Shares for troubled Belgian bank KBC suffered heavy losses this month amid concerns about the bank's exposure to fragile emerging markets as well as its need to raise fresh capital.
At the beginning of this year, the bank said in a press release that it expected its full-year net earning to fall by E900 million ($1.2 billion). This is a result of further downgrades that Moody's Investors Service made on a range of CDOs held by the group.
KBC said in its statement that the adverse impact on value for KBC came to E600 million. This was after the new rating assumptions were applied to the entire CDO portfolio, including securities that were not downgraded, bringing the value down to zero for all securities with a credit rating below 'Ba3'.
Another E300 million CDO markdown was linked to the increased market value of financial guarantees (written by monoline insurers) on the back of the rating downgrades. This brings the combined pre-tax impact to E900 million.
The bank has since seen its shares lose almost half their value. Last week Moody's responded by downgrading KBC Bank's bank financial strength rating (BFSR) to 'C+' from 'B-', and its long-term debt and deposit ratings to 'Aa3' from 'Aa2'. At the same time, KBC Group's long-term debt rating was also downgraded to 'A1' from 'Aa3'. All long-term ratings and the bank's BFSR continue to carry a negative outlook. All short-term ratings were affirmed at Prime-1. As a consequence of the rating action on KBC Bank, a number of its subsidiaries ratings have also been affected.
To improve its standing, KBC has written down the full value of the (mezzanine) CDO notes in which it has invested (retaining only the super senior tranches). Measures were also taken to further concentrate its activities on its home markets, contain costs and reduce market risk. The group is additionally set to further strengthen its capital base by a E2 billion non-dilutive core capital issue from the Flemish Regional Government, with access to an additional E1.5 billion for future use.
"We took a conservative stance when marking down to zero all CDO investments which do not have the highest, so-called super senior status," said Andre Begen, group CEO. "We have also taken decisive measures to reduce costs and to further reduce the risk profile of our activity portfolio. We are pleased to see that the performance in our core markets in Belgium and Central and Eastern Europe held up relatively well."
However, Moody's noted that despite the efforts the group has initiated, it still maintains a sizeable exposure to structured finance asset classes, specifically to assets from the super senior CDO and RMBS portfolios. In addition, Moody's views the KBC Financial Products (KBC FP) activities as an area of concern in the current volatile environment, although KBC has stated that it will take measures to scale down its derivatives activities.
The rating agency also warned of the significantly weakening market conditions in Central and Eastern Europe and Russia (CEER) and in Ireland, which represent approximately 37% and 5%, respectively, of KBC's net banking income for the first nine months of 2008.
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