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Financial Institutions

www.fitchratings.com 10 May 2019

ESG / Global

ESG Factors Influencing Financial Institution Ratings Governance Risks Affect Banks and NBFIs, Environmental Risks Impact Insurers

Special Report

High-Impact ESG Issues Differ: Financial crime compliance and conduct issues drive the

highest ESG relevance scores (‘5’ on the 1-5 scale) for developed market (DM) banks’ credit

ratings, including Sw edbank and Commonw ealth Bank Australia. Governance also drives the

highest ESG relevance scores for non-bank f inancial institutions (NBFIs) including Russell

Investments and Apollo Investment Corporation, but the biggest factor is management strategy.

Insurance entities have yet to be assigned an ESG relevance score of ‘5’ in any category.

Sector Differences: Governance-related risk elements, particularly ‘Governance Structure’,

account for the majority of the higher relevance scores (‘4’ or ‘5’ on the 1-5 scale) for both

banks and NBFIs. Environmental considerations, specif ically catastrophe risk, are most

relevant to property and casualty (P&C) (re)insurers. ‘Social’ ESG risks represent only 9% of ‘4’

or ‘5’ ESG relevance scores for FIs globally. These usually relate to NBFIs, and typically stem

from the conduct risks of lending at higher interest rates or to w eaker borrow ers.

Regional Differences: At a global level, 34% of non-bank, 22% of bank, and 6% of insurance

entities feature at least one relevance score of ‘4’ or ‘5’. But 56% of bank issuers w ithin APAC

emerging markets (EM) are assigned at least one higher ESG relevance score. This is follow ed

by Americas EM at 38% and Middle East and Africa at 31%.

ESG relevance for NBFIs is highest in APAC EM at 67%, follow ed by Americas EM at 45% and

European EM at 38%- albeit based on a relatively small sample size. The scores are driven by

governance and, secondarily, social considerations. Although few er (re)insurers credit ratings

are affected by ESG relevant risks, the largest concentration of such entities are w ithin APAC

(DM and EM).

ESG Higher Relevance Score Case Studies – Index Case Studies Named entities

DM Banks: Financial Crime Compliance, Conduct

Failings

Swedbank, Danske Bank, US Bancorp,

Commonwealth Bank Australia, National Australia Bank

Americas Banks, NBFIs: Corporate Governance Wells Fargo, Docuformas SA de CV, Financiera Independencia SAB

DM/EM NBFIs/Banks: Management Strategy, Acquisition Integration

Russell Investment Group, Apollo Investment Corporation, TP ICAP, MIK, Home Credit, Lionbridge

Capital, Deutsche Bank Banks/NBFIs: Complex Group Structures Sparkassen-Finanzgruppe, Avolon Holdings

(Re)insurers, NBFIs: Environmental Impact Mitsui Sumitomo Insurance Company, ABCI Insurance Company, Lloyds of London, Berkshire

Hathaway, Technoleasing Annex 1: Banks with higher ESG relevance element

scores

Annex 2: NBFIs with higher ESG relevance element

scores

Annex 3: (Re)Insurance Companies (Property &

Casualty) with Higher ESG Relevance Scores

Source: Fitch Ratings

Related Research

Gov ernance Most Relevant of ESG Risks for Banks (April 2019)

Global Non-Bank Financial ESG Risk Mostly Gov ernance (March 2019)

Introducing ESG Relevance Scores for Financial Institutions (February 2019)

What Inv estors Want to Know: ESG Relev ance Scores (Marking the Intersection

of Credit Risk and ESG Risks) (February 2019)

Analysts

Monsur Hussain – FI Research +44 20 3530 1793 [email protected] Kev in Duignan – Global Head, FI Ratings +1 212 908 0771 kev [email protected] Andrew Steel – Global Head, Sustainability Group

+44 20 3530 1793 [email protected]

Amendment:

This report, originally published

on 9 May, has been amended to correct some of the identif ied

ratings on page 7.

https://www.fitchratings.com/site/pr/10068156




https://www.fitchratings.com/site/re/10063894






mailto:[email protected]




ESG Factors Influencing Financial Institution Ratings

May 2019 2

Introduction

This report provides case studies on selected f inancial institution issuers w ith higher ESG

relevance scores (i.e. ‘4’s and ‘5’s) together w ith a summary of all Fitch-rated FI issuers w ith

higher relevance scores (refer to the annex). Fitch Ratings assigns an ESG relevance score of

‘4’ w hen an issue has an impact on the rating but is not a key rating driver. A relevance score

of 5 is assigned w hen an issue is a key rating driver.

Source: Fitch Ratings, transaction document

The ESG Relevance Score template used by analysts is split into three broad groupings, for

Environmental, Social and Governance. Our analysts then identif ied and agreed categories of

sector-specif ic credit rating aspects relating to each of the sub-elements listed in the general

issues. On a sectoral basis, NBFIs issuers' credit ratings w ere more impacted generally by

ESG factors (i.e. scoring ‘4’ or ‘5’) w hen compared w ith banks and especially insurance

companies. Governance drove the impact on NBFIs and banks, w hereas (re)insurers w ere

almost w holly affected by Environmental risk factors.

We found a more signif icant ESG impact on EM NBFI and bank issuer credit ratings than on

DM issuers. APAC (re)insurers’ credit ratings w ere more affected by ESG factors than North

American or EMEA-based issuers.

ESG Scoring Definitions

Lowest Relevance

Irrelevant to the

entity rating and

irrelevant to the

sector.

1 2

Irrelevant to the

entity rating but

relevant to the

sector.

Minimally relevant to

rating, either very low

impact or actively

managed in a way

that results in no

impact on the entity

rating.

Neutral

3

Credit-Relevant to Issuer

4 5

Relevant to

rating, not a key

rating driver but

has an impact

on the rating in

combination with

other factors.

Highly relevant,

a key rating

driver that has a

significant

impact on the

rating on an

individual basis.

0

20

40

60

80

100

Environmental Social Governance

(%) NBFIs Banks Insurers


ESG Elements Driving Credit Rating Impact - By Sector(For entities assigned at least one ESG relevance score of 4 or 5)

0

20

40

60

80

100

EM Asia EM Americas EM Middle Eastand Africa

EM Europe DM Americas DM Asia DM Europe

(% Issuers in region) Banks NBFIs P&C (Re)Insurers


FI Higher ESG Relevance - BySector/Region

Env ironmental Risk Categories EAQ – GHG Emissions & Air Quality; EFM – Energy Management; EWT – Water & Wastewater Management; EHZ – Waste & Hazardous Materials Management; Ecological Impacts; EIM – Exposure to Environmental Impacts Social Risk Categories SCR – Human Rights, Community Relations, Access & Affordability; SCW – Customer Welfare - Fair Messaging, Privacy & Data Security; SLB – Labour Relations & Practices; SEW – Employee Well-being; SIM – Exposure to Social Impacts Gov ernance Risk Categories GEX – Management Strategy; GGV – Governance Structure; GST – Group Structure; GTR – Financial Transparency



May 2019 3

Corporate Governance, Transparent Reporting – Banks, NBFIs

DM Banks: Financial Crime Compliance, Conduct Failings

Misconduct and f inancial crime-related compliance failures have driven several negative rating

actions over the last few years among higher-rated DM bank issuers. This coincides w ith

heightened regulatory and supervisory scrutiny of conduct issues globally.

Swedbank AB’s ‘5’ ESG relevance score reflects Fitch Ratings’ April 2019 decision to place

the Sw edish bank’s ‘AA-‘ Long-Term (LT) and ‘F1+’ Short-Term (ST) Issuer Default Ratings

(IDR) on Rating Watch Negative (RWN). Fitch's view is that the allegations of Sw edbank’s

potential involvement in money-laundering through its Baltic operations, and specif ically

Estonia, have revealed w eaknesses in the bank's management, w hich could ultimately affect

its franchise. The RWN also reflects uncertainty over the bank's management of operational

and reputational risks, w hich might no longer be in line w ith the bank's high rating, as w ell as

the risk of capital erosion should Sw edbank's money laundering allegations be confirmed and

result in substantial capital-depleting f ines.

