Negative outlook for Dutch banking system

The outlook for the Dutch banking system remains negative, Moody's Investors Service said in its new outlook for the Netherlands, reflecting the many uncertainties and risks associated with the still ongoing radical transformation of the country’s banking system.
Moody's noted that the Dutch banking system has seen major upheavals since last year, as the repercussions of the global banking crisis have continued to be felt. This is evident from the ongoing restructuring of the sector, which involves both consolidation as well as fragmentation of the leading players in the banking market. This restructuring is both broad (affecting much of the Dutch financial system) and deep (resulting in lasting and meaningful change).
However, Moody's also noted that there have been improvements over the past year, albeit insufficient to offset the remaining risks.
"In our view, the operating environment is better than a year ago with, among other factors, a return to positive economic growth, deleveraged and more conservative balance sheets at banks as well as increased capitalisation, which was made possible in large part due to the Dutch government's intervention," explained Nick Hill, author of the report.
"However, the extent and timing of the synergies and other benefits that can be expected from the major restructuring of most of the key players of the Dutch banking system remain unclear, as do the nature and duration of the government's involvement."
In the report, Moody's said that banks are still challenged by significant operational risks, the possibility of lower demand and higher credit costs due to the better but low domestic economic growth, as well as the general fragility in the broader EU economy and by non-negligible funding challenges. Having refocused on the domestic market, Dutch banks have only limited exposure to the more indebted EU peripheral countries, yet this retrenchment could intensify competition.
"Under such conditions, the Dutch banking system will be challenged to return to comparatively normal profit levels. Moreover, although state aid has played a critical role in improving the future prospect of the Dutch system, the likelihood of this assistance being repeated in the future remains uncertain," said Hill.