Euroclear Bank S.A. · in its capitalization from the year before. We consider that Standard &...

Euroclear Bank S.A.

Primary Credit Analyst:

Thierry Grunspan, Paris (33) 1-4420-6739; [email protected]

Secondary Contacts:

Yulia Kozlova, CFA, London +44 207 176 3493; [email protected]

Giles Edwards, London (44) 20-7176-7014; [email protected]

Table Of Contents

Major Rating Factors

Rationale

Outlook

Profile: Largest European Securities Settlement Franchise

Support And Ownership: Majority Owned By Users

Strategy: Deepen Relevance To Clients Through More Efficient And

Expanded Post-Trade Services

Risk Management: A Vital Discipline And Key Strength

Accounting: Analysis Of Both Bank And Group

Profitability: Improved Efficiency

Capital: Sustained Strong Ratios Expected

Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 22, 2014 1

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Euroclear Bank S.A.

Major Rating Factors

Strengths:

• Crucial role in supporting Euroclear's leading franchise in international

securities markets.

• Strong risk management and regulatory framework.

• Very low risk profile.

• Strong capitalization and limited leverage.

Counterparty Credit Rating

AA/Stable/A-1+

Weaknesses:

• High operational risk inherent in settlement and custody activities.

• Dynamic operating environment, requiring constant adaption to mitigate potential threats and leverage

opportunities

Rationale

The ratings on Belgium-based Euroclear Bank S.A. reflect Standard & Poor's Ratings Services' view of its "core" status

to ultimate parent Euroclear plc (Euroclear), and the crucial role that it maintains in the international securities

markets. The ratings also reflect the strong and dynamic risk management framework, the Euroclear group's very low

risk profile, and the strong regulatory framework under which it operates. While apparently well-managed, we consider

high operational risk to be inherent in the settlement and custody business.

Euroclear Bank is one of the world's largest providers of cross-border settlement services, covering domestic and

international bonds, equities, and investment funds. In addition to securities settlement, the bank continues to focus on

related activities such as asset servicing, securities lending and borrowing, collateral management, money transfer, and

ancillary banking services. In addition to the bank's role as one of the two leading international central securities

depositaries (CSDs), the Euroclear group also operates the national CSDs for many countries in north-west Europe.

Euroclear reports that it covers 57% (by value) of debt and equity securities issued by European Union issuers, and

provides access to 90% of securities worldwide. It held €24.2 trillion in client assets at end-2013. Although Euroclear's

client assets are about double those of Luxembourg-based competitor Clearstream group, we see the two as very close

peers, given their hegemony as the leading international CSDs and broadly comparable financial strength.

Euroclear operates in a dynamic regulatory and competitive environment. We believe that it is protected to a large

degree by its strong franchise, high barriers of entry, and we see no current initiatives that pose a conclusive threat to

its leading position. However, to maintain this position Euroclear continues to innovate and adapt, for example in

response to rising client demand for global collateral management services and, over the medium term, from the

European Central Bank's planned Target2 Securities (T2S) initiative. While we see Euroclear as relatively

well-positioned to deal with the prospective loss of some of its settlement revenues and the more competitive

environment that T2S could well bring, we see currently it as an at-best neutral development for Euroclear. In our

view, the EU CSD directive is unlikely to constitute a serious threat to Euroclear's current business model because we


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expect that it will continue to allow a CSD to undertake both depositary/settlement activities and related banking

activities.

As a largely user-owned infrastructure provider, Euroclear is not a profit maximizer, but it does seek to generate a level

of profitability that is satisfactory to its stakeholders. Euroclear's reported business metrics for 2013 showed growth in

all areas, including a 5% year-on-year rise in client assets, a 6% rise in securities transaction settled, and a 12% rise in

average daily collateral outstandings. Earnings followed the trends evident in the preceding year: that is, a slight rise in

fee income, interest income continuing to be held back by super-low central bank interest rates, and solid cost

management disciplines. Together, these combined to push reported operating profit to €353 million from €328

million the year before. We expect that Euroclear will see further traction in its major growth opportunities in the

current and next financial years: notably from collateral management, expanding links into emerging markets, and

growing funds-related activity. However, given our expectation of no strong and sustained rebound in market activity,

a likely persistent very low interest rate environment, and now limited scope for further reductions in total operating

expenses, we see only modest scope for profit growth in 2014 and 2015. But, equally we would expect any reduction

in underlying profitability to be modest.

The operational risk inherent in the settlement and custody business is high, but we consider it well-managed by

Euroclear. Euroclear Bank settles transactions in commercial bank money and faces sizable inherent intraday liquidity

risk. However, we consider this risk to be substantially mitigated, aided by the delivery-versus-payment approach to

settlement and associated processes, the bank's sizable liquidity resources, and its solid and stable customer franchise.

While the bank cannot entirely avoid taking unsecured exposure to counterparts, we consider credit risk incurred in

related banking services to be low, due in large part to the short duration of credit facilities granted, their generally

highly secured nature, and the group's conservative investment policy.

