July 18 - Fitch Ratings has downgraded Banque Internationale a Luxembourg's (BIL) Long-term Issuer Default Rating (IDR) to 'A-' from 'A+' and removed it from Rating Watch Negative (RWN). The Outlook is Stable. The agency has also revised BIL's Support Rating Floor to 'A-' from 'A+' and removed it from RWN. A full list of ratings is at the end of this comment.
BIL's Long- and Short-term IDRs, Support Rating and Support Rating Floor reflect Fitch's view that there would be an extremely high probability of support from the state of Luxembourg ('AAA'/Stable) if required. This view takes into account the bank's domestic systemic importance as one of the three largest retail banks in Luxembourg, Moreover, once the planned sale by Dexia closes, the state of Luxembourg will become a 10% owner of the bank, with Precision Capital holding the remaining 90%.
The Short-term IDR has been downgraded to 'F1', the higher of the two mapping options which link Short-term and Long-term IDRs generally applied by Fitch. This reflects the agency's belief that potential additional support from the Luxembourg state is more certain in the short term.
The agency no longer expects that the primary source of support in case of need would come from Dexia. Precision Capital is a Qatari investment group. As Fitch does not rate Precision Capital, neither its ability nor its willingness to support BIL are factored into the ratings.
BIL's IDRs are sensitive to any change in the Luxembourg authorities' ability (as defined by the rating of the Grand Duchy of Luxembourg) or propensity to support BIL and any reduction could be negative for BIL's IDRs. There is clear intent in developed markets to reduce state support for banks in the medium term, and force shareholders and creditors, rather than taxpayers, to take losses. Fitch does not, , expect a change in the willingness of the Luxembourg authorities to support banks in the near term given the current market turbulence.
BIL's Viability Rating (VR) reflects a good retail funding base, solid capital ratios, moderate risk profile, domestic geographic concentration and satisfactory operating profitability. BIL has a good retail funding base in Luxembourg and is liability driven. Customer deposits fund the bank's customer-loan portfolio and the rest of the bank's assets are essentially match funded. The VR takes into account the expectation that the bank will successfully reach its targeted Basel 3 Common Equity Tier 1 ratio of 9% (corresponding to Basel 2 Core Tier 1 ratio of 12%) after being sold.
The VR is sensitive to capital ratios being below target in future or any unexpected increase in the bank's risk profile resulting from a change in strategic direction, following the change of ownership. The bank's capital ratios are now lower due to the realised loss of EUR1.9bn from the transfer of assets to Dexia (largely related to the legacy portfolio EUR1.7bn). The VR would benefit from a track record in its new scope as an independent bank, successful implementation of its business plan and improvements in efficiency.
BIL will be only roughly half its size following the sale as certain businesses will be carved out beforehand. BIL's legacy bond portfolio and asset management and investor services businesses will remain with Dexia or be sold. Once sold, BIL will be active in private, retail and commercial banking with a focus on Luxembourg and neighbouring countries. The quality of the loan book remains good. Loan impairment charges and impaired loans will likely rise in 2012 given the weaker economy, but should continue to be low as the bank concentrates on its low risk domestic clients.
The rating of the hybrid securities reflects their non-performance under Fitch's criteria 'Rating Bank Regulatory Capital and Similar Securities'. As BIL made a loss in 2011, it has waived the quarterly coupons on these instruments until the next annual results are approved and has written them down by 15%. If the bank makes sufficient profits in future years it must restore the nominal amount to its original value and therefore reverse the write-down as per the conditions in the prospectus.
The 'CCC' rating of the securities reflects Fitch's view that the instruments are expected to return to performing status with only moderate economic losses for investors being sustained once the bank returns to profitability. The rating is therefore sensitive to any weakening of BIL's earnings outlook that might give rise to the risk of a longer period of non-performance of the securities.
The rating actions are as follows:
Long-term IDR: downgraded to 'A-' from 'A+' removed from RWN; Stable Outlook
Short-term IDR: downgraded to 'F1' from 'F1+' removed from RWN
Support Rating: affirmed at '1'
Support Rating Floor: revised to 'A-' from 'A+' removed from RWN
Viability Rating: 'bbb' assigned
Senior debt: downgraded to 'A-' from 'A+' removed from RWN
Market linked notes: downgraded to 'A-(emr)' from 'A+(emr)' removed from RWN
Subordinated debt: affirmed at 'BBB-' removed from RWN
Hybrid securities: affirmed at 'CCC' removed from RWN
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