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TEXT-S&P afrms 'A-/A-2' rtgs on Banque Int. a Luxembourg; otlk stbl

(The following statement was released by the rating agency)

Oct 08 - Overview

-- On Oct. 5, 2012, Precision Capital and the Grand Duchy of Luxembourgfinalized the acquisition of respectively 90% and 10% of Dexia S.A.'s stake inBanque Internationale a Luxembourg (BIL).

-- The transaction closed according to the terms of the share priceagreement previously signed on April 4, 2012.

-- At the closing, BIL's common Tier 1 ratio amounted to 9% under BaselIII following the EUR204 million capital injection from Dexia.

-- We are affirming our 'A-/A-2' issuer credit ratings on BIL andremoving them from CreditWatch with negative implications.

-- The stable outlook reflects our expectation that BIL's business, risk,and funding positions will be resilient to the deterioration in the economicenvironment.

Rating Action

On Oct. 8, 2012, Standard & Poor's Ratings Services affirmed its 'A-/A-2'long- and short-term counterparty credit ratings on Banque Internationale aLuxembourg (BIL) and removed them from CreditWatch with negative implications,where we placed them on May 11, 2012. The outlook is stable.

Rationale

The rating action follows the acquisition of BIL by Precision Capital, a groupof Qatari private investors, and the Grand-Duchy of Luxembourg from DexiaS.A., which was finalized on Oct. 5, 2012. The transaction closed according tothe terms of the share price agreement previously signed on April 4, 2012:

-- BIL finalized the sale of its stakes in RBC Dexia Investor Services,Dexia Asset Management, Dexia LdG Banque, ParfiPar, and Popular Banca Privada.

-- BIL's EUR5.6 billion portfolio of legacy securities has been entirelydisposed of.

-- BIL's common Tier 1 ratio was 9% under Basel III following the EUR204million capital injection from Dexia.

The rating affirmation reflects our view that the structure of BIL after theclosing of the transaction is in line with our current view of its "moderate"business position, "moderate" capital and earnings, "adequate" risk position,"average" funding, and "adequate" liquidity, as our criteria define theseterms. We still assess the stand-alone credit profile (SACP) at 'bbb'.

Our bank criteria use our Banking Industry Country Risk Assessment (BICRA)methodology and our economic risk and industry risk scores to determine abank's anchor, the starting point in assigning a bank an issuer credit rating.

Our anchor for a commercial bank operating mainly in Luxembourg, such as BIL,is 'a-'. Luxembourg's economic score of '2' reflects the duchy's very strongeconomic resilience, absence of potential asset bubbles, positive externalposition, and moderate resident private-sector indebtedness. Our industry riskscore of '3' factors in the obstacles for the regulators in supervising abanking sector that essentially comprises subsidiaries of larger internationalgroups, and the existence of a significant nonbanking financial sector. Wealso consider that Luxembourg's banking industry is very stable and benefitsfrom a favorable funding structure, supported by an excess of customerdeposits over loans.

We view BIL's business position as "moderate." The stability brought by BIL's14% market share in domestic retail banking and 17% market share in domesticbusiness banking makes it the third-largest bank in Luxembourg. But this ismitigated by the 50% revenue share generated by private banking, which has ahigher level of confidence sensitivity and is more vulnerable to thecompetitive pressure on Luxembourg as a financial center coming from non-EUcountries. BIL lost about EUR3.5 billion in deposits--mainly fiduciaryassets--between July and October 2011, highlighting the confidencesensitivity. Since December 2011, and with the prospect of the sale, BIL hasrecovered EUR1.2 billion in deposits, bringing its total deposits to EUR10.5billion as of October 2012. We also consider BIL's business position to belimited by its narrow geographic focus--mostly on Luxembourg with a smallposition in Switzerland. We consider the acquisition by Precision Capital, agroup of Qatari private investors, to be a neutral factor. We expect thatPrecision will be a long-term investor not seeking to sell its stake and we donot foresee major changes in management and strategy.

We assess BIL's capital and earnings as "moderate." Following the closing ofthe sale of BIL, the bank's pro forma risk-adjusted capital (RAC) ratioamounted to 5.1%. This includes a EUR204 million capital injection from DexiaS.A. to bring BIL's common Equity Tier 1 ratio under Basel III to 9% andexcludes the EUR7.3 billion of equity stakes and bonds sold prior to the sale.We expect the RAC ratio to grow to about 6% by the end of 2013, based onmoderate risk-weighted asset growth and a dividend pay-out ratio of around50%.

