LGT Bank in Liechtenstein Affirmed At 'A+/A-1' On Bank Criteria ...

Research Update:
LGT Bank in Liechtenstein Affirmed
At 'A+/A-1' On Bank Criteria
Change; Outlook Negative
Primary Credit Analyst:
Per Tornqvist, Stockholm (46) 8-440-5904;per_tornqvist@standardandpoors.com
Secondary Contact:
Dirk Heise, Frankfurt (49) 69-33-999-163;dirk_heise@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
December 5, 2011
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Research Update:
LGT Bank in Liechtenstein Affirmed At
'A+/A-1' On Bank Criteria Change; Outlook
Negative
Overview
• Following a review under Standard & Poor's revised bank criteria
(published on Nov. 9, 2011), we have affirmed our 'A+/A-1' ratings on LGT
Bank in Liechtenstein. The outlook is negative.
• In our view, LGT Bank has an adequate business position, capital and
earnings, and risk position, as well as average funding and adequate
liquidity, reflecting an SACP of 'a-'.
• We consider LGT Bank to have high systemic importance in Liechtenstein,
which provides two notches of uplift above the SACP.
• The negative outlook reflects the considerable challenges the group faces
in establishing its franchise in new markets in competition with much
larger institutions and in an increasingly difficult environment for
private banks.
Rating Action
As previously announced on Dec. 5, 2011, Standard & Poor's Ratings Services
affirmed its 'A+' long-term and 'A-1' short-term counterparty credit ratings
on LGT Bank in Liechtenstein AG (LGT Bank). The outlook is negative.
Rationale
Standard & Poor's bases its ratings on LGT Bank on the company's "adequate"
business position, "adequate" capital and earnings, and "adequate" risk
position, as well as its "average" funding and "adequate" liquidity, as our
criteria define these terms. The stand-alone credit profile (SACP) is 'a-'.
Our bank criteria use the economic risk and industry risk scores from our
Banking Industry Country Risk Assessment (BICRA) to determine a bank's anchor,
the starting point in assigning an issuer credit rating. The anchor for a
commercial bank operating only in Liechtenstein is 'a-'.
The BICRA score includes our evaluation of economic risk, reflecting
Liechtenstein's extremely high wealth, export-oriented industries, and very
strong public finances. Owing to the predominance of private banking, lending
is of minor importance. Loans are typically highly collateralized and credit
losses have been low. The industry faces significant changes because of
foreign governments' regulations to prevent tax evasion. We therefore expect
Liechtenstein banks to strengthen their positions in international onshore
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Research Update: LGT Bank in Liechtenstein Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Negative
private banking markets and to invest in branding and service quality.
Systemwide funding benefits from the banks' sizable deposit bases, but remains
vulnerable to the confidence sensitivity of wealth management activities.
When we assess economic risk for private banks, we use the economic risk
factor for the country of origin, which in the case of LGT Bank is
Liechtenstein.
LGT Bank's business position is "adequate", in our view, reflecting its strong
competitive position in its home market, Liechtenstein, while competing in a
global market against much larger institutions that already have a foothold in
wealth management. With Swiss franc (CHF) 24 billion in total assets and more
than CHF88 billion in assets under management as of June 30, 2011, the LGT
group is a specialized wealth management organization. The group is striving
for international expansion to counter the waning benefits of banking secrecy.
Despite LGT Bank's progress in penetrating international markets, challenges
remain, including the continuing instability of financial markets and the
changing regulatory and taxation environment in Liechtenstein. The banking
group is owned by the princely family and also manages the family's wealth;
the so-called "Princely Portfolio" serves as a profile product for the group.
We expect LGT to pursue its international onshore market expansion focused on
LGT's core competencies and without transforming its current business profile.
Our assessment of capital and earnings as "adequate" reflects our view of LGT
Bank's adequate capital and our projected risk-adjusted capital (RAC) ratio of
about 8.5% to 9.5% for the bank over the next 18 months. In addition, we
regard LGT Bank's quality of capital and earnings as strong and comparing
favorably with that of peers in the industry. We currently view the company's
capital ratios as adequate, and we expect them to continue comparing well with
those of private banks in the near to medium term. Our RAC ratio for LGT Bank
reflects material deductions from unrealized gains on the Princely Portfolio
in which the bank invests. Furthermore, based on our calculations, the bank's
three-year average earnings buffer is 59 basis points, which is in line with
that of banks with "adequate" capital and earnings. Furthermore, we do not
project a reduction or increase of LGT Bank's investments in the Princely
Portfolio, which could impact capitalization under our definition.
