SNS Bank's return to the capital markets signals stronger fundamentals

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1 SNS Bank N.V. ISSUER IN-DEPTH SNS Bank's return to the capital markets signals stronger fundamentals RATINGS SNS Bank N.V. Outlook Stable Bank deposits Baa1 Baseline Credit Assessment baa3 Adjusted Baseline Credit Assessment baa3 Counterparty Risk Assessment A2(cr)/ P-1(cr) Senior Unsecured Baa2 Subordinated MTN (P)Ba1 Commercial Paper -Dom Curr P-1 Other Short Term (P)P-2 Moody's KEY METRICS: SNS Bank N.V Total assets (EUR mn) On October 29, 2015, Dutch retail lender SNS Bank issued a EUR500 million Tier 2 bond, which marks a return to the markets since the bank was nationalised in February This new issue signals SNS Bank s stronger credit fundamentals, which translated to an upgrade of its baseline credit assessment (BCA) to baa3 from ba1, while its long-term deposit rating was affirmed at Baa1 and its senior unsecured rating at Baa2 with a stable outlook. The main factors supporting SNS Bank s improved credit strength are as follows: SNS Bank has streamlined its business profile and refocused on the Dutch retail market. SNS Bank has effectively separated from the SNS REAAL group, as of 30 September 2015, and now operates as a fully independent bank owned by the Dutch government. The new situation simplifies the group structure and governance and all funding granted by SNS Bank to SNS REAAL and Vivat, the group insurance company sold to Anbang, will be terminated. As a result of this measure, SNS Bank is now exclusively focused on the Dutch retail market, which is positive for its asset quality HY , , ,988.0 Tangible Common Equity (TCE) (EUR mn) 2, , ,008.6 Problem Loans/ Gross Loans 4.5% 4.3% 4.2% TCE/RWA 15.0% 18.7% 22.4% Net Income/ Tangible Assets -1.8% 0.2% 0.8% Market Funds/ Tangible Banking Assets 34.7% 22.5% 18.4% Liquid Banking Assets/Tangible Banking Assets 23.5% 17.4% 19.3% Moody's The quality of the loan book has improved following a tightening of lending standards. SNS Bank has refocused its mortgage loan production on the lower risk segments of the market; the average loan-to-value (LTV) ratio of the whole mortgage portfolio decreased to 85% in June 2015 from 89% in 2013, and the average cost of risk has decreased to 15 basis points (bps) of gross loans from 28 bps in SNS bank s total non-performing loan (NPL) ratio has stabilised at above 4%, in the first half of 2015, which is closer to the average of the Dutch banking system (3.6% at end-june 2015) than it was previously. We expect this trend to continue over the next 12 to 18 months. Capital has improved due to both increasing reserves and a downsizing of assets. At end-june 2015, the bank s stand-alone CET1 ratio (Basel III fully loaded) was 20.7% and its leverage ratio was 4.3%. These ratios are expected to improve further by the end of 2015 as the redemption of a EUR250 million loan to Vivat will further decrease risk-weighted assets (RWAs). ANALYST CONTACTS Laurent Le Mouel VP-Senior Analyst laurent.lemouel@moodys.com Yasuko Nakamura VP-Senior Credit Officer yasuko.nakamura@moodys.com Alain Laurin Associate Managing Director alain.laurin@moodys.com Nick Hill Managing Director - Banking nick.hill@moodys.com Profitability is picking up but is constrained. SNS Bank's profitability is picking up again, as a result of: (i) Declining interest rates on retail and wholesale funding; and (ii) lower credit costs on retail mortgages. The bank s net interest margin increased to 1.54% of average assets in June 2015, from 1.37% in June As of June 2015, net income amounted to