The low risk profile of Euroclear Bank and the wider group contributes to both maintaining very strong regulatory

capitalization. Euroclear reported a 48% Basel II Tier 1 ratio at end-2013 on a consolidated basis. While Euroclear

maintained its dividend payout ratio at 40% in 2013 and undertook a share buyback in mid-year, there was no change

in its capitalization from the year before. We consider that Standard & Poor's risk-adjusted capital (RAC) framework

offers some insight into the capitalization of Euroclear, which is a regulated banking group. Based on this measure, we

view the group's capitalization as a supportive factor, even at this high rating level. The RAC ratio at year-end 2013

was 17.3%, and we expect no significant change in future.

The group's only structural debt arises from the hybrid instrument issued by a subsidiary of Euroclear Bank and

guaranteed by it. There is now just €98 million nominal remaining after the bank completed a tender offer for €196

million nominal in 2012. The instrument is not Basel III-compliant and has a 2015 call date.

Reflecting the vital role that it plays for the group, the material size of its capital base in a group context, and its

continued strong contribution to group earnings, we consider Euroclear Bank to be "core" to Euroclear under our

group ratings methodology. As a result, we equalize the ratings on Euroclear Bank with the "aa" group credit profile

(GCP).

Until February 2014, we were applying our November 2013 criteria on rating companies above the sovereign as


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Euroclear Bank S.A.

Belgium was lower rated than Euroclear Bank. Our analysis suggested that Euroclear's business and financial drivers

were relatively uncorrelated with the fortunes of the Belgium government and the domestic economy, and that a

sovereign default was a relatively remote possibility. Belgium is now rated AA/Stable/A-1+, in line with the bank, so

this criteria is no longer of immediate relevance to our rating on Euroclear Bank.

Outlook

The stable outlook reflects our view that Euroclear's creditworthiness is likely to remain resilient. We expect that it will

maintain its low risk profile, satisfactory underlying profitability, strong capitalization, and a leading position in

settlement and associated post-trade activities, despite a highly competitive environment and structural changes in the

European securities industry.

We could lower the rating if Euroclear's business or financial profile was to deteriorate materially. This could result

from a marked deterioration in the group's very strong market position or its profitability, an increase in its risk

appetite, or from a material increase in financial leverage. While we consider this exceptionally unlikely, it could also

result from a revision of Euroclear Bank's group status (from the current "core" status to Euroclear).

We consider an upgrade unlikely at this time, given the already high rating and the potential challenges to the group's

business model and competitive position arising from initiatives such as T2S. Nevertheless, we could raise the rating if

we expected that the group was able to materially strengthen its already very strong business profile, for example

because earnings were rising as a result of it materially deepening its franchise among an ever-widening base of users.

Profile: Largest European Securities Settlement Franchise

Euroclear Bank is the most important subsidiary of Euroclear, whose other operating companies primarily comprise

the national CSDs of France, Belgium, Netherlands, U.K. and Ireland, Sweden and Finland. The bank regularly

contributes about two-thirds of group income, one-half of group pretax profits, and about 85% of the consolidated

group balance sheet (see chart 1). One of the two leading global international CSDs (ICSDs), Euroclear Bank was

originally established in 1968 to provide eurobond settlement services--a business that has been hugely successful.

However, over time it has become increasingly active in asset servicing, and settling transactions in funds and equities.

The bank has also developed ancillary services, including money transfer and custody, collateral management, and

securities lending and borrowing. Euroclear Bank caters to a variety of financial institutions worldwide, including

investment and universal banks, global custodians, central banks, and asset managers.


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Euroclear Bank S.A.

Chart 1

While legally a banking group, we rate Euroclear under our exchange and clearinghouse criteria since we consider

that, as a piece of important financial market infrastructure (FMI), the creditworthiness of Euroclear Bank, and that of

its group, is more closely linked to the risks and operating environment in the FMI sector than in the banking sector. In

our view, Euroclear's business model is built around its crucial role in global capital markets, rather than as a

Belgium-headquartered banking group, and its fee-based revenues are influenced by transaction volumes and values

across the breadth of the international capital markets.

Unlike the Clearstream group, whose business is in part built on its position within the vertically integrated trading

execution, clearing and settlement chain under Deutsche Boerse AG, Euroclear is a stand-alone provider of services

within the securities settlement layer of the financial markets. Through 2000-2008, Euroclear's vision of horizontal

integration in Europe led it to initiate mergers with national CSDs in France (2000), The Netherlands (2002), the U.K.

and Ireland (2002), and Sweden and Finland (2008), and some bolt-on acquisitions. In our view, as a result of these

consolidation efforts and the continued enhancement of its own infrastructure, services, and efficiency, Euroclear

reinforced its position as Europe's leading securities settlement system for both equity and fixed-income transactions.

The combined group now settles the equivalent of more than €570 trillion in securities transactions per year,

representing 170 million domestic and cross-border transactions, and holds over €24 trillion of client assets (see chart


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Euroclear Bank S.A.

