Actions conclude the review extended on 15 February 2012
Paris, June 15, 2012 -- Moody's Investors Service has today downgraded KBC Bank's
standalone Bank Financial Strength Rating (BFSR) to D+ (mapping to
a standalone credit assessment of baa3) from C-/baa1. This
prompted the downgraded of KBC Bank's long-term debt and
deposit ratings by two notches to A3 from A1, and the short-term
rating to Prime-2 from Prime-1. The outlook is stable.
Prompted by the rating action on KBC Bank, Moody's has also
downgraded KBC Group's long-term debt and deposit ratings
by two notches to Baa1 from A2. Its short-term rating was
lowered to Prime-2 from Prime-1. The outlook is stable.
These downgrades were triggered by:
(i) KBC Bank's higher sensitivity to the deteriorating European
macro-economic environment, due its exposures to markets
experiencing material stress, notably Ireland and Hungary.
The losses stemming from these exposures are likely to continue to weigh
on the bank's profits;
(ii) The unfavourable market and economic conditions, which in Moody's
view could constrain KBC Group's ability to meet the requirement
of the European Commission under its restructuring plan to deleverage
and repay part of the core capital securities held by the Belgian Federal
and Flemish Regional Governments by the end of 2013; and
(iii) The higher than expected sensitivity of part of the bank's
funding to market pressures.
Moody's notes several mitigating factors that have limited the extent
of today's downgrades. These include (i) Moody's anticipation
that KBC would generate sufficient revenues to cover potential losses
generated by its exposures in Ireland and Hungary, (ii) Moody's
expectation that in case of difficulty, KBC would be able to limit
the repayment of state aid to an amount that would allow it to preserve
adequate solvency both at KBC Bank and KBC Insurance, (iii) the
likelihood that in the increasingly pressurised European operating environment,
the EC would likely prove flexible if the group is unable to comply with
the agreed repayment conditions and (iv) KBC Bank's robust liquidity.
In addition to the above rating actions, Moody's has downgraded
KBC Bank's subordinated debt by five notches to Ba1 from A2,
following the removal of systemic support for these securities.
Moody's has also downgraded the cumulative Perpetual Debt Securities issued
by KBC Bank by one notch to Ba2 (hyb) from Ba1 (hyb), as a reflection
of the lower standalone credit strength of the bank and confirmed the
Ba3 (hyb) rating of the non-cumulative Trust Preferred Securities
issued by KBC Bank Funding Trust II, III and IV. The outlook
is stable on these subordinated debt and hybrid.
Moody's has also downgraded KBC Bank Ireland (KBCI)'s long-term
bank deposit and debt ratings to Ba1 from Baa3 and the short-term
bank deposit rating to Not-Prime from Prime-3. The
guaranteed Prime-1 commercial paper rating is downgraded to Prime-2
in line with the downgrade to Prime-2 of the short-term
rating of KBC Bank N.V. (the guarantor). The outlook
on KBCI's deposit and debt ratings is negative. The standalone
BFSR of D-/ba3 (which has a negative outlook) was not on review
and has not been affected by today's rating action.
Today's actions on KBC Bank's BFSR and the long-term
debt and deposit ratings of KBC Bank, KBC Group and KBCI conclude
the reviews 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).
The action on the subordinated debt instruments 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_143135
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 KBC Bank's standalone credit strength reflects the
following drivers.
FIRST DRIVER --- EXPOSURE TO THE IRISH AND HUNGARIAN
MARKETS
KBC Bank's loan portfolios in Ireland and Hungary account for around
11% and 3.7% of the bank's total lending book,
respectively, based on Moody's estimates. Since 2010,
these portfolios have driven a large portion of the credit costs incurred
by the group. Moody's says that losses could continue to
increase in the current fragile macro-economic environment,
exerting pressure on the bank's overall earnings.
Regarding the Hungarian loan book, Moody's acknowledges that
the losses generated in 2011 were inflated by one-off provisions
triggered by a change in legislation in the country that recognised the
lenders' responsibilities in foreign-exchange losses incurred
by the households that had contracted residential mortgages denominated
in foreign currencies. Moody's also recognises that KBC Bank's
loan book in Hungary is out-performing those of the bank's
main local peers and that the profit generated locally has covered the
losses generated in 2011.
