DBRS Confirms Belfius’ Senior Debt at A (low); Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the Senior Long-Term Debt & Deposits rating of Belfius Bank SA/NV’s (Belfius, the Bank or the Group) at A (low). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for Belfius is A (low). The support assessment remains SA3. As a result, the final senior debt rating is positioned in line with the IA.

The confirmation reflects the Bank’s success in untying its links to Dexia S.A. (Dexia) while establishing a stand-alone franchise, building on its Belgian retail roots, as well as its historic expertise with the public and social sector in Belgium. Belfius has been delivering stable earnings, an improved risk profile, funding structure, as well as strengthened levels of capitalisation. These trends were recognised in the change of the Bank’s IA to A (low) from BBB (high) in September 2015.

Further upward movement in the senior ratings is not expected in the short-medium term, but could occur if Belfius were to significantly improve overall levels of profitability. Downward pressure on the IA is also not expected, but could occur if Belfius were to have difficulties in sustaining progress in shedding legacy assets or were to significantly increase its risk profile, or to face difficulties in managing costs efficiently.

The Bank’s IA reflects the strength of its franchise, which has demonstrated resiliency since its break-up with Dexia. This resiliency reflects the Bank’s well-entrenched banking and insurance operations in Belgium, where, despite increased competition, the Bank has market shares of around 13-15% in loans and deposits in retail banking, which position Belfius as the third largest bank in Belgium. Through its large branch network, it has a national presence and Belfius has also retained and built on its leading position in serving local, regional and federal authorities, health, accommodation and education sectors.

Belfius’ franchise is a key strength that underpins its earnings power and its ability to withstand stress. Net income has been trending up since 2012. Net profit was EUR 506 million in 2015, 10% up year-over-year (YoY) and 20.2% from 2012 confirming sustained organic growth. Driven by increased revenues as well as its cost reduction measures, Belfius reported income before provisions and taxes (IPBT) of EUR 787 million, up 26.4% year-on-year (YoY). At the same time, Belfius’ net interest margin has been relatively stable but low at about 1%. DBRS does not expect this to increase given the Bank’s lending mix, strong competition and a persistently low interest rate environment. Therefore, maintaining good commercial momentum combined with good cost control will remain important to enhance the Group’s earnings resiliency. Thanks to a strategy focusing on digitalisation and redirection of clients, Belfius managed to significantly improve its cost-to-income - at 64% in 2015 down from 70% in 2014 and 78% in 2013, in spite of a context of indexed salaries and higher bank taxes in Belgium. Generally, the Bank has been generating sufficient earnings to readily absorb credit costs.

DBRS considers Belfius as having a low risk credit profile, which is also evidenced in the Bank’s sound asset quality and low credit costs. Belfius’ risk profile reflects the nature of its predominantly Belgian franchise and business activities, as well as its recent history linked to the de-risking and deleveraging of the Dexia Group. The Group’s non-performing loan ratio was down to 2.29% at end-2015 from an already low 2.33% at end-2014. Another improving component of Belfius’s risk profile is the reduction in the legacy assets inherited from its former parent, Dexia. While the period of intensive restructuring is over, the Group retains some legacy assets in the form of a legacy bond portfolio and credit guarantees. The legacy assets in run-off in Belfius’s investment portfolio are down 30% at end-2015 from 2013 following tactical de-risking and natural amortisation.

Belfius has rebalanced its funding profile taking advantage of its strong deposit franchise in Belgium. The strength of its deposit base has helped it to maintain the loan-to-deposit ratio of its commercial (ie core lending) balance-sheet below 100%, at 91% at end-2015. The reduction in legacy assets and deleveraging is leading to lower usage of wholesale funding. Since February 2015, Belfius is no longer providing funding to Dexia, which represented EUR 10.6 billion at end-2014 or EUR 44 billion at the time of the separation with Dexia at end-2011. At end-2015, Belfius’ liquidity coverage ratio (LCR) ratio was well positioned at 132%.

Belfius has reached solid levels of capitalisation through retained earnings, the reduction in risk-weighted assets, and the favourable variation of unrealised losses on the AFS bond portfolio. At end-2015, Belfius’ Basel III fully-loaded Common Equity Tier 1 ratio reached 14.9%, up 170 basis points (bps) from end-2014 (based on Danish compromise). Belfius’ fully loaded leverage ratio was 4.9% at end-2015, and its fully loaded total capital ratio was 16.2%, up 195 bps from end-2014.

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 Vincent
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: December 5, 2007
Most Recent Rating Update: September 29, 2015

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