DBRS Confirms Rabobank Nederland at AAA with a Stable Trend

DBRS has today confirmed its ratings for Rabobank Nederland, including its Long-Term Senior Debt & Deposit rating of AAA and its short-term rating of R-1 (high). The ratings for Rabobank Nederland are based on the leading position of Rabobank Group (Rabobank or the Group) in financial services to Dutch retail clients and small to medium-sized enterprises (SMEs) and its extensive range of product offerings including unique skills in food and agribusiness. A key rating underpinning is the conservative business culture rooted in the Group’s cooperative organization that continues to demonstrate strong cohesion and member participation. The ratings reflect the credit strength of the overall Group, as the Group’s members, the local Rabobanks, are linked together by a cross-guarantee system where members are joint and severally liable for each other’s commitments.

The Group’s business mix has proven valuable, resulting in resilient performance in a difficult operating environment. During the ongoing financial crisis the Group maintained its solid profitability, increased its already strong capitalisation and strengthened its liquidity by growing customer deposits and reducing interbank funding. These fundamentals and the Group’s low risk profile underpin DBRS’s intrinsic assessment of AA (high). The AAA ratings also take into account DBRS’s view that Rabobank is a systemically important bank that would likely receive some form of external support, if needed. Actions taken by the Dutch State to support other large Dutch banks amidst the current crisis reinforce this perspective.

Throughout the current crisis, and in the years leading up to it, Rabobank adhered to its strategic principles to be focused on the needs of its cooperative members, to be a leading provider of all financial services in the Dutch market, and to be a leading global food and agriculture bank, an area of specialized expertise that has developed from the Group’s origins in the Netherlands. Reflecting its strategic focus on the core Dutch franchise, Rabobank has remained the market leader in serving retail customers, small to mid-sized businesses and the agricultural sector. The Group has strong market shares across most lending and savings products and a dominant 85% in financing the Dutch agricultural sector. This positioning is reflected in the Groups earnings, with 55% of revenues and 59% of net profit generated by the Domestic Retail Banking segment in 2008. Residential mortgages, at EUR 190 billion, remain by far the largest loan category and accounted for 47% and 31% of Group lending to customers and assets, respectively, as of year-end 2008.

While the Group has been negatively affected by ongoing market turmoil and the deteriorating economy, its performance in 2008 demonstrates the strength and resilience of its franchise, in DBRS’s view. The Group reported net income of EUR 2.75 billion for 2008, a 2% increase from 2007, which DBRS views as a sound performance given the challenging environment, especially relative to other large banks. The local Rabobanks increased their market shares and experienced a strong 10% increase in deposits in 2008. Moreover, the Group was still able to place long-term debt into public markets, including a USD 1.5 billion perpetual Tier 1 issuance in May 2009, the first of its kind in 2009.

DBRS views Rabobank as well capitalised, with a Tier 1 capital ratio of 12.7% as of year end 2008 under Basel II. DBRS notes positively that Rabobank has increased its target regulatory capital ratios to reflect lower risk weightings of its assets under Basel II and takes into account the newly elevated expectations of regulators, investors and other constituents. The Group currently targets a Tier 1 ratio of 12.5%, a ratio that provides an ample cushion above current regulatory minimums. The Group uses an extensive economic capital process to ensure that risk is aligned with returns across its businesses.

Rabobank’s liquidity has remained strong, anchored by the Group’s customer deposit base of EUR 304 billion as of the end of 2008. Deposits amounted to 71% of customer loans at year-end, stable from recent years, as deposit growth kept pace with loan growth. Benefiting from the market’s perception of Rabobank as a safe haven, savings deposits at local member banks grew strongly in 2008 and Rabobank was able to increase deposits as a share of total funding. At the same time, it lowered its need for wholesale funding by reducing its holdings of securities.

DBRS expects Dutch banking to remain fiercely competitive, with Rabobank having to defend its position against other well-entrenched players. That, combined with the Group’s focus on low-risk business somewhat constrains its margins relative to more aggressive peers, particularly during boom times. In addition, asset quality is expected to deteriorate moderately, as the Dutch real estate market shows signs of weakening, which could negatively affect the Group’s residential mortgage portfolio. Positively, the structure of the Dutch mortgage market and a limited land and housing supply have enabled it to be more stable than various other nations’ in the current downturn.

In recent years, Rabobank has continued to demonstrate an ability to generate growth from within the core Dutch market, both organically and through add-on acquisitions, for example in asset management, private banking, leasing and insurance. Careful expansion of its international operations is also contributing to franchise growth. The Group’s solid performance amid the current financial crisis and its announced goal of balanced lending and deposit growth indicate that Rabobank’s strategic choices are consistent with its ratings level.

Note:
All figures are in EUR unless otherwise noted.

The applicable methodologies are: Analytical Background and Methodology for European Bank Ratings, Second Edition; Analytical Background and Methodology for European Co-Operative Banks and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institution) rating.