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Tuesday, 8 March 2011

Putting the thermometer in the banks(1). The annual results of Rabobank and ABN AMRO.

Rabobank (RABO) loses its triple A rating

Standard&Poor’s decided on November 29 to downgrade the Rabobank to AA (Outlook stable) from AAA, effectively ending the Rabobank’s stint as the world’s only commercial bank with an AAA-rating. There are still some banks  left with a Triple-A rating, but these are locally operating, semi-government, (agricultural) development banks in several countries in Europe.

The reason for this downgrade had not so much to do with a deterioration of credit quality at the Rabobank itself, but with increased risk in The Netherlands as a market and the relative reliance of Dutch banks on the wholesale market for funding. S&P ( writes in its report:


Following a review of Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland or, alternatively, group) under Standard & Poor's revised bank criteria (published on Nov. 9, 2011), we have lowered our long-term rating to 'AA' from 'AAA'.

At the same time, we affirmed the 'A-1+' short-term rating. The outlook is stable.

Our ratings on Rabobank Nederland reflect our view of its 'a-' anchor, very strong business position, adequate capital and earnings, strong risk position, average funding, and adequate liquidity. Our ratings also reflect our view of Rabobank Nederland's high systemic importance in The Netherlands.


The 'a-' anchor draws on our Banking Industry Country Risk Assessment (BICRA) methodology and our view of the weighted-average economic risk in the countries in which Rabobank Nederland operates, based on the geographic distribution of its private sector customer lending--The Netherlands (75%), the rest of Europe (10%), U.S. (10%), and the rest of the world (5%).

The economic risk score for The Netherlands is '2' on a scale of 1-10 (1 is the lowest risk and 10 is the highest), and the weighted-average score for the countries in which Rabobank Nederland operates is close to that level. Our industry risk score for Rabobank Nederland is based solely on its home market of The Netherlands.

The sector's relatively large reliance on wholesale funding is partly attributable to households' propensity to save in life insurance and pension products. We consider Rabobank Nederland's business position to be "very strong", reflecting its exceptional stability and resilience, prudent management and strategy, and leading competitive position in its domestic market.

The long-term counterparty credit rating is one notch higher than the SACP, reflecting our view that Rabobank Nederland has high systemic importance in The Netherlands and the Dutch government is supportive of the banking sector.

The Rabobank has often boasted on its AAA credit rating and used it as a marketing tool in older commercials. That has come to an end now, but the Rabobank will remain one of the strongest capitalized, commercial banks in the world.

Future risk for the Rabobank will probably hide in the extremely large mortgage market in The Netherlands (with a value of 120% of GDP), where the bank is the biggest player and in the overvalued Dutch Residential Real Estate (RRE) that is represented heavily at the balance sheets of the Dutch banks.

Other ratings of Dutch banks are:
              ING Groep NV (INGA)   : A
              ABN AMRO NV            : A
              SNS Bank NV              : A-

Emergency law for nationalization ING Groep (INGA)

The Dutch newspaper NRC ( picked up a story that emerged at the Dutch parliamentary investigation on political actions during the credit crisis. In 2009, the Dutch government had a secret emergency law ready ‘at the shelf’ for a big bang nationalization of the largest Dutch bank ING Groep, that had a balance sheet value of about € 1.3 trn at the time. The NRC writes:

Early in 2009, The Dutch ministry of Finance prepared a secret law that should enable a total nationalization of ING in one big bang. This was stated by senior official Ronald Gerritse to the parliamentary investigation commission, chaired by Jan De Wit of the Socialist Party (SP).

In February 2009, top-secret consultations were held on the various options that the Dutch state had to save the destitute ING Bank. One of the options was using an emergency law to fully nationalize the bank in one big bang. According to NRC reporter Erik van der Walle who was present at the hearing, this was the nuclear option for the Dutch government, as it was very risky. ING had then a balance total of €1,303 trn, while the Dutch GDP was €594 bln.

I´m glad that ING survived in 2009 without being nationalized. But we have been at the edge of the financial abyss and luckily we didn´t fall in it then.

And I´m glad that this news came to the surface during the parliamentary investigation, as it confronts us again with the vulnerability of a small country with a much too large financial industry. During good times it seems that the sky is the limit, but in bad times the whole industry can blow up in a matter of days, taking the whole country down in the process.

Dutch banks will pinch off lending for Small and Medium Enterprise (SME) in 2012

The Dutch newspaper Het Financieele Dagblad or FD ( writes on the declining money supply available for business lending at the Dutch banks in 2012.

According to economic advisor and former CFO of largest Dutch pension fund ABP Jan van de Poel, business lending by banks for Small and Medium Enterprise (SME) will drop by 20% in 2012. ABN AMRO and ING (INGA) confirm that business lending will decline.

Van de Poel: ‘a banker must put the equal amount of energy in a small and a large account. The transaction costs for SME lending are therefore high, compared to the yields. It makes sense that lending will be pinched off. It’s the easy way out’.

According to the former professor in Business Accounting, the SME is victimized by stricter government regulation for the banks as well as lending.

A spokesperson of ABN Amro acknowledges that lending will decline in 2012. ‘We expect a mild recession. This means that there will be less demand for credit and thus that the total flow of credit for SME will reduce’. A spokesperson of ING states that restraining measures make lending to entrepreneurs much harder. ‘The stalling economy will cause a dropping demand for credit. However, we think that a decline of 20% is exaggerated’.

Business lending is like the life-blood for SME companies. Therefore the credit supply should not totally stop. But there has been too much credit until 2008 and the resulting credit crisis caused a new risk-awareness at the banks. I can’t blame those for being more cautious.

And not only will the demand for credit decline heavily in a stalling economy, but companies that developed new ideas, services or products will have an extra hard time to market those new inventions. Banks should not put their heads in the gallows by supplying undeserved credits to poor entrepreneurs, but should assess the risk and potential successes of companies, just like they are supposed to do.

Liquidity crucial for banks next year

In a natural follow-up on the previous article, the FD ( writes on the potential liquidity problems that could be ahead for the Dutch banks.

Banks have a hard time at the capital markets currently. How do Dutch banks arrange their debt redemptions?

Various Dutch bankers would feel relieved if the European debt crisis would be overcome soon. These bankers need to roll over their debt that is due for redemption in 2012. And without the burden of the debt crisis it would be much easier to refinance debt at the capital markets. Now these markets are totally locked for many banks. 

ABN Amro, ING and Rabobank are among the banks that are planning to enter the capital markets for rolling over their debt next year. These banks could collect more money in 2011 than they needed for rolling over debt, but this surplus is insufficient for covering the refinancing needs in 2012.

When all redemptions must be rolled over with new debt, ABN Amro should collect €8bln, ING €8.9bln and Rabobank €19bln. The latter stated that it was planning to collect €20-€25bln from the capital markets next year.

The three banks already took a deterioration of the credit markets into account. They grabbed every possibility to collect extra money on top of the amounts needed for rolling over debt. The banks didn’t invest this money for profit, but for many banks liquidity is more important now than revenues.

This whole article is a must-read for people that have knowledge of the Dutch language. It proves once again how messed up the financial markets currently are: the ECB might be the lender of last (and only) resort, as the banks don’t trust each other enough for supplying credit.

The savers can be the winners in this situation, as the banks are probably willing to supply interest rates well above the ECB refi-rate or perhaps even above the LIBOR and Euribor rates to fulfill their refinancing needs. This is a good development as the small savers have been the victims of the extremely low interest rates during the last 15 years. Even with a current interest of 3%, the yields of a saving's account are barely enough to compensate the official inflation rates.

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