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Industry Report Card:
Why A Slow Recovery Will Continue To Weigh On Dutch Banks In 2014

Primary Credit Analysts: Constance Hauville, Paris (33) 1-4420-6749; constance.hauville@standardandpoors.com Alexandre Birry, London (44) 20-7176-7108; alexandre.birry@standardandpoors.com Secondary Contacts: Dhruv Roy, London (44) 20-7176-6709; dhruv.roy@standardandpoors.com Nigel Greenwood, London (44) 20-7176-7211; nigel.greenwood@standardandpoors.com
Table Of Contents
Industry Ratings Outlook Sovereign Action Sparks Downgrades The Economy Is On The Turn The Housing Market Stirs After A Five-Year Slump Cost Management Remains In The Spotlight Hybrid Capital Issuance Looks Set To Increase Despite Sound Regulatory Ratios Rebalancing Of Funding Profiles Aids Liquidity Issuer Review Contact Information Related Criteria And Research
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Industry Report Card:
Why A Slow Recovery Will Continue To Weigh On Dutch Banks In 2014

Industry Ratings Outlook
After a difficult 2013, Standard & Poor's Ratings Services believes that elevated loan impairment charges in the first half of 2014 will continue to burden the Dutch banking sector. Thereafter, the country's improving economic prospects should gradually feed through to the banks, although in our view the loan impairment charge for the sector will still exceed 50 basis points of average customer loans for the full year. While our economic forecast for The Netherlands still has downside risk, several indicators point to a more positive economic stance, including improvements in consumer confidence and a sharper-than-expected pick-up in GDP growth in the last two quarters of 2013. There are also signs that the housing market is stabilizing. Yet, despite these bright spots, we expect the recovery to be sluggish. Overview We anticipate that the lag effect of the protracted domestic downturn will continue to strain Dutch banks' performance in 2014. However, a stabilizing housing market, combined with the expected, albeit slow, economic recovery, could alleviate the pressure in the second half of the year. We expect limited changes to individual banks' stand-alone credit assessments in 2014 unless our projected gradual economic recovery does not materialize.
The underlying earnings of Dutch banks in 2013 generally benefited from a continued increase in net interest margins due to further repricing of lending and reduced funding, including deposit, costs. This increase generally offset a reduction in lending, which was exacerbated by an acceleration in mortgage repayments. However, high loan loss provisions on domestic counterparties still dampened the banks' results. The wide divergence in the stand-alone credit profiles (SACPs) of Dutch banks (from 'a+' to 'bb+'; see table 1) around the 'bbb+' anchor reflects what we view as large differences in the resilience of these institutions to the tough operating environment of the past six years. The sector has taken steps to reduce downside risk ahead of the upcoming comprehensive assessment by the European Central Bank (ECB). Following the Dutch Central Bank's asset quality review of the sector, which concluded in the fourth quarter of 2013, banks and independent consultants have carried out an in-depth review of commercial real estate exposures. In addition, a number of institutions increased their level of provisioning in the fourth quarter. The ECB's assessment, which includes an asset quality review, will cover about 130 banks across Europe, of which
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Industry Report Card: Why A Slow Recovery Will Continue To Weigh On Dutch Banks In 2014
seven are located in The Netherlands. Although we can't exclude the risk of some additional provisioning for Dutch banks in 2014 as a result of this exercise, we believe that the largest Dutch banks have materially increased their level of preparedness over the past two years. The three largest institutions, namely ING Bank N.V., Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland), and ABN AMRO Bank, are well prepared, in our view, to meet higher regulatory standards, whether in terms of funding and liquidity or capitalization (see table 1). However, we consider these factors to be neutral to their credit profiles, particularly in light of our expectation of a sluggish recovery in the domestic economy. We note the European authorities' intention to avoid future bank bail-outs (that is, government support) by using bail-ins (burden sharing with investors, potentially including senior unsecured obligations). We continue to monitor developments, and by the end of April 2014 plan to review our ratings on European banks that benefit from systemic support uplift. For further details, see "Standard & Poor's To Review Government Support In European Bank Ratings," published March 4, 2014, on RatingsDirect.
Table 1
Components Of Standard & Poor's Ratings On Dutch Banks

