DEXIA posts 1Q12 € 431m net loss – EGM held today

Dexia Group posted a 1Q12 net loss € 431m of which € -416m were linked to continuing operations and € 15m to discontinued operations. This non audited result does not take into account potentially negative value adjustments related to the disposal of Banque Internationale a Luxembourg.
1Q12 earnings were mainly impacted by non-recurring items, for a total pre-tax amount of € -286m. They include: 
-  € 128m pre-tax running fees paid to Belgium, France and Luxembourg based on the outstanding guaranteed debt;  
-  € 145m impairment on participation capital in Kommunalkredit Austria, and; 
-  € 102m adjustments linked to the disposal of DMA.

The € 484m gain achieved through the buy-back of the perpetual non-cumulative (Tier 1 hybrid) securities issued by Dexia Funding Luxembourg and Dexia Crédit Local was not booked through profit and loss but had a direct positive impact of 86bps on the Group's Core Tier 1 compared with the end of December 2011. The core Tier 1 ratio remained unchanged vs. year-end.
At the end of March, Dexia's total consolidated balance sheet amountedto € 399bn, down € 14bn q/q. This balance sheet reduction resulted from the underlying trend of a decrease (€ -6.5bn) in outstanding loans from the "core" Public and Wholesale Banking and a reduction (€ -4.7bn) of the Legacy Division's total assets. In addition, the size of the balance sheet was also impacted by the increase of long-term interest rates, leading to a reduction in collateral posted by the Group (€ -4.8bn).
Core shareholders' equity amounted to € 7.6bn (6.7% core Tier 1 ratio) including the 1Q12 reported loss. Other comprehensive income (OCI) stood at € -8bn improving by € 1.6bn q/q, essentially driven by the reduction in the AFS reserve explained by a spread tightening on sovereign credits, mainly Italy and Poland as well as on Spanish covered bonds. Risk weighted assets stood at € 86.5bn.

Our View:
As long as we have no sight on the final scope of the group, further divestment losses to be incurred (mainly DenizBank) and the funding cost + cost of guarantees received, we are unable to establish a proper valuation for a bond hedge fund with no IFRS shareholders’ equity. Dexia’s EGM will take place today at 2:30pm. It will propose to assign Mr. Karel De Boeck as new CEO, replacing mister Mariani.

Conclusion:
We maintain our Reduce recommendation and € 0.10 symbolic target.