Nederlandse Waterschapsbank N.V.

Transcription

1 CREDIT OPINION 11 July 17 Nederlandse Waterschapsbank N.V. Semi-Annual Update Update Summary Rating Rationale Nederlandse Waterschapsbank N.V. (NWB Bank)'s baseline credit assessment (BCA) of a1 reflects: (1) the bank's very high asset quality since its portfolio is mostly comprised of loans to public entities; () its role as the second largest lender to the Dutch public sector; () its high capitalization; and (4) its adequate funding profile and liquidity position despite some maturity mismatches. RATINGS Nederlandse Waterschapsbank N.V. Domicile Netherlands Long Term Debt Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Type LT Bank Deposits - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. The bank's deposit and senior unsecured ratings reflect (1) the bank's standalone credit strength of a1, () the application of our advanced Loss Given Failure (LGF) analysis, resulting in a two-notch LGF uplift from the BCA of a1 given the significant volumes of senior debt, and () a government support uplift of two notches, reflecting a very high support probability from the Dutch national government ( stable) due to the entity's public ownership and its role as one of the principal financiers of the Dutch public sector. The bank's CR Assessment of (cr)/prime-1(cr) is four notches above the BCA, reflecting the substantial volume of bail-in-able liabilities protecting operating obligations as well as a very high probability of government support. Exhibit 1 Rating Scorecard - Key Financial Ratios Nederlandse Waterschapsbank (BCA: a1) Analyst Contacts Yasuko Nakamura VP-Senior Credit Officer yasuko.nakamura@moodys.com Jeanne Harrison Assistant Vice President jeanne.harrison@moodys.com Claudia Silva Associate Analyst claudia.silva@moodys.com Alain Laurin Associate Managing Director alain.laurin@moodys.com Nick Hill Managing Director Banking nick.hill@moodys.com Median a1-rated banks 6% % 4% % % 1%.% 5.4% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Source: Moody's Financial Metrics 89.5%.1% Profitability: Net Income/ Tangible Assets 14.9% Funding Structure: Liquid Resources: Liquid Banking Market Funds/ Assets/Tangible Tangible Banking Assets Banking Assets Liquidity Factors (RHS) 1% 9% 8% 7% 6% 5% 4% % % 1% %

2 Credit Strengths NWB Bank is a major lender to the Dutch public sector and fully owned by Dutch public entities High quality assets; most loans are % risk-weighted (99%) Profitability is commensurate with the bank's specific mandate and low risk profile Large volume of senior debt resulting in deposit and senior unsecured debt ratings benefiting from a very low loss-given-failure and two-notch uplift from the BCA Very high probability of government support resulting in two-notch uplift for debt and deposit ratings Credit Challenges Mismatches between assets and liabilities mitigated by diversified funding and eligibility of loans to central bank financing Uncertainty on regulatory rules that will apply to capital Rating Outlook The outlook on NWB Bank's long-term deposit and senior unsecured ratings is stable, and is underpinned by (1) the limited likelihood of a downgrade in the bank's BCA, () the current liability structure of the bank, which results in two notches of uplift reflecting a very low loss-given-failure, and () two notches of systemic uplift reflecting a very high probability of government support. Factors that Could Lead to an Upgrade Upward pressure on NWB Bank's BCA could primarily result from further material reduction in maturity mismatches. An upgrade in the BCA will however not trigger any upgrade in the bank's deposit and senior unsecured ratings as they are already rated. Factors that Could Lead to a Downgrade Downward pressure on NWB Bank's BCA could result from (1) a deterioration in the creditworthiness of the Dutch public sector ; () a significant increase in non o% risk- weighted assets ; () a significant increase in funding gaps or (4) a weaker standing in the capital markets. A downward movement in NWB Bank's BCA could result in downgrades of all ratings. NWB Bank's ratings would also likely be downgraded in the case of (1) a significant change in the bank's liability structure implying a material reduction in the volume of long-term senior unsecured debt and hence an increase in loss-given-failure, or () a decrease in the probability of government support, or () a downgrade of the Netherlands' sovereign rating. 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. 11 July 17