Similarly, Danske Bank AS’s ‘5’ ESG relevance score reflects legal and compliance risks w ith

regard to suspicions of money laundering operations carried out by the bank’s Estonian

branch. The bank’s Outlook w as revised to ‘Negative’ from ‘Stable’ in September 2018 ( the

Danish bank’s LT IDR and VR w ere unchanged at ‘A’ and ‘a’ respectively). This reflected

uncertainty as to the ultimate impact on the bank’s capitalisation, franchise and funding profile

follow ing the publication of a report in September 2018 regarding lapses in the anti-money

laundering (AML) control framew ork for the bank’s Estonian non-resident portfolio betw een

2007 and 2015.

Fitch’s base case is that any f ines facing Danske w ill be an earnings rather than a capital

event. How ever, the magnitude of suspicious transactions means there is tail risk of larger f ines

being incurred, particularly as US authorities are now involved. This is especially the case

given that many of the non-resident clients have not yet been investigated and that sanction

screening is not complete.

Commonwealth Bank Australia (CBA) and National Australia Bank (NAB) are assigned ‘5’

ESG relevance scores for ‘Governance Structure’ and ‘4’ in respect of ‘Customer Welfare’.

Outlooks for both banks w ere revised to ‘Negative’ from ‘Stable’ last year due to risks in

remediating shortcomings in operational risk management and governance framew orks. CBA’s

revision in May 2018 follow ed a prudential inquiry into it specif ically by the Australian Prudential

Regulation Authority (APRA).

The APRA’s review identif ied shortcomings in CBA’s “non-f inancial” risk management.

Follow ing this, all the other large banks in Australia w ere asked to undertake self -assessments

on the issues identif ied by APRA. NAB w as the only one to publish its self -assessment, w hich

highlighted shortcomings as w ell. In addition, w hile the Royal Commission into Misconduct in

the Banking, Superannuation and Financial Services Industry affected all four major banks to

some degree, CBA and NAB w ere highlighted for their shortcomings in their management of

operational and compliance risks, culture and governance.

Fitch subsequently revised NAB’s outlook to Negative in February 2019. The revised rating

outlooks for both banks reflects their focus on remediation and culture that could take several

years to resolve, lead to increased compliance costs and a major distraction for the

management. Consequently, Fitch Ratings believes this could result in a w eakening of their

earnings relative to domestic peers.

US Bancorp’s (USB’s) ‘4’ ESG relevance score relates to the one-notch dow ngrade of its LT

IDR to ‘AA-‘ in February 2018. This follow ed the public disclosure of settlements w ith various

regulators for historic AML control framew ork deficiencies. The breadth of the authorities’

Governance Elements – For Banks, NBFIs

Management

Strategy

(GEX)

Operational

implementation of

strategy

Gov ernance

Structure (GGV)

Board independence

and effectiveness; ownership

concentration; protection of

creditor/stakeholder rights; legal/compliance

risks; business continuity; key person

risk; related-party transactions

Group Structure

(GST)

Organizational structure;

appropriateness relative to business

model; opacity; intra-group dynamics;

ownership

Financial

Transparency (GTR)

Quality and timing of

financial reporting and auditing processes




May 2019 4

f indings, particularly regarding USB’s lapses in risk management, w as outside of Fitch’s

expectations given the bank’s high rating level. How ever, the ‘4’ score – instead of ‘5’- reflects

Fitch’s view that the AML-related deficiencies w ere a partial ratings driver, in combination w ith

other factors.

EM Banks: Potential for State Influence and Financial Transparency Issues

Notw ithstanding the higher-profile ESG findings for DM banks above, almost 85% of banks

assigned higher ESG relevance scores are w ithin EM jurisdictions – notably China, India, Brazil

and Gulf-Cooperation Council (GCC) countries.

All rated Chinese banks are assigned ‘4’ ESG relevance scores for corporate governance,

reflecting the potential for signif icant influence by the state either as ow ner or through

regulatory influence (given the lack of independence from the state). The government influence

often results in banks behaving in w ays that do not maximise shareholder values, e.g. banks

being asked to lend to small private enterprises at low er interest rates in order to support

economic grow th. Such issues are more signif icant for state-ow ned banks than private, but

governance w eighs on all VRs and potentially on support prospects for some. How ever, w hile

the influence of Chinese authorities may have positive implications for support prospects , it is

factored into Chinese banks’ IDRs.

Similarly state-ow ned Indian, Brazilian and Chilean banks are assigned ‘4’ scores for corporate

governance due to the similar rationale of deliberate state control and or signif icant influence.

While this compromises their governance and standalone VRs in the process, the greater the

influence, the closer the bank is likely to be to the state and therefore the higher the support

rating f loor.

Moreover, all rated Chinese and Indian banks are given a ‘4’ score for the ‘Financial

Transparency’ risk element. For Chinese banks, this reflects Fitch’s concerns regarding

signif icant under-reporting of non-performing loans (NPLs) and risk-w eighted assets (RWAs),

due to the use of off-balance sheet transactions. Similarly, for Indian banks the ‘4’ score

reflects Fitch Ratings’ f indings of large divergences betw een the banks’ and the central bank

concerning NPL reporting. These divergences ultimately reflect w eaknesses externally

(concerning the Reserve Bank of India’s supervision) and internal audit standards at the banks

themselves.

EM Europe, Middle East & Africa Islamic Banks: Governance Structure

All Islamic banks need to ensure compliance of their entire operations and activities w ith sharia

principles and rules. This entails additional costs, processes, disclosures, regulations, reporting

and sharia audits. This results in a governance structure relevance score of ‘4’ for rated Islamic

banks (in contrast to a typical ESG relevance influence score of ‘3’ for comparable conventional

banks). In addition, Sharia-rules set activity-based restrictions that prohibit Islamic banks from

lending to companies or individuals involved in activities deemed to harm society (for example,

gambling) or prohibited under Islamic law (for example, f inancing construction of a plant to

make alcoholic beverages). This is reflected in the ESG relevance score for Exposure to Social

Impacts. How ever, at a typical score of ‘3’ (versus ‘2’ for comparable conventional banks), this

has less of a bearing on their credit ratings than their governance structure.

Americas Banks, NBFIs: Corporate Governance

Wells Fargo & Company’s (WFC) ‘4’ ESG relevance score for Governance Structure (and

Management Strategy) reflects Fitch’s decision to dow ngrade its LT IDR ratings from ‘AA-‘ to

‘A+’, Outlook ‘Stable’ in October 2017. This w as due to risk control and governance issues, and

a diminished earnings profile, follow ing regulatory actions regarding improper account openings

in the Community Bank segment. Assuming Fitch had the ESG relevance scoring framew ork in

place w hen WFC’s Outlook w as moved to ‘Negative’ in Autumn 2017, then theoretically Fitch

w ould have assigned WFC a ‘5’ ESG relevance score for ‘Governance Structure’. The current



May 2019 5

‘4’ ESG relevance score reflects our view s that, after the dow ngrade, these issues are now

contributing factors rather than the solely driver.

Fitch does not anticipate further material corporate governance-related w eaknesses. But any

further substantial issues could negatively affect the rating, w ith a dow ngrade possible. Fitch

expects that WFC w ill meet the various regulatory requirements of the Federal Reserve’s

consent order, though failure to have the asset cap lif ted in a timely manner w ould likely be

view ed negatively by Fitch.

Further, Fitch remains sensitive to the long-term implications on the company’s earnings profile

of the various risk control-related issues, as w ell as potential effects on the franchise given

heightened reputational risk. If , over the longer term, WFC’s franchise appears impaired

relative to recent history, this may exert dow nw ard ratings pressure on its ratings.

Docuformas S.A.P.I. de C.V. (Docuformas, Mexico, LT IDR ‘BB-‘) is assigned ‘4’ ESG

relevance scores for several governance risk elements including governance structure. The

recent LT IDR upgrade (7 December 2018) reflected the strengthening of corporate

governance practices and reduction of key person risk under a new shareholder structure, as

w ell as signif icant improvements in Docuformas' leverage position follow ing a capital injection

of USD27 million. How ever, areas for improvement persist, such as the inclusion of more

independent members in the board of directors (only one member is now independent).

An ESG relevance score of ‘4’ is applied to Financiera Independencia, S.A.B. de C.V.

SOFOM, E.N.R (Findep, Mexico, LT IDR ‘BB’) as the company has experienced signif icant

senior management turnover over the last three years. In 2016 the CEO and the CFO w ere

replaced. In 2018 a new CFO w as hired w ho lacked experience at a f inancial or consumer-

oriented company. In August 2018, Findep’s head of investor relations also left the company.

