Post on 23-Jul-2020
transcript
Euroclear Bank S.A.
Primary Credit Analyst:
Thierry Grunspan, Paris (33) 1-4420-6739; thierry.grunspan@standardandpoors.com
Secondary Contacts:
Yulia Kozlova, CFA, London +44 207 176 3493; yulia.kozlova@standardandpoors.com
Giles Edwards, London (44) 20-7176-7014; giles.edwards@standardandpoors.com
Table Of Contents
Major Rating Factors
Rationale
Outlook
Profile: Largest European Securities Settlement Franchise
Support And Ownership: Majority Owned By Users
Strategy: Deepen Relevance To Clients Through More Efficient And
Expanded Post-Trade Services
Risk Management: A Vital Discipline And Key Strength
Accounting: Analysis Of Both Bank And Group
Profitability: Improved Efficiency
Capital: Sustained Strong Ratios Expected
Related Criteria And Research
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 1
1354795 | 301084691
Euroclear Bank S.A.
Major Rating Factors
Strengths:
• Crucial role in supporting Euroclear's leading franchise in international
securities markets.
• Strong risk management and regulatory framework.
• Very low risk profile.
• Strong capitalization and limited leverage.
Counterparty Credit Rating
AA/Stable/A-1+
Weaknesses:
• High operational risk inherent in settlement and custody activities.
• Dynamic operating environment, requiring constant adaption to mitigate potential threats and leverage
opportunities
Rationale
The ratings on Belgium-based Euroclear Bank S.A. reflect Standard & Poor's Ratings Services' view of its "core" status
to ultimate parent Euroclear plc (Euroclear), and the crucial role that it maintains in the international securities
markets. The ratings also reflect the strong and dynamic risk management framework, the Euroclear group's very low
risk profile, and the strong regulatory framework under which it operates. While apparently well-managed, we consider
high operational risk to be inherent in the settlement and custody business.
Euroclear Bank is one of the world's largest providers of cross-border settlement services, covering domestic and
international bonds, equities, and investment funds. In addition to securities settlement, the bank continues to focus on
related activities such as asset servicing, securities lending and borrowing, collateral management, money transfer, and
ancillary banking services. In addition to the bank's role as one of the two leading international central securities
depositaries (CSDs), the Euroclear group also operates the national CSDs for many countries in north-west Europe.
Euroclear reports that it covers 57% (by value) of debt and equity securities issued by European Union issuers, and
provides access to 90% of securities worldwide. It held €24.2 trillion in client assets at end-2013. Although Euroclear's
client assets are about double those of Luxembourg-based competitor Clearstream group, we see the two as very close
peers, given their hegemony as the leading international CSDs and broadly comparable financial strength.
Euroclear operates in a dynamic regulatory and competitive environment. We believe that it is protected to a large
degree by its strong franchise, high barriers of entry, and we see no current initiatives that pose a conclusive threat to
its leading position. However, to maintain this position Euroclear continues to innovate and adapt, for example in
response to rising client demand for global collateral management services and, over the medium term, from the
European Central Bank's planned Target2 Securities (T2S) initiative. While we see Euroclear as relatively
well-positioned to deal with the prospective loss of some of its settlement revenues and the more competitive
environment that T2S could well bring, we see currently it as an at-best neutral development for Euroclear. In our
view, the EU CSD directive is unlikely to constitute a serious threat to Euroclear's current business model because we
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 2
1354795 | 301084691
expect that it will continue to allow a CSD to undertake both depositary/settlement activities and related banking
activities.
As a largely user-owned infrastructure provider, Euroclear is not a profit maximizer, but it does seek to generate a level
of profitability that is satisfactory to its stakeholders. Euroclear's reported business metrics for 2013 showed growth in
all areas, including a 5% year-on-year rise in client assets, a 6% rise in securities transaction settled, and a 12% rise in
average daily collateral outstandings. Earnings followed the trends evident in the preceding year: that is, a slight rise in
fee income, interest income continuing to be held back by super-low central bank interest rates, and solid cost
management disciplines. Together, these combined to push reported operating profit to €353 million from €328
million the year before. We expect that Euroclear will see further traction in its major growth opportunities in the
current and next financial years: notably from collateral management, expanding links into emerging markets, and
growing funds-related activity. However, given our expectation of no strong and sustained rebound in market activity,
a likely persistent very low interest rate environment, and now limited scope for further reductions in total operating
expenses, we see only modest scope for profit growth in 2014 and 2015. But, equally we would expect any reduction
in underlying profitability to be modest.
The operational risk inherent in the settlement and custody business is high, but we consider it well-managed by
Euroclear. Euroclear Bank settles transactions in commercial bank money and faces sizable inherent intraday liquidity
risk. However, we consider this risk to be substantially mitigated, aided by the delivery-versus-payment approach to
settlement and associated processes, the bank's sizable liquidity resources, and its solid and stable customer franchise.
While the bank cannot entirely avoid taking unsecured exposure to counterparts, we consider credit risk incurred in
related banking services to be low, due in large part to the short duration of credit facilities granted, their generally
highly secured nature, and the group's conservative investment policy.
