DBRS Upgrades KBC Bank NV to A (high), Trend Stable

DBRS Ratings Limited (DBRS) upgraded the Long-Term Issuer and Senior Debt Ratings of KBC Group NV (KBC or the Group) and confirmed the Short-Term Issuer and Debt ratings to R-1 (low). Concurrently, DBRS upgraded the Long-Term Issuer, Senior and Deposit ratings of KBC Bank NV (KBC Bank), the principal banking subsidiary of KBC to A (high), as well as the Short-Term Issuer, Debt and Deposit ratings to R-1 (middle). The one notch differential in the long-term ratings between the parent company and KBC Bank reflects structural subordination. KBC Bank’s Long-Term Critical Obligations and Short-Term Critical Obligations Ratings were upgraded to AA and R-1 (high). The trends on all ratings are now Stable. 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 IA.

The upgrade reflects the consistent performance achieved by KBC in recent years, illustrated by its strong earnings generation benefiting from its diversified business model as well as solid liquidity and funding profile. The ratings also take into account the Group’s demonstrated ability to steadily build up its capital buffers, which compare favourably with those of many European peers. The rating action also considers the improvements in the Group’s risk profile, which accelerated in 2017. The Group has substantially reduced impaired exposures in its Irish portfolio, which had been a drag on the Group’s asset quality. DBRS notes that KBC has also managed to consolidate its already well-established franchise, to attain leading positions in banking and insurance in its six core markets.

KBC’s ratings are underpinned by its deep-rooted bancassurance franchise in its core markets. KBC’s core strength is its position as one of largest universal banks in Belgium with a well-positioned retail franchise. KBC has also built an important position in the Czech Republic and has a significant presence in other CEE countries as well as Ireland. In 2017, KBC expanded in Bulgaria, which made the Group the largest bank-insurer in the country.

KBC has continued to demonstrate strong earnings capacity in 2017 despite a challenging operating environment. Net income was EUR 2.6 billion in 2017, up 6.1% YoY and up 14.8% YoY when excluding the negative one-off impact of tax reform in Belgium. The Group’s statutory revenues increased 7.6% YoY in 2017, which reflected strong performance in insurance and fee-driven activities such as asset management that compensated for the continued pressure from low interest rates on net interest income. Despite growth in operating expenses related to the integration of the acquisitions in Bulgaria and investments in digitalisation, KBC maintained good operating efficiency with a cost-to-income ratio of 53% in 2017 (as calculated by DBRS).

The Group’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 remained the key contributors, representing respectively 61% and 27% of the Group’s 2017 net profits.

DBRS views KBC’s risk profile as solid, combining low risk in its Belgian and Czech portfolios, with somewhat higher risk portfolios in other CEE businesses. Also, whilst the share of impaired exposures remains very high in the Irish loan book, DBRS notes that asset quality has strongly improved in 2017. At Group level, impaired loans declined to 6.0% at end-2017 from 7.2% in 2016. DBRS will continue to closely monitor the performance of KBC’s Irish mortgage book: it also notes that KBC’s exposure to Ireland is mitigated by its moderate share of total exposures at 8%.

Also supporting the ratings is KBC’s solid funding profile, reflecting a strong and stable retail and mid-sized corporate deposit base in its core markets. Customer deposits represented 70% of total funding while the end-2017 loans-to-deposits ratio was around 94% for the Group (excluding debt certificates). KBC Bank’s liquidity position is also solid, in DBRS’s view, with end-2017 LCR and NSFR ratios well above the regulatory requirements, at 139% and 134% respectively.

KBC Group’s capital has continued to strengthen. The Group’s fully loaded Basel III CET1 ratio under the Danish Compromise, stood at 16.3% at end-2017, increasing by 50 bps YoY despite the acquisitions in Bulgaria, mainly owing to robust internal capital generation. KBC also reported a fully loaded total capital ratio of 20.2%. This provides KBC with ample buffers over the 2018 CET1 and total capital requirements (respectively at 9.875% and 13.375%). The fully loaded Basel 3 leverage ratio for the Group (under the Danish compromise) remained relatively high at year-end 2017 at 6.1%. 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 24% of RWAs (fully loaded) based on KBC Group’s issued instruments only. The Group estimates that Basel 4 will result in RWA growth of around EUR 8 billion (impact on fully loaded basis based on end-2017 RWAs) and a 1.3% decline in the CET1 ratio. DBRS views this impact as manageable.

RATING DRIVERS

Whilst unlikely given the recent upgrade, positive rating pressure could stem from a continued improvement of asset quality to more normalised levels, while further consolidating the franchise and maintaining strong and stable earnings.

Negative rating pressure could come from a deterioration in asset quality, significant weakening in key segments of the Group’s franchise or a substantial downturn in the economies of KBC’s core markets.

The Grid Summary Grades for KBC Group are as follows: Franchise Strength –Strong; Earnings – Strong; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Very Strong/Strong.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 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 and US regulations only.

Lead Analyst: Arnaud Journois – Assistant 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: July 14, 2017

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