Banks

www.fitchratings.com 19 December 2013

Belgium

Belfius Bank SA/NV Full Rating Report

Key Rating Drivers

State Support-Driven IDR: Belfius Bank SA/NV‟s Long-Term IDR is at its Support Rating

Floor. This reflects Fitch Ratings‟ view that there would be an extremely high probability the

Belgian state would support the bank if required. This opinion derives from Belfius‟s systemic

importance as the third-largest domestic retail bank (with a market share of around 13% of

retail deposits) and from its full ownership by the Belgian state.

Improved Viability: Belfius‟s Viability Rating (VR) reflects the bank‟s solid retail and public

finance franchise in Belgium, which provides it with a good customer-driven funding mix and a

low-risk loan book, but only modest profitability. The VR remains negatively affected by the

outsized legacy bond portfolio (2.6x equity at end-H113), although Fitch believes the quality of

this portfolio has stabilised.

Moderate Performance: Belfius reported an operating profit in 1H13 after two years of

operating losses as calculated by Fitch, but revenue is under pressure and costs remain high.

Fitch expects operating profitability gradually to improve as planned cost reductions are

realised. The operating loss in 2012 was driven by realised losses on the sale of legacy bonds

given “strategic de-risking”, but this was more than offset by large (EUR779m) “one-off” gains

from buybacks on the bank‟s subordinated debt, leading to positive net income for the year.

Sound Asset Quality: The quality of the bank‟s customer loan book (largely focused on

Belgium) remains good, with a low level of impaired loans (2.6%) well covered by impairment

reserves (70.1%). Exposure to peripheral eurozone public and private debt has declined

significantly following sales of lower-rated bonds (eg, Spanish and Greek government bonds),

but remains high, essentially to Italian government debt and Spanish covered bonds.

Reduced Funding to Dexia: Belfius has historically been a significant provider of funding to

Dexia, but this has decreased (EUR14.4bn at end-August 2013) and is now entirely state-

guaranteed or secured. Moreover, this exposure does not weigh on the Belfius‟s funding needs

as it is refinanced in large part using Dexia‟s state-guaranteed debt as collateral.

Satisfactory Capital: The Fitch core capital ratio is lower than the regulatory core Tier 1 ratio

due to the deduction of large negative revaluation reserves (EUR1.4bn at end-June 2013), the

bank‟s investment in its insurance subsidiary and deferred tax assets. Negative revaluation

reserves have declined significantly owing to the sale of bonds, the amortisation of the portfolio

and tightening credit spreads. Remaining reserves will not necessarily translate into losses.

Rating Sensitivities

Reduced State Support: Belfius‟s IDRs would be sensitive to a weakening of Belgium‟s ability

(as measured by its rating). These ratings are also sensitive to a change in Fitch‟s assumptions

on the availability of sovereign support for Belgian financial institutions. There is clear political

intent to ultimately reduce the implicit state support for systemically important banks in Europe.

Improvement in Standalone Strength: Belfius‟s VR would benefit from a material

improvement in its profitability and/or further notable reduction in its legacy bond portfolio and

derivatives assets. Any deterioration in capital as measured by Fitch, for example due to higher

negative revaluation reserves or losses on derivatives, would be detrimental to the VR. The VR

would also be sensitive to marked asset quality deterioration due to higher-than-expected

domestic and European economic stress, resulting in securities and loan impairment charges.

Ratings

Foreign Currency

Long-Term IDR A− Short-Term IDR F1 Viability Rating bb+ Support Rating 1 Support Rating Floor A−

Sovereign Risk Long-Term Foreign-Currency IDR

AA

Long-Term Local-Currency IDR AA

Outlooks

Long-Term Foreign-Currency IDR

Stable

Sovereign Long-Term Foreign-Currency IDR

Stable

Sovereign Long-Term Local-Currency IDR

Stable

Financial Data

Belfius Bank SA/NV

30 Jun 13

31 Dec 12

Total assets (USDm) 253,209 280,970 Total assets (EURm) 193,578 212,947 Total equity (EURm) 5,842 5,359 Operating profit (EURm)

268.8 -181.8

Published net income (EURm)

255.3 417.0

Comprehensive income (EURm)

467.9 2,084.6

Operating ROAA (%) 0.27 -0.08 Operating ROAE (%) 9.68 -4.25 Core tier 1 ratio (%) 14.30 13.30 Fitch core capital/ regulatory weighted risks (%)

9.51 7.45

Related Research

Belgium (November 2013)

Analysts

Lawrence Power +44 20 3530 1567 lawrence.power@fitchratings.com Alain Branchey +33 1 44 29 91 41 alain.branchey@fitchratings.com

Banks

Belfius Bank SA/NV

December 2013 2

Profile

Belfius is the third-largest Belgian bank by total assets and market share (13% share of retail

deposits) after BNP Paribas Fortis (A+/Stable/a) and KBC Bank (A−/Stable/a−). In addition to

its good retail banking franchise, it is the clear market leader in public finance. These

businesses form the backbone of its operations, which are organised under three business

lines: Retail and Commercial Banking (RCB); Public and Wholesale Banking (PWB); and

Insurance.

