Market and clients
Credit and liquidity crisis
Rabobank International's activities were affected by the credit market crisis in 2007.
The turmoil in the financial markets led to changes in the market environment for Global
Financial Markets. The ensuing crisis caused the result for Global Financial Markets to decline.
Leveraged Finance, which specialises in financing with high volumes of borrowed capital,
was likewise confronted with greatly altered market conditions following the crisis.
This resulted in a lower number of transactions in the second half 2007.
Local market conditions being the main decisive factor, Rabobank Group's international
retail banking business was hardly affected by the turmoil in the financial markets.
The private equity market developed favourably for Rabobank International in 2007,
resulting in positive revaluations for Gilde funds participations, the interest in Langholm and
for Rabo Private Equity, and also in the sale of a number of participating interests.
The credit crisis has left deep scars in the financial markets over the past months, and, like
other financial institutions, Rabobank is feeling its negative effects. The crisis was directly
caused by increased payment problems among less creditworthy mortgage borrowers in
the United States as a result of higher interest rates and the decline in house prices. Since
many of these so-called subprime mortgages had been securitised, bundled and resold to
other parties in past years, it was unclear where the risks ended up. The result was a lack of
confidence, making banks hesitant to lend to each other, causing an acute liquidity shortage
in the money markets. The crisis soon spread to the entire credit market. Even products
totally unrelated to US subprime mortgages were affected. Many markets that, until recently,
were liquid saw their liquidity disappear. This had significant consequences for the valuation
of positions, because if there is little or no trading in certain financial assets, it is difficult to
establish their fair market value. Price quotations seen in the market became more than just
a reflection of a position's credit risk, the lack of liquidity, too, is reflected strongly in the prices.
Rabobank Group's balance sheet and profit and loss account are affected by the turmoil in
the financial markets, in the context of which a distinction has been made between effects
from 'indirect subprime exposure' and 'other effects on profit and equity'.
In millions of euros
Revaluation charged
to 2007 profit (after tax)
Revaluation
charged to
equity
Carrying value
at 31
December
2007
of cost
AAA rating
AA or higher
rating
Alt-A RMBS
2
4
41
82%
94%
96%
Subprime RMBS
17
24
165
73%
82%
94%
CDO
265
99
112
17%
91%
98%
Total
284
127
318
Indirect subprime-exposure
Rabobank has no direct exposure to subprime mortgages. However, Rabobank
International's investment portfolios contain a limited indirect exposure in the form of
Residential Mortgage Backed Securities (RMBS's) and Collateralized Debt Obligations (CDO's).
These items have been revalued, with EUR 284 million in value adjustments being charged
to profit and loss and EUR 127 million to reserves. At 31 December 2007, this exposure
amounted to EUR 318 million.
Other effects on profit and equity
Apart from the indirect subprime effects discussed above, the turmoil in the financial markets
has had other effects in a broader sense, in the form of value adjustments to those financial
assets and liabilities that are valued at fair value. These effects are reflected partly in profit
and partly in reserves, and result from, inter alia, increased credit spreads. Partly as a result of
this, the item 'Net income from financial assets and liabilities at fair value through profit and
loss' was EUR 284 million lower in 2007, at EUR -38 (246) million. In the investment portfolio,
which totals more than EUR 50 billion, a revaluation of EUR 697 million was charged to equity.
50
Rabobank Group Annual Report 2007
