Belfius Bank SA/NV

FINANCIAL INSTITUTIONS
Belfius Bank S.A./N.V.
ISSUER IN-DEPTH
15 March 2016
Strengthened Franchise and Successful De-risking Strategy
Pave the Way for Privatisation
Summary
RATINGS
Belfius Bank S.A./N.V.
Outlook
Stable
Bank Deposits
A3/P-2
Baseline Credit
Assessment
baa3
Counterparty Risk
Assessment
A2(cr)/P-1(cr)
Senior Unsecured
A3
Senior Subordinate Dom Curr
(P)Ba1
Jr Subordinate - Dom
Curr
Ba2(hyb)
Source: Moody's Investors Service
KEY METRICS:
»
The bank's brand and high street presence is restored ;
»
A large share of the bank’s legacy assets have been disposed of;
6218
»
Capital buffers are strengthened;
2.4%
2.8%
»
Profitability has partially recovered;
16.5%
12.4%
»
Funding and liquidity are now adequate.
2013
2012
Total
157771
assets (EUR
mn)
155811
173419
TCE (EUR
mn)
7709
7036
Problem
2.3%
loans/
Gross loans
TCE/RWA
15.6%
The former French/Belgian bank Dexia was severely hit by the financial crisis between 2008
and 2011, which finally led to its resolution. The Belgian government acquired Dexia Bank
Belgium in October 2011 to preserve the bank’s franchise and maintain financial stability in
Belgium. The Belgian business was formally renamed Belfius in June 2012.
Since then the credit fundamentals of the bank have improved significantly:
Belfius Bank S.A./N.V.
2014
Belgian bank Belfius has made significant progress in restoring its creditworthiness since the
Belgian state took it over in 2011. The bank's improved finances and strengthened franchise
pave the way for a potential privatisation within the next two or three years. We also expect
that the first dividend payment on ordinary shares since nationalisation will be made this
year, a further sign that the bank is back to business as usual.
Source: Mooody's Investors Service
Contacts
Alain Laurin
33-1-5330-1059
Associate Managing
Director
alain.laurin@moodys.com
Laurent Le Mouel
+33 1 5330 3340
VP-Senior Analyst
laurent.lemouel@moodys.com
We expect the positive trend to continue over the coming quarters as the moderate
economic recovery now under way in Belgium gradually creates an improving operating
environment for business expansion.
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
The bank's franchise has been restored, paving the way for privatisation
Belgian bank Belfius has made significant progress in restoring its creditworthiness since it was nationalised in 2011. We consider that
the restoration of its franchise and its return to financial strength paves the way for a potential privatisation within the next two or
three years.
Belfius is the third-largest bank in Belgium by total assets (EUR177 billion as at December 2015) and is 100%-owned by the Belgian
state, through the Federal Holding and Investment Company, the state's investment arm. With its core businesses essentially domestic,
Belfius has a well-established franchise in retail, commercial, and public sector lending.
The bank's reputation suffered during the financial crisis. In October 2011, the bank faced deposit outflows of close to 6% in the space
of one week, which triggered its acquisition by the Belgian state. Significant efforts to rebrand the bank have paid off and deposits have
recovered: Belfius now has a higher market share of deposits (16%) than in 2010 (14%).
Exhibit 1
Belfius’ market share of deposits is now higher than pre-crisis
Belgian Banks’ Market Share (Deposits)
Sources: Moody’s Investors Service, banks’ financial statements, Belgian National Bank
Belfius is the fourth largest bank in Belgium as regards retail and commercial banking, with a 13% market share in domestic mortgages,
still below the 16% reached in 2010. By contrast, it is by far the leader in the public and social banking sector, with market shares
consistently exceeding 70% and outstanding loans amounting to more than 40% of the bank's total commercial exposure. This
business generates many cross-selling opportunities and is a key contributor to Belfius’ revenues and profitability.
Belfius has also developed its insurance activities to become the fifth largest insurer in Belgium, with 8% and 5% market shares in
life and non-life insurance sectors, respectively. The bank collected EUR2.1 billion in premiums as of December 2015 and the business
contributed around 40% of the bank’s annual net profit. Belfius has implemented an integrated bancassurance strategy, taking full
advantage of cross-selling opportunities between retail and public sector banking activities and the insurance sector. We expect these
cross-selling opportunities to continue to increase insurance income in the future.
Privatisation can now be contemplated
The European Commission endorsed the orderly resolution of the Dexia group (28 December 2012) without imposing any timeframe
for a future privatisation of Belfius. Considering progress made since its nationalization in 2011, we believe that the privatisation of the
bank can now be contemplated.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Firstly, the restructuring measures agreed with the Commission and which constrained Belfius’ activities lapsed in January 2015. Those
measures cut operating costs, downsized trading activities, banned dividend and coupon payments as well as acquisitions, placed limits
on remuneration and capped new production of public banking loans and life insurance. Secondly, Belfius has regained a strong market
share in the Belgian retail bank and insurance markets. Thirdly, the bank’s credit fundamentals (asset risk, capital, profitability and
liquidity) have all improved significantly (see below).