Fully State-Owned Bank

The Belgian state has owned 100% of Belfius (through the Federal Holding and Investment

Company) since acquiring it from Dexia in October 2011. The reason for the acquisition was to

limit the negative impact of the problems facing Dexia on Belfius, given its importance to the

Belgian financial sector. However, as Belfius had historically been a significant liquidity provider

to Dexia, Belfius still has significant – albeit substantially reduced – exposure to Dexia.

Fitch believes the state will sell Belfius (probably through a partial public offering) once the

bank has a long enough track record of operating in its new standalone form and once the

operating environment for financial institutions improves, in order to maximise the exit value.

Fitch does not expect this to occur for several years. The state does not intervene in the bank‟s

strategy and has not set it any particular targets, such as lending volume objectives.

Belfius‟s board of directors is made up of 15 members, including the six members of the

management board (as required by Belgian law) and seven independent directors. Board of

directors members, appointed in early 2012, are experienced and were chosen by the

shareholder from a shortlist prepared by an international recruitment firm. No member of the

government or a local authority sits on the board of directors.

Strategy: Focus on Domestic Market

Management‟s goal is to strengthen Belfius‟s domestic franchise by focusing on its core

businesses, and to render the bank appealing to private investors in a few years‟ time. Belfius

has no intention of growing internationally and has a moderate to low risk appetite. Increasing

cost efficiency is another key goal. The bank has announced that it will reduce staff by around

10% by end-2016, targeting EUR240m of annualised savings that year.

Certain legacy issues inherited from having belonged to the Dexia group remain, but they are

becoming less significant, resulting in a reduction in Belfius‟s balance sheet and an

improvement of its liquidity and capital. Belfius‟s major legacy issues are a large bond portfolio

built up when the bank was owned by Dexia to generate returns (EUR14.9bn at end-June

2013) that is being wound down, funding to its former shareholder (EUR14.4bn at end-August

2013, essentially issued under Dexia‟s government-guaranteed programme) and a large

derivatives book, which stems from the bank's previous role as a competence centre for

derivatives within Dexia before being nationalised.

Business Lines Retail and Commercial Banking (RCB)

Belfius‟s large retail network (around 790 branches) provides the bank with a nationwide

presence and a solid retail franchise in a competitive market. The bank has changed its name

(from Dexia Bank Belgium in 2012 to get rid of the tainted “Dexia” name) and is positioning

itself as a local bank, which is helping it regain lost market share following the severe

turbulence experienced by Dexia. The bank has also traditionally enjoyed a reasonable private

banking franchise.

RCB provides Belfius with a significant amount of funding (EUR62.3bn at end-June 2013),

including certificates of deposit, savings certificates and bonds subscribed to by customers but

not reported as deposits in the accounts. This leaves the division with a sound 53%

Third-largest Belgian bank

Fully state-owned since buyout from

Dexia in October 2011

Privatisation expected in several

years‟ time

Strategic focus on domestic market

and good franchise in retail banking

and public finance

European Commission (EC)

Investigation

In October 2011, the EC temporarily

approved the nationalisation of

Belfius and announced that it would

investigate whether this complied

with state aid rules.

Belfius submitted a 2012-2016

business plan that was approved by

the EC to demonstrate that it would

not require additional state aid.

Certain conditions have been

imposed on Belfius, such as a

dividend payment ban, a ban on

acquisitions and coupon payments

for subordinated debt (when not

mandatory), and a cap on public

lending and life insurance premiums.

Related Criteria

Evaluating Corporate Governance (December 2012)

Global Financial Institutions Rating Criteria (August 2012)

Banks

Belfius Bank SA/NV

December 2013 3

loans/customer funding ratio (or EUR29bn of “excess” funding), which is typical for domestic

retail business in Belgium.