2).

Support And Ownership: Majority Owned By Users

Euroclear PLC, the U.K.-domiciled holding company of the group, is owned by a consortium of 167 user-shareholders,

who have an 86% stake in the company (see chart 3). The remaining 14% is held by Sicovam Holding, the previous

owners of the French CSD. Euroclear S.A./N.V., incorporated in Belgium, is the intermediate holding company for all

the operating companies of the group, including Euroclear Bank. The ownership of Euroclear PLC has been

remarkably stable for many years, notwithstanding the share buyback in 2013, and we expect that it will remain so.


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Euroclear Bank S.A.

As a licensed bank operating in Belgium, Euroclear Bank is subject to the prudential supervision and oversight of the

Belgian National Bank (NBB), which exercises its supervision on a consolidated basis. Euroclear Bank and Euroclear

Belgium are also subject to the supervision of the NBB in respect of their role as operators of the Euroclear system and

the domestic securities settlement system, respectively. The securities settlement systems operated by the other

Euroclear CSDs are overseen by their domestic regulators.

In our view, Euroclear Bank benefits from a sound regulatory framework specific to its role as operator of the

Euroclear system. In particular, Article 31 of the Belgian Law of Aug. 2, 2002 provides a statutory lien in favor of

Euroclear Bank, which gives it the right to liquidate assets to cover participants' debts, without the need for a collateral

agreement (in cases of unsecured credit lines, for example). Belgian law also governs the contractual relationships

between the system operator and participants. Euroclear Bank's holding of securities is governed by Belgian Royal

Decree No. 62 of Nov. 10, 1967, which facilitates the circulation of securities on a fungible basis. Finally, under

Euroclear's terms and conditions, contractual protection for Euroclear Bank includes the right of set-off and retention,


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Euroclear Bank S.A.

and limitations on liability (negligence only, indirect damages only in case of gross negligence and wilful misconduct,

and no liability for third parties, including sub-custodians).

Reflecting the vital role that it plays for the group, the material size of its capital base in a group context, and its

continued strong contribution to group earnings, we consider Euroclear Bank to be "core" to Euroclear under our

group ratings methodology. As a result, we equalize the ratings on Euroclear Bank with the group's 'aa' GCP.

Given the central role that Euroclear plays in the post-trade infrastructure in the European capital markets (and

increasingly outside of Europe), we consider that there is a very strong incentive for, in particular, the user-owners of

Euroclear Bank's ultimate parent, Euroclear PLC, to provide the bank with extraordinary support if needed. However,

we do not notch up the ratings on Euroclear Bank beyond our view of the group's intrinsic creditworthiness.

Strategy: Deepen Relevance To Clients Through More Efficient And ExpandedPost-Trade Services

Euroclear operates in a dynamic regulatory and competitive environment. We believe that it is protected to a large

degree by its strong franchise, high barriers of entry, and we see no current initiatives that pose a conclusive threat to

its leading position. However, to maintain this position Euroclear continues to innovate and adapt, for example in

response to rising client demand for global collateral management services and to the European Central Bank's

Target2 Securities (T2S) initiative.

Over the past four decades, the group's leading franchise and market position was built on its position as one of the

two largest ICSD operators ]at the heart of the securities processing chain, and a reputation for strong risk control,

facilitated by the relentless growth of the financial markets, principally in Europe. Since the 2008 onset of the global

financial crisis, the market environment in Europe--that is, asset prices, transaction volumes, and interest rates--has

been less supportive. However, while earnings are only now returning to pre-crisis levels, in our view the group has

nevertheless prospered. It has consistently expanded its reach into geographies outside Europe, into newer and

strongly growing asset classes such as funds, and ancillary services such as collateral management. In recent years, a

strong focus on cost efficiency and service delivery has arguably improved the group's commercial position, without

any apparent weakening in risk management.

Having focused heavily on cost control in the past few years, management has indicated that it is now moving the

group to a growth-based strategy. In keeping with its focus on maintaining and, where possible, deepening its

relevance to clients, we see Euroclear responding to four key factors:

• The needs of clients for effective collateral management services to improve the efficiency of their collateral pools

and help them meet increasing demand for margin from clearinghouses and other counterparties;

• The appetite of investors for reliable infrastructure to facilitate investment in growing markets outside of the most

developed global economies;

• The wish, and to some extent expectation, of investors that Euroclear can improve market efficiency in growing

asset classes, such as mutual funds and ETFs; and

• The focus of clients (notably the major banks) on cost efficiency at their service providers, at a time when they are

themselves under pressure to improve returns in a low-growth market.


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Euroclear Bank S.A.

Within the above, we see collateral management as particularly important, and increasingly a differentiator for the

largest CSDs and global custodians, who already sit on very large collateral pools and have the resources needed to

fund the required sizeable investment in technology. While both have long been strong in triparty repo and securities

lending, to a degree we see Euroclear as catching up Clearstream in this area. Clearstream developed its highly

successful GC Repo product some years ago. Still, we see Euroclear as having developed a highly credible offering

through its "Global Collateral Highway" service to compete with Clearstream's "Liquidity Hub", and the Euro GC

product as a counterfoil to GC Repo. We also note Euroclear's plans to create a joint collateral processing service with

Depository Trust Corp. (DTC) as potentially being a highly attractive proposition for clients.

