ABN Amro chief opts for slow and steady route

As the Dutch finance minister begins planning the reprivatisation of ABN Amro, rescued in 2008 by the country's government from the wreckage of its takeover by Fortis, his opposite number at the top of the bank will have a keen appreciation of the political pressures the minister is facing. Gerrit Zalm, who heads ABN Amro’s management board today, spent more than a decade as finance minister of the Netherlands until 2007. He recognises the conflicting messages facing his successor.

“Some investment bankers may say you should go as fast as possible, you will have a slightly lower stock price but you can then point to a beautiful rise after the listing. My answer is that I am also a former minister of finance and this argument does not impress me. The minister wants to recover as much public money as he can, and sometimes hurrying is not the best advice,” says Mr Zalm.

The Dutch government confirmed in late August that it will hold an initial public offering (IPO) for ABN Amro to return it to private ownership. Mr Zalm is advocating 2015 as the earliest date for a listing, to avoid relying on the bank’s results from the recession years of 2012 and 2013 for its valuation.

He notes the similarities between his current role and his time as a minister – the challenge of managing bureaucracy in a large organisation, as well as the importance of the economy and the international landscape for his thinking. But he also sees striking differences.

“It is true that what I call cost control today, I called public expenditure control in my previous role. But the goals of a bank are easier to define, the needs of clients are clearer than the interests of the public, it is less complex than politics. I also like the fact that I have more opportunity in this role to speak to staff and clients, to be what we call a boegbeeld, the figurehead of the ship that everyone wants to follow and to identify with,” says Mr Zalm.

Selective focus

A central element to preparing ABN Amro for an IPO is the effort to find a role for a bank that retains an international network, but is now some distance from the global top tier. According to The Banker’s Top 1000 World Banks ranking, ABN Amro is now placed 65th in the world by Tier 1 capital, and is about half the size of either of the two largest Dutch banks, ING and Rabobank.

Mr Zalm believes the bank can compete profitably through the clean and specialised units it inherited from the combination of ABN’s Dutch operations and those of Fortis Nederlands, which included an international private bank, an energy, commodities and transportation division and a clearing bank.

“We are a preferred bank for almost all large commodity traders because we have the systems, the people, the knowledge of the markets, the operational excellence. You also need size, and at about €400bn our balance sheet has that size,” he says.

The private bank is particularly strong in the Netherlands, as it combined ABN’s market-leading franchise with the Fortis number two franchise, Mees-Pierson. More broadly in western Europe, the bank engages in collateral finance, and is building a leasing division in the UK. On the clearing side, ABN handles about 25% of stocks listed on the London Stock Exchange, and is one of the largest clearers on the Chicago Mercantile Exchange.

“It was a tough job to split up the old bank, and then merge two parts of two banks into a new bank. That is now all behind us, and we can look to the future in a more positive mode. The first thing that would be helpful is to get the Netherlands out of recession, as that is leaving its traces on the bank in terms of revenues and especially impairments,” says Mr Zalm.

Measured international growth

Despite those economic pressures at home, ABN Amro reported return on equity of 12% in 2012, or 7% excluding all one-off gains. Mr Zalm’s focus is on increasing cost control while still expanding in areas that are profitable, especially outside the Netherlands. The bank has subsidiaries in Singapore, Hong Kong and Dubai and has opened operations in Shanghai, while buying small Brazilian bank CR2 in 2012 to establish a licence in the country. The bank still earns 82% of its revenues from its home market, but rather less of its net profits from there, as the international businesses have higher margins. Mr Zalm says there is room for growth in overseas markets without forcing matters.

“We agreed upon a strategy of focused international activities, no mission creep or planting flags everywhere in the world. We are now in 23 countries and we think that is enough for the time being. It is now about expanding there in segments where we have special capabilities such as the private banking and commodities businesses. What I want to prevent is that we start trying to do everything everywhere in the world,” he says.

In ABN’s home market, some of those that dismantled the original bank are now retreating, allowing ABN to regain market share. RBS sold Dutch investment banking operations back to ABN in 2012, while Deutsche Bank has apparently scaled back small business banking in the country, shedding 18,000 clients in 2013 after buying some of ABN’s commercial banking activities in 2010.

Responding to regulation

As is the case with all major European banks, ABN Amro is adapting to the flurry of new regulation from Basel and Brussels alike. Mr Zalm has his time on the policy-maker’s side of the fence to give him a perspective on this, and he is strongly supportive of new capital and liquidity requirements. He says the new-look ABN intends to maintain a moderate risk profile, avoiding proprietary trading or acquiring loans in the secondary market. The bank already meets the Basel III capital requirement of 10%, and the plan is to raise this ratio still further, perhaps as far as 12.5%.

“Some equity investors might see that as potentially diluting return on equity, but the positive effect on funding costs partly compensates for that, and we attract risk-averse shareholders who appreciate a reasonable return on equity with less risk. We recently brought a 10.5-year syndicated loan to market, and paid about the same rate as Rabobank, which has never happened in ABN’s history, so debt investors obviously appreciate our strategy,” says Mr Zalm.

However, he is more sceptical about the finer details of some regulatory and reporting requirements coming from national and European bodies. He says he would prefer to face higher capital and liquidity requirements, instead of complex regulation that makes banks potentially less flexible and agile, while adding a significant cost burden.

“These new costs are enforcing concentration, they are raising the minimum size of a bank to survive, which is a bit of a paradox when people are worrying about banks being too-big-to-fail,” he says.

He believes supervisors might find it more productive to pay closer attention to corporate governance and culture. He fears that the best risk models cannot help much if chief executives become too self-confident and start to ignore warnings from within their own bank.

“If you look at the big banking disasters, they generally have something to do with behaviour and culture at the top – sometimes successful chief executives end up thinking they can walk on water. When you are chief executive of a large company, you must surround yourself with people who are able to contradict you, and you must listen a lot to people within the company,” he says.

Mr Zalm is also keeping a close eye on efforts to bring about closer fiscal union and coordinated banking supervision in Europe. As the head of a cross-border bank, he says banking union could be very beneficial, but his experience has clearly taught him not to underestimate the difficulties of ministers reaching agreement.

“The decision-making is complex. Usually, prime ministers take two steps forward, then their finance ministers take a step backward because they worry about the details,” says Mr Zalm.

He praises the “substantial progress” made in the past two years. But he warns that there are still “tough nuts to crack”, especially on the more complex technical topics such as a common European bank resolution mechanism. 

Gerrit Zalm is the chairman of the management board at ABN Amro. He was minister of finance in the Netherlands from 1994 to 2007.