Complex Made Simple

From Amsterdam to Dubai: Whither ABN Amro Bank shares?

Matein Khalid, investment expert and Chief Investment Officer at ASAS Capital, comments on the current state of ABN Amro Bank, its long-winded history, and forecasts its future share value.

"My real windfall in ABN Amro came not as a client of its Private Bank but as an investor in its share price when the Dutch bank became a takeover target for three imperial CEO’s who defined the credit bubble era of 2007" "The current valuation is at least a 30% discount to the bank’s average valuation after relisting in 2016" "Yet ABN Amro can well deliver a 10 – 12% ROE metric, a testament to the “oligopoly dividend” I love in Dutch banking, given that 50 odd local and foreign banks compete fiercely in a Holland size country like the UAE"

While I was a college student at Penn in the 1980’s, I used to spend several weeks every summer in my uncle Solly’s house in Amsterdam. Uncle Suleiman had an encyclopedic knowledge of Amsterdam’s past as a global banking, shipping and financial centre, home of the world’s first central bank, joint stock company and stock exchange. We often spent hours strolling on the banks of the fabled Amsterdam canals and I was totally fascinated with the centuries old banking houses on the Herengracht, once the Wall Street of Europe, the successor to London’s Moorgate and Venice’s Rialto. I was later to visit Bank van Haften Labouchere as a Chase New York derivatives banker and have a partner show me the bank’s superb art collection of Dutch and Flemish Old Masters. Now that is education!

ABN Amro’s parent banks had operated in the UAE since the Trucial States era in 1968 and boasted branches in Jeddah in the 1920’s pre-Saudi Hijaz to cater for Indonesian pilgrims. ABN Amro incubated the most brilliant bankers of my generation, who I am still proud to call close friends. Rahul Vohra became global head of private banking at ICICI and chairman of his own boutique in Mumbai. Michael Markland, my beloved Big Red, was the shining star at Morgan Stanley, DBS and Citi Dubai and is now chairman of Kashaf. Rafik Seedat built the GCC global capital markets business at Merrill, Fimat/Soc. Gen and Emirates NBD Treasury Dubai. Adhip Shankar went on to dazzle his peers at Citi, Barclays and the Dubai Golf Club on the Creek. My old Wharton classmate Aurie is President/CEO of Pakistan’s Habib Bank. Janak Gore, my old ABN RM, is now an oil swaps trading wizard. I used to love to visit ABN Amro’s dealing room on Bank Street and was even invited several times to brief Van Gogh (Vincent, not Theo!) bankers on my take on global equities, oil, metals, FX and interest rates.

Yet my real windfall in ABN Amro came not as a client of its Private Bank but as an investor in its share price when the Dutch bank became a takeover target for three imperial CEO’s who defined the credit bubble era of 2007 – Fred the Shred at RBS, Don Emilío Botín at Santander and Bob Diamond at Barclays. The deal was pure hubris and doomed to fail but ABN Amro’s share price doubled in early 2008, even as the lights began to go out on Wall Street, thanks to subprime excreta, Bear Stearns, UBS, AIG and Citi’s fatal dance of death under Chuck Prince.

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Now ABN Amro’s global investment banking empire and UAE presence is long gone and the bank is a rump Dutch/Benelux retail and corporate bank, provincial, risk averse, plagued by negative ECB interest rates and a suspicious Dutch political elite in the Hague that owns a majority stake in the bank. The Dutch hostility to banker’s pay is so visceral that the next ABN Amro CEO PwC lifer named Robert Swaak. All the swagger and global alchemy is gone from the ABN Amro franchise I once knew and loved in the pre-Lehman Stone Age of UAE haute finance.

Even though ABN Amro was listed in 2016, its share price has been a disaster since 2017, falling even more than the “digital”, if no longer exotic EM rival ING. The Dutch government owns a majority of ABN Amro shares eleven years after the bailout of the bank. On paper, ABN Amro is one of the most attractive takeover targets in Europe but I doubt a deal will happen since it would entail the loss of thousands of Dutch jobs, a no no for the politicians in The Hague, and not even generate a profit on the bailout for the Dutch taxpayer after more than a decade.

The burghers of Rembrandt’s Night Watch, heirs to a global trading empire, would have been horrified by their timid, populist, socialist, politically correct government in 2020. Yet a new CEO can at least strengthen the bank’s anti-money laundering protocols and cut deadwood in the investment banking division, even though he can do nothing about ECB negative interest rates, the Dutch parliaments penchant for banker bashing and hostility to a transformational takeover deal for ABN Amro, one of the Big Three of Benelux banking with ING and KBC.

