DBRS Confirms KBC Group’s Senior Ratings at A (low), Trend Revised to Positive

DBRS Ratings Limited (DBRS) has today confirmed KBC Group NV’s (KBC or the Group) Issuer Rating and Senior Long-Term Debt ratings at A (low) and the Short-Term Debt Rating at R-1 (low). KBC Bank NV (KBC Bank) is the principal banking subsidiary of Belgium’s KBC Group. The Issuer Rating and the Senior Long-Term Debt & Deposits Rating of KBC Bank were confirmed at “A” and Short-Term Debt & Deposits at R-1 (low). The trend on the Issuer Ratings, the long term ratings of both KBC and KBC Bank, and on the Short-Term rating of KBC Bank were changed to Positive from Stable. KBC Bank’s Junior Subordinated Debt confirmed at BBB and trend changed to Positive. KBC Bank’s Long-Term Critical Obligations and Short-Term Critical Obligations Ratings were confirmed at AA (low) and R-1 (middle) respectively and the trend on both of them was revised to Positive. The one notch differential in the long-term ratings between the parent company and KBC Bank reflects the structural subordination. 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 senior debt rating and the Issuer Rating are positioned in line with the Intrinsic Assessment.

The change in the trend to Positive reflects DBRS’s view that KBC continues to make consistent progress in improving its capital and enhancing its risk profile, while maintaining strong profitability and a solid funding profile. Asset quality has continued to improve with the share of impaired loans declining to 7.2% from 8.6%, largely reflecting the improvement in Ireland but also across other business units.

The ratings reflect KBC’s well established bancassurance franchise in its core markets, strong earning generation, diversified revenues and solid funding. KBC’s core strength is its position as one of largest universal banks in Belgium with its well-positioned retail franchise. KBC has also built an important position in the Czech Republic and has a significant presence in other CEE countries and Ireland. In December 2016 KBC made acquisitions in Bulgaria, which should establish its position as the third largest bank with a market share of around 11%. KBC’s capacity to absorb potential losses is high, based on its strong profitability, reflecting a significant contribution from insurance and asset management, and good cost efficiency. Diversification is supported by its international presence, however Belgium and Czech Republic are the key contributors, representing respectively 59% and 25% of the Group’s 2016 net result.

Despite a challenging operating environment, the Group’s strong earnings capacity was confirmed in 2016. Net income was EUR 2.4 billion in 2016, down 8% YoY but up 9% YoY when excluding the one-off impact of the liquidation of KBC Financial Holdings in 2015 and goodwill impairments.

KBC’s credit risk profile combines its low risk Belgian and Czech portfolios, which jointly represent 84% of loans, somewhat higher risk portfolios in other CEE businesses and the Irish loan book, where the share of impaired exposures remains very high but has been continuously improving. The share of impaired loans in the consolidated loan book declined to 7.2% at end-2016 from 8.6%. DBRS notes that the Irish economy, despite its recent good macroeconomic performance, is significantly exposed to Brexit. While DBRS will closely monitor the performance of KBC’s Irish book, it also notes that a potential adverse impact on asset quality at the Group level should be mitigated by its moderate share of total loans at 8%.

Also supporting the ratings, KBC’s funding profile is solid, reflecting a strong retail and mid-sized corporate deposit base in its core markets. Customer deposits represented 69% of total funding while the end-2016 loans-to-deposits ratio was around 95% for the Group (excluding debt certificates). KBC Bank’s liquidity position is also solid, in DBRS’s view.

DBRS views KBC Group’s capital as strong. The Group’s fully loaded Basel III CET1 ratio under the Danish Compromise, stood at 15.8%, increasing by 95 bps YoY, mainly due to a robust internal capital generation. The end-2016 Group leverage ratio at 6.1% (Danish Compromise) remained relatively high, despite its 20 bps YoY decline, due to an increase in total exposures. The negative impact of the recent acquisition in Bulgaria on the fully loaded CET1 ratio is anticipated at 54 bps. The MREL target has not been formally communicated to the Group, however KBC estimates its target MREL at 26.25% of RWAs. As of end-2016, the MREL ratio stood at 21% of RWAs (fully loaded) based on KBC Group’s issued instruments only.

RATING DRIVERS

Positive rating pressure on the ratings could come from a further improvement of asset quality, while maintaining strong and stable earnings, capital and funding and a limited impact of potential acquisitions on the Group’s risk profile.

Given the Positive trend, a downgrade is unlikely. However, negative rating pressure could arise from a lack or reversal of the asset quality improvement, significant weakening in key segments of the Group’s franchise that impact its earning power, capitalization and financial profile, or if the economies of KBC’s core markets were to deteriorate such that the Group’s financial fundamentals were substantially impacted.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2016). 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 2017), DBRS Criteria: Guarantees and Other Forms of Support (February 2017) and Critical Obligations Rating Criteria (February 2017) 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 disclosures, National Bank of Belgium and the European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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 historical default rates published by the European Securities and Markets Authority (“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: Tomasz Walkowicz – Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: June 3, 2010
Most Recent Rating Update: September 27, 2016

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