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Rating Action:

Moody's confirms Banque Internationale à Luxembourg's Baa1 long-term ratings; outlook stable

16 Oct 2012

Prime-2 short-term rating confirmed; standalone BFSR upgraded to D+ from D

Paris, October 16, 2012 -- Moody's Investors Service has today confirmed the Baa1 senior unsecured debt and deposit ratings of Banque Internationale à Luxembourg (BIL), with a stable outlook, and the Prime-2 short-term debt and deposit ratings. At the same time, Moody's upgraded BIL's standalone bank financial strength rating (BFSR) to D+ (equivalent to a standalone credit assessment of ba1), with a stable outlook, from D/ba2 on review with direction uncertain.

Today's upgrade of BIL's standalone BFSR to D+/ba1, stable outlook, reflects (1) its improved risk profile following its exit from the Dexia group; (2) the stabilisation of BIL's core retail and commercial franchise in Luxembourg; and (3) its sound post-closing financial fundamentals. BIL's standalone BFSR is still constrained by certain challenges including (1) its operational de-linkage from the Dexia group; (2) the lack of sufficient hindsight for assessing the stabilisation of the bank's franchises; and (3) challenges surrounding the private-banking activities.

In addition, the confirmation of BIL's Baa1 long-term debt and deposit ratings, with a stable outlook, reflects (1) BIL's ba1 standalone credit strength; and (2) Moody's continued assumption that there is a very high likelihood the Grand Duchy of Luxembourg (Aaa, negative) would provide systemic (government) support to BIL, in case of need.

BIL's subordinated debt and junior subordinated debt ratings were upgraded to Ba2 from Ba3 and to Ba3(hyb) from B1(hyb), respectively. Both ratings, which were previously on review with direction uncertain, were assigned a positive outlook. At the same time, Moody's confirmed the rating of BIL's non-cumulative preferred stock at B3(hyb) and revised its outlook to positive from on review with direction uncertain.

Today's rating actions conclude Moody's review of BIL's long- and short-term senior unsecured ratings initiated on 3 October 2011 and follows the completion of the sale of BIL to Precision Capital (unrated) on 5 October 2012.

RATINGS RATIONALE --- BFSR UPGRADE

FIRST DRIVER --- EXIT FROM THE DEXIA GROUP

The upgrade of BIL's standalone BFSR to D+/ba1 partly reflects (1) BIL's exit from the Dexia group and sale to the Qatari investment fund, Precision Capital, effective 5 October; and (2) the bank's limited residual exposures to Dexia group. At the closing of the transaction, BIL had no senior unsecured exposures to Dexia's entities and all legacy assets had been transferred to Dexia Credit Local (DCL; Baa2 deposits, negative; BFSR E/BCA caa1 stable, Prime-2). The residual exposures to Dexia, including EUR46 million of covered bonds issued by Dexia Municipal Agency and less than EUR1 billion of mark-to-market exposure to interest-rate swaps, which are daily cash-collateralised, present limited credit risk in Moody's opinion (source: company presentation).

SECOND DRIVER --- PRESERVED CORE FRANCHISE

The standalone BFSR upgrade also reflects the stabilisation of BIL's core retail and commercial franchise in Luxembourg. Although the situation with Dexia during Q3 2011 weakened BIL's credit profile, as it experienced large deposit outflows, Moody's believes that BIL managed to preserve its core franchise. The deposit outflows were mainly concentrated on large private-banking customers and institutional clients and have ceased since the signature of the preliminary agreement of 20 December 2011 between Dexia, the State of Luxembourg and Precision Capital. BIL's H1 2012 operating performance seemed to confirm a stabilisation of the bank's franchise with growth witnessed in customer deposits and assets under management. BIL's new perimeter -- which excludes the former participations in Dexia Asset Management, RBC Dexia Investor Services, Dexia LDG Banque, Parfipar and Popular Banca Privada -- leaves the bank with (1) strong positions in Luxembourg retail and commercial banking, ranking third in market shares; and (2) an established private-banking franchise with EUR17 billion of assets under management, as of year-end 2011.

THIRD DRIVER --- ROBUST CREDIT FUNDAMENTALS

Additionally, Moody's believes that BIL displays sound post-closing financial fundamentals. BIL's new capitalisation appears adequate, with a Basel-2 core Tier 1 ratio in excess of 15%, equivalent to 9% under Basel 3, due to a capital injection by the Dexia group (source: Dexia's press release, 5 October 2012). Similarly, BIL's liquidity position is strong, as it benefits from an ample deposit base stemming from its retail and private-banking franchises. The bank exhibits a level of deposits structurally in excess of its loan book (Moody's estimates the pro forma loan-to-deposit ratio at approximately 75%). Recurring profitability appears strong in the context of the mature Luxembourg retail and commercial banking market, with expected net income above 2% of Basel II risk-weighted assets and a cost/income ratio of around 65% in 2012 on a pro-forma basis, and should offer a satisfactory level of stability, in Moody's opinion.

