LONDON, UK: Fitch Ratings has revised the Outlook on Swisscard AECS GmbH’s (SC) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at ‘A-‘.
Fitch has also affirmed the Short-Term IDR at ‘F1’, a statement said.
Swisscard’s Long-Term IDR is driven by its Standalone Credit Profile (SCP), but is also underpinned by the likelihood of institutional support from its 50% owner Credit Suisse (Schweiz) AG (CS Schweiz, A+/Negative/a). SC’s Short-Term IDR is solely driven by the likelihood of support from CS Schweiz.
The revision of the Outlook on SC’s Long-Term IDR to Stable reflects abating pressure on Swisscard’s standalone creditworthiness as the economic situation in Switzerland stabilises.
It also reflects Fitch’s view that SC’s business model has performed resiliently during the pandemic. Consequently, Fitch has revised the outlook on SC’s operating environment, asset quality and earnings and profitability key rating factors to stable from negative as we expect SC’s corresponding financial metrics to recover in 2H21 and 2022.
Swisscard’s SCP reflects its robust and low-risk business model with tight control of credit risk, strong profitability and moderate leverage. The ratings are constrained by the company’s monoline and geographically concentrated business model and reliance on wholesale funding with high encumbrance of assets.
Swisscard also benefits from strategic relationships with its 50-50 joint owners Credit Suisse Group AG (CS) and American Express Company (Amex, A/Stable/a), which support its market leadership in the issuance of credit cards in Switzerland.
SC operates almost exclusively in the highly developed Swiss market. Its business model is well-tested and allows the company to tightly control credit and interest rate risks, while largely avoiding foreign exchange risk.
Swisscard is only active in the credit card segment, but business concentration risk is somewhat mitigated by diversification of revenue by several types of fee income as well as interest income (17% of total revenue in 2020).
Despite the diversification by sources, we note the correlation of SC’s revenue with the volume of billed business. SC does not publicly disclose financial statements. Its corporate governance is in line with its status as an unlisted company.
The company maintained solid asset quality metrics despite the pandemic crisis and a reduction in its loan book. SC’s impairment ratio increased to 3.1% of gross loan exposure as of end-2020 (from 0.4% at end-2019, which would be 2.3% as per new rules) largely reflecting a change in local GAAP rules and not carrying a profit and loss effect.
Impairment loans were 100% provisioned. SC’s charge-off rate in 2020 was 0.8%, in line with 2019 and its longer-term average. This compares well with international peers and is a function of consumers’ generally better payment discipline in Switzerland, as well as SC’s prudent underwriting and rigorous control of credit risk.
SC’s revenue in 2020 was negatively affected by a decrease in billing volumes and particularly travel spending, triggered by the pandemic. Total revenue declined (mainly driven by commission income), which was mitigated by a reduction in corresponding operational expenses and cost-reduction measures.
Nevertheless, the impact on SC’s net income and return metrics was very significant. We expect profitability to gradually recover in 2H21 and 2022, largely due to a rebound in billing volumes.
SC is not subject to direct regulation, but is supervised by Swiss regulator FINMA through CS. SC’s total equity declined in 2020 as net profit was offset by a dividend distribution.
As a result, SC’s leverage increased, despite a 24% decline in net loans, reflected in an increase of its gross debt-to-tangible equity to 3.5x at end-2020 (from 2.8x at end-2019). Improving profitability in 2H21 and 2022 should support leverage, but this could be offset by balance sheet growth.
SC’s debt maturing in 2H21 comprised private placement notes: CHF70 million in September and CHF75 million in October. The nearest ABS notes’ maturity is in June 2022 (CHF200 million).
Swisscard’s available liquidity of CHF155 million as of end-1H21 and CHF784 million of unutilised committed lines offsets refinancing risk. CS also provides an additional uncommitted line that could be available in a stress scenario.
The assessment of institutional support from CS considers the shared jurisdiction, the manageable cost of potential institutional support relative to CS’s available resources, synergies between CS and SC given that SC is the sole issuer of CS’s credit cards in Switzerland and reputational risks for CS.
Factors limiting credit for potential institutional support include the joint venture nature of SC’s ownership structure and the partially different branding.
“In our view, Swisscard is strategically important but not core to CS Schweiz, resulting in an institutional support-driven rating that is one notch lower than CS Schweiz’s Viability Rating (VR) of ‘a’, which anchors our support assessment. We use CS Schweiz’s VR rather than its Long-Term IDR as anchor rating because we view it as unlikely that CS Schweiz would trigger resolution recapitalisation to support SC,” Fitch Ratings noted.
While Fitch acknowledges the strategic nature of SC’s relationship with Amex, the agency does not ascribe any institutional support uplift to SC’s ratings from Amex given the different branding, the joint-venture nature of the ownership structure and the limited impact of SC’s activities on Amex’s overall business.
Swisscard Short-Term IDR of ‘F1’ corresponds to the higher of the two possible ratings for a ‘A-‘ Long-Term IDR, as Fitch generally views institutional support from CS as more certain in the near term.
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