While a threat and an opportunity, we consider that Euroclear appears relatively well positioned to respond to T2S, an

ECB project that aims to provide an integrated settlement process for eurozone securities. Two drawbacks of T2S are

the sizable upfront investment for Euroclear and other CSDs, of which relatively little may be recouped from clients,

and the fact that settlement fees are likely to fall significantly once it is implemented, at least for Euroclear's national

CSDs located in the eurozone. However, we believe that T2S will generally favor CSDs that are efficient and have

strong service offerings in ancillary activities, such as asset servicing and collateral management. Overall, we see these

factors as generally favoring Euroclear over some smaller competitors, but we currently view T2S as an at-best neutral

development for the group.

Having addressed the trade layer through Markets in Financial Instruments Directive (MIFID II) and strengthened and

expanded clearing through European Market Infrastructure Regulation (EMIR), the European lawmakers are now

focused on enhancing minimum standards in the settlement layer of European post-trade. Overall, we see the CSD

Regulation (CSD-R), which is due for implementation in 2015, as neutral for a conservatively-run and strongly

capitalized group such as Euroclear. Importantly, in the one area that could have disrupted Euroclear's current

business model, we expect that CSD-R will continue to allow Euroclear Bank to undertake both depositary/settlement

activities and related banking activities.

Risk Management: A Vital Discipline And Key Strength

Euroclear Bank is fully integrated in the group's enterprise risk management (ERM) framework. We consider that

framework to be strong, dynamic, and to have delivered a solid track record of operational effectiveness. We also

consider that the bank's risk appetite appears cautious and conservative. Operational risk is, in our view, inherently

high, but appears well managed. We also note that Euroclear suffered no material loss or disruption during the market

crisis.

Credit risk: Highly collateralized short-term exposures

We consider Euroclear Bank's asset quality to be strong, given both its delivery-versus-payment approach to

settlement, and the highly secured, very short-term nature of its banking activities, and the group's conservative

investment policy. In our view, these elements continue to support a very low risk profile that is also underpinned by

the maintenance of apparently conservative risk policies and procedures and a supportive legal framework.

A key factor underpinning Euroclear Bank's strong credit risk profile is the legal framework from which it benefits. In

this respect, Article 41 of the Belgian Law of 1995 provides for a statutory lien in favor of the Euroclear system


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Euroclear Bank S.A.

operator. It is applicable to participants' assets (consisting of the balance of all securities in securities clearing

accounts, and the balance of all cash in cash accounts). It permits the recovery of all debts to the operator related to

securities clearance and settlement activity, and also provides for the immediate realization of securities and cash, as

well as the recovery of loaned securities.

To ensure settlement efficiency, Euroclear Bank makes available credit facilities--mainly uncommitted and intraday

(sometimes overnight) overdraft lines and securities lending--to clients that do not have sufficient funds on account

with the bank. Unsecured intraday overdrafts have remained stable over the past several years at about €2 billion;

more than 85% of which tends to be concentrated on high-investment-grade clients, mainly central banks who are

unable to grant liens on their assets. We consider the credit risk incurred through these facilities to be very low given

that 99% of the credit exposure is typically well-secured by collateral and the unsecured exposures are typically to

highly rated clients. Euroclear Bank applies haircuts to the related pledged securities collateral, which vary according

to the type of security, its liquidity, and the potential volatility in its value. The collateral, over which Euroclear Bank

has retention rights in the event of client default, is marked-to-market on a daily basis and carefully monitored to avoid

an undesirable build-up in concentrations. The haircuts are managed actively, aided by the back-testing and

stress-testing of valuations.

Banking exposure also arises from the large deposit balances left by clients, which have more than doubled in recent

years to in excess of €18 billion. Euroclear reinvests the cash with the dual objectives of limiting credit exposure and

maintaining a very high degree of liquidity. The majority is invested in reverse repo, and placements with the

Eurosystem via the NBB. The residual, typically around €2 billion, is placed on an unsecured basis or left with cash

correspondents, with over 85% of balances typically with counterparts rated 'A-' or higher. Euroclear and Clearstream

seek to avoid having unmitigated credit risk on each other through the careful management of settlement flow, use of

letters of credit, and, as a backstop, the right of legal set-off.

We consider Euroclear's appetite for risk arising from the investment of its capital to be low: the main objectives being

capital preservation and liquidity, with yield only a subsidiary consideration. These resources are invested in

short-dated bonds issued by some of the strongest eurozone governments and agencies, with the remainder placed

with the Eurosystem via the NBB.