The low risk profile of Euroclear Bank and the wider group contributes to both maintaining very strong regulatory
capitalization. Euroclear reported a 48% Basel II Tier 1 ratio at end-2013 on a consolidated basis. While Euroclear
maintained its dividend payout ratio at 40% in 2013 and undertook a share buyback in mid-year, there was no change
in its capitalization from the year before. We consider that Standard & Poor's risk-adjusted capital (RAC) framework
offers some insight into the capitalization of Euroclear, which is a regulated banking group. Based on this measure, we
view the group's capitalization as a supportive factor, even at this high rating level. The RAC ratio at year-end 2013
was 17.3%, and we expect no significant change in future.
The group's only structural debt arises from the hybrid instrument issued by a subsidiary of Euroclear Bank and
guaranteed by it. There is now just €98 million nominal remaining after the bank completed a tender offer for €196
million nominal in 2012. The instrument is not Basel III-compliant and has a 2015 call date.
Reflecting the vital role that it plays for the group, the material size of its capital base in a group context, and its
continued strong contribution to group earnings, we consider Euroclear Bank to be "core" to Euroclear under our
group ratings methodology. As a result, we equalize the ratings on Euroclear Bank with the "aa" group credit profile
(GCP).
Until February 2014, we were applying our November 2013 criteria on rating companies above the sovereign as
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 3
1354795 | 301084691
Euroclear Bank S.A.
Belgium was lower rated than Euroclear Bank. Our analysis suggested that Euroclear's business and financial drivers
were relatively uncorrelated with the fortunes of the Belgium government and the domestic economy, and that a
sovereign default was a relatively remote possibility. Belgium is now rated AA/Stable/A-1+, in line with the bank, so
this criteria is no longer of immediate relevance to our rating on Euroclear Bank.
Outlook
The stable outlook reflects our view that Euroclear's creditworthiness is likely to remain resilient. We expect that it will
maintain its low risk profile, satisfactory underlying profitability, strong capitalization, and a leading position in
settlement and associated post-trade activities, despite a highly competitive environment and structural changes in the
European securities industry.
We could lower the rating if Euroclear's business or financial profile was to deteriorate materially. This could result
from a marked deterioration in the group's very strong market position or its profitability, an increase in its risk
appetite, or from a material increase in financial leverage. While we consider this exceptionally unlikely, it could also
result from a revision of Euroclear Bank's group status (from the current "core" status to Euroclear).
We consider an upgrade unlikely at this time, given the already high rating and the potential challenges to the group's
business model and competitive position arising from initiatives such as T2S. Nevertheless, we could raise the rating if
we expected that the group was able to materially strengthen its already very strong business profile, for example
because earnings were rising as a result of it materially deepening its franchise among an ever-widening base of users.
Profile: Largest European Securities Settlement Franchise
Euroclear Bank is the most important subsidiary of Euroclear, whose other operating companies primarily comprise
the national CSDs of France, Belgium, Netherlands, U.K. and Ireland, Sweden and Finland. The bank regularly
contributes about two-thirds of group income, one-half of group pretax profits, and about 85% of the consolidated
group balance sheet (see chart 1). One of the two leading global international CSDs (ICSDs), Euroclear Bank was
originally established in 1968 to provide eurobond settlement services--a business that has been hugely successful.
However, over time it has become increasingly active in asset servicing, and settling transactions in funds and equities.
The bank has also developed ancillary services, including money transfer and custody, collateral management, and
securities lending and borrowing. Euroclear Bank caters to a variety of financial institutions worldwide, including
investment and universal banks, global custodians, central banks, and asset managers.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 4
1354795 | 301084691
Euroclear Bank S.A.
Chart 1
While legally a banking group, we rate Euroclear under our exchange and clearinghouse criteria since we consider
that, as a piece of important financial market infrastructure (FMI), the creditworthiness of Euroclear Bank, and that of
its group, is more closely linked to the risks and operating environment in the FMI sector than in the banking sector. In
our view, Euroclear's business model is built around its crucial role in global capital markets, rather than as a
Belgium-headquartered banking group, and its fee-based revenues are influenced by transaction volumes and values
across the breadth of the international capital markets.
Unlike the Clearstream group, whose business is in part built on its position within the vertically integrated trading
execution, clearing and settlement chain under Deutsche Boerse AG, Euroclear is a stand-alone provider of services
within the securities settlement layer of the financial markets. Through 2000-2008, Euroclear's vision of horizontal
integration in Europe led it to initiate mergers with national CSDs in France (2000), The Netherlands (2002), the U.K.
and Ireland (2002), and Sweden and Finland (2008), and some bolt-on acquisitions. In our view, as a result of these
consolidation efforts and the continued enhancement of its own infrastructure, services, and efficiency, Euroclear
reinforced its position as Europe's leading securities settlement system for both equity and fixed-income transactions.
The combined group now settles the equivalent of more than €570 trillion in securities transactions per year,
representing 170 million domestic and cross-border transactions, and holds over €24 trillion of client assets (see chart
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 5
1354795 | 301084691
Euroclear Bank S.A.
2).
