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June 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Netherlands-based NIBC Bank NV's (NIBC) Long-term Issuer Default Rating (IDR) at 'BBB-', Short-term IDR at 'F3', and Viability Rating (VR) at 'bbb-'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, VR AND SENIOR DEBT
The IDRs and VR reflect NIBC's niche banking business model, making its performance vulnerable to economic cycles. The ratings also reflect NIBC's current weak profitability, which leaves a limited buffer to absorb unexpected shocks, although the risk is partly mitigated by the bank's strong capitalisation.
NIBC's niche franchise, which focuses on lending and other asset financing products mainly in the Netherlands and increasingly in Germany, results in revenue and asset concentrations. NIBC's company profile has a high influence on its ratings, particularly in view of its large exposures to cyclical sectors such as shipping and commercial real estate. The bank, however, continues to reduce concentrations in its loan book and diversify its geographical reach, which in the long-term may decrease the relative influence of NIBC's company profile on its VR.
Slow economic growth, low transaction volumes, and low interest rates continue to weigh on NIBC's net interest income-driven profitability. Profitability has also been affected by elevated loan impairment charges in recent years. Benefits expected from NIBC's German acquisition will partly be offset by continued low interest rates (see "Fitch: No Rating Impact on NIBC from German Acquisition" dated 12 March 2014). Nevertheless Fitch expects the Dutch housing market and corporate sector to stabilise in 2014 and 2015, which should help the bank's earnings. Repaying expensive state-guaranteed funding in 2014 and a reduction in low- yielding assets should further aid profit generation.
NIBC's capitalisation is strong and compares well with that of domestic and international peers. Its low profitability generates weak internal capital generation but solid leverage and high risk- weighted capital ratios provide an adequate buffer against moderate shocks, which is important given the bank's exposure to certain cyclical industries. NIBC has largely been able to manage the quality of its loan portfolio through the downturn.
NIBC is reliant on wholesale markets for structural funding, but deposit funding is growing in importance. NIBC maintains a large buffer of high quality liquid assets to mitigate refinancing risks resulting from its funding structure.
RATING SENSITIVITIES - IDRS, VR AND SENIOR DEBT
NIBC's ratings are sensitive to an increase of risk appetite of the bank or materially lower liquidity or capitalisation. Its low profitability means capital is the key risk buffer and worsening asset quality or lower capitalisation would therefore likely be rating-negative.
The bank's niche profile limits the rating's upside and any positive rating action would be contingent on a sustained improvement in profitability, strengthening its ability to absorb unexpected shocks.
KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR NIBC's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect the agency's view that while support from the Dutch authorities is possible, it cannot be relied upon. This primarily reflects NIBC's small franchise in the Dutch market.
Similarly, while there is a possibility that its owner, a consortium led by the private equity firm JC Flowers & Co, may support NIBC in case of need, Fitch is unable to adequately assess the owner's capacity to support and as a result potential support from its ultimate shareholders is not factored into NIBC's Support Rating nor Support Rating Floor.
Fitch currently does not envisage any upward pressure on NIBC's Support Rating or Support Rating Floor.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by NIBC are all notched down from the bank's VR. Therefore, their respective ratings have been affirmed, alongside the VR, and are sensitive to any change in the VR. The ratings are in accordance with Fitch's criteria 'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria', reflecting each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.
Tier 2 securities are rated one notch below NIBC's VR to reflect the incremental loss severity risk of these securities relative to average recoveries. Fitch does not apply additional notching for non-performance risk as it believes it is not materially different to that reflected by the VR.
Hybrid Tier 1 securities are rated four notches below NIBC's VR to reflect the higher loss severity risk of these securities relative to average recoveries (two notches from the VR) and a high risk of non-performance (an additional two notches).
KEY RATING DRIVER AND SENSITIVITIES - STATE-GUARANTEED DEBT
NIBC's state-guaranteed securities are rated 'AAA', reflecting the Dutch sovereign guarantee and so are sensitive to any change in the Netherlands' rating (AAA/Negative).
The rating actions are as follows:
Long-term IDR: affirmed at 'BBB-'; Outlook Stable
Short-term IDR: affirmed at 'F3'
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
State-guaranteed debt: affirmed at 'AAA'/'F1+'
Senior unsecured debt: affirmed at 'BBB-' /'F3'
Subordinated debt: affirmed at 'BB+'
Hybrid Tier 1 securities: affirmed at 'B+'