SECOND DRIVER --- CONSTRAINTS RELATED TO THE COMMITMENT
TO DELEVERAGE AND REPAY STATE AID
As part of the agreement reached with the European Commission in November
2009 on its restructuring plan, further revised in 2011 and 2012,
KBC Group is committed to (i) completing its divestment programme;
and (ii) repaying EUR4.2 billion out of the residual EUR6.5
billion government-held hybrid securities, by the end of
2013.
The unfavourable market and economic conditions may constrain KBC's
ability to meet these targets, and Moody's believes that some
capital losses on the remaining disposals are likely. KBC's
ability to repay state aid by the end of 2013 hinges on its capacity to
complete the planned divestments and to generate sufficient earnings over
the coming quarters. The rating agency continues to believe that
in the current environment, KBC's performance could be volatile
and subject to (i) further pressures exerted by the deteriorating operating
environments both in the domestic and foreign markets; and (ii) the
impact of high market-spread volatility on both the valuation of
its legacy CDOs and on the effectiveness of its interest-rate hedging
strategy. Moody's notes that should KBC Bank be unable to
meet the conditions imposed by the European Commission, there might
be negative implications for the group's credit profile, in particular
if the Commission were to set further compensation measures for state
aid provided in 2008/2009. In turn, this could negatively
affect KBC's diversification or franchise, in Moody's view.
THIRD DRIVER --- HIGHER-THAN-EXPECTED
SENSITIVITY OF A PORTION OF FUNDING SOURCES
While KBC Bank's core deposit base has remained stable, we
understand that the bank experienced some outflows of funds from international
institutional investors during Q4 2011. This caused a slight deterioration
in its loan-to-deposit ratio to 103% from the mid-90%
range. We understand that the situation has since stabilised (as
of the beginning of Q1 2012) and the lost funding recovered slightly during
that quarter, but nonetheless highlighted an element of confidence-sensitive
funding.
MITIGATING FACTORS
Moody's notes several mitigating factors that have limited the extent
of today's downgrades.
Moody's anticipates that the bank would generate significant revenues
from its core businesses that can help absorb potential losses that could
be generated by its exposures in Ireland and Hungary. Nonetheless,
further deterioration of these operations may impact KBC Bank's
ability to repay state capital as currently anticipated.
Regarding state aid, Moody's assumes that in case of difficulty,
KBC would limit the repayment to an amount that would allow it to preserve
adequate solvency both at KBC Bank and KBC Insurance. Moody's
also anticipates that in the increasingly pressurised environment,
the European Commission would likely prove flexible if the group would
is unable to comply with the conditions agreed upon due, to adverse
market and/or economic conditions.
The liquidity of KBC Bank has remained robust, despite the outflow
of a portion of institutional funding. As at the end of March 2012,
the bank appears able to withstand further wholesale outflows as well
as the loss of some deposits. As of the same date, KBC Bank's
net short-term wholesale funding was comfortably covered by unencumbered
central bank eligible assets.
RATINGS RATIONALE -- DEBT & DEPOSIT RATINGS
The downgrade of KBC Bank's debt and deposit ratings follows the
lowering of the bank's standalone credit assessment to baa3 from
baa1. These ratings continue to incorporate a very high probability
of systemic support being forthcoming from the Belgian Government (Aa3,
negative) if needed, resulting in three notches of uplift from its
baa3 standalone rating.
The downgrade of KBC Group's debt and deposit ratings was triggered
by the lowering of KBC Bank's long-term ratings. KBC
Group's debt and deposit ratings continue to be positioned one notch
below that of KBC Bank, and reflect (i) the structural subordination
of the holding company relative to bank creditors; (ii) the sound
profile of the group's insurance business (a sister company to KBC Bank);
and (iii) the absence of double leverage.
RATIONALE FOR STABLE OUTLOOK
The stable outlooks on all ratings 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.
RATINGS RATIONALE - SUBORDINATED AND HYBRID DEBT
The downgrade of KBC Bank's subordinated debt ratings to Ba1 reflects
Moody's view that systemic support is less likely to be extended to subordinated
instruments going forward. It was also triggered by the downgrade
of the bank's BFSR.
The downgrade of the cumulative Perpetual Debt Securities issued by KBC
Bank to Ba2 (hyb) was triggered by the lowering of the bank's standalone
credit strength and is positioned two notches below KBC Bank's adjusted
standalone credit assessment (equivalent to the bank's standalone
credit assessment in the absence of parental and cooperative support).
