The largest Dutch commercial banks – ABN AMRO, ING and Rabobank – display highly-distinct business models; the common denominator being a strong international presence. As a result, Dutch lenders are significantly exposed to global growth and international trade. And, given where oil prices are, the global energy exposures of the three lenders will also suffer.

“We see credit risks primarily deriving from exposures to industries sensitive to the fall in oil prices and from disruptions to trade finance,” said Chiara Romano, senior analyst in the financial institutions team of Scope Ratings and author of a report out today. “A prolonged contraction in domestic GDP, amplified by the open, export-oriented nature of the Dutch economy, could lead to a significant worsening of the credit quality of the banks’ domestic portfolios.”

The bottom-line profitability of the top three banks has been boosted by historically low cost of risk. On a normalised level, pre-provision profitability would be able to absorb between 60bp and 100bp of additional impairments this year. This compares to an average of 25bp-30bp at ABN AMRO and ING through the cycle.

“Given the pro-cyclicality of IFRS 9 provisioning rules, coupled with historically low default rates of domestic retail exposures, provisioning needs in this downturn could be significant compared to previous episodes,” warned Romano. “While the new guidance on IFRS 9 for exposures covered by moratorium measures will likely flatten the recognition of provisions, they will be neutral from a risk perspective in cases of significant credit deterioration.” In the case of exposures to large international corporates, government support measures might be less forthcoming.

On the positive front, the banks have de-risked in the past few years and have much stronger solvency metrics today. On top of comfortable capital positions, the relaxation of requirements from both ECB and the Dutch central bank leave considerable additional room for manoeuvre. All three lenders have elected to adhere to the ECB recommendation to suspend 2019 final dividend payments, setting aside roughly EUR 2.7bn in aggregate previously earmarked for distributions.

In addition, the Dutch central bank (DNB) has reduced the systemic buffers for ABN AMRO (for which the O-SII buffer now applies), Rabobank and ING. The three banks are releasing roughly EUR 4.8bn of capital in aggregate. DNB has also postponed the introduction of a risk-weighting floor for mortgage loans, which would have been an additional burden in 2020.

The full report can be downloaded here.