Figure 1 Belfius’s Performance by Business Line RCB PWB Insurance

(EURm) 1H13 2012 1H13 2012 1H13 2012

Revenues 570 1,314 163 381 257 270 Expenses -504 -1,020 -98 -194 -100 -178 Pre-impairment operating profit

66 294 65 187 157 92

Impairment charges -17 -47 2 -10 11 -13 Other impairments -1 0 0 0 0 0 Operating profit 48 247 67 177 168 79 Cost/income (%) 88 78 60 51 n.m. n.m. Impairment charges/ average loans (annualised, bp)

5.4 14.1 -0.4 2.3 n.m. n.m.

Loans/customer funding (%)

53.3 53.9 228.6 219.1 n.m. n.m.

Source: Belfius, Fitch calculations

Public and Wholesale Banking (PWB)

Public finance (banking for local authorities, quasi-public entities such as schools and hospitals,

and associations) has historically been a key strength of the bank, and Belfius enjoys a strong

market share in this segment, which, unlike in other jurisdictions, provides a decent amount of

deposits to the bank. The wholesale part of the business line also offers a full range of banking

products to medium-sized and large corporates but is more a challenger to BNP Paribas Fortis

and KBC Bank in this segment.

The division attracts customer funding (EUR19.6bn at end-June 2013), but loans are well in

excess of deposits (loans/deposits ratio of around 229%), which is not uncommon for such

activities. However, PWB‟s customer funding shortfall of EUR25.2bn at end-June 2013 was

more than offset by RCB‟s “excess” customer funding.

Insurance

Belfius Insurance is a core subsidiary of Belfius. Bancassurance is a well-functioning business

model in Belgium as 81% of life insurance premiums and 41% of non-life premiums are sold

through branch networks. In addition, the group uses independent agents (under the brand

DVV/AP) and the internet (Corona Direct). Belfius has domestic market shares of around 10%

in life and 5% in non-life. Total life insurance reserves were around EUR20bn at end-June 2013

and stable on the previous year.

Group Centre and Side Activities

For reporting purposes, Belfius has isolated not only a “Group Centre”, which encompasses

treasury and asset and liability management (ALM), but also “Side Activities”, which include the

legacy bond portfolio.

Performance

Global Picture: Profitability No Longer Affected by Legacy Issues

Since it began operating on a standalone basis, Belfius‟s operating performance has been poor.

However, operating profit was positive in 1H13, whereas it was distorted in the past by the

negative impact of non-recurring losses and impairments on the legacy bond portfolio.

Operating profit is likely to remain positive for full year 2013, but revenues will remain under

pressure given the low interest rate environment and the high cost base.

Belfius reported an operating profit of EUR268.8m in 1H13 (operating loss of EUR181.8m in

2012), as defined by Fitch, after adjusting for non-recurring items such as the gains booked on

Performance no longer affected by

legacy issues

Operating profit continues to be weak

Measures taken to improve cost

efficiency

Banks

Belfius Bank SA/NV

December 2013 4

the buyback of the bank‟s own Tier 1 and Tier 2 instruments (EUR61m in 1H13; EUR779m in

2012, reported in line 25 of the income statement at the end of the report).

The major driver of the operating loss in 2012 was the net realised loss on legacy assets

(EUR0.5bn). Under the “strategic de-risking” programme, the bank has sold some of its riskier

legacy assets (EUR2.6bn of fixed-income securities), and the realised losses were largely

related to sales of peripheral European and Central and Eastern European (CEE) government

bonds (included in line 10 of the income statement). Belfius would have made an operating

profit of EUR0.3bn without this non-recurring loss. The major issue related to legacy assets in

2011 was the large impairment charges (EUR1.4bn) on Greek government bonds.

Revenue of the Businesses: RCB and PWB Underperform

The contribution of RCB and to a lesser extent PWB to operating profit in 1H13 was poor (see

Figure 1). This is largely owing to lower net interest income, which is under pressure due to the

low interest rate environment and higher allocated costs in line with improving funding and

liquidity. Moreover, the sale of a small part of the mortgage book to the insurance business for

liquidity reasons reduced RCB‟s interest income.

Net interest income represents Belfius‟s major revenue source. Margins are thin (1.01%, as

calculated by Fitch at end-2012), but reflect the overall low-risk business undertaken by the

bank, with a large part of its loan book being domestic residential mortgages and loans to

public or quasi-public entities, and its fixed-income securities portfolio being dominated by

highly rated bonds. However, margins should increase as Belfius has been raising the rates

charged on new loans and decreasing rates paid on deposits, as is the case at other Belgian

banks. Currently, Belfius pays 0.60% on standard savings deposits, but offers a higher rate

through the internet and on longer-term deposits. This rate drives the rate for other types of

savings.

