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ABN Amro Shrinking to Shadow

April 15, 2012

The record 71.9 billion-euro takeover of ABN Amro by three banks on the cusp of the financial crisis led to the company’s breakup just as the credit crunch forced the Dutch government to nationalize parts of the institution and bail out firms such as ING Groep NV. Photographer: Jock Fistick/Bloomberg

The record 71.9 billion-euro takeover of ABN Amro by three banks on the cusp of the financial crisis led to the company’s breakup just as the credit crunch forced the Dutch government to nationalize parts of the institution and bail out firms such as ING Groep NV. Photographer: Jock Fistick/Bloomberg

When the curtain rises at the Royal Theater in The Hague, an actor playing former ABN Amro Holding NV Chief Executive Officer Rijkman Groenink, an avid hunter, drops a dead deer upon the stage.

The rest of the drama, titled De Prooi, or The Prey, recounts the events that led the hunter to become the hunted, culminating in the 2007 sale and splintering of ABN Amro, then the largest Dutch bank. More shows were added in Amsterdam and Rotterdam after the production, based on a book by Jeroen Smit, sold out in those cities before opening.

The play’s success points to unhealed wounds in the national pride of the Dutch, for centuries among the leaders in global trade and finance. The record 71.9 billion-euro ($94 billion) takeover of ABN Amro by three banks on the cusp of the financial crisis led to the company’s breakup just as the credit crunch forced the Dutch government to nationalize parts of the institution and bail out firms such as ING Groep NV. (INGA) The tumult left the financial industry smaller in size and influence.

“Power, that was the game that was played,” said Arnoud Boot, a professor of corporate finance and financial markets at the University of Amsterdam. “That applied to governments too, striving for bigger financial centers than their countries needed. Now, the government doesn’t know what to do with its banking sector, and it will probably take a decade of trial and error to figure it out.”

Banking Bailouts

Reverberations from ABN Amro’s takeover in October 2007 spread beyond the Netherlands. The deal contributed to the collapse of two of the acquirers, Edinburgh-based Royal Bank of Scotland Group Plc and Fortis, based in Brussels and the Dutch city of Utrecht. In the process, it redefined the debate on too- big-to-fail banks.

In the three-way purchase, Fortis, at the time the largest Belgian financial-services company, bought ABN Amro’s Dutch consumer-banking arm as well as its asset-management and private banking units. RBS took the Asian and investment-banking operations, while Spain’s Banco Santander SA (SAN) acquired the Brazilian and Italian divisions.

As the financial crisis swept across Europe in October 2008, the Netherlands had to prop up its banks. The government purchased Fortis’s Dutch banking and insurance units, including its portion of Amsterdam-based ABN Amro, for 16.8 billion euros. Additional assistance pushed the rescue to about 30 billion euros, while separate bailouts for ING, SNS Reaal NV (SR) and Aegon NV (AGN) drove the state’s costs higher.

Getting Smaller

Now the Netherlands owns a bank bearing the ABN Amro name that’s less than half the size of its predecessor when measured by assets, and has 24,225 employees, down from almost 108,000 in 2006. The bank’s footprint, which formerly extended to 56 countries, has shrunk to 23, and it gets 82 percent of operating income from the Netherlands, compared with 21 percent from its Dutch business unit in 2006.

The lender currently has a value of about 12 billion euros, or about a sixth of the price it sold for five years ago, according to estimates by Benoit Petrarque, an analyst at Kepler Capital Markets in Amsterdam.

The Dutch financial industry currently measures about 4.8 times the size of the economy. While that ranks among the highest in the world, it’s down from 5.8 in 2007, according to the country’s government planning agency CPB. It’s likely to get smaller, as Amsterdam-based ING -- now the country’s biggest financial company -- hives off its global insurance operations to meet European Union conditions for its rescue.

On the Map

“Before the crisis, the Dutch mindset was on the Netherlands as a financial center and getting Dutch banks on the map,” said Harald Benink, a professor of banking and finance at Tilburg University. “Now the discussion has turned as we’ve seen how risks attached to large lenders can disrupt economies.”

