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Rating Action:

Moody's downgrades SNS Bank to A3/P-2 senior and confirms REAAL Verzekeringen's A2 IFSRs

23 Feb 2010

Holding company ratings confirmed at Baa1; all ratings on negative outlook

Paris, February 23, 2010 -- Moody's Investors Service has today downgraded the bank financial strength rating (BFSR) of SNS Bank N.V. to C- (mapping to a baseline credit assessment of Baa2) from C, its long-term senior debt rating to A3 from A2, the bank's short-term debt and deposit ratings to Prime-2 from Prime-1 and the non-cumulative capital securities issued by SNS Bank to Ba2 from Baa1. At the same time, the rating agency has confirmed the A2 insurance financial strength ratings (IFSRs) of SNS REAAL's insurance operations and the Baa1 senior debt rating of SNS REAAL N.V., the holding company of the Group. All long-term ratings have been assigned a negative outlook. This rating action concludes the review for possible downgrade on SNS REAAL's ratings initiated on 22 October 2009.

The rating agency also confirmed the rating of some selected hybrid instruments issued by SNS REAAL N.V. (EUR250 million 6.258% capital securities) and SNS Bank N.V. (EUR39 million 7.625% perpetual subordinated notes), concluding the review for possible downgrade on these instruments initiated on 8 September 2009. The outlook on the two securities is negative.

A list of all ratings affected by these rating actions is available at the end of the press release.

SNS BANK RATINGS

Moody's review, during which it carried out a scenario analysis of how expected losses would affect SNS Bank's asset quality, earnings and capitalisation, showed that the bank's BFSR would potentially be weakened by further deterioration in its financial performance as a result of the economic downturn (please refer to Moody's Special Comments: "Moody's Approach to Estimating Dutch Banks' Credit Losses", published in October 2009; "Calibrating Bank Ratings in the Context of the Global Financial Crisis", published in February 2009; and "Moody's Approach to Estimating Bank Credit Losses and their Impact on Bank Financial Strength Ratings", published in May 2009).

Moody's rating action on SNS Bank was triggered by the significant worsening of the bank's asset quality and notably by the high level of impairments stemming mainly from SNS Property Finance, Given the downturn of the real estate markets, the rating agency also cautions about further losses on the bank's predominant asset class: residential mortgages (75% of the customer loan portfolio). Furthermore, Moody's notes the decrease in the bank's profitability in 2009 in its core business, retail banking, mainly resulting from high cost of funding.

SNS Bank is primarily a mortgage lender in the Netherlands, a business generating low but stable revenues and relatively low risk. The bank's risk profile has, however, increased with the development of SNS Property Finance activities in investment management and project financing up to mid-2009. The SNS Property Finance EUR13.2 billion outstanding loans accounts for 20% of the customer loan portfolio and includes real estate investment (EUR7.7 billion) and project financing (EUR5.5 billion) mainly in the Netherlands (73%) but also abroad with some significant exposure to the US. The EUR418 million impairments registered by SNS Property Finance in 2009 largely stems from SNS's international project financing activities. Although the bank has announced the run-off of its international project financing portfolio and its focus on Dutch business exclusively, the decrease in the bank's exposure will be gradual and is likely to be completed only by end-2012. Moody's therefore expects further high impairments from this portfolio. A further risk is presented by the high level of industry concentration -- especially in the construction and property industries -- in SNS Bank's loan portfolio in the Dutch commercial and residential real estate markets in the context of the current downturn.

Moody's also notes that the bank's profitability is structurally low and pressurised given the prominence of its mortgage business in the Netherlands, which we view as a very competitive market. In 2009, SNS Bank's profitability has further deteriorated not only due to high impairments but also as a result of lower net interest income at SNS Retail Bank. The bank has suffered from high funding costs primarily linked to low margin from savings. Moody's believes that SNS Retail Bank is likely to improve its profitability in 2010 given its increasing margins since the fourth quarter of 2009 in its core businesses, residential mortgages and savings, which have seen a rise in their market shares to 9.1% and 8.7% respectively. Additionally, SNS Bank is implementing a cost reduction plan within SNS Retail Bank, which should have positive effects in 2010. However, Moody's notes that potential improvements at SNS Retail Bank may not be sufficient to offset additional allowances against expected losses at SNS Property Finance. SNS Bank remains indeed significantly reliant on wholesale funding and will have to refinance significant amounts of maturing debt in 2010. Adequate bank's cost of funding going forward will therefore be monitored by Moody's as one of the key elements for the bank to restore its profitability levels.

Moody's adds that SNS Bank's capital ratios (core Tier 1: 8.3%, Tier 1: 10.7%) provide some loss absorption capacity to the bank. However, a capital contribution of EUR150 million from SNS REAAL has been necessary to maintain such capital ratios. Given that the bank's impairments are expected to remain high in 2010 and that the bank's capacity to generate earnings is limited, Moody's does not rule out the need for further contributions from SNS REAAL.

The negative outlook reflects our concerns with regard to SNS Bank's deteriorating asset quality. Moody's expects that an increase of provisioning levels will be necessary in 2010, thereby affecting SNS Bank's results significantly. Moody's adds that potential improvements in SNS Retail Bank's profitability might be offset by the bank's high cost of funding in the future, and might therefore not prove sufficient to cover additional provisioning requirements.

REAAL VERZEKERINGEN RATINGS

Moody's confirmed the A2 IFSRs of REAAL Schadeverzekeringen N.V. and REAAL Levensverzekeringen N.V., and assigned a negative outlook to these ratings. Moody's also said that it will withdraw REAAL Levensverzekeringen's rating due to corporate reorganisation (please refer to Moody's rating withdrawal policy available on www.moodys.com), and that it assigned an A2 first-time IFSR to SRLEV N.V., the newly formed insurance entity resulting from the merger of the formers Zwitserleven N.V. and REAAL Levensverzekeringen. This rating also carries a negative outlook.

The confirmation of REAAL Levensverzekeringen and REAAL Schadeverzekeringen's ratings reflects the improvements in underlying earnings of REAAL Verzekeringen throughout 2009, its reduced asset risk and Moody's consequent expectations of a low level of impairments for 2010, and its good capital position, supported by the outstanding amount of hybrids issued to the Foundation and to the Dutch government.

The negative outlook reflects the potential pressure on the life profitability, as the Dutch insurance market remains very challenging, and on the capitalisation of the insurance operations, resulting from (i) some potential transfer of capital to support the banking operations' solvency ratios, as experienced in 2009, and (ii) the Group's intention to repay the hybrids issued to the Dutch government and to the Foundation, and the uncertainties on the extent to which SNS REAAL will be able to rely on generated earnings or on a capital increase to achieve this goal. SNS REAAL may use some of the capital buffers available at the insurance operations level to repay this money, which Moody's sees as a potential negative rating driver. The negative outlook also reflects Moody's opinion that the financial flexibility of the Group will remained constrained in the next 12 to 18 months, primarily due to a low fixed charge coverage ratio.

Although REAAL Verzekeringen's solvency I ratio has improved from 176% to 230% in 2009, Moody's notes that most of this improvement is explained by volatile and market-dependent components (e.g. unrealised gains, excess reserves in accordance with the Dutch legislation), while retained earnings have contributed to a lower extent to this improvement. Therefore, Moody's considers that the currently good capitalisation of SNS REAAL is still reliant on the money received from the Foundation and the Dutch government.

Furthermore, despite improvements in underlying earnings, REAAL Verzekeringen's profitability from insurance operations is still under pressure, according to Moody's. SNS REAAL distributes many traditional life insurance products with a relatively high guarantee, and given the currently low interest rate environment, Moody's believes that the margins on the life operations will remain tight, notwithstanding the fact that the Group is dynamically hedging its exposure to interest rate risk. The rating agency estimates that the duration gap (between the assets and the liabilities of REAAL Verzekeringen) is relatively large, leaving the insurance company with a significant reinvestment risk.

Moody's notes positively that the Dutch group is engaged in a cost saving programme, aimed at reducing the level of expenses by EUR150 million in 2010 compared to 2008. However, Moody's also notes that the Dutch insurance market is highly competitive, and recent legislation has further facilitated the direct competition between banking products and insurance products, which places additional pressure on life insurers' top line.

According to Moody's, key developments that could pose negative rating implications for REAAL Schadeverzekeringen and SRLEV primarily include a depletion of capital resources, as evidenced for example by an upstream of capital to the Group holding company, either to support the capitalisation of the bank or the repayment of the hybrids issued to the Foundation and the Dutch government, without replacing it to a significant degree by high-quality capital (e.g. retained earnings or new equity). Maintaining good levels of profitability and financial flexibility is also a significant challenge that is likely to influence the options available for the Group to repay the State aid. As a result, a deterioration in underlying earnings with the underlying return on equity decreasing below 5%, which would negatively impact earnings coverage as well, would also weigh on the ratings.

HOLDING COMPANY RATINGS

Moody's confirmed the Baa1 senior debt rating of SNS REAAL N.V., and assigned a negative outlook to this rating, reflecting the actions taken on the ratings of the Group's operating companies.

The Baa1 senior debt rating continues to reflect the combination of the credit strengths of the banking and insurance operations of SNS REAAL, the specific credit benefit that the Group enjoys as a diversified financial conglomerate, the systemic support that would be available to the banking units and the resulting benefits attributable to the holding operations, and the structural subordination of the revenues that the Group receives in the form of dividends from operating companies.

The confirmation of the rating also reflects the slightly positive consolidated results in 2009, as improvements at the insurance level have offset growing impairments at the bank level, and the resilient capitalisation of both insurance and banking operations.

The negative outlook reflects the negative outlook on the ratings related to both the banking and the insurance operations. More specifically, it reflects the pressure on the Group's profitability as well as the pressure on the Group's financial flexibility. Although Moody's estimates that the financial leverage of the Group remains at a moderate level, thanks to a good capitalisation enhanced by the core Tier 1 securities, the fixed charge coverage ratio appears to be increasingly constrained, with recent issuance of hybrids made at very high cost.

According to Moody's, a downgrade of the insurance ratings and/or of the bank ratings would likely result in a downgrade of the holding company ratings.

SNS BANK's NON-CUMULATIVE CAPITAL SECURITIES

Moody's downgrade of its ratings on the non-cumulative capital securities issued by SNS Bank to Ba2 outlook negative from Baa1 is in line with its revised Guidelines for Rating Bank Hybrids and Subordinated Debt published in November 2009 and takes into account the downgrade of SNS Bank's BFSR to C-, negative outlook.

The starting point in Moody's revised approach to rating hybrid securities is the Adjusted Baseline Credit Assessment (Adjusted BCA). The Adjusted BCA reflects the bank's standalone credit strength, including the probability of parental and/or cooperative support, if applicable. The Adjusted BCA excludes systemic support expectations.

The Adjusted BCA for SNS Bank is Baa2 and is the same as the BCA as parental and/or cooperative support does not apply. The ratings of the non-cumulative capital securities were downgraded to Ba2, which is three notches below the Adjusted BCA due to their deeply subordinated claim in liquidation and the mandatory non-cumulative coupon skip mechanism tied to the breach of a balance sheet loss trigger.

SNS REAAL's CAPITAL SECURITIES AND SNS BANK's PERPETUAL SUBORDINATED DEBT

Moody's confirmed the Ba1 rating of the EUR250 million 6.258% capital securities issued by SNS REAAL N.V., as well as the Baa3 rating of the 7.625% perpetual subordinated notes issued by SNS Bank. These ratings have been assigned a negative outlook.

On 8 September 2009, Moody's downgraded the ratings of these instruments and placed them on review for possible downgrade. Moody's notes that the Group received final approval from the EC for the capital support by the Dutch State. Consequently, the confirmation reflects the fact that the EC has not requested that the holding company defers any coupon on these securities. The confirmation of the ratings also reflects the subordination of the instruments, their mandatory and optional deferral triggers, as well as the cumulative coupon payment (at least during five years for securities issued by SNS REAAL), hence limiting the loss severity of a coupon deferral if this were to materialise.

LIST OF SNS BANK RATINGS (INCLUDING HYBRIDS)

The following ratings have been downgraded and assigned a negative outlook:

SNS Bank N.V. -- bank financial strength rating to C- from C;

SNS Bank N.V. -- senior unsecured debt rating and long term bank deposit rating to A3 from A2;

SNS Bank N.V. -- subordinated debt rating to Baa1 from A3;

SNS Bank N.V. EUR11 million 5.75% capital securities (XS0172565482) -- preferred stock rating to Ba2 from Baa1;

SNS Bank N.V. EUR320 million 11.25% capital securities (XS0468954523) -- preferred stock rating to Ba2 from Baa1;

The following rating has been confirmed and assigned a negative outlook:

SNS Bank N.V. -- EUR39 million 7.625% perpetual subordinated debt (XS0112493969) -- junior subordinated debt rating at Baa3.

The following ratings have been downgraded:

SNS Bank N.V. -- short-term bank deposit rating and other short-term ratings to Prime-2 from Prime-1.

LIST OF REAAL VERZEKERINGEN RATINGS

The following ratings have been confirmed and assigned a negative outlook:

- REAAL Levensverzekeringen N.V. -- insurance financial strength rating at A2 (this rating will be subsequently withdrawn for business reasons);

- REAAL Schadeverzekeringen N.V. -- insurance financial strength rating at A2.

The following rating has been assigned with a negative outlook:

- SRLEV N.V. -- insurance financial strength rating at A2.

LIST OF SNS REAAL RATINGS (INCLUDING HYBRIDS)

The following ratings have been confirmed and assigned a negative outlook:

- SNS REAAL N.V. -- senior unsecured debt rating at Baa1;

- SNS REAAL N.V. -- subordinated debt rating at Baa2;

- SNS REAAL N.V. EUR250 million 6.258% capital securities (XS0310904155) -- preferred stock rating at Ba1.

The last rating action on SNS REAAL, REAAL Schadeverzekeringen, REAAL Levensverzekeringen and SNS Bank was on 22 October 2009 when Moody's placed all SNS REAAL's ratings on review for possible downgrade.

The principal methodologies used in rating REAAL Schadeverzekeringen, REAAL Levensverzekeringen, SRLEV, SNS Bank, SNS REAAL and their hybrid sintruments are "Moody's Global Rating Methodology for Property and Casualty Insurers", "Moody's Global Rating Methodology for Life Insurers", "Bank Financial Strength Ratings: Global Methodology", "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", "Moody's Guidelines for Rating Insurance Hybrid Securities and Subordinated Debt" and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory.

SNS REAAL is a bancassurance group headquartered in Utrecht, the Netherlands. Focusing on the Dutch market, it reported total income of EUR8.5 billion in 2009 and had shareholders' equity of EUR5.1 billion as of 31 December 2009.

SNS Bank, headquartered in Utrecht, the Netherlands, had total assets of EUR80.3 billion and reported shareholders' equity (including minority interest) of EUR2.4 billion as of 31 December 2009.

REAAL Verzekeringen, headquartered in Utrecht, the Netherlands, had total assets of EUR53.6 billion and reported shareholders' equity (including minority interest) of EUR3.3 billion as of 31 December 2009.

London
Simon Harris
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Benjamin Serra
Analyst
Financial Institutions Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades SNS Bank to A3/P-2 senior and confirms REAAL Verzekeringen's A2 IFSRs
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