New space: ING's futuristic headquarters in Amsterdam is to be sold as part of a major restructuring

The Dutch banking sector has returned to some semblance of normality following the global crisis, with AAA rated Rabobank leading the way and other banks busy rebuilding their reputations. However, fears of a contagion effect from troubled economies in southern Europe, or even a double-dip recession in some of the world's larger economies, are adding caution to any optimism. Writer Michael Imeson

The Netherlands' financial sector is now back on track after a bumpy ride and some spectacular derailments.

When Fortis, the Belgian-Dutch financial group, found itself in trouble in 2008, the Dutch state nationalised every company in the country bearing the name - Fortis Bank Netherlands, the Fortis-owned parts of ABN Amro Bank and two insurance companies. At the same time, the government injected €10bn of core capital into the financial conglomerate ING, €3bn into insurer Aegon and €750m into SNS Reaal, the banking and insurance group. To cap it all, DSB, a small Dutch bank, went bust in 2009.

Today, the picture is much rosier. Three of the four main banks (ING, Rabobank and SNS Bank) have increased half-year profits, while ABN Amro Bank has merged with Fortis Bank Netherlands and, although still losing money, its underlying profit is rising. And the recipients of state aid are paying it back.

The ABN Amro/Fortis merger on July 1 was a positive event, but there will be casualties. "Integrating the two organisations will not be a wholly enjoyable process as we will unfortunately have to bid farewell to colleagues for whom there is no place in the new organisation," says Gerrit Zalm, the bank's chairman. The bank currently has 30,000 staff, 6.8 million customers and operations in 27 countries.

The Dutch government intends to return ABN Amro to the private sector after 2011. It has already sold one of the nationalised Fortis insurance companies (to a UK insurer for €350m in 2009), but the other Fortis insurer is still in state hands.

Aegon, meanwhile, has repaid €1bn of its state aid and will pay back another €500m before December. SNS has repaid €185m. ING has returned half of its state aid but the rest will not be forthcoming until the outcome of an appeal to the General Court of the EU against elements of the European Commission's decision on ING's restructuring plan.

The four Dutch banks that took part in the EU stress tests did well. In the exercise, the average Tier 1 ratio across the four banks tested, after two years of stress under the worst-case scenario, declined from 12% in 2009 to 10.3% at the end of 2011, well above the 6% threshold.

DSB blame game

The investigation carried out by the Scheltema Commission (led by former deputy justice minister Michael Scheltema) into the collapse of DSB concluded in June that De Nederlandsche Bank (DNB), the central bank, should never have given DSB a banking licence in 2005 and did not adequately supervise the bank. Finance minister Jan Kees de Jager called on DNB to beef up its corporate governance and internal supervision.

For its part, DNB says it had already decided in its revised supervision strategy to focus on two main areas: paying closer attention to how the activities of financial institutions are interwoven, and placing more emphasis on strategy and business culture within those institutions. "We will supplement these measures with the setting up of two new departments, one for interventions and one for internal risk management within our supervision division," says DNB spokesman Tobias Oudejans, referring to the finance minister's criticism.

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Hans van der Noordaa, a member of ING's banking management board and CEO of Retail Banking Benelux

Rabobank's safe pair of hands

Rabobank, generally regarded as one of the safest banks in the world (although this did not prevent it suffering a spectacular roof-top fire at its new twin-tower Utrecht headquarters in June), has emerged from the events of the past few years unscathed. It is a co-operative bank, made up of 143 independent local Rabobanks, plus their central organisation Rabobank Nederland and its international subsidiaries. The group has 58,000 staff worldwide and operates in 48 countries.

Its net profit for the first half of 2010 was €1.7bn, up 26% on the corresponding period last year. "There were three main drivers behind our improved results," says Piet Moerland, chairman of Rabobank Group's executive board. "The first was better margins on savings. The second was cost cutting. Third, there has been a 50% reduction in bad debt provisions, reflecting the fact that many of our customers are in better shape due to the economic recovery. The overall level of provisioning for the group in the first half of 2010 was €569m as opposed to more than €1.1bn in the first half of 2009."

Despite this good news, Mr Moerland is still concerned about the Dutch economy. "If you picture the world as an aeroplane with four engines - China, Japan, the US and Europe - those engines have a different pace of growth," he says.

