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Fitch Affirms SNS REAAL & SNS Bank at 'BBB+'; Downgrades Insurance Entities' IFS to 'BBB+'
August 5, 2013 / 2:52 PM / 4 years ago

Fitch Affirms SNS REAAL & SNS Bank at 'BBB+'; Downgrades Insurance Entities' IFS to 'BBB+'

(The following statement was released by the rating agency) LONDON/PARIS, August 05 (Fitch) Fitch Ratings has affirmed SNS REAAL N.V.'s (SNS REAAL) and SNS Bank N.V.'s (SNS Bank) Long-term Issuer Default Ratings (IDRs) and Support Rating Floors (SRF) at 'BBB+' and removed them from Rating Watch Evolving (RWE). The Outlook on the Long-term IDRs is Stable. At the same time, the agency has upgraded SNS Bank's Viability Rating (VR) to 'bb-' from 'f' and placed it on Rating Watch Positive (RWP). Fitch has also downgraded the Insurer Financial Strength (IFS) ratings of SRLEV and REAAL Schadeverzekeringen to 'BBB+' from 'A-' and removed them from RWE. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary. The rating actions reflect the on-going restructuring of SNS REAAL, the group's holding company, and its banking and insurance operating entities under state ownership. They take into account the agency's belief that the Dutch state will ultimately look to privatise the group once its restructuring is completed, it has demonstrated a long enough track record of operations under its new scope and market conditions permit such a transaction. SNS REAAL's and SNS Bank's IDRs were placed on RWE on 5 February 2013 following the nationalisation of the group to solve the financial difficulties experienced by SNS Bank (SNS REAAL's banking subsidiary) in its property finance (PF) portfolio. As part of the nationalisation, the Dutch state has provided substantial extraordinary support mainly in the form of a EUR2.2bn fresh capital injection into SNS REAAL (of which EUR1.9bn has been downstreamed to the bank), conversion into share premium of EUR0.6bn core Tier 1 hybrid securities provided as state aid in 2008 and a EUR1.1bn bridge loan to SNS REAAL to enable it to repay debt to external creditors and group companies. The state has required substantial further provisions (EUR2bn, in addition to the EUR1.2bn reserve coverage at end-2012) against the EUR7.8bn PF portfolio and has plans to remove the portfolio from SNS Bank into a separately capitalised legal entity that will, initially at least, be funded by SNS Bank but with the benefit of a government guarantee. The European Commission (EC) temporarily approved the state aid on 22 February, but the Dutch state has to submit a restructuring plan to the EC by 22 August. In particular, the plan to remove the PF portfolio from SNS Bank requires state aid approval. The timing of the EC's final approval is uncertain, but a decision might potentially be expected towards the end of 2013 or during H114. It is Fitch's base case that any asset divestments that could be required by the EC would most likely be concentrated on the group's insurance activities. KEY RATING DRIVERS - IDRs, SENIOR DEBT, SUPPORT RATING and SUPPORT RATING FLOOR SNS Bank's and SNS REAAL's 'BBB+' Long-term IDRs are at their SRFs and reflect Fitch's continued view that there is currently a high probability that the Dutch state will support both entities, if required. This is primarily because SNS REAAL, and thus its fully-owned subsidiary SNS Bank, are now fully state-owned and are likely to remain so over the medium term. SNS Bank is considered a systemically important bank by the Dutch authorities and was nationalised in order to preserve domestic financial stability. KEY RATING DRIVERS - INSURANCE ENTITIES Fitch also placed the insurance operating entities' ratings on RWE on 16 July 2012 reflecting SNS REAAL's announcement that it would take capital strengthening initiatives by the end of 2012. One option to strengthen SNS REAAL's capital position would be the sale of the group's insurance operations. On 1 February 2013, the Dutch Minister of Finance decided to nationalise SNS REAAL. As a 100% subsidiary of SNS REAAL, REAAL NV (the insurance holding company) and its subsidiaries were also nationalised. Although no information regarding the possible disposal of the insurance operations has yet been made available, Fitch still views the sale of the group's insurance operations, either partly or in total, as a high possibility. Therefore the insurance entities are now rated on a standalone basis. The downgrade of the insurance entities reflects Fitch's view that profitability and interest