Capital Long-term Business and rating/outlook Anchor position earnings No. of notches Funding and Type of of Additional liquidity SACP support support Factors Holding company rating
Institution
Risk position
Diversified financial institutions ABN AMRO Bank N.V. ING Bank N.V. Rabobank A/Stable A/Stable AA-/Negative bbb+ bbb+ bbb+ Adequate Adequate Adequate Average/Adequate (0) (0) (0) (0) Strong Adequate Adequate Average/Adequate (+1) (0) (0) (0) Very Adequate Strong (0) (+2) Strong Average/Adequate (+1) (0) bbb+ aa+ Syst. imp. Syst. imp. Syst. imp. Syst. imp. 2 1 1 0 0 0 A-
SNS Bank N.V.
BBB/Negative
bbb+ Weak (-2)
Strong Moderate Below (+1) (-1) Average/Adequate (-1)
bb+
BB+
Specialized financial institutions Achmea Hypotheekbank N.V. AEGON Bank N.V. Bank Nederlandse Gemeenten N.V. F. van Lanschot Bankiers N.V. KAS BANK N.V. LeasePlan Corporation N.V. Nederlandse Waterschapsbank N.V. A/Negative bbb+ Weak (-2) Strong (+1) -Very Strong (+2) Strong (+1) -Below average/Adequate (-1) -bbb Group 3 0
A+/Stable AA+/Stable
-bbb+
-Adequate (0) Moderate (-1)
-a+
Group (core) GRE
-3 0
A-
Strong Average/Adequate (+1) (0)
BBB+/Negative BBB+/Stable BBB+/Positive
bbb+ bbb+
Strong Adequate Average/Adequate (+1) (0) (0)
bbb+ bbb+ bbbSyst. imp. Group
0 1 2
0 -1 0
Adequate Adequate Adequate Average/Strong (0) (0) (0) (0) Strong Adequate Below (+1) (0) Average/Adequate (-1) Very Strong (+2) Strong Average/Adequate (+1) (0)
bbb+ Weak (-2)
AA+/Stable
bbb+
Adequate (0)
a+
GRE
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Table 1
Components Of Standard & Poor's Ratings On Dutch Banks (cont.)

NIBC Bank N.V. BBB-/Negative bbb+ Weak (-2) Strong Adequate Below (+1) (0) Average/Adequate (-1) ---bbb0 0
Royal Bank of Scotland N.V. (The)
A-/Negative
--
--
--
Group (core)
--
BBB+
SACP--Stand-alone credit profile. GRE--Government-related entity. Syst. Imp.--Systemic importance.
Sovereign Action Sparks Downgrades

In November 2013, we lowered our counterparty credit ratings on ING, Bank Nederlandse Gemeenten N.V., and Nederlandse Waterschapsbank N.V. by one notch, following a similar rating action on the State of The Netherlands. As of end-March 2014, six Dutch banks have negative outlooks, largely related to their capital and risk positions, reflecting our view that the economic risk trend for the Dutch banking sector remains negative. Also in November 2013, we revised to negative from stable our outlook on Rabobank Nederland. The outlook revision reflected the possibility that we could revise our favorable assessments of the bank's business and risk positions due to the findings of an investigation into interbank offered rates, and the bank's exposure to the still-difficult domestic credit environment. This followed the announcement on Oct. 29, 2013, of the resignation of the chairman of Rabobank Nederland's executive board and a 774 million settlement related to the industrywide investigation into the setting of interbank offered rates. We continue to view the economic risk trend for the Dutch banking sector as negative. Under our base-case credit scenario, we anticipate that that domestic house prices will remain stable in 2014 and that the economy will start a slow recovery. That said, we could revise downward our stand-alone assessments for some banks in the event of a more protracted slump in the Dutch housing market than we currently envisage. Under this latter scenario, the early signs of renewed life in the housing market would stall, and the lack of confidence would constrain domestic consumption and lead to a further deterioration in credit losses. We expect the recovery in the Dutch economy (our economists forecast GDP growth of 0.8% in 2014 and 1.3% in 2015) to remain largely reliant on exports, with a limited contribution from internal demand initially despite a marked improvement in consumer confidence. And even if pressure starts to alleviate for some of the banks from the second half of the year as the recovery takes hold, we don't expect a material decrease in loan impairment charges for 2014 because of the continued pressure on small and midsize enterprises (SMEs) and the commercial real estate sector.
The Economy Is On The Turn

