The overall outlook for the ratings of Dutch banks remains stable, reflecting the sector’s sound financial condition, the low risk profiles of the major banks and a robust regulatory environment but also a relatively low level of profitability, Moody’s Investors Service said in its new Banking System Outlook for the
Nonetheless, selective upgrades or downgrades remain possible and would likely be driven largely by potential ownership changes or acquisition-related developments.
Moody’s expects that the two large banks — ING Bank and Rabobank — will continue to dominate the market and that ABN AMRO will also remain of systemic importance despite the break-up of its operations, which will primarily impact its foreign activities — principally in Italy and Brazil — and its Global Wholesale and International Retail client businesses. ABN’s Dutch domestic retail and SME businesses will be integrated with those of Fortis Bank Nederland (Holding).
“The ABN takeover may offer some of the smaller Dutch institutions an opportunity to increase their market shares marginally in particular segments, such as mortgages. However, we do not anticipate any regulatory developments or dramatic realignments of product pricing — which already reflects the competitive nature of Dutch banking — that would be likely to undermine the entrenched positions of the big players,” said Lynn Exton, a Moody’s Senior Vice President-Regional Credit Officer and co-author of the report.
Moody’s also notes that all Dutch banks’ ratings continue to reflect the mature, liberalised and competitive nature of the domestic financial markets, whilst intense local competition makes it difficult for new entrants or smaller players to pursue an aggressive policy that could weigh on the inherent profitability of financial products in the long term.
Nonetheless, one key feature of the Dutch banking sector is the modest scale of the big banks’ recurring earnings, which is largely a result of their high operating costs. However, Moody’s recognises the ongoing progress that they are making in improving their operating efficiency and quality of risk management.
“An analysis of the Dutch banking system has to take into account the considerable differences in the business profiles of the various banks. For example, ABN AMRO has hitherto earned most of its money outside the Netherlands but going forward will be split up with Fortis running domestic retail and SME activities, while Rabobank is primarily a domestic bank but with material and growing overseas operations and the smaller banks tend to be wholly focused on Dutch business,” Exton explained. In this context, bank-specific factors continue to be the key drivers of individual institutions’ ratings.
To date, the sharp deterioration in global credit market conditions that ensued from the sub-prime mortgage market turmoil has had limited impact on the Dutch banking industry.
Moody’s has taken only one rating action on a Dutch bank as a direct consequence of this crisis but does not exclude taking more actions if necessary as the situation continues to develop. The future impact of the sub-prime crisis on Dutch banks will depend on the extent to which the reduced willingness to carry risks and the lower valuations affect current activities.
