The Outlook revision reflects heightened uncertainty in the operating environment arising from the coronavirus pandemic. It also reflects the related pressure on the company's earnings and profitability amid uncertainty in investment banking revenue because of weaker market sentiment, as well as a subdued share of profit from associated companies.
The affirmation reflects Fitch's assessment that FNS continues to have adequate capital buffers to withstand the immediate shock brought about by the pandemic.
KEY RATING DRIVERS
The ratings reflect FNS's small niche domestic franchise, the potential for volatile profitability as well as acceptable capital and liquidity positions.
The ratings also take into account Fitch's expectation of weak earnings to continue into 2020, the potential delay of pending IPO transactions and ongoing low profit contribution from Finansia Syrus Securities Plc (FSS; 29.29% stake, held by FNS's subsidiary).
Nevertheless, Fitch believes that the stable cash inflow from its warehouse and factory rental business, liquid asset holdings and sound equity base provide FNS with some financial flexibility. The sale of FNS's investments in leasehold rights and private equity transactions may also support its ability to generate excess cash flow over the medium term.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Rating upgrades are less probable in light of the challenging operating environment and FNS's modest profitability.
Fitch might revise the rating Outlook to Stable if the company's operating profitability shows resilience to the coronavirus-related impact, while it also maintains an intact capital and liquidity profile.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Negative Outlook reflects the increased risk of weak profitability in its core operation and its associated company over the short-term. Rating downgrades could arise from a prolonged decrease in profitability that leads to a significant deterioration in key financial ratios, particularly in leverage.
Any diversion from the debt-repayment plan that stems from higher risk appetite, significant losses in the core operations of its subsidiaries or affiliates, or signs of withdrawal in creditors' confidence may also result in a negative rating action.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com