Market risk: Minimized wherever possible

Euroclear Bank faces market risk in four main ways: the effect of the absolute level of interest rates on income, the

potentially uneven effect of currency movements on revenues and expenses, the potential for market movements to

reduce the value of the investment portfolio, and the potential interest and currency risk on its treasury activities.

The first of these has, in our view, the greatest scope to influence reported profitability. This is because it is an inherent

and largely unavoidable risk of the business, and because market risk is otherwise minimized. The bank routinely uses

cashflow hedges to help to mitigate volatility in earnings. As noted above, Euroclear Bank manages its investment

portfolio cautiously, in our view, seeking to eliminate the interest rate mismatch risk. Euroclear Bank does not keep

open positions, and any foreign exchange transactions with clients are immediately unwound in the markets, thereby

eliminating exchange risk.


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Euroclear Bank S.A.

Liquidity risk: Low risk appetite, conservatively managed

We consider that at the parent company level, Euroclear faces minimal liquidity risk--the lack of debt leaving only

dividends to pay. Similarly, liquidity risk for the domestic CSD subsidiaries is limited as they settle trades only on a

delivery versus payment basis, typically in central bank money. The main source of potential liquidity risk to the group

therefore comes from the bank, because of its nature as a deposit-funded institution and because, for reasons of

settlement efficiency, it uses its resources intraday to bridge imbalances in client cashflows. In practice, however, we

consider the bank's balance sheet liquidity risk to be modest, due to its liability-driven nature and aided by the high

quality and short tenor of its financial assets, and its access to contingent sources of liquidity. We also note the bank's

careful management of the intra-day credit provided to facilitate settlement.

The bank's balance sheet can be characterized as being split into an investment book and a treasury book. The

treasury book comprises the substantial client funds left on deposit at the bank, mainly by clients wanting to facilitate

the settlement of their transactions. Due to the relative stability of these balances and the bank's careful and short-term

placement of them, we consider the treasury book as being a potential source of liquidity. The investment book, which

relates the investment of the bank's capital, is structurally highly liquid and high quality and also available as a source

of contingent liquidity.

In our view, the bank's main potential liquidity risk arises intraday; it needs sufficient liquidity to manage the billions of

euros worth of transactions in the batch and real-time daily settlement routines. Across the day, inflows and outflows

match very closely, but the bank allows sizable mismatches to occur during the day, bridging the gap with its

discretionary extension of intra-day overdrafts. The largest scope for problems is early in the day. At the opening of

the business day (after the night-time settlement process), the bank extends around €80 billion of intra-day credit to its

clients--a figure that is not a cash amount. During the day, clients fund their accounts to pay down the overdrafts;

others that open the day with the opposite long cash position will wire some of their proceeds out of the system. As a

result, the bank only needs to find intraday liquidity sources during the day for four reasons:

• To the extent that those clients with accounts in credit (arising from settlement completion) withdraw cash faster

than those with overdrawn accounts pay in cash to remediate this possible shortfall; (ii) To meet any rise in

end-of-day client overdrafts;

• To cover any unequal cashflows with Clearstream, where Euroclear pays out more cash more than it receives; and

• To cover any difference between inflows and outflows in deposits generally.

To cover these potential gaps, sources of cash include Euroclear Bank's own on-balance-sheet resources noted above,

sizable intraday multi-currency credit lines with cash correspondent banks, committed and backstop facilities, and the

ability to monetize client securities at the discount window. We understand that in practice there is a relatively good

matching of daily in-/out-cashflows in normal circumstances, meaning that the bank rarely moves beyond using

on-balance-sheet sources of cash and some operational intra-day facilities. However, it runs liquidity stress scenarios

to examine more extreme circumstances, which include simulating the effects of the largest intraday borrower, a

settlement bank, or a major cash counterpart. This is in line with the Committee on Payment and Settlement Systems

(CPSS) and International Organization of Securities Commissions (IOSCO) Principles for Financial Market

Infrastructures (FMIs) that requires that a settlement system is, at the minimum, able to withstand the liquidity need

arising from the default of the participant and its affiliates that would generate the largest aggregate payment


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Euroclear Bank S.A.

obligation amid extreme but plausible market conditions. In extremis, and while Euroclear's liquidity risk modelling

does not rely on this, the bank retains the rulebook power to delay trade settlement if the client's cash account has

insufficient funds.

Operational risk: Well managed, but major inherent risk given huge volumes

Given the enormous value of the transactions settled, and the number of transactions and counterparties involved, we

consider operational risk as the main potential source of risk for Euroclear. However, in our opinion, the risk is well

managed and controlled, and the level of operational risk losses--typically in the low single digit millions annually--is

modest. Litigation expenses remain modest, with only one settlement--for a few million euros--of any note in recent

years.

Operational risk management is enhanced by the highly integrated nature of the group's operations, the highly

automated nature of the transaction processing, Euroclear's continuous investment in its systems, and the wealth of

corporate memory derived from its stable workforce. Euroclear's business continuity plan is based on the use of two

data centers with a monthly switch, complemented by a third data center, ensuring a short recovery time for the

resumption of business should the need arise. In addition, Euroclear covers its global operational risk through a general

blanket insurance policy that includes coverage for loss of securities in transit, professional liability, and third-party

fraud and computer crime. Euroclear uses the Advanced Measurement Approach to calculate its Basel II operational

risk charge.

