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Fitch Affirms KBC Bank and KBC Group at 'A-'; Outlook Stable
July 24, 2014 / 3:51 PM / 3 years ago

Fitch Affirms KBC Bank and KBC Group at 'A-'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, July 24 (Fitch) Fitch Ratings has affirmed KBC Bank's and KBC Group's Long-term Issuer Default Ratings (IDRs) at 'A-' with Stable Outlooks. Fitch has also affirmed KBC Bank's Viability Rating (VR) at 'a-'. KBC Verzekeringen's and KBC Group Re's Insurer Financial Strength (IFS) ratings have also been affirmed at 'A-' with Stable Outlooks. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS - VR, IDRS AND SENIOR DEBT OF KBC BANK AND KBC GROUP The affirmation of KBC Bank's VR, and hence its IDRs, reflect the de-risking of the bank and the resolution of legacy issues. The sources of risk were essentially the past strategic decisions to invest outside the bank's core markets and customers. Following restructuring, the primary focus of the bank, and the group overall, is now Belgium and the Czech Republic, complemented by a limited presence in a few more volatile countries, including Ireland, Hungary, Bulgaria and Slovakia. In addition, management has placed risk appetite and risk management at the centre of the group's strategy, with the aim of becoming a low risk bank-insurance group. Fitch views the bank's overall risk appetite as fairly conservative, supported by the dominance of the Belgian operations, while some CEE countries bring in potential volatility. Underwriting standards are generally low risk and risk management has recently been strengthened and centralised. Legacy asset quality problems are the bank's main rating weakness, and a rating factor with high influence. Earnings have been dented in the past five years by large loan and securities impairment charges. The bank is still affected by the weak performance of its Irish and Hungarian lending books, pushing impaired loans to gross loans ratio to around 10% at end-2013, which compares poorly with similarly rated peers. In addition, this ratio makes capital vulnerable to a fairly high level of unreserved impaired loans. The ratings are, however, underpinned by the bank's strong retail and corporate franchise in its two key markets, Belgium and the Czech Republic, benefiting from KBC Group's integrated bank-insurance model given the relatively high level of personal savings in Belgium. The bank's aim to strengthen its focus on a relationship banking business model should create a stable and diverse financial group. Revenue and cost initiatives will support the bank's satisfactory efficiency. KBC Bank's capital ratios are good for its rating level. Its fully loaded Basel III common equity Tier 1 ratio was 12% at end-2013. However, the bank's capital adequacy has to be viewed in conjunction with the overall capital of the group. KBC Group still has EUR2bn of hybrid capital from the Flemish region, for which it has a repayment schedule of equal yearly instalments of EUR0.33bn starting in 2014, a manageable amount in Fitch's view. The ratings also benefit from KBC Bank's healthy funding profile, with customer loans largely funded by customer funding. The bank has a solid retail funding base, especially in Belgium, where it benefits from strong market shares. It also continues to issue long-term senior debt. Liquidity is now robust. Although only part of the bank's unencumbered assets are high quality liquid assets, these are more than sufficient to cover short-term cash outflows. KBC Group's IDRs and senior debt ratings are equalised with those of KBC Bank as the bank represents the bulk of the group, they share a common regulator, operate in the same jurisdictions, have a common brand and double leverage remains manageable. KBC Group's double leverage was 107% at end-2013, on the assumption that state hybrid capital is equity and not debt. RATING SENSITIVITIES - VR, IDRS AND SENIOR DEBT OF KBC BANK AND KBC GROUP KBC Bank's VR is at the same level as its Support Rating Floor. A downgrade of KBC Bank's IDRs and senior debt ratings would occur only if both the Support Rating Floor was revised downwards and the VR was downgraded. An unexpected rise in losses on loans or legacy assets, lack of focus on maintaining its solid capitalisation or deterioration of recurring profitability could result in a downgrade of the VR. The Short-term rating of 'F1' is sensitive to maintaining strong liquidity. Fitch does not expect to upgrade KBC Bank's VR and, consequently, its Long-term IDR in the near term, in light of the bank's asset quality weaknesses. A significant reduction in impaired assets would be beneficial to the ratings. KBC Group's Long-term IDR and senior debt rating are likely to move in tandem with those of KBC Bank. However, a significant increase of KBC Group's double leverage ratio (calculated assuming state hybrid capital is equity not debt) or a weakening of the links with KBC Bank including those driven by regulatory changes, could lead to negative rating pressure. KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS OF KBC BANK AND KBC GROUP The Support Ratings and Support Rating Floors reflect Fitch's expectation that there is an extremely high probability that the Belgian state (AA/Stable) would support KBC Bank and KBC Group, if required. This opinion derives from KBC Group's systemic importance in Belgium. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives. We expect the EU's Bank Recovery and Resolution Directive (BRRD) to be implemented into national legislation later in 2014 or in 1H15. We also expect progress towards the Single Resolution Mechanism (SRM) for eurozone banks in this timeframe. In Fitch's view, these two developments will dilute the influence Belgium has in deciding how Belgian banks are resolved and increase the likelihood of senior debt losses in its banks if they fail solvability assessments. RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR OF KBC BANK AND KBC GROUP The Support Ratings and Support Rating Floors are primarily sensitive to further progress made in implementing the BRRD and the SRM. The directive requires 'bail in' of creditors by 2016 before an insolvent bank can be recapitalised with state funds. A functioning SRM and progress on making banks 'resolvable' without jeopardising the wider financial system are areas of focus for eurozone policymakers. Once these are operational they will become an overriding rating factor, as the likelihood of the bank's senior creditors receiving full support from the sovereign if ever required, despite its systemic importance will diminish substantially. Fitch expects that the BRRD will be enacted into national legislation in the near term and progress made on establishing the SRM is looking close to being ready in the next one to two years. Fitch expects to downgrade KBC Bank's and KBC Group's Support Ratings to '5' and revise their Support Rating Floors to 'No Floor'. The timing at this stage is likely to be some point in late 2014 or in 1H15. A revision of the Support Rating Floors would not necessarily lead to a downgrade of the Short-term IDRs. We may affirm the Short-term IDRs at 'F1' to reflect KBC Bank's robust liquidity. The Support Ratings and Support Rating Floors are also sensitive to any change in Fitch's assumptions about the sovereign's ability (for example, triggered by a downgrade of Belgium's sovereign rating) to provide support. KEY RATING DRIVERS AND SENSITIVITES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and hybrid securities issued by KBC Bank are notched off KBC Bank's VR. Therefore, their respective ratings are sensitive to any change in KBC Bank's VR. In accordance with Fitch's criteria 'Assessing and Rating Bank Subordinated and Hybrid Securities', legacy hybrid securities issued by KBC Bank are rated four notches lower than KBC Bank's VR (two notches for non-performance and two notches for relative loss severity). Subordinated debt issued by KBC IFIMA N.V is rated one notch lower than KBC Bank's VR (for relative loss severity). The perpetual hybrid instruments' and subordinated debt's ratings are primarily sensitive to any change in KBC Bank's VR. The CRD IV compliant undated deeply subordinated additional Tier 1 debt securities issued by KBC Group are notched off KBC Group's implicit intrinsic creditworthiness, of which KBC Bank is the predominant operating entity. They are rated five notches below KBC Group's implicit intrinsic creditworthiness. The notching reflects the notes' higher expected loss severity relative to senior unsecured creditors (two notches) and higher non-performance risk (three notches). The rating assigned to the notes is broadly sensitive to the same factors as those that would affect KBC Bank's VR. In addition, the notes' rating is sensitive to the build-up of additional double leverage at KBC Group. The notes' rating is also sensitive to any change in notching that could arise if Fitch changed its assessment of the probability of the notes' non-performance risk relative to the risk captured in KBC Group's implicit intrinsic creditworthiness. KEY