DBRS Comments on Rabobank Nederland’s 1H12 Results – Ratings Unchanged

DBRS, Inc. (DBRS) has today commented that its ratings for Rabobank Nederland (Rabobank or the Group), including its Long-Term Senior Debt & Deposit rating of AAA and its Short-Term rating of R-1 (high), are unchanged following the release of the Group’s 1H12 earnings. The trend on all ratings is Stable. Rabobank reported net profit of EUR1.3 billion for the six months ended 30 June 2012, up EUR541 million from the difficult 2H11, but down 29% from 1H11. Net of payments on member certificates, hybrids and other non-controlling interests, 1H12 net profit was EUR687 million, compared to EUR1.3 billion for 1H11.

While down year-over-year (YoY), DBRS views the Group’s earnings as acceptable in light of the difficult operating environment in Europe, which worsened in 2Q12. Capital levels, including a Basel 2.5 Core Tier 1 ratio of 12.7%, remain solid and the franchise remains strong, as evidenced by leading market shares. Rabobank also generated good deposit and loan growth in the period, benefiting from the acquisition of Friesland Bank. The Group’s customers remain relatively resilient, but confidence is weak in the current environment and credit quality deteriorated in the period. Though certainly not immune to the effects of a European recession, Rabobank’s direct exposure to struggling peripheral countries is modest. At 30 June 2012, the Group’s direct exposure (including State-Guaranteed bonds) to Greece, Ireland, Portugal, Spain and Italy totaled just EUR298 million. DBRS notes that Rabobank is involved in the ongoing investigations into alleged LIBOR/EURIBOR manipulation, and the Group continues to cooperate with various domestic and international regulators.

Value adjustments of EUR1.1 billion in 1H12 were up 77% from 1H11 and 11% above 2H11 levels, and drove the YoY decline in earnings. The increase in value adjustments reflected weakness in the property sector, construction lending and the greenhouse horticulture sector in Domestic Retail Banking. Still, DBRS comments that risk costs remain a relatively modest and manageable 49 basis points (bps) of average lending, reflecting the Group’s low risk profile. Notably, losses on the Group’s largest portfolio, Dutch residential mortgages, remain de minimis at 5 bps for 1H12. Nevertheless, DBRS continues to monitor developments in the Dutch housing market. Given the weaker economy, higher unemployment and reduced consumer confidence, house prices and sales volumes declined further in 1H12, and DBRS expects them to remain pressured for the remainder of 2012. In addition, possible changes to the tax deductibility of interest on mortgages and affordability concerns for first-time buyers are issues that could further impact Dutch house prices. Importantly, delinquency rates remain very low and DBRS anticipates that absent a material increase in domestic unemployment, losses on this portfolio will continue to be very manageable.

Overall, Rabobank’s income (revenue) was stable, declining just 2% from 1H11 to EUR7.2 billion. Yet, operating expenses grew by 10% YoY to EUR4.6 billion. By segment, Domestic Retail Banking’s net profit fell by 42% from 1H11 to EUR609 million due to the noted increase in value adjustments and lower net interest income. Rabobank’s other main operating segment, Wholesale Banking & International Retail Banking, increased earnings 7% YoY to EUR543 million, thanks to stable value adjustments and lower taxes. The Group’s other, specialized segments reported mixed results; profits were up for Leasing, but down for Asset Management and Real Estate. In response to the challenging domestic operating environment, characterized by strong competition and low rates which are pressuring margins and new regulations that are adding to expenses, Rabobank announced a new cost reduction initiative aimed at lowering expenses in Domestic Retail Banking. By 2016, the Group aims to reduce its expenses by 10% to below EUR4 billion annually. The Group is also reviewing strategic options for its Asset Management business.

As noted, Rabobank continues to strengthen capital levels and enhance its funding profile, which is anchored by the Group’s EUR341 billion customer deposit base. Rabobank continues to fund loan growth with deposit growth in the Domestic Retail Banking segment as deposit growth of 6% outpaced loan growth of 3% in 1H12. Also, the Group’s direct banking business (part of Wholesale Banking & International Retail Banking), which following the launch of RaboDirect in Germany in 1H12 operates in six countries, reports deposits of EUR19.1 billion at period end, up 16% from 1H11. This remains a key growth driver for the Group. Further bolstering liquidity, Rabobank’s liquidity buffer, comprised of cash, Government debt and other central bank eligible debt, amounted to almost EUR160 billion at 30 June 2012, equal to around 20% of total assets.

Highlighting the Group’s ready access to capital markets, Rabobank issued EUR23 billion of senior unsecured debt in 1H12. This amount meets the Group’s funding needs for all of 2012, though Rabobank has indicated it will be opportunistic when it comes to issuance in 2H12. The Group remains on track to be in full compliance with Basel III funding and liquidity requirements by the start of the phase-in period in 2013.

Note:
All figures are in EUR unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purpose of providing this rating was of satisfactory quality.

This commentary was disclosed to the issuer and no amendments were made following that disclosure.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 16 May 2011
Most Recent Rating Update: 19 January 2012

For additional information on this rating, please refer to the linking document under Related Research.