Standard and Poors Rating Report (KBC Bank NV) March 10 2014

Research Update:
KBC Group Upgraded On Belgium's
Stabilizing Economic Risks And Our
Expectation For Capital Strengthening;
Outlook Stable
Primary Credit Analyst:
Taos D Fudji, Milan (39) 02-72111-276; [email protected]
Secondary Contact:
Aurelie Thiellet, Paris (33) 1-4420-7303; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
S&P Review Of Government Support In European Bank Ratings
Ratings Score Snapshot
Related Criteria And Research
Ratings List
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Research Update:
KBC Group Upgraded On Belgium's Stabilizing
Economic Risks And Our Expectation For Capital
Strengthening; Outlook Stable
Overview
• We consider that Belgian banking and insurance group KBC operates in a
more supportive environment following our recent revision of the outlook
on Belgium to stable and our view that economic risks for domestic banks
have turned stable.
• We believe KBC now has a greater ability to increase net income and
strengthen its capitalization over the coming three years.
• We are raising our ratings on KBC Bank to 'A/A-1' from 'A-/A-2', on KBC
Insurance to 'A' from 'A-', and on holding company KBC Group to 'A-' from
'BBB+'.
• The stable outlook indicates our belief that KBC will consolidate its
capital and maintain asset quality, following its efforts in recent years
to improve its risk position.
Rating Action
On March 10, 2014, Standard & Poor's Ratings Services raised its long-term and
short-term counterparty credit ratings on Belgium-based KBC Bank N.V. to
'A/A-1' from 'A-/A-2', its insurer financial strength rating on KBC Insurance
N.V. to 'A' from 'A-', and its long-term counterparty credit rating on holding
company KBC Group N.V. to 'A-' from 'BBB+'. Simultaneously, we affirmed our
'A-2' short-term counterparty credit rating on KBC Group. We also raised our
insurer financial strength ratings on "highly strategic" subsidiary KBC Group
RE S.A. to 'A-' from 'BBB+' and on "strategic" Czech Republic-based subsidiary
CSOB Pojitovna AS to 'A-' from 'BBB+'. The outlooks on these KBC entities are
stable.
At the same time, we raised our long-term issue ratings on KBC's subordinated
debt to 'BBB+' from 'BBB' and on its existing junior subordinated debt to
'BBB-' from 'BB+'.
We assigned our 'BB' long-term issue rating to the proposed Tier 1 undated
deeply subordinated resettable notes to be issued by KBC Group. The rating is
subject to our review of the notes' final documentation.
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Research Update: KBC Group Upgraded On Belgium's Stabilizing Economic Risks And Our Expectation For
Capital Strengthening; Outlook Stable
Rationale
The rating actions follow our revision of the outlook on Belgium to stable
(see "Outlook On Belgium To Stable On Improved Structural Policy Environment;
'AA/A-1+' Ratings Affirmed," published Feb. 28, 2014, on RatingsDirect). We
also factor in our view that the economic risk trend in Belgium is stable,
under our Banking Industry Country Risk Assessment (BICRA) methodology. We
consider that KBC now operates in more supportive economic environment and
consequently believe it has a greater ability to increase its net income and
strengthen its capital over the next three years. We also take into account
the group's recent clarification of its dividend policy and its proposed tier
1 hybrid capital issue. In conjunction with our upgrade of KBC Bank, we have
revised upward our assessments of its capital and earnings to "adequate" from
"moderate" and its stand-alone credit profile (SACP) to 'a-' from 'bbb+'.
We estimate that the Belgian economy will grow in real terms by an average of
1.2% annually over 2014-2017. In the real estate market, despite the strong
rise in residential prices during the 2000s, we do not expect any major price
correction during the same period. In our base-case scenario, we foresee a
trend toward stabilization in real-term property prices by 2015. We anticipate
that banks' provisions for domestic credit losses will be about 30 basis
points in 2014, which is low compared with levels in other Western European
countries.
We now forecast a risk-adjusted capital (RAC) ratio, our main measure of a
bank's capital, at 7.5% or more in 2014 and beyond, versus 6.3% in 2012, for
the group. We calculate our RAC ratio at group level because we consider that
KBC will remain an integrated bancassurance group in the foreseeable future,
and because it manages capital allocation on a consolidated basis.
