OREANDA-NEWS. Fitch Ratings has affirmed Compagnie Odier SCA's (Lombard Odier) Long- and Short-term Issuer Default Ratings (IDRs) at 'AA-'/'F1+' and its Viability Rating (VR) at 'aa-'. Its Support Rating and Support Rating Floor (SRF) have been affirmed at '5' and No Floor', respectively. The Outlook on the Long-term IDR is Stable.

Compagnie Odier SCA (formerly Compagnie Lombard, Odier SCA) is the unlimited liability holding company that owns the main operating entities of the Lombard Odier Group.

KEY RATING DRIVERS
VR AND IDRS
Lombard Odier's VR and IDRs consider the group's low risk appetite, a factor which Fitch believes to be of high importance in assessing its ratings. We do not expect this low risk appetite to change in the medium term. On-balance sheet credit exposure is limited and arises mainly from the group's Lombard lending and a portfolio of highly-rated securities. Market risk is low and tightly controlled. Fitch expects the bank to expand its Lombard loan and securities portfolios moderately to offset margin pressure in a low-interest rate environment, but growth should remain well-controlled and asset quality managed conservatively.

The group's company profile is also of high importance, based on its robust private banking franchise in Switzerland and internationally.

Lombard Odier is owned and managed by six partners. The group has a strong track record of following a well-defined strategy. Although growth of the group has resulted in businesses being run more independently, the partners maintain close control of the group's activities.

As one of Switzerland's largest independent private banks, Lombard Odier's operations mainly consist of managing client assets, which stood at CHF134bn at end-2014 (excluding double-counting). The group has reached a critical scale in wealth management, which should help it sustain earnings momentum and offset cost pressures. However, the asset management division is yet to become a significant earnings contributor.

Lombard Odier's sound earnings are underpinned by its track record of sustained growth in assets under management (AuM). Delivering on cost savings will be an important driver of profitability, given the group's relatively high 80% cost/income ratio in 2014. Wealth management in Switzerland generally requires high staff costs, and the Swiss franc appreciation has increased pressure as the bank incurs a large proportion of operating expenses in Switzerland. Aligning the currency composition of revenues and costs should help mitigate the pressure on profitability.

While credit and market risks are fairly limited as a result of the business model, Lombard Odier's main risks are operational and reputational. Lombard Odier's ratings reflect Fitch's expectation that a possible financial penalty linked to the US Department of Justice's (DoJ) Swiss bank programme, although subject to considerable uncertainties, will be easily manageable. Lombard Odier advised the DoJ in late 2013 that it intended to participate in the programme as a 'category 2' bank. This involves providing evidence on US-related accounts potentially linked to tax-related offenses to seek a non-prosecution agreement.

In line with Swiss private banking peers, the implementation of automatic exchange of information by 2018 is likely to result in incremental costs as the capabilities of data reporting systems are upgraded. Lombard Odier's resilient IT systems should place it in a comparatively strong position to face these challenges, but the benefits of front-loaded investments in digitalisation will only be visible in the longer term.

Although the equity base of the group is small in absolute terms, Fitch considers Lombard Odier's capitalisation to be sound, as regulatory capital consisted exclusively of Common Equity Tier 1 (CET1) capital, and the group's CET1 ratio was 22.6% at end-2014. The large proportion of liquid, mainly short-term assets on the group's balance sheet supports its strong liquidity profile.

Fitch assumes that double leverage will not increase materially above its currently low level and that capital and liquidity can be easily transferred among the operating entities of the group, subject to regulatory limits.

SUPPORT RATING AND SRF
Lombard Odier's Support Rating and SRF reflect Fitch's view that sovereign support, while possible, cannot be relied upon. The group caters for an affluent international client base and does not have a retail deposit franchise in Switzerland.

Extraordinary support provided from the partners' private wealth is possible, but cannot be relied upon.

RATING SENSITIVITIES
VR AND IDRS
The Stable Outlook reflects Fitch's expectation that any litigation or operational costs faced by Lombard Odier will not permanently dent its capital buffers. The ratings are therefore sensitive to a sizeable operational loss or legal penalty that would erode capitalisation without credible plans to restore it swiftly. The ratings are also sensitive to any weakening of the group's franchise, which could result from a loss of reputation.

The ratings would also come under pressure if the group increases its risk appetite unexpectedly. This could take the form, for example, of higher balance sheet risks in the loan or securities portfolio to support earnings.

The ratings are also sensitive to weaker operating profitability, which could arise from structural increases in operating expenses or from failure to improve the profitability of the group's asset management operations.

As the ratings are assigned to the holding company, they are also sensitive to the build-up of double leverage at the holding company or changes to the fungibility of capital within the group.

Given Lombard Odier's high ratings relative to peers and challenges facing the sector, upside potential remains limited.

SUPPORT RATING AND SRF
As Fitch's assessment of support depends on Lombard Odier's business model, any changes to the group's Support Rating or SRF are highly unlikely and are contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.