"The US is slowing down and people fear a double-dip recession there. Japan has slow growth. China is doing well but, because of the fear of overheating, its growth will have to be reduced a little. And in Europe we have different paces of growth in the north and the south, plus problems with the euro, sovereign bonds and low long-term interest rates. During the past few weeks, Europe's problems have further deteriorated. I refer to the spreads of southern European sovereign bonds and interest rates in the capital market."

Rabobank has only limited exposure - €1.3bn - to European government bonds that are currently perceived by the market as less creditworthy, but it would not be immune to the knock-on effects of a renewed crisis.

The secret of Rabobank's success is its co-operative structure. "Co-operative banks in general and Rabobank in particular remained stable throughout the financial crisis," says Mr Moerland. "We have been operating for 112 years and we operate in the real economy, close to our customers. In addition, we have always retained a large proportion of our profits, so we have an accumulation of capital over 100 years. We have more than €40bn of equity, much of it retained earnings."

Rabobank sought to raise €25bn in long-term funding this year. By August it had already raised more than €30bn and might achieve €40bn by the year end. Its target for next year is likely to be about €20bn to €25bn.

The bank's overseas strategy remains unchanged. "We want to remain the leading food and agriculture bank in the world, and we hope to expand step by step," says Mr Moerland. "For example, we recently signed a co-operation agreement with the Agricultural Bank of China [ABC]. We participated to a small degree in ABC's $250m initial public offering." In the US, Rabobank's international activities have been broadened by the recent acquisition of three Californian banks.

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Piet Moerland, chairman of Rabobank Group's executive board

ING returns to profit

ING registered a dramatic return to profitability in the first half of 2010, reporting a net profit of €2.4bn, compared with a loss of €722m for the same period in 2009. As part of its 'Back to Basics' programme, it is reducing costs, risks and lending, and selling non-core businesses. It is also separating its banking and insurance operations and, as part of its European Commission-approved restructuring plan, it will sell its entire insurance and investment management operations globally, as well as ING Direct USA, by 2013.

"During the financial crisis, I would say that our insight into our exposure worldwide, and into the actions we needed to take, worked very well; what we could not control was the outside world," says Hans van der Noordaa, a member of ING's banking management board and CEO of Retail Banking Benelux.

"Like everyone else, we looked back and reflected and asked ourselves: 'What could we do better?'

"We now place even more emphasis on sound risk management. Given the new regulations coming out of Basel on the bank side, and [the EU directive] Solvency II on the insurance side, we will have to ensure that we are aligned with them, while finding the right balance between risk, capital, growth, profit and everything else in between."

So what will ING look like after it has sold its insurance and investment management divisions? "We will be primarily a European bank with some interesting operations in India, China and Thailand," says Mr van der Noordaa. "Benelux will remain an important part of the group and will be a healthy provider of capital and profits."

ING House, the group's landmark headquarters building in Amsterdam, will be sold along with the insurance business. Bank staff will relocate to offices elsewhere in the city.

Right now, rebuilding customer loyalty is a major priority for ING. "The industry as a whole needs to work hard to regain customer trust," says Mr van der Noordaa. "The only way to do that is through your services, your products and the quality of delivery. That is where you create trust, not by placing a big advertisement in a newspaper saying you are a trusted bank. "The way we position ourselves is 'under-promise, over-deliver'. If you do that, you do a better job than expected. Exceeding customer expectations creates loyalty. Where banks can really differentiate themselves is in their service, in their branding and in their positioning, because on the product side everyone offers much the same."

But there is still scope for product innovation. In August ING introduced 'Tim', a personal finance application with which customers can see and organise transactions on their payment accounts and create a planning tool. This is financial education in action, something the authorities and financial institutions are keen to improve, not just in the Netherlands, but around Europe.

ING's lending to small and medium-sized enterprises is about 80% of its level before the crisis, but action is being taken to lend more. "For example, we recently started an initiative with ABN Amro and Rabobank to finance a micro-credit institution that makes loans of up to €50,000 and offers business advice," says Mr van der Noordaa.

The images of some Dutch financial institutions have certainly been tarnished. But if, in the words of Mr van der Noordaa, they under-promise and over-deliver, it may not be long before their reputations are shining bright again.


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