OREANDA-NEWS. Fitch Ratings has affirmed Oddo et Compagnie's (Oddo) Long-term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook, Short-term IDR at 'F3' and Viability Rating (VR) at 'bbb-'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
The ratings reflect Oddo's established but modest franchise in its two main businesses of asset and wealth management and investment banking, exposure to some earnings volatility in the latter business and the weight of key man risk in our assessment of management and corporate governance. They also factor in the bank's prudent approach to risk-taking, solid leverage and overall sound profitability.

Oddo's modest franchise constrains its ratings, as we consider a small player to be more vulnerable to difficult market conditions, lower business volumes or potential regulatory changes. Investment banking is by nature prone to earnings volatility, all the more so as Oddo's franchise lacks scale in some businesses. However, some of these activities should be viewed in the context of their cross-selling potential and Oddo has been reactive in adjusting its cost base accordingly.

We expect recent acquisitions in Germany, the asset manager Meriten and the investment bank Seydler, to strengthen Oddo's franchise and ultimately the quality of income generation. However, we believe that revenue and cost synergies will take some time to materialise. In asset management, Oddo will have around EUR40bn of assets under management after the integration of Meriten and a more diversified product offering.

Oddo's profitability has been improving due to the bank's solid revenue generation, notably in asset management, and tight cost control. Oddo's asset and wealth management business is increasingly driving the bank's revenue and operating profit (around 60% in 2014), which should limit future earnings volatility.

Oddo's conservative risk appetite is underpinned by its ownership, with over half of its employees holding company shares and two unlimited partners (one of whom is Philippe Oddo) liable for losses upon liquidation. Fitch assesses key man risk as fairly high, albeit partly mitigated by a seasoned and well-regarded senior management. Oddo's balance sheet assets are mainly short term, of sound quality and/or collateralised.

The bank's businesses expose it to operational and reputational risks. However, Oddo has a sound track record of managing these risks, with manageable operating losses to date and effective protection of its franchise.

Liquidity management is prudent. The bank has sufficient high-quality liquid assets, which more than cover its fairly modest short-term funding needs, even under stress scenarios. Oddo's capitalisation is a strength, and we expect its leverage ratio (tangible equity to tangible assets) to remain strong, including after the consolidation of Meriten in 3Q15.

SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch considers that the probability of sovereign or institutional support for Oddo, although possible, cannot be relied upon, resulting in the '5' Support Rating and 'No Floor' Support Rating Floor. This reflects the bank's limited systemic importance in France as its contribution to financing the French real economy is modest. While possible, potential support from the main shareholder, the Oddo family, cannot be relied upon given the difficulties associated with evaluating private family fortunes.

SUBORDINATED DEBT
The lower Tier 2 subordinated debt is notched down once from Oddo's VR in accordance with Fitch's criteria to reflect below-average recoveries for this type of debt.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Upside potential for Oddo's ratings would be contingent on material strengthening and further diversification of its still modest franchise, while maintaining solid capitalisation and moderate risk appetite.

Conversely, an erosion of Oddo's recurring profitability or capitalisation would be a negative rating factor. An indication of a weakening of its franchise or expansion into higher-risk businesses, which is currently not expected, could also result in a downgrade.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of Oddo's Support Rating and upward revision of its Support Rating Floor would be contingent on a positive change in the systemic importance of the bank and in the sovereign's propensity to support its banks. This is highly unlikely, in Fitch's view.

SUBORDINATED DEBT
The rating is sensitive to changes in Oddo's VR and therefore to the same factors that would drive a change in the VR.

The rating actions are as follows:
Long-Term IDR: affirmed at 'BBB-'; Outlook Stable
Short-Term IDR: affirmed at 'F3'
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: affirmed at 'BBB-'
Subordinated (Lower Tier 2) debt (FR0010494419): affirmed at 'BB+'
Commercial paper: affirmed at 'F3'