Friesland bank sold to Rabobank, after nearly fatal loss. Will it be the first domino in a row to drop, due to Basel III and the locked-up capital market?

For most people it was quite shocking news yesterday: the small, independent Dutch-Frisian bank Friesland bank was about to be taken over by the mighty cooperative Rabobank, one of the ‘four sisters’ in The Netherlands that claim 80% of the Dutch banking market: ING Group, ABN AMRO, Rabobank and SNS Bank.

Although you could see in hindsight that the writing had already been on the wall for quite some time, I also was shocked by the suddenness of this friendly take-over.

The Friesland bank had been very busy with advertising on TV and radio during 2011 and Q1 of 2012, using Dutch celebrity Jort Kelder in its commercials: the former ‘golden boy’ editor of Quote, a Dutch magazine that strongly resembles Fortune. Besides that, it offered an interest well-above average for its savers. From a distance everything looked hunky-dory with this small bank.

However, in this kind of situation the question always should be: why does this bank offer such a good interest rate to its savers. The four sisters offer interest rates that reside between ‘insulting’ and ‘pathetic’ as the availability of nearly free money from the ECB is ubiquitous.

The reason was that the bank lacked access to the international capital markets; the bank was too small and had too little financial fire-power. Therefore it had to pay interest rates well above Euribor to attract enough savings money for its investments. Moody’s placed the bank with its A3-rating in the group, due for a possible downgrade, while S&P even didn't bother to give the bank a rating.

Although the balance sheet of Friesland Bank mid-2011 looked healthier than that of many other banks, with a balance sheet total of €11 bln, an equity of €837 mln and thus a leverage rate of only 14 (14 borrowed Euro’s against 1 Euro of equity), the return on equity was a poor 1.3% mid-2011 and even -5.2% at the end of 2010.

And although the bank was rather known for solidity than for financial wizardry, it had to be taken over as it was too small and too financially unhealthy to survive on its own. While the annual data of the bank on 2011 has not been published yet, the bank is said to have suffered a (nearly) fatal loss during this year. This was the last push that the bank needed to start looking for a healthier partner.

The bank itself presented the following press release of which I print the following translated, pertinent snips:

Friesland Bank chooses for merging with Rabobank

Friesland Bank and Rabobank reached an agreement on a merger of Friesland Bank with Rabobank. To enable this merger, Friesland Bank will initially become a 100% subsidiary of Rabobank The Netherlands.

The depth, nature and lenght of the current economic crisis hit Friesland Bank itself, as well as its customers. Besides that, Friesland Bank, in order to meet the demands of the crisis, keeps substantially larger amounts of expensive liquidity than in normal market circumstances.

These developments put heavy pressure on the results of Friesland Bank. This makes realizing the short-term goal of reinforcing the equity of the bank to a Basel III-level very uncertain. It is true that Friesland Bank built up much symphaty in the consumer-market lately and it operated very succesfully in it during the last years, but that doesn’t outweigh the combination of earlier mentioned effects.

The executive board determined, after an in-depth strategic analysis, that it had become irresponsible towards its customers and employees to strive for a continued independent existence.

After exploratory talks with various potential partners, the merger with the Rabobank seemed the most viable solution.

This development cannot be seen loose from a recent change: the Dutch Authority Financial Markets being on the warpath against the (small) banks in order to protect the  interests of Dutch consumers of the financial industry. The Dutch financial newspaper Het Financieele Dagblad (www.fd.nl) writes on the AFM:

AFM: small banks will not be excused

The downfall of Friesland Bank is not a reason to plead for more softened supervision towards smaller banks. This is the opinion of Ronald Gerritse, chairman of the board of the Dutch Authority Financial Markets (AFM). Besides that, he does not exclude the possibility that the stricter demands towards banks will lead to a further consolidation in the banking industry. Gerritse made his statement after the presentation of his first annual report as chairman of the AFM.

The nearly hundred year old Friesland Bank was taken over by the Rabobank on Monday April 2, as it threatened to get into trouble, due to the stricter capital and liquidity demands (Basel III). After the news on Friesland Bank, immediately questions were raised on two other smaller banks, namely SNS Reaal and Van Lanschot. Gerritse will not discuss individual cases, but he can imagine that ‘further consolidation is neccessary’.

  

How dire the situation of the Friesland Bank had become, was disclosed in another article of Het Financieele Dagblad (unfortunately only available for subscribing readers of the offline newspaper; the snips here emerged from a PDF-version of this article on another site).

Independence irresponsible

Friesland Bank (FB) waived its independence after it became clear that the bank encountered a massive loss over 2011. The bank that fought for its independence for a long time, is immediately taken over by the Rabobank.

At special request of the local bank, supervisor Nma (Dutch supervisor for competition ) followed a very unusual emergency procedure to approve of the take-over. Otherwise FB would have been forced to publish its annual data without a safety net in place. The disastrous data, with a loss of possibly around €100 mln [on a balance sheet total of €11 bln – EL] would make the bank with its large numbers of internet savers very vulnerable for a bankrun.

This article is a must-read for everybody that reads Dutch and contains more interesting facts. English and American readers can use Google Translate, which supplies a poor, but readable translation.

I think that CEO Kees Beuving of Friesland Bank took the only possible decision by negotiating with Rabobank on a take-over, even knowing that it would cost him his job eventually. I praise him for his courage and lack of ostrich-like behaviour.

The sad fact, however, is that the downfall of Friesland Bank makes the oligopoly of the four sisters in The Netherlands even stronger. And if Ronald Gerritse of the AFM is correct, the four sisters might soon become three sisters, if SNS Bank drops from the train. The aforementioned bank Van Lanschot and a number of other small banks are only accessible to very wealthy people with at least €100K - €500K in investible income and are therefore not an option to the Dutch Joe-the-Plummer.

It reminds me of this hilarious scene in the movie Demolition Man: “Taco Bell won the franchise wars and now all restaurants are Taco Bell”. Translated to the Dutch situation: Rabobank won the Basel III-wars and now all banks are Rabobank”.

It has not come this far yet, but…