DBRS Rates ABN AMRO Bank N.V. at AA and R-1 (high)

Dominion Bond Rating Service (DBRS or the Rating Agency) has assigned today new ratings to ABN AMRO Bank N.V. (ABN AMRO) of AA for its Long-Term Debt and Deposits, AA (low) for Subordinated Debt and R-1 (high) for Short-Term Debt and Deposits. A rating of AA has been assigned to ABN AMRO Holding N.V.’s Long-Term Debt. DBRS has also rated at A (high) the Preference Shares issued by ABN AMRO Capital Funding Trust V/VI/VII, guaranteed on a subordinated basis by ABN AMRO Holding N.V. The ratings for ABN AMRO also apply to debt issued by its Australian, Chicago, New York and Paris branches. All these ratings have a stable trend.

DBRS says that ABN AMRO’s long-term ratings reflect the Bank’s strong domestic franchise and superior international diversification, further enhanced by the recent acquisition of Italy’s Banca Antoniana Popolare Veneta (Banca Antonveneta) and successful track record in managing risks. The rating also incorporates the initial benefits from the Bank’s strategic overhaul initiated in recent years, crystallized in significant improvement in cost-efficiency measures, asset sales and a more focused capital management. These credit strengths are somewhat tempered by the challenges of successfully integrating Banca Antonveneta, and of further upgrading ABN AMRO’s profitability, notably by making further progress in cost efficiency and dealing with underperforming wholesale banking activities. DBRS added that, at their current level, ABN AMRO’s ratings also incorporate DBRS’s expectation of some form of timely systemic support for the Bank and its core subsidiaries, in the highly unlikely event of a stress scenario.

ABN AMRO is one of Europe’s largest and most diversified banking groups, with a solid franchise in The Netherlands, the U.S. Midwest, Brazil and Italy, and a growing presence in Asia. It also has significant international business lines in wealth management and capital markets. The bank’s strategy is to focus on its franchise strengths amongst mid-sized corporates and mass affluent individuals in its various markets. The new organization implemented since early 2006 aims at unlocking the group’s intrinsic potential, by leveraging the Bank’s resources and ensuring that they are perfectly aligned to deliver best-of-breed products and services to its core customer base. While recognizing the implicit benefits of the Bank’s strategic refocusing, DBRS nevertheless highlighted the challenges in generating the expected increased operating efficiency and business synergies, in the smooth alignment of the group’s various business units. At the same time, significant cost savings are being delivered through the reorganization of back office and information technology functions.

ABN AMRO’s broad based consumer and commercial Dutch banking franchise remains one of its two largest profit contributors and anchors the bank’s sound credit profile. Since 2001, the Bank has successfully tackled the challenge of upgrading the profitability of its retail network by boosting revenues and curbing costs. These efforts have helped improve significantly the Dutch network’s efficiency ratio, which now compares more favourably with peers. More importantly, the Bank has been able to upgrade its service levels and customer satisfaction, helping safeguard its well entrenched mid-market retail franchise in the long term. That said, intense competition should continue to exert margin pressure, requiring constant efforts to boost distribution and manage costs aggressively.

ABN AMRO’s credit profile also takes advantage of its superior diversification, underpinned by its solid presence in the United States and Brazil, and the opportunities afforded by the recent acquisition of Banca Antonveneta. In the United States, LaSalle Bank, ABN AMRO’s subsidiary, ranks amongst the top 20 institutions, and has been expanding the breadth and quality of its services to compensate for the lower profit contribution of its mortgage activities since 2001. In Brazil, ABN AMRO’s strategy is to increase the penetration of its fully-fledged consumer and commercial activities while taking advantage of Brazil’s healthy economic expansion, and further grow its leading consumer and car finance business. In addition, DBRS believes that Banca Antoveneta’s solid mid-market franchise meshes well with ABN AMRO’s strategy to leverage its cost and credit management skills and unleash its growth potential.

“The recalibration and realignment of ABN AMRO’s wholesale banking has long-term positive connotations for the Bank’s earnings and risk profile” says Jean-Luc Lepreux, Senior Vice President and lead analyst for ABN AMRO. However, these underperforming activities have dragged on the Bank’s profitability in recent years, due to high costs, and DBRS estimates that attaining the financial targets will remain challenging. Moreover, despite some strong competitive positions, the Bank’s narrower focus is proving a handicap when competing against better resourced competitors. On the other hand, ABN AMRO intends to cap the amount of capital allocated to the Global Clients Business Unit, which should help further lower earnings volatility.

