A Masterly Touch

The Dutch banking scene has never looked better, with a strong currency, fast growing economy, booming stock market and historically low interest rates. There are some big challenges ahead but slowly, everything is falling into place.

Banks have been able to bolster their domestic position and grow their foreign operations at a pace unknown before. Profits in securities trade increased by 40-80 per cent. The public attitude towards savings and investment has shifted since the government started the privatisation of social and retirement benefits.

Much of the profits during the upturn of bank results have been ploughed back into the technical infrastructure and the creation of new forms of distribution of services. Call centres have been set up to assist customers in their financial dealings.As a result the tariff structure for many services such as securities dealing and custody management has been eased. After the introduction of electronic banking services and automatic teller machines, this is the second big step in cost reduction where the benefits can be shared between bank and customer.

 

ABN AMRO practically doubled its trading capacity at the head office in Amsterdam. Trading in derivatives and primary markets rose sharply in recent years. But much of the job creation is also a result of a culture of mutual understanding and step-by-step type of negotiation that characterises the restructuring that is now taking place.The financial sector in the Netherlands has always had a high degree of co operation between employer and employees and this has worked out well in recent years, as efforts have been made to increase efficient working hours by reducing the overall hours in the banking industry. ABN AMRO claims it has created at least 1,000 more jobs as a result of the 36-hour working week in spite of closing arrange of offices after its merger with Amrobank.

Rabobank is trying to increase the quality of its staff with education programmes and even compulsory training.The quest for more brain power is acute, but most of all in the banking sector because of the large numbers of fexiworkers, or folding-chair workers as they are called.

However, banks are feeling the pinch in retaining trading specialists and product developers. They need to be homegrown and that takes years. But competition is so fierce between banks that there is a risk of losing the trainee to a competitor after he or she finishes a costly inhouse education. And there is always the fear of mass defections of traders, portfolio managers or analysts as INGs accusations of patching at ING-Baring by Morgan Grenfell and, more recently, the widely publicised Nicola Horlick affair, with ABN AMRO on the receiving end of similar accusations made clear.

This year the banks did well too and cashed in on a number of hedging instruments for the private investor, the so -called click funds. Investors can use these funds as a safety belt, as they click at certain levels of the stock market index.

The interest in this type of derivatives has grown considerably as the fear of heights among investors at these record index levels has proved contagious. In a matter of only two months, more than one and a half billion guilders was put into these instruments and the demand is still there. In the event of a bear market, even a moderate one, banks will profit from increased trading. A sell-out is not expected this year, most pension funds and insurance companies are still enlarging their shareholding and profits as most of the quoted companies are still satisfactory.

For the first time the banks are showing their hidden reserves for unexpected losses in their loan portfolio. Until now only the addition to the secret reserves had been made public. This means that Dfl 2-3 billion ($1-1.6 billion) can be added to the shareholders equity, which gives more space for capital market operations and thus a slightly better competitive edge in international finance, since the larger banks will look even better with the Tier One BIS ratio increasing by 1-2 per cent. Spectacular losses in business loan portfolios are not expected.

The low mortgage rates fulfill an important role in private home-building. This will mean that any write-offs will have no material effect on the profit figures for the current year. The flipside is that there are fewer possibilities to use the secret reserves as a means to spread the losses and profits over a number of years, thereby creating a more stable picture of the way the bank results develop.Creating opportunities for the future is at the top of everyones agenda now that the restructuring of the large banking institutions is materialising on a broad scale. Massive investment in information technology will absorb a lot of money in coming years, as will the ongoing process of mergers and acquisitions. Dutch banks that are now big in their own currency will still be at best mediumsized in a Europe where the euro will become the predominant currency. By making the strategic positions in the home market more difficult for outsiders from other EU-countries to penetrate, only one part of their strategy

is fulfilled. How are the big banks to defend their Euro-interests in the future? Both Herman Wijffels of Rabobank and Jan Kalff of ABN AMRO expect a new wave of cross-border link-ups and mergers that will address this in coming years. The difficulty of finding the right partner without each losing its identity is just one of the problems that will have to be overcome. In a number of cases this has led to difficulties and even break-ups. New efforts have been launched by bancassurance combines that were formed in the last five years.Getting new business through acquisitions will undoubtedly mark the expansion of the largest three banks in the Netherlands in coming years. ING made an important step with the acquisition of Baring two years ago. And ABN AMRO started a series of mostly profitable acquisitions in 1979, when it bought LaSalle National Corporation and has subsequently increased its banking operations in this area over the last 20 years, also branching out into merchant banking with the acquisition

of The Chicago Corporation with offices in Chicago and New York. In Europe in snapped up Hoare Govett and Banque neuflize - Schlumberger and efforts are under way to get a foothold in Hungary, Sri Lanka and Australia.

ING has been more aggressive in creating profit centres in emerging markets and has so far benefited from its strategy to create greenfield operations throughout Asia, South America and Eastern Europe. Merchant banking, insurance and capital markets knowledge are pooled in many cases and this has proven to be an ideal combination.

Fighting their way into the big financial centres of the world, which was part of the reason to step into the Barings situation and the efforts of ABN AMRO to build up a full service brokerage outlets in Wall Street and London, will probably take more money, more brains and more time. Coping with and taking away cultural difficulties will always be a part of acquisition plans. As is shown in the diplomatic way that ABN AMRO set up a joint venture with Rothschild. No rush, no rush. Everything will fall into place at some point.

The Banker, an FT publication

Much of the profits have been ploughed back into the technical infrastructure and creation of distribution services.