Fitch Ratings has affirmed Oddo et Compagnie's (Oddo) 'BBB-' Long-Term Issuer Default Rating (IDR), 'F3' Short-Term IDR and 'bbb-' Viability Rating (VR). At the same time, the Outlook on the Long-Term IDR has been revised to Stable from Negative. A full list of rating actions is at the end of this commentary.
Key rating drivers - IDRs, VR and senior debt
The Outlook revision reflects the bank's business model being increasingly oriented towards wealth management (WM), which currently generates the bulk of the bank's operating profit, the bank's improved operating profitability and its reduced risk profile. Oddo's IDRs, VR and senior debt ratings continue to reflect the bank's prudent risk-taking approach, sound liquidity and adequate capital. They also take into account the bank's niche franchise, small size and exposure to some earnings volatility in its IB business.
Oddo's operating profitability has benefitted from the restructuring of its investment banking (IB) business, which has also led to a reduced risk profile, and the successful implementation of cost cutting measures. The bank exited or streamlined loss-making IB businesses (i.e. option market-making and cash equity) and as a result IB reached break even in 2012 and operating profitability was satisfactory in H113. Remaining IB businesses will by nature continue to be prone to earnings volatility, all the more so as Oddo's franchise is small and therefore more exposed to difficult market conditions, lower business volumes or potential regulatory changes.
The WM business continues to perform well. Net new money was positive for Oddo's three businesses in H113 (asset management, private banking and securities services), allowing for stable and balanced growth. WM particularly benefited from the integration of two entities acquired in 2011 (Banque Robeco and Banque d'Orsay) through significant costs synergies.
Oddo maintains cautious liquidity management and relatively low leverage as it aims to remain independent. Its portfolio of liquid assets is ample and largely covers its relatively modest short-term funding needs.
Fitch considers that Oddo's ownership positively influences its prudent risk approach. Philippe Oddo (one of the two unlimited partners) is personally liable for any loss, and around one-third of Oddo's employees hold 30% of the bank's capital.
Rating sensitivities - IDRs, VR and senior debt
Oddo's IDRs and VR remain sensitive to an evolution of its business model and an expansion into riskier businesses (notably in IB), which is currently not expected. Any erosion of its recurring profitability, or indication of a weakening of its franchise would be a negative rating factor. Oddo's IDRs and VR could be downgraded if the bank's capital level materially worsened or its liquidity position significantly weakened. Upside potential for Oddo's IDRs and VR is not expected in the short-term.
Key rating drivers and sensitivities - Support rating and support rating floor
Fitch considers that the probability of sovereign or institutional support for Oddo, although possible, cannot be relied upon, resulting in a '5' Support Rating and a 'No Floor' Support Rating Floor.
Key rating drivers and sensitivities - Subordinated debt
The lower Tier 2 subordinated debt issued by Oddo is notched off Oddo's VR in accordance with Fitch's criteria to reflect below average loss severity for this type of debt compared to average recoveries. The rating is sensitive to changes in Oddo's VR.