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Dutch Economic Weakness To Weigh On Banking System Outlook, Moody's Says

12/12/2012 4:56 AM ET

The structural weakness and difficult operating environment in the Dutch economy are likely to adversely affect the outlook of the country's banking system, Moody's Investors' Service said in a report on Wednesday.

Moody's kept the rating outlook on the banking system 'negative.' The outlook reflected the difficult operating environment that will persist throughout the fourth quarter of 2012 and 2013, the agency said.

Moody's noted that the difficult operating environment combined with structural economic weaknesses will negatively impact the banks' financial profiles over the 12-18 month period. According to the agency, the structural weaknesses included high household indebtedness, high banking system's leverage and banks' high reliance on wholesale funding.

"The main driver of our negative outlook on the Dutch banking system is the domestic operating environment, which will remain difficult for financial institutions," said Stephane Herndl, an Assistant Vice President-Analyst at Moody's. "This reflects the currently weak macroeconomic conditions in the Netherlands and associated risks resulting from the high leverage of domestic households."

Moody's said the Netherlands' export-oriented economy is deeply integrated within the European Union and is therefore exposed to contagion from the ongoing euro area debt crisis, and regional economic weakness.

"Dutch banks' asset quality has remained strong in recent years. However, there are risks of increasing deterioration within the domestic commercial real estate sector, which is undergoing a period of severe stress, and, to a lesser extent, within residential mortgage portfolios, driven by the weakening domestic economy", Herndl said.

The agency noted that despite the introduction of the Dutch Intervention Act, the probability of systemic support remains high for depositors and senior bondholders of the four largest banks.

This reflected Moody's view that the tools extended by the Act, such as the transfer of assets to 'bad-banks' would be difficult to deploy in the case of large and systemically important banks, and that the most likely form of support would be nationalization, the report said.

by RTT Staff Writer

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