2 0.7% of tangible assets, a higher level than Dutch peers. However, profitability is constrained by interest margins, which amount to 80% of the bank's total revenues, and are under pressure as a result of protracted low interest rates in Europe. We, thus, expect net income progression to be limited in the future. Liquidity profile remains a credit strength and access to market funding is no longer constrained. SNS Bank's liquidity profile is sound, primarily as a result of its large deposit base. The bank s loan-to-deposit ratio was 107% at June 2015, declining from 172% in As a consequence, its reliance on market funding has decreased to 18.4% of its tangible banking assets at June This was also the result of SNS Bank s restricted access to capital market since its nationalization in However, on 29 October 2015, SNS Bank issued a EUR500 million Tier 2 bond, which signals its return to markets and should eventually allow the bank to develop a more diverse funding base. SNS Bank has streamlined its business profile and refocused on the Dutch retail market SNS Bank is the fourth largest retail bank in the Netherlands, with a deposit base of EUR47.6 billion and a loan book of EUR49.7 billion as of June The bank s creditworthiness was severely damaged by large losses on its commercial real estate lending in This impaired depositors confidence who took out retail deposits of EUR2.1 billion in the weeks before its public bail out. After its nationalisation on February 1, 2013, the SNS REAAL group, SNS Bank s parent company, has been dismantled progressively: in 2013, SNS Bank s loss-making Property Finance portfolio was transferred to Propertize B.V., wholly owned by the Dutch government s company NL Financial Investments (NLFI), and put in run-off. In July 2015, SNS REAAL s insurance subsidiary Vivat, was sold to a Chinese insurance company, Anbang Group Holdings Co. Ltd. On September 30, 2015, SNS Bank was separated from SNS REAAL and placed under the ownership of the Dutch State through NLFI and a pass-through holding company, SNS Holding BV. This latest development, which marks the end of the bank's dismantling process, simplifies the governance structure of the bank and allows the termination of SNS REAAL s intra-group financing. In June 2015, a Tier 2 loan of EUR40.2 million from SNS REAAL to SNS Bank was repaid. SNS Bank s remaining credit exposure on Vivat of EUR250 million will be repaid by year-end In accordance with the restructuring plan approved by the European Commission on December 19, 2013, SNS Bank s shareholding could be transferred to the private sector. The Dutch Minister of Finance has requested NLFI to advise on the sale of SNS Bank by mid This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Exhibit 1 Summary of SNS REAAL restructuring Source: SNS Bank's Tier II Investor and analyst presentation (October 2015) As a consequence of the dismantling of the group, SNS Bank s activities are now refocused on the Dutch retail market: 91% of the EUR49.7 billion loan book is comprised of Dutch retail mortgages as of June The other 9% comprises loans to SMEs and public sector entities. Exhibit 2 SNS Bank Is Refocusing on the Dutch Retail Market SNS Bank: Loan portfolio breakdown (gross amount as of June 2015) Source: SNS Bank, Interim Financial Report, 27 August

4 We consider the dismantling of the group and the refocus of SNS Bank to its core market in the Netherlands to be positive, as they have helped to improve the overall quality of its loan book. However, we expect it will take time for the bank to rebuild its mortgage business to pre-crisis levels and to meet the target market share of around 8% that management has set: market share in retail mortgages slightly decreased to 7.1% in June 2015, from about 8% in June 2013, and its market share in retail savings was stable at 10.7%, as of the same date. Stricter lending standards have helped improve SNS Bank s asset quality Remedial action following SNS Bank s nationalisation involved removing the troubled commercial real estate portfolio from the bank s balance sheet and strengthening its capital. As a result, SNS bank s total NPL ratio has stabilised above 4%, which is closer to the average of the Dutch banking system (3.6% at end-june 2015) than it was previously. Exhibit 3 SNS Bank s Non-Performing Loan Ratio Is Closer to the Dutch Banking Average Large Dutch banks: ratio of non-performing loans to gross loans As economic and employment conditions continue to improve in the Netherlands, we expect some further, but more gradual, strengthening of SNS Bank s asset quality profile over the next months. In 2013, the Dutch government introduced new measures to limit the tax deductibility of interests paid on mortgages and progressively decrease the maximum LTV of mortgage loans. Together with the decisions made by SNS Bank's management to tighten lending standards, these measures have contributed to the improvement of the overall quality of SNS Bank s mortgage portfolio. In the first half of 2015, 61% of new loan production was guaranteed by the Dutch mortgage guarantee provider NHG and another 15% has a LTV ratio below 75%. As a consequence, the risk profile of the whole mortgage loan book is slowly improving. The average LTV of the whole mortgage portfolio decreased to 85% in June 2015 from 89% in 2013, and the average cost of risk has also decreased to 15 bps of gross loans in June 2015 from 35 bps at year-end 2014, which remains slightly higher than the average of Dutch peers (5-10 bps in June 2015). 4

