DBRS Assigns Debt Rating to Fortis Bank (Nederland) N.V., Senior at A (high)

DBRS has today assigned to Fortis Bank (Nederland) N.V. (FBN or the Bank) an Issuer rating of A (high), a Long-Term Deposits & Senior Debt rating of A (high) and a Short-Term Debt rating of R-1 (middle). These rating actions follow DBRS’s designation of FBN as a Critically Important Banking organisation (CIB) in the Netherlands. Further, DBRS has assigned its AAA/R-1 (high) ratings to all debt which is guaranteed by the Dutch State. All non-guaranteed long-term ratings have been placed Under Review with Positive Implications.

The CIB designation follows DBRS’s introduction of a floor rating in the Netherlands. As a CIB, FBN’s ratings are subject to the floor rating, which is A (high) for long-term debt and deposits and R-1 (middle) for short-term debt and deposits. The level of the floor reflects DBRS’s expectation that the Dutch state will provide support, if necessary, to prevent any CIB from weakening below this rating level. DBRS views A (high)/R-1 (middle) as the level of creditworthiness that market participants demand for CIBs to be viewed as stable counterparties. CIBs need to be perceived as reliable partners in undertaking a wide range of financial transactions. DBRS views the floor as the level of support at which the Dutch state will sustain their CIBs to ensure that their financial system is fully functioning. In DBRS’s opinion, the prompt and decisive actions taken by the Dutch Government to support the FBN illustrates and supports the CIB designation. These actions include full nationalization, access to Dutch State provided liquidity and debt guarantees, and ongoing indications of support, including a commitment to combine FBN with the State-owned businesses of ABN AMRO. Accordingly, FBN’s ratings are set at the level of the Floor for CIBs operating in the Netherlands, which at A (high), is positioned above FBN’s intrinsic rating of A (low).

The intrinsic rating reflects FBN’s solid local franchise, which is supported by its reasonably well-positioned niche business. Geographically, FBN is a predominantly Dutch bank, as 83% of the EUR 235 billion total exposures (on and off balance sheet) are to Netherlands domiciled clients. The Bank has a 5% share of the retail banking and SME market in the Netherlands and has strong positions in several segments of merchant and commercial banking, all of which speak to the strength of the franchise. In addition to strengthening its home market positions, FBN expects to selectively reinforce or re-establish its international presence, to support its clients. Moreover, DBRS views the current ownership position of the bank by the Dutch State, as a temporary, yet very important factor underpinning the ratings. Public ownership affords the time and resources, in as much as they are needed in stabilizing this franchise and preparing the Company to ultimately reemerge under private ownership as a stronger, more diversified bank.

The intrinsic rating also reflects the earnings generation ability of the Bank. Despite the challenging operating environment, the prolonged process of separation, and the ongoing infrastructure building efforts, FBN has remained marginally profitable in H1 2009, recording an operating profit of EUR 51 million. Although this profit was down significantly from EUR 562 million in H1 2008, importantly, operating profits improved over H2 2008. DBRS sees the Bank’s ability to remain profitable under the current situation, as indicative of the resiliency of the Fortis Bank (Nederland) N.V. franchise. Nonetheless, operating revenues continue to experience pressure, while impairments are increasing with the current recessionary conditions in the Netherlands. Also posing a key challenge for FBN is competition from well-entrenched competitors in the Netherlands. Further, the intense competition for deposits has pressured net interest income and margins.

DBRS acknowledges FBN’s improving liquidity and funding position. However, additional diversification and lengthening of the maturities will continue to be a challenge, especially in the current environment. Prior to nationalization, FBN relied heavily on intercompany funding from its former parent Fortis SA/NV. At the time of nationalization, the Dutch State refinanced the intercompany loans by immediately making available EUR 34 billion to repay the short-term debt to the former parent. On 2 July 2009, FBN announced completion of the repayment of the loan from the Dutch State through increased deposits and with the issuance of various tenors of unsecured debt. The Bank has access to the EUR 200 billion Government-guaranteed bond programme set up by the Dutch State. To date, FBN has issued Government guaranteed short-term and long-term debt certificates totalling EUR 15.9 billion. DBRS views the Bank’s improving funding profile, the ahead of schedule repayment of the Government debt, and the increasing deposit book as an illustration of the strength of the Bank’s franchise.

DBRS sees FBN as facing numerous operational challenges. The separation of the Bank from its former parent is a complex process. The Bank needs to build up many functional activities and processes that were conducted by the former parent. Although the Bank has made significant progress on separation, full separation is not expected to be achieved until the end of Q3 2010. Furthermore, DBRS sees the announced combination with ABN AMRO’s Dutch banking unit and private bank as posing risks, which include standard merger risk and the risk that the merger does not happen or is delayed. Nonetheless, DBRS believes that the benefits of the combination will outweigh the risks associated with the integration. While uncertainties remain as to the timing of any asset/liability transfers and the final form of the new entity, the combined operations are expected to have a top three market position in most retail and SME banking, as well as a private bank with about EUR 139 billion of assets under management. It is likely to operate approximately 800 branches in the Netherlands. DBRS expects to conclude its review of Fortis Bank (Nederland) N.V.’s Issuer and Long-Term Debt & Deposit ratings when more detailed information becomes available about the specific debt to be transferred, asset mix, funding profile, capitalization and strategic direction of the new banking entity. Importantly, DBRS notes that the resolution of the review may extend beyond the timeframe of a typical review placement.

Notes:
All figures are in EUR unless otherwise noted.

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

This is a Corporate (Financial Institutions) rating.