DBRS Confirms KBC Group’s Senior Debt at A (low); Trend Now Positive

DBRS Ratings Limited (DBRS) has today confirmed the Senior Long-Term Debt & Deposits ratings of KBC Group N.V.’s (KBC or the Group) at “A (low)” and the Senior Long-Term Debt & Deposits of KBC Bank N.V (KBC Bank) at “A”, KBC’s principal banking subsidiary. At the same time, DBRS has confirmed the Intrinsic Assessments (IAs) of KBC Bank at A (low) and the Group at BBB (high). KBC is considered a systemically important banking organisation with an SA2 designation that results in a one-notch uplift for the final ratings above their IAs.

The trend on all Long-Term ratings has been revised to Positive. In revising the trend to Positive, DBRS recognises the progress that KBC has achieved in restructuring the Group over the past year and notes that the divestment plan agreed with the European Commission in 2009 is now complete. KBC has emerged from its restructuring phase, displaying an improvement in earnings, funding and capital that now counterbalance remaining downside risks. Further upward pressure on the ratings could result, if the Group is successful in maintaining the current pace of profitability while making further progress in restructuring the weaker parts of its International Markets business unit, such as Ireland and Hungary. However, the trend could revert to Stable, if KBC were to have difficulties in improving the risk profile in its overseas subsidiaries, or if KBC was unable to reimburse the remaining State aid while remaining compliant with regulatory capital minimums.

The confirmation of KBC’s IAs reflects the Group’s completion of the restructuring plan agreed with the EC, as demonstrated by its 2014 results. This has resulted in a simplified structure, improved earnings, a solid funding profile, and strengthened capitalisation. DBRS also considers KBC’s strong core franchise in Belgium to be a key strength of the Group. The Belgian business unit, the largest contributor to Group’s earnings, reported EUR 1.5 billion of adjusted net income in 2014, stable from 2013. The second key contributor to earnings is the Czech Republic, which posted EUR 0.5 billion of adjusted net income in 2014, stable from 2013 – illustrating KBC’s ability to succeed outside of Belgium. But overall, the International Markets division is not yet profitable. This is due primarily to the elevated level of provisioning required for KBC’s operations in Ireland, which have been a drag on the Group’s profitability but are now on track to break-even by 2017, as well as net losses in Hungary driven by exceptional expenses related to the changes in the Hungarian banking law.

KBC has improved its capacity to absorb credit provisioning. On an underlying basis excluding one-time items, this capacity is following a positive trajectory, as provisions absorbed 21% of Income Before Provisioning and Tax (IBPT) in 2014, down from 52% in 2013 (when KBC added provisions in anticipation of the Asset Quality Review), and 32% of IBPT in 2012. The Group’s IBPT also benefits from satisfactory levels of efficiency. For the Group’s banking business, the cost-to-income ratio on an underlying basis was maintained at 54% year-to-date excluding specific items, 57% including them.
DBRS notes that KBC’s non-performing loan (NPL) ratio remains elevated and is still a challenge for the Group. While down to 5.5% from 6.0% at end-2013 (pro-forma for the figures of Antwerp Diamond Bank and Transformation Fund -a subsidiary of CSOB in Czech Republic), the high NPL ratio is driven primarily by the Irish subsidiary which reached a new high of 27% at end-2014.. Under the EBA definition, the impaired loans ratio in Ireland was 52% (unchanged from 2013) with a coverage of 37.4% in 2014. At Group level, the impaired loans ratio was 9.9% under the EBA definition (down from 10.2% in 2013) with a coverage of 42% in 2014 (up from 40%).

DBRS views KBC’s funding profile as solid. With funding from customers representing roughly 73% of total funding at December 2014, KBC has available liquid assets of EUR 61.9 billion, covering close to four times its net short term funding. KBC has a loan to deposit ratio below 100% and a Liquidity Coverage Ratio (LCR) ratio of 120% at end 2014 under current assumptions.

KBC has strengthened its capital base and KBC’s common equity ratio (CET1) reached 14.3% at December 2014 under fully loaded Basel III and the Danish compromise, up 150 basis points (bps) from end-2013. Its fully loaded Basel III leverage ratio is estimated to be 5.1% for the Bank. Out of an initial EUR 7 billion in state aid, KBC now has EUR 2.0 billion remaining of non-voting core capital securities issued to the Flemish Regional Government. This remaining State aid is included in CET1, but DBRS estimates that KBC’s CET1 ratio without the State aid would still be at an adequate level of 12.1%. Consequently, DBRS considers that KBC has the ability to repay the EUR 2.0 billion by 2017, ahead of the 2020 initially agreed with the EC, subject to regulatory approval.

Concurrently, the trend on KBC Bank’s Short-Term Debt and Deposits ratings has been revised to Positive. The trend on KBC Group’s Short-Term Debt and Deposits ratings remain Stable.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/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.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Vitaline Vincent
Rating Committee Chair: William Schwartz
Initial Rating Date: 3 June 2010
Most Recent Rating Update: 8 January 2014

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