DBRS: Dexia Group’s Ratings Unchanged Following 2Q10 Results; Senior at A (high)
DBRS has today commented on the 2Q10 results for Dexia Group (Dexia or the Group). Following these results, the ratings remain unchanged for Dexia Bank Belgium, Dexia Crédit Local and Dexia Banque Internationale à Luxembourg at A (high) for Senior Long-Term Debt & Deposits and R-1 (middle) for Short-Term Debt & Deposits. The trend on all ratings is Negative.
In 2Q10, Dexia reported net income of EUR 248 million in another positive quarter, as compared to net income of EUR 216 million in 1Q10 and EUR 283 million in 2Q09. DBRS views the Group as making significant progress with its Transformation Plan, by continuing to run-off of its bond portfolios, reduce lending in non-core markets, and improve its funding profile. Within its Core Division, which includes Retail & Commercial Banking (RCB), Public & Wholesale Banking (PWB), Asset Management & Services (AMS) and the Group Center (GC), Dexia generated pre-tax income of EUR 275 million in 2Q10 up substantially from 1Q, but, within its Legacy Portfolio Management (LPM) Division, Dexia reported a marginal pre-tax loss of EUR 39 million, after sizeable positive net income in 1Q.
In RCB, Dexia generated pre-tax income of EUR 187 million, up EUR 18 million from 1Q, and contributing about 47% of Core Division income excluding the GC (core income). Positive underlying trends suggest that RCB can continue to increase its contribution in 2010. RCB grew customer deposits by 10% year-over-year (YoY) to EUR 87 billion and increased lending by 9% YoY to EUR 54 billion at the end of 2Q10. With a loan-to-deposit ratio of 67%, DBRS view RCB as having a stable funding base. Income earned in RCB is well-diversified, with 49% of net income in 2Q10 generated in Belgium, 32% in Turkey, 17% in Luxembourg and a small percentage in other geographies. Within Belgium and Luxembourg, the 8% YoY growth in customer deposits was in both traditional savings deposits and insurance products. New lending was driven by mortgages and lending to small- and medium-sized entities (SMEs). Importantly, the cost of risk remained stable and at low levels. In Turkey, the Group saw robust loan and deposit growth, helping Dexia to maintain a loan-to-deposit ratio of 126%. Dexia is focused on gaining new retail and business customers, while increasing brand visibility through marketing campaigns and additional ATMs. While the cost of risk in Turkey remains elevated, it is trending downward.
In PWB, Dexia generated pre-tax income of EUR 149 million, up a substantial EUR 70 million QoQ due to a one-off capital gain on the sale of SPE, and contributing 38% of core income. PWB continues to focus on loan production in core markets, which means being selective about new originations and maintaining solid margins. The Group had EUR 5.0 billion of new loan production in the first half of 2010, which is on target to reach the goal of EUR 10.0 billion of loan originations by year end. While deposits were up 5% since the end of 2009 to EUR 25.4 billion, long-term commitments amounted to EUR 232 billion, resulting in this business being largely wholesale funded. DBRS views Dexia’s maintenance of margins earned on new loans in core markets to match the cost of funding as an important factor when analysing the Group’s ability to generate earnings. A significant decline in the cost of risk, which was down 70% QoQ largely due to provision write-back in Q2, was a major factor in the improved bottom line.
While pre-tax income was down 17% QoQ in AMS, revenues held up well. Higher management fees and an improved product mix in Asset Management, plus increased volumes in Investor Services, were offset by the negative impact of impairments and losses in the Insurance business. Pointing to further improvement, various indicators of franchise strength - assets under management, insurance premiums and assets under administration - all improved YoY. With a very low cost of risk, which stems from the insurance business, pre-tax income in AMS was EUR 58 million, or 15% of Dexia’s core income.
Within the LPM Division, the Group reported a net loss of EUR 39 million, as compared to net income of EUR 123 million in the prior quarter and EUR 125 million in 1Q09. While the cost of risk was down QoQ, revenues declined even more with stressed financial markets and Dexia’s deleveraging. As part of its balance sheet deleveraging process, Dexia has reduced its bond portfolio in run-off by 3% QoQ to EUR 125 billion, of which 95% is investment grade (IG), and it has reduced its financial products (FP) portfolio by 0.4% QoQ to USD 14.6 billion (EUR 11.9 billion), of which 40% is IG. Positively, the FP portfolio, which is the smaller portfolio in run-off, but appears to be more risky, has seen the first signs of stabilisation since the beginning of the crisis. Additionally, the Group has run-off non-core PWB commitments, reducing loans by 31% since the end of 2008 and reducing U.S. liquidity lines by 39% over the same time period, illustrating the Group’s success with its strategy. Despite progress in running down its bond portfolios, PWB non-core loans and U.S. liquidity lines, the LPM division continues to have an elevated cost of risk, contributing to 56% of total Group cost of risk.
Dexia reported gross operating income, which is net of expenses and before provisions, of EUR 497 million in 2Q10 compared to EUR 607 million in the prior quarter, but 1Q10 had benefitted from certain one-off items. Excluding the one-offs, the modest decline was mainly due to balance sheet deleveraging and the cost of further closing the liquidity gap. DBRS views this positively, as the Group is focused on strengthening its balance sheet and core franchise rather than on revenue growth. At EUR 126 million, the cost of risk was more than halved QoQ and down 62% YoY. Dexia’s gross operating income was approximately four times its cost of risk, giving the Group a greater ability to absorb provisions. Going forward, provisions are expected to remain stable or decline, as Dexia is seeing positive credit trends across its businesses.
Dexia’s prospects have also improved as it significantly enhanced its funding and liquidity position through deposit growth, issuance of long-dated covered bonds and unsecured medium- and long-term funding, combined with a significant reduction in its short-term funding needs. Dexia benefitted from the support of the State guarantee through 30 July, but will issue only unguaranteed debt going forward. The Group has issued EUR 37.9 billion in medium- and long-term debt in 1H10, of which EUR 23.2 billion was guaranteed by the State, and EUR 9.9 billion of covered bonds. With 51% of new medium- and long-term issuance in 1H10 being non-guaranteed, DBRS views this sizeable proportion as a sign of investor confidence in the Group on a standalone basis.
DBRS views Dexia’s capitalisation as considerably bolstered by the support of the States and Dexia’s progress in reducing its risk profile. The Group’s Tier 1 capital ratio was 12.2% at 2Q10 versus 11.3% at 2Q09 and core Tier 1 ratio was 11.3% in 2Q10 as compared to 10.4% a year earlier. The strength of the Group’s capitalisation was further affirmed by the European stress tests, which were released on 23 July. Dexia’s Tier 1 ratio would be reduced to 11.2% under an adverse stress scenario and 10.9% when an additional sovereign shock was added to the adverse scenario. The Group passed the stress test with a sizable cushion over regulatory minimums.
Note:
All figures are in Euros unless otherwise noted.
The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.
This is a Corporate (Financial Institutions) rating.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.