The Dutch are still poring over the events that shook the nation’s banking industry. A parliamentary committee said April 11 that the government took on “large” risks with too little transparency and poor execution in its bailouts of Fortis, ABN Amro and ING in 2008 and 2009.

Lawmaker Jan de Wit, who headed the investigation into the measures taken by the Dutch authorities, submitted his report in The Hague after the committee conducted more than 130 interviews under oath. Fortis’s difficulties were mostly related to its part in the takeover of ABN Amro, a deal the Dutch central bank and the ministry of finance shouldn’t have allowed, De Wit said.

‘Reduced to Pieces’

“ABN Amro, the pride of the nation built over almost 200 years, was reduced to pieces within a couple of years time, within the law,” Johan Doesburg, the director of The Prey, writes in the program that’s distributed at the show. “That fascinates, surprises and annoys me.”

The drama, performed by actors of the theater group Het Nationale Toneel, opened March 10 and will be staged in cities across the Netherlands until June 9. Reviews, from culture and financial critics, praised Doesburg and writer Sophie Kassies for bringing a business story to life on stage.

Gerrit Zalm, a former Dutch finance minister, has been charged with preparing what’s left of ABN Amro for a sale as soon as 2014. As CEO, he plans to strengthen the bank’s position in the Netherlands, while selectively expanding the international network to serve Dutch customers. The company reopened offices in Hong Kong, the U.S. and Russia last year, and will start a representative office in Shanghai this month.

ABN Amro bought LGT Group’s German private-banking unit in 2011 and regained some Dutch investment-banking staff from Royal Bank of Scotland in March.

Looking for Growth

Zalm is bidding to generate growth from ABN Amro activities including trade and commodities finance, equities and derivatives clearing and its private-banking unit, which ranks third in the euro region by assets under management, according to a July study from Scorpio Partnership, a London-based research firm. Zalm, 59, didn’t respond to an e-mail asking for comment sent to his press department. ABN Amro spokesman Jeroen van Maarschalkerweerd declined to comment.

ABN Amro paid its first dividend to the Dutch state in September. The bank earned 665 million euros last year, a fraction of the 4.7 billion-euro profit it made in 2006, and up from a loss of 417 million euros in 2010. The company was hurt that year by an 812 million-euro charge tied to the EU-ordered sale of part of Dutch commercial client activities, including Hollandsche Bank Unie NV, to Deutsche Bank AG.

Costs fell to 64 percent of income in 2011 from 75 percent in 2009 after the bank reduced the workforce by 18 percent. A further round of 2,350 cuts currently underway should bring the ratio to less than 60 percent by 2014, the bank said in August.

‘Ready’ by 2014

“Operationally, in terms of costs, they should be ready for a listing by 2014,” said Cor Kluis, an Utrecht-based analyst at Rabobank International. “They did a good job at getting that under control.”

ABN Amro, formed in 1991 by the merger of the two biggest Dutch banks, AMRO Bank and Algemene Bank Nederland NV, traces its roots to a trading company set up by King Willem I in 1824.

Groenink, 62, who took over as CEO in 2000, pledged that year to make ABN Amro one of the top five banks by shareholder returns among a group of 20 peers, including New York-based Citigroup Inc. (C:US), Frankfurt-based Deutsche Bank AG (DBK) and ING.

To get there, he set out to double corporate and investment banking revenue over four years, an effort that failed as the collapse of technology and Internet shares caused global stock markets to slump. ABN Amro later decided to reorganize and scale back its corporate and investment bank, and concentrate on the “mid-market” consumer and business segments.

Reaching Target

By 2006, ABN Amro’s holdings spread from LaSalle Bank in Chicago, North America’s 15th biggest lender by deposits, to Banco Real, the third-largest privately-owned bank in Brazil. That year it bought Italy’s Banca Antonveneta SpA (AABA) for 7.5 billion euros as part of a strategy to build up its consumer and business clients in four markets: the Netherlands, Italy, the U.S. Midwest and Brazil.

