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Rating Action:

Moody's affirms Dexia Credit Local's Baa3 senior unsecured rating with a stable outlook

31 Oct 2018

Dexia Crediop's senior unsecured debt rating affirmed at Baa3

Paris, October 31, 2018 -- Moody's Investors Service today affirmed the long-term senior unsecured debt and deposit ratings of Dexia Credit Local (DCL) at Baa3. The outlooks remain stable. This action follows the affirmation of DCL's baseline credit assessment (BCA) of b2.

DCL's short-term deposit ratings and short-term deposit note/CD program were affirmed at Prime-3. Moody's also affirmed DCL's long-term and short-term counterparty risk ratings (CRRs) of Baa3 and Prime-3 respectively, its long-term and short-term counterparty risk assessments (CR assessments) of Baa3(cr) and Prime-3(cr) respectively, its subordinated debt rating of B3 and its non-cumulative preferred stock rating of C(hyb). The Aa3 backed long-term and Prime-1 backed short-term program ratings of DCL, guaranteed by the governments of Belgium (Aa3 stable), France (Aa2 positive) and Luxembourg (Aaa stable) were unaffected by this rating action.

At the same time, Moody's affirmed Dexia Crediop S.p.A.'s (Dexia Crediop) BCA and adjusted BCA of b2, its long-term deposit and senior unsecured debt ratings of Baa3 with a stable outlook, its short-term deposit ratings of Prime-3, its long-term and short CRRs of Baa3 and Prime-3 respectively, and its long-term and short-term CR assessments of Baa3(cr) and Prime-3(cr) respectively.

A list of all affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

DEXIA CREDIT LOCAL

The BCA of b2 reflects Moody's view that the run-off plan for Dexia Credit Local has been unfolding without any major disruption thanks to the extraordinary support provided by the government of Belgium, France and Luxembourg through both the state-guaranteed debt programme and the capital injection of €5.5 billion by Belgium and France in December 2012. It also reflects the fact that there is a material risk that the entity might need additional support during its prolonged run-off period.

The bank's risk profile is slowly improving through de-risking. Since 2016, it has also been taking advantage of favourable market conditions to accelerate the reduction of its portfolio through asset disposals. Dexia group's total assets fell to €168 billion at end-June 2018 from €213 billion at year-end 2016 and €247 billion at year-end 2014.

However, the group's multi-year wind-down process still involves significant challenges. Although average asset quality is good, concentration risk is high. While DCL has a high level of capitalization with a reported consolidated group common equity Tier 1 ratio of 25% at end-June 2018, this is partly offset by the bank's inability to generate sustainable profits. The group is loss-making as a result of low asset margins and decreased revenues due to asset shrinkage, high cash collateral posting costs on derivatives, and increased regulatory costs. Even in the absence of significant loan losses, Moody's expects DCL to post further losses over the coming years. DCL's ability to continue to meet its solvency requirements will depend on the magnitude of future losses, and on whether its risk-weighted assets would decrease sufficiently quickly to offset the effect of capital depletion.

If DCL were to need further external support, Moody's believes that the probability of additional support from the governments of Belgium and France remains very high. Indeed, the current exposures of these governments to DCL via their equity investments and guarantees on funding are such that both have a strong interest in preventing the bank's default, both from (1) a liquidity perspective, as a default would render the states directly liable for maturing debts under the terms of their guarantee; and (2) a loss perspective, as losses would likely be greater in a liquidation.

Moody's also considers that any additional support needed from public authorities would not necessarily result in a resolution under the EU Bank Recovery and Resolution Directive (BRRD). Therefore, Moody's assumes that, in practice, DCL is out of the scope of the EU's BRRD and, hence, the agency does not apply its Advanced Loss Given Failure (LGF) approach as used for banks subject to operational resolution regimes. Instead Moody's applies its Basic LGF approach, which provides no uplift from the adjusted BCA for senior debt and deposits, and one notch of rating uplift for the CRR and CR assessment.

Moody's retains a very high probability of government support for the senior unsecured creditors, junior depositors, CRR liabilities and operational liabilities. This results in a five-notch uplift for the senior unsecured debt rating and deposit rating to Baa3. The Baa3 CRR and Baa3(cr) CR assessments incorporate four notches of government support uplift. Moody's considers that the CRR and operational liabilities of an entity already in resolution are unlikely to benefit from any additional protection compared with depositors and senior creditors.

The Basic LGF approach results in a rating one notch below the adjusted BCA for subordinated debt. The rating on preferred stocks is a further five notches lower at C(hyb), reflecting the fact that coupon payments and early redemption have been suspended on these securities, in accordance with the EC's decision of 2012. Government support assumption is low for subordinated and junior debts, resulting in no rating uplift.