With GDP contracting by 0.8% last year, 2013 should, in our view, represent a trough for the Dutch banking system. Property prices continued to decline until the middle of the year, consumer confidence remained weak, and corporate bankruptcies increased (see chart 1) giving rise to elevated loan impairment charges for the sector. We calculate that the overall loan impairment charge of the three largest banks--Rabobank Nederland, ABN AMRO, and ING--was about
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3.7% larger in 2013 than in 2012 (see chart 2), and around 15% larger after adjusting for ABN AMRO's 685 million release on its Greek and Madoff files in 2013. All in all, loan impairment charges stood at about 50 basis points on average for the three banks. We believe that loan impairment charges will remain elevated in 2014, possibly close to their 2013 level as a proportion of customer loans. Our projection assumes that loan losses will largely come from the SME sector. Our base-case scenario assumes that retail exposures will see further increases in delinquencies as a lag effect of the protracted downturn, although the pace of deterioration should slow as the housing market continues to stabilize. Our base case also assumes that unemployment will increase further in 2014--but remain well below the average for the European Economic and Monetary Union (eurozone)-before starting to gradually decrease in 2015.
Chart 1
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Chart 2
The Housing Market Stirs After A Five-Year Slump

Improving economic conditions, reduced policy uncertainty, and increased affordability have halted the slump in the Dutch housing market. Although we expect further stabilization in the market, we don't foresee much of a recovery this year or next. Our base case is that house prices will be broadly flat in 2014, before rising 2% in 2015 (see "Economic Research: Europe's Housing Markets May Be On A Slow Path To Recovery," published Jan. 22, 2014). Dutch house prices rose 0.5% in the third quarter of 2013--the first quarterly increase in three years, according to Statistics Netherlands. Overall, house prices were broadly flat between mid-2013 and the end of February 2014. Transactions in the six months to February 2014 also rose by 13% year on year. Even so, home sales totaling approximately 110,000 in 2013 were still about 6% lower than in 2012. Also underpinning the stabilization in house prices is the increased affordability of homes. While house prices have tumbled 20% since 2008 (see chart 3), the price-to-rent ratio was only 5% above its long-term average in June 2013, owing to adjustments in rental regulation that have caused rents to rise. Our view that house prices will stabilize and gradually recover is supported by the reduction in uncertainty regarding
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the fiscal framework for mortgages, government measures to kick-start the market such as a permanent reduction in the transaction tax, reforms relating to the rental market, and improved housing affordability. However, any recovery will in our view be muted by the fall in households' real disposable incomes (down 6% in 2012 and 2013), increasing unemployment, households' increasing savings' rate, and accelerated mortgage debt repayment.
Chart 3
Cost Management Remains In The Spotlight

The performance of Dutch banks in 2013 reflected to a large extent that the protracted downturn only came to a halt in the third quarter. By our calculations, the aggregate operating pretax profit of the country's three largest banks decreased slightly by about 1% in 2013 compared with 2012 (see table 3 and chart 4), and by a more material 16% compared with 2011. Any improvements in 2014, if they arise at all, will likely be subdued, largely owing to asset quality pressure that we expect to persist at least through the first half of the year.
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Table 2
2013 Results For The Top Four Dutch banks