In our RAC ratio, we factor in our estimate of KBC's annual net income--about
€1.6 billion--over the next three years, further pay back of government
hybrids, and a skip in dividends and government hybrid coupons in 2015. At the
KBC Bank Ireland subsidiary, we expect a pronounced decline in credit costs.
This subsidiary has accounted for 50%-60% of total group credit costs in the
past four years. We also believe that KBC will not face any material
impairment charges as a result of the European Central Bank's (ECB) asset
quality review because the group preemptively identified impairments in
November 2013. Lastly, our RAC calculation includes the KBC Group's proposed
issue of additional tier 1 hybrid instruments in excess of €1 billion, by our
estimates. These instruments will comply with the EU's Capital Requirements
Directive IV for banks.
We view positively KBC's stated intention to maintain a Common Equity Tier 1
ratio under full implementation of Basel III at above 10%. KBC's pro forma
Common Equity Tier 1ratio stood at 12.5% at year-end 2013 under full
implementation of Basel III.
KBC is one of Belgium's leading financial services groups. It reported total
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Research Update: KBC Group Upgraded On Belgium's Stabilizing Economic Risks And Our Expectation For
Capital Strengthening; Outlook Stable
assets of €240 billion on Dec. 31, 2013. We base our ratings on KBC Bank on
our analysis of the consolidated creditworthiness of KBC Group, which controls
100% of the bank, and KBC Insurance N.V., given the very high integration
between the group's banking and insurance operations.
In accordance with our criteria for hybrid capital instruments, the 'BB'
rating on the group's proposed additional Tier 1 hybrids stands four notches
below KBC Bank's SACP, incorporating:
• The deduction of two notches, which is the minimum downward notching from
the SACP under our criteria for a bank hybrid capital instrument.
• A deduction of an additional notch to reflect our view that reporting a
loss in a particular accounting period while breaching Basel III equity
buffers would prevent coupon payments, and that this could happen
independently of the bank's collapse or non-viability. This risk may not
otherwise be reflected in the SACP. Payments can be limited under
Condition 3.2 in the notes' documentation, which refers to the "Maximum
Distributable Amount," subject to respect of the "combined buffer" (as
the Capital Requirements Directive IV defines these terms). Given that
this limit is defined in reference to the "combined buffer," we
understand that this trigger level will increase over time, along with
the expected regulatory phase-in. We also factor in that if this earnings
clause and trigger were to be activated, then KBC Group would not have
flexibility to use otherwise distributable reserves to make coupon
payments.
• The deduction of a fourth notch to reflect that the notes feature a
contingency clause leading to principal write-down. This clause would
become effective if KBC Group's consolidated Common Equity Tier 1 ratio
was to fall below a 5.125% trigger, which we see as a "non-viability
contingency clause."
The 'BB' issue rating also reflects the structural subordination of debt
issued at KBC Group level, compared with debt issued by operating subsidiary
KBC Bank.
We understand the Belgian regulator has granted the proposed hybrid instrument
Tier 1 status and regulatory capital credit. Consequently, we have assigned
"intermediate" equity content to the hybrid notes, reflecting our view that
they would allow the absorption of losses on a "going-concern" basis, through
coupon cancellation at the option of the issuer. Our assessment also reflects
that the instrument is perpetual and has no step-up clause.
Outlook
The stable outlook indicates our belief that KBC will consolidate its capital
and maintain asset quality following its efforts in recent years to improve
its risk position.
We could consider a downgrade if the economies of KBC Bank's main countries of
operation do not stabilize as we expect, or if we come to believe that KBC
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Research Update: KBC Group Upgraded On Belgium's Stabilizing Economic Risks And Our Expectation For
Capital Strengthening; Outlook Stable
Bank's asset quality will weaken significantly. In particular, we expect that
the impairment charges linked to the ECB's upcoming asset quality review will
not materially exceed the amount announced on Nov. 14, 2013, and that the cost
of credit risk in 2014 will be lower than the 2012 level. In addition, higher
losses than we currently expect could lead us to revise downward our view of
KBC Bank's risk position.