5 Exhibit 4 SNS Bank s Mortgage book quality is improving but still lagging behind peers SNS and large Dutch banks average: mortgage book credit cost % of mortgage gross loans Source: Banks Financial Statements A large part of SNS Bank s mortgage portfolio was originated in the years prior to the 2007/2008 financial crisis, at a time when lending standards were less conservative. The tightening of lending standards mentioned above and the improved conditions in the Dutch mortgage market will continue to positively impact the quality of the bank s mortgage portfolio. However, we expect that it will take time for asset quality metrics to catch up with peers. Furthermore, there is a risk that SNS Bank's plan to increase market share may lead it to loosen its lending standards. SNS Bank has strengthened its capital base SNS Bank's capital increased in 2014 and 2015 as a result of 18 months of retained earnings, as SNS Bank has not paid any dividends in this period, and a decrease in risk-weighted assets, driven by a decline in mortgage loans and derivative positions. Furthermore, as a consequence of the transfer of SNS Bank from SNS REAAL to the Dutch state, SNS Bank no longer bears the risk of its former insurance sister company. At end-june 2015, the bank s stand-alone CET1 ratio (Basel III fully loaded) was a high 20.7% and its leverage ratio was 4.3%. SNS Bank s leverage ratio, which is structurally low due to the low risk weight applied to mortgages, now compares favourably to Dutch peers. 5

6 Exhibit 5 SNS Bank s Capital Ratio Is Significantly Higher Than Dutch Peers Large Dutch banks: tangible common equity over risk-weighted assets Exhibit 6 SNS Bank s Leverage Ratio Now Compares To Peers Large Dutch banks: Tier 1 leverage ratio We expect these ratios to further improve by the end of 2015, as the redemption of a EUR250 million loan to Vivat will further decrease RWAs. Furthermore, SNS Bank is expected to further increase its capital base to meet the future MREL requirement and protect its depositors from bail-in in the case of resolution. Going forward, SNS Bank could also be materially affected by both the new standard on leverage and ongoing regulatory works on Basel 4. Although we do not yet know how this framework will be calibrated, it will likely result in action to reinforce capitalisation. Profitability is picking up but is constrained SNS Bank s underlying profitability has stabilised over the last two years as loan-loss provisions have decreased. A EUR1.4 billion net loss reported in 2013 was related to the transfer of its troubled commercial real estate portfolio. In June 2015, the bank reported a EUR244 million net profit - corresponding to a net income / tangible banking asset ratio of 0.7%, higher than Dutch peers. This result is 6

7 mainly due to: (i) declining interest rates on retail and wholesale funding; and (ii) lower credit costs on retail mortgages. The bank s net interest margin increased to 1.54% of average assets in June 2015, from 1.37% in June Exhibit 7 SNS Bank s Profitability Has Recovered Large Dutch banks: net income over tangible assets SNS Bank s profitability is now sufficiently high to absorb ongoing loan-loss provisions. In 2014, SNS Bank s loan-loss provisions represented 39% of its pre-provision income, declining from 62% in They are now broadly in line with the average of the Dutch banking system. Exhibit 8 SNS Bank's Pre-provision Profits Are Able to Absorb On-going Loan Loss Provisions Large Dutch banks: Loan loss provisions as % of pre-provision income Source: Moody's Banking Financial Metrics (adjusted) However, SNS Bank s profitability is constrained by the fact that 80% of its revenues come from retail mortgages, and are thus highly dependent on the Dutch mortgage market. This lack of diversification makes its business model more fragile in the case of a new downturn in Dutch housing prices. In addition, the prospect of protracted low interest rates in Europe will continue to put pressure on 7