Accounting: Analysis Of Both Bank And Group

In view of the importance of group financial strength to Euroclear Bank's creditworthiness and franchise, we analyze

financial data for the consolidated group as well as the bank (solo) level. The tables at the end of this report reflect the

consolidated group data that are an important determinant of our view of the GCP, and are presented in bank

format--consistent with Euroclear's disclosure as a banking group. In addition, we calculate the key corporate-like

measures for Euroclear, such EBITDA, as we do for other FMIs.

Euroclear issued €300 million in perpetual securities in 2005, of which €98 million nominal remain in issue. With the

advent of Basel III from Jan. 1, 2013, the securities are being phased out of regulatory capital on an amortizing basis

until their first call date in 2015. When calculating group-level leverage and debt servicing metrics, we classify the

securities as being of "intermediate" equity content, and include 50% in total tangible equity (TTE), our measure of

group-level capitalization for FMIs. In addition, when assessing group-level debt servicing capacity, we treat half the

associated coupon as an equity dividend.

Profitability: Improved Efficiency

As a largely user-owned infrastructure provider, Euroclear is not a profit maximizer, but it does seek to generate a level

of profitability that is satisfactory to its stakeholders; a stance that management describes as "profit-moderated".

Broadly, management targets an 8%-10% return on equity, in keeping with the utility-like service that the group

provides. Euroclear's reported business metrics for 2013 showed growth in all areas, including a 5% year-on-year rise


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Euroclear Bank S.A.

in client assets, a 6% rise in securities transactions settled, and a 12% rise in average daily collateral outstandings.

Earnings followed the trends evident in 2012: that is, a slight rise in fee income, interest income continuing to be held

back by super-low central bank interest rates, and solid cost management disciplines. Together, these combined to

push reported operating profit to €353 million from €328 million the year before.

Euroclear currently draws about 90% of its total income from fees and commissions, the remainder coming from net

interest income. The majority of this fee income continues to stem from safekeeping, followed by fees arising from

settlement. It is therefore influenced by transaction volumes, and securities prices--the basis on which safekeeping fees

are charged. That said, debt securities are based on nominal values, making associated revenues less vulnerable to

market sentiment. Net interest income fluctuates with the level of cash balances and the absolute level of interest

rates--in recent years, super-low central bank rates have compressed the interest margin, leading to a sharp decline in

net interest income (NII) despite inflows of extraordinarily high deposit balances. By contrast, however, a future

normalization of interest rates would likely lead to a significant uplift to earnings; management indicates a 50bps rise in

rates could translate to a €50 million rise in NII (assuming no change in deposit balances).

In our view, and in contrast to some key peers, Euroclear does not face such strong commercial pressures of highly

return-focused shareholders, and historically was less focused on cost efficiency. However, we observe substantial

progress in recent years, with reported operating expenses falling 17% between end-2008 and end-2013. We consider

this to be an achievement given the high proportion of fixed costs inherent in this line of business and Euroclear's

continued substantial investment spend through this period. As a result of this--and broadened service provision that

has lifted non-interest income--efficiency improved in the four years to end-2013, despite the super-low interest rate

environment and less-than-buoyant level of market activity (see chart 4).


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Euroclear Bank S.A.

Chart 4

We expect that Euroclear will see further traction in its principal growth opportunities: notably collateral management,

expanding links into emerging markets, and growing funds-related activity. However, given our expectation of no

strong and sustained rebound in market activity, a likely persistent low interest environment, and potentially limited

scope for further reductions in total operating expenses, we see limited scope for material profit growth in the current

and next financial years. But, we would equally expect any reduction in underlying profitability to be modest.

Although less relevant in a highly-liquid group such as Euroclear, Standard & Poor's monitors debt-servicing capacity

and leverage in relation to the outstanding hybrid securities. For 2013, we calculated EBITDA coverage of interest

expense as166x and gross debt/EBITDA as 0.1x: ratios that we see as indicative of a de minimis level of leverage.

Capital: Sustained Strong Ratios Expected

Euroclear Bank's low risk profile and solid base of tangible equity contribute to it maintaining very strong regulatory

capitalization. While distributions to shareholders have increased in the past year, we expect that capitalization at bank

and group level is likely to remain supportive at this rating level.

Euroclear measures its regulatory capital at both the bank and consolidated group level. Since 2007, these calculations


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Euroclear Bank S.A.

have been in accordance with the Basel II framework. Euroclear reported a 48% Tier 1 ratio at end-2013 on a

consolidated basis and 42% at Euroclear Bank level on a stand-alone basis. Euroclear has indicated an unchanged 40%

dividend payout ratio in 2013, and it undertook a share buyback in mid-2013. In aggregate, the total distribution was in

line with the group's post tax earnings for 2013.

