Moody's: Netherlands' banking system outlook remains negative
Date: Dec 14, 2012
Categories: Results & Ratings
Paris, December 12th 2012 – The outlook for the Netherlands' banking system remains negative, says Moody's Investors Service in a new Banking System Outlook published today. The outlook principally reflects the difficult operating environment that will persist throughout Q4 2012 and 2013, which, combined with structural economic weaknesses, will negatively impact the banks' financial profiles over the 12-18 month outlook period. The structural weaknesses include (1) the high household indebtedness; (2) the banking system's high leverage; and (3) banks' high reliance on wholesale funding. In addition, commercial-real estate portfolios, and to a lesser extent, residential mortgages, will be the drivers of higher loan losses.
The new report, entitled "Banking System Outlook: The Netherlands", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
"The main driver of our negative outlook on the Dutch banking system is the domestic operating environment, which will remain difficult for financial institutions. This reflects the currently weak macroeconomicconditions in the Netherlands and associated risks resulting from the high leverage of domestic households", says Stephane Herndl, a Moody's Assistant Vice President-Analyst at Moody's.
Moody's says that the Netherlands' export-oriented economy is deeply integrated within the European Union and is therefore exposed to contagion from the ongoing euro area debt crisis, and regional economic weakness.
"Dutch banks' asset quality has remained strong in recent years. However, there are risks of increasing deterioration within the domestic commercial real estate sector, which is undergoing a period of severe stress, and, to a lesser extent, within residential mortgage portfolios, driven by the weakening domestic economy", says Mr. Herndl.
Despite recent improvements in regulatory capital ratios, Dutch banks' leverage remains very high; in Moody's view, even incremental increases in credit losses would be credit negative for the banks' asset quality.
Dutch banks' heavy reliance on wholesale funding exposes them to negative changes in market sentiment. However, Moody's notes that the banks have generally retained access to wholesale funding, particularly covered bonds and securitisation markets, as a result of the strong past performance of the underlying collateral. Dutch banks also have large liquidity buffers; a sizeable portion of these buffers comprises own-securitisations, which may be less readily marketable in the event of stress but would facilitate access to central bank funding, if needed.
Moody's expects pressure on pre-provision profitability as funding costs rise and competition for domestic retail business intensifies. The rating agency also anticipates that the cost of risk will rise from its current low levels, primarily as a result of the stress affecting the domestic commercial real estate sector, and to a lesser extent, the domestic home loan market.
Despite the introduction of the Dutch Intervention Act, the probability of systemic support remains high for depositors and senior bondholders of the four largest banks of the system. This reflects the rating agency's view that the tools extended by the Act, such as the transfer of assets to 'bad-banks' would be difficult to deploy in the case of large and systemically important banks, and that the most likely form of support would be nationalisation.
Re-disseminated by The Asian Banker