ING BANK N.V.
UNIVERSITY OF GRONINGEN
BENCHMARKING ANALYSIS
GRADUATION PROJECT
Thesis supervisors:
Mrs N. Campbell
Mr F. Becker - Ritterspach
Prepared by:
Andrey Pavlenko (s 1345834)
Groningen June 2004
ABSTRACT
The objective of this paper is to provide ING Bank with Benchmarking analysis in the Banking area. To find out where could be possible gaps between ING Bank performance and performance of its leading competitors and provide ING Bank with strategic recommendation for improvement.
Benchmarking is the process of measuring our operations against similar operations for the purpose of improving our business processes. The purpose of benchmarking is to improve products and processes to better meet customer needs.
Benchmarking as a tactical planning tool originated with Xerox Business Systems in the late 1970s. Japanese affiliates were selling better quality copiers for less than manufacturing costs of similar products in the USA. One of the first experiments in benchmarking was in the production logistics area. Xerox Business Services benchmarkted with L Bean, a clothing manufacturer who had one of the best logistics operations in the world.
There are different methods for Benchmarking analysis. The decision to choose one of these methods depends on situation and also on Benchmarking type. Good Benchmarking analysis has a vital importance and a big influence on performance of every organization. For this reason it is important for ING Bank. Results from this research can be viewed as an important first step for the business improvement and can be used internally for the feather research and analysis.
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ACKNOWLEDGEMENTS
I would like to thank everyone who helped me to work on this paper. In particular I want to thank my thesis supervisors from University of Groningen Mrs. Campbell and Mrs. Ruel who provided me with very useful ideas about the structure and content of my diploma. And my supervisor from ING Bank Mrs. De Beer who has given me a very valuable advises and invested a great deal of her time to help me to finalize my work.
I must of course mention my colleagues from ING Bank who provided me with a very useful material and shared their knowledge about the matter.
TABLE OF CONTENT
1 INTRODUCTION page 5
2 METHODOLOGY page 6
3 DESCRIPTION OF RESEARCH MODEL page 9
4 THEORY OF BENCHMARKING ANALYSIS page 10
5 BENCHMARKING IDENTIFICATION page 14
4 ANALYSIS OF THE EU BANKING SECTOR page 16
5 MARKET ANALYSIS NETHERLANDS page 18
• 5.1 Political environment
• 5.2 Economic environment
• 5.3 Legal environment
• 5.4 Banking Industry Analysis
• 5.5 Description of Dutch Banks
6 MARKET ANALYSIS BELGIUM page 29
• 6.1 Political environment
• 6.2 Legal environment
• 6.3 Economical environment
• 6.4 Banking industry analysis.
• 6.5 Description of Belgium Banks
7 MARKET ANALYSIS POLAND page 35
• 7.1 Political environment
• 7.2 Legal environment
• 7.3 Economic environment
• 7.4 Banking industry analysis
• 7.5 Description of Polish banks
8 FINANCIAL ANALYSIS AND GAP IDENTIFICATION page 43
9 MAIN PROBLEMS IDENTIFIED FROM BENCHMARK ANALYSIS page 46
10 STRATEGIC RECOMMENDATIONS page 47
PROBLEM 1 PROBLEM 2
CONCLUSIONS page 57
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1 INTRODUCTION
We often wish success to our friends and relatives. Everyone wants to succeed; business people are not an exemption. Success for a Bank would be the highest possible return at a lowest possible risk received on time. But what form a basis for a success?
There are many factors, which form the ground for success, many of them are beyond our control: fortune, weather, our natural qualities and so forth. Among the factors we can control, one of the most crucial is a right decision-making. For a Bank it will be a right choice of the strategy, market for operation, ways for cost reduction and profit incensement. To make a right decision is very important especially at this turbulent for economy time and new developments concerning with enlargement of European Union.
To make a right decision we need full, relevant and reliable information on a question. There are many aspects of information, which influences the Banks’ business decision and strategy; one of the most important of them is the information received from Benchmarking Analysis.
Benchmarking Analysis allows a Bank to comparer its operations with the main competitors and to discover difference in performance. The main idea behind it is to find out the gaps in performance and than search for the ways to eliminate or minimize these gaps. The results from Benchmark Analysis can make a useful contribution to the implementation of Bank’s strategic goals. For management it is important to make a right conclusions and decisions based on the results of Benchmarking Analysis. These decisions should lead to the profit maximization and cost reduction.
There are different sources where Bank can gather information that will be used in Benchmark Analysis: mass media, internal own channels, annual reports, and colleagues’ advice.
Information, which is extracted from the financial statements in annual report, is used as a base for an analysis because it provides management with most comprehensive information about competitor’s performance and is available in the same form for all interested parties.
The objective of this research project is to provide ING Bank with Benchmark analysis in the Banking area in three ING’s home markets. To find out where could be possible gaps between ING Bank performance and performance of its leading competitors and provide ING Bank with strategic recommendations for improvement.
2 METHODOLOGY
The following analysis is based on both desk and field research (analysis of financial statements, interview with my colleagues). My research includes both on qualitative and quantitative analysis (ratio analysis). The approach was taken to analyse both external market environment and internal factors that have an influence on ING Bank performance and performance of its main competitors. Ratios analysis will play a significant role in my research especially for problem identification.