Looking forward, Euroclear is now subject to the toughened requirements of Basel III, but aside from the reducing

value ascribed to the hybrid instrument, we expect the transition to Basel III to have had no significant effect in the

group's regulatory Tier 1 ratio. We anticipate no problem with the group meeting the minimum leverage ratio.

Similarly, Euroclear reported a liquidity coverage ratio of 117% and a net stable funding ratio of 248% at end-2013,

both comfortably above regulatory requirements.

Management has indicated that while the dividend payout ratio may not change significantly from 40%, Euroclear has

an only modest requirement for exposure (and so risk-weighted asset) growth in the coming two years. Therefore,

while we see no appetite from management to allow the group's capital ratios to weaken materially, we consider

further share buybacks to be highly likely.

Although Euroclear's capital ratios remain far in excess of regulatory requirements, we believe that Basel ratios do not

fully capture the inherent risk, especially the legal and operational risks, arising from the group's substantial settlement

and custody volumes. We consider that our risk-adjusted capital (RAC) framework offers some insight into the

capitalization of Euroclear, which is a regulated banking group. Based on this measure, we view the group's

capitalization as a supportive factor, even at this high rating level. The RAC ratio at year-end 2013 was 17.3%, and we

expect there to be no significant change in future.

Using our metric for FMIs, for end-2013, we calculate the group's TTE to be €2.2 billion, unchanged on end-2012.

Again, we expect no meaningful future change to this figure.

Related Criteria And Research

Related Criteria

• Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013

• Group Rating Methodology And Assumptions, Nov. 19, 2013

• Bank Capital Methodology And Assumptions, Dec. 16, 2010

• Standard & Poor's Updated Methodology For Rating Exchanges And Clearinghouses, July 10, 2006

• Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008

Related Research

• Bulletin: Euroclear Bank Ratings Not Affected By Parent's Intended Acquisition Of Euronext Stock, May 28, 2014

• 2014 Global Exchange And Clearinghouse Outlook: Taking Care Of Unfinished Business, Dec. 9, 2014

• Rating Actions On Five Financial Market Infrastructure Companies Following Revised Ratings Above The Sovereign

Criteria, Nov. 25, 2013

• Collateral Optimization Is Playing A Transformative Role For Depositories, Custodians, And Clearinghouses, Dec.

18, 2012


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Euroclear Bank S.A.

Table 1

Funding, And Liquidity Ratios

-- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009

Customer deposits/funding base 0.0 0.0 3.8 2.0 2.8

Total loans/customer deposits N.M. N.M. 0.5 5.6 6.3

Customer loans (net)/assets (adjusted) 0.0 0.0 0.0 0.1 0.1

The following tables reflect financial data for Euroclear plc on a consolidated basis, rather than bank-level figures. N.M.--Not meaningful.

Table 2

Profitability Ratios


(Mil. €) 2013 2012 2011 2010 2009

Net interest income/average earning assets 0.56 0.67 1.12 1.00 1.09

Net interest income/revenues 8.60 8.87 11.20 9.40 11.16

Fee income/revenues 88.91 89.76 87.17 89.52 86.21

Market-sensitive income/revenues 1.35 0.21 0.22 (0.38) 0.94

Personnel expense/revenues 38.42 38.55 38.40 43.18 44.39

Noninterest expenses/revenues 66.99 70.40 71.73 77.38 85.14

New loan loss provisions/revenues 0.15 0.08 0.04 0.03 0.00

Pretax profit/revenues 35.48 27.51 28.64 (25.25) (0.06)

Tax/pretax profit 24.60 14.34 23.60 (19.15) N.M.

Core earnings/revenues 24.13 25.28 21.57 17.79 10.56

Core earnings/average adjusted assets 1.23 1.43 1.68 1.64 0.86

Noninterest expenses/average adjusted assets 3.40 3.99 5.58 7.15 6.91

Core earnings/average adjusted common equity 11.39 12.44 11.66 9.42 5.48

Pretax profit/average common equity (%) 10.98 8.83 9.92 (7.89) (0.02)

N.M.--Not meaningful.

Table 3

Capital Ratios


(Mil. €) 2013 2012 2011 2010 2009

Tier 1 capital ratio 47.60 47.70 50.00 42.70 34.10

Adjusted total equity/adjusted assets 10.76 10.64 12.44 19.87 20.75

Adjusted total equity/managed assets 10.27 10.16 11.70 18.15 18.32

Common dividend payout ratio 40.00 41.44 30.03 (15.03) (114.35)

Table 4

Summary Balance Sheet


(Mil. €) 2013 2012 2011 2010 2009

Assets

Cash and money market instruments 17,436 18,051 13,846 8,237 7,478


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Euroclear Bank S.A.

Table 4

Summary Balance Sheet (cont.)