Net fees and commissions, which come from traditional banking transaction fees and

management fees from customer investments in mutual funds, are low. They have been

affected by lower assets under management, below pre-global financial crisis levels. Although

the equity markets have rallied, investors remain cautious and favour less remunerative asset

classes.

The contribution of the insurance business to operating profit improved in 1H13, whereas it

suffered in 2012 from losses from de-risking. Moreover, this business provides a good

complement for clients, especially retail, who want to have more investment possibilities. The

negative contribution of insurance in the accounts (line 12 of the income statement) can be

explained by the accounting treatment, which does not include revenues from insurance

investments or all of the commissions from selling products through the branch network.

The Group Centre is not a profit centre and its contribution is expected to remain somewhat flat.

Side Activities encompass “non-core” assets that are being run down (such as legacy assets)

and non-recurring items (such as the liability management exercises on the bank‟s Tier 1 and

Tier 2 securities).

Costs Remain High

Belfius‟s cost base should be adapted to its reduced scope and lower revenue, especially for

the RCB business. The bank is implementing a new distribution model in RCB to increase the

use of alternative distribution channels for standard banking transactions. Belfius has the

second-largest branch network in Belgium but is the third-largest bank, which indicates that

efficiency could be improved. Belfius has announced a cost adjustment plan aimed at reducing

staff by 10% by 2016. This would support its cost efficiency and help absorb the impact of the

adverse economic environment.

Figure 2 Revenues and Net Income by Business Lines (EURm) 1H13 2012

RCB 570 1,314 PWB 163 381 Insurance 257 270 Total revenues of the businesses

990 1,965

Group Centre 53 21 Side Activities 6 472 Total revenues 1,049 2,458 RCB 32 167 PWB 44 118 Insurance 133 59 Total net income of the businesses

209 344

Group Centre 40 -53 Side Activities 6 125 Total net income 255 416

Source: Belfius

Banks

Belfius Bank SA/NV

December 2013 5

Low Loan Impairment Charges

Loan impairment charges (LICs) on the bank‟s core businesses should continue to be low.

However, LICs for full year 2013 will be higher than for 1H13, which benefited from write-backs.

LICs were exceptionally high in 2011 as the bank had to impair loans to two of Dexia

shareholders (Arco and Holding Communal), which experienced significant financial strains

following the collapse of Dexia‟s share price. Fitch estimates that around 50% of LICs taken in

2011 were related to these two names.

Peer Comparison

As can be seen in the peer table at the end of this report (Figure 6), Belfius‟s profitability ratios

are improving. In absolute terms, Belfius‟s capital base is currently below those of its main

competitors, but capitalisation, as measured by the FCC ratio, is acceptable.

Risk Management

Belfius runs its own adequate risk management processes; all service-level agreements

between Dexia and Belfius have been terminated. Risk and strategy committees fall under the

supervision of the chief risk officer who sits on the management board. Operational risk from

the bank‟s separation from Dexia has remained under control with no major incident/

discontinuation experienced.

Credit Risk: Low-Risk Loan Book

Credit risk (calculated under the Advanced Internal Ratings-Based approach) represented 91%

of Belfius‟s regulatory weighted risks at end-June 2013. Credit risk (EUR206.8bn at end-2012)

comprises: the bank‟s EUR89.4bn customer loan book (which includes EUR8.3bn fixed-income

and EUR0.478m reverse repos); EUR41.3bn of loans and advances to banks and reverse

repos; a EUR36.7bn fixed-income securities portfolio; and EUR39.4bn of counterparty risk for

derivatives exposures.

Credit risk is largely concentrated in Belgium (two-thirds), France (9%), the US (4%) and the

European Union (the remainder). Fitch estimates that Belgian GDP will be flat in 2013, with 1%

growth forecast for 2014. Unemployment has deteriorated slightly and is expected to reach 8%

in 2013 (7.6% in 2012), but compares favourably with the eurozone average of 12%. Belgian

companies have not undertaken massive lay-offs during the crisis, helping to curb

unemployment.

Loan Book Dominated by Mortgages and Public-Sector Loans

The retail loan book includes loans to individuals and SMEs. Loans to individuals are largely

mortgages (EUR21bn), which remain sound. Some weakening may occur as unemployment

has risen slightly, but should remain limited, given sound underwriting policies, the fact that

loans are mostly fixed-rate, and the stable housing market. The SME book (EUR10bn) has

seen some deterioration given weak economic growth, but the level of impaired loans remains

low (roughly 4%) and any additional impairment charges should remain manageable. Public-

sector lending is a historical strength at Belfius and represents a low risk, helped by the fact

that that the bank has close relationships with its customers as it is usually their primary bank.

