October 24, 2017 / 10:30 AM / a year ago

Fitch Affirms ZKB's IDR at 'AAA'/Stable; VR at 'a+'

(The following statement was released by the rating agency) LONDON, October 24 (Fitch) Fitch Ratings has affirmed Zuercher Kantonalbank's (ZKB) Long-Term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook, Short-Term IDR at 'F1+', Viability Rating (VR) at 'a+' and Support Rating at '1'. KEY RATING DRIVERS IDRS ZKB's IDRs and Support Rating are based on institutional support from the Canton of Zurich (AAA/Stable), the bank's guarantor and sole owner, and are equalised with the canton's IDRs. The Canton guarantees all of ZKB's non-subordinated liabilities according to a specific cantonal law (ZKB Law). ZKB's balance sheet is large relative to the canton's budgetary resources but Fitch believes the bank's stable business model and strong capitalisation would trigger manageable recapitalisation needs in a realistic stress scenario. Given ZKB's domestic systemically relevant bank (D-SIB) status, we expect that the Swiss central bank would provide liquidity to ZKB in case of need. The canton's guarantee does not explicitly ensure timely support, but Fitch believes that support, if necessary, would be provided in a timely fashion, given ZKB's high importance for the canton and the potential repercussions of a failure for the Swiss financial sector. ZKB's strategic importance to the canton is underpinned by the bank's mandate as a cantonal bank, which requires the bank to concentrate its activities on the Canton of Zurich, with limited nationwide or international activities. The Canton of Zurich is also required to have a cantonal bank according to the cantonal constitution. As a D-SIB, ZKB must prepare a contingency plan to be approved by FINMA and the canton in its capacity as the sole potential contributor of capital support. The plan could require the canton to commit a large volume of contingent capital relative to its own resources. However, we do not expect this to jeopardise the canton's ratings or trigger a reassessment of our support assumptions underpinning ZKB's IDRs. VR ZKB's VR reflects the bank's stable and resilient business model, sound profitability, strong asset quality, conservative risk appetite, and strong funding and capitalisation. The VR also benefits from ZKB's leading deposit and residential mortgage lending franchise in the Canton of Zurich, where the bank's operations are concentrated. This geographic concentration is mitigated by Zurich's economic strength as Switzerland's largest economic region. ZKB's main risk stems from a large exposure of property loans in Zurich', which is mitigated by the bank's sound credit underwriting standards, with moderate loan-to-value ratios. We believe that ZKB could comfortably absorb the credit losses arising from a moderate fall in property prices. ZKB's profits have been fairly stable through the economic cycle but are under pressure from negative interest rates. As with most of its main competitors, the bank has responded by adjusting pricing in mortgage lending but it has not started to charge negative rates on deposits, except for short-term funds from some large corporates. A significant share of ZKB's large cash balance at Swiss National Bank is subject to the negative rates. The integration of Swisscanto's asset management activities, which ZKB fully acquired in 2015, has helped revenue diversification, increasing the proportion of fees as a revenue source. Trading income also continues to contribute a material proportion of operating income as the bank has good franchises in some trading segments. We expect ZKB's cost base to remain higher and less flexible than many peers' given the cantonal mandate, despite synergies from the integration of Swisscanto. We expect loan impairment charges (LICs) to increase only moderately as releases from loan loss reserves are likely to decrease. LICs should remain low in the near term, helped by the borrower-friendly interest rate environment and a resilient Swiss economy as Fitch expects moderate GDP growth to continue in the next two years. ZKB's end-June 2017 CET1 ratio of 15.7% reflects the high regulatory capital requirements imposed on Swiss global and domestic SIBs. Internal capital generation is adequate, even though ZKB typically distributes about half of its net income to the canton and its municipalities. The CHF575 million undrawn portion of its endowment capital committed by the canton supports the VR as we would view a drawdown as ordinary institutional support. ZKB's funding is underpinned by a large and mostly granular deposit base despite some concentrated corporate deposits. Client funds account for over half of non-equity funding and cover almost the full volume of client loans. Wholesale funding needs are moderate. RATING SENSITIVITIES IDRS ZKB's IDRs and Support Rating are primarily sensitive to changes in the bank owners' ability or propensity to support the bank. A downgrade of the Canton of Zurich's IDRs would result in a downgrade of ZKB's IDRs. An increase in the canton's contingent liabilities, which are dominated by ZKB, could put pressure on the canton's and thus ZKB's IDRs. For instance, sustained growth of the bank's balance sheet in excess of the canton's GDP growth or a multi-notch downgrade of ZKB's VR could signal a higher likelihood of support requirements for the canton. ZKB's IDRs and Support Rating are also sensitive to changes to ZKB's relationship with the canton, especially if the ZKB Law is amended in a way that would weaken the guarantee's effectiveness or cast doubt on the timeliness of support. However, we view this scenario as unlikely in the foreseeable future. VR The VR is primarily vulnerable to large property-related losses that could arise from a sharp drop of property prices in Zurich. However, Fitch does not expect significant house price correction in Zurich in the near term. The ratings would also come under pressure if the bank increases its risk appetite, which could be indicated by higher loan growth or by greater exposure to interest rate risk in the banking book. ZKB's sound capitalisation and profits could absorb a material fine related to a settlement with the US authorities over the bank's legacy US off-shore private banking clients. However, a settlement amount materially above our expectations could reduce ZKB's financial flexibility and damage the bank's reputation, and thus put pressure on the VR. Contact: Primary Analyst Krista Davies Director +44 20 3530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Maria Shishkina Associate Director +44 203 530 1379 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below