LGT Bank's risk position is "adequate", in our view. We base this assessment
on our view that LGT Bank's credit risk is below average, since lending does
not constitute a main activity for the group. The bank's credit losses have
therefore been very limited over the past five years, representing on average
0.54% of its operating revenues. Nevertheless, LGT Bank engages in complex
financial transactions and is exposed to market risks, which are more material
to the business operations than credit risk. Market and operational risk
constitute 65% of the bank's total risk-weighted assets under Standard &
Poor's capital framework. Complex product structures and tailored products
require considerable administrative and control functions and expose the bank
to event risks. LGT Bank has a long track record of catering to clients that
require tailored services. However, our weighting of market and operational
risks reflects the concentration risk associated with this type of business.
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Research Update: LGT Bank in Liechtenstein Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Negative
LGT Bank has "average" funding and "adequate" liquidity, in our opinion, since
the bank is chiefly a deposit-funded institution, with deposits amounting to
three times loans. Wholesale funding is mainly for managing the group's
liquidity needs over the short to medium term. This funding profile compares
favorably with that of most financial institutions that rely on wholesale
funding for their core loan business and also reflect LGT Bank's client base.
Owing to its deposit surplus, the bank holds a large portfolio of money market
and fixed-income instruments, which results in substantial balance-sheet
liquidity.
The long-term counterparty credit rating is two notches higher than the SACP,
reflecting our view of LGT Bank's "high" systemic importance in Liechtenstein
and our assessment of the Liechtenstein government as "supportive".
Outlook
The negative outlook on LGT Bank reflects the strategic challenges that the
group is facing on multiple fronts. First, the prolonged period of rising
leverage in the western world is coming to a close and is restricting growth
opportunities for wealth management business in many mature markets. In
addition, LGT Bank's success in transforming itself into an international
wealth manager will depend on its performance and the relative yield it
provides investors. The transformation process and the task of competing with
larger, well-established competitors will require considerable geographic and
organizational growth.
We would consider a downgrade if LGT Bank's new assets under custody,
administration, or management were to decline, translating into decreasing
recurring revenues; or if potential acquisitions caused the RAC ratio to fall
to less than 7%.
We could revise the outlook to stable if LGT Bank showed steady progress in
its efforts to diversify revenue and establish itself in markets offering
sustainable growth possibilities. A stable inflow of new funds in excess of
10% annually, resulting in a sustainable improvement in pretax earnings, could
also trigger a positive rating action. Growth in recurring fee income is of
particular importance in this assessment.
An upgrade is unlikely at this juncture.
Ratings Score Snapshot
Issuer Credit Rating A+
SACP a-
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Research Update: LGT Bank in Liechtenstein Affirmed At 'A+/A-1' On Bank Criteria Change; Outlook Negative
Anchor a-
Business Position Adequate (0)
Capital and Earnings Adequate (0)
Risk Position Adequate (0)
Funding and Liquidity Average and adequate (0)
Support 2
GRE Support 0
Group Support 0
Sovereign Support 2
Additional Factors 0
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Banking Industry Country Risk Assessment Methodology And Assumptions,
Nov. 9, 2011
• Group Rating Methodology And Assumptions, Nov. 9, 2011
• Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
Ratings List
Ratings Affirmed
LGT Bank in Liechtenstein AG
Counterparty Credit Rating A+/Negative/A-1
LGT Finance Ltd.
Senior Unsecured* A+
*Guaranteed by LGT Bank in Liechtenstein.
Additional Contact:
Financial Institutions Ratings Europe;FIG_Europe@standardandpoors.com
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column. Alternatively, call one of the following Standard & Poor's numbers:
Client Support Europe (44) 20-7176-7176; London Press Office (44)
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm
(46) 8-440-5914; or Moscow 7 (495) 783-4009.
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