OREANDA-NEWS. March 01, 2016. This commentary replaces the version published earlier on 26 February to correct the banks' average risk weights for mortgage lending.

Major Dutch banks' asset quality will continue to be supported by a sustained economic recovery in 2016 as lower loan impairment charges (LICs) will partly offset revenue pressures from low interest rates, says Fitch Ratings.

Lower LICs mainly drove the major Dutch banks' earnings improvement in 2015. ING Bank NV (ING) and ABN AMRO Bank NV (ABN AMRO) achieved returns on average equity in excess of 10% despite persistently low interest rates and higher regulatory costs. Cooperatieve Rabobank UA's (Rabobank) profitability remains weaker, reflecting its high cost base and cooperative nature.

LICs at ABN AMRO and Rabobank more than halved in 2015 and amounted to 19 basis points and 23 basis points of average gross loans respectively, driven by stronger domestic economic growth, falling unemployment and a recovering housing market. The improvement to 25 basis points from 31 basis points of average gross loans at ING was less pronounced, since it has a lower share of Dutch lending in the loan book.

Dutch mortgage loans account for around half of gross loans at Rabobank and ABN AMRO and a quarter at ING. These loans have remained resilient, despite the house price correction that has taken place in the Netherlands, and the three banks reported mortgage LICs between 1bp (ABN AMRO) and 7bp (ING) in 2015, following an average of 6bp (Rabobank) to 18bp (ING) in 2012-2014. The sharp improvement for ABN AMRO was primarily driven by a release of provisions in 2Q15, whereas at Rabobank, mortgage LICs remained fairly flat at 6bp. The key driver of LICs for these three banks has remained outside of the mortgage lending.

Internal risk-weight models are being debated in Europe, and the Basel Committee on Banking Supervision has proposed a harmonisation of risk weights for mortgage loans. Such a harmonisation would affect the large Dutch banks, although to a varying degree. At end-2015, ABN AMRO reported average risk-weights for mortgage lending of 13%, and Rabobank and ING 11% and 18%, respectively, at end-2014 (no published data as at end-2015). The fairly moderate risk-weights are substantiated by minimal historical losses, despite high loan-to-value ratios, but may not factor in all future risks.

Rabobank and ABN AMRO would be more affected than ING by these proposed risk weight changes, although ABN AMRO is in a somewhat better starting position given similar risk-weighting but higher capital ratios (fully loaded common equity Tier 1 capital ratio of 15.5% at end-2015 compared with 12% at Rabobank). A risk weight harmonisation would not change the underlying risk, which remains low, but could result in higher pricing or a shift in business models whereby banks may sell part of the mortgage loans they originate rather than retain them on their balance sheets.