Research Update: Outlook On NIBC Bank To Stable On Stabilizing Economic Risks In The Netherlands; Ratings Affirmed At 'BBB-/A-3' Primary Credit Analyst: Nigel Greenwood, London (44) 20-7176-7211; [email protected] Secondary Contact: Alexandre Birry, London (44) 20-7176-7108; [email protected] Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 1 1367450 | 300001899 Research Update: Outlook On NIBC Bank To Stable On Stabilizing Economic Risks In The Netherlands; Ratings Affirmed At 'BBB-/A-3' Overview • In our view, the Dutch banking industry should benefit moderately from the domestic economy's gradual exit from a protracted correction phase. • We consider that improving conditions in the housing market illustrate this trend, despite the still-weak commercial property market. • In our view, the trend in domestic economic risk for Dutch banks is now stable. • We are therefore affirming our ratings and revising the outlook to stable from negative on NIBC Bank N.V. • The stable outlook reflects out assumption that NIBC will maintain robust capitalization by our measures, and that the likely pick up in its business activity will be at least matched by deposit growth. Rating Action On Nov. 4, 2014, Standard & Poor's Ratings Services revised to stable from negative its outlook on Netherlands-based NIBC Bank N.V. (NIBC). At the same time, we affirmed our 'BBB-/A-3' counterparty credit ratings on the bank. Rationale The affirmation reflects our view that the domestic economic risks under which Dutch banks operate are now stabilizing (see "Various Rating Actions Taken On Dutch Banks On Stabilizing Economic Risks," published today on RatingsDirect). Under our base-case scenario, we expect that real GDP will grow by around 1% on average in 2014 and 2015, after a two-year recession in 2012 and 2013. We anticipate that domestic house prices will continue to increase moderately. We also expect a continued gradual reduction in private sector leverage, limited demand for credit, and a steady decrease in credit losses next year (albeit from a relatively high level). Dutch property prices peaked in mid-2008 and had fallen by about 20% in mid-2013, an average annual decline of about 4%. Prices have since stabilized and started to increase moderately. Encouragingly, the volume of property transactions increased by about 40% in the first nine months of 2014 year-on-year. We expect this trend to continue and forecast moderate nominal house price growth of about 2% in 2014 and 2015, supported by improved conditions in the domestic economy, increased affordability of housing, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 2 1367450 | 300001899 Research Update: Outlook On NIBC Bank To Stable On Stabilizing Economic Risks In The Netherlands; Ratings Affirmed At 'BBB-/A-3' limited housing supply, and greater certainty on fiscal policy reforms. However, commercial real estate prices have continued to fall, a trend we expect to reverse only gradually from 2015. Gross household leverage remains elevated and growth in the eurozone (European Economic and Monetary Union) is forecast to be below average. Combined with ongoing geopolitical events that may encumber the export-orientated Dutch economy, we expect these factors to limit the improvement in the private sector. However, in our view, Dutch banks benefit from a diversified and competitive domestic economy, flexible fiscal policy, and adaptable labor market, underpinning the government's track record of reporting strong current account surpluses. Beyond our view of the stable banking environment in The Netherlands, which underpins NIBC's 'bbb+' anchor--the starting point in assigning an issuer credit rating--our view of the bank's stand-alone credit factors remains unchanged. NIBC's stand-alone credit profile (SACP) is 'bbb-'. In particular, we assume that NIBC's capitalization will remain a supportive ratings factor. We calculate that NIBC's risk-adjusted capital (RAC) ratio stood at 10.9% at end-2013 (up from 9.8% at end-2012), which is above the 10% threshold which we ascribe to a "strong" capital and earnings assessment. The improvement in 2013 was due to certain exposure reductions, especially in the corporate book. We estimate that this ratio will be little changed by year-end 2014 and expect that it will be in the 10.5%-11.0% range through end-2016. We assume that in future the balance sheet will grow, despite the previous declining trend, but that this growth will be modest and will be matched by deposit growth. Reported operating income has tended to fall in recent years, as NIBC focused on reducing higher-risk exposures and rebalancing its funding profile in a generally difficult operating environment. NIBC has long-standing expertise in its corporate niches, which in our view helped it to defend its franchise through the recent downturn. More recently, we have seen evidence of growth in corporate banking business. Moreover, new mortgage lending has resumed following a change in approach; the bank now pushes its NIBC Direct-branded business, rather than pursuing "white-label" mortgages via a distribution partner or insurance company. We consider that NIBC is now better positioned to expand both businesses in future and anticipate that income will start to rise. Outlook The stable outlook reflects our assumption that NIBC will maintain robust capitalization by our measures, and that the likely pick up in business activity will be at least matched by deposit growth. We could lower the ratings if we saw a deterioration in the bank's hitherto resilient asset quality or if the risk appetite evolved to one which we no longer consider consistent with an "adequate" risk position assessment. This scenario could be relevant, in particular, if our forecast for our RAC ratio WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 3 1367450 | 300001899 Research Update: Outlook On NIBC Bank To Stable On Stabilizing Economic Risks In The Netherlands; Ratings Affirmed At 'BBB-/A-3' is very close to our 10% threshold for a "strong" capital and earnings assessment. We could raise the ratings if we observe a substantial improvement in earnings without an associated increase in risk appetite, combined with a stable economic backdrop in its chosen markets. In particular, if our confidence in the predictability of NIBC's revenues increased, we could revise our business position assessment to "moderate" from "weak." However, this possibility appears unlikely in the near term as the management team seeks to reinvigorate and grow its niche franchises. We could also raise the ratings if we observe a sustainable rebalancing of the bank's funding profile, indicated by a further decrease in its reliance on wholesale funding, and if our confidence in the resilience of NIBC's deposit base continues to grow. Ratings Score Snapshot To BBB-/Stable/A-3 From BBB-/Negative/A-3 SACP Anchor Business Position Capital and Earnings Risk Position Funding and Liquidity bbbbbb+ Weak (-2) Strong (+1) Adequate (0) Below Average and Adequate (-1) bbbbbb+ Weak (-2) Strong (+1) Adequate (0) Below Average and Adequate (-1) Support GRE Support Group Support 0 0 0 0 0 0 Additional Factors 0 0 Issuer Credit Rating Related Criteria And Research Related Criteria • Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Sept. 18, 2014 • Banks: Rating Methodology And Assumptions, Nov. 9, 2011 • Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 • Bank Capital Methodology And Assumptions, Dec. 6, 2010 Related Research • Various Rating Actions Taken On Dutch Banks On Stabilizing Economic Risks, Nov. 4, 2014 • Banking Industry Country Risk Assessment: The Netherlands, Nov. 4, 2014 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 4, 2014 4 1367450 | 300001899 Research Update: Outlook On NIBC Bank To Stable On Stabilizing Economic Risks In The Netherlands; Ratings Affirmed At 'BBB-/A-3' Ratings List Ratings Affirmed; CreditWatch/Outlook Action To NIBC Bank N.V. Counterparty Credit Rating BBB-/Stable/A-3 From BBB-/Negative/A-3 Ratings Affirmed NIBC Bank N.V. Senior Unsecured Subordinated Junior Subordinated Commercial Paper Certificate Of Deposit BBBBB B+ A-3 BBB-/A-3 Additional Contact: Financial Institutions Ratings Europe; [email protected] Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. 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