Fitch Ratings has affirmed EFG International AG's (EFG) and EFG Bank AG's Long-Term Issuer Default Ratings (IDRs) at 'A' and Viability Ratings (VRs) at 'a'.

The Outlooks on the Long-Term IDRs are Stable. A full list of rating actions is below.

Fitch has withdrawn EFG and EFG Bank's Support Ratings (SR) of '5' and Support Rating Floors (SRF) of 'No Floor', as they are no longer relevant to Fitch's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. Fitch has assigned EFG and EFG Bank Government Support Ratings (GSR) of 'No Support' ('ns').

Key Rating Drivers

Established Wealth-Management Franchise: The Long-Term IDRs and VRs of EFG and EFG Bank reflect the group's intrinsic strength, which we assess on a consolidated basis. They reflect an established franchise, good asset quality, conservative underwriting standards and sound liquidity. EFG's ratings also reflect our assumption that holding company double leverage will continue to decrease to below 120%.

Continued Strategic Execution: EFG is continuing to successfully execute its strategy focused on cost efficiency, which is strengthening the business model. It has also reduced exposure to legacy assets and businesses that are not in line with its strategy and continues to optimise its legal entity structure and geographical footprint. As a result, the business model is increasingly focused on the bank's core competencies and its more remunerative activities.

Decreasing Operational Risks: The acquisition of BSI exposed EFG to significant operational risks, but these have been reduced through the integration process by exiting higher-risk relationships and implementing more conservative underwriting standards for new lending. Some potential legal exposures remain, including those inherited from BSI. The bank is also uniquely exposed to longevity risk from a legacy portfolio of life insurance policies, but this exposure is reducing and will cease to be material within a few years.

Good Asset Quality: Credit risk appetite is moderate, and the loan book mainly consists of well-collateralised Lombard loans. Unlike some larger peers, EFG also has small portfolios of residential and commercial mortgages. Other loans include some commercial lending, which we view as higher risk, but this portfolio is not large enough to affect our overall asset quality assessment. The impaired loans ratio decreased in 2021, mainly because a single, large legacy loan was reclassified from an impaired loan exposure to an operational risk (legal) exposure.

Structurally Improved Profitability: Operating profit reached 2.6% of risk-weighted assets in 2021 during a period of record earnings for Swiss private banks, and it remained resilient at 2.5% in 1H22, despite large market corrections. We expect operating profit to be lower in 2022, but we still expect it to be stronger than 2018-2020, due to the group's ongoing cost-efficiency programme, which will help mitigate lower earnings. Higher interest rates will also benefit EFG more than some peers, given its higher proportion of net interest income.

Sound Capitalisation: The group's consolidated IFRS common equity Tier 1 (CET1) ratio of 14.8% at end-1H22 is sound. The group no longer reports the ratio under Swiss GAAP, which was typically 200bp-300bp higher, but this does not affect our assessment. Our assessment also considers EFG's potential exposure to unresolved legal liabilities as well as the possibility that excess capital could be used for acquisitions, given the group's history of inorganic growth.

Sound Liquidity: At end-1H22, EFG had a consolidated liquidity coverage ratio of 172%, and high-quality liquid assets represented about 35% of total assets, making liquidity a rating strength. The group is predominantly funded by deposits and has relatively limited funding needs, as reflected in its 54% loan/deposit ratio.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A sustained and significant reversal in profitability could result in a downgrade. The ratings could also be downgraded if the CET1 ratio falls below the group's 14% target without the prospect to quickly restore it above this level. An increase in operational risks, such as legal risks that could significantly reduce capitalisation, could also weigh on the ratings. EFG's VR and IDR could also be downgraded if double leverage does not decrease to below 120% following the wind-down of BSI.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade would require a structural improvement in profitability without increasing risk appetite, a material and sustained reduction in Stage 3 loans and the maintenance of larger capital buffers with lower volatility.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

EFG's additional Tier 1 (AT1) notes are rated four notches below the VR to reflect their fully discretionary coupon deferral and deep subordination.

EFG and EFG Bank's GSRs reflect Fitch's view that senior creditors cannot rely on extraordinary support from the Swiss authorities in the event the entities become non-viable, given their low systemic importance and the advanced stage of resolution legislation in Switzerland, which would require senior creditors to participate in losses in case of a resolution. The group caters to an affluent international client base and does not have a retail deposit franchise in Switzerland.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The AT1 notes' rating is primarily sensitive to changes to EFG's VR and would be downgraded if EFG's VR is downgraded. It is also sensitive to changes in their notching, which could arise if their non-performance risk increases materially, for example, if buffers above mandatory coupon omission points shrink to below 100bp.

VR ADJUSTMENTS

The Business Profile score has been assigned above the implied score due to the following adjustment reason(s): Business Model (positive)

The Funding & Liquidity score has been assigned below the implied score due to the following adjustment reason(s): 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 Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg.

RATING ACTIONS

Entity / Debt

Rating

Prior

EFG International AG

LT IDR

A

Affirmed

A

ST IDR

F1

Affirmed

F1

Viability

a

Affirmed

a

Support

WD

Withdrawn

5

Support Floor

WD

Withdrawn

NF

Government Support

ns

New Rating

junior subordinated

LT

BBB-

Affirmed

BBB-

EFG Bank AG

LT IDR

A

Affirmed

A

ST IDR

F1

Affirmed

F1

Viability

a

Affirmed

a

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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