SPONSORED STATEMENT

September 2016 • Borrowers

SPONSORED STATEMENT

At the start of this year, Rabobank’s new co-operative structure came into effect, with the merger of 106 previously legally independent units into the newly named Coöperatieve Rabobank UA, which was previously the Coöperatieve Centrale Raiffeisen-Boerenleenbank BA, the central institution of the Rabobank Group.

“This was quite a big step in our history, because up until then, all of the local Rabobanks operated as legally independent Rabobanks, each with their own banking licences and their own financial statements,” explains Pauline Bianchi, Head of Investor Relations and Rating Agencies at the bank’s Utrecht headquarters. “Since the start of January, these have all been merged into a single entity with one banking licence and one set of financial statements.”

The efficiencies that Rabobank has been able to generate from this restructuring are clear enough. “Prior to the restructuring, we had 107 banking licenses, so we had to pass compliance tests 107 times, which was onerous and time-consuming,” says Bianchi.

There was inevitably a considerable amount of unnecessary duplication under the old Rabobank structure, because each local bank had its own call centre, which had obvious implications for costs. The inefficiencies arising from this duplication are now being eliminated. “Now that the merger is in place, we are centralising the operation and restructuring these call centres, which will allow us to reduce our headcount by roughly 1500 full-time equivalents (FTEs),” Bianchi explains. “Eventually, we plan to have no more than around eight regional call centres.”

“For Rabobank this restructuring is a significant shift,” she adds. “Although the independence concept was core to the co-operative culture from the outset, it was clear that the model would no longer be sustainable over the long term.”

Enhancing Customer ServiceFar from changing or weakening Rabobank’s retail banking operations, Bianchi says that the consolidation of the local units probably strengthens the franchise. This is because by relieving the local banks of much of their back office burden it will allow them to dedicate more time and resources to customer service.

Already, there are clear indications in the Netherlands that the changes being made by Rabobank are being welcomed. Customer satisfaction as measured by NPS has further improved among retail and business customers alike, who have responded constructively to a series of new initiatives launched in 2016. One example is the introduction of an accelerated mortgage application process, which allows customers to learn within a week whether their new mortgage application has been approved.

Rabobank also made further investments in its online banking service in the first half of 2016, with a series of improvements made to the Rabo Banking App in response to customer feedback building on innovations such as Rabo Wallet and Rabo SmartPin.

The changes to Rabobank’s governance structure have been warmly welcomed by rating agencies as well as customers. “The change in structure will allow Rabobank to preserve its historically important role in containing the risks taken by the bank while allowing it to reduce structural costs,” Moody’s commented in February. It added that “the new governance structure will allow the bank to be more rapid in answering risk management issues. It will also enhance the group’s flexibility to respond to regulatory challenges and improve the bank’s efficiency.”

In other words, there is no question of the changes in the governance structure leading to an erosion of the conservatism that has been a hallmark of the bank’s strategy for decades.

The 2016-2020 Strategic FrameworkThe new structure that took effect at the start of 2016 is a significant component of the bank’s broader transition strategy, which Bianchi says is already starting to deliver a range of efficiency enhancements.

At the end of 2012 Rabobank started a restructuring programme, named Vision 2016, in response to a trend among Rabobank’s customers of executing an increasing share of their business online. As a result, the number of clients visiting bricks and mortar branches declined at a rapid pace. Rabobank responded

proactively to this trend by investing more in its virtual distribution channel and at the same time closing fully-fledged branches. In order to mitigate the inconvenience for clients, Rabobank increasingly took initiatives such as opening pop-up stores, opening desks in retirement homes and providing banking services from buses which visit some of the more remote villages in the Netherlands.

The targets set out in Vision 2016 have, however, been largely overtaken by recent developments, such as radically changing customer preferences and behaviour, societal changes, technology and innovation, competition from non-banks and regulatory events. The transition programme enshrined in Vision 2016 was supplemented by a new restructuring programme at the end of 2015 because of the impending passage of a cascade of new regulations, such as the overhaul of Basel 3, in order to reduce excessive variability in RWAs and higher capital requirements.

Rabobank is not among the 30 global systematically important banks (G-SIBs) required to comply with the total loss-absorbing capacity (TLAC) requirements announced by the Financial Stability Board (FSB) in November 2015. This means that along with all other EU-based banks it will be subject to Minimum Requirement for own Funds and Eligible Liabilities (MREL).

