Fitch Affirms Oddo and BHF-Bank at 'BBB-'; Outlooks Positive
Oddo has announced that following the end of the initial acceptance period of its counter bid for the shares it did not own in BHF KB, it will own 97.22% of BHF KB's shares. At the same time, Oddo has launched a squeeze-out procedure for the remaining 2.78% of BHF KB's shares.
BHF KB Group includes three main assets: BHF-Bank AG in Germany, Kleinwort Benson Wealth Management in the UK and Kleinwort Benson Investors in Ireland. As part of the deal, Oddo has announced that it has a binding agreement from Societe Generale for the latter to acquire Kleinwort Benson Wealth Management. BHF-Bank is the targeted entity in Oddo's acquisition of BHF KB.
KEY RATING DRIVERS - VR AND IDRs
The affirmation reflects Fitch's view that the acquisition of BHF-Bank strengthens Oddo's franchise and geographical diversification. The combination of Oddo and BHF-Bank, with an integrated offering, is likely to be viewed as an interesting independent player with presence in two large European economies. A larger and more geographically diversified franchise in private banking, asset management and investment banking should provide the combined group with a more robust earnings base through the cycle.
Earnings generation at BHF-Bank has been very weak, and this will be the main rating weakness of the combined entity. We expect the group's profitability to improve gradually through recovering revenues at BHF-Bank, supported by its new owner, but also cost synergies, as well as some revenue diversification across the group. Our expectation is that it will take time for Oddo's management to achieve satisfactory profitability at the German bank, taking into account lower margins in wealth management in Germany compared with France. We expect that Oddo will focus on a rapid integration of BHF-Bank and that providing the German bank with a strategic owner will revitalise its franchise and provide much needed stability for BHF Bank's management and strategy.
The transaction has a material impact on Oddo's capitalisation given the large size of the acquired entity. Oddo has already taken steps to strengthen its equity base, including EUR100m capital increases in late 2015. In addition, the sale of Kleinwort Benson Wealth Management will help to restore its capital ratios. The bank targets a core Tier 1 capital ratio of at least 13.5% by end-June 2016. Fitch expects Oddo to further strengthen its capital base.
BHF-Bank is the third acquisition that Oddo has made in Germany in the past 18 months. However, given the relatively large size of the acquired entity compared with Oddo, execution risk is high. Mr Philippe Oddo will become BHF-Bank's CEO.
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 Mr Philippe Oddo) liable for losses upon liquidation. 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 effective protection of its franchise. Our assessment of the combined entity's risk appetite reflects our expectations that the bank will improve earnings without increasing risk.
BHF-Bank's ratings reflect our expectation that Oddo will be successful in restoring the bank's earnings generation, leveraging on BHF-Bank's German-based franchise. Fitch believes that stable ownership by Oddo with expertise in asset management and private banking would support and complement BHF's current business strategy.
Our assumption that Oddo will integrate BHF-Bank quickly is an important driver of the ratings. There are uncertainties surrounding BHF-Bank's ability to generate sustainable profit while preserving its overall adequate risk profile. Fitch expects cost efficiencies will be achieved under Oddo's leadership. Capitalisation is expected to remain adequate, and restoring earnings generation would support this.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
ODDO AND BHF-BANK
Fitch considers that the probability of sovereign or institutional support for Oddo and for BHF-Bank, although possible, cannot be relied upon, resulting in the '5' Support Ratings and 'No Floor' Support Rating Floors. This reflects the banks' limited systemic importance in their own countries.
In addition, in Fitch's view, legislative, regulatory and policy initiatives (including the implementation of the Bank Resolution and Recovery Directive) have substantially reduced the likelihood of sovereign support for financial institutions in the EU. It is likely that senior creditors will be required to participate in losses, if necessary instead of or ahead of the bank receiving sovereign support. Hence sovereign support, although possible, cannot be relied upon.
While possible, potential support for Oddo from the main shareholder, the Oddo family, cannot be relied upon given the difficulties associated with evaluating private family fortunes.
In addition, we believe that although Oddo would have a high propensity to provide support, its ability to provide extraordinary support would be limited. BHF-Bank will account for more than 50% of the combined entity's total assets and equity, which means that it would be difficult for Oddo to provide support to such a large subsidiary.
KEY RATING DRIVERS - SUBORDINATED DEBT
The lower Tier 2 subordinated debt is notched down once from Oddo's Viability Rating in accordance with Fitch's criteria to reflect below-average recoveries for this type of debt.
VR AND IDRs
The Positive Outlook reflects Fitch's expectation that Oddo will successfully integrate BHF-Bank, which should be visible in improved earnings generation at the German bank. Inability to improve profitability of the combined entity in line with the bank's forecast, potentially arising from the bank not being able to capitalise on the expanded and more diversified franchise, would likely result in a revision of the Outlook to Stable.
A material deviation from Oddo's planned capital ratio trajectory, including failure to restore its capital ratios to above its minimum over a reasonably short period, would put the ratings under pressure. Expansion into higher-risk businesses, which is currently not expected, could also result in a downgrade
BHF-BANK's ratings are sensitive to a successful integration with Oddo. The Positive Outlook reflects the expected benefits from its new ownership, in particular in terms of franchise, strategic orientations and earnings generation. No improvement in recurring revenue generation and cost efficiency or a weakening of the bank's franchise, especially an outflow of assets under management, would result in negative rating pressure. Achieving cost efficiency could become particularly relevant if current market conditions dampen the bank's customer activity and transaction driven revenues.
SUPPORT RATING AND SUPPORT RATING FLOOR
ODDO AND BHF-BANK
An upgrade of Oddo's and BHF-Bank's Support Ratings and upward revision of their Support Rating Floors would be contingent on a positive change in the systemic importance of the banks and in the sovereigns' propensity to support their banks. This is highly unlikely, in Fitch's view.
The rating is sensitive to changes in Oddo's Viability Rating and therefore to the same factors that would drive a change in the Viability Rating.
The rating actions are as follows:
Oddo et Cie
Long-Term IDR: affirmed at 'BBB-'; Outlook revised to Positive from 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'
Long-term IDR affirmed at 'BBB-'; revised to Positive from Stable
Short-term IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'.