Rating action concludes methodology and support-related reviews
NOTE: On December 21, 2015, the list of affected credit ratings accessible via hyperlink from the press release was corrected as follows: (i) the unsolicited credit ratings disclosure for Banque Internationale a Luxembourg was changed from “Not applicable” to “This rating was not initiated or not maintained at the request of the rated entity”; (ii) the participation in unsolicited ratings disclosure for Banque Internationale a Luxembourg was changed from “Not applicable” to “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.”; (iii) the paid for other services disclosure for Banque Internationale a Luxembourg was changed from “No” to “Not applicable.”
Paris, June 24, 2015 -- Moody's Investors Service has today concluded its rating reviews on three
banks based in Luxembourg (Aaa stable). These reviews were initiated
on 17 March 2015 (see press release at https://www.moodys.com/research/--PR_321005),
following the publication of Moody's new bank rating methodology and also
reflect revisions in Moody's government support assumptions for European
banks.
Moody's rating action on Luxembourg banks reflects the following considerations:
(1) the 'Very Strong -' Macro Profile of Luxembourg; (2) Luxembourg
banks' strong core financial metrics; (3) the protection offered
to senior creditors by substantial volumes and subordination of bail-in-able
securities, as captured by Moody's Advanced Loss Given Failure (LGF)
liability analysis; and (4) the reduced likelihood of government
support being forthcoming for these institutions in the event of need.
Among the actions Moody's has taken are the following:
- Baseline Credit Assessments (BCAs) and adjusted BCAs were upgraded
for two banks and affirmed for one bank;
- Long-term bank deposit ratings were upgraded for two banks
and downgraded for one bank;
- Long-term bank senior unsecured debt ratings were upgraded
for one bank, downgraded for one bank and confirmed for one bank.
Furthermore, Moody's affirmed the short-term deposit and
debt ratings for the three Luxembourg banks involved in today's rating
action. Concurrently, Moody's has also assigned Counterparty
Risk Assessments (CR Assessments) to these three banks, in line
with its new bank rating methodology.
Moody's has withdrawn the outlooks on all junior instrument ratings for
its own business reasons. Please refer to Moody's Investors Service's
Policy for Withdrawal of Credit Ratings, available on its website,
www.moodys.com.
Outlooks, which provide an opinion on the likely rating direction
over the medium term, are now assigned only to long-term
senior debt and deposit ratings.
Please click on the following link to access the full list of affected
credit ratings. This list is an integral part of this press release
and identifies each affected issuer:
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_182536
RATINGS RATIONALE
The new bank rating methodology includes a number of elements that Moody's
has developed to help more accurately predict bank failures and determine
how each creditor class is likely to be treated when a bank fails and
enters resolution. These new elements capture insights gained from
the crisis and the fundamental shift in the banking industry and its regulation.
(1) LUXEMBOURG'S "VERY STRONG -" MACRO PROFILE
Banks in Luxembourg benefit from the Grand Duchy's significant wealth
and strong debt metrics, as well as the strength of the institutional
framework and low susceptibility to event risk. Luxembourg's
ability to attract and retain foreign investors and a highly qualified
work force encourages innovation and growth in the financial and other
service sectors, which has contributed to raising and maintaining
a high level of GDP per capita. Furthermore, Luxembourg's
track record of fiscal prudence further supports the economy. However,
the economy is highly dependent on the health of the financial sector,
which accounts for around a third of Luxembourg's GDP and 12% of
total employment.
Luxembourg domestic retail banks take deposits through their branches,
but also through their private banking activities and through the treasury
services they provide for the country's very large fund management
industry. Limited lending opportunities within the small Luxembourg
economy means the deposits they take are typically greater than the loans
they give out. A wealthy working-age population, the
presence of foreign money in their private banking businesses and significant
treasury management activities also play a part in the banks' funding
strength.
The Luxembourg banking system does not suffer from excessive fragmentation
that could result in overcapacity and depressed profitability.
The systemically important financial institutions have very large cumulated
market shares in retail banking for private individuals and commercial
banking, allowing adequate pricing power and profitability.
Nonetheless, the Luxembourg banking system is competitive,
with no significant distortion from the public sector or sponsored institutions.