DEXIA CREDIOP

Dexia Crediop, the Italian subsidiary of DCL, was placed in run-off in July 2014. Its run-off is intrinsically linked to the orderly resolution plan of its parent DCL. The bulk of the bank's funding is provided by DCL and its risk and capital management is closely linked to that of its parent. The affirmation of Dexia Crediop's BCA of b2 is based upon Moody's assessment of the bank as an entity Highly Integrated and Harmonized (HIH) with DCL, which better reflects its status and creditworthiness than an analysis of its standalone financials. Moody's therefore aligns Dexia Crediop's BCA with the b2 BCA of DCL.

Given DCL's exposure to its subsidiary, the likelihood of Dexia Crediop being resolved independently from the rest of DCL is very low. For this reason, Moody's applies the same Basic LGF approach to Dexia Crediop as to DCL, which provides no uplift from the adjusted BCA for senior debt and deposits, and one notch of rating uplift for the CRR and CR Assessment.

Moody's also assumes a very high government support assumption for Dexia Crediop's depositors, senior creditors, CRR and operational liabilities from the governments of France and Belgium. This assumption is based on Moody's view that the very high support for DCL from these two governments would very likely extend to Dexia Crediop since DCL provides a substantial proportion of its subsidiary's funding. The very high probability of government support translates into a five-notch uplift from the bank's adjusted BCA for the deposit and senior unsecured debt ratings to Baa3, and a four-notch uplift for the CRR and CR assessment to Baa3 and Baa3(cr) respectively.

WHAT COULD CHANGE RATINGS UP/DOWN

DCL's BCA could be upgraded as a result of the bank performing better-than-expected in the implementation of the orderly resolution plan. Given its run-off status, an upgrade of the bank's long-term ratings is unlikely, even if the BCA were upgraded.

Significant deviations from the trend set out in the resolution plan could trigger a downgrade of DCL's BCA, which, in turn, could lead to a downgrade of the bank's long-term deposit and senior unsecured ratings. Evidence from the guarantor states and/or national or European resolution authorities that additional government support would not be provided or under conditions detrimental to investors could also likely result in a downgrade of the bank's long-term deposit and senior unsecured ratings.

Any change in DCL's BCA or ratings will likely result in a change in Dexia Crediop's BCA and ratings. Although unlikely, moves to separate Dexia Crediop from DCL could lead to a downgrade of Dexia Crediop's BCA and ratings.

LIST OF AFFECTED RATINGS

Issuer: Dexia Credit Local

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed Baa3

....Short-term Counterparty Risk Ratings, affirmed P-3

....Long-term Bank Deposits, affirmed Baa3 Stable

....Short-term Bank Deposits, affirmed P-3

....Short-term Deposit Note/CD Program, affirmed P-3

....Long-term Counterparty Risk Assessment, affirmed Baa3(cr)

....Short-term Counterparty Risk Assessment, affirmed P-3(cr)

....Long-term Issuer Rating, affirmed Baa3 Stable

....Baseline Credit Assessment, affirmed b2

....Adjusted Baseline Credit Assessment, affirmed b2

....Senior Unsecured Regular Bond/Debenture, affirmed Baa3 Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)Baa3

....Subordinate Regular Bond/Debenture, affirmed B3

....Subordinate Medium-Term Note Program, affirmed (P)B3

....Preferred Stock Non-cumulative, affirmed C(hyb)

....Other Short Term, affirmed (P)P-3

..Outlook Action:

....Outlook remains Stable

Issuer: Dexia Crediop S.p.A.

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed Baa3

....Short-term Counterparty Risk Ratings, affirmed P-3

....Long-term Bank Deposits, affirmed Baa3 Stable

....Short-term Bank Deposits, affirmed P-3

....Long-term Counterparty Risk Assessment, affirmed Baa3(cr)

....Short-term Counterparty Risk Assessment, affirmed P-3(cr)

....Baseline Credit Assessment, affirmed b2

....Adjusted Baseline Credit Assessment, affirmed b2

....Senior Unsecured Regular Bond/Debenture, affirmed Baa3 Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)Baa3

..Outlook Action:

....Outlook remains Stable

Issuer: Crediop Overseas Bank Limited

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed Baa3 Stable

..Outlook Action:

....Outlook remains Stable

Issuer: Dexia Credit Local, New York Branch

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed Baa3

....Short-term Counterparty Risk Ratings, affirmed P-3

....Long-term Bank Deposits, affirmed Baa3 Stable

....Short-term Bank Deposits, affirmed P-3

....Long-term Counterparty Risk Assessment, affirmed Baa3(cr)

....Short-term Counterparty Risk Assessment, affirmed P-3(cr)

..Outlook Action:

....Outlook remains Stable

Issuer: Dexia Delaware LLC

..Affirmation:

....Backed Commercial Paper, affirmed P-3

..No Outlook assigned

Issuer: Dexia Funding Luxembourg S.A.

..Affirmation:

....Backed Preferred Stock Non-cumulative, affirmed C(hyb)

..No Outlook assigned

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies 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 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 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 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.

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
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
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

No Related Data.
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