Morningstar DBRS Confirms KBC Bank NV’s LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of KBC Group N.V. (KBC or the Group) including the Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). Concurrently, Morningstar DBRS confirmed the credit ratings of KBC Bank NV (KBC Bank), the principal banking subsidiary of KBC, including the Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The one notch differential in the long-term credit ratings between the parent company and KBC Bank reflects structural subordination. Morningstar DBRS has also maintained KBC Bank’s Intrinsic Assessment at AA (low) and the Group’s Support Assessment at SA3. The trend on all ratings remains Stable. See the full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of the credit ratings reflects Morningstar DBRS’s view that KBC’s bancassurance franchise, solid footprint in its core markets and high degree of diversification has enabled the Group to continue reporting solid profitability metrics. The Group’s profits were driven by strong revenue growth, on the back of higher interest rates which more than offset the negative impact of inflation and high bank taxes on operating expenses. Credit ratings also continue to take into account KBC’s conservative risk approach and high level of management overlays, which resulted in provision releases in 2023 despite the challenging environment. In addition, the ratings continue to be underpinned by KBC’s robust funding and liquidity profile, backed by its large and stable deposit base and substantial liquidity buffers. The ratings also continue to take into account the Group’s capital position, which remains at the higher-end of its peer group and well above regulatory requirements.

Whilst Morningstar DBRS sees KBC’s Net Interest Income (NII) as peaking in the current interest rate cycle, the high proportion of Non-Interest Income should support revenues going forward. This, combined with contained increases in the cost base and low cost of risk should drive future profits. However, Morningstar DBRS expects that KBC´s asset quality will deteriorate during coming quarters given the challenging economic environment, characterised by tighter financial conditions and weaker economic dynamics in most of the Group’s geographies. Nevertheless, Morningstar DBRS views KBC’s strong earnings generation capacity and sound asset quality metrics to be key mitigating factors, providing the Group with some flexibility to absorb the expected deterioration.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require further improvement in the risk profile whilst delivering strong profitability, and high capital levels.

The Long-Term Ratings would be downgraded in the event of sustained asset quality deterioration combined with a prolonged negative impact on profitability or capital.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong

KBC’s credit ratings are underpinned by its deep-rooted and leading bancassurance franchise in its core markets, with a solid position in both Belgium and the Czech Republic where it has well-positioned leading retail franchises. The Group’s franchise is further boosted by its meaningful market positions in Hungary, Slovakia and Bulgaria, recently reinforced by targeted acquisitions.

Earnings Combined Building Block (BB) Assessment: Strong/Good

The Group has been able to leverage its geographically diverse bancassurance franchise and continues to demonstrate solid profitability, with a reported return on equity of 15% for 2023, up from 14% in 2022. KBC reported a net attributable profit of EUR 3.4 billion in 2023, compared to EUR 2.8 billion in 2022. Results were driven by strong revenue growth which absorbed higher operating expenses. The Group reported in particular strong growth in net interest income, trading income and fees and commissions and a resilient performance in insurance. Despite growth in operating expenses, KBC reported positive operating leverage and was able to further improve its efficiency ratio, with the cost to income ratio adjusted for specific items and bank taxes, at 43% in 2023 compared to 45% in 2022. KBC reported net releases of loan loss provisions in 2023 for EUR 16 million compared to EUR 154 million of loan loss provisions in 2022. As a result, the reported cost of risk at group level was 0 bp compared to an already low 8 bps for 2022.

Risk Combined Building Block (BB) Assessment: Strong/Good

Morningstar DBRS considers KBC’s risk profile as good, combining the low-risk Belgian and Czech portfolios, with somewhat higher risk portfolios in other core markets. The Group’s asset quality has remained broadly unchanged since the sale of the Irish activities. At end-2023, the share of impaired loans was 2.1%, stable from last year. Morningstar DBRS expects that KBC´s asset quality will deteriorate during coming quarters given the challenging economic environment, characterised by tighter financial conditions and weaker economic dynamics. However, Morningstar DBRS views KBC’s strong earnings generation capacity to be a key mitigating factor, providing the Group with some flexibility to absorb any potential deterioration in asset quality.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong

KBC’s robust funding position, based on the stable retail and mid-sized corporate deposit base in its core markets also supports the ratings. At end-2023, customer deposits represented 70% of total funding while the loan-to-deposit ratio was 85%. KBC Bank’s liquidity position is also solid in Morningstar DBRS’s view, with liquid assets representing around 40% of the balance sheet and LCR and NSFR ratios well above the regulatory requirements, at 159% and 136% respectively at end-2023.

Capitalisation Combined Building Block (BB) Assessment: Strong

Morningstar DBRS continues to view KBC’s capitalisation as robust, supported by strong recurring capital generation. Although earnings improved, KBC reported a fully loaded Basel III Common Equity Tier 1 (CET 1) ratio, under the Danish compromise, of 15.2% at end-2023, fairly stable from 15.3% at end-2022 reflecting the Group’s policy to distribute surplus capital when the fully loaded CET1 ratio is above 15.0%. KBC also reported a fully loaded total capital ratio of 18.8%, up 50 bps from a year ago. This provides KBC with an ample buffer over the minimum overall capital requirements (OCR) of 10.92% for CET 1 and of 15.24% for Total Capital. The 5.7% fully-loaded Basel 3 leverage ratio for the Group (under the Danish compromise) also remained high at end-2023. KBC also reported, at Group level, a 206% Solvency II ratio for KBC Insurance, well above the 100% regulatory minimum requirement and in line with last year’s level. In addition, Morningstar DBRS notes that the Group already amply complies with MREL requirements. At end-2023, KBC’s MREL ratio was 30.7% of RWAs and 10.4% of LRE. Given the high capital ratios and the excess capital, KBC maintains a payout ratio policy of at least 50% of consolidated profits and decides each year at its discretion on the distribution of surplus capital. This could result in an additional cash dividend and/or share buy-backs.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/428489.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (23 January 2024).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar, Inc. and company documents, KBC Group Q1, Q2, Q3 and Q4 2023 Quarterly Reports, KBC Group Q1, Q2, Q3 and Q4 2023 Earnings Presentations and KBC Group Q1, Q2, Q3 and Q4 2023 Press Releases. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/428488.

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

Lead Analyst: Arnaud Journois, Vice President, Credit Ratings - European Financial Institution Ratings
Rating Committee Chair: Vitaline Yeterian, Senior Vice President, Credit Ratings - European Financial Institution Ratings
Initial Rating Date: June 3, 2010
Last Rating Date: February 23, 2023

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