Support And Ownership: Majority Owned By Users
Euroclear PLC, the U.K.-domiciled holding company of the group, is owned by a consortium of 167 user-shareholders,
who have an 86% stake in the company (see chart 3). The remaining 14% is held by Sicovam Holding, the previous
owners of the French CSD. Euroclear S.A./N.V., incorporated in Belgium, is the intermediate holding company for all
the operating companies of the group, including Euroclear Bank. The ownership of Euroclear PLC has been
remarkably stable for many years, notwithstanding the share buyback in 2013, and we expect that it will remain so.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 6
1354795 | 301084691
Euroclear Bank S.A.
As a licensed bank operating in Belgium, Euroclear Bank is subject to the prudential supervision and oversight of the
Belgian National Bank (NBB), which exercises its supervision on a consolidated basis. Euroclear Bank and Euroclear
Belgium are also subject to the supervision of the NBB in respect of their role as operators of the Euroclear system and
the domestic securities settlement system, respectively. The securities settlement systems operated by the other
Euroclear CSDs are overseen by their domestic regulators.
In our view, Euroclear Bank benefits from a sound regulatory framework specific to its role as operator of the
Euroclear system. In particular, Article 31 of the Belgian Law of Aug. 2, 2002 provides a statutory lien in favor of
Euroclear Bank, which gives it the right to liquidate assets to cover participants' debts, without the need for a collateral
agreement (in cases of unsecured credit lines, for example). Belgian law also governs the contractual relationships
between the system operator and participants. Euroclear Bank's holding of securities is governed by Belgian Royal
Decree No. 62 of Nov. 10, 1967, which facilitates the circulation of securities on a fungible basis. Finally, under
Euroclear's terms and conditions, contractual protection for Euroclear Bank includes the right of set-off and retention,
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 7
1354795 | 301084691
Euroclear Bank S.A.
and limitations on liability (negligence only, indirect damages only in case of gross negligence and wilful misconduct,
and no liability for third parties, including sub-custodians).
Reflecting the vital role that it plays for the group, the material size of its capital base in a group context, and its
continued strong contribution to group earnings, we consider Euroclear Bank to be "core" to Euroclear under our
group ratings methodology. As a result, we equalize the ratings on Euroclear Bank with the group's 'aa' GCP.
Given the central role that Euroclear plays in the post-trade infrastructure in the European capital markets (and
increasingly outside of Europe), we consider that there is a very strong incentive for, in particular, the user-owners of
Euroclear Bank's ultimate parent, Euroclear PLC, to provide the bank with extraordinary support if needed. However,
we do not notch up the ratings on Euroclear Bank beyond our view of the group's intrinsic creditworthiness.
Strategy: Deepen Relevance To Clients Through More Efficient And ExpandedPost-Trade Services
Euroclear operates in a dynamic regulatory and competitive environment. We believe that it is protected to a large
degree by its strong franchise, high barriers of entry, and we see no current initiatives that pose a conclusive threat to
its leading position. However, to maintain this position Euroclear continues to innovate and adapt, for example in
response to rising client demand for global collateral management services and to the European Central Bank's
Target2 Securities (T2S) initiative.
Over the past four decades, the group's leading franchise and market position was built on its position as one of the
two largest ICSD operators ]at the heart of the securities processing chain, and a reputation for strong risk control,
facilitated by the relentless growth of the financial markets, principally in Europe. Since the 2008 onset of the global
financial crisis, the market environment in Europe--that is, asset prices, transaction volumes, and interest rates--has
been less supportive. However, while earnings are only now returning to pre-crisis levels, in our view the group has
nevertheless prospered. It has consistently expanded its reach into geographies outside Europe, into newer and
strongly growing asset classes such as funds, and ancillary services such as collateral management. In recent years, a
strong focus on cost efficiency and service delivery has arguably improved the group's commercial position, without
any apparent weakening in risk management.
Having focused heavily on cost control in the past few years, management has indicated that it is now moving the
group to a growth-based strategy. In keeping with its focus on maintaining and, where possible, deepening its
relevance to clients, we see Euroclear responding to four key factors:
• The needs of clients for effective collateral management services to improve the efficiency of their collateral pools
and help them meet increasing demand for margin from clearinghouses and other counterparties;
• The appetite of investors for reliable infrastructure to facilitate investment in growing markets outside of the most
developed global economies;
• The wish, and to some extent expectation, of investors that Euroclear can improve market efficiency in growing
asset classes, such as mutual funds and ETFs; and
• The focus of clients (notably the major banks) on cost efficiency at their service providers, at a time when they are
themselves under pressure to improve returns in a low-growth market.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 8
1354795 | 301084691
Euroclear Bank S.A.
Within the above, we see collateral management as particularly important, and increasingly a differentiator for the
largest CSDs and global custodians, who already sit on very large collateral pools and have the resources needed to
fund the required sizeable investment in technology. While both have long been strong in triparty repo and securities
lending, to a degree we see Euroclear as catching up Clearstream in this area. Clearstream developed its highly
successful GC Repo product some years ago. Still, we see Euroclear as having developed a highly credible offering
through its "Global Collateral Highway" service to compete with Clearstream's "Liquidity Hub", and the Euro GC
product as a counterfoil to GC Repo. We also note Euroclear's plans to create a joint collateral processing service with
Depository Trust Corp. (DTC) as potentially being a highly attractive proposition for clients.
