Fitch Affirms BNPP Fortis and BGL BNPP at 'A '; Outlook Stable
KEY RATING DRIVERS
IDRs, SUPPORT RATING AND SENIOR DEBT
BNPPF and BGL BNPP's IDRs, and senior debt ratings are equalised with the banks' majority or ultimate shareholder BNP PARIBAS (BNPP, A+/Stable/F1). BNPPF is fully-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 considers BNPPF and BGL BNPP to be 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. Furthermore, we believe that despite their moderate size compared with BNPP, BNPP would have sufficient resources to recapitalise them to a level acceptable to the regulators as and when required on a timely basis.
Fitch's view of both banks being core subsidiaries to BNPP is supported by their strong retail franchises (retail banking being BNPP's largest business in terms of revenue contribution and allocated equity) in Belgium and Luxembourg. 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 with key management positions having been 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. Further intra-group transactions, although on a smaller scale, are likely.
KEY RATING DRIVERS - BNPPF's VR
BNPPF's VR reflects the bank's retail-focused banking business model, which generates adequate profitability and contributes to an overall moderate to low risk profile. The rating is also underpinned by strong capital ratios and healthy funding and liquidity.
The scope changes have slightly increased the risk profile of BNPPF's loan book, but to a manageable extent. The quality of the loan book remains healthy and loan impairment charges should continue to represent a low to moderate percentage of average loans.
The bank's capitalisation is strong, not only on a risk-weighted basis, with a fully loaded common equity Tier 1 ratio at 11.9% at end-2014, but also on an unweighted basis. BNPPF's tangible common equity to tangible assets ratio compares very well with peers, at a high 8.4% at end-2014.
Liquidity remains robust thanks to a strong retail funding base, especially in Belgium where the bank has a market share around 25%. Customer deposits represent the largest source of funding. The bank 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 subordinated debt rating is notched down from BNPPF's Long-term IDR 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 (XS0063913387, XS0059603802 and XS0071344799) are capped at a level that would be assigned to equivalent securities issued by BNPP. They are three notches lower than BNPP's VR (one notch for loss severity and two for non-performance).
Fitch has upgraded the rating of the CASHES hybrid capital (BE0933899800) by one notch to reflect the upgrade of Ageas SA/NV (previously Fortis SA/NV), the ultimate holding company of the Ageas group. 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 with similar characteristics (ISIN XS0147484074 and XS0147484314) issued by Ageasfinlux whose co-obligor is Ageas SA/NV.
The rating of the CASHES hybrid is lower than other hybrids issued by BNPPF as the payment of the coupon in cash is linked to the declaration of a dividend by Ageas SA/NV, notwithstanding the use of the Alternative Coupon Satisfaction Method in case of non-cash payment.
SUBSIDIARY AND AFFILIATED COMPANY
BNP Paribas Fortis Funding and Fortis Funding LLC are wholly owned financing subsidiaries of BNPPF 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, SUPPORT RATING AND SENIOR DEBT
The IDRs of BNPPF and BGL BNPP, and their senior debt ratings 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
BNPPF's VR would be mostly sensitive to a material decrease in its capital ratios, which could stem from a vast deterioration in asset quality and/or a change in capital allocation within the BNPP group that would result in capital being upstreamed to the parent entity or a significant amount of assets being further transferred to BNPPF.
A downward revision of Fitch's assumptions regarding the credit risk embedded in the customer loan book, mostly likely coming from stresses in certain asset classes, could also lead to pressure on BNPPF's VR.
Upward pressure on BNPPF's VR appears 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 (BE0933899800) are sensitive to changes in the IDRs of the AGEAS group.
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 'BB+' 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'
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