Standalone Baseline Credit Assessment affirmed at b3
London, 04 November 2015 -- Moody's Investors Service has today affirmed KBC Bank Ireland PLC's
(KBCI) long-term deposit and senior unsecured debt ratings at Ba1.
The outlook on the ratings was changed to stable from negative.
The rating agency also affirmed the bank's standalone baseline credit
assessment (BCA) and adjusted BCA at b3 and ba1, respectively.
Additionally, Moody's affirmed KBCI's Counterparty Risk Assessment
(CR Assessment) at Baa1(cr)/P-2(cr). The bank's short-term
deposit ratings were affirmed at Not-Prime. Finally,
Moody's affirmed KBCI's Backed Commercial Paper ratings at
Prime-1.
This rating action reflects the stabilisation of the bank's credit fundamentals,
ongoing support from the parent, KBC Group NV, as well as
the results of Moody's Advanced Loss Given Failure (LGF) analysis.
RATINGS RATIONALE
---RATIONALE FOR THE BCA AND THE ADJUSTED BCA
KBCI's b3 BCA continues to reflect the bank's (1) very weak
asset quality with a problem loan ratio at approximately 50%,
which remains significantly higher than peers; (2) ongoing losses,
albeit declining thanks to an improving operating environment (3) reliance
on KBC Group NV for funding.
KBCI's weak asset risk metrics remain the bank's main credit
challenge. KBC Group reports an impaired loan ratio of 50%
for its Irish subsidiary as of June 2015, which is much higher than
that of KBCI's rated Irish and European peers.
The bank continues to be loss-making, although the size of
the reported losses is declining. The KBC Group's Irish business
reported a loss before tax of EUR5 million in the first half of 2015 compared
to a loss before tax of EUR112 million in the same period of 2014.
The improvement was driven by both strengthening net interest income (increase
of 43% year-on-year in H1 2015) and significant reductions
in impairment charges (down by 79%). Moody's expects
gradual improvements in KBCI's profitability driven by the positive
operating environment in Ireland.
KBCI still relies very heavily on its parent for funding, representing
58% of the bank's tangible banking assets as of December
2014. However, the bank has made significant progress in
increasing funding from customer deposits (up to EUR4.2 billion
as of December 2014 from EUR3.5 billion as of December 2013).
While Moody's considers the lack of funding independence as a relative
weakness, parental funding is also deemed to be less confidence-sensitive
than other types of wholesale funding.
KBCI's Adjusted BCA of Ba1 is based on Moody's assessment of the very
high probability of ongoing parental support from Belgium's KBC Bank NV
(A2 positive -- Deposit Rating, baa2 - BCA) which leads
to a five-notch uplift from its b3 baseline credit assessment.
This assessment is supported by the very substantial capital injections
that KBC Group has provided to KBCI over the past few years, and
the ongoing funding that it provides.
--- RATIONALE FOR THE DEPOSIT AND SENIOR DEBT RATINGS
The affirmation of KBCI's long-term deposit and senior unsecured
debt ratings at Ba1 and the affirmation of the short-term deposit
ratings at Not-Prime are based on the bank's adjusted BCA and the
results of Moody's Advanced LGF analysis.
KBCI is subject to an Operational Resolution Regime through Ireland's
implementation of the EU Bank Resolution and Recovery Directive (BRRD),
and Moody's therefore applies its Advanced LGF analysis. The following
standard assumptions are made: residual tangible common equity of
3% and losses post-failure of 8% of tangible banking
assets, a 25% run-off in "junior" wholesale deposits,
a 5% run-off in preferred deposits, and a 25%
probability to deposits being preferred to senior unsecured debt.
In addition, according to its public filed accounts, Moody's
calculates the proportion of deposits considered junior at 19%
of the bank's total deposits.
KBCI' deposits and senior unsecured debt are likely to face moderate loss-given-failure
driven by: (1) the modest amount of junior deposits and outstanding
third-party senior unsecured debt, and (2) the absence of
junior debt instruments in the liability structure which would otherwise
provide cushion for deposits and senior unsecured debt in loss absorption.
This results in a Preliminary Rating Assessment (PRA) of ba1 for both
deposits and senior unsecured debt, in line with the Adjusted BCA.
--- RATIONALE FOR THE CR ASSESSMENT
As part of today's action, Moody's also affirmed a Baa1(cr)/P-2(cr)
CR Assessment to KBCI, three notches above the adjusted BCA of ba1.
The CR Assessment is driven by the banks' standalone assessment,
support provided by the parent and by the presence of bail-in-able
deposits and debt in the liability structure which will likely shield
counterparty obligations from losses.
The CR Assessment, which is not a rating, reflects an issuer's
probability of defaulting on certain bank operating liabilities,
such as covered bonds, derivatives, letters of credit and
other contractual commitments. In assigning the CR Assessment,
Moody's evaluates the issuer's standalone strength and the likelihood,
should the need arise, of affiliate and government support,
as well as the anticipated seniority of counterparty obligations under
Moody's Advanced LGF framework. The CR Assessment also assumes
that authorities will likely take steps to preserve the continuity of
a bank's key operations, maintain payment flows, and avoid
contagion should the bank enter a resolution.
--- RATIONALE FOR THE STABLE OUTLOOK
The change in the outlook on the deposit and senior unsecured debt ratings
to stable from negative reflects Moody's expectation that KBCI's
credit fundamentals will continue to stabilise albeit from a weak level
supported by the improving operating environment.
WHAT COULD CHANGE THE RATINGS UP / DOWN
The BCA could be upgraded if KBCI achieves a sizable decline in the absolute
level of problem loans, while making further progress in improving
profitability and funding structure. A positive change in the bank's
BCA would likely be accompanied by a re-assessment of potential
support from the group and would not necessarily lead to an upgrade in
the bank's Adjusted BCA or its ratings.
The bank's BCA could be downgraded as a result of unexpected losses,
a failure to return to profitability, or a deterioration in capital.
A downward movement in KBCI's BCA would likely result in downgrades
of all ratings. A negative change in instrument ratings could also
come from an indication of weakening ties, for example a reduction
of funding inter linkages, between KBC Bank N.V. and
KBCI, which may result in lower affiliate support assumptions.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
March 2015. 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.
This rating was not initiated or not maintained at the request of the
rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. On
this basis, the rated entity or its agent(s) is considered to be
a participating entity. The rated entity or its agent(s) generally
provides Moody's with information for the purposes of its ratings
process.
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.
Carlos Suarez Duarte
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Nicholas Hill
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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Moody's affirms KBC Bank Ireland's long-term deposit and senior unsecured ratings at Ba1 and changes outlook to stable from negative
