Memo to Barclays: ABN Amro's US Banks Are a Mixed Bag March 20, 2007
Memo to Barclays: ABN Amro's US Banks Are a Mixed Bag
News that Barclays Plc (NYSE:BCS) is intent on merging
with ABN Amro Holding NV (NYSE:ABN) made us wonder: Just how are the US banking units of ABN performing these days? The answer looking at the financial statement data provided to the FDIC for year-end 2006 is so-so.
Based on the $121
billion in total assets of its subsidiary banks, ABN ranks 13th among US bank
holding companies ("BHCs"). BCS, which is one of the largest banks in
the world, does not even show up among the top 100 US BHCs because most of
its US operations are focused on securities and derivatives via its Barclays Capital unit.
The table below
shows the summary profiles from the IRA Bank Monitor
for the three US bank units of ABN as of December 31, 2006. As the figures suggest, the largest bank is a peer performer in its industry specialization category, but the second largest bank is in some respects down right mediocre.
The IRA
Bank Monitor: HOLDING COMPANY DRILL DOWN REPORT
The lead bank unit, LaSalle Bank NA, is currently performing just above peer in terms of ROA and
ROE, but this uptick in performance is a relatively new development. In fact, the $73 billion
asset commercial lender has performed at or below peer for
the past several years, a surprising fact given the strong performance of its peers
-- even in the mid-west. The above-peer ROE of 16% for 2006 came
after three quarters of below-peer results. The operative descriptive here is
instability in terms of the consistency of its financial
results.
With a ratio of net interest
income to gross noninterest income of 2:1 and an efficiency ratio of 50%,
LaSalle Bank NA falls in the middle of the peer group. In terms of credit
performance, the bank's default experience peaked at 90bp at the end of 2002,
but has since trended below peer to just 13bp at the end of 2006.
Loss Given
Default ("LGD") for LaSalle Bank NA was consistently above-peer through the
2001-2003 period, well above 90%, but then plunged down to the 50% level and
gyrated wildly through the past two years, including two quarters of negative
defaults, until it ended 2006 at a very respectable 56%. Again, the
term which comes to mind looking at the bank's five year credit performance
history is unstable.
The second largest US unit of ABN, LaSalle Bank Midwest
National Association, ended 2006 well below peer in terms of ROA and ROE.
Again, unstable is the adjective that occurs to us looking at this bank's
financial results.
LaSalle Bank Midwest National Association began 2000 performing above peer in terms of ROA, then dropped well-below peer in 2001. As 2002 began, LaSalle Bank Midwest surged well-above peer, reaching a remarkable annualized ROA of almost 3% in Q1 2003. The bank's performance trended lower from that point, although it finished 2003 at a very respectable 2% ROA, but from there the bank fell below peer and has remained so ever since.
More alarming than the
financial performance is the credit experience of LaSalle Bank Midwest. While
the LGD for the peer group has been trending down through 2006, the bank's LGD
has been rising steadily and finished the year at almost 75% vs. 23%
for the peer group generated by the IRA Bank Monitor.
The WAM on the loan portfolio of LaSalle Bank Midwest finished 2006 at over 6 years vs. 3.6 years for the peer group, but actually started 2006 at almost 9 years -- an enormous amount of duration risk. While the combined WAM for the three US banks in the ABN group is 3.4 years, a bit below peer, the long maturity of LaSalle Bank Midwest is, to us, remarkable.
Bottom line: A number of analysts have mentioned that acquiring ABN is a good way for BCS to grow its US banking business. If we were the folks at BCS responsible for diligence on this transaction, we'd want to know why the performance of the two largest US bank subsidiaries of ABN has been so variable.
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