Banque Internationale a Luxembourg

Transcription

1 Primary Credit Analyst: Philippe Raposo, Paris (33) ; Secondary Contact: Francois Moneger, Paris (33) ; Table Of Contents Major Rating Factors Outlook Rationale Related Criteria Related Research NOVEMBER 23,

2 SACP bbb+ + Support +1 + Additional Factors 0 Anchor a- Business Position Capital and Earnings Moderate -1 Adequate 0 Risk Position Adequate 0 Funding Liquidity Average Adequate 0 ALAC Support +1 GRE Support 0 Group Support 0 Sovereign Support 0 Issuer Credit Rating A-/Stable/A-2 Major Rating Factors Strengths: Weaknesses: Leading local player in retail and commercial banking. Good asset quality of the loan portfolio. Ongoing build-up of loss-absorbing capacities. Narrow geographic focus for its retail and corporate banking segments. The bank remains a second-tier player in private banking. Outlook: Stable The stable outlook reflects S&P Global Ratings' view that Banque Internationale à Luxembourg's (BIL's) financial profile will continue to improve in the next two years. In particular, we project that, by the end of 2018, BIL will strengthen its additional loss-absorbing capacity (ALAC) buffer to protect senior unsecured creditors to above 5.5% of S&P Global Ratings' risk-weighted assets (RWAs), our threshold for a one notch of ALAC uplift for BIL. We expect the bank to do so by maintaining stable core capitalization and issuing bail-in-able subordinated instruments. We view an upgrade as remote in the next two years. If we believed that BIL's risk-adjusted capital (RAC) ratio was going to stay sustainably above the 10% mark for a stronger assessment, we could likely revise up our assessment of the bank's stand-alone credit profile (SACP) and consequently raise the rating on the subordinated instruments. However, everything else being equal, we would likely not raise the issuer credit rating, as the ALAC buffer would be offset to below our 5.5% threshold. We would consider a downgrade if the bank's strategy with respect to the build-up of a sufficient buffer of bail-in-able debt changed and became less substantial than we currently expect. At this time, given BIL's stable strategy, we do not anticipate rating pressure from the bank's business profile, although we will continue monitoring potential implications of the bank's acquisition by Chinese (Hong Kong) Legend Holdings. NOVEMBER 23,

3 Rationale We base our ratings on BIL on our 'a-' anchor for a bank operating mainly in Luxembourg, then adjust for our opinions on the following bank-specific factors: A moderate business position, reflecting the concentration of its lending activities in a narrow geographic focus and its second tier franchise in private banking. Adequate capitalization and earning generation. We anticipate that profitability will stabilize and the RAC ratio will remain below 10% in the next two years (9.1% achieved at end-2016). An adequate risk position, combining the low risk of the bank's retail activities and the higher operational and reputational risks inherent to private banking. Average funding and adequate liquidity, with stronger-than-average metrics underpinned by private banks' client deposits that we consider more confidence-sensitive than retail deposits. The above-mentioned factors lead us to a 'bbb+' SACP. In addition, we take into account our view of BIL being of systemic importance for the Luxembourgian banking industry and assume the bank would be subject to resolution under the EU Bank Recovery and Resolution Directive (BRRD). We therefore apply a one-notch positive uplift to the ratings because we anticipate the bank will benefit from a sufficient and sustainable ALAC buffer to protect senior unsecured creditors in the next two years. Anchor:'a-' for a commercial bank operating in Luxembourg We use our Banking Industry Country Risk Assessment economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning a bank an issuer credit rating. The resulting anchor for a commercial bank operating mainly in Luxembourg, including BIL, is 'a-'. Our economic risk score of '2' for Luxembourg is supported by the grand duchy's very strong economic resilience, positive external position, and very high prosperity. It has one of the world's leading per capita incomes. These factors are balanced by Luxembourg's concentration on the financial sector and its position as a financial center, which entails vulnerability to regulatory and fiscal pressure. Our anchor also reflects the absence of potential asset bubbles, even though real-estate prices have been rising more quickly and the growth of credit to the private sector has accelerated. Corporate-sector debt remains high compared with European peers. We understand that this primarily reflects leverage at international groups that are headquartered in Luxembourg but largely operate abroad. Therefore, we expect credit losses in domestic retail and corporate markets to remain fairly stable over We view the trend on economic risk as stable. Our industry risk score of '3' reflects our view that Luxembourg's banking industry is stable and benefits from a favorable funding structure, supported by an excess of customer deposits over loans. It also factors in the complexity for the regulators of supervising a banking sector that essentially comprises subsidiaries of larger international groups and the existence of a significant nonbanking financial sector. Banks' focus on private banking and wealth management businesses, which are highly confidence-sensitive, also exposes Luxembourg's banking industry to reputation and regulatory risks, in our view. NOVEMBER 23,

