Paris, June 30, 2022 -- Moody's Investors Service ("Moody's") today affirmed the Aa2 long-term deposit ratings of Luxembourg-based Banque et Caisse d'Epargne de l'Etat (BCEE), its long-term senior unsecured debt ratings of Aa3 and its short-term deposit and programme ratings of Prime-1. The rating agency also affirmed BCEE's Baseline Credit Assessment (BCA) and Adjusted BCA of a2, as well as its long-term and short-term Counterparty Risk Ratings (CRR) of Aa1 and Prime-1, respectively, and long-term and short-term Counterparty Risk (CR) Assessment of Aa1(cr) and Prime-1(cr), respectively. The outlook on the bank's long-term deposit and senior unsecured debt ratings remains stable.
A list of all affected ratings is provided towards the end of this press release.
RATINGS RATIONALE
Baseline Credit Assessment (BCA)
The affirmation of BCEE's BCA of a2 reflects the bank's leading domestic market position, low risk profile, very strong capitalization and sound funding profile, supported by its strong deposit base.
BCEE's low risk profile is driven by its focus on domestic retail and commercial banking activities in a strong economy. However, BCEE is moderately vulnerable to the large individual exposures in its investment portfolio, mostly to the banking, sovereign and corporate sectors, which is of sound credit quality. The bank is also exposed to a downturn in the domestic housing market, due to its large mortgage portfolio representing 64% of total loan book, which has so far benefited from rapid population growth in the decade 2011-2021, boosting demand for new dwellings. Given a shortage of supply, house prices have risen faster than in most European peer countries (+108% increase in the housing price index for new and existing dwelling since 2011, compared to +42% for the EU average) and household indebtedness increased to 66% of GDP in 2021 from 58% in 2011. However, current increase in interest rates combined with higher inflation and construction costs could have a bearing on the real estate market, slow down lending activity and prompt additional cost of risk.
BCEE's capital is strong and provides a comfortable buffer against potential losses. As of December 2021, its Common Equity Tier 1 (CET1) capital ratio was 22.1%, well above most European peers. BCEE's ability to generate additional capital is however constrained by its moderate profitability, due to compressed net interest margins and its low-yielding investment portfolio. In Moody's view, the positive impact of higher interest rates will be offset by lower residential lending activity due to a deteriorating borrowing capacity, while cost of risk will increase due to the slowing economic growth. Moreover, operating expenses will continue to increase through wage inflation and investments required to upgrade IT systems and further develop digital banking.
BCEE's sound funding profile, reflecting its low reliance on market funding for its lending activity, shields the bank from the risk of an adverse shift in investor confidence. Notwithstanding its strong funding profile, reflected by a very low loan-to-deposit ratio of 68% in December 2021, a large part of BCEE's deposits is from institutional investors and large corporates, which are more prone to rapid outflows in a liquidity stress. In addition, despite its excess deposits over loans, the bank taps the capital markets to invest in securities and generate additional profits.
Long term ratings
BCEE's long-term deposit and senior unsecured debt ratings of Aa2 and Aa3, respectively, reflect very low and low loss-given-failure, leading to an uplift of two notches and one notch, respectively, from the bank's a2 Adjusted BCA. Moody's also expects a moderate probability of government support for BCEE, given its systemic importance to the national economy, resulting in an additional one-notch uplift for both deposits and senior unsecured debt.
OUTLOOK
The stable outlook on BCEE's long-term deposit and senior unsecured debt ratings reflects Moody's view that, despite the implications of current challenges arising from higher inflation and lower economic growth in Europe on asset risk and profitability, BCEE's low risk profile will continue supporting its strong solvency profile over the outlook horizon.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the BCA would be difficult to achieve, given its high level of a2, but could stem from a very material and sustainable increase in profitability, without an increase in asset risk. An upgrade of the BCA would likely lead to an upgrade of BCEE's long-term deposit and senior unsecured debt ratings.
The bank's long-term deposit and senior unsecured debt ratings could be upgraded if the bank were to issue a substantial amount of junior senior unsecured debt, Tier 2 or any other subordinated instruments, then providing greater protection to depositors and senior unsecured creditors in a resolution scenario.
A downgrade of the bank's BCA could result from (1) a deterioration in the quality of its loan portfolio and securities investments, notably through an increase in riskier investments; or (2) a prolonged decrease in profitability due to a durable and severe deterioration in the operating environment and higher operating costs. More generally, the BCA could be downgraded following a weakening of the bank's franchise in Luxembourg. A downgrade of BCEE's BCA would likely result in a downgrade of all its long-term ratings.
A downgrade of BCEE's debt and deposit ratings could also result from higher loss given failure if the volume of these instruments were to decrease or if the buffer of subordinated instruments were to be reduced.
LIST OF AFFECTED RATINGS
Issuer: Banque et Caisse d'Epargne de l'Etat
..Affirmations:
....Long-term Counterparty Risk Ratings, affirmed Aa1
....Short-term Counterparty Risk Ratings, affirmed P-1
....Long-term Bank Deposits, affirmed Aa2, outlook remains Stable
....Short-term Bank Deposits, affirmed P-1
....Long-term Counterparty Risk Assessment, affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment, affirmed P-1(cr)
....Baseline Credit Assessment, affirmed a2
....Adjusted Baseline Credit Assessment, affirmed a2
....Senior Unsecured Regular Bond/Debenture, affirmed Aa3, outlook remains Stable
....Senior Unsecured Medium-Term Note Program, affirmed (P)Aa3
....Subordinate Regular Bond/Debenture, affirmed A3
....Subordinate Medium-Term Note Program, affirmed (P)A3
....Commercial Paper, affirmed P-1
....Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook remains Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Roland Auquier
Vice President - Senior Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Olivier Panis
Senior Vice President
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
