Morningstar DBRS Confirms KBC Bank NV's Long-Term Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on 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). Morningstar DBRS also confirmed its credit ratings on 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 trends on all credit ratings are Stable. See the full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings and the Stable trends reflect KBC's solid bancassurance franchise, particularly in Belgium and the Czech Republic, where it has well-positioned retail franchises, as well as its consistently strong earnings, underpinned by a high degree of revenue diversification. The credit ratings also reflect KBC's solid capital position with regulatory capital ratios well above regulatory requirements and robust funding and liquidity position. KBC has a conservative risk approach and a low ratio of nonperforming loans (NPLs). There has not been any meaningful deterioration in asset quality, although tighter financing conditions, geopolitical risks, and economic weakness in the geographies where the Group operates could eventually result in an uptick in NPLs from low levels. Morningstar DBRS nonetheless considers that KBC's strong earnings generation capacity provides the Group with flexibility to absorb any potential deterioration in asset quality.

Morningstar DBRS assigned KBC Bank's Intrinsic Assessment of AA (low) at the midpoint of the Intrinsic Assessment Range to reflect that KBC's credit fundamentals and performance are commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
An upgrade of the credit ratings would require a longer track record of improvement to the risk profile while delivering strong profitability and high capital levels.

Conversely, Morningstar DBRS would downgrade the credit ratings 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 leading retail franchise positions in both Belgium and the Czech Republic. The Group's franchise is further boosted by its meaningful market shares in other Central and Eastern European (CEE) countries, including Hungary, Slovakia, and Bulgaria. These positions were reinforced recently by targeted acquisitions. The Group's insurance and asset management businesses, as well as its advanced digital capabilities, further strengthen KBC's franchise.

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

Profitability for KBC over the last two years has benefited from higher interest rates and the Group's geographically diverse bancassurance franchise. KBC's reported return on equity of 15% and its net attributable profit of EUR 3.4 billion in 2024 were comparable to 2023 results. Strong revenue growth in 2024 stemmed from insurance income (up 9.9% year over year (YOY)), fees and commissions (up 9.8% YOY), and net interest income (up 1.9% YOY from a high level). Net interest margin of 2.1% in 2024 was broadly unchanged from a year earlier. Despite the higher interest rates, total lending increased by 4.6% YOY in 2024. Noninterest income streams contribute roughly half of total revenue. Operating expenses were broadly contained last year and the Group maintained sound efficiency. The cost-to-income ratio adjusted for specific items and bank taxes was 43% in 2024, the same as in 2023. KBC reported net impairment charges of EUR 199 million at YE2024, following EUR -16 million of reversals in 2023. The reported cost of risk at group level increased to 10 basis points (bps), up slightly from 0 bps reported a year earlier.

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

KBC's risk profile benefits from its conservative risk appetite with its low-risk Belgian and Czech operations and somewhat higher-risk portfolios in other core markets. Belgium accounts for 65% of the gross loan book, the Czech Republic 20%, and other CEE countries represent the remaining exposures. The Group's asset quality has remained broadly unchanged since the sale of the Irish activities via KBC Bank Ireland. At YE2024, the share of impaired loans (stage 3) was 2.0%, a slight improvement from the 2.1% at YE2023. The Group significantly reduced Stage 2 loans from 17.9% at YE2023 to 7.8% at YE2024, largely reflecting model adjustments.

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, is a strength to the credit ratings. Morningstar DBR considers the deposit outflows in 2023 following the Belgian bank market intervention to be a one-off and unrelated to the Group's strong deposit franchise. At YE2024, customer deposits grew by 6% YOY and represented 71% of total funding. The loan-to-deposit ratio was 84%. KBC Bank's liquidity position is also solid, with liquid assets representing around 40% of the balance sheet and a liquidity coverage ratio (158%) and net stable funding ratio (139%), well above the regulatory requirements at YE2024. KBC also has good access to wholesale market funding and a diversified base of debt outstanding with a balanced maturity structure.

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

KBC's capitalisation is robust and supported by strong recurring capital generation. KBC reported a fully loaded Basel III CET1 ratio under the Danish compromise of 15.0% at YE2024. This is comparable with previous years and consistent with the Group's policy to distribute surplus capital when the ratio is above 15%. KBC also reported a fully loaded total capital ratio of 18.7%. KBC's solvency position allows for ample buffer over the minimum overall capital requirements of 10.9% for CET1 and of 15.1% for total capital. The 5.5% fully loaded Basel 3 leverage ratio for the Group (under the Danish compromise) also remained high at YE2024. KBC also reported a 200% Solvency II ratio for KBC Insurance, well above the 100% regulatory minimum requirement and in line with YE2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/448421.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781 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 these credit ratings include Morningstar Inc. and company documents, KBC Group 2024 Quarterly Reports, 2024 Quarterly Earnings Presentations, and 2024 Quarterly Press Releases. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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 trends 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://dbrs.morningstar.com/research/448422.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jason Graffam, Senior Vice President, Global Sovereign & Financial Institution Ratings
Rating Committee Chair: Maria Rivas, Senior Vice President, Sector Lead, Global Financial Institution Ratings
Initial Rating Date: 3 June 2010
Last Rating Date: 22 February 2024

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