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Advisory report on the future direction of SNS Bank

June 2016

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Content

Summary & conclusions 4

1 Introduction 7

2 SNS Bank strategy and profile 102.1 Introduction 10

2.2 SNS Bank’s current position 10

2.3 Strategicfundamentalsandprofile 15

2.4 SNSBank’sviewsofitsfutureprofile 18

2.5 OtherviewsonSNSBank’sfutureprofile 19

2.6 Conclusion 20

3 Transition to future profile 233.1 Starting points 23

3.2 Transition and improvement plan objectives and monitoring 23

3.3 Anticipatedreturnconsiderations 25

4 Exit preconditions 284.1 Introduction 28

4.2 IsSNSBankreadyforsale? 28

4.3 Isthefinancialsectorstable,inparticularformortgageandsavingsbanks? 29

4.4 IstheresufficientmarketinterestinasaleofSNSBank? 31

4.5 Willcapitalexpendituresberecouped? 32

5 Future ownership structure considerations 35

Appendix 38ResponseManagementandSupervisoryBoardofSNSBank’sopinion 39

ReactionWorksofSNSBank’sadvice 42

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Summary & conclusions

Inhisletterof22May2015totheHouseofRepresentatives(‘SaleofABNAMRO’),

theMinisterofFinancestatedhisintentiontorequesttheTrustOfficeFoundationfor

theManagementofFinancialInstitutions(Stichting administratiekantoor beheer

financiële instellingen,hereinafter:NLFI),toissueanadvisoryreportonthefutureof

SNSBankbymid-2016.Bysubmittingthisletter,NLFIcomplieswiththisrequest.

NLFIhasprepareditsadviceinlinewithNLFI’slegalpurposeaslaiddowninthe

TrustOfficeFoundationfortheManagementofFinancialInstitutionsAct(Wet stichting

administratiekantoor beheer financiële instellingen,hereinafter:NLFIAct).Indrawing

upthisadvisoryreport,NLFIhasbeenguidedbythestatutorydescriptionofNLFI’s

goals.

Initsinvestigation(basedon,inter alia,apublicconsultationofstakeholdersand

opinionmakersfromacademia,thefinancialsector,regulatorybodies,interestgroups

andcivicorganisations),NLFIfoundthatthereisawidespreadinterestinthefuture

strategicpositionofSNSBankbeingthatofasaferetailbankofferingsimple,

transparentandfairlypricedfinancialproducts,operatingonthebasisofanopera-

tionallyexcellentbusinessmodelanddeliveringacompetitivedividendyield.NLFI

hasassessedSNSBank’sstrategicplan-named‘SpotOn’-anddeterminedthatthe

abovementionedstrategicprinciplescanbemet,shouldtheplanbesuccessfully

executed.Theexecutionofthestrategicplanalsomeetsthepreconditionssetbythe

EuropeanCommissioninthecontextoftherestructuringplan.

NLFIisoftheopinionthatSNSBankneedsmoretimetoacquireastrongposition

withintheDutchbankingsectorandiscurrentlynotyetreadyforanexit.Whilethe

financialandoperationalresultshaveimprovedeversinceSNSREAALwasnation-

alised,thebankisstillconfrontedwithanumberofoperationalandstructural

challenges.Theprimaryreasonsfortheexistenceofthesechallengesare:the

currentlyextremelylowinterestrates,whichresultinpressureonmarginsand

volumes;theupwardpressureoncostsincurredbySNSBankduetohigherregulatory

costsandthesplit-offoftheformerparentcompany;anduncertaintyaboutthecapital

structureduetotheuncertaineffectsof,inter alia,thenew‘BaselIV’regulations.

NLFIbelievesthateffectingoptimumlong-termvaluecreationrequiresthatSpotOn

beexecutedoveraperiodoftwotothreeyears,duringwhichtimethebankwillat

anyratehavetheopportunitytobuildupasolidtrackrecordintermsofreducing

costsandachievingsufficientdividendyieldonthebasisofabalancesheetcomprising

safeassetsandasolidliquidityandcapitalstructure.

ThemarketatpresentisinsufficientlyinterestedinasaleofSNSBankonconditions

acceptabletotheState,partlyinconnectionwiththecurrentuncertaintiesarising

from‘BaselIV’regulations.SuccessfulexecutionofSpotOnwill,intheopinionof

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NLFI,resultinarevenuemodelfeaturingalowriskprofileandadividendyieldthat

maybeattractivetoawidegroupoflong-terminvestors.Hence,theexecutionof

thedesiredimprovementplandoesnot,fortheyearstocome,resultinirreversible

measuresbeingtakenoroptionsbeingprecludedinrespectoffutureownership

structures.

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1 Introduction

Inthisletter,theTrustOfficeFoundationfortheManagementofFinancialInstitutions

(Stichting administratiekantoor beheer financiële instellingen),operatingunderthe

nameofNLFI,providestheMinisterofFinancewithitsadviceontheoptionsopento

SNSBankinrespectofitsfuturedirection.Itsubmitsthisletterinresponsetoyour

request,madeinyourletterof22May2015totheHouseofRepresentatives(‘ABN

AMROsale’).1Whenmakingtherequest,youemphasisedtheimportanceofSNS

Bankacquiringastrong,independentpositionwithintheDutchbankingsectorbefore

adecisioncanbemadeonthefutureofSNSBank.

Inthisadvisoryreport,NLFIprovidesanoverviewofthecurrentpositionofSNSBank,

basedonitscurrentviewsonthepossibilitiesofmeetingthefourpreconditionsfor

allowingSNSBanktoreturntotheprivatesector,assetbyyourpredecessor.2 In so

doing,whereverpossible,NLFIreferstothevan Hijum/Nijboer motion on safeguarding

theutilitybankcharacter(nutsbank karakter)ofSNSBank3andtheMerkies/Nijboer

motiononconductinganinvestigationintohavingSNSBankremaininStatehands.4

Atthesametime,thisadvisoryreportprovidesanoverviewofthefundamental

startingpointsthatafutureSNSBankstrategymaybebuilton,withoutexcluding

any sale options.

Indrawingupthisadvisoryreport,NLFIhasbeenguidedbythestatutorydescription

ofNLFI’sgoals.Indischargingitsstatutorytaskandinexercisingtherightsassociated

withthesharesheldbyNLFI,NLFIhasfocusedprimarilyonthefinancialandeconomic

interestsoftheState,whiletakingintoconsiderationtheinterestsofthecompany,

itsassociatedbusinessesandtheemployeesinvolved.

NLFIseekstoalignitsadvicewiththefundamentaltenetsoftheGovernmentPolicy

onGovernmentHoldingsMemorandum2013.5Itsadviceisalsoinkeepingwiththe

decision-makingframeworkphrasedbythePrivatisation/EmpowermentofGovernment

ServicesParliamentaryInquiryCommittee.6Thisdecision-makingframeworkdefines

fivedifferentphases.Yourministryhasindicatedthattheprocessiscurrentlyinthe

phasewhereadecisionistobetakenontheprivatisationdesign,i.e.phasetwo.As

ofyet,noirreversiblestepstowardsprivatisationarebeingtaken.

1 ParliamentaryDocumentsII,sessionyear2014-2015,31789,no642 ParliamentaryDocumentsII,sessionyear2010-2011,28165,no1173 ParliamentaryDocumentsII,sessionyear2015-2016,343464 ParliamentaryDocumentsII,sessionyear2013-2014,32013,no455 GovernmentPolicyonHoldingsMemorandum,18October2013,annexeto:ParliamentaryDocuments

II,sessionyear2013-2014,28165,no1656 Privatisation/EmpowermentofGovernmentServicesParliamentaryInquiryCommittee(2012),

“Verbinding Verbroken?”Inquiryintotheparliamentarydecision-makingprocessontheprivatisationandempowermentofgovernmentservices,Senate,sessionyear2012-2013,C,A

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Inordertosubstantiateitsadvice,NLFIreliedonapublicconsultationonthedesired

roletobeplayedbySNSBankintheDutchbankingsectorandanexplorationofthe

strategicoptionsavailabletoSNSBankconductedbytheBostonConsultingGroup

ontheinstructionsofNLFI.Thisadvisoryreportwaspartlybasedonintensivecontact

betweenNLFIandSNSBank.WealsooweourthankstotheMinistryofFinanceand

De Nederlandsche Bankforprovidingtheiropiniononearlierversionsofthisreport.

Inaddition,discussionswereheldwithanumberofmarketexperts,legaladvisers

andotherexpertswhosharedtheirviewswithus.Weareverygratefultoallthose

whohelpedusproducethisdocument.

This is a translation of the original text in Dutch. In case of divergences between the

texts, the text of the Dutch version shall prevail.

