DBRS Downgrades Belfius’ Senior Debt to A (low); ST to R-1 (low) Following Removal of Belgian Floor

DBRS, Inc. (DBRS) has today downgraded the Senior Long-Term Debt & Deposits ratings of Belfius Bank S.A.’s (Belfius or the Bank) to “A (low)”. The trend is Stable. At the same time, DBRS has confirmed the Intrinsic Assessment (IA) of Belfius at BBB (high). Belfius is considered a systemically important banking organisation with an SA-2 support assessment.

These rating actions conclude the review that was initiated after DBRS removed the rating floor for critically important banking organisations in Belgium on October 11, 2013. The floor was A (high) for banks, resulting in three notches of uplift between the IA and final ratings for Belfius.

While the floor is no longer warranted given the improved financial markets and strengthened banking system, DBRS still expects that some level of timely systemic support for Belfius would be forthcoming in the event of a stress scenario. After the separation from Dexia, the Bank has been 100% state-owned through the Federal holding and Investment Company (FPIM), a public holding that manages equity holdings for the Belgian federal governments. This perspective results in the SA-2 support assessment, which gives a one-notch uplift to the Bank’s final rating from its IA.

The Bank’s IA considers Belfius’ fundamentals, including its franchise that has remained resilient throughout an extended period of crisis. This resiliency reflects the Bank’s well-entrenched banking and insurance franchise in Belgium, a relatively wealthy market. Despite increased competition domestically, the Bank has maintained its strong position in its domestic market at about 13-15% share of loans and deposits in retail banking with a predominantly mortgage based portfolio in Retail and Commercial Banking, positioning it as one of the four largest banks in Belgium. Through its large branch network, it has a national presence that is strong in wealthy regions. Belfius has also retained its leading position in serving local, regional and federal authorities, health, accommodation and education sectors.

Also factored into the IA is the Bank’s success in untying its links to its former shareholder, Dexia S.A. (Dexia), and recovering from a certain loss of market and customer confidence that was reflected in deposit outflows following Dexia’s difficulties and the separation from Dexia in 2011. The Bank has been successfully refocusing on the Belgian market under a new corporate banner (new name/new logo since mid-2012), rebuilding IT expertise to operate autonomously, and significantly reducing its funding to Dexia. From a peak of EUR 56 billion in October 2011, the remaining exposure to Dexia of EUR 14.4 billion is guaranteed or secured. The Bank is now compliant with Belgian regulatory requirements on its concentration risk ratio with Dexia.

Belfius’ strong core franchise in Belgium is a key strength that underpins its earnings power and its ability to withstand stress. Net interest income (NetII) has shown a relatively stable trend taking into consideration deleveraging. NetII was about EUR 1.0 billion in 1H13, a slower pace than in 2012 and 2011 when NetII was in the range of EUR 1.1 billion (on a semi-annual basis), while total assets have been reduced by EUR 54.3 billion since December 2010 to EUR 193.6 billion at June 2013. Belfius’ NIM has been relatively stable at about 1.00% according to our estimates. DBRS does not expect NIM to increase, given the Bank’s lending mix, higher liquidity costs, and strong competition. Therefore, progress with expense control will be important to enhance the Group’s earnings resiliency in this environment. While swings in earnings during 2012/2011 have reflected losses and gains on the investment portfolio linked to legacy assets, the Bank is generating sufficient underlying earnings to readily absorb credit costs. This capacity is shown in the businesses. In 1H13, provisions in Retail and Commercial Banking (RCB) absorbed 26% of income before provisions and taxes (IBPT), while in Public and Wholesale Banking (PWB) there was a positive reversal of impairments.

The lower risk profile is also evident in the Bank’s credit trends and credit costs. The Bank’s NPL ratio was 2.52% at the end of June 2013, down from 2.78% in 2012 and 2.72% in 2011, which reflects the low risk characteristics of Belfius’ customer mix and the low risk economy of Belgium. Belfius continues to reduce its exposure to legacy assets and sovereign debt.

Belfius is also making progress in rebalancing its funding profile and taking advantage of its strong deposit franchise in Belgium. The strength of its deposit funding is indicated by its commercial balance-sheet, which has a loan-to-deposit ratio of 91% as of June 2013, stable compared to 2012, and down from 98% at end-2011. As the Bank sheds legacy assets and deleverages, it is reducing its reliance on wholesale funding. DBRS expects Belfius to be compliant with its internal target to meet the regulatory liquidity coverage ratio (LCR) ratio by end-2014. Belfius’ net stable funding ratio and LCR ratio are not disclosed.

Comparing well with Belgian peers, Belfius’ core tier 1 ratio reached 14.3% at June 2013 under Basel II, up 100 basis points (bps) from end-2012 thanks to retained earnings, 11.5% reduction in RWA, and also the positive variation of unrealised losses on the AFS bond portfolio stemming from the difference between acquisition value and fair value of the bonds (both in bank and insurance). Phased-in Basel III common equity ratio (CET1) is estimated at 12.8%, up from 10.6% at end-2012.

The Stable trend reflects Belfius’ progress since it was acquired by the Belgian state. The Bank has improved its risk profile, given its de-risking of its government bond portfolio, reduced exposure to Dexia and asset deleveraging. Upward rating pressure could arise, if Belfius continues to make progress in shedding legacy assets, improving its profitability, while further enhancing its operating efficiencies and its funding profile. Negative rating pressure could occur, if Belfius were to have difficulties in sustaining progress in strengthening its earnings power and also if pressure were to arise due to its wholesale funding needs.

Notes:
All figures are in euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 5 December 2007
Most Recent Rating Update: 11 October 2013

For additional information on this rating, please refer to the linking document under Related Research.