Banking Industry Country Risk Assessment: The … reports/2012-11...2012/11/16 · The Netherlands...

Banking Industry Country RiskAssessment: The Netherlands

Primary Credit Analyst:

Alexandre Birry, London (44) 20-7176-7108; [email protected]

Secondary Contacts:

Dhruv Roy, London (44) 20-7176-6709; [email protected]

Elisabeth Grandin, Paris (33) 1-4420-6685; [email protected]

Sovereign Analyst:

Ivan A Morozov, London (44) 20-7176-7159; [email protected]

Table Of Contents

Major Factors

Rationale

ECONOMIC RISK

INDUSTRY RISK

Peer BICRA Scores

Government Support

Related Research And Criteria

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Banking Industry Country Risk Assessment: TheNetherlands

Economic Risk 3

Economic

ResilienceVery Low

Risk

Economic

ImbalancesIntermediate

Risk

Credit Risk In The

EconomyIntermediate

Risk

Industry Risk 3

Institutional

FrameworkIntermediate

Risk

Competitive

DynamicsIntermediate

Risk

Systemwide

FundingLow Risk

BICRA Group 3

GovernmentSupport

Supportive

Major Factors

Strengths:

• Wealthy, diversified, competitive, and open economy.

• Structural current account surpluses and relatively low unemployment.

• Sound credit culture and restrained overall risk appetite.

Weaknesses:

• Reactive approach of the regulators during the banks' expansionary phase, despite a strengthening supervisory

framework since the financial crisis.

• High gross leverage of the private sector and risk of protracted downturn domestically and in the eurozone.

• Some reliance on wholesale funding, despite diversified funding profiles.

Rationale

We have reviewed the banking sector of The Netherlands (AAA/Negative/A-1+ unsolicited ratings) under our

Banking Industry Country Risk Assessment (BICRA) methodology. We rank The Netherlands in group '3', along with

countries such as Denmark, the U.K., the U.S., and New Zealand. For peer comparison, we define The Netherlands'

peers as Austria, France, the U.K., and Denmark.

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Chart 1

Our criteria define the BICRA framework as one "designed to evaluate and compare global banking systems." A BICRA

analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in

both activities. A BICRA is scored on a scale from '1' to '10', ranging from what we view as the lowest-risk banking

systems (group '1') to the highest-risk (group '10'). A BICRA comprises two main areas of analysis--economic risk and

industry risk—-where The Netherlands scores '3' on both.

Our economic risk score of '3' reflects our view that The Netherlands faces "very low risk" in "economic resilience,"

"intermediate risk" in "economic imbalances," and "intermediate risk" in "credit risk in the economy," as our criteria

define these terms.

In our view, Dutch banks benefit from a diversified and competitive domestic economy, flexible fiscal policy, and

adaptable labor market. Our assessment of economic resilience incorporates the track record of strong current account

surpluses, despite our expectation of anaemic growth prospects in the next two years.

Our assessment of economic imbalances is based on our view that the Dutch economy is currently undergoing a

correction phase. We expect ongoing pressure on the private sector as a result of the continued price correction in the

Dutch property market, the recessionary conditions in the European Economic and Monetary Union (EMU or



Banking Industry Country Risk Assessment: The Netherlands

eurozone), and measures to reduce the budget deficit.

We consider that the prolonged housing market slump, elevated household leverage, and measures to reduce the

budget deficit are constraining consumer confidence and private-sector activity in general. We anticipate that the

impact of these constraints could lead to moderately higher impairment charges among Dutch banks over the next two

years. In our view, the increase in impairment charges--albeit from a low level—will be attributable primarily to the

pressure on some small and midsize companies. We expect relatively low--albeit increasing--unemployment, limited

unsecured debt, and structural features of the Dutch housing market to mitigate overall risks in the household sector.

High private sector leverage exceeds that of most of The Netherlands' European peers and is largely due to

specificities of the domestic mortgage market. For example, the tax deductibility of mortgage interest payments, which

is being amended, has until recently given borrowers a strong incentive to pay into insurance products or repayment

vehicles.

Our industry risk score for The Netherlands of '3' reflects our view that the Dutch banking system faces "intermediate

risk" from its "institutional framework" and "competitive dynamics", and "low risk" in "systemwide funding".

