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Monday, 30 March 2015

Dutch Finance Minister Jeroen Dijsselbloem says “nyet” to the IPO of ABN Amro. Of course all the usual suspects are in a state of shock. The question remains: was it a wise decision by Dijsselbloem?!

Those days are gone forever
I should just let them go but

This week was a very special week for the Dutch, state-owned bank ABN Amro. The date had been written in the agendas of ABN Amro’s executive managers with thick, black markers.

It should have become the week in which the Dutch Finance Minister and Chairman of the Euro-group Jeroen Dijsselbloem announced the date for the IPO of this bank, at the Euronext Amsterdam stock exchange. 

This would become the IPO, that would make an effective end to the dark period, formed by the full state-ownership of ABN Amro, and it would enable a new and more promising episode in the long history of this old bank.

There was only one problem: there was no announcement for an IPO of ABN Amro this week!

Instead, Finance Minister Jeroen Dijsselbloem flabbergasted the executives of ABN Amro with a firm decision to postpone the IPO for the time being, leaving them in shock and awe.

There had been a few incidents regarding ABN Amro, during the last two weeks.

First, in 2014 the executive layer, residing under CEO and former Finance Minister Gerrit Zalm, had been rewarded with an additional €100,000 per year on their fixed salary. De Telegraaf:  

ABN Amro, which is still firmly in hands of the Dutch State, rewarded the executive management with a payment raise of €100,000 last year. This has been announced by the bank today, in an explanation upon the remuneration policy.

With an exception for CEO Gerrit Zalm, the fixed salary rose by 17% to €707,500. According to the stateowned bank, this raise was part of the prohibition arrangement for bonuses and variable remuneration for state-supported banks. This arrangement actually offered a possibility to compensate for missed bonuses through a payment raise of up to 20% of the fixed salary.

This raise of €100,000 had indeed been negotiated earlier, as a compensation for these executives having to abolish their bonuses and variable payments.

In spite of the fact that this deal had been rock-solid on paper, it led to public outrage anyway, when the Dutch citizens heard that the highest level management of this stateowned bank would receive this extra annual payment.

A second nail in the coffin for ABN Amro was formed by a large corruption scandal in Dubai, which had been described in Het Financieele Dagblad a few weeks ago:

In January, the Dutch stateowned bank ABN Amro had to fire almost the whole executive layer of its very successful private banking desk in Dubai. Six bankers have become victims of this lay off operation. 

Cause for this scandal was the discovery of widespread malversations, in which employees of this desk had been involved. This question is painful for ABN Amro, because the bank stands at the eve of a reintroduction at the stock exchanges. 

While trying to make investors forget the chequered past before the nationalization in 2008 and present a unstained bank to the investors, this fraud affair at a distinguished foreign subsidiary comes at a very unfavourable time.

Yes, indeed it does... And there has been even more. 

The Dutch national bank DNB had sent a confidential letter to the executives of ABN Amro, in which DNB condemned the mitigation of corruption risks at ABN Amro, as being ‘insufficient’.  This DNB letter leaked to Het Financieele Dagblad and quotes from it have been published this Saturday:

From an industry-wide investigation into corruption and conflicts of interests, the national supervisor concluded that there are ‘shortcomings’ in the bank-wide policy against ‘corruption risks’ [at ABN Amro - EL]. Earlier criticism by DNB did not lead to decisive changes, in spite of a few improvements. DNB urged ABN Amro to address these shortcomings now and announced a secondary investigation in this matter.

A large gap is that, according to DNB, the first line (i.e. the bankers who are doing the actual business) are ‘insufficiently’ involved in the bank's anti-corruption policy. The bank puts ‘too little effort’ in improvement. ‘It did not became clear at all that ABN Amro did actually identify the inherent corruption risks for its organization or its activities’. This failure is ‘especially present’ at the division, which trades in energy and commodities, like oil.

To cut a long story short, Jeroen Dijsselbloem shorted the IPO plans of ABN Amro and put them in the refrigerator for an unknown period of time. When asked, he mentioned ‘a few reasons’ for taking this decision, of which the "blunt" salary raise was one.

The ABN Amro executives were not the only ones who were baffled. Also in the London City investments bankers had to grab the seat of their pants after hearing the news. 

There had been numerous reactions like:”what was the minister thinking?”, “well, now he waved goodbye to €15 billion in shareholder money” or “he has turned back the clock for at least two years, when it comes to confidence in this stateowned bank. How can investors ever build up trust again in the discretion of the Dutch government, with respect to ABN Amro?!

I can understand the astonishment at the ABN Amro bank, as it wants to fight its way out of the government yoke of stateownership and return to the free market, in order to fulfil the international ambitions that undoubtedly reside within the bank. 

And I can understand the frustration in the London City, which sees this juicy target suddenly disappear after the horizon.

Yet, I can also understand the Finance Minister, who wants to earn back with the IPO a considerable share of the €32 billion, that have been invested in the bank after the nationalization. He probably does not want to take a risk with a bank that is subject to a few scandals. On top of that, the minister also has to deal with the still explosive mood in The Netherlands, against bankers and the banking industry as a whole.

Perhaps the minister did make a wise decision, by temporarily withdrawing the IPO of the bank, as the aforementioned scandals were indeed simmering until boiling point and new scandals are the least that both the bank and the minister could use.

The main question for me, however, is how much the ABN Amro is really worth when the IPO would indeed be continued. The figure of €15 billion has been mentioned, but is this a realistic figure?! Let's find out!