Balance sheet clean-up has significantly reduced asset risk
Since 2011, the bank's activities have been split between core banking and insurance operations (“Franchise”), and legacy assets dating
back to before 2012 (“Side”). Side activities are in wind-down and comprise a portfolio of securities, a book of credit guarantees and
funding for Dexia entities.
The legacy securities portfolio, which originally amounted to EUR18.3 billion has dropped to EUR8.1 billion (as of December 2015);
credit guarantees have fallen to EUR5.4 billion from EUR11.6 billion; and funding provided to Dexia entities has shrunk to just EUR62
million from EUR44 billion. As a result, the overall risk profile of the bank has strengthened and we expect that the residual portfolio
will be in line with Belfius' own average risk level by the end of 2016, as announced by the bank.
Exhibit 3
Belfius legacy assets have shrunk by 80%
Belfius’ Side assets (in EUR billion)
Source: Bank's financial statements
In the Franchise business, loan loss provisions have decreased steadily since 2011. This is due to gradually improving macro-economic
conditions in Belgium from 2013, as well as stricter lending standards imposed by Belgian banks in general, and Belfius in particular,
since the beginning of the banking crisis. Loan loss provisioning costs are now very low (about 8 basis points of loans and advances to
customers). Large volumes of low-risk exposures to the public sector (43% of credit risk exposures as at June 2015) are a contributing
factor.
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15 March 2016
Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Exhibit 4
Loan-loss provisions are the lowest among Belgian banks
Credit cost % of gross loans
Sources: Moody’s Investors Service, banks’ financial statements
Consequently, Belfius’ non-performing loans (NPLs) are below Belgian peers, at 2.3% of total loans (see Exhibit 4). Furthermore, Belfius
has built up a high level of loan loss reserves. These currently cover more than 70% of the bank’s NPLs.
Exhibit 5
Problems loans are below the average for Belgian banks
Non-performing loans % of gross loans
Sources: Moody’s Investors Service, banks’ financial statements
Belfius is less exposed than Belgian peers to volatile real-estate markets. Real-estate prices have reached very high levels in Belgium
increasing the vulnerability of the Belgian mortgage market to any potential market correction. Belfius' low market share in the
mortgage sector, at 13% means it would be less impacted than peers should any turmoil occur.
The bank has a large investment portfolio that amounted to EUR25.1 billion at the end of December 2015 (14% of the bank’s total
assets). It is comprised of an asset and liability management (ALM) portfolio (EUR6.3 billion), the legacy securities portfolio (EUR8.1
billion) and an insurance investment portfolio (EUR10.7 billion). On the whole the investment portfolio is of good quality. Half of It
comprises sovereign and public sector bonds, 97% is rated investment grade and the average rating is A-.
Some risks remain
Nevertheless, loan concentration -- inherited from a period when single-name exposures were determined on the basis of Dexia
Group's much larger capital base -- remains high, especially in the investment portfolio, despite the de-risking achieved thus far.
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Outstanding exposure to Italian government bonds, for example, amounted to EUR4 billion as of December 2015, representing 57% of
the bank’s common equity Tier 1(CET1) capital.
Finally, Belfius has also a large book of derivatives held for trading (worth EUR22.2 billion of negative marked-to-market for a notional
amount of EUR473 billion, as at June 2015). The book is a legacy of Belfius' former activities as the treasury and ALM center for the
whole Dexia group. Belfius aims to mitigate market risk and unwind the notional amount of derivatives to the greatest extent possible.
The total amount of trading derivatives remains high, however, and generates collateral requirements, which may create balance-sheet
volatility. Collateral needs for derivatives amounted to EUR20.3 billion in June 2015 but the current low interest rates should keep any
additional requirements at a low level. Collateral pledged for derivatives contribute about half to the 22% amount of encumbered
assets, which is in line with the average of Belgian banks, according to EBA calculations1.
Exhibit 6
Belfius' large derivative book generates collateral needs
Negative marked-to-market value of derivatives held for trading and amount of collateral pledged for derivatives
Sources: Moody’s Investors Service, banks’ financial statements
Deleveraging has strengthened Belfius' capital
Belfius has increased its capital buffers in line with its financial plan, helped by the balance sheet clean-up and profits accumulated
during the European Commission dividend ban. Its Basel III (fully loaded) Common Equity Tier 1 (CET1) ratio was 14.9% as of December
2015 (vs. 13.2% in December 2014) and its phased-in ratio was 15.9% at the same date, well above the average of EU banks (13% at
the same date).
