Echoing a decision made by Standard & Poor's, Fitch Ratings revised its outlook on Dexia SA and certain subsidiaries to negative from stable, citing "the impact of continuing deterioration in the U.S. housing market on Dexia's [residential mortgage-backed securities] portfolio," which is largely held by the Franco-Belgian bank's bond insurer subsidiary Financial Security Assurance Inc.
While voicing its concerns, Fitch affirmed Dexia's long- and short-term issuer default ratings at AA-plus and A-minus based on the bank's "dominant position in European public finance, strong loan quality and sound capitalization."
"The group's profitability has been stable and adequate," Fitch said. "However, it suffered in [the first quarter of] 2008 from significant impairment charges on its portfolio of U.S. RMBS, mostly linked to home equity loans. While this was expected to cover potential future losses, further impairments cannot be ruled out."
In its first-quarter results released this May, Financial Security Assurance Holdings Ltd. - the parent of FSA - reported it added $266.1 million in loss reserves on eight home equity line of credit transactions and $86.9 million in loss reserves on four Alt-A closed-end second-lien mortgage transactions.
Fitch also warned about side effects arising out of support for the growth of FSA's municipal insurance business. FSA has benefitted from the downgrade of other insurers, wrapping $31.6 billion in municipal bonds through the first half of 2008, compared to $23.3 billion at that point in 2008, according to Thomson Reuters data.
"Dexia's capital injection and liquidity provision to support the strong growth of FSA's municipal business at higher spreads have reduced its financial flexibility to absorb any potential problems elsewhere within the group," Fitch said.