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

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). Concurrently, DBRS Morningstar withdrew the rating on the 6.250% Sub Notes as these have been repaid. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The A (high) IA assigned to ABN AMRO reflects the Bank’s strong retail and commercial banking franchise in the Netherlands, combined with a solid franchise in private and commercial banking in Northwest Europe, particularly France and Germany and a global clearing business. The IA takes into account the Bank’s historically sound earnings generation, whilst also noting that results in recent years were negatively impacted by revenue pressure from the low interest rate environment, a high level of impairments related to the non-core Corporate & Institutional Banking (CIB) business, and elevated costs related to the Bank’s anti-money laundering (AML) procedures. The IA also incorporates the Bank’s generally sound asset quality indicators following the de-risking of the portfolio and the Bank’s solid funding and liquidity profile, which is underpinned by a stable customer deposit base and good access to market funding. We also note that 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 significantly improve its profitability metrics while showing a consistent track record of improved risk management.

The ratings would be downgraded in the event of a sustained deterioration in asset quality or a material weakening of profitability metrics.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong/Good

ABN AMRO is a leading Dutch bank with EUR 422 billion in total assets at end-Q1 2022. The Bank mainly operates in its domestic market where it benefits from a strong retail and commercial banking franchise, reporting a 17% market share in new mortgage lending in Q1 2022 and a 18% share in SME lending in 2021. ABN AMRO aims to reach a market share of approximately 20% in new mortgage production and SMEs by 2024. In addition, the Bank has a solid private banking footprint in Northwest Europe, mainly Belgium, France and Germany. In line with its focus on Northwestern European clients, the Bank announced in August 2021 that it would exit all non-European Corporate Banking activities, as well as its Trade and Commodity Finance activities by 2023. However, the Bank will maintain its global clearing business, where it has a leading market position.

Earnings Combined Building Block (BB) Assessment: Good/Moderate

ABN AMRO has historically reported sound earnings generation, supported by its strong franchise in the Dutch market, and generally low levels of impairment charges. Nevertheless, persistent pressure from low interest rates, higher cost of risk in 2020 as well as higher operating costs, mostly linked to the Bank’s AML remediation issue, has led to volatility in the last few years. In 2021, ABN AMRO returned to profitability with a net profit of EUR 1,234 million after a net loss of EUR -45 million in 2020. The result was mostly driven by net loan loss reversals of EUR 46 million in 2021 compared to the pandemic induced loan loss provisions of EUR 2,303 in 2020. Operating income reduced mainly due to persistent pressure on net interest income (NII), partially compensated by higher net fees and commissions which continued to perform well in Q1 2022. Cost control remains a key focus for ABN AMRO as AML-related costs and regulatory expenses remained high. However, we expect the results of the Bank’s cost management efforts to become more visible by 2024, while regulatory and AML-related costs are also expected to decline. Uncertainty has increased as the macroeconomic outlook is weakening following Russia’s invasion of Ukraine and could adversely affect cost of risk and lending volumes. However, over the medium term the Bank is expected to benefit from increasing interest rates.

Risk Combined Building Block (BB) Assessment: Good

Following the de-risking of the Bank’s CIB loan portfolio DBRS Morningstar views ABN AMRO’s risk profile as sound. More than half of the Bank’s loan portfolio consists of low-risk Dutch mortgages. At end-Q1 2022, ABN AMRO reported a Stage 3 loan ratio of 2.5%, down from 3.3% a year earlier. Going forward a number of factors could adversely affect asset quality metrics, including higher interest rates, elevated inflation and energy prices in particular. However, we view ABN AMRO as well reserved against these risks given the EUR 424 million loan loss reserves. In Q1 2022, the Bank released EUR 161 of these reserves, while creating a EUR 148 million overlay to protect against secondary effects from the war in Ukraine. In addition, the Bank took a EUR 72 million impairment to reflect the deteriorating macroeconomic environment.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good

ABN AMRO’s funding profile is considered solid, supported by a sound customer deposit base and diversified funding sources. In line with peers, customer deposits continued to increase steadily throughout the pandemic leading to a loan-to-deposit ratio (LTD) of 99% at end-Q1 2022. With regards to ECB funding, the Bank had EUR 35.0 billion of TLTRO III outstanding at end-2021, while ABN AMRO's wholesale funding totaled EUR 67 billion or around 19% of total funding at end-2021. We consider ABN AMRO’s wholesale funding as well diversified in terms of funding mix and maturity profile and the Bank maintained good access to capital markets. Liquidity remains ample with ABN AMRO’s liquidity buffer at EUR 97.1 billion at end-Q1 2022, with 7.1x coverage of the wholesale short-term funding as reported by the Bank.. ABN AMRO reported a Liquidity Coverage Ratio (LCR) of 163% and a Net Stable Funding Ratio (NSFR) of 136% at end-Q1 2022.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good

DBRS Morningstar considers ABN AMRO’s capital base as sound, supported by good internal capital generation. While capital ratios slightly decreased in Q1 2022 mostly due to regulatory changes, the Bank’s capital cushion over minimum regulatory requirements remained solid and the CET1 ratio is still well above the long term Basel IV CET1 target ratio of 13%. At end-March 2022, ABN AMRO reported a Basel III Common Equity Tier 1 (CET1) ratio of 15.7%, down from 16.3% at end-2021. The reduction was attributable to planned model reviews and redevelopments. Including the temporary relaxation of certain capital buffers during the pandemic, ABN AMRO’s minimum CET1 ratio requirement was 9.6%, implying a capital cushion of 610 bps at end-Q1 2022. As a result, we view the Bank as being well prepared for the expected gradual increase in the countercyclical capital buffer (CCyB) requirement from 0% to 2% by the Dutch central bank (DNB), with banks required to hold a buffer of 1% starting from 25 May 2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/398258

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
DBRS Morningstar views the ‘corporate governance’ subfactor as relevant for ABN AMRO’s ratings. This is reflected in the Franchise building block, and largely relates to weaknesses within the Bank’s internal controls, which could negatively affect the Bank’s reputation. In April 2021, ABN AMRO accepted a settlement with the Dutch Public Prosecution Service (DDPS) related to serious shortcomings in their anti-money laundering (AML) framework, especially failure to identify accounts involved in money laundering, end relations with suspicious clients, and report such activities to regulatory authorities between 2014 and 2020. As part of the settlement the Bank paid EUR 480 million in fines and profit disgorgement. In response to these shortcomings, ABN AMRO has implemented a remediation process in order to strengthen its internal control framework. The remediation process is ongoing and will continue into 2023. We note that the fine did not have an impact on the Bank’s capital, representing approximately 39% of total net profit in 2021.

This G factor is new and was not present in the prior credit rating disclosure.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes: All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) - https://www.dbrsmorningstar.com/research/381742/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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The sources of information used for this rating include Morningstar Inc. and Company Documents, ABN AMRO Annual Report 2021, ABN AMRO Investor & Analyst Presentation Q4 2021 & Q1 2022, ABN AMRO Quarterly Report Q4’21 & Q1’22, ABN AMRO Press Release Q1’22, ABN AMRO Factsheet Q4’21 & Q1’22. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/398257

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

Lead Analyst: Sonja Forster, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date:05/21/2009
Last Rating Date: 06/16/2021

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