Like TLAC, the MREL loss absorbency requirements are designed to ensure that EU banks are sufficiently well-capitalised to withstand future banking crises, safeguarding financial stability and minimising losses to the taxpayer. Unlike TLAC, the final MREL requirements will be determined by the Single Resolution Board/national regulators on a case-by-case basis. The SRB is expected to finalise the MREL conditions for banks (in the Netherlands) towards the end of this year. It is market expectation that these will be in line with the TLAC guidelines.

It is this expectation that has defined Rabobank’s new Strategic Framework. “The update of our strategy at the end of 2015 was triggered both by pending regulations on TLAC and MREL, and by our own scenario analysis based on initial proposals put forward by the Basel Committee in December 2014,” says Bianchi. “Our base case scenario assumed that risk weights would rise by 40%.”

Since then, the Basel Committee has stated that it does not intend to significantly increase overall

Rabobank: A New Strategic Blueprint

January 1, 2016, was a landmark date in the recent history of Rabobank, the A+/Aa2/AA-/AA rated Dutch co-operative bank regarded as one of the most stable and robust in Europe. Founded over 115 years ago, Rabobank is now active in 40 countries and has 8.6m customers worldwide.

Pauline Bianchi,Rabobank Group Head of Investor

Relations & RatingAgencies

Rabobank statement FINAL.indd 8 29/09/2016 10:49

RABOBANK SPONSORED STATEMENT

Borrowers • September 2016

capital requirements across the banking sector, and it has made several amendments to the initial proposals. “Although the final regulations have not been finalised, we still expect that our RWAs will increase,” she adds. “So rather than sit on our hands we have chosen to adopt a proactive strategy, which means improving our financial performance on the one hand and actively managing down our RWAs on the other.”

Rabobank’s new Strategic Framework for 2016-2020, details of which were announced in December 2015, aims to significantly reduce the size of the bank’s balance sheet by 2020. The ultimate reduction target is dependent on the final outcome of the overhaul of Basel 3. During the 2016 to 2020 period Rabobank is targeting efficiency improvements of more than €2.1bn, an increase in its core equity tier 1 (CET1) ratio to at least 14% and a rise in its total capital to at least 25% in 2020. Mid-2016 Rabobank’s CET 1 ratio stood at 13.4% and its total capital ratio at 23.5%.

Other key components of the bank’s strategic framework are an increase in return on invested capital (ROIC) from 5% in June 2016 to at least 8% by 2020, and a decline in the cost to income ratio (excluding regulatory levies) from 73.7% to 50% over the same period. “We feel it is important to exclude regulatory levies from our target because these are beyond our control,” Bianchi explains. “If we were to include regulatory levies of about €0.5bn per annum, the 2020 target would be between 53% and 54%.”

Feedback on the new strategy from rating agencies, all of which have left Rabobank’s ratings unchanged this year, have been constructive. “We view this plan as a positive step to enhance the bank’s profitability and capital ratios, as the bank has around 47% of its private sector loan portfolio made up of residential mortgage loans which may be particularly hard hit by the new regulations,” Moody’s commented in February.

Profitability Targets“We have always emphasised that as we are a co-operative bank we do not aim to maximise profits,” says Bianchi. “But we need to generate reasonable profits in order to be prepared for future regulatory changes. Increasing capital requirements and the overhaul of Basel 3, which we call Basel 4, means that risk-weightings are rising which will in turn put further pressure on our capital ratios. To ensure that these ratios remain solid, we recognise that we need to increase profitability and retain more earnings.”

In the first half of 2016, Rabobank posted a net profit of €924m, down 39% year-on-year. This was chiefly a result of €990m of exceptional items, including €514m of additional provisions for SME interest rate derivatives and €190m of restructuring costs. As Bianchi says, excluding these items, profits in the first six months of this year were broadly comparable to underlying profit in the same period in 2015.

About two-thirds of Rabobank’s core revenues are accounted for by net interest income, which as Bianchi says was flat in the first half of 2016. While net interest income slipped very slightly, from €4.482bn in the same period of 2015 to €4.375bn, net fee and commission income was up by 2%.

Bianchi says that Rabobank’s net interest margin (NIM) has remained stable over the last year, with the 12-month NIM reaching 1.33% at the end of June 2016. She says that an environment in which interest rates remain low may exert downward pressure on Rabobank’s NIM, but she adds that the bank has some room for manoeuvre on the depositor liability side. “We’re paying 30bp on savings accounts to private individuals, so we still have room to reduce these if rates fall further, although we feel the floor is zero because we would prefer rates for retail customers not to move into negative territory,” she says. “But if we were to see a prolonged period of low or negative rates we would not rule this out. We already charge negative rates for very large corporates.”

