Privatization: ABN Amro IPO leaves ING in the dust
Overtakes rival with new valuation; dismisses state meddling, commodities concerns.
ABN Amro’s return to the Amsterdam stock exchange in late 2015 was the biggest European bank IPO since the 2008 crisis. Its marketing as a ‘Dutch domestic bank’ was a far cry from the global claims it once made. Nevertheless, it can boast some success.
Pricing in the middle of a range between €16 and €20 a share, it raised €3.8 billion for the Dutch state and gained a market capitalization at IPO of around €16.7 billion, roughly equal to book value. The stock rose 3.5% on its first day of trading in late November, rising 8% within a week. The IPO price of €17.75 was appropriate given the 77% that the state still has to sell after the six-month lock-up period, says Fred Bos, ABN’s senior managing director overseeing the IPO.
Bos says ABN Amro was able to stand out from the slew of European bank equity issuance – including recent capital raisings from Credit Suisse and Standard Chartered, and planned state sell-downs in the UK and Ireland in 2016 – as investors were well-primed for its deal, and the bank had maintained contact with the investor community in the debt markets.
Fred Bos, ABN Amro
The government first asked ABN Amro to start preparing for the transaction in 2013, four years after it was nationalised, alongside the Dutch assets of Fortis, in a €30 billion bail-out. Dutch finance minister Jeroen Dijsselbloem said in late 2014 that the bank was ready and his criteria for the IPO could be met in 2015.
With the stock market buoyant, the bank was under pressure to complete the deal by the end of the year, particularly after a row with lawmakers in the spring over bankers’ pay delayed the sale. The process only got going again when executives waived part of their compensation.
Bos downplays fears of political interference on matters such as costs, which some investors raised with analysts at Exane BNP Paribas during the offering. “The influence of the government on the bank has been minimal, and from a strategic perspective it has been nil,” Bos says.
After parliament allowed the process to continue, the task of selecting global coordinators began in early summer, and the bank had already started preparing the prospectus and other documentation. It selected itself, Deutsche Bank, and Morgan Stanley to coordinate the transaction, backed up by six joint bookrunners and two co-lead managers. Rothschild advised the government; Lazard advised the bank.
Investors managed to gain a small discount to ING, previously the only big listed Dutch bank, which Bos attributes to ABN Amro’s lack of an existing presence on the stock market. He notes his bank’s valuation has since overtaken ING – overturning the hierarchy in Dutch banking. ING’s stock fell in the month after the launch of ABN Amro’s offering by roughly as much as ABN Amro’s stock rose in its first week.
ING was ABN Amro’s “closest peer, but with clear differences”, says Bos. He points to the far higher proportion of international revenues at ING. Bos says ABN Amro’s business, 80% of which is in the Netherlands, revolves around “very traditional activities, and a very clear business model”. Investors appreciated that home bias due to the local recovery, including in the housing market. The Dutch economy was set to grow by 2.3% in 2015 compared to 1.6% in the eurozone as a whole, according to the bank’s own projections late last year.
In late November, ABN Amro said its return on equity had reached almost 13%, well above the European average, even after the local bank levy. Net profit for the first nine months of 2015 more than doubled over the same period the previous year. Its cost-to-income ratio, just over 60%, has been consistently higher than ING, according to research from Mediobanca, though ABN’s ratio has trended down in the past year.
“ABN Amro has a bigger private bank, which is a typically high-cost business,” counters Bos. “In retail banking the difference [with ING’s efficiency ratio] is minimal.”
Despite the stated focus on the Netherlands, growth at ABN Amro is mainly mentioned in the context of foreign operations. Bos insists this will only be in private banking, asset-backed finance, clearing, and energy, commodities and transport (ECT).
However, given the bearish natural resources outlook, the firm’s growth in the latter in recent years is another area of concern for investors, according to Exane BNP Paribas.
Although Mediobanca highlights higher new lending volumes in mortgages at the bank, Bos says ABN Amro’s Dutch mortgage portfolio will remain roughly stable.
“In the Netherlands, we can grow our market share in corporate banking, and as the economy recovers we can pick up more business, but not beyond GDP growth,” he says. “In our international activities, our growth can be more in line with global trade growth, which is likely to be higher than Dutch GDP growth.”
ABN Amro’s main attraction should still be yield, Bos concludes. “We haven’t positioned ABN Amro as a growth stock,” he says. He highlights the firm’s dividend policy. Its pay-out target is around 50% of earnings from 2017, according to the third-quarter results presentation. With a 14.8% fully loaded CET1 ratio at end-September, readiness for Basel IV was a further comfort for investors in the dividends context, in Bos’ view.