By Tyler Durden on 06/14/2012 20:57 -0400
While we await the Moody’s downgrade of the Spanish banking system, which we can only attribute to a lack of outsourced Indian talent, since three banks are now rated higher than the sovereign, Moody’s decided to give a little present to our Dutch readers by downgrading 5 of their biggest banks: Rabobank Nederland, (2 notches to A2) for ING Bank N.V., (2 notches to A2) for ABN AMRO Bank N.V. (2 notches to A2), and for LeasePlan Corporation N.V. (2 notches to Baa2). The long-term debt and deposit ratings for SNS Bank N.V. were downgraded by one notch to Baa2. And yes, this means that the US banks (looking at your Margin Stanley) are likely next.
Moody’s downgrades Dutch banking groups; most outlooks now stable
Actions conclude rating reviews announced on 15 February 2012
Frankfurt am Main, June 15, 2012 — Moody’s Investors Service has today downgraded the long-term debt and deposit ratings for five Dutch banking groups.
The long-term debt and deposit ratings for four groups declined by two notches: to Aa2 for Rabobank Nederland, to A2 for ING Bank N.V., to A2 for ABN AMRO Bank N.V., and to Baa2 for LeasePlan Corporation N.V.. The long-term debt and deposit ratings for SNS Bank N.V. were downgraded by one notch to Baa2. The short-term ratings for all aforementioned groups are unchanged.
Concurrently, Moody’s has assigned stable outlooks to the ratings for four of the aforementioned groups, while assigning negative outlooks to the ratings for ING Bank N.V. and its related entities.
Please click this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143130 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer. For additional information on bank ratings, please refer to the webpage containing Moody’s related announcements http://www.moodys.com/bankratings2012.
Today’s actions reflect Moody’s view that Dutch banks will face difficult operating conditions throughout 2012 and possibly beyond. Furthermore, the Dutch banks affected by today’s actions have structural features which, while not new, heighten risks for creditors amidst elevated uncertainty and downside risks to the economic outlook and fragile investor confidence in Europe. With today’s rating actions, Moody’s is giving greater weight to these features in assessing the overall risk profile of these institutions, consistent with its previously-announced analytic approach (see “European Banks — How Moody’s Analytic Approach Reflects Evolving Challenges”, 19 January 2012, http://www.moodys.com/research/European-Banks-How-Moodys-Analytic-Approa…).
Specifically, the main drivers underlying today’s rating actions on Dutch banks are as follows:
(i) Adverse operating conditions, including the current recession and declining house prices in the Netherlands, will likely persist at least through 2012. Moreover, the Netherlands, as a euro area member deeply integrated within the EU, is affected by the ongoing euro area debt crisis and regional economic weakness. Economic weakness limits household incomes and business earnings, which will likely adversely affect credit costs and profitability for banks.
(ii) The Dutch banks affected by today’s rating actions have characteristics that render them more vulnerable in the current environment, including structural reliance on wholesale funds and large mortgage books. Wholesale funding is susceptible to changes in investor confidence, while high real estate exposures leave banks sensitive to potential deterioration in loan performance given declining real estate collateral values. Moody’s recognises, however, that Dutch banks have generally retained good access to market funding, and asset quality remains sound to date.
In addition, Moody’s assumptions about the availability of government support for ABN AMRO have declined slightly, reducing the support-driven uplift factored into the long-term debt and deposit ratings for the bank to three notches (previously four). Support-driven ratings uplift for ABN AMRO is now more in line with other systemically-important European banks. Support-driven ratings uplift for the other four Dutch groups downgraded today is unchanged.
More detail on bank-specific rating drivers is discussed below.
The revised rating levels also take into account several mitigating factors, including (i) the large Dutch banks’ strong, sustainable domestic franchises; (ii) improved regulatory capitalisation; and (iii) relatively stable pre-provision earnings. Moody’s also recognises that the domestic environment for Dutch banks has weakened less compared with more stressed euro area countries, given the strong credit profile of the Dutch government (rated Aaa, with a stable outlook).
Following today’s downgrades, the average asset-weighted deposit rating for Dutch banks is between A1 and A2 (closer to A1), but still ranks in the upper range among European banking systems. The average asset-weighted standalone credit assessments is between a3 and baa1 (closer to baa1), also in the upper peer range.
Moody’s has published a Special Comment today entitled “Key Drivers of Dutch Bank Rating Actions,” (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143143) which provides more detail on the rationales for these rating actions.
MOST RATING OUTLOOKS ARE STABLE
The stable rating outlooks for four of the five Dutch banking groups downgraded today express Moody’s view that currently foreseen risks to creditors are now reflected in these ratings. Nevertheless, negative rating momentum could develop if conditions deteriorate beyond current expectations. Specifically, Moody’s has factored into the ratings an increased risk of an exit of Greece from the euro area, but this is currently not the central scenario. If a Greek exit became Moody’s central scenario, further rating actions on European banks could well be needed.
The negative rating outlooks for ING Bank and its related entities take into account the bank’s specific funding structure, which substantially relies on wholesale funds and which has a significant proportion of non-domestic deposits. Under a stressed scenario, some of these non-domestic deposits could, in Moody’s view, become less fungible as national regulators focus on safeguarding local liquidity.
RATINGS RATIONALE — STANDALONE CREDIT STRENGTH
- FIRST DRIVER: ADVERSE OPERATING CONDITIONS WILL LIKELY PERSIST
The Dutch economy is currently in recession and Moody’s expects Dutch real GDP to contract by 0.6% in 2012 overall (see Sovereign Country Credit Statistical Handbook, 31 May 2012,http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141528). As an open economy deeply integrated within the EU, the Netherlands is affected by regional economic weakness and by the increased risk of additional shocks emanating from the ongoing euro area debt crisis.
In addition, housing prices in the Netherlands have declined since 2009 after more than a decade of steady growth (source: Dutch Central Bank). As a result, the value of real estate collateral backing domestic housing loans is declining. Amidst the current recession, bankruptcies have also risen to the highest level since 1993 (source: Central statistical office of the Netherlands), posing a risk for banks’ lending to small and mid-sized enterprises.
Furthermore, Dutch households have some of the highest debt levels among western European countries, at 127% of GDP and almost 250% of gross income at year-end 2010 (source: Eurostat). Moody’s recognises that Dutch household loans, including banks’ large residential mortgage books, have shown resilient performance to date; however, highly indebted Dutch consumers are vulnerable to the possibility of a prolonged recession.
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