For a long time the Dutch banks were among the world’s best, but now they are withdrawing to Europe and primarily their home market, involuntarily or otherwise.

In 2005 ING had a balance sheet total of 1,159 billion euros, just 100 billion less than French BNP Paribas. And ABN Amro was almost as large as Deutsche Bank. The two could measure up to the top banks in Europe. Last year Deutsche Bank and BNP grew to over 2,000 billion euros, but ABN Amro fell to 666 billion. Once ING has split itself up, the financial group will be only a shadow of its former self.

ING and ABN Amro have fallen to the level of the 1990s, the period in which both major banks were created from mergers. It is a development that will affect the strategy for the coming years and which will also have consequences within the national borders. The competition will most likely become even tougher and the slimmed down institutions can become prey to takeovers once the recession is over.

“The scope of the financial sector gave the Netherlands a great deal of influence and prestige in the world, certainly considering the country’s size. There is good reason we are among the G20,” says Sjoerd van Keulen, former CEO of SNS Reaal bank and since May chairman of the Holland Financial Centre, a foundation to boost the financial sector. “The scope of the financial sector is still relatively large, but our prestige has taken a blow.”

Financial superpower

Not long ago there was talk of the creation of one Dutch financial superpower. At the beginning of 2007 the merger of ABN Amro and ING was in the works. It would have become a giant that could measure up to the largest banks in the world. But the merger failed and an exposure of the sector followed.

At the end of 2007 ABN Amro, the national financial flagship, was bought up by a consortium and split into three parts. The bank, which had a presence in 53 countries and followed Dutch businesses to every part of the globe, fell into foreign hands. It was the credit crisis that ensured that the Dutch part of the bank just barely survived, thanks to nationalisation by the government.

When ABN Amro dropped out of the game, ING was still a player. The bank-insurer was one of the leading players in the world in its segment. That changed last week. ING found itself in major difficulties as a result of the credit crisis and required a bailout from the state not once, but twice, to stay afloat. Under pressure from the European Commission, which had to give permission for the government support to the bank, ING announced a drastic reorganisation. It will split into two parts in the coming years and sell internet bank ING Direct in the US, following orders from Brussels. ING will divest 45 percent of its balance sheet total. ING will no longer be a worldwide group, but a mid-sized European bank with its centre of gravity in the saturated markets of the Benelux.

The third largest Dutch bank, Rabobank, has emerged relatively unscathed from the crisis so far. The bank is the largest in the Netherlands, but is a relatively small player internationally, certainly in comparison to the ‘old’ ING and ABN Amro.

Consequences for the domestic market

The question is whether the situation is so bad that the financial sector, which accounts for just under 7 percent of the gross domestic product, is losing ground internationally. "Should you want a Dutch bank to have large subsidiaries in the US or Brazil? I don’t think so,” says economist Jaap Koelewijn, professor of finance at Nyenrode. “Local competitors are often much larger and often do better.”

The new reality for the international position will also have consequences for the domestic market. The fact that these two (former) major powers are becoming more dependent on the home market for their profits will have consequences for the other players. Competition is expected to increase in a market where rivalry is intense in all market segments and the margins are low.

Added to this is the fact that new foreign players are appearing who have a great deal riding on securing a solid position. Deutsche Bank will soon buy ABN Amro subsidiary HBU. With the takeover of the thirteen regional consultancy offices and two offices in major cities the Germans will secure the position they so desire on the market for small and medium-sized enterprise.

And soon the Dutch banks will probably be able to expect yet another competitor. ING will create a new bank from the parts of the old company. This entity will have a market share of 6 percent on the mortgage market and about 500,000 saving accounts. The buyer will most likely be a foreign player. Sjoerd van Keulen would bet on it being a French company. “BNP has traditionally had a great interest in the Benelux, as has Crédit Agricole.”

So while the merger of Fortis Bank Nederland and ABN Amro and the bankruptcy of DSB create less competition, strong newcomers will also be joining the market.

More likely prey

The margins will probably only become smaller, which could in fact be reason for foreign players to stay away from the Dutch market, says Van Keulen. But even if the home country offers little growth, foreign banks will probably venture a try nonetheless.

“If the economy picks up again, I see the Dutch institutions growing once again as well," says Van Keulen. “ING is still strong in Eastern Europe and Asia and ABN Amro will also rebuild its network for commercial banking in order to facilitate the business sector.”

Van Keulen says that in future, banks must not try to do everything for everyone, but should choose specific niches. That is something that banks should look into, the former CEO says. “The Netherlands is very good in payment transactions. And in financing sustainability projects, such as biomass and wind energy.”

ABN Amro does indeed plan to combine the offices that it has acquired as part of the integration with Fortis. ABN Amro can merge the international network that it still has in the division for wealthy private individuals with Fortis’ foreign offices that support the business sector. This involves about 30 foreign offices, which could form the basis for ABN Amro’s new commercial bank for the Dutch business sector abroad.

Does this threaten a return to the unbridled expansion of the 1990s once the recession dies down? “I do not see any large takeovers or a return to large-scale private banking on foreign markets,” says Van Keulen. Koelewijn says the end of the economic malaise could bring about the round of European consolidations that experts have been forecasting for years. Dutch banks were long seen as buyers. But their new smaller size makes them more likely prey.