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