The financial sector sees light at the end of the tunnel again. This week, the three major Dutch banks – ING, ABN Amro and Rabo – presented their figures for 2021. And they show that the turnaround from the corona crisis was made in the second half of the year – with an emphasis on the fourth quarter. In the rest of Europe, with some exceptions, the same picture prevails.
Read here about the fine that ABN Amro had to pay: Sorry, says the bank, after years of failed money laundering policy
In recent years, the banks have struggled on almost all fronts. Setback number one: stricter supervision of money laundering and fraud led to fines in the recent past – and additional expenditure on internal supervision. Rabobank, for example, spent 1.6 billion euros on its Know Your Customer offensive over the past five years – not counting a recent extra effort of a quarter billion demanded by regulators. ING and ABN Amro have paid hefty fines in recent years.
Moreover, the magnifying glass under which banks have been since the credit crisis of 2008-2009 has not yet disappeared: there are high capital requirements and the outside world is watching with suspicion at possible mistakes in the calculation of interest and fees.
Setback two: banks mainly rely on interest income, and times were tough there too. The major central banks had already lowered their money market interest rates worldwide to zero – and in the case of the Eurozone, even below zero. Government bond buying policies pushed their prices up and, as a result, their interest rates down. This also applied to tradable corporate loans. The pandemic and fears of a devastating recession have strengthened that policy, pushing interest rates on these longer-term loans even lower.
The result: not only a low absolute interest rate level, but also a rather ‘flat interest rate structure’: the difference between the short-term interest rate and the interest rate on longer-term loans narrowed further. And banks have to be right about both the interest margin – the difference between what you pay when borrowing and what you receive when borrowing – and the game – as far as allowed, with that interest structure – with the difference between short-term and long-term credit.
slingshot jars
Setback number three: the pandemic itself. Because no one could know how this would turn out economically at the beginning of 2020, sizable provisions for loan defaults (‘strap jars’) were made just to be safe.
The figures from European banks show that the summer of 2021 was a break in the trend. This did not apply to the magnifying glass of the outside world and associated costs. But interest is rising anyway. As inflation rises sharply, the financial markets are anticipating more tightening policies by central banks to prevent monetary depreciation from getting out of hand. That means an end to the buying up of government and corporate bonds, and perhaps later on also interest rate hikes on the money market.
The result of that pre-sorting: higher interest rates across almost the entire line. In principle, this is favorable for banks. Or better: less extremely unfavorable than before. And since short-term interest rates rose less – they only really do so if central banks really take action – than long-term interest rates where the market becomes more decisive, the interest rate structure also looked less flat. New loans in particular became more expensive last year. Many companies brought forward loans to take advantage of the low interest rates.
In addition, the economic fallout from the pandemic is not too bad. And so the banks are partly emptying their noose pots again – in favor of profits.
Also read what we wrote after the half-year figures in 2021: Are banks not overconfident after their resounding profit figures?
The result of all that: ABN Amro made a loss of 45 million euros in the first pandemic year, 2020, but turned that around into a profit of 1.2 billion last year – with a sprint in the fourth quarter. ING saw its profits almost double compared to 2020, from 2.5 billion to 4.8 billion. At Rabobank, profit even rose from 1.1 billion in 2020 to 3.7 billion last year.
While this is only dawn. There will only be a real heyday if the banks start to cash in on the higher interest margins this year.
Risks for 2022
However, there are new risks. Higher mortgage rates can cause problems in the housing market, while inflation erodes the purchasing power of homeowners. ING is already somewhat ahead of this with a recent addition to the credit risk node pot. And if central banks are too late to fight inflation and suddenly have to raise their interest rates hastily and much more sharply than expected, that is in principle good for the banks, but not for their customers. Citizens, businesses and governments, especially those in emerging countries, could find themselves in trouble – not to mention the associated turmoil in the stock markets. And then there’s the unpredictable pandemic. De Rabo already released part of the noose pot last year, but later put something in it again to absorb risks for 2022.
Risk for 2022: higher interest rates for mortgages could cause problems in the housing market
Fortunately, Dutch banks have good capital buffers. ING closed 2021 with a common equity tier 1ratio (a broad measure of equity to total assets) of 15.9 percent – one and a half times more than the minimum required. At ABN Amro this was 16.3 percent and Rabo even closed the year with 17.4 percent. This gives room to absorb blows, to expand or to meet any stricter capital requirements that the European Central Bank could set with a view to climate risks. Or the banks give back a little more to their shareholders or depositary receipt holders. Because they also want something, after years of subbing.
A version of this article also appeared in NRC Handelsblad on 12 February 2022
A version of this article also appeared in NRC in the morning of February 12, 2022