ABN AMRO Bank N.V. (Mil. ) Operating revenues Preprovision operating income Pretax profit Core earnings Noninterest expenses/operating revenues (%) Core earnings/operating revenues (%) Total assets (reported) Customer loans (net)/customer deposits (%) New loan loss provisions/average customer loans (bps) 2013 7,324 2,602 1,571 1,208 64.5 16.5 372,022 124.0 37.0 2012 7,338 2,908 1,151 1,352 60.4 18.4 ING Bank N.V. 2013 15,301 6,854 4,233 3,435 55.2 22.5 2012 15,311 6,136 4,330 3,025 59.9 19.8 Rabobank Nederland 2013 13,020 4,312 2,277 682 66.9 5.2 674,139 139.7 56.0 2012 13,452 4,621 2,468 1,151 65.7 8.6 752,410 142.8 50.0
394,404 787,644 836,068 130.5 46.0 107.0 43.0 117.8 38.0
Source: Annual reports and Standard & Poor's. Note: 2012 data have not been restated.
Chart 4
The banks' reduced profitability in 2013 was the result of at-best flat revenues during the period, combined with a 4% increase in reported loan impairment charges versus 2012. Credit demand from the private sector remained limited
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due to the weak economic climate and Dutch households' move to start deleveraging. As a result, the total loan book declined by 3.5% on average for the top three banks in 2013. In addition, the banking tax introduced in 2012 by the Dutch government continued to weigh on profitability. Now, following SNS REAAL N.V.'s nationalization, the government has imposed an additional 1 billion one-off levy on the Dutch banking system, to be paid in 2014. As in 2012, the reported profitability of the Dutch banking sector in 2013 was distorted by a few special items. These items included ABN AMRO's 685 million release of provisions on its Greek and Maddoff files; Rabobank Nederland's 1.6 billion profit on its sale of Robeco, which more than offset the 774 million charge related to the interbank rate settlement; and SNS Bank's nationalization measures, including the expropriation of subordinated debtholders and the transfer of its property finance book. We anticipate further one-off items in 2014 although we consider the Dutch banks to be well advanced in their restructuring programs. In particular, we note ABN AMRO and ING's announcements in the past few months of pension scheme renegotiations, which will lead to one-off expenses in 2014, although they will materially reduce the banks' long-term exposure to pension risk. Owing to the prospect of constrained revenue growth for the foreseeable future, most Dutch banks have maintained their focus on cost containment. However, efficiency savings in 2013 were partly offset by some restructuring costs and, in some cases, an increase in pension contributions. On an underlying basis, we calculate that the cost-to-income ratio of the three main banks was a relatively high 61% in 2013. SNS Bank's return to profit in 2013, following its nationalization on Feb. 1, 2013, was supported by the elimination of property finance-related risks. This involved the transfer of the property finance book to the Dutch government at the end of the year and the expropriation of subordinated debtholders, which boosted the bank's net interest margin despite limited new retail lending volumes in 2013.
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Chart 5
Hybrid Capital Issuance Looks Set To Increase Despite Sound Regulatory Ratios
The fallout from the financial crisis, coupled with changing regulatory and market expectations, has led to a steady improvement in Dutch banks' capitalization, in a number of cases with government support. Regulatory capital ratios in the sector have generally improved since 2008, reflecting the close management of risk-weighted assets, low or no dividend payments, one-time gains from disposals, and subordinated debt buybacks. In the case of SNS Bank, capitalization improved markedly in 2013 as a result of its nationalization measures, including the bail-in of subordinated creditors, a capital injection by the government, and the transfer of its property finance book. We note that the Basel III fully loaded common equity Tier 1 capital ratios of the three largest Dutch banks, which account for close to three-quarters of the market, are within a sound range of 10.0%-12.1% according to published reports (see chart 6). The ratios of smaller peers tend to be at a similar or higher level. Most banks have also started to report their leverage ratios, and on this measure they also appear relatively well prepared for the latest Basel requirements, with ratios of 3% or more. However, we note that there is a great deal of debate in The Netherlands regarding the possible implementation of a 4% minimum leverage ratio, which is higher than the 3% minimum
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currently considered as part of the Basel Committee's framework.

Chart 6
By our calculations, Dutch banks appear adequately capitalized. We estimate that the risk-adjusted capital (RAC) ratios of the three leading banks should remain higher than 7%--our threshold for an "adequate" assessment of capital and earnings--as of Dec. 31, 2013 (see chart 7). The RAC ratio is the metric we use to assess financial institutions' capital adequacy and facilitate comparisons among countries and regions. We expect a moderate strengthening in the RAC ratios for most banks in the next 18 months, based on retained earnings and subdued (if any) balance-sheet growth during the period. We also consider the quality of the Dutch banks' capitalization as good, with hybrids representing less than 15% of their total adjusted capital, our preferred measure of capitalization and the numerator of our RAC ratio.
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Chart 7
The EU's Bank Recovery and Resolution Directive envisages that in resolution, at least 8% of a bank's liabilities (equity plus adjusted liabilities) would have to be bailed-in before it could access extraordinary government support. Certain liabilities--such as insured deposits, secured liabilities, and settlements with less than seven days maturity--would likely be exempt from bail-in. We've undertaken a theoretical exercise comparing the amount of equity and subordinated debt at the consolidated group level to total reported liabilities for the four largest banks, as a measure of the buffer lying below senior bondholders (see chart 8). This point-in-time estimate suggests that none of the major Dutch banks currently meets the 8% threshold using just equity and subordinated debt, although Rabobank Nederland is the closest, in our view. We've seen recent issuance of Tier 2 capital instruments by some Dutch banks, but note the absence of Additional Tier 1 (AT1) issuance. We understand that this is partly due to a delay in the clarification of the tax treatment of these instruments in The Netherlands. Looking ahead, we expect most major Dutch banks to start issuing AT1 instruments in the coming quarters, which should support the build-up of larger subordinated buffers, and could also be supportive our RAC ratios for these institutions. However, we don't expect such issuance to push our RAC projections for any of the three largest banks to more than 10%--the threshold for a strong assessment--in the medium term. Nevertheless, such issuance could reduce the downside risk to our assessment of some of the banks' capital positions.
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Chart 8
Rebalancing Of Funding Profiles Aids Liquidity