Our assessment of the Dutch institutional framework takes into account the timely and appropriate response of the

authorities to the financial turmoil. However, in our view the Dutch Central Bank's (DNB) supervisory framework did

not prevent the severe stress situations that a number of institutions experienced, which have required significant

extraordinary government support. A number of measures have been implemented to strengthen the DNB's

governance and supervisory culture, and additional tools--such as the Dutch resolution regime--have been granted to

the authorities.

Strong domestic concentration in a mature banking sector with moderate revenue prospects had, until the financial

crisis, led to international expansion by some of the largest players. This expansion has generally stopped or materially

slowed down, however, owing to the effects of the crisis and problems that a number of banks have faced in some of

their overseas exposures. Two of the three largest players have undergone material restructurings, some imposed by

the European Commission, as a result of state aid that they had received. We believe these restructurings have been

largely completed.

Core deposits as per our measures fund about half of total loans; savings from Dutch households are traditionally

channeled into other investments, such as life insurance and pension products. As a result, part of the banks' net

funding gap is covered by foreign investors. Nevertheless, our assessment of Dutch systemwide funding as "low risk"

benefits, among other things, from the depth of the domestic capital market, and the good track record of the Dutch

authorities in providing liquidity support.

ECONOMICRISK |

3

The economic risk score for The Netherlands is '3', based on our assessment of three main factors: economic

resilience, economic imbalances, and credit risk in the economy.




Economic resilience: very low risk

Our assessment of economic resilience is based on our view of the underlying stability of an economy and its

resistance to adverse economic developments, such as external shocks.

Economic structure and stability. With GDP per capita of around $46,000 in 2012, according to our forecasts, we

consider the Dutch economy to be wealthy, open, and diversified. The economy also benefits from a flexible labor

force. The country's track record of strong current account surpluses (forecast to remain in excess of 7% of GDP in

2012) and low unemployment also demonstrates its resilience.

Full-year real GDP in The Netherlands grew by 1.2% during 2011; however, growth has been oscillating around nil

since the second half of 2011. Because of uncertain trade prospects, particularly within the eurozone, as well as

sluggish private sector consumption, we think that the Dutch economy could contract slightly during 2012 and 2013,

before commencing a gradual recovery in 2014.

Macroeconomic policy flexibility. Between 2005 and 2008, the Dutch government operated an average primary

surplus of over 2% of GDP. However, its net general government debt position has deteriorated by about 16% of GDP

since the onset of the global financial crisis--to 60% of GDP at end-2011. The ECB's exceptionally accommodative

monetary policy provides some support to the economy through low private-sector debt-servicing costs and a low

short-term funding rate for banks.

Political risk. The Netherlands benefits from longstanding, stable political institutions. The policy challenges related to

the eurozone crisis have not only weighed on the Dutch economy's recovery, but contributed to rising political

uncertainty in the period leading to the early general elections of September 2012. As a result of the elections, a

pro-European coalition, including the center-right and labor parties, has been formed. We observe that the eurosceptic

parties on the left and right of the political spectrum have lost popular support.

Table 1

Economic Resilience

--Year ended Dec. 31--

(Mil. €) 2007 2008 2009 2010 2011 2012F

Nominal GDP (bil. $) 783.6 874.3 796.6 780.1 838.1 765.5

Per capita GDP ($) 47,903.3 53,295.6 48,321.8 47,063.1 50,320.6 45,752.0

Real GDP growth (%) N.M. 1.8 (3.5) 1.7 1.2 (1.0)

Inflation Rate (CPI) N.M. 2.2 1.0 0.9 2.5 2.5

Change in general government debt as % of GDP 45.3 14.9 (0.1) 3.9 3.6 3.8

Net general government debt as % of GDP (%) 44.5 57.6 55.5 58.5 60.5 64.3

N.M.--Not meaningful.

Economic imbalances: intermediate risk

The economic imbalances factor focuses on imbalances, such as credit-fueled asset-price bubbles and persistently

lopsided current account flows, which affect financial institutions.

