Baseline credit assessment (BCA) downgraded to a3 from a2
London, 27 March 2018 -- Moody's Investors Service today downgraded Rabobank's long-term
senior unsecured debt and deposit ratings to Aa3 from Aa2 and revised
their outlooks to stable from negative. At the same time,
Moody's downgraded Rabobank's baseline credit assessment (BCA)
and adjusted BCA to a3 from a2. The downgrade of Rabobank's
BCA primarily reflects the challenges the bank has been facing in reducing
its operating expenses and ultimately improving its profitability.
Moody's also downgraded Rabobank's long-term Counterparty
Risk (CR) assessment to Aa2(cr) from Aa1(cr), its Senior Contingent
Notes to Baa1(hyb) from A3(hyb), subordinated debt to Baa1 from
A3 and 'low trigger' non-cumulative tier 1 capital
securities to Baa3(hyb) from Baa2(hyb).
Concurrently, Moody's affirmed the bank's short-term
programme and deposit ratings of Prime-1, its short-term
CR assessment of Prime-1(cr) and its 'high trigger'
additional tier 1 (AT1) securities of Baa3(hyb).
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
The downgrade of Rabobank's BCA to a3 reflects the fact that despite
material improvements in asset risks, capital and funding,
the bank's profitability improvement programme is unlikely to yield
sufficient benefits to maintain a credit profile consistent with the previous
relatively high BCA of a2. While Moody's recognizes that
Rabobank increased its net profit in 2017, this was to a large extent
driven by numerous one-off items and a reversal of loan loss provisions.
Further improvements in efficiency will likely be offset by net interest
margin pressure and normalised cost of risk meaning earnings will remain
structurally weaker than peers'.
Rabobank's reported underlying cost-to-income ratio,
excluding exceptional items but including regulatory levies, was
65.3% in 2017, up from 64.8% in 2016,
which is significantly weaker than the bank's target of 53%-54%
to be achieved by 2020. Moody's expects the bank to significantly
decrease operating expenses in 2018, as large pension-related
expenses subside and the benefits of continuing staff reductions will
progressively materialize. However, net interest revenues,
which represented a high 74% of the bank's net banking revenues
in 2017, will suffer from prolonged low interest rates and resulting
pressure on asset yields, given that funding costs are unlikely
to decline further. In addition, the bank's loan-loss
charges are currently at record low levels (with net recoveries of 5 bps
of the private sector loan book in 2017 versus a net cost of 7 bps in
2016) thanks to provision reversals, which are now likely to diminish.
Moody's expects credit costs to modestly increase in 2018,
resulting in net income close to that of 2017.
The BCA of a3 adequately reflects Rabobank's significant improvements
in its capital and funding profile in 2017. The bank increased
its fully-loaded common equity tier 1 (CET1) ratio by two percentage
points to 15.5%, above its 14% minimum target
for 2020, in part via the issuance of €1.5 billion of
"Rabobank Certificates", CET1-eligible mutual
shares typically issued by cooperative banking groups. In parallel,
the bank reduced its wholesale funding to €160 billion at year-end
2017 (2016: €189 billion), which brings it close to its
€150 billion target. The bank also issued its first covered
bonds in May 2017, raising €2.5 billion.
The downgrade of Rabobank's long-term senior unsecured debt and
deposit ratings to Aa3 from Aa2 results from (1) the lower BCA and adjusted
BCA of a3; (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.
AFFIRMATION OF ADDITIONAL TIER I SECURITIES
The affirmation of Rabobank's AT1 securities rating of Baa3(hyb)
reflects Moody's approach to the rating of 'high trigger'
securities, which takes account of their ranking within the bank's
liability structure and the risk of a coupon suspension. Moody's
uses a model to assess the probability of Rabobank's CET1 ratio
reaching the contractual trigger of 7%. The model output
is based upon Rabobank's BCA of a3, the bank's CET1
ratio (15.8%) as of year-end 2017 and the 7%
trigger. The assigned rating of Baa3(hyb) is unchanged from the
current rating, because the distance to trigger increased by close
to two percentage points in 2017, offsetting the impact of the downgrade
of Rabobank's BCA. The rating is not constrained by Moody's
rating on the non-viability AT1 instruments, as the agency
also rates these securities Baa3(hyb), three notches below Rabobank's
adjusted BCA of a3.
STABLE OUTLOOK
The outlook on Rabobank's long-term deposit and senior unsecured
debt ratings is stable because Moody's does not anticipate any significant
change in the bank's creditworthiness over the next two-to-three
years.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade of the BCA, and consequently of the long-term
deposit and senior unsecured debt ratings, may occur if (1) Rabobank
improves its structural profitability beyond its current plans; (2)
its capital continues to steadily increase; and (3) asset risks remain
very low. In addition, the bank's long-term
deposit and senior unsecured debt ratings could be upgraded if there were
a lower loss-given-failure for senior debt and deposit holders
due to higher levels of subordinated debt.
The BCA could be downgraded if (1) the bank's profitability was
significantly impaired; or (2) the cost of risk in the bank's
loan portfolio were to increase materially. In addition,
Rabobank's long-term deposit and senior unsecured debt ratings
would be downgraded as a consequence of a downgrade of the BCA.
LIST OF AFFECTED RATINGS
Issuer: Rabobank
....Adjusted Baseline Credit Assessment,
downgraded to a3 from a2
....Baseline Credit Assessment, downgraded
to a3 from a2
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
....Long-term Bank Deposits,
downgraded to Aa3 Stable from Aa2 Negative
....Long-term Deposit Note/CD Program,
downgraded to (P)Aa3 from (P)Aa2
....Long-term Issuer Rating,
downgraded to Aa3 Stable from Aa2 Negative
....Senior Unsecured Regular Bond/Debenture,
downgraded to Aa3 Stable from Aa2 Negative
....Senior Unsecured Regular Bond/Debenture,
downgraded to Baa1(hyb) from A3(hyb)
....Backed Senior Unsecured Regular Bond/Debenture,
downgraded to Aa3 Stable from Aa2 Negative
....Senior Unsecured Medium-Term Note
Program, downgraded to (P)Aa3 from (P)Aa2
....Backed Senior Unsecured Medium-Term
Note Program, downgraded to (P)Aa3 from (P)Aa2
....Subordinate Regular Bond/Debenture,
downgraded to Baa1 from A3
....Subordinate Medium-Term Note Program,
downgraded to (P)Baa1 from (P)A3
....Backed Subordinate Regular Bond/Debenture,
downgraded to Baa1 from A3
....Preferred Stock Non-cumulative,
downgraded to Baa3 (hyb) from Baa2 (hyb)
..Affirmations:
....Preferred Stock Non-cumulative,
affirmed Baa3(hyb)
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Short-term Bank Deposits,
affirmed P-1
....Short-term Deposit Note/CD Program,
affirmed P-1/(P)P-1
....Other Short Term, affirmed (P)P-1
....Backed Other Short Term, affirmed
(P)P-1
....Commercial Paper, affirmed P-1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Friesland Bank N.V.
..Downgrades:
....Long-term Bank Deposits,
downgraded to Aa3 Stable from Aa2 Negative
....Senior Unsecured Medium-Term Note
Program, downgraded to (P)Aa3 from (P)Aa2
....Subordinate Medium-Term Note Program,
downgraded to (P)Baa1 from (P)A3
....Backed Subordinate Regular Bond/Debenture,
downgraded to Baa1 from A3
..Affirmations:
....Short-term Bank Deposits,
affirmed P-1
....Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Rabo Capital Securities Limited
..Downgrade:
....Preferred Stock Non-cumulative,
downgraded to Baa3(hyb) from Baa2(hyb)
..No Outlook
Issuer: Rabobank Australia Limited
..Downgrade:
....Backed long-term Bank Deposit,
downgraded to Aa3 Stable from Aa2 Negative
..Affirmations:
....Backed short-term Bank Deposit,
affirmed P-1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Rabobank Capital Funding Trust IV
..Downgrade:
....Preferred Stock Non-cumulative,
downgraded to Baa3(hyb) from Baa2(hyb)
..No Outlook
Issuer: Rabobank Ireland plc
..Affirmation:
....Backed Commercial Paper, affirmed
P-1
..No Outlook
Issuer: Rabobank Nederland, Australia Branch
..Downgrades:
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
....Senior Unsecured Medium-Term Note
Program, downgraded to (P)Aa3 from (P)Aa2
....Senior Unsecured Regular Bond/Debenture,
downgraded to Aa3 Stable from Aa2 Negative
..Affirmations:
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Other Short Term, affirmed (P)P-1
....Commercial Paper, Affirmed P-1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Rabobank Nederland, Hong Kong Branch
..Downgrades:
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
....Long-term Deposit Note/CD Program,
downgraded to (P)Aa3 from (P)Aa2
..Affirmations:
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Short-term Deposit Note/CD Program,
affirmed (P)P-1
..No Outlook
Issuer: Rabobank Nederland, New York Branch
..Downgrades:
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
....Long-term Bank Deposit, downgraded
to Aa3 Stable from Aa2 Negative
....Long-term Deposit Note/CD Program,
downgraded to (P)Aa3 from (P)Aa2
....Senior Unsecured Regular Bond/Debenture,
downgraded to Aa3 Stable from Aa2 Negative
....Senior Unsecured Medium-Term Note
Program, downgraded to (P)Aa3 from (P)Aa2
..Affirmations:
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Short-term Deposit Note/CD Program,
affirmed (P)P-1
....Commercial Paper, affirmed P-1
....Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Rabobank Nederland, New Zealand Branch
..Downgrades:
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
....Senior Unsecured Medium-Term Note
Program, downgraded to (P)Aa3 from (P)Aa2
....Senior Unsecured Regular Bond/Debenture,
downgraded to Aa3 Stable from Aa2 Negative
..Affirmations:
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Short-term Deposit Note/CD Program,
affirmed P-1
....Commercial Paper, affirmed P-1
....Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Rabobank Nederland, Paris Branch
..Downgrade:
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
..Affirmations:
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Short-term Deposit Note/CD Program,
affirmed P-1
..No Outlook
Issuer: Rabobank Nederland, Singapore Branch
..Downgrade:
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
..Affirmations:
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Commercial Paper, affirmed P-1
..No Outlook
Issuer: Rabobank Nederland, The Netherlands Branch
..Downgrade:
....Long-term Counterparty Risk Assessment,
downgraded to Aa2(cr) from Aa1(cr)
..Affirmation:
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
..No Outlook
Issuer: Rabobank Polska SA
..Affirmation:
....Backed Commercial Paper, affirmed
P-1
..No Outlook
Issuer: Rabobank USA Financial Corporation
..Affirmation:
....Backed Commercial Paper, affirmed
P-1
..No Outlook
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
September 2017. 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
Client Service: 44 20 7772 5454
Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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