Rating Action: Moody's concludes review on four Belgian banks' ratings

Transcription

1 Rating Action: Moody's concludes review on four Belgian banks' ratings Global Credit Research - 04 Jun 2015 Rating action concludes methodology and support-related reviews; CR Assessments assigned to five banks Paris, June 04, Moody's Investors Service, ("Moody's") has today concluded its rating reviews on four Belgian banks and affirmed ratings of a fifth bank. These reviews were initiated on 17 March 2015 and also reflect revisions in Moody's government support assumptions for European banks. Please refer to: following the publication of Moody's new bank rating methodology (see "Banks," published on 16 March 2015, available at Moody's rating action on Belgian banks reflects the following considerations: (1) the 'Very Strong -' Macro Profile of Belgium (Aa3 stable); (2) Belgian banks' generally strong core financial metrics; (3) the protection offered to senior creditors by substantial volumes and subordination of bail-in-able securities, as captured by Moody's Advanced Loss Given Failure (LGF) liability analysis; and (4) the reduced likelihood of government support for these institutions. Among the actions Moody's has taken are the following: - Baseline credit assessments (BCAs) and adjusted BCAs were affirmed for all five banks; - Long-term bank deposit ratings were upgraded for two banks, confirmed for two others and affirmed for one bank; - Long-term bank senior unsecured debt rating was affirmed for one bank and confirmed for two banks, while the holding company long-term issuer rating was downgraded for one bank. Furthermore, Moody's affirmed all the short-term deposit and debt ratings for the five Belgian banks involved in today's rating action. Concurrently, Moody's has also assigned Counterparty Risk Assessments (CR Assessments) to these five banks and their branches, in line with its new bank rating methodology. Moody's has withdrawn the outlooks on all junior instrument ratings for its own business reasons. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, Outlooks, which provide an opinion on the likely rating direction over the medium term, are now assigned only to long-term senior debt and deposit ratings. Please click on the following link to access the full list of affected credit ratings. This list is an integral part of this press release and identifies each affected issuer: RATINGS RATIONALE The new bank rating methodology includes a number of elements that Moody's has developed to help more accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation. (1) BELGIUM'S "VERY STRONG -" MACRO PROFILE Belgian banks benefit from operating in a country that has a robust and diverse economy with limited macroeconomic imbalances, a very high degree of institutional strength and low event risk. The Belgian privatesector debt is moderate and the outstanding debt of Belgian households is among the lowest in Europe.

