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Rating Action:

Moody's upgrades KBC Bank's senior unsecured rating to A2/P-1; outlook stable

08 May 2014

KBC Group's issuer rating upgraded to A3; outlook stable

Paris, May 08, 2014 -- Moody's Investors Service has today upgraded KBC Bank N.V.'s and its supported long-term and short-term senior unsecured and deposit ratings to A2/Prime-1 from A3/Prime-2. This action follows the upgrade of KBC Bank's BFSR to C-/baa2 from D+/baa3. The outlook is stable on the long-term and bank financial strength ratings.

These upgrades were prompted by (1) the improved visibility on KBC Bank's solvency and expectation of a stabilised bottom-line profitability; and (2) the full restoration of KBC Bank's liquidity to a robust position. Asset quality, undermined by the performance of the Irish and Hungarian loan portfolios, remains a weakness and continues to offset these strengths to some extent.

Following the rating action on KBC Bank, Moody's has also upgraded KBC Group NV's long-term issuer and debt ratings to A3 from Baa1. The outlook is stable. Its short-term rating was unaffected at Prime-2.

In addition, Moody's has upgraded KBC Bank's and its supported subordinated debt to Baa3 from Ba1, the cumulative Perpetual Debt Securities issued by KBC Bank to Ba1 (hyb) from Ba2 (hyb), and the non-cumulative Trust Preferred Securities issued by KBC Bank Funding Trust II and IV to Ba2 (hyb) from Ba3 (hyb), as a reflection of the bank's higher standalone credit strength. The outlook is stable on these ratings. Further, the rating agency has upgraded the backed short-term commercial paper rating of KBC Bank Ireland Plc to Prime-1 from Prime-2.

Please click on this link (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_170144) for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

The upgrade of KBC Bank's standalone credit strength reflects the following drivers.

-- IMPROVED VISIBILITY ON SOLVENCY AND EXPECTATION OF MORE STABLE PROFITS AS A RESULT OF REDUCED CONSTRAINTS FROM STATE AID REPAYMENT AND GROUP RESTRUCTURING

By completing in July 2013 the repayment of EUR4.7 billion state aid -- out of the total EUR7 billion capital received in 2008-09 -- KBC Group fulfilled its commitment vis a vis the European Commission (EC). This was primarily achieved thanks to (1) the deleveraging over the past two years which reduced the group's capital needs; (2) retained earnings; and (3) a capital increase at KBC Group of EUR1.25 billion in December 2012 and the issuance of EUR0.75 billion contingent capital issued by KBC Bank in Q1 2013. In January 2014, KBC Group further repaid EUR0.33 billion plus the penalty of 50% to the Flemish government. The repayment of the residual aid can be phased-in until 2020 as agreed with the EC. Moody's believes this phased repayment will not constitute a major constraint for KBC Bank and KBC Group. The group is also about to complete the final steps of the restructuring plan agreed with the EC in 2009. These achievements have relieved both KBC Bank and KBC Group from substantial constraints and uncertainties that weighed on their capital and bottom-line profit over the past three years, without weakening their respective capital levels. KBC Bank and KBC Group's Basel III fully loaded common equity Tier 1 ratios stood at 12% and 12.8% respectively at year-end 2013.

Moody's also expects KBC Bank's bottom line profit to better reflect its core businesses' sound profitability going forward as the restructuring process, which implied substantial volatility on the bank's results in the past years, is being finalized.

-- RETURN TO A ROBUST LIQUIDITY POSITION

KBC Bank's liquidity was rapidly restored since it experienced an outflow of international institutional investors during the last quarter of 2011 thanks to an increase in customer deposits in its main operating markets. The bank's loan-to-deposit ratio is currently comfortably below 100%. The bank further strengthened its liquidity position by increasing the term structure of its wholesale funding through the successful issuances of covered bonds under the Belgian legislation in place since 2012. KBC Bank's robust liquidity continues to be supported by the high customer deposit base in all its core markets, as evidenced by the LCR and NSFR levels consistently above 100% since the beginning of 2013.

