Fitch Rates KAS BANK 'A-'

Fitch Ratings has assigned KAS BANK N.V. Long- and Short-term Issuer Default Ratings (IDRs) of 'A-' and 'F2', respectively. The Outlook on the Long-term IDR is Stable. The agency has also assigned KAS BANK a Viability Rating (VR) of 'a-', a Support Rating of '5' and a Support Rating Floor of 'No Floor'.
 
Key rating drivers
KAS BANK's ratings are driven by the bank's franchise as a post-trade securities services provider to institutional investors, mostly Dutch pension funds and insurance companies, and by its low risk appetite. KAS BANK has an established franchise in its core business in the Netherlands, but Fitch views the bank's monoline business model and geographically concentrated customer base as constraints to the ratings.
The ratings also reflect a high, albeit well-managed, exposure to operational risk, moderate earnings generation and sound risk-weighted capitalisation but a small capital base.
 
Although KAS BANK has a fairly concentrated, primarily Dutch, franchise, the bank has proven that there are growth opportunities in its business as reflected by healthy increases in assets under administration and in the number of customers in the past 18 months. KAS BANK is an independent player, which differentiates it from its larger competitors, and it focuses on the specific needs of its pension fund, insurer and investment fund customers. Fitch expects KAS BANK to maintain critical mass in its core asset administration business. Management is experienced and has a track record of coherent strategy.
 
Fitch views KAS BANK's risk appetite as low. Credit risk is very low, as credit exposures are essentially intraday collateralised settlement-related facilities. There are some large low quality securities investments, a legacy from the past, which are no longer in line with the bank's tighter investment policies. KAS BANK is exposed to operational risk, but losses have been small. KAS BANK outsources its mainframe, but this is mitigated by the tight outsourcing agreements and close contacts the bank has with its main outsourcer. Manual inputs are minimal as KAS BANK's investment programmes are aimed at maximising the use of straight-through processing. Overall the risk control framework is solid.
 
Profitability is moderate and should be supported by its cost reduction programme and the bank's widening of its value-added reporting services. Continuous IT investments result in a fairly high cost base, which is not fully covered by fee income. Earnings are somewhat reliant on returns on the investment of the bank's equity.
 
KAS BANK's balance sheet is liability-driven. Its risk weighted core capital ratio is sound, at around 22% over the years; however, its leverage is fairly high and fluctuates in line with customer deposits. Capitalisation needs to be viewed in the context of the bank's high exposure to operational risk. The small equity base makes it vulnerable to shocks. Fitch expects KAS BANK to gradually improve its capital levels.
 
Support rating and support rating floor
In Fitch's view, legislative, regulatory and policy initiatives (including the implementation of the Bank Recovery and Resolution Directive - BRRD) have substantially reduced the likelihood of sovereign support for financial institutions in the EU. KAS BANK is subject to the BRRD. The bank's '5' Support Rating and 'No Floor' Support Rating Floor imply that it is likely that senior creditors will be required to participate in losses, if necessary instead of or ahead of the bank receiving sovereign support. Hence sovereign support, although possible, cannot be relied upon.
 
Rating sensitivities
Upside to the ratings is limited due to KAS BANK's fairly limited franchise and monoline business model in a global context - as reflected in Fitch's assessment of the bank's company profile - and its small equity base compared with similarly rated peers.
 
The ratings are primarily sensitive to a weakening of capitalisation, an increase in risk appetite or larger-than-expected operational losses that could cause reputational damage and pressure on business volumes and revenue.
 
Support rating and support rating floor
KAS BANK's Support Rating and Support Rating Floor are primarily sensitive to legislative changes at national and European levels, increasing the propensity of sovereigns to support institutions such as KAS BANK. While not impossible, this is not expected by Fitch.