A predominantly domestic Loan PortfolioRabobank’s total loan portfolio expanded by €1bn in the first half of 2016 to reach €427bn. The residential mortgage loan portfolio contracted by €2bn due to loan sales and a rise in repayments. Despite competition from new entrants such as insurance companies and pension funds hunting for enhanced longer-term returns to match their long-dated liabilities, Rabobank’s share of the Dutch mortgage market remains stable at about 20%. Bianchi is optimistic about continued demand for home loans in the Netherlands. “Although prices are not yet back to their August 2008 peak, house sales are now back to their pre-crisis levels,” she says.

Domestic retail banking continues to account for 65% of Rabobank’s total private sector loan book €279bn at the end of the first half of 2016). Wholesale, rural and retail (WRR) lending grew by €5bn in the first six months of 2016, to €104bn (24% of the total), with leasing unchanged at €30bn and specialised commercial real estate lending down €1bn to €14bn.

With domestic retail deposits rising by €7bn in the first half of 2016 to €219bn, total deposits increased by €5bn to €343bn, supporting a modest improvement in the bank’s loan to deposit ratio, which reached 124% at the end of June 2016, compared with 125% at the end of 2015 and 132% at mid-year in 2015.

A steady recovery in the economic environment has underpinned a continued improvement in Rabobank’s asset quality, with loan impairment charges (LIC) reaching a 10-year low of 7bp of average lending in the first half of 2016, down from 16bp in the first half of 2015 and 32bp in the second half. “7bp is extremely low in a historic context,” says Bianchi.

LICs in Rabobank’s domestic residential mortgage lending business remained very low at

4bp of average lending in the first half of 2016. As Fitch observes in a recent report, “Rabobank’s large residential mortgage loan portfolio has proved particularly resilient compared with peers during the tough economic conditions in the Netherlands in recent years.”

Non-performing loans (NPLs), meanwhile, also continue to fall, reaching 4.4% of the total private sector loan book as of June 30th, 2016, compared with 4.6% at the end of 2015 and 4.8% at the end of the first half of 2015. On the back of the continued economic recovery, NPLs remained on a downward trend across all business segments in the first half of 2016, remaining below 1% in the bank’s domestic mortgage loan portfolio.

The coverage ratio, meanwhile, has also continued to decline, standing at 42.6% at the end of the first half of 2016, versus 43.5% at year-end 2015.

An accelerated Rationalisation ProgrammePivotal to Rabobank’s strategy of bringing its cost to income ratio down to 50% by 2020 is a targeted reduction in the bank’s total staff by 12,000 full-time equivalents (FTEs) by 2018. This process has been accelerated in the first half of 2016, with a reduction of 1900 FTEs. This excludes around 500 redundancies which were still in the resignation process, as the social plan allows redundant staff a period of 10 months to find another position before they are laid off. The progress that has already been made in trimming the workforce in the first six months of this year suggests that Rabobank is on track to meet its revised objective of achieving 5000 FTEs this year, compared with an initial target of 4000.

In parallel, downsizing the branch network is another key pillar of Rabobank’s accelerated rationalisation programme. The number of branches has already been cut from 826 at the end of 2012 to 488 at the end of June 2016, and the target set out in the Vision 2016 programme was to reduce this to roughly 400 by the end of this year.

“Of course this is a sensitive subject,” says Bianchi. “But we have been compensating for the branch closure programme by ensuring that we continue to offer a comprehensive range of

Sjaak-Jan Baars, Rabobank Group

Head of Global Long-Term Funding

Rabobank statement FINAL.indd 9 29/09/2016 10:49

SPONSORED STATEMENT

September 2016 • Borrowers

retail banking services through alternative distribution channels. These include mobile and pop-up branches and home visits.”

Bianchi adds that Rabobank has been lagging behind other Dutch banks in terms of branch closures. “One of the conditions of the state support received by the other banks during the crisis was the rationalisation of their business,” she explains. “As Rabobank was the only Dutch bank which did not receive any state aid, we were not under the same pressure to make cuts early. But today, improvements in efficiency across the Dutch banking industry mean that we need to ensure that we remain competitive. It’s a delicate process, but I think it is one that is understood by our customers.”

