Dexia: Not a Bargain...yet!

Dexia released its 4Q09 set of results on February 24th, 2010. Unsurprisingly
the picture is brighter than that of last year as the group posted a EUR1.1bn
FY09 profit VS a EUR3.3bn loss in FY08. Keys drivers for this return to
profitability include:

- Better results from operations on less murky financial markets where Dexia
registered a EUR84m in 2009 vs a EUR4bn loss in 2008.

- A strong decline in provisions, dropping by 65% to EUR1.1bn from
EUR3.3bn

All the divisions contributed to the overall upswing:

- In the Retail and Commercial Banking division (RCB), net profit jumped from
EUR184m to EUR608m thanks to i) higher revenues mainly coming from the
EUR153m capital gain on the sale of Credit du Nord, ii) a 10% increase in
income from Turkey (which accounted for 30% of the division's income at
year-end 2009) and iii) a 37% decrease in the cost of risk.

- The Public and Wholesale Banking division (PWB) posted a net profit, that

grew by 29% (to EUR502m) thanks to a sharp cut in the cost of risk (-40%)
and smaller operating expenses.

- The Asset Management and Service (AM&S) business line benefited from
stronger revenues from insurance and asset management activities, resulting

in a surge in net profit of EUR74m from a EUR329 loss.

- Even the troubled Group Center division slashed its loss by increasing its
revenues but also by drastically reducing the cost of risk. This led to a FY09
EUR173 loss in 2009 vs EUR3.5bn loss in 2008
Despite this material improvement in the group's figures, we clearly see no
reason to put the flags out. In our opinion, Dexia is still in the recovery ward.

...the overall profitability remains weak with a return on adjusted asset of only 0.18% based on our calculation. -- Samson Jackuel

On the P&L side, the growth in Net Operating income (NOI) mainly flows from
financial markets volatile income while the recurring revenues (including net
interest income, fees and net insurance income) plunged by 22% to
EUR7.7bn.

In addition, the overall profitability remains weak with a return on
adjusted asset of only 0.18% based on our calculation.

Secondly, based on the balance sheet, we are not comfortable with the group
solvency. Although Dexia boost strong core tier 1 and Tier 1 ratios
respectively of 11.3% and 12.3% which benefited from the 11% reduction of
the balance sheet size to EUR578bn, the book value solvency of 1.70% is low
and is affected by EUR7bn of Available For Sale (AFS) reserve. Moreover,
based on Dexia's calculations, the reclassification of EUR91.6bn of AFS
assets in loans helped the group to avoid adding EUR600m to the AFS
reserve. As to asset quality, it deteriorated by 40bp to 1.39% YoY and the
worsening accelerated from 3Q09 to 4Q09 with the amount of impaired loan
soaring by 29% to EUR4.8bn. We also consider the doubtful loans coverage
of 55% as also relatively poor.

Going forward, the group remains under the scrutiny of the European
Commission and has to reduce its balance sheet by 35% by 2014. We view
Dexia's refocus on its core business and the ongoing deleveraging as
positive. The planned sale of its insurance activities in Turkey, stakes in Dexia
Crediop, Dexia Sabadell, Dexia Banka Slovensko… coupled with the run-off
of its structured asset portfolio and non-core public loans are to respectively
downsize the balance sheet by EUR44bn and EUR82bn by 2014, which will
improve the group's risk profile.

However, Dexia remains saddled with the burden of its EUR59bn toxic
exposure (including mainly a EUR46bn exposure to monoliners, a EUR6bn
exposure to US RMBS, a EUR3.4bn to UK and Spanish RMBS and a EUR2.2
exposure to LBO), which is huge compared with the group's EUR10bn of
adjusted shareholder's equity. Despite rating agencies' recent positive
upgrades on Turkey, the strong expansion in the retail and commercial
business in Turkey could also weigh on the group's risk profile especially
given the uncertain global economy. Based on Dexia's figures, in 4Q09, the
cost of risk of the retail business in Turkey increased by 340bp while it only
rose by 23% in Belgium and Luxembourg.

All in all, Dexia's management still have to convince that the recovery is sustainable and that profitability can durably pick up -- Samson Jackuel

All in all, Dexia's management still have to convince that the recovery is
sustainable and that profitability can durably pick up, especially after the end
of the government drip in June 2010. Dexia is rated A1 St/ A Neg/ A+ St
respectively by Moody's, S&P and Fitch. We expect the ratings to remain
unchanged following the FY09 result publication.
The CDS on Dexia are trading at 209bp, well above those of peers such as

KBC (A1 Neg/ A- St/ A St) or ING (A1 St/ A St/ A St) which are respectively
trading 109bp and 88bp. Although we view selling protection on Dexia and
buying the CDS of KBC Groep or ING respectively for a 100bp and 121bp
pick up is tempting, we would wait to get more insight on Dexia's black box
following the group's investor day on May 27th, 2010

Samson Jakuel