We consider that Dutch banks have sound funding and liquidity ratios (see table 4), and that these generally meet Basel III requirements ahead of the framework's full implementation in 2018-2019. This has been achieved by lengthening their wholesale funding base, focusing on raising customer deposits, and the disposal or run-off of certain portfolios.
Table 3
Reported Funding And Liquidity Metrics*

(%) Net stable funding ratio Liquidity coverage ratio *As of year-end 2013. ABN AMRO Bank ING Bank Rabobank 114 126
105 Not disclosed 100 >100
While the Dutch banking sector has traditionally been reliant on wholesale funding, we note that this reliance continued to decrease in 2013. Without adjusting for the sale of portfolios or subsidiaries, we calculate that the gap between total reported customer loans and total reported customer deposits for the four largest banks declined by
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more than 92 billion to about 225 billion between the end of 2011 and the end of 2013 (see chart 9). Over the next 12 months, we anticipate limited debt issuance due to muted demand for lending.
Chart 9
Our stable funding ratio for the largest Dutch banks is generally close to 100%, suggesting an absence of structural funding mismatches. Similarly, our ratio of broad liquid assets to short-term wholesale funding is about 1x or more, which supports our assessments of their liquidity as adequate. We don't foresee a deterioration in these ratios, and note that the decrease in cash balances by some of the banks in 2013 was matched by a reduction in short-term wholesale funding. We believe that changes that the largest banks have made to their balance sheets over the past four years have positioned them well in light of stricter regulatory requirements. In our view, the next phase of the transition for these institutions will be increasingly focused on restoring higher profitability levels despite sluggish growth prospects. Provided that the nascent recovery holds, the decreasing cost of risk should support these ambitions, although progress this year should be modest.
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Issuer Review
Table 4
Financial Institution/Counterparty credit rating*; SACP/Comments
Analyst
Achmea Hypotheekbank N.V. (AHB) (A/Negative/A-1, SACP 'bbb') AHB reported a net profit of 21 million for 2013 compared with 36 million in 2012. Excluding the fair value Constance volatility impact (31 million in 2013 versus 42 million in 2012), operating income was down 16% to 55 Hauville million. Interest margins remained under pressure due to the low-interest-rate environment, combined with the bank's policy of building strong liquidity balances in anticipation of a peak in the bank's refinancing needs in 2014. Pre-tax income was also eroded by a 12% increase in operating expenses, reflecting further investments in risk management and higher regulatory-related expenses. Our assessment of AHB's risk position as "strong" continues to be supported by low loan impairment charges of 13 million in 2013, equivalent to 12 basis points (bps) of average loans. Our baseline scenario is that AHB's earnings will be constrained by continued pressure on the net interest margin from higher levels of liquidity, and flat loan growth. In addition, we base our expectation for earnings over the next two years on AHB's continued focus on tight cost control and low impairment charges. In the course of 2014 AHB will merge with Achmea Retail Bank N.V. and Achmea Bank Holding N.V. into one company that will be renamed Achmea Bank N.V., subject to regulatory approvals. We view this announced merger as neutral for AHB's creditworthiness. We continue to view AHB as a "strategically important" subsidiary of Achmea B.V. Bank Nederlandse Gemeenten N.V. (BNG) (AA+/Stable/A-1+, SACP 'a+') BNG realized a net profit of 283 million for 2013 compared with 332 million in 2012. Excluding the fair-value Constance volatility impact (negative 5 million in 2013 versus positive 88 million in 2012), operating income increased Hauville by 11% at 557 million, driven by higher volume and an improved net interest margin. Total new long-term lending in 2013 was up by 7% to 11.9 billion, based on high demand for refinancing of existing loans. Steady retained earnings and modest risk-weighted asset (RWA) growth continue to support our assessment of BNG's capital and earnings as "very strong." BNG's current leverage ratio is 2.3% (as of year-end 2013). Since the beginning of 2011, management has reduced the dividend payout ratio to 25% from 50% in order to position the bank for the Basel III 3% minimum leverage ratio requirement by 2018. BNG remained active in the funding markets in 2013, raising 15 billion of long-term funding, in line with 2012. Our central expectation is that the net interest margin will remain under pressure due to the persistently low long-term interest rates and that loan book growth will be stable. Nederlandse Waterschapsbank N.V. (AA+/Stable/A-1+, SACP 'a+') NWB Bank's net profit was down 15% in 2013 to 33.9 million, mainly due to lower interest income, in a Constance persistently low long-term interest rate environment. NWB Bank's new lending increased to 3.7 billion in 2013, Hauville compared with 2.6 billion in 2011. NWB Bank's current leverage ratio is 1.9% (as of year-end December 2013). Since the beginning of 2011, the bank's policy is that all future profits will be added to reserves (40 million in 2012) to position the bank for the Basel III 3% minimum leverage ratio requirement by 2018. NWB Bank remained active in the funding markets in 2013, raising 9.5 billion of long-term funding, against 12 billion in 2012. We base our view of NWB Bank's modest earnings capacity over the medium term on our expectation that the company's net interest margin will remain at