Date of Release: 2008-03-12

Dexia Group

Ratings Unaffected by 2007 Results – Senior at AA (high)

In view of the 2007 results reported by Dexia Group (Dexia or the Group), DBRS does not see any change in the ratings of Dexia Bank Belgium, Dexia Crédit Local and Dexia Banque Internationale à Luxembourg at AA (high) for Senior Long-Term Debt & Deposits and R-1 (high) for Short-Term Debt & Deposits. The trend on all ratings remains Stable.

Demonstrating the strength of its franchise, Dexia’s underlying net income was EUR2.36 billion, an increase of 12.5% from 2006 on a pro forma basis that adjusts for acquisitions and divestitures, as well as other items. In Q4 2007, the Group’s underlying net income was EUR603 million, which was up 14.2% over Q4 2006 pro forma. On a reported basis, Dexia’s net income for 2007 was EUR2.53 billion, down from EUR2.75 billion in 2006, while net income for Q4 2007 was EUR587 million.

Dexia was not immune to the dislocations in the financial markets, but most of the Group’s businesses were not materially impacted. In Q4 2007, FSA, Dexia’s U.S. financial guarantor subsidiary, had mark-to-market write-downs of EUR203 million in its insured credit default swap (CDS) portfolio. While these write-downs flowed through the income statement, FSA engages in these CDS transactions with the expectation of holding them to maturity, so Dexia views these write-downs as non-operating. These write-downs were partially offset at the Group by equity capital gains of EUR119 million and tax benefits. Given the nature of FSA’s business and its financial strength, DBRS views this treatment as having merit in providing a perspective on the Group’s business trends. Regardless of the treatment, DBRS views Dexia’s ability to sustain its earnings and financial profile, even with these write-downs, as an important demonstration of its financial health. For the full year, mark-to-market write-downs in FSA's CDS portfolio of EUR461 million were more than offset by equity capital gains of EUR362 million, tax benefits and other positives.

DBRS views positively the strong pace of business activity that has supported underlying revenue growth among Dexia’s business lines in 2007. For Public/Project Finance and FSA, business opportunities have increased as a result of the repricing of credit in recent quarters. In Q4 2007, income in Public/Project Finance & Credit Enhancement (PPFCE) of EUR711 million was up 11.2% over Q4 2006 (14.3% on a constant exchange rate basis). Newer markets, such as Eastern Europe and Japan, as well as DenizBank in Turkey, are contributing to this revenue growth. For 2007, PPFCE’s income of EUR2.8 billion was up 10.2% over 2006 and its net income was up 15% to EUR1.3 billion, as its expense growth was held to 8.1%.

While Dexia is broadening its Personal Financial Services (PFS) franchise, business growth was more moderate in PFS with income of EUR2.8 billion, up only 4.6% in 2007 over the prior year. With expense growth controlled at only 3.5% even with branch expansion in DenizBank, net income of EUR686 million was up 11.0% over 2006. Dexia generated stronger year-over-year growth in net income in its smaller business lines of Asset Management (12.3%) and Investor Services (13.0%), which includes the joint venture with Royal Bank of Canada. Benefiting from Dexia’s strong liquidity position, its Treasury and Financial Markets saw increased net interest income, but this division’s net income of EUR238 million was down 22.7% from 2006 due to the impact of widening credit spreads on its trading portfolios.

Even as it invested in its franchise, Dexia improved its operating efficiency in 2007 by driving its underlying cost-to-income ratio down to 56.4% in Q4 2007 from 58.2% in Q4 2006. For 2007, this ratio was 54.8%, down from 55.4% in 2006. With slower growth in the Group’s more established markets, such as retail banking in Belgium, DBRS views Dexia’s success in delivering greater efficiency as an important contributor to sustaining its earnings growth.

The Group also delivered positive operating leverage in 2007. Underlying revenues in Q4 2007 were up 8.7% from Q4 2006, but underlying expenses were up only 5.3%. A big driver of this expense increase was investment in Dexia’s expanding businesses. Excluding increased activity in Turkey, costs were largely flat in PFS. As Dexia expands its franchise globally with added complexity and greater presence in more dispersed markets, DBRS sees its ability to achieve the right balance between its revenue growth and investing in its franchise as an important factor in maintaining its financial strength.

Dexia’s 2007 results also reflect its consistency in maintaining a low risk profile across its businesses, including FSA. DBRS considers Dexia’s careful management of risk across its businesses, including FSA, to be an important component of its business model and its ability to fund itself in turbulent wholesale markets. Comprising primarily additions to reserves at FSA and loan loss provisions, the cost of risk remained relatively modest at EUR163 million for 2007, although it was up from EUR124 million in 2006. Business growth was a factor in the increased provisioning. Increased activity at FSA contributed to the pace of additions to non-specific reserves rising from 0.6 basis points (bps) of net par outstanding in 2006 to 0.8 bps in 2007. Expanding business and decreased positive contribution from provision write-backs in 2007 contributed to the increase in provisioning to 4.3 bps of total net outstanding commitments from 2.4 bps in 2006.

Dexia’s low risk profile reflects its business mix across counterparties and geographies. Almost 56% of the Group’s exposure was to central government and local public sector counterparties at the end of 2007. Demonstrating its conservative risk management, Dexia’s exposure to U.S. sub-prime mortgage-related assets remains limited and the Group stayed out of ABS CDOs.

The Group’s liquidity position has remained strong during the market disruptions of recent quarters. Although more reliant on wholesale funding than deposits, Dexia has benefited from having a strong deposit base and banking franchise, combined with a well established infrastructure for its wholesale funding. Reflecting these capabilities, the Group reported that it has benefited from being a net supplier of liquidity to the capital markets. This result indicates the strength of its franchise and its funding abilities, as well as its conservative approach. Dexia does not have liquidity commitments to conduits or off-balance sheet structured investment vehicles (SIVs). DBRS views Dexia’s conservative approach to risk management and funding as important underpinnings of its ratings.

Dexia maintains strong capitalization with a Tier 1 ratio of 9.1% at the end of 2007, although this was down from 9.8% at the end of 2006. While Tier 1 capital increased 11.7% with retained earnings from 2006, the increase in risk-weighted assets of 19.5% was greater as a result of business expansion. Under Basel II, for which Dexia has completed extensive implementation work in 2007, the Tier 1 ratio is higher at 11.5%, indicating a larger cushion. DBRS views this implementation process as an important driver of enhanced risk management and more extensive application of the economic capital and risk-return framework with the Group. Also indicative of the Group’s capital strength was the injection of EUR340 million into FSA in 2007 to bolster its capital position and support its ability to take advantage of business opportunities.

In DBRS’s opinion, the Group’s creditworthiness is characterized by healthy and predictable operating profitability and a strong balance sheet, and is underpinned by very low asset and market risk, strong liquidity and solid risk-adjusted capitalisation. Financial performance has been supported by increasing fee income, low credit expenses and improvement in cost management.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.