DBRS Assigns First-Time Ratings to Dexia Bank Belgium & Dexia BIL at AA (high), R-1 (high): Ratings Reflect Credit Strength of Dexia Group

DBRS has today assigned first-time ratings to Dexia Bank Belgium (Dexia BB) and Dexia Banque Internationale à Luxembourg (Dexia BIL) at AA (high) for Senior Long-Term Debt & Deposits and R-1 (high) for Short-Term Debt & Deposits, all with Stable trends (see below for a full list of assigned ratings). DBRS already rates Dexia Crédit Local’s (Dexia CL) obligations at AA (high) and R-1 (high) since January 2007. These ratings reflect the credit strength of the entire Dexia Group (Dexia or the Group). The trends are Stable.

Reflecting their full integration and key role within Dexia, DBRS’s ratings for Dexia BB and Dexia BIL are based on the Group’s overall business and balance-sheet strength in order to take into account expected support within the Group’s companies. DBRS says that its ratings on the main operating subsidiaries of Dexia are largely underpinned by the Group’s solid intrinsic credit strength. The Stable trends reflect the expectation that the Group should uphold its conservative strategy and risk profile.

Along with Dexia CL, both Dexia BB and Dexia BIL constitute core components of the Dexia Group. Dexia BB is one of the Group’s key pillars, and is the leading bank in Belgium for its Public & Project Finance and Personal Financial Services activities. In addition, Dexia BB is involved in some of the Group’s other major business lines: Wealth Management (e.g., life insurance, mutual funds) and Treasury and Financial Markets. On the other hand, Dexia BIL leads Dexia’s Wealth Management activities including private banking, asset management and securities services (in a joint venture with Royal Bank of Canada).

DBRS notes that Dexia BB enjoys a dominant position in Belgium’s territorial community lending market and an important presence in domestic retail banking as the country’s second largest bank. It also displays good financial fundamentals. The bank’s creditworthiness is notably characterized by healthy and predictable operating profitability and a strong balance-sheet structure – underpinned by very low asset and market risk, strong liquidity and solid risk-adjusted capitalisation. Financial performance has been supported by increasing fee income, low credit expenses and improvement in cost management. In that regard, DBRS notes that the merger with Artesia Bank, in 2001, has allowed Dexia to significantly streamline the two banks’ branch networks and organisations, yielding significant synergies. These strengths are somewhat mitigated by a domestic competitive environment and social rigidities, which are pressuring margins, and by earnings reliance on Asset and Liability Management profits. All of these elements combine to afford Dexia BB’s AA (low) Intrinsic Assessment (IA) equivalent.

Similarly, Dexia BIL boasts an important retail and off-shore private banking franchise in the small but wealthy Luxembourg market, high risk-adjusted profitability and solid asset quality. The bank’s credit profile and earnings diversification also takes advantage of the Group’s investment management and securities services that it is spearheading within Dexia. Maintaining critical mass in these two activities, as well as successfully adapting to potential structural changes to Luxembourg’s favourable off-shore private banking sector, should constitute Dexia BIL’s main long-term challenges, according to DBRS. These analytical strengths and challenges are reflected in Dexia BIL’s A (high) Intrinsic Assessment (IA) equivalent.

DBRS notes that Dexia BB and Dexia BIL enjoy a large and stable deposit base, which contributes to reducing Dexia’s overall reliance on wholesale funding, supplementing the Group’s access to cheap funding obtained via its various covered bonds programmes. The Group’s liquidity, even in recent times, has remained extremely strong. In addition, Dexia has been thus far relatively unscathed by the financial crisis, given its modest exposure to U.S. sub-prime – either directly or through Financial Security Assurance Inc. – and to leveraged finance. While widening credit spreads have hurt the valuation of some portfolios, Dexia’s management believes that this decline in market valuation reflects transient market conditions experienced in the global credit markets in the wake of the U.S. sub-prime crisis, rather than losses on the assets’ intrinsic economic value and expects the assets’ market valuation to normalize, and become positive, eliminating the negative impact recorded in recent months.

Both Dexia BB’s and Dexia BIL’s AA (high) ratings incorporate the benefit for the bank of being a core and integral part of Dexia. In addition, the ratings of Dexia BB and Dexia BIL – as well as those of Dexia CL – take into account an element of institutional support, in the highly remote scenario of a financially healthy group like Dexia needing any form of outside support in the foreseeable future. As a major retail bank and premier lender to local governments, Dexia BB is a critically important financial institution in Belgium, while Dexia BIL is also a key player in the crucial Luxembourg financial sector.

Commenting on rating change drivers, under the current strategy and business model, DBRS sees little potential for uplift for the foreseeable future, given that the already high level of these ratings positions it among the most creditworthy credit institutions in Europe.

On the other hand, Jean-Luc Lepreux, Senior Vice President in the DBRS Paris office, adds that a material merger with, or acquisition of, a weaker entity could exert negative pressure on the Group ratings, if such a transaction were to be carried out on less-than-optimal economic terms or if acquisition-related execution risks were poorly managed. DBRS also noted that negative rating connotations could emerge from a material shift of the Group’s business mix away from public-sector financing and into a heavier reliance on more-sensitive wealth investment activities. While asset management, private banking, insurance and securities services may not necessarily display higher risks, DBRS nonetheless believes that enhancing critical mass or substantially expanding these activities should remain challenging as the Group faces strong international competitors. Finally, any easing of the Group’s very tight liquidity management or significant decapitalisation could also penalize Dexia’s credit profile.

Intrinsic Assessments and Support Assessments (the latter on a scale from SA1 to SA4) are the two building blocks of DBRS’s bank ratings, as per the DBRS bank rating methodology introduced in 2006. (To view the most updated version of that report, Analytical Background and Methodology for European Bank Ratings, published in January 2007, visit www.dbrs.com).

Dexia Bank Belgium is headquartered in Brussels and had total assets of EUR276 billion at year-end 2006. Based in Luxembourg, Dexia Banque Internationale à Luxembourg had total assets of EUR64 billion at year-end 2006. The Dexia Group is headquartered in Paris and Brussels and had total assets of EUR577 billion as of 30 June 2007.

The full reports providing additional analytical detail are available by clicking on the link below or by contacting us at info@dbrs.com.