OREANDA-NEWS. Fitch Ratings has affirmed Close Brothers Group's (CBG) and its wholly owned banking subsidiary Close Brothers Limited's (CBL) Long-Term Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks. Their Viability Ratings (VRs) have been affirmed at 'a'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VRS AND SENIOR DEBT
CBG's and CBL's IDRs reflect the group's resilient business model, which is based on secured lending, short maturity loans, small ticket size and a longer maturity profile of funding compared to lending. As a result of this strategy, the group has been able to mitigate the higher risk nature of the bank's SME loan book and report a track record of strong performance through the cycle.

CBG (the group's parent holding company) runs several businesses out of separate subsidiaries, of which the largest by assets and earnings is the banking one, CBL. Other group subsidiaries operate in asset management and securities trading but are smaller in importance in terms of capital usage and profit generation. However, they are cash generative, and in Fitch's opinion, do not pose significant additional risk to the group. The group's securities business, Winterflood Securities Limited, is a leader in market marking FTSE and AIM listed stocks (by number of UK stocks covered) and has been consistently profitable over the years. Asset management, undertaken through Close Asset Management Holdings Limited, had GBP10.8bn of total client assets in FYE15. After undergoing a complete restructuring, it has reported a third year of profits and is undergoing a gradual and measured expansion.

CBL and CBG's ratings are aligned given the absence of double leverage at CBG, and the high fungibility of capital and liquidity between the parent and the bank.

CBL provides asset, insurance premium, invoice, motor and property finance and benefits from the high margins available in these segments. Business origination is largely through brokers in premium finance, motor dealers in motor finance, but also through own branches (around 50 across the UK) in other segments. CBL's track record is strong and risk is mitigated by the secured nature of lending, management's expertise and generally conservative underwriting standards and controls. Some risk could stem from the fast loan book growth over the past five years (8.5% in the year to end-July 2015, FYE15), although CBL's business model implies growing counter-cyclically, to benefit during periods of low credit supply in the market. We expect growth rates to moderate as competition among lenders returns.

Asset quality at the bank has continued to improve since its deterioration during the crisis (FYE15: impaired loans/ gross loans at 3% at Group level; peaked at 11.4% at FYE09) thanks to the favourable operating environment in the UK, completions and sale of property loans extended before January 2009 and write-offs in the property and asset finance books. Loan impairment charges (LICs) reduced to 0.8% of average loans in FY15 (FY14: 0.9%), which compares with an average loss rate over the past 25 years of 1.5%. Credit losses are compensated by strong margins, and LICs only consumed 16% of pre-impairment profit in FY15. We believe reserve coverage of impaired loans is adequate at around 35% given the secured nature of lending, while the unreserved part accounts for a low proportion of Fitch Core Capital at Group level (FYE15: 12%).

The bank's business model also benefits from maintaining a strong liquidity buffer, comprising GBP1.1bn of Bank of England reserves and gilts (13.3% of total assets) at FYE15, which Fitch believes it needs to maintain given the low proportion of deposits that it can consider core, and also to deal with any loan, particularly in the property sector, which begins to repay later than expected. The bank has access to the Bank of England contingency liquidity facilities and has also accessed the government's Funding For Lending Scheme during the year. The bank's funding is reasonably diversified comprising retail deposits (sourced online), corporate deposits, secured and unsecured debt and bank facilities. The average maturity of term funding is longer than that of lending (FYE15: weighted average of 31 and 14 months, respectively).

Capitalisation is adequate for CBG's credit profile with a fully loaded Basel III ratio of 13.7% at FYE15 and leverage is very low with a reported leverage ratio of 10.2%. Capital is supported by strong internal capital generation. CBL has historically kept its core Tier 1 ratio at around 11%, upstreaming the excess to the group.

Senior unsecured debt is issued through CBG and through an issuing vehicle Close Brothers Finance Plc. Debt issued through Close Brothers Finance Plc is guaranteed by CBL.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch does not rely on the possibility of extraordinary support being made available to the group by the UK government in its ratings.

RATING SENSITIVITIES
IDRS, VRS AND SENIOR DEBT
Negative pressure on CBL's and CBG's ratings could arise if management increases its risk appetite, which could be in the form of aggressive lending growth in relatively new niches, reducing the gap between funding and loan maturity or continuing strong loan growth despite increases in competition, which may imply lower margins. The ratings would also be sensitive to weakening capitalisation, deterioration in asset quality and/or a weaker funding and liquidity position. Upside potential is limited given the relatively higher risk, albeit well-managed, businesses, in which it is involved.

CBG and CBL's ratings are broadly sensitive to the same factors. However, for CBG the continued absence of double leverage is also a key rating consideration.

Senior debt ratings are sensitive to the same considerations above.

KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch does not expect any changes to the Support Rating and Support Rating Floor given the low systemic importance of the group as well of the legislation in place which would enable the institution to be bailed in, in case of need.

The rating actions are as follows:

Close Brothers Group plc
Long-Term IDR affirmed at 'A'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'a'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
GBP200m senior unsecured debt, XS0486241382, affirmed at 'A'

Close Brothers Limited
Long-Term IDR affirmed at 'A'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'a'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'

Close Brothers Finance plc
Senior unsecured EMTN programme ratings, guaranteed by CBL, affirmed at 'A'/'F1'
GBP300m senior unsecured debt, XS1080948265, guaranteed by CBL, affirmed at 'A'.