It leaves the bank with ample headroom above the minimum regulatory requirement of 11.25% (made up of the 10.75% CET1 ratio
imposed by the Single Supervisory Mechanism (SSM) under the Supervisory Review and Evaluation Process (SREP), and an additional
systemic buffer of 0.5%, imposed by the National Bank of Belgium).
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Exhibit 7
Belfius CET 1 Ratio Is Higher Than EU Peers
CET 1 capital (Basel III phased-in) % of RWAs
Sources: Moody’s Investors Service, Belfius' financial statements, European Banking Authority (EBA)
Exhibit 8
Belfius' capital ratios are in the higher range of Belgian peers
Capital ratios of large Belgian banks
31-Dec-15
Belfius Bank
BNP Paribas Fortis
ING Belgium
KBC Group
Common Equity Tier 1
Basel III fully transitioned
Common Equity Tier 1
Basel III phased-in
14.9%
12.5%
14.9%
15.9%
14.2%
14.5%
15.2%
Tier 1 Basel III Total Capital ratio Basel III
Tier 1 Leverage ratio Basel
III
17.7%
19.8%
4.9%
4.7%
5.4%
14.5%
16.9%
Sources: Moody’s Investors Service, banks’ financial statements
The bank's capital is sensitive to market spreads and model assumptions
Belfius’ capital ratio is sensitive to market spreads as unrealized losses on the securities portfolios are recorded in the available-for-sale
(AFS) reserve and, as such, deducted from CET 1 capital. However, the tightening of credit spreads associated with the downsizing of
the legacy bond portfolio has had a positive impact on Belfius’ AFS reserve on the bank portfolio, which has decreased to EUR -633
million, as of December 2015, from EUR -3.1 billion at end-2011. Nonetheless, a future widening of credit spreads on sovereign bonds
could still have a negative impact on Belfius’ capital, although not in the same proportion as that seen in 2011.
Belfius’ leverage ratio amounts to 4.9% as of December 2015 (Basel III fully transitioned), a slightly less favourable level than Belgian
peers due to the bank’s high exposure to the local public sector which has a low risk weight. This makes Belfius' capital position more
dependent on model assumptions regarding low risk weights of public-sector entities. As a consequence, the current regulatory
discussions on the consistency and comparability of modelled credit risk capital requirements might translate into higher risk weights
for public sector entities, which would affect negatively Belfius’ capital ratios.
Profitability is largely restored but remains modest
Belfius’ operating performance has significantly improved since 2012, although it is still modest compared to Belgian peers. The bank's
ratio of net income to total assets stood at 0.3% at year-end 2015.
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Exhibit 9
Belfius Profitability Is Modest Compared to Belgian Peers
Net income as a % of total assets
Sources: Moody’s Investors Service, banks’ financial statements
Belfius’ profitability is hampered by net losses recorded from de-risking on legacy assets (EUR-105 million in December 2015).
However, the negative impact of the legacy assets on the bank’s overall profitability declines in parallel with the downsizing of these
activities and is progressively offset by improving trends in the main Franchise operations.
These are driven by:
»
Increasing net banking income (+5.5% between end-2014 and end-2015);
»
Successful cost control (-3.5% during the same period), bringing the bank’s cost-to-income ratio to 64% (from 70% a year ago) in
line with the Belgian banks’ average;
»
Very low provisioning costs (8 basis points of gross loans in 2015);
»
Stable insurance revenues above EUR200 million a year since 2013.
Exhibit 10
Belfius profitability has gradually improved over time since 2013
Belfius’ main income indicators
Sources: Moody’s Investors Service, banks’ financial statements
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Exhibit 11
Banking net profit is increasing while insurance net profit is stable
Belfius’ bank and insurance net profit
Sources: Moody’s Investors Service, banks’ financial statements
Like other Belgian banks, Belfius’ profitability is under pressure from current low interest rates. Belfius’ net interest margin ranks the
lowest among the large Belgian banks. This is mainly due to the large volumes of loans to public sector entities, which are lower risk
and generally generate lower interest income.
Belfius has been able so far to preserve its interest margins by reducing interest paid on deposits. We do not expect a significant
deterioration of its profitability in the forthcoming months. This is because:
»
We expect loan-loss provisions to remain very low in the future, given the good resilience of assets during lackluster economic
growth over the past two years and the limited likelihood of loan quality deterioration now that a moderate economic recovery is
under way;
»
We expect insurance revenues to grow in the future as synergies between banking and insurance services will continue to prosper;
similarly asset management net income will continue to grow, driven by the low interest rates offered to customers on their sight
and term deposits;
»
Tactical de-risking and portfolio amortisation will limit the risk of one-off losses on legacy assets; the risk profile of the legacy
assets will be brought into line with the bank’s core activities by the end of 2016.
