(2,64 EUR, 2,17%) reported a 1Q11 net profit of € 69m which was below expectations (€ 105m) but above consensus (€ 61m). The core division did however report a very strong pre-tax profit of € 421m outstripping our forecast € 337m and the consensus (€ 289m). The deviation to our forecast therefore comes entirely from the Legacy Portfolio Management division which reported a pre-tax loss of € 247m (vs. € -134m expected and consensus at € -167m).
Dexia's core division reported a pre-tax profit of € 421m o/w € 251m from Retail and Commercial Banking (€ 212m expected), € 91m from Public and Wholesale Banking (€ 81m expected) and € 85m from Asset Management and Services (€ 81m expected). The very good performance was driven by higher top-line (+8% y/y); contained costs (-2% y/y) and an improvement in cost of risk (-96% y/y) following a reversal of impairments on Lehman Brothers.
Dexia's Legacy Portfolio Management division recorded a € 247m pre-tax loss o/w € -177m from the bond run-off portfolio (portfolio reduced by € 9.6bn q/q to € 102.1bn), € -95m from the Financial Products portfolio which saw a rise in expected economic losses and additional impairments of € 127m, and a € 1m pre-tax loss from PWB run-off commitments. More than half of the 2011 disposal programme has now been completed, the annual target for reduction of the short-term funding requirement has been reached and the balance sheet was reduced by € 40bn to € 526.7bn.
Dexia's solvency remained strong with a core Tier-1 ratio of 12.3% and a Tier-1 ratio of 13.4%. (41,75 EUR, -0,16%) shareholders equity (IFRS) improved by € 0.7bn to € 9.7bn (€ 5.22 per share) following the € 0.3bn contraction of the negative available-for-sale reserve on securities. The core shareholders equity remained flat at € 19.3bn (€ 10.44 per share). The "frozen" fair value of financial assets reclassified as loans and receivables fell from € -5.3bn to € 4.9bn (USD/EUR effect and amortization).
At the end of April, had issued € 8.7bn of funding (half of full year needs) o/w € 4.8bn covered bonds, € 2.6bn long-term secured funding and € 1.3bn senior unsecured debt.
Our View:
The LPM division remains a drag on earnings (given negative carry) but all of the operating units reported better than expected earnings whereas equity (both reported IFRS and core equity) was very resilient in an environment of rising interest rates.
Conclusion:
We remain Accumulating with an unchanged target at € 4.50.