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Wed 01 Jun, 2022 - 08:22 ET Fitch Ratings - Paris - 01 Jun 2022: Fitch Ratings has affirmed Quintet Private Bank (Europe) S.A.'s Long-Term Issuer Default Rating (IDR) at 'BBB' and Viability Rating (VR) at 'bbb'. The Outlook is Stable. Fitch has withdrawn Quintet's Support Rating of '5' and Support Rating Floor of 'No Floor' as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria in November 2021. In line with the updated criteria, we have assigned Quintet a Government Support Rating (GSR) of 'no support' (ns). Key Rating Drivers Niche Franchise, High Cost Base: Quintet's ratings reflect the bank's weak profitability, small, although geographically diversified, franchise in private banking, and an organic and acquisition-driven growth strategy. The latter is expected to result in a strengthened franchise, but is also subject to execution and integration risks. The ratings also factor in well-managed liquidity and satisfactory capitalisation, and benefit from the bank's presence in wealthy economies such as the UK, the Netherlands and Luxembourg. Growth-Driven Strategy: Quintet is a mid-tier private bank, with local franchises in six western European countries. Except for the Netherlands, its market share numbers in single-digits in most countries it operates in. The bank's organic and acquisition-driven strategy is aimed at increasing critical mass and relevance in these markets. The strategy appears well-executed but entails significant cost and execution risks. Its unexpected exit from Switzerland, a market where Quintet re-entered a couple of years ago, confirms Fitch's view that Quintet's strategic objectives are opportunistic and may change over time. Moderate Risk Appetite: Business growth is a key driver of Quintet's risk appetite, which, in other areas such as loan underwriting and investment policies, we deem generally in line with that of similarly rated peers. Lending is mostly secured and adequately underwritten, and its securities portfolio is largely investment-grade. Given the continued business expansion, maintaining an adequate control framework is crucial to limiting operational risk. End to Losses in Sight: Fitch expects Quintet to make a small operating loss in 2022 before turning profitable in 2023. The turnaround will be driven by a continued build-up of assets under management, healthy loan growth, higher EU interest rates and contained operating costs. Adequate Capitalisation: Quintet's common equity Tier 1 ratio (CET1) was 17.9% at end-2021 and its total capital ratio 21.9%. This provides a comfortable buffer above its 8.7% CET1 and 13.4% total capital minimum requirements, including capital buffers. Capitalisation underpins the bank's rating given weak capital-generation prospects. We expect the CET1 ratio will gradually decrease in the next 12-24 months on continued lending and business growth, but to remain around 15%. Well-Managed Liquidity: Quintet has limited external funding requirements due to its balance sheet-light business model. The transition from subsidiaries to branches in the EU reduces complexity and enhances capital and funding fungibility across the group. Liquidity is well-managed and supported by a large cash balance and liquid assets of appropriate quality. Short-Term IDR: Quintet's 'F2' Short-Term IDR is the higher of two options corresponding to a 'BBB' Long-Term IDR. This reflects its funding & liquidity score of 'a-', which is above the minimum required to obtain a Short-Term IDR of 'F2' Rating Sensitivities Factors that could, individually or collectively, lead to negative rating action/downgrade: Downside pressure on the ratings would most likely arise if its CET1 capital is eroded by larger-than- expected losses leading to a fall in the CET1 ratio to below 14.5%-15%, with no concrete plan of restoring it swiftly to its target levels. Ratings would also come under pressure if we perceive an increase in the bank's risk appetite. Factors that could, individually or collectively, lead to positive rating action/upgrade: Rating upside is currently limited unless the bank sustainably strengthens its critical mass and franchise as well as significantly improve its profitability. Successful implementation of its growth strategy leading to strengthened earnings and, ultimately, supporting capital flexibility could be rating-positive. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS The'F2' short-term rating of the bank's EUR750 million EUR commercial paper programme is equalised with the bank's Short-Term IDR. The additional Tier 1 notes of Quintet are rated four notches below its 'bbb' VR, reflecting Fitch's baseline notching for loss severity (two notches) and for non-performance (two notches). Our assessment is based on the bank operating with a CET1 ratio comfortably above coupon-omission points, the presence of substantial distributable reserves, and our expectation that this will continue. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: The short-term debt rating on the euro commercial paper programme is sensitive to a downgrade of the Short-Term IDR. The ratings of the AT1 notes are primarily sensitive to a downgrade of the bank's VR. Factors that could, individually or collectively, lead to positive rating action/upgrade: The short-term debt rating on the euro commercial paper programme would be upgraded if the Short-Term IDR is upgraded. The ratings of the AT1 notes would be upgraded if the VR is upgraded. VR ADJUSTMENTS The earnings & profitability score of 'bb' is above the 'b & below' implied score due to the following adjustment reason: historical and future metrics (positive). The capitalisation & leverage score of 'bbb' is below the 'aa' implied score due to the following adjustment reasons: internal capital generation and growth (negative) and historical and future metrics (negative). The funding & liquidity score of 'a-' is below the 'aa' implied score due to the following adjustment reasons: deposit structure (negative). Best/Worst Case Rating Scenario International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on ESG Relevance Scores, see www.fitchratings.com/esg Source : https://www.fitchratings.com/research/banks/fitch-affirms-quintet-private-bank-europe-sa-at-bbb-outlook-stable-01-06-2022