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Basellandschaftliche Kantonalbank Basellandschaftliche Kantonalbank Primary Credit Analyst: Salla von Steinaecker, Frankfurt (49) 69-33-999-164; [email protected] Secondary Contact: Fouad Bouhlou, Frankfurt (49) 69-33-999-191; [email protected] Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2015 1 1442873 | 301765380 Basellandschaftliche Kantonalbank Additional SACP a+ Support +2 0 + + Factors Anchor a- Issuer Credit Rating Business GRE Support +2 Adequate Position 0 Capital and Very Strong Earnings +2 Group Support 0 Risk Position Adequate 0 AA/Stable/A-1+ Funding Average 0 Sovereign Support 0 Liquidity Strong Major Rating Factors Strengths: Weaknesses: • Strong retail banking franchise in Canton of • Concentration risk due to focus on residential Basel-Country. mortgage lending in the home region. • Sound financial profile, underpinned by very strong • Limited geographic, business, and earnings capitalization and stable earnings. diversification. • High quality loan book dominated by granular and • Little growth potential. well-collateralized residential mortgages. Outlook: Stable Standard & Poor's Ratings Services' stable outlook on Switzerland-based Basellandschaftliche Kantonalbank (BLKB) reflects that on the bank's majority owner and guarantor, the Canton of Basel-Country. The stable outlook also reflects our expectation that the bank's status as a government-related entity (GRE) and the "extremely high" likelihood of support will not change in the foreseeable future. Moreover, we expect that BLKB will maintain its sound financial profile, underpinned by its very strong capitalization and sound earnings capacity in the near term. We could take a negative rating action if BLKB's ties with Canton of Basel-Country were to loosen or changes to the canton's statutory guarantee were made. However, we currently consider this scenario unlikely and we expect BLKB's existing obligations will be grandfathered. A positive rating action is remote at this stage, in our view, as we do not expect BLKB to adjust its comparatively concentrated business model. However, a positive rating action on the Canton would trigger an upgrade of BLKB. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2015 2 1442873 | 301765380 Basellandschaftliche Kantonalbank Rationale Our ratings on BLKB are based on its anchor of 'a-', its "adequate" business position, "very strong" capital and earnings, "adequate" risk position, "average" funding, and "strong" liquidity, as our criteria define these terms. The SACP is 'a+'. We continue to consider BLKB to be a GRE with an "extremely high" likelihood of receiving timely and sufficient extraordinary support from the Canton of Basel-Country in times of stress. We base this opinion on BLKB's "very important" role and "integral" link to its home canton. This provides a two-notch uplift from the 'a+' SACP to arrive at the 'AA' issuer credit rating on BLKB. Anchor: 'a' for banks operating solely in Switzerland The anchor reflects BLKB's Swiss headquarters and its credit exposures, which are almost exclusively to Swiss-domiciled counterparties. Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The BICRA score of '2' for Switzerland includes our evaluation of low economic risk and low industry risk. Consequently our anchor for a commercial bank operating only in Switzerland is 'a-'. In this respect, we view Switzerland as a highly diversified and competitive economy, benefiting from one of the highest GDPs per capita in the world and very robust government finances. We believe that large parts of the Swiss banking market demonstrate a conservative risk and lending culture. That said, economic risk has increased, due to an acceleration of residential real estate price increases and real estate loan growth during the past few years, which has led to increasing economic imbalances. The Swiss banking industry is supported by its sizable and very stable customer deposit base. Pure domestic Swiss banks have not loosened credit standards in recent years, thanks to sound earnings potential from core products. We consider regulatory standards to be more stringent than in other developed countries. Table 1 Basellandschaftliche Kantonalbank Key Figures --Year-ended Dec. 31-- (Mil. CHF) 2015* 2014 2013 2012 2011 Adjusted assets 23,495.0 21,743.8 20,517.9 19,232.6 18,725.6 Customer loans (gross) 18,344.7 18,301.6 17,345.8 16,444.7 15,695.4 Adjusted common equity 1,966.5 1,853.6 1,764.0 1,654.8 1,550.4 Operating revenues 184.5 356.5 349.8 364.0 364.6 Noninterest expenses 90.8 172.9 167.8 173.0 192.9 Core earnings 92.7 180.2 179.6 185.5 169.1 *Data as of June 30. CHF--CHF-Swiss Franc. