the bank's risk appetite has caused some volatility for its performance through the business cycle. The bank's company profile has been improving, with the reduction of legacy problematic assets, and increased focus on less capital-intensive businesses, such as wealth management, advisory and transactional banking. However, its profitability remains only moderate as a result of its high cost base.
Our assessment of risk appetite takes into account the bank's appetite for higher-risk structured corporate assets and commercial real estate (CRE) loans, which although reducing, remain high compared with peers, as the bank has maintained an appetite for CRE exposure, a highly cyclical industry. Impairment charges have declined, helped by the current low unemployment and interest rates and higher real estate prices. Reserve coverage of impaired loans is prudent.
IBP's revenues have become more diversified and less volatile as a result of the repositioning of its businesses and the bank's increased focus on its wealth management business. However, the high costs are partially due to its business model, rendering profitability at the bank just average. Profitability has been supported by very low loan impairment charges that have reached cyclical lows. Given the higher risks of the bank's assets, we believe they are likely to remain at the higher end of the spectrum. Furthermore, valuation movements in the bank's income statement are likely to give rise to additional volatility, given IBP's sizeable exposure to equity and other more volatile investments.
Funding and liquidity are managed prudently. IBP has consistently maintained a large on-balance sheet liquidity buffer. Its healthy funding profile is diversified and has improved over recent years by extending the maturity profile of the deposit book. IBP has no reliance on wholesale funding; nevertheless it has access to the wholesale markets through occasional senior and subordinated, secured and unsecured bond issuance. IBP's strong liquidity drives the bank's 'F2' Short-Term IDR, which is the higher of the two Short-Term IDRs that map to the bank's Long-Term IDR.
IBP's capitalisation is in line with its risk profile, with adequate buffers maintained over the regulatory minimum. The CET1 ratio was 11.9% at end-FY16, calculated on a standardised approach. Its leverage is low, with a strong fully loaded Basel III leverage ratio of 7.5% at end-FY16.
SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
IBP's SR and SRF reflect Fitch's view that senior creditors cannot rely on extraordinary support from the UK authorities in the event the bank becomes non-viable given UK legislation and regulations that provide a framework that is likely to require senior creditors to participate in losses after a failure and because of the bank's low systemic importance.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by IBP are all notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Subordinated (lower Tier 2) debt is rated one notch below IBP's VR to reflect higher loss severity. The junior subordinated debt securities are rated three notches below IBP's VR to reflect the higher loss severity risk (one notch) as well as incremental risk of non-performance due to the discretionary, albeit often constrained, coupon deferral features of this instrument (an additional two notches).
IDRs, VR AND SENIOR DEBT
IBP's VR, IDRs and senior debt ratings are primarily sensitive to structural deterioration in profitability, through tighter margins and higher loan impairment charges, and weaker asset quality. This could be caused by a material weakening of the operating environment in the UK if the economic effect of the UK's decision to leave the EU is particularly severe. In particular, weaker prospects for CRE would put IBP's ratings under pressure, given the bank's exposure to this segment.
IBP's ratings could also be sensitive to material changes in the ratings of Investec Bank Limited (BBB-/Stable/F3). Due to a dual listing company structure between Investec plc, the UK holding company, and Investec Limited, the South African holding company, we believe that there is a link between IBP's ratings and the ratings of the group's banking operations in South Africa. Creditors of each entity are ring-fenced and there are no cross guarantees between the companies. However, Investec plc and Investec Ltd. (the holding companies) share a brand, have a common management and culture and are run with the same boards of directors. Therefore, we believe that a deteriorating credit profile at Investec Bank Limited, for instance through reputational risk, could have an effect on IBP's business or on its funding and liquidity, which could put pressure on its ratings.
IBP's ratings would also come under pressure from a material deterioration of capitalisation, or if loan impairment charges were significantly higher than expected or if there are large losses in its investment portfolio. Evidence of an increase in risk appetite or a weakening of the bank's liquidity and funding could also put pressure on the ratings.
We do not expect an upgrade of the bank in the short term. Any upgrade would be contingent on a further rebalancing of its business model towards less capital-intensive businesses, stronger earnings and improvement in asset performance while maintaining sound capital and funding.
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch does not expect any changes to IBP's SR and SRF given the low systemic importance of the bank as well as the legislation in place which is likely to require senior creditors to participate in losses for resolving IBP.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings are primarily sensitive to changes in the VR from which they are notched. The ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the VR. The ratings are also sensitive to a change in Fitch's assessment of each instrument's loss severity, which could reflect a change in the expected treatment of liability classes during a resolution.
The rating actions are as follows:
Long-Term IDR affirmed at 'BBB'; Outlook Stable
Short-Term IDR affirmed at 'F2'
VR affirmed at 'bbb'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
Senior unsecured certificates of deposit Long - and Short-Term ratings affirmed at 'BBB'/'F2'
Senior unsecured EMTN Programme Long - and Short-Term ratings affirmed at 'BBB'/'F2'
Subordinated debt (ISIN: XS0593062788) affirmed at 'BBB-'
Junior subordinated debt (ISIN: XS0283613437) affirmed at 'BB'