For theoretical part number of books on marketing, financial accounting and corporate finance were read to obtain the basic information about the Benchmarking Analysis, market analysis, financial analysis, bank statements, types of analysis and their limitations. Financial magazines and newspapers provided an overview of latest trends in accounting and financial analysis.
Moreover annual reports of main competitors were reviewed and analysed in order to make research more comprehensive.
The practical research was primarily based on the financial data and ratio analysis of financial statements of peer group. Number of interviews was carried with my colleagues from the Strategy & Business Change Department of ING Bank in Amsterdam in order to find out ways of conducting Benchmarking Analysis and understands the importance of it. They gave me useful recommendations concerning the Benchmarking Analysis and accounting peculiarities in preparing of financial statements. Information that was obtained from these interviews was later used on finding out the gaps in performance and searching for possible solutions.
I believe that both theoretical and practical research provide reasonable basis for my analysis and allow to cover the topic from all sides. In my research I will use inductive method. The inductive method (usually called the scientific method) is the deductive method "turned upside down". The deductive method starts with a few true statements (axioms) with the goal of proving many true statements (theorems) that logically follow from them. The inductive method starts with many observations of nature, with the goal of finding a few, powerful statements about how nature works (laws and theories).
The objective of this research project is to provide ING Bank with Benchmarking analysis in the Banking area in its three home markets. To find out where could be a possible gap between ING Bank performance and performance of its leading competitors and provide ING Bank with strategic recommendations for improvement.
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Limitations of the research:
Time limitation:
Benchmarking analysis is a complex process and it requires a lot of time to find out and understand the differences in banking performance. Different accounting standards had to be taken into account. Also searching for the problem solutions and recommendations requires more time than was available for this research.
Collecting information:
Some times it was difficult to find out particular information about competitors. In order to find out it both internal and external search was used. External search for information was limited because not always necessary information was available.
Confidentiality:
Not all information that is necessary for the research could be collected because some information is confidential. This reason also has an impact on providing recommendations.
RESEARCH MODEL
ING BANK [1]
Current performance
COMPETITORS [2]
Market analysis:
-Analysis of the EU banking sector.
-Market analysis for Netherlands, Belgium, Poland.
Competitors analysis:
Main competitor’s analysis in the Netherlands. Belgium &
Poland.
[3]
FINANCIAL ANALYSIS
&
GAP IDENTIFICATION
[4]
MAIN PROBLEMS IDENTIFIED FROM
BENCHMARK ANALYSIS
[6]
NEW STRATEGY FOR ING BANK
[5]
STRATEGIC RECOMMENDATIONS
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3 DESCRIPTION OF RESEARCH MODEL
In my research model I have described steps that I am going to use in analysis in order to achieve research objectives. My analysis will include both internal and external research. Project will be started from the description and analysis of EU Banking sector. I need this part in order to find out main trends in banking sector that are taking place during last years in European Union.
After describing main trends in EU Banking sector I will make a deeper analysis of each home market of ING Bank. (Dutch, Belgium and Polish markets). This analysis will include detaile description of market environment (political and economical factors, general trends in local banking industry) and local competitors of ING. Comparison will be also made between competitors and ING Bank in these regions.
The next step will be financial analysis where I will analyze financial statements from main competitors and compare them with financial performance of ING Bank. Financial and not financial analysis will be used in order to find out gaps in performance and to identify main problems.
Gaps in performance will be explained and finally strategic recommendations will be provided how to eliminate or minimize the impact from problems and to improve performance.
4 THEORY OF BENCHMARKING ANALYSIS
“Benchmarking a continuous, systematic process for evaluating the products, services, and work processes of organizations that are recognized as representing best practices for the purpose of organizational improvement”
Michael J. Spendolini
Benchmarking is the process of measuring our operations against similar operations for the purpose of improving our business processes. The purpose of benchmarking is to improve products and processes to better meet customers needs. The linkage of the business process to customer needs is critical to effective benchmarking.
Types of Benchmarking1
Industry Group Measurements:
The measurement of various facets of Bank’s operation and comparing these to similar measurements. Often the measures have little to do with productivity, customer satisfaction, or
“best practice”. Many industry groups publish comparative data either privately (for members of the group or service only) or publicly or both.
“Best Practice” studies:
These are studies and lists of what works best. These are useful to benchmarking research, but they are not useful as metrics. What works best for an entity in its specific environment may not work the same way in another environment. These studies can be useful stimulators, but they are not “benchmarks”.
Cooperative Benchmarking:
The measurement of key production functions of inputs, outputs, and outcomes with the aim of improving them. Cooperative Benchmarking is done with the assistance of the entity being studied. Often the entity chosen as a benchmark is one that has “best practice” in the area of interest or has won a major national or international quality award. A version of cooperative benchmarking is Collaborative Benchmarking. In the collaborative method, both entities study each other and work together to improve.
Competitive Benchmarking:
The study and measurement of a competitor without their cooperation for the purposes of process or product quality improvement. The latter is called reverse engineering.
There are other benchmarking terms that refer to or describe versions of these basic types. For my purposes, I will focus on Competitive Benchmarking.
Benchmarking is usually done within the same industry. However, benchmarking is often done between organizations that have s similar process, but they are in different industries. By benchmarking the process across industries, the organization sometimes achieve greater results
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than by sticking to their own industry. Benchmarking a process across industries causes people to challenge some of the assumptions that are part of the problem.