Credit exposures to corporates are not overly concentrated (the top 20 exposures represented

114% of equity at end-June 2013) but are focused on Belgian names rated in the „A‟/„BBB‟

categories.

Loans and Advances to Banks: Much Reduced Exposure to Dexia

Funding provided to Dexia has decreased significantly and is now entirely state-guaranteed

(EUR13.4bn at end-June 2013) or secured (EUR1bn of reverse repos). However, this exposure

does not weigh on the bank's funding as it is refinanced with central bank repo facilities, in

large part using the state-guaranteed debt as collateral. The remainder of Belfius‟s exposure to

banks is made up of cash collateral and placements with highly rated banks in a granular

portfolio.

Figure 3 Breakdown of Loan Book (EURbn) 1H13 2012

Corporate and SMEs 18.0 18.2 Public and social sector

32.5 31.1

Consumer loans 1.5 1.6 Mortgages 21.0 21.2 Sight accounts 1.9 1.7 Total

a 74.9 73.8

a Figures adjusted for bonds reclassified as

L&R Source: Belfius

Solid quality loan book; any

deterioration should be manageable

Reduced exposure to peripheral

eurozone economies

No operational losses following the

separation from Dexia

Banks

Belfius Bank SA/NV

December 2013 6

Impaired Loans

The ratio of impaired loans to gross loans is low and compares well to those of peers. This ratio

rose significantly in 2011, as the bank impaired exposures to two of Dexia shareholders (Arco

and Holding Communal). At 70.1% at end-2013, Belfius‟s coverage of impaired loans by

impairments (individual and collective) is high compared to peers, especially given the nature of

the bank‟s lending.

Fitch expects LICs to be roughly stable in 2H13 and 2014. Any increase, for example stemming

from the SME portfolio, should remain manageable for the bank as a whole, and LICs should

certainly remain below their level in 2011, when Arco and Holding Communal experienced

significant financial strains from the failure of Dexia.

Decreased Exposure to Peripheral Eurozone Following Strategic De-Risking

The bank has virtually no exposure left to Greece, Portugal or Ireland. The largest exposure is

to Italy (largely owing to government debt of EUR4.6bn at end-June 2013). The exposure to

Spain is lower, essentially relating to covered bonds (EUR3.8bn, of which 85% was investment

grade at end-June 2013); only EUR1m exposure to the sovereign.

Fixed-Income Securities Portfolio

The fixed-income securities portfolio (EUR35.1bn at end-June 2013) is composed of insurance

assets (EUR12.9bn), the bank‟s ALM portfolio (EUR7.3bn) and legacy assets (EUR14.9bn, in

run-off). Legacy assets at Belfius are more diversified than at most banks and not limited to

structured finance investments as they were part of a “credit spread portfolio” built up by Dexia

before the global financial crisis, aimed at improving the bank‟s performance by investing in

bonds paying a higher spread than Dexia‟s low pre-crisis funding cost.

Fitch does not expect any significant additional impairment charges from the fixed-income

portfolio, which is well rated (see Figure 4). The bank has de-risked this portfolio (sale of

Spanish, Greek and Central and Eastern European government bonds) in line with its

moderate risk appetite and is focusing its investment strategy on Belgian government bonds

(EUR8bn).

Market Risk

Market risk (calculated using internal models) represented 3% of Belfius‟s regulatory weighted

risks at end-2012. It arises from (limited) positions taken for client flow business. During 2012,

the maximum total value at risk (VaR; 10-day holding period, 99% confidence interval) was

small (EUR30m, well below the prudent internal limit of EUR41m). Structural interest rate risk is

monitored using derivatives and appears adequately managed. At end-2012, the bank

calculated that a 100bp parallel increase in the yield curve would have improved net income by

EUR10m, which is very limited.

However, Belfius is exposed to credit spread risk given its substantial fixed-income securities

holdings. As these securities are largely accounted for as available-for-sale (AFS) assets, the

mark-to-market changes affect revaluation reserves and can create volatility in the bank‟s

equity. The significant amount of negative revaluation reserves (EUR1.4bn at end-June 2013)

weighs on Fitch core capital (see Funding, Liquidity and Capital), although these negative

reserves are largely due to macro hedges.

