ABN AMRO reports a net loss of €54 mln for Q3, due to write-offs on exposure to the PIIGS. The bank is leveraging again and shows misplaced optimism on next year’s recovery.

The ABN AMRO presented its quarterly results today. There was an operational loss of €54 mln, due to an impairment of €408 mln on PIIGS exposure. 

Here are the key figures , the balance sheet and an economic outlook for 2012, as presented by the bank in its press release and investors´ presentation. All documents are available via www.abnamro.com:

ABN AMRO Group reports underlying net profit of EUR 9 million in Q3 2011 and EUR 983 million in first nine months of 2011

• Underlying net profit, which excludes integration and separation-related expenses, was EUR 9million for Q3 2011. Q3 includes loan impairments of EUR 408 million net of tax (EUR 500 million pre-tax) for Greek Government-Guaranteed Corporate Exposures

• In a rapidly deteriorating macro environment in Q3, Retail &Private Banking (R&PB) delivered a good performance; Commercial &Merchant Banking’s (C&MB) revenues were lower and loan impairments were higher in Q3

• Underlying net profit for the first nine months amounted to EUR 983 million compared with EUR 768 million in 2010

• The first nine months of 2011 include loan impairments for Greek Government-Guaranteed Corporate Exposures, a restructuring provision of EUR 132 million and one-off gains of approximately EUR 150 million (both net of tax)

• Reported net result was a loss of EUR 54 million for Q3 2011 and a profit of EUR 810 million for first nine months of 2011

• The underlying cost/income ratio for the first nine months of 2011 improved to 63% from 70% in 2010

• At 30 September 2011, core Tier 1, Tier 1 and total capital ratio under Basel II were 10.9%, 13.2% and 17.4% respectively

I always wonder why banks and large companies with a stock quotation often try to disguise a loss as being a profit. It took me 15 minutes of reading and interpreting the investors´ presentation to discover that the ´underlying profit´ of €9 mln was in reality a net loss of €54 mln. For me this looks a bit dishonest, just like saying: ´Excluding all bad news, we had a wonderful year´.

Peter Atwater of Minyanville once stated: the future of a bank is in its balance sheet. For me this was an eye-opener at the time and today, it proved true once more, when looking at the ABN AMRO balance sheet.

If you only look at the aforementioned core Tier 1 capital, then the bank looks very well funded and ready for the demands in Basel III. However, if you look at the current leverage of the bank on the balance sheet, it increased to a ratio of 35:1 in Q3 from 30:1 in December 2010. This is a bad development.

The Core Tier one capital ratio can be manipulated to a certain level by considering assets with a certain risk level, as being non-risk. However, the balance sheet amount can hardly be manipulated.

Balance sheet of ABN AMRO; click to enlarge

Wietze Reehoorn, Director Risk and Strategy of ABN AMRO made some interesting statements during the investors´ presentation, that I print below:

• The eurozone economy is expected to contract in the final quarter of 2011 and first half of 2012, as the escalating sovereign debt crisis has hit confidence and activity and is weighing on bank lending. The crisis is expected to drag on well into 2012. If policy makers manage to contain it in the end, the economy should pick up again as from the second half of next year. However, fiscal consolidation will limit the pace of recovery. The ECB is expected to cut its main policy rate to 0.5%
• The US economy will prove more resilient and has recently been showing signs of firming. However, financial stress and uncertainty will spill-over from the Eurozone. We expect moderate growth in the coming quarters and forecast more quantitative easing by the Fed US & Eurozone economic outlook.
• Dutch GDP is expected to shrink in the final quarter of the year and the first part of 2012. The very open Dutch economy is suffering from the slowdown in global output and trade
• The slowdown will be evident above all in next year’s growth figure. On average, the Dutch economy is expected to contract in 2012. This reflects the severe global cooling down, which translates into an only small expansion in Dutch exports. Moreover, private consumption will not provide any counterweight as purchasing power will shrink. And lower government spending will also depress growth. 

The four bold-printed statements can be roughly translated as:

• We hope that the Euro-zone governments do not mess up big-time; our statement on the European economy picking up in the second half of 2012 is also totally based on hope.
• We hope that the ECB cuts the interest rates to 0.5%, although our savers will pay the price for this. We don´t care, do we?!
• We hope for a serious Quantitative Easing III program in the US and we don´t care that QEI and QEII didn´t do one darn thing for the US economy. Let the money presses roll, please!
• Our opinion on the Dutch export still expanding a little in 2012 is totally based on hope, as the rest of the economic data looks so bad that we get totally depressed by this.