(2) LUXEMBOURG BANKS' STRONG CORE FINANCIAL METRICS
The three banks' median BCA is around baa1 (BCAs range from baa3 to a2),
which reflects (1) their strong core financial metrics including their
moderate risk profiles, focused on traditional commercial and retail
banking; (2) sound liquidity relying mainly on stable funding sources;
and (3) substantial loss-absorption capacity through earnings,
loan-loss reserves and, ultimately, capital.
Luxembourg banks' profitability is reduced by the current low interest-rate
environment.
(3) PROTECTION OFFERED TO SENIOR CREDITORS, AS CAPTURED BY MOODY'S
ADVANCED LGF LIABILITY ANALYSIS
Since Luxembourg banks are subject to the EU Bank Resolution and Recovery
Directive (BRRD), Moody's considers Luxembourg to have an Operational
Resolution Regime. Accordingly, Moody's applies its Advanced
LGF analysis to Luxembourg banks' liability structures. This analysis
results in a low to very low loss-given-failure for long-term
deposits and senior debt in most cases, reflected in a one or two-notch
uplift from the adjusted BCA for all banks. This approach captures
the protection offered by the banks' sizeable volumes of deposits and
senior debt, and the amount of debt subordinated to both senior
debt and deposits.
(4) REDUCED LIKELIHOOD OF GOVERNMENT SUPPORT
Moody's has lowered its expectations about the degree of support that
a government might provide to a bank in Europe. The main trigger
for this reassessment is the introduction of the BRRD in the EU,
which came into effect in January 2015 and is currently being transposed
into local law in each European jurisdiction. This has resulted
in a reduction in government support uplift in Moody's senior unsecured
debt and deposit ratings to one notch for the three Luxembourg banks as
they are all considered systemically important by Moody's.
The impact of this is partly and in some cases more than offset by the
notches of LGF uplift in recognition of the low loss-given-failure
described above.
ASSIGNMENT OF COUNTERPARTY RISK ASSESSMENTS
As part of today's rating action, Moody's has assigned CR Assessments
to three banks. CR Assessments are opinions of how counterparty
obligations are likely to be treated if a bank fails, and are distinct
from debt and deposit ratings in that they (1) consider only the risk
of default rather than the likelihood of default and the expected financial
loss incurred in the event of default and (2) apply to counterparty obligations
and contractual commitments rather than debt or deposit instruments.
The CR Assessment is an opinion of the counterparty risk related to a
bank's covered bonds, contractual performance obligations (servicing),
derivatives (e.g., swaps), letters of credit,
guarantees and liquidity facilities.
Moody's CR Assessments for banks subject to a going-concern operational
resolution regime, which includes all Luxembourg banks, start
with the banks' adjusted BCA and use an advanced LGF approach that takes
into account the volume of liabilities subordinated to counterparty obligations
in the bank's liability structure as well as any assumption of government
support.
As a result, the CR Assessments for two of the Luxembourg banks
is one notch higher than their deposit ratings, and for one bank
(BGL) it is two notches above the deposit rating.
--- SPECIFIC ANALYTICAL FACTORS FOR THE THREE BANKS
- Banque et Caisse d'Epargne de l'Etat (BCEE)
Moody's upgraded BCEE's BCA and adjusted BCA to a2 from a3,
reflecting the bank's stable profitability, strong liquidity
and capitalisation, as well as a its low-risk profile.
The upgrade also takes into consideration BCEE's reduced exposure
concentrations to highly-indebted European countries, including
Italy (Baa2 stable). The exposure to Italian government bonds,
which has represented close to 100% of tangible common equity (TCE)
in the past, has decreased to only one third of TCE in recent years
and is now thus less of a constraint on the BCA.
BCEE's long-term deposit ratings were downgraded to Aa2 from
Aa1 and its long-term senior unsecured debt ratings to Aa3 from
Aa1. The outlooks on the long-term deposit and senior unsecured
debt ratings are stable. These ratings result from (1) the bank's
adjusted BCA of a2; (2) the two-notch LGF uplift for deposits
and one-notch LGF uplift for senior debt given the large volume
of deposits and more limited amount of senior unsecured debt and subordination
below both deposits and senior debt; and (3) government support uplift
of one notch (from five notches previously), reflecting a moderate
probability of support. Although the Luxembourg government would
likely favour extending support to this state-owned bank in case
of need, Moody's notes that BCEE is now subject to the BRRD
and therefore the state's ability to act is more restricted than
previously. Moody's now believes that the probability of
government support for senior unsecured debt and deposits is moderate,
resulting in uplift of one notch for both ratings, in line with
other European banks considered systemically important.
