Search This Blog

Wednesday, 8 June 2011

ABN AMRO: Majority of the Second Chamber of Dutch parliament disagrees on planned IPO for the bank in 2014. I agree with the Second Chamber, but doubt if state support will ever be paid back in full.

Since the credit crisis broke out in The Netherlands in 2008, the ABN AMRO has been state property. The bank needed to be saved after the takeover process by Banco Santander, RBS and Fortis Bank went awry:
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).
Since then the state has invested a staggering amount of €25 bln ($36 bln at the current exchange rate) in the ABN AMRO/Fortis combination to keep both banks alive and to make them financially healthy. That is indeed €5 bln more than the €20 bln I calculated with in the aforementioned article.

It makes sense that the Dutch government wants to receive this money back as soon as possible, as it is taxpayers’ money that now cannot be used for other causes. Besides that, the Dutch national debt soared since 2008, due to initially the banking crisis which culminated into the sovereign debt crisis in the Euro-zone.

Selling the ABN AMRO bank via a successful IPO would return this money at least partially. Therefore Dutch Finance Minister Jan Kees de Jager and CEO Gerrit Zalm of ABN AMRO have been pondering on an IPO for the new ABN AMRO in 2014.

In the aforementioned article, I expressed my strong doubts on a successful IPO in 2014. Here are some pertinent snips:
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.
And ABN AMRO? I guess that will be a state-owned bank for many years to come.
In the meantime, the Second Chamber of Dutch parliament figured this out too. Following a proposal from the PVDA (Dutch social-democrat party), it advised Minister De Jager to stop his plans to start the preparation for an ABN AMRO IPO in 2013.

The following snips are from an article on the IPO (link in Dutch) in the Dutch financial newspaper ‘Het Financieele Dagblad’ (
Majority in Second Chamber against IPO ABN Amro
A majority of the Second Chamber [of Dutch Parliament – EL] is against the plans for 2013 to make significant steps in preparing an IPO for Dutch bank ABN AMRO. Although all parties are not against privatizing the state bank, they would rather wait a few years. That becomes clear from a series of interviews by BNR (Business News Radio) and the FD.
Silent partner of the Dutch cabinet, PVV (Party for ‘Freedom’) and opposition parties PvdA, SP (Socialistic Party) and GroenLinks (Leftwing Environmental party) reject for now the plans of Finance Minister Jan Kees de Jager, to make significant steps in 2013 for an IPO of ABN AMRO.

When the ABN AMRO would go to the exchange next year, this would yield an estimated €17 bln. ‘That is too litttle’, according to Bruno Braakhuis of GroenLinks. ‘We want at least to earn back the €25 bln, that the Dutch taxpayer paid for the bank until now. That means that we won’t privatize ABN AMRO before 2015’.
PVV MP (member of parliament) Roland van Vliet wants to sell the bank asap, under the condition that, next to the full purchase amount, also the interest paid is earned back. That seems impossible the coming two years.
The Chamber debates on Wednesday with De Jager on the exit strategy of ABN Amro. In 2009, Minister De Jager outlined four conditions that the bank should meet before it can be sold:·     The Financial markets should have eased down·     The bank should be able to survive without state support and warranties·     The private investor(s) should have ample financial means·     The private investors should have a good policy for the bank
By rejecting De Jager’s plans for preparing an IPO for ABN Amro in 2013, the PvdA sets off to a new course. Former PvdA leader Wouter Bos said in 2009, when he was Finance Minister, that the bank should be sold to private investors in a few years. 
‘I don’t feel the need to hurry’, says Ed Groot, financial specialist of the PvdA. ‘Let the minister start with making the bank financially self-supporting: without state support or state warranties. France has many state banks. That is not at all illegal”. Groot points to the former, stateowned ‘Postbank’ (currently ING): ‘That was a fierce, innovative competitor for the cosy banking syndicate, without excess salaries or bonuses. I think that customers of ABN Amro would find the idea comforting’.
When I say I agree with the Second Chamber, I mean that I agree with its theory that an IPO of ABN Amro in 2014 would not yield the full €25 bln of state support, not even to mention the interest paid over the years. To put it stronger: I think, we might be glad if the bank even yields half of this amount in 2014.

