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Rating Action:

Moody's affirms Belfius Bank's senior unsecured rating at Baa1/P-2; outlook stable

14 May 2014

Belfius Bank's BFSR upgraded to D+/ba1; outlook stable

Paris, May 14, 2014 -- Moody's Investors Service has today affirmed Belfius Bank SA/NV's and its supported long-term and short-term senior unsecured and deposit ratings at Baa1/Prime-2. The rating agency concurrently upgraded Belfius Bank's standalone bank financial strength rating (BFSR) to D+ -- equivalent to a ba1 baseline credit assessment -- from D-/ba3. The outlook is stable on the long-term ratings and the BFSR.

The upgrade reflects (1) the bank's progress in rebranding the bank and recovering customer operations; (2) the material improvement in liquidity over the past two years; and (3) the improved risk profile as a result of reduced exposure to Dexia Credit Local (DCL; Baa2 negative/Prime-2, E stable /ca) and asset disposals. However, the BFSR remains constrained by the still-limited visibility on the bank's profitability, the existence of high concentrations in its investment portfolio, and the legacy portfolio that it inherited from Dexia Group, which continues to weigh on the bank's capital and liquidity.

In addition, Moody's has upgraded Belfius Bank's and its supported subordinated debt to Ba2 from B1, and Belfius Financing Company S.A's backed junior subordinated debt rating to Ba3(hyb) from B2(hyb), as a reflection of Belfius Bank's higher standalone credit strength. The outlook is stable on these ratings. Belfius Bank's 6.25% cumulative junior subordinated debt rating remains unaffected at Caa1 (hyb) due to the ban on coupon payments that the European Commission (EC) imposed on these securities until the end of 2014.

Please refer to the list of affected debts at the end of this report.

RATINGS RATIONALE

The upgrade of Belfius Bank's standalone credit strength reflects the following drivers.

-- PROGRESS ACHIEVED IN REBRANDING THE BANK AND RECOVERING CUSTOMER OPERATIONS

The bank's franchise was affected by the credit deterioration of its previous owner Dexia Group in 2011, but the situation has materially improved since October 2011 under the ownership of the Kingdom of Belgium (Aa3 stable). The new name aimed to distance its image from Dexia Group and signaling that the bank would take a different direction by focusing on serving its domestic core markets. Belfius's brand recognition rate is now in line with that of its main peers. Customer funding, which had dropped to around EUR76 billion in November 2011 has recovered to EUR79.5 billion at year-end 2013, as reported by the bank.

-- MATERIAL IMPROVEMENT IN LIQUIDITY

Belfius Bank's improved liquidity since 2011 is evidenced by the circa 65% decrease in its reliance on central bank and secured short-term funding to EUR22 billion at year-end 2013 or 12% of its total balance sheet based on Moody's estimates. These funding sources accounted for 27% of the bank's total liabilities at year-end 2011. The residual central bank funding at year-end 2013 is limited to the EUR13.5 billion LTRO from the European Central Bank, which finances EUR13.4 billion state-guaranteed debt issued by DCL.

This progress was primarily achieved thanks to the drastic decrease in the financing provided to DCL over the period. Additionally, as a result of the recovery in deposits, Belfius Bank currently has excess customer funds over loans that are used to finance its other assets. The successful issuances of covered bonds under the Belgian legislation in place since 2012 have also allowed the bank to lengthen the term structure of its wholesale funding.

-- IMPROVED RISK PROFILE AS A RESULT OF REDUCED EXPOSURE TO DCL AND ASSET DISPOSALS

Moody's considers that credit risks related to DCL have now subsided sufficiently and the rating agency does not expect material losses to stem from the current legacy portfolio in a base case scenario. The bank reports that gross and net exposures to Dexia Group entities decreased to EUR13.4 billion (state-guaranteed debt) and nil, respectively at year-end 2013, from circa EUR56 billion and EUR22.6 billion, respectively at end-September 2011. Belfius Bank also carried out circa EUR7.5 billion de-risking operations in its investment portfolio since the end of 2011, notably in the legacy bond portfolio in run-off inherited from Dexia Group, which decreased EUR5.9 billion over the period to EUR12.4 billion at year-end 2013.

-- CONSTRAINTS ON THE STANDALONE CREDITWORTHINESS

The following challenges continue to constrain Belfius Bank's intrinsic creditworthiness:

(1) While the volatility observed in the bank's result over the past two years limits the visibility on its ability to generate sufficient profit in the near future to increase its loss-absorption capacity, the recurring profit prospects remain relatively weak in our view.