Securities 1,498 987 1,254 1,600 1,567

Trading securities (marked to market) 14 1 5 6 6

Nontrading securities 1,484 986 1,249 1,595 1,561

Customer loans (gross) 0 0 2 9 12

Loan loss reserves 0 0 0 0 0

Customer loans (net) 0 0 2 9 12

Earning assets 15,065 15,271 10,901 9,402 8,111

Investments in unconsolidated subsidiaries (financial companies) 12 11 14 12 12

Intangibles (nonservicing) 926 924 979 994 1,293

Fixed assets 116 104 97 110 127

Derivatives credit amount 1 3 0 2 0

Accrued receivables 113 94 103 116 89

All other assets 248 326 240 382 425

Total assets 20,350 20,502 16,535 11,462 11,003

Intangibles (nonservicing) -926 -924 -979 -994 -1,293

Adjusted assets 19,424 19,578 15,556 10,468 9,710

Liabilities

Total deposits 16,164 16,568 12,673 7,750 7,036

Noncore deposits 16,164 16,568 12,182 7,594 6,842

Core/customer deposits 0 0 491 156 194

Other liabilities 973 749 851 583 534

Total liabilities 17,137 17,318 13,524 8,333 7,570

Total equity 3,212 3,185 3,011 3,129 3,433

Limited life preferred and quasi equity 0 0 0 0 0

Preferred stock and other capital 0 0 0 300 299

Common shareholders' equity 3,212 3,185 3,011 2,830 3,133

Share capital and surplus 147 147 147 147 147

Revaluation reserve 4 5 6 -3 7

Retained profits 2,166 2,128 1,969 1,751 1,822

Other equity 896 904 888 935 1,158

Total liabilities and equity 20,350 20,502 16,535 11,462 11,003

Table 5

Equity Reconciliation Table


(Mil. €) 2013 2012 2011 2010 2009

Common shareholders' equity 3,212 3,185 3,011 2,830 3,133

Minus dividends (not yet distributed) -106 -97 -66 -42 -44

Minus revaluation reserves -4 -5 -6 3 -7

Minus nonservicing intangibles -926 -924 -979 -994 -1,293

Minus tax loss carryforwards -76 -63 -10 -3 -62

Adjusted common equity 2,101 2,095 1,949 1,793 1,728


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Euroclear Bank S.A.

Table 5

Equity Reconciliation Table (cont.)

Plus admissible preferred and hybrids 0 0 0 300 299

Total Adjusted Capital 2,101 2,095 1,949 2,092 2,027

Minus equity in unconsolidated subsidiaries -12 -11 -14 -12 -12

Adjusted total equity 2,089 2,084 1,935 2,080 2,015

Table 6

Profit And Loss


(Mil. €) 2013 2012 2011 2010 2009

Net interest income 85 88 113 88 98

Interest income 108 116 152 121 138

Interest expense 23 28 39 33 40

Operating noninterest income 905 907 898 844 782

Fees and commissions 880 893 882 834 759

Trading gains 13 2 2 -4 8

Equity in earnings of unconsolidated subsidiaries 0 0 0 0 0

Other noninterest income 11 12 14 14 15

Operating revenues 990 995 1,011 932 880

Noninterest expenses 663 700 725 721 749

Personnel expenses 380 383 388 402 391

Other general and administrative expense 258 281 287 264 304

Preprovision operating income 327 294 286 211 131

Credit loss provisions (net new) 1 1 0 0 0

Operating income after loss provisions 325 294 286 210 131

Nonrecurring/special income 26 33 10 21 54

Nonrecurring/special expense 0 53 6 45 0

Impairment of intangibles 0 0 0 421 185

Pretax profit 351 274 290 -235 -0

Tax expense/credit 86 39 68 45 38

Net income (before minority interest) 265 234 221 -280 -38

Net income before extraordinaries 265 234 221 -280 -38

Net income after extraordinaries 265 234 221 -280 -38

Table 7

Core Earnings Reconciliation Table


(Mil. €) 2013 2012 2011 2010 2009

Net income (before minority interest) 265 234 221 -280 -38

Minus nonrecurring/special income -26 -33 -10 -21 -54

Plus nonrecurring/special expense 0 53 6 45

Plus or minus tax impact of adjustments 0 -3 1 0 0

Plus amortization/impairment of goodwill/intangibles 0 0 0 421 185


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Euroclear Bank S.A.

Table 7

Core Earnings Reconciliation Table (cont.)

Minus preferred dividends 0 0 0 0 0

Core earnings 239 252 218 165 93

Ratings Detail (As Of August 22, 2014)

Euroclear Bank S.A.

Counterparty Credit Rating AA/Stable/A-1+

Junior Subordinated A+

Senior Unsecured A-1+

Senior Unsecured AA

Counterparty Credit Ratings History

24-Feb-2012 AA/Stable/A-1+

07-Dec-2011 AA+/Watch Neg/A-1+

01-Aug-2000 AA+/Stable/A-1+

Sovereign Rating

Belgium (Kingdom of) (Unsolicited Ratings) AA/Stable/A-1+

*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable

across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.

Additional Contact:

Financial Institutions Ratings Europe; [email protected]


1354795 | 301084691

Euroclear Bank S.A.

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