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2 SNS Bank strategy and profile

2.1 Introduction

ThisChapterprovidesanoverviewofSNSBank’scurrentpositionandprofile.Based

ontheparliamentarydebateofNLFI’spreviousrecommendations,BCG,onthe

instructionsofNLFI,conductedapublicconsultationonthedesiredroleofSNSBank

intheDutchbankingsector.NLFIhascomparedtheresultswithSNSBank’sstrategic

plan.ThisChapterprovidesanoverviewofhowSNSBank’selaborationofthestrategy

anditsfutureprofileisinlinewiththeviewsheldbyothersonthefutureprofileof

SNS Bank.

2.2 SNS Bank’s current position

SNSBankwassplitofffromSNSREAALon30September2015.Thiswasprompted

bythebooklossresultingfromthesaleofVivat(REAALN.V.)bySNSREAAL,which

wasaccountedforontheconsolidatedlevel,butcarriedoverintothecalculationof

theprudentialcapitalheldbySNSBankattheconsolidatedlevel.TheStateacquired

thebankfromSNSREAALandtransferredcontrolofthesharesinthebanktoNLFI.

Forthepurposesofexercisingthiscontrol,aholdingcompany(SNSHoldingB.V.)

wasfounded,whichownsallsharesinSNSBank.NLFImanages100%oftheshare

capitalandexercisesfullvotingrightsinSNSHolding.TheArticlesofAssociationof

SNSHoldingprovidethatpriorpermissionbyNLFIisrequiredformajordecisionsby

SNS Bank.

Profile SNSBank’shistorydatesbackto1817,whenthe‘Maatschappij tot Nut van ‘t Algemeen’

-‘t Nutforshort-wasfounded:thefirsttrueutilitysavingsbank.Utilitysavings

banksgenerallypursuedsocialovercommercialgoals,aiming,forinstance,working

tohelppeoplebecomemoreself-reliant.Theywerecharacterisedbyconverting

depositsintosafeassets.Inthesecondhalfofthe20thcentury,thesavingsbanks

expandedtheirportfolioofassets,whichnowalsoincluded,forexample,residential

mortgagesandconsumercredit.Thisperiodwasalsocharacterisedbymergersof

savingsbanks,manyofwhichmergedintoSNS,whichstandsfor‘Samenwerkende

Nederlandse Spaarbanken’,orAssociationofDutchSavingsBanks.

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Presently,SNSBankistheNetherlands’fourthlargestbankintermsofassetsand

marketposition.ThebankispredominantlyactiveintheDutchretailmarket.7 Its

rangeofproductsonofferconsistsofthecoreproductgroupsofpaymentproducts,

mortgagesandsavingsproducts,towhichcanbeaddedconsumercredit.Inaddition,

SNS Bank serves as a distributor of insurance and investment products. SNS Bank

hasarelativelyhighnumberof‘secondary’customers-thatis,customerswithonly

oneproduct-whencomparedtoABNAMRO,INGBankandRabobank,allofwhich

attractmore‘primary’customers,thusrealisinghighercross-sellingrates.

SNSBankpursuesamulti-brandstrategy.ThebrandsSNS,Regiobank,ASNBank

and BLG Wonenallfeaturetheirownpositioningandassociatedtargetaudience.

Regiobank,profiledasthe‘bankclosetoyou’,andASNBank,profiledas‘the

sustainablebank’,bothhaveaclearanddistinctivepositionwithinthemarket.The

SNSbrandisprofiledasthe‘normalbank’.ThevariousbrandssharethesameIT

platform for every product group.

SNSBank’smissionisdetailedinamanifesto,whichstatesthatthebankfocuseson

bankingwithahumantouch’inofferingitsservices.8Initsmanifesto,SNSBank

statesthatitsfinancialservicesarefocusedonutilityforthecustomer(insteadofon

yield),financialstrengthandsustainability.SNSBanktranslatesthemanifestointo

servicesforitscustomerssuchasamortgagetermservice,aninterest-freetemporary

overdraftandpurchaseprotectioninsuranceforpurchasesmadeviapayment

accounts.

Competitive positionApproximately90%ofSNSBank’srevenueisderivedfrominterestincomefrom

mortgages.Retaildepositsinsavingsaccountsmakeupabout60%oftotalassets.

Theloan/depositratiois105%.Thebank’smarketshareshaveincreasedsinceitwas

nationalised.Bytheendof2015,SNSBankhada4.1%marketshareinnew

mortgageproduction.Itssavingsmarketshareamountedto10.9%.SNSBank’s

mortgageportfoliomarketsharedroppedfrom7.4%in2013to6.9%in2015.

7 Inthisconnection,SNSBanksoldSNSSecurities,whichisactiveinthefieldofsecuritiesbroking,capitalmarkettransactionsandassetmanagement,lastyear.

8 Thetextofthismanifestoisavailableat:https://www.snsbanknv.nl/over-ons/missie-strategie/ons-manifest

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Figure 1: SNS Bank market shares.

Becauseofthepersistentlylowinterestrates,thebank’snetinterestincomemay

comeunderpressure.Thisisdue,inthefirstinstance,tothepossibilitiesoffurther

reducinginterestonsavingsbecomingmorelimited,whilemortgageloaninterest

ratesaregoingdown.Second,thepersistentlylowinterestratesresultinfurther

shiftsinbothcustomerbehaviourandthecompetition.Ifinterestratesarelow,

customersaremoreinclinedtopayofftheirmortgageearlyandtakeoutanew

mortgageloanatalowerinterestrate,despitethecustomarypenaltyfeestobepaid

whenpayingoffearly.Inaddition,customersmoreoftenoptforalonger-term

mortgage,amarketsegmentthathasbecomeincreasinglydominatedbyinsurers

andpensionfundsoverthepastfewyears.Thesepartiesareparticularlyactivein

thissegmentduetothepreferredmatchingoftheirlong-termliabilitiesandassets.

Thesemortgagesareoftenofferedby‘regiepartijen,whicharecompaniesfinanced

by pension funds and asset managers.

Figure 2: Dutch mortgage market share by type of mortgage lender. Source: IG&H, Mortgage

Update Q4 2015

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ForSNSBank,theincreasingcompetitionbynon-bankstranslatesintorisingpressure

onbothinterestmarginsandmortgageportfolio.In2015,thetotalprivatemortgage

portfoliodecreasedby3%(EUR1.5billion)toEUR45billion,astotal(early)repayment

outpacedtheproductionofnewmortgages.SNSBankaimstoincreasetheretention

ratebyintensifyingcontactwithmortgageesandexpandingitsmortgageportfolio.

Cost structureComparedtothethreemajorDutchbanks,SNSBank’sorganisationisrelatively

simplystructured.Consequently,itisabletoserviceitsbrandsinacost-effective

manner.AsforbothSNSandRegiobank,distributionismostlybywayoffranchising,

thecostsincurredbySNSBankarenotablylowerthanisthecaseforsimilarbanks.9

However,thispositionhasworsenedsomewhatinrecenttimes.SNSBank’soperational

costsareatastructurallyhigherlevelthantheyusedtobe,partlybecauseofthe

increaseinmortgage-relatedactivitiesandthesplit-offfromitsformerparent

company.Inaddition,thecostsarisingfromstricterregulationhaverisensharply.

Thescalingupofthemiddleoffice,necessarytohandletheincreasedlevelof

mortgage-relatedactivitiesandtoimproveoperationaleffectivenessandthecontrol

framework,ledtohighercostsbeingincurredin2015.

Figure 3: SNS Bank operational expenses (including statutory levies, in millions of EUR).

Capital structureThebank’sregulatorycapitalisdifferentiatedtoalimiteddegreeonly.Tier1capital

isfullymadeupofcommonequity.Onthebasisofcurrentregulations,SNSBank

hasaCommonEquityTier1(CET1)targetof14%inplace.However,atpresent,the

CET1ratioissignificantlyhigher(endof2015:25.3%).Thissignificantdeviationfrom

9 Duetotheuseofafranchisingsystem,apartoftheincome,too,accruetothefranchisees.However,asthesereductionsincostsandbenefitsarenotproportionallyrelated,SNSBankoperatesatalowercostlevel(costs/totalassets)thantheDutchmajorbanks.

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thetargetfigurewasnecessary,untilrecently,inordertomaintainthe(unweighted)

leverageratio.Bytheendof2015,theleverageratiowas4.7%,whichwashigher

thanthe2018minimumratioestimateof4%.