In earlier days, before the troika of Banco Santander, Fortis and Royal Bank of Scotland took over the bank, the ABN Amro was a global player with a truly international portfolio of services, with branches all over the world and a bedazzling stock value of above €75 billion, “but those days have gone forever and we should just let them go”.

Since the nationalization, the bank has turned into a local player, which mainly operates on the Dutch market. It only has a few international services on offer that can truly compete with the large British, German and American competitors of the bank. 

When looking at the Boston Matrix, in my humble opinion the bank will therefore not be a star, but it could be a cash cow, yielding decent annual profits and solid dividends on its stock. That is about it, unless… the bank decides to change its strategy again and turn into an international champion after all. 

I have serious doubts, however, whether this will take place with politician/banker Gerrit Zalm at the helm or not, as he obviously lacks the international banking experience to achieve such. Currently, the bank is as the Dutch say: too big for the napkin, but too small for the table cloth!

As I’m not an investment banker and therefore not subject to the need to “talk the stock up”, I want to take a look at a realistic value for the bank, based upon the annual data of 2014.

I start with the income statement of the bank.

Income statement of ABN Amro for 2014
Data courtesy of
Click to enlarge
The bank managed to earn a considerably higher operational income in 2014 (+€600 million or 8%) at slightly higher operating expenses. On top of that, the impairment charges (for write-offs on f.i. bad loans and bad mortgages) were considerably lower in 2014(-/- €500 billion) than in 2013: a clear sign that the worst might be behind us, when it comes to the credit and euro crisis.

That the reported profit for the period is eventually slightly lower than in 2013, has to do with the unfavourable amount at the special items (one off material expenses or profits, which are not related to normal business activities), where 2013 showed a favourable amount.

When you look at the profit of ABN Amro in 2014, before deduction of these special items, this amounted to €1.5 billion. If one would take a rather conservative P/E (i.e. profit to equity) ratio of 10, the value of the bank would indeed be around €15 billion.

However, like the recent scandal in Dubai and the letter of DNB showed, the bank seems still quite vulnerable for allegations of corruption and fraud. Such allegations could possibly lead to serious penalties in the future, as especially the United States government has little patience with offenders of its banking rules and fights corporate corruption with massive penalties, that could cost the bank a shedload of money.

Balance sheet of ABN Amro for 2014
Data courtesy of
Click to enlarge
The balance sheet of ABN Amro is clearly growing again by €14 billion in 2014, but the leverage in the balance decreased slightly to 26 from 27 in 2013, which is a good sign.

Particularly conspicuous are the massive increase of the derivative portfolio at both the debit and credit side and the financial investments. According to the bank, the former has been caused by ‘changes in FX rates and interest movements, impacting the fair value of derivatives‘, while the latter is the results of investments in the liquidity buffer.

The increased ’liabilities due to customers’ in 2014 show that people and companies still wanted to save money during that year, in spite of the disappointing interest rates. It is a tell-tale signal that in 2014 both consumers and companies were still reluctant to spend or invest their money and rather hoarded it at the bank.

Income statement for Corporate Banking
of ABN Amro for 2014
Data courtesy of
Click to enlarge

Income statement for Retail Banking
of ABN Amro for 2014
Data courtesy of
Click to enlarge

Income statement for Private Banking
of ABN Amro for 2014
Data courtesy of
Click to enlarge
When we zoom in at the achievements of the corporate, private and retail banking parts of the bank, these look all quite solid with considerable improvements in the reported profits. 

Everywhere, the interest margin improved considerably and the overall reduction in the impairment charges shows indeed that the Dutch economy has become much healthier in 2014 than it was in 2013.

Inspiring confidence are especially the achievements of corporate banking, as it seems that the large corporate clients, as well as the small and medium enterprises (SME), did fine.  Especially SME clients have formerly been a pain in the neck for the Dutch banks, so this favourable development of the profits at corporate banking seems a massive improvement.

Finally I want to take a look at the cost to income ratio of the bank:

Cost to income ratio for all company parts
of ABN Amro for 2014
Data courtesy of
Click to enlarge

What stands out here are the cost to income ratio for private banking and – to a lesser degree – for corporate banking. As the following benchmark for private banking of the Scorpio Partnership shows, ABN Amro’s cost to income ratio in 2014 was 4% higher than the global benchmark of 77% for a diversified bank in 2013.

Global cost to income benchmark
for private banking
Data courtesy of
Click to enlarge
This means quite a deterioration of the operational expenses and it could mean that ABN Amro has to further cut its costs in that area of business.

Summarizing, overall the annual data for ABN Amro for 2014 look really good and when the one off special items would be taken out of the equasion, a total stock value of €12 - €17 billion seems viable indeed. 

Especially good is that all parts of the bank make solid profits and there are no real negative outliers. From that point of view, Finance Minister Dijsselbloem could have missed a good opportunity to sell the bank in 2015.

However, unless the strategy of the bank changes dramatically, the bank seems rather a cash cow with steady dividends than a star, as it lacks the international ambitions and strategy to achieve that. On top of that, there are a few looming scandals nowadays, which could dramatically spoil the results in future years, under pressure of (inter)national supervisors.

That, and the enduring discussions in The Netherlands with respect to the executive remuneration at ABN Amro, caused by the badly calibrated social antennas of ABN Amro's executive leadership, means that Dijsselbloem could have made a wise decision indeed, by not going all-in with the bank.

The fact that the executive leadership of ABN Amro decided this very afternoon to abolish the €100 K payment raise after all, does not change much about that.

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