The negative outlook for the Dutch banking system reflects the adverse impact the country's recent economic recession is expected to have on Dutch banks, Moody's Investors Service said in a new report, expecting that the recent recession will drive deterioration in bank financial fundamentals, including rising non-performing loans (NPLs), lower earnings, and, potentially, an erosion in capital levels.
Following two years of negative growth, Moody's forecast that GDP will rise a modest 0.4% in 2014. The composition of this tepid recovery is mixed: exports have begun to show improvement, while domestic consumption may take more time to rebound. The unemployment rate continues to rise and low domestic consumption and consumer confidence also reflect declining 'wealth effects' stemming from residential real estate price declines, as well as concerns regarding mortgage market and pension reforms.
Moody's notes that Dutch banks' loan books, which make up about three-quarters of system assets, are relatively evenly split between domestic residential mortgages and corporate loans. Problem loan levels are low, at 2.7% as of June 2013, but they are up from 2.3% at end-2009 due to a deterioration in corporate loan books, particularly among commercial real estate and SME exposures. However, while corporate bankruptcies are on the rise, and residential housing prices have fallen 20% since their 2008 peak, ultimate loss rates on both mortgages and corporate loans are low, with reported credit costs for H1 2013 of 17 bps and around 50 bps, respectively.
The negative outlook is also driven by Dutch banks' still heavily reliance on wholesale funding, a credit negative as this exposes them to changes in investor confidence. Balancing this issue, the Dutch banks have strong liquidity buffers, consisting of cash, central bank deposits, and own-mortgage securitizations. The banks' securitizations are included in liquidity buffers due to their eligibility as central bank financing collateral.
Moody's negative outlook also reflects growing uncertainty over the Dutch state's willingness to extend support to creditors and depositors in the event of market turmoil. This stance is evidenced by comments by public authorities at the time of the rescue of the SNS REAAL group in early 2013, when subordinated bondholders suffered a total loss. It is also evidenced by EU-wide initiatives to build a common resolution regime which, as envisioned, will include provisions for the bail-in of creditors, as deemed necessary.
However, Moody's notes that relative to European peers, the banking system is in relatively sound financial health overall, with low NPLs, and above-average capital ratios and profitability.
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