Morningstar DBRS Confirms Coöperatieve Rabobank's LT Issuer Rating at AA (low), Trend Remains Stable

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Long-Term Issuer Rating of Coöperatieve Rabobank U.A. (Rabobank or the Bank) at AA (low) and the Short-Term Issuer Rating at R-1 (middle). The trend on all ratings remains Stable. The support assessment remains SA3, and the Intrinsic Assessment (IA) also remains AA (low). See the full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings at AA (low) considers Rabobank's strong retail and commercial franchise in the Netherlands, as well as its global franchise in the global food & agriculture finance business. Ratings are underpinned by the Group's solid asset quality metrics, which have been unaffected so far by the challenging environment thanks to Rabobank's low-risk profile and conservative approach. In addition, the credit ratings are further supported by the well-diversified funding profile, thanks to a large and stable deposit base and a strong liquidity profile. Rabobank continues to report capital cushions well-above regulatory minimum requirements, which provides ample room to reinvest in the franchise while navigating potential headwinds. Finally, credit ratings incorporate the further progress made on profitability, which should enable the Group to report strong 2024 financial performance.

Nevertheless, the stable trend also reflects Morningstar DBRS's view that profitability is peaking and that while Rabobank should still benefit from the higher interest rate environment, they will likely also experience increasing deposit rates, moderate but resurging loan demand, higher credit costs and moderate operating expense growth. In addition, while Rabobank has not experienced asset quality deterioration, Morningstar DBRS expects some credit risk deterioration in the coming quarters.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require a material and sustainable improvement in profitability, combined with the Bank maintaining its low risk profile and robust capital levels.

A downgrade of the Long-Term Issuer Rating would occur in case of a significant deterioration in asset quality indicators or profitability.

CREDIT RATING RATIONALE

Franchise Combined Building Block Assessment: Very Strong/ Strong
Rabobank is one of three major Dutch banks with total assets of EUR 621 billion at end-June 2024. The Bank is active in Domestic Retail Banking, Wholesale & Rural Banking, Leasing and Property Development. Domestic Retail Banking is Rabobank's biggest contributor to revenues and the Bank benefits from operating in a mature and highly concentrated market. Rabobank has a strong position in mortgage lending in the Netherlands with a market share of 18.6% in H1 2024. The Bank is also a leader in the global Food & Agri finance business. The Bank has been pursuing continued digitalisation and a reduced footprint in Domestic Retail Banking with a more streamlined and simplified structure in its wholesale operations. Over the medium-term the Bank has a cost-income ratio target in the mid-50% range and a return on equity (ROE) target above 8%. Strategically, Rabobank seeks to further strengthen its franchises in the Netherlands, in Food & Agri and Vendor Finance, while focusing on food system and energy transition.

Earnings Combined Building Block Assessment: Strong/Good
Rabobank's profitability further improved in H1 2024, with a reported net profit of EUR 2,818 million, up from EUR 2,528 million in H1 2023. This was driven by higher core revenues and lower impairment charges which offset a moderate increase in the cost base. As a result, the Bank's reported return-on-equity (ROE) stood at 11.1% compared to 9.1% in 2023. We expect the Bank to report strong results for the whole 2024 fiscal year, and above 2023, driven by a strong Net Interest Income (NII) performance amid declining but still high rates and lower than expected migration from current accounts to term deposits as well as lower regulatory levies which should offset growth in operating expenses and credit costs. However, we also see profitability as peaking and expect the Bank should still benefit from the higher interest rate environment, but experience increasing deposit rates, moderate but resurging loan demand, higher credit costs and moderate operating expense growth.

