EXPERIENCED BANKING ANALYSTS such as Morgan Stanley’s Huw van Steenis and Bruce Hamilton are not generally given to hyperbole. But when they visited Switzerland earlier this summer they were clearly struck by how profoundly the events of the past year had affected the private banking industry. "We think there is a once-in-a-lifetime opportunity for [Julius] Baer and a number of the smaller private banks to take share from large global integrated players that have suffered in the market turmoil," van Steenis and Hamilton wrote.
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"We’ve had the crisis, and we have certainly benefited from the safe-haven effect that it has caused. At the short end of the curve in particular, we have been swamped with liquidity"
Bert Bruggink, Rabobank |
Whether or not equally transformational opportunities have been created in the broader European banking universe remains to be seen. But a crisis that left several industry heavyweights squirming has been survived and even enjoyed by others. "A year or so ago, when people asked me what the best thing that could happen to us would be, my answer was a crisis in the financial markets," says Bert Bruggink, CFO of Rabobank. "We’ve had the crisis, and we have certainly benefited from the safe-haven effect that it has caused. At the short end of the curve in particular, we have been swamped with liquidity."
Rabobank has been uniquely positioned to benefit from the past 12 months. Its principal exposure is to highly defensive sectors such as the Dutch retail market, where its main competitors have been shooting themselves in the foot. Its cooperative status means that it does not have aggressive shareholders insisting that it maximizes return on equity. And it continues to sport a triple-A badge of honour that most European banks surrendered many years ago.
The inflows that Rabobank has attracted over the past 18 months have been impressive. In 2007 alone, retail deposits rose by some €21 billion, and Bruggink says that in 2008 inflows have maintained that momentum. Analysts say that Rabobank has been one of the few European banks successfully to use its triple-A imprimatur as a marketing tool in the retail market.
Another demonstrable survivor of the crisis, DnB Nor, has also benefited from the economic strength of its domestic market. At a time when 16 of the largest 50 European banks covered by Standard & Poor’s have been assigned negative outlooks, Norway’s market leader was upgraded by S&P to AA– from A+. "S&P recognized that we have built a diversified revenue base that has given us consistent and sustained profitability," says DnB Nor’s CFO, Bjoern Erik Naess. "But I think what has also been important is that we have been very loyal over the last few years to traditional, relationship-based banking concepts."
Also important has been the solidity of the Norwegian economy, buttressed by high oil prices and a resilient shipping sector. The picture could scarcely be more different in embattled Spain, which appears to be hurtling towards a recession. That makes the other recent S&P upgrade in the European banking industry all the more remarkable. In February the agency raised its long term rating on Banco Bilbao Vizcaya Argentaria to AA from AA–, commenting that "a well-diversified risk profile, a conservative lending culture and strong loan-loss reserves place BBVA in a favourable position to face a slowdown in the Spanish economy and real estate sector".
Although few banks have come out of the recent crisis with improved ratings as DnB Nor, BBVA – and, more recently, Portugal’s CGD – have, a number of others have emerged with their ratings, access to liquidity, balance sheets and credibility more or less intact. Foremost has been BNP Paribas, which analysts view as ironic, given it’s role in kick-starting the crisis when it froze three investment funds in August 2007. France’s largest bank continues to command an unusually strong rating from S&P of AA+, and the agency saw no reason to tinker with its stable outlook after BNP Paribas announced a 27% fall in its first-half after-tax profits in August. "The bank’s underlying profitability remains resilient and is in line with our expectations," said S&P.
Source of pride
S&P’s favourable observation on BNP Paribas’ performance relative to its peers is a source of pride to the bank’s chief executive, Baudouin Prot. "In an environment of extreme value destruction the only two international players with significant corporate and investment banking activities that have been consistently profitable have been Goldman Sachs and BNP Paribas," he says.
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"There has been no credit crunch at BNP Paribas"
Baudouin Prot, BNP Paribas |
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That, says Prot, has been the product of what he describes as a "symbiosis between a stringent risk profile and a growth culture". Prot argues that the BNP Paribas business model is one that has enabled the bank to maintain what S&P has described as a "credit-risk-averse culture" combined with continued growth. "We’ve been able to acquire new customers and serve existing ones throughout this crisis, increasing our risk-weighted assets by about 10% and continuing to lend," he says. "There has been no credit crunch at BNP Paribas."
Prot does not go as far as Rabobank’s Bruggink by saying that he has welcomed the crisis. However, like Bruggink, he insists that the his bank’s rating has helped to engineer a virtuous circle at BNP Paribas. "There are only four AA+ rated banks in the world, and it is clear that many more customers are taking comfort from that rating," he says. "Client revenues have shown double-digit growth compared with the second quarter of 2007, which itself was a pre-crisis record. But our AA+ rating is also extremely important for our derivatives business, where clients are often entering into very long-dated transactions and need to know they are dealing with a banking counterparty that is really solid."