Fitch affirms KBC group at 'A' - outlook stable

In addition, the agency has upgraded KBC Bank's Individual Rating to 'C/D' from 'D' and KBC Group Re's IFS rating to 'A' from 'A-'. KBC Bank's, and KBC Group's, long-term IDRs are at their support rating floors, indicating an extremely high probability of additional support, if needed, from the Belgian state ('AA+'/Stable).

Fitch said that the upgrade of KBC Bank's individual rating reflects a significant improvement in operating profit as it no longer needs to make substantial write-downs on its CDOs, the fact that the overall level of loan impairment charges appear to have reached a peak and the strengthening of capital ratios.

Nevertheless, the individual rating also takes into account the continuing pressure on operating revenue and high loan impairment charges given the exposure to Ireland and central and eastern Europe.

In addition, the bank's financial flexibility has been reduced as it will share the burden with its parent, KBC Group, of repaying €7bn of state hybrid capital received during the crisis.

It added that KBC Insurance's ratings reflect solid capital adequacy thanks to the capital support received from its parent, KBC Group, strong business positions in both Belgium and CEE and better prospects for profitability as shown in 2010 after two years of poor performance.

However, a high dividend payout to KBC Group as part of the planned repayment of state hybrid capital has reduced KBC Insurance's standalone creditworthiness.

The equalisation of KBC Insurance's IFS and IDR ratings reflects the continuing material government support for the group by means of hybrid capital.

The group's 'A' IDR places a cap on KBC Insurance's IFS rating. The upgrade of KBC Group Re's IFS rating reflects Fitch's decision to revise its view of the subsidiary as core (previously very important) to KBC Group based on its meaningful size (€400m of equity), change of name, business activity, capital support agreement and demonstrated capital support from the group to cover potential CDO write-downs. KBC Group Re is the group's wholly-owned reinsurance subsidiary based in Luxembourg previously known as Assurisk SA.

The group has strong domestic franchises. KBC Bank is one of the three largest Belgian banks with 20% of deposits and KBC Insurance is one of the largest insurers with market shares of 13% in life and 13% in non-life.

The group is also present in CEE, especially through its banking activities, which has led to increased impairment charges. The bank and insurance company are managed in an integrated manner in terms of business, strategy, risk and capital.