OREANDA-NEWS. Fitch Ratings has downgraded the Netherlands-based F. Van Lanschot Bankiers N.V.'s (Van Lanschot) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-'. The Outlook is Stable. A full list of rating actions is available at the end of this rating action commentary.

The downgrade reflects Fitch's view that it will be challenging for Van Lanschot to achieve sufficiently improved financial metrics, particularly profitability, in a persistently difficult operating environment for European banks. Fitch recognises the progress achieved by the bank following its strategic review in 2013, and expects asset quality and profitability metrics to improve further, but we expect this to be only gradual and rely partly on a strengthened Dutch economy.

KEY RATING DRIVERS
IDRS, VIABILITY RATING AND SENIOR DEBT
The ratings are underpinned by Van Lanschot's established, albeit niche and regional, franchise in wealth management and merchant banking, as well as its solid capitalisation and fairly conservative risk appetite. The ratings also reflect weak core profitability, partly due to a lack of sustained net inflow of new assets under management (AuM).

Core profitability remains a weakness and will most likely remain under pressure as long as interest rates and net inflows of AuM remain low. In addition to envisaged cost savings and better margins on managed assets resulting from a shift to a higher proportion of discretionary business, a substantial improvement in profitability will also rely on the bank's ability to ensure stable inflow of new AuM. The track record of the latter has been mixed to date, with net outflows of EUR0.7bn and EUR0.4bn recorded in 2014 and 1H15 respectively. The sustainability of inflows reported in recent months is still to be confirmed, in Fitch's view.

The current strategic plan includes a refocus on private banking and wealth management while running down the non-core loan book (commercial real estate and SME loans; 20% of gross loans at end-June 2015). Impaired loans remain high as a proportion of gross loans compared with its larger Dutch and similarly rated European peers, although Fitch expects asset quality to slowly improve as the Dutch economy recovers and the non-core portfolio is being reduced. Fitch expects the quality of the private banking loan book, which is dominated by Dutch mortgage loans, to remain resilient.

Van Lanschot's capitalisation is solid and Fitch expects further improvements from deleveraging and profit retention. Its risk-weighted capital ratios are in line with European peers', while leverage is strong compared with its larger Dutch peers. Van Lanschot's funding profile is sound, largely made up of customer deposits, and the bank has demonstrated its ability to access wholesale funding markets even in a turbulent environment. The bank's liquidity is sound.

SUPPORT RATING AND SUPPORT RATING FLOOR
Van Lanschot's Support Rating and Support Rating Floor reflect Fitch's view that the provision of state support to the bank, if required, while possible, cannot be relied upon. This reflects the bank's lack of systemic importance in the Netherlands, as well as legislative, regulatory and policy initiatives (including the implementation of the Bank Recovery and Resolution Directive (BRRD)) that have substantially reduced the likelihood of sovereign support for European Union commercial banks in general.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Van Lanschot's dated subordinated debt securities are rated one notch below the bank's VR to reflect a higher loss severity than senior unsecured debt.

Innovative Tier 1 securities (NL0000117745, issued in 2005) are rated four notches below the bank's VR. This reflects two notches for loss severity in light of the notes' deep subordination and two notches for non-performance relative to the risks captured in the bank's VR.

RATING SENSITIVITIES
IDRS, VIABILITY RATING AND SENIOR DEBT
An upgrade is unlikely in the near term. Over the longer term, upside pressure could stem from a strengthening of Van Lanschot's franchise, provided the bank has built a track record of significantly improved profitability. The ratings could be downgraded in case of a significant deterioration of asset quality, particularly should that result in a weakening of the bank's capitalisation, or reduced focus on liquidity.

SUPPORT RATING AND SUPPORT RATING FLOOR
Any upgrade to the Support Rating and upward revision to the Support Rating Floor would be contingent on a positive change in the Netherland's propensity to support its banks, as well as a significant increase of Van Lanschot's systemic importance. While not impossible, this is highly unlikely in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings on subordinated debt and other hybrid securities are broadly sensitive to changes in Van Lanschot's VR. The notes' ratings are also sensitive to changes in Fitch's assessment of their respective non-performance risk relative to that captured in the bank's VR.

The rating actions are as follows:
Long-term IDR: downgraded to 'BBB+' from 'A-'; Outlook Stable
Short-term IDR: affirmed at 'F2'
Viability Rating: downgraded to 'bbb+' from 'a-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior debt long-term rating: downgraded to 'BBB+' from 'A-'
Senior debt short-term rating: affirmed at 'F2'
Dated subordinated debt: downgraded to 'BBB' from 'BBB+'
Innovative Tier 1 securities (NL0000117745): downgraded to 'BB' from 'BB+'