The recession in the Netherlands continues putting pressure on loan origination and business activity. This combined with weakness in the Dutch housing market have had a negative impact on FY12 Dutch bank results. Further to this, The Netherlands has also introduced a bank tax which is intended to give some form of compensation to the State for its implicit guarantee. However the banks continue to de-risk and build capital.
Rabobank FY12 – weaker economic conditions put pressure on results
Net profit was down 20% to EUR 2,112m, because of higher allocations to the provision for loan losses and the introduction of a bank tax in the Netherlands in 2012 (an additional expense item of EUR 196m). The economic situation combined with the uncertainty in the Dutch housing market led to low demand for loans and mortgages. The provision for loan losses increased EUR 744m to EUR 2,350m due in particular, to the economic decline in the Netherlands and the slump in the property market.
Domestic earnings: Net profit from domestic retail banking fell by 30% to EUR 1,304m. Businesses active in construction and real estate, retail, glasshouse horticulture, and maritime shipping and inland navigation were hit particularly hard. This was reflected in value adjustments (i.e. provisions of bad and doubtful debts), which were up EUR 681m to EUR 1,329m (i.e. 44bps which is higher than the long-term average of 13bps). The loan portfolio saw a 4% growth to EUR 306.5bn thanks primarily to the consolidation of Friesland Bank. Operating expenses were up at the local Rabobanks due to the costs associated with the implementation and enforcement of stricter rules and regulations. As a result, the efficiency ratio of domestic retail banking worsened from 57.4% to 59.8%.
International earnings: Rabobank International had a relatively good year given difficult market conditions, posting a profit of EUR 704m, down 10% on FY11. Lower margins and higher operating expenses put pressure on earnings, but they were offset, in part by gains from the sale of shares in Indian-based Yes Bank. Online savings banks experienced strong growth outside the Netherlands. RaboDirect was launched in Germany, taking the total online savings banks to six countries.
The recession in the Netherlands and the weak property market lead Rabobank Group to increase its provisions, particularly at the local Rabobanks and FGH Bank. All in all, value adjustments were up 46% at group level, rising to EUR 2,350m. At 52bps (37bps FY11) of average lending, bad debt costs were considerably above the long-term average of 25bps.
Retained earnings added to equity resulted in the core tier 1 ratio increasing by 0.5 percentage points to 13.2%, well in excess of the Basel III requirements and above those of recent European Banking Authority (EBA) stress tests.
Despite the reduction in profit and economic headwinds in the Netherlands, Rabobank continues to build capital and has amongst the highest Tier 1 capital ratio of any commercial bank in the world at 17.2% (compared to the Australian major banks that run at around 10-12%).
We continue to believe Rabobank will call its AUD Tier 1 hybrid securities in December 2014 (subject to regulatory approval and market conditions at the time of call). Both AUD senior debt and AUD Tier 1 hybrid securities of Rabobank are viewed as attractive relative value.
ING FY12 – multiple asset sales continue to build capital
ING Group’s quarterly net profit was EUR 1,434m compared with EUR 1,186m in the fourth quarter of 2011 and EUR 609m in the third quarter. Fourth-quarter results included EUR 1,613m of gains on divestments, of which EUR 1,135m was attributable to ING Direct Canada, EUR 745m to the sale of Insurance Malaysia and EUR -244m to the sale of ING Direct UK. The net results from divested units was EUR 13m and the net result from Insurance and Investment Management Asia, recorded under discontinued operations, totalled EUR 78m. Special items after tax amounted to EUR -643m and predominantly reflect costs for various restructuring programmes. After-tax separation and IPO preparation costs were EUR 61m in the quarter and EUR 169m for the full year 2012.
ING Bank recorded a fourth-quarter underlying result before tax of EUR 184m, including EUR 175m for the Dutch bank tax for the full year 2012, EUR 188m of negative credit and debt adjustments, and EUR 126m in losses from de-risking of mainly southern European debt securities. Excluding these impacts and other market-related items, results declined 20.0% from the fourth quarter of 2011, due to higher risk costs, and were 36.2% lower than the third quarter of 2012. The decline on a sequential basis was mainly due to higher liquidity costs following the lengthening of the Bank’s funding profile, seasonally lower results at Financial Markets, and lower results at Retail Banking. The Bank’s underlying interest margin was 1.33%, down one basis point from the third quarter. Excluding the Dutch bank tax, expenses were stable year-on-year and increased only slightly from the previous quarter. Risk costs remained elevated and increased both year-on-year and sequentially, consistent with the weak economic environment.
The fourth-quarter operating result of Insurance increased 24.9% to EUR 296m compared with EUR 237m in the third quarter of 2012, supported by a higher investment margin as a release from the provision for profit sharing in the Netherlands offset the impact of de-risking and the low interest rate environment. Insurance operating results declined 15.2% year-on-year, as the fourth quarter of 2011 benefited from a non-recurring expense reduction in the US. The fourth-quarter underlying result before tax of Insurance improved significantly to EUR 272m, reflecting a lower net impact from market-related items relative to both comparable quarters.
Insurance sales rose 12.7% from the fourth quarter of 2011, on a constant currency basis. Sales at Insurance US grew 18.9%, fuelled by the Retirement business. Central and Rest of Europe recorded a 13.3% increase, driven by higher Pension sales in Turkey and the Czech Republic. Premiums in the Benelux declined 18.6% due to lower sales of Individual Life products in the Netherlands and lower sales in Belgium following a reduction in guaranteed rates. Compared with the previous quarter, total Insurance premiums jumped 23.6% at constant currencies, mainly attributable to higher sales at Insurance US and in Central and Rest of Europe.
ING Bank’s core Tier 1 ratio was 11.9%, supported by the gain on the sale of ING Direct Canada, which helped to partially fund a dividend upstream of EUR 2.125bn to repay part of the core Tier 1 securities and reduce the Group leverage. Risk-weighted assets were reduced by EUR 8bn, including EUR 2bn of negative currency impacts which primarily related to the sale of ING Direct Canada as well as lower lending volumes and de-risking of the investment portfolio. ING Bank is already meeting most Basel III requirements. The core Tier 1 ratio on a fully loaded basis stands at 10.4%, exceeding the Bank’s target of at least 10%.
ING Bank has a number of AUD senior bonds in the market which compare favourably from a relative value point of view with bonds from domestic issuers with similar credit and rating profiles.