Correction phase. Our assessment of economic imbalances is based on our view that the Dutch economy is currently

undergoing a correction phase. We expect ongoing pressure on the private sector as a result of the continued price

correction in the Dutch property market, dampening consumer confidence, the recessionary conditions in the

eurozone, and measures to reduce the budget deficit. However, the overall impact should, in our view, be relatively

limited. We incorporate into our assessment The Netherlands' strong structural competitiveness and the moderate




house price inflation between 2000 and the 2008 peak relative to some other European markets.

Private sector credit growth. Dutch domestic credit growth has been slowing down in recent years, with a four-year

average of less than 1% in proportion to GDP. New lending has abated materially in absolute terms, although we

believe that this is due to weaker demand from the private sector. We consider that the availability of credit from

Dutch financial institutions has remained broadly adequate, even if lending margins have increased. We note that

outstanding retail loans, about 95% of which are residential mortgages, continued to increase, albeit at a slower pace.

Overall corporate sector debt has only increased marginally over the past four years. We expect total mortgage loans

to flatten and then reduce very gradually as a result of recently announced measures.

Real estate prices. Dutch property prices have been gradually decreasing since their peak in mid-2008, by about

3%-4% annually on average. In nominal terms, house prices at a national level are back to their 2004 level. We expect

a continuation of the house price correction in the next 12-18 months. Our base case is that house prices will decrease

by a further 10% in the next 18 months, before the market gradually stabilizes. We note the gradual nature of the

recently announced measure to reduce the tax-deductibility of mortgage interest payments, which reduces previous

uncertainties for prospective buyers. This announcement, combined with other measures concerning the rental sector,

should be supportive of the housing market, but only once the macroeconomic outlook improves.

As previously mentioned, the increase in house prices between 2000 and the 2008 peak has been much more

moderate in The Netherlands than in a number of neighboring countries, with a compounded annual growth rate in

nominal prices of 5.7%.

Chart 2




Dutch commercial real estate lending represents a moderate part of the banks' domestic loan books (about 10%, the

majority of which is for revenue-generating properties). Pressure on prices and increased vacancies in a number of

sectors have recently led to higher provisioning levels, which we expect to persist for the rest of 2012 and 2013.

In line with other European markets, equity prices declined strongly in the second part of 2011 and have somewhat

recovered since mid-2012. We consider that Dutch banks have a modest exposure to stock markets.

Current account and external debt position.We view this as an area of strength for The Netherlands, and expect the

Dutch economy to retain its net external creditor position in 2012 with a surplus exceeding 20% of GDP, according to

our forecasts, supported by a high level of competitiveness. Historically, the creditor position has primarily been based

on a strong surplus in trade and service surpluses, which together have exceeded 7% of GDP on average over the past

decade. Despite the uncertain trade outlook, The Netherlands should, in our view, maintain its structural surplus in

2012 and 2013. We also expect its net international investment position to continue to show a surplus--predicted to be

45% of current account receipts (CARs) in 2012.

Table 2

Economic Imbalances


(Mil. €) 2007 2008 2009 2010 2011 2012F

Annual change in domestic credit private sector & NFPEs as % of GDP 188.1 5.1 21.8 (15.6) (1.2) (2.0)

Annual change in residential housing prices (real): national 2.7 (0.5) (6.1) (2.0) (5.8) (8.5)

Annual change in commercial real estate price index (real) (%) N.M. (5.9) (5.9) (2.3) (6.0) (6.0)

Annual change in equity index (inflation-adjusted) (%) N.M. (54.5) 35.4 4.8 (14.4) N.A.

Current account balance as % of GDP 6.7 4.3 4.1 7.1 9.2 7.4

Net external debt as % of GDP 25.9 32.6 29.8 38.6 27.4 23.0

N.A.--Not available. N.M.--Not meaningful.

Credit risk in the economy: intermediate risk

Our assessment of credit risk is largely underpinned by our view of the high gross leverage in the private

sector--mainly due to substantial mortgage debt. However, this is partly offset by sound underwriting standards, a

strong payment culture and legal framework, and a government guarantee scheme that covers a material part of Dutch

mortgages.

Private sector debt capacity and leverage. With GDP per capita in excess of $50,000 in 2011, we classify The

Netherlands in our top tier for debt capacity, according to our criteria. However, the elevated ratio of private sector

domestic credit to GDP--which we estimate at about 200% at end-2012, the second highest in Europe after

Denmark--remains a structural impediment to our assessment of credit risk.