Where I disagree with the Second Chamber, is:
·    whether the state support will ever be paid back by ABN Amro. I don't think so 
·    Whether the Dutch taxpayer should be happy to be the owner of a large bank. Again, I don't think so

On April 25th I wrote an article on the bank, called ABN Amro aiming to scrap a few hundred jobs:
Now the bank is especially aimed at servicing Dutch customers in The Netherlands and abroad, except for a few profitable and high-profile activities where the bank still is considered a global player. How´s that for a down-to-earth ambition.
And on top of that the bank is still in the middle of a merger with Fortis Bank in which at least 6500 jobs need to be scrapped before 2013, due to double manned positions and banking activities that are abolished.
If you then state as ABN AMRO that you are planning to return to the stock exchange in 2014, in my opinion you are busy with a ´mission impossible / implausible´:
The amount of state support that ABN AMRO received is estimated at about €25 bln, including the state support for rescuing Fortis Bank: 
·    The chance that an IPO in 2014 will yield this amount of money for the state is about 0,00000000001%, especially if you read what the target customer groups of the bank are. 
·    I don´t know if Jan Kees de Jager (finance minister) or PM Mark Rutte are ready to tell the Dutch taxpayers that they can wave goodbye to at least €15 bln in state support when the IPO is over and done? 
·    Fact is that if the state remains a partial owner by majority of the bank, the other shareholders know they don´t stand a chance when the bank comes into trouble again. The state comes first.

I think my conclusions in that article were rocksolid then and now, although they were based on a gutfeeling.

In the meantime, the bank showed some solid Q1 results:€500 bln profit. If you multiply this by four, the estimated annual profit would be €2 bln (please don’t do it, you will kid yourself). If you would subsequently multiply this estimated annual profit by 10 (profit/rate ratio), the exchange rate might be €20 bln, not €25 bln. And for a bank a factor of 10 is already quite optimistic.

·    The strategy of ABN Amro is aimed locally, at the Dutch market; not globally: this reduces the future growth perspective for ABN AMRO
·    ABN Amro has (limited) exposure to the sovereign bond market
·    ABN AMRO has large exposure to the international CRE market
·    ABN AMRO has large exposure to the Dutch RRE market
·    The margin between interest earned from customers and interest paid to customers is currently extremely large, but will IMO not prove sustainable:
o   The highest savings’ interest is a lousy 2.50% (conditionally) and the highest deposit rate for five year fixed is 3.60%,
o   The mortgage interest is 4.20% variable rate on a fully financed house and 5.05% for ten year fixed.
o   The bank makes at least about 1.5% in margin, but in practice this is probably a lot more.
·    The chance that ABN AMRO will have to write-off on their risk-bearing assets, like sovereigns or Commercial and Residential Real Estate, is in my opinion 90%:
o   Sovereign bonds of the PIIGS countries are today’s junk bonds
o   CRE is close to death (look also for my other articles on CRE in the archive)
o   RRE is in a total lock-up (again, look also for my other articles on RRE in the archive)

So even if the bank would earn this €2 bln profit for 2011, a profit/rate ratio of 4-5 would be more appropriate, I guess. In this scenario the IPO of ABN Amro would only yield about €9bln. Who is going to tell that to the taxpayer.

And if waiting with the IPO is the solution for this problem? As I said, the strategy is aimed too much at the Dutch market to have real growth perspective. And massive write-offs on assets (my prediction) will further reduce the confidence of the taxpayers in the financial markets AND in politics.

My suggestion: schedule the IPO of ABN Amro for 2015 and prepare the taxpayers that they will lose about €15 bln of tax money. It seems that Finance Minister Jan Kees de Jager is caught between a rock and a hard place… I hope he has the ‘cojones’ to tell this to the Dutch people.

No comments:

Post a Comment