Hostage to fortune
In countries with economies that rely particularly heavily on the financial services sector, the credit crunch was always going prove especially challenging. But the pain has not been evenly distributed, and those with a focus on the domestic market have faired admirably well, reports Savita Iyer-Ahrestani.
The global credit crisis has hit banks in the Benelux region hard. Such is the extent of the interconnection between national capital markets, even players like Dutch bank NIBC, with its traditional focus on domestic corporate lending, lost heavily through their subprime exposure. Approximately two-thirds of NIBC’s trading book losses were a result of subprime exposure.
Yet Dutch banks have, on balance, remained relatively insulated from the global problems, said Claire Curtin, an analyst at Standard & Poor’s in London covering banks in The Netherlands. Aside from the top two or three, most institutions are domestically focused in their business. The impact has therefore been felt predominantly in terms of their limited access to wholesale funding.
“It’s still tough to get that funding, so banks have looked to create liquidity on their balance sheets in different ways,” Curtin said.
With liquidity hard to come by, it has been a slow year for capital markets activity of any kind. In the Benelux region, as elsewhere, equity issuance has been very modest, limited to companies that needed to recapitalise, said Han de Jong, global head of research at Fortis. With the region’s equity markets heavily weighted towards financials, that made it especially tough in Benelux.
“However, if you look at where banks are trading now in terms of their P/E ratios, it would seem that a lot of the bad news has been priced into these markets,” de Jong said. “But the uptrend for the markets and the Benelux banks depends on the outlook for global picture.”
Despite the wider credit crunch, debt issuance in Europe – Benelux included – has maintained a decent pace this year. Benelux banks have followed the general European trend: focusing on lending to their regional corporates. The banks with the stronger connections in this space – such as NIBC, which has always focused on middle market Dutch companies – have done well. ING, too, has gravitated toward domestic corporate lending. “This now makes up about half of the bank’s profits,” S&P’s Curtin said.
According to central bank statistics, bank lending numbers throughout Europe remain fairly strong, particularly loans to the corporate sector. But future debt underwriting by the banks will depend on the rate of corporate defaults, which many expect will rise significantly.
Benelux banks need funding to finance future capital markets activities, and that will depend largely on their deposits. Thus far, retail banking in the Netherlands hasn’t suffered to the same extent as it has in the UK, said Curtin. She predicted the region will remain robust on the retail front.
For capital markets business generally, experts envisage things remaining muted – in Benelux and beyond – for some time, as banks struggle to regain both balance and financial flexibility. Fortis – which is still digesting its ABN AMRO acquisition – lost a whopping €41bn in its structured credit portfolio.
Yet the broader picture was more upbeat, as the group recorded revenues of €268m at the end of the second quarter – a two percent increase from Q1 – despite the difficult market conditions and the negative impact of the liquidity crisis. “This highly seasonal client-driven business entails very limited credit and market risks and continues to benefit from increased volumes,” Fortis stated in a press release issued at the end of Q2.
On the credit portfolio management side, the bank recorded a positive revaluation gain of €183m in the first half of 2008 (compared to a €37m negative revaluation in H1 2007), resulting from widening credit spreads in the first quarter. Despite highly volatile spreads during the second quarter, active portfolio management substantially contained the negative revaluation, Fortis said. Its credit portfolio management team converted the entire hedging portfolio into single-name credit default swaps in the last quarter of 2007. This covered an average total notional amount of €13bn and was divided between counterparties that are all highly rated European and US investment banks.
The businesses Fortis acquired from ABN AMRO were mainly in wealthy markets, a Fortis spokesperson said, and are expected to provide a recurrent profit.
“All in all, the acquisition of ABN AMRO has given us or reinforced our leadership position in bank and insurance in our domestic markets and strong positions internationally,” the spokesperson said.