Fitch Ratings has affirmed Swisscard AECS GmbH's Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook and Short-Term IDR at 'F2'.

Both ratings have been removed from Rating Watch Negative (RWN). Fitch has maintained Swisscard's Shareholder Support Rating (SSR) of 'bbb-' on Rating Watch Positive (RWP).

The affirmation and removal from RWN reflect Fitch's view of reduced short-term risks to Swisscard's franchise and business model stability from UBS Group AG's (UBS; A/Stable/a) plans to merge its domestic Swiss bank, UBS Switzerland (A+/Stable/a), with Swisscard's 50% owner Credit Suisse Schweiz AG (CS Schweiz; A+/Stable/bbb). The rating actions also reflect that Swisscard's financial performance has remained resilient despite uncertainty around its future strategic direction. We expect its performance and market share to be largely unchanged until Swisscard's long-term strategic direction is finalised by its shareholders.

Swisscard is a leading Swiss credit card provider and a 50-50 joint venture between CS Schweiz, and American Express Company (Amex, A/Stable/a).

Key Rating Drivers

Stability Over Outlook Horizon: Fitch believes immediate short-term risks to Swisscard's business model and profitability have reduced as UBS is proceeding with the multi-year integration of Credit Suisse. Swisscard's profitability has remained resilient and is underpinned by strong billing volumes, despite reduced volumes from the CS Schweiz channel. Fitch expects no impactful changes to current financial metrics and franchise over the short term.

Standalone Credit Profile: Swisscard's Long-Term IDR is driven by its standalone credit risk profile and reflects its robust and low-risk business model with tight credit risk control, strong profitability and moderate leverage. The ratings are constrained by the company's monoline and geographically concentrated business model and reliance on wholesale funding with high asset encumbrance.

Strategically Important to CS Schweiz: In our view, Swisscard is strategically important but not core to CS Schweiz, resulting in an SSR that is one notch lower than CS Schweiz's 'bbb' VR, which anchors our support assessment. Fitch's assessment of shareholder support from CS Schweiz considers the shared jurisdiction, the manageable cost of potential institutional support relative to CS Schweiz's available resources, and synergies between CS Schweiz and Swisscard, given that Swisscard is the sole issuer of CS Schweiz's credit cards in Switzerland.

Factors limiting credit for potential shareholder support include the joint venture nature of Swisscard's ownership structure and the partially different branding.

Expected Change in SSR Anchor: Fitch currently uses CS Schweiz's VR rather than its Long-Term IDR as the anchor rating because of its view that there is insufficient certainty to assume that support would flow from CS Schweiz's owner through to Swisscard. However, once CS Schweiz has merged with UBS Switzerland, expected in 2H24, Fitch expects to anchor Swisscard's SSR on UBS Switzerland, which could provide upside to Swisscard's SSR as reflected in the RWP. Fitch expects to resolve the RWP once the absorption of CS Schweiz by UBS Switzerland is complete, which may take longer than six months.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

IDRs

Clear indications of a weakening of Swisscard's franchise, its ability to originate business or its competitive position in the Swiss credit card market as a result of a new strategic direction under the post-merger structure could lead to a downgrade of the IDRs.

A downgrade of Swisscard's Long-Term IDR by two notches, in conjunction with a weaker assessment of Swisscard's funding, liquidity, and coverage profile, could lead to a downgrade of its Short-Term IDR in line with Fitch's rating correspondence table.

SSR

A downgrade of CS Schweiz's VR would likely lead to a downgrade of Swisscard's SSR as long as CS Schweiz remains Swisscard's shareholder.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

IDRs

Upgrade potential for Swisscard's IDRs based on its standalone credit profile is unlikely in the short term, given the current uncertainties regarding its strategic direction under the announced new ownership. Swisscard's modest scale (in an international context), monoline business model and wholesale funding profile limit upside potential in the medium to long term. However, on a support-driven basis, the IDRs could be upgraded if the SSR was upgraded to 'a' or higher.

An upgrade of Swisscard's Long-Term IDR by one notch or a stronger assessment of Swisscard's funding, liquidity, and coverage profile, could lead to an upgrade of its Short-Term IDR.

SSR

Fitch currently uses CS Schweiz's VR as the anchor rating rather than its Long-Term IDR. However, we expect CS Schweiz to be absorbed by UBS Switzerland and for UBS Switzerland to become the anchor rating following the completion of the UBS Switzerland and CS Schweiz merger, which would likely result in an upgrade of the SSR. Once UBS Switzerland becomes Swisscard's shareholder, we expect to anchor Swisscard's SSR on UBS Switzerland with - among other things - Swisscard's strategic importance for UBS Group's domestic operations, operational integration, and ownership proportion determining the magnitude of notching and which rating to anchor Swisscard's SSR to.

An upgrade of CS Schweiz's VR would also lead to an upgrade of Swisscard's SSR, as long as Fitch maintains its current notching difference.

ADJUSTMENTS

The sector risk operating environment has been assigned above the implied score due to the following adjustment reason(s): regulatory and legal framework (positive).

The earnings & profitability score has been assigned below the implied score due to the following adjustment reason: revenue diversification (negative).

The funding, liquidity & coverage has been assigned above the implied score due to the following adjustment reason(s): funding flexibility (positive)

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.

Public Ratings with Credit Linkage to other ratings

Swisscard's SSR is linked to CS Schweiz's VR.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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