Belfius also retains a large derivatives book. Fitch believes that this business is well managed

and the market and credit risks are low, especially considering the increased government and

regulatory oversight after change of ownership and restructuring, although it will nevertheless

be an operational burden for Belfius until it is substantially run down.

Operational Risk

Operational risk (calculated under the standardised approach) represented 6% of Belfius‟s

regulatory weighted risks at end-2012. Belfius‟s separation from Dexia has been efficiently

Figure 4

Figure 5

AAA12%

AA27%

A25%

BBB30%

NIG6%

Fixed-Income Securities by RatingEUR35.1bn end-June 2013

Source: Belfius

ABS/MBS12%

Fixed Income Securities by Asset ClassEUR35.1bn end-June 2013

Source: Belfius

Covered bonds18%

Sovereign & public sector

42%

Other corporate

16%

Financial institutions

12%

Banks

Belfius Bank SA/NV

December 2013 7

conducted, with no major incidents reported to Fitch. Each business line is responsible for

monitoring operational risk, and any incidents are continuously reported to improve internal

controls. Losses amounted to EUR3.6m in 2012, essentially relating to execution and fraud

incidents.

Funding, Liquidity and Capital

Funding: Good Retail Funding

Belfius benefits from a large amount of customer funding (of which two-thirds relates to retail

deposits) as is the case for other Belgian banks. It reported customer outflows in the second

half of 2011 in the aftermath of the Dexia crisis, but the bank has fully recovered lost deposits.

The bank‟s loans/customer deposits ratio as calculated by Fitch is high compared to peers‟

(150% at end-2012 excluding EUR8.1bn of repos accounted for as deposits). However, the

loans/customer deposits ratio does not reflect the fact that customers also invest in the bank‟s

certificates of deposits and savings certificates, both of which are accounted for as debt

securities. These amounted to EUR11.8bn at end-2012. In addition, the bulk of debt securities

are placed within the retail network (EUR12.8bn). Taking into account this additional funding,

the ratio of loans/customer funding would have been 106% at end-2012, which is more in line

with peer levels.

Belfius‟s senior unsecured funding placed with wholesale investors is limited and essentially

long-term. However, Belfius is taking advantage of the Belgian covered bond (“Mortgage

Pandbrieven”) legislation adopted in August 2012 to set up a EUR10bn programme

(EUR1.25bn issued in 1H2013 and EUR1.34bn in 2012). Belgium was the only significant

western European country without legislation for this instrument. This offers management an

additional longer-term and cheap funding instrument. The covered bonds under the programme

have been assigned a rating of „AAA‟ by Fitch. Interbank funding is largely with the central bank

(EUR15bn at end-June 2013), used to refinance the exposure to Dexia, and has declined in

line with this exposure.

Belfius has also set up securitisation programmes. At end-2012, EUR20.6bn of loans had been

securitised (essentially retained on balance sheet and used as collateral for repo transactions).

Assets encumbered for securitisations and repo transactions represented around 20% of the

bank‟s total assets, which is manageable.

Liquidity

Belfius‟s liquidity has significantly improved and is now satisfactory. Management informed the

agency that Belfius had an amount of available liquidity (cash plus assets eligible for repo with

the ECB) at end-May of EUR31bn (which includes roughly EUR15bn of retained securitisation

available with the ECB) that more than exceeds one-year short-term wholesale funding.

Moreover, the customer deposit base experienced limited outflows in an actual stress situation

(rapidly assuaged by nationalisation).

The improvement in Belfius‟s liquidity was helped by the reduction of funding to Dexia

(EUR56bn at end-2011, EUR14.4bn at end-August 2013). The sale agreement signed between

Dexia and the Belgian state stipulates, among other things, priority allocation of cash received

by Dexia to reimbursement of funding from Belfius (other than state-guaranteed securities). In

addition, various initiatives have been undertaken to improve Belfius‟s liquidity position,

including the direct investment in loans by Belfius Insurance and increasing the pool of ECB-

eligible assets (new retained securitisations).

Capital

Belfius‟s Fitch core capital/weighted risks ratio (9.51% at end-June 2013) is much lower than its

regulatory Core Tier 1 ratio (14.30%). The major reason is negative revaluation reserves

(EUR1.4bn at end-June 2013), which affect Fitch core capital, while prudential filters exclude

Good retail franchise provides

significant customer funding

Liquidity position has improved and is

now satisfactory

Regulatory capital ratios are solid but

Fitch core capital is lower due to

large negative revaluation reserves

Banks

Belfius Bank SA/NV

December 2013 8

revaluation reserves on bonds (the largest part of Belfius‟s revaluation reserves) from

regulatory capital under Basel II. In addition, several deductions are made to calculate Fitch

core capital, notably the investment in the insurance subsidiary (EUR781m) and deferred tax

assets (EUR626m). Under Basel III/CRD IV, Belfius would report a phased-in Core Tier 1 ratio

of 12.8%, virtually all the impact being due to higher risk-weighted assets for CVA risk on the

bank‟s derivative book.