Again, rating agencies are positive about the outlook for stronger profitability underpinned by the bank’s new structure. In its most recent update, Fitch says that it expects the improving trend in Rabobank’s profitability to continue for structural and cyclical reasons, and that the group will reduce the profitability gap to similarly rated peers.

Balance Sheet ReductionAnother critical component of Rabobank’s proactive response to regulatory changes is a reduction in its RWAs, that will allow it to absorb expected higher risk weights. Already, the bank has made considerable progress in paring its balance sheet in line with this strategy.

In March 2016, for example, Rabobank sold a share of its mortgage portfolio worth €1bn – which represented about 0.5% of the bank’s total portfolio - to the insurance company, VIVAT Verzekeringen. As Rabobank explained at the time, “in line with its capital strategy Rabobank is using this transaction to free up capital to further strengthen its buffers.”

More recently, in July, the bank sold a further €500m tranche of its mortgage portfolio to Delta Lloyd and €340m to BinckBank. Its subsidiary Obvion securitised €1bn of residential mortgages in the same month. This transaction differed from previous RMBS deals done by Obvion (known as STORM), as this time also the most junior tranches were sold to investors. As a result, off-balance sheet treatment was achieved.

Rabobank is quick to add that the sale or securitisation of parts of its mortgage portfolio has no consequences for mortgage customers. “Customers will keep all their contracts with

Rabobank,” it explained in March. “The mortgages contracts which were agreed between the bank and the customer remain the same. The local banks do not know which mortgages have been sold on and naturally Rabobank remains the sole point of contact for the customer.”

There have been several other initiatives aimed at trimming the size of the balance sheet over the last 12 months. These have included the sale to investors of selected commercial real estate loans and the divestment of the bank’s lease subsidiary, Athlon Car Lease, to Mercedes Benz Financial Services for €1.1bn. The sale of Athlon, which is scheduled to be closed in the second half of the year, will increase Rabobank’s CET1 ratio by about 40bp and reduce the size of the bank’s balance sheet by approximately €4bn.

Another innovative solution aimed at deleveraging on the one hand, and supporting small borrowers on the other, is the development of a platform (“Rabo & Co”) allowing SMEs to borrow money from the bank’s high net worth customers. This achieves the triple objective of giving entrepreneurs access to an alternative source of finance, while offering high net worth customers with investable assets of at least €1m a new investment opportunity and removing assets from the bank’s balance sheet. This innovative “peer-to-peer” lending mechanism supplements existing forms of finance such as regular bank credit and crowdfunding.

A Proxy for the Strong Dutch EconomyIn re-emphasising its conservative pedigree, Rabobank is also underlining its commitment to its core strengths, which are reflected in the bank’s two strategic pillars known as “Banking for the Netherlands” and “Banking for Food”.

In the Netherlands, Rabobank commands

market shares of 20% in mortgages, 35% in savings and 41% in business lending, making it a proxy for the Dutch economy. As Moody’s puts it, “as a primarily domestic bank, Rabobank’s operating environment is heavily influenced by the Netherlands, and its macro profile is thus aligned with that of the Netherlands.” The agency adds that “Dutch banks benefit from operating in a wealthy and developed country with a very high degree of economic, institutional and government financial strength as well as very low susceptibility to event risk.”

In 2016 and 2017, Rabobank’s economic research

team is anticipating sustained economic growth across all areas of the Dutch economy, with GDP growth reaching 1.75% in 2016 and 1.5% in 2017, helping to reduce unemployment to below 6% in 2017.

This bodes well for the Dutch housing market, as does sales data for the second quarter of 2016 which indicated an increase of almost 10,000 in house sales on a year-on-year basis. By late August, house prices were 4.4% higher than they were a year before, and Rabobank expects this momentum to continue for the foreseeable future.

“Increasing shortages on the housing market, the failure of new house building to keep pace and improved affordability of owner-occupied homes mean that the number of transactions and house prices will continue to rise during the coming quarters,” Rabobank’s research department noted in an update published in August. “We expect the number of transactions to continue to rise to between 200,000 and 220,000 sales a year.” The same update forecasts that house price rises of about 5% this year and next will continue to outpace GDP growth.

International PresenceIn recent years, Rabobank has been re-focusing on its domestic and international food & agriculture (F&A) activities, pulling back from overseas activities that are not regarded as core. For example, at the end of 2013, Rabobank announced the sale of its 98.5% stake in its Polish subsidiary, Bank Gospodarki Zywnosciowej (BGZ), to BNP Paribas.