Benchmarking Steps2
There are many versions of Benchmarking Steps used by very successful organizations. The simplest framework has five steps:
1 Plan 2 Research 3 Analyze 4 Adapt 5 Improve
Benchmarking is not a one-time project. It is a continuous improvement strategy and a change management process. Once begun, the entity should continue to benchmark against “best practices” in order to continuously improve. Benchmarking is a part of the Total Quality Management system, and it relates well to other TQM initiatives.
Step 1: Plan
The first step in the benchmarking process is to plan. The Needs Assessment Team provides insight into key customer needs and the processes in the organization that address those needs.
When a customer need is identified, the processes that directly fulfill that need become critical processes. We only benchmark critical processes. Typically, researcher tries to identify week critical processes that can give him the most leverage if they are fixed.
The researcher needs to:
• Understand the critical processes and how they are measured
• Decide what kind of data is needed and how data will be collected.
The planning stage is where the Benchmarking Team begins the process of linking their study to the organizations strategic goals. The benchmarking effort should focus its energies on those customers and customer needs that are most important.
Step 2: Research
The purpose of research is to:
• Establish the metrics to be used
• Identify the benchmark candidate
• Collect public data
Before collecting a lot of data about others, a benchmarking team needs to collect baseline data about its own processes. Collecting this data will refine the measurement process and help
develop the final set of metrics to be used in the benchmarking efforts. Use TQM tools or other analytical tools to observe and analyze your own process.
Identifying potential benchmarking partners is another step in the research phase. It is always best to develop a list with potential benchmarking partners. To find a likely benchmark partner, there are a number of methods to discover who is best at satisfying customers and best at the process you want to measure. The most obvious search would be in your own industry and among direct competitors.
When likely candidates are found, some preliminary research should be done to help narrow the list. Using only public information, the Benchmarking Team complies as much relevant data as possible. The data collection plan developed earlier keeps the data gathering process relevant and under control.
Some potential partners may not have much information available. In these cases, they are normally dropped from the list. The ones remaining will have sufficient public data so that the Benchmarking professional can make a final decision of which organization we want to approach to be their cooperative benchmarking partner.
Step 3 Analyze
Analysis of the collected data usually takes several steps:
1 Summarize and interpret the data.
2 Analyze the gap between company process competitor process 3 Project where future gaps will be.
4 Develop key findings into new operational goals.
Analyzing the benchmark performance “Gap” can be done as a snapshot or as a trend over a period of time. Either method (or both) may be appropriate for the process being studied.
Sometimes it is useful to look at the historical trend as well as the current gap.
Step 4 Adapt
As a process improvement technique, benchmarking requires the same change management framework that all improvements need. The key change management techniques are:
• Communicate the benchmark findings widely.
• Involve a broad cross functional team of employees.
• Translate the findings to a few core principles.
• Work down from principles to strategies to action plans.
Benchmarking is about improving processes. Each process has a process “owner”, and process owners and other stakeholders need to have a voice in the changes recommended. Before developing strategies, it is important to communicate with all who might be involved in the change.
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The best results from benchmarking have come from organizations that extrapolate and generalize the findings into a few core principles.
Adapting results of benchmarking can be the most difficult step. No two organizations are alike, so what works for you benchmark partner may not work for you in the same way or with the same results. Whatever is chosen, there should be strong linkages between the original purpose in the benchmarking plan and the strategies selected.
Step 5 Improve
The key implementation strategy is to choose solutions to benchmark findings that also contain an element of continuous improvement.
Part of the organization’s environment includes technology and competitors. It is not enough to continuously improve if competitors are improving at a faster rate. Benchmarking imbues the organization with a sense of continuous improvement, and it also acts a practical monitor on the environment to ensure long-term organizational survival.
All this steps are important to use during conducting a Benchmarking research. These steps are also depending on a complication of particular project. This theoretical approach for Benchmarking analysis will be also used for my research.
5 BENCHMARKING IDENTIFICATION
ING Bank is a universal Bank that offers to its clients services in three main areas: Retail Banking (including ING Direct), Wholesale Banking (including Investment Banking) and Asset Management. The main market for both Retail and Wholesale operations of ING Bank is Europe.
Core markets are Netherlands, Belgium and Poland. (More than 70% from Total Income is received in total from these countries)
The fact that ING Bank is universal Bank was taken into account during construction of list with competitors. I included to the peer group those Banks that have similar services (Retail Banking, Wholesale Banking, Asset Management) and also operating in the same like ING markets.
In order to find out competitors for ING Bank I have created a special table (see Appendix 1) where I have listed main European and Global banks. I have investigated what banks are offering the same kind of services and are operating at the same market like ING. These banks were selected for the Benchmarking analysis. (Dutch Market: ABN AMRO, Rabobank, Fortis;
Belgium Market: KBC, DEXIA; Polish Market: PEKAO, PKO, Citibank Handlowy).
With the help of market and ratio analysis I will be able to compare performance of ING Bank with the peer group. This comparison should provide important information that can be used for the improvement of ING Bank performance.