The rating of the non-cumulative Trust Preferred Securities issued
by KBC Bank Funding Trust II, III and IV was confirmed at Ba3 (hyb),
i.e. three notches below KBC Bank's adjusted standalone
credit assessment.
All the above ratings carry a stable outlook.
RATINGS RATIONALE - KBCI
The downgrade of KBCI's long-term bank deposit and debt ratings
to Ba1 and the downgrade of the short-term deposit rating to Not-Prime
is driven by the downgrade of the standalone rating of its parent KBC
Bank N.V. to D+ /baa3. Since KBCI's debt
and deposit ratings benefit from an assumption of parental support from
KBC Bank N.V. being forthcoming if needed, the lower
ability to support -- as indicated by the weakening standalone
credit profile of KBC Bank NV -- has resulted in lower debt
and deposit ratings for KBCI.
KBCI now benefits from only two notches of rating uplift from parental
support. This continues to incorporate Moody's assumption of a
very high level of parental support from KBC Bank N.V. that
results in the uplift from the bank's D-/ba3 standalone BFSR.
The outlook on KBCI's Ba1 senior ratings is negative, in line
with the negative outlook on the standalone rating of KBCI.
The downgrade of the guaranteed Prime-1 commercial paper rating
to Prime-2 is in line with the downgrade to Prime-2 of the
short-term rating of KBC Bank N.V. (the guarantor).
The standalone BFSR of D-/ba3 (which has a negative outlook) was
not on review and has not been impacted by today's ratings actions.
WHAT COULD MOVE THE RATINGS UP/DOWN
Upwards pressure could develop on KBC Bank's BFSR if there is sufficient
evidence of a strong and sustainable recovery in the bank's net
profit. This would likely stem from a decrease in credit costs
and legacy issues, and would increase KBC Bank's capacity
to repay the outstanding capital securities held by the Belgian Federal
government and the Flemish region.
Downward pressure may be exerted on KBC Bank's BFSR from (i) further material
deterioration in the performance of its loan books in Ireland or in the
CEE (beyond Moody's current expectations); (ii) an increase
in corporate defaults worldwide, which could trigger further losses
on CDOs; (iii) further market-spread widening, which
would negatively affect the valuation of CDOs and decrease the effectiveness
of the bank's interest-rate hedging strategy; (iv) other pressures
on returns that could hamper KBC's ability to repay state aid without
compromising its capital, diversification or franchise; and/or
(v) a deterioration in the bank's liquidity position.
KBC Bank's senior ratings would be downgraded as a result of a downgrade
of the BFSR. Similarly, the ratings could be lowered in the
event of a multi-notch downgrade of the rating of the Government
of Belgium (Aa3, negative outlook), or Moody's perception
of a reduced likelihood of systemic support .
KBC Group's ratings could be downgraded as a result of a downgrade
of KBC Bank's senior ratings.
An upgrade of KBCI's deposit and senior debt rating is highly unlikely
given today's downgrade and the negative outlook. Upward
pressure on KBCI's standalone BFSR would likely require a substantial
increase in sticky retail and commercial deposits, such that the
reliance on its parent falls, combined with a sustained reduction
in impairment charges. A significant capital injection from its
parent that substantially increases the capital levels would also be positive
for the BFSR. The development of higher-than-expected
provisioning as a result of a deterioration in asset quality or a deterioration
in the bank's franchise could lead to downward pressure on the BFSR.
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings 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.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143135
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
Releasing Office
Person Approving Credit Rating
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 entities or its designated
agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare the ratings are the following :
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Information sources used to prepare the ratings for KBC Bank Ireland plc
are the following: parties involved in the ratings, and public
information.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings 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 considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
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to entities rated by MIS's EU credit rating agencies" on the
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The below contact information is provided for information purposes only.
Please see the issuer page on www.moodys.com for Moody's
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for information on (A) MCO's major shareholders (above 5%) and
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Yasuko Nakamura
Vice President - Senior Analyst
Financial Institutions Group
Moody's France SAS
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Paris 75008
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Carola?Schuler
MD - Banking
Financial Institutions Group
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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 KBC Bank and KBC Group; outlook stable