8 the bank s interest margin. Moreover, more intense competition in the mortgage market, which has intensified over the past year, in particular from the non-bank sector, may weigh on SNS Bank s revenues. On the positive side, SNS Bank s operational efficiency is the strongest among Dutch banks at 42% in June 2015, reflecting recent costcutting initiatives. However, we expect an increase in operating costs over the next months due to dis-synergies following the separation of SNS Bank from SNS REAAL. Exhibit 9 SNS Bank is more cost-efficient than other large Dutch banks Large Dutch banks: Cost-to-income ratio Liquidity is sound and no longer constrained by limited access to market funding SNS Bank s liquidity position is sound, as the bank is financed at 81% through retail deposits. The bank s loan-to-deposit ratio has fallen over the last years to 107% at June 2015, from 172% in This is due to both the reduction of the loan portfolio and the collection of new deposits. Exhibit 10 SNS Bank Is Mostly Funded Through Retail Deposits SNS Bank: Funding breakdown as at June 2015 Source: SNS Bank, Interim Financial Report, 27 August

9 As a consequence, SNS Bank s use of market funding has decreased to 18.4% of its tangible banking assets at June 2015, a level which is significantly lower than that of Dutch peers. Exhibit 11 SNS Bank Is Less Reliant Than Peers to Market Funding Large Dutch banks: market funding over tangible banking assets SNS Bank's liquid banking assets amounted to EUR14.1 billion at June 2015, up 8% from year-end It is comprised of cash (EUR3.4 billion), sovereign and public sector bonds (EUR4.2 billion) and RMBS eligible for central bank refinancing (EUR5.8 billion). Although these assets are eligible to ECB operations, we consider them of lower quality than central bank deposits or government bonds, as they may not be negotiable in the secondary market in a stress situation. However, the total buffer covers the entire stock of short-term liabilities and SNS Bank published a high Basel III liquidity coverage ratio of 326% in June Exhibit 12 SNS Bank s Liquidity Buffer Increased From A Low Level SNS Bank: Liquid assets as a % of tangible banking assets 9

10 On October 29, 2015, SNS Bank issued a EUR500 million 10-year Tier 2 bond. This is the first time SNS Bank has tapped the capital market since its nationalization. The bond was issued at a spread of 365 bps over the five-year euro mid-swap, which is a relatively high level. It was over-subscribed by up to more than twice the nominal amount (to EUR1.1 billion). This issuance indicates renewed investor appetite for SNS Bank s debt, and the bank plans to be a frequent issuer of capital market debt in the future. This development is credit positive as it demonstrates that SNS Bank's liquidity profile is no longer constrained by its restricted access to capital market. This is reflected in a higher liquidity score in the bank's baseline credit assessment (BCA). Furthermore, additional Tier 2 instruments increase the amount of subordinated debt, which protects senior creditors and depositors in a bank resolution scenario. 10

11 Peer Group:» Abn Amro Bank NV» ING Bank NV» Rabobank Nederland Methodology used:» Banks Moody's Related Research Special Reports: SNS Bank N.V. - The Netherlands: Progress Towards Full Recovery Underpins Our Positive Outlook Higher Minimum Leverage Ratio Would be Positive for Dutch Banks Credit Opinion: SNS Bank N.V. Company Profile: SNS Bank N.V. To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 11

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13 ANALYST CONTACTS PARIS Laurent Le Mouël Vice President - Senior Analyst laurent.lemouel@moodys.com Yasuko Nakamura Vice President - Senior Credit Officer yasuko.nakamura@moodys.com 13 Nick Hill Managing Director nick.hill@moodys.com Alain Laurin Associate Managing Director alain.laurin@moodys.com AUTHOR Laurent Le Mouël FINANCIAL WRITER Carolyn Henson EDITOR Hannah Collins