Retail Banking
Most of the Banks that were selected are offering Retail Banking services only at their home markets. With introduction of ING Direct ING Bank has been promoted in those markets where ING has no retail presence (Australia, Canada, France, Germany, Italy, Spain, UK, US). Because ING Bank now targets retail customers also in other countries it automatically because competitor in the Field of Retail Banking to those companies that were selected in a table. But for my investigation I will only analyze competitors that are operating in the ING home markets (Netherlands, Belgium, Poland).
Wholesale Banking
ING Wholesale is predominantly focusing on Europe. All Banks selected are also focusing on European market. Some of these Banks are specializing in particular markets like Fortis (Benelux), ING Bank (Benelux and Eastern Europe), DEXIA (Belgium and France) and some banks are covering all Europe with their Wholesale operations like ABN AMRO Bank.
Investment Banking
For most universal Banks Investment operations are included to their Wholesale operations.
Investment operations are not the main core business for most of these Banks.
In my table I separated Wholesale operations and Investment operations because within Wholesale Banking investment activities still are separated business units.
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Asset Management
As it can be seemed from the table most of the banks that were selected are involved in Asset Management operations. The size for Asset Management operations is different for these Banks.
Some of them are global players like HSBC, Citigroup and some are local (mostly operating in Europe or in a particular country.
4 ANALYSIS OF THE EU BANKING SECTOR
In this part information will be given about EU Banking sector in years 2001 and 2002. In this period, the banking sector operated under increasingly difficult economic and financial market conditions. After analyzing financial reports from Fitch Rating, UBS Bank, Standard Poor’s I have come to the conclusion that there are around five main trends developing in EU Banking sector3:
• First, banks increasingly focused on their traditional operations in their home markets.
Because of difficult economic condition a lot of banks reduced their investment banking activities and exited some international operations. However, international activities within the EU and operations in Central and Eastern European Countries were maintained and increased.
• Second, banks increased their cost saving efforts in 2002.
Organizational changes were introduced. Also branch network and number of employees were reduced.
• Third, consolidation in the EU banking sector continued to progress.
But these developments are slow at this moment because difficult financial market environment reduced the possibilities for mergers and acquisitions (M&A). Most of the M&A activities were between small banks and in the domestic markets.
• Banks continued to expand the range of their product and services.
A lot of new developments are relating to the Internet Banking and introduction of new savings instruments.
• Banks intensified their efforts in the area of risk management.
In 2002, credit and market risk remained the two most important banking risks. Credit risk increased owing to worsening economic conditions, reflected in an increase in losses and provisioning needs across most countries.The number of bad loans increased within last yeas making credit risk analysis especially important for every Bank. Banks are trying to increase efficiency of their Risk Management Departments.
Overall, banks in the EU have remained stable despite temporally pressure on liquidity and profits. Structural changes in their business orientation and improved risk management had a positive effect on banking stability. Banks focused their lending activities mainly on retail activities, with consumer lending and lending for house purchase increasing, whereas corporate lending generally showed slower growth, because of economic conditions.4
Banks had substantial pressure during 2002, which caused them to increase their efforts to improve management procedures, to limit risk exposures and to restore profitability through cost cutting measures, including laying off staff.
Banks have increasingly concentrated on traditional banking activities such as retail and corporate banking, while reducing investment banking and trading activities. The concentration
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on regions considered to be their “home markets” led many banks to restructure their international operations.
Branches remain at the core of banks distribution strategies, but their role is changing as specific tasks become increasingly automated. As a result branch networks continue to be downsized and alternative distribution channels gain place. Some regions (North Europe) place a strong emphasis on Internet banking.
At this moment it is difficult to say how stable these trends will be. Concentration on core activities and home markets might simply represent a reaction to the current economic situation and because of this could be of a temporary nature.
5 MARKET ANALYSIS NETHERLANDS
5.1 Political environment
The government, composed of the centrist Christian Democratic Appeal (CDA), the right of center Liberals (VVD) and the left liberal D66, and led by Jan Peter Balkenende, is expected to remain in office during the outlook period. Political situation is stable.
5.2 Economical environment
The Dutch economy is one of the most open European economies. As a result the Dutch economy’s open character renders it particularly sensitive to international economic developments. Therefore the Netherlands was seriously affected by the global economic slowdown in 2001 – 2002. In 2002 the growth was only 0.2% and 3.5% inflation. In spite of the poor performance in year 2002 the Economist Intelligence Unit estimates that economy is now poised for a modest recovery. Real GDP is forecast to grow by 1.1% in 2004. Inflation fell from 5.1% in 2001 to 3.5% in 2002 and to 2.2% in 2003. The current account will remain surplice of around 4% of GDP in 20045.
In annual terms, 2003 was a year of modestly declining economic activity, characterized by weak consumer demand and investment, offset slightly by an increase in inventory accumulation and rising government consumption. Weak consumer demand is a reflection of rising unemployment and generally pessimistic public sentiment. The majority of households still consider that now is not a good time to make a major purchase. According to the Dutch statistical office (CBS) the biggest fall was in spending on durable goods6. In contrast to consumer spending, government consumption remained comparatively high in 2003, increasing by an average of 2.4%. Business investment was the weakest element of domestic demand in 2003, showing 3.6% reduction.