The high private sector indebtedness is mainly due to the retail sector's large mortgage debt. Unsecured household

debt is limited. The large domestic mortgage debt is due to the tax deductibility of mortgage interest payments, which

gives borrowers a strong incentive to pay into insurance products or repayment vehicles. The household sector's

financial assets are more than two times its debt, although wealth distribution is uneven across borrowers. Life

insurance and pension investments represent the majority of these assets (see chart 3). Some measures have already

been taken to limit the types of products eligible for tax relief. A long-term impact of these reforms should be a

reduction in household indebtedness, but we expect the process to be very gradual.




Chart 3

We believe that sizable social benefits partly mitigate the possible impact of an increase in unemployment--currently

among the lowest in Europe--on household income.

Corporate gross debt to GDP has been broadly flat since end-2009 at around 95%, higher than in France but lower

than in the U.K. Bankruptcies have recently increased, although from a very low level. We believe there is a notable

discrepancy between the sound financial situation of large groups on the one hand, and a number of more fragile small

and midsize enterprises (SMEs) on the other.

Lending and underwriting standards. As a result of the tax deductibility of mortgage interest payments, Dutch

mortgages have traditionally been characterized by high loan-to-value (LTV) ratios, which compare less favorably than

those of peer systems. Until the recent reform debates, borrowers have been encouraged to save in other vehicles

rather than repay debt outstanding. However, we believe that the Dutch lenders' sound underwriting criteria somewhat

mitigate this risk.

In particular:

• Mortgages are generally long term (30 years) and have fixed interest rates for several years.

• There is limited speculation in the housing market as a result of historically high stamp duty and a tightly regulated

rental market.




• Systematic affordability testing is used as key underwriting criteria.

• Reforms since 2011 have started restricting the tax relief eligibility of certain products; as a result of recent

measures, only mortgage products amortising over a maximum of 30 years will be eligible for tax relief; gradually

decreasing caps to the maximum loan-to-value have also been introduced.

In addition, we note that many Dutch mortgages benefit from the Nationale Hypotheek Guarantie (NHG), a guarantee

scheme that we view as equivalent to a guarantee from the Dutch state. Borrowers pay a fee for the guarantee,

currently eligible for properties up to €320,000, which enables them to benefit from a lower interest rate from

mortgage providers. 15%-20% of outstanding mortgages are covered and we estimate that the guarantee covers up to

50%-60% of new mortgages granted in recent years.

Corporate loan books are reasonably diversified, in our view, with modest lending to real estate construction and

development (less than 2% of the Dutch lenders' books). The use of residential mortgage-backed securities is broad,

but securitization continues to be primarily used as a funding, rather than risk-transfer, tool, in our view.

Payment culture and rule of law. We consider the payment culture and rule of law in The Netherlands as "at least

moderately strong," according to our criteria, and supportive of our intermediate assessment of credit risk in the

economy. The country ranks in the top decile of the World Bank's rule of law and control of corruption indicators. The

Dutch legal framework is supportive of mortgage lending asset quality. Borrowers who default remain liable for their

debt even after foreclosure on the property, and lenders have full recourse to a borrower's other savings and can also

apply to have access to part of a borrower's income streams.

Table 3

Credit Risk In The Economy


(Mil. €) 2007 2008 2009 2010 2011 2012F

Per capita GDP ($) 47,903 53,296 48,322 47,063 50,321 45,752

Domestic credit private sector & NFPEs as % of GDP 188.1 193.2 214.9 199.3 198.1 196.1

Household debt as % of GDP 119.0 120.9 132.9 133.9 134.6 136.2

Household net debt as % of GDP (168.9) (125.2) (153.1) (166.5) (169.7) (171.1)

Corporate debt as % of GDP 91.4 89.9 95.6 94.4 94.7 95.5

NPAs as % of total loans (year-end) N/A 1.7 3.2 2.8 2.7 3.1

FC lending (% of total lending) N/A N/A 17.0 19.7 17.9 N/A

N/A--Not applicable.

Base-Case Credit Losses

Loan losses in 2011 have generally remained low in The Netherlands, despite some moderate deterioration in the

second half. For 2012-2013, our scenario is based on a weak economy followed by a slow recovery. The

continued pressure on the property markets will likely lead to a deterioration in the cost of risk related to

corporates operating in the sector. We expect overall loan losses in other corporate sectors to continue to

deteriorate moderately in the next two years, followed by some slow improvement after 2014. We expect a

notable deterioration in retail mortgage asset quality, although from an exceptionally benign level. We assess the

cost of risk at around 10 basis points (bps) of average loans in 2011 and we expect the cost of risk related to this

segment to remain comparable with other peer markets. Downside risk to our scenario is focused on any spillover

effect from the moribund property market and household consumption on the SME sector first, and on retail

lending in the event of a material rise in unemployment.




Table 4

Actual And Projected Credit Loss Rates (As A % Of Lending)

2011 (actual) 2012 (estimated) 2013 (projected)

Corporate 0.80 1.00 1.10

Residential mortgages 0.10 0.13 0.18

Total loan portfolio 0.33 0.42 0.50

Data based on Standard & Poor's estimates.

INDUSTRYRISK |

3

The industry risk score for the Dutch banking industry is '3', based on our assessment of three factors: institutional

framework, competitive dynamics, and systemwide funding.

Institutional framework: intermediate risk

Our institutional framework risk score is based on an analysis of banking regulation and supervision, regulatory track

record, and governance and transparency.

Banking regulation and supervision. In our view, banking regulation and supervision are of "intermediate risk". A

commission was set up following the financial crisis to assess potential weaknesses in the supervisory framework,

leading to a number of initiatives proposed by the Ministry of Finance. We consider that a number of measures have

already been implemented, which have helped strengthen the Dutch Central Bank's (DNB) governance and

supervisory culture. The DNB acts as the central regulator that supervises all types of financial institutions. We believe

that the Intervention Act, in place since June 2012, provides enhanced powers to the Dutch Central Bank and Ministry

of Finance to resolve a distressed financial institution in an orderly way.

Regulatory track record.The Dutch regulatory track record is one of the key constraints on our institutional framework

score. Only one small domestic bank failed in the recent turmoil, but a number of larger institutions--including two of

the three largest banks--have required significant extraordinary government support, including in the form of capital

injections. However, we consider that the response by the Dutch authorities to the emerging problems during the crisis

was timely and appropriate; the authorities have also ensured that banks took substantial corrective actions, which

banks have implemented rapidly.

Governance and transparency. We consider that governance and transparency in the Dutch banking industry is "at

least adequate". Nearly all institutions provide timely release of full-year accounts prepared and audited under

International Financial Reporting Standards (IFRS). Additionally, they release detailed three- or six-monthly financial

accounts or trading updates, and annual Pillar 3 disclosures. The Dutch corporate governance code--effective since

2004, with an update effective as of January 2009--follows international best practice. All Dutch listed companies have

to follow the guidelines on a "comply or explain" basis.

Competitive dynamics: intermediate risk

This factor represents the structural implications of the competitive landscape that a bank faces within the broader

banking industry. It is determined by risk appetite, industry stability, and market distortions.

Risk appetite. We assess the risk appetite of Dutch banks as "moderate". Until the recent crisis, strong domestic

concentration in a mature banking sector with moderate revenue growth prospects led to international expansion by

some of the largest players. We believe that the risk appetite in some of these international activities often exceeded




the banks' risk appetite domestically or was not sufficiently defined. This expansion has generally been suspended or

has materially slowed down as a result of the crisis and past problems faced by most large banks in some of their

overseas exposures, including through purchased structured credit products. We believe that the ensuing simplification

of the business models of the large Dutch banks, and revised international ambitions, are compatible with profitability

targets which have been lowered materially.

Industry stability. We believe the Dutch banking system is characterized by sound competitive dynamics. The

concentration of the industry is already very high, with three main players controlling more than 70% of the market,

according to our estimates. In addition, some capacity has been taken out of the market as a result of the merger of

Fortis Bank Nederland with ABN Amro Bank during the crisis, but also as a result of the withdrawal of number of

foreign competitors from the corporate market. Market discipline has enabled a strengthening in lending margins over

the past four years. However, we believe that deposits--and more generally funding margins--will remain under some

pressure due to the lengthening of wholesale funding maturities and increasing shares of deposit funding targeted by

domestic banks. As a result of modest lending volumes anticipated in the medium term, most players have

implemented a number of cost containment measures. This is also reflected in a trend toward more direct distribution

and product simplification.

