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Wednesday, 9 March 2011

Putting the thermometer in the banks(2). The annual results of Rabobank and ABN AMRO.

Both the Rabobank and ABN AMRO presented their annual results last week. While the Rabobank presented a substantial profit of 2.77 bln EUR, the ABN AMRO stated a loss of 414 mln EUR. What is behind these figures and what should we think about it?

Yesterday I showed the figures of the Rabobank in part 1 of this series. Now the turn is for the ABN AMRO bank

The ABN AMRO is a special case under the large Dutch banks: in 2007 the bank was taken over by a consortium existing of RBS, Banco Santander and Fortis Bank (the Dutch / Belgian holding) for a record amount of  €71 bln. This amount was so large that two banks of the consortium came into financial trouble: RBS and Fortis.

When Fortis came in so much financial trouble in October 2008 that the Dutch state had to act (according to Wouter Bos, Dutch finance minister), the state in a surprise move took over the Dutch belongings of Fortis, namely Fortis Bank The Netherlands and Fortis Insurance The Netherlands, separating those of the Belgian parts of Fortis.

With that move the state became owner of the parts of ABN AMRO that belonged to Fortis Bank. After this fact the parts of ABN AMRO belonging to the Dutch state were legally demerged from the RBS parts. The state remained owner of the name ABN AMRO.

After these proceedings the ABN AMRO had quite a difficult existence. ABN AMRO had to sell some valuable parts of the bank to foreign competitors (a.o. HBU, the precious metals subsidiary), due to the EC Remedy measure enforced by the European Commission. The formerly “bragging” and arrogant bank was suddenly turned into the Cinderella of the Dutch banking market, leaving ING Bank on the undefeated number one-position.

What remained was a bank with a balance sheet total of about €350 bln, existing of ABN AMRO and Fortis Bank parts, that is specialized in the retail and private banking market and besides that has a small corporate banking part. This is the situation that the bank is in now. The merger process of ABN AMRO and Fortis Bank is still not finished and will probably last until 2013.


-   ABN AMRO Group reports strong growth in underlying profit to EUR 1,077 million in 2010 
-   Reported net loss for the period 2010 was EUR 414 million, due to the forced sale under the EC Remedy (EUR 812 million negative net-of-tax) and separation and integration costs (EUR 679 million net-of-tax in total). Reported net profit for the period 2009 was EUR 274 million 
-   Underlying net profit, which excludes the sale under the EC Remedy and separation and integration costs, amounted to EUR 1,077 million, compared with an underlying net profit of EUR 142 million in 2009 
-   This increase was driven by higher operating income (+10%) and lower loan impairments (-47%), despite higher costs as a result of legal provisions and expenses (EUR 264 million net-of-tax) as reported on previous occasions 

Gerrit Zalm, Chairman of ABN AMRO Group comments:
”Looking back on 2010, we can conclude that we have reached and in some occasions even surpassed the goals we had set for 2010: we realised separation, concluded the first major integration projects successfully and on time, rebuilt capabilities, boosted client satisfaction and delivered a strongly improved financial performance. 
The improvement in underlying profit in 2010 was mainly due to our continued focus on clients and costs, the first synergy benefits from the integration and the recovery of the Dutch economy. The reported result was impacted by separation and integration costs and the forced sale under the EC Remedy, EUR 1.5 billion in total. The integration costs will diminish sharply in the two years ahead of us. We are now well under way to improving the profitability and efficiency of the bank. Our capital and liquidity position gives us a good starting position to meet the upcoming Basel III requirements, which will be phased in starting from 2013. The Dutch State has announced that we can start preparations for an exit in 2013, probably leading to a stock exchange listing in 2014. We welcome this view.[…]" 
Interested readers should read the whole press release of the annual results, as you only find the highlights here, accompanied by my comments.
Balance sheet of ABN AMRO. Click on image for enlargement

Looking at the balance sheet you notice the following changes:

-     Equity, although strongly improved compared to 2009 (€12,112 mln vs €8,955 mln.), is still leveraged 30 times with the current asset total of €379 bln
-     Financial assets held for trading and “other” are up by resp. 20% and 13.5%, while financial investments and loans and receivables – banks and customers are down by about 8% and 1.8%
-     Financial liabilities held for trading and liabilities due to banks are significantly down with respectively 25% and 42%, while issued debt is up by 22%. Subordinated debt is down by 31%

Key figures from risk management:

Credit risk exposure:
-         At year-end 2010, 58% of Loans and Receivables customers was from private individuals, consisting of residential mortgages (EUR 161.3 billion) and, to a lesser extent, consumer loans (EUR 14.2 billion). The majority of Loans and Receivables customers are exposures to Netherlands-based clients. 
-         Sovereign and sovereign-guaranteed exposures (in € bln) of the riskiest countries
o        Belgium 2.6
o        Greece 1.4
o        Italy 1.3
o        Portugal 0.2
o        Ireland 0.1
o        Spain 0.1
o        Total exposure in sovereign bonds is € 25.5 bln 
-         In addition, some of the exposures (mainly Greece and The Netherlands) are recorded in loans and receivables (at amortised cost). The Greek exposures show an unrealised loss of EUR 216 million compared to the fair value at year-end. No impairments have been booked as these loans are performing. The remainder of the exposures is booked at fair value and is part of the trading portfolio in Financial assets held for trading.