2 The Belgian banking system has limited reliance on wholesale funding with banks' loan to deposit ratios comparing favourably with most European banking systems. The Belgian banking system is highly concentrated with the four largest banks accounting for 84% of the system's total assets. The sector is a mature but still highly competitive environment. Specific features, such as strong customer loyalty and the market's concentration around four major players, play an important stabilising role. (2) BELGIAN BANKS' STRONG CORE FINANCIAL METRICS The five banks' median BCA is around baa2 (BCAs range from baa1 to ba1), which reflects (1) their generally strong core financial metrics including their moderate risk profiles, strongly focused on traditional commercial and retail banking for the largest players; (2) sound liquidity relying mainly on stable funding sources; and (3) substantial loss-absorption capacity through earnings, loan-loss reserves and, ultimately, capital. Belgian banks' profitability is impacted by the current low interest-rate environment. However, Moody's expects that a reduced cost of risk and decreasing operating expenses will help Belgian banks preserve their earnings over the coming months. (3) PROTECTION OFFERED TO SENIOR CREDITORS, AS CAPTURED BY MOODY'S ADVANCED LGF LIABILITY ANALYSIS Since Belgian banks are subject to the EU Bank Resolution and Recovery Directive (BRRD), Moody's considers Belgium to have an Operational Resolution Regime. Accordingly, Moody's applies its Advanced LGF analysis to Belgian banks' liability structures. This analysis results in a low to very low loss given failure for long-term deposits and senior debt in most cases, reflected in a one or two-notch uplift from the Adjusted BCA for all banks, with exception of AXA Banque Europe, which has no LGF uplift. This approach captures the protection offered by the banks' sizeable volumes of deposits and senior debt, and the amount of debt subordinated to both senior debt and deposits. (4) REDUCED LIKELIHOOD OF GOVERNMENT SUPPORT Moody's has also lowered its expectations about the degree of support that a government might provide to a bank in Europe. The main trigger for this reassessment is the introduction of the BRRD in the EU, which went into effect in January 2015 and is currently being transposed to local law in each European jurisdiction. This has resulted in a reduction in government support uplift in Moody's senior unsecured debt and deposit rating, to one notch for all Belgian banks considered systemically important, with the exception of AXA Bank Europe which has no government support uplift. The impact of this is wholly or in some cases more than offset by the notches LGF uplift in recognition of the low loss given failure described above. ASSIGNMENT OF COUNTERPARTY RISK ASSESSMENTS As part of today's rating action, Moody's has assigned CR Assessments to five banks and their branches. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than the likelihood of default and the expected financial loss incurred in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. Moody's CR Assessments for banks subject to a going-concern operational resolution regime, which includes all Belgian banks, start with the banks' adjusted BCA and use an advanced LGF approach that takes into account the volume of liabilities subordinated to counterparty obligations in the bank's liability structure as well as any assumption of government support. As a result, the CR Assessments for the four banks is one notch higher than their deposit ratings, and for one bank (AXA Bank Europe) it is three notches higher than the deposit rating, reflecting Moody's view that, in the event of a resolution, authorities are likely to honor the operating obligations the CR Assessment refers to in order to preserve a bank's critical functions and reduce potential for contagion. SPECIFIC ANALYTICAL FACTORS FOR THE FIVE BANKS - AXA Bank Europe Moody's affirmed AXA Bank Europe (ABE)'s BCA at baa3 and its adjusted BCA, which incorporates four notches of affiliate support uplift, at a2. ABE's BCA reflects the bank's sound liquidity and its adequate capital ratio. These