While a threat and an opportunity, we consider that Euroclear appears relatively well positioned to respond to T2S, an
ECB project that aims to provide an integrated settlement process for eurozone securities. Two drawbacks of T2S are
the sizable upfront investment for Euroclear and other CSDs, of which relatively little may be recouped from clients,
and the fact that settlement fees are likely to fall significantly once it is implemented, at least for Euroclear's national
CSDs located in the eurozone. However, we believe that T2S will generally favor CSDs that are efficient and have
strong service offerings in ancillary activities, such as asset servicing and collateral management. Overall, we see these
factors as generally favoring Euroclear over some smaller competitors, but we currently view T2S as an at-best neutral
development for the group.
Having addressed the trade layer through Markets in Financial Instruments Directive (MIFID II) and strengthened and
expanded clearing through European Market Infrastructure Regulation (EMIR), the European lawmakers are now
focused on enhancing minimum standards in the settlement layer of European post-trade. Overall, we see the CSD
Regulation (CSD-R), which is due for implementation in 2015, as neutral for a conservatively-run and strongly
capitalized group such as Euroclear. Importantly, in the one area that could have disrupted Euroclear's current
business model, we expect that CSD-R will continue to allow Euroclear Bank to undertake both depositary/settlement
activities and related banking activities.
Risk Management: A Vital Discipline And Key Strength
Euroclear Bank is fully integrated in the group's enterprise risk management (ERM) framework. We consider that
framework to be strong, dynamic, and to have delivered a solid track record of operational effectiveness. We also
consider that the bank's risk appetite appears cautious and conservative. Operational risk is, in our view, inherently
high, but appears well managed. We also note that Euroclear suffered no material loss or disruption during the market
crisis.
Credit risk: Highly collateralized short-term exposures
We consider Euroclear Bank's asset quality to be strong, given both its delivery-versus-payment approach to
settlement, and the highly secured, very short-term nature of its banking activities, and the group's conservative
investment policy. In our view, these elements continue to support a very low risk profile that is also underpinned by
the maintenance of apparently conservative risk policies and procedures and a supportive legal framework.
A key factor underpinning Euroclear Bank's strong credit risk profile is the legal framework from which it benefits. In
this respect, Article 41 of the Belgian Law of 1995 provides for a statutory lien in favor of the Euroclear system
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 9
1354795 | 301084691
Euroclear Bank S.A.
operator. It is applicable to participants' assets (consisting of the balance of all securities in securities clearing
accounts, and the balance of all cash in cash accounts). It permits the recovery of all debts to the operator related to
securities clearance and settlement activity, and also provides for the immediate realization of securities and cash, as
well as the recovery of loaned securities.
To ensure settlement efficiency, Euroclear Bank makes available credit facilities--mainly uncommitted and intraday
(sometimes overnight) overdraft lines and securities lending--to clients that do not have sufficient funds on account
with the bank. Unsecured intraday overdrafts have remained stable over the past several years at about €2 billion;
more than 85% of which tends to be concentrated on high-investment-grade clients, mainly central banks who are
unable to grant liens on their assets. We consider the credit risk incurred through these facilities to be very low given
that 99% of the credit exposure is typically well-secured by collateral and the unsecured exposures are typically to
highly rated clients. Euroclear Bank applies haircuts to the related pledged securities collateral, which vary according
to the type of security, its liquidity, and the potential volatility in its value. The collateral, over which Euroclear Bank
has retention rights in the event of client default, is marked-to-market on a daily basis and carefully monitored to avoid
an undesirable build-up in concentrations. The haircuts are managed actively, aided by the back-testing and
stress-testing of valuations.
Banking exposure also arises from the large deposit balances left by clients, which have more than doubled in recent
years to in excess of €18 billion. Euroclear reinvests the cash with the dual objectives of limiting credit exposure and
maintaining a very high degree of liquidity. The majority is invested in reverse repo, and placements with the
Eurosystem via the NBB. The residual, typically around €2 billion, is placed on an unsecured basis or left with cash
correspondents, with over 85% of balances typically with counterparts rated 'A-' or higher. Euroclear and Clearstream
seek to avoid having unmitigated credit risk on each other through the careful management of settlement flow, use of
letters of credit, and, as a backstop, the right of legal set-off.
We consider Euroclear's appetite for risk arising from the investment of its capital to be low: the main objectives being
capital preservation and liquidity, with yield only a subsidiary consideration. These resources are invested in
short-dated bonds issued by some of the strongest eurozone governments and agencies, with the remainder placed
with the Eurosystem via the NBB.
Market risk: Minimized wherever possible
Euroclear Bank faces market risk in four main ways: the effect of the absolute level of interest rates on income, the
potentially uneven effect of currency movements on revenues and expenses, the potential for market movements to
reduce the value of the investment portfolio, and the potential interest and currency risk on its treasury activities.
