DBRS Confirms ABN AMRO; Bank at A (high), Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the “A” Issuer and Long-Term Debt ratings of ABN AMRO Group N.V. (ABN AMRO Group or the Group), and the A (high) Long-Term Debt & Deposits Rating of ABN AMRO Bank N.V. (ABN AMRO or the Bank). The Trend is Stable on all of the ratings. DBRS designates a support assessment of SA-2 to ABN AMRO, indicating DBRS’s view that timely systematic support would be provided to ABN AMRO should it be required. As such, the long-term ratings are positioned one notch above the Group’s intrinsic assessment of A (low) and the Bank’s intrinsic assessment of “A”. Concurrent with today’s rating action DBRS has confirmed the AAA Long-Term ratings of ABN AMRO Bank N.V.’s debt guaranteed by the Dutch State. The rating action follows a review of the Company’s operating results, financial fundamentals and outlook.

Separately, DBRS has today downgraded the Short-Term debt rating of ABN AMRO Group. This reflects that with the removal of the rating floor in the Netherlands in September 2013 the Group’s short-term rating is no longer supported by the floor. As a result this rating has been downgraded to R-1 (low).

DBRS views the Bank’s “A” intrinsic assessment as underpinned by the strong franchise in the Netherlands, the still solid underlying earnings generation ability and its improved liquidity and capital position. Importantly, in DBRS’s view, the combination of ABN AMRO and the former Fortis Bank (Nederland) (FBN) has created a full service bank with a solid franchise and good market position in the Netherlands.

DBRS views the Dutch State’s ownership positively as it has provided the time needed to improve the Bank’s financial profile and franchise. The Dutch State announced in August 2013 that in principle, a flotation of the bank is the best option for the government to exit from ABN AMRO. The government will assess this in one year based on criteria including the overall condition of the Dutch financial sector, the level of private market interest in ABN AMRO, and whether the Group is ready to undertake the process. As a result DBRS would not expect any privatisation to occur until 2015 at the earliest.

Despite the challenging economic environment in the Netherlands, ABN AMRO continues to report good underlying earnings generation capacity, underpinned by its well-positioned franchise in the Netherlands. In 1H13 the Group reported an operating profit of EUR 1.3 billion. Although this was down 19% from 1H12, the reduction in the operating result was primarily driven by a substantial fall in other non-interest income and DBRS notes that an element of this reflects certain one-offs in both reporting periods, including in part the winding down of the Bank’s non-client related equity derivatives business. Positively in 1H13 net interest income as a percentage of average total assets increased to 1.31% from 1.21% in 1H12.

Loan loss provisions continue to weigh on profitability. Excluding releases totalling EUR 550 million related to the Bank’s collateral from clients exposed to the Madoff fraud and the recovery on the Greek government-guaranteed corporate exposures, total loan loss provisions would have risen to EUR 766 million in 1H13 or 38% higher year-on-year. As a result of the weak operating environment in the Netherlands, where 83% of the Group’s operating income is generated, asset quality deterioration in the Netherlands was the primary driver of the increase in underlying provisioning. DBRS would expect these trends to continue for the remainder of 2013 and into 2014 putting pressure on the bank’s bottom line over the near-to medium term. Overall, ABN AMRO continues to be profitable with a net profit of EUR 817 million in 1H13. However, as noted above, without the provisioning releases the result would have been significantly lower.

ABN AMRO’s asset quality has deteriorated reflecting the on-going weak economic environment in its domestic market. Total impaired loans were EUR 8 billion or 2.8% of total gross loans at 30 June 2013, with impaired loans on the residential mortgage portfolio increasing to EUR 1.7 billion (from EUR 1.5 billion at end-December 2012) resulting in an impaired loan ratio of 1.1%. Provisions on mortgage loans increased by EUR 94 million in 1H13 due to the weakening credit performance. As a result, the coverage ratio improved to 21.7% from 19.4% in 2012. The underlying performance of the commercial loans portfolio also deteriorated although the above noted reserve releases led to the commercial loan impaired loans ratio improving to 6.1% from 7.3% at year-end 2012.

DBRS views the exposure to commercial real estate as a major challenge facing the Bank. The total exposure to this asset class at 30 June 2013 was EUR 14.5 billion, although DBRS notes that this includes EUR 4.5 billion of exposure to social housing companies, of which EUR 2.7 billion is guaranteed by a Dutch State entity. Impaired loans increased to 5.1% of the total commercial real estate portfolio at end-June 2013, up from 4.7% a year ago. DBRS notes that the coverage ratio remained solid at 64%.

The Group’s funding profile is viewed by DBRS as solid, reflecting the strong core retail funding base and well diversified wholesale funding sources. The Group has strongly improved its funding profile by increasing its deposit base while the loan book has grown more moderately. In 1H13, customer deposits rose by EUR 67 billion to EUR 207 billion benefiting from the positive trend in the Retail Banking division in the Netherlands which remains the main source of funding for the Group. This has led to an improvement in the reported LTD ratio to 123% at end-June 2013 from 135% in 2010. DBRS would anticipate further improvement in this ratio in the future. ABN AMRO also maintains a significant liquidity buffer that totalled EUR 67 billion at end-June 2013, up from EUR 53 billion at end-June 2012. DBRS notes that the liquidity buffer exceeds the EUR 30.2 billion of long-term funding that matures to the end of 2015, and the total short-term funding outstanding of EUR 20.7 billion.

In DBRS’s view, capital remains solid. At end-June 2013, the Bank’s Basel II Core Tier 1 ratio improved to 13.3%, compared with 12.1% at year-end 2012. On a fully-loaded Basel III basis, the pro-forma Core Tier 1 ratio was 11.5%.

Given the difficult operating conditions in the Netherlands and the Group’s large exposure to its domestic market, as well as the planned privatisation process, any positive rating pressure is unlikely in the medium-term. Negative rating pressure would likely increase should there be notable deterioration in the credit performance of residential mortgages or commercial real estate from current levels leading to substantially higher impairment charges, or if the Group were to increase significantly the weight of its more volatile capital market activities.

Separately, DBRS has also withdrawn the R-1 (high) ratings on Short-term government-guaranteed debt, as this debt has been repaid.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other applicable methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 23, 2014, to reflect actual methodologies used.]

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 25 June 2010
Most Recent Rating Update: 14 June 2012

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For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf