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May 7 (The following statement was released by the rating agency)
Additional capital buffers for the Netherland's four systemic banks announced by the Dutch central bank last week should support the banks' access to confidence-sensitive international capital markets, Fitch Ratings says. The refinancing risk from Dutch banks' structural reliance on wholesale funding is also mitigated by cautious liquidity management.
Dutch systemic banks already meet the new 1%-3% capital add-on that will be phased in between 2016 and 2019. The range had been discussed for some time by the central bank, although the name-specific requirements have only just been provided. The three largest banks - Rabobank, ING Bank and ABN AMRO - will be required to hold an additional 3% common equity Tier 1 (CET1) buffer on top of the 7% Basel III requirement. SNS Bank's add-on will be 1%. All four banks already reported fully-loaded CET1 ratios at end-2013 at or above 10%.
We believe the banks will maintain solid capitalisation, especially as challenges in the domestic market appear to be easing. We revised 2014 GDP growth to 0.7% from 0% in March. ING's 1Q14 results published today show early signs of loan impairment charges receding and we expect similar trends at other Dutch banks, although these are likely to stay high in the medium term.
Dutch banks' solid capitalisation helps them to maintain access to international capital markets for funding. The additional capital buffer requirements should enhance investor confidence because if a firm fails to meet the buffers, it will face restrictions on the amount of profits it can distribute through, for example, dividend payments or coupons on Basel III compliant securities.
Wholesale funding-reliance varies, with loans-to-deposits ratios at systemic banks ranging from 108% to 138% at end-2013. The funding gap arises from households investing their savings in pension and insurance products, and a large mortgage loan market prompted by tax incentives, which started reducing last year.
Dutch banks rely on international investors to plug the funding gap because domestic pension funds diversify their euro-denominated investments, rather than concentrating them in Dutch assets. This makes the refinancing risks higher than in countries such as Sweden and Denmark, where banks reliant on wholesale funding benefit from a captive domestic investor base.
The risks are also offset by Dutch banks generally maintaining good access to funding markets and holding large liquidity portfolios. The four banks had Basel III liquidity coverage ratios above 100% at end-2013.
We believe Dutch banks will continue to build an extra layer of subordinated debt to maintain the confidence of senior bond investors. An extra buffer would mitigate the potential risk of higher losses for senior bondholders and safeguard the cost of future senior debt. Additional Tier 1 securities could be another source for banks to strengthen capital, once the tax treatment has been finalized.