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The housing market slump in the Netherlands is causing headaches for the country's banks, which were just on their way to recovering from the financial crisis in 2008 and could now face rising losses and tighter funding conditions.
The Dutch government is expected to wrap up negotiations this week on more austerity measures to bring its budget deficit in line with European Union requirements in 2013. In addition to tax increases and spending cuts, it will likely to take a first step in addressing the huge mortgage debt in the Netherlands. The debt pile stands at around EUR640 billion, well over 100% of gross domestic product and among the highest in the EU. It has become a key concern since house prices have fallen by around 10% since 2008 and are forecast to drop further.
Against a backdrop of rising unemployment and more austerity, an increasing number of Dutch households will be scrambling to pay off their debt. While the slump is far less severe than the contractions seen in Spain and Ireland, it is weighing on the economy and poses a risk to the financial sector, experts say.
The issues will help to put this upcoming earnings season under the spotlight more than usual. ING will report first-quarter results May 9, and ABN Amro will follow May 16. Rabobank doesn't report quarterly figures.
In its annual report, the Dutch central bank last month warned that a prolonged downturn could result in an increase in loan losses for banks this year and that they could experience more difficulties securing funding in capital markets. This could be problematic: Dutch banks are heavily reliant on wholesale funding to finance their mortgage books due to a lack of deposits from households and companies. This "deposit funding gap," as the central bank describes it, currently stands at around EUR480 billion and is on the rise.
After being hit hard during the financial crisis in 2008, Dutch banks have improved their capital positions and slashed their balance sheets. They currently rank among the strongest in Europe and should be able to withstand the slump, Standard & Poor's Ratings Services said in a report. However, S&P also noted they are still "generally reliant on wholesale funding" and that it will be crucial they keep the confidence of financial markets, as they have around EUR115 billion in debt maturing in 2012 and 2013.
The biggest mortgage lenders--cooperative Rabobank Groep, state-owned ABN Amro Bank NV and ING Groep NV (ING)--have sought to reassure financial markets that they can deal with the downturn and that they still enjoy healthy access to wholesale funding. The banks noted that Dutch unemployment is still relatively low and that households have sufficient buffers to pay off their mortgages.
Rabobank, the biggest mortgage lender with a loan book of around EUR200 billion, has said that losses have been "extremely limited," without being more specific. ABN Amro, the second-largest player with a EUR155 billion mortgage book, said payments due for over 90 days were EUR3.29 billion, or 2.1% of the total.
And ING, which has EUR142 billion in outstanding mortgages, has said that delinquencies of more than 90 days have been relatively stable since 2008 at around 1%. At an investor day in January, it said the market is less risky than perceived and that losses would still be manageable even when unemployment would rise to 10% and house prices would drop 25%.
Prices could fall further if the government starts reducing or removing some subsidies for the housing market, such as a tax deduction on mortgage interest payments. This fiscal benefit encourages households to borrow heavily, and the International Monetary Fund has criticized it for stretching the balance sheets of both the government and banks.
The uncertainties have fueled concerns among analysts.
UBS in February downgraded ING, citing the tough conditions in the mortgage market. And Citigroup said in a recent report that earnings at ING's retail bank in the Netherlands, the group's biggest unit, will be squeezed this year.
"Furthermore, any change in the government stance towards mortgage tax-deducibility could result in an even sharper decline in earnings than we currently forecast and a prolonged period of lower profitability," it said.
ING is the only listed bank of the big mortgage lenders, and its shares are down 1% since the start of the year but off nearly 35% from a year ago.
- By Maarten van Tartwijk; Dow Jones Newswires; +31 20 571 5201; firstname.lastname@example.org