Morningstar DBRS Confirms Belfius Bank’s Issuer Ratings at “A” / R-1 (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Long-Term Issuer Rating of Belfius Bank SA/NV (Belfius or the Bank) at “A” and the Short-Term Issuer Rating at R-1 (low). Morningstar DBRS also confirmed with the credit ratings of Belfius Financing Company, the Bank’s subsidiary in Luxembourg at “A”. The trend on all credit ratings is Stable. Morningstar DBRS has also maintained the Bank’s intrinsic assessment (IA) at “A” and its support assessment at SA3. See the full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings and the stable trend reflects the Group’s improved earnings generation, resulting from the higher interest rate environment which, combined with strong operating leverage and a very low cost of risk enabled the Group to report strong results in 2023. Nevertheless, the credit rating action also considers Belfius’s Net Interest Income (NII) as having peaked in the current interest rate cycle as well as the negative impact from the September 2023 Belgian State Bond issue and the remuneration rate of the minimum liquidity reserves at the ECB set at zero in 2024. Whilst Morningstar DBRS expects less impact from inflation on operating expenses and sound cost efficiency to remain, the deterioration of the cost of risk, albeit from a very low base, could weigh on profitability.

Belfius’ ratings continue to be underpinned by its leading bancassurance franchise in Belgium. The Bank also benefits from an overall strong funding and liquidity profile, backed by a large and stable deposit base and substantial liquidity buffers, although the loan to deposit ratio continues to be somewhat higher than peers. We also continue to take into account the Bank’s strong capital position, which remains at the higher-end of its peer group and well above regulatory requirements.

Whilst Belfius continued to demonstrate asset quality metrics in 2023 in line with the European average, Morningstar DBRS expects continued geopolitical tensions, the high interest rate environment and relatively high inflation to lead to a rise in defaults. However, the credit rating action also incorporates Belfius’s low risk profile, which should remain a mitigating factor.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require a sustained material improvement in profitability metrics whilst maintaining a low risk profile and solid capital levels.

A downgrade of the credit ratings would occur if there was a prolonged period of weak profitability, a significant deterioration in asset quality, and a notable deterioration in funding profile.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong/Good
The Bank’s ratings are underpinned by its well-established and leading bancassurance franchise in its core market of Belgium. The Bank has a strong domestic franchise in retail, SME and mid-cap customer segments as well as Private & Wealth and is the market leader in public sector banking in Belgium, particularly lending to local governments and public/project finance. The Bank is owned by the Belgian state, but is expected to be privatised in the future.

Earnings Combined Building Block (BB) Assessment: Good
Belfius reported a net attributable profit of EUR 1,115 million in 2023, up from a net attributable profit of EUR 932 million in 2022. Results were driven by strong revenue growth which absorbed higher operating expenses. The Group reported in particular strong growth in net interest income, benefitting from higher rates, overall good performance in insurance and resilient fees and commissions despite the challenging environment. In addition, results were supported by a contained cost of risk. The Bank contributed EUR 876 million up from EUR 765 million last year whilst the insurance contribution increased to EUR 239 million compared to EUR 167 million a year ago. We expect sustained revenues as interest should decrease but remain high overall in 2024, positive jaws and a cost of risk to remain contained, reflecting Belfius’s low risk profile.

Risk Combined Building Block (BB) Assessment: Strong
Morningstar DBRS considers that Belfius has generally maintained a solid risk profile, benefiting from a moderate appetite for risk and a loan portfolio dominated by high quality exposures. Asset quality is supported by low risk retail exposures, which in large part consists of Belgian mortgages and loans to public entities. Belfius’ asset quality remains sound at end-2023 with reported gross NPL ratio of 1.95%, slightly up from end-2022 but not evidencing yet asset quality deterioration. Coverage levels remained solid at 56.0% compared to 59.6% in the same period. We expect that Belfius´s asset quality will deteriorate during the coming quarters given the challenging economic environment characterised by tighter financial conditions and weaker economic dynamics. However, we view Belfius’ asset quality metrics and low risk profile to be key mitigating factors.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Belfius benefits from a solid funding profile, taking advantage of a strong and stable deposit base in Belgium. Customer funds, predominantly retail, represented 83.2% of the bank’s funding at end-2023, contributing to its stability. The loan-to-deposit ratio (as calculated by Morningstar DBRS) of the commercial (i.e. core lending) banking balance sheet remained strong at 93% at end-2023, against the 87% last year, despite the drop in deposits in relation with the issuance of the State retail bond in September 2023. Reflective of sizeable secured funding, Belfius has encumbered assets that represented EUR 23 billion or about 13.9% of Belfius Bank’s total bank balance sheet and collateral (received under securities format), down from 22.3% at end-2022. Despite this, Belfius Bank’s liquidity position is robust with an available liquid asset buffer of EUR 45.1 billion, representing around seven times the outstanding wholesale funding with maturity below one year of EUR 6.3 billion at end-2023. The Liquidity Coverage Ratio (LCR) ratio was strong at 139% and Net Stable Funding Ratio (NSFR) was 128% at end-2023.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views Belfius’ capitalisation as solid. In 2023, the Group maintained strong capital ratios, reporting a Basel III Common Equity Tier 1 (CET1) under the Danish compromise of 16.0%, slightly down from 16.5% at end-2022 despite strong earnings. Belfius also reported a strong total capital ratio of 19.1% compared to 19.8% last year. This provides Belfius with ample cushions over the 2024 CET1 of 10.1% and total capital requirements of 14.5%. Belfius also reported at Group level a 195% Solvency II ratio, well above the 100% minimum requirement. With EUR 20.2 billion of MREL at end-2023, representing an MREL ratio of 11.4% of Total Leverage Exposure at end-2023, Morningstar DBRS considers that Belfius already maintains an ample cushion over its final biding MREL requirements of 7.07% for 2024.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/429511.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors and DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support https://dbrs.morningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, Belfius 2023 Presentation, Belfius 2023 Press Release and Belfius 2023 Supporting Slides. Morningstar DBRS 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

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

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://dbrs.morningstar.com/research/429513.

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

Lead Analyst: Arnaud Journois, Vice President - European Financial Institution Ratings
Rating Committee Chair: Vitaline Yeterian, Senior Vice President - European Financial Institution Ratings
Initial Rating Date: December 5, 2017
Last Rating Date: March 20, 2023

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