Stable outlook for Belgium’s banking system

While continued progress has been made in integrating and rationalising their domestic operations, Belgian banks’ earnings and efficiency remain moderate, says Moody’s Investors Service in its new Banking System Outlook for Belgium.

“The outlook for Belgian bank ratings remains stable, based on the banks’ low — but generally improving — profitability, their solid domestic franchises and relatively low risk profiles,” said Stephane Le Priol, a Moody’s Vice President/Senior Analyst and author of the report.

“Nevertheless, while continued progress has been made in integrating and rationalising their domestic operations, earnings and efficiency remain moderate. Furthermore, we believe that revenue growth remains challenging for the banks.”

The Belgian banking system is highly concentrated, being dominated by four major banking groups. Dexia, Fortis, ING Belgium and KBC together control more than 85% of both deposits and credits. Moody’s views Belgium as a medium-support environment. However, given the very high concentration of the market, there is a very high likelihood that the financial authorities would extend support to any of the four large banks in the system in case of need, in Moody’s opinion.

“The subprime-related crisis has not overly weighed on Belgian banks so far, thanks to their predominantly European retail focus and diversified bancassurance strategies,” added Le Priol. “As the crisis develops further, we will remain vigilant as to potential impacts on ratings, and especially on Bank Financial Strength Ratings, coming from the banks’ capital-market or asset-backed finance activities.”

The Belgian banking market is characterised by intense competition, low margins and increasingly integrated cross-border activities within the Benelux: of the four major banking groups in Belgium, two are parts of groups with a majority of their assets in the Netherlands (ING Belgium and now Fortis Bank, with the ongoing integration of the acquired ABN AMRO businesses).

“The four market leaders display good revenue diversification across traditional banking activities, have developed successful bancassurance strategies and hold significant asset management franchises,” said Le Priol. “With these groups having been established for some time, we see some incremental scope for achieving further efficiency and profitability domestically, on top of the progress already made in the past few years. However, the pace of improvement is likely to remain measured.”