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Rating Action:

Moody's downgrades Dexia Bank Belgium to Baa1; outlook stable

24 May 2012

Short-term rating downgraded to Prime-2; BFSR downgraded to D- from D

Paris, May 24, 2012 -- Moody's Investors Service has today downgraded by one notch to Baa1 with a stable outlook, previously A3 on review with direction uncertain, the long-term senior debt and deposit ratings of Dexia Bank Belgium (DBB), known as Belfius Bank. The short-term rating was downgraded to Prime-2 from Prime-1, previously on review for downgrade. The downgrade of the long-term senior debt and deposit ratings to Baa1 directly follows Moody's downgrade of DBB's standalone bank financial strength rating (BFSR) to D- mapping to ba3 on the long-term scale -- with a positive outlook. The BFSR was previously D/ba2, on review with direction uncertain.

The downgrades of the BFSR -- and thus the long-term senior debt ratings -- were triggered by Moody's view that despite its progressive disentangling from the Dexia Group, DBB is likely to need more time than initially expected to stabilise its financial profile, including its liquidity, its profitability and its risk concentrations. The long-term ratings continue to benefit from a very high degree of systemic support, resulting in five notches of uplift from DBB's standalone credit strength.

DBB's subordinated debt and Dexia Overseas Limited's backed junior subordinated debt ratings have been downgraded to Baa2 from Baa1 and to Ba2 (hyb) from Ba1 (hyb) respectively. Both ratings remain on review for downgrade.

DBB's 6.25% cumulative junior subordinated debt rating has been downgraded to Caa1 (hyb) with a stable outlook, previously B2 (hyb) on review for downgrade.

These rating actions conclude the review for downgrade of DBB's long and short-term senior ratings and BFSR, initiated on 3 October 2011.

RATINGS RATIONALE

BFSR DOWNGRADE REFLECTS DBB's ON-GOING RESTRUCTURING

The downgrade of DBB's BFSR to D- (mapping to a ba3 standalone credit strength) reflects Moody's reassessment in the current unfavourable macro-economic and funding environment of:

(i) the bank's still fragile liquidity position, which to a large extent is driven by the financing provided to Dexia Credit Local (DCL; E/caa1 stable, Baa2 negative, Prime-2), and which remains reliant on financing from central banks;

(ii) the relatively high borrower concentration risk; and

(iii) the lack of visibility on its ability to generate sufficient profit in the near future to increase its loss absorption capacity.

At the same time, Moody's recognizes that the disentangling operations from DCL are progressing, and notably that its unsecured credit exposure to the latter has almost been eliminated as of today. The rating agency also believes that, despite some deposit outflows in the fourth quarter of 2011, DBB has managed to preserve its core franchise in the Belgian retail, commercial and public sector banking and insurance businesses. Moody's understands DBB's intention to focus on these activities going forward and expects its overall risk profile to progressively return to a level consistent with such businesses. Nevertheless, DBB's on-going restructuring process may take more time than initially expected. Hence Moody's considers that its current profile is more consistent with a BFSR of D-. The positive outlook of the BFSR reflects the potential improvements in the bank's liquidity as a result of further de-linkage from DCL, our expectation of an improved funding structure resulting from the introduction of a covered bond law in Belgium, and the potential for improvement in the bank's structural profitability as it establishes an autonomous track record outside the Dexia group.

SENIOR DEBT RATINGS UNDERPINNED BY HIGH PROBABILITY OF SYSTEMIC SUPPORT

The downgrade of DBB's long-term and short-term debt and deposit ratings to Baa1/P-2 directly follows the downgrade of its standalone BFSR. Nevertheless, we continue to believe DBB benefits from a very high probability of systemic support due to the combination of the following factors:

(i) its state ownership following its acquisition from Dexia by the Belgian government in October 2011; and

(ii) its leading position in financing the Belgian public and social sector, as well as its significant share of domestic retail and commercial banking.

For these reasons we incorporate an unusually high five notches of support uplift from the ba3 standalone credit strength in our Baa1 senior debt ratings.

The outlook of DBB's senior debt ratings is stable despite the positive outlook on the bank's BFSR: given the very high support assumptions already factored into DBB's long-term ratings, the senior ratings are only likely to be upgraded in the case of a multi-notch upgrade of the BFSR.

SUBORDINATED AND JUNIOR SUBORDINATED DEBT RATINGS

DBB's subordinated debt and Dexia Overseas Limited's backed junior subordinated debt ratings are downgraded to Baa2 from Baa1 and to Ba2 (hyb) from Ba1 (hyb) respectively. These ratings still incorporate systemic support as they continue to be positioned one notch below DBB's senior supported rating and one notch above DBB's adjusted BCA respectively -- where the adjusted BCA is equivalent to its standalone credit strength in the absence of parental or cooperative support. Both ratings remain on review for downgrade, reflecting the rising risk that government support for this type of debt might not be available in the future (please see "Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade" published on 29 November 2011).

DBB's 6.25% cumulative junior subordinated debt rating is downgraded to Caa1 (hyb) with a stable outlook from B2 (hyb) on review for downgrade. Due to the consecutive coupon skips since November 2009, this security continues to be rated on an expected-loss basis. The rating agency believes that, in the context of the acquisition of the bank by the Belgian government, there is a high risk of either (i) an extension of the ban on DBB from paying dividends that was imposed by the EU Commission until the end of 2011, and/or (ii) DBB deciding to not pay any dividends in the short to medium-term to strengthen its risk absorption capacity. The downgrade results from both the downgrade of the BFSR and the assumption of continued coupon skips.

WHAT COULD MOVE THE RATINGS UP/DOWN

DBB's BFSR could be upgraded as a result of (i) a significant improvement in its liquidity position; or (ii) further successful de-risking of the investment portfolio without materially affecting the bank's capital base; or (iii) evidence of a recovery and stabilisation in its profitability.

An upgrade of DBB's senior ratings could result from a multi-notch upgrade of the BFSR.

The factors that may exert negative pressure on DBB's stand-alone credit strength include (i) further deterioration in its liquidity position that may result from difficulties in accessing stable funding; (ii) a significant increase in credit losses stemming from the investment portfolio or the loan book; (iii) an inability to generate sufficient profit to further strengthen its capital base.

The bank's senior ratings could be downgraded if (i) the BFSR is downgraded; or if (ii) the probability of government support declines; or if (iii) the Belgian sovereign debt experiences multi-notch rating migration.

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 www.moodys.com for a copy of these methodologies.

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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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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.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Yasuko Nakamura
Vice President - Senior 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
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Dexia Bank Belgium to Baa1; outlook stable
No Related Data.
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