Inaddition,theCET1ratioofSNSBankisrelativelyhighduetouncertaintyabout

thenewcapitalrulesandtheirpossibleimpact.TheBaselCommitteeonBanking

Supervisionhasrecentlymadeanumberofproposalsaimedatlimitingtheinfluence

ofinternalriskmodelsusedtodeterminerisk-weightedassets(internalratingsbased

approach)inanumberoffields(includingcertaincounterparty-relatedrisks,

mortgagesandoperationalrisks).Theseproposalsformpartofamoreexpansiveset

ofproposalsrelatedtothebanks’capitalmanagement,madeinconnectionwiththe

so-called‘BaselIV’regulations.Theseproposalsmayyetbeamended,alsoonthe

basisofaQuantitativeImpactStudyperformedontheinstructionsoftheBasel

Committee.ExpectationsarethattheBaselCommitteeonBankingSupervisionwill

issueadefinitivesetofrulesbytheendofthisyear.10

GiventherelativelylowriskweightsDutchbanksattachtotheirmortgageportfolio

onthebasisofhistoricallylowcreditlosses,thetighteningofcapitalrequirements

willspecificallyaffecttheDutchmortgagemarket.ThisalsoappliestoSNSBank.

SNSBankcurrentlymakesuseofitsownriskmodelstocalculatetherisk-weighted

assets(RWA)ofresidentialmortgages.Thiscurrently(endof2015)resultsinan

averageRWAdensityof16%.WhiletheexactimpactoftheBaselCommittee’s

proposalsisasyetunknown,managementexpectsthatimplementationofthe

proposedadjustmentswillresultinasignificantincreaseoftheriskweightingofthe

SNSBankresidentialmortgages.ThetotalimpactonSNSBank’srequiredcapital

levelcouldwellbesignificant,consideringthehighproportionofresidentialmortgages

onitsbalancesheet.ShouldtheBaselCommittee’scurrentproposalsbeadopted

andimplemented,managementbelievesthatthecapitalrequiredtomeetthe

leverageratiowillbelowerthanthecapitalrequiredtomeettherisk-weighted

targets.

Inadditiontofocusingontheinfluenceoftheharmonisationofmortgageriskweights,

theregulatorshavealsobecomemoreawareofthevulnerabilitiesofso-called

monolinebanks-i.e.,specialisedbankswhoseassetsderivefromaspecificsetof

products.Thismonolinenatureincreasesthebank’sconcentrationrisk.Becauseof

itsownmonolinenature,SNSBank’sstatutorySREPratio11of11.75%isrelatively

high.WhenincludingtheSifibuffer12of0.25%SNSBankisrequiredtohold,SNS

Bank’scurrentminimumCET1ratiois12%.SNSBank’smonolinebusinessmodel

alsotranslatesintoasignificantcontractualtermmismatchbetweenassets(which

arelongterm)andliabilities(mostlyshortterm,directlywithdrawablesavings),

resultingindistinctliquidityriskinthebusinessoperations.

10 RegulationsintroducedbytheBaselCommitteecanbeconsideredtoanticipateonEuropeanregulations.Itasyetunclearwhen-andtowhatextent-theBaselCommittee’sproposalswillbeadopted.Expectationsarethatthiswilltakeacoupleofyears.

11 ThisistheminimumcapitalratiorequiredbythesupervisorundertheSupervisoryReviewandEvaluationProcess.

12 TheSifibufferisanadditionalcapitalbufferforbanksdeemedtobesystemicallyimportant.

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ConclusionTheprofitabilityofSNSBankisheavilydependentonthedevelopmentsintheDutch

savingsandmortgagemarketandthemaximumobtainablelevelofcustomerservice

efficiency.SNSBankiscurrentlyconfrontedwithanumberofoperationalandstructural

challenges.Theprimaryreasonsfortheexistenceofthesechallengesarethecurrently

extremelylowinterestrates,whichresultinpressureonthemarginsandvolumes,

theupwardpressureonthecostsincurredbySNSBank-partlyduetohigher

regulatorycostsandthesplit-offoftheformerparentcompany-anduncertainty

aboutthecapitalstructureduetotheuncertaineffectsof,inter alia,thenew‘BaselIV’

regulations.NLFIbelievesthatSNSBankbeingabletoaddressthesechallengesis

crucialtothebankhavingalastingfuture.

2.3 Strategic fundamentals and profile

OntheinstructionsofNLFI,strategicadvisoryfirmBCGhasexploredthepossible

strategicalternativesopentoSNSBank,assumingthebank’sstartingpositionas

detailedintheprevioussection.Thisexplorationispartlybasedonapublic

consultationonthedesiredroleofSNSBankintheDutchbankingsectorconducted

byBCG(refer to Section 2.5).ThestrategicalternativesexploredbyBCGare:

• RetainingSNSBank’scurrentprofileandcurrentbusinessmodel;

• Retainingthebankasitisnow,butaddingnewservicessuchasmakingits

paymentplatformavailabletothirdparties,includingsmallerbanksand‘fintech’

companies,and/orfocusingonaspecifictargetclientsegmentliketheself-

employed;

• Becominga‘simpleretailbank’withafocusonofferingthreecoreproducts-

mortgages,paymentproductsandsavingsproducts-andcompetitivepricing,

basedonanefficientbusinessmodel;

• Becominganichebankwithafocusonasingleproduct,like‘green’mortgages,

orasingletargetclientsegment,suchastheself-employed;

• BecomingamortgageproviderbasedontheDanishmodel,featuringanexact

contractualtermmatchbetweenoutstandingmortgagesonthebank’sbalance

sheetandthebondsissuedtofinancethem;

• Becomingaone-stopshopofferingawiderangeoffinancialservices,forinstance

by becoming a bancassurance group or by becoming part of a consortium;

• Becomingafourthmajorbank,offeringprivatebankingandcorporatebanking

activitiesbyenteringintoajointventureormergingwithother,domesticor

foreign,banks;

• Splittingupthebankintoitsvariousbrandsordismantlingitbywayofassets/

liability transactions.

BCGdevelopedanassessmentframework,basedalsooninputfromNLFI,toscore

thealternativesbasedonvariouscriteriarelevanttothestakeholders:recoupingthe

investmentbytheState,stabilityforexistingcustomers,contributingtoadiverse

bankingsector,alignmentwiththecurrentstrategy,alignmentwiththebank’scurrent

capabilities,preservationofjobs,feasibilityofthechangeprocessesandbeing

relatedtoSNSBank’scurrentactivitiesandbusinessmodel.Givingequalweightto

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thevariousassessmentcriteria,BCGfindsthefollowingfourstrategicalternatives

mostsuitable:

1. CurrentSNSBankprofileandbusinessmodel

2. Current SNS Bank but adding new services

3. CurrentSNSBankwithafocusonaspecifictargetclientsegment

4. The‘simpleretailbank’offeringalimitedrangeofproducts

NLFIhasbaseditsownassessmentofthevariousprofilingoptionsopentothebank

ontheabovealternatives,alsotakingaccountofthebank’scurrentspecificbusiness

model,itspositionwithintheDutchbankingsector,thedevelopmentsinthesector

andthebank’scompanyculture.Moreover,forthetimebeing,itisimportantthat

thefuturestrategyandprofileofSNSBankdoesnotprecludeanyexitoptionsor

futureownershipstructures.

European Commission preconditionsByvirtueoftheEuropeanCommission’sdecisionof19December2013,duetothe

Statesupportprovidedandtheimpactthereofonthecompetitiveconditions,a

numberofrestrictionsapplytoSNSBank.Someoftherestrictionsrelevanttothe

SNSBankstrategyfortheperiodupuntiltheendof2017include:

• Aprohibitionagainstacquiringcompaniesorassetportfolioswhichcanbe

deemed to form a company;13

• Aprohibitionagainstpursuingaggressivecommercialstrategiesthatwouldnotbe

possiblewithouttheStatesupport;

• Aprohibitionagainstenteringthepropertyfinancemarket.

Basic principlesGivenitshistoricprofile,SNSBankisabankfocusedonretailactivities,whereby

offeringmortgageandsavingsproductstotheDutchmarketconstitutesakeypartof

itsbusinessmodel.Historically,thebankhashadalowriskprofileandis‘closetothe

customer’.ThissetsSNSBankapartfromthethreemajorDutchbanks,whichoffer

variousproductsandservices,includingto(large)enterprises,andareactiveabroad.

AsconcernsSNSBank’sprofile,NLFIbelievesthefollowingstartingpointsapply:

• Low risk profile; no diversification

Beingaretailbank,itiscrucialthatSNSBankmaintainsalowriskprofile.This,in

viewoftheuniquerisksassociatedwiththebank’smonolinenature,whichmakes

itvulnerabletoliquidityandsolvencyrisksshouldinternalorexternalcircumstances

change.Thisrequireshigh-levelcreditriskcontrolandbalancesheetmanagement.