4 Table 1 Banque Internationale a Luxembourg Key Figures --Fiscal year ending Dec (Mil. ) 2017* Adjusted assets 23,741 23,027 21,379 20,218 19,631 Customer loans (gross) 13,035 12,355 11,675 11,121 10,313 Adjusted common equity Operating revenues Noninterest expenses Core earnings *As of June 30, Business position: Narrow geographic focus on Luxembourg and modest private banking activities compared with peers We believe BIL has a moderate business position compared with competitors with similar business models. This assessment mainly reflects our view of the bank's concentration of its lending business in the limited Luxembourgian market, as well as our opinion that BIL remains a second-tier player in the private banking market. BIL's resilient market position in retail and commercial banking in the narrow, but stable and wealthy, Luxembourgian market somewhat mitigates these weaknesses, in our view. As of Dec. 31, 2016, BIL's operating revenues stemmed from private banking (43%), retail banking (24%), corporate lending (19%), and treasury and financial markets (14%). We expect the revenue mix to remain broadly unchanged in the next two years, with potential capital gains improving revenues. We consider private banking activities to be more vulnerable to market confidence and competition from banks in non-eu countries. We also factor in BIL's second-tier franchise in the wealth management industry compared with larger international peers. The private banking activities experienced outflows related to the implementation of the automatic exchange of information until 2016; we believe these outflows ended and were more than compensated by new clients' inflow. Also, some customers from neighboring countries withdrew their assets from Luxembourg in connection with their participation in tax-regularization programs in their home countries. In 2017, assets under management (AUM) continued to flow in, thanks to a dynamic net new money and an almost neutral market effect. AUM rose to 39.7 billion at mid-2017, up 2 billon from the beginning of the year. However, this volume remains modest compared with larger asset gathering peers. BIL's business position is also limited, in our view, by its narrow geographic focus, mainly on Luxembourg for its commercial franchise. With 23.9 billion in total assets as of June 30, 2017, BIL is the third-largest retail bank in Luxembourg, enjoying a 13.5% market share in both domestic deposits and domestic loans. BIL's franchise is well entrenched locally. The bank's strategy is to continue servicing the Luxembourgian market, from individuals to the larger local corporates. In our view, the announcement of Hong Kong-listed Legend Holdings (not rated) to acquire Precision Capital's 89.9% stake in BIL does not affect ratings. We understand the transaction remains subject to regulatory approval. We assume that continuity will prevail regarding BIL's strategy, along with continued implementation of the bank's 2020 business plan and the way BIL will be operated. We will monitor to what extent the new ownership alters BIL's NOVEMBER 23,

5 creditworthiness, if at all, after the closing of transaction expected in Table 2 Banque Internationale a Luxembourg Business Position --Fiscal year ending Dec (%) 2017* Total revenues from business line (mil. ) Commercial & retail banking/total revenues from business line Trading and sales income/total revenues from business line Other revenues/total revenues from business line (4.9) (2.3) Investment banking/total revenues from business line Return on equity *As of June 30, N/A--Not applicable. Capital and earnings: A stable and adequately capitalized profile compared to the bank's risk profile We view BIL's capital and earnings as adequate. We expect that the bank's capitalization will stabilize, as measured by our RAC ratio, which we project to be in the 9.0%-9.5% range in the next 24 months. At end-2016, the bank's RAC ratio stood at 9.0% before concentration. On the same date, BIL's fully loaded common equity tier 1 ratio (CET1) was 13%. The large difference between our RAC ratio and the CET1 ratio is mainly because of the bank's large investment portfolio and private banking activities, for which our RAC charges--in particular those pertaining to operational risk--are higher than regulatory charges. We anticipate that BIL's RAC ratio will remain between 9.0% and 9.5% in the next 24 months. Our forecasts are based on the following assumptions: An average 5% increase in S&P Global Ratings' RWAs, driven by a similar growth of the loan book and higher operational RWA. We expect core earnings to remain between 100 million and 110 million, leading to a modest 0.5% return on assets. This anticipation assumes stable margins in the retail and commercial activities; increasing revenues stemming from the private banking segment on the back of higher AUMs; and increasing noninterest expenses due to investment in new information technology systems and retail branch modernization. A dividend pay-out close to 50% of the net income. The new investment in intangibles assets, mainly the new digital platform and replacement of the core banking system, will dent total adjusted capital (TAC). No material acquisitions. We consider the bank's quality of capital to be high, comprising 85% of common equity, the remaining 15% being a single additional tier 1 of 150 million. We still view the bank's profitability as being lower than that of its best-performing peers, with core earnings to average adjusted assets at 0.5% and cost-to-income at 68% in We understand that BIL's efforts to consolidate its retail and private banking activities under its current strategy will be done without increasing its retail international footprint or by acquiring large private-banking competitors. As such, we assume the current strategy will not markedly affect our opinion of the bank's capital and earnings position in the short term. NOVEMBER 23,