3 Detailed Rating Considerations NWB BANK IS A MAJOR LENDER TO THE DUTCH PUBLIC SECTOR, FULLY OWNED BY DUTCH PUBLIC ENTITIES A long-standing player in the Dutch public sector financing business, NWB Bank is an established institution with a strong franchise in financial services to the water authorities ( waterschappen ), and lending to municipalities, provincial authorities and to other public sector entities including social housing, healthcare and educational institutions in the Netherlands. With a long-term loan book of EUR48 billion (nominal value) at end-december 16, its overall market share of Dutch public-sector lending is approximately %. Its main competitor, Bank Nederlandse Gemeenten N.V. (BNG Bank, LT deposit stable, LT senior unsecured stable, BCA a1), has around 55% market share. We expect NWB Bank and BNG Bank to continue to dominate Dutch public sector lending, given their ownership, mandate and advantageous funding costs compared to commercial banks. The government's involvement at NWB Bank is substantial. As per the institution's Articles of Association, only the State of the Netherlands and other legal entities governed by public law may hold NWB Bank's shares. Dutch water authorities own 81% of the bank, the Dutch State owns 17% and the provinces %. As a bank established with an explicit public policy mandate, we believe that NWB Bank benefits from an entrenched franchise in a niche market. These conditions result in exceptional stability in terms of asset quality, capital, profitability, and overall in a very low risk profile. We apply a positive adjustment of one notch in our scorecard to reflect this feature. HIGH ASSET QUALITY DOMINATED BY % RISK- WEIGHTED ASSETS NWB Bank's credit rating rests on the high quality of the local government sector that it serves, as shown by a problem loan ratio of %, which is reflected in a score of aa1 (Asset Risk) in our scorecard. NWB Bank lends exclusively to the public sector and has never recorded a loss on its loan book. The bank's public policy mandate translates into relatively large single borrower concentrations in the lending portfolio. However, we believe that concentration risk is largely mitigated by the fact that the bulk of NWB Bank's lending (99% of total exposures excluding fair value adjustments at end-december 16) relates to borrowers benefiting from an implicit or indirect guarantee from the Dutch government. These exposures entail no capital charge from a regulatory perspective (as a chartered bank NWB Bank is subject to all banking regulations) and include : The Dutch municipal and provincial authorities (1% of the portfolio) and the water authorities (1%). We view the Dutch local government sector as financially healthy and we note that there are no limitations to their taxation power. Additionally, any surplus may be kept for local government use. As local tax revenues can vary between local governments due to differing local tax bases, grants allow to equalise annual revenues. Dutch local governments have strict requirements to set and maintain budgetary balances and national accounting standards require multi-year projections and audits. The central government oversees the provinces and the provinces oversee the municipalities and water authorities. If a municipality or a water authority faces financial difficulties, both the Minister of the Interior and Kingdom Relations and the Minister of Finance would step - in. The Housing associations (64% of the portfolio) : lenders to these associations benefit from three layers of security, including the value of properties, the full guarantee from the Social Housing Guarantee Fund (Waarborgfonds Sociale Woningbouw or WSW), which itself is backed by an explicit support by the central government and the municipalities. The Healthcare sector (7% of the portfolio) : NWB Bank's lending in this sector is limited to financing guaranteed by the Healthcare Sector Guarantee Fund (Waarborgfonds voor de Zorgsector or WFZ), which is backed itself by the Dutch central government. A very small portion of the lending portfolio (approximately 1% of total exposures) does not benefit from any support from the government and is hence subject to capital charges. These exposures mainly include lending to utility companies and public-private partnership (PPP). NWB Bank launched several PPP financing activities after updating its articles of association in 1. We note that the bank purports to confine this new business to infrastructure and accommodation projects in the Netherlands on behalf of the Dutch central or local governments. Moreover, NWB Bank will focus on the financing of the operational phase of each project. While we consider that PPP financing implies higher risk for NWB Bank, we believe that this business will not materially alter the bank's creditworthiness and its overall risk profile if total volumes and the size of single exposures remain limited, in keeping with NWB Bank's stated intention. 11 July 17