Lowriskprofilebanksprimarilyturntheirliabilitiesintolowriskassets-whichcan

beconvertedintocashresourcesifnecessary-andmaintainacautiouscapital

management attitude.

SNSBank’slowriskprofileisatoddswithstrivingforbusinessdiversification,

bothgeographicallyandasconcernstheproductsonoffer.Thebank’sfocus

shouldremainontheDutchretailmarket(payment,savings,mortgages)andit

13 Thisrestrictionappliesuntil19December2016.

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shouldnotsignificantlyexpandintorelatedactivitieslikeextendingcredittoSMEs

orgrantinghigherriskconsumerloans.ThelimitedsizeofSNSBank,ascompared

tothemajorthreeDutchbanks,meansthatSNSBankislesswellsuitedto

independentlyofferotherproductsatequalpricesandconditions.SNSBank

could,however,takeontheroleofdistributorofsuchproducts.

Maintainingalowriskprofilealsomeansthatthebankforgoesacceptinghigher

riskswithinproductcategories.Thebankshouldnot‘chaseyield’andinsodoing

acceptmoreriskthanisdesirabletomaintainsustainablebusinessoperations.

Asearchforyieldwillincreasetheriskofmakingthewrongriskacceptance

choicesandmainlyattractingcustomerswithahighriskprofile(adverseselection).

Byofferingsimplemortgagestoretailcustomersonthebasisofcautiouscredit

management,alowriskprofilecanbemaintained.Whenassessingwhetherto

offernewproducts,theproductalsoneedstofirstbecheckedagainsttheprinciple

ofmaintainingalowriskprofile.Themortgageloansonthebalancesheetneedto

bestandardised,soastoenabletheiruseinsecuritisationandattractECBfunding.

Thetrendtowardslonger-termmortgagesisincreasingthepressureonmaturity

transformationservices,whichinturnincreasestheimportanceofbeingableto

convertlong-termassetsintoshort-termcashresourcesintheformofECB

collateral.

• Cost management; efficiency

ThecombinationofSNSBank’sspecialisedrangeofproductsanditsmorelimited

sizeascomparedtothethreemajorDutchbanksrequiresthebanktohave

excellentcostmanagementsystemsinplacetoremaincompetitiveintheDutch

savingsandmortgagemarket.DespiteSNSBank’shistoricallystrongcostbasis,

recentyearshaveseenanincreaseinoperationalcosts.Inpart,thisisduetoits

smallcostbasisactuallyincreasingasaresultofnewregulatoryrequirements,

whileINGBank,ABNAMROandRabobankwereactuallyabletoimplementcost

savingsprogrammes.Asaconsequence,whenSNSBank’sefficiencyiscompared

tothatofthethreemajorDutchbanks,asmeasuredbycost/incomeratio,its

positionhasworsened.14NLFIbelievesthatSNSBankneedstoshowsignificant

improvement in its operational cost development if it is to remain competitive in

themediumandlongterm.Exclusivelyofferingasimplerangeofproductsmight

helpreducecosts,asmightmoreefficientinternalprocessesoperations.

Inaddition,savingscanberealisedbystaffrationalisationperformedincombination

withfurtheroptimisationofthemulti-labelsingleplatformandreductionofthe

administrativeandsalarycosts,whichhaveincreasedsincethesplitofffromthe

former parent company.

TheaforementionedstartingpointsprovideampleroomtoprojectSNSBankasa

lowcostproducercautiousinacceptingrisk,whichfitsnicelywiththeprofileofa

simpleretailbankaspresentedbyBCG.Inaddition,SNSBankshouldbeableto

capturesufficientmarketshareintheDutchsavingsandmortgagemarket,inline

14 TheSNSBank’s2015cost/incomeratiowas53%,comparedtoABNAMRORetailBank’s55%,INGBank’s56%andRabobankDomesticRetail’s70%.

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withmarketconditions.Itthereforeneedstosetcompetitivetargetsthataretailored

tothebank’slowriskprofile.

2.4 SNS Bank’s views of its future profile

Eversincelate2015,whenitwasde-mergedfromSNSREAAL,SNSBankhasbeen

workingonastrategicplan-namedSpotOn-andoncreatingafutureprofilefor

thebank.Thebankconsideredvariousoptions:

• Beingacommercialbankofferingretailactivities,intheveinofthethreemajor

Dutchbanks;

• Beinga‘socialbank’providingservicestothecustomerandmakingapositive

contributiontosocietyasawhole;

• Beingautilitybank/statebankfocusedonlyonmanagingsavingsdepositsand

providing payment services.

SNSBankpreferstheprofileofbeinga‘socialbank’.Thisprofileischaracterisedby

anumberoffeatures:

• Onthebasisofitssocialrolewithintherealeconomy(warehousing,risktrans-

formation,moneycreation),SNSBankofferssimplecoreproductsinsuchaway

astobebothofservicetoitscustomersandprofitable,yetwithoutrunning

unnecessary risks;

• Thebankdistinguishesitselffromotherbanksbydirectlytranslatingitsvision

andmanifestointoitsproducts,processesandbusinessmodel;

• Efficiencyistobeachievedbykeepingitsbusinessoperationssimpleandefficient,

ensuring an absolute reduction in operational costs;

• Improvingriskmanagementallowsforstructurallyreducingmortgageriskcosts,

dependingonthestateoftheDutcheconomy;

Thebankstrivestooptimiseitscompoundreturnbywayoftheso-called‘Shared

Value’strategy,whichtakestheinterestsofcustomers,employees,shareholdersand

societyasawhole,intoaccount.SNSBankbelievesthisprofiletobeanimportant

additiontotheDutchbankingsectorandexpectstobeabletoattractmore

customersandstrengthenitsrelationswithexistingcustomers,byadoptingit.The

bank’sboardhasstatedthatthisgrowthpotentialformsabasisforasuccessful

long-term strategy.

NLFIhasassessedSNSBank’sstrategicplananddeterminedthatthebank,by

successfullyimplementingit,willmeettheprinciplesoflowriskprofileandhigh

efficiency.ThevisionasprovidedbySNSBankisalsoinlinewiththe‘simpleretail

bank’profileaspresentedbyBCG,bywhichthebankwouldhaveafocusonoffering

threecoreproducts-mortgages,paymentproductsandsavingsproducts-and

competitivepricing,basedonanefficientbusinessmodel.Thebankwillfocuson

producing simple and transparent products based on low production costs and

effectingahealthybalancebetweenthecoreelementsofthe Shared Value strategy,

ensuringthatshareholderfinancialreturnsarenotsubordinatedtotheotherelements.

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2.5 Other views on SNS Bank’s future profile

OntheinstructionsofNLFI,BCGinvestigatedtheopinionscurrentinsocietyonthe

desiredroletobeplayedbybanksintheDutchbankingsectorandSNSBank’splace

init.ThisroundofconsultationchartedwhichpossiblepositionstobetakenbySNS

Bankreceivewidesupport,alsoinviewofthevanHijum/Nijboermotion15 on

safeguardingtheutilitycharacterofSNSBank.

BCG consultationBCGconductedapublicconsultationonthedesiredroleofSNSBankintheDutch

bankingsector.BCGhadvariousmeetingswithselectedstakeholdersandopinion

makersfromacademia,thefinancialsector,regulatorybodies,interestgroupsand

civicorganisations.BCGfoundthatthepersonsconsultedbroadlyagreethatthe

Dutchbankingsectorrequiresincreaseddiversityandcompetitiontowidenthe

rangeofoptionsopentotheconsumerandtoensurethattheexistingfinancial

institutionsbeattentiveto,forinstance,theirpricesandproductconditions.In

addition,theviewthatabankshouldnotbeautilitycompany-inthesenseof

providingutilityservicesaccessibletoeveryone-butshouldormayhaveasocial

function,wasfoundtobewidelysupported.ToSNSBank,thismeansthatitssocial

functionshouldbenefitthewholeofDutchsociety,notjustexistingorfutureSNS

customers.Therespondentsalsostatedthatreturnslowerthanusualinthemarket

shouldnotbetheresultofinefficientbusinessoperations.Suchlowerreturnsshould

bedemonstrablycompensatedbythecreationofsocialvalue.

The‘simpleretailbank’profilewasfoundtobewidelysupportedduringthe

consultations.Intheviewoftherespondents,thisprofileischaracterisedbythe

bankhavingtobesociallyinvolvedandfocusedonthe‘massretailsegment’,

offeringtransparentproductsbasedonefficientbusinessoperations.Mostofthe

intervieweesbelieveapossibleexpansionbySNSBankofitsrangeofproductsinto

othersegments-forexample,offeringcredittoSMEs,etc.-wouldcomplicate

matters,notbeinlinewiththebank’scurrentcapabilitiesandculture,andberisky.