Fitch believes incoming management need to prove adherence to previously stated strategic

objectives to sustain continuity, stable grow th and sound performance in the near future.

Management Strategy – NBFIs, Banks

DM/EM NBFIs: Management Strategy, Acquisition Integration

For the 30 NBFI issuers globally assigned higher (‘4’, ‘5’) ESG relevance scores, operational

implementation of management strategy is a key influence for half of these issuers’ credit

ratings. Often this is accompanied by higher ESG relevance scoring for other Governance-

related sub-factors (such as ‘Governance Structure’ - discussed above).

Several DM NBFIs have been assigned higher ESG relevance scores due to concerns about

each issuer’s ability to execute on a strategy and/or acquisition – these include Russell

Investment Group Ltd (US, LT IDR ‘BB’), Apollo Investment Corporation (US, LT IDR ‘

BBB-‘), and TP ICAP Plc (UK, LT IDR ‘BBB-‘).

Russell Investment Group Ltd’s high ‘5’ ESG relevance score relates to w hat Fitch view s as a

lack of consistency in its f inancial or operating strategies, and the potential for additional

leveraged shareholder-friendly distributions by its PE ow ners. This could call into question the

credibility of management’s or the ow nership’s articulated f inancial policy and could lead to a

negative rating action.

The maintenance of the Negative Outlook for Apollo Investment Corporation in February 2019

reflects the continuation of execution risk associated w ith the planned portfolio mix shift given

Apollo Investment Corporation's mixed track record and the highly competitive environment.

This follow s Apollo Investment Corporation receiving board approval to reduce its asset

coverage ratio to 150% from 200% from April in response to a relaxation of regulatory

requirements. Apollo Investment Corporation is a business development company externally

Governance Elements – For Banks, NBFIs

Management

Strategy

(GEX)

Operational

implementation of strategy

Gov ernance Structure

(GGV)

Board independence and effectiveness;

ownership concentration;

protection of creditor/stakeholder

rights; legal/compliance risks; business

continuity; key person risk; related-party

transactions

Group

Structure (GST)

Organizational

structure; appropriateness

relative to business model; opacity; intra-

group dynamics; ownership

Financial Transparency

(GTR)

Quality and timing of financial reporting and

auditing processes




May 2019 6

managed by Apollo Group Management. Apollo Group Management’s ‘A’ rating and Stable

Rating Outlook w ere unaffected by these actions.

Follow ing the acquisition of ICAP’s voice and hybrid broking business in December 2016, TP

ICAP became the w orld’s largest interdealer broker. Signif icant cost synergies w ere expected

from this transaction w ith integration costs to achieve these set at around GBP100 million. But

by July 2018, TP ICAP announced that this target w as no longer realistic and revised it

dow nw ards to GBP75 million. ICAP integration cost containment w as also an issue w ith

estimated integration costs increased from the initial GBP100 million to GBP160 million. This

announcement of restated cost synergy targets w as accompanied by the departure of the CEO.

EM-based NBFIs assigned higher ESG relevance scores in the same category- such as MIK

(Mongolia, LT IDR ‘B’-‘), Home Credit (Vietnam, LT IDR ‘B+’), and Lionbridge Capital Co

(China, LT IDR ‘B+’)) – that respectively score ‘5’, ‘4’, ‘4’- share common features contributing

to their higher ESG relevance scores. All have relatively short operating histories and have

experienced substantial business grow th in the past few years w ithin a relatively benign cycle.

As such, Fitch believes that the sustainability of their business models have yet to be fully

tested through economic cycles. Their business model could evolve quickly subject to the less

predictable changes in regulations and government policy w hile some of them are more likely

to diverge into new businesses.

Deutsche Bank: Execution of Strategy

The ‘4’ ESG relevance score for Deutsche Bank AG (DB) is tied to the Negative Outlook rating

action taken in June 2018 (Germany, LT IDR ‘BBB+’ Affirmed). This reflects Fitch’s view that

the bank faces substantial execution risk in implementing its strategy. Failure to achieve

business and f inancial targets, in particular regarding costs, returns and capitalisation, w ould

likely result in a dow ngrade. DB’s strategy has been revised several times in recent years and

management has yet to prove that it can implement it according to plan and w ithout setbacks.

Improving profitability in the corporate and investment bank is an important priority, w hich w ill

be diff icult to achieve given a risk of further loss of business, and unfavorable market

conditions. The legal entity merger of the tw o retail businesses w as completed, but the bank

has yet to prove that it can achieve targeted synergies. Further progress also needs to be

demonstrated w ith regard to plans to increase the automation of processes and strengthen risk

controls.

Complex Group Structures – Banks, NBFIs

Sparkassen-Finanzgruppe (SFG): Organisational structure

The netw ork of 332 German savings banks under the SFG umbrella (Germany, LT IDR ‘A+’) is

assigned a ‘4’ ESG relevance score, as it is one of the least cohesive groups to w hich Fitch

assigns "group" ratings. Under Fitch’s Bank Criteria, Fitch may assign group ratings to banks

that are members of a mutual support mechanism. SFG does not produce consolidated

f inancial accounts and its aggregated risk reporting is less advanced than other European

mutual support banking groups rated by Fitch. How ever, Fitch acknow ledges initiatives by the

Deutscher Sparkassen- and Giroverband (DSGV), the national savings bank association, to

increase the adherence of the individual savings banks to common strategic projects, including

digitalisation, process automation and standardisation, data collection, analytics and risk

management.

The IDRs and VR for SFG are sensitive to a change in Fitch's assessment of the group's

cohesion. Continuing initiatives, particularly to streamline SFG's infrastructure and a common

digitalisation strategy, point tow ards further strengthening. How ever, an upgrade of the VR is

unlikely unless SFG signif icantly strengthens its corporate governance by streamlining its

decision-making process and disclosure, including audited consolidated f inancial statements.

Governance Elements – For Banks, NBFIs Management

Strategy

(GEX)

Operational

implementation of

strategy

Gov ernance

Structure (GGV)

Board independence

and effectiveness; ownership

concentration; protection of

creditor/stakeholder rights; legal

/compliance risks; business continuity;

key person risk; related-party

transactions

Group

Structure (GST)

Organizational

structure; appropriateness

relative to business model; opacity; intra-

group dynamics; ownership

Financial Transparency

(GTR)

Quality and timing of financial reporting and

auditing processes




May 2019 7

Avolon Holdings Limited: Ownership Structure, Intra-group Dynamics

Avolon Holdings Limited is assigned a ‘4’ score for ‘Group Structure’ alongside ‘4’ for

‘Governance Structure’. The higher relevance scoring relates to changes over time made to

Avolon’s complex intercompany agreements (that govern creditor repayments and dividend

policies), and the highly speculative credit risk profiles of Avolon’s ow ner, Bohai Capital Holding

Co., Ltd. (Bohai Capital) and its majority ow ner, HNA Group Co., Ltd. (HNA). In August 2018

Avolon’s Outlook w as revised to ‘Positive’ on an investment by Japan’s ORIX Corporation,

together w ith enhancements to Avolon’s f inancial structure and corporate governance. This

w as follow ed by an upgrade to Avolon’s LT IDR to ‘BBB-‘, reflecting Avolon's stated intention to

adhere to the enhanced corporate governance framew ork, as agreed by Bohai Leasing and

ORIX.

Environmental Impact - Insurance Companies, NBFIs

The environmental impact associated w ith the frequency and severity of w eather events is the

most relevant ‘Environmental’ risk category for influencing credit ratings, particularly for

(re)insurers. How ever, w e expect the impact of changes associated w ith the transition to a

low er-carbon economy w ill increase over time. This is likely to lead to a broader range of

environmental risk categories increasing in relevance as credit rating drivers , for a greater

breadth of f inancial institutions.

Property & Casualty (Re)Insurers: Direct Exposure to Catastrophe Risks

For (re)insurers, and more specif ically property and casualty (P&C) (re)insurers, exposure to

environmental impacts is a common risk factor. How ever, if actual or increased exposure to

natural catastrophe losses led to a change in rating, outlook or w atch for an entity, this w ould

be view ed as a highly relevant environmental impact on the overall credit rating, and assigned

an ESG relevance risk score of ‘4’. For US non-life companies, environmental issues can be

particularly relevant given a signif icant number of individual carriers' underw riting exposure to

natural catastrophe risk, in terms of insured losses.