Investors chafed against the bank’s changing focus and the underperformance of the shares. The goal to become one of the top five of a self-selected group of banks haunted Groenink for the rest of his tenure. The target was achieved only when the company became a takeover candidate in October 2007 and ABN Amro ranked second, up from 16th at the end of 2006.

U.K. hedge fund TCI Fund Management sent a letter to ABN Amro in February 2007, urging management to consider a break-up. Dutch Central Bank President Nout Wellink called the demand a “bridge too far.” Charlie McCreevy, then the EU’s financial- services commissioner, took a different view, saying hedge funds should be encouraged rather than attacked for putting pressure on companies to improve their performance.

Hedge Fund Pressure

A month after the TCI letter, London-based Barclays Plc and ABN Amro agreed on initial merger terms and a formal offer was made on April 23. Two days later, the RBS-led group made a higher cash-and-shares offer.

Groenink, who initially sought to fend off the plan to dismantle his bank, conceded in July that he could no longer recommend Barclays’s bid over the “financially superior” alternative. In the end, the central bank said it didn’t have grounds to block the group’s bid.

In The Prey, Groenink, played by Mark Rietman, is portrayed as ambitious and isolated. The bank’s inability to present a unified strategy for its disparate units in the Netherlands, Italy, Brazil and the U.S. is blamed for a failure to boost earnings and the share price, leaving ABN Amro vulnerable.

‘Dead Against It’

Groenink told a first parliamentary probe led by De Wit in February 2010 that ABN Amro “didn’t succeed in showing the market we had a consistent strategy that we were executing.” Of the takeover by RBS, Fortis and Santander, Groenink said he was “dead against it. I was in favor of a merger with Barclays.” He declined to comment for this article.

The former CEO, who said he received about 26 million euros when his ABN Amro shares were purchased as part of the acquisition, told students at the University of Amsterdam in April 2010 that he felt “a kind of glee” that the acquirers had “bled” for his share options.

The Dutch government intends to sell ABN Amro as early as 2014, preferably through an initial public offering, according to Finance Minister Jan Kees de Jager. Recouping the full amount invested by the Netherlands in the bank will be difficult, De Jager has said. In remarks made in February, Groenink agreed.

“I think it will be very hard for the current management, in light of the nature and size of the bank and the earnings capacity it has, to make so much profit and raise the value of the company to a size that the full amount can be recouped,” Groenink told an audience of 200 students on the Dutch television program College Tour.

Market Recovery

Crucial for any IPO will be a recovery in banking shares, said Rabobank’s Kluis. The credit crunch that followed the collapse of New York-based Lehman Brothers Holdings Inc. in 2008 and Europe’s sovereign-debt crisis has driven the Bloomberg Europe Banks and Financial Services Index down 74 percent since the end of 2006. The European Central Bank’s decision to provide three-year loans in December and February has pumped more than 1 trillion euros into the banking system, easing concern about a credit squeeze and bolstering shares in the first quarter.

While ABN Amro slims down in preparation for a sale, ING is under pressure to meet conditions laid down by the European Commission, the EU’s enforcement arm, for its rescue by the Dutch state. ING has until the end of 2013 to reduce its balance sheet by 45 percent from September 2008 levels.

Shedding Insurance

ING sold its Internet bank in the U.S. for about $9 billion in February, as well as most of its Latin American insurance operations in 2011. Now it’s preparing to dispose of insurance units in Asia, Europe and the U.S., which generated 38 billion euros in income last year and had more than 26,000 employees.

The company received 10 billion euros in aid in 2008 and transferred the risk on 21.6 billion euros of U.S. mortgage assets to the Dutch state in 2009. It has returned 7 billion euros to date. CEO Jan Hommen, 68, said the company may not be able to complete repayment in 2012 given Europe’s debt crisis and increasing regulatory capital requirements.