--- BFSR CONSTRAINING FACTORS

Despite these strengths, several challenges constrain BIL's standalone BFSR, including (1) operational de-linkage from the Dexia group; (2) the lack of sufficient hindsight for assessing the stabilisation of the bank's franchises after the recent events; and (3) the current challenges surrounding BIL's private-banking activities. Moody's believes that BIL's transition to a standalone bank presents inherent credit risks linked to BIL's need to create certain functions that were previously centralised at the group level. Firstly, BIL has had to transition towards in-house risk-management and liquidity management functions, requiring certain IT investments and additional staff resources. Moody's positioning of the standalone credit assessment at ba1 reflects these transition efforts which need to be assessed over time. The lack of historical data following last year's events around the Dexia group also provides for a transition period during which Moody's will assess the sustainability of the stabilisation of BIL's core franchise. Lastly, only 30% of BIL's private banking clients are Luxembourg residents, suggesting that it might need to convert clients to on-shore banking rapidly, in the context of increased regulatory and tax scrutiny. This could generate additional costs and reveal the bank's lack of critical mass in this sector, in Moody's opinion.

However, although Moody's has assigned a stable outlook to the D+ BFSR, the rating agency says that there is a degree of upwards pressure on BIL's standalone credit assessment, reflecting the stable nature of BIL's core retail and commercial activities, and Moody's expectations for a successful transition towards a fully independent bank from a risk-management standpoint. Moody's BFSR scale is non-linear; as such, a D+ BFSR can be equivalent to a standalone credit assessment of either ba1 or baa3. Although these upward pressures might prompt a baa3 standalone credit assessment at some point in the future, the BFSR would remain at D+, hence the stable outlook.

SENIOR DEBT RATINGS UNDERPINNED BY HIGH PROBABILITY OF SYSTEMIC SUPPORT IN CASE OF NEED

The confirmation of BIL's long and short-term debt and deposit ratings at Baa1/P-2 directly follows the upgrade of the standalone BFSR. Moody's continues to believe that BIL benefits from a very high probability of systemic support due to the combination of the following factors:

(1) The fact that the Luxembourg has previously extended systemic support to BIL through Dexia during the crisis;

(2) The post-sale 10% state-ownership, advocating further support in case of need; and

(3) The bank's systemic importance for the domestic economy, where it holds major positions in retail and commercial banking.

For these reasons, Moody's incorporates three notches of systemic uplift from the ba1 standalone credit strength into BIL's Baa1 senior debt ratings.

SUBORDINATED AND JUNIOR SUBORDINATED DEBT RATINGS

Moody's has upgraded BIL's subordinated debt and junior subordinated debt ratings one notch to Ba2 and Ba3(hyb) respectively, both with a positive outlook. These upgrades mirror the raising of BIL's adjusted standalone credit assessment to ba1. BIL's subordinated and junior subordinated debt ratings are notched off the adjusted standalone credit assessment, respectively by one and two notches. The adjusted standalone credit assessment is equal to the standalone credit assessment, as Moody's does not incorporate parental support uplift from BIL's new parent, Precision Capital.

Moody's has confirmed BIL's non-cumulative preferred stock at B3(hyb), now with a positive outlook. BIL's 2011 losses caused a EUR33 million principal write-down on this instrument, the indenture of which contains loss-absorbing features. BIL subsequently skipped three quarterly coupons in 2012. Before paying dividends, BIL must replenish the instrument's nominal and pay coupons during two consecutive years, or redeem the security at par on a quarterly call date. Moody's believes that there is a high likelihood that BIL will want to be in a position to pay dividends as soon as possible and therefore that the instrument will not eventually incur capital losses. The B3(hyb) rating reflects the current nominal loss that the instrument has incurred, as well as the non-cumulative nature of its coupons. The positive outlook reflects the likely replenishment of the nominal in the near future, in Moody's opinion.

WHAT COULD MOVE THE RATINGS UP / DOWN

Upwards rating pressure on the bank's standalone BFSR could develop if (1) BIL successfully manages its operational de-linkage from the Dexia group and (2) BIL's franchise confirms its stabilisation over the next 12-18 months.

However, downwards pressure on BIL's standalone BFSR and senior unsecured ratings might develop if (1) BIL's franchise fails to stabilise on a longer-term basis; or (2) if its risk profile increases. This could occur depending on the constitution of its new investment portfolio, or if BIL engages in overly aggressive international expansion in private banking.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. 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 relevant 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 relevant 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 relevant 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

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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.

Guillaume Lucien-Baugas
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
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SUBSCRIBERS: 44 20 7772 5454

Moody's confirms Banque Internationale à Luxembourg's Baa1 long-term ratings; outlook stable
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