6 Table 3 Banque Internationale a Luxembourg Capital And Earnings --Fiscal year ending Dec (%) 2017* Criteria reflected in RAC ratios N/A 2017 RAC Criteria 2010 RAC Criteria 2010 RAC Criteria 2010 RAC Criteria Tier 1 capital ratio S&P RAC ratio before diversification N/A S&P RAC ratio after diversification N/A Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Noninterest expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets *As of June 30, N/A--Not applicable. Table 4 Banque Internationale a Luxembourg Risk-Adjusted Capital Framework Data (Mil. ) Exposure* Basel III RWA Average Basel III RW (%) S&P Global RWA Average S&P Global RW (%) Credit risk Government and central banks 7, Institutions and CCPs 3, Corporate 5,133 2, , Retail 8,052 1, , Of which mortgage 5, , Securitization Other assets Total credit risk 24,702 4, , Credit valuation adjustment Total credit valuation adjustment Market risk Equity in the banking book Trading book market risk Total market risk Operational risk Total operational risk , (Mil. ) Basel III RWA S&P Global RWA % of S&P Global RWA Diversification adjustments RWA before diversification 5,819 9, NOVEMBER 23,

7 Table 4 Banque Internationale a Luxembourg Risk-Adjusted Capital Framework Data (cont.) Total Diversification/Concentration Adjustments -- 1, RWA after diversification 5,819 11, (Mil. ) Capital ratio Tier 1 capital Tier 1 ratio (%) Total adjusted capital S&P Global RAC ratio (%) Capital ratio before adjustments Capital ratio after adjustments *Exposure at default. Securitisation Exposure includes the securitisation tranches deducted from capital in the regulatory framework. Other assets includes Deferred Tax Assets (DTAs) not deducted from ACE. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31, 2016, S&P Global. Risk position: A restrained risk appetite and stable portfolio composition Our assessment of BIL's risk position as adequate is based on the good asset quality metrics in its core loan portfolio, counterbalanced by its high concentration in Luxembourg and operational and reputational risk related to private banking activities. We believe the bank's stronger growth compared with peers in neighboring countries is well managed, as the risk framework remains unchanged. Over , BIL's loan portfolio had an average cost of risk of 18 basis points (bps), which is in line with peers operating in countries with similar economic risk. We expect the cost of risk to remain in the 10bps-20bps range in the next two years since market conditions are favorable for borrowers and reflecting our assumption that BIL's risk appetite will stay unchanged. Because residential real estate loss experience is extremely low in Luxembourg, we understand that the large portion of the bank's credit losses stems from the small and midsize enterprises and corporate sector, the remaining credit losses being due consumer retail loans. For the record, in 2016 cost of risk stood at 14bps and further lowered to 8bps at mid At mid-2017, nonperforming loans were stable at 2.8% of total loans with a 83% coverage by loan-loss reserves. We view this level of nonperforming loans as higher than peers' but note that these include a legacy runoff portfolio that is well provisioned. Overall we consider that the bank already took its losses by highly provisioning its nonperforming portfolio, as illustrated by the comparatively high level of coverage, and that the underlying risk of impaired loans is in line with peers'. The investment portfolio comprises highly liquid government and financial institutions securities. We believe BIL's exposures to Italy, Ireland, and Spain via government bonds, amounting to 813 million at mid-2017, is of weaker credit quality than the rest of the investment portfolio. These exposures represented less than 14% of the total investment portfolio but almost 85% of capital on the same date. We believe BIL's risk diversification will remain limited, due to its relatively significant level of geographic concentration in Luxembourg, which is a small market. However, BIL's retail, corporate, and private banking businesses are well diversified by counterparties. We don't foresee credit-fueled asset prices bubbles in Luxembourg despite a somewhat faster increase in real estate prices and acceleration in credit to the private sector, but which we believe has leverage comparable to peers. NOVEMBER 23,