coverage will remain weak, exacerbated by the low interest-rate environment, difficult economic conditions and the fierce competition in the Dutch insurance market. The ratings reflect the insurance subsidiaries' strong business position in the Dutch insurance market and good capital adequacy (end-March 2013: 181%), offset by weak profitability and interest coverage, relatively high financial leverage, and limited financial flexibility following the recent change of ownership. RATING SENSITIVITIES - IDRs, SENIOR DEBT, SUPPORT RATING and SUPPORT RATING FLOOR SNS REAAL's and SNS Bank's IDRs, SRFs and senior debt ratings are sensitive to a notable weakening in the Dutch state's ability to support its banks. They are also sensitive to a change in Fitch's assumptions around the Dutch state's propensity to support SNS REAAL, SNS Bank or Dutch banks in general. In this context, on-going developments and policy discussions around support and 'bail in' for eurozone banks are relevant. There is a clear political intention to ultimately reduce the implicit state support for systemically important banks in Europe. This might result in Fitch revising SRFs down in the medium term. Until now, senior creditors in major global banks have been supported in full (as was the case for SNS REAAL and SNS Bank), but more comprehensive resolution legislation is developing quickly and starting to make it look more feasible for taxpayers and creditors to share the burden of resolving large banks. The SRs and SRFs are also sensitive to a change in ownership. Privatisation of SNS REAAL and/or SNS Bank would exert pressure on their respective SRFs and SRs. Counterbalancing this, SNS Bank's VR is likely to have improved by the time of any return to the private sector, which would cushion or potentially even eliminate any downward pressure on SNS Bank's IDRs. KEY RATING DRIVERS - SNS BANK'S VR The upgrade of SNS Bank's VR to 'bb-' from 'f' reflects the impact of restructuring measures and recapitalisation taken by the state to date. The various measures taken as part of the nationalisation have strengthened SNS Bank's standalone creditworthiness. The substantial impairments taken in Q113 (defined as 'constructive obligation') on the PF exposures (now discounted to around 60% of their nominal value) have significantly reduced the risk to SNS Bank from this portfolio. The impact on the bank's capital was more than offset by a EUR1.9bn capital injection, EUR0.7bn of capital generated by the expropriation of the subordinated securities and reduction in risk weighted assets (RWA). As a result, SNS Bank's capitalisation is now satisfactory (estimated Fitch core capital ratio of 9.5% at end-Q113; regulatory core Tier 1 ratio of 11.5%) although net impaired loans (being residential mortgages at present) and foreclosed assets are still estimated by Fitch to be relatively high at around 80% of core Tier 1 capital, meaning the bank is exposed to a further reduction in collateral values. SNS Bank classifies as 'impaired' any retail loan with payment arrears, irrespective of their age. This is a fairly conservative definition by market standards (usually based on the '90-day past due' trigger), which inflates the ratio of net impaired loans to capital. SNS Bank's liquidity position is also satisfactory, with liquid assets comfortably exceeding wholesale debt maturing to end-2014. However, the VR also takes into account a still high reliance on capital market funding (its loan/deposit ratio was 143% at end-March 2013), historically weaker underwriting standards and weaker asset quality in its residential mortgage loan book than most of its Dutch peers (albeit still of satisfactory quality), and some uncertainties about the bank's future strategy and operations, as a consequence of possible EC requirements. RATING SENSITIVITIES - VR Fitch has placed SNS Bank's VR on RWP as the intended separation of PF through its transfer to a separate legal entity and a state guarantee on the funding provided by SNS Bank will be beneficial to the bank's intrinsic credit profile. EC approval will be required and timing for EC approval and legal transfer of PF might take longer than six months. Fitch will review the VR once the EC measures are known and agreed with the Dutch state and the transfer of PF to a separate legal entity is completed. The transfer of the PF portfolio (and state guarantee on the funding provided by SNS Bank to it) would result not only in immunising SNS Bank from tail risks in the