BFSR downgraded to C/a3; actions conclude review announced on 15 February 2012
Paris, June 15, 2012 -- Moody's Investors Service has today downgraded the senior debt and deposit
ratings of Banque et Caisse d'Epargne de l'Etat (BCEE) to Aa1 from Aaa,
prompted by the downgrade of the standalone bank financial strength rating
(BFSR) to C (mapping to an a3 standalone credit assessment) from C+/a2.
The short term Prime-1 ratings were unaffected. The outlook
is stable on all ratings.
Today's downgrade of BCEE's standalone rating to a3 is due
to (i) the bank's material borrower and industry concentrations,
notably to Italian government bond holdings and to the European banking
sector in general; and (ii) the bank's vulnerability to an
economic deterioration of the operating environment in Europe, including
Luxembourg, which could ultimately affect its asset quality.
The positioning of BCEE's long-term ratings at Aa1 reflects
(i) the standalone credit assessment of BCEE; and (ii) Moody's
continued assumption of very high systemic support being extended from
the Grand Duchy of Luxembourg (Aaa, stable) to BCEE in case of need,
based on the 100% state ownership and the bank's leading
market shares in Luxembourg with around 43% of domestic retail
mortgages based on central bank data.
Moody's notes that several mitigating factors have limited the magnitude
of today's downgrades. Firstly, the bank's liquidity
position is amongst the strongest across European banking peers.
Secondly, BCEE's large portion of retail activities provides
a certain degree of earnings stability, which has allowed the bank
to strengthen its capital position and therefore improve its ability to
absorb unexpected losses.
The rating action on the BFSR and the long-term debt and deposit
ratings concludes the review initiated on 15 February 2012 (see "Moody's
reviews Ratings for European Banks" - http://www.moodys.com/research/Moodys-Reviews-Ratings-for-European-Banks--PR_237914)
while the rating action on the subordinated debt ratings concludes the
review of those ratings initiated on 29 November 2011(see Moody's reviews
European banks' subordinated, junior and Tier 3 debt for downgrade
- http://www.moodys.com/research/Moodys-reviews-European-banks-subordinated-junior-and-Tier-3-debt--PR_231957).
Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143132
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
For additional information on bank ratings, please refer to the
webpage containing Moody's related announcements http://www.moodys.com/bankratings2012
RATINGS RATIONALE
The lowering of BCEE's standalone rating, and debt and deposit ratings,
primarily reflects the following rating drivers:
FIRST DRIVER --- LARGE INDIVIDUAL AND INDUSTRY BORROWER
CONCENTRATIONS
As a consequence of its historical excess of funding over its lending
activities, the bank has a large liquidity position in the form
of a sizeable investment portfolio, which exhibits material credit
risk concentrations. This portfolio remains highly concentrated
on the European banking and sovereign sectors and is significant relative
to BCEE's capitalisation. In the context of the current worsening
euro area debt crisis, Moody's believes that BCEE's
investment portfolio is more vulnerable than before. Despite the
sizeable reduction of its exposures to Italian government bonds --
net exposure of EUR980 million as per unaudited Q1 2012 financials,
compared with EUR2.3 billion according to audited FYE 2010 financials
-- this exposure remains significant, representing
53% of the bank's Tier 1 capital (EUR1.8 billion as
per unaudited Q1 2012 financials). Similarly, the ten largest
senior unsecured banking exposures represented EUR3.7 billion at
end-March, equivalent to 200% of Tier 1 capital.
Set against this, Moody's notes that the banks' bond
portfolio remains highly liquid and exhibits high credit-quality
assets. However, its high concentration constrains the bank's
standalone rating at the C/a3 level.
SECOND DRIVER --- VULNERABILITY TO DETERIORATING
OPERATING ENVIRONMENT
With leading and unthreatened market shares in retail banking, the
bank is mainly exposed to Luxembourg's economy. Luxembourg
remains one of the strongest economies in the euro area; however,
Moody's notes the bank operates in a comparatively small market.
Moody's anticipates that the worsening euro area debt crisis and
the difficult overall European operating environment will lead to mounting
negative pressures on the overall asset quality of Luxembourg banks,
including BCEE.
BCEE's loan book is primarily exposed to domestic mortgages.
Although the Grand-Duchy's housing market has proven resilient
so far, Moody's notes that it has been supported partly by
high inflows of employees in Luxembourg, which is an important European
financial center. Moody's notes that the attractiveness of
the Grand-Duchy as a workplace could decrease during economic downturns
which in turn could result in lower demand for properties and thus negatively
affect house prices. In addition, BCEE exhibits large exposures
to domestic corporates and SMEs, which are likely to be particularly
vulnerable to the current macroeconomic cycle. For this reason,
Moody's expects asset-quality to deteriorate in the short-to-medium
term. This, in turn, would reduce the bank's
overall profitability through higher provisioning costs.