about 20 bps and that loan book growth will be subdued due to public sector spending cuts. SNS Bank N.V. (BBB/Negative/A-3; SACP 'bb+') On Feb. 1, 2013, The Netherlands nationalized SNS REAAL N.V. and expropriated all subordinated obligations Alexandre of SNS REAAL and banking subsidiary SNS Bank. Senior creditors of the group did not bear any losses because Birry the government decided instead to provide additional support to the group in order to avoid any contagion risk. The group's restructuring plan was accepted by the European Commission in December. The plan includes the transfer to the Dutch State of the bank's property finance book (completed at year-end) and the divestment of insurance activities. The nationalization measures led to a sharp rise in the bank's reported core Tier 1 ratio, to 16.6% from 6.1% between end-2012 and end-2013. The bank calculates its ratio on a Basel III fully-loaded basis to be a sound 12.4%. SNS Bank's results - excluding Property Finance which has now been transferred - were characterized by a sharp improvement in net profit in 2013, to a reported 190 million, with the elimination of subordinated debt supporting net interest income despite very small new lending volumes during the year. Loan impairment charges were broadly stable albeit still relatively high at around 40 bps of average loans. Sound inflows of retail deposits and the transfer of the property finance book led to an improvement in its loan-to-deposit ratio to 122% from 148% during the year.
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F. Van Lanschot Bankiers N.V. (BBB+/Negative/A-2, SACP 'bbb+') Van Lanschot reported net profit of 33.5 million for 2013 compared to 11.1 million underlying net profit in Alexandre 2012, excluding an impairment on goodwill and intangibles of 127 million and nonrecurring charges of 45 Birry million. Interest margins remained under pressure due to the low-interest-rate environment combined with the steady reduction in the loan book and partly compensated by repricing. Net fee commissions increased by 8% compared with 2012, mainly driven by management fees that benefited from a 10% increase in discretionary mandates. Costs continued to decrease by 6% to 375 million. Results remained significantly affected by high loan loss provisions at 104 million as a result of the asset quality review performed on the commercial real estate (CRE) and corporate loan portfolios. At year-end 2013, the core Tier 1 ratio amounted to 13%, and the loan-to-deposit ratio increased to 123% from 118% a year earlier, due to loan repayments, lower deposits rates, and a shift to investment products. We believe the bank's appetite for lending will be limited over the next two years, with further single-digit percentage annual reductions in CRE and corporate loan portfolios. We also anticipate that loan losses will gradually decrease in 2014 and 2015 from their 2012 peak, and that operating costs will continue decreasing by single digits as the bank benefits from cost-containment initiatives. Coperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland) (AA-/Negative/A-1+; SACP 'a+') Rabobank Nederland's reported net profit of 2 billion, almost flat over 2012, was distorted by a range of Alexandre material special items. The main item was its 1,585 million gain on the sale of its asset manager, Robeco, Birry which more than offset a 774 million charge related to interbank-rate settlements. Domestic activities were also affected by a restructuring provision as the bank implements wide-ranging initiatives to reduce its cost base. All in all, underlying performance was down during the year, due largely to a further increase (by 12%) in loan impairment charges--a trend which started in mid-2011--to close to 59 bps of average loans from 52 bps a year earlier. The weakening asset quality was attributable to the difficult domestic economy, which again caused relatively high losses, particularly in the real estate sector and domestic SMEs. The Dutch mortgage portfolio, which represents almost half the total loan book, continues to demonstrate very strong asset quality (loan impairment charge of 6 bps). The customer loans-to-deposit ratio was broadly flat at 145%. The bank estimated its Basel III fully loaded common equity Tier 1 ratio at 11.1%, and its Basel III leverage ratio at 4.8%. Management also believes that it is well placed to meet Basel III requirements regarding liquidity and funding, with a net stable funding ratio estimated at 114% and a liquidity coverage ratio of 126% at year-end 2012. ABN AMRO Bank N.V. (A/Stable/A-1; SACP 'bbb+') ABN AMRO reported a net profit of 1,160 million for 2013, almost flat over 2012. However, reported numbers Alexandre were distorted by the exceptional release of provisions totaling 685 million on the Greek and Madoff files. Birry Excluding these, net profit was down to about 750 million. The deterioration in the bank's underlying profit was largely attributable to a 17% increase in underlying loan impairments, mainly on SME, consumer lending and mortgages, and weak activity levels in the markets activities (which management has placed under review). Net interest income was up 7%, with improving margins more than compensating for the decrease in total customer loans partly on the back of accelerated mortgage repayments. Operating expenses increased 7% as a result of higher pension costs, leading to a deterioration in the cost-to-income ratio to 64% from 60% year-on-year. Apart from the private banking division, which saw a sharp increase in profitability, the performance of the other divisions (Retail Banking, Commercial Banking, and Merchant Banking) were all down owing to the difficult economic environment in The Netherlands in 2013. We observe some improvements albeit slow in the outlook for the Dutch economy. However, the lag