MOODY'S CONFIRMS RATINGS OF BACOB BANK S.C. (SENIOR AT A2/Prime-1) AND ITS GUARANTEED SUBSIDIARIES BUT MAINTAINS NEGATIVE RATING OUTLOOK
London, 08-12-97 -- Moody's Investors Service has confirmed the long- and short-term deposit (senior at A2/Prime-1), bank financial strength (C) and counterparty (A2) ratings of Bacob Bank S.C. (Bacob) and its guaranteed subsidiaries. This rating action concludes a review for possible downgrade initiated in May 1997.
The review, following the announcement that Bacob was acquiring Banque Paribas Belgique (BPB), the Belgian banking subsidiary of the Paribas group with assets of BEF 650 billion (approx. US$ 19 billion), focused on the terms and conditions of the acquisition and financing, and the longer-term impact on Bacob's financial fundamentals and its banking franchise in Belgium.
Moody's recognizes the opportunities afforded by Bacob's acquisition of BPB, which will facilitate entrance into the high-end of the corporate lending market in Belgium and the Netherlands and double the size of assets under management. Synergies also include the opportunity for Bacob to raise its visibility in the international markets, economies of scale and the prospect of leveraging its existing corporate client base. These synergies should enable Bacob to bolster its customer base and further diversify its income sources. Moody's said it was seeing opportunities for benefits mainly from revenue enhancement, and, to a lesser extent, from cost savings. Bacob's enhanced business profile at the regional level in Europe is a positive factor in the context of EMU.
The acquisition is financed through a combination of share and debt issues. Moody's notes that Bacob's financing mix adequately balances the raising of Tier 1 capital with that of Tier 2. In addition, the fact that Bacob is acquiring a series of stakes in BPB over a four-year period means a more gradual impact on its reported capital position.
However, Moody's maintains a negative rating outlook for the following reasons. Firstly, the acquisition leads to a deterioration of Bacob's true capitalization when allowing for the fact that Bacob will have full economic control of BPB at end-1997. Furthermore, Bacob's core profitability remains comparatively weak and Belgium's price competitive environment offers few opportunities for significant upside over the medium-term. The agency noted that Bacob's efficiency indicators continue to lag its domestic rivals despite some progress over the last four years. Similarly, revenue diversification remains relatively limited. Bacob's failure to reap the expected benefits from its acquisition of BPB could have some negative implications for the bank's ratings.
Finally, the integration of BPB represents a significant management challenge for Bacob. In particular, there is a risk that synergies may take longer to generate than expected. In addition, potential differences in corporate culture between Bacob and its new subsidiary could undermine the integration of the two operations and lead to some loss of BPB's customer franchise for Bacob.
The following ratings are affected:
* Bacob Bank S.C. – long-term bank deposits at A2, short-term deposits at Prime-1, bank financial strength at C and counterparty at A2
* Bacob Delaware Inc. – commercial paper guaranteed by Bacob Bank at Prime-1
* Bacob Finance N.V. – senior debt guaranteed by Bacob Bank at A2
* Bacob Overseas Limited – senior debt at A2 and subordinated debt at A3, both guaranteed by Bacob Bank.
Bacob Bank S.C., headquartered in Brussels, had consolidated assets of BEF 1,523 billion (approx. US$ 44 billion) at end-December 1996.
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