(2) Belfius is exposed to high credit concentrations in both its investment portfolio and core public-sector lending operations. In particular, the bank's portfolio of Italian government bonds and Spanish covered bonds imply some tail risk, despite the positive effects of the selective de-risking operations the bank carried out in 2012 and 2013;

(3) The holding of the legacy bond portfolio weighs on Belfius's bottom line profitability because of the very low spreads over LIBOR that it generates, resulting in limited profitability for this portfolio. It also weighs on the bank's capital by generating non-negligible negative AFS reserves and risk-weighted assets that are prone to volatility depending on the evolution of markets, and to a lesser extent on its liquidity.

-- DEBT & DEPOSIT RATINGS

As a result of the upgrade of Belfius Bank's standalone BFSR, the systemic uplift from the bank's BCA has reduced to three notches from five, which included some extraordinary support from the Belgian government, the bank's 100% owner. Belfius Bank's Baa1 debt and deposit ratings continue to incorporate a very high probability of systemic support from the Belgian government, if needed.

--- RATIONALE FOR THE OUTLOOKS

The outlook is stable on Belfius Bank's BFSR, consistent with Moody's view that the firm's standalone BCA incorporates all currently foreseeable risks over the outlook period.

The outlook is stable on Belfius Bank's and its supported long-term senior unsecured and deposit ratings, in line with the outlook on the firm's BFSR.

-- SUBORDINATED AND HYBRID DEBT

The upgrade of Belfius Bank and its supported subordinated debt ratings to Ba2 from B1 is triggered by the upgrade of the bank's BFSR.

The upgrade of Belfius Financing Company's backed junior subordinated debt rating to Ba3 (hyb) from B2(hyb) was also triggered by the upgrade of the bank's standalone BFSR. Belfius Financing Company's backed junior subordinated debt rating is positioned two notches below Belfius Bank's adjusted BCA (equivalent to the bank's standalone BCA in the absence of parental and cooperative support).

All the above ratings carry a stable outlook.

WHAT COULD CHANGE THE RATINGS UP / DOWN

Belfius's BFSR and thus its senior ratings could be upgraded as a result of (1) further reduction in risk concentrations in its investment portfolio without materially affecting the bank's capital base; or (2) evidence of further recovery and stabilisation in its profitability; or (3) further significant improvement in its liquidity position.

Factors that may exert negative pressure on Belfius's standalone credit strength include (1) deterioration in its liquidity position that may result from difficulties in accessing stable funding; (2) a significant increase in credit losses stemming from the investment portfolio or the loan book; and/or (3) an inability to generate sufficient profit to further strengthen its capital base.

The bank's senior ratings could be downgraded if (1) Moody's downgrades the BFSR; or (2) Belgian sovereign debt experiences a multi-notch rating downgrade. In addition, a downward revision of Moody's current assumptions of government (systemic) support -- which may arise in the context of the new Bank Recovery and Resolution Directive -- could also have adverse implications for the Baa1 long-term ratings.

LIST OF AFFECTED RATINGS

The following ratings were upgraded with a stable outlook:

- Belfius Bank's BFSR to D+/ba1, from D-/ba3

- Belfius Bank subordinated debt to Ba2 from B1

- Belfius Financing Company's backed subordinated debt to Ba2 from B1

- Belfius Financing Company's backed junior subordinated debt to Ba3 (hyb), from B2 (hyb)

The following ratings were upgraded:

- Belfius Bank's provisional subordinated MTN programme rating to (P)Ba2, from (P)B1

- Belfius Financing Company's backed provisional subordinated MTN programme rating to (P)Ba2, from (P)B1

- Belfius Financing Company's backed provisional junior subordinated MTN programme rating to (P)Ba3, from (P)B2

The following ratings were affirmed with a stable outlook:

- Belfius Bank's senior unsecured debt and deposit ratings, at Baa1

- Belfius Financing Company's backed senior unsecured debt, at Baa1

The following ratings were affirmed:

- Belfius Bank's provisional senior unsecured MTN programme rating, at (P)Baa1

- Belfius Bank's short-term deposit ratings, at Prime-2

- Belfius Bank's long-term Deposit Note/CD Programme rating at (P)Baa1

- Belfius Bank's short-term Deposit Note/CD Programme rating at (P)Prime-2

- Belfius Financing Company's backed provisional senior unsecured MTN programme rating, at (P)Baa1

- Belfius Financing Company's backed commercial paper rating, at Prime-2

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Yasuko Nakamura
Vice President - Senior Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Belfius Bank's senior unsecured rating at Baa1/P-2; outlook stable
No Related Data.
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