Moody's goes negative on Fortis

Moody's announced today that it had affirmed all of the ratings of Fortis and has changed the rating outlook to negative from stable on Fortis SA/NV, Fortis NV (both with issuer ratings at Aa3), and all of their main operating subsidiaries (bank deposits at Aa2, BFSR at B-, and IFSR at Aa3).

Commenting on the outlook change, Moody's noted the combination of the recent deterioration of the group's capital position and financial flexibility, as well as the potential for further capital markets-led pressures. "The negative outlook reflects Moody's expectation of a challenging recovery in the short to medium term of Fortis Group's underlying credit fundamentals, in the context of an uncertain macro-economic environment, a major integration initiative for the group with the acquired ABN AMRO businesses, and potential additional depreciation to certain of Fortis' pressurised assets" said Jose Morago, Moody's Assistant Vice-President/Analyst and lead analyst for Fortis Group.

In terms of the Group's financial flexibility, Moody's said that in its view this had deteriorated recently, in the context of the hybrid raising initiatives to support the capitalisation of the banking operations as well as the funding of the ABN acquisition. As a result, compared to historical levels, Fortis' financial leverage and fixed charge coverage are likely to be over Moody's expectation for the rating levels in the short to medium term. Moody's added that any further capital markets-induced pressures, for instance further writedowns of structured assets, would add to these pressures. Furthermore, Moody's noted the significant increase of the group's hybrid usage, whereby hybrid capacity will be nearly exhausted in the short-term.

With reference to the Fortis Bank ratings, Moody's said that in line with the stress tests that it is applying to financial institutions with important CDO exposures, it had reviewed Fortis Bank's exposures to this asset class. While Fortis' stressed marks are considered broadly adequate, the rating agency said that in line with its analysis for financial institutions, it had taken a conservative view of the potential need for additional write-downs given the continued challenging market conditions. "The negative outlook reflects Moody's opinion of the prospect for additional impairments and reduced recurring earnings given the important revenue contributions from the bank's merchant banking activities. The negative outlook also reflects the weakened capitalisation of the bank both in terms of quality and absolute levels", said Lynn Exton, Senior Vice President and lead analyst for Fortis Bank.

Moody's said that it views a Tier 1 ratio in line with the bank's target of 7%, excluding the impact of the capital raised to finance the acquisition of ABN AMRO and calculated on a Basel 1 basis, as an appropriate level for Fortis Bank to remain within its present rating category. If the Tier 1 ratio were to be broadly below the target level of 7% level on a Basel 1 basis and net of the impact from the ABN AMRO financing, for a prolonged period, the bank's ratings would be under additional negative pressure.

Regarding the Group's insurance ratings, Moody's noted that even though the underlying fundamentals of the insurance operations have not changed materially in the last few months, the outlook change reflects the potential for pressure on capitalisation levels and financial flexibility of the insurance ratings, in the context of the bank's/group's needs. It also reflects the level of integration of insurance with the bank/group, in terms of capital management, risks management and asset management, and thus potential contagion risk.

Regarding the ABN AMRO acquisitions Moody's noted that despite the good strategic rationale of the transaction, in the context of the challenges above, the integration of ABN AMRO operations represent an additional burden on the group's ratings in the short to medium term.

Moody's also affirmed and maintained a positive outlook on the A3 IFSR of FICA, the group's life insurance subsidiary headquartered in Hong Kong, considering that there are no material changes in the company's fundamentals or the level of implicit support from the parent Fortis Group. The positive outlook continues to reflect our expectation that FICA's business and financial profile will improve over the medium-term due to changes made to its operations following its ownership and involvement of Fortis Group in Asia.

Moody's added that the negative rating outlook on Fortis' main operating entities could return to stable in the event of improvements to Fortis' risk profile, capital position and financial flexibility in the next 12 to 18 months. Specifically, strong operating results for 2008 consistent with limited write downs on structured assets, a strong capital replenishment consistent with a banking Tier I ratio of at least 7% and consolidated financial leverage no higher than the low 30s could result in an outlook change to stable. On the other hand, further deterioration in or a sustained weakness in capital position and financial flexibility could result in a rating downgrade in the short-term.