announced the acceleration of the disposal of its non-core assets in order to improve the recurring profits, risk and liquidity profile. To that end will take a € 3.6bn provision in 2Q11E to cover for the losses linked to the divestment of the guaranteed part of the Financial Products portfolio and the expected losses linked to the acceleration of the divestment of other non-core assets.
The accelerated divestment programme entails:
- The divestment of the guaranteed part(USD 9.5bn) of the Financial Products portfolio for which will constitute a specific provision of € 1.8bn and that would lead to an immediate improvement of € 1.2bn in the negative AFS-reserve;
- The acceleration of divestments of long-duration assets for which will charge a € 1.8bn provision to 2Q11E earnings. expects to see an improvement in the negative AFS-reserve up to a maximum of 50% of the provision to be recorded. This will occur upon divesting assets;
- Risk Weighted Assets should be reduced by $ 7bn (linked to FP) at the end of June and by $ 20bn at year-end 2011, representing 46% of Legacy Portfolio Management Division’s RWAs and 11% of Group RWAs;
- Solvency is estimated to decline to c. 11% at the end of June 2011 and to recover to c. 12% by year-end 2011.
A hair cut on Dexia’s Greek sovereign debt exposure of respectively 30% and 50% would further reduce Dexia’s Tier-1 ratio to respectively 10.4% and 9.8% by the end of June 2011. A 50% hair cut on the PIGS exposure would at year-end 2011 still leave a Tier-1 ratio in excess of 10%.
FY11E dividend will be omitted in view of the expected FY11E full year loss. Management does however not exclude that it will for FY12E pay an interim dividend.
expects the divestment of the PF portfolio to enable the Group to negotiate with the guarantor governments and the European Commission the terms and consequences of waiving the benefit of the State guarantees attached to this portfolio, which will lead to the removal of a substantialpart of the state support.
We reduce our target price from € 4.50 to € 3.50 reflecting the impact of the € 3.6bn provision (c. € 1.86 per share) on the book value and earnings, partly offset by the NPV of the early termination of the state guarantee cost (no longer to be paid), the NPV of the reduction of the negative carry on the divested assets that would have persisted should the portfolios be held until maturity and the reduction of the negative AFS-reserve. We remain Accumulating .