European Commission puts ABN AMRO Bank effectively on a leash

ABN AMRO, the former number one and current top 3 bank in The Netherlands had an “interesting” history over the last 7 years: It started with their enduring, but finally succesful take-over bid on Banco Antonveneta in Italy. In the end, this struggle cost the bank so much money that it became a take-over candidate itself. After a hard-fought battle between Barclays and a troika of European banks (Banco Santander, RBS and Fortis Bank), the ABN AMRO bank was taken over by the troika for a record amount of about €75 bln.

And then came the credit crisis: in October 2008 Fortis Bank faced immediate financial difficulties, due to a lack of trust under the shareholders and private savers of Fortis Bank, which resulted in a slow, but steady bank run. The situation for Fortis Bank became so desperate, due to a lack of liquidity, that the Dutch government took over the Dutch part of the bank. Also RBS had to receive blns of Euro’s in state aid to stay afloat.

By taking over Fortis Bank The Netherlands NV, the Dutch state became not only the owner of the Dutch branch of Fortis, but also owner of Fortis’ share of ABN AMRO (mainly the private banking and retail organization).

Under pressure of the Dutch state these two banks merged into the new ABN AMRO bank with a balance total of €380 bln (2010), led by former 12-year Finance Minister Gerrit Zalm. In the proces the new bank received between €4.2 - €5.45 bln in direct state aid. This amount is measured without the takeover price of €15 bln for Fortis Bank, paid by the Dutch government.

And there the European Commission came in play: according to the European rules, every European bank that received state aid has to take measures to reinforce solvency and liquidity. Also each bank has to bring some sacrifices to prevent it from having unfair competitive advantages, due to the state aid. In case of the ABN AMRO the sacrifice was a.o. the forced sale of their subsidiary ‘Hollandsche Bank Unie’ (HBU) to Deutsche Bank. And also the European Commision started an investigation whether the state aid in 2008-2009 was allowed under the European rules.

This investigation came yesterday to a definitive conclusion as the European Commission sent their final report. The following pertinent snips come from an ABN AMRO press release, as the official report is not yet accessible to the public.

Final outcome of state aid investigation by the European Commission

On Tuesday 5 April 2011 the European Commission announced the outcome of its state aid investigation procedure on ABN AMRO.

The European Commission states in its press release that it has approved under EU state aid rules the support package and restructuring plan for ABN AMRO Group, subject to certain conditions. These include a ban on acquisitions, and measures to stimulate competition in private banking in the Netherlands.

Acquisitions are still possible if these are below a certain (cumulative) limit or are part of certain activities, such as private equity.

In addition, other conditions not mentioned in the press release of the European Commission are a continuation of the price leadership restrictions similar to the ones implemented in 2010; a ban on advertising State ownership; an interest payment to the Dutch State of EUR 18 million based on a recalculation; the monitoring of net interest income levels; and certain restrictions on coupon payments and calling of capital instruments.[…]

Most measures are implemented for the duration of three years starting 5 April 2011. The restrictions imposed on acquisitions will be prolonged to a maximum of five years if after three years the Dutch State continues to hold more than 50% of the ordinary shares.

And with this outcome of the European Commission investigation, ABN AMRO Bank is put effectively on a dogs’ leash.

The situation with ABN AMRO in The Netherlands is:

·    They are too small to compete internationally with ING Bank, Rabobank and other large European players, as these banks have at least twice their balance sheet total.

·    On the other hand, they are too big to be a local bank with a limited international network.

By being forbidden to take acquisitions during the next five years, this situation will last much longer. I say five years on purpose: I don’t see any possibilities to put ABN AMRO back on the European stock market for more than 50% of current stock value within three years. I understand this decision by the EC, but it makes life for ABN AMRO much harder.

Also the restriction concerning price leadership is something that ABN AMRO has got to put up with. In the highly competitive Dutch banking market price leadership is a very effective way to survive. Having the lowest tariffs for private and corporate financial management and financial services, is a unique selling point. Relative advantage is that a number of competitors also received state aid: ING Bank, SNS Bank, Aegon Bank and Leaseplan Bank. These banks will also have a restriction on price leadership.

The monitoring of net interest income levels means in plain English: there is a minimally required net margin between the amount of interest the bank asks for corporate and private loans and the interest that it pays on private and corporate savings accounts.

Especially this last decision of the European Commission – although understandable –  is bad news.  For ABN AMRO, but particularly for the Dutch savers. The amount of interest paid on private savings accounts is depressing, being in general about 2.5% or less. In particular in these days, as the international fears of inflation are surging.

Having 2.5% interest on their savings account with a current inflation in the Euro zone of 3% means, as a matter of fact, that private savers are losing money when they stash their money at the bank. This is not only the case at the ABN AMRO, but at all state supported banks. The private saver is the unresisting victim of this situation.

I put my hopes on Jean-Claude Trichet of the ECB. By raising the general interest rates, he might enforce that putting your money at the bank is not a losing investment anymore.

And ABN AMRO? I guess that will be a state-owned bank for many years to come.