The first of these has, in our view, the greatest scope to influence reported profitability. This is because it is an inherent
and largely unavoidable risk of the business, and because market risk is otherwise minimized. The bank routinely uses
cashflow hedges to help to mitigate volatility in earnings. As noted above, Euroclear Bank manages its investment
portfolio cautiously, in our view, seeking to eliminate the interest rate mismatch risk. Euroclear Bank does not keep
open positions, and any foreign exchange transactions with clients are immediately unwound in the markets, thereby
eliminating exchange risk.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 10
1354795 | 301084691
Euroclear Bank S.A.
Liquidity risk: Low risk appetite, conservatively managed
We consider that at the parent company level, Euroclear faces minimal liquidity risk--the lack of debt leaving only
dividends to pay. Similarly, liquidity risk for the domestic CSD subsidiaries is limited as they settle trades only on a
delivery versus payment basis, typically in central bank money. The main source of potential liquidity risk to the group
therefore comes from the bank, because of its nature as a deposit-funded institution and because, for reasons of
settlement efficiency, it uses its resources intraday to bridge imbalances in client cashflows. In practice, however, we
consider the bank's balance sheet liquidity risk to be modest, due to its liability-driven nature and aided by the high
quality and short tenor of its financial assets, and its access to contingent sources of liquidity. We also note the bank's
careful management of the intra-day credit provided to facilitate settlement.
The bank's balance sheet can be characterized as being split into an investment book and a treasury book. The
treasury book comprises the substantial client funds left on deposit at the bank, mainly by clients wanting to facilitate
the settlement of their transactions. Due to the relative stability of these balances and the bank's careful and short-term
placement of them, we consider the treasury book as being a potential source of liquidity. The investment book, which
relates the investment of the bank's capital, is structurally highly liquid and high quality and also available as a source
of contingent liquidity.
In our view, the bank's main potential liquidity risk arises intraday; it needs sufficient liquidity to manage the billions of
euros worth of transactions in the batch and real-time daily settlement routines. Across the day, inflows and outflows
match very closely, but the bank allows sizable mismatches to occur during the day, bridging the gap with its
discretionary extension of intra-day overdrafts. The largest scope for problems is early in the day. At the opening of
the business day (after the night-time settlement process), the bank extends around €80 billion of intra-day credit to its
clients--a figure that is not a cash amount. During the day, clients fund their accounts to pay down the overdrafts;
others that open the day with the opposite long cash position will wire some of their proceeds out of the system. As a
result, the bank only needs to find intraday liquidity sources during the day for four reasons:
• To the extent that those clients with accounts in credit (arising from settlement completion) withdraw cash faster
than those with overdrawn accounts pay in cash to remediate this possible shortfall; (ii) To meet any rise in
end-of-day client overdrafts;
• To cover any unequal cashflows with Clearstream, where Euroclear pays out more cash more than it receives; and
• To cover any difference between inflows and outflows in deposits generally.
To cover these potential gaps, sources of cash include Euroclear Bank's own on-balance-sheet resources noted above,
sizable intraday multi-currency credit lines with cash correspondent banks, committed and backstop facilities, and the
ability to monetize client securities at the discount window. We understand that in practice there is a relatively good
matching of daily in-/out-cashflows in normal circumstances, meaning that the bank rarely moves beyond using
on-balance-sheet sources of cash and some operational intra-day facilities. However, it runs liquidity stress scenarios
to examine more extreme circumstances, which include simulating the effects of the largest intraday borrower, a
settlement bank, or a major cash counterpart. This is in line with the Committee on Payment and Settlement Systems
(CPSS) and International Organization of Securities Commissions (IOSCO) Principles for Financial Market
Infrastructures (FMIs) that requires that a settlement system is, at the minimum, able to withstand the liquidity need
arising from the default of the participant and its affiliates that would generate the largest aggregate payment
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 11
1354795 | 301084691
Euroclear Bank S.A.
obligation amid extreme but plausible market conditions. In extremis, and while Euroclear's liquidity risk modelling
does not rely on this, the bank retains the rulebook power to delay trade settlement if the client's cash account has
insufficient funds.
Operational risk: Well managed, but major inherent risk given huge volumes
Given the enormous value of the transactions settled, and the number of transactions and counterparties involved, we
consider operational risk as the main potential source of risk for Euroclear. However, in our opinion, the risk is well
managed and controlled, and the level of operational risk losses--typically in the low single digit millions annually--is
modest. Litigation expenses remain modest, with only one settlement--for a few million euros--of any note in recent
years.
Operational risk management is enhanced by the highly integrated nature of the group's operations, the highly
automated nature of the transaction processing, Euroclear's continuous investment in its systems, and the wealth of
corporate memory derived from its stable workforce. Euroclear's business continuity plan is based on the use of two
data centers with a monthly switch, complemented by a third data center, ensuring a short recovery time for the
resumption of business should the need arise. In addition, Euroclear covers its global operational risk through a general
blanket insurance policy that includes coverage for loss of securities in transit, professional liability, and third-party
fraud and computer crime. Euroclear uses the Advanced Measurement Approach to calculate its Basel II operational
risk charge.