RATING DRIVERS AND SENSITIVITIES - KBC VERZEKERINGEN The main rating driver for KBC Verzekeringen is its core strategic importance within KBC Group. In addition, the ratings are supported by the company's strong regulatory solvency ratio (at end-March 2014: 299%), strong business positions, especially in Belgium and to a lesser extent in a selected number of countries in Central and Eastern Europe, and strong profitability with net profit of EUR468m in 2013 (2012: EUR993m, including EUR408m one-off gains due to the divestment in Warta and Fidea). The equalisation of KBC Verzekeringen's IFS rating and IDR reflects the continuing material government support for the group by means of hybrid capital. The group's 'A-' IDR therefore acts as a cap on KBC Insurance's IFS rating. Any changes in KBC Group's ratings are likely to result in similar changes to KBC Verzekeringen's ratings. In addition, if in Fitch's view, KBC Verzekeringen were to become less strategically important within the KBC Group prompted by a significant and sustainable deterioration in its profitability, a negative new business margin, or a regulatory solvency ratio of below 150%, this would likely result in a downgrade. Conversely, the IFS rating could be upgraded by one notch if the group repays the Flemish Region hybrid capital and, at the same time, KBC Verzekeringen maintains a strong financial profile as this would likely result in a return to standard notching between the IFS and IDR. KEY RATING DRIVERS AND SENSITIVITIES - SUBSIDIARIES AND AFFILIATED COMPANIES KBC IFIMA N.V, KBC Financial Products International, Ltd, KBC North America Finance Corp and KBC Bank Ireland plc are wholly owned subsidiaries of KBC Bank. Their debt ratings are aligned with those of KBC Bank, based on an extremely high probability of support if required and are sensitive to the same factors that might drive a change in KBC Bank's IDRs. Fitch has also affirmed KBC Group Re's IFS rating, the group's wholly owned core captive reinsurance subsidiary based in Luxembourg, at 'A-'. The affirmation reflects KBC Group Re's core strategic status to KBC Verzekeringen. Fitch also views positively its solid standalone financial profile and cautious management. An upgrade of KBC Verzekeringen's IFS rating could trigger an upgrade of KBC Group Re; conversely a downgrade of KBC Verzekeringen's rating would likely trigger a downgrade. The rating actions are as follows: KBC Bank - Long-term IDR affirmed at 'A-', Outlook Stable - Short-term IDR affirmed at 'F1' - Viability Rating affirmed at 'a-' - Support Rating affirmed at '1' - Support Rating Floor affirmed at 'A-' - Senior debt affirmed at 'A-/F1' - Commercial paper affirmed at 'F1' - Perpetual subordinated debt securities affirmed at 'BB+' KBC IFIMA N.V. - Senior debt affirmed at 'A-' - Short term debt affirmed at 'F1' - Subordinated debt affirmed at 'BBB+' - Market linked securities affirmed at 'A-emr' KBC Financial Products International, Ltd. - Senior debt affirmed at 'A-' - Commercial paper affirmed at 'F1' KBC North America Finance Corp. - Commercial paper affirmed at 'F1' KBC Bank Ireland plc - Commercial paper affirmed at 'F1' KBC Group - Long-term IDR affirmed at 'A-', Outlook Stable - Short-term IDR affirmed at 'F1' - Senior debt affirmed at 'A-/F1' - Support Rating affirmed at 1 - Support Rating Floor affirmed at 'A-' - Undated deeply subordinated securities (BE0002463389) affirmed at 'BB' KBC Verzekeringen N.V. - IFS rating affirmed at 'A-', Outlook Stable - Long-term IDR affirmed at 'A-', Outlook Stable KBC Group Re - IFS rating affirmed at 'A-', Outlook Stable Contact: Primary Analyst (KBC Bank and KBC Group) Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Primary Analyst KBC (Verzekeringen NV and KBC Group Re) Amelie Hibos Analyst +33 1 4429 91 78 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst (KBC Bank and KBC Group) Philippe Lamaud Director +33 1 44 29 91 26 Secondary Analyst (Verzekeringen NV and KBC Group Re) Marc-Philippe Juilliard Senior Director +33 1 4429 91 37 Committee Chairperson (KBC Bank and KBC Group) Maria Jose Lockerbie Managing Director +44 20 3530 1083 Committee Chairperson (KBC Verzekeringen NV and KBC Group Re) Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria: 'Global Financial Institutions Rating Criteria', dated 31 January 2014; 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 31 January 2014; 'Insurance Rating Methodology', dated 13 November 2013 are all available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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