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Rating Action:

Moody's downgrades KBC Bank to A1 from Aa3; outlook stable

21 Sep 2011

BFSR downgraded to C, negative outlook; short-term rating affirmed at Prime-1

Paris, September 21, 2011 -- Moody's Investors Service has today downgraded to A1 from Aa3 KBC Bank's long-term senior debt and deposit ratings. The outlook on the bank's long-term ratings is stable. The downgrade of the entity's long-term ratings was driven by the lowering of its Bank Financial Strength Ratings (BFSR) to C, which corresponds to A3 on Moody's long-term rating scale, from C+. The outlook on the BFSR is negative.

At the same time, Moody's has downgraded to A2 from A1 holding company KBC Group's long-term senior debt rating. The outlook on KBC Group's ratings was changed to stable from negative.

Moody's affirmed at Prime-1 the short-term ratings of both KBC Bank and KBC Group.

Moody's affirmed at Ba1(hyb) the cumulative Perpetual Debt Securities issued by KBC Bank, and at Ba3(hyb) the non-cumulative Trust Preferred Securities issued by KBC Bank Funding Trust II, III and IV. Moody's changed the outlook on both hybrids to stable from positive.

For a detailed list of ratings affected, please refer to the end of the press release.

RATINGS RATIONALE

SOUND FUNDAMENTALS BUT UNCERTAINTY OVER STATE AID REPAYMENT HAS INCREASED

The rating agency's decision to downgrade KBC Bank's BFSR and long-term debt ratings was driven by the following factors:

(i) Moody's perception of increased uncertainty regarding KBC Group 's ability to repay by year-end 2013 (representing the period agreed upon with the EU Commission in 2009) the whole amount of the core capital securities held by the Belgian Federal and Flemish Regional Governments, while at the same time achieving Basel 3 pro forma Core Tier 1 ratio of 8% at the group level.

(ii) Moody's concerns regarding the consequences that this potential inability may have on the group's credit profile, notably via the imposition of further conditions by the EU Commission, which could negatively affect KBC's diversification or franchise.

Moody's recognises that KBC Group currently has a relatively high regulatory Core Tier 1 ratio, which suggests some ability to repay part of the aid it has received from the government. However, the ultimate amount it will be able to repay by the year-end 2013 will depend on both (1) its ability to implement the business disposal program as scheduled in its restructuring plan, without incurring any significant capital losses; and (2) the level of earnings it will be able to accumulate over the next three years after dividend distributions to shareholders and coupon payments on the state-held capital.

Moody's notes that the group has encountered delays in executing its disposal program. In addition, the current market conditions may further negatively affect the timely divestment of the assets earmarked for sale. Regarding KBC's earning generation capacity, the level of income could be hampered by the evolution of the loan books in Ireland and Central and Eastern Europe (CEE), which have been hit by significant impairments over the past two years.

At the same time, Moody's recognises:

(iii) The bank's good fundamentals, notably its strong franchise in Belgium and the countries of Central and Eastern Europe where it operates, and its sound liquidity profile based on a stable and resilient customer deposit base.

(iv) The recovery in net income since 2010, mainly due to a substantial decrease in losses related to the legacy structured product portfolio. In Moody's opinion, the potential risk stemming from KBC's exposures to CDOs is now reasonably reflected in the current carrying values and the likelihood of further significant losses to be incurred by the group on these products is low in Moody's base case scenario.

Despite these strengths, Moody's believes that the challenges KBC is facing are more consistent with a BFSR of C, which corresponds to A3 on Moody's long-term rating scale. The negative outlook reflects the uncertainties on the level of constraints that could be imposed by the EU Commission.

Moody's factors a very high probability of external support from the Belgian Government into KBC Bank's long-term debt and deposit ratings of KBC Bank, resulting in two notches of uplift from its A3 standalone rating. This is based on the rating agency's perception that, due to its importance within the Belgian retail market as evidenced by its high shares in both domestic savings and lending markets, KBC Bank continues to benefit from high systemic support. This support has been in evidence since 2008 through the hybrid injection and guaranty extended on the bank's exposures to CDOs. The stable outlook results from the limited sensitivity of the bank's senior long-term rating to a potential downgrade of the BFSR at this point on the ratings scale.

The A2 long-term debt rating of KBC Group is positioned one notch below that of KBC Bank and is a function of the structural subordination of the holding company relative to bank creditors, the sound profile of the group's insurance business (a sister company to the Bank), and the current modest level of double leverage (approximately 11% as at year-end 2010 as per Moody's estimate).

RATINGS SENSITIVITY

Downward pressure may be exerted on KBC Bank's BFSR from (i) a significant deterioration in the performance of the loan books in Ireland or in CEE; (ii) an increase in corporate defaults worldwide, which could trigger further losses on CDOs; and/or (iii) other pressure on returns that could hamper KBC's ability to repay state aid without compromising its capital, diversification or franchise.

KBC Bank's long-term debt and deposit ratings would be downgraded as a result of a multi-notch downgrade of the BFSR. Similarly, it could be downgraded in the event of a multi-notch downgrade of the rating of the Government of Belgium or a lower perception by Moody's of the probability of systemic support that would extended in the future to KBC Bank.