8 Table 5 Banque Internationale a Luxembourg Risk Position --Fiscal year ending Dec (%) 2017* Growth in customer loans Total diversification adjustment / S&P RWA before diversification N/A Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets *As of June 30, N/A--Not applicable. Funding and liquidity: A balanced funding profile We regard BIL's funding as average and its liquidity as adequate. Our view of BIL's funding balances the bank's relatively strong metrics--such as a stable funding ratio of 129% and a strong loan-to-deposit ratio of 77% as of end-june against our view of the higher volatility of private banking and nonresident deposits compared with pure domestic retail deposits. It also reflects the concentration of BIL's corporate deposits on a few counterparties. Our view of BIL's liquidity is supported by the bank's 7.9 billion in broad liquid assets, which covered its short-term wholesale funding needs by 4x at mid About 84% of BIL's investment portfolio was eligible for repurchase transactions at the European Central Bank on the same date. In our view, the bank manages its liquidity cautiously through stress tests and liquidity gaps. Table 6 Banque Internationale a Luxembourg Funding And Liquidity --Fiscal year ending Dec (%) 2017* Core deposits/funding base Customer loans (net)/customer deposits Long term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Net broad liquid assets/short-term customer deposits Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) N/A N/A *As of June 30, N/A--Not applicable. Support: Ongoing build-up of ALAC In our view, BIL has high systemic importance in Luxembourg, mainly reflecting its material market share in retail deposits. Since December 2015, we have regarded the prospect of extraordinary government support for Luxembourgian banks as uncertain, in view of the country's effective resolution regime. As a result, systemic banks are NOVEMBER 23,

9 not eligible for notching uplift for possible future government support from the grand duchy. However, we view Luxembourg's resolution regime as effective under our ALAC criteria because, among other factors, we believe it contains a well-defined bail-in processes under which authorities would permit nonviable systemically important banks to continue critical functions as going concerns following a bail-in of eligible liabilities. We calculated that ALAC was 3.6% of S&P Global Ratings' RWA at year-end 2016, below the 5.5% threshold we apply to BIL. Our threshold is 50bps above our standard 5.0%, reflecting an adjustment we made to reflect concentration of debt maturities, as we expect this buffer will consist of a limited number of instruments. Nevertheless, we expect the ALAC buffer to further strengthen and be sustainably higher than 5.5% before end We understand that future regulatory requirements could oblige BIL to increase the buffer of instruments that we expect will be eligible for ALAC. Taking into account the expected issuance volume in 2018, we project that BIL's ALAC ratio will be in the 6.0%-7.0% range at year-end 2018, and therefore incorporate a positive notch in our long-term rating on BIL. Additional rating factors: None No additional factors affect this rating. Related Criteria Criteria - Financial Institutions - General: Risk-Adjusted Capital Framework Methodology, July 20, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Financial Institutions - Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015 Criteria - Financial Institutions - Banks: Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Financial Institutions - Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Criteria - Financial Institutions - Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Criteria - Financial Institutions - Banks: Bank Capital Methodology And Assumptions, Dec. 6, 2010 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Bulletin: Banque Internationale a Luxembourg Ratings Unaffected By The Acquisition Of 90% Of Its Capital By Legend Holdings, Sept. 4, 2017 Banking Industry Country Risk Assessment: Luxembourg, Jan. 25, NOVEMBER 23,

10 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of November 23, 2017) Banque Internationale a Luxembourg Counterparty Credit Rating Senior Unsecured A- Short-Term Debt A-2 Subordinated Counterparty Credit Ratings History 02-Dec Apr Oct-2012 Sovereign Rating Luxembourg (Grand Duchy of) A-/Stable/A-2 BBB- A-/Stable/A-2 A-/Negative/A-2 A-/Stable/A-2 AAA/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@spglobal.com NOVEMBER 23,

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