This is not to suggest that Rabobank’s international franchise is being marginalised. At the end of the first half of 2016, the bank’s international private sector lending totalled

4%

8%

4%6%

11%

68%

Assets

6%

8%

8%

22%

6%

50%

Liabilities & Equity

Other assets

Financial assets

Loans to customers

Cash & cash equivalents

Due from other banks

Derivatives

100%= €687bn

Balance sheet composition

Source: Rabobank

Rabobank statement FINAL.indd 10 29/09/2016 10:49

RABOBANK SPONSORED STATEMENT

Borrowers • September 2016

€113.6bn, or 27% of the group’s loan portfolio. Of this total, €52.2bn – or 59% of the bank’s total international WRR portfolio – is accounted for by F&A. The bank’s F&A lending now amounts to about a quarter of Rabobank’s total global loan portfolio.

Rabobank’s commitment to its F&A lending franchise remains a key pillar of the bank’s long term strategy for two reasons. First, it is a source of diversification, which is an important consideration for rating agencies. “We believe that its international activities focused upon food and agriculture add to the diversity of its domestic business,” comments S&P.

Other rating agencies agree. “The portfolio appears fairly well diversified by sub-sector. Abroad, Rabobank lends to F&A corporates and traders, and finances large-scale industrialised farms, mainly in Australia, New Zealand and the US, with some exposures in Latin America,” notes Fitch’s most recent report. “This industry is typically vulnerable to adverse weather but risks can be mitigated by lender expertise and diversification, which is the case for Rabobank.”

Second, prioritising the F&A business underscores Rabobank’s mission of making a meaningful contribution to feeding the world sustainably. This mission stems from its cooperative heritage and agricultural roots, as the bank was established over 115 years ago by farmers. As Bianchi says, Rabobank believes that feeding the world will become an increasingly serious challenge over the coming decades given population growth and demographic dynamics in the developing world.

More broadly, Rabobank remains committed to supporting economic development in emerging regions. For example, in August, Rabobank, Norfund and FMO announced that they were joining forces to invest in a new company named Arise, which will invest in financial services providers (FSPs) throughout sub-Saharan Africa. Starting with assets of $660m and a presence in over 20 countries, Arise will begin operations at the start of 2017. As Berry Marttin, Executive Board Member of Rabobank, announced in August, “Rabobank’s activities in investing and building strong financial service providers in emerging economies, especially Sub-Saharan Africa, truly fit our Banking for Food strategy, focused on creating solutions with our clients to feed the world in 2050.”

Funding StrategyUninterrupted access to wholesale funding sources has traditionally been integral to Rabobank’s business model, in part because of the structure of the Dutch market for financial services. As Standard & Poor’s (S&P) explains, “the

system’s relatively heavy reliance on wholesale funding is partly attributable to households’ propensity to save using life insurance and pension products, rather than bank deposits.” S&P adds that the funding profile of Dutch banks “benefits from factors including the depth of the domestic capital market and the Dutch authorities’ good track record in providing liquidity support.”

Moody’s echoes other rating agencies when it comments that “we believe that Rabobank’s reliance on wholesale funding, which is a feature of the Dutch banking system, is largely mitigated by its conservative asset and liability management, based on an adequate duration of the bank’s funding and a substantial liquidity portfolio.”

This relatively high dependence on wholesale funding rather than deposits, twinned with the growth in its balance sheet in the first decade of the 2000s, has made Rabobank one of the most regular borrowers in the international capital market. According to Sjaak-Jan Baars, head of global long-term funding, total issuance peaked at about €40bn in 2011.

A hallmark of Rabobank’s funding strategy has been the diversification of its issuance across a wide vista of markets, products, currencies and maturities, allowing the bank to access institutional as well as retail investors throughout the world. As of the end of the first half of 2016, just over half (54%) of Rabobank’s funding was in euros, with the balance in US dollars (18%), Australian dollars (8%), Japanese yen (6%) and Sterling (4%). A range of other currencies accounted for the remaining 10%.

A striking example of the continued strength of investor demand for exposure to Rabobank’s senior debt came in March 2016 when the bank printed its first euro-denominated 10 year benchmark of the year. This was an €2bn transaction priced at a minimal new issue premium which built a book of more than

€4.25bn, with 70% of the bonds placed with asset managers.

