AMSTERDAM, Dec 12 (Reuters) - Dutch banks including ING and SNS Reaal will face tough operating conditions next year, with the prospect of higher loan losses from property and increased funding costs, Moody's Investors Service warned on Wednesday.
Moody's - which downgraded five Dutch banks in June and put the Netherlands' sovereign triple-A credit rating on negative outlook in July - kept its negative outlook on the bank sector, citing worsening economic conditions, high levels of household debt and a reliance on market funding.
"The negative outlook on the Dutch banking system is in line with the outlook on the rating for the government of the Netherlands, reflecting the common pressure from the deteriorating macroeconomic outlook," Moody's said in a report published on Wednesday.
The state had to rescue several Dutch financial institutions during the 2008 financial crisis including ING Groep, SNS Reaal, and ABN Amro, which was eventually nationalised.
While ING is in the process of selling off assets to repay state aid, Moody's warned that there was an increasing risk that SNS Reaal would not be able to meet the deadline for repayment and could require additional state support.
While the Netherlands, a core euro zone member, is a firm advocate of fiscal prudence, its export-driven economy is vulnerable because of its close links to the rest of the European Union.
Only this week, the Dutch central bank revised its forecast to paint a much gloomier outlook for 2013, saying the economy would contract next year and the budget deficit would exceed the EU's target of 3 percent of economic output.
Despite the fact Dutch banks have strong domestic franchises, limited direct exposure to the troubled euro zone countries, and are based in a large, wealthy and open economy, Moody's flagged several risks.
It said the deteriorating domestic economic outlook would lead to weaker financial performance among the banks, and that asset quality would be hit by a high level of corporate defaults and rapid deterioration of the domestic commercial real estate sector.
"High household leverage and the slowdown in the Dutch housing market are exacerbating the loss potential on domestic residential mortgage portfolios," it warned. (Reporting by Sara Webb; Editing by James Dalgleish)