effect of the past protracted downturn will, in our view, likely slow down the recovery in the banks performance in 2014. The bank estimates that it already meets Basel III requirements, with a fully-loaded common equity Tier 1 ratio of 12.2% and a fully-loaded leverage ratio of 3.5%. Similarly, it estimates its liquidity coverage ratio at 100% and its net stable funding ratio at 105% at end-2013. The bank announced a dividend for the year of 350 million (150 million of which was already paid as an interim dividend). ING Bank N.V. (A/Stable/A-1; SACP 'a-') ING Bank reported a broadly net profit of about 3 billion for 2013. Exceptional items during the year were Alexandre substantially smaller than in 2012, when reported numbers were distorted by gains on the sales of ING Direct in Birry Canada, the U.S., and the U.K., which more than offset exceptional expenses, including the settlement with the U.S. authorities. Excluding one-off items, underlying profit increased in 2013, reflecting the benefits of the bank's diversification, despite a difficult economic backdrop in The Netherlands during the year. The improving performance of retail activities outside The Netherlands and of the commercial banking division more than offset the weaker profitability of retail banking in The Netherlands. Operating revenues were broadly stable year-on-year, with the continued improvement in the net interest margin offsetting the reduction in total customer loans. Operating expenses continued on a marked downward trend, with an average annual reduction of about 6% between 2011 and 2013. Loan impairment charges increased by close to 8%, largely driven by mortgages and business lending in The Netherlands. The bank's Basel III fully loaded core Tier 1 ratio stood at
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10% at end-2013, its liquidity coverage ratio was estimated at more than 100% and its leverage ratio at close to 4%. In February 2014, the group and the Dutch state completed the unwinding of the Illiquid Assets Back-up Facility (IABF). We expect further pressure on profitability in the first half of 2014, with possible gradual improvement later in the year. However, in our view, internal capital generation should remain sufficient for the bank to be in a position to meet the planned repayment of the final tranche of government capital in May 2015 (outstanding total of 700 million excluding premium). LeasePlan Corp. N.V. (BBB+/Positive/A-2, SACP 'bbb-') LeasePlan reported a net profit of 326 million in 2013, up 35% on the previous year, exceeding our Rayane Abbas expectations for the bank. At the same time, it slightly increased its vehicle fleet by 1.5%. The bank's net interest margin remained healthy, while gross profit rose by about 14% year on year and was well diversified. In particular, gross profit was boosted by strong results of vehicles sold, which increased almost six-fold, to 153.9 million in 2013 from 27.5 million in 2012, mostly thanks to a rise in the prices for second-hand vehicles in almost all countries where LeasePlan operates. Consequently, the bank's cost-to-income ratio improved to 63% in 2013 from 68% in 2012. LeasePlan has reported very low credit losses since 2010 and we expect them to remain low in 2014. We see the bank's mostly wholesale funding profile as a rating weakness, although its significant amount of savings deposits (4.2 billion as of Dec. 31, 2013) brings some diversification benefit and significantly reduces the bank's dependence on the unsecured wholesale market. Capitalization remains strong, with a Core Tier 1 ratio of 16.9% at year-end 2013, a noticeable increase from the 15.6% of a year earlier. NIBC Bank N.V. (BBB-/Negative/A-3; SACP 'bbb-') NIBC Bank's reported net profit was down to 22 million 2013 from 73 million in 2012. The deterioration was largely attributable to reduced financial gains and an increase in loan impairment charges. More positively, we note a continued increase in net interest income, by about 16% over 2012, and an 8% reduction in operating expenses owing to the measures implemented by the bank over the past four years. The increase in loan impairment charges to 62 million from 45 million was due to adverse economic conditions, although 2013 charges remain broadly in line with peers as a proportion of customer loans. While the bank remains more reliant on wholesale funding than most domestic peers, we observe that initiatives to raise retail deposits through its NIBC Direct franchise have led to a rapid improvement in the loan-to-deposit ratio to around 170% at year-end 2013 from close to 390% at year-end 2010. The bank estimates its net stable funding ratio at year-end 2013 to be 107% and its liquidity coverage ratio to be 150%. NIBC Holdings core Tier 1 ratio at end-2013 stood at a sound 14.7%. We expect that early signs of a pick-up in activity levels in the second half of 2013 could lead to some gradual improvement in revenues in 2014, supporting a moderate improvement in profitability. NIBC announced in March 2014 the acquisition of Gallinat Bank, a small bank specializing in leasing and financing to midsize companies in Germany. We expect the transaction to further entrench NIBC's German franchise and support a moderate increase in the diversification of its funding sources.
Alexandre Birry
Contact Information
Table 5
Credit analyst Location Telephone (33) 1-4420-7302 E-mail rayane_abbas@standardandpoors.com
Rayane Abbas, Ratings Specialist Paris Alexandre Birry, Director Nigel Greenwood, Director Constance Hauville, Analyst Dhruv Roy, Director London London Paris London
(44) 20-7176-7108 alexandre_birry@standardandpoors.com (44) 20-7176-7211 nigel_greenwood@standardandpoors.com (33) 1-4420-6749 constance_hauville@standardandpoors.com
(44) 20-7176-6709 dhruv_roy@standardandpoors.com
Related Criteria And Research

