In an interview in September 2008,
Bert Bruggink, chief financial officer of Rabobank, told RBI the
bank could not give any guidance on second-half profits, adding
that the outlook for the banking sector remained bleak. A year on,
Bruggink tells Douglas
Blakey the outlook is altogether more positive
In direct contrast to long-term Dutch rivals ING and ABN AMRO,
Dutch-based co-operative Rabobank ends the year in rude health: its
liquidity and capital positions remain strong; it has had no need
for government capital injections (so avoids the scrutiny of the
European Union’s Competition Commissioner); and it remains in
growth mode on the look-out for fresh acquisition targets in the
new year.
Go deeper with GlobalData
Little over a year ago, Rabo’s chief financial
officer, Bert Bruggink, painted a depressing picture of the
sector’s prospects, telling RBI: “We are fairly negative
about how big this crisis will be and how long it will take to
resolve… this is a nasty environment to live in and bank in
[see RBI 598].”
And unusually for a bank noted for open
discussion of its profits targets, Bruggink could give no guidance
about earnings prospects in the second half in the September 2008
interview.
In the end, he need not have been so gloomy:
net profit for fiscal 2008 not only held up but rose by 2 percent
to reach a record €2.8 billion ($4.2 billion) while deposits and
lending rose by 10 percent and 11 percent, respectively.
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By GlobalDataA year on and Bruggink told RBI in
the London offices of Rabobank: “In the end, ultimately, 2008 was a
very good year for Rabo and other financial statistics were better
than ever before even though the crisis kicked in from September
onwards.
“The current recovery is stronger and kicked
off a bit earlier than we expected…and for the future, things look
a bit better than they looked even as recently as the summer, with
the number of defaults less than we had expected in the
Netherlands.”
While Rabo has not escaped the crisis entirely
(it has talked of being dealt a glancing blow compared to its
publicly quoted rivals), with profits for the six months to 30 June
down 18 percent to €1.3 billion after loan provisions topped €1
billion compared to €158 million in the year-ago-period, the bank
has retained its coveted triple A rating and a high equity Tier 1
ratio of 13 percent, ahead of its target of 12.5 percent.
Its continued success in cutting costs
resulted in a drop in its cost-income ratio by 550 basis points to
59.1 percent, and it has maintained its dominant market share
positions in the Dutch retail market, with 30 percent of the
mortgage and 40 percent of the savings markets, respectively.
“We feel quite comfortable with such market
shares and are now less focused on growing balance sheet and market
share and are more focused on profitability – for the full year,
results are likely to be in line with what you would expect,”
Bruggink said.
His upbeat assessment of the bank’s prospects
even extends to the state of the domestic housing market, arguing
that the bank has barely been affected by last year’s downturn in
house prices.
Though average bad debt costs across the group
rose to 55 basis points in the first half, compared with Rabo’s
traditionally very low 21 basis points figure in the 10-year period
up to 2008, the bank’s domestic retail strength was reflected in a
nominal retail bad debt ratio of just 2 basis points (0.02
percent).
“It is quite amazing that our retail losses,
predominantly mortgage losses, have been extremely small and to
date this year we have only re-possessed 60 homes in the
Netherlands while the losses on those 60 properties have been close
to zero due to the value of the collateral we hold. It really does
reflect the quality of our book,” he explained.
Waiting for stiff competition
If there is any area in which Rabo’s
forward-planning of the past two years has not yet been borne out
by events, it was the expectation of heightened competition from
ING, Fortis and ABN AMRO.
ING kicked off a €1 billion, five-year revamp
of its Dutch retail business two years ago while Fortis
participated in the ill-fated Royal Bank of Scotland-led deal to
acquire ABN AMRO in an attempt to beef up its retail business
across the Benelux region.
Following the European Union’s harsher than
expected restructuring plan foisted on ING, including the
requirement it give up Dutch retail banking market share as well
the requirement that the bank cannot be a price leader in any of
the EU’s 27 countries for retail or SME banking until Dutch
taxpayers have been repaid in full (see
RBI 621), ING’s competitive threat to Rabo has been
blunted.
Nationalised Fortis will not, in the meantime,
pose the kind of threat to Rabo anticipated as recently as 18
months ago.
Bruggink is, however, anxious to guard against
complacency.
