Short-term Prime-1 rating unaffected
Frankfurt am Main, November 16, 2012 -- Moody's Investors Service has today confirmed Bank Julius Baer & Co. AG's (BJB) A1 long-term bank deposit and issuer rating and its C+ standalone bank financial strength rating (BFSR), equivalent to a standalone credit assessment of a2. Concurrently, Moody's confirmed Julius Baer Group's (JBG) A2 long-term issuer rating -- which is one notch below BJB's A1 deposit rating -- reflecting the structural subordination of the Group. BJB's Prime-1 short-term deposit rating is unaffected and all ratings carry a negative outlook.
Today's rating actions conclude Moody's review, initiated on 15 August 2012, following JBG's announcement of its intention to acquire Merrill Lynch's international wealth-management (IWM) business outside the US and Japan from Bank of America.
The decision to confirm BJB's and JBG's ratings reflects Moody's view that the likely decline of the group's capital ratios over the course of the IWM transaction is less pronounced than expected when Moody's initiated the ratings review. In addition, Moody's says that BJB's A1 rating continues to benefit from one notch of systemic support as one of the largest private banks in Switzerland, an industry of strategic importance for the country.
Please refer to the end of this press release for a list of affected ratings.
RATINGS RATIONALE RATINGS CONFIRMATION The decision to confirm BJB's and JBG's ratings reflects Moody's view that the likely decline of the group's capital ratios over the course of the IWM transaction is less pronounced than expected when the review was opened. In September 2012, an extraordinary shareholders' meeting approved the creation of CHF750 million new share capital to finance the transaction. Subsequently, JBG successfully placed a rights issue with gross proceeds of CHF492 million while approximately CHF240 million of new equity capital will be issued to Bank of America as and when assets under management (AUM) are transferred. As a third component to fund the deal for a total consideration of CHF1.47 billion -- assuming that JBG acquires up to CHF72 billion in AUM -- JBG issued CHF250 million new Basel 3 compliant Perpetual Tier 1 Subordinated Bonds. In Moody's view, these capital measures, in combination with the group's expected future earnings capacity, create adequate capital buffers to mitigate unforeseen risks that are generally related to private banking and wealth management, including legal risks.
The originally communicated EUR250 million equity capital buffer to increase flexibility for future acquisitions was not proposed to JBG's extraordinary shareholder meeting. The rating agency considers this an important step (1) towards limiting the bank management team's options regarding the use of funds to make further acquisitions; and (2) to focus on the considerable task of integrating the IWM acquisition.
RATIONALE FOR THE NEGATIVE OUTLOOK
The decision to assign negative outlooks on BJB's and JBG's ratings reflects Moody's view that high integration risks from the IWM acquisition are likely to persist over an extended timeline and may have a medium-term negative impact on the group's earnings capacity. Over the projected integration phase, with full completion not expected before Q4 2014, Moody's will assess whether the group can reach its integration objectives according to the publicly announced timeline. In this respect, the transfer of client advisory and custody relationships to JBG's platform are the most import economic drivers. In addition, Moody's believes that the Group's appetite for further acquisitions has not abated, potentially exposing the Group to further integration risk. The negative outlook also reflects the risks of further profit pressures on the bank due to an extended period of low interest rates, upwards pressure on the Swiss franc, and continued client caution in the face of global macroeconomic uncertainty.
SUBORDINATED DEBT AND HYBRID CAPITAL
Moody's confirmed the rating of JBG's senior subordinated debt (LT2) at Baa1, which is two notches below BJB's adjusted standalone credit strength of a2 reflecting (1) the instrument's actual subordination in the group's capital structure; (2) the absence of "point-of-non-viability" clauses; (3) the instrument's structural subordination, because it is issued by the holding company; and (4) Moody's current assessment of the Swiss regulatory framework in respect of this debt class.
Moody's also confirmed JBG's hybrid securities (non-cumulative preferred stock) at Baa3(hyb), three notches below BJB's adjusted standalone credit strength of a2 (plus an additional notch to reflect Julius Baer Group'sLtd structural subordination). These securities have a deeply subordinated claim in liquidation and a non-cumulative coupon skip mechanism tied to the breach of a balance-sheet loss and a minimum regulatory capital trigger.
WHAT COULD MOVE THE RATINGS UP/DOWN
Currently, there is no upwards rating pressure as indicated by the negative outlook on BJB's and JBG's ratings.
In the longer term, upwards pressure on BJB's standalone credit strength and deposit rating could arise from (1) a successful, profitable expansion into the group's enlarged footprint of private banking growth markets; (2) effectively managing the IWM integration and securing the anticipated efficiency gains; and (3) a return to higher capital ratios following the transaction-implied decline from currently strong levels.
Downwards pressure could develop on BJB's standalone credit profile as a result of (1) material, prolonged erosion in AUM, as well as client or advisor attrition; (2) a further decline in pre-tax margins; (3) failure to successfully integrate and efficiently operate an enlarged, global private banking platform following the closure of the IWM transaction; (4) additional commercially or financially aggressive acquisitions; and/or (5) potential litigation charges that exceed Moody's expectations of those connected with typical private wealth-management suits (tax cases or reputational cases).
A wider notching of JBG's ratings, for instance as a result of significant double leverage at the holding company level, would also exert downwards pressure on JBG's ratings.
LIST OF AFFECTED RATINGS
The following ratings of BJB were confirmed:
- Standalone BFSR at C+, mapping to a standalone credit assessment of a2;
- Bank deposits rating at A1; - Issuer rating at A1. The following ratings of JBG were also confirmed:
- Issuer rating at A2;
- Senior subordinated debt (LT2) at Baa1;
- Hybrid securities (non-cumulative preferred stock) at Baa3(hyb).
All the above ratings carry negative outlooks.
The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.
Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Julius Baer Group Ltd. has received a Rating Assessment Service within the last two years preceding the Credit Rating Action.
Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Swen Metzler Vice President - Senior Analyst Financial Institutions Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Carola Schuler MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED,DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."
Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.
Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ("MJKK") are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, "MIS" in the foregoing statements shall be deemed to be replaced with "MJKK". MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO.
This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.