Not all Dutch banks have needed a bailout. Rabobank, a cooperative owned by regional lenders, maintained its top credit rating until November, when Standard & Poor’s applied a new method of calculation and lowered it to AA from AAA.

Rabobank is the world’s highest-rated privately owned bank, and in 2011 customer deposits reached 330 billion euros, marking the company’s position as “a safe haven,” the lender said in a March 1 statement. The firm, formed in 1898 to serve Dutch farmers, had operations in 47 countries as of last month.

Mortgage Risks

Rabobank also has the country’s biggest book of mortgage loans, with a market share of 32 percent, according to the statement. It had more than 200 billion euros in Dutch mortgage loans, equal to 45 percent of total group lending.

Mortgage debt marks one of the Netherlands’ biggest financial risks, according to the country’s central bank. Dutch mortgage debt is among the highest in the world, amounting to 107.1 percent of gross domestic product in 2010, data compiled by the European Mortgage Federation show. That compares with 52.4 percent in the 27-nation EU.

Dutch banks had a combined 640 billion euros of mortgage loans on their books, with 80 percent at the country’s four biggest lenders, making them vulnerable to any extreme decline in house prices combined with an increase in delinquencies.

Is Smaller Better?

The mortgage debt contributes to a gap of about 500 billion euros between bank loans and deposits as most savings go to the nation’s mandatory pension funds. That makes Dutch banks more reliant than others on securitization markets, capital market funding and attracting savings from other countries, according to the central bank.

Policy makers and central bankers are trying to figure out how big the banking industry should be and what checks to put in place to prevent a recurrence of the collapse that left taxpayers with the bill. ING, Rabobank, ABN Amro and SNS Reaal account for 80 percent of the financial industry’s assets, central bank figures show.

The Netherlands shouldn’t necessarily strive for a smaller banking industry as financial institutions make a significant contribution to the Dutch economy and employment, the central bank said in its annual report published March 29. Banks with international operations also play a role in helping Dutch companies expand outside the country, it said.

Competitive Disadvantage

Even so, the Netherlands is a small country with a large financial industry that requires increased protections, the central bank said. “That can result in a competitive disadvantage for institutions on the European market, but that will have to be accepted to a certain extent.”

After two parliamentary inquiries and legislative proposals ranging from a bank levy to requiring blueprints for splitting off and salvaging banks’ crucial operations in times of crisis, consensus remains elusive. The central bank said a bank tax may be unwise as long as lenders haven’t sufficiently strengthened their capital buffers.

Lawmakers called last month for another commission of experts to come up with a view on structural reforms, potentially including separating lenders’ consumer and investment-banking units along the lines of proposals by the U.K.’s Independent Commission on Banking.

ABN Amro’s breakup may serve as a lesson to policy makers weighing such measures, Zalm told the parliamentary committee in December.

The purchasers “greatly underestimated how complicated it is to divide a bank in three,” Zalm said. “There is talk on splitting up banks again now, be it for different reasons. It is a very expensive and complicated matter. At Harvard, I believe they find the case too complicated to present to students, but for the rest, ‘how not to take over a bank’ would be a great title for this story.”

Recruiting Bankers

Zalm picked up a team of 70 investment bankers last month from RBS’s Dutch unit to rebuild some of the financial advisory activities lost in the sale. It shouldn’t be seen as a return to risk taking, he told reporters on March 9.

“This is to enable us to advise our clients on a strategic level in financing and potential mergers and acquisitions,” Zalm said. “We didn’t have full capacity there and this was a big opportunity to quickly add that, and with people who still have green and yellow in their veins,” he said, referring to the colors of the bank’s logo.

The Prey ends with Groenink’s last shareholders’ meeting, as he reflects on what has been lost with the sale and split-up of the Dutch bank. For the Netherlands, the story hasn’t ended.

To contact the reporter on this story: Maud van Gaal in Amsterdam at mvangaal@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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