-- ASSET QUALITY, UNDERMINED BY THE IRISH AND HUNGARIAN LOAN PORTFOLIOS, REMAINS A WEAKNESS

KBC Bank's consolidated pre-provision profit provides a significant loss absorption buffer. However, the rating agency considers that the bank's loan portfolios in Ireland, and to a lesser extent in Hungary, could constrain KBC Bank's standalone credit strength. More provisions might be needed to account for continued stressed conditions for both local economic conditions and customers' creditworthiness.

KBC Bank's loan portfolios in Ireland and Hungary continue to drive a large portion of the credit costs incurred by the group. They account for around 11% and 4% of the bank's total lending book, respectively, based on Moody's estimates, but have together generated between 55% and 70% of its loan-loss provisions in 2012 and 2013. Moody's underscores that the 2013's credit costs have been driven by the recognition of a high level of impairments (around EUR0.8 billion) in keeping with the European Bank Authority's definition of non-performing loan and forbearance.

-- DEBT & DEPOSIT RATINGS

The upgrade of KBC Bank's debt and deposit ratings to A2 from A3 follows the upgrade of the bank's standalone BCA to baa2 from baa3. These ratings continue to incorporate a very high probability of systemic support from the Belgian Government (Aa3, stable) if needed, resulting in three notches of uplift from its baa2 standalone BCA.

The upgrade of KBC Group's long-term ratings to A3 from Baa1 was triggered by the upgrade of KBC Bank's long-term ratings. KBC Group's long-term ratings continue to be positioned one notch below that of KBC Bank, and reflect (1) the structural subordination of the holding company relative to bank creditors; (2) the sound profile of the group's insurance business (a sister company to KBC Bank); and (3) the low double leverage.

--- RATIONALE FOR THE OUTLOOKS

The outlook is stable on KBC Bank's BFSR, consistent with Moody's view that the firm's standalone BCA incorporates all currently foreseeable risks over the outlook period.

The outlook is stable on KBC Bank's and its supported long-term senior unsecured and deposit ratings, in line with the outlook on the firm's BFSR.

-- SUBORDINATED AND HYBRID DEBT

The upgrade of KBC Bank's and its supported subordinated ratings to Baa3 is triggered by the upgrade of the bank's BFSR.

The upgrade of the cumulative Perpetual Debt Securities issued by KBC Bank to Ba1 (hyb), and of the upgrade of the non-cumulative Trust Preferred Securities issued by KBC Bank Funding Trust II and IV to Ba2 (hyb) were triggered by the upgrade of the bank's standalone BFSR. They are positioned two notches and three notches respectively below KBC Bank's adjusted BCA (equivalent to the bank's standalone BCA in the absence of parental and cooperative support).

All the above ratings carry a stable outlook.

WHAT COULD CHANGE THE RATINGS UP / DOWN

Upward pressure could be exerted on KBC Bank's BFSR and thus on its senior ratings (1) if there is clear evidence that the Irish and Hungarian portfolios no longer entail material credit risks; and/or (2) once there has been a proven track-record of sustainable profits.

Downward pressure could be exerted on KBC Bank's BFSR as a result of any of the following (1) material deterioration in the performance of its loan books beyond Moody's current expectations, notably in Ireland or in CEE; (2) an increase in corporate defaults worldwide beyond Moody's current expectations, which could trigger losses on CDOs; (3) other pressures on profitability that could impair KBC Group's ability to repay residual state aid, and which could affect its capital and franchise; and/or (4) a strong 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 downgraded in the event of a multi-notch downgrade of the rating of the Government of Belgium. In addition, a downward revision of Moody's current assumptions of systemic support -- which may arise in the context of the new Bank Recovery and Resolution Directive -- could also have adverse implications for the A2 long-term ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in May 2013. 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.

The person who approved KBC Bank N.V., KBC Group NV, KBC Bank Funding Trust II, KBC Bank Funding Trust IV, KBC Bank N.V., Succursale Francaise, KBC Dublin Capital Plc, KBC Financial Products International Ltd, KBC Financial Products International VI Ltd., KBC IFIMA N.V., KBC International Finance N.V. and Kredietbank North American Finance Corp credit ratings is Carola Schuler, MD - Banking, Financial Institutions Group, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454.

The person who approved KBC Bank Ireland PLC credit rating is Johannes Wassenberg, MD - Banking, Financial Institutions Group, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

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 upgrades KBC Bank's senior unsecured rating to A2/P-1; outlook stable
No Related Data.
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