Wed Apr 4, 2012 4:55am EDT
(The following statement was released by the rating agency)
Apr 04 - Fitch Ratings has affirmed Netherlands-based Rabobank Group's (Rabobank) Long-term Issuer Default Rating (IDR) at 'AA' and its Viability Rating (VR) at 'aa'. The Outlook on the Long-term IDR is Stable. Fitch has also affirmed Rabobank's central organisation, Cooperatieve Centrale Raiffeisen-Boerenleenbank BA's (Rabobank Nederland) Long-term IDR at 'AA'. At the same time, the agency has upgraded Friesland Bank's (FB) Long- and Short-term IDRs to 'AA' from 'BBB' and to 'F1+' from 'F3' respectively. The Outlook on the Long-term IDR is Stable. FB's Support Rating has also been upgraded to '1' from '3'. A full list of rating actions is at the end of this commentary.
The rating actions reflect the implications for Rabobank's, Rabobank Nederland's and FB's ratings following the acquisition of FB by Rabobank Nederland on 1 April 2012. Rabobank Nederland has acquired from Stichting Friesland Bank (unrated) 100% of the shares of the holding company fully owning FB. Both the Dutch competition and banking regulation bodies have approved the transaction.
FB's IDRs and Support Rating now reflect an extremely high likelihood of support from Rabobank. FB is owned by the group's central organisation. Its operations will be integrated into Rabobank over the next two years and Rabobank has committed to assume joint and several liability for all FB's liabilities under a '403-statement', based on Article 2:403 of the Dutch Civil Code. Consequently, FB's Long- and Short-term IDRs have been aligned with those of Rabobank and the ratings of FB's outstanding debt have been aligned with those of similar instruments issued by Rabobank. These ratings will now move in line with their equivalent Rabobank ratings.
Fitch has withdrawn FB's Viability Rating because it is no longer considered analytically meaningful. In light of the merger and integration, Fitch also believes it is no longer possible to undertake a prospective, analytically meaningful assessment of FB's standalone risk profile. Fitch has affirmed and withdrawn FB's 'BB+' Support Rating Floor because the primary source of future support is now likely to be Rabobank, rather than the Dutch state and, under Fitch's criteria, SRFs are not usually assigned under such circumstances.
For Rabobank and Rabobank Nederland, the impact of the acquisition is neutral or at worst marginally negative for the group's key credit metrics, largely because FB is a small bank relative to Rabobank (at end-June 2011 FB had EUR11.7bn of assets relative to EUR732bn for Rabobank at end-2011).
The acquisition will have a negligible impact on Rabobank's geographic and product mix, corporate governance (FB's executive board will stand down), profitability, asset quality, market and operational risks, funding and liquidity and capitalisation. Both banks mainly engage in Dutch retail and commercial banking, but the FB acquisition will strengthen Rabobank's franchise in the north of the country. Rabobank's asset quality is strong and superior to FB's, but FB's higher non-performing loan ratio will have a negligible impact on Rabobank's given the size difference.
Similarly, the transaction is too small for it to have a material impact on Rabobank's funding and liquidity risk profile. Fitch calculates that the acquisition will weaken Rabobank's Fitch core capital (FCC)/weighted risks ratio by only around 10bp-20bp. Rabobank had a strong FCC ratio of 12.5% at end-2011 and Fitch expects it to remain a major rating strength of the group. Overall, Fitch does not expect any major obstacle or challenges to the integration of FB's assets into Rabobank given their similar cultures and operations and the small size of FB relative to Rabobank.
FB stated that the main trigger for the transaction was the significant challenges regarding its capitalisation ahead of the Basel III implementation. Fitch notes that internal capital generation at the bank has been poor over the past three years with modest profits generated by its banking business wiped out by large impairments on equity holdings. The bank's reliance on the wholesale markets has resulted in high funding costs in an environment of low investor appetite for senior unsecured debt. FB's banking franchise, in a relatively small region of the Netherlands, has been insufficiently strong to generate an adequate return.
Rabobank's high ratings continue to be driven by its robust capitalisation, well managed liquidity, resilient earnings and its generally low risk appetite and profile. Given the group's high exposure to the Dutch market, its ratings are sensitive to a change in Fitch's assumptions around key economic and market variables for the country, for example should there occur a long and protracted recession and significant rise in unemployment, particularly if combined with a sharp correction in property prices. This is because of the group's large market share of domestic mortgage loans, domestic SME lending and exposure to the real estate sector. These would negatively affect the group's net earnings, capital generation, access to/cost of wholesale funding and hence its ratings.
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