Market distortions. We consider market distortions in the Dutch market to be limited. Although the Dutch government

owns ABN Amro Bank--one of the three main banks--as a result of state aid provided during the crisis, the bank

continues to operate on commercial terms and government ownership is temporary. We classify two Dutch banks as

government-related entities (GREs) under our criteria (Bank Nederlandse Gemeenten and Nederlandse

Waterschapsbank), but their activities are restricted to lending to public-sector or government-guaranteed borrowers.

Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland) is the dominant retail bank in The

Netherlands. Despite its cooperative status, and prioritization of steady, long-term franchise growth over short-term

returns, we do not believe that this institution engenders any material market distortion for the overall system.

Table 5

Competitive Dynamics


(Mil. €) 2007 2008 2009 2010 2011

ROE of domestic banks (%) 18.7 (12.5) (0.4) 7.1 5.4

ROE of corporate sector (%) 13.2 15.5 10.0 12.3 N/A

System-wide return on average assets for banking sector (%) 0.6 (0.4) (0.0) 0.3 0.2

Net interest income to average earning assets for banking sector (%) 1.0 1.1 1.2 1.3 1.4

Market share of largest three banks N/A 61.0 71.0 73.0 75.0

Market share of gov't-owned + not-for-profit banks N/A 6.1 14.6 14.0 14.0

N/A--Not applicable.

Systemwide funding: low risk

The systemwide funding risk score assesses the relative stability of a banking sector's funding sources and its access to

alternative funding sources.

Although the Dutch banking system has a material funding gap in terms of its deposit-to-loan ratios, we believe that it

has certain strengths that offset this weakness, namely a moderate percentage of banking sector external indebtedness

set against a background of macroeconomic current account surpluses, an active and relatively deep domestic bond

market, as well as a highly rated and supportive government that has a proven track record of providing liquidity and

guarantees to the banking sector.




Core customer deposits. Core deposits typically fund about half of total loans in the Dutch banking system. This

material funding gap is due to the large amount of mortgage debt outstanding owing to tax relief, and because Dutch

households' savings are typically channelled into investments such as life insurance and pension products. We

estimate the resulting funding gap in domestic retail activities at more than €200 billion for Dutch banks. We expect

this gap to narrow in the foreseeable future, but only slowly, as a result of existing measures to curb mortgage debt and

those that are about to be implemented, and increasing household deposits. Recently introduced tax-efficient savings

products--competing to some extent with traditional nonbank investments--should also support this trend.

External funding. Domestic investors are large investors in the debt issued by Dutch banks to fill in their structural

funding gap. However, foreign investors also invest in Dutch banks' debt, leading to a moderate net external debtor

position for the Dutch banking system. This contrasts with the overall net external creditor position of the overall

Dutch economy. Compared with most of their eurozone peers, Dutch banks appear to have maintained better access

to external funding in recent quarters in our view. As a result of the eurozone crisis, Dutch banks' deposits with the

European Central Bank, through the DNB, increased rapidly in the second half of 2011. At the end-2011 peak, about

€150 billion of deposits with the DNB (57% of the DNB's balance sheet) were onlent to other eurozone central banks

through the Target 2 mechanism.

Domestic debt capital markets. The depth of the Dutch debt capital markets is a strength in our overall assessment of

systemwide funding as "low risk". It is supported, among other things, by the substantial balance sheets of the Dutch

insurance groups and pension funds--large investors in fixed-income securities domestically and abroad--and the

regular presence in the market of a number of large blue chip domestic corporates along with financial institutions.

Debt instruments are available at both short- and long-term maturities.

Government role. The Dutch government has a proven track record of providing guarantees and liquidity during

market turmoil. For example, Dutch institutions issued up to €50 billion in 2008-2009 under the government guarantee

scheme set up to alleviate the shortage of liquidity in the markets at that time. Dutch banks can also access ECB

facilities, which are very large and responsive. Capital support was also extensive during the crisis. In addition to the

nationalization of ABN Amro Bank, three financial groups with large banking operations (ABN AMRO, ING, and SNS

REAAL) and insurance group AEGON N.V. received large capital injections, totalling close to €20 billion, about half of

which has been repaid to date.