Accounting: Analysis Of Both Bank And Group
In view of the importance of group financial strength to Euroclear Bank's creditworthiness and franchise, we analyze
financial data for the consolidated group as well as the bank (solo) level. The tables at the end of this report reflect the
consolidated group data that are an important determinant of our view of the GCP, and are presented in bank
format--consistent with Euroclear's disclosure as a banking group. In addition, we calculate the key corporate-like
measures for Euroclear, such EBITDA, as we do for other FMIs.
Euroclear issued €300 million in perpetual securities in 2005, of which €98 million nominal remain in issue. With the
advent of Basel III from Jan. 1, 2013, the securities are being phased out of regulatory capital on an amortizing basis
until their first call date in 2015. When calculating group-level leverage and debt servicing metrics, we classify the
securities as being of "intermediate" equity content, and include 50% in total tangible equity (TTE), our measure of
group-level capitalization for FMIs. In addition, when assessing group-level debt servicing capacity, we treat half the
associated coupon as an equity dividend.
Profitability: Improved Efficiency
As a largely user-owned infrastructure provider, Euroclear is not a profit maximizer, but it does seek to generate a level
of profitability that is satisfactory to its stakeholders; a stance that management describes as "profit-moderated".
Broadly, management targets an 8%-10% return on equity, in keeping with the utility-like service that the group
provides. Euroclear's reported business metrics for 2013 showed growth in all areas, including a 5% year-on-year rise
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 12
1354795 | 301084691
Euroclear Bank S.A.
in client assets, a 6% rise in securities transactions settled, and a 12% rise in average daily collateral outstandings.
Earnings followed the trends evident in 2012: that is, a slight rise in fee income, interest income continuing to be held
back by super-low central bank interest rates, and solid cost management disciplines. Together, these combined to
push reported operating profit to €353 million from €328 million the year before.
Euroclear currently draws about 90% of its total income from fees and commissions, the remainder coming from net
interest income. The majority of this fee income continues to stem from safekeeping, followed by fees arising from
settlement. It is therefore influenced by transaction volumes, and securities prices--the basis on which safekeeping fees
are charged. That said, debt securities are based on nominal values, making associated revenues less vulnerable to
market sentiment. Net interest income fluctuates with the level of cash balances and the absolute level of interest
rates--in recent years, super-low central bank rates have compressed the interest margin, leading to a sharp decline in
net interest income (NII) despite inflows of extraordinarily high deposit balances. By contrast, however, a future
normalization of interest rates would likely lead to a significant uplift to earnings; management indicates a 50bps rise in
rates could translate to a €50 million rise in NII (assuming no change in deposit balances).
In our view, and in contrast to some key peers, Euroclear does not face such strong commercial pressures of highly
return-focused shareholders, and historically was less focused on cost efficiency. However, we observe substantial
progress in recent years, with reported operating expenses falling 17% between end-2008 and end-2013. We consider
this to be an achievement given the high proportion of fixed costs inherent in this line of business and Euroclear's
continued substantial investment spend through this period. As a result of this--and broadened service provision that
has lifted non-interest income--efficiency improved in the four years to end-2013, despite the super-low interest rate
environment and less-than-buoyant level of market activity (see chart 4).
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 13
1354795 | 301084691
Euroclear Bank S.A.
Chart 4
We expect that Euroclear will see further traction in its principal growth opportunities: notably collateral management,
expanding links into emerging markets, and growing funds-related activity. However, given our expectation of no
strong and sustained rebound in market activity, a likely persistent low interest environment, and potentially limited
scope for further reductions in total operating expenses, we see limited scope for material profit growth in the current
and next financial years. But, we would equally expect any reduction in underlying profitability to be modest.
Although less relevant in a highly-liquid group such as Euroclear, Standard & Poor's monitors debt-servicing capacity
and leverage in relation to the outstanding hybrid securities. For 2013, we calculated EBITDA coverage of interest
expense as166x and gross debt/EBITDA as 0.1x: ratios that we see as indicative of a de minimis level of leverage.
Capital: Sustained Strong Ratios Expected
Euroclear Bank's low risk profile and solid base of tangible equity contribute to it maintaining very strong regulatory
capitalization. While distributions to shareholders have increased in the past year, we expect that capitalization at bank
and group level is likely to remain supportive at this rating level.
Euroclear measures its regulatory capital at both the bank and consolidated group level. Since 2007, these calculations
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 14
1354795 | 301084691
Euroclear Bank S.A.
have been in accordance with the Basel II framework. Euroclear reported a 48% Tier 1 ratio at end-2013 on a
consolidated basis and 42% at Euroclear Bank level on a stand-alone basis. Euroclear has indicated an unchanged 40%
dividend payout ratio in 2013, and it undertook a share buyback in mid-2013. In aggregate, the total distribution was in
line with the group's post tax earnings for 2013.
Looking forward, Euroclear is now subject to the toughened requirements of Basel III, but aside from the reducing
value ascribed to the hybrid instrument, we expect the transition to Basel III to have had no significant effect in the
group's regulatory Tier 1 ratio. We anticipate no problem with the group meeting the minimum leverage ratio.
Similarly, Euroclear reported a liquidity coverage ratio of 117% and a net stable funding ratio of 248% at end-2013,
both comfortably above regulatory requirements.