Creatingafourthmajorbankisverywidelyheldnotbearealisticorusefuloptionby

therespondents.NLFIendorsesthisconclusion.NLFIhasincludedtheinputprovided

duringtheroundofconsultationswhendeterminingthepointsofdepartureatthe

baseofSNSBank’sstrategyandfutureprofile.

Van Hijum/Nijboer motion on safeguarding the utility character of SNS BankTheHouseofRepresentativeson12December2014adoptedthevanHijum/Nijboer

motiononsafeguardingtheutilitycharacterofSNSBank.Thismotionconstitutesa

requesttothegovernmenttoinvestigatehowbesttosafeguardSNSBank’sutility

characterinlightofthebank’s“Peopleforpeople”manifesto,whichincludesthe

ambitiontoturnSNSBankintoasimplesavingsbank,puttingsocialbenefitover

financialreturns.

15 ParliamentaryDocumentsII,sessionyear2015-2016,34346

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OntheinstructionsofNLFI,BCGinvestigatedhowSNSBankcouldbestfulfilautility

bankfunctioninlinewiththefindingsfromtheconsultationround.Initsinvestigation,

BCGdistinguishesbetweenhighutilityandlowutilitybanks.BCGusedthefollowing

definitionofahighutilitybank:

• Products:thebankonlyoffersbasicproductsunderclearproductconditions

• Segments:thebankoffersfinancialretailservicestothe‘massretailsegment’

• Riskprofile:thebankmaintainsaconservativeriskprofile

• Returns:thebankstrivestowardsacquiringmaximumreturns,unlessdeviating

fromthisdrivebenefitsbroadsocialobjectives

• Ownershipform:theutilitynaturecanbeensuredinthelongtermbywayofthe

ownershipstructureused,irrespectiveofthebankbeinginpublicorprivate

ownership.

BCGindicatesthateachofSNSBank’sfutureprofileoptionsallowsforthebank

havingeitherahighoralowutilitynature.Ahighutilitynaturemayalsobe

connectedtoexpectedreturns.Ahighutilitybankcould,forinstance,befocusedon

compositereturninsteadofonaneconomicrateofreturn.WhileSNSBank’s

manifestodoesnotexplicitlystatehowstakeholderinterestsshouldbebalanced,it

does,inviewofthebank’ssocialorigin,attachalotofweighttocustomerinterests.

Themanifestocanbetranslatedintoconditionsthatareattractivetocustomers,like

offeringamortgagetermservice(includinginterestrateaveraging),aninterest-free

temporaryoverdraft,interestonbalancesinpaymentaccountsandpurchase

protectioninsuranceforpurchasesmadeviapaymentaccounts.

Competitivereturnsarerequiredtobeabletogrowandtoattractinvestors.Toa

bank,thisisofgreatimportanceinconnectionwithcontrollingthecostofcapital.

BCGnotesthatabandoningthepursuitofeconomicratesofreturnisnotanecessary

preconditionforhavingahighutilitynatureaspartofthecompanyprofile.Thedrive

torealisestableandpredictablereturnswithreducedupwardpotential,butalso

reducedriskformspartofthebank’sfinancialpolicy.Inordertoensurethebank’s

highutilitynature,alternativemeasures,includingembeddingSNSBank’ssocialrole

initsArticlesofAssociationandprotectingitselfagainstundesiredshareholder

activism by implementing customary market measures like issuing depositary

receiptsforsharesandfoundingafoundationtoprotectthebank’sidentity,maybe

considered.Inaddition,thebank’sutilityfunctioncouldbesafeguardedby

subscribingtothecooperativemodel.SNSBankcould,inthatconnection,issue

depositaryreceiptsforsharesorvariousclassesofsharestopartiesaffiliatedtothe

bank.ThiscanbeworkedoutmorefullywhenSNSBankisexit-ready.

2.6 Conclusion

TheresultsoftheHouseofRepresentatives’debateonthefutureofSNSBankandof

theroundofconsultationheldbyBCGshowthatthereisawidelysupportedneedfor

thefuturestrategicpositionofSNSBanktobethatofasaferetailbankoffering

simple,transparentandfairlypricedfinancialproducts,operatingonthebasisofan

operationallyexcellentbusinessmodelandresultinginacompetitivedividendyield.

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Optingforafutureprofileofbeinga‘socialbank’isinlinewiththisneedandisalso

inkeepingwiththe‘simpleretailbank’profilepresentedbyBCG.

NLFIhasassessedSNSBank’sstrategicplananddeterminedthatthestrategic

principlesfollowingfromtheviewsonthebankcurrentinsocietywillhavebeenmet,

shouldtheplanbesuccessfullyexecuted.Thestrategicplanalsomeetsthepre-

conditionssetbytheEuropeanCommissioninthecontextoftherestructuringplan.

ThenextChapterwillelaborateontherequiredtransitiontowardsanewSNSBank

profile.NLFIbelievesthatvariousownershipstructuresarepossibleforabankwith

thisstrategyandprofile.Thisfocusthereforedoesnota priori preclude any sale or

ownershipstructures.

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3 Transition to future profile

3.1 Starting points

InthepreviousChapter,wenotedthatSNSBankiscurrentlyconfrontedwitha

numberofoperationalandstructuralchallenges.Addressingthesechallengesis

crucialtothebankhavingalastingfuture.ForSNSBanktobecomeasimpleretail

bank,itmustundergoatransition.SNSBankhasaccountedforthistransitionin

SpotOn,itsstrategicplan.Thetransitionwillatanyrateincludethefollowing

elements:

• Loweringthecoststructure.Thecostsofproductioncanbereducedtoalevel

allowing SNS Bank to become competitive on a long-lasting basis.

• Improvingriskmanagement.Thesuccessesalreadyachievedinimprovingrisk

managementneedtobefollowedupon.Theprovisionsmadetocovercredit

losseswheninvestinginDutchmortgageshavetobeatanequal,orevenlower,

levelthanaremadebythethreemajorbanksthroughthecycle.

• Furthershiftoftherangeofproductstowardsstandardisedproducts.Thebank

shouldnotperformactivitiesthatfalloutsidethescopeofnormalbusiness

operations.

• Becominga‘smartadopter’offintechdevelopments,therebystructurally

improvingcustomercontact,productinnovationandservicelevel.

• Possibleadjustmentandstreamliningofthebank’scapitalstructureonthebasis

ofthedeterminationoffuturemortgageinvestmentriskweightsandthe

definitionofMRELduties.

BasedonSNSBank’scurrentstartingposition,theimprovementplandraftedbythe

bankandthefinancialsubstantiationofacquiringtheprofileofa‘socialbank’,NLFI

believesthatSNSBankrequiresatleast2,possiblyupto3,yearstoaddressthe

variouschallengesitfacesandrealiseatleastthemajorityofthedesired

improvements.Duringthistime,thebankshouldatanyratebuildupasolidtrack

recordintermsofreducingcostsandachievingsufficientdividendyieldonthebasis

ofasolidliquidityandcapitalstructure.

3.2 Transition and improvement plan objectives and monitoring

TheelementsallowingSNSBanktotakeupthepositionofasimpleretailbankneed

toberealisedinthemediumterm.NLFIandSNSBankdefinedanumberofobjectives

tothispurpose.

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Cost reductionTheoperationalcosts,excludingstatutorylevies,needtobereducedinabsolute

termsfromtherealised2015figureofEUR575milliontoachieveastructurallylower

costofproduction.However,inordertorealisethesecostreductions,initial

investmentsinandadditionstotherestructuringprovisionarerequired.Achieving

suchabsolute reduction of costformsanimportantindicatortothebank.

Duetothepressureonthebank’sincomeanditsalternativedistributionmodel,which

ispartlybasedonfranchising,thecost/income ratio is not fully suitable to serve as

thesolegaugeformeasuringthecostreductiontobeachievedbySNSBank.Asa

significantshareoftheassetsonthebalancesheet(72%)arecomposedofresidential

mortgages,themortgageproductioncostsarealsomainlyexpressedintheoperational

costs/average assets,thusformingabettergaugeofthedegreetowhichthebank

hasimproveditsefficiency,tobeusedalongsidethetraditionalcost/incomeratio.

Improving risk managementSNSBankhassubstantiallycutbackonitscreditlossprovisionsinthepastfewyears.

ThegroundforeffectingthisreductionwastherecoveryoftheDutcheconomyand,

inparticular,ofthepropertymarket.Inaddition,SNSBankinvestedinimprovingits

processestopreventorlimitmortgagearrears.Thesemeasures,too,contributedto

reducing credit loss provisions to a competitive level. Loan impairment charges as a

percentage of the total mortgage portfoliowas0.07%(7basispoints)in2015.