We view BIL's risk position as "adequate." This reflects our view that BIL'score loan portfolio exhibits asset quality metrics in line with those of theLuxembourg banking system and that this will remain the case, in light ofBIL's expected restrained risk appetite. Excluding the bond portfolio andequity participations not part of the sale, BIL's loan portfolio had a cost ofrisk of 26 basis points (bps) in 2011. After the sale of its legacy bondportfolio to Dexia, we consider BIL's exposure to southern European economiesto be very limited. The bank notably cut by EUR71 million to EUR64 million itsexposure to Greece, Italy, Ireland, Portugal, and Spain during the first partof 2012.

We regard BIL's funding as "average" and its liquidity position as "adequate."Although BIL lost deposits in 2011, its core customer deposits still fundedclose to 100% of its customer loan portfolio on Dec. 31, 2011. In addition, webelieve that the sale of the long-dated bond portfolio prior to the closing ofthe sale and its replacement by a smaller new portfolio of shorter maturitywill improve the funding profile.

The bond portfolio transfer will also improve liquidity and reduce recourse tounsecured and repo wholesale markets. BIL expects its new securities portfolioto be eligible collateral for funding with the European Central Bank (ECB;unsolicited AAA/Stable/A-1+), and largely sufficient to cover its short-termliquidity gap in case of stress.

The long-term rating on BIL is two notches higher than its SACP because webelieve BIL has "high" systemic importance in Luxembourg and that thegovernment is "supportive" toward the domestic banking sector. We do notfactor in any support from Precision Capital.

Outlook

The outlook is stable, based on our opinion that capital will grow in the nexttwo years on the back of a level of net profit that we estimate at about EUR100million per year and a moderate dividend pay-out. It also reflects ourexpectations that BIL's business, risk, and funding positions will beresilient to the deterioration in the economic environment in 2012 because ofthe following factors:

-- We expect financial risks to remain limited overall, after taking intoaccount the sale of legacy assets and equity stakes linked to the Dexia S.A.group; and

-- Retail and private banking activity in Luxembourg has been generallystable through the crisis, and BIL's client base has stabilized since itsannounced sale to Precision Capital and the Grand Duchy of Luxembourg;

-- The funding base is largely made up of retail deposits proportionateto BIL's asset base excluding the legacy assets, which limits BIL'ssensitivity to potential tensions on wholesale funding markets.

We could lower the rating if BIL's future strategy were to become aggressivein terms of acquisitions or balance sheet growth, or if dividends were toabsorb most of the profit generation. We could also lower the rating if weconsidered that the new recession in the eurozone could significantly alterthe economic prospects of Luxembourg and translate into a more riskyoperational environment for Luxembourg banks.

We could raise the rating if BIL's capitalization were to materiallystrengthen, with a RAC ratio increasing to the 7%-10% range, while at the sametime BIL's financial risks did not increase. Given the current deteriorationof the economic environment, which dampens the prospects for material profitgrowth, we believe this scenario is currently unlikely.

Ratings Score Snapshot Issuer Credit Rating A-/Stable/A-2 SACP bbb Anchor a- Business Position Moderate (-1) Capital and Earnings Moderate (-1) Risk Position Adequate (0) Funding and Liquidity Average and Adequate (0) Support 0 GRE Support 0 Group Support 0 Sovereign Support 2 Additional Factors 0 Related Criteria And Research

-- CreditWatch Implications On Banque International a Luxembourg 'A-/A-2'Ratings Revised To Negative Pending Sale Closure, May 11, 2012

-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Bank Capital Methodology And Assumptions, Dec. 6, 2010

-- Banking Industry Country Risk Assessment Methodology And Assumptions,Nov. 9, 2011

-- Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Banque Internationale a Luxembourg Counterparty Credit Rating A-/Stable/A-2 A-/Watch Neg/A-2 Certificate Of Deposit A-/A-2 A-/Watch Neg/A-2 Senior Unsecured A- A-/Watch Neg Subordinated BBB- BBB-/Watch Neg Commercial Paper A-2 A-2/Watch Neg Junior Subordinated C C ((Bangalore Ratings Team, Hotline: +91 80 41355898, Bhanu.priya@thomsonreuters.com,Group id: BangaloreRatings@thomsonreuters.com,Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))