Risk Combined Building Block Assessment: Strong/Good
We consider Rabobank's risk profile as solid, supported by a granular and diversified loan book, which includes a high proportion of residential mortgages, and conservative risk management. The loan portfolio is skewed towards the Netherlands, with 66% of the private sector loan book in its domestic market at end-June 2024. In our view, this provides Rabobank 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. Rabobank undertook a pro-active NPL reduction strategy between 2018 and 2021, which resulted in improved asset quality metrics which have remained largely stable since then despite a more challenging environment. Asset quality remained solid with a gross Stage 3 loan ratio (as calculated by Morningstar DBRS), of 2.1% at end-June 2024, stable over the past three years, as the few inflows experienced were offset by write-offs. Since the start of the investigation into alleged AML violation, Rabobank has invested substantial resources into strengthening its know-your-customer (KYC), Customer Due Diligence (CDD) and Transaction Monitoring activities as well as increasing the number of full-time employees (FTE) involved in financial economic crime (FEC) prevention. We do not expect that a potential fine resulting from the investigation would adversely affect Rabobank's credit strength. However, FEC-related issues to continue to take up significant financial and managerial resources.

Funding and Liquidity Combined Building Block Assessment: Strong/Good
We consider that Rabobank has a solid and well-managed funding profile, underpinned by a large, stable, and granular retail deposit base, reflecting its leading position in the Netherlands. The Bank is mainly funded by customer deposits, which accounted for 74% of total funding at end-June 2024, with more than 80% of DGS eligible household deposits within the EU being covered under the Deposit Guarantee Scheme (DGS). Deposits from customers, which amounted to EUR 401.6 billion, were up 2.6% in H1 2024, mainly driven by domestic retail customers, partly driven by unused holiday payments. At end-June 2024, the bank reported a loan-to-deposit ratio (LTD - 12-month average) of 111%, stable since end-2020, which remains somewhat weaker than its international peers and the rest of the Dutch banking sector. Another factor supporting the credit ratings is the Bank's solid liquidity position, with high-quality liquid assets (HQLA) standing at EUR 100 billion at end-June 2024. On top of this, Rabobank also reported a 12-month average liquidity coverage ratio (LCR) of 167% and a net stable funding ratio (NSFR) of 133% at end-June 2024, well above minimum regulatory ratios.

Capitalisation Combined Building Block Assessment: Strong/Good
Rabobank's capital position remains solid, supported by a sound internal capital generation capacity and continued access to the capital markets. The Common Equity Tier 1 (CET1) ratio stood at 16.3% at end-June 2024 down from 17.1% at end-2023, driven by risk-weighted asset (RWA) growth and the impact of the cash tender offer on Rabobank Certificates, although mitigated by retained earnings. This represents a 530 bps buffer above the regulatory minimum requirement of 11.01%. On top of this, Rabobank exceeds the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) applicable as of end-June 2024, i.e. a total requirement (including CBR) of 28.9% of RWAs. Rabobank intends to fully meet the total requirement with its subordinated MREL position, which stood at 29.0% at end-June 2024. Rabobank's total MREL ratio (including eligible Senior Preferred Debt) stood at 33.4% at the same date.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/442362/.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Governance (G) Factors
The following Governance factor had a relevant effect on the credit analysis: Corporate/Transaction Governance. This is in relation with the identified deficiencies the Dutch Central Bank (DNB) has highlighted in regard to compliance and risk framework related to the Dutch Anti-Money Laundering and Anti-Terrorist Financing Act. Moreover, this relates to the criminal investigation of Rabobank for allegedly violating Anti-Money Laundering Laws. We view Rabobank as having invested significant resources into dealing with these issues but might still incur a fine which we estimate as not impacting the Group's credit strength.

There were no Environmental/Social 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 (13 August, 2024) https://dbrs.morningstar.com/research/437781

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/433881 In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (13 August, 2024) https://dbrs.morningstar.com/research/437781 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. Rabobank Annual Report 2023, Rabobank Investor Presentation FY2023 & H1 2024, Rabobank Interim Report 2024, Rabobank ESG Presentation 2024, Rabobank Pillar 3 Report H1 2024, Rabobank "At a Glance" Document 2024. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

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://dbrs.morningstar.com/research/442361/.

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

Lead Analyst: Arnaud Journois, Senior Vice President -- European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: 21 November 2003
Last Rating Date: 02 November, 2023

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