Management has indicated that while the dividend payout ratio may not change significantly from 40%, Euroclear has
an only modest requirement for exposure (and so risk-weighted asset) growth in the coming two years. Therefore,
while we see no appetite from management to allow the group's capital ratios to weaken materially, we consider
further share buybacks to be highly likely.
Although Euroclear's capital ratios remain far in excess of regulatory requirements, we believe that Basel ratios do not
fully capture the inherent risk, especially the legal and operational risks, arising from the group's substantial settlement
and custody volumes. We consider that our risk-adjusted capital (RAC) framework offers some insight into the
capitalization of Euroclear, which is a regulated banking group. Based on this measure, we view the group's
capitalization as a supportive factor, even at this high rating level. The RAC ratio at year-end 2013 was 17.3%, and we
expect there to be no significant change in future.
Using our metric for FMIs, for end-2013, we calculate the group's TTE to be €2.2 billion, unchanged on end-2012.
Again, we expect no meaningful future change to this figure.
Related Criteria And Research
Related Criteria
• Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013
• Group Rating Methodology And Assumptions, Nov. 19, 2013
• Bank Capital Methodology And Assumptions, Dec. 16, 2010
• Standard & Poor's Updated Methodology For Rating Exchanges And Clearinghouses, July 10, 2006
• Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
Related Research
• Bulletin: Euroclear Bank Ratings Not Affected By Parent's Intended Acquisition Of Euronext Stock, May 28, 2014
• 2014 Global Exchange And Clearinghouse Outlook: Taking Care Of Unfinished Business, Dec. 9, 2014
• Rating Actions On Five Financial Market Infrastructure Companies Following Revised Ratings Above The Sovereign
Criteria, Nov. 25, 2013
• Collateral Optimization Is Playing A Transformative Role For Depositories, Custodians, And Clearinghouses, Dec.
18, 2012
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 15
1354795 | 301084691
Euroclear Bank S.A.
Table 1
Funding, And Liquidity Ratios
-- Year ended Dec. 31--
(Mil. €) 2013 2012 2011 2010 2009
Customer deposits/funding base 0.0 0.0 3.8 2.0 2.8
Total loans/customer deposits N.M. N.M. 0.5 5.6 6.3
Customer loans (net)/assets (adjusted) 0.0 0.0 0.0 0.1 0.1
The following tables reflect financial data for Euroclear plc on a consolidated basis, rather than bank-level figures. N.M.--Not meaningful.
Table 2
Profitability Ratios
-- Year ended Dec. 31--
(Mil. €) 2013 2012 2011 2010 2009
Net interest income/average earning assets 0.56 0.67 1.12 1.00 1.09
Net interest income/revenues 8.60 8.87 11.20 9.40 11.16
Fee income/revenues 88.91 89.76 87.17 89.52 86.21
Market-sensitive income/revenues 1.35 0.21 0.22 (0.38) 0.94
Personnel expense/revenues 38.42 38.55 38.40 43.18 44.39
Noninterest expenses/revenues 66.99 70.40 71.73 77.38 85.14
New loan loss provisions/revenues 0.15 0.08 0.04 0.03 0.00
Pretax profit/revenues 35.48 27.51 28.64 (25.25) (0.06)
Tax/pretax profit 24.60 14.34 23.60 (19.15) N.M.
Core earnings/revenues 24.13 25.28 21.57 17.79 10.56
Core earnings/average adjusted assets 1.23 1.43 1.68 1.64 0.86
Noninterest expenses/average adjusted assets 3.40 3.99 5.58 7.15 6.91
Core earnings/average adjusted common equity 11.39 12.44 11.66 9.42 5.48
Pretax profit/average common equity (%) 10.98 8.83 9.92 (7.89) (0.02)
N.M.--Not meaningful.
Table 3
Capital Ratios
-- Year ended Dec. 31--
(Mil. €) 2013 2012 2011 2010 2009
Tier 1 capital ratio 47.60 47.70 50.00 42.70 34.10
Adjusted total equity/adjusted assets 10.76 10.64 12.44 19.87 20.75
Adjusted total equity/managed assets 10.27 10.16 11.70 18.15 18.32
Common dividend payout ratio 40.00 41.44 30.03 (15.03) (114.35)
Table 4
Summary Balance Sheet
-- Year ended Dec. 31--
(Mil. €) 2013 2012 2011 2010 2009
Assets
Cash and money market instruments 17,436 18,051 13,846 8,237 7,478
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 16
1354795 | 301084691
Euroclear Bank S.A.
Table 4
Summary Balance Sheet (cont.)