SNS Bank aims to maintain a low level.

Mortgage standardisationStandardisationofthemortgageproductsonoffermayresultinoperationalefficiency

gains and makes securitising mortgages and creating collateral eligible to receive

ECBfundingeasier.Thetransitiontowardsaproductportfoliofeaturingstandardised

simpleandtransparentproductswilltakesometime,giventhematuritytermof

mortgages.However,currentlowinterestrateshaveresultedinhighrefinancingand

redemption rates. SNS Bank also actively offers interest rate averaging services to

itsmortgagecustomerssoastoincreasetheretentionrate.Interestrateaveraging

meansthatthepenaltyinterestpayableonearlyrefinancingisincludedintherevised

interestrateasasurchargeforthedurationofthenewfixed-interestterm.Thenewly

issuedmortgagewillthenbeastandardisedone.Inthisway,standardisation of the

mortgage portfoliomaybeachievedwithinacoupleofyears.Theaimistohavea

greater share of the mortgage portfolio be securitisable so as to serve as collateral

forpossibleECBfundingwithoutanappreciable‘haircut’beingapplied.

TheEuropeanCommissioninthecontextoftheSNSBankrestructuringplanrequires

anannualassessmentofmarketconditionstodeterminewhetherthebankcouldbe

privatised.IntheopinionofNLFI,theabovegaugesandobjectives,setupbySNS

Bankinthecontextofitstransitiontowardsbeingasimpleretailbank,couldforma

partofthisannualmarketconditionstestrequiredbytheEuropeanCommission.

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3.3 Anticipated return considerations

ThecostreductiondriveatSNSBankandthelowercreditlossprovisionsareexpected

toleadtothebank’sprofitabilityremainingatthesamelevelforthecomingyears

andslightlyimprovingaround2020,evenwhentakingintoaccounttheexpected

decreaseinthenetinterestmarginasaconsequenceoftheshrinkingcreditportfolio

andthepersistentlylowinterestrates.NLFIbelievesthatthisimprovementwillbe

reflectedinthereturnstotheStateovertheperioduptoprivatisation.European

regulationsrequirethatmarketconsistent,competitivereturnsarerealised.Whether

thereturnisinlinewithmarketconditionsistestedonthebasisofthemarketeconomy

investorprinciple.Underthistest,theMemberStatehastoconsideracompanyjust

like it would be considered by a private investor in similar circumstances. If a Member

Statesystematicallywaivesareturnonthecapitalithasinvestedinthecompany,

irrespectiveofthecompany’sresults,orifitwouldsystematicallyacceptnon-

competitivereturns,thismightconstituteillegalstateaid.

InChapter2,wenotedthatSNSBankatpresentholdsarelativelyhighamountof

capitalinordertomeetthe-expected-leverageratioand‘BaselIV’requirements.

ThedefinitiveimpactofthecurrentproposalsbytheBaselCommitteeonBanking

SupervisionisimportanttodeterminingthetotalamountofcapitalSNSBankisto

hold.Thismeansthat,forthemoment,thebankwillcontinuetoholdarelatively

highamountofcapitalsoastoallowittomeetfutureprudentialrequirements.

Becauseofthisdenominatoreffect,thereturnonequity(RoE)isnotverywell

suitedtoserveasagaugeformeasuringthebank’soverallreturn.

WithrespecttotheholdingsmanagedbytheState,theStateappliesaspecific

standardreturntoeachseparategovernmentholding.16Thisstandardreturnisalso

usedtoencourageacompany’sboardtooperatemoreefficiently.Duetothe

temporarynatureoftheinvestmentsrelatedtothefinancialcrisis,SNSBankdoes

notqualifyasacompanyunderpermanentStatemanagement.Adividendyield

structurecouldbeappliedtofollowthebasicprincipleofensuringacompetitivelevel

ofreturntotheStateduringthetransitionphase.Takingtheaveragedividendyield

ofsimilarbanksintheNetherlandsandEuropeasacalculationbasisandadjusting

thisfigureforSNSBank’slowriskprofile,aminimumannualdividendyieldof5%on

theState’scapitalinvestmentinSNSBankata2015sellingpriceofEUR2.7billion

appearstobeadequate.ThiswouldhavetheannualdividendyieldontheState’s

investmentinSNSBankamounttoatleastEUR135millionforthenextcoupleof

years,or40%ofthebank’s2015realisedprofits.Onthebasisofparametersagreed

inadvance,thisyieldmayalsobehigherthan5%from2017onward.Thiscouldbe

thecaseforinstanceiftheyieldwastogrowinlinewithgrowthintheDutchGDP,

insofarasthebank’scapitalpositionallows.

16 GovernmentPolicyonGovernmentHoldingsMemorandum2013,p.41

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ThestartingpointsforthetransitionfromSNSBank’scurrentprofiletothatofbeing

asimpleretailbank-reducingthecostsofproduction,improvingriskmanagement,

standardisingtheproductrangeandstreamliningthecapitalstructure-intheopinion

ofNLFI,provideabasisforanacceptablelong-termreturn.Intheyearstocome,

themanagementhastheopportunitytobuildupasolidtrackrecordinreducing

costsandrealisingsufficientreturnwhilemaintaininganefficientcapitalstructure.

Duringthisperiod,thetransitionhastoberegularlyassessedand,ifnecessary,

adjustedtocreateabankfeaturingalowriskprofileandsufficientdividendyieldin

linewiththatriskprofile,suchthatSNSBankcanbecomeattractivetoawiderange

of investors.

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4 Exit preconditions

4.1 Introduction

SNSREAAL,theformerparentcompanyofSNSBank,wasnationalisedon1February

2013toprotectthefinancialstability.17Youandyourpredecessorshaveemphasised

thetemporarynatureoftheinvestmentsmadetoprotectthestabilityofthefinancial

sector.Thegovernmentdesiresaswiftreturnofallnationalisedcompaniestothe

privatesector,ifandtotheextentthatthreepreconditionsaremet:18

i. Thecompanyisreadyforprivatisation;

ii. Thefinancialsectorisstable;and

iii. Thereissufficientmarketinterestintherelevanttransaction

Inadditiontothesepreconditions,theStatewishestorecoupasmuchofthetotal

investmentmadeintothecompanytobeprivatised,plustheState’scapitalcosts.

Overthepastperiod,NLFIhascarefullymonitoredwhetherthesaleofSNSBankcan

beconsidered,keepinginmindtheabovepreconditions,andalsowhethertryingto

sellthebankwouldbefeasibleandappropriateatthismoment.NLFI’scurrent

perspectiveonwhetherSNSBankhasmetthesepreconditionsisfurtherdetailed

below.Theparticularfocusisondeterminingwhetherthebankisreadyforsale.

Onlyoncewehaveestablishedthatthebankisreadydoweneedtomorefully

considerwhetherthesectorisstableandwhetherthereissufficientmarketinterest.

4.2 Is SNS Bank ready for sale?

WhendiscussingthepresentstateofSNSBankinChapter2,wenotedthatthebank

iscurrentlyconfrontedwithanumberofoperationalandstructuralchallenges.

Thelowinterestrateresultsinpressureonmarginsandvolumes.Thistrendis

increasedbythegrowingcompetitionontheDutchmortgagemarket.Inaddition,

SNSBank’soperationalexpenseshaveincreasedoverthepastperiodduetoitssplit-

offfromSNSREAALgroupandtheassociateddis-synergies,investmentsintoits

middleofficecapacityandthecostsincurredtoimproveoperationalefficiencyand

thecontrolframework.Tothisneedtobeaddedthepresentuncertaintyaboutthe

capitalstructureduetotheuncertaineffectsofupcomingchangesinapplicable

regulations.Determiningthefuturemortgageinvestmentriskweightsinfuture

regulationsonthebasisoftheBaselCommitteeonBankingSupervision’sproposals

17 ParliamentarydocumentsII,sessionyear2012-2013,33532,no118 ParliamentaryDocumentsII,sessionyear2010-2011,28165,no117

29van 42

ontheharmonisationofrisk-weightedassetsandfurtherdefiningtheMREL

requirementsmayallowforstreamliningthebank’scapitalstructure.