3 strengths are nevertheless partly offset by the bank's relatively low profitability due to its limited operations in Belgium and the cost of risk, which has been elevated lately. This weighs on ABE's capacity to generate enough income to absorb the high fixed costs inherent to retail banking, and renders its performance very sensitive to fluctuations of margins. In addition, ABE still has a material exposure to Hungarian mortgages through its local branch (placed in run-off), the bulk of which is denominated in Swiss Francs. The general deterioration of the performance in the Hungarian mortgage market is exerting pressure on ABE's profitability and potentially on its capital levels depending on the magnitude of the losses the local branch will incur. ABE's a2 adjusted BCA incorporates a four-notch uplift from the bank's baa3 standalone BCA, reflecting a very high probability of support from AXA Group's insurance operating entities (Aa3 insurance financial strength rating, stable, which implies senior debt rating of A1). Moody's considers that ABE functions as a captive company of AXA Group and plays an important role for the insurance companies of the group. This is evidenced by (1) the strong integration of commercial strategies and synergies between the bank's retail banking business and the group's insurance business in Belgium; and (2) the provision of services by ABE to the group's insurance companies, notably by executing on behalf of the insurance companies the hedging derivatives for variable annuity contracts outside the US, and by providing them with access to liquidity on the interbank market. Moody's also confirmed ABE's long-term deposit rating at A2 and affirmed its short-term deposit rating at Prime-1. Under the Advanced LGF analysis, ABE benefits from a moderate loss-given-failure for deposits, given the low level of subordination below this creditor class, which results in no uplift from the bank's adjusted BCA. Furthermore, ABE receives no government support. We also assigned a long-term and short-term CR Assessment of Aa2(cr)/Prime-1(cr) to ABE. - Belfius Bank SA/NV (Belfius) Moody's has affirmed Belfius Bank SA/NV's BCA at ba1, which reflects the bank's substantial progress in restoring its franchise since the beginning of The bank's liquidity position has also improved, primarily thanks to the decrease in the funding provided to Dexia Credit Local (DCL), brought down to zero, but also as a result of asset disposals. However, the BCA remains constrained by the still-limited visibility on the bank's profitability, the existence of high concentrations in its investment portfolio, and the legacy portfolio that it inherited from Dexia Group, which continues to weigh on the bank's capital and liquidity, despite a decreasing trend. Belfius Baa1/Prime-2 long-term and short-term deposit rating and its Baa1 senior unsecured debt rating were affirmed. The Baa1 deposit and senior unsecured ratings reflect (1) the bank's ba1 adjusted BCA, (2) the two notch uplift under the Advanced LGF analysis stemming from the large volume of deposits and senior long-term debt; and (3) government support uplift of one notch, reflecting a moderate support probability from the Belgian government. The outlook on the long-term deposit and senior unsecured debt ratings are positive, reflecting further improvements that we anticipate in the bank standalone credit strength in the medium term. Moody's also affirmed the bank's subordinated debt rating at Ba2 and upgraded the junior subordinated debt rating to Ba3(hyb) from Caa1(hyb), following the payment on 18 May 2015 of coupons, which had been previously suspended on this cumulative instrument until 31 December 2014 as a result of an agreement with the European Commission. Concurrently, Moody's assigned a long-term and short-term CR Assessment of A3(cr)/Prime-2(cr) to Belfius. - BNP Paribas Fortis SA/NV (BNPPF) Moody's affirmed BNPPF's BCA at baa1, reflecting the bank's strong retail franchises in both Belgium and Luxembourg, its adequate financial fundamentals, notably its solid capital base and sound liquidity profile, as well as its integration within BNP Paribas (BNPP; deposits A1 stable/senior unsecured A1 stable; BCA baa1). The BCA is nevertheless constrained by several factors, the most important being BNPPF's limited recurring profitability in retail banking in Belgium. In addition, the transfer of BNPP's Specialised Finance activities in the EMEA area to BNPPF has the potential to negatively alter its risk profile, although these activities remain limited in size currently. Moody's upgraded BNPPF's long-term deposit rating to A1 from A2 and confirmed the bank's long-term senior unsecured debt rating at A2. Both the short-term deposit and debt ratings were affirmed at Prime-1. The lossgiven-failure is very low for BNPPF's deposits given the high volume of deposits resulting in two notches of LGF uplift above the bank's adjusted BCA. The loss-given-failure of the bank's senior unsecured debt is low, given the lower volume of this debt category, resulting in only one notch of LGF uplift. The government support uplift is