Securities 1,498 987 1,254 1,600 1,567
Trading securities (marked to market) 14 1 5 6 6
Nontrading securities 1,484 986 1,249 1,595 1,561
Customer loans (gross) 0 0 2 9 12
Loan loss reserves 0 0 0 0 0
Customer loans (net) 0 0 2 9 12
Earning assets 15,065 15,271 10,901 9,402 8,111
Investments in unconsolidated subsidiaries (financial companies) 12 11 14 12 12
Intangibles (nonservicing) 926 924 979 994 1,293
Fixed assets 116 104 97 110 127
Derivatives credit amount 1 3 0 2 0
Accrued receivables 113 94 103 116 89
All other assets 248 326 240 382 425
Total assets 20,350 20,502 16,535 11,462 11,003
Intangibles (nonservicing) -926 -924 -979 -994 -1,293
Adjusted assets 19,424 19,578 15,556 10,468 9,710
Liabilities
Total deposits 16,164 16,568 12,673 7,750 7,036
Noncore deposits 16,164 16,568 12,182 7,594 6,842
Core/customer deposits 0 0 491 156 194
Other liabilities 973 749 851 583 534
Total liabilities 17,137 17,318 13,524 8,333 7,570
Total equity 3,212 3,185 3,011 3,129 3,433
Limited life preferred and quasi equity 0 0 0 0 0
Preferred stock and other capital 0 0 0 300 299
Common shareholders' equity 3,212 3,185 3,011 2,830 3,133
Share capital and surplus 147 147 147 147 147
Revaluation reserve 4 5 6 -3 7
Retained profits 2,166 2,128 1,969 1,751 1,822
Other equity 896 904 888 935 1,158
Total liabilities and equity 20,350 20,502 16,535 11,462 11,003
Table 5
Equity Reconciliation Table
-- Year ended Dec. 31--
(Mil. €) 2013 2012 2011 2010 2009
Common shareholders' equity 3,212 3,185 3,011 2,830 3,133
Minus dividends (not yet distributed) -106 -97 -66 -42 -44
Minus revaluation reserves -4 -5 -6 3 -7
Minus nonservicing intangibles -926 -924 -979 -994 -1,293
Minus tax loss carryforwards -76 -63 -10 -3 -62
Adjusted common equity 2,101 2,095 1,949 1,793 1,728
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 17
1354795 | 301084691
Euroclear Bank S.A.
Table 5
Equity Reconciliation Table (cont.)
Plus admissible preferred and hybrids 0 0 0 300 299
Total Adjusted Capital 2,101 2,095 1,949 2,092 2,027
Minus equity in unconsolidated subsidiaries -12 -11 -14 -12 -12
Adjusted total equity 2,089 2,084 1,935 2,080 2,015
Table 6
Profit And Loss
-- Year ended Dec. 31--
(Mil. €) 2013 2012 2011 2010 2009
Net interest income 85 88 113 88 98
Interest income 108 116 152 121 138
Interest expense 23 28 39 33 40
Operating noninterest income 905 907 898 844 782
Fees and commissions 880 893 882 834 759
Trading gains 13 2 2 -4 8
Equity in earnings of unconsolidated subsidiaries 0 0 0 0 0
Other noninterest income 11 12 14 14 15
Operating revenues 990 995 1,011 932 880
Noninterest expenses 663 700 725 721 749
Personnel expenses 380 383 388 402 391
Other general and administrative expense 258 281 287 264 304
Preprovision operating income 327 294 286 211 131
Credit loss provisions (net new) 1 1 0 0 0
Operating income after loss provisions 325 294 286 210 131
Nonrecurring/special income 26 33 10 21 54
Nonrecurring/special expense 0 53 6 45 0
Impairment of intangibles 0 0 0 421 185
Pretax profit 351 274 290 -235 -0
Tax expense/credit 86 39 68 45 38
Net income (before minority interest) 265 234 221 -280 -38
Net income before extraordinaries 265 234 221 -280 -38
Net income after extraordinaries 265 234 221 -280 -38
Table 7
Core Earnings Reconciliation Table
-- Year ended Dec. 31--
(Mil. €) 2013 2012 2011 2010 2009
Net income (before minority interest) 265 234 221 -280 -38
Minus nonrecurring/special income -26 -33 -10 -21 -54
Plus nonrecurring/special expense 0 53 6 45
Plus or minus tax impact of adjustments 0 -3 1 0 0
Plus amortization/impairment of goodwill/intangibles 0 0 0 421 185
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 18
1354795 | 301084691
Euroclear Bank S.A.
Table 7
Core Earnings Reconciliation Table (cont.)
Minus preferred dividends 0 0 0 0 0
Core earnings 239 252 218 165 93
Ratings Detail (As Of August 22, 2014)
Euroclear Bank S.A.
Counterparty Credit Rating AA/Stable/A-1+
Junior Subordinated A+
Senior Unsecured A-1+
Senior Unsecured AA
Counterparty Credit Ratings History
24-Feb-2012 AA/Stable/A-1+
07-Dec-2011 AA+/Watch Neg/A-1+
01-Aug-2000 AA+/Stable/A-1+
Sovereign Rating
Belgium (Kingdom of) (Unsolicited Ratings) AA/Stable/A-1+
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable
across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
Additional Contact:
Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 19
1354795 | 301084691
Euroclear Bank S.A.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P
reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com
(subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information
about our ratings fees is available at www.standardandpoors.com/usratingsfees.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective
activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established
policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain
regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P
Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any
damage alleged to have been suffered on account thereof.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and
not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,
hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to
update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment
and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does
not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be
reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part
thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval
system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be
used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or
agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not
responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for
the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING
WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no
event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential
damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by
negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 20
1354795 | 301084691