Fitch Ratings has affirmed the
In addition, Fitch has affirmed the IDRs of BK's operating subsidiaries, including
Key Rating Drivers
VR Underpins IDR: BK's IDR is driven by its 'aa-' Viability Rating (VR), strong franchise, conservatively managed balance sheet and strong liquidity. These attributes are offset by Fitch's assessment of the company's weaker earnings and profitability, and capital and leverage, relative to similarly rated banks. The Outlook is Stable, as Fitch expects BK's credit fundamentals to remain in line with its current ratings despite Fitch's expectations for a weaker economy in 2024.
Leading Franchise Supports Ratings: The ratings receive continued support from BK's leading franchise in global trust and custody, along with a competitive position in the asset management and wealth management businesses, and a dominant position in securities clearing. The company's business model produces high levels of relatively stable fee-based revenue at about 75% of total revenues at FY23, which Fitch views favorably. The scale and breadth of product offerings, in businesses with high barriers to entry, results in strong and sticky client relationships.
Strong Risk Culture: Fitch believes BK has strong controls and effective oversight across all risk domains and the conservative risk culture is embedded throughout the organization. Fitch considers the company's operational risk, its main risk factor, well managed, supported by low operational loss history over time. Cyber risk is a prominent risk factor for the bank, given BK's significant role in providing market infrastructure, particularly in
Low Credit Footprint: BK's loan book, at 16% of total assets, is among the lowest of Fitch-rated
Expense Control Offset NII Headwinds: Operating profit increased 27% in FY23, driven by
The company expects flat or positive operating leverage in FY24 despite NIR headwinds, driven by flat expense growth and moderate fee revenue growth. Fitch considers
Solid Capital Levels: Fitch considers the bank's capital, measured by common equity tier 1 (CET1) adequate, particularly in the context of our view of the bank's relatively low-risk balance sheet. CET1, at 11.6% at 4Q23, is above its newly announced target 11%. Tier 1 leverage, the bank's binding capital constraint, improved to 6.0%, driven by deposit outflows which reduced total assets. Fitch expects BK to distribute excess capital in excess of 100% of earnings in FY24, supported by BK's projected AOCI burndown of
Fitch believes BK will continue to run CET1 above its target range in the short-term while Tier 1 leverage remains the bank's binding capital constraint. The company reiterated its long-term strategy to distribute close to 100% of earnings over time. Fitch believes the capital strategy implies nominal asset growth over the medium given its leverage constraint.
High Balance Sheet Liquidity: Fitch considers BK's low-risk investment portfolio and highly liquid balance sheet profile a key rating strength, complemented by high levels of cash balances and a reputation as a safe haven for deposits. Average 4Q23 loan to deposits, at 24%, is among the lowest across Fitch-rated banks globally. The core business as the world's largest securities servicer and its leading treasury services segment brings in significant levels of operational and non-interest-bearing deposits. Notably, BK's deposit base has proven countercyclical during times of market stress. The rating also reflects a strong access to global capital markets and high level of contingent liquidity.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
BK's ratings would be at risk if the CET1 were to approach, or ultimately dip below, 10% for several quarters in the absence of a credible plan for recovery in CET1 to levels consistent with recent years at, or near, 10%. Fitch expects the bank to maintain Tier 1 leverage above regulatory minimums. A capital level below the regulatory well-capitalized minimum at either the holding company or operating company could lead to a lower rating.
The ratings could be negatively affected by outsized deterioration in the level and volatility of earnings. Should the bank's level of annualized operating profit/risk-weighted assets fall below 1.5% for several quarters, Fitch may revise the Rating Outlook on the LT IDRs to Negative or downgrade the VR and Long-Term IDRs.
Fitch believe the main threat to the business model and ratings would result from a large, idiosyncratic technological (including cyber), counterparty or operational loss leading to reputational damage that causes clients to withdraw assets from the bank. Fitch believes these risks are well-monitored and controlled but acknowledge they are inherently difficult to predict and quantify. A large incident that causes a loss equivalent to 5% of revenue or greater would likely prompt Fitch to consider a negative rating action.
Although not expected, should specific protections within BK's legal structure not hold up and not allow for uninterrupted liquidity availability from the IFE under business as usual, the holding company's VR and IDRs could be notched down accordingly.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The ratings are already near the top of Fitch's global rated bank universe. As a result, Fitch believes there is limited potential for upward rating momentum.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Government Support Rating (GSR): BK's GSR of 'ns' reflects Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BK becomes non-viable. In Fitch's view, implementation of the
Senior Debt Ratings: BK's senior debt ratings are aligned with the firm's IDRs, as a default on these obligations equates to a default of the holding company.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Government Support Rating (GSR):In Fitch's view, BK's GSR would be sensitive to any change in
Long-Term and Short-Term Deposit Ratings: The long-term and short-term deposit ratings for BNYM are sensitive to any change to BK's Long-Term and Short-Term IDRs;
Senior Debt Ratings: Senior debt ratings are sensitive to any change in BK's IDRs;
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Domestic Subsidiaries: The VRs remain equalized between BK and its material domestic operating subsidiaries, namely BNYM,
BNYM and other
In addition, the intermediate holding company,
International Subsidiaries: The IDRs of BK's material international subsidiaries, namely
Long- and Short-Term Deposit Ratings: BNYM's domestic (uninsured) deposit ratings are one notch higher than its senior debt ratings reflecting uninsured depositors' superior recovery prospects in case of default, given depositor preference in the
Derivative Counterparty Ratings: Derivative Counterparty Ratings (DCRs) were affirmed for BK and its main operating banks as they either have significant derivatives activity or are counterparties to Fitch-rated structured finance transactions. The DCRs are at the same level as the respective companies' LT IDRs as they have no definitive preferential status over other senior obligations in a resolution scenario and; therefore, the ratings will move in line with the IDR.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Domestic Subsidiaries: BK's material domestic operating subsidiaries' common VR and Long-Term IDR would be sensitive to the intrinsic creditworthiness of the group as a whole. Additionally, the subsidaries' Long-Term IDR would be sensitive to changes in existing TLAC or long-term debt requirements which impact the size of junior debt or resolution buffers.
International Subsidiaries: The Long-Term IDRs of BK's material international subsidiaries would be sensitive to a change in BNYM's Long-Term IDR, a change to these entities' entitlement to intragroup resources under BK's resolution plan or Fitch's reassessment of the plan's credibility. Moreover, the Long-Term IDRs of BK's international subsidiaries are sensitive to Country Ceiling constraints.
Long- and Short-Term Deposit Ratings: Deposit ratings of domestic or international depository subsidiaries would be primarily sensitive to changes in their respective Long-Term IDRs.
Derivative Counterparty Ratings: The DCR is primarily sensitive to a change in BNYM's Long-Term IDR. In addition, it could be upgraded one notch above the IDR if a change in legislation creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario.
VR ADJUSTMENTS
A Business Profile score of 'aa-' was assigned above the implied score of 'a' due to the follow adjustment reasons: Market Position (positive).
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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