ConclusionNLFIfindsthatSNSBankiscurrentlyconfrontedwithanumberofoperationaland

structuralchallengesanduncertainties.Thesechallenges,atpresent,standinthe

wayofaclearequitystory.AsstatedinSection2.3,NLFIbelievesittobeimperative

thatSNSBankimplementsitsstrategyandmoreclearlydefinesitselfasasimple

retailbank-i.e.,abankfeaturingcompetitivepricing,lowcostofproductionanda

lowriskprofile-inthecomingtime.Thebankisatanyratetoworktowardsthe

objectives referred to in Section 3.2tobecomereadyforprivatisation.NLFIbelieves

SNSBankis,atpresent,notyetreadyforanIPO(initialpublicoffering).NLFIalso

believesthat,atpresent,nooptimumresultcanberealisedfromanyothersale

options.ConsideringthecurrentpositionofSNSBankandthefinancialsubstantiation

ofSpotOnasdrawnupbythebank,theimplementationofthestrategicplanwill

requiretwotothreeyearstorealiseoptimumlong-termvaluecreation.

4.3 Is the financial sector stable, in particular for mortgage and savings banks?

Themacro-economicconditionsintheNetherlandshaveclearlyimprovedinthepast

fewyearsandeconomicrecoverycontinuesinboththeUSandEurope.However,the

rateofgrowthinanumberofimportantemergingeconomiesisdecreasing,playing

animportantpartinanupsurgeofvolatilityinthefinancialmarket.Thesurgefollows

ontheheelsofaperiodwithexceptionallylowvolatilityandmaythereforepartlybe

explainedasacorrectiveeffect.Atthesametime,however,concernamonginvestors

aboutlaggingglobaleconomicgrowthhasincreasedsharply.19

Inresponsetotheuncertaineconomiccircumstancesandinflationratesthathave

beenbelowinternaltargetsforalongtimenow,theECBhasfurthereasedits

monetarypolicyoverthepastfewmonths,alsotakinganumberofunconventional

measures.TheECB’sbaseinterestratehasbynowbeenloweredto0%andtheECB

depositfacilityinterestrateiscurrentlyevennegative,havingbeenloweredto-0.4%

inMarch2016.Inaddition,monthlypurchasesunderthequantitativeeasingpolicy

havebeenfurtherincreasedwhilethelistofassetsthatmayserveascollateralfor

ECBfundinghasbeenexpandedtocoverhigh-qualitycorporatebonds.These

interventionshaveledtoafurtherlevelling-offoftheyieldcurve.

Thislowinterestenvironmentnegativelyimpactsthebanks’interestmargin,especially

sincetherenowislessroomtoreduceinterestratesondeposits.Inaddition,the

persistentlylowinterestratesresultinfurthershiftsinbothcustomerbehaviourand

thecompetition.Whileaslightincreaseintheproductionofmortgageshasbeen

19 Alsoreferto:DeNederlandscheBank,AnnualReport2015,p.11ff.

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visibleforthemarketasawholesince2013(refertofigure4),theshareheldby

bankshasdecreased.Onbalance,thealteredcompetitiveconditionshaveresultedin

lowernewmortgageproductionvolumesforthebankingsectorasawhole.

Figure 4: Mortgage turnover and number of mortgages sold in the Netherlands. Source:

IG&H, Mortgage Update Q4 2014 and Q4 2015.

Maintainingtheinterestmargin,themostimportantsourceofincomeforbanks,

dependsontheextenttowhichbanksareabletomaintainthemortgagemarginand

reducefinancingcosts,butisalsorelatedtouncertaininterestincomefactorslike

thelevelofcompetition,thedemandfornewloansandtheweighingofkeeping

marketshareagainstprofitability.20Generallyspeaking,theprofitabilityofbanks

seems to be under pressure.

Concernsaboutprofitabilityheldbyfinancialinstitutionsinthepastyearledto

financialmarketvolatility.Thestartoftheyearwitnessedaparticularsurgeinvolatility

inthecontingentconvertibleobligations(CoCos)marketastherewasadistinct

possibilitythatEuropeanbankswouldnotbeabletomeetdividendandCoCocoupon

paymentsduetofallingprofitabilitylevels.21TheBankforInternationalSettlements

notedthatthelimitedimpactonthebanks’seniorobligationpricesoverthisperiod

suggestedthatprimaryinvestorconcernisnotaboutthesizeorqualityofthebanks’

capital buffers.22Stronginterventionbygovernmentsandcentralbankshascontributed

significantlytothisstateofaffairs.Crucialstepshavebeentakeninthereformprocess

atnationalandEuropeanleveloverthelastyearsinordertostrengthenthestability

ofthefinancialsector.Thishasledto,forexample,regulationsrequiringbanksto

20 DNB,pressrelease:Lage rente uitdaging voor gehele financiële sector; integriteit blijft zorgpunt (LowInterestchallengeforentirefinancialsector;integrityisofconcern),19May2016,http://www.dnb.nl/nieuws/nieuwsoverzicht-en-archief/persberichten-2016/dnb341434.jsp

21 DNB,OverviewofFinancialStability,Spring2016,p.1322 BankforInternationalSettlements,BISQuarterlyReview,December2015

31 van 42

holdhighercapitalbuffers,theintroductionofanunweightedminimumleverage

ratioandthecomingintoforceofabail-inregimethatistoensurethatbanksissue

sufficientnumbersofloss-absorbinginstruments.

Forbankswithafocusonrelativelylow-riskactivities,likeresidentialmortgages,the

downsideoftheintroductionoftheunweightedminimumleverageratio23isthat

thesebanksarerequiredtoholdarelativelyhighamountofcapital.Inaddition,

banksarealsoconfrontedwiththeuncertainresultsof,inter alia,‘BaselIV’regulations.

Tomortgagebanks,thisinparticularconcernsuncertaintyaboutfuturerulesonthe

harmonisationofrisk-weightedassetsincaseof,inter alia,mortgageinvestments

andtheamountofloss-absorbingcapitaltobeheld(MRELandTLACrequirements24).

Theharmonisationofrisk-weightedassetsinconnectionwithmortgageinvestments

formsanespeciallybigchallengetoDutchretailbanksduetotheirlowmortgage

riskweights,resultingfromhistoricallylowcreditlosses.Thecombinationofchanging

marketconditionsandthetighteningofcapitalrequirementshaspromptedanumber

ofDutchbankstolimittheirmortgageproduction.

ConclusionMacroeconomicconditionshavenoticeablyimprovedoverthepastfewyearsandthe

stabilityofthefinancialsectorasawholehasbeenstrengthenedduetotighter

legislation.However,circumstancesinthesavingsandmortgagemarketsareless

clear,inparticularduetothelowinterestrateandtheuncertaintiesinconnection

withthefuturemortgagecapitalrequirements.Thesecircumstanceshavean

especiallylargeimpactonDutchmortgageandsavingsbanksand,atthemoment,

hamperthespeedyreturnofSNSBanktotheprivatesector.

4.4 Is there sufficient market interest in a sale of SNS Bank?

Proactivelycontactingpartiesinordertoascertaintheirinterestinapossible

acquisitionofSNSBankwasnotpartoftheprocesswithinthecontextofthis

advisoryreport.NLFIdoesregularlyconsultwithinvestmentbanksonmarket

developmentsandpossibleinvestorinterestinbankslikeSNSBank.Thishasallowed

NLFItoformanopiniononpossiblemarketinterest.Inviewofthemarketconditions

referredtointheabove,theexistinguncertaintiesaboutupcomingregulation,the

currentexpectedreturnsandthesystematicchallengesSNSBankisfacing,thereis

atthemomentverylittletonopotentialbuyerinterestinSNSBankatconditions

acceptabletotheState.Thisappliestobothstrategicbuyersandprivateinvestors.

TheseStateconditionsconcernnotonlytheprice,butalsotheacquisitionstructure,

23 UndertheCRD4directive,aminimumleverageof3%currentlyapplies.ThefutureratioexpectedtoapplytotheNetherlands,is4%.

24 TheMREL(minimumownfundsandeligibleliabilities)andTLAC(totallossabsorbingcapacity)requirementsrelatetoimprovingtheresolvabilityofbanksincaseofabankrequiringrescue.Theliabilitiessideofthebalancesheetofasystematicallyimportantbank,inthisconnection,istobecomprised,toadegreeasdeterminedadvance,ofequityandfinancialinstrumentsofsufficientloss-absorbingcapacitytoallowfortherequiredrecapitalisationofthebankinaresolutionscenario.

32 van 42

theeffectsonemploymentandaspectsofthecompanyculture.Thelackofsufficient

investorinterestappliestobothaprivatesaleofthebankand,especiallyas

concernsanacceptableprice,toapossiblestockmarketflotation.

ConclusionAlsoinviewofNLFI’sanalysiswithrespecttothefirsttwopreconditionsforanSNS

Bankexit,NLFIfindsthat,atpresent,thereisinsufficientmarketinterestforasale

atconditionsacceptabletotheState.NLFIexpectsinterestatconditionsacceptable

totheStatetobecreatedoncethebankhasbuiltupatrackrecord-includingon

theoperationalfront-asastand-alonebank,independentofitsformerparent

company,andoncemorecertaintyexistsasconcernstheimpactofthenew

regulationsinconnectionwithmortgageinvestmentriskweights.

