OREANDA-NEWS. Fitch Ratings has affirmed BNP Paribas Fortis SA/NV's (BNPPF) and subsidiary BGL BNP Paribas's (BGL BNPP) Long-Term Issuer Default Ratings (IDRs) at 'A+' with Stable Outlooks and Short-Term IDRs at 'F1'. At the same time, BNPPF's Viability Rating (VR) has been affirmed at 'a'. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS AND SENIOR DEBT

BNPPF's and BGL BNPP's IDRs and senior debt ratings are equalised with the banks' majority or ultimate shareholder BNP PARIBAS's (BNPP, A+/Stable/F1) ratings. BNPPF is wholly-owned by BNPP while BGL BNPP's capital is 50%-owned by BNPPF and 16% by BNPP with the remainder owned by the State of Luxembourg, a consequence of the Fortis Bank bail-out in 2008.

The Support Rating of '1' reflects an extremely high probability of support from BNPP, if needed. Fitch views BNPPF and BGL BNPP as core to BNPP's strategy. They are highly integrated, both in terms of operations and management, and we believe that BNPP's reputation would suffer were one of these subsidiaries to default. We also believe BNPP would have sufficient resources to recapitalise them to a level acceptable to regulators as and when required on a timely basis.

Retail banking is BNPP's largest business in terms of revenue contribution and allocated equity, and BNPPF's and BGL BNPP's strong retail franchises in Belgium and Luxembourg underpin their status as core BNPP subsidiaries. Both banks benefit from large customer deposit bases, which strengthen the parent's funding base. Belgium and Luxembourg are defined by BNPP as part of its 'domestic' markets (along with France and Italy).

Operations and management are highly integrated and key management positions are shared among BNPP, BNPPF and BGL BNPP. To optimise capital and liquidity allocation within the group, BNPPF and BGL BNPP consolidate part of BNPP's specialised lending (asset finance) and its leasing operations, respectively, further supporting Fitch's opinion that both entities are integral parts of the group.

VR

BNPPF's VR reflects the bank's retail-focused banking business model, which generates adequate profitability and contributes to an overall moderate risk profile. The rating is also underpinned by solid capital ratios and healthy funding and liquidity.

The consolidation of BNPP's leasing operations and fast growing Turkish operation elevate the risk profile of BNPPF, but we believe this is manageable. The quality of the loan book remains healthy and loan impairment charges should continue to represent a low to moderate percentage of average loans.

Fitch expects the bank to maintain solid risk-weighted capitalisation and leverage, despite potentially upstreaming some more capital to the parent. The cumulative 2015 dividend exceeded reported net income, yet the bank still reported a comfortable common equity Tier 1 ratio of 12.5% at end-2015.

Funding and liquidity remains robust, due to a strong retail deposit base, especially in Belgium where the bank has a market share around 25%. Customer deposits represent the largest source of funding. Reliance on wholesale funding is limited, and the bank has strong market access from being part of the BNPP group. It runs a large liquidity buffer in the form of cash and repo-able securities, with a significant amount of high quality sovereign bonds.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The rating of subordinated debt is notched down from BNPPF's Long-Term IDR, as opposed to its VR, as Fitch believes parental support will neutralise BNPPF's non-performance risk in line with Fitch's rating criteria for such securities. The ratings of upper Tier 2 debt issued by BNP Paribas Fortis Funding are capped at a level that would be assigned to equivalent securities issued by BNPP. They are rated three notches below BNPP's VR (one notch for loss severity and two for non-performance risk).

Fitch has upgraded the rating of the CASHES hybrid capital (BE0933899800) by one notch to reflect the recent one-notch upgrade of Ageas SA/NV ('A'/Stable - previously Fortis SA/NV), the ultimate holding company of the Ageas group, which acts as a contractual co-obligor for these notes. The cash coupon of the CASHES is linked to the declaration of a dividend by Ageas SA/NV, and in case a dividend is not declared the coupons will be settled non-cash via the issuance of new Ageas SA/NV shares using the Alternative Coupon Satisfaction Method (ACSM).

Given the existence of Ageas as a co-obligor, and that cash payment of the coupon is linked to the continued declaration of a dividend by Ageas SA/NV, Fitch rates the CASHES hybrids under relevant insurance criteria (Insurance Rating Methodology (March 2016)). The hybrids are rated four notches below Ageas SA/NV's IDR to reflect higher-than-average loss severity risk of these securities (two notches) as well as a higher risk of non-performance (an additional two notches). The rating of this instrument is the same as that of a hybrid instrument issued by Ageasfinlux, with similar terms and an ACSM dividend trigger (ISIN XS0147484074 and XS0147484314), and whose co-obligor is also Ageas SA/NV.

SUBSIDIARY AND AFFILIATED COMPANY

BNP Paribas Fortis Funding and Fortis Funding LLC are wholly owned financing subsidiaries of BNPPF and whose debt ratings are aligned with those of BNPPF. This is based on Fitch's expectation that BNPPF will honour the unconditional and irrevocable guaranteed provided to holders of the notes issued by BNP Paribas Fortis Funding under its common Euro medium term note programme with BNPPF and issued by Fortis Funding LLC under its US CP programme.

RATING SENSITIVITIES

IDRS AND SENIOR DEBT

The IDRs and senior debt ratings of BNPPF and BGL BNPP are sensitive to a change in BNPP's IDRs. As such, the Stable Outlook on BNPPF's and BGL BNPP's Long-Term IDR mirrors that on BNPP's.

While not expected, the ratings would also be sensitive to a downgrade of the Support Rating arising from changes in Fitch's assessment of BNPP's propensity or capacity to provide timely support to BNPPF and BGL BNPP.

VR

BNPPF's VR would be sensitive to a material weakening in capitalisation, which could stem from a change in capital allocation within the BNPP group by up-streaming large amounts to the parent, or transferring a significant amount of assets to BNPPF. Worsening asset quality could also put pressure on the ratings, particularly if capital would be materially affected.

Upward pressure on BNPPF's VR is limited in the near term, but the VR could benefit from improved efficiency with capital ratios and liquidity maintained at high levels.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

BNPPF's subordinated debt ratings are broadly sensitive to the same considerations that might affect BNPPF's IDR. The rating of the CASHES hybrid capital are sensitive to changes in AGEAS SA/NV's IDRs.

SUBSIDIARY AND AFFILIATED COMPANIES

BNP Paribas Fortis Funding's and Fortis Funding LLC's ratings are sensitive to the same factors that might drive a change in BNPPF's ratings.

The rating actions are as follows:

BNP Paribas Fortis SA/NV

Long-Term IDR affirmed at 'A+'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Viability Rating affirmed at 'a'

Support Rating affirmed at '1'

Short-term debt affirmed at 'F1'

Senior unsecured affirmed at 'A+'

Subordinated debt affirmed at 'A'

Hybrid capital (CASHES BE0933899800) upgraded to 'BBB-' from 'BB+'

BGL BNP Paribas

Long-Term IDR affirmed at 'A+'; Outlook Stable

Short-Term IDR affirmed at 'F1'

Support Rating affirmed at '1'

Short-term debt: affirmed at 'F1'

Long-term senior debt: affirmed at 'A+'

Market-linked notes affirmed at 'A+emr'

BNP Paribas Fortis Funding LLC

Short-term debt affirmed at 'F1'

Senior unsecured affirmed at 'A+'

Market-linked notes affirmed at 'A+emr'

Subordinated debt affirmed at 'A'

Subordinated debt (upper Tier 2) affirmed at 'BBB+'

Fortis Funding LLC

Short-term debt affirmed at 'F1'