ABN Amro's role in the consolidation of European banks

Let's talk banks again today. Not because I am so greatly fascinated by banks, but simply because there's something going on in this industry. After having covered Banco Pastor and Capitalia last month, I'd like to add some more general thoughts today, in particular on Dutch bank ABN Amro. The banking industry, and more specifically the European banking industry, is one that is very fragmented and awaits -in my humble opinion- a major consolidation in the years to come. This is the major reason why I think 2007 is going to be the year that is going to blow some dust off of these financials. This view is backed up by a report by Deloitte (PDF!), which compares the European banking industry with the American banking industry before a consolidation took place. Then there is the fact that Dutch banks generally have quite attractive (I would almost say 'competitive') P/E-ratios. For instance, ABN Amro is valued at 10.7 x earnings, ING Group at 9.8 and Fortis at 9.5 even. If you compare these valuations to those of their European peers, it becomes clear that there is somewhat of a discount. Dutch banks are also on the move. They are eyeing new markets and the best example of this was ABN Amro's acquisition of Banco Antonveneta, which may have opened up the Italian banking market for other European (or even American) players. There is certainly no consolidation needed in this industry in the Netherlands. The combined assets of country's five biggest banks made up 84% of total Dutch banks' assets. This is quite the opposite of Spain, where the five biggest banks made up 44% of total Spanish banks' assets, UK (33%), Italy (27%) and especially Germany (22%). But that does not mean that ABN Amro is not a potential prey for foreign banking groups, as was pointed out by rumours lifting ABN Amro's share price 3% today to Eur 24.10. CEO Rijkman Groenink has always maintained his view that ABN Amro is for sale if the right price is offered. However, the likelihood of ABN Amro being swallowed by a bigger fish is in my opinion quite low and I therefore tend to speculate that it will rather be the one playing its own strong role in the industry's consolidation. And this could be a reason why this bank is attractive, as shown in latest figures on the integration of Banco Antonveneta. Synergies appeared to be much higher than initially expected and restructuring costs much lower. The operating efficiency ratio of ABN Amro may have been higher than that of Antonveneta before the acquisition, but the deal was easy to justify: a similar package of banking services costs an Italian customer an average Eur 250/yr, compared to an average Eur 45/yr for Dutch banks' customers. Also, the customer satisfaction rate in the Italian banking industry is around 15% versus some 85% in the Dutch banking industry*. After seeking the right preys and after getting the required experience in restructuring and integrating these targets, the acquiring parties may be the ones thriving in the years to come. There is great potential in streamlining the diverse natures of Europe's banking industries and knowing that the one who moves first is often the one who is most successful, I would say that ABN Amro has a lot in store in the coming three years. Antonveneta might just be the start of a beautiful story. * 2004, KPMG research report 'Banking Beyond Borders'