MITIGATING FACTORS
Moody's notes that several mitigating factors have limited the magnitude
of today's downgrades. Firstly, BCEE is not structurally
reliant on market funds, and is therefore considered to be less
vulnerable to investor confidence than many of its European peers.
This is reflected by the bank's low loan-to-deposit
ratio of 68% as at year-end 2011. Deposits represent
nearly two-thirds of the bank's balance sheet according to audited
2011 financials and mainly comprise saving deposits which we generally
consider less credit sensitive by nature. Additionally, Moody's
considers that BCEE's large securities portfolio represents a solid
liquidity buffer. As at year-end 2011, the bank's
investment portfolio comprised EUR10.4 billion of liquid assets
immediately eligible for central bank refinancing, after haircut,
representing roughly one quarter of total assets. Moody's
considers BCEE's liquidity position as being amongst the strongest
across European banking peers.
Secondly, BCEE's large portion of retail activities provides
a certain degree of earnings stability, which allowed the bank to
strengthen its capital position and therefore improve its ability to absorb
unexpected losses. Although currently modest, the profitability
of retail activities continues to prove resilient. Moody's
believes that BCEE's low risk profile -- as illustrated by its retail-focused
franchise -- and liquid balance sheet could help alleviate
the effects of economic cycles.
RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS
The downgrades of BCEE's debt and deposit ratings reflect the one
notch lowering of the bank's standalone credit assessment to a3.
BCEE's Aa1 senior unsecured long-term ratings continue to
incorporate a very high probability of systemic support, which provides
five-notches of rating uplift. This exceptional level of
support is underpinned by (i) BCEE's leading position in domestic
retail banking; (ii) its full ownership from the Grand-Duchy
of Luxembourg, which has proven to be stable since the creation
of the bank more than 150 years ago; and (iii) its role in the development
of the local economy, as stipulated by law in its status and mission,
whereby the bank provides financing to certain key sectors of the economy.
RATING OUTLOOKS ARE STABLE
The stable rating outlooks for BCEE express Moody's view that currently
foreseen risks to creditors are now reflected in these ratings.
Nevertheless, negative rating momentum could develop if conditions
deteriorate beyond current expectations. Specifically, Moody's
has factored into the ratings an increased risk of an exit of Greece from
the euro area, but this is currently not Moody's central scenario.
If a Greek exit became Moody's central scenario, further rating
actions on European banks could well be needed.
RATIONALE FOR SUBORDINATED DEBT AND JUNIOR SUBORDINATED DEBT DOWNGRADES
The downgrade of BCEE's subordinated debt and junior subordinated debt
ratings to Baa1/(P)Baa1 and (P)Baa2 respectively (one and two notches
below its a3 standalone credit assessment) reflects Moody's view that
systemic support is less likely to be extended to subordinated instruments
going forward.
WHAT COULD MOVE THE RATINGS UP/DOWN
An upgrade of the bank's long-term ratings is unlikely in
the near term, given the already very high systemic support factored
into the ratings. Nevertheless, continued improvements in
profitability and efficiency, reduced credit-risk concentrations
-- whilst maintaining a conservative risk profile --
would exert upward pressure on the bank's BFSR.
Factors that could exert downward pressure on the BFSR include a weakening
of the bank's franchise in Luxembourg or a further significant deterioration
of the public finances of the countries that BCEE is exposed to,
principally Italy. More generally, downward pressure on the
BFSR could develop following marked deterioration of the institution's
financial fundamentals, or if Moody's considers that BCEE's
risk positioning has weakened.
The long-term debt and deposit ratings would likely be downgraded
in the event of a downgrade of the BFSR. The long-term rating
could also be downgraded independently from any action on the BFSR rating,
if Moody's lowers its assessment of systemic support. This could
result from (i) a diminished ability of the Grand-Duchy to support
banks; and/or (ii) Moody's re-evaluating the systemic support
uplift it currently factors into the long-term ratings.
PRINCIPAL METHODOLOGIES
The methodologies used in this rating were Bank Financial Strength Ratings:
Global Methodology, published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: Global
Methodology, published in March 2012. Please see the Credit
Policy page on ww.moodys.com for a copy of these methodologies.
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.
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Moody's downgrades Banque et Caisse d'Epargne de l'Etat LT ratings to Aa1
