ABN Amro to slash investment bank size after Covid losses

Amsterdam — ABN Amro Bank will cut its investment bank by about a third and shut down lending outside Europe as the Dutch bank tries to turn around business hit hard by the market chaos caused by the coronavirus crisis.

ABN Amro will stop providing corporate finance outside Europe and exit trade and commodity financing altogether, the Dutch bank said on Wednesday. As many as 800 jobs could be lost over three to four years as the investment bank pulls back from activities that now bring in about 45% of client loans.

European lenders including Deutsche Bank, Societe Generale and BNP Paribas  have been slashing and refocusing their investment banks as they seek to cut costs and get out of higher-risk businesses. CEO Robert Swaak accelerated his review of the investment bank as volatile markets hit profitability and caused large impairments at the unit.

“The new CEO has essentially delivered what we asked for over a year ago, namely a proper wind-down of the CIB business. A pity that it took a pandemic to do so,” Barclays analyst Omar Fall said in a note. “The focus will now be on how much of the very sizeable €2.5bn of CIB wind-down capital will eventually return to shareholders.”

ABN Amro rose as much as 9.4% in Amsterdam trading, the most in two months, and was up 8.3% before the close. The stock has declined by 46% in 2020.

Net loss

The bank reported a net loss of €5m for the quarter on writedowns and a slowdown in lending prompted by the Covid-19 crisis. Provisions for loan losses declined to €703m from €1.1bn in the first quarter. ABN Amro said it expects provisions to total €3bn in 2020, partly on costs to wind down loans at the investment bank. That’s up from an earlier prediction of €2.5bn.

Corporate banking in the US, Asia, Australia and Brazil will be wound down, but the bank will retain its global clearing business, one of the world’s biggest, the company said. The natural resources and transportation and logistics parts of the business will focus on European clients only.

“Clearing has taken several derisking measures in the past months following a large loss incurred earlier this year,” it said. The bank said it expects additional impairments related to job losses and the wind down of corporate loans.

‘Tough decision’

“It’s a tough decision,” to exit trade and commodity finance, a business that has been historically strong for the Netherlands, CFO Clifford Abrahams said in an interview. “We’ve been in these businesses in some cases for hundreds of years. It’s tough for our clients and our staff, but we are convinced it’s in the best interest for the bank.”

CEO Swaak said that ABN Amro lacks scale in the rest of the world but it is looking to “invest and grow” in its corporate banking business in northwest Europe. The lender is also conducting a strategic review on operational efficiency, financial targets and capital distributions, which will be presented in November.

ABN Amro is among the four banks with the highest exposure to Wirecard, the defunct payments company that prompted competitors ING and Commerzbank to take provisions of about €175m each in the second quarter, Bloomberg reported in June. The bank said an “exceptional client file” contributed to the high impairments in the second quarter.

Exceptional charges

“We don’t comment on specific clients, but the exceptional client file that caused high impairments reflect a potential fraud case in Germany,” Abrahams said when asked about the impact of Wirecard.

ABN Amro reported provisions of €616m  for three exceptional client files in the first half of this year. Two cases in the first quarter accounted for €460m, leaving €156m  for the German case.

The corporate and investment bank accounted for 14.5% of group profit in 2019 and the unit’s headcount was a similar share of the total. The investment bank’s activities carry much more risk than ABN Amro’s retail business and require more capital as well, making it costly to squeeze out decent profits in good times.

In the previous quarter, the lender wrote down €460m  on two individual client cases, which contributed to its first loss since 2013. Even before the coronavirus crisis, the investment bank fell short of ABN Amro’s 10% to 13% return on equity target.

Other second-quarter earnings highlights were net interest income fell 9.9% to €1.51 billion year on year, its quarterly common equity tier 1 ratio was stable at 17.3%, second quarter cost-to-income ratio fell to 60.4% from  67.6% in the previous quarter, and annualised net fee and commission income fell 9.2% to €375m.

Bloomberg