Corporate bankruptcies rose by more than 15% in 2002. However, the Dutch bankruptcy rate, at 6.9% in 2002, remained significantly below the levels recorded during the previous economic downturns: 9.2% in 1993 and 14,4% in 1983.7
Current economic situation has a negative impact on labor market. The jobless total increased from an average of 302,000 in 2002 to an average of 396,000 in 2003.
In spite of economic difficulties that were described earlier the expectations for the economic recovery is positive. As it was maintained before real GDP is forecast to grow by 1.1% in 2004 and inflation will fell.
5.3 Legal environment
The full tax deductibility of mortgage interest payments in the Netherlands. This encouraged Dutch households to borrow as much as possible in order to maximize the tax benefits.
About 20% of outstanding Dutch residential mortgages carry a Nationale Hypotheek Garantie (NHG), according to which the government will pay the lender in case of default8.
5.4 Banking Industry Analysis
In this paragraph, I would like to give some general information about Dutch banking sector. The Dutch market for financial services is characterized by a strong oligopolistic supply side structure with limited growth opportunities. For years four very large financial conglomerates, which offer the whole range of financial products and which are in fierce competition with each other, have dominated the financial sector. Three of these companies are Dutch of origin (ABN AMRO, ING
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Bank, Rabobank) but are now global players and fourth is Belgich / Dutch. (Fortis). Together they control 80% of Dutch banking market. High sunk costs, high switching costs for account holders, and the oligolipolistic feature of the Dutch banking sector have raised entry barriers for new entrants9. On the other hand understanding that there is little room for expansion in the Dutch domestic sector, the main Dutch banks have spread their activities internationally.
(Especially in Eastern Europe).
Each of these companies covers the total area of The Netherlands with a large distribution network of regional and local offices. Each of them is universal bank. They combine three major types of financial services: banking, insurance securities. Within these sub sectors they offer all types of financial products. Apart from them, there are only some smaller banks and insurance companies and a number of “niche players” active on the Dutch market.
The major banks have been able to reduce their cost to income ratios significantly through sustained development of alternative distribution channels and the considerable reduction of the physical branch networks. Dutch banks operating flexibility does, however, remain hampered by a high cost base, mainly stemming from generous collective labor agreements.
Banks also have tightened the supply of loans to corporate, moving away to less risky and more profitable sectors, such as mortgage and consumer lending. (40% for market leader Rabobank’s total portfolio, and about 25%-30% for ABN AMRO and ING.
The Dutch banks operating performance compares unfavorably with that of banks in most neighboring countries. At year-end 2002, their average operating profit came slightly under 10%
of average equity. At mid 2002 the average cost to income ratio of the five largest Dutch universal banks stood at 71%, a level only exceeded in Germany10. The reason for such a result was lower income and higher costs. Dutch banks are penalized by relatively high funding costs on customer’s deposits and savings, and by the low rates charged for banking services to the middle market companies and to individual consumers. According to the Dutch Central Bank, banking services charged to SMEs (Small & Medium Enterprises) are 50% higher in the UK than in the Netherlands. The major Dutch banks were also hit by the bad capital markets performance in recent years, which translated into a significant decline in non-interest income. The Dutch banks profitability is also affected by a steep increase in the charge of risk, on both their domestic and international portfolios. Loan provisioning rose by 50.4% in 2002 over the preceding years.
This risk is partly mitigated by solid financial profiles of Dutch banks.
5.5 Description of Dutch Banks:
ING GROUP and ING Bank
ING Group is a global financial institution of Dutch origin with 115 000 employees. ING offers banking, insurance and asset management to 60 million clients in 60 countries. ING Group originated in 1991 from the merger between Nationale Nederlanden and MMB Postbank Group.
Product & Services:
Saving & Investing, Individual Loans, Current Account, Private Banking, Individual Loans, Individual Insurance
ING’s strategy is to achieve sustainable growth while maintaining healthy profitability. The Group’s financial strength, its broad range of products and services, the wide diversity of its profit sources and the good spread of risks form the basis for ING’s continuity and growth potential.
Mission: ING’s mission is to be a leading, global, client focused, innovative and low cost provider of financial services through the distribution channels of the client’s preference in markets where ING can create value.
The Executive Board has decided on the following Group strategic objectives for the years 2002 – 200511.
1 Strengthen the capital base and improve other key ratios to maintain a solid financial foundation.
ING will give the highest priority to strengthening its capital base and to improving its ratings.
The Executive Board has also taken a series of other measures to reinforce the capital base and reduce the dependency of ING;s business on stock-market developments. Furthermore, ING will continue its efforts to improve its efficiency, return on equity, return on required capital, risk adjusted return on capital (banking) and debt/equity ratios.
2 Optimize the existing portfolio
No large acquisitions will be made in the near future. In markets where reinforcement of the distribution capacity is an immediate priority, ING will seek to enter into joint ventures with local partners. ING will be very selective about investment choices and deployment of resources.
3 Create value for the clients with multy – product / multy-channel approach.
From the start, ING has chosen integrated financial services as the heart of its strategy. The power of the integrated financial services concept is in the multy-channel / multi – product approach. ING gradually aims to extend both the product range (insurance, banking, asset management( and distribution channels.
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4 Develop ING’s special skills
The ING Direct operates in seven large countries have thus created substantial value for ING in only a few year’s time. ING Direct is the group’s brand for direct – including Internet – banking.
