DBRS Morningstar Confirms KBC Bank NV’s Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of KBC Group NV (KBC or the Group) including the Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). Concurrently, DBRS Morningstar confirmed the ratings of KBC Bank NV (KBC Bank), the principal banking subsidiary of KBC, including the Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The one notch differential in the long-term ratings between the parent company and KBC Bank reflects structural subordination. DBRS Morningstar has also maintained KBC Bank’s Intrinsic Assessment at AA (low) and the Support Assessment at SA3. The trend on all ratings remains Stable. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of ratings reflects DBRS Morningstar’s view that KBC has continued to leverage its leading positions in its six core markets and on its bancassurance business model, which enabled the Group to remain highly profitable despite the COVID-19 crisis. In addition, the ratings continue to be underpinned by the strong funding and liquidity profile, backed by its large and stable deposit base and substantial liquidity buffers. The ratings also continue to take into account the Group’s very strong capital position, which remains at the higher-end of its peer group and well above regulatory requirements. The latter is viewed as key to absorbing the potential fallout from the crisis.

Nevertheless, KBC is likely to see pressure on asset quality in 2021. KBC has managed in recent years to reduce its legacy exposures in Ireland and now demonstrates more normalised asset quality metrics at the Group level compared to European peers. However, we expect new NPLs to materialise in 2021 with the end of the support provided by the moratoria schemes in the different jurisdictions where the Group operates.

In confirming the ratings with a Stable Trend, DBRS Morningstar considers that the Group has proven resilient in terms of profitability in 2020. Strong results in the insurance business and cost reductions mitigated the small loss in Q1 2020 induced by the market turmoil, the impact of lockdowns, the low interest rate environment and the significant loan loss provisions related to COVID-19. KBC reported an ROE of 8% in 2020, which compares very favourably with peers, and in our view, demonstrates the Group’s robust earnings capacity.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating is unlikely over the near term, given the challenging economic outlook. Over the longer term, an upgrade of the ratings would require an improved risk profile, whilst maintaining strong, above peer earnings generation and capitalisation.

Conversely, a downgrade would occur from a sustained asset quality deterioration combined with a prolonged negative impact on profitability and capital.

RATING RATIONALE

KBC’s ratings are underpinned by its deep-rooted and leading bancassurance franchise in its core markets, with its main strengths being its solid position in both Belgium and the Czech Republic where it has well-positioned retail franchises. DBRS Morningstar also views as positive KBC’s effectiveness in reaching meaningful positions in Hungary, Slovakia and Bulgaria.

Despite the impact of the COVID-19 crisis, the Group continued to demonstrate high profitability, with a reported return on equity of 8% for 2020, compared to 14% in 2019. In 2020, KBC reported a net attributable profit of EUR 1.4 billion, down from EUR 2.5 billion in 2019, as results were impacted by the higher provisions and pressure on core revenues resulting from the lockdowns and low interest rates, despite solid performance in insurance and continued cost reductions. The Group was able to maintain a good efficiency ratio, with the reported cost to income ratio, adjusted for specific items, at 59% in 2020 compared to 58% in 2019.

DBRS Morningstar considers KBC’s risk profile as solid, combining the low risk in its Belgian and Czech portfolios, with somewhat higher risk portfolios in other CEE businesses. The Group’s asset quality has been consistently improving in recent years and continued to improve in 2020, with the share of impaired loans declining to 3.3% at end-2020 from 3.5% a year earlier. DBRS Morningstar notes that whilst this resulted from positive trends across all country units, it stems mainly from the improvement in Ireland, most notably driven by the write-off of legacy loans. However, due to the COVID-19 pandemic we expect asset quality to deteriorate in coming quarters when moratoria expire and bankruptcies start to materialise.

KBC’s solid funding position, based on the stable retail and mid-sized corporate deposit base in its core markets also supports the ratings. At FY 2020, customer deposits represented 70% of total funding while the loan-to-deposit ratio was around 83% for the Group. KBC Bank’s liquidity position is also solid in DBRS Morningstar’s view, with liquid assets representing around 40% of the balance sheet and FY 2020 LCR and NSFR ratios well above the regulatory requirements, at 147% and 146% respectively.

DBRS Morningstar views KBC’s capitalisation as robust, and notes that internal capital generation contributed to a steady improvement in capital levels in recent years. KBC reported a fully loaded Basel III Common Equity Tier 1 (CET 1) ratio under the Danish compromise of 17.6% at end-2020 compared to 17.1% at end-2019. KBC also reported a fully loaded capital ratio of 21.2%. This provides KBC with a significant buffer over the theoretical minimum capital requirement of 7.95%. The reduced capital requirements result from the announced ECB and National Bank measures which provide temporary relief on the minimum capital requirements. The fully loaded Basel 3 leverage ratio for the Group (under the Danish compromise) remained high at year-end 2020 at 6.4%. KBC also reported at Group level a 222% Solvency II ratio, well above the 100% minimum requirement. DBRS Morningstar also notes that the Group already reports an MREL ratio above regulatory requirements, which will be binding by end-2021. At end-2020, the Group reported an MREL ratio of 10.1% of Total Liabilities and Own Funds (TLOF) compared to a requirement of 9.67%.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for KBC Bank NV are as follows: Franchise Strength –Strong; Earnings Power – Strong; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Very Strong/Strong.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020). https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021)
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, KBC Group Annual Accounts 2015- 2020, KBC Group Quarterly Accounts 2015-2020, KBC Group Earnings Presentations 2015-2020, the National Bank of Belgium, the European Central Bank and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/374330

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Ross Abercromby, Managing Director, Global Financial Institutions Group
Initial Rating Date: June 3, 2010
Last Rating Date: February 27, 2020

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