Bank Business Model continues to Crumble

Pfäffikon SZ, Switzerland – For decades on end the Rabobank had been the healthiest bank of the Netherlands and was in this regard well matched to the best in the world. However, since the outbreak of the credit crisis, a lot has changed. The Rabobank finds itself in the corner where the blows are being felt and is even forced to sell its silverware. The unique and deeply implemented cooperation model continued to crumble under the guise of efficiency benefits. Local Rabobanks became umbrella banks which offered false security whereby the power continued to shift towards Utrecht and Eindhoven.

Roots cut
By cutting the uniquely local roots in favor of a so-called efficiency benefit, the Rabobank has slowly but surely bitten off far more than it can chew. Today it is struggling with an image problem. Moreover, the Rabobank lost its AAA status and seems a long way away from regaining it. The previously aimed efficiency benefit has reversed itself into a gaping hole of losses whereby I ask myself if the same would have happened had the local Rabobanks stood firm.

Floating Rabo investors
Something else that stands out is that the asset management clients of the Rabobank are often excessively overweighted in the bank’s member certificates and additionally they are crammed with various Robeco products. The argument that was often used in that context was that the bank should also earn something “extra”. Now that the Robeco – to my sorrow – has fallen into Japanese hands, these Rabo investors are floating all around the world and are getting tossed in every direction. Surely that could not have been the intention of the Rabobank as the as-decent-as-can-be Dutch financial institute?

Draijer’s move
In any case, it is up to the new chairman of the board Ir. Wiebe Draijer to turn things around. Draijer is relatively young and not a banker but a consultant, which is a big difference in the financial world. Thinking differently has its advantages, but also creates risks. Draijer has embarked on a charm offensive and explains that the bank had been doing “too well” with regards to the Libor Scandal. I find this explanation cheap and short sighted. The Rabobank has been flourishing for more than one hundred years. The mission statement of the first farmer’s lending bank was to “avert the usury, to stand by the peasant in need but also to promote neighborly love, industriousness and temperance”. Little is indeed left of that initial mission statement.

Hurdles ahead
The task and challenge for Draijer are grand, whereby I sincerely hope he will successfully complete the job. But the column of hurdles ahead is long. Undoing the dents done to the bank’s image in particular, will take time and a lot of effort. Moreover I find that Draijer’s ambition to get the Rabobank the strongest balance sheet in the Netherlands, the most important mission, by far. Without going into Draijer’s “Silicon Valley ideas” I find that the business model for namely European banks continues to crumble. Banks are forced to keep larger capital buffers, which doesn’t help the revenue model. Draijer’s first ideas seem to suggest he’s thinking more in terms of software solutions and platforms.

Cutting
In order to maintain the profitability of the bank, there is a good chance that Draijer at some point will make large cuts in the workforce. This by the way not only applies to the Rabobank, but for other banks as well. The bank employee anno 2020 is increasingly becoming a civil servant with a feeling for software. Additionally, one must consider that in The Netherlands the banks rank at the top in terms of employment opportunities. The further crumbling of the business model in combination with the ban on, or limit of, many provisions can come to cost the banking sector dearly.

It remains for me to wish you a good weekend.


Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.