It has been promoted in those markets where ING Bank has no retail presence (Australia, Canada, France, Germany, Italy, Spain, UK, US) and forms the core element of the bank’s international expansion strategy. ING Direct’s business model is to gain entry to a market by using a high rate, no fee, no minimum balance savings account and then, when it has achieved the necessary scale, it complements the savings product by cross selling mortgages, mutual funds, pensions and life insurance.
As a pension specialist, ING currently offers pension products in 30 countries around the globe and assists governments struggling with the necessary reform of their pension systems. The pension business also offers attractive opportunities for cross-selling.
5 Further lower the cost base
In 2002, ING made much progress in lowering its cost base. The strict cost discipline will be maintained in the years ahead. Substantial future cost savings are expected from the rationalization of the operations / IT activities.
ING Bank
Banking arm of ING Group, one of the 15 largest global financial services companies. Bank is managed geographically with an integrated bancassurance approach. Strategy in the bank has become increasingly focused on retail activities and on Europe. ING is the second largest bank in the Netherlands, with a 25% market share based on total assets and a 26% market share of deposits. Postbank is a major pillar of the domestic franchise, providing retail banking services to over 7millions private customers. Around 60% of Dutch households have a financial relationship with Postbank.12
Belgium is the second home market for ING Bank. In 1998, ING acquired Banque Bruxelles Lambert (re-named ING Belgium), the third largest Belgian private sector commercial bank, and German/s BHF Bank re named ING BHF. ING BHF is ING Bank’s second largest subsidiary outside the Netherlands and is one of Germany’s largest investment/private banks. In Central Europe, ING Bank Slaski in Poland is ING Bank’s most material investment and is the sixth largest bank in the country. No other major international banking acquisitions are currently planned and ING Bank is using its direct channel (ING Direct) as its prime expansion vehicle outside its home markets.
Since 2002, ING Bank has been restructuring its investment banking and international wholesale activities, resulting in the downscaling or exiting of a number of these operations.
ING Group’s global corporate and investment banking activities were brought within EC Europe in 2001 to create ING Wholesale. This involved fully integrating the former Corporate &
Investment Banking EC. ING Wholesale will now be predominantly focused on Europe. The wholesale banking units in the Americas and Asia report into EC Europe.
SWOT
Strengths:
• ING has a leading position in Nederland and especially strong in retail operations, it has adequate capitalization and sound asset quality.
• ING Bank has a good network for distribution its products in the Netherlands (via Postbank). This network is competitive advantage for the Bank. (Around 60% of Dutch households have a financial relationship with Postbank).
• Strong international franchise (especially in Belgium and Eastern Europe).
Weaknesses
• Weak financial markets and higher credit costs resulted in lower operating profit across most divisions in 2001 and 2002, though wholesale and investment banking units were particularly badly affected.
• Week financial performance in Germany coursed by bad debts and low net income generated from Poland. (During last two years there were small variation in absolute terms in operating profit from the Netherlands and Belgium. But ING BHF Bank reported a loss in 2003, as it did for 2002, and ING Bank Slaski also reported a weak result)13.
Opportunities
• ING Bank has significant potential to restructure profitability of its banking activities.
ING Bank accounts for 60% of group equity, but generates ROE of only 12%. The key problem areas are Germany, where BHF Bank has extremely high bad debt levels and Poland.
• Despite the fact that at this moment Poland is a problem area for the ING Bank it is also highly potential. Developing this region will allow ING not only to make its position stronger in Eastern Europe but also increase its total profit after restructurization of Bank Slaski.
• There are also opportunities in integration of banking and insurance businesses via common cross-selling. This should reduce operational cost, increase profit and on other hand will be a strong competitive advantage that will not be easy for competitors to imitate.
Treats
• At this moment the biggest threat for ING Bank is coming from its operation in Germany and Poland. This is the market where a lot of investments were made during last years for business developing. Return on this investments is still small, cost of operations is high, strong competition. These factors also have a negative influence on total performance of ING Bank.
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ABN AMRO Bank
ABN AMRO Bank NV is the only subsidiary of ABN AMRO Holding NV. By assets, it is one of the largest 10 banks in Europe, and top 20 in the world. At end 2002, it employed 105,567 staff worldwide. ABN AMRO aims to be a key player in the global financial markets. Its business is well diversified with 3,500 branches of its own and its affiliates in 67 countries and territories.
ABN in recent years has undergone a number of shifts in strategic direction. In August 2001 it changed strategy to the current Retail and Asset Gathering businesses and decided to reduce its global footprint to maintaining a presence in a 3 key “home markets”; Brazil, the US and the Netherlands. Like many of its peers ABN remains capital constrained to make large – scale acquisitions and so explains ABN management’s near term focus in on both revenue growth and capital generation. The group has displayed commitment to their Retail business14.
ABN has 3 main business units: Wholesale banking (for large corporate), a combined retail and SME business and finally the Private clients & Asset management. The Retail and SME Business is divided into 4 regions, Netherlands, North America, Brazil and Rest of the World.
Commercial banking \ Investment banking
Commercial banking is predominately in Netherlands and US, accounting for 60% of lending on our estimates15. The remaining exposure is mainly to large corporate on the Continent. The business is evenly split between loan products and traditional investment banking encompassing (equities, fixed income and corporate finance). Recent strategic moves have been the closure of their US equities and corporate finance business to concentrate more on fixed income. On the lending side ABN is taking a more selective approach to clients by exiting low margin relationships and taking on only higher margin business.