We view very limited upside rating potential at this stage.
S&P Review Of Government Support In European Bank Ratings
European authorities have recently indicated their intention to avoid future
bank bail-outs (government support) by using bail-ins (burden sharing with
investors, potentially including senior unsecured obligations). Consequently,
we plan to review our ratings on European banks, including KBC Bank, that
benefit from uplift to reflect government support. For further details, see "
Standard & Poor's To Review Government Support In European Bank Ratings,"
published March 4, 2014.
Ratings Score Snapshot
KBC Bank
To
From
Issuer Credit Rating:
A/Stable/A-1
A-/Positive/A-2
SACP:
Anchor:
Business Position:
Capital and Earnings:
Risk Position:
Funding and Liquidity:
abbb+
Strong (+1)
Adequate (0)
Adequate (0)
Average and
Adequate (0)
bbb+
bbb+
Strong (+1)
Moderate (-1)
Adequate (0)
Average and
Adequate (0)
Support:
GRE Support:
Group Support:
Sovereign Support:
1
0
0
1
1
0
0
1
Additional Factors:
0
0
Related Criteria And Research
Related Criteria
• Group Rating Methodology, Nov. 19, 2013
• Insurers: Rating Methodology, May 7, 2013
• Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital
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Research Update: KBC Group Upgraded On Belgium's Stabilizing Economic Risks And Our Expectation For
Capital Strengthening; Outlook Stable
Framework, June 22, 2012
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Banking Industry Country Risk Assessment Methodology And Assumptions,
Nov. 9, 2011
• Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
• Bank Capital Methodology And Assumptions, Dec. 6, 2010
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
• Standard & Poor's To Review Government Support In European Bank Ratings,
March 4, 2014
• Outlook On Belgium To Stable On Improved Structural Policy Environment;
'AA/A-1+' Ratings Affirmed, Feb. 28, 2014
• Request For Comment: Assigning Issue Credit Ratings To Bank And
Prudentially Regulated Finance Company Hybrid Capital Instruments, Feb.
6, 2014
• Banking Industry Country Risk Assessment: Belgium, Jan. 28, 2014
Ratings List
Upgraded; Ratings Affirmed
KBC Bank N.V.
Counterparty Credit Rating
Certificate Of Deposit
Junior Subordinated
Certificate Of Deposit
Commercial Paper
KBC Insurance N.V.
Counterparty Credit Rating
Local Currency
Financial Strength Rating
Local Currency
KBC Group N.V.
Counterparty Credit Rating
CSOB Pojistovna a. s.
KBC Group Re S.A.
Counterparty Credit Rating
Local Currency
Financial Strength Rating
Local Currency
KBC Bank Funding Trust II
Preferred Stock (1)
To
From
A/Stable/A-1
A/A-1
BBBA-1
A-1
A-/Positive/A-2
A-/A-2
BB+
A-2
A-2
A/Stable/--
A-/Positive/--
A/Stable/--
A-/Positive/--
A-/Stable/A-2
BBB+/Positive/A-2
A-/Stable/--
BBB+/Positive/--
A-/Stable/--
BBB+/Positive/--
BBB-
BB+
KBC Bank Funding Trust III
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Research Update: KBC Group Upgraded On Belgium's Stabilizing Economic Risks And Our Expectation For
Capital Strengthening; Outlook Stable
Preferred Stock (1)
BBB-
BB+
KBC Bank Funding Trust IV
Preferred Stock (1)
BBB-
BB+
KBC Bank Ireland PLC
Commercial Paper (1)
A-1
A-2
KBC Ifima N.V.
Senior Unsecured (1)
Senior Unsecured (1)
Senior Unsecured (2)
Subordinated (1)
A
AABBB+
ABBB+
BBB+
BBB
Kredietbank N.A. Finance Corp.
Commercial Paper (1)
A-1
A-2
New Rating
KBC Group N.V.
Junior Subordinated
BB
(1) Guaranteed by KBC Bank N.V.
(2) Guaranteed by KBC Group N.V.
Additional Contacts:
Financial Institutions Ratings Europe; [email protected]
Insurance Ratings Europe; [email protected]
Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by
this rating action can be found on Standard & Poor's public Web site at
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