Banks without an M&A plan in progress are just cheap takeover targets

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Banks without an M&A plan in progress are just cheap takeover targets

How banks can ride the upcoming M&A wave and serve Dutch interests

A full fourteen years after the 2008 global financial meltdown and the ensuing bank bailouts and nationalisations, the Dutch government still owns 100% of Volksbank and over 50% of ABN AMRO. But with M&A momentum picking up across the European banking sector, change is around the corner, Deloitte experts say. Some suggestions how banks (and their state owner) can ride the upcoming M&A wave in a way that serves Dutch interests.

The Dutch banking landscape is traditionally dominated by the “big three” global players ING, ABN AMRO and Rabobank. These days, ING and Rabobank still have significant foreign activities. But ABN AMRO, ING’s erstwhile rival in terms of market share and international reach, now comes third, having shed its independence and much of its global network post-2008. Around them we see a modest-sized, state-owned domestic retail bank (Volksbank) and a host of smaller domestic and retail focused players. Plus various fintech challengers, some of whom are already quite strong. In revenue terms, banks are mortgage-heavy in the Netherlands, far more so than elsewhere. Their cost ratios are relatively high, due to factors like labour-intensive anti-money laundering processes, limited sources of fee income and untapped economies of scale.

What are the consequences of the status quo?

The current banking mix works, certainly for consumers, who still have enough choice. But it does have certain consequences, says Deloitte partner Chris Vialle. “For taxpayers, the heavy reliance on mortgage revenues is a risk if the housing market cools off too quickly. For Dutch business, the palet of international banking services is not as rich as it first was. Finally, for our country’s position as a financial centre of excellence – and for financial talents seeking employment – it’s vital to have multiple world-class banks headquartered here.”

How did we get here?

The bank bailouts and nationalisations in 2008 wiped out public trust in the financial sector and demoralised its workforce. Banks that had proven “too big to fail” were forced to downsize. Insurance activities were spun off and the remaining activities derisked. High-risk, high revenue adventures abroad were axed. More recently, derisking went into overdrive when the regulator slapped high fines on banks for their inadequate anti-money laundering effort. “Simplification is the trend in Dutch banking right now,” says Vialle, “but where is earnings growth going to come from? Eliminating risk means settling for low-growth activities.”

What’s been happening meanwhile in Europe?

The EU and the ECB have for some time been making the case for (cross-border) M&A as a means to strengthen balance sheets and efficiency in European banking. Now, rising interest rates are fuelling M&A momentum. But while Dutch banks have made no meaningful acquisitions since 2008, French banks in particular have been on an M&A spree – a strategy encouraged by their government. It’s time for Dutch banks to develop and execute an external growth strategy, too, Deloitte M&A expert Siebe Groenveld believes. “Banks without an M&A plan in progress are just cheap takeover targets.”

What would a foreign takeover of a Dutch bank mean for our country?

“A strong foreign player is certain to change the dynamics of the Dutch banking sector, broadening competition and giving international business customers more choice,” says Deloitte partner Harmen Meijnen. “But it would also mean the loss of a head office.” Groenveld also sees risks. “Look at how Deutsche Bank retreated from the Netherlands not long after taking over parts of ABN AMRO post-2008. It goes to show that a foreign-owned bank is less committed to Dutch society. Do we want a Belgian-style banking landscape, where all the banks are foreign-owned and decisions affecting our economy are made abroad? Do we want a Dutch bank to become the next KLM or Tata Steel?”

Should Dutch banks sit tight or take the offensive?

Sitting tight means leaving the initiative to others. This summer, for example, ABN AMRO seemed about to be caught up in these dynamics, with BNP Paribas making overtures. “A takeover by a foreign bank is one option,” says Vialle, “but ABN AMRO and our country might be better off if the bank actively seeks out an M&A candidate itself. Preferably in Northwest Europe, its chosen geography, which is also crucial for our export. An acquisition could help safeguard ABN AMRO’s continuity as a Dutch bank and thereby benefit the Dutch corporate sector. After all, Dutch banks and Dutch business have a long history together. They understand and strengthen each other. Moreover, a larger, independent ABN AMRO would bolster our country’s position as a financial innovation hub.”

How do banks get mergers past the first post of regulatory approval?

The downsizing and derisking pressures of the past fourteen years are still incorporated in the M&A approval procedures of the European Central Bank. Eelco Schnezler of Deloitte Banking Union Centre puts it like this. “The ECB is in a catch-22 between the need for European banking consolidation and avoiding M&A risks. Its challenge is to apply the brakes with care. For banks trying to get an M&A deal approved, transparency is the magic word. Cross-border mergers remain challenging, however, especially between EU and non-EU parties, as local legislation often differs. But even within the eurozone, it remains complicated as long as a fully integrated Capital Market Union has not been established. Therefore, the simpler a bank’s organisational structure, and the more standardised its figures, the likelier parties are to get the green light. In this context, legacy IT can be a real stumbling block, though.”

What about the risk of failed post-M&A integration?

A merger of companies, and certainly banks, presents serious challenges. Technical ones, but also regarding customer and employee experience, Deloitte partner Ellen Nijs explains. “Communication can be the make-or-break of a bank integration. To customers and employees, a merger is more than a name change. Customers need clarity up front about what will change for them – and what won’t. Employees will want to be reassured that not only their pay but also their non-financial perks will remain intact. And both expect the culture and values of the new entity to be worth their continued commitment.” The integration roadmap starts well before the actual deal, she believes. That’s when parties need to assess the impacts and determine which ones to solve prior, during and post migration. Doing this right will minimise the number of touchpoints in the customer journey, reduce the complexity of the actual conversion, and allow the new brand to make a clean start. Post-merger, the day-one priority for the new organisation is strengthening the emotional connection with customers and employees. “The last thing a newly merged bank needs is an exodus of customers. Or of key employees - a challenge in itself, given the current race for talent, new skills and changing workforce needs.”

What’s the Dutch government’s role in the banking landscape?

With the Postbank’s privatisation in 1986, the Dutch government made a well-considered decision to exit the banking sector, only to step back in post-2008 with the emergency nationalisations of ABN AMRO and Volksbank. The idea was to sell the bank holdings “in due time” – preferably at a modest profit, of course. Almost half of ABN AMRO has been brought to market now. The latest coalition agreement, however, contains no plan for further sales – nor any alternative strategy for these holdings. Which is worrying, in Vialle’s view. “As long as this situation lasts, these banks are in limbo. Any plans they make depend on the approval of their shareholder – who has political sensitivities to contend with. They need room to grow, and that would serve Dutch interests. The government can’t afford to sit on the fence any longer.”

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