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

DBRS Ratings GmbH (Morningstar DBRS) 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 trends on all ratings remain 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 CREDIT RATING CONSIDERATIONS
The confirmation of ABN AMRO’s credit ratings 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 credit ratings also take into account the Bank’s sound earnings generation capacity, which has improved following the de-risking undertaken by ABN AMRO, higher interest rates, and a cost base that is under control. In Morningstar DBRS' view, improved earnings generation provide ABN AMRO with the flexibility to absorb a potential deterioration in the cost of risk, which could materialise in the current environment, with inflation and higher interest rates potentially affecting borrowers.

In addition, ABN AMRO’s credit ratings incorporate the Bank’s solid funding and liquidity profile, which is underpinned by a stable customer deposit base and good access to market funding. Whilst capital ratios have been trending down in recent quarters on the back of regulatory and accounting impacts, Morningstar DBRS expects regulatory capital cushions to remain sound.

CREDIT RATING DRIVERS
An upgrade of the credit ratings would arise from a longer track record of improved profitability and improved risk management.

A downgrade of the credit ratings would occur from a sustained deterioration in asset quality or a material weakening of profitability metrics.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong
ABN AMRO is a leading Dutch bank with total assets of EUR 397.6 billion at end-Q1 2024. The Bank mainly operates in its domestic market (77% of total credit exposure), where it benefits from a strong retail and commercial banking franchise. It reported a 19% market share in new mortgage lending and a 16% share in SME lending in 2023. ABN AMRO aims to reach a market share of approximately 20% in new mortgage production and SMEs in 2024. In addition, the Bank has a solid private banking footprint in Northwest Europe, mainly Belgium, France, and Germany. In late May 2024, the Group announced that it had reached an agreement with Fosun International to acquire Hauck Aufhäuser Lampe (HAL), a leading German private bank. In Morningstar DBRS’ view, this will enable the bank to achieve a leading position in the private banking business in Germany and will support fee and commission income going forward.

Earnings Combined Building Block (BB) Assessment: Good
In Morningstar DBRS’ view, ABN AMRO’s earnings capacity is sound, supported by its strong core franchise in the Netherlands and supplemented by its international operations. In recent years, the Group proceeded with the wind-down of non-core activities and recorded charges in relation to weaknesses in anti-money laundering (AML) procedures, which affected its income statement. However, profitability has been gradually improving in the past two years as the bank benefited from the higher interest rate environment, cost containment, and the cost of risk remaining under control. In 2023, ABN AMRO reported a net profit of EUR 2.7 billion, up 44% from EUR 1,867 million a year earlier. Results were driven by higher revenues, boosted by a strong increase in net interest income (NII) on the back of higher rates, lower operating expenses and provision releases. As a result, the bank reported a return on equity (ROE) of 12.2% compared with 8.7% in 2022, well above the 9-10% target for 2026. This continued in Q1 2024, with the bank reporting a EUR 674 million net profit, up 29% YOY with a ROE at 11.6%.

Risk Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views ABN AMRO’s risk profile as good, mainly reflecting the benign Dutch operating environment, strong risk management as well as the de-risking that took place in the Bank’s CIB loan portfolio. In our view, these provide ABM AMRO with a strong starting point for any potential deterioration the Bank might face in the current challenging environment, characterised by tighter financial conditions and weaker economic dynamics. The Bank’s asset quality metrics have been gradually improving since end-2020, and stabilised at 1.9% at end-March 2024 (1.9% at end-2023; 2.0% at end-2022). Stage 2 loans slightly declined to 8.1% in Q1 2024 from 8.7% at end-2023. Going forward, we expect some pressure on asset quality mainly due to delayed impact of high inflation, high interest rates, and the subdued economic environment. In our view, asset quality risks are likely to remain at manageable levels.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views ABN AMRO’s funding profile as solid, supported by a sound customer deposit base and diversified funding sources. Customer deposits, which accounted for 70% of total non-equity funding at end-Q1 2024, increased by 2.7% compared to end-2023. However, around 50% of total deposits are insured, which is lower than its peers, and reflects a relatively large share of deposits from corporates and private banking, which could be less sticky than retail deposits. The Group reported a sound loan-to-deposit (LTD) ratio of 97% at end-March 2024. 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. Another factor supporting the credit ratings is the Bank's solid liquidity position, with MREL ratios exceeding requirements. In Morningstar DBRS’ view, ABN AMRO’s liquidity position is solid. At end-March 2024, the Group’s liquidity buffer stood at EUR 104.9 billion, equivalent to 6.2x the short-term wholesale maturities. In addition, the 12-month rolling average Liquidity Coverage Ratio (LCR) of 144% and Net Stable Funding Ratio (NSFR) of 134% were well above the minimum regulatory ratios.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
In our view, ABN AMRO’s capitalisation is adequate, supported by a good internal capital generation capacity and continued access to capital markets. However, whilst capital cushions remain comfortable, they have been trending down in recent quarters due to regulatory headwinds such as the first-time adoption of IFRS 17, and the increase in the countercyclical capital buffer (CCyB) requirement. The Bank reported a CET1 of 13.8% at end-March 2024, down from 14.3% at end-2023, mainly due to an increase in RWAs driven by higher credit risk RWAs, as well as capital deductions, which offset internal capital generation. The Group has maintained shareholder return with a dividend pay-out of 50%, in line with the 2026 targets. As a result, the Bank maintained adequate buffers over SREP requirements, which now include a CET1 ratio of 10.8% and a total capital ratio of 18.6%. Morningstar DBRS notes that at the end of May 2024, the Dutch CCyB will increase to 2%, whereas the OSII will decline to 1.25%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/434187.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024); https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (04 June 2024) https://dbrs.morningstar.com/research/433882/morningstar-dbrs-publishes-updated-global-methodology-for-rating-banks-and-banking-organisations In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents, ABN AMRO Q1 2024 and 2023 Reports, ABN AMRO Q1 2024 and 2023 Press Releases, ABN AMRO Q1 2024 and 2023 Pillar 3 Reports, ABN AMRO Q1 2024 and 2023 Presentations, ABN AMRO Q1 2024 and 2023 Roadshow Presentations and ABN AMRO Q1 2024 and 2023 Factsheets. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

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

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/434186.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President, European Financial Institution
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global Head of Financial Institutions
Initial Rating Date: May 21, 2009
Last Rating Date: June 12, 2023

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