Rabobank has also ensured that it has maintained its footprint in the US dollar market, completing two strategic benchmarks each raising $1.5bn in 2016 – one of which was a five year senior trade; the other a 10 year tier 2 transaction. Rabobank recently added another $1.4bn senior trade in three year senior fixed and floating tranches.

Baars says he has been delighted with the response of investors to Rabobank’s benchmark issuance this year, especially as the volatility of recent months has meant that good timing in the primary market has assumed more importance in 2016 than it has for many years. “I think the distribution of our benchmark issues has been remarkable,” says Baars. “In a very volatile market we have still been generating large order books from top quality investors, which has allowed us to print in size and at tight spreads and minimal new issue premiums.”

Like a number of other issuers, Rabobank has also been able to take advantage of the low interest rate environment and investors’ continued hunt for yield by extending the average maturity of its debt. “The average duration has traditionally been between four and five years, whereas it is now closer to five,” says Baars.

By early September, Rabobank had already raised some €14bn in long-term senior funding in 2016. “I don’t expect us to issue much more this year in benchmark format,” says Baars. “We will do some smaller targeted issuance and we also have access to the ECB’s TLTRO II facility, so we have plenty of optionality for funding.”

In line with the planned reduction in the size of its balance sheet over the next five years, Rabobank is targeting a reduction in its wholesale funding programme over the next few years. “While senior debt will continue

to be an important part of Rabobank’s funding, as we reduce our balance sheet Rabobank bonds will become more scarce,” says Baars. “We’ll raise about €20bn this year, and eventually I expect this will come down to about €10 to €15bn per year.”

Baars says that this reduced senior debt funding requirement will not have an adverse impact on Rabobank’s liquidity. Nor will it undermine the bank’s strategy of ensuring that it maintains close relations with its extensive and well-diversified investor base in the euro and dollar markets as well as those in currencies such as yen, Australian dollars and sterling. But as Baars says, a smaller funding programme will give Rabobank even more flexibility and optionality in identifying windows of opportunity for issuance in international debt markets.

Domestic commercial real estate6%

Domestic retail mortgages48%

Domestic retail F&A7%

Other domestic retail SMEs9%

Wholesale & Int. Retail24%

Leasing7%

Group private sector loan portfolio €427.3bn

Source: Rabobank

Rabobank statement FINAL.indd 11 29/09/2016 10:49

SPONSORED STATEMENT

September 2016 • Borrowers

A proactive and low-risk Capital StrategyRabobank’s conservative capital strategy, which dates back to 2012, has evolved in response to regulatory changes, and is based on a firm commitment to safeguarding its senior bondholders against bail-in risk. Given that the bank has never reported a loss in its 115-plus year history, let alone defaulted on its obligations, this is a risk that is vanishingly remote. It is, nevertheless, a risk that Rabobank is committed to guarding against, given the importance of senior bondholders to its funding strategy and therefore to the bank’s business model.

“In terms of CET1 capital targets we aim to maintain a reasonable buffer above minimum capital requirements,” says Isabel Rijpkema, director capital. “This means safeguarding holders of Rabobank Certificates and AT1 instruments against restrictions on coupon payments on these instruments pursuant to maximum distributable amounts (MDA) regulation. These have been the subject of intensive discussions this year.”

As Rabobank is not categorised as a global systematically important bank (G-SIB), it will not need to comply with minimum TLAC requirements set by the FSB at 16% of RWAs from January 2019 rising to 18% by January 2022. Like other banks in the EU, Rabobank will instead be subject to minimum requirements for own funds and eligible liabilities (MREL) to be determined by the SRB.

Rijpkema echoes a number of other market participants when she says that she welcomes the idea of converging TLAC and MREL into a single capital requirement that would make the market more transparent to investors. “A harmonised solution would be very helpful because without it we will continue to have a very fragmented market in Europe which is difficult for investors to understand,” she says.

Although the SRB is still in the process of determining an appropriate MREL level for Dutch banks, true to its conservative approach to capital management, Rabobank has set the bar very high for its capital ratios. By 2020, it is aiming for a minimum Core Equity Tier 1 (CET1) ratio of 14%, compared with 13.5% at the end of December 2015.