Concurrently, Moody's affirmed the short-term deposit
and senior unsecured debt ratings at Prime-1 and upgraded the subordinated
debt rating to A3 from Baa1.
Moody's also assigned a long and short-term CR Assessment
of Aa1(cr)/Prime-1(cr) to BCEE.
- BGL BNP Paribas (BGL)
Moody's upgraded BGL's long-term deposit rating to A1 from
A2 and confirmed the senior unsecured debt rating at A2. Both the
short-term deposit and debt ratings were affirmed at Prime-1.
The bank's subordinated debt ratings were also affirmed at Baa1.
Furthermore, Moody's assigned a CR Assessment of Aa2(cr)/Prime-1(cr)
to BGL.
BGL's long-term deposit and senior unsecured ratings reflect
the bank's standalone BCA, which has been affirmed at a3,
owing to the bank's solid financial fundamentals. The deposit rating
also reflects a low loss-given-failure given the sizeable
volume of deposits, resulting in one notch of LGF uplift above the
bank's adjusted BCA. The loss-given-failure
of the bank's senior unsecured debt is however moderate, given
the limited volume of this debt category and the possibility of its subordination
to junior deposits in resolution, resulting in no LGF uplift.
Government support uplift is limited to one notch for both deposits and
senior unsecured debt, reflecting a moderate probability of support.
- Banque Internationale a Luxembourg (BIL)
Moody's upgraded BIL's BCA and adjusted BCA to baa3 from ba1,
reflecting the bank's recent track record of solid results since
the bank has been acquired by Precision Capital. The baa3 BCA reflects
(1) the bank's strong and stable core retail and commercial franchise
in Luxembourg; and (2) its sound financial fundamentals. Despite
some concentrations on sovereign bonds of peripheral European countries
in the investment portfolio, namely Italy, Ireland (Baa1 stable)
and Spain (Baa2 positive), these exposures do not constrain the
BCA at the baa3 level.
BIL's long-term deposit and senior unsecured debt ratings
were upgraded to A3 from Baa1. This results from (1) the bank's
adjusted BCA of baa3; (2) the two-notch LGF uplift for deposits
and senior debt from the baa3 adjusted BCA, given the large volume
of deposits and the amount of senior unsecured debt and subordination
below both deposits and senior debt; and (3) a moderate probability
of support from government support uplift of one notch (from three notches
previously) as we consider BIL to be a systemically important bank.
The outlooks on the long-term deposit and senior unsecured debt
ratings are positive. This reflects potential for an upgrade in
the BCA if the bank continues to accumulate a strong track record of earnings
stability whilst demonstrating clarity over its strategic direction,
which would likely result in an upgrade to the ratings.
Concurrently, Moody's upgraded BIL's subordinated debt
rating to Ba1 from Ba2 and junior subordinated debt rating to Ba2(hyb)
from Ba3(hyb). The rating agency also affirmed the bank's
Prime-2 short-term deposit and senior unsecured debt ratings.
Moody's also assigned a long and short-term CR Assessment
of A2(cr)/Prime-1(cr) to BIL.
WHAT COULD CHANGE THE RATINGS UP/DOWN
An upgrade of the long-term debt and deposit ratings of the Luxembourg
banks involved in this rating action could result from (1) a sustainable
and significant improvement in the banks' profitability; (2) a durable
improvement of asset quality, notably through lower exposures to
peripheral European sovereigns; and/or (3) further clarity of the
strategic direction and stability of financial results for BIL.
The ratings could be downgraded if (1) the macroeconomic environment weakens
and asset quality and/or credit underwriting standards deteriorate;
(2) revenue and profitability pressures intensify, especially if
banks are unable to re-price their loan portfolio against the background
of a low interest-rate environment; and/or (3) the banks'
capital and/or liquidity positions were to deteriorate.
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.
The following information supplements Disclosure 10 ("Information
Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J)
of SEC Rule 17g-7") in the regulatory disclosures made at
the ratings tab on the issuer/entity page on www.moodys.com
for each credit rating as indicated:
Moody's was not paid for services other than determining a credit
rating in the most recently ended fiscal year by the person(s) that paid
Moody's to determine this credit rating.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
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.
Guillaume Lucien-Baugas
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Nicholas Hill
Managing Director
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 concludes review on three Luxembourg banks' ratings
