DBRS Confirms Rabobank Nederland at AAA with a Stable Trend

DBRS has today confirmed its ratings for Rabobank Nederland, including its Long-Term Deposits & Senior Debt rating of AAA and its Short-Term Debt rating of R-1 (high). The ratings for Rabobank Nederland are based on the leading position of Rabobank Group (Rabobank or the Group) in financial services to Dutch retail clients and small to medium-sized enterprises (SMEs) and its extensive range of product offerings including unique skills in food and agribusiness that are also key elements in its expanding, but focused international operations. A key underpinning is the conservative business culture rooted in the Group’s cooperative organisation that continues to demonstrate strong cohesion and member participation. The ratings reflect the credit strength of the overall Group, as the Group’s members, the local Rabobanks, are linked together by a cross-guarantee system where members are joint and severally liable for each other’s commitments.

Demonstrating the strength of its franchise and financial fundamentals, Rabobank maintained profitability throughout the crisis and bolstered its already strong capital levels. In 1H10, the Group reported a healthy net profit of EUR1.7 billion, ahead of pre-crisis levels and a 26% increase from 1H09. First half results benefitted from improved margins and from the recovery in the Dutch economy, which drove a sharp decline in bad debt costs (to 27 bps of average lending, down 28 bps from 1H09). Rabobank adhered to its strategic principles to be focused on the needs of its cooperative members, to be a leading provider of all financial services in the Dutch market, and to be a leading global food and agriculture bank, an area of specialized expertise that has developed from the Group’s origins in the Netherlands. These fundamentals and the Group’s low risk profile underpin DBRS’s intrinsic assessment (IA) of AA (high). The triple-A ratings also take into account a support assessment of SA2 that provides a one notch uplift to the IA. The SA2 considers the importance of the Group for the financial system in the Netherlands and DBRS’s expectation of government support should it prove necessary. Rabobank Nederland has also been designated as a Critically Important Banking organisation (CIB) by DBRS, and could therefore benefit from the floor rating for CIB’s in the Netherlands of A (high)/R-1 (middle).

Reflecting its strategic focus on its core Dutch franchise, Rabobank has remained the market leader in serving retail customers, small to mid-sized businesses and the agricultural and food production sector. In 1H10, the Group maintained strong market shares across most lending and savings products in the Netherlands, including a 39% share of the savings markets, a 41% share of the SME market and a 31% mortgage market share. The Group also has a dominant share in financing the Dutch agricultural sector. This positioning is reflected in the Groups earnings, with 50% of revenues and 56% of net profit generated by the Domestic Retail Banking segment in 1H10. Residential mortgages in Domestic Retail Banking, at about EUR193 billion, remain the largest loan category and accounted for 44% of total private sector lending at the end of 1H10.

In recent years, Rabobank has continued to demonstrate its ability to generate growth from within the core Dutch market, both organically and through add-on acquisitions. One avenue for the Group is increasing its penetration among larger Dutch corporations, with results in Wholesale Banking indicating some success in this area. Careful expansion of its international operations is also contributing to franchise growth. Rabobank has made selective acquisitions, including FDIC assisted deals, in the U.S. and in 1H10 acquired a 30% stake in Sicrendi, a Brazilian lending cooperative. The Group is also seeking to enhance its links in China. The Group has refocused its international rural and retail business on the U.S. Australia, Brazil, New Zealand and Poland, while deemphasising Ireland. The Group also sold part of its equity stake in an Indian bank in 1H10, realizing a gain of EUR152 million.

DBRS views Rabobank as well capitalised, with a Tier 1 capital ratio of 14.9% as of 30 June 2010 under Basel II. The Group currently targets a Tier 1 ratio of 12.5%, a ratio that provides an ample cushion above current regulatory minimums, though Rabobank has indicated that it could raise targets given the evolving regulatory landscape and will maintain capital above its formal target for now. DBRS notes that the Group comfortably passed the stress test conducted by the Committee of European Banking Supervisors. In the adverse scenario, including the additional sovereign shock, Rabobank’s Tier 1 ratio remained strong at 12.5% at year-end 2011.

Rabobank’s liquidity has remained strong, anchored by the Group’s customer deposit base of EUR298 billion as of the end of 1H10. Deposits amounted to 68% of private sector loans at 30 June 2010, down from recent periods due to loan growth in Wholesale Banking & International Retail Banking that was, in large part, driven by exchange rate movements. In 1H10, Rabobank added considerably to its liquidity, building a EUR28 billion liquidity portfolio comprising high-quality Government bonds (primarily German, Dutch and French). Based on regulatory guidelines, the Group estimates that its liquidity buffer was EUR125 billion at the end of June. The Group has also extended the duration of its long-term debt, adding stability to its funding profile.

DBRS expects Dutch banking to remain fiercely competitive, with Rabobank having to defend its position against other well-entrenched, and refocused, players. That, combined with the Group’s focus on low-risk business somewhat constrains its margins relative to more aggressive peers, particularly during boom times. Still, DBRS sees the Group’s solid performance through the financial crisis and its announced goal of balanced lending and deposit growth at the local Rabobanks as indicating that the Group’s strategic choices are consistent with its ratings level.

As a CIB, Rabobank’s ratings are subject to DBRS’s floor rating. In the Netherlands, DBRS has assigned a floor rating of A (high) for long-term debt and deposits and R-1 (middle) for short-term debt and deposits at the bank level. The level of the floor reflects DBRS’s expectation that the Dutch state would provide support, if necessary, to prevent any CIB from weakening below this rating level. Actions taken to support other large Dutch banks during the crisis reinforce this perspective. DBRS views A (high)/R-1 (middle) as the level of creditworthiness that market participants demand for CIBs to be viewed as stable counterparties, as CIBs need to be perceived as reliable partners in undertaking a wide range of financial transactions. DBRS views the floor as the level of support at which the Dutch state will sustain their CIBs to ensure that their financial system is fully functioning.

Note:
All figures are in EUR unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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