Belfius has set aside EUR75 million for a dividend that the bank intends to pay to its public shareholder from 2015 profits. This is a
first time it would pay a dividend since nationalisation. The total amount would represent a dividend of 21 eurocents per share, a
distribution rate of 15%.
Funding and liquidity have improved
Belfius’ financing structure is sound. Loans to customers are fully covered by customer savings (which include certificates and bonds
distributed in the retail network), with a loan-to-deposit ratio of 91% as of December 2015. The decline in interest paid on deposits has
not hurt the bank’s deposit base, which increased by 1.5% between end-year 2014 and end-year 2015.
Nevertheless, Belfius has also historically relied substantially on market-sensitive wholesale funding as a result of its large securities
portfolio and its collateral posting needs on derivatives. These features represent the main constraint to Belfius’ funding profile and
place the bank’s liquidity in a weaker position than its Belgian peers. As of December 20142, market funds represented 40% of Belfius’
tangible banking assets, a much higher level than the average of Belgian peers (27% at the same date).
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Exhibit 12
Market Funding Represents A High Portion Of Belfius’ Assets
Market funds as a % of tangible banking assets
Sources: Moody’s Investors Service, banks’ financial statements
Exhibit 15
Belfius's funding profile has significantly improved in recent years, primarily driven by a drop in the financing it provides to Dexia.
Belfius has also diversified its funding sources, notably by:
»
Issuing mortgage covered bonds following the new Belgian covered bond legislation in November 2012 (for a total outstanding
amount of EUR5.5 billion as at December 2015) and, since October 2014, public covered bonds (EUR1.8 billion as at December
2015);
»
Setting up internal securitisations and a residential mortgage backed security (RMBS) amounting to EUR800 million, issued in
November 2015.
We consider that the bank’s funding structure will stabilize at the current level as the positive effect of downsizing its legacy bond
portfolio will be offset by the negative market value of derivatives which will hold in the current low interest rate environment, keeping
collateral needs at a high level.
Belfius’ liquid assets have increased since 2012, putting the bank in better shape to withstand any potential market liquidity squeeze.
In December 2015, the bank’s liquidity asset buffer (including unencumbered assets rapidly tradable in the market and central bank
eligible assets) amounted to EUR33.8 billion and covered more than 500% of its short-term wholesale funding. Its liquidity coverage
ratio (LCR), calculated according to Basel III standards, stood at 132%, higher than the minimum regulatory standard of 100%.
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Exhibit 16
Belfius’ Liquidity Reserves Make It More Resilient to Liquidity Shocks
Liquid assets and short-term (< 1 year) wholesale funding
Sources: Moody’s Investors Service, banks’ financial statements
Increased liquidity buffers have allowed Belfius to reduce its reliance on central bank funding. In June 2015, the amount of Belfius’
funding through the European Central Bank's Long Term Refinancing Operation (LTRO) and Targeted Long Term Refinancing Operation
T-LTRO was down to EUR1.7 billion, from EUR14 billion at year-end 2013.
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Peer Group:
»
KBC Group
»
BNP Paribas Fortis S.A./N.V.
»
ING Belgium S.A./N.V.
Moody's Related Research
Credit Opinion:
»
Belfius Bank S.A./N.V.
Banking System Outlook:
»
Improved Profitability, Asset Quality Support Our Stable Outlook, December 2015
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
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Endnotes
1 See European Banking Authority, EBA Report on Asset Encumbrance, September 2015
2 Last available data before the publication of banks’ annual reports for year 2015.
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
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REPORT NUMBER
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Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation
FINANCIAL INSTITUTIONS
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Contacts
CLIENT SERVICES
Carolyn F Henson
44-20-7772-5600
AVP-Research Writer
carolyn.henson@moodys.com
Claudia Silva
Associate Analyst
claudia.silva@moodys.com
4420-7772-1714
Laurent Le Mouel
+33 1 5330 3340
VP-Senior Analyst
laurent.lemouel@moodys.com
Alain Laurin
Associate Managing
Director
alain.laurin@moodys.com
33-1-5330-1059
Andrea Usai
VP-Sr Credit Officer
andrea.usai@moodys.com
Guillaume Lucien33-1-5330-3350
Baugas
VP-Senior Analyst
guillaume.lucien-baugas@moodys.com
4420-7772-1058
Yasuko Nakamura
33-1-5330-1030
VP-Senior Credit Officer
yasuko.nakamura@moodys.com
14
15 March 2016
Nick Hill
Managing Director Banking
nick.hill@moodys.com
Americas
1-212-553-1653
Asia Pacific
852-3551-3077
Japan
81-3-5408-4100
EMEA
44-20-7772-5454
33-1-5330-1029
Belfius Bank S.A./N.V.: Strengthened Franchise and Successful De-risking Strategy Pave the Way for Privatisation