4 We positively note that NWB Bank's liquidity portfolio is restricted to specific highly rated securities or securities guaranteed by the public sector. FUNDING PROFILE AND LIQUIDITY POSITION ARE ADEQUATE DESPITE SOME MATURITY MISMATCHES Similarly to most peer groups in Europe, NWB Bank is almost entirely wholesale funded. It issues debt in multiple currencies and markets, which is subscribed by a wide array of investors. This funding strategy is prudent and similar to other specialised lenders. We note that NWB Bank's asset and liability management entails some maturity mismatches. This policy helps the bank to maintain low pricing on the financing provided to the Dutch public sector despite the very long maturity of the loans. We note that the funding gaps have been reduced from higher levels in the past and we believe that, overall, the risks implied by these gaps are well-managed at NWB Bank : Liquidity risk is managed through the coverage of the gaps within the one-year bucket (around EUR5 billion based on our estimation at year-end 16) by a liquidity buffer composed of highly liquid assets (EUR11 billion at year-end 16) and immediate drawing capacity on the ECB collateralised by public sector loans already pledged by NWB Bank at the central bank (EUR11.5 billion after haircut at year-end 16). While the collateral already recorded at the ECB is calibrated on the level of short-term gaps, we note that the bank is able to use its whole portfolio of % risk- weighted loans (i.e. the vast majority of its portfolio) as collateral for refinancing at the ECB. This provides substantial additional liquidity in case of need. Maturity mismatches could have negative implications on NWB Bank's interest margins where the bank's spreads would rise significantly for a prolonged period of time and imply an increase in the refinancing cost of outstanding loans. Given the thin margins generated, NWB Bank's room for maneuver in such a scenario could be limited. We nevertheless believe that this risk is mitigated by the fact that the funding gaps are maintained within reasonable limits and by NWB Bank's good standing in the capital markets. The European Commission's decision to include bonds issued by «promotional banks - designating banks where lending to the public sector represents more than 9% of total loans - within the level 1 category assets (the highest quality of the High Quality Liquid Assets or HQLA) for the calculation of the Liquidity Coverage Ratio (LCR) is also favorable for NWB Bank. It has further enhanced financial institutions' appetite for the bank's securities. At end-december 16, both NWB Bank's LCR and Net Stable Funding Ratio (NSFR) were above 1%, in compliance - ahead of schedule - with EU prudential requirements. These factors are reflected in a Combined Liquidity score of baa. CAPITAL POSITION IS LIKELY TO BE STRENGTHENED DUE TO REGULATORY REQUIREMENTS NWB Bank's capitalisation is adequate in relation to its low-risk assets. Its Common Equity Tier 1 ratio was 5.5% at end-december 16. However, due to the close-to-zero risk-weight of its assets, the bank's capital ratio translates into high nominal leverage. NWB Bank's leverage ratio was.% at end-december 16. NWB Bank targets % leverage ratio, and does not intend to pay dividends until it achieves this threshold. The bank also raised EUR11 million of additional Tier 1 capital (in 16 on top of the EUR million issued last year). The European Commission (EC) is proposing amendments to the Capital Requirements Regulation (CRR) published at the end of November 16 that public development institutions ' exposures to regional governments, local authorities or public sector entities in relation to public sector investments should be excluded from the denominator of the leverage ratio.1 While the final outcome remains uncertain, NWB's leverage ratio - based on its current capital - could result in a leverage ratio substantially in excess of the % threshold if this rule were to be implemented and applicable by the institution. For more details, please refer to Moody's research European lenders to local governments: adequate capitalisation despite expected relaxation in leverage requirements published in March 17 We therefore assign a high Capital score of aa1 despite the high nominal leverage July 17