Negative revaluation reserves have declined significantly owing to the sale of legacy bonds, the

natural amortisation of the bond portfolio and tightening credit spreads. Moreover, the overall

quality of the AFS securities is solid. Therefore, the negative revaluation reserves will not

necessarily translate into further impairments.

The bank‟s leverage remains high, which means it has a low equity/assets ratio (3.02% at end-

June 2013), but continues to improve as the bank reduces its legacy assets. No dividends will

be paid under the terms agreed with the European Commission, as earnings will be used to

strengthen the bank‟s capital position.

Figure 6 Peer Comparison

BNP Paribas Fortis KBC Bank Belfius Bank

(EURm) 1H13 2012 1H13 2012 1H13 2012

Total assets 271,738 272,254 221,985 224,824 193,578 212,947 Total equity 22,652 23,326 12,937 11,973 5,842 5,359 Operating profit/average equity (%) 9.00 9.93 20.14 14.27 9.68 -4.25 Operating profit/average assets (%) 0.76 0.66 1.12 0.72 0.27 -0.08 Net interest income/average earning assets (%) 1.82 1.52 1.75 1.83 1.00 1.01 Cost/income (%) 66.9 65.3 47.8 56.5 76.0 95.2 Loan impairment charges/average gross loans 0.27 0.23 0.86 0.80 -0.07 0.30 Loans and securities impairment charges/pre-impairment op. profit 17.6 14.94 30.66 40.21 -12.61 311.6 Impaired loans/gross loans (%) 4.65 4.64 6.19 5.66 2.52 2.69 Reserves for impaired loans/impaired loans 49.0 51.2 65.1 64.1 70.7 70.5 Core Tier 1 capital ratio (%) 13.29 11.40 14.30 13.30 Fitch core capital ratio (%) 14.68 14.77 13.55 11.27 9.51 7.45 Loans/customer deposits 99.9 103.4 97.3 104.6 129.3 150.7 Ratings

Long-Term Issuer Default Rating A+ A− A− Short-Term Issuer Default Rating F1 F1 F1 Viability Rating a a− bb+ Support Rating 1 1 1

