DBRS Confirms Belfius SA/NV’s Issuer Rating at A (low); Trend Revised to Positive

DBRS Ratings Limited (DBRS) has confirmed Belfius Bank SA/NV (Belfius or the Group)’s Long-Term Issuer Rating at A (low) and the Short-Term Issuer Rating at R-1 (low). The trend on the long-term ratings was changed to Positive from Stable while the trend on all short-term ratings remains stable. The Long Term Critical Obligations rating was also confirmed at A (high) and the Short Term Critical Obligations rating at R-1 (middle). The Group’s intrinsic assessment (IA) was confirmed at A (low) and the support assessment remains SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The change in the Trend to Positive reflects DBRS’s view that Belfius has significantly reduced the legacy portfolio it inherited from Dexia, leaving only residual exposures to naturally amortise. DBRS also considers that the Group has efficiently leveraged its well-established franchise in public-sector financing and retail banking in Belgium, to gradually improve its profitability and capital generation. Belfius’s ratings are further underpinned by its strong capital and liquidity position, as well as its low credit risk profile.

RATING DRIVERS
Further evidence of improved earnings and good cost control are likely to lead to positive rating pressure.

Given the Positive trend, a downgrade is unlikely. However, negative rating pressure could arise from material deterioration of its franchise or earnings generation. Negative rating pressure could also stem from significant deterioration in the Group’s asset quality.

RATING RATIONALE

The Group’s ratings are underpinned by its well-established bancassurance franchise in its core market of Belgium, where it is one of the major banks. The Group’s franchise is focused on retail, SME and mid-cap customer segments as well as insurance. Reflecting its origins, Belfius is also the market leader in public sector banking in Belgium, in particular in lending to local governments and public/project finance. Belfius is also a leading player in arranging bond issues for Belgian issuers. Whilst the Belgian state is currently the owner of the Group, a partial privatisation of Belfius is likely to take place, which would lead to a minority stake of the Group being listed through an IPO.

Belfius has continued to strengthen its revenue generation in 2017, leading to the strongest results since its nationalisation, despite its focus on the low margin public finance business and the continued negative impact of the low interest rates on net interest income. This reflects management’s successful strategy to develop higher-margin lending to Belgian corporates and increasing bancassurance cross-selling. In 2017, the Group reported net income (group share) of EUR 606 million, up 13% year-on-year (YoY). DBRS also views as key the Group’s ability to maintain good cost control. In 2017 the cost base was flat leading to an improved cost-to-income ratio of 58%, a solid level compared to European peers. The cost of risk was extremely low in 2017, at 4 basis points (bps), compared to an already low 13 bps in 2016, helped by the benign economic environment and reversals of provisions. Credit impairments remained low, absorbing only 3% of income before provisions and taxes in 2017, and DBRS expects the Group to maintain low levels of cost of risk.

DBRS views Belfius’ risk profile as solid, benefiting from a moderate appetite for risk, a loan portfolio dominated by high quality exposures, and significant progress in the de-risking of the legacy portfolio inherited from Dexia. During 2017, the Group’s non-performing loan ratio improved to 1.99% from 2.54% at end-2016, a level that DBRS views as sound and comparing favourably with that of the Group’s European peers. Asset quality is supported by low risk retail exposures (26% of credit risk at the Group level), which in large part consist of Belgian mortgages, and loans to public entities (28%). While credit impairments remain low, DBRS notes that geographical diversification is limited with Belgium representing 71% of credit risk exposures.

Also supporting the ratings is Belfius’s successful rebalancing of its funding profile, taking advantage of the strong and stable deposit base in Belgium. Customer funds, predominantly retail, represented 77% of the Group’s funding sources at end-2017. Belfius is also an active issuer of covered bonds, backed by mortgage loans and by public sector loans. The loan-to-deposit ratio of the commercial (i.e. core lending) banking balance sheet was a healthy 92% and has remained fairly stable in recent years. Despite a relatively high level of encumbered assets (20.4% of total bank balance sheet and collateral received under securities format), the Group’s liquidity position is robust with an available liquid asset buffer of EUR 34.3 billion, almost five times the outstanding short-term wholesale funding. Belfius posted a Liquidity Coverage Ratio (LCR) ratio of 130% and a Net Stable Funding Ratio (NSFR) of 116% at end-2017.

The Group has continued to maintain solid capital buffers, confirming its capacity to generate and retain earnings. At end-2017, Belfius’ Basel III fully-loaded Common Equity Tier 1 (CET1) ratio (based on Danish compromise) was 15.9%, down from 16.1% at end-2016, due to risk-weighted asset increase, mainly due to higher risk-weighting of its Italian sovereign exposures. Belfius’ fully loaded leverage ratio remained relatively high at 5.5% at end-2017 compared to 5.3% at end-2016, and its fully loaded total capital ratio was 18.1%, compared to 18.4% last year. This provides Belfius with ample buffers over its SREP requirements. The MREL target has not been formally communicated to the Group, however Belfius estimates its target MREL at 27.25% of risk-weighted assets (RWAs). As of end-2017, the MREL ratio stood at 24% of RWAs (fully loaded). The Group estimates that Basel 4 will result in RWA increase of around EUR 3.5 billion (impact on fully loaded basis based on end-2017 RWAs) and a 1.0%-1.25% decline in the CET1 ratio foreseen in 2022. DBRS views this impact as manageable.

The Grid Summary Grades for Belfius Bank SA/NV are as follows: Franchise Strength –Strong/Good; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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). This 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, the 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 access to accounts, management and other 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: Roger Lister - Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings

Initial Rating Date: December 5, 2007
Most Recent Rating Update: July 14, 2017

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