NETHERLANDS: FINANCIAL INSTITUTIONS LOSE BILLIONS BUT WILL

UNCLAS SECTION 01 OF 02 THE HAGUE 000442 SENSITIVE SIPDIS STATE FOR EUR/WE (TSMITH),EEB/IFD USDOC FOR 4212/USFCS/MAC/EURA/OWE/DCALVERT TREASURY FOR IMI/OASIA/VATUKORALA PARIS ALSO FOR OECD USEU FOR BARBARA MATTHEWS E.O. 12356: N/A TAGS: ECON EFIN EINV NL SUBJECT: NETHERLANDS: FINANCIAL INSTITUTIONS LOSE BILLIONS BUT WILL SURVIVE THE HAGUE 00000442 001.2 OF 002 REFTEL: A) 07 THE HAGUE 1967 B) 07 THE HAGUE 1836 C) 07 THE HAGUE 2053 SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE ACCORDINGLY. ¶1. (SBU) SUMMARY. Dutch financial institutions have posted EUR 9 billion ($14 billion) in losses to date as a result of the subprime mortgage/credit crisis. The recent takeover of ABN Amro and liquidity issues at medium-sized bank NIB Capital have also rattled the Dutch financial sector. Despite these wobbles, Dutch officials and financial supervisors are confident that Dutch banks are not vulnerable and the economy is strong enough to absorb a shock. The GONL's Treasurer-General told Charge d'Affaires that the Dutch are carefully monitoring the financial turmoil's possible trickle-down effects on the real economy, which he anticipates might hit in the latter half of 2008. END SUMMARY. THE "BIG FOUR" BANKS CHASTENED BUT STABLE -------------- ¶2. (U) ING, the Netherlands' largest bank, has written off EUR 194 million ($305 million) on subprime and related issues, and another EUR 751 million ($1.2 billion) for "negative revaluations on subprime." (Note: ING's total assets were EUR 1.3 trillion ($2.0 trillion) at year-end 2007. End note.) As analysts had expected losses as high as EUR 2 billion ($3.1 billion),the bank was "relatively unharmed." ING maintained that it operated "without distraction from the market turmoil," although disposing of stakes in acquired companies (including ABN Amro) boosted profits. Despite disappointing first quarter results, ING still has a healthy 8.3 percent Tier I capital ratio and is pursuing bolt-on acquisitions (e.g., ING announced May 19 that it would buy German mortgage lender InterHyp). ¶3. (U) Rabobank, a large unlisted cooperative bank, said it had "no direct exposure to subprime mortgages," except indirectly through its international subsidiary. Rabobank has reported two revaluations totaling EUR 1.4 billion ($2.2 billion) but still managed to exceed expectations by increasing profits 14 percent. (Note: Rabobank's total assets were EUR 570 billion ($897 billion) at year-end 2007. End note.) Rabobank's chairman called 2007 "a good year, although a tumultuous one." ¶4. (U) ABN Amro, acquired in 2007 by a consortium of Royal Bank of Scotland, Banco Santander, and Fortis (ref A),wrote down EUR 1.6 billion ($2.5 billion) due to American subprime mortgages and other market related losses. ¶5. (U) Fortis, the Dutch-Belgian bank and insurance company, has suffered the most from the market turmoil among the "big four" banks in the Netherlands (now the big three after ABN Amro's takeover). Fortis' total subprime related impairments amounted to EUR 2.7 billion ($4.2 billion) in 2007. (Note: Fortis' total assets were EUR 871 billion euros ($1.4 trillion) at year-end 2007. End note.) Fortis has admitted the ABN Amro takeover stretched its balance sheet and is looking for additional financing. For example, Fortis announced on March 19 that it will sell 50 percent of its global asset management arm, Fortis Investments, to Chinese financial services conglomerate Ping An for EUR 2.1 billion ($3.3 billion). Fortis announced poor first quarter results on May 13, including an additional EUR 380 million ($598 million) write-down. NIB CAPITAL HIT THE HARDEST -------------- ¶6. (U) The liquidity issues at medium-sized Netherlands Investment Bank Capital (NIB Capital) has aroused the greatest alarm in the Dutch financial sector. Besides reporting a series of write-downs totaling EUR 437 million ($688 million)(ref C),NIB Capital's announced acquisition by Iceland's Kaupthing Bank was cancelled in January due to "instability in the financial markets." In April, NIB Capital disclosed that it might have to borrow EUR 4 billion ($6.3 billion) from the European Central Bank in order to "fulfill its payments." SHOULD WE BE WORRIED? -------------- ¶7. (U) Although the headline losses posted by Dutch banks are smaller than at many other European and American banks, the losses THE HAGUE 00000442 002.2 OF 002 amount to around 40 percent of their total 2006 profits. The large Dutch banks have taken a considerable hit. However, the Dutch central bank's (DNB) recent Overview of Financial Stability stated that "Dutch financial firms' direct exposure to, and losses on, subprime products are relatively contained." ¶8. (U) More troubling than the Dutch banks' own financial health is the potential for their big losses to affect the real economy in the Netherlands. According to DNB statistics, six unnamed Dutch banks are now applying stricter conditions on mortgage and consumer lending. For example, Fortis announced that it will limit the growth of its credit portfolio to 10 percent this year. DNB has also reported that small- and medium-sized companies are particularly susceptible to the stricter loan criteria. ¶9. (U) The IMF's World Economic Outlook, released in April, warned that "the effects of the U.S. subprime mortgage and credit crisis are casting its shadow on economic growth in the Netherlands." The IMF forecasts Dutch GDP growth at 2.1 percent this year, weakening to 1.6 percent in 2009 (compared to 3.5 percent GDP growth in 2007). In addition, the IMF stated that the Netherlands will face a big correction on the housing market, with consequences for consumer spending and investments. This scenario holds plenty of risk for Dutch banks. Dutch officials have roundly criticized the IMF report -- particularly the assertion that Dutch house prices are 30 percent overvalued. Finance Minister Wouter Bos described the IMF's predictions as too pessimistic: "The picture of a stagnating economy has not been confirmed by the figures I have." COMMENT -------------- ¶10. (SBU) As Ronald Gerritse, the Finance Ministry's new Treasurer-General, told Charge d'Affaires during their May 16 meeting, Dutch banks have withstood "substantial but not excessive losses," and the Dutch financial markets have "held up well so far." He also commented that "the average Dutch taxi driver hasn't noticed the credit crisis." Attention now turns to the second half of 2008 and 2009. The Dutch economy benefited from a strong tailwind of growth and rising natural gas prices in 2007. (Note: The Netherlands is one of the world's top ten natural gas producers. End note.) Gerritse added that the GONL is carefully tracking possible trickle-down effects of the financial turmoil. The Dutch realize their economy is not out of the woods yet. END COMMENT.