How ever, the majority of (re)insurers w ith ESG relevance scores of ‘4’ operate w ithin the APAC

region. This is due to the multiple hazards affecting the economies – e.g., earthquakes,

tsunamis, cyclones, f looding.

For instance, Mitsui Sumitomo Insurance Company Limited (MSI, Japan, Insurer Financial

Strength (IFS) ‘A+’) expects its combined ratio to rise to 100% at FYE19, due to higher than

expected incurred losses from domestic w eather-related losses (Typhoon Jebi, Typhoon Trami

and f looding in July). In FYE18, the Group’s earnings w ere affected by the loss incurred from

hurricanes Hervey Irma, Mariam and Mexican earthquakes under MSI’s fellow subsidiary ADI

and MSI’s subsidiary MS Amlin. Similarly, ABCI Insurance Company Limited (Hong-Kong, IFS

‘A-‘) has large earthquake and typhoon risk exposure in China through its inw ard reinsurance

businesses, and heavily relies on reinsurance arrangements to mitigate this risk.

PT Reasuransi Nasional Indonesia (Indonesia, IFS ‘BB+’) sources nearly 100% of its premium

income from the domestic market. Indonesia is geographically w idespread, and faces multiple

hazards, including f looding, earthquakes, landslides, tsunami, volcanoes, and cyclones.

Beyond APAC, Lloyd’s of London (“Lloyds”, UK, IFS ‘AA-’) is a prominent global insurance

and reinsurance f irm, w ith greater catastrophe risk exposure than peers- although it has been

actively managing this dow n over the past 12 months. 2017 w as one of the costliest years on

record for catastrophe losses follow ing a series of events, including three major hurricanes –

Harvey, Irma and Maria – and earthquakes in Mexico and w ildfires in California.

Berkshire Hathaway: Exposure to Waste and Hazardous Materials

Berkshire Hathaway Inc. (US, LT IDR: ‘AA-’) is the only company in Fitch’s (re)insurance

rating universe exposed to signif icant latent asbestos and environmental (A&E) losses, scoring

Environmental Elements – For Insurance (P&C)

GHG

Emissions & Air Quality

(EAQ)

n.a.

Energy

Management (EFM)

n.a.

Water & Wastewater

Treatment (EWT)

n.a.

Waste & Hazardous

Materials (EHZ)

Underwriting/reserving exposed to

asbestos/hazardous materials risks

Exposure to Env ironment

al Impacts (EIM)

Underwriting/reserving exposed to

environmental and natural catastrophe

risks; impact of catastrophes on own

operations or asset quality; credit

concentrations


Environmental Elements – For NBFIs

GHG

Emissions & Air Quality

(EAQ)

Regulatory risks,

emissions fines or compliance costs

related to owned equipment, which could

impact asset demand, profitability, etc.

Energy Management

(EFM)

Investments in or ownership of assets

with below-average energy/fuel efficiency

which could impact future valuation of

these assets

Water &

Wastewater Treatment

(EWT)

n.a.

Waste &

Hazardous Materials

(EHZ)

n.a.

Exposure to

Env ironmental Impacts

(EIM)

Impact of extreme

weather events on assets and/or

operations and corresponding risk

appetite & management;

catastrophe risk; credit concentrations




May 2019 8

‘4’ in the Environmental sub-score for Waste and Hazardous Materials Management,

Ecological Impacts. It has assumed a signif icant amount of the industry’s A&E exposure

through retroactive reinsurance contracts.

TechnoLeasing LLC: Indirect Exposure to Climate Risks

Beyond reinsurers, TechnoLeasing LLC (Kazakhstan, LT IDR: ‘B-’) is a unique example of an

NBFI w ith high, albeit indirect, exposure to climate risk. Its domestically focused lease book is

dominated by investments in agricultural machinery (tw o-thirds of net investment in lease in

2017), w ithin Kazakhstan – a country w hose agricultural sector is associated w ith elevated

climate risks. This is due to average temperature increases tw ice as fast as the w orld average.

TechnoLeasings’ asset quality notably deteriorated follow ing crop failure in dry seasons

(particularly in 2010, 2012), due to poor revenues among its customers.



May 2019 9

Annex 1: Banks with Higher (4, 5) ESG Relevance Element Scores

Higher Relevance Scores in this sector cluster were dominated by Governance, particularly the ‘Governance Structure’ risk element.

Abu Dhabi Islamic Bank

PJSC

GGV 4 Applies to all rated Islamic banks; need to ensure compliance of

their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations,

reporting and sharia audit. The score also reflects high related-party lending to interests of the bank’s controll ing shareholder.

Access Bank Plc GEX 4 There is heightened operational risk with Access Bank’s merger with Diamond Bank.

Agricultural Bank of China Limited

GGV

GTR

4

4

Applies to all Chinese banks. Potential for significant influence by the state as owner or through regulatory influence (given lack of

independence from the state). The issues are more significant for state-owned banks than private, but governance weighs on all VRs

and potentially on support prospects for some. Applies to all Chinese banks. There is significant under-reporting of

NPLs and RWAs due to use of off-balance sheet transactions and regulatory forbearance/loan rollovers. Risk mitigation is not clear,

giving rise to substantial contagion.

Ahli United Bank

(Kuwait)



reporting and sharia audit.

Ajman Bank PJSC GGV 4 Applies to all rated Islamic banks; need to ensure compliance of



Al Hilal Bank PJSC GGV 4 Applies to all rated Islamic banks; need to ensure compliance of



Al Rajhi Bank GGV 4 Applies to all rated Islamic banks; need to ensure compliance of



Alinma Bank GGV 4 Applies to all rated Islamic banks; need to ensure compliance of



Almazergienbank GGV 4 The rating reflects weaknesses in governance and controls

contributing to significant levels of directed and/or related-party lending.

American Express Company

SCW 4 A consumer lender with above-average interest rates, which is indicative of a higher-risk asset class that is l ikely to garner more

scrutiny from consumer advocacy groups and regulators.

Arab Tunisian Bank SIM 4 Interest rate caps on all lending are a direct result of social and

political disapproval of high interest rates charged by banks.

Asia Commercial Joint

Stock Bank

GGV

GTR

4

4

Governance at SOE banks is weak, with few independent directors,

and SBV’s supervisory role could be conflicted due to large/direct ownership.

Financial disclosures are weak, especially significant under-reporting of impaired loans.

Attijariwafa Bank GGV 4 The score reflects high related-party lending to companies controlled by the bank’s shareholder.

Axis Bank Ltd. GTR 4 Applies to all rated Indian banks, but particularly to government banks. Large divergence with central bank on NPL reporting reflects

weaknesses externally (RBI’s supervision) and internal audit standards.

Banca Mifel, S.A., Institucion de Banca

Multiple, Grupo Financiero Mifel

GGV 4 Ownership concentration in a single family.

Banco Agrario de

Colombia S.A.

GGV 4 It is owned by the Colombian federal government and, therefore,

potentially affected by the government's plans and incentives.

Banco Atlántida, S.A. GST 4 The organisational structure is more complex than other issuers’.

Banco BOCOM BBM S.A.

GGV 4 There are no governance issues that directly affect the bank’s VR, and regulatory ring-fencing is sound in Brazil, but it is owned by a

major Chinese bank, which exposes creditors to potential foreign government influence (parent score is also ‘4’).

Env ironmental Risk Categories EAQ – GHG Emissions & Air Quality; EFM – Energy Management; EWT – Water & Wastewater Management; EHZ – Waste & Hazardous Materials Management; Ecological Impacts; EIM – Exposure to Environmental Impacts Social Risk Categories SCR – Human Rights, Community Relations, Access & Affordability; SCW – Customer Welfare - Fair Messaging, Privacy & Data Security; SLB – Labour Relations & Practices; SEW – Employee Wellbeing; SIM – Exposure to Social Impacts Gov ernance Risk Categories GEX – Management Strategy; GGV – Governance Structure; GST – Group Structure; GTR – Financial Transparency



May 2019 10

Higher Relevance Scores in this sector cluster were dominated by Governance, particularly the ‘Governance Structure’ risk element. (Cont.)

Banco BTG Pactual S.A. GEX

GST

4

4

[+] The positive changes in the bank’s strategy since 2015, when

the main shareholder faced a major corporate scandal, resulted in

improvements in its financial profile.