5 PROFITABILITY IS COMMENSURATE WITH THE BANK'S SPECIFIC MANDATE AND LOW RISK PROFILE NWB Bank's profitability is moderate because it provides, as per its mandate, cost-effective funding to the Dutch public sector. As a bank owned by its own customers, NWB Bank has no profit maximising constraints. We also believe that the average profit generated by NWB Bank is commensurate with its low risk profile. Excluding some volatility stemming from the valuation of hedging instruments, NWB Bank's net profit has been relatively stable in recent years. While its net interest results had suffered somewhat from higher refinancing costs between 11 and 1 (NWB Bank's net interest margin (NIM) was at the lower end of the range - typically below basis points -, of its European peers), we note that the measures taken by the bank, including the re-pricing of its new production, had a positive effect on its profitability in 14, which continued into 15 and 16. Operating with a relatively small number of staff (57 employees as end-december 16), NWB Bank's efficiency is good, although regulatory levies weigh quite heavily on total costs. NWB Bank's cost-to-income ratio was 9.8% for 16 (excluding bank tax and resolution levy). These factors are reflected in a Profitability score of ba. Notching Considerations Loss Given Failure Despite its ownership and public mandate, NWB Bank falls in the scope of the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime. We assume residual tangible common equity of the lower of the actual equity and % of tangible banking assets, losses post-failure of 8% of tangible banking assets, a 5% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and assign a 5% probability to deposits being preferred to senior unsecured debt. The proportion of deposits considered junior is 6%. These are in line with our standard assumptions. Our LGF analysis indicates a very low loss-given-failure for deposits and senior unsecured debts leading us to position its Preliminary Rating Assessment two notches above the Adjusted BCA. In the LGF table below, deposits designate NWB Bank's funds entrusted and the preference shares designate the AT1 capital attracted by NWB Bank. GOVERNMENT SUPPORT Despite the objectives of, and limitations on government support embedded in the BRRD, the scope of which includes NWB Bank, we expect a very high probability of government support for the bank's deposits and senior unsecured debts, resulting in a two-notch uplift for both debt classes. Due to the bank's ownership and public policy mission, we believe the potential for support is considerably greater than for purely commercial banks, which can be affected by a bail-in. The very high support assumptions include the support that would come (1) from the Dutch public sector (including the central government) acting as the shareholder of the bank, and () from the government stepping in to address systemic risk. COUNTERPARTY RISK ASSESSMENT The CR Assessment is positioned at (cr). The CR Assessment, prior to government support is positioned three notches above the Adjusted BCA of a1, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the volume of the instrument class. The CR Assessment also benefits from one notch of systemic support. This reflects our view that any support provided by governmental authorities to a bank which benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations 5 11 July 17

6 reflected by the CR Assessment as well, consistent with our belief that governments are likely to maintain such operations as a goingconcern in order to reduce contagion and preserve a bank's critical functions. ABOUT MOODY'S BANK SCORECARD Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity July 17

7 Rating Methodology and Scorecard Factors Exhibit Nederlandse Waterschapsbank N.V. Macro Factors Weighted Macro Profile Strong + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver # Long-run loss performance Solvency Asset Risk Problem Loans / Gross Loans.% aa1 aa1 Quality of assets Capital TCE / RWA 5.4% aa1 aa1 Risk-weighted capitalisation.1% b ba Earnings quality Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 89.5% caa ba Term structure Liquid Resources Liquid Banking Assets / Tangible Banking Assets 14.9% ba1 a Additional liquidity resources a1 aa Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA b Balance Sheet in-scope (EUR million) 1,51 6,6 4,484 1,576 54,96 6 1,5 76,45 Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Preference shares (bank) Equity Total Tangible Banking Assets 7 1% 11 July 17 Market funding quality baa a 1 1 aa-a a1 a1 % in-scope 17.7% 7.9% 5.9%.1% 71.9%.4%.% 1% at-failure (EUR million) 1,51 6,6 4,6 1,18 54,96 6 1,5 76,45 % at-failure 17.7% 7.9% 5.6% 1.5% 71.9%.4%.% 1%

8 Debt class Counterparty Risk Assessment Deposits Senior unsecured bank debt De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA aa1 (cr).4% 74.% aa.4% 74.%.4% aa Instrument class Counterparty Risk Assessment Deposits Senior unsecured bank debt Loss Given Failure notching Additional Preliminary Rating Notching Assessment aa1 (cr) aa aa Government Support notching Local Currency Rating 1 (cr) - Foreign Currency Rating - Source: Moody's Financial Metrics Ratings Exhibit Category NEDERLANDSE WATERSCHAPSBANK N.V. Moody's Rating Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured Commercial Paper Other Short Term Stable /P-1 a1 a1 (cr)/p-1(cr) P-1 (P)P-1 Source: Moody's Investors Service 8 11 July 17

9 Endnotes 1 Article 49a(d) of the EC's proposal for a Regulation of the European Parliament and the Council dated November July 17

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