4.5 Will capital expenditures be recouped?

StatecapitalexpenditurestoSNSREAAL,includingSNSBank,arecalculatedtoamount

toEUR4.458billion.25Thisisreflectedintable1.Theamountlisteddoesnotinclude

thecapitalcosts-includinginterestcharges-oftheState.

Inthespringof2015,NLFIhadperformedavaluationofSNSBankasastand-alone

bankinconnectionwithSNSBankbeingsplitfromtheSNSREAALgroup.Thevaluation

wasperformedbyMacquarieCapitalonthebasisofSNSBank’s2015Operational

Planandpubliclyaccessibleinformation.Macquarieproducedavaluationrangeof

EUR2.5to2.9billion,whichwaslessthanSNSBank’slate2014carryingamountof

EUR3billion.InconsultationwithSNSREAALandtheEuropeanCommission,the

purchasepricewassetatEUR2.7billion.26ThebridgingloanofEUR1.1billiongranted

bytheState,plusinterestpaid,wereoffsetagainstthepurchasepriceoftheshares

in SNS Bank.

SNSREAAL’sinsurancesubsidiary,REAALN.V.,currentlyoperatingasVivat,wassold

bySNSREAALforEUR85millionlastyear.Followingsettlementofcertaintaxclaims,

thenetsellingpriceamountedtoapproximatelyEUR1.

25 Inpreviousadvisoryreports,NLFIstatedthatEUR2.865billioninStatecapitalexpendituresareallocatedtoSNSREAAL.However,sinceSNSBankwassplitfromSNSREAAL,thesaleoftheSNSBanksharesbySNSREAAL,offsetagainstthebridgeloanandtheassociatedinterest,arecountedascapitalexpensesforthebenefitofSNSREAALandSNSBank.Inaddition,theproceedsoftheresolutionlevyareEUR5millioninexcessoftheestimatesusedinpreviousadvisoryreports.

26 ParliamentaryDocumentsII,sessionyear2014-2015,33532,B no 47

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Table 1: Overview of capital expenditures of and dividend received by the Dutch State

ConclusionAtthemoment,itisuncertainwhetherthecapitalexpendituresincurredforthe

benefitofSNSREAALcanberecoupedbywayofthesaleofSNSBankandthe

dismantlingofSRH.HavingSNSBankimplementthedesiredimprovementsoverthe

comingperiodmaypositivelyaffectthebank’syieldandvalue.

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5 Future ownership structure considerations

YourlettertotheHouseofRepresentativesof23August2013(‘Plansforthefuture

ofthefinancialinstitutionsABNAMRO,ASRandSNSREAAL’)27statesthattheState,

aspartofthestateaidprocedurewiththeEuropeanCommission,proposedthatSNS

Bankcontinuetoexistindependently,therebyensuringthatenoughpartiesareactive

ontheDutchmarket.Inthiscontext,theStateinformedtheEuropeanCommission

ontheexistingproblemswithreducedcompetitionontheDutchmarketasa

consequenceofthepriceleadershipban.Inyour22May2015lettertotheHouseof

Representatives(‘ABNAMROsale’)28youalsoemphasisedtheimportanceofSNS

Bankacquiringastrong,independentpositionwithintheDutchbankingsectorbefore

adecisioncanbemadeonthefutureofSNSBank.

Youandyourpredecessorshaveemphasisedthetemporarynatureoftheinvestments

madetoprotectthestabilityofthefinancialsector.29The19December2013decision

oftheEuropeanCommission30ontherestructuringplanofSNSBank,too,states

thattheState,aspartoftheStateaidprocedure,committeditselftoprivatisingSNS

Bankinduecourse.Inaddition,theStatehastoinvestigatewhethermarketconditions

permitprivatisationofSNSBankatleastonceayear.TheStatedidnotcommittoa

certaindatebywhichSNSBankhastobeprivatised.Nevertheless,keepingSNSBank

inthehandsoftheStateseemstobeatoddswiththeEuropeanCommission’sdecision.

NLFIbelievesthatSNSBankisnotyetreadytobeprivatised.Itmayalteritsopinion

ifSNSBankenergeticallyworkstowardseffectingthedesiredoperationaland

structuralimprovements.NLFIexpectsSNSBanktorequireatleast2andpossibly

upto3yearstorealisetheimprovements.NLFIisauthorisedtokeepmanagingthe

sharesinSNSHoldingandSNSBankundertheTrustOfficeFoundationforthe

ManagementofFinancialInstitutionsActanditsArticlesofAssociation(commercial,

non-politicalgovernance),allowingforthepreservationofthetemporarynatureof

theState’sinvestmentinSNSBank.Aninvestigationintotheexistenceofaneedto

havingSNSBankremaininStatehands,inconformitywiththeMerkies/Nijboer

motion,canbeconductedatalaterstageofthebank’stransition.31Theresultsof

thisinvestigationmaythenbecomparedtoalternativeswhich,atpresent,arenot

availableorexpedient,includingasaleand/orstockmarketflotationinoneof

multiple ways.

27 ParliamentaryDocumentsII,sessionyear2012-2013,32013,no3628 ParliamentaryDocumentsII,sessionyear2014-2015,31789,no6429 ParliamentaryDocumentsII,sessionyear2010-2011,28165,no11730 EuropeanCommission,TheNetherlands-RestructuringPlanSNSREAAL2013,C(2013)9592,19

February2013;availableat:http://ec.europa.eu/competition/state_aid/cases/249726/249726_1544400_217_2.pdf

31 ParliamentaryDocumentsII,sessionyear2015-2016,34346

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Thesuccessfulexecutionofthestrategicplanwill,intheopinionofNLFI,resultina

revenuemodelfeaturingariskprofileandadividendyieldthatmaybeattractiveto

awidegroupoflong-terminvestors.Optionsincludeasaletopartiessuchas

provinces,pensionfundsandforeignbanks,placementofshares/depositaryreceipt

ofshareswithcustomersorafullorpartialstockmarketflotation.

NLFIbelievesthatitisasyettooearlytochartthevariousexitpossibilitiesopento

SNSBankintermsoffutureownershipstructures,asitiscurrentlynotknownto

whatextentthecapitalstructurehastobeadjustedtothebank’sfuturecapital

requirements,whileastartdoeshavetobemadetoeffectingthedesiredimprovement

ofoperationalefficiency.Theexecutionofthedesiredimprovementplandoesnot,

fortheyearstocome,resultinirreversiblemeasuresbeingtakenoroptionsbeing

precludedasconcernsfutureownershipstructures.

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Appendix

Thefollowingappendicesareincluded:

• ResponseManagementandSupervisoryBoardofSNSBank’sopinion,

June27,2016

• ReactionWorksofSNSBank’sadvice,June10,2016

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NLFI Mr M. Enthoven P.O. Box 45650 2504 BB The Hague

Ondernemingsraad SNS Bank N.V. Croeselaan 1 Postbus 8444 3503 RK Utrecht

Classification Confidential Our reference OR 2016-26 Date 10 juni 2016

Subject Point of view Works Council SNS Bank NV on advice on future options for SNS Bank NV

Dear Mr Enthoven,

Over the past few months, a great deal of work has been done to examine the options for the future privatisation of SNS Bank NV.

The Works Council of SNS Bank NV (hereinafter OR) is very grateful that the Board of Directors has closely involved us in the examination of the options and has allowed us express our views.

From the OR’s point of view, we would like to present the following points of attention to you in connection with your advice to the Minister of Finance on the future of SNS Bank NV.

The OR subscribes the strategic plan (named Spot On) drawn up by the bank to position SNS Bank NV as a ‘social bank’. We understand that cost reductions are necessary to achieve acceptable returns in the long run and to provide adequate dividend yields in order to interest a wide range of investors. We frequently and constructively consult with the Board. In this process, we have to make balanced assessments of the necessity to work more efficiently and reduce costs on the one hand, and to serve short and long term employee interests on the other.

Both now and in the future (in the post exit period too), we find it important that the principles of the Manifesto of SNS Bank N.V. remain intact and are protected. As far as the OR is concerned, the aforementioned starting points also apply to the assessment of any future exit options, in respect of which we are pleased to note that NLFI, apart from the price, has also taken into consideration the effects on employment and cultural aspects of the organisation. The ultimate exit option may give us reason to go into greater depth/expand on our starting points. Kind regards,

Susan Dassen-Luhrman Chair Works Council SNS Bank NV

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