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Rating Action:

Moody's upgrades KBC Bank's deposit and debt ratings to A1; outlook stable

28 Jan 2016

KBC Group's issuer rating upgraded to Baa1; outlook stable

NOTE: On November 11, 2016, the press release was corrected as follows: The releasing office was updated to London from Paris. Revised release follows.

London, January 28, 2016 -- Moody's Investors Service has today upgraded KBC Bank N.V.'s long-term deposit ratings and KBC IFIMA N.V.'s backed senior unsecured debt ratings to A1 from A2. The outlooks on these ratings are stable. These actions follow the upgrade of KBC Bank's Baseline Credit Assessment (BCA) to baa1 from baa2.

These upgrades were prompted by the strong and durable improvements in asset quality experienced by the bank in recent quarters, and in particular the reduction in tail risk from its Irish subsidiary. These improvements enabled the bank to report solid and stabilised net earnings in the first nine months of 2015 and rapidly increasing regulatory capital ratios, which in turn allowed KBC Group to fully repay state aid at the end of the year.

Moody's has also upgraded KBC Group NV's long-term issuer rating to Baa1 from Baa2 and has assigned new long-term and short-term senior unsecured debt ratings of (P)Baa1/(P)Prime-2 to KBC Group's Medium Term Note programme. The outlook on KBC Group's long-term issuer rating is stable. The upgrade of KBC Group's long-term issuer rating reflects 1) the upgrade of KBC Bank's BCA and 2) Moody's Advanced Loss Given Failure (LGF) analysis applied to KBC Group in the context of contemplated issuance of new senior holding company debt. In addition, Moody's corrected an input error concerning the volume of subordinated debt included in the agency's Advanced LGF analysis.

KBC Bank's short-term deposit ratings and its supported entities' backed senior debt ratings have been affirmed at Prime-1 and KBC Group's short-term issuer rating has been affirmed at Prime-2. In addition, Moody's has upgraded KBC IFIMA's backed subordinated debt to Baa2 from Baa3 and KBC Bank's cumulative backed junior subordinated debt to Baa3(hyb) from Ba1(hyb). Moody's has also upgraded KBC Bank's long-term Counterparty Risk (CR) assessment to Aa3(cr) from A1(cr) and affirmed its short-term CR assessment at Prime-1(cr).

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

-- KBC BANK N.V.

Moody's upgrade of KBC Bank's BCA to baa1 reflects the strong improvement in asset quality witnessed by the bank in recent quarters. Although the bank's impaired loan ratio of 9.0% at end-September 2015 remains high, its loan loss provisioning charge declined to an annualised rate of only 0.23% of gross loans in the nine months ending September 2015, a level which is close to the bank's Belgian peers. Belgian exposures, which represent 59% of total exposures, continued to perform strongly with loan loss provisions of less than 0.21% of gross loans during the same period.

In particular, credit trends have improved in the bank's Irish exposures of EUR14.1 billion, accounting for 10% of the consolidated loan book of the group as of end-September 2015, and in its Hungarian exposures of EUR4.5 billion (3%). KBC Bank's impairment charges totalled EUR34 million in Ireland in the first nine months of 2015, or 0.30% of outstanding loans, a significant decrease from EUR157 million in the nine months ending September 2014. KBC Bank's Hungarian loan book reported loan loss provisions representing 0.19% of outstanding loans in the nine months ending September 2015, a significant decline versus 0.94% for the full year 2014. Moody's expects these credit trends to be sustained over the near term.

As a result of lower loan loss provisions, KBC Bank's net income currently better reflects its core businesses' sound profitability. KBC Bank reported a net income of 0.8% of total assets in the first half of 2015, a level that is above the net profitability of its Belgian peers. This is also partly due to stronger efficiency metrics, as reflected by a cost-to-income ratio of 54% during the first nine months of 2015. The improved profitability of the bank has enabled it to progressively increase its regulatory capital ratios despite upstreaming dividends to enable KBC Group to fully repay state aid of EUR2 billion to the Flemish government and EUR1 billion of related penalty at the end of 2015, largely ahead of the bank's stated objective (2017) and contractual requirement (2020). This cash payment did not present a major constraint for KBC Group's capital, representing just over one year's net earnings. KBC Group's Basel III fully-loaded common equity tier one (CET1) ratio at end-September 2015 was 14.0%, taking into account the repayment and related penalty, a level Moody's considers as sound. KBC Bank's Basel III fully loaded CET1 ratio stood at 13.0% at end-September 2015.

The upgrade of KBC Bank's long-term deposit ratings and KBC IFIMA's backed senior unsecured debt ratings to A1 results from (1) the upgrade of the bank's BCA to baa1; (2) the two-notch Advanced LGF uplift from the baa1 adjusted BCA given the material level of subordination below both deposits and senior debt; and (3) government support uplift of one notch, reflecting a moderate probability of support.

-- KBC GROUP N.V.