4 limited to one notch for both deposits and senior unsecured debt, reflecting a moderate probability of support. Moody's also affirmed BNPPF's subordinated and junior debt ratings at Baa2 and Baa3(hyb) respectively and assigned a long and short-term CR Assessment of Aa3(cr)/Prime-1(cr). - ING Belgium SA/NV (ING Belgium) Moody's has affirmed ING Belgium's BCA at baa1, which reflects the bank's (1) solid domestic market position; (2) sound financial profile, including high loss-absorption capacity from stable recurring earnings and good capitalization; and (3) strategic importance and strong integration with its parent ING Bank N.V. (deposits A1 stable/senior unsecured A1 stable; BCA baa1). The bank's BCA is constrained by that of its parent ING Bank N.V. -- to which it is exposed on an unsecured basis -- and the implementation of the ING group-wide assetliability management strategy, which could weigh on ING Belgium's financial structure and risk profile. ING Belgium's long-term deposit rating was upgraded to A1 from A2 and its short-term rating was affirmed at Prime-1. This results from (1) the bank's standalone BCA of baa1; (2) the two-notch LGF uplift from the baa1 adjusted BCA given the bank's large volume of deposits and more limited amount of senior unsecured debt; and (3) one notch of uplift for government support (from two previously), reflecting a moderate probability of government support. The outlook on the long-term deposit rating is stable. Moody's assigned a long-term and short-term CR Assessment of Aa3(cr)/Prime-1(cr) to ING Belgium. - KBC Bank N.V. (KBC Bank) Moody's has affirmed KBC Bank's BCA at baa2, which reflects the bank's solid fundamentals, notably its strong franchise in Belgium and in several Eastern European countries, its strong capital base and also its sound liquidity profile, which is based on a historically stable and resilient core customer deposit base. Despite recent improvements, asset quality, undermined by the performance of the Irish loan portfolio, and to a lesser extent of the Hungarian loan portfolio, remains a relative weakness and continues to offset these strengths to some extent. KBC Bank's long-term deposit and senior unsecured debt ratings were confirmed at A2. This results from (1) the bank's standalone BCA of baa2; (2) the two-notch LGF uplift from the baa2 adjusted BCA given the material level of subordination below both deposits and senior debt; and (3) government support uplift of one notch (from three notches previously), reflecting a moderate probability of support. Moody's assigned a positive outlook to the deposit and debt ratings, reflecting (1) upward rating pressure on the BCA on the back of improved results in the International Markets business line, including lower loan loss provisions in Ireland, and increased capitalization of the group; and (2) the likelihood that KBC Group will issue significant amounts of Basel III-compliant Tier 2 subordinated debt in the foreseeable future, driven by regulatory pressures, which would reduce the loss given failure for senior creditors of both the bank and the holding company. Concurrently, Moody's has also confirmed KBC Bank's subordinated debt rating at Baa3 and affirmed its short-term deposit and senior unsecured debt ratings at Prime-1. Moody's assigned a long-term and short-term CR Assessment of A1(cr)/Prime-1(cr) to KBC Bank. Moody's has also downgraded the holding company long-term issuer rating of the parent company KBC Group N.V. (KBC Group) to Baa2 from A3. The outlook is positive. The downgrade was driven by the reduction of government support to no uplift, as Moody's considers the probability of support being provided to holding company creditors to be low. The Advanced LGF analysis suggests a moderate loss-given-failure stemming from the subordinated debt and hybrid debt issued by both KBC Bank and KBC Group. This results in no LGF uplift and places the senior unsecured debt rating at Baa2, the same level as the bank's adjusted BCA. Concurrently, KBC's Group's short-term senior unsecured debt rating was affirmed at Prime-2. WHAT COULD CHANGE THE RATINGS UP/DOWN An upgrade of the long-term debt and deposit ratings of the Belgian banks involved in this rating action could result from (1) further improvements in the quality of assets linked to foreign subsidiaries and legacy portfolios; (2) a sustainable and significant improvement in the banks' profitability; (3) further improvement in their solvency, particularly in terms of nominal leverage ratio; and/or (4) a sustainable increase in debt loss-absorption capacity resulting in higher LGF uplift. The ratings could be downgraded if (1) the macroeconomic environment weakens and asset quality and/or credit underwriting standards deteriorate noticeably; (2) revenue and profitability pressures intensify, especially if banks

5 are unable to re-price their loan portfolio against the background of a low interest-rate environment; and/or (3) the banks' capital and/or liquidity position were to deteriorate. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Banks published in March Please see the Credit Policy page on for a copy of this methodology. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. The rating of rated entity ING Belgium International Finance S.A. was initiated by Moody's and were not requested by these rated entities. Rated entity ING Belgium International Finance S.A. or its agent(s) participated in the rating process. This rated entity or its agent(s), if any, provided Moody's - access to the books, records and other relevant internal documents of the rated entity. The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating. Guillaume Lucien-Baugas Asst Vice President - Analyst Financial Institutions Group Moody's France SAS 96 Boulevard Haussmann Paris France JOURNALISTS: SUBSCRIBERS: Nicholas Hill Managing Director Financial Institutions Group JOURNALISTS:

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