MOODY'S DOWNGRADES THE LONG-TERM DEPOSIT AND FINANCIAL STRENGTH RATINGS OF KREDIETBANK N.V. TO Aa3/B AND UPGRADES THE LONG-TERM DEPOSIT AND FINANCIAL STRENGTH RATINGS OF CERA BANK C.V. TO Aa3/B IN ANTICIPATION OF THE TWO BANKS' MERGER
London, 04-23-98 -- Moody's downgraded the ratings of Kredietbank N.V. for long-term deposit and senior debt to Aa3 from Aa2 and for bank financial strength to B from B+. At the same time, Moody's upgraded the ratings of CERA Bank C.V. for long-term deposit and senior debt to Aa3 from A1 and for bank financial strength to B from C+. According to Moody's, these rating actions conclude a review process initiated in January following the announcement of Kredietbank's and CERA's intention to merge later on in 1998. Through these rating actions, Moody's effectively assigns new long-term deposit and debt and financial strength ratings of Aa3/B to the new banking group which will arise from the merger of Kredietbank and CERA. The two banks' short-term ratings had not been placed under review and were confirmed at Prime-1.
These ratings reflect the new bank's leading market shares in the Belgian banking market, which will allow it to operate from a position of strength and should enable it to withstand any increase in competition from new entrants into the market post-EMU. Moody's noted that the merger of Kredietbank and CERA notably creates a financial powerhouse in Flanders, one of Europe's more economically dynamic regions. In light of the complementarities between Kredietbank and CERA in terms of client base, branch networks, business profile and funding mix, their merger will create one of the more diversified banking groups in Belgium. The new group will be controlled by Almanij, a leading Belgian financial services group, but the merger with CERA will lead to the entrance of CERA shareholders into Almanij's capital.
Although the merger of Kredietbank and CERA gives birth to a banking group with greater critical mass at the European level, a positive development ahead of EMU, the new group nevertheless remains a second-tier player at the European level. Looking forward, the new group's solid capitalization and access to share capital financing afford it the resources necessary to expand autonomously. Yet, Moody's notes that the new group's declared strategy of international expansion through acquisitions raises potential issues both in terms of solvency and asset quality.
Domestically, Kredietbank and CERA's merger is expected to afford the new bank opportunities for cross-selling and economies of scale. Cross-selling opportunities should mainly arise in "bancassurance" as a result of the new bank's partnership with its sister company, the insurance group which will itself ensue from the merger of CERA's insurance affiliate ABB N.V. with Kredietbank's insurance subsidiaries. However, Moody's said that the fact that the new insurance group is a sister company of the new banking group rather than a subsidiary should somewhat limit the revenue upside for the banking group.
In terms of economies of scale, management anticipates cost savings over the medium-term from staff and network rationalization as well as the integration of the two merging banks' information technology systems, capital markets operations, and support and administrative functions. However, integrating the two banks post-merger will first generate additional outlays notably in terms of information technology adjustments, early retirement packages and wage level equalization. As a result, Moody's expects that the new banking group's cost base will first be negatively affected by the merger of its two constituent banks. The rating agency also considers that generating the expected productivity gains represents a significant management challenge notably as regards information technology systems.
The new banking group's credit fundamentals should be characterized by adequate profitability, sound asset quality, high liquidity and solid capitalization. Performance indicators should notably evidence (i) unimpressive margins, (ii) a dependence on net interest income, and (iii) good efficiency. Low margin levels reflect the low-risk nature of the new group's balance sheet as well as pressure on interest spreads owing to stiff competition among Belgian banks on both sides of the balance sheet. Because CERA is essentially domestic in focus and less diversified across revenue sources than Kredietbank, the new banking group should exhibit both a reliance income from domestic activities as well as a dependence on net interest earnings, a negative factor in a context of narrowing margins.
The new banking group should post regulatory capital ratios above peer levels notably owing to excess capitalization at CERA. True economic capitalization should remain understated given the continued presence of substantial hidden reserves and large unrealized capital gains in the new bank's investment portfolios. The set-up of the new banking group will give it greater potential access to fresh capital than was true of both Kredietbank and CERA on their own since Almanij can sustain a dilution of its stake from its original level of 67% while still retaining majority control. Moody's thus expects the new banking group to maintain good capital ratios despite its plans for international expansion through acquisitions.
The following ratings were downgraded:
Kredietbank N.V. – long-term bank deposits to Aa3 from Aa2, bank financial strength to B from B+ and long-term senior debt to Aa3 from Aa2;
Kredietbank International Finance N.V. – senior debt guaranteed by Kredietbank to Aa3 from Aa2 and subordinated debt guaranteed by Kredietbank N.V. to A1 from Aa3;
Kredietbank Ifima N.V. – subordinated debt guaranteed by Kredietbank N.V. to A1 from Aa3.
The following ratings were upgraded:
CERA Bank C.V. – long-term deposits to Aa3 from A1 and bank financial strength to B from C+;
Cerinvest N.V. – senior debt guaranteed by CERA Bank C.V. to Aa3 from A1.
The followings ratings had not been placed under review and were confirmed:
Kredietbank N.V. – short-term bank deposits at Prime-1;
Kredietbank North America Finance Corporation – commercial paper guaranteed by Kredietbank N.V. at Prime-1;
CERA Bank C.V. – short-term bank deposits at Prime-1;
CERA Finance North America Inc. – commercial paper guaranteed by CERA Bank C.V. at Prime-1.
Kredietbank N.V., headquartered in Brussels, Belgium, had consolidated assets of BEF4,168 billion (approximately US$113 billion) at end-December 1997. Headquartered in Leuven, Belgium, CERA Bank C.V. had consolidated assets of BEF1,668 billion (approximately US$45 billion) at end-December 1997. The new banking group will start operations with total assets of BEF5,822 (approximately US$158 billion).
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