DBRS Comments on Rabobank Nederland’s 2012 earnings – 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 results for the full year 2012.

Rabobank reported a net profit of EUR 2.1 billion for 2012, a 20% reduction from 2011. Despite this notable decline in earnings, DBRS views Rabobank’s overall results as demonstrating the strength of the franchise, which is supported by its leading domestic market positions and top-tier position internationally in food and agribusiness. Moreover, the results illustrate the benefits of the Group’s relatively low credit and financial risk profile. Nonetheless, DBRS sees achieving earnings growth as a challenge in 2013 as households and businesses in the Netherlands continue to be reluctant to take on additional debt or commit to large investments thereby constraining demand for new lending and other banking products and services.

While Rabobank’s income (revenues) expanded 6% year-over-year (YoY) in 2012 to EUR 13.5 billion, DBRS comments that growth was driven by a noteworthy expansion in other income reflecting one-time gains on the sale of businesses and investments as well as hedge accounting gains partially offset by a fall in credit spread on Rabobank issued structured notes and impairments on property developments. Subdued demand for lending and reduced economic activity resulted in core revenues being lower compared to 2011. Intense market competition for Dutch savings accounts resulted in interest income declining 1% YoY to EUR 9.1 billion. Reduced insurance and securities commissions at the local Rabobanks and the absence of Sarasin following the completion of its sale in August 2012 contributed to a 7% reduction in fee and commission income to EUR 2.2 billion.

Group-wide operating expenses were 7% higher at EUR 8.8 billion primarily due to staff costs rising 10%. Higher pension costs in the Netherlands, U.K. and U.S., and a temporary increase in outside staff drove the expansion in staff costs. As a result, the Group’s efficiency ratio weakened to 65.6% from 64.9% a year ago. DBRS notes that as part of its medium-term plan, Rabobank has announced a target cost reduction of EUR 1.0 billion by 2016, which combined with a recovery in the Dutch economy should result in the Group’s efficiency ratio improving.

By business, Domestic Retail Banking experienced a notable decline in earnings of 30% to EUR 1.3 billion from EUR 1.9 billion a year ago. The results reflect the recessionary environment in the Netherlands which has impacted consumer and business confidence resulting in subdued demand for lending and lower transaction volumes. Loan volumes were 4% higher primarily due to the acquisition of Friesland Bank. Nonetheless, the Group maintained its position as a leading provider of mortgages and savings in its highly competitive domestic market, and continues to focus on being a leading global food and agriculture bank and serving the needs of its cooperative members. In 2012, Wholesale & International Retail Banking continued to advance its direct banking franchise and maintained its position in the Netherlands as the leader in wholesale banking. Net profits at EUR 704 million for the year, were 10% lower YoY as lower interest spreads and higher operating expenses were partially offset by gains on the sale of shares in Indian-based Yes Bank and a modest reduction in value adjustments.

With exception of Rabo Real Estate Group, which recorded a net loss of EUR 113 million in 2012, Rabobank’s other businesses experienced a strong upswing in earnings. In Robeco, the Group’s asset management business, net profit was 47% higher at EUR 197 million on an increase in assets managed and a continued solid cost control. Excluding the sale of Sarasin, assets under management improved EUR 38.1 billion to EUR 188.9 billion bolstered by positive cash flows and positive investment returns. Net profits for the leasing business grew 21% YoY to EUR 367 million, largely attributed to growth in the lease portfolio and solid portfolio management. Lending at EUR 29.6 billion increased 5% YoY.

As expected, given the challenging economic conditions in its domestic market and weakening property values, bad debt costs increased 46% YoY to EUR 2.35 billion. Nonetheless, DBRS continues to view Rabobank’s credit risk profile as a relative strength that reflects its conservative culture. Bad debt costs represent 52 bps of average lending, a 15 bps increase from 2011, but still low compared to its domestic peers. DBRS notes that credit costs in the food and agribusiness sector remain in line with its expectations. Importantly, losses on the Group’s largest portfolio, Dutch residential mortgages, remain very low at approximately 6 bps supported by delinquencies that remain at a low level.

Rabobank’s financial risk profile continues to benefit from the Group’s sound funding and liquidity profile as well as strong capital levels. The Group’s EUR 334.3 billion customer deposit base serves as the foundation to the liquidity profile. Domestic retail deposits totalled EUR 213.9 billion with the acquisition of Friesland Bank supporting the expansion. The Group continues to expand RaboDirect, its online direct banking platform, to broaden the overall funding profile. Currently, operating in six countries, the direct banking platform generated a strong expansion in savings deposits of 48% to EUR 24.2 billion. In an uneven capital market environment, Rabobank was successful in issuing EUR 29 billion of unsecured long-term bonds in 17 different currencies in 2012. Liquidity is enhanced by the Group’s sizeable liquidity buffer which totalled EUR 157 billion at 31 December 2012, or 2.6x the short-term debt outstanding.

Regarding capital, equity declined slightly to EUR 44.6 billion as earnings retention and a partial conversion of Rabo Extra Member Bonds into Member Certificates were offset by the reduction in non-controlling interests as a result of the Sarasin sale and the redemption of USD 750 million of capital securities. Regulatory capital ratios remain well in excess of requirements with the Group reporting a Basel 2.5 Core Tier 1 ratio of 13.2% and a Tier 1 ratio of 17.2%.

Notes:
All figures are in EUR unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]