PRESS RELEASE: DBRS Confirms Dexia Entities at A (high); Trend Revised to Stable from Negative
DBRS(R) As It Happens
DECEMBER 8, 2010 05:20 PM
Press Releases
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DBRS Confirms Dexia Entities at A (high); Trend Revised to Stable from Negative
DBRS's ratings for Dexia Group's (Dexia or the Group) main operating entities -- Dexia Credit Local (Dexia CL), Dexia Bank Belgium (Dexia BB) and Dexia Banque Internationale a Luxembourg (Dexia BIL) -- reflect their combined solid intrinsic credit strength. The support of the Belgian, French and Luxembourg states (collectively, the States) is factored into the final ratings. The long-term ratings of A (high), which were confirmed on 8 December 2010, reflect Dexia's well-entrenched retail and commercial banking franchises in Belgium, Luxembourg and Turkey combined with its strong position in public finance. While still reducing the scope of its businesses, adjusting to the current funding environment and working down its legacy asset exposures, Dexia has remained profitable since its major losses in 2H08. The return to a Stable trend reflects the Group's success in executing its Transformation Plan, its continued profitability and its improved liquidity profile, which limits the downward pressure on the ratings at this time.
DBRS's intrinsic assessment (IA) of "A" considers Dexia's well-established and diversified franchise, underlying earnings resiliency, improved liquidity profile and strengthened capitalisation, but also recognises the challenges the Group faces given its wholesale funding reliance and the still disrupted financial markets. Ratings for Dexia's principal subsidiaries reflect the combined strength of the Group, which operates these entities as integral components of its overall franchise and leverages their strengths for the benefit of the Group. Based on an SA-2 Support Assessment, Dexia's Senior Long-Term Debt & Deposits rating of A (high) is one notch above the Group's IA, reflecting the expectation of some timely form of systemic external support. DBRS views positively the support the Group has received from the States in terms of capital and debt guarantees that confirms DBRS's expectation of systemic support.
During the financial crisis, Dexia faced losses primarily due to its FSA exposure and weaknesses in its large securities portfolio. Dexia received support from the States in terms of capital injections, debt guarantees and arrangements to ring-fence its legacy exposures to FSA's financial products business. Subsequently, Dexia sold FSA, while retaining FSA's Financial Products portfolio that is in runoff. Dexia also reduced its bond portfolio by over 25% since 2008. Until the end of June 2010, Dexia used funding via the States' guarantee for a significant portion of new issuance, as well as covered bonds and increased deposits to meet its funding needs. While there are encouraging signs that market confidence in Dexia has recovered, the current IA reflects funding challenges still facing the Group.
In refocusing on its core businesses, Dexia is transforming itself into more of a retail banking group, largely in Belgium, Luxembourg and Turkey that also has extensive public finance capabilities. Dexia expects that by 2014, its Retail and Commercial Banking (RCB) division will contribute to 60% of revenues, up from just 36% in 2007. The Group has refocused its public sector lending and public/project finance franchise on its core markets, mainly France and Belgium, where it is a leader, as well as Iberia, Italy and a few additional countries. Such markets offer strong commercial franchises where Dexia can advance direct client relationships and build significant cross-selling. These markets also offer Dexia avenues for raising the long-term funding necessary to support this business. The refocusing of the Public and Wholesale Banking (PWB) business will reduce lending in non-core markets, such as Central and Eastern Europe (CEE), Australia and Japan, where Dexia did not have access to the local funding markets thereby also reducing wholesale funding needs. DBRS would view Dexia's success with this plan as critical for an improvement in Dexia's IA.