DBRS also points to ABN AMRO’s solid risk management competences and sound financial profile. In particular, DBRS believes that the Bank’s effective risk management program should help maintain sound credit quality over the business cycle, although provisions could rise in the medium term, as the global credit environment becomes less benign. ABN AMRO boasts an excellent granularity of its loan portfolio, with a high concentration in Western Europe and the United States, a significant proportion of secured loans (notably mortgages) and sound coverage ratios, reflecting a moderate risk appetite, which is also apparent in its modest market risk exposure. In addition, liquidity − underpinned by solid core deposits base in the Bank’s various markets − is ample and balance sheet management appears conservative. Another positive rating factor is the Bank’s more disciplined capital management, which aims at maintaining a comfortable capital cushion in relation to the risk profile and profitability of its activities.

Finally, DBRS said that while lower loss provisions, the benefit of recent restructuring and increased focus on costs, as well as some margin improvement, have enhanced the risk-adjusted profitability of ABN AMRO’s various business units, the Bank is not yet realizing its full earnings potential. Going forward, its major challenge will be to deliver increased savings and efficiency, and to enhance the sustainability of its global financial performance, which has been beset by some higher volatility than peers.

Commenting on rating change drivers, DBRS notes that ABN AMRO’s credit profile would benefit from measurable success in the implementation of the new strategy and business organization in terms of increased penetration and cross sell in key markets, as well as from a sustainable improvement of financial performance, which DBRS believes will come primarily from progress in cost efficiency. In the medium term, a successful integration of Banca Antonveneta would also be credit positive. Conversely, negative rating pressure could appear should the Bank face an erosion of its market shares or signal greater risk appetite in wholesale banking activities, although at this stage, both scenarios appear rather unlikely, which underpins the stable trend on the Bank’s ratings. DBRS concludes that all the credit fundamentals and rating considerations discussed above underpin a AA (low) Intrinsic Assessment (IA) equivalent.

Furthermore, according to DBRS, ABN AMRO is a systemically important institution in The Netherlands, as the country’s second-largest financial institution, and more broadly, in the European Union, where it generates c.60% of its revenues. The Rating Agency therefore expects that Dutch authorities − potentially in coordination with regulators of other countries where ABN AMRO has a major presence − would take steps to support the bank on a timely basis in case of financial stress. Accordingly, DBRS has assigned an SA2 Support Assessment rating to ABN AMRO. However, DBRS added that the likelihood a financially strong institution such as ABN AMRO ever resorting to systemic support is an extremely unlikely scenario for the foreseeable future. Finally, DBRS says that the long-term rating of ABN AMRO Holding N.V., positioned at the same level than the Bank, is consistent with its methodology for rating European bank holding companies, which reflects Europe’s regulatory environment which focuses supervision on the financial group as whole.

Intrinsic Assessments and Supports Assessments (the latter on a scale from SA1 to SA4) are the two building blocks of DBRS’s bank ratings, as per the new bank rating methodology announced in 2006 (to view that report “Analytical Background and Methodology for European Bank Rating”, published in January 2006, visit www.dbrs.com). At this time, DBRS is in the process of adjusting its existing bank ratings to the new IA and SA methodology.

Regarding the AA senior long-term rating assigned to ABN AMRO Holdings N.V., which is the group’s holding company, DBRS notes that it is the same as the equivalent ratings of ABN AMRO Bank N.V. This is in line with the Rating Agency’s methodology – detailed earlier this year (“Analytical Background and Methodology for European Bank Ratings” – January 2006) and takes account of the fact that a lack of a different regulatory treatment for the holding company compared to the main operating bank warrants the same rating for both.

The following ratings were assigned:

ABN AMRO Bank N.V. – AA for Long-Term Debts and Deposits, AA (low) for Subordinated Debts and R-1 (high) for Short-Term Debts and Deposits, Commercial Paper and other Short-Term instruments.

ABN AMRO Holding N.V. – AA for Long-Term Debt.

ABN AMRO Capital Funding trust V, VI and VII – A (high) for Preferred Shares guaranteed on a subordinated basis by ABN AMRO Holding N.V.

ABN AMRO Bank N.V. is headquartered in Amsterdam, The Netherlands, and reported total assets of EUR 989 at June-end 2006.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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