Wholesale banking: ABN Amro cuts now, but ING is next

Think of a European bank that needs to shrink its corporate and investment bank.

Deutsche Bank or Societe Generale probably come to mind, but ABN Amro’s decision to run down all corporate banking outside Europe – and exit commodity trade finance completely – is a timely reminder of the next layer down.

Below the likes of Deutsche and SocGen, European wholesale banks’ competitive advantages are even less able to justify their costs after Covid-19 and as Basel reforms suck up more capital.

All the big Dutch banks fit in this next tier down, because their domestic market is so small. They maintain full-service investment banks.

But to a greater degree than the French, they are struggling to fight back against the US firms, even in their home market. Increasingly, they won’t have the client flows to justify expensive capital-markets capabilities.

ABN Amro’s recent cuts, which will see its wholesale-banking exposures fall by a third, then raise the question of what might happen at ING: the Netherlands’ biggest bank.

Robert Swaak, ABN Amro

At ABN Amro, the arrival of Robert Swaak as new chief executive in April helped lead to a rethink. Similarly, at ING, Steven van Rijswijk’s replacement of Ralph Hamers as CEO in July could give way to an overdue wholesale-banking restructuring.

Last week, in another potential catalyst, ING said its wholesale banking head of the past four years Isabel Fernandez will leave at the end of 2020.

ING is already simplifying and keeping a closer tab on its risks in commodity trade finance, as risks there have shot up due to the oil-price crash.

In recent years, ING has become the world’s biggest commodity trade finance bank, slightly ahead of firms such as SocGen and even ABN Amro. BNP Paribas scaled back after the French firm’s US fine for breaking sanctions in Iran and elsewhere in 2014 – although the French banks are now cutting this activity still further.

Both banks’ unusually large exposure to this year’s bankruptcy of Wirecard has belied boasts that the Dutch banks have as much expertise as enthusiasm in fintech 

Even compared with the French, Dutch banks have steadily become less attractive to investors during the past year, initially due to new determination in the Netherlands to clamp down on money-laundering failures.

Ralph Hamers

Since the coronavirus crisis, ING has finally lost the valuation premium it enjoyed for years over BNP Paribas, arguably its closest international peer. For all Hamers’ fluency in selling ING’s advantages as an international online retail bank, it seems investors have at last woken up to how much capital remains in its relatively low-yielding, risky and uncompetitive wholesale bank.

The pandemic has hit sectors particularly hard, especially energy and transport, which ABN Amro and ING had ill-advisedly pushed in recent years on a global stage. Both banks’ unusually large exposure to this year’s bankruptcy of German payments company Wirecard has, in addition, belied boasts that the Dutch banks have as much expertise as enthusiasm in fintech.

ABN Amro, one insider admits, has suffered more than its fair share of wholesale-banking hiccups lately. Its exposure to Hin Leong – about six times higher than ING – may have ultimately triggered its exit from commodity trade finance. The Singapore oil trader has had to seek bankruptcy protection this year, losing ABN Amro as much as €200 million.

While ABN punches well above its weight in commodity trade finance, single-name events like this show up less at ING, because its balance sheet is bigger.

From another perspective, though, ING has less heritage in wholesale banking than ABN Amro. About half of ING’s risk-weighted assets lie in its wholesale bank. Its global corporate banking share is still way off US banks and top-tier European firms.

With more rivals exiting, ING might pick up higher margins in commodity trade finance. Yet recent market volatility has highlighted widespread fraud among commodities traders.

Even in the best of times, commodity trade finance – such as ING’s wholesale bank overall – is much less profitable than simple Dutch mortgage lending, which generates returns in the mid-teens or higher.

Excess retail deposits

The underlying issue in wholesale banking at ABN Amro and ING, though, is excess retail deposits. This is worse at ING, moreover, because it has tended to grow as an international digital bank through the savings market.

These excess retail deposits would evaporate if ING drastically lowered its savings rates. Doing so, however, would risk undermining its core thesis that cross-border retail banking works, if you do it digitally. Its scale and profitability in Germany have given that idea credibility during the past decade, but the opposite is true of its online banks in France, Italy and Spain.

Despite cuts to its international network a decade ago, and more recent efforts to cross-sell third-party insurance, not much has changed since liquidity from ING Direct in the US ended up in subprime-mortgage securitizations before 2008.

Hamers’ recent efforts to properly integrate ING’s international retail banks remained a pipe dream, says Johann Scholtz, banks analyst at Morningstar.

Under a CEO less enthralled by Silicon Valley, change is on its way at ING: even if its investment-banking cuts may be less dramatic than those at ABN Amro. There have already been rumours about talks to sell its Turkish bank, too.

UBS, meanwhile, might hope that Hamers – who succeeds Sergio Ermotti as CEO in November – focuses a bit more on the basics of risk and returns, and believes in the digital sales pitch a bit less.