The group structure is complex and challenging and as such the

identification of intra-group operations can be difficult.

Banco Compartamos,

S.A., Institucion de Banca Multiple

SCR

SCW

SIM

GEX

4

4

4

4

[+] The bank’s focus on the supply of services for underbanked and

underserved communities enhances its profile due to barriers of entry for competitors.

High lending rates to unbanked, lower-income segments of the population expose Banco Compartamos to relatively higher

regulatory, legal and reputational risks. Its Microfinance Focus on Unbanked Segments makes the bank s

profile and performance vulnerable to shifts in social or consumer preferences, and also to political or social programmes.

Management and Strategy is 'Moderate' in the Navigator because execution lacked consistency with stated strategic objectives.

Banco de Costa Rica GEX

GGV

GST

4

5

4

Strategy has been under review since the corporate events that led to a downgrade in 2017. Weaknesses in the bank's governance

framework have tested the quality of its risk controls and challenged execution of its strategy.

Corporate governance issues regarding board effectiveness triggered a rating downgrade in 2017. The resulting VR and Rating

Watch Negative were maintained in 2018 due to investigations and interim appointments.

Its appetite for intra-group operations is sometimes opportunistic.

Banco de la Ciudad de

Buenos Aires

GGV 4 Owned by a sub-national government and, therefore, potentially

affected by the government's plans and incentives.

Banco de la Produccion

S.A. Produbanco y Subsidiarias

GGV 4 There is a risk of government intervention through the regulatory

framework.

Banco de los Trabajadores

GEX

GGV

4

5

[+] Its strategy has been under review because of the corporate events of the past three years. After making important managerial

changes, the bank has an above-average execution of strategy. [+] An alleged fraud attempt by three board members on the bank's

shareholders triggered a rating downgrade in 2016. The resolution of the investigation and the strengthening of the corporate

governance framework are triggers for the resolution of the Positive Rating Outlook.

Banco de Reserv as de la Republica

Dominicana, Banco de Serv icios Multiples

(BANRESERVAS)

GGV 4 Owned by the Dominican Republic federal government and, therefore, potentially affected by the government's plans and

incentives.

Banco del Caribe, C.A.

Banco Univ ersal

GTR 4 Distortion of financial indicators from hyperinflation and

transparency of regulation.

Banco del Estado de

Chile

GGV 4 Owned by the Chilean federal government and, therefore,


Banco do Brasil S.A. GGV 4 Owned by the Brazil ian federal government and, therefore,


Banco do Estado do Rio

Grande do Sul S.A.



Banco Fassil SA GGV 4 Exposed to considerable government intervention. It needs to

allocate roughly half of its portfolio to certain sectors.

Banco GNB Sudameris

S.A.

GGV 4 Key person risk, since the chairman is perceived as materially

influencing broad operations across the bank, under sound controls.

Banco Internacional de

Costa Rica

GGV 4 Owned by the two large state-owned Costa Rican banks, which

affects the overall governance.

Banco La Hipotecaria,

S.A.

GST 4 Owned by a diversified financial conglomerate that adds some

complexity to the analytical review.

Banco Latinoamericano

de Comercio Exterior (Bladex)

GEX 4 Given its presence across the region, Bladex needs to frequently

adapt its overall strategy. The bank has a below-average execution of strategy as reflected in its weak financial performance.

Banco Mercantil del Norte, S. A., Institucion

de Banca Multiple, Grupo Financiero

Banorte

GEX 4 Banorte recently made an acquisition that increased its already high exposure to government and moderately weakened its risk appetite.

Strategy is opportunistic at times, especially regarding its relationships with public sector entities.

Banco Nacional de

Costa Rica

GGV 4 Owned by the Costa Rican federal government and, therefore,


Banco Nacional de

Panama

GGV 4 Owned by the Panamanian government and, therefore, potentially




May 2019 11


Banco Original S.A. GGV 4 The bank has a very large volume of related-party transactions with

its parent. While these are fully and clearly disclosed in the financial

statements, the parent (food producer JBS) is sti l l being investigated for corruption, and contagion risks (albeit lower)

remain.

Banco Pan S.A. GST 4 Joint-venture between a specialised private bank (BTG Pactual) and

a state-owned major bank (Caixa), which at times has made corporate strategies difficult to implement (such a recent capital

raise that took longer than expected).

Banco Pichincha C.A. y

Subsidiarias

GGV 4 There is a risk of government intervention through regulatory

framework.

Banco Ve por Mas, S.A.,

Institucion de Banca Multiple, Grupo

Financiero Ve por Mas

GGV 4 Ownership concentration in a single family.

Banestes SA Banco do

Estado do Espirito Santo



Bank Aljazira GGV 4 Applies to all rated Islamic banks; need to ensure compliance of their entire operations and activities with sharia principles and rules.

This entails additional costs, processes, disclosures, regulations, reporting and sharia audit.

Bank of Baroda GGV

GTR

4

4

Applies to all rated Indian government banks. Lack of board independence due to high government influence/interference.

Applies to all rated Indian banks, but particularly to government banks. Large divergence with central bank on NPL reporting reflects

weaknesses externally (RBI's supervision) and internal audit standards.

Bank of Beij ing GGV

GTR

4

4

Applies to all rated Chinese banks. Potential for significant influence by the state as owner or through regulatory influence (given lack of

independence from the state). Issues are more significant for state-owned banks than private, but governance weighs on all VRs and

potentially on support prospects for some. Applies to all rated Chinese banks. There is significant under-

reporting of NPLs and RWAs due to use of off-balance sheet transactions and regulatory forbearance/loan rollovers. Risk

mitigation is not clear giving rise to substantial contagion.

Bank of Ceylon GGV 4 Influence from state as owner.

Bank of China Limited GGV

GTR

4

4


independence from the state). Issues are more significant for state -owned banks than private, but governance weighs on all VRs and




Bank of

Communications Co., Ltd.

GGV

GTR

4

4

Applies to all rated Chinese banks. Potential for significant influence

by the state as owner or through regulatory influence (given the lack of independence from the state). The issues are more significant for

state-owned banks than private, but governance weighs on all VRs and potentially on support prospects for some.

Applies to all rated Chinese banks. There is significant under-reporting of NPLs and RWAs due to use of off-balance sheet

transactions and regulatory forbearance/loan rollovers. Risk mitigation is not clear, giving rise to substantial contagion.

Bank of India GGV

GTR

4

4


Applies to all rated Indian banks, but particularly to government banks. The large divergence with central bank on NPL reporting

reflects weaknesses externally (RBI's supervision) and internal audit standards.

Bank of Sharjah PJSC GGV 4 Executive management (CEO & Deputy CEO) plays an important role (high influence) in new loan and investment book decisions.

The board lacks independent members, which is not unusual in the region, but average length of service is very high, around 30 years.

Barwa Bank GGV 4 Applies to all rated Islamic banks; they need to ensure compliance of their entire operations and activities with sharia principles and

rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit.



May 2019 12


Belarusbank GGV 4 Reflects weaknesses in governance and controls contributing to

significant levels of directed lending.

Belinv estbank, OJSC GGV 4 Reflects weaknesses in governance and controls contributing to significant levels of directed lending.

Boubyan Bank K.S.C.P. GGV 4 Applies to all rated Islamic banks; need to ensure compliance of their entire operations and activities with sharia principles and rules.


BRB - Banco de Brasilia SA

GGV 4 Owned by a sub-national government and, therefore, potentially affected by the government's plans and incentives.

CAIXA ECONOMICA MONTEPIO GERAL,

Caixa economica bancaria, S.A.

GGV 4 Disagreements between Banco Montepio’s previous management team and the bank’s shareholder, Montepio Geral Associação

Mutualista, led to significant management turnover in 2018.The stabilisation of the bank’s management and board of directors is

taking longer than expected. This, coupled with a strong influence from the association on day-to-day business, reflects a less

developed corporate governance than those of its peers.

Canara Bank GGV

GTR

4

4

Applies to all rated Indian government banks. Lack of board

independence due to considerable government influence/interference.



Capital One Financial Corporation

GGV 4 Potential impact of pending AML investigation.

Cartu Bank GGV 4 The rating reflects weaknesses in governance and controls contributing to significant levels of related-party lending.