In fact, I think ABN Amro could well buy a local competitor or one of the fintech startups (payments? Home mortgages?) that proliferate in hip, techy, bohemian, booming Amsterdam. ABN Amro does have some hidden crown jewels in its arsenal. Euromoney voted the Dutch bank the best global bank for sustainable development in 2019.

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I am a man fascinated by history and the power of memory, including my own. So a gut instinct tells me I will see an ABN Amro takeover bid once again in my lifetime, though no Sir Fred the Shred this time around as an arch-villain. The Dutch government will not want to own a majority stake in a zero-growth zombie bank forever. There are no shortage of potential bidders for ABN Amro in Europan banking. The CEO of Sweden’s Nordea suggested a reverse the merger in 2016. The Benelux banking market, like Sweden, is rich, scalable, oligopolistic, globalized and well into the Digital Age. There is even talk of a Flemish solution (a deal with KBC!) in Belgium, a state that is the geopolitical equivalent of an unhappy marriage between the Flemish and the Walloons.

Post Brexit London could mean Amsterdam emerges as a global financial center as Macron’s Paris is mired in the gilets jaunes “manis” (protests). I simply do not believe Dublin or Finanzplatz Deutschland in Frankfurt are credible global hubs, though Dublin is at least the home of Oscar Wilde and James Joyce. ABN Amro has scale in Dutch retail banking and operates a very profitable, efficient European private bank but it lacks scale in corporate, investment and institutional banking, something BNP Paribas and Société Générale could surely provide if the political constellations in the Élysée Palace and The Hague were aligned. Fat chance for now.

I am saddened by ABN Amro Bank’s sheer fall from grace since 2017. The shares have fallen from €28 to a mere 15.6 as I write. The market cap is a mere $7.43 billion, the dividend yield is above 9.35%. Will ABN Amro cut its dividend? No way. The valuation multiple is a mere 7.8 times earnings and the payout ratio is 65% of net profit after tax. Above all, the risk averse, do no evil culture of the bank has generated near zero credit losses since 2017. The dividend could well be €1.45 in 2020. As they say in Texas, this aint no bull and this aint no typo. 

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Dutch banks, range from simple/predictable to wild, complex risk takers, a lesson I learnt from my youthful Amsterdam summer sojourns on the Leidseplein. Post bailout ABN Amro has a simple, low risk, predictable business model since ABN Amro and ING alone own 60% market share in Dutch loans and deposits. This is in sharp contrast to, say, fragmented Germany or even Spain. ABN Amro’s 25 – 28% market share in retail/corporate current accounts with provide a cheap, loyal funding base and the bank has low reliance on fickle wholesale Euromarkets funding. If ever there was an anti Deutsche (Russian roulette) Bank, ABN Amro is it. Wholesale funding is a mere 25% of ABN Amro’s balance sheet, the lowest in Europe, a competitive advantage that will only grow when the ECB policy regime changes, as it will well before the Day of Judgement.

Since net interest income generated two thirds of the bank’s net profits, a steeper yield curve would be nirvana for the bank. Yet ABN Amro, net interest rate margins at 288 basis points are well above the 2% level of ING and KBC.

The ECB’s negative interest rates are a disaster as ABN Amro Bank de facto subsidizes small depositors. Yet this is precisely the reason this Dutch beauty trades at a Cinderella valuation of 9.2 times trailing 2019 earnings. Two other factors have also contributed to ABN Amro’s fall from grace on the Amsterdam stock exchange. The bank’s anti-money laundering controls were found to be lax due to inadequate vetting of client accounts. The financial markets also conclude that a bank whose fate is controlled by the Dutch government will not necessarily operate to optimize shareholder value alone.

Yet at 0.68 times price/tangible book value, I believe these factors are well discounted into the share price. The current valuation is at least a 30% discount to the bank’s average valuation after relisting in 2016. To paraphrase the late, unlamented Saddam, this is the mother of all value stocks in banking. Yet ABN Amro can well deliver a 10 – 12% ROE metric, a testament to the “oligopoly dividend” I love in Dutch banking, given that 50 odd local and foreign banks compete fiercely in a Holland size country like the UAE. Holland’s GDP is $830 billion, more than double the UAE GDP at $400 billion. The math is pure poetry.

True, ING and not ABN Amro is the market leader in the Pays-Bas that Louis XIV coveted, Philip von Habsburg ruled and the Nazi Fuhrer occupied but the House of Orange is still around in their palace on Dam Square. So, fine, if Cinderella needs a Prince charming, no problemo. For a 9.3% div yield and a real (not fake – habibi) bank book value, I will gladly turn summersaults, (even though this promise defies the laws of physics now!), while waiting for deep value to crystalize into profits. My call? ABN Amro trades at 22 Euros in Amsterdam sometime in the next two years. In life, as in banking, sometimes boring is beautiful! 

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