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

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

KEY RATING CONSIDERATIONS
The ratings confirmation and the stable trend reflects our view that Belfius has continued to leverage its leading bancassurance franchise in Belgium, which has enabled the Bank to offset pressure in its banking activities as a result of the ongoing Coronavirus Disease (COVID 19) pandemic through a sustained contribution from the insurance business. In addition, Belfius’s ratings continue to be underpinned by its strong funding and liquidity profile, backed by a large and stable deposit base and substantial liquidity buffers, which provide room to navigate the pandemic . We also continue to take into account the Bank’s strong capital position, which remains at the higher-end of its peer group and well above regulatory requirements, allowing Belfius the ability to absorb any potential fallout from the crisis.

Nevertheless, we also incorporate the headwinds Belfius faces on asset quality in 2021, notably through the likely materialisation of NPLs when all the moratoria schemes expire. However, we take into account the already solid asset quality profile and also acknowledge that the Group has, to date, not experienced significant signs of asset quality deterioration. Almost all loans under moratoria that have expired have resumed payment and Belfius has not experienced any significant increases in Stage 2 or Stage 3 loans in 2020. In addition, we see Belfius as well-equipped to cope with the potential effect of the pandemic given its exposure to Public-Sector lending (26% of the loan portfolio), where we expect limited impact.

The ratings also reflect that, despite the crisis, Belfius has proven resilient in terms of profitability. Solid performance in insurance, core revenue growth, and cost control, has mitigated the higher provisions induced by the crisis. Belfius reported a ROE of 5.6% in 2020, slightly down from 7.4% in 2019 and this still compares well with peers.

RATING DRIVERS
An upgrade of the Long-Term Issuer Rating is unlikely over the near term, given the challenging economic outlook. Over the longer term, an upgrade of the ratings could arise from a material improvement in profitability whilst maintaining a low risk profile and the current capital levels.

Conversely, a downgrade would occur from a major asset quality deterioration combined with a prolonged negative impact on profitability and capital.

RATING RATIONALE
The Bank’s ratings are underpinned by its well-established and leading bancassurance franchise in its core market of Belgium. The Bank has a strong franchise in retail, SME and mid-cap customer segments and is the market leader in public sector banking in Belgium, in particular in lending to local governments and public/project finance. The Bank is owned by the Belgian state, and we do not exclude that in the long run the government plans to launch an IPO.

Despite the ongoing pandemic, Belfius continued to demonstrate resiliency, notably through the diversification stemming from the bancassurance business model. Belfius reported a net attributable profit of EUR 532 million in FY 2020, down from a net attributable profit of EUR 667 million in FY 2019. This was mainly driven by high levels of provisions to cover the expected deterioration in economic conditions as a result of COVID-19. Despite this, the cost of risk at the group level still remained relatively low at 35 bps (FY 2019: 9 bps). Nevertheless, results were supported by a solid performance in insurance, as well as core revenue growth and good cost control.

DBRS considers that Belfius has generally maintained a solid risk profile, benefiting from a moderate appetite for risk and 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. Belfius’s asset quality remains strong at end-2020 with a reported gross NPL ratio of 2.0%, fairly stable from end-2019, and coverage levels remain strong at 60.0%, compared to 62.3% at end-2019. However, due to the COVID-19 pandemic we expect asset quality to deteriorate in coming quarters when moratoria expire and bankruptcies start to materialise.

Belfius benefits from a solid funding profile, taking advantage of a strong and stable deposit base in Belgium. Customer funds, predominantly retail, represented 77.6% of the bank’s funding at end-2020, contributing to its stability. 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 declined marginally to 89% at end-2020, against the 94% and 95% recorded in the prior two years respectively. Belfius’s liquidity profile remains strong and has further improved in 2020. Due to sizeable secured funding, encumbered assets are relatively high at 26.3% of Belfius Bank’s total bank balance sheet and collateral (received under securities format). Despite this, at end-2020, Belfius Bank’s liquidity position is robust with an available liquid asset buffer of EUR 35.7 billion, representing around thirteen times the outstanding wholesale funding with maturity below one year. The Liquidity Coverage Ratio (LCR) ratio stood at 158% and Net Stable Funding Ratio (NSFR) was 128% at end-2020.

The Group has a solid capital position, partly supported by its strong internal capital generation. At end-2020, Belfius’ fully loaded Basel III Common Equity Tier 1 (CET1) under the Danish compromise was 17.1%, up from 15.9% at end-2019. Belfius also reported a strong total capital ratio of 20.4%, up from 19.2% at end-2019. This provides Belfius with ample cushions over the 2020 CET1 and total capital requirements of 9.625% and 13.1%, respectively. The fully loaded Basel 3 leverage ratio for the Group (under the Danish compromise) remained relatively high at 6.9% at year-end 2020. With EUR 19.8 billion of MREL at end-2020, (indicative MREL ratio of around 13.0% of Total Liabilities and Own Funds at end-2020), DBRS Morningstar considers that Belfius maintains ample cushions over MREL requirements of 10.56%.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 8, 2020). https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021)
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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

The sources of information used for this rating include Company Documents, Belfius Annual Accounts 2015- 2020, Belfius Quarterly Press Releases 2015-2020, Belfius Earnings Presentations 2015-2020, 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.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: YES

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 12-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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375713

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: December 5, 2007
Last Rating Date: March 24, 2020

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