DBRS Morningstar Confirms Belfius’s Issuer Ratings at “A” / R-1 (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long-Term Issuer and Senior Debt Ratings of Belfius Bank SA/NV (Belfius or the Bank) at “A” and the Short-Term ratings at R-1 (low). The trend on all ratings is Stable. DBRS Morningstar has also maintained the Bank’s IA at A and support assessment at SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects DBRS Morningstar’s view that the Bank has continued to generate strong earnings, leveraging on its strong established retail and bancassurance franchise in Belgium. This, coupled with the Bank’s low risk profile and cost control, has supported profits despite higher operating costs largely related to further investments in the franchise, most notably in digitalisation. Belfius’ ratings continue to be underpinned by the Bank’s very sound asset quality and its strong funding and liquidity profile. In addition, the Bank benefits from strong capital cushions over its regulatory requirements, reinforced by its capacity to generate earnings. We will continue to monitor the developing situation and potential impact of the coronavirus (COVID-19) outbreak on revenues, profits and asset quality, whilst taking into account the significant relief measures being taken by governments and regulators.
RATING DRIVERS

Positive rating pressure could arise from a material improvement in profitability and capital position whilst maintaining a low risk profile.

Negative rating pressure could come from a major deterioration in asset quality or significant deterioration in core earnings.

RATING RATIONALE
The Bank’s ratings are underpinned by its well-established bancassurance franchise in its core market of Belgium, where it is one of the four major banks. The Bank also has a strong franchise in retail, SME and mid-cap customer segments and it the market leader in public sector banking in Belgium, in particular in lending to local governments and public/project finance. The Belgian state is the owner of the Bank, although with the intention of launching an IPO to sell in the long-term.

The Group reported net income (group share) of EUR 667 million in 2019, up 2.8% year-on-year (YoY). DBRS Morningstar views as positive that Belfius managed to increase its revenues amidst the low interest rate environment environment, largely driven by a 5.4% growth of revenues in 2019 YoY on the back of higher-margin lending to Belgian corporates and increasing bancassurance cross-selling. Net interest income for the bank was up 2.8% YoY in 2019, as strong volume growth offset the continued negative pressure of low interest rates. Net fee and commission income was also up 4.9% YoY, mainly driven by an increase in the volume of off-balance products (investment funds and bancassurance) and good performance in the insurance business. DBRS Morningstar considers that Belfius has maintained a relatively stable cost base, despite additional investments in its franchise. In 2019, operating expenses were EUR 1,452 million, up 1.9% YoY, mainly related to investments in digitalisation and human resources and the cost-to-income ratio was 58.4% which compares well with European peers. Cost of risk remained very low at 9 bps of gross outstanding loans and advances to customers.

DBRS Morningstar views Belfius’ risk profile as solid, benefiting from a moderate appetite for risk, a loan portfolio dominated by high quality exposures. Asset quality is supported by low risk retail exposures, which in large part consist of Belgian mortgages, and loans to public entities. At end-2019, the Group’s non-performing loan ratio was 2.0%, broadly in line with the previous year, a level that DBRS Morningstar views as sound. Although it is still early stage, we will also closely monitor the potential negative impact of the Covid-19 outbreak on the Bank’s asset quality. Belfius has a relatively high exposure to Italian sovereign debt (22% of total sovereign debt at end-2019), albeit much reduced from previous years, which in our view exposes the Bank if the Italian sovereign position were to deteriorate significantly. Most of this exposure is accounted as amortised book therefore limiting any capital volatility arising from these bonds valuation movements.

Also supporting the ratings is Belfius’s funding profile, stemming from the strong and stable deposit base in Belgium. Customer funds, predominantly retail, represented 80.5% of the Group’s funding sources at end-2019. 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 94% and has remained fairly stable in recent years. Despite a relatively high level of encumbered assets (21.5% 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 28.6 billion at end-2019, around five times the outstanding short-term wholesale funding (maturing within 12 months). Belfius posted a Liquidity Coverage Ratio (LCR) ratio of 130% and a Net Stable Funding Ratio (NSFR) of 116% at end-2019.

The Group has a solid a capital position, partly supported by its strong internal capital generation. At end-2019, Belfius’ Basel III fully-loaded Common Equity Tier 1 ratio (based on Danish compromise) was 15.6%, down from 16.0% at end-2018, as risk-weighted asset (RWA) growth offset retained earnings. This provides Belfius with a large buffer of 478 bps over its SREP requirements of 10.82% as of end-2019. Belfius’ fully loaded leverage ratio was a strong 5.8% at end-2019. With EUR 17.04 billion of MREL at end-2019, (indicative MREL ratio of around 12.5% of TLOF at end-2019, DBRS Morningstar considers that Belfius maintains ample cushions over MREL requirements of 10.56%.

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 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 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 access to accounts, management and other 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Arnaud Journois, Vice President, Global Financial Institutions
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: December 5, 2007
Last Rating Date: March 25, 2019

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