SNS tries to get a position at the mortgage market, but might fight a losing battle against the ‘apparatchiks’ from Brussels

The bank-insurer and smallest of the Dutch big banks, SNS Reaal, was yet again in the news last week after a few months of relative peace and quiet.

Since the beginning of February, when SNS was nationalized, the bank had been working on its self-confidence again by slowly picking up the fight against the big three: ING Groep NV, (the nationalized) ABN Amro and the Rabobank group.

As the core bank and the insurance companies of SNS Reaal have always been quite healthy by themselves and the only real problem of the group had been SNS Property Finance, the bank could still act as the smaller and friendlier alternative for the big banks, after the rescue action by the state.

Nevertheless, the verdict of the European Commision hangs above SNS Reaal’s head, like Damocles’ sword. It can be expected that SNS Reaal will be severely punished by the EC, due to the fact that it a. received massive state support from the Dutch state during the nationalization process at the beginning of this year and b. that it had been the second time that the bank-insurer had received state aid, since the credit crisis started at the end of 2008.

Next to a foreseeable split up of the SNS Reaal group, wherein the bank and the insurance companies will be separated and large chunks of the bank or the insurance companies must be sold to external parties, there will probably be other measures as well.

ING and ABN Amro, for instance, were not allowed by the European Commission to:

• Acquire new financial companies and gain market share through this
• Promote price leadership:
• Being price fighters, who offer their services at the best prices
• Being interest stunters, who offer the lowest lending rates or highest savings’ rates
• Refer in advertisements to the fact that it was a stateowned bank (ABN Amro) 

It can be expected that similar punishments will also be effectuated upon SNS Reaal. The EC must do so, in order to not treat this relatively small bank-insurer more friendly than its two bigger competitors.

Still, SNS Reaal is not going to wait for the verdict of the European Commission, while sitting on its hands. Instead, the bank tries to make itself an indispensable, small party in the near-oligopoly that the Dutch banking industry is, which might not be a bad strategy.

Their strategy: convincing the European Commission that ‘splitting us up would ruin the competitiveness of the Dutch banking and insurance industry’. Their market of choice: the Dutch mortgage market.

Het Financieele Dagblad has written upon this story:

SNS tries to butter up Brussels

SNS Reaal is attacking the Dutch mortgage market. It is going to ‘mark down’ its mortgages, in order to rapidly expand its current, minimal market share, at the expense of its competition. In the fall of 2013, the company will reduce the prices of its mortgages.

According to insiders in the matter, SNS is taking this step in order to show to the European Commissioner of Competition, that the bank-insurer can play an important role as a booster for competition in the Dutch banking industry. Consequently, it hopes to receive a milder ‘punishment’ for the received state support than for instance ING.

SNS aims at expanding its position at the Dutch mortgage market towards a market share of 6% in mortgages for newly-built houses. This became clear at the presentation of the half year data. During the last years, the fourth bank in The Netherlands saw its market share shrink from 9.4% towards the current 1.2%.

According to CFO Maurice Oostendorp of SNS Reaal, the profits margins that banks currently make on mortgages do allow SNS to reduce its prices. ‘The acceptance conditions for consumers have been enhanced and our margins allow that we offer sharper prices on mortgages. Thus we can add a small contribution to the revival of the Dutch housing market’.

These plans of SNS cannot be seen separately from the restructuring plan that the bank must hand over to Brussels next week. It is expected that the company must abolish a large part of its assets, as it received state support twice. By making itself ‘bigger’ at the Dutch mortgage market, SNS can show that ‘the Dutch number four is able to fight the competition of the Big Three’.

Insiders doubt whether SNS is able to shake up the Dutch mortgage market. As the bank is still not welcome at the international capital markets, it has very little leeway for lowering its prices.

The observation by the insiders (red and bold text) is probably right. When the bank has no access to the capital markets yet, their funding capital is definitely (much) more expensive than the funding amounts that ING Groep and ABN Amro need for their mortgages.  

Asking lower interest rