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
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
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
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
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
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
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
SNS Bank N.V. EUR320 million 11.25% capital
securities (XS0468954523) -- preferred stock rating to Ba2
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
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
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
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
Financial Institutions Group
Moody's Investors Service Ltd.
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Moody's downgrades SNS Bank to A3/P-2 senior and confirms REAAL Verzekeringen's A2 IFSRs
Financial Institutions Group
Moody's France S.A.
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