Fitch: Scottrade's 'BBB-' Rating and Positive Outlook Unaffected by Security Breach

CHICAGO--(BUSINESS WIRE)-- According to Fitch Ratings, Scottrade Financial Services, Inc.'s (Scottrade) 'BBB-' rating and Positive Rating Outlook are unaffected, at this time, by the disclosure on Oct. 1, 2015 that the company recently received notice from federal law enforcement officials about investigations on cybersecurity crimes involving the theft of client information from Scottrade and other financial services companies that occurred between late 2013 and early 2014.

Approximately 4.6 million Scottrade clients are believed to be affected, but so far it appears only client names and street addresses were stolen according to the company's on-going internal investigations and information from federal law authorities. Scottrade's strong financial position and franchise strength support the current ratings; however, should the loss from this operational incident prove to be material and either cause a quarterly loss in earnings such that Scottrade's cash flow leverage metrics deteriorate or pressure the company's financial position, negative pressure on Scottrade's ratings or Rating Outlook may ensue.

The incident underscores retail brokers' vulnerability to operational risk including cybersecurity attacks, which continues to be a key rating constraint for the industry. In Scottrade's case, the disclosure put out by the company seems to suggest it was not aware of the breach until federal law enforcement officials notified them of the attack. It is possible that a more comprehensive cybersecurity program could have been able to detect threats and protect client data and information.

A security breach at a retail brokerage has the potential to damage the company's reputation and Fitch believes Scottrade is not immune from this. Incidents such as these can cause some customers to leave the firm or eventuate in litigation arising from the security breach. Any material loss of clients resulting from this incident could have negative effects on Scottrade's trading revenues which increased in 2013 and 2014 after declining from 2010-2012. Trading revenue accounted for about 35% of total revenues in the most recent two years. Scottrade's excess deposits could also be impacted by client departures.

Scottrade is offering affected clients a free year of identity theft protection, although it is too early to assess to what extent this will address customer concerns or mitigate potential financial losses resulting from this incident. Also, Scottrade's offer to provide affected customers with one year of free identity protection services could be another drag on future earnings.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 W. Madison, St.
Chicago, IL 60602
or
Secondary Analyst
Nathan Flanders
Managing Director
+1-212-908-0827
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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