DBRS Morningstar Confirms ABN AMRO’s Long-Term Issuer Rating at A (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long- and Short-Term Issuer Ratings of ABN AMRO Bank N.V. (ABN AMRO or the Bank) at A (high) / R-1 (middle). The trend on all ratings remains Stable. The Bank’s support assessment is SA3 and the Bank’s Intrinsic Assessment (IA) is A (high). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The Intrinsic Assessment of A (high) for ABN AMRO reflects the Bank’s strong retail and commercial banking franchise in the Netherlands, combined with a solid franchise in private banking in Northwest Europe, particularly France and Germany. The IA takes into account the Bank’s historically sound earnings generation, whilst also noting that 2020 results were negatively affected by revenue pressure from the low interest rate environment, the wind-down of the non-core Corporate & Institutional banking (CIB) business, and a high level of impairment charges. The IA also incorporates the Bank’s generally sound asset quality indicators, despite some weakening during 2020. The Bank's funding and liquidity profile is sound, underpinned by a stable customer deposit base and good access to market funding, while ABN AMRO’s capital position is strong, with significant cushions over minimum regulatory requirements.

RATING DRIVERS
The ratings would be upgraded, if the Bank can improve its profitability and risk metrics, while maintaining a sound capital position.

The ratings would be downgraded in case of a sustained deterioration in asset quality, possibly exposing deficiencies in risk management. Additionally, a downgrade of ratings could be driven by a prolonged weakening of profitability metrics.

RATING RATIONALE
ABN AMRO has a strong retail and commercial banking franchise in the Netherlands. In November 2020 the Bank reported an overall market share in the Dutch market of approximately 20%, including a market share of 18% in both retail mortgages and SME lending. Furthermore, ABN AMRO has a solid private banking footprint in Northwest Europe. In late 2019, ABN AMRO announced a review of its Corporate & Institutional Banking (CIB) division, in order to improve profitability and better realign the division’s risk profile, which was accelerated in 2020 following elevated credit losses in this segment. This includes the wind-down of EUR 14 billion Basel III risk-weighted assets and also that this segment's focus is now on Northwest Europe and on Clearing. Trade & Commodity Finance is being exited completely, while the sub-segments of Natural Resources and Global Transportation & Logistics will be focusing only on Europe going forward. We view this realignment positively as fitting the Bank's strategy of being a strong regional player in Europe, particularly in the Northwest. At the end of Q1 2021, 58% of ABN AMRO’s EUR 251 billion lending book were mortgages, while 34% were corporate loans.

ABN AMRO has historically demonstrated solid earnings generation ability, supported mainly by its well-entrenched franchise in the Dutch market, but also by sound cost control and generally low levels of impairment charges. However, results in 2020 were impacted by the challenging operating environment driven by the COVID-19 pandemic, which resulted in lower revenues and higher impairment charges. In 2020, statutory operating income totalled EUR 7,916 million, down 8% Year-on-Year (YoY), as net interest income (NII) was affected by continued pressure on deposit margins, but also lower lending balances as a result of the non-core CIB wind-down (down 9% YoY). Similarly, net fee and commission income was 5% lower YoY as a result of lower credit card usage, the non-core CIB wind-down, and a divestment. In Q1 2021, the trend continued with NII down 11% and net fee income down 7% YoY, however, core revenues (i.e., excluding the impact of the non-core CIB wind-down) were flat YoY, supported by other operating income.

Cost control remains a key focus for ABN AMRO. In 2020, statutory operating expenses totalled EUR 5,256 million, and were flat YoY, as staff costs were stable and higher regulatory costs were offset by cost-saving programmes. Nevertheless, the lower income resulted in the reported cost-income ratio deteriorating to 66.4% in 2020. In Q1 2021, operating expenses increased by 42% to EUR 1,843 million, impacted by the EUR 480 million anti-money laundering (AML) settlement with the Dutch Public Prosecutor. Excluding the charge, total expenses were EUR 1,363 million, compared to EUR 1,300 million in Q1 2021, due to higher regulatory, compliance and restructuring costs. For 2021, the Bank expects a cost base of EUR 5.3 billion, partly due to the sizeable one-offs. However, starting in 2022, operating expenses are anticipated to decline and reach a level below EUR 4.7 billion by end-2024, supported by EUR 0.7 billion cost-saving initiatives.

We consider ABN AMRO as having a generally sound risk profile, benefitting from a large share of low-risk Dutch mortgages in its loan book. In 2020, ABN AMRO experienced elevated credit losses in the CIB loan book, however, with the Bank exiting certain more volatile businesses as part of the non-core CIB wind-down, we expect CIB to be better aligned with the Bank's overall risk profile. Overall, asset quality indicators deteriorated during 2020, with the Bank reporting a Stage 3 ratio of 3.4% at end-2020, compared to 2.5% at end-2019, slightly improving to 3.3% at end-Q1 2021. In Q1 2021, the Bank also incurred a significant fine in relation to past AML failures. The issues have been addressed, but in our view financial crime remains an ongoing topic for major banks.

The Bank’s funding profile is solid, supported by a sound customer deposit base and diversified funding sources. Customer deposits increased 1.5% YoY to end-2020 and an additional 2.9% to end-Q1 2021, which, combined with declining loan volumes resulted in the Bank's loan-to deposit ratio (LTD) improving to 102% at end-Q1 2021, compared to LTD ratios of over 110% for the previous years. Liquidity remains ample with the Bank’s liquidity buffer at EUR 106.3 billion at end-2020, covering 5.1x the short-term funding outstanding, consisting of EUR 9.3 billion commercial paper and EUR 11.7 billion long-term funding maturing within 2021.

In our view, ABN AMRO has a solid capital position, supported by a good internal capital generation ability and good access to capital markets. Capital buffers over minimum regulatory requirements are sound in the context of future capital requirements, including the implementation of the finalised Basel III rules ('Basel IV') as of January 1, 2023. At end-March 2021, the Bank reported a Basel III Common Equity Tier 1 (CET1) ratio of 17.4%, excluding the 2019 dividend reserved for future distribution. This was down from 17.7% at end-Q4 2020, due to the loss incurred in the quarter, but also due to RWAs as a result of model adjustments. The Bank's Basel IV CET1 ratio was above 15%, with ABN AMRO anticipating the gap between Basel III and Basel IV RWAs to be less than 10% by end-2021, whilst management has an ambition for a CET1 ratio of 13% by end-2024.

Concurrently, DBRS Morningstar discontinued the ratings on the Floating Rate Sub Notes Due 2020 and on the 6.375% Sub Notes Due 2021 as these instruments have now matured.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for ABN AMRO Bank N.V. are as follows Franchise Strength - Strong ; Earnings Power – Strong/Good ; Risk Profile – Strong/Good; Funding & Liquidity - Strong; Capitalisation – Strong.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The sources of information used for this rating include ABN AMRO Annual Report 2020, ABN AMRO Presentation Q1 2021, ABN AMRO Quarterly Report Q1 2021, ABN AMRO Pillar III Q1 2021 Report, ABN AMRO Investor Presentation November 2020 and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380190

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Förster, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global FIG
Initial Rating Date: 05/21/2009
Last Rating Date: 06/25/2020

DBRS Ratings GmbH
Neue Mainzer Straße 75
Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.