Rumours push Fortis deeper into trouble
The current financial crisis is claiming an increasing number of victims, not just in the US but in western Europe too. In Amsterdam, the Dutch-Belgian financial services group Fortis is being hardest hit. What can the financial services watchdog do about it?
Has the Dutch finance minister Wouter Bos or central bank president Nout Wellink already rung ING boss Michel Tilmant and Rabobank CEO Bert Heemskerk to ask, "what shall we do with Fortis?".
On Monday, British prime minister Gordon Brown suggested that Lloyds TSB take over the HBOS banking group. And US treasury secretary Hank Paulson and federal reserve chairman Ben Bernanke have been active too. They orchestrated the rescue of Bear Sterns, bailed out mortgage lenders Fannie Mae and Freddie Mac and dictated what should happen to Lehman Brothers (court protection from creditors), Merrill Lynch (sale) and AIG (nationalisation).
The odds that the Dutch or Belgian authorities will step in to sort out the financial sector are getting narrower. Dutch banks and insurers have been sucked into the whirlpool created on Wall Street. The decline in the share prices of Dutch financials Aegon and ING are in line with their peers elsewhere in western Europe. Worryingly, the share price of Fortis has nose-dived more sharply.
Jittery market
The situation at Fortis resembles that of Bear Stearns, Lehman Brothers and HBOS. Certain stock market players - read hedge funds which can profit from a continued decline in prices - spread rumours that a bank has a solvency problem.
Whether this is true or not doesn't matter. Because, in the current jittery market such a rumour is enough to spark a wave of selling. The declining share price pressures the bank in question and prompts other banks to withdraw their loans to it. Anxious customers may decide to withdraw their funds too. As a result, the bank has a solvency problem. The process is a self-fulfilling prophesy.
On Tuesday, Fortis categorically denied rumours that it was considering a new emission. “There are no new developments,” it said in a statement. Fortis plans to give more details about its position in the coming days. Nevertheless, its share price continued to plummet.
Fortis beaten up
“Fortis has been beaten up,” said one banker. Its share price recovered a little on Thursday morning. But, on balance, Fortis shares have lost a quarter of their value over the past few days. Compared with last spring, prior to its takeover of part of ABN Amro Bank, Fortis has lost 25 billion euro of its market capitalisation.
You don't have to be a rocket scientist to realise that Fortis is in need of funding. According to press agency Bloomberg, Fortis has had to write off five billion euros in assets as a result of the credit crisis. In addition, it is staggering under the burden of its costly partial takeover (24 billion euros) of ABN Amro. Profit was halved in the second quarter of this year. The third quarter, which closes in 12 days, is likely to be worse.
Like other financials, Fortis will have seen the value of its investment portfolio shrink. It expects to have to write off 137 million euros in connection with the collapse of Lehman Brothers. And it is already clear that it will have to sustain an extra loss of 900 million euros on its compulsory sale of parts of ABN Amro to Deutsche Bank.
Controversial programme
Its controversial solvency programme unveiled at the end of June is stalling. Analysts estimate Fortis has only managed to collect half of the required 8.3 billion euro in funding necessary to restore its capital buffers.
The sale of several non-core assets and a bond issue are struggling. What's more: financials around the world are also trying to sell assets. So even if it does succeed, Fortis will not get the highest price. In addition, there is still no official go-ahead for Chinese insurer Ping An's 2.1 billion euro investment in Fortis's asset management arm.
Should this ominous mix of circumstances spur the supervisory authorities to intervene?
In the knowledge that a new share issue has no chance in the current market, it helps that there are several other options at hand. The most rigorous approach would be for the supervisory body to follow the AIG model: invest money in Fortis in exchange for control, which would then allow it to sell off assets in an orderly fashion.
Suitable partner
A more likely option is that the Dutch central bank will urge another financial institution to step in, the HBOS model. The French bank BNP Paribas was tipped by analysts last week as a suitable partner. It could be that the central bank will prefer a Dutch option as it did last year when it unsuccessfully tried, behind the scenes, to get ABN Amro to merge with ING.
In principal, the Dutch central bank does not get involved in the commercial processes of the free market, and certainly not visibly. Its official reaction is, 'we remain alert'. It will only intervene if the situation is critical. A declining stock market is not enough, but acute solvency problems are. Should Fortis fail to meet its solvency ratios, the bank will have to act.