DBRS Confirms KBC Bank’s Senior Debt at A, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the Senior Long-Term Debt & Deposits of KBC Bank N.V (KBC Bank) at “A” and Short-Term Debt & Deposits at R-1 (low). KBC Bank is the principal banking subsidiary of Belgium’s KBC Group (KBC or the Group). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for KBC Bank is A. The support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the final senior debt rating is positioned in line with the IA.

The confirmation of KBC Bank’s IA reflects KBC’s ongoing progress with regard to profitability and the improving risk profile. These trends were recognised in the change of the Bank’s IA to A from A (low) in September 2015. In addition, DBRS notes the Group’s simplified structure, solid funding profile, and solid capitalisation.

DBRS considers KBC’s strong core franchise in Belgium and its ability to withstand stress to be a key strength of the Group. The Belgian business unit, the largest contributor to Group’s earnings, reported EUR 1.6 billion of net income in 2015, up from EUR 1.5 billion from 2014. The second key contributor to earnings is the Czech Republic business unit, which posted EUR 0.5 billion of net income in 2015, largely stable on 2014. In addition, International Markets are back to profitability reflecting the much lower levels of provisioning in KBC’s bank subsidiary in Ireland.

The Stable trend reflects KBC’s demonstrated resiliency given its well-executed reduction of risk-weighted assets (RWAs) that was mostly driven by non-core divestments and sale of legacy assets. Also reflective of KBC’s progress is the full re-imbursement of state aid, ahead of the 2020 date, which had initially been agreed with the European Commission (EC). DBRS perceives KBC as well positioned to cope with the current low interest rate environment thanks to its bancassurance model, which is proving to be successful not only in Belgium but also in Czech Republic and Hungary. However, franchise development, cost control, and managing risk remain important to enhance KBC’s resiliency in an ongoing uncertain macroeconomic environment.

In 2015, loan impairment charges of EUR 0.4 billion absorbed 12% of KBC’s income before provisions and taxes (IBPT) of EUR 3.3 billion, compared to EUR 0.5 billion provisions absorbing 17% of EUR 2.9 billion of IBPT in 2014. Contributing to the level of earnings, the Group’s IBPT is supported by contained operating costs in spite of higher bank taxes, higher regulatory costs, renewed competition in Belgium and pressured net interest margins (NIM). While still at a solid level, the Group’s NIM was down to 2.02% in 2015 vs. 2.08% in 2014. The contribution of net fee and commission income was up 6.7% vs. 2014 totaling EUR 1.7 billion at end-2015. In 2015, assets under Management increased to EUR 209 billion from EUR 186 billion at end-2014. For the Group’s banking business, the cost-to-income ratio adjusted for specific items (one of which was the impact of the liquidation of KBC Financial Holdings) was 55% in 2015, slightly up from 54% in 2014 on the same basis according to KBC estimates (specific items included mainly the mark-to-market impact of ALM derivatives and one-off provisions in Hungary).

Also supporting the level of the IA, DBRS views KBC’s funding profile as strong. With funding from customers representing roughly 73% of total funding at December 2015, KBC has available liquid assets of EUR 58.5 billion covering close to four times its net short term funding. DBRS notes that the liquidity coverage ratio (LCR) was 127% at end-2015, and the net stable funding ratio (NSFR) at 121%.

KBC is maintaining its capitalisation at a solid level. KBC’s fully loaded Basel III common equity ratio (CET1) was 14.9% at December 2015 after the reimbursement of the remaining state aid, supported by retained earnings and lower RWA. At the end of 2015, KBC paid back the EUR 2.0 billion it had to return to the Flemish government as well as EUR 1 billion of penalty, which represented 300 bps of CET1 in total. DBRS also notes positively that KBC’s fully loaded Basel III leverage ratio is an estimated 6.3% for the Group at end-2015.

Risk is now significantly reduced with lower RWAs and less complexity, while the Group is also benefiting from some improvement in the economic environment in Ireland. While KBC’s overall impaired ratio remains elevated compared to peers, its asset quality has improved as its Irish bank subsidiary is benefiting from the recovery of the Irish economy. KBC’s impaired loan ratio was down to 8.6% at end-2015 from 9.9% at end-2014. Specific loan impairments for impaired loans, mortgages loans excluded, were up to 53% from 51%. Simplifying the Group’s structure, KBC liquidated KBC Financial Holdings in 4Q15. DBRS notes that KBC reports limited exposure to the oil & gas sector.

Upward rating pressure could arise in the medium term, if KBC continues to maintain strong and stable profitability in a context of low interest rates and macro uncertainties and continues to improve asset quality in Ireland. Negative rating pressure could occur, if the Group were to significantly increase its risk profile or if profitability drops substantially.

Concurrently, DBRS has changed KBC Group’s debt names to “Senior Long-Term Debt” and “Short-Term Debt” to reflect its holding company status.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Critical Obligations Rating (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

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 Yeterian
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: June 3, 2010
Most Recent Rating Update: September 29, 2015

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