Rabobank proves rock amid chaos

As one of the world's highest-rated banks, Dutch co-operative Rabobank is benefiting from the "flight to quality" spurred by the current financial turmoil, and is confident of avoiding any fallout from the feared meltdown in Eastern European economies that may wound other Western European banks.

Here in New Zealand, where the bank introduced its successful RaboPlus low-cost direct banking model several years ago, it remains on an impressive upward trajectory, although it still commands a relatively tiny market share.

RaboPlus New Zealand's most recent publicly available data - for the nine months to September last year - shows hefty growth in after-tax profit of $31.64 million from $19.76 million for the previous corresponding period. Retail deposits at that time were $2.45 billion and RaboPlus general manager Mike Heath last week said they had continued to grow and now stood at about $2.7 billion.

Its parent's recently released 2008 year results, however, were solid rather than spectacular. Net profit of 2.8 billion ($6.8 billion) was still a record, Ralf Dekker - a director at Rabobank International - told the Business Herald last week, but the rise at 2 per cent was historically low.

"That has a lot to do with the market, both the financial markets and thus the valuations of positions as well as credit losses."

In fact, he says, potential credit losses as the global and European economies deteriorate, "might make 2009 a difficult year, even for us".

While there have been growing fears that the Western European banks' loans to Eastern European economies may prove a bigger problem than the losses they sustained on their US sub-prime holdings, Dekker downplays the level of Rabobank's exposure.

"We have a majority share in a Polish bank BTZ Bank, and the rest is owned by the Polish Government. That bank has been quite profitable in the last few years, but I would not expect to see their profits flatten or even decline over the coming year.

"It's clear the Eastern European economies are doing very poorly, including the Polish one. That doesn't mean there will be important losses, certainly not for Rabobank. Some European banks have big exposures we've been quite jealous of in previous years, but in some countries such as Hungary, Bulgaria and Russia banks might suffer substantially."

That said, Dekker doesn't see much potential for systemic risk among Western Europe's banks as a result of the problems to the East.

"I think the largest risk for systemic failure is in the financial markets and my guess is we've seen the worst of that now."

And, in what Dekker says is an extremely unlikely hypothetical situation, if RaboBank was to get into trouble in Europe, there would be little risk of contagion to its subsidiaries such as New Zealand and Australia.

"In both New Zealand and Australia Rabobank's operations are balanced with all lending backed by retail deposits. That's the nice formula we have here in Oceania. We are in hardly any way dependent here on what the Dutch mother company would do."

In fact, the parent bank's AAA rating, reconfirmed last month by S&P and Moody's, is a strength right now.

"There's more and more flight to quality. A few years back it was essential to offer the highest rate to attract clients. That still plays a role but the security aspect has grown in importance, and we think that's only fair, as being a AAA bank comes with a cost, we have to keep a high capital adequacy ratio. Now that is changing people are prepared to take a slightly lower rate for security."

Then again Dekker sounds a less than 100 per cent certain that his bank will retain this vaunted status, not because of any internal issues but because the entire international ratings system may itself be altered as a result of the recent turmoil.

He expects Rabobank will hang on to its AAA rating "as long as banking as a profession can be AAA".

"I've been in banking since 1982 but I've never seen the moves we've seen in the last year. Credit rating agencies have come under tremendous pressure as some of the mishaps we've seen in the market are partly their doing. If there's any continuity there in their policies I wouldn't see any reason to change Rabobank's rating but continuity is something that is hard to come by these days."