DBRS Confirms KBC Bank NV’s Long-Term Issuer Rating at A (high); Trend Changed to Positive

DBRS Ratings GmbH (DBRS) confirmed the Long-Term Issuer Rating of KBC Bank NV (KBC Bank), the principal banking subsidiary of KBC Group NV (KBC or the Group), at A (high), as well as the Short-Term Issuer Rating at R-1 (middle). Concurrently, DBRS confirmed the Group’s Long-Term Issuer Ratings at A and the Short-Term Issuer Rating at R-1 (low). The trend on the Bank and Group’s Long-Term ratings was changed to Positive from Stable while the trend on the Short-Term ratings remains Stable. The Bank’s intrinsic assessment (IA) was confirmed at A (high). The Group’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The change in the Trend to Positive reflects DBRS’s view that KBC has managed to significantly improve its risk profile, both organically and through the sale of Irish non-performing exposures, while maintaining a solid funding and liquidity profile and strong capital levels. DBRS also considers that KBC has effectively managed its well-established and diversified franchise to maintain strong profitability and absorb challenging conditions in certain business areas.

RATING DRIVERS
Further evidence of asset quality improvement as well as stable and robust earnings would be required for any potential upgrade.

Given the Positive trend, a downgrade is unlikely. However, negative rating pressure could arise from from a reversal of the recent asset quality improvement or if there were to be a significant weakening in key segments of the Group’s franchise that impacts its earning power. Any significant change in risk profile that might arise from a potential acquisition could also contribute to negative rating pressure.

RATING RATIONALE
KBC’s ratings are underpinned by its deep-rooted bancassurance franchise in its core markets with its main strengths being its solid position in both Belgium and the Czech Republic where it has well-positioned retail franchises. DBRS also views as positive KBC’s effectiveness in reaching meaningful positions in its other core countries, Hungary, Slovakia, Bulgaria and Ireland.

Despite a challenging operating environment, the Group’s strong earnings capacity was confirmed in 2018. Net income was EUR 2,570 million in 2018, compared to EUR 2,575 million in 2017. In 2018, KBC continued to report a strong ROE of 16%, slightly down from 17% last year but well-positioned compared to European peers. This was driven by a very low cost of risk which compensated for lower trading revenues and higher operating costs, driven among others by investments in digitalisation, banking taxes and full consolidation of the Bulgarian subsidiary.

The Group’s capacity to absorb potential losses is high, based on its strong profitability, reflecting a significant contribution from insurance and asset management, and good cost efficiency. Diversification is supported by its international presence, although Belgium and the Czech Republic remain the key contributors, representing respectively 56% and 25% of the Group’s 2018 net profits.

The change in the trend also reflects the ongoing improvement in the Group’s asset quality profile. DBRS considers KBC’s risk profile as solid, combining the low risk in its Belgian and Czech portfolios, with somewhat higher risk portfolios in other CEE businesses. DBRS views as positive the improvement in the Irish unit’s risk profile, driven primarily by the sale of EUR 1.9 billion of non-performing loans in 4Q18, although the share of legacy exposures remains high. As a result, the impaired loans ratio at a Group level improved to 4.3% at FY18, from 6.0% at FY17.

Also supporting the ratings is KBC’s solid funding profile, which reflects the strong and stable retail and mid-sized corporate deposit base in its core markets. At FY18 customer deposits represented 77% of total funding while the loan-to-deposit ratio was around 92% for the Group (excluding debt certificates). KBC Bank’s liquidity position is also solid, in DBRS’s view, with FY18 LCR and NSFR ratios well above the regulatory requirements, at 139% and 136% respectively.

DBRS views KBC’s capitalisation as strong. Robust internal capital generation has contributed to a steady improvement in capital levels in recent years. KBC has reported a fully loaded Basel III Common Equity Tier 1 (CET 1) ratio under the Danish compromise of 16.0% at FY18 compared to 16.3% at FY17. This reflects the first-time application of IFRS 9 and the completion of the share buy-back scheme, offset by retained earnings net of a 59% dividend pay-out. KBC also reported a fully loaded capital ratio of 20.8%. This provides KBC with ample buffers over the 2019 CET1 and total capital requirements of 10.7% and 14.2%. The fully loaded Basel 3 leverage ratio for the Group (under the Danish compromise) remained relatively high at year-end 2018 at 6.1%. DBRS also notes that the Group is well placed to comply with the future MREL requirements.

The Grid Summary Grades for KBC Bank NV are as follows: Franchise Strength –Strong; Earnings Power – Strong; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Very Strong/Strong.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company disclosures, the National Bank of Belgium and the European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Arnaud Journois –Vice President - Global FIG
Rating Committee Chair: Ross Abercromby – Managing Director – Global FIG
Initial Rating Date: June 3, 2010
Last Rating Date: March 15, 2018

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Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.