Senior Contingent Notes upgraded to A3(hyb) from Baa2(hyb)
NOTE:On November 25 2016, the press release was corrected as follows: In the debt list under Rabobank Nederland, New York Branch outlook was added to Aa2 Long-term Deposit Note/CD. Revised release follows.
London, 24 November 2016 -- Moody's Investors Service today affirmed Rabobank's long-term
deposit and senior unsecured debt ratings of Aa2. In addition,
Moody's affirmed Rabobank's baseline credit assessment (BCA)
and adjusted BCA of a2. However, Moody's revised the
outlook on long-term deposit and senior unsecured debt ratings
to negative from stable. At its current level, the bank's
BCA largely incorporates the expected improvements resulting from the
bank's ongoing restructuring programme while the negative outlook
reflects the execution risks inherent to the transformation.
Short-term deposit and senior unsecured debt ratings were affirmed
at Prime-1. In addition, Moody's affirmed the
bank's subordinated debt rating of A3, non-cumulative
tier 1 capital securities rating of Baa2(hyb) and the additional tier
1 (AT1) securities rating of Baa3(hyb). Moody's also affirmed
the bank's long-term and short-term counterparty risk
assessments (CR assessments) of Aa1(cr) and Prime-1(cr).
The ratings of Rabobank's supported entities were also affirmed.
Concurrently, the rating agency upgraded Rabobank's EUR1.25
billion Senior Contingent Notes (SCNs) maturing in 2020 to A3(hyb) from
Baa2(hyb).
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
The affirmation of Rabobank's BCA of a2, which is at the high
end of BCAs globally, is driven by the strong financial fundamentals
of the bank, in particular its solid asset quality and high level
of capitalization. Furthermore, the current BCA incorporates
the additional improvements expected from a broad ongoing restructuring
which has resulted in a far-reaching overhaul of the bank's
governance structure and anticipates significant staff reductions and
other cost-cutting and revenue generation initiatives.
Rabobank's asset quality has substantially improved, as reflected
by decreasing loan impairment charges, which represented only 7
basis points of gross loans during the first six months of 2016.
A period of lacklustre results stemming from losses incurred in several
sectors, in particular the Dutch commercial real estate, has
come to an end, and indeed during the first half of 2016 Rabobank
has been able to reverse some of the provisions linked to these exposures.
Moody's now expects asset risks and related provisioning to remain
benign over the foreseeable future. The bank's capital levels,
with a Common Equity Tier 1 ratio of 13.4% at 30 June 2016,
provide a good level of loss-absorption. Underlying profitability
has also recovered during the first six months of 2016, thanks to
lower loan losses and decreasing operating expenses, despite a number
of extraordinary items impacting reported earnings. That being
said, Rabobank's recurring profitability remains modest,
which has prompted a far-reaching cost-cutting plan currently
being implemented.
Rabobank has adopted a new governance structure, merging the 106
local Rabobanks into a single bank in January 2016. This was an
important step that will enable the bank to radically streamline its organization
and eliminate inefficiencies, which Moody's expects to yield
significant improvements over the next three years. The bank targets
a head count reduction of 12,000 full-time employees,
or 23% of its workforce, by year-end 2018, of
which 1,900 was already achieved in the first half of 2016.
In the twelve months ending June 2016, operating expenses decreased
by 6.2% as a result of these measures, in addition
to a reduction of 2,000 employees in 2015. However,
the bank's underlying cost-to-income ratio was a relatively
high 59% during the first half of 2016, compared to its target
of just 50% by 2020. The bank is also seeking a reduction
in wholesale funding to below EUR150 billion by 2020, 25%
below its current level. This is a positive development given the
bank's extensive use of senior bond funding which Moody's
believes to be typically more sensitive to changes in market sentiment
than customer deposits.
The affirmation of the BCA of a2 incorporates the improvements of the
bank's financial fundamentals already achieved, but also to
a large extent the expected improvements from the ongoing restructuring.
The affirmation of Rabobank's long-term debt and deposit
ratings of Aa2 results from (1) the affirmation of the BCA and adjusted
BCA of a2, (2) two notches of uplift under Moody's advanced
Loss Given Failure (LGF) analysis and (3) Moody's assumption of
a moderate probability of government support for both deposits and senior
unsecured debt, resulting in one notch of uplift.
UPGRADE OF SENIOR CONTINGENT NOTES
The upgrade of Rabobank's EUR1.25 billion SCNs to A3(hyb)
from Baa2(hyb) reflects the evolution of the notes towards non-viability
contingent capital securities with a senior debt host from 'high
trigger' contingent capital securities.
The write-down trigger of the SCNs is an Equity Capital Ratio (ECR)
of 7%. The ECR was introduced by Rabobank prior to the definition
of common equity tier one (CET1) under the current capital requirements
directive (CRD IV). The ECR was 14.9% at end-June
2016, higher than the bank's phased-in CET1 ratio of 13.4%
and significantly higher than its "fully-loaded" CET1
ratio of 12.5%. The ECR does not take into account
new regulatory capital deductions in its numerator and therefore it increases
more rapidly than the bank's CET1 ratio as CRD IV provisions are progressively
introduced.
The difference between the ECR and the CET1 ratio was 1.5 percentage
points at end-June 2016, up from 0.8 percentage points
at year-end 2014. This in turn means that the 7%
ECR trigger is now equivalent to a CET1 trigger of 5.5%
(from 6.2% previously), which in Moody's view
means there is little difference between the ECR trigger and standard
non-viability instruments. Given a loss-given-default
of 75% under the terms of the instrument, Moody's has
upgraded the instrument by two notches to A3, one notch below the
bank's BCA, and in line with non-viability Tier 2 instruments.
This reflects both a probability of default of the security in line with
the bank's probability of requiring extraordinary level of support to
avoid a default, as well as the high loss severity of the notes.
NEGATIVE OUTLOOK
Moody's BCA of a2 is relatively high and as noted above substantially
incorporates both the bank's current fundamentals and the prospects
of further improvements under its restructuring. Yet these benefits
are subject to some uncertainty and Moody's has therefore assigned
a negative outlook to the bank's deposit and senior unsecured debt
ratings to reflect the possibility that they are not fully achieved.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade of the BCA, and consequently of the deposit and senior
unsecured debt ratings, is unlikely in the foreseeable future,
as reflected in the negative outlook on the bank's ratings.
The BCA could be downgraded if (1) the bank were unable to improve its
profitability as stated in its restructuring plan objectives; (2)
asset risks increased due to renewed weakness in the Dutch real estate
sector or rising deficiencies in the corporate loan portfolio; and/or
(3) the bank were to be unable to reduce wholesale funding as per its
stated objectives or if its funding and liquidity profiles deteriorated.
Rabobank's long-term deposit and senior unsecured debt ratings
would be downgraded as a consequence of (1) a downgrade of the BCA and/or
(2) increased loss-given-failure for senior debt and deposit
holders due to lower levels of subordinated debt or a lower level of pari
passu debt benefiting these creditors.
LIST OF AFFECTED RATINGS
Issuer: Rabobank
..Upgrades:
....Senior Contingent Notes, upgraded
to A3(hyb) from Baa2(hyb)
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Long-term Deposit Ratings,
affirmed Aa2, outlook changed to Negative from Stable
....Long-term Deposit Note/CD Program,
affirmed (P)Aa2
....Short-term Deposit Ratings,
affirmed P-1
.Short-term Deposit Note, affirmed (P)P-1
....Short-term CD Program, affirmed
P-1
....Long-Term Issuer Rating,
affirmed Aa2, outlook changed to Negative from Stable
....Senior Unsecured Regular Bond/Debenture,
affirmed Aa2, outlook changed to Negative from Stable
....Senior Unsecured Medium-Term Note
Program, affirmed (P)Aa2
....Backed Senior Unsecured Regular Bond/Debenture,
affirmed Aa2, outlook changed to Negative from Stable
....Subordinate Regular Bond/Debenture,
affirmed A3
....Backed Subordinate Regular Bond/Debenture,
affirmed A3
....Pref. Stock Non-cumulative
(AT1), affirmed Baa3 (hyb)
....Pref. Stock Non-cumulative
(Tier 1 capital securities), affirmed Baa2 (hyb)
....Commercial Paper, affirmed P-1
....Other Short Term, affirmed (P)P-1
....Other Short Term debt rating, affirmed
P-1
....Baseline Credit Assessment, affirmed
a2
....Adjusted Baseline Credit Assessment,
affirmed a2
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Friesland Bank N.V.
..Affirmations:
....Long-term Deposit Ratings,
affirmed Aa2, outlook changed to Negative from Stable
....Short-term Deposit Ratings,
affirmed P-1
....Backed Senior Unsecured Regular Bond/Debenture,
affirmed Aa2, outlook changed to Negative from Stable
....Senior Unsecured Medium-Term Note
Program, affirmed (P)Aa2
....Backed Subordinate Regular Bond/Debenture,
affirmed A3
....Subordinate Medium-Term Note Program,
affirmed (P)A3
....Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Rabo Capital Securities Limited
....Pref. Stock Non-cumulative,
affirmed Baa2 (hyb)
..Outlook Action:
....No Outlook
Issuer: Rabo Financial Products B.V.
..Affirmations:
....Senior Unsecured Regular Bond/Debenture,
affirmed Aa2, outlook changed to Negative from Stable
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Rabobank Australia Limited
..Affirmations:
....Backed long-term Deposit Rating,
affirmed Aa2, outlook changed to Negative from Stable
....Backed short-term Deposit Rating,
affirmed P-1
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Rabobank Capital Funding Trust IV
..Affirmations:
....Pref. Stock Non-cumulative,
affirmed Baa2(hyb)
..Outlook Action:
....No Outlook
Issuer: Rabobank Ireland plc
..Affirmations:
....Backed Commercial Paper, affirmed
P-1
..Outlook Action:
....Outlook changed to No Outlook from Stable
Issuer: Rabobank Nederland, Australia Branch
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Senior Unsecured Regular Bond/Debenture,
affirmed Aa2, outlook changed to Negative from Stable
....Senior Unsecured Medium-Term Note
Program, affirmed (P)Aa2
....Other Short Term, affirmed (P)P-1
....Commercial Paper, affirmed P-1
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Rabobank Nederland, Hong Kong Branch
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Long-term Deposit Note/CD Program,
affirmed (P)Aa2
....Short-term Deposit Note/CD Program,
affirmed (P)P-1
..Outlook Action:
....Outlook changed to No Outlook from Stable
Issuer: Rabobank Nederland, New York Branch
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Long-term Deposit Rating,
affirmed Aa2, outlook changed to Negative from Stable
....Long-term Deposit Note/CD Program,
affirmed Aa2, outlook changed to Negative from Stable
....Long-term Deposit Note/CD Program,
affirmed (P)Aa2
....Short-term Deposit Note/CD Program,
affirmed (P)P-1
....Senior Unsecured Regular Bond/Debenture,
affirmed Aa2, outlook changed to Negative from Stable
....Senior Unsecured Medium-Term Note
Program, affirmed (P)Aa2
....Commercial Paper, affirmed P-1
....Other short-term, affirmed
(P)P-1
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Rabobank Nederland, New Zealand Branch
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Short-term Deposit Note/CD Program,
affirmed P-1
....Senior Unsecured Regular Bond/Debenture,
affirmed Aa2, outlook changed to Negative from Stable
....Commercial Paper, affirmed P-1
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Rabobank Nederland, Paris Branch
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Short-term Deposit Note/CD Program,
affirmed P-1
..Outlook Action:
....No Outlook
Issuer: Rabobank Nederland, Singapore Branch
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Commercial Paper, affirmed P-1
..Outlook Action:
....No Outlook
Issuer: Rabobank Nederland, The Netherlands Branch
..Affirmations:
....Long-term Counterparty Risk Assessment,
affirmed Aa1(cr)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
..Outlook Action:
....Outlook changed to No Outlook from Stable
Issuer: Rabobank Polska SA
..Affirmations:
....Backed Commercial Paper, affirmed
P-1
..Outlook Action:
....No Outlook
Issuer: Rabobank USA Financial Corporation
..Affirmations:
....Backed Commercial Paper, affirmed
P-1
..Outlook Action:
....No Outlook
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
January 2016. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Guillaume Lucien-Baugas
Vice President - Senior Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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