“We have to be aware there will be true
competition at some point in the future in the home retail market…
Full competition will be back so we have to make sure we stay ahead
of the pack in terms of our efficiency, but we are probably at a
better starting point than our rivals,” he said.
He does not expect to see any new entrant seek to target the
Dutch market as is currently anticipated in the UK where up to
three new entrants are slated to set up shop, arguing that the
Netherlands is one of the least attractive markets for a new player
to target due to low levels of fee income and the need to operate a
sizeable branch network to be competitive.
He was adamant that Rabo was correct to turn
its back on growing its already dominant Dutch position by walking
away from any possible deal to acquire failed domestic mid-tier
rival DSB, the first European bank to fail this year following its
collapse in October.
“We had a look – all Dutch banks had a look –
but concluded it was impossible to save this bank.”
He was scathing about initial press reports
suggesting Rabo could take a hit of as much as €1.3 billion
following the failure of DSB under the terms of the Dutch state’s
customer deposit guarantee system.
“The liquidators have indicated that they
expect a recovery of around 96 percent of the bank’s €8 billion
assets so our share of a 4 percent loss will equate to around €100
million at most, probably less, and that figure is gross,” he
explained.
Looking further abroad
Outside of its home market, Bruggink
remains positive about growth prospects in a number of countries,
in particular India, where his bank holds an 18 percent stake in
Yes Bank, despite continuing delays in obtaining its own retail
banking licence in the country.
Rabo continues to be linked with fresh merger
and acquisition activity outside of the Netherlands and Bruggink
does not deny its strong balance sheet means it is well equipped to
snap up a weakened rival, with the US its most likely country of
focus, although Australia and New Zealand were also mentioned as
markets where Rabo might seek to grow its presence.
“The food and agricultural sectors will
continue to be the main driver of our strategy and we will continue
to seek to grow organically but now and then we will do a small
transaction.”
One deal Bruggink is quick to rule out in the
future is ING Direct USA – “it is of no interest and does not fit
our purpose at all” – but he did not dismiss the possibility of the
bank finally setting up some form of direct banking operation in
the US.
“We might look at direct banking in the US but
linked to our branch network in the Midwest or California… such an
operation will be linked to where we are physically using the same
model as we operate in Australia and New Zealand.”
About the only business area where Rabobank
has been battered has been its Irish-based subsidiary, ACC
Bank.
The Dutch group has been forced to set aside
€1 billion to cover losses on its €5 billion loan book since the
onset of the economic crisis, culminating in plans to close 16 of
its 25 branches in the country by the end of the first half next
year.
And while Rabo executives have lamented the
current difficulties facing international banks in Ireland, arguing
they can only do business there if there is a level playing field –
a dig at the level of support given to the country’s domestic
players via the state sponsored National Asset Management Agency,
which plans to buy distressed debt from Irish lenders – Rabo is,
said Bruggink, “still lending in Ireland.”
“I am quite convinced with the provisions we
have already made that we will not face further losses there. The
agriculture portfolio is quite good and full withdrawal from
Ireland is not on the agenda… at least not yet,” he added.
Co-operation is key
Unsurprisingly, Bruggink argues Rabo
has been well served during the crisis by its co-operative model,
advantages he believes will continue to offer opportunities for
growth in coming years.
Nor he can disguise his pleasure
that Rabo’s marketing strategy, which begun long before the crisis
kicked off, has been vindicated.
“In 2007 we ran an ad campaign which was very
straightforward, with just one picture and the message ‘Proud to be
dull’. Maybe Rabo was once considered boring, safe, dull, indeed I
recall people saying ‘why do you raise term funds, you must be
mad’. But to be boring in this climate is quite a virtue. So many
of the principles we have followed for so long have proved to be
the right ones,” he concluded.
|
PERFORMANCE |
|||
|
Rabobank – fundamentals, H109 vs |
|||
|
H109 |
H108 |
y-o-y % change |
|
|
Interest income (€bn) |
3.89 |
3.92 |
-1 |
|
Fees and commission income (€bn) |
1.21 |
1.47 |
-17 |
|
Other income (€bn) |
1.16 |
0.36 |
220 |
|
Total income (€bn) |
6.26 |
5.75 |
9 |
|
Operating expenses (€bn) |
3.69 |
3.72 |
-1 |
|
Bad debts (€bn) |
1.12 |
0.16 |
608 |
|
Net earnings (€bn) |
1.32 |
1.61 |
-18 |
|
Source: Rabobank |
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