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2015 3 1442873 | 301765380 Basellandschaftliche Kantonalbank Business position: Well-established regional franchise in the Canton of Basel-Country We consider BLKB's business position to be adequate in comparison with other domestic banks, balancing its regional concentration with its exceptional business stability over the economic cycle. BLKB is the eighth-largest cantonal bank in Switzerland in terms of assets and operates in the economically strong region of Northwestern Switzerland. As of June 30, 2015, the bank's total assets equaled Swiss franc (CHF) 23.5 billion (€21.9 billion). Similar to most cantonal banks, BLKB's business activities are mainly focused on residential mortgage lending (78% of the total loan book) and lending to small and midsize enterprises in the region (10%); lending to public bodies and others accounts for the remainder (12%). BLKB's business activities are accompanied by private banking operations (assets under management of about CHF 14 billion in 2014) and to a smaller extent by client-initiated trading activities, a business model that we do not expect to change in the medium term. Although we expect BLKB to remain a market leader in its home canton, we continue to view the concentration of its business on primarily one Swiss canton as a rating weakness. However, we consider that the bank's very prudent approach to managing credit risks will enable it to continue generating stable revenues and to deal with challenges arising from its business concentration. Furthermore, we view positively BLKB's investment in Swiss direct bank Swissquote Group (not rated) and the joint launch of an online platform for e-mortgage loans to offer loans countrywide, which provides BLKB with a limited but additional source of revenues. Although we expect the volumes to remain minor in the near term, this activity points to BLKB's efforts to test new products and distribution channels and its ambitions to eventually expand its use of e-banking offerings nationwide in the future. We also observe that BLKB is proactively executing strategic initiatives in order to cope with the changing landscape in the retail banking industry due to ongoing trends toward digitalization and standardization. We are confident that BLKB is capable of meeting these challenges in order to secure its current business position. Table 2 Basellandschaftliche Kantonalbank Business Position --Year-ended Dec. 31-- (%) 2015* 2014 2013 2012 2011 Loan market share in country of domicile N/A 1.7 1.6 1.6 1.6 Deposit market share in country of domicile N/A 1.4 1.3 1.4 1.5 Total revenues from business line (mil. CHF) 202.9 357.4 361.1 365.3 371.3 Commercial & retail banking/total revenues from business line 100.0 100.0 100.0 100.0 100.0 Return on equity 5.3 6.1 6.3 6.6 6.9 *Data as of June 30. CHF--Swiss francs. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. Capital and earnings: Very strong capitalization supported by stable earnings We anticipate that BLKB's stable earnings generation and its conservative capital policy will not change. Therefore, we assess BLKB's capital and earnings as very strong. We expect BLKB's risk-adjusted capital ratio (RAC) to gradually increase to the range 23%-24% over the next 18-24 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2015 4 1442873 | 301765380 Basellandschaftliche Kantonalbank months, compared with 22.7% at year-end 2014. The lower range compared with our previous RAC projection (and compared with a ratio of 25.3% in 2013) results mainly from the increased capital requirements under our capital framework, due to the higher economic risk we associate with exposures on Swiss counterparties following our revision of the BICRA assessment on Switzerland in December 2014. However, our expectation is that BLKB's capital buildup will exceed the growth in Standard & Poor's risk-weighted assets over the projection period, allowing it to maintain a RAC ratio that is very strong in a global comparison. We view BLKB's earnings capacity as strong and predictable, even compared with that of other cantonal banks. We expect the bank's profit before tax to be in the range €95 million-€105 million through 2015 and 2016 (it was CHF52 million in the first half of 2015). We expect BLKB's loan growth to slow down from 5.5% in 2014 to about 2%-3% in the next two years. At the same time, we anticipate that BLKB will focus on improving its lending margins in the mortgage loan business. The earnings will also be supported by stable fee and commission income driven by the securities and wealth management business. We expect the bank's dividend policy to remain in line with previous years, with a payout ratio of 50%-55%. Consequently, we estimate BLKB's three-year average earnings buffer, which measures the capacity for a bank's earnings to cover its normalized credit losses, at a very strong 150 basis points of its Standard & Poor's risk-weighted assets.
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