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Monday, 10 June 2013

European Commission orders split up of Dutch bank/insurer SNS Reaal. Will this become an example of “maintaining competitiveness by killing the competition”?

In the recent past, I did my share of writing on the rise and fall of SNS Reaal NV ($SR), the bank / insurer and fourth biggest bank in The Netherlands.

SNS Reaal had always been a down-to-earth bank-insurer with many small savers and small, but mostly financially sound borrowers within the Small and Medium Enterprise (SME) range. Historically, the bank had a healthy cash position and good investments within its comfort zone, while the insurance division consisted of two viable insurance companies (Reaal – a general insurer – and Zwitserleven, the former Dutch branch of SwissLife).

Sadly, the bank became an unresisting victim of the ‘we must grow and increase our yields and profits in order to keep the shareholders happy’-virus, among its executive officers.

With the takeover of Bouwfonds Property Finance (continued by SNS under the name SNS Property Finance) from ABN Amro, SNS Reaal took clearly a much bigger bite than it could chew. Bouwfonds PF, a Commercial Real Estate (CRE) company which had been stuffed by ABN Amro with most of its dubious customers, became a poison pill, that slowly, but surely killed this small bank-insurer.

At the beginning of the credit crisis, the bank already needed financial aid by the Dutch state, in order to remain upright, during the first difficult months of the crisis. The bank survived the crisis by a whisker, but was never able to uprise again, due to its millstone, called SNS Property Finance.  

In January of this year (click here, here and here for my 2013 articles on this bank), the bank finally went down, under the enduring pressure of its CRE portfolio gone awry and needed to be rescued by the Dutch Finance Minister Jeroen Dijsselbloem through the means of a nationalization.

Current Eurogroup-chairman Dijsselbloem had a prime with his decision to not only let the shareholders fully share the burden, but also the holders of subordinated bonds. In Europe, this had been unprecedented during the crisis for banks receiving state-aid.

Every insider had already been afraid that the European Commission would punish the bank fiercely for the nationalization and for the fact that the bank needed state aid for an unprecedented, second time in only five years. And so the European Commission is supposedly planning to…

The following snips come from an article in Het Financieele Dagblad (FD) of last Friday:


The rescue of SNS Reaal by the Dutch state gets nasty consequences. Brussels only wants to approve of the state support, when the bank-insurer abolishes 25%-50% of its activities.

This means – in almost every scenario – that at least the insurance labels Reaal and Zwitserleven, owned by SNS, have to be sold. In the most far-fetching scenario even bank subsidiaries, like ASN, must look for a new owner.

Yesterday, this news became clear at the postponed presentation of the annual data for 2012. ‘Currently, we are in fierce negotiations with Brussels’, according to new CEO Gerard van Olphen, who has been appointed by Finance Minister Jeroen Dijsselbloem as a successor for dismissed CEO Ronald Latenstein. ‘We have to be real; we received firm state support earlier this year. We also did in 2008. In such a case, you will be subject to the heaviest category of penalizing. We should seriously reckon with a balance reduction of 25% to 60%.’

SNS Reaal already planned to abolish the real estate branch SNS PF, the source of all problems. However, as this branch only counts for 5% of the bank’s balance, this will not be sufficient at all to satisfy the European Commission. All insurers combined count for 38% of the balance.

First, let me be clear. It would be more than justifiable when the European Commission punished SNS Reaal for the erratic and unresponsible behaviour of its former executive management, who brought the bank to the brink of defaulting during the last six years.

These people with NO HANDS-ON EXPERIENCE AT ALL in the field of Commercial Real Estate bought a company – Bouwfonds Property Finance – with already a doubtful reputation at the time and an even more doubtful CRE portfolio.

This CRE portfolio had some serious bleeders aboard: domestic and foreign real estate projects, developed by sometimes ill-reputed project developers, with almost blank checks from Bouwfonds PF and with virtually non-existant controls from the mother company.

In other words, Bouwfonds PF was a car-crash waiting to happen. SNS Reaal did buy the company, after banks like Rabobank and ING Groep NV ($INGA) gladly refused the honour of buying Bouwfonds PF.

On top of that, these SNS executives allowed ABN Amro to fill up the company with former ABN Amro customers, some of whom spread a serious odour of (organized) crime, fraud and dishonestly collected CRE.

Where was the due dilligence investigation? Where was the self-control of these SNS executives to not mess around in a line of business that they didn’t know at all?

However, that is not the point!

The point is that The Netherlands has a near-oligopoly of banks: ING, Rabobank and ABN Amro almost divide the whole consumer and Small and Medium Enterprise (SME) banking market among themselves. Other banks are just too small, too exclusively aimed at the rich and famous or they have a too narrow business services portfolio to be true competitors for the ‘three sisters’.

SME customers would have virtually nowhere else to go for loans and credit facilities and consumers / savers would be receiving their insulting interest rates with some serious toothgrinding, knowing they couldn’t go nowhere else, when there would not have been… SNS Reaal.

SNS Reaal was still enough bank to offer some competition to the three sisters. Although the bank was small, it attracted enough business from customers, who were dissatisfied by the other three banks and wanted a more personal and small approach. This became especially important after the demise and take-over of Friesland Bank by the Rabobank group.

Even today, the consumer and SME banking core is still healthy and sufficiently profitable. According to the same, earlier mentioned article in the FD, the banking part of SNS Reaal made an autonomous profit of €99 million in 2013Q1.

When, as a penalty for the received state aid, the European Commission would dismantle this banking part of SNS Reaal and force it to be sold to other Dutch or foreign banks, this would be bad loss for banking competition in The Netherlands. Then, the banking oligopoly of the three sisters would be a fact.

Of course, I know that something has to be done about SNS Reaal, to prevend from false competition. On the other hand: ING Groep received state aid, ABN Amro received state aid and is still a state-owned bank; this makes the Rabobank the only large Dutch bank to not receive state aid.

On top of that, the Rabobank owns considerable Commercial and Residential Real Estate portfolios, among others through its subsidiary FGHBank. These portfolios are still booked in the balance sheets at (presumably) overly optimistic prices. Nobody bothered yet to ask the Rabobank for a serious readjustment of its CRE and RRE portfolios, while many insiders state that there is a lot of vapour in these portfolios (Check out Kees de Kort in this article). 

Officials putting their head in the sand, when it comes to balance readjustments among the large banks, could also be called a kind of state support.

From a European point of view, SNS Reaal is a fly on the wall, virtually without any financial meaning for the European banking industry. The Dutch government, calling SNS Reaal a Dutch system bank was ridiculous, when you looked at the financial data and sheer size of the bank alone.

However, for the Dutch consumers and SME entrepreneurs, the bank is an inadmissable part of the financial industry in The Netherlands. Losing it, would seriously diminish free choice for the Dutch consumers and entrepreneurs.

So please, EC: give SNS Reaal a multi-million Euro penalty and force it to sell SNS PF and both insurance branches Reaal and ZwitserLeven to other insurance companies.

Although ‘revenge’ is not my cup-of-tea usually, I would even applaude it when past executive managers were personally penalized for their role in the demise of SNS Reaal: with fines of millions of Euro’s. And perhaps, even with imprisonment for a considerable period. 

These people have ruined this bank-insurer and they have wasted billions in Dutch tax money. They did so either out of stupidity or out of a misplaced feeling of superiority and lack of self-reflection and objection from their peers. 

Either way, this proved to be fatal for this bank.

But please don’t kill the only bank in The Netherlands that prevends the country from becoming a banking oligopoly.


You just can’t maintain competitiveness by killing the competition!

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