DBRS Upgrades Belfius SA/NV’s Issuer Rating to A, Trend Stable

DBRS Ratings GmbH (DBRS) upgraded Belfius Bank SA/NV (Belfius or the Group)’s Long-Term Issuer Rating at A and confirmed the Short-Term Issuer Rating at R-1 (low). The trends on all ratings is now Stable. The Group’s intrinsic assessment (IA) is now A and the support assessment remains SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The upgrade of the Long-Term Issuer rating reflects Belfius’s progress in strengthening its banking and bancassurance franchise in its home market of Belgium in recent years. It also reflects that as a result the Group is improving its revenue diversification, which is helping it to cope better with revenue pressure from the low interest rate environment. The ratings also consider the Group’s sound asset quality, strong funding and liquidity profile and strong capital position. However, the ratings also take into account the Group’s limited geographical diversification and some risk concentration to certain Sovereign exposures.

RATING DRIVERS
Whilst unlikely given the recent upgrade, positive rating pressure could stem from a continued improvement in profitability and capital position whilst maintaining a low risk profile.

Negative rating pressure could come from a major deterioration in asset quality or significant deterioration in core earnings.

RATING RATIONALE
The Group’s ratings are underpinned by its well-established bancassurance franchise in its core market of Belgium, where it is one of the four major banks. The Group’s franchise is focused on retail, SME and mid-cap customer segments as well as insurance. Reflecting its origins, Belfius is also the market leader in public sector banking in Belgium, in particular in lending to local governments and public/project finance. Belfius is also a leading player in arranging bond issues for Belgian issuers. Whilst the Belgian state is currently the owner of the Group, a partial privatisation of Belfius could take place, which would lead to a minority stake of the Group being listed through an IPO.

As part of its recent strategic initiatives, Belfius has been growing higher-margin lending to Belgian corporates and increasing bancassurance cross-selling in the last two years. The Group reported net income (group share) of EUR 649 million in 2018, up 7.1% year-on-year (YoY), the highest results since its nationalisation in 2011. DBRS views as positive that Belfius managed to increase its revenues by 0.3% in 2018 YoY at EUR 2,361 million, despite the challenging environment. Net interest income for the bank was down 2% YoY in 2018, reflecting the continued negative pressure of low interest rates despite volume growth. Net fee and commission income for the bank was up 1%, mainly driven by an increase in the volume of off-balance products (investment funds, equities, bancassurance) and good performance in the insurance business, especially non-life. Operating costs were up 4.2% YoY mainly related to investments in digitalisation and human resources. Despite these investments, the cost-to-income ratio remained strong compare to European Peers at 60.4%. The cost of risk remained low in 2018, at 6 bps, with credit impairments absorbing only 7% of Income before Provisions and Tax (IBPT) in 2018.

DBRS views Belfius’ risk profile as solid, benefiting from a moderate appetite for risk, a loan portfolio dominated by high quality exposures, and significant progress in the de-risking of the legacy portfolio inherited from Dexia. In 2018, the Group’s non-performing loan ratio was 2.1%, broadly in line with the previous year, a level that DBRS views as sound and comparing favourably with that of the Group’s European peers. Asset quality is supported by low risk retail exposures, which in large part consist of Belgian mortgages, and loans to public entities. While credit impairments remain low, DBRS notes that geographical diversification is limited with Belgium representing the vast majority of credit risk exposures. Belfius still retains a relatively high exposure to Italian sovereign debt (23% of total sovereign debt at end-2018), albeit much reduced from previous years.

Also supporting the ratings is Belfius’s successful rebalancing of its funding profile, taking advantage of the strong and stable deposit base in Belgium. Customer funds, predominantly retail, represented 80% of the Group’s funding sources at end-2018. Belfius is also an active issuer of covered bonds, backed by mortgage loans and by public sector loans. The loan-to-deposit ratio of the commercial (i.e. core lending) banking balance sheet was a healthy 94% and has remained fairly stable in recent years. Despite a relatively high level of encumbered assets (21.1% of total bank balance sheet and collateral received under securities format), the Group’s liquidity position is robust with an available liquid asset buffer of EUR 28.8 billion, almost six times the outstanding short-term wholesale funding (maturing within 12 months). Belfius posted a Liquidity Coverage Ratio (LCR) ratio of 135% and a Net Stable Funding Ratio (NSFR) of 116% at end-2018.

The Group has continued to maintain solid capital buffers, confirming its capacity to generate and retain earnings. At end-2018, Belfius’ Basel III fully-loaded Common Equity Tier 1 ratio (based on Danish compromise) was 16.0%, fairly stable from 16.2% at January 1, 2018, with retained earnings more than offsetting risk-weighted asset (RWA) growth. Belfius’ fully loaded leverage ratio remained relatively high at 6.0% at end-2018 compared to 5.5% at end-2017, and its fully loaded total capital ratio was 19.6%, up from 18.1% last year. This provides Belfius with ample buffers over its SREP requirements. The SRB determines the consolidated MREL requirements for Belfius to be 9.70% of Total Liabilities and Funds (TLOF) corresponding in 2018 to a total MREL of EUR 12.46 billion. With EUR 15.07 billion of MREL at end-2018, DBRS considers that Belfius maintains ample cushions over MREL requirements (indicative MREL ratio of 11.7% of TLOF at end-2018).

DBRS also discontinued the ratings on Belfius’s Junior Subordinated Debt, as there is no longer any debt outstanding in this category.

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

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 access to accounts, management and other 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: Elisabeth Rudman - Managing Director, Head of EU FIG – Global FIG
Initial Rating Date: December 5, 2007
Last Rating Date: April 26, 2018

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