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 Luxembourg finalized the acquisition of respectively 90% and 10% of Dexia S.A.'s stake in Banque Internationale a Luxembourg (BIL).

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

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

-- We are affirming our 'A-/A-2' issuer credit ratings on BIL and removing 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 economic environment.

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 a Luxembourg (BIL) and removed them from CreditWatch with negative implications, where we placed them on May 11, 2012. The outlook is stable.


The rating action follows the acquisition of BIL by Precision Capital, a group of Qatari private investors, and the Grand-Duchy of Luxembourg from Dexia S.A., which was finalized on Oct. 5, 2012. The transaction closed according to the 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 entirely disposed of.

-- BIL's common Tier 1 ratio was 9% under Basel III following the EUR204 million capital injection from Dexia.

The rating affirmation reflects our view that the structure of BIL after the closing 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 these terms. 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 a bank'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 strong economic resilience, absence of potential asset bubbles, positive external position, and moderate resident private-sector indebtedness. Our industry risk score of '3' factors in the obstacles for the regulators in supervising a banking sector that essentially comprises subsidiaries of larger international groups, and the existence of a significant nonbanking financial sector. We also consider that Luxembourg's banking industry is very stable and benefits from a favorable funding structure, supported by an excess of customer deposits over loans.

We view BIL's business position as "moderate." The stability brought by BIL's 14% market share in domestic retail banking and 17% market share in domestic business banking makes it the third-largest bank in Luxembourg. But this is mitigated by the 50% revenue share generated by private banking, which has a higher level of confidence sensitivity and is more vulnerable to the competitive pressure on Luxembourg as a financial center coming from non-EU countries. BIL lost about EUR3.5 billion in deposits--mainly fiduciary assets--between July and October 2011, highlighting the confidence sensitivity. Since December 2011, and with the prospect of the sale, BIL has recovered EUR1.2 billion in deposits, bringing its total deposits to EUR10.5 billion as of October 2012. We also consider BIL's business position to be limited by its narrow geographic focus--mostly on Luxembourg with a small position in Switzerland. We consider the acquisition by Precision Capital, a group of Qatari private investors, to be a neutral factor. We expect that Precision will be a long-term investor not seeking to sell its stake and we do not foresee major changes in management and strategy.

We assess BIL's capital and earnings as "moderate." Following the closing of the sale of BIL, the bank's pro forma risk-adjusted capital (RAC) ratio amounted to 5.1%. This includes a EUR204 million capital injection from Dexia S.A. to bring BIL's common Equity Tier 1 ratio under Basel III to 9% and excludes 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 on moderate risk-weighted asset growth and a dividend pay-out ratio of around 50%.

We view BIL's risk position as "adequate." This reflects our view that BIL's core loan portfolio exhibits asset quality metrics in line with those of the Luxembourg banking system and that this will remain the case, in light of BIL's expected restrained risk appetite. Excluding the bond portfolio and equity participations not part of the sale, BIL's loan portfolio had a cost of risk of 26 basis points (bps) in 2011. After the sale of its legacy bond portfolio to Dexia, we consider BIL's exposure to southern European economies to be very limited. The bank notably cut by EUR71 million to EUR64 million its exposure to Greece, Italy, Ireland, Portugal, and Spain during the first part of 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 funded close to 100% of its customer loan portfolio on Dec. 31, 2011. In addition, we believe that the sale of the long-dated bond portfolio prior to the closing of the sale and its replacement by a smaller new portfolio of shorter maturity will improve the funding profile.

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

The long-term rating on BIL is two notches higher than its SACP because we believe BIL has "high" systemic importance in Luxembourg and that the government is "supportive" toward the domestic banking sector. We do not factor in any support from Precision Capital.


The outlook is stable, based on our opinion that capital will grow in the next two years on the back of a level of net profit that we estimate at about EUR100 million per year and a moderate dividend pay-out. It also reflects our expectations that BIL's business, risk, and funding positions will be resilient to the deterioration in the economic environment in 2012 because of the following factors:

-- We expect financial risks to remain limited overall, after taking into account 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 generally stable through the crisis, and BIL's client base has stabilized since its announced sale to Precision Capital and the Grand Duchy of Luxembourg;

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

We could lower the rating if BIL's future strategy were to become aggressive in terms of acquisitions or balance sheet growth, or if dividends were to absorb most of the profit generation. We could also lower the rating if we considered that the new recession in the eurozone could significantly alter the economic prospects of Luxembourg and translate into a more risky operational environment for Luxembourg banks.

We could raise the rating if BIL's capitalization were to materially strengthen, with a RAC ratio increasing to the 7%-10% range, while at the same time BIL's financial risks did not increase. Given the current deterioration of the economic environment, which dampens the prospects for material profit growth, 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 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))