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Wednesday, 31 October 2012

Oh Lord, would you buy me a brand-new bad bank?! Dutch SNS Bank cries: ‘me too!’

Oh Lord, would you buy me
A brand-new bad bank
My company has got much real estate
I have to make a hedge

The SNS Reaal NV (SR) Bank/Insurer group and especially its subsidiaries SNS Bank and SNS Property Finance passed a number of times in these columns during the last 1.5 years. In almost all cases, it was due to bad news on either the property portfolio or the whole financial situation of this bank, lying under heavy crossfire from both its investors and the Dutch government.

The problems of SNS Reaal are huge. The bank is sitting on a €4.8 bln (book-value) commercial/residential real estate portfolio in The Netherlands and other countries like Spain. The marked-to-market value of this portfolio has vaporized during the last ten years, as a consequence of the rising (structural) vacancy of CRE in The Netherlands and the disastrous real estate situation in Spain, where numerous real estate projects have been cancelled or remain vacant.

Although the bank was among the first to carry out serious write-offs to the tune of hundreds of millions of Euro’s on its CRE/RRE portfolio, the problems remained. This was caused by the simple fact that the investors just didn’t believe that the remaining real estate portfolio was healthy.

Another complicating factor is that both the Dutch government and the EU want redemption of the €848 mln in state-aid that the bank received during the Dutch banking crisis in 2008/2009. The bank should return this money before the end of 2013. Unfortunately, this is money that the bank can’t pay at the moment without getting an immediate shortage in liquidity.

The latest spasm of SNS Bank on their doubtful way to recovery is the plan to start a ‘bad bank’, that would be filled with the vast real estate portfolio of the bank.

SNS Bank hoped that the ‘big three’ banks in The Netherlands – ING Groep NV (INGA)Rabobank and ABN Amro – would buy a large share in this bad bank and asked DNB to investigate this possibility. After hearing from this plan by SNS Bank, the big three watched their feet and whistled a merry tune, only to mumble something about ‘being willing to consider the idea when a state warranty would be in place’.  And they were right.

This is of course a plan that will be watched Argus-eyed by investors, who have a 20/20 hindsight at the financial situation of Spanish mega-bank Bankia. Bankia SA (BKIA), a very large bank formed by mergers between a number of local banks (i.e. cajas), like Bancaja and Caja Madrid, turned into a financial black hole, ‘sucking up billions of Euro’s in private and government money’. In a way Bankia has also been set up as a bad bank and stating that this turned out not so good is an understatement.

The Dutch financial newspaper Het Financieele Dagblad ( wrote on the bad bank-plans of SNS Bank. Here are the pertinent snips:

SNS Reaal investigates the possibility to put its problematic real estate subsidiary Property Finance outside the company, in a so-called ‘bad bank’.

This is stated to ‘Het Financieele Dagblad’ by insiders of the bank. With the help of American merchant bank Goldman Sachs (GS), SNS Reaal is looking for possibilities to repay the €848 mln in state aid, which should happen before the end of 2013.

The remaining, huge losses at Real Estate-subsidiary Property Finance, restrain the bank in its possibilities to set the necessary repayment money free. Earlier, the news was spread that SNS had the plan to sell its insurance subsidiaries Reaal and ZwitserLeven (aka Swiss Life), but this sale doesn’t yield enough money to solve all financial problems of the bank.

If SNS Reaal would want to return the state aid later than 2013, it runs the risk of receiving a new penalty from the EU, as this would again be considered state aid. The sale of SNS Reaal’s insurance-subsidiaries is heavily frustrated by the grim perspective for the life-insurance market and the uncertain outcome of the so-called loan-shark policy claims (i.e. insured investment policies that charge so many annual expenses to the investors that very little money remains for real investments)

The foundation of a bad bank is far from easy. SNS Reaal should find investors that are willing to take the risk on its €4.8 bln real estate portfolio. The ‘big three’ ING, Rabobank and ABN Amro were approached cautiously by the Dutch national bank DNB, but reacted cooly at the offer of taking a share in the bad bank. They stated that ‘the potential losses of the portfolio are very uncertain. A solution could be that the government (partially) warrants the investments in this bad bank’. This solution lies very delicate for the Second Chamber of Dutch Parliament.

In the meantime the pressure on SNS Reaal is mounting, now the supervisors AFM [Authority Financial Markets] and DNB are urging all financial institutions to re-evaluate their real estate portfolios. A one-time only write-off would greatly exceed the financial elasticity of SNS.

Cautious readers will have read that the whole scheme for ‘privatizing the profits and socializing the losses’ is in place again. Of course the big three asked for a state warranty (red and bold text) for the investment in SNS’ bad bank. I myself would have… 

However, that doesn’t mean that the Dutch tax-payers should grant this warranty. The banks – all banks as a matter of fact – had a large stake in creating this big mess we are in currently and the only solution they can think of is to let the tax-payer be on the hook again, when investments go awry. The Second Chamber will probably not like the smell of this scheme and so do I.

You could of course accuse me of populism and ‘bashing the banks’. This is not true. I work at a large and well-respected Dutch bank and I am convinced that this bank is on its way to a better and more solid financial future. I hugely respect this bank for walking this path.

However, the foundation of a financial-black-hole-bad bank like the ‘SNS Real Estate bank’ is not in the interest of the Dutch tax-payer and should therefore not happen at all, or at least with private money only.

One more thing. SNS Reaal is probably not the only bank that gets a migraine headache from the mandatory re-evaluation of their Real Estate portfolio, as desired by the Authority Financial Markets and the Dutch national bank De Nederlandsche Bank. Also at the big three banks, the aspirines will be swallowed by the dozen, when they look at the marked-to-market value of their Commercial and Residential Real Estate portfolios. You better believe it.

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