Table 6

Systemwide Funding


(Mil. €) 2007 2008 2009 2010 2011 2012F

Systemwide domestic core customer deposits/Systemwide domestic loans 50.2 48.3 49.0 48.4 48.9 49.9

Banking sector net external debt/systemwide domestic loans* 12.7 10.1 12.7 10.8 8.6 9.0

Systemwide domestic loans/consolidated systemwide assets 45.9 45.5 46.0 51.7 49.4 N/A

Outstanding bonds and CPs issued by the private sector in the domestic markets/GDP (%) 70.9 68.6 74.3 75.5 72.9 N/A

*Ajdusted for net Target 2 balances; source: BIS. N/A--Not applicable.

Peer BICRA Scores

Our economic risk score for The Netherlands is in line with those for France, Denmark, and the U.K., all of which are

in a "correction phase", but weaker than the one for Austria, for instance. Our industry risk score for The Netherlands is

in line with its peers, apart from France, which compares more favorably. This partly reflects its banking system's




better track record through the recent crisis.

Table 7

Peer BICRA Scores

Netherlands France U.K. Austria Denmark

BICRA group 3 2 3 2 3

Economic risk score 3 3 4 2 3

Industry risk score 3 2 3 3 3

Government propensity

to support

Supportive Supportive Supportive Supportive Supportive

Sovereign rating AAA/Negative/A-1+ AA+/Negative/A-1+ AAA/Stable/A-1+ AA+/Negative/A-1+ AAA/Stable/A-1+

BICRA subscores

Economic resilience 1 2 1 1 1

Economic imbalances 3 3 4 2 3

Credit risk in the

economy

3 2 3 3 3

Institutional framework 3 2 3 3 2

Competitive dynamics 3 2 3 3 3

Systemwide funding 2 2 2 2 3

Government Support

We classify the Dutch government as "supportive" toward its banking system. Our view is underpinned by the

government's significant track record of providing support to domestic institutions in times of economic duress.

We believe that the Dutch government wishes to avoid having to resort to taxpayers' money again to support failing

banks in the future. We consider that the resolution regime introduced in June 2012 should give the authorities a

framework for intervention at an earlier stage, as well as a way to support institutions more selectively. However, we

believe that the framework is in line with that being considered by the European authorities. In addition, we continue

to view the Dutch authorities as supportive because we believe that, in practice, the current uncertain macroeconomic

backdrop and persisting systemic contagion risk would still encourage the authorities to support systemically

important institutions if needed.

Table 8

Five Largest Dutch Financial Institutions By Assets

Long-term counterparty credit rating/outlook Assets* (bil. €) Systemic importance

ING Bank A+/Negative 900 high

Rabobank Nederland AA-/Stable 771 high

ABN Amro Bank A/Stable 421 high

Royal Bank of Scotland N.V. A/Stable 134 --

Bank Nederlandse Gemeenten AAA/Watch Neg 143 GRE

*Data as of June 30, 2012; consolidated; Sources: Standard & Poor's Financial Institution Ratings. GRE--Government-related entity.




Related Research And Criteria

• Various Rating Actions Taken On Dutch Banks Due To Increased Economic Risks, Nov. 16, 2012

• No Pain, No Gain: How The Housing Market Correction Is Affecting Dutch Banks, June 27, 2012

• The Eurozone's New Recession--Confirmed, Sept. 25, 2012

• S&P's BICRAs Measure Banking Risks For 86 Countries, Nov. 9, 2011

• Sovereign Government Rating Methodology And Assumptions, June 30, 2011

• Bank Resolution Regimes: Potential Rating Implications As Sovereign Support Frameworks Evolve, March 16, 2011

• Bank Capital Methodology And Assumptions, Dec. 6, 2010

• Understanding Standard & Poor's Rating Definitions, June 3, 2009

• No Pain, No Gain: How The Housing Market Correction Is Affecting Dutch Banks, June 27, 2012




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