State bank ABN Amro should be sold ‘at all costs’, according to Z24, as ‘state banks usually suffer from low performance’. The newspaper is right indeed, but for different reasons!

Today, the online Dutch economic newspaper Z24 wrote in an article that ABN Amro, the Dutch state bank should be sold 'at all costs'; even if this meant a loss for the state.  Their argumentation was that a state bank in general performed worse than a privately owned bank. I happen to agree with Z24, but not for their reasons.

Here are the pertinent snips from the Z24-article:

Sell ABN Amro, even at a loss

State banks often perform bad. That is the reason that ABN Amro should be sold as soon as possible, in spite of a possible loss. This is stated by Harry Huizinga, professor International Economy at the Tilburg University.

Extensive research has been done into state banks, according to Huizinga. This research disclosed that statebanks:

• have lower efficiency than private banks;
• have to book more depreciations on bad loans;
• have to make a higher interest margin at the expense of their customers.

On a macro-level statebanks give rise to lower economic growth and badly developed financial markets.

There is a bright spot, however: state banks bring more stability in times of crises. They keep the brake on loans in good times, but are less afraid to lend in bad times. However, there are better means of stabilizing the economy, like a monetary policy for interest rate reduction in bad times and rising capital buffers for banks in good times.

Former Finance Minister Wouter Bos paid €16.8 bln for the Dutch parts of ABN Amro and Fortis in October 2008 and spent another €6 bln on reorganizations within the bankparts (i.e. ABN Amro and Fortis Bank) and insurance company (i.e. Fortis Insurance, currently called ASR).

CEO Gerrit Zalm of ABN Amro stated recently that a future IPO remains the best option for the nationalized bank. Huizinga agrees: as soon as the stock markets are stable, you have to sell ABN Amro.

I agree with both persons, but for different reasons. I want to make one thing clear: ABN Amro is a good, professional and customer-friendly bank for private customers and its internet telebanking application is probably the best in The Netherlands. However, that is not the point.

Unfortunately, ABN Amro’s current reputation is far from undisputed.

The bank has been heavily involved with the still developing Vestia affair, while the name Fortis Bank (now part of ABN Amro) has been mentioned in the bribery affair of VVD-delegate Ton Hooijmaijers.

ABN Amro was the first bank to issue a structured finance product again after the crisis started in 2008/2009 in The Netherlands. It has also a reputation of using ‘near-extortion’ tactics to force its suppliers into handing out vast discounts.

Then there is the issue that ABN Amro – just like all SIFI (systemically important financial institution) banks in The Netherlands – has a large base of houses with mortgages that are underwater, while the number of arrears on mortgages is soaring currently.

On top of that it calls itself ‘the most important credit supplier for Commercial Real Estate in The Netherlands’,  which means that the bank is therefore heavily involved in CRE financing. What that means won’t be a secret for the regular readers of my blog.

At this moment the bank seems to be explicitely looking abroad (especially to the Far East) for new business opportunities. This is a 180 degree change with last year’s policy to become a national champion, instead of an internationally aimed SIFI-bank.

All in all there are quite a number of reasons why the Dutch citizens should be not too proud of owning a share in ABN Amro through their tax-money.

Most of these reasons have to do with moral hazard: why should the bank shy away from taking risks with the full firepower of the Dutch government (i.e. the Dutch tax-payer) behind it. It can privatize the profits and socialize the losses.

For me this is the main reason that the bank has been consistently showing more risk-seeking behaviour than (f.i.) ING Bank over the last 3-4 years, together with the fact that the bank wants to become as valuable as possible in case of a future IPO. A national champion gains less shareholder’s money than an internationally operating bank with a bright future ahead.

This brings us to the difficult point of an IPO for ABN Amro. The reasons that the Dutch government should be interested in bringing the bank to the stock exchange as soon as possible, presumably even at a loss, are the same reasons that shareholders should be not too interested in buying shares of this bank.

There are simply too many hazards at this bank, that could mean future loss of shareholder value: the risk-seeking behavior of the bank, the moral hazards, the still unfolding Vestia case or the CRE/RRE issue that could take a big bite out of the bank’s balance in the future.

All these hazards mean that an IPO for ABN Amro in 2013-2014 might not yield much more than €7-8 bln for the government, that invested a staggering €22 bln in this bank (although even amounts of €30 bln have been mentioned in the press).

That will be a very bitter pill to swallow for the next Dutch government. On the other hand: keeping this bank in the hands of the state could mean much larger losses in the not too distant future.

Sell, Mortimer, sell!!!