Rabobank New Zealand has had its Standard & Poor's (S&P) credit rating cut one notch to AA- from AA as the credit rating agency grows more concerned about the rural lender's parent's home market, the Netherlands.
The New Zealand subsidiary was downgraded alongside parent Rabobank Nederland, with S&P cutting its long-term rating to AA- with a stable outlook, saying Dutch banks are exposed to the potential of a more protracted downturn in the Netherlands and the wider Eurozone.
The downgrade brings S&P's rating on Rabobank NZ in line with New Zealand's big four banks , - ANZ, ASB, BNZ and Westpac, which S&P also rates AA-.
"We observe that the bank's performance has not been immune to some deterioration domestically since mid-2011, particularly in certain portfolios such as commercial real estate and certain small and midsize enterprise (SME) sectors," S&P said of Rabobank Nederland.
"However, we consider that Rabobank Nederland's overall position continues to compare favourably to peers. This view underpins our assessment of the bank's risk position, which remains "strong". Asset quality is underpinned by the large domestic residential mortgage book, which represented 46% of private sector lending at June 30, 2012, and has a long-term average bad debt cost of about 5 basis points."
S&P's move came as it cut its economic risk score for the Netherlands and its Banking Industry Country Risk Assessment to '3' from '2'.
The credit rating agency said, however, that it also retains a view of Rabobank Nederland's business position as "very strong". This is based on the cooperative's "exceptional stability and resilience, prudent management and strategy, and leading competitive position" in its domestic market.
"Our assessment of capital and earnings remains 'adequate', based primarily on our expectation that the bank's risk-adjusted capital (RAC) ratio before adjustments, according to Standard & Poor's measures, will be in a 8.5%-9% range in the next 18-24 months. We calculate that the bank's RAC ratio at the end of 2011, pro forma our revised assessment of economic risk for the Dutch system to '3' from '2', was 7.7%. We note management's cautious capital policies and greater focus on its domestic market and the food and agriculture sector internationally, which, combined with the absence of common dividends due to its mutual status, should support our expectations for the bank's RAC ratio," S&P said.
Rabobank Nederland's funding is viewed as "average" and its liquidity position as "adequate", S&P added.
"As is common in the Dutch market, its loan-to-deposit ratio is relatively high, at about 140% at June 30, 2012, despite its leadership position in the domestic deposit market. The bank has maintained good access to both public and private wholesale funding markets, in our view, and has taken advantage of opportunities to extend the maturity profile of debt issues."
S&P said Rabobank Nederland has "high" systemic importance in the Netherlands and the Dutch government is "supportive" of the banking sector.
Meanwhile, the stable outlook on the new, lower rating reflects S&P's expectation the bank should be able to maintain a sound capital position and better-than-average asset quality despite the difficult economic environment.
"The increased focus on its domestic business and food and agriculture sector internationally is unlikely to affect our assessment of the bank's very strong position."