Fitch Affirms Banque Internationale a Luxembourg at 'BBB+'/Stable
OREANDA-NEWS. Fitch Ratings has affirmed Banque Internationale a Luxembourg's (BIL) Long-term Issuer Default Rating (IDR) and senior debt ratings at 'BBB+' and Short-term IDR and debt ratings at 'F2'. The Outlook on the Long-term IDR is Stable. BIL's Viability Rating (VR) has also been affirmed at 'bbb+'.
A full list of rating actions is available at the end of this rating action commentary.
The ratings actions are part of a periodic portfolio review of major Benelux banking groups rated by Fitch.
KEY RATING DRIVERS
IDRs, VR AND SENIOR DEBT
The IDRs, VR and senior debt ratings reflect BIL's sound retail and commercial banking franchise in Luxembourg, resulting in some geographical concentration to a small but strong economy. They also take into account BIL's overall healthy loan book, sound capital ratios but fairly high cost base, modest equity volume and, therefore, vulnerability to any potential sizeable operational or compliance risk arising from the private banking business. Ample funding and liquidity is a positive rating factor.
Profitability benefits from predictable income streams in retail and private banking but suffers from BIL's underperforming retail banking, due to a high cost base and low interest rates. Management has taken measures to reduce the cost base, in particular in the branch network. At the same time, continued strengthening of the bank's wealth management franchise would benefit BIL's company profile.
Increasing assets under management is a key focus for the bank. BIL reported net inflows in 2015, despite further outflows from small customers in relation to the Automatic Exchange of Information. Achieving critical mass would reduce potential volatility in core activities' earnings generation and support the bank's overall profitability. The expansion of its private banking operations internationally, essentially through off-shore operations, is strengthening the international diversification of its revenue base.
BIL's common equity Tier 1 ratio decreased to 13.1% at end-June 2015, following a high dividend pay-out for 2014. Fitch expects the capital ratios to benefit from lower dividend pay-out in the future and hence to remain at around the end-June 2015 level. Capital ratios are sound but, when compared with other private banks, capitalisation overall is somewhat lower, making it vulnerable to potentially large operational losses.
BIL reported healthy growth in customer deposits in 2015, which contributed to an increase in its total balance sheet and a lowering of its loans-to-deposits ratio. Lending growth was also healthy in 2015, but BIL intends to maintain its moderate risk appetite by focusing on risk-returns. Asset quality is sound overall, with high reserve coverage resulting in a fairly low unreserved impaired loans-to-Fitch Core Capital (FCC) ratio. BIL has a noticeable amount of forborne loans; however, a large part of them is performing. The loan book is concentrated in Luxembourg and its neighboring regions.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and Support Rating Floor reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BIL becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that is likely to require senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support.
Subordinated debt issued by BIL is rated one notch below its VR in accordance with Fitch's assessment of the instrument's higher-than-average loss severity risk.
VR, IDRs AND SENIOR DEBT RATINGS
The IDRs, VR and senior debt ratings would benefit from further strengthening of BIL's private banking franchise and further improvement in profitability, in particular reducing the cost base in retail banking.
The bank's ratings are sensitive to regulatory changes resulting in significant outflows, as well as additional risk from further expansion into new markets. In addition, losses from sizeable operational, compliance or other reputational events or further weakening of capitalisation would be rating-negative.
SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of the Support Rating or upward revision of the Support Rating Floor would be contingent on a positive change in the Luxembourg sovereign's propensity to support its banks. While not impossible, this is highly unlikely, in Fitch's view.
The rating of subordinated debt issued by BIL is primarily sensitive to changes in BIL's VR.
The rating actions are as follows:
Long-term IDR affirmed at 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
Viability Rating affirmed at 'bbb+'
Senior debt affirmed at 'BBB+'/'F2'
Market-linked notes affirmed at 'BBB+emr'
Subordinated debt affirmed at 'BBB'