DBRS Morningstar Upgrades KBC Bank NV to AA (low), Trend Stable

DBRS Ratings GmbH (DBRS Morningstar) upgraded the Long-Term Issuer and Senior Debt Ratings of KBC Group NV (KBC or the Group) to A (high) and the Short-Term Issuer ratings to R-1 (middle). Concurrently, DBRS Morningstar upgraded the Long-Term Issuer ratings of KBC Bank NV (KBC Bank), the principal banking subsidiary of KBC to AA (low), and confirmed the Short-Term Issuer ratings to R-1 (middle). The one notch differential in the long-term ratings between the parent company and KBC Bank reflects structural subordination. The trend on all ratings is now Stable. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The upgrade of the Long-Term Issuer rating reflects the continuous improvement that has taken place in KBC’s risk profile, both organically and through the sale of Irish legacy exposures, while maintaining a solid funding and liquidity profile and robust capital levels. The upgrade also incorporates DBRS Morningstar’s view that KBC continues to leverage on its well-established and diversified franchise to maintain strong profitability and absorb challenging conditions in certain business areas.

The upgrade of the Short-Term ratings of KBC Group reflects DBRS Morningstar’s decision to grant the upside Short-Term Rating mapping exception to KBC Group holdco. The exception reflects that DBRS Morningstar considers bank holdcos to typically hold high liquidity standards, reflecting both that they are part of a of regulated entity that has demanding regulatory requirements as well as their role as liquidity provider for the broader group.

RATING DRIVERS

Positive rating pressure would require an improved risk profile and more stable operating environment in some of the countries where the group is present. Upward rating pressure would at the same time require that the Group maintain strong earnings generation and capitalisation.

Negative rating pressure could arise from a significant weakening in key segments or geographies of the Group’s franchise that impacts its earning power. Any significant change in risk profile that might arise from a potential acquisition could also contribute to negative rating pressure.

RATING RATIONALE

KBC’s ratings are underpinned by its deep-rooted bancassurance franchise in its core markets, with its main strengths being its solid position in both Belgium and the Czech Republic where it has well-positioned retail franchises. DBRS Morningstar also views as positive KBC’s effectiveness in reaching meaningful positions in its other core countries, Hungary, Slovakia, Bulgaria and Ireland.

Despite a challenging operating environment, the Group’s earnings capacity remained strong in 2019. Net income was EUR 2,489 million in 2019, compared to EUR 2,570 million in 2018. In 2019, KBC continued to report a strong ROE of 14%, slightly down from 16% last year but well-positioned compared to European peers. This was driven by a very low cost of risk, cost control and resilient revenues, despite interest rate pressure on net interest income. The Group’s capacity to absorb potential losses is high, based on its strong revenue generation, reflecting a significant contribution from insurance and asset management, and good cost efficiency. Diversification is supported by its international presence, although Belgium and the Czech Republic remain the key contributors, representing respectively 60% and 22% of the Group’s revenues in 2019.

DBRS Morningstar considers KBC’s risk profile as solid, combining the low risk in its Belgian and Czech portfolios, with somewhat higher risk portfolios in other CEE businesses. DBRS Morningstar views as positive the improvement in the Irish unit’s risk profile, driven primarily by organic reduction and further disposals of legacy exposures. As a result, the impaired loans ratio at a Group level improved to 3.5% at FY19, from 4.3% at FY18.

Also supporting the ratings is KBC’s solid funding position , which reflects the strong and stable retail and mid-sized corporate deposit base in its core markets. At FY19, customer deposits represented 72% of total funding while the loan-to-deposit ratio was around 89% for the Group. KBC Bank’s liquidity position is also solid, in DBRS Morningstar’s view, with FY19 LCR and NSFR ratios well above the regulatory requirements, at 138% and 136% respectively.

DBRS Morningstar views KBC’s capitalisation as solid. Robust internal capital generation has contributed to a steady improvement in capital levels in recent years. KBC has reported a fully loaded Basel III Common Equity Tier 1 (CET 1) ratio (under the Danish compromise) of 16.1% at FY19 compared to 16.0% at FY18. KBC also reported a fully loaded capital ratio of 19.6%. This provides KBC with ample buffers over the 2020 CET1 and total capital requirements of 11.1% and 14.6%. The fully loaded Basel 3 leverage ratio for the Group (under the Danish compromise) remained relatively high at year-end 2019 at 6.4%. KBC also reported at Group level a 202% Solvency II ratio, well above the 100% minimum requirement. This provides KBC with ample buffers over the 2020 SREP requirements of 11.1% for CET1 and 14.6% for Total Capital. DBRS Morningstar also notes that the Group already reports an MREL ratio above regulatory requirements, which will be binding by end-2021. At end-2019, the Group reported an MREL ratio of 10.0% of Total Liabilities and Own Funds (TLOF) compared to a requirement of 9.67%.

Concurrently, DBRS Morningstar has discontinued the ratings on KBC’s Junior Subordinated Debt to reflect that there are no instruments outstanding in this category.

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

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents, the National Bank of Belgium, the European Central Bank and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar had no access to relevant internal documents for the rated entity or a related third party.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global Financial Institutions Group
Initial Rating Date: June 3, 2010
Last Rating Date: March 13, 2019

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