Downward pressure on KBC Group's long-term ratings could stem from (i) a downgrade of KBC Bank's ratings; (ii) deterioration of the insurance company's solvency; or (iii) a significant increase in double leverage.

As evidenced by the current negative outlooks, we see little prospect of an upgrade on both KBC Bank's and KBC Group's ratings as long as state aid is not repaid.

HYBRID AND JUNIOR SUBORDINATED DEBT RATINGS

KBC Group is committed to paying coupons on the capital securities held by the Belgian Federal and Flemish Regional Governments in 2011, 2012 and 2013. Since the documents of the hybrid securities issued or guaranteed by the bank contain a pusher, dividend/coupon payments on parity or more junior securities issued by either KBC Bank or KBC Group "push" hybrid coupon payments. Moody's therefore expects all coupons to be paid on hybrid securities until 2014. Payments on KBC's hybrid securities were made both in 2009 and 2010 despite the group not making any payment on the governments' capital securities during this period. Nevertheless, Moody's believes that uncertainties remain regarding hybrid coupon payments made after 2013. In the event that KBC Group is unable to repay its entire outstanding state aid package by year-end 2013, the European Commission may potentially require it to suspend hybrid coupon payments.

KBC's hybrid securities' ratings continue to be notched from KBC Bank's A3 Adjusted Baseline Credit Assessment (Adjusted BCA). Moody's arrives at the Adjusted BCA by adding parental and cooperative support, if applicable, to the BCA, which excludes systemic and regional support. In the case of KBC Bank, the Adjusted BCA is in line with the BCA of A3, as we do not factor in any form of support. The ratings also incorporate Moody's view that, while the bank is implementing its restructuring plan and state aid has not been reimbursed, investment grade ratings are not appropriate for these instruments. The following ratings were affirmed:

- The Perpetual Debt Securities issued by KBC Bank are positioned four notches below KBC Bank's Adjusted BCA at Ba1(hyb). Moody's adds that unpaid coupons are cumulative on these securities and must be settled through an alternative coupon settlement mechanism (ACSM). Coupon payments can be suspended at the bank's option.

- The non-cumulative Trust Preferred Securities issued by KBC Bank Funding Trust II, III and IV are positioned six notches below KBC Bank's Adjusted BCA at Ba3(hyb). These securities are junior to the Perpetual Debt Securities and coupons can be suspended on a non-cumulative basis at the bank's option.

Given the uncertainty that remains regarding hybrid coupon payments after 2013, the outlook for both securities has been changed to stable from positive.

IMPACT ON SUBSIDIARIES

In respect of the Group's main operating units, Moody's has taken the following rating actions:

- KBC Bank N.V.'s BFSR was downgraded to C from C+, long-term deposits and senior unsecured debt ratings were downgraded to A1 from Aa3, and cumulative Perpetual Debt Securities issued by KBC Bank were affirmed at Ba1(hyb). The outlook on the BFSR is negative while all other ratings carry a stable outlook. The Prime-1 short-term deposit ratings were affirmed.

- KBC Group N.V.'s long-term senior unsecured debt rating and issuer rating were downgraded to A2 from A1. The outlook is stable. The Prime-1 short-term issuer rating was affirmed.

In respect of the Group's funding vehicles, Moody's has taken the following rating actions:

- Kredietbank North America Finance Corp's Prime-1 backed commercial paper rating was affirmed.

- KBC International Finance N.V.'s backed senior unsecured rating was downgraded to A1 from Aa3, backed senior unsecured MTN rating was downgraded to (P)A1 from (P)Aa3, and backed subordinated MTN was downgraded to (P)A2 from (P)A1. All ratings carry a stable outlook.

- KBC Bank Funding Trust II's backed non-cumulative preferred stock rating was affirmed at Ba3 (hyb). The rating carries a stable outlook.

- KBC Bank Funding Trust III's backed non-cumulative preferred stock rating was affirmed at Ba3 (hyb). The rating carries a stable outlook.

- KBC Bank Funding Trust IV's backed non-cumulative preferred stock rating was affirmed at Ba3 (hyb) . The rating carries a stable outlook.

- KBC IFIMA N.V.'s backed senior unsecured rating was downgraded to A1 from Aa3, backed subordinated debt rating was downgraded to A2 from A1. The outlook is stable. The Prime-1 short-term debt rating was affirmed.

- KBC Dublin Capital's Prime-1 backed commercial paper rating was affirmed.

- KBC Financial Products International Ltd's backed senior unsecured debt rating was downgraded to A1 from Aa3. The outlook is stable. The Prime-1 short-term debt and commercial paper ratings were affirmed.

- KBC Financial Products International VI Ltd's backed senior unsecured debt rating was downgraded to A1 from Aa3. The outlook is stable.

Moody's says that any potential impact of this rating action on the Group's other subsidiaries will be considered separately.

PRINCIPAL METHODOLOGIES

The methodologies used in this rating Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Based in Brussels, KBC Group had total assets amounting to EUR320.8 billion at year-end 2010. KBC Group's consolidated total income stood at EUR8.38 billion and its net profit group share stood at EUR1.86 billion in 2010.

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 three 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 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 KBC Bank to A1 from Aa3; outlook stable
No Related Data.
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