Comparison with ING
The commercial / Investment banking businesses of ABN and ING appear similar in many respects: both are largely focused on the Netherlands and US, both are not very profitable, and both are currently operating in restructuring mode.
Retail Banking
ABN combines its retail and SME business under the same banner. The group takes a geographically focused approach by concentrating on three key markets, Brazil, the US and the Netherlands. ABN occupies a dominant position in the US Midwest, the southeast region in Brazil. In the Netherlands ABN is a top 3 player in the retail and SME market.
Comparison with ING
Like ING, ABN is trying to attract customers to take up longer – term savings products. ABN is more a corporate bank in the Netherlands where as ING has a stronger retail presence. In the Netherlands, ABN is stronger in urban areas where as ING has a more even spread for its branch network.
SWOT analysis:
Strengths:
• ABN is strong in mortgage banking in the US, consumer financing in Brazil and has the dominant position in large corporate lending in the Netherlands. As the largest corporate lender in the Netherlands, they have some power on pricing. ABN is also number one in Dutch Private banking.
• Restruicturisation that was implemented by the bank over the past three years appear to be successful. Bank receives higher revenue and achieved substantially lower cost and market reduction in loan loss provisions.
Weaknesses:
• Somewhat lacking momentum in their stated goal of bolster their asset gathering presence.
Small bolt on acquisitions have been made but still ABN’s presence still lags behind the bancassurers that have a much bigger presence16. ABN’s organic growth policy may not deliver growth fast enough to meet their objectives. Additionally, their exposures to large corporate has hit profits badly in 2001 and 2002 resulting in large loan loss provision changes.
• Relatively low profitability in domestic operations. The bulk of ABN AMROs net income is generated by the Consumer and Commercial Clients Business Unit, within which North America is the largest contributor. However, the relatively low profitability of ABN AMROs domestic operations continues to be weakness. Despite comprehensive restructuring, and 21 reductions in headcount since end 2001, there has only been a minimal decrease in operating expenses, mainly because of rising pension costs.
Opportunities:
• There is some room left for cost cutting in the Netherlands retail and SME business. There is also potential to cross sell into Belgium and Luxembourg, markets whose proximity could allow this to be done quite cheaply.
• There is also the opportunity for fill in acquisitions in both Brazil and US.
• There are opportunities from strict cost control and exploiting synergies within Bank Threats:
• The Netherlands is a competitive market and there exists other players like ING, and Aegon that also have significant scale, product and distribution. This could add additional pressure on market shares or margins in the future.
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FORTIS
Fortis is the fourth largest bank in the Netherlands, with a 7% market share in loans and deposits17. It also undertakes some international activities. It is fully owned by the Belgian Dutch banking and insurance group. Like many other Continental European financials, Fortis’s strategy is one of more defense than offence today. Management intends to increase revenue by offering a broader range of financial services to more customers, while continuing reducing its cost base by decreasing the branch network, staff, winding down risk and integrating the many acquisitions made during the 1990s. In addition, owing to its retail focus, large customer base and wide product range, the bank has relatively stable and diversified sources of income that are helping it deal with the challenges currently facing the banking sector.
But on my opinion Fortis no longer has the financial flexibility to continue its acquisition spree and those made have left it with sizeable market shares in the mature Benelux region and few sustainable growth options (unlike ING with its emerging market life businesses and direct bank).
Commercial banking
Commercial banking is mostly Benelux centric but also operates (slowly expand) on the Continent, as well as in Asia. Products and services include lending and cash management services, commodities trading, securitisation and factoring. Fortis is the leader in Belgium, a top 5 player in the Netherlands and a fringe competitor on the Continent and in Asia. Fortis claims to be strong in areas including commodities and currency trading, project finance, and asset backed security issuance and trading18.
General comparison with ING
Like Fortis, ING is one of the strongest players in the Benelux. However, ING is more diversified in many respects, particularly geographically with its much larger operations in Germany, Poland, and the US.
Retail Banking
Fortis’s strategy is to offer integrated financial service solutions to retail and small business customers, predominantly in the Benelux (but also in France, Poland. And Hong Kong). Fortis is in top 5 player in the Netherlands. The retail bank is not small in global terms, but would be ranked outside the top 2019. One of the main Fortis competitive advantage’s in this area is its longstanding history in the Beneluxm and particularly Belgium, market place.
General comparison with ING
Like Fortis the number 1 in Belgium, ING is the number 2 in the Netherlands (behind ABN AMRO). The primary area of differentiation between the two, in my opinion, is the benefit ING derives from its Post Bank business. This low cost, high visibility distribution channel allows ING Bank to touch a high percentage of Dutch retail customers in a cost effective manner.
SWOT analysis
Strengths:
• Fortis is a leading integrated financial services provider in the Benelux and enjoys the critical mass needed to be a credible scare player. Strengths include breadth of products (spanning retail/wholesale banking, life and non life insurance, and fund management/security services).
• Distribution capability is also quite strong, incorporating the gamut of retail bank branches, brokers and private bankers.
• Demonstrating strong cost control in its banking activities, loan loss provisions remained stable and manageable. This has a very positive effect on revenue growth.