Related criteria: Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
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Related research: The Three Key Risks For Global Banking In 2014 Are The Economy, Regulations, And Government Support, March 19, 2014 Standard & Poor's To Review Government Support In European Bank Ratings, March 4, 2014 Banking Industry Country Risk Assessment: The Netherlands, Nov. 8, 2013
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com
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Industry Report Card:

Why A Slow Recovery Will Continue To Weigh On Dutch Banks In 2014

Industry Report Card:

Why A Slow Recovery Will Continue To Weigh On Dutch Banks In 2014

Components Of Standard & Poor's Ratings On Dutch Banks

SNS Bank N.V.

bbb+ Weak (-2)

Strong Moderate Below (+1) (-1) Average/Adequate (-1)

-Adequate (0) Moderate (-1)

Group (core) GRE

Strong Average/Adequate (+1) (0)

BBB+/Negative BBB+/Stable BBB+/Positive

Strong Adequate Average/Adequate (+1) (0) (0)

bbb+ bbb+ bbbSyst. imp. Group

bbb+ Weak (-2)

Components Of Standard & Poor's Ratings On Dutch Banks (cont.)

Royal Bank of Scotland N.V. (The)

SACP--Stand-alone credit profile. GRE--Government-related entity. Syst. Imp.--Systemic importance.

Sovereign Action Sparks Downgrades

The Economy Is On The Turn

The Housing Market Stirs After A Five-Year Slump

Cost Management Remains In The Spotlight

2013 Results For The Top Four Dutch banks

394,404 787,644 836,068 130.5 46.0 107.0 43.0 117.8 38.0

currently considered as part of the Basel Committee's framework.

Rebalancing Of Funding Profiles Aids Liquidity

Reported Funding And Liquidity Metrics*

105 Not disclosed 100 >100

Financial Institution/Counterparty credit rating*; SACP/Comments

(44) 20-7176-7108 alexandre_birry@standardandpoors.com (44) 20-7176-7211 nigel_greenwood@standardandpoors.com (33) 1-4420-6749 constance_hauville@standardandpoors.com

(44) 20-7176-6709 dhruv_roy@standardandpoors.com

Related Criteria And Research

Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com

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