portfolio but would also reduce RWA by around 25% (based on end-March 2013 figures); excluding property finance, SNS Bank would have reported a strong 15.6% core Tier 1 at end-March 2013. In addition, this would somewhat alleviate SNS Bank's funding needs as PF is expected to raise funding independently and repay the lines provided by SNS Bank. Ultimately, this would reduce SNS Bank's reliance on capital markets for funding. An upgrade could potentially be multi-notch. SNS Bank's VR could also be upgraded following the strengthening of its business positions (notably regaining the market share in the mortgage market it abandoned to manage its capital position and funding needs), a track record of solid operating performance, easing of the current pressure in its mortgage book, regained access to capital markets and a reduction in reliance on wholesale funding. Conversely, any set-back in the bank's cautious liquidity management or a prolonged and material deterioration in asset quality causing a significant reduction in capitalisation would be detrimental to the bank's VR. KEY RATING DRIVERS AND SENSITIVITIES - HYBRID SECURITIES The 'C' ratings on two hybrid Tier 1 securities issued by SNS Bank (XS0468954523 and XS0172565482) reflect the loss suffered by debt holders when these were expropriated by the Dutch state as part of the nationalisation. These securities have been converted into equity (as share premium). Their ratings have been withdrawn as they are no longer considered analytically meaningful. KEY RATING DRIVERS AND SENSITIVITIES - State guaranteed debt The debt securities issued by SNS Bank and guaranteed by the Dutch state are rated 'AAA', reflecting the Dutch sovereign guarantee and so are sensitive to any change in the Netherlands' rating (AAA/Negative). KEY RATING DRIVERS AND SENSITIVITIES - IFS Key ratings drivers for a downgrade of the IFS ratings would be a further decline in the group regulatory solvency ratio to below 125% or if the insurance activities' profitability does not stabilise in the medium term. The ratings are also dependent on developments over the next few months with the restructuring plans and possible requirements that could be imposed by the EC. Key ratings drivers for an upgrade would include a return to profitability in line with the 'A' rating category (for example, if reported net income reaches around EUR200m and is expected to remain at that level). The rating actions are as follows: SNS REAAL: Long-term IDR: affirmed at 'BBB+'; off RWE; Stable Outlook Short-term IDR: affirmed at 'F2'; off RWE Support Rating: affirmed at '2'; off RWE Support Rating Floor: affirmed at 'BBB+'; off RWE SNS Bank: Long-term IDR: affirmed at 'BBB+'; off RWE; Stable Outlook Short-term IDR: affirmed at 'F2'; off RWE Viability Rating: upgraded to 'bb-' from 'f'; placed on RWP Senior debt: affirmed at 'BBB+'; off RWE Market linked notes: affirmed at 'BBB+(emr)'; off RWE Hybrid Tier 1 securities: affirmed at 'C' and withdrawn Commercial paper: affirmed at 'F2'; off RWE Support Rating: affirmed at '2'; off RWE Support Rating Floor: affirmed at 'BBB+'; off RWE Dutch state guaranteed securities: affirmed at 'AAA' SNS REAAL N.V. Insurance Activities: SRLEV N.V. IFS: downgraded to 'BBB+' from 'A-'; off RWE; Stable Outlook REAAL Schadeverzekeringen N.V. IFS: downgraded to 'BBB+' from 'A-'; off RWE; Stable Outlook Contact: Primary Analyst (SNS REAAL, SNS Bank) Philippe Lamaud Director +33 1 4429 91 26 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Primary Analyst (Insurance entities) Anais Daveine Associate Director +33 1 4429 92 80 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst (SNS Bank) Olivia Perney Guillot Senior Director +33 1 4429 91 74 Secondary Analyst (SNS REAAL) Anais Daveine Associate Director +33 1 4429 92 80 Secondary Analyst (Insurance entities) Marc-Philippe Juilliard Senior Director +33 1 4429 91 37 Committee Chairperson (SNS REAAL and SNS Bank) James Longsdon Managing Director +44 20 3530 1076 Committee Chairperson (Insurance entities) David Prowse Senior Director +44 20 3530 1250 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012; 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012, and, 'Insurance Rating Methodology' dated 11 January 2013' are all available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities here Rating FI Subsidiaries and Holding Companies here Insurance Rating Methodology — Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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