In general these figures don’t look bad at all. The exposure to sovereign bonds in risky countries is with €5.7 bln quite high, especially compared to the equity of €12.1 bln. And there is also a substantial risk in the exposure to Dutch mortgages. But ABN AMRO is a state bank, so there will not be negative equity as the state (read: I and my fellow countrymen) will always foot the bill.

In the coming years the costs of the merger and the costs of the EC Remedy will indeed be omitted and then the profits might return to ABN AMRO. One thing I don’t understand: how can you not have written off already a substantial amount on your exposure to Greece and other risky countries, as “these loans are performing”. The chance that the Greek sovereigns are paid back in full is that of a snowball-in-hell.

Also the statement that ABN AMRO might be brought to the stock exchange in 2014 is IMHO extremely naïve. The bank has too many “dead bodies” lying around:
-     There is a claim for €2 bln in shares on ABN AMRO from the Belgian company Ageas, that emerged from Fortis Belgium, due to an agreement from 2007 about the issuance of Mandatory Convertible Securities (MCS).
o    Although the Dutch state claims that this claim doesn’t stand a chance, due to the details of the take-over deal of October 2008, the case is due for being handled in court.
-     There is a claim from the Stichting Investor Claims against Fortis that is also due for being handled in court, in which this foundation claims that Fortis in 2007 fraudulently misinformed their customers on their investments.

Some pertinent snips of the claim (which is an absolute must-read): 

A specially formed foundation representing investors in the U.S., Europe, the Middle East and Australia has brought a unique shareholder fraud action in connection with the collapse of Belgium-based financial services company Fortis N.V. Currently known as Ageas NV/BV, Fortis, which had huge exposure to subprime loans in the U.S., was rescued by the Dutch, Luxembourg and Belgium governments in 2008 following its acquisition of Dutch bank ABN Amro. Valued at over euro 11 billion, the bailout was among the largest on record among European banks.  

The foundation, officially known as Stichting Investor Claims Against Fortis, has filed suit in Utrecht Civil Court seeking declaratory judgment against Fortis for defrauding investors through a 2007 rights issue to acquire ABN Amro -- the offering raised more than euro 13 billion, most of which was wiped out during the financial crisis. Although the investor group cannot recover damages under current European and American securities laws, Stichting's liability action allows shareholders to join the foundation and position themselves to bring damage claims under the Dutch legal system. 

Formed this past June, the Fortis investor foundation is represented by Dutch law firm Janssen Broekhuysen Advocaten. Leading U.S. shareholder law firms Grant & Eisenhofer P.A. and Barroway Topaz Kessler Meltzer & Check, LLP are actively supporting the foundation, and may assist in pursuing damages claims against Fortis. To date, more than 140 institutional investors, including many of the largest pension funds in Europe, have signed up to join the foundation, along with more than 2,000 individual claimants. Shareholder losses are estimated in the tens of billions of euros, with some investors losing up to 90% of the value of their Fortis holdings. Over a 12-month period from 2007-08, shareholder equity at Fortis fell from euro 33 billion to euro 6.8 billion. 

The foundation alleges that Fortis and its officers and directors, as well as lead underwriter Merrill Lynch UK Holdings, misled investors about the bank's financial health from the fall of 2007 up to just three days prior the government bailout on Sept. 29, 2008. The foundation contends that Fortis, at the time the largest financial institution in the Netherlands and Belgium grossly misrepresented the value of its collateralized debt obligations and the extent to which its assets were held as subprime mortgage-backed securities. The lawsuit also accuses Fortis of downplaying risks associated with its ill-fated decision to acquire ABN Amro in a consortium with the Royal Bank of Scotland andSpain's BancoSantander Central. The foundation seeks to represent investors who relied on information published by Fortis from May 29, 2007 through Oct. 14, 2008. 

Even if the Dutch state is so naïve that they bring the bank in 2014 to the stock exchange anyway, it would be a definitive no-no as far as I’m concerned. Those legal actions might take a long time, but the results for the bank can be devastating. If the bank remains state-owned only the taxpayer is on the hook (again: I and my fellow countrymen)

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