DBRS: Rabobank Reports Solid 1H15 with Lower Impairments and Continued Cost Control

Summary:
• Continued cost control supports improved underlying earnings
• Impairment charges down significantly year-on-year (YoY), reflecting improvements in Dutch economy, with bad debt costs of 16 basis points (bps) in 1H15 below the long-term average.
• Asset quality remains stable, with a non-performing loan (NPL) ratio of 4.8% at end-1H15.
• DBRS rates Rabobank Nederland at AA (high) – Under Review with Negative Implications for Long-Term Deposits and Senior Debt.

DBRS Ratings Limited (DBRS) views Rabobank Group’s (Rabobank or the Bank) 1H15 results as solid. On an underlying, DBRS adjusted basis (including the payment on capital securities), the Bank reported income before provisions and taxes (IBPT) of EUR 1.9 billion, an increase of 4% YoY, as a result of continued progress on lowering the cost base. Operating expenses were down 3% YoY, to EUR 3.8 billion, despite upward pressure from currency effects, following further reductions in the number of employees and reduced overhead costs. This helped to offset a marginal decrease in total income, driven principally by a goodwill impairment of EUR 600 million for Rabobank National Association (RNA), Rabobank’s California-based retail operations.

Statutory net profit for the period was EUR 1.5 billion, up 41% YoY, driven in part by a 70% YoY decrease in impairment charges, to EUR 356 million, as growth in the Dutch economy contributed to a EUR 6 million net write-back of provisions in Domestic Retail Banking (vs. a EUR 578 million charge in 1H14). Despite the improvements in the Domestic Retail Banking business, DBRS notes that the consequences of the longer-term problems in sectors such as commercial real estate and greenhouse horticulture will need to be taken into account in 2H15.

Total NPLs decreased slightly in 1H15, compared to end-2014, as a 7% decrease in domestic retail banking NPLs offset increases in the wholesale banking and international retail banking, leasing and real estate portfolios. As a result, the Bank’s NPL ratio totalled 4.8% at end-1H15, down 10 bps from end-2014. The Bank’s domestic commercial real estate (CRE) portfolio, which experienced a 4.4% increase in NPLs in 1H15, remains highly impaired, with an NPL ratio of 24% at end-1H15. DBRS does, however, note that domestic CRE impairment charges were down 92% in 1H15, at EUR 44 million.

DBRS notes that in 1H15 the Bank integrated FGH Bank, which is engaged in CRE lending, into Rabobank Nederland, as it continues to make its transition to a new governance model by December 2015. This new governance model is envisaged to result in all of the 108 local Rabobanks, along with the centralised organisation, operating as part of one cooperative, with one banking license and one set of financial statements.

The Bank’s capital position remains solid. At end-1H15, the fully loaded common equity tier 1 (CET1) ratio was 11.8%, and the fully-loaded leverage ratio was 3.9%. On a transitional basis, the CET1 ratio was 13.2%, down 40 bps from end-2014, reflecting the gradual impact of the CRR adjustments on CET1 capital in 1H15, in combination with an increase in risk weighted assets (RWAs). DBRS also notes that the Bank’s bail-in buffer increased 6% in 1H15, to EUR 54.5 billion, and corresponded to 25.1% of RWAs. The increase principally reflected the issuance of Additional Tier 1 (AT1) in 1H15, and retained earnings.

DBRS rates Rabobank Nederland at AA (high) – Under Review with Negative Implications (URN) for Long-Term Deposits and Senior Debt. The URN reflects DBRS’s view that recent developments in European regulation and legislation, including the Bank Recovery & Resolution Directive (BRRD), means that there is less certainty about the likelihood of timely systemic support for systemically important banks (SIBs). Currently DBRS’s support assessment for Rabobank is SA-2, which results in a one-notch uplift from Rabobank’s IA of AA to the final rating of AA (high).

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