China CITIC Bank Corporation Limited

(CNCB)

GGV

GTR

4

4

Applies to all rated Chinese banks. There is potential for significant influence by the state as owner or through regulatory influence

(given lack of independence from the state). Issues are more significant for state-owned banks than private, but governance

weighs on all VRs and potentially on support prospects for some. Applies to all rated Chinese banks. There is significant under-


mitigation is not clear, giving rise to substantial contagion.

China Construction

Bank Corporation

GGV

GTR

4

4


by the state as owner or through regulatory influence (given lack of independence from the state). The issues are more significant for

state-owned banks than private, but governance weighs on all VRs and potentially on support prospects for some.


transactions and regulatory forbearance/loan rollovers. Risk mitigation is not clear giving rise to substantial contagion.

China Ev erbright Bank GGV

GTR

4

4






China Guangfa Bank

Co., Ltd.

GGV

GTR

4

4


by the state as owner or through regulatory influence (given lack of independence from the state). Issues are more significant for state-

owned banks than private, but governance weighs on all VRs and potentially on support prospects for some.





May 2019 13


China Merchants Bank

Co., Ltd.

GGV

GTR

4

4


by the state as owner or through regulatory influence (given lack of

independence from the state). Issues are more significant for state-owned banks than private, but governance weighs on all VRs and

potentially on support prospects for some.

Applies to all rated Chinese banks. There is significant under-



China Minsheng

Banking Corp., Ltd.

GGV

GTR

4

4


by the state as owner or through regulatory influence (given lack of independence from the state). Issues are more significant for state -




Commonwealth Bank of Australia

SCW

GGV

4

5

Multiple misconduct issues have been identified, and a remediation programme is underway as a result of a prudential inquiry report.

This has contributed with other factors to weigh on the Rating Outlook which was revised to negative in May 2018.

Cooperativ a de Ahorro y Credito (FUCEREP)

GEX 4 The business mix is shifting towards a greater contribution from non-payroll deductible loans.

Credit Bank of Moscow GGV

GST

4

4

The rating reflects weaknesses in governance and controls, as evidenced by high levels of related-party lending and lack of

transparency with respect to the bank’s ownership structure. It also reflects significant double leverage at the level of the bank’s

holding company, as well as lack of transparency with respect to ownership structure.

Danske Bank AS GGV 5 Legal and compliance risks associated with material volumes of transactions with non-resident customers of Danske's Estonian

branch between 2007 and 2015, many of which are expected to be deemed suspicious. The bank is under investigation by local and

international authorities. Outlook revised to Negative in September 2018.

Deutsche Bank AG GEX 4 The Negative Rating Outlook on Deutsche Bank AG's Long-Term IDR reflects substantial execution risk in implementing its

restructuring. Failure to achieve the bank's targets would put the management's ability to execute the strategy in question and would

likely result in a downgrade.

Dev elopment Bank of

the Philippines

GGV 4 Applies to both DBP & LBP. Risk of influence from full state

ownership, as both act as commercial banks, but perform quasi -policy roles.

Diamond Bank Plc GGV 4 The bank failed to replace key board members who resigned in 4Q18. This gives rise to concerns about how executive decisions

are currently being made at the bank.

Discov er Financial

Serv ices

SCW 4 A consumer lender with above-average interest rates, which is

indicative of a higher-risk asset class that is l ikely to garner more scrutiny from consumer advocacy groups and regulators.

Dubai Islamic Bank PJSC

GGV 4 Applies to all rated Islamic banks: they need to ensure compliance of their entire operations and activities with sharia principles and


Emirates Islamic Bank PJSC

GGV 4 Applies to all rated Islamic banks; need to ensure compliance of their entire operations and activities with sharia principles and rules.


Expressbank Open Joint Stock Company

GGV 4 The rating reflects weaknesses in governance and controls, as evidenced by high levels of related-party lending.

First BanCorp EIM 4 The impact of Hurricanes Irma and Maria has complicated the Commonwealth of Puerto Rico's efforts to reverse outward

migration, generate sustainable economic growth, and address its fiscal and debt imbalances.

Fulton Financial Corporation

SCW 4 There is rating sensitivity regarding a fair lending probe.



May 2019 14


Gazprombank (Joint-

stock Company)

GGV

GST

4

4

The rating reflects weaknesses in governance and controls

contributing to significant levels of directed lending.

It also reflects contingent risks from considerable debt and equity exposure to non-banking subsidiaries.

Getin Noble Bank S.A. GTR 4 Weakened financial transparency with respect to l iquidity and deposit flows following increased liquidity risk in November 2018.

Grupo Financiero Banorte, S.A.B. de C.V.

GEX 4 GFNorte recently made an acquisition that increased its already high exposure to government and moderately weakened its risk

appetite. Strategy is opportunistic at times, especially regarding its relationships with public sector entities.

Hua Xia Bank Co., Limited

GGV

GTR

4

4


(given the lack of independence from the state). The issues are more significant for state-owned banks than private, but governance



mitigation is not clear, giving rise to substantial contagion.

ICICI Bank Ltd. GTR 4 Applies to all rated Indian banks, but particularly to government

banks. Large divergence with central bank on NPL reporting reflects weaknesses externally (RBI's supervision) and internal audit

standards.

IDBI Bank Ltd. GGV

GTR

4

4

Applies to all rated Indian government banks. Lack of board

independence due to high government influence/interference. Applies to all rated Indian banks, but particularly to government

banks. There is wide divergence with central bank on NPL reporting reflects weaknesses externally (RBI's supervision) and internal audit

standards.

Industrial and

Commercial Bank of China Limited

GGV

GTR

4

4


by the state as owner or through regulatory influence (given lack of independence from the state). Issues are more significant for state -




Industrial Bank Co., Ltd GGV

GTR

4

4






Joint Stock Commercial

Bank Asaka

GGV 4 The rating reflects weaknesses in governance and controls

contributing to significant levels of directed lending.

Joint Stock Commercial

Bank For Foreign Trade of Vietnam

GGV

GTR

4

4

Governance at SOE banks is weak, with few independent directors


Financial disclosures are weak, and there is especially significant under-reporting of impaired loans.

Joint Stock Commercial Bank Univ ersal Bank

GGV 4 Reflects weaknesses in governance and controls contributing to significant levels of related-party lending.

Joint Stock Company OTP Bank

GST 4 Significant exposure to, and potential contingent risks related to, sister company, which operates as microfinance lender.

JSC Alfa-Bank GST 4 Bank is in process of merging with sister bank. This did not lead to rating action (as both banks have similarly weak rating profiles), but

is sti l l a significant factor driving stand-alone analysis and the VR.

JSC State Sav ings

Bank of Ukraine (Oschadbank)

GGV 4 The rating reflects weaknesses in governance and controls leading

to risks of directed lending.

JSC The State Export-Import Bank of Ukraine

(Ukreximbank)

GGV 4 Reflects weaknesses in governance and controls leading to risks of directed lending.

KCB Bank Kenya

Limited

SIM 4 Interest rate caps on all lending are a direct result of social and


KCB Group PLC SIM 4 Interest rate caps on all lending are a direct result of social and




May 2019 15


King's Town Bank GGV 4 Strategy and key management changes are rating sensitivities. The

tight control at top serves as key person risk.

Krung Thai Bank Public Company Limited

GGV 4 An SOE and a quasi-policy bank operating as commercial bank. Its governance has been/can be compromised by the state.

Kuv eyt Turk Katilim Bankasi A.S



Kuwait Finance House (K.S.C.P.)



Kuwait International Bank K.S.C.P.



Land Bank of the Philippines

GGV 4 Applies to both DBP & LBP. There is a risk of influence from full state ownership, as both act as commercial banks, but perform

quasi-policy roles.

Mercantil, C.A. Banco

Univ ersal

GTR 4 Distortion of financial indicators from hyperinflation and

transparency of regulation.

Microcreditbank GGV 4 Reflects weaknesses in governance and controls contributing to


Military Commercial

Joint Stock Bank

GGV

GTR

4

4



Financial disclosures are weak, and there is especially significant under-reporting of impaired loans.

National Australia Bank Limited

SCW

GGV

4

5

There are shortcomings in management, with increased operational and compliance risks, and in its culture.

Failings identified as part of Royal Commission and self-assessment. A remediation programme is underway. This was the

main factor resulting in the revision of the Rating Outlook to Negative in February 2019.

National Bank of Egypt GGV 4 There is very strong government influence (because of state

ownership).