By the same date, Rabobank is targeting a total capital ratio of at least 25%. Although this would put Rabobank at the upper end of the spectrum of European banks in terms of total capital, it already looks to be well within the bank’s grasp. As Rijpkema explains, the bank’s official capital ratio at the end of June 2016 was 23.5%, but this was prior to a $1.5bn issue of tier 2 securities in July, and does not take into account the proceeds that will be generated from the recent sale of the bank’s Athlon car leasing subsidiary. “These bring

our total capital to 24.5%, which demonstrates Rabobank’s role as a frontrunner in Europe in terms of total capital,” says Rijpkema.

Rijpkema adds that there is still considerable uncertainty about the liabilities that will be eligible for TLAC and MREL. Rabobank has been vocal in its opposition to a German proposal tabled early in 2015 which would effectively make all senior debt subordinated. Rabobank responded to this proposal last year with a position paper which outlined its objections to the German recommendations. This argues that “the German Proposal is not in line with Rabobank’s view: Rabobank focuses on high capital ratios and a layer of bail-inable liabilities as broad as possible instead of lifting out a specific asset class to comply with new regulations.”

The Rabobank position paper adds that “introducing the German Proposal could also give rise to moral hazard. Banks who have not been actively raising capital are ‘being rewarded’ with including senior unsecured. Moreover, it discourages efforts to build up capital buffers, as MREL and TLAC buffers could be filled with non-capital instruments, i.e. senior unsecured debt instruments. This German Proposal also goes against the Basel 3 reforms to increase quality and quantity of buffers and endangers the price and availability of senior unsecured funding as investors can step away from investing in this asset class.”

Rijpkema says that Rabobank is a supporter of the French proposal for the creation of a new class of non-preferred senior or “tier 3” debt which she says would be a more cost-effective and flexible option for fulfilling capital requirements.

An innovative Additional Tier One (AT1) and Tier Two Issuance StrategyThe process of increasing Rabobank’s capital ratio was accelerated at the end of 2014 when the Dutch Ministry of Finance confirmed that additional tier one (AT1) issued by banks in the Netherlands would qualify as debt for corporate income tax purposes. This belatedly brought the tax regime in the Netherlands into line with those of other leading European jurisdictions, allowing Rabobank to issue its debut CRD IV-compliant AT1 transaction at the start of 2015. This was a €1.5bn perpetual non-call 5.5 deal priced at 5.5%, which was at the tight end of initial guidance of 5.625%.

Rabobank’s inaugural CRD IV-compliant AT1 transaction attracted some 270 orders totalling €4.2bn within four hours, and the success of the deal was widely credited with reopening a market which had been dormant in the latter stages of 2014. It was also regarded as the icebreaker for other Dutch banks in the AT1 space, reaffirming Rabobank’s credentials as a benchmark issuer in

the international capital market. Rabobank’s AT1 transaction in January 2015

was a high trigger structure, meaning that the principal is liable to being partially or fully written down in the highly improbable event of the group’s CET1 ratio falling below 7% (or if the CET1 ratio on issuer level falls below 5.125%).

Rabobank returned to the AT1 market in April 2016, printing a highly successful €1.25bn perpetual non-call five year transaction. This issue, coming soon after the reopening of the market in March, generated the biggest order book for an AT1 issue since 2014, with demand of more than €6.5bn bearing witness to the strength of investor appetite for AT1 from the top-rated names. Goldman Sachs, Morgan Stanley, Nomura, Rabobank and UBS led this well-received return to the AT1 market, which was priced at 6.625% following initial pricing guidance of 7%. “Our transaction in April went exceptionally well and played an important role in helping to reopen the AT1 market in Europe after the February sell off that we had seen in this market,” says Rijpkema. “We were delighted with the quality of the order book which allowed us to price 37.5bp inside guidance.”

Rabobank’s 2016 AT1 trade will be written down in the event of the Coöperatieve Rabobank’s CET1 ratio falling below 5.125% or if the CET1 ratio of the Rabobank Group dips below 7%. To put this trigger into vivid perspective, the bank would have to post losses of more than €13bn for the write down to be activated. For the senior bail-in buffer to be reached, those losses would need to swell to an eye-watering €57bn, which for a bank that has never posted a loss in its 115-year history would be close to unimaginable. •

Isabel Rijpkema, Rabobank Group Director Capital -

Treasury

CONTACT:Investor RelationsTel: +31 (0)30 712 2401E-mail: IR@rabobank.comwww.rabobank.com/IR Bloomberg: RABO NA

Rabobank statement FINAL.indd 12 29/09/2016 10:50