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 Group’s 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 the ratings reflects DBRS Morningstar’s view that KBC has continued to leverage its leading positions in its core markets and its bancassurance business model, and this has enabled the Group to restore profitability back to pre-pandemic levels. In addition, the ratings continue to be underpinned by the robust 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 capital position, which remains at the higher-end of its peer group and well above regulatory requirements.
Whilst we continue to expect some potential pressure on asset quality due to the COVID-19 crisis, we consider KBC’s improved asset quality metrics as a key mitigating factor. In particular, the Group’s planned sale of its Irish operations, as well as the recent disposal of EUR 1.1 billion of Irish non-performing loans (NPLs) will provide the Group with some flexibility to absorb any potential deterioration of asset quality in the Group’s other jurisdictions.
An upgrade of the Long-Term Issuer Rating would require further improvement in the risk profile, whilst maintaining strong earnings generation and capitalisation.
Conversely, a downgrade would occur in the event of a sustained asset quality deterioration combined with a prolonged negative impact on profitability or capital.
Franchise Combined Building Block (BB) Assessment: Strong
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. The Group’s franchise is further boosted by the meaningful positions developed in Hungary, Slovakia and Bulgaria, recently reinforced by targeted acquisitions. DBRS Morningstar also views the exit from Ireland as positive given the Group’s inability to develop a leading market position in the country.
Earnings Combined Building Block (BB) Assessment: Strong/Good
The Group has been able to leverage on its geographically diverse bancassurance franchise and continues to demonstrate solid profitability, with a reported return on equity of 13% for 2021, compared to 8% in 2020. KBC reported a net attributable profit of EUR 2.7 billion in 2021, compared to EUR 1.4 billion in 2020. The improved results were driven by provision releases, a rebound in banking revenues and solid performance in its insurance operation. Despite growth in operating expenses, KBC reported positive jaws and was able to further improve its efficiency ratio, with the reported cost to income ratio, adjusted for specific items, at 55% in 2021 compared to 57% in 2020.
Risk Combined Building Block (BB) Assessment: Good
DBRS Morningstar considers KBC’s risk profile as solid, combining the low risk Belgian and Czech portfolios, with somewhat higher risk portfolios in the other core markets. The Group’s asset quality has consistently improved in recent years and continued to improve in 2021, with the share of impaired loans declining to 2.9% at end-2021 from 3.3% a year earlier. DBRS Morningstar notes that whilst this improvement was visible across all the country units, it stems mainly from the write-off of legacy loans in Ireland. Whilst we continue to expect some potential pressure on asset quality due to the COVID-19 crisis, we consider KBC’s improved asset quality metrics as a key mitigating factor. In particular, the Group’s planned sale of its Irish operations, as well as the recent disposal of EUR 1.1 billion of Irish non-performing loans (NPLs) will provide the Group with some flexibility to absorb any potential deterioration of asset quality in the Group’s other jurisdictions.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
KBC’s robust funding position, based on the stable retail and mid-sized corporate deposit base in its core markets also supports the ratings. At FY 2021, customer deposits represented 69% of total funding while the loan-to-deposit ratio was around 80% 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 2021 LCR and NSFR ratios well above the regulatory requirements, at 167% and 148% respectively.
Capitalisation Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views KBC’s capitalisation as robust, supported by the strong recurring capital generation. KBC reported a fully loaded Basel III Common Equity Tier 1 (CET 1) ratio, under the Danish compromise, of 15.5% at end-2021, compared to 17.6% at end-2020, as KBC resumed dividend payments in Q3 and Q4 2021 after the ECB lifted restrictions at end-September 2021. KBC also reported a fully loaded capital ratio of 18.6%. This provides KBC with an ample buffer over the minimum overall capital requirements (OCR) of 10.81% for CET 1 and of 14.31% for Total Capital. The 5.4% fully-loaded Basel 3 leverage ratio for the Group (under the Danish compromise) remained high at year-end 2021. KBC also reported, at Group level, a 201% Solvency II ratio, well above the 100% regulatory minimum requirement. DBRS Morningstar notes that the Group already complies with MREL requirements. At end-2021, KBC’s MREL ratio was 27.7% of risk-weighted assets (RWAs) and 9.9% of Leverage Ratio Exposure (LRE) compared to requirements at January 1, 2022 of 25.98% of RWAs and 7.34% of LRE.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/392928.
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.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/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 (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Morningstar Inc. and Company Documents, KBC Group Q4 2021 Quarterly Report, KBC Group Q4 2021 Earnings Presentation and KBC Group Q4 2021 Press Release. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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/392925.
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 FIG
Initial Rating Date: June 3, 2010
Last Rating Date: February 26, 2021
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