Dexia Profit Misses Estimates on Legacy Loss, Funding Cost

Dexia SA, the lender to local governments that was rescued by France and Belgium, reported profit that missed estimates because of mounting provisions for losses on asset-backed securities and declining interest income.

Fourth-quarter net income dropped to 56 million euros ($77 million) from 202 million euros a year earlier, the Paris- and Brussels-based bank said today in a statement. That missed the 148 million-euro average estimate of eight analysts surveyed by Bloomberg. Revenue fell 18 percent to 1.21 billion euros.

Chief Executive Officer Pierre Mariani, who set a goal of doubling pretax profit to 1.8 billion euros in 2014, shuffled the bank’s management board in December by doubling its size and giving Alexandre Joly the oversight of a unit that manages bond and loan portfolios being wound down. The so-called legacy division posted a pretax loss of 246 million euros as Dexia increased its forecast for losses on a pool of mostly U.S. residential-mortgage-backed securities by $588 million.

“We have taken tougher assumptions about the duration of the crisis on the real-estate market. Our base scenario now is seven years,” Mariani told analysts and investors on a conference call. “We know that, because of the structure of these securities, most losses will appear post 2015.”

Writedowns on the U.S. asset-backed securities increased $336 million in the quarter to $2.25 billion, exceeding Dexia’s own forecast for losses by $456 million. Dexia said it doesn’t expect default rates in the U.S. mortgage market to improve in the coming three years. Losses so far amount to $624 million.

Basel III Effect

Dexia’s core Tier 1 ratio, a key measure of a bank’s ability to absorb losses, increased to 12.1 percent from 11.8 percent at the end of September. The lender said it expects Basel III capital rules to inflate risk-weighted assets by 25 billion euros, cutting its estimate from 50 billion euros in October.

Fourth-quarter net interest income, the difference between what the bank pays for funds and what it charges for loans, dropped 8.5 percent to 958 million. Competition among banks on the French market for public-finance loans is easing, according to Mariani.

“A few competitors have finally understood that liquidity has a cost.” Mariani said on the call. “There’s no competition on price in this market, at least in France.”

The bank raised 44.4 billion euros last year selling medium- and long-term debt, including government-guaranteed notes and covered bonds, and cut its short-term funding by 48 billion euros to 119 billion euros at the end of December.

Dexia also said it reduced central-bank borrowings to about 18 billion euros, from a peak of 122 billion euros in February

2009. The lender has about 42 billion euros of assets left it could pledge as collateral with the European Central Bank in return for additional funds.

Sovereign bond holdings in the banking unit amount to about 50 billion euros, a 13 percent cut from last year’s stress tests, Mariani said on the call.

    Before it's here, it's on the Bloomberg Terminal.