• Finally, the risk profile is maintained and quite manageable levels, which kept Fortis in relatively good position.
Weaknesses:
• Lacking obvious long-term growth options because it no longer has the financial flexibility to continue its acquisition.
• Fortis does not have a material presence in the US or exposure to underdeveloped, higher growth markets like Asia.
• Fortis has also weak position in Eastern Europe.
Opportunities:
• Cost-cutting, predominantly within banking. Fortis is targeting roughly a 5% reduction in full time equivalent employees in 2003 and flat costs overall.
Threats:
• The Benelux is a competitive market and there exists other players like ING, ABN AMRO and Aegon that also have significant scale, product and distribution prowess. This could add additional pressure on market shares or margins in the future.
• Credit risk is the major risk in the bank. (Fortis tries to reduce this risk by maintaining large proportion of low risk assets, including retail mortgages.)
• Dutch market is saturated and the bank faces challenges from its three much larger domestic competitors.
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RABOBANK
The Rabobanks, formerly known as agricultural credit banks, were founded in about 1900 as cooperative societies modeled on the German Raiffeisen banks, in order to serve as savings banks and credit institutions for the local agricultural communities.
On 1 January 1997, 481 local banks belonged to this group. Independently operating within their own region, they are associated with the Coperatieve Centrale Raiffeisen-Boerenleenbank, known as Rabobank Nederland for short.
The field of activities of the rabobanks largely covers that of the universal banks, although there are still differences in emphasis. Traditionally, the customers of the rabobanks were private individuals and small enterprises outside the towns. At present, the Rabobank group has a strong competitive position vis--vis the universal banks as supplier of all kinds of financial services to the whole of Dutch trade and industry.
In the Netherlands the bank has a prominent position in the domestic insurance market thanks to its subsidiary Interpolis, a major Dutch insurance company.
Commercial banking \ Investment banking
During the last decade Rabobank Nederland has extended its international operations. At the end of 1997, the international network comprised of 112 offices in 35 countries. In addition it has made several alliances with cooperative organizations and banks in other European countries. In the Netherlands the bank has a prominent position in the domestic insurance market thanks to its subsidiary Interpolis, a major Dutch insurance company.
Rabobank Nederland is also attempting to enlarge its securities business, including investment and asset management services for its customers. In 1990 it entered into a joint venture with the leading Dutch investment group Robeco, for the promotion and sale of Robecos investment funds through the branch network of its own associated banks. In June 1996 the two partners in this alliance agreed to intensify their co-operation. After taking a 50% stake in early 1997, the Robeco Group was subsequently integrated in the Rabobank organisation during 1997. As a consequence, Rabobanks 1997 figures incorporate the Robeco Group for the first time.
Retail Banking
Private clients, many of them in cities since the rabobanks have opened a large number of branches in densely populated areas, are still very important for these institutions, as can be inferred from the fact that at the end of 1995 savings accounted for 50% of funds entrusted.
General comparison with ING
Both ING and Rabobank are universal banks. In spite the fact that Rabobank is trying to increase its International operations it still has a strong domestic focus: (Stantart & Poor’s report) about 75% of the bank’s revenues are generated in the Netherlands, which has shielded the bank from
negative international developments in recent years. On the other hand, Rabobank is more exposed to the downturn of the Dutch economy. ING also has a strong focus on the Dutch market but its international operations are broader spread. ING Bank has three home markets:
Netherlands, Belgium and Poland.
SWOT analysis
Strengths:
• In recent years, the bank has been able to strengthen its already strong market position in the Netherlands, while at the same time improving its operating performance, limiting its cost of risk (this ratio declined significantly to 65% in year 2003), and maintaining a high capitalization.
• Rabobank is very important for Dutch economy and has a strong position in agricultural sector. The organization has a strong franchise in the domestic retail market, with a 24%
share of the residential mortgage business and 40% of saving deposits. Rabobank maintains banking relationships with roughly 39% of Dutch small and midsize business and accounts for more than 83% of loans to domestic agribusiness and farmers20.
Weaknesses
• Rabobank’s overheads have traditionally been relatively high, reflecting the group’s extensive branch network, its role as a payment agent for corporations, and its sustained expansion abroad. As a response for this Rabobank has started strong cost reduction program.
(In 2003, Rabo closed 138 branches and saw a reduction of over 1,900 staff in its domestic network)21
• International operations of Rabobank are also relatively week if to compare with other Dutch banks like ABN AMRO and ING Bank. This is a strong weakness on my opinion because in order to operate effectively in current highly competitive market environment during economic slow down the Bank should also diversify its operations. (Especially now when Dutch economy is not performing so well)
Opportunities:
• There is an opportunity of profit maximization by entering new markets, especially the Eastern European market. In the late of 1990, Rabobank increasingly diversified its international operations. The group’s corporate and investment-banking arms expanded aggressively under the name of Rabobank International. The initial performance of Rabobank International was disappointing. In spite of this these operations are highly potential and Rabobank should continue its international operations. The main challenges facing Rabobank are to project its strong domestic market position and to implement an effective international strategy.
Threats
• As it was mentioned before Rabobank still has a very strong domestic focus where about 75%
of the bank’s revenues are generated in the Netherlands22. For this reason Rabobank is more exposed to the downturn of the Dutch economy and competition in a saturated Dutch market.
