OREANDA-NEWS. Fitch Ratings has affirmed KBC Bank's and KBC Groep NV's (KBC Group) Long-Term Issuer Default Ratings (IDRs) and senior debt ratings at 'A-'. The Outlooks on the Long-Term IDRs have been revised to Positive from Stable. KBC Bank and KBC Group's Viability Ratings (VR) of 'a-' have also been affirmed. A full list of rating actions is available at the end of this commentary.

The ratings' actions are part of a periodic portfolio review of major Benelux banking groups rated by Fitch.

KEY RATING DRIVERS
IDRS, VRS AND SENIOR DEBT
KBC Bank's ratings are underpinned by the bank's strong retail and corporate franchise in its two key markets, Belgium and the Czech Republic, its conservative risk appetite, improving earnings generation, sound capital ratios and robust liquidity.

The Positive Outlook reflects KBC Bank's improved earnings generation and capitalisation, which have reduced its vulnerability to its still high level of unreserved impaired loans. KBC Bank's Irish legacy loan portfolio remains its main rating weakness, despite continued improvement but the bank can increasingly absorb any unexpected rise in credit losses.

Asset quality weakness has a high influence on its VR. Impaired loans are falling although they will most likely remain high compared with peers in the medium term. They totalled 9.3% of gross loans at end-2015, according to Fitch's calculation that excludes reverse repos and interbank lending from the denominator, of which more than half related to Ireland Our base case is for loan impairment charges (LICs) in Ireland to remain low, aided by a solid economic recovery, but we also believe there is still significant downside risk. The relatively high amount of total unreserved impaired loans, at about two-thirds of Fitch core capital at end-2015, makes capital vulnerable to collateral valuation and represents a risk to the bank.

KBC Bank's risk appetite is supported by the dominance of its stable and fairly low-risk Belgian operations and stability in its Czech operations, while exposure to some other central and eastern European countries gives rise to potential earnings and risk volatility. Earnings generation has improved and compares well with similarly rated peers. The bank is building a track record of resilient and stable profitability, underpinned by management's focus on core banking.

We assess KBC Bank's capital adequacy in conjunction with the overall capital of the group, which we view as comfortable. The bank has a solid retail funding base, and nearly all subsidiaries are self-funded. Customer deposits are its largest source of funding and fund most of its lending. The bank also has access to the debt capital markets. Liquidity is strong, and this drives the short-term IDR of F1, the higher of two potential short-term IDRs mapping to a Long-Term IDR of 'A-'.

The ratings of KBC Groep NV (KBC Group) are equalised with those of KBC Bank, reflecting the dominance of the bank in the group (around 90% of group assets), low double leverage and the use of the holding company for capital raising, including recent Tier 2 and additional Tier 1 (AT1) transactions. Liquidity is managed at bank level.

SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that KBC Bank 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 participating in losses, instead of or ahead of a bank receiving sovereign support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and hybrid securities issued by KBC Bank and KBC Group are notched down from the entities' VRs.

Hybrid securities issued by KBC Bank are rated four notches lower than KBC Bank's VR (two notches for non-performance and two notches for relative loss severity). Subordinated debt issued by KBC IFIMA N.V is rated one notch lower than KBC Bank's VR (for relative loss severity).

Subordinated debt issued by KBC Groep is rated one notch lower than KBC Groep's VR to reflect relative loss severity. The CRD IV-compliant undated deeply subordinated additional Tier 1 debt (AT1) securities issued by KBC Groep are rated five notches below KBC Groep's VR. The notching reflects the notes' higher expected loss severity relative to senior unsecured creditors (two notches) and higher non-performance risk (three notches).

SUBSIDIARY AND AFFILIATED COMPANY
KBC IFIMA N.V, KBC Financial Products International, Ltd, KBC North America Finance Corp and KBC Bank Ireland plc are wholly owned subsidiaries of KBC Bank. Their senior debt ratings are aligned with those of KBC Bank, based on extremely high probability of support if required.

RATING SENSITIVITIES

IDRS, VRS AND SENIOR DEBT
An upgrade of KBC Bank's ratings is contingent on strong earnings generation and capitalisation, including reduced vulnerability to the Irish legacy book, as problem loans decrease or cash reserve coverage is raised. A material set-back in the current improvement would likely lead to the Outlook being returned to Stable. Negative rating pressure could arise from an unexpected rise in loan impairment charges, weaker capitalisation or deterioration in recurring profitability.

The Short-Term IDR is sensitive to the bank maintaining strong liquidity. The ratings of KBC Group are likely to move in tandem with those of KBC Bank. Double leverage beyond 120% (currently around 100%) could result in a downgrade of KBC Group's ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade to KBC Bank or KBC Group's Support Ratings and upward revision of the entities' Support Rating Floors would be contingent on a positive change in the Belgian sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and hybrid securities issued by KBC Bank, KBC IFIMA N.V or KBC Group are primarily sensitive to the Bank and the Group's VRs. The ratings of the hybrid securities are also sensitive to changes in Fitch's assessment of the probability of the notes' non-performance risk relative to the risk captured by the Bank and Group's VRs. The ratings of notes issued by the Group are sensitive to a build-up of additional double leverage at the holding company.

SUBSIDIARY AND AFFILIATED COMPANIES
The senior debt ratings of KBC IFIMA N.V, KBC Financial Products International, Ltd, KBC North America Finance Corp and KBC Bank Ireland plc are sensitive to the same factors that might drive a change in KBC Bank's IDRs.

The rating actions are as follows:

KBC Bank
- Long-Term IDR affirmed at 'A-', Outlook Revised to Positive from Stable
- Short-Term IDR affirmed at 'F1'
- Viability Rating affirmed at 'a-'
- Support Rating affirmed at '5'
- Support Rating Floor affirmed at 'No Floor' '
- Senior debt affirmed at 'A-/F1'
- Commercial paper affirmed at 'F1'
- Perpetual subordinated debt securities affirmed at 'BB+'

KBC IFIMA N.V.
- Senior debt affirmed at 'A-'
- Short-Term debt affirmed at 'F1'
- Subordinated debt affirmed at 'BBB+'
- Market linked securities affirmed at 'A-emr'

KBC Financial Products International, Ltd.
- Senior debt affirmed at 'A-'
- Commercial paper affirmed at 'F1'

KBC North America Finance Corp.
- Commercial paper affirmed at 'F1'

KBC Bank Ireland plc
- Commercial paper affirmed at 'F1'

KBC Groep
- Long-Term IDR affirmed at 'A-', Outlook Revised to Positive from Stable
- Short-Term IDR affirmed at 'F1'
- Viability Rating affirmed at 'a-'
- Support Rating affirmed at '5'
- Support Rating Floor affirmed at 'No Floor' '
- Senior debt affirmed at 'A-'/'F1'
- Subordinated debt affirmed at 'BBB+'
- Undated deeply subordinated securities (BE0002463389) affirmed at 'BB'