Fitch Ratings has affirmed Luxembourg-based Clearstream Banking SA's (Clearstream) Long-Term Issuer Default Rating (IDR) and Viability Rating (VR) at 'AA' and 'aa' respectively. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is below.
KEY RATING DRIVERS
VR, IDR AND DEBT RATING
The ratings of Clearstream reflect its market leading position in the international post-trade securities services industry as one of only two registered international central securities depositories (ICSDs) in Europe, with particularly strong capabilities in settlement, custody and collateral management. The ratings also recognise the bank's volume-driven and scalable business model and conservative risk appetite.
The financial profile of Clearstream, including asset quality, capitalisation and profitability remains robust, supported in particular by an inherently low exposure to credit risk. The bank has continued to perform strongly in a volatile operating environment, benefiting from its strong operational capabilities and ongoing investments in IT and risk infrastructure in recent years.
Clearstream is ultimately fully-owned by Deutsche Boerse AG (DBG, which incorporates the German stock exchange, the German CSD and Eurex Clearing).
Operational risk, and in particular systems failure, is a key risk for Clearstream and the sector as a whole. In this regard, the bank has managed this well and benefits from a very resilient risk-control framework, which is fully embedded into that of its parent, DBG, which continues to invest strongly in systems infrastructure (with particular focus on IT and cyber resilience). As the technological landscape continues to evolve and transaction volumes increase over time, we view the robustness of the risk-control framework and processing systems resilience as an increasingly important risk consideration for the credit profile strength of the bank.
Revenue generation is strong, with fee income from settlement and custody activities (which typically accounts for more than half of net revenues) being largely transaction volume-driven and recurring in nature. Our profitability assessment also recognises counter-cyclicality in Clearstream's earnings profile, with trading activity (and ultimately fee-income generation) typically increasing in periods of market stress (as evident at the onset of the Covid-19 pandemic in March/April 2020).
Profitability continues to be supported by good cost discipline, with incremental investments primarily focused on systems resilience and the strengthening of ancillary business lines. While core earnings remained resilient in 2020 (buoyed by good market activity and an increasing contribution of fund-services earnings), net income was somewhat weighed down by a significant reduction in net interest income (NII), given the low interest-rate environment in all relevant currencies.
Capitalisation is strong for Clearstream, with its common equity Tier 1 (CET1) capital ratio improving to 26.6% at end 2020 (2019: 24%). We consider Clearstream's capital management in the context of its ultimate shareholder, DBG, which although committed to maintaining key capitalisation parameters for Clearstream at reasonably conservative levels (i.e. minimum tangible equity: EUR1.1 billion), typically has a strong focus on shareholder returns, usually resulting in a fairly high dividend pay-out ratio at Clearstream (95% over the past four years). While regulatory capital is small in absolute terms considering its business volumes, the bank maintains healthy margins above minimum regulatory requirements.
Liquidity management is prudent and reflects the short-term nature of its balance sheet, with liquidity needs being largely intraday and transaction-driven. Clearstream covers its Central Securities Depositaries Regulation Cover II requirement via contingent liquidity facilities, which include unused committed revolving bank lines.
Clearstream's commercial paper rating is aligned with the bank's Short-Term IDR.
SUPPORT RATING
As a licensed bank, Clearstream is subject to the EU Bank Resolution and Recovery Directive, which provides a resolution framework whereby it is likely senior creditors will be required to participate in losses, if necessary, instead of or ahead of the bank receiving sovereign support.
We believe that while sovereign support for Clearstream is possible, it cannot be relied upon. In our view, Clearstream would first seek support from its parent, DBG. We believe that support from DBG is extremely likely given Clearstream's core position within the group and Fitch's assessment of DBG's ability to support Clearstream. This underpins the affirmation of Clearstream's Support Rating at '1'.
RATING SENSITIVITIES
VR, IDR AND DEBT RATING
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Given the already high ratings of Clearstream, upside is limited. An upgrade is subject to a notable improvement in the company profile, including greater business diversification, thereby further enhancing the risk profile; and a very low appetite for risk (particularly operational risks), supported by stronger key financial metrics, in particular strengthening earnings generation. This, together with a sustained, notable improvement in key capital metrics while Fitch's credit assessment on DBG remains unchanged or improves, would support upward rating momentum.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Operational risk is a rating sensitivity given the bank's high-volume business model and dependence on IT system robustness. As such, a higher risk appetite in the form of increased exposure to operational risk events and/or a weakening in capitalisation could lead to negative rating action.
Significant and/or sustained reputational damage, in particular if arising from outsized persistent operational losses and/or adverse legal proceedings, leading to permanent damage in the franchise value and impairing the bank's ability to attract transaction flows, could give rise to downward rating pressure.
Maintaining sound risk-weighted capital ratios is relevant for the bank's ratings, and therefore a reduction in the bank's absolute capital base would put pressure on their ratings.
The ratings are also sensitive to marked deterioration in DBG's creditworthiness, negatively affecting Clearstream's franchise, risk appetite or capitalisation (via outsized up-streamed earnings).
Clearstream's commercial paper rating is sensitive to a change in the bank's Short-Term IDR.
SUPPORT RATING
Clearstream's Support Rating is primarily sensitive to a perceived change in the propensity and ability of DBG to support Clearstream.
SUBSIDIARIES: KEY RATING DRIVERS
Not applicable
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Not applicable
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, visit www.fitchratings.com/esg
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.
Link to Rating Actions: Rating Actions
