December 7, 2017 / 4:45 PM / 10 months ago

Fitch Revises Banque Internationale a Luxembourg's Outlook to Positive; Affirms at 'BBB+'

(The following statement was released by the rating agency) PARIS/LONDON, December 07 (Fitch) Fitch Ratings has revised Banque Internationale a Luxembourg's (BIL) Outlook to Positive from Stable. The bank's Long-Term Issuer Default Rating (IDR) and senior debt ratings have been affirmed at 'BBB+' and Viability Rating (VR) at 'bbb+'. A full list of rating actions is available at the end of this rating action commentary. The ratings actions are part of a periodic portfolio review of major banks in Belgium and Luxembourg rated by Fitch. KEY RATING DRIVERS IDRs, VR AND SENIOR DEBT The Positive Outlook reflects on-going progress in the implementation of management's strategy to strengthen BIL's domestic franchise and measures to improve cost efficiency. Over the past five years, BIL has been rebuilding its domestic retail and commercial franchise and has created a positive momentum in its private banking business, leading to higher revenue. Fitch views positively the expected change in the majority ownership of BIL and expects the strengthening of earnings generation to continue. The ratings of BIL reflect its moderate risk appetite in its retail and commercial banking operations, combined with an overall healthy loan book and ample liquidity, as well as BIL's geographical concentration on Luxembourg, which is a small but strong economy. A further important rating consideration is the bank's small size relative to more highly rated peers, which means that costs are high compared with revenue-generating capacity, and BIL is more exposed to shocks than banks with larger capital bases. BIL has a sound franchise in Luxembourg as one of the top three banks in retail and commercial banking and has regained market shares lost in the early 2010's. Its traditional banking business model, further focusing on long-term customer relationships, provides resilient earnings generation. The bank has also been strengthening its wealth management franchise, including internationally. Increasing assets under management and achieving critical mass in selected geographical areas are key focus for the bank. Having to balance the rebuilding of its franchise with necessary cost savings measures results in only slow improvement in overall cost efficiency. In addition, management has decided to replace the core banking system, a material investment for a bank of its size. Overall earnings generation benefits from the currently benign operating environment and low loan impairment charges. BIL intends to maintain its moderate risk appetite, mitigating the geographical concentration of its lending. Asset quality is sound overall. The loan book accounts for around half of total assets, and reserve coverage of impaired loans is comfortable compared with peers. BIL has a noticeable amount of forborne loans; however, a large part of them is performing. The remaining assets consist mainly of the securities portfolio, which is generally of good quality and highly liquid. Customer deposits significantly exceed loans, meaning that available liquidity is invested in cash and high-quality securities. Liquidity is a rating strength. BIL benefits from a large customer deposit base, provided by its retail and private banking businesses. Capital ratios are satisfactory but have recently shown some reliance on retained earnings to sustain healthy lending growth. At end-June 2017, the phased-in common equity Tier 1 ratio, excluding 1H17 net profit, was 11.7%. We expect management to maintain this ratio at around 12%. Leverage (measured by tangible common equity/ tangible assets) was satisfactory at around 4% over the past year. However, lower capitalisation than at other private banks makes BIL vulnerable to potential sizeable operational or compliance risk arising from the private banking business. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that BIL becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that is likely to require senior creditors participating in losses, instead of or ahead of a bank receiving sovereign support. SUBORDINATED DEBT Subordinated debt issued by BIL is rated one notch below its VR to reflect the above-average loss severity risk of this type of debt. RATING SENSITIVITIES IDRs, VR AND SENIOR DEBT An upgrade of the ratings is contingent on further earnings improvement reflecting management's further implementation on BIL's strategy, building further critical mass in private banking and reducing the bank's overall cost base. The Outlook would be revised to Stable if profitability weakens, following setback in the cost savings measures and IT implementation, resulting in lower internal capital generation. The ratings would be downgraded if there are signs of a higher risk appetite, in particular in corporate lending, or weaker capitalisation, both under the current or the new majority owner. The bank's ratings are also negatively sensitive to risk from further private banking expansion into new markets and losses from sizeable operational, compliance or other reputational events. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the Support Rating or upward revision of the Support Rating Floor would be contingent on a positive change in the Luxembourg sovereign's propensity to support its banks. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT The rating of subordinated debt issued by BIL is primarily sensitive to changes in its VR. The rating actions are as follows: Long-Term IDR: affirmed at 'BBB+'; Outlook revised to Positive from Stable Short-Term IDR: affirmed at 'F2' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Viability Rating: affirmed at 'bbb+' Senior debt affirmed at 'BBB+/F2' Market-linked notes: affirmed at 'BBB+emr' Subordinated debt: affirmed at 'BBB' Contact: Primary Analyst Olivia Perney Guillot Senior Director +33 1 44 29 91 74 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Bjorn Norrman Senior Director +44 20 3530 1330 Committee Chairperson Artur Szeski Senior Director +48 22 338 6292 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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