Moody’s Investors Service has downgraded Swiss private bank Julius Baer & Co. AG and put its ratings on review for further downgrade, following the news that it plans to acquire Merrill Lynch’s international wealth-management business.

The rating agency says that the one-notch downgrade to A1/C+ reflects the bank’s “increased risk appetite to pursue a transformational deal that increases risks to bondholders”. It also cites increasing pressures on traditional Swiss private banking franchises, stemming from: the move away from offshore private banking; declining gross margins from lower client-risk appetite and trading activities; and, operating expense pressures, including pressure from a strong Swiss franc.

Moody’s says that, while it recognizes the “franchise-enhancing aspects” of the proposed deal, it also says that the transaction will likely cause a decline in the bank’s strong regulatory capital ratios. Its review will focus on the capital impact of the deal; its appetite for further acquisitions; and the integration risks on the Merrill deal, which is expected to take three years to fully complete. If the deal receives regulatory and shareholder approval, Moody’s currently expects a further one-notch downgrade.

Additionally, it says the bank could face subsequent downward pressure on its credit profile as a result of: material, prolonged erosion in assets under management (AUM), as well as client or advisor attrition; a continued decline in gross and net margins on AUM; failure to successfully integrate and efficiently operate a larger global private banking platform; further financially aggressive acquisitions; and/or litigation charges that exceed Moody’s expectations.