July 24, 2014 / 4:12 PM / 3 years ago

Fitch Affirms Belfius's IDR at 'A-'; Outlook Negative, Upgrades VR to 'bbb+'

(The following statement was released by the rating agency) PARIS/LONDON, July 24 (Fitch) Fitch Ratings has affirmed Belfius Bank SA/NV's (Belfius) Long-term Issuer Default Rating (IDR) and Support Rating Floor (SRF) at 'A-'. The Outlook on the Long-term IDR is Negative. At the same time, Fitch has upgraded the bank's Viability Rating (VR) to 'bbb+' from 'bb+'. A full list of rating actions is at the end of this rating action commentary. The rating actions follow a periodic review of major Benelux banking groups. KEY RATING DRIVERS- IDRs, SUPPORT RATING, SRF AND SENIOR DEBT The bank's Long-term IDR and its senior debt ratings are driven by its SRF of 'A-'. This reflects Fitch's view that there remains an extremely high probability that the Belgian state (AA/Stable) would support the bank if required, given its systemic importance in the local economy as the third to fourth largest domestic bank with 10%-15% market shares and largest provider of credit to local authorities. The Negative Outlook on the Long-term IDR reflects 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. KEY RATING SENSITIVITIES- IDRs, SUPPORT RATING, SRF AND SENIOR DEBT The ratings are sensitive to a weakening of Fitch's assumptions around Belgium's ability or propensity to provide timely support to the bank. They 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 banks senior creditors receiving full support from the sovereign if ever required, despite their systemic importance, will diminish substantially, unless mitigating factors arise in the meantime. Fitch expects that the BRRD will be enacted into national legislation in the near team and progress made on establishing the SRM is looking close to being ready in the next one to two years. Fitch expects to then downgrade Belfius's Support Rating to '5' and revise its SRF to 'No Floor'. The timing at this stage is likely to be in late 2014 or in 1H15. The Outlook on the Long-term IDR is Negative because a downward revision of the SRF is likely to result in downgrades of the Long-term IDR and long-term senior debt rating to the level of Belfius's 'bbb+' VR. Belfius's Short-term IDR would then likely be downgraded to 'F2'. KEY RATING DRIVERS - VR The upgrade of the VR is based on Belfius's significant improvements in its main credit metrics due to the progress made on restructuring, including the gradual phasing-out of 'legacy' issues, focus on growing revenue and achieving cost efficiency. Fitch's expectations are that management should continue its orderly execution of plans to strengthen the bank's fundamentals. Belfius's solid risk-weighted capital ratios are solid are partially offset by the bank's residual legacy issues. Belfius reported a Fitch Core Capital (FCC) to regulatory weighted risks ratio of 11.2% at end-2013 (up from 7.5% at end-2012) and a 'fully-loaded' Basel III common equity Tier 1 (CET1) ratio of 11.7% at the same date. The improvement stems from retained earnings, lower negative revaluation reserves on available-for-sale securities due to the tightening of credit spreads and sales and amortisation of the legacy securities portfolio, resulting in improved capital and a reduction of risk-weighted assets. Fitch believes the improving trend in capital will continue and Belfius should achieve its target of a phased-in CET1 ratio above 13% by 2016. The agency also expects the bank's leverage ratio to improve, as a consequence of increasing capital and reducing legacy assets. Although of good credit quality and hedged against interest rate risk, the large legacy bond portfolio, which represented around 2x equity at end-2013, remains a drag on the VR as it creates credit and market risk, as well as additional funding needs while generating low returns. The bank also retains a large derivatives portfolio from its historical role as a competence centre within the Dexia Group. The market risk from this portfolio is limited by hedging arrangements, but the book weighs on the bank's liquidity needs given the collateral required for some of these positions, on capital metrics as it inflates the bank's balance sheet and on operational risk. However, Belfius's track record of managing the portfolio is positive. Operating profitability is improving, mostly driven by the structural benefits of the cost reduction measures. Belfius's returns have remained modest, but Fitch considers its weaker profitability metrics than most peers in light of the bank's lower risk business mix. Earnings should benefit from the bank's robust domestic franchise, deleveraging of low-yielding legacy assets, increased cross-selling of bank and insurance products and upward loan repricing. Fitch believes Belfius's target of a EUR500m net profit in 2016 is realistic. Belfius's VR benefits from its solid domestic retail banking and insurance (as is typical in Belgium) and public finance franchises, which provide it with a healthy customer-driven funding mix and low risk loan book (impaired loans representing only 2.4% of gross loans at end-2013). RATING SENSITIVITIES - VR The bank's VR is sensitive to a set-back in the expected gradual easing of 'legacy' issues (mostly reduction in the legacy bond portfolio and decrease in the volume of the derivatives portfolio). A set-back in the strengthening of Belfius's capital and leverage, which could manifest itself through a marked deterioration in negative revaluation reserves and significantly lower retained earnings would be detrimental for the bank's VR. The VR is also sensitive to a worsening in asset quality metrics, which would most likely be caused by a significant deterioration in the Belgian economy and/or housing market, which is currently not Fitch's base case. Finally, although not expected by the agency, profit generation turning out to be significantly lower than currently envisaged would cause negative pressure on the VR, as it might demonstrate weaknesses in the bank's business model. Fitch sees limited upside potential for the VR in the medium term as the expected continuation of the positive trajectory in capital and profitability metrics is already incorporated into the current level along with the assumption that other key credit metrics will remain fairly stable. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT Subordinated lower Tier 2 securities (XS0286515621, issued by Belfius Financing Company and guaranteed by Belfius) are notched once from Belfius's VR, in line with Fitch's rating criteria for such securities, to reflect the above average loss severity of this type of debt when compared with average recoveries. Their upgrade reflects that of the bank's VR and their ratings are sensitive to any changes in Belfius's VR. SUSBIDIARY AND AFFILIATED COMPANY- RATING DRIVERS AND SENSITIVITIES Belfius Financing Company is a wholly-owned financing subsidiary of Belfius and all its issues are guaranteed by Belfius. The debt ratings are aligned with Belfius's ratings and are sensitive to the same factors that might drive a change in the bank's senior and subordinated debt ratings. The rating actions are as follows: Belfius Bank: Long-term IDR affirmed at 'A-'; Outlook Negative Short-term IDR affirmed at 'F1' Viability Rating: upgraded to 'bbb+' from 'bb+' Senior debt affirmed at 'A-'/'F1' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Belfius Financing Company: Senior debt affirmed at 'A-' Commercial Paper affirmed at 'F1' Subordinated (lower Tier 2) debt XS0286515621: upgraded to 'BBB' from 'BB' Contact: Primary Analyst Philippe Lamaud Director +33 1 44 29 91 26 Fitch France S.A.S 60, Rue de Monceau 75008 Paris Secondary Analyst Lawrence Power Analyst +44 20 3530 1567 Committee Chairperson Maria Jose Lockerbie Managing Director +44 20 3530 1083 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on 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 and are 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 Sovereign Support For Banks: Rating Path Expectations 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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