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.

Rationale

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.

Outlook

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

Source: http://news.yahoo.com/text-p-afrms-2-rtgs-banque-int-luxembourg-101354766--sector.html

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