DBRS Morningstar Confirms ABN AMRO Bank’s Long-Term Issuer Rating at A (high), Trend Remains Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long- and Short-Term Issuer Ratings of ABN AMRO Bank N.V. (ABN AMRO or the Bank) at A (high) / R-1 (middle). The trend on all ratings remains Stable. The Bank’s support assessment is SA3 and the Bank’s Intrinsic Assessment (IA) is A (high). Concurrently, DBRS Morningstar discontinued the ratings on the 7.125% and 7.75% Sub Notes as these have been repaid. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The ratings reflect ABN AMRO’s strong retail and commercial banking franchise in the Netherlands, combined with a solid franchise in private and commercial banking in Northwest Europe, particularly France and Germany, and a global clearing business. The ratings take into account the Bank’s sound earnings generation capacity, which has improved since end-2021 following the wind-down of non-core activities and charges incurred in relation to anti-money laundering (AML), and boosted by high interest rates. The Bank has solid asset quality indicators which reflect the benign Dutch operating environment, the de-risking of the Bank’s CIB loan portfolio, as well as a resilient mortgage portfolio. The ratings also incorporate the Bank’s solid funding and liquidity profile, which is underpinned by a stable customer deposit base and good access to market funding. We also note that ABN AMRO’s capital position is strong, with significant cushions over minimum regulatory requirements.

The Stable trend considers that high rates will continue to support revenues, which should help offset the potential downside from an economic slowdown, inflationary pressures and the impact of higher interest rates on asset quality.

RATING DRIVERS

The ratings would be upgraded if the Bank can significantly improve its profitability metrics while showing a consistent track record of improved risk management.

The ratings would be downgraded in the event of a sustained deterioration in asset quality or a material weakening of profitability metrics.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong

ABN AMRO is a leading Dutch bank with total assets of EUR 404 billion at end-Q1 2023. The Bank mainly operates in its domestic market (77% of total credit exposure), where it benefits from a strong retail and commercial banking franchise, reporting a 17% market share in new mortgage lending and a 16% share in SME lending in 2022. ABN AMRO aims to reach a market share of approximately 20% in new mortgage production and SMEs by 2024. In addition, the Bank has a solid private banking footprint in Northwest Europe, mainly Belgium, France and Germany.

Earnings Combined Building Block (BB) Assessment: Good/Moderate

In DBRS Morningstar’s opinion ABN AMRO earnings capacity is sound, supported by its strong core franchise in the Netherlands and supplemented by its international operations. Following the wind-down of non-core activities, charges incurred in relation to weaknesses in anti-money laundering (AML) procedures, and the increase in rates, we expect a stabilisation of earnings going forward. In 2022, ABN AMRO reported a net profit of EUR 1,867 million, up 51% from EUR 1,234 million a year earlier. The result was driven by somewhat higher interest and fee income and a significant drop in operating costs, due to lower incidentals such as expenses related to the AML remediation and the variable interest compensation. The ROE was 8.7% in 2022, up from 5.8% in 2021. In Q1 2023, profits continued to increase, with an annualised ROE of 9.6%, mainly driven by wider deposit margins which benefitted from the high interest rate environment.

Risk Combined Building Block (BB) Assessment: Good

DBRS Morningstar views ABN AMRO’s risk profile as good mainly reflecting the benign Dutch operating environment, strong risk management as well as de-risking of the Bank’s CIB loan portfolio. At end-Q1 2023, ABN AMRO reported a low Stage 3 loan ratio of 1.9%, down from 2.5% a year earlier mainly due to recoveries and write-offs. However, we expect some pressures on asset quality amid the subdued economic growth, high interest rates and inflationary pressures. In our view, asset quality risks are likely to remain manageable. More than half of the Bank’s loan portfolio consists of relatively low-risk Dutch mortgages, which are expected to remain resilient, given sound loan-to-values, long fixed rate periods and low unemployment in the Netherlands.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good

ABN AMRO’s funding profile is solid, supported by a sound customer deposit base and diversified wholesale funding sources. Customer deposits, which accounted for 69% of total non-equity funding as of Q1 2023, increased by 2% compared to end-2022. Combined with an overall declining level of loan volumes following the Bank’s de-risking strategy, ABN AMRO's loan-to-deposit ratio (LTD) improved to 96% at end-2022 (end-Q1 2023 95%), compared to 103% at end-2021, and above 110% pre-2020. We consider ABN AMRO’s wholesale funding as well diversified in terms of funding mix and maturity profile and the Bank maintained good access to capital markets. Liquidity remains ample with ABN AMRO’s liquidity buffer at EUR 103.6 billion at end-2022 (Q1 2023 at 104.3 billion), covering 2.1x the wholesale short-term funding as reported by the Bank. ABN AMRO reported a Liquidity Coverage Ratio (LCR) of 144% and a Net Stable Funding Ratio (NSFR) of 136% at end-Q1 2023.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good

DBRS Morningstar considers ABN AMRO has an adequate capital profile, supported by good internal capital generation. In 2022, the Bank’s Common Equity Tier 1 (CET1) ratio declined to 15.2% from 16.3% a year earlier reflecting an increase in credit RWAs mainly due to credit risk model and methodology adjustments. In Q1 2023, CET1 experienced a modest decline to 15.0%, as higher RWAs for credit risk and the negative impact from the first-time adoption of IFRS17 exceeded the positive contribution from profit retention. The CET1 ratio remained well above the minimum regulatory requirement of 9.8%. On a finalised Basel III (or 'Basel IV') basis the CET1 ratio would be around 16%. The Bank maintains its 50% dividend pay-out ratio, and continues to aim for a CET1 ratio under Basel IV of at least 13%, with a threshold for share repurchases of 15%. We continue to view the Bank as well-positioned to withstand a stressed environment.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415715

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Governance (G) Factors
The G factors have changed from the prior credit rating disclosure. The “Corporate governance” subfactor was previously marked as Relevant to reflect weaknesses within the Bank’s internal controls as well as the settlement of EUR 480 million which the Bank had to pay to the Dutch Public Prosecution Service (DDPS) in 2021 due to serious weaknesses in the Bank’s anti-money laundering framework between 2014 and 2020. While the settlement was substantial it did not have an impact on the Bank’s capital or franchise. In response to the shortcomings identified by the DDPS, ABN AMRO implemented an AML remediation program in close cooperation with the Dutch Central Bank (DNB), with major steps expected be completed in 2023. As such, we no longer consider the subfactor to be relevant to the rating of the Bank.
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (17 May 2022)

Notes:

All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, ABN AMRO Annual Report 2022, ABN AMRO Investor & Analyst Presentation Q4 2022 & Q1 2023, ABN AMRO Quarterly Report Q4’22 & Q1’23, ABN AMRO Press Release Q1’23, ABN AMRO Factsheet Q4’22 & Q1’23. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/415714

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Forster, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 21 May 2009
Last Rating Date: 10 June 2022

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