DBRS Downgrades Rabobank to AA (high), Trend Negative

DBRS Ratings Limited (DBRS) has today downgraded the Long-Term Deposits & Senior Debt ratings of Rabobank Nederland (Rabobank or the Group), to AA (high) from AAA. The R-1 (high) Short-Term Debt rating has been confirmed. The trend on the long-term ratings is Negative while the trend on the short-term rating remains Stable. Rabobank’s ratings reflect an intrinsic assessment (IA) of AA combined with a support assessment of SA-2, which results in a one notch uplift to the final rating from the IA. The SA-2 considers the importance of Rabobank to the financial system in the Netherlands and DBRS’s expectation of government support should it prove necessary. As a result of today’s actions the Long-Term Deposits & Senior Debt ratings have been removed from Under Review with Negative Implications, where they were placed on November 11, 2013.

The rating action takes into account Rabobank’s recent legal settlements relating to Libor and Euribor submission processes, which in DBRS’s view, demonstrates a weaker control and compliance framework than is commensurate with the prior rating level. Although Rabobank continues to improve its control and compliance framework, and in response to the Libor issue, the Group has increased its spending on remedial measures, at this stage it is difficult to assess the full cost and revenue impact of these changes. Overall, DBRS expects that these measures will impact negatively on the profit and efficiency metrics of Rabobank, which are already lower than similarly DBRS-rated banks.

The trend is Negative reflecting several factors, including the notably lower profit and efficiency metrics compared to other similarly rated banks, the relatively large structural wholesale funding reliance, and the challenging economic environment in the Netherlands, which DBRS expects to lead to continued elevated provisioning charges. There could be further ratings pressure if provisioning charges remain elevated and pre-provision income (IBPT) shows further signs of weakening. DBRS will also continue to monitor whether the Libor issue and related developments have any impact on the Bank’s strong domestic franchise. Upward ratings pressure is unlikely given the high level of the current ratings.

In October 2013 Rabobank announced that it had entered into agreements with De Nederlandsche Bank (DNB), the Dutch Public Prosecutor (DPP), the UK Financial Conduct Authority (FCA), the US Commodity Futures Trading Commission (CFTC), the US Department of Justice (DOJ) and the Japanese Financial Services Agency (JFSA) in relation to Libor and Euribor submission processes. As a result Rabobank has paid settlement amounts totalling approximately EUR 774 million. The agreement also includes a deferred prosecution agreement (DPA) with the DOJ.

DBRS notes that Rabobank has also recently announced a further major organisational change to its structure with the activities of Rabobank International being merged with those of Rabobank Nederland. From DBRS’s perspective this is viewed positively as it should enable better control and monitoring of those activities and help to underpin the ongoing reforms across the Group. However, in DBRS’s view it is a significant challenge to successfully reform procedures and strengthen controls in large banking organisations such as Rabobank. This is especially the case at Rabobank as the Group is already undertaking a strategic restructuring which will lead to a reduction in the number of local banks and a significant reduction in headcount. DBRS views positively the reduction in recent years of the size of the Global Financial Markets business line, including the sale/run-down of certain business lines, and the increased emphasis on this business line supporting the core businesses of the Group.

Mitigating the above challenges, DBRS recognises that any further charges related to Libor and Euribor are unlikely to be large enough to undermine the Group’s financial stability. Rabobank remains one of DBRS’s highest rated banking groups and the Group’s AA (high) Long-Term Deposit & Senior Debt ratings reflect the Group’s extremely strong franchise including market-leading positions in retail savings, residential mortgages, small to mid-sized enterprises and food and agricultural lending in the Netherlands, as well as its international food and agribusiness franchise where Rabobank is an acknowledged global leader. A key factor underpinning the IA is the conservative business culture rooted in the Group’s cooperative organisation that continues to demonstrate strong cohesion and member participation. The IA also reflects Rabobank’s solid capitalisation, its low risk profile, conservative business model and overall operating philosophy, all of which are important drivers for the Group’s high ratings.

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

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations. The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents, SNL Financial, De Nederlandsche Bank (DNB), the Dutch Public Prosecutor (DPP), the UK Financial Conduct Authority (FCA), the US Commodity Futures Trading Commission (CFTC), the US Department of Justice (DOJ) and the Japanese Financial Services Agency (JFSA). 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: May 16, 2001
Most Recent Rating Update: November 11, 2013

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