NongHyup Bank SIM

GGV

4

4

There is a potential impact on VR because of the pressure to

increase agricultural policy loans, to maximise distributions to NACF (thus ultimately to farmers/member co-ops) through brand fee and

dividends. There is significant influence from the ultimate parent NACF (policy

co-op) impacts our assessment on management and strategy, risk appetite.

Noor Bank GGV 4 Applies to all rated Islamic banks; need to ensure compliance of their entire operations and activities with sharia principles and rules.


OJSC Agrobank GGV 4 Reflects weaknesses in governance and controls contributing to significant levels of directed lending.

Open Joint Stock Company International

Bank of Azerbaijan

GGV 4 Reflects largely untested governance and controls after the previously weak framework that resulted in the bank's failure.

Ping An Bank Co., Ltd. GGV

GTR

4

4

Applies to all rated Chinese banks. There is potential for significant

influence by the state as owner or through regulatory influence (given lack of independence from the state). The issues are more

significant for state-owned banks than private, but governance weighs on all VRs and potentially on support prospects for some.



Popular, Inc. EIM 4 The impact of Hurricanes Irma and Maria has complicated the Commonwealth of Puerto Rico's efforts to reverse outward

migration, generate sustainable economic growth, and address its fiscal and debt imbalances.



May 2019 16


Postal Sav ings Bank of

China Co., Ltd

GGV

GTR

4

4

Applies to all rated Chinese banks. There is potential for significant

influence by the state as owner or through regulatory influence


weighs on all VRs and potentially on support prospects for some.

Applies to all rated Chinese banks. There is significant under-



Promerica Financial

Corporation

GST 4 The group structure complexity adds challenges to the analytical

review, and sometimes makes difficult the identification of intra -group operations.

Punjab National Bank GGV

GTR

4

4




Qatar International Islamic Bank



Qatar Islamic Bank (Q.P.S.C)



Russian Agricultural Bank

GGV 4 Reflects weaknesses in governance and controls leading to risks of directed lending.

Santander Holdings USA, Inc.

SCW 4 Historical compliance issues at the subprime auto lending unit, including findings of improper repossessions and fees as well as

weaknesses in oversight, are in the process of resolution but continue to factor in the company's risk appetite assessment.

Shanghai Pudong Dev elopment Bank

GGV

GTR

4

4






Sharjah Islamic Bank GGV 4 Applies to all rated Islamic banks; need to ensure compliance of



SLM Corporation SIM 4 Student loans are subject to elevated political and reputational risk

given the potential payment burden for young graduates.

Sparkassen-

Finanzgruppe (Sparkassen)

GST 4 Fitch assigns "group" ratings to Sparkassen-Finanzgruppe (SFG) in

l ine with criteria for rating banking structures backed by mutual support mechanisms. We view SFG as one of the least cohesive

groups to which Fitch assigns "group" ratings, but the sector's mutual support scheme has an impeccable record of safeguarding

its member banks' viability. The IDRs and VR are sensitive to a change in Fitch's assessment of the group's cohesion, and an

upgrade of the VR is unlikely unless SFG significantly strengthens its corporate governance by streamlining its decision-making

process and disclosure, including audited consolidated financial statements.

Stanbic Bank Kenya Limited

SIM 4 Interest rate caps on all lending are a direct result of social and political disapproval of high interest rates charged by banks.

State Bank of India GGV

GTR

4

4




Sv iaz-Bank GGV 4 Reflects weaknesses in governance and controls contributing to the bank's weak asset quality and underperformance.



May 2019 17


Swedbank AB GGV 5 Swedbank AB is exposed to risks related to its governance

structure, which are a key driver for its RWN. This is reflected in the

‘5’ ESG relevance score for this factor. A confirmation that Swedbank was involved in money laundering would point to

material control deficiencies and weaker management of operational, reputational and litigation risks.

Synchrony Financial SCW 4 A consumer lender with above-average interest rates, which is indicative of a higher-risk asset class that is l ikely to draw more

scrutiny from consumer advocacy groups and regulators.

Taishin International

Bank Co., Ltd.

GST 4 The parent has a continuing dispute with the government over the

control of Changhwa Bank.

Trade Bank of Iraq GGV 4 The Iraqi government is highly involved at board level and in the

business.

Turkiye Finans Katilim

Bankasi A.S.




Turkiye Halk Bankasi

A.S.

GGV 4 The rating reflects Fitch's view of a sti l l material risk of the bank

becoming subject to a fine or other punitive measures as a result of the US investigation, which resulted in the conviction of its deputy

general manager for violation of US sanctions. This drives Rating Watch Negative on VR, but IDR is not on Rating Watch Negative as

it is underpinned by support.

U.S. Bancorp GGV 4 There are compliance risks outstanding related to the Bank Secrecy

Act/Anti-Money Laundering (BSA/AML) regulation order.

Union de Banques

Arabes et Francaises - U.B.A.F.

GGV 4 The outcome of l itigation with the US Office of Foreign Assets

Control (OFAC) is uncertain. This follows the self-disclosure of certain transactions that might be construed as impermissible under

US regulations.

Uzbek Industrial and

Construction Bank Joint-Stock Commercial

Bank

GGV 4 Reflects weaknesses in governance and controls contributing to


Vakif Katilim Bankasi

AS

GGV 4 Applies to all rated Islamic banks: they need to ensure compliance

of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures,

regulations, reporting and sharia audit.

Vietnam Joint Stock

Commercial Bank for Industry and Trade

GGV

GTR

4

4



Financial disclosures are weak, especially significant under-reporting of impaired loans.

Warba Bank GGV 4 Applies to all rated Islamic banks: they need to ensure compliance of their entire operations and activities with sharia pri nciples and


Wells Fargo & Company

GEX

GGV

4

4

The bank is in the process of remediating various risk control issues and responding to regulatory findings. Ratings are sensitive to risk

control-related issues. The ratings are affected by risk control and governance issues.

Outstanding legal and compliance risk not yet fully addressed.

[+] Signif ies an ESG element that has a positive influence on credit risk Source: Fitch Ratings



May 2019 18

Annex 2: NBFIs with Higher (4, 5) ESG Relevance Element Scores

Higher Relevance Scores in this sector cluster were dominated by Governance, particularly the ‘Governance Structure’ risk element. Emerging market names also contributed a proportionately higher share of higher ESG relevance scores.

Algeco Scotsman

Global S.a r.l.

GEX 4 The recent disposal of US business led to higher leverage and

contributed to Rating Outlook revision to Negative.

Apollo Inv estment Corporation

GEX 4 The pursuit of higher leverage is expected to occur in concert with portfolio rotation into more senior assets, which gives rise to strategic

execution risk.

Av olon Holdings

Limited

GGV

GST

4

4

The ownership and group structures are complex.

The majority owner has a weaker financial profile.

BGC Partners, Inc. GGV

GST

4

4

Key person risk.

Complex group structure.

Bolsa Mexicana de

Valores, S.A.B. de C.V.

GGV 4 [+] The strong and sound governance structure provides a relative

competitive advantage in terms of market reputation and further reinforces FMI barriers to entry.

Cantor Fitzgerald, L.P.

GGV GST

4 4

Key person risk. Complex group structure.

Credito Real, S.A.B. de C.V., Sociedad

Financiera de Objeto Multiple, Entidad

Regulada

SCW

SIM

4

4

The bank is exposed to reputational and operational risks as it targets government employees and dependencies at relatively high rates.

It is also exposed to a shift in consumer or social preferences or to government regulation of its lending offer.

Docuformas, S.A.P.I.

de C.V.

GEX

GGV

GTR

4

4

4

The Management and Strategy assessments on the Ratings Navigator

are 'Moderate'. Recent changes due to a new shareholder structure and the changed role of the founder acting only as the CEO, and not as

the chairman of the board. Recent execution risks from inorganic growth need to be improved.

A non-regulated entity. Positive corporate practices were implemented recently, but areas for improvement persist. It is exposed to key person

risk, which moderately decreased recently. Although financial transparency has improved, this is sti l l recent and

further enhancements are sti l l continuing due to its non-regulated nature.

Element Fleet Management Corp.

GEX 4 There is execution risk because of the new management team's ability to successfully implement proposed strategic, financial and operational

plans, which include winding down non-core assets and reducing leverage.

Far East Horizon Limited

GST 4 The FEH’s organisational structure is considered complex due to the large number and multiple layers of onshore and offshore entities to

facil itate its business in various sectors. The continued growth of hospital operations could further add complexity to its organisational

structure.

Financiera

Independencia, S.A.B. de C.V.

SOFOM, E.N.R.

SCW

SIM

GEX

4

4

4

High lending rates to unbanked, lower-income segments of the

population expose Findep to relatively high regulatory, legal and reputational risks.

The business model (individual loans to low-income segments) is exposed to shifts of consumer or social preferences or to measures that

the government could take to increase financial inclusion. After frequent managerial shifts, the management needs to prove the

company's adherence to strategic objectives and execution.

FLLC Mikro Leasing GEX

GGV

GST

GTR

4

4

4

4

The strategic goals are not very well articulated following a recent

change of top management. Corporate governance is rudimentary, with l imited management and

board independence. There is significant reliance on related parties for funding.

The aggressive venture -type private owner with diverse interests in a number of risky start-ups results in contagion risk.

The financials are not disclosed and there is very limited transparency.

Freedom Mortgage

Corporation

GGV 4 There is key person risk and there are related-party transactions.

GFH Financial Group

BSC

GEX 4 Performance in the post-crisis period has been volatile, but the current

management team appears to have brought greater stability.

Home Credit Vietnam

Finance Company Limited

GEX 4 The company is located in a growing but less developed market prone

to business and economic volatility. Its business model is not well tested through the cycle, and execution is susceptible to less

predictable regulations and operations.

Intrum AB GTR 4 Certain key ratios (EBITDA, ERC) rely on non-IFRS numbers and

management judgment.

Jefferies Group LLC GST 4 The group structure is complex.

Environmental Risk Categories

EAQ – GHG Emissions & Air Quality ;

EFM – Energy Management; EWT –

Water & Wastewater Management;

EHZ – Waste & Hazardous Materials

Management; Ecological Impacts;

EIM – Exposure to Env ironmental

Impacts

Social Risk Categories SCR – Human Rights, Community

Relations, Access & Af f ordability ;

SCW – Customer Welf are - Fair

Messaging, Priv acy & Data Security ;

SLB – Labour Relations & Practices;

SEW – Employ ee Wellbeing;

SIM – Exposure to Social Impacts

Governance Risk Categories

GEX – Management Strategy ;

GGV – Gov ernance Structure;

GST – Group Structure;

GTR – Financial Transparency



May 2019 19

Higher Relevance Scores in this sector cluster were dominated by Governance, particularly the ‘Governance Structure’ risk element. Emerging market names also contributed a proportionately higher share of higher ESG relevance scores. (Cont.)

JSC Microfinance

Organization Swiss Capital

SCW

SIM

4

4

High-yield lending with complicated pricing mechanism induces

potential mis-selling claims.

High-yield lending to socially disadvantaged population drives material

regulatory risk.

Lionbridge Capital Co., Limited

GEX 4 Lionbridge was established in 2011 and has a short operating history. The sustainability of its business model, strategic focus, risk appetite

and financial profile has yet to be fully tested through economic cycles.

Metrofinanciera,

S.A.P.I. de C. V., Sociedad Financiera

de Objeto Multiple, Entidad Regulada

GEX 4 There is l ittle stability in top management stability and the company

profile is very limited. The management has not been able to successfully execute goals.

Mongolian Mortgage Corporation HFC

LLC

GEX

GGV

5

4

Its business model is evolving, and the company plans to diversify away from purchasing subsidised mortgages under Mongolia's

affordable housing programme to issue residential mortgage-backed securities. Its aggressive growth plan has created execution risks that

expose the company to high levels of counterparty risk. While owned by commercial banks, the business model is highly

sensitive to the direction of government policy.

Nav ient Corporation SIM 4 Student loans are subject to elevated political and reputational risk

given the potential payment burden for young graduates.

Och-Ziff Capital

Management Group LLC

GEX 4 The SEC/DOJ investigation and fines, together with the noise around

succession planning and several management resignations, have led to management and strategic missteps at the firm. The direction of the

rating is contingent on the ability to execute on growth in non-hedge fund business lines and stabili sation in the hedge fund AUM in order to

de-lever. Additional concerns about recent strategic announcements, including a realignment of common equity ownership, a restructuring of

the debt and a C-Corporation conversion, raise questions about the pace at which the firm can reduce leverage.

ORIX Corporation GST 4 ORIX has a complex business model and organisational structure as the company expands and moves across sectors and geographies.

This heightens the challenges facing ORIX in risk management and governance.

Pershing Square Holdings, Ltd.

GGV 4 Key person risk.

Russell Inv estments Cayman Midco, Ltd.

GEX 5 The uncertainty surrounding the company’s future strategy and financial policies and the ability to execute on them due to their private equity

ownership drove the Negative Rating Outlook.

Stifel Financial Corp GGV 4 There is key person risk.

TechnoLeasing LLC EIM 4 There is high exposure to agriculture in an area with elevated climate risks. Asset quality notably deteriorates after the dry season.

TP ICAP plc GEX 4 The former CEO departed in July 2018 amid concerns over reduced cost synergy targets and cost overruns relating to the ICAP integration.

Virtu Financial LLC GEX 4 There is elevated execution risk associated with the acquisition of Investment Technology Group, Inc in terms of integration, achievement

of envisioned synergies and deleveraging.

[+]Signif ies an ESG element that has a positive influence on credit risk Source: Fitch Ratings



May 2019 20

Annex 3: (Re)Insurance Companies (Property & Casualty) with Higher (4, 5) ESG Relevance Scores

For (re)insurers, and more specifically P&C (re)insurers, there is significant exposure to environmental risk factors. This is typically associated with exposure to a variety of catastrophe risks.

ABCI Insurance

Company Limited

EIM 4 Reinsurance, Risk Mitigation and Catastrophe Risk are weighted

'Higher Influence'. "Prism Score is sensitive to net PML assumptions provided by the company" stated in the rating sensitivity section.

Berkshire Hathaway Inc.

EHZ 4 BH has about one-half of the industry's total exposure to asbestos.

Eurohold Bulgaria AD GTR 4 The score is based on past qualified audit opinions and frequent change of auditor.

Lloyd's of London EIM 4 Exposure to catastrophe risk referenced in sensitivities.

Mitsui Sumitomo

Insurance Company, Limited

EIM 4 Exposures to natural catastrophe risks. Reinsurance weighted at

'Moderate'.

PT Reasuransi Indonesia Utama

(Persero)

EIM 4 Relatively high catastrophe exposure; ‘Moderate’ influence of reinsurance factor.

PT Reasuransi Nasional

Indonesia

EIM 4 Major non-l ife business, high catastrophe exposure; ‘Moderate’

influence of reinsurance factor.

RenaissanceRe

Holdings Ltd.

EIM 4 Property catastrophe business is 39% of GPW, with downgrade

sensitivity of catastrophe loss of 25% or more of shareholder equity. 1:250 aggregate PML of 38% of equity.

Sirius International Group, Ltd.

EIM 4 Sizable property (30%) and property catastrophe (15%) NPW, with 1:250 aggregate PML of 42% of equity.

Sompo Japan Nipponkoa Insurance

Inc.

EIM 4 Catastrophe risk was mentioned in the latest RAC, and Reinsurance is 'Moderate' influence.

Yingda Taihe Property

Insurance Co., Ltd

EIM 4 Exposure to catastrophe risk is mentioned in the downgrade

sensitivities.

Tokio Marine & Nichido

Fire Insurance Co., Ltd.

EIM 4 Exposures to natural catastrophe risks. Reinsurance weighted at

'Moderate'.

[+] Signif ies an ESG element that has a positive influence on credit risk Source: Fitch Ratings

Env ironmental Risk Categories EAQ – GHG Emissions & Air Quality; EFM – Energy Management; EWT – Water & Wastewater Management; EHZ – Waste & Hazardous Materials Management; Ecological Impacts; EIM – Exposure to Environmental Impacts Social Risk Categories SCR – Human Rights, Community Relations, Access & Affordability; SCW – Customer Welfare - Fair Messaging, Privacy & Data Security; SLB – Labour Relations & Practices; SEW – Employee Wellbeing; SIM – Exposure to Social Impacts Gov ernance Risk Categories GEX – Management Strategy; GGV – Governance Structure; GST – Group Structure; GTR – Financial Transparency



May 2019 21

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