OREANDA-NEWS. Fitch Ratings has affirmed the Netherlands-based SNS REAAL N.V.'s and SNS Bank N.V.'s Long-Term Issuer Default Ratings (IDRs) at 'BBB+', both with Negative Outlooks. At the same time, SNS Bank's Viability Rating (VR) has been upgraded to 'bbb' from 'bbb-'. A full list of rating actions is provided at the end of this rating action commentary.

The upgrade of SNS Bank's VR reflects the progress made to transform SNS Bank into a largely domestic mortgage lender, following its nationalisation in 2013. The quality of SNS Bank's mortgage lending still lags behind its larger domestic peers', although Fitch believes a 'bbb' VR is more reflective of the bank's through-the-cycle creditworthiness.

KEY RATING DRIVERS - IDRs, SUPPORT RATINGS AND SUPPORT RATING FLOORS
SNS Bank's and SNS REAAL's IDRs, Support Ratings (SRs), Support Rating Floors (SRFs) and senior debt ratings reflect Fitch's expectation that there remains a high probability of support from the Dutch state (AAA/Stable) if required. The Long-term IDRs are at their SRFs. The Netherlands' strong ability, as reflected in its rating, and high propensity to support its banks, underpinned by a strong track record, drive Fitch's assessment.

SNS Bank's systemic importance in the Netherlands, as the fourth largest domestic bank, drives Fitch's support expectation. The smaller size of SNS Bank compared with the three largest Dutch banks explains its lower SR and SRF. The public ownership of SNS REAAL, the holding company for SNS Bank and its sister insurance companies, is temporary and will cease as the state clearly intends to privatise SNS Bank over the medium term. The ownership of SNS Bank therefore plays a smaller role in Fitch support expectations.

The Negative Outlooks on the Long-term IDRs reflect Fitch's view that there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU. The progress in addressing practical and legislative impediments to effective bank resolution, including the Bank Recovery & Resolution Directive (BRRD), and move towards a Single Resolution Mechanism (SRM) underpin this assessment. Fitch expects SNS Bank's IDR to be downgraded to the level of its VR by mid-2015.

RATING SENSITIVITIES - IDRs, SRs, SRFs
As SNS Bank's and SNS REAAL's Long-term IDRs are at their SRFs, the sensitivities of their IDRs are predominantly the same as those for the SRFs. The SRs and SRFs are sensitive to progress made in practical implementation of the BRRD and the SRM. A functioning SRM and progress on making banks 'resolvable' without jeopardising the wider financial system are areas of focus for eurozone policymakers. Once these are operational they will become an overriding rating factor, as the likelihood of the bank's senior creditors receiving full support from the sovereign, despite the bank's systemic importance, will diminish substantially. Fitch expects to downgrade SNS Bank's and SNS REAAL's SR to '5' and revise down their SRFs to 'No Floor' by mid-2015.

A revision of the SRF to 'No Floor' would mean that SNS Bank's Long-term IDRs would likely be downgraded to the level of its VR, which as it currently stands would mean a one-notch downgrade to 'BBB'. The bank's Short-term IDR would then likely be mapped to 'F3'. After a revision of the SRF, the Long-term IDR would be sensitive to the same factors that affect the VR, and would likely be assigned a Stable Outlook. SNS REAAL's IDRs would be assessed in line with Fitch's criteria for holding companies and linked to SNS Bank's Long-term IDR at the time. On the assumption that double leverage will remain below 120% for SNS REAAL, its Long-term IDR would likely be aligned with SNS Bank's. The sale of SNS REAAL's insurance operations could, however, negatively affect double leverage, which would result in notching its ratings below SNS Bank's ratings.

KEY RATING DRIVERS - SNS BANK'S VR
SNS Bank's VR is constrained by the bank's company profile, including its geographical and product concentration and limited franchise - particularly compared with its larger domestic peers. Its focus on Dutch retail mortgage lending, and limited risk appetite outside this area, will support asset quality going forward, and was the key driver for the upgrade of the VR. The separation from its insurance sister companies should not have a material impact on the bank's franchise or VR.

Asset quality is satisfactory, although impaired loans represent a fairly material proportion of gross loans, particularly for a predominantly Dutch mortgage lender. Fitch believes that SNS Bank's historically looser underwriting standards have been tightened, and will lead to improvements in asset quality ratios over time - this has been factored into the VR upgrade. Nonetheless, the bank will likely maintain loan impairment charges (LICs) somewhat above its larger domestic peers in 2015.

SNS Bank's risk-weighted capital ratios are strong, boosted by low risk-weights on residential mortgage loans, although higher risk-weights than most of its larger domestic peers'. Leverage is fairly high. The bank's capital is sensitive to collateral valuations given that unreserved impaired loans represented a significant 40% of equity at end-June 2014.

Deposits make up the majority of SNS Bank's funding, with a decreasing reliance on wholesale funding (loan/deposit ratio of under 120% at end-June 2014). Nonetheless, the bank still depends on access to debt markets to fund part of its loan book, and maintaining its focus on liquidity to mitigate refinancing risks is important. In addition, Fitch believes SNS Bank's smaller franchise means more competitive pricing in deposits is more crucial than its larger peers should the bank need to raise additional funding.

Earning generation capacity is satisfactory, but reliant on a single market and dependent on net interest income (NII) given its business model. Fitch expects operating profitability to be sound in 2014, but for LICs to continue to dent performance. Fitch expects maintained focus on cost reductions and lower LICs will support profitability in 2015, whereas low interest rates will dampen NII.

RATING SENSITIVITIES - SNS BANK'S VR
The upgrade of the VR incorporates Fitch's expectation of improving asset quality, maintained strong capitalisation, and sound liquidity stemming from gradually improved leverage from retained earnings. As such, there is limited upside potential for SNS Bank's VR within the constraints of its company profile.

SNS Bank's VR would be sensitive to increased risk appetite, particularly if that would worsen asset quality and capitalisation in the longer term. Given that the bank still depends on wholesale markets to fund part of its loan book, reduced liquidity buffers or significant shortening of maturities would also be rating-negative.

The rating actions are as follows:
SNS Bank
Long-term IDR affirmed at 'BBB+'; Outlook Negative
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
Viability Rating upgraded to 'bbb' from 'bbb-'
Senior debt: affirmed at 'BBB+'
Commercial paper: affirmed at 'F2'

SNS REAAL
Long-term IDR: affirmed at 'BBB+'; Outlook Negative
Short-term IDR: affirmed at 'F2'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB+'