Under Moody's previous rating action of June 4, 2015, KBC Group was assigned long-term and short-term issuer ratings of Baa2 and Prime-2, respectively. Due to an input error concerning the volume of subordinated debt included in the agency's Advanced LGF analysis, the long-term issuer rating was incorrectly positioned at the same level as KBC Bank's BCA, rather than one notch below the BCA.

Moody's updated LGF assessment corrects this error and incorporates an assumption that KBC Group's creditors would benefit from having access to assets other than those of KBC Bank if the bank entered resolution. The recognition of the additional residual value offered by the bank's sister companies, KBC Insurance and KBC Asset Management (both unrated), results in a higher equity-at-failure assumption of 3.6%. This reflects an estimated value attributed to KBC Insurance in the event of the bank's failure equal to half of its minimum Solvency Capital Requirement under Solvency II. In addition, Moody's incorporates the expected near-term debt issuance from the holding company.

As a result of these assumptions, Moody's determined that KBC Group's senior debt holders were likely to face a moderate loss rate in resolution. This resulted in a senior debt programme rating aligned with KBC Bank's BCA, at (P)Baa1. Moody's expects only a low probability of government support for senior debt issued by KBC Group, resulting in no uplift for the long-term senior debt programme rating of the group.

OUTLOOKS

KBC Bank's long-term deposit ratings, KBC IFIMA's backed senior debt ratings and KBC Group's long-term issuer rating all carry stable outlooks.

WHAT COULD CHANGE THE RATINGS UP / DOWN

An upgrade of KBC Bank's and KBC Group's long-term ratings could result from 1) significantly increased regulatory capital ratios at the bank and group levels; 2) substantial issuance of senior debt by KBC Group, adding sustainable subordination in favour of KBC Bank's senior creditors and additional volume benefiting KBC Group's senior creditors.

A downgrade of KBC Bank's BCA could occur as a result of 1) decreasing profitability caused by negative revenue trends due to the low interest rate environment and distressed financial markets impacting fee and commission income; 2) reduced regulatory capital ratios at the bank and group levels, due to a switch toward a more aggressive financial policy in terms of dividends, lending growth and acquisitions; and 3) a resurgence of asset quality issues, possibly due to the need to further provision for Irish exposures.

A downgrade of KBC Bank's BCA would typically result in a downgrade of the long-term ratings of KBC Bank and KBC Group. These ratings could also be downgraded if there was a significant and sustainable decrease in debt loss-absorption capacity resulting in higher loss-given-failure for one or more instrument class.

LIST OF AFFECTED RATINGS

Upgrades:

..Issuer: KBC Bank N.V.

.... Adjusted Baseline Credit Assessment, Upgraded to baa1 from baa2

.... Baseline Credit Assessment, Upgraded to baa1 from baa2

.... Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

....backed Junior Subordinated Regular Bond/Debenture, Upgraded to Baa3 (hyb) from Ba1 (hyb)

....Long-term Deposit Rating, Upgraded to A1 stable from A2 positive

..Issuer: KBC Bank N.V., Succursale Francaise

.... Counterparty Risk Assessment, Upgraded to Aa3(cr) from A1(cr)

..Issuer: KBC Group NV

....Long-term Issuer Rating, Upgraded to Baa1 stable from Baa2 positive

..Issuer: KBC IFIMA N.V.

....backed Senior Unsecured Medium-Term Note Program, Upgraded to (P)A1 from (P)A2

....backed Subordinate Medium-Term Note Program, Upgraded to (P)Baa2 from (P)Baa3

....backed Subordinate Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....backed Senior Unsecured Regular Bond/Debenture, Upgraded to A1 stable from A2 positive

Assignments:

..Issuer: KBC Group NV

....Senior Unsecured Medium-Term Note Program, Assigned (P)P-2

....Senior Unsecured Medium-Term Note Program, Assigned (P)Baa1

Affirmations:

..Issuer: KBC Bank N.V.

....Counterparty Risk Assessment, Affirmed P-1(cr)

....Short-term Deposit Rating, Affirmed P-1

..Issuer: KBC Bank N.V., Succursale Francaise

.... Counterparty Risk Assessment, Affirmed P-1(cr)

.... Senior Unsecured Deposit Program, Affirmed P-1

..Issuer: KBC Group NV

....Short-term Issuer Rating, Affirmed P-2

....Senior Unsecured Deposit Program, Affirmed P-2

..Issuer: KBC IFIMA N.V.

....backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

..Issuer: Kredietbank North American Finance Corp

....backed Commercial Paper, Affirmed P-1

Outlook Actions:

..Issuer: KBC Bank N.V.

....Outlook, Changed To Stable From Positive

..Issuer: KBC Group NV

....Outlook, Changed To Stable From Positive

..Issuer: KBC IFIMA N.V.

....Outlook, Changed To Stable From Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Guillaume Lucien-Baugas
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

Nicholas Hill
Managing Director
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

No Related Data.
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