Support Rating Floor - A− A− Outlook Stable Stable Stable

Source: Fitch

Banks

Belfius Bank SA/NV

December 2013 9

Belfius Bank SA/NV

Income Statement30 Jun 2013 31 Dec 2012 31 Dec 2011 31 Dec 2010

6 Months - Interim6 Months - Interim As % of Year End As % of Year End As % of Year End As % of

USDm EURm EURm EURm EURm

Unaudited Unaudited Unqualified Unqualified Unqualified

1. Interest Income on Loans n.a. n.a. - 3,098.7 1.50 3,301.7 1.46 3,252.0 1.34

2. Other Interest Income 4,193.7 3,206.1 0.00 1,778.7 0.86 2,370.1 1.05 2,170.0 0.89

3. Dividend Income 39.1 29.9 0.00 53.4 0.03 69.2 0.03 66.1 0.03

4. Gross Interest and Dividend Income 4,232.8 3,236.0 0.00 4,930.8 2.38 5,741.0 2.53 5,488.1 2.26

5. Interest Expense on Customer Deposits n.a. n.a. - 759.8 0.37 1,094.5 0.48 882.7 0.36

6. Other Interest Expense 2,947.4 2,253.3 0.00 1,995.1 0.96 2,436.0 1.07 2,429.6 1.00

7. Total Interest Expense 2,947.4 2,253.3 0.00 2,754.9 1.33 3,530.5 1.56 3,312.3 1.37

8. Net Interest Income 1,285.4 982.7 0.00 2,175.9 1.05 2,210.5 0.97 2,175.8 0.90

9. Net Gains (Losses) on Trading and Derivatives n.a. n.a. - (28.8) (0.01) (70.3) (0.03) 6.4 0.00

10. Net Gains (Losses) on Other Securities 53.2 40.7 0.00 (192.5) (0.09) (635.0) (0.28) 124.1 0.05

11. Net Gains (Losses) on Assets at FV through Income Statement 7.2 5.5 0.00 3.2 0.00 28.9 0.01 n.a. -

12. Net Insurance Income (258.9) (197.9) 0.00 (574.6) (0.28) (331.5) (0.15) (381.2) (0.16)

13. Net Fees and Commissions 243.0 185.8 0.00 314.3 0.15 332.2 0.15 368.4 0.15

14. Other Operating Income (38.3) (29.3) 0.00 (23.9) (0.01) (37.8) (0.02) 75.2 0.03

15. Total Non-Interest Operating Income 6.3 4.8 0.00 (502.3) (0.24) (713.5) (0.31) 192.9 0.08

16. Personnel Expenses 436.5 333.7 0.00 723.3 0.35 660.1 0.29 663.0 0.27

17. Other Operating Expenses 545.3 416.9 0.00 870.2 0.42 997.2 0.44 987.9 0.41

18. Total Non-Interest Expenses 981.8 750.6 0.00 1,593.5 0.77 1,657.3 0.73 1,650.9 0.68

19. Equity-accounted Profit/ Loss - Operating 2.4 1.8 0.00 5.8 0.00 (2.7) (0.00) 28.7 0.01

20. Pre-Impairment Operating Profit 312.2 238.7 0.00 85.9 0.04 (163.0) (0.07) 746.5 0.31

21. Loan Impairment Charge (39.4) (30.1) 0.00 267.9 0.13 555.3 0.24 24.4 0.01

22. Securities and Other Credit Impairment Charges n.a. n.a. - (0.2) (0.00) 1,408.1 0.62 2.1 0.00

23. Operating Profit 351.6 268.8 0.00 (181.8) (0.09) (2,126.4) (0.94) 720.0 0.30

24. Equity-accounted Profit/ Loss - Non-operating n.a. n.a. - n.a. - n.a. - n.a. -

25. Non-recurring Income 79.8 61.0 0.00 779.1 0.38 n.a. - 117.0 0.05

26. Non-recurring Expense 1.2 0.9 0.00 n.a. - n.a. - 40.2 0.02

27. Change in Fair Value of Own Debt n.a. n.a. - 0.0 0.00 (19.3) (0.01) (34.7) (0.01)

28. Other Non-operating Income and Expenses n.a. n.a. - 0.2 0.00 n.a. - n.a. -

29. Pre-tax Profit 430.2 328.9 0.00 597.5 0.29 (2,145.7) (0.95) 762.1 0.31

30. Tax expense 96.3 73.6 0.00 180.5 0.09 (778.8) (0.34) 81.6 0.03

31. Profit/Loss from Discontinued Operations n.a. n.a. - n.a. - n.a. - n.a. -

32. Net Income 333.9 255.3 0.00 417.0 0.20 (1,366.9) (0.60) 680.5 0.28

33. Change in Value of AFS Investments 278.1 212.6 0.00 1,694.3 0.82 (818.8) (0.36) (892.1) (0.37)

34. Revaluation of Fixed Assets n.a. n.a. - n.a. - n.a. - n.a. -

35. Currency Translation Differences n.a. n.a. - 0.0 0.00 (0.9) (0.00) 7.8 0.00

36. Remaining OCI Gains/(losses) n.a. n.a. - (26.7) (0.01) 6.4 0.00 (6.9) (0.00)

37. Fitch Comprehensive Income 612.0 467.9 0.00 2,084.6 1.01 (2,180.2) (0.96) (210.7) (0.09)

38. Memo: Profit Allocation to Non-controlling Interests 0.1 0.1 0.00 1.4 0.00 (0.1) (0.00) 2.2 0.00

39. Memo: Net Income after Allocation to Non-controlling Interests 333.8 255.2 0.00 415.6 0.20 (1,366.8) (0.60) 678.3 0.28

40. Memo: Common Dividends Relating to the Period n.a. n.a. - 0.0 0.00 0.0 0.00 0.0 0.00

41. Memo: Preferred Dividends Related to the Period n.a. n.a. - n.a. - n.a. - n.a. -

Exchange rate USD1 = EUR0.76450 USD1 = EUR0.75790 USD1 = EUR0.77290 USD1 = EUR0.74840

Earning Assets

Earning

Assets

Earning

Assets

Earning

Assets

Banks

Belfius Bank SA/NV

December 2013 10

Banks

Belfius Bank SA/NV

December 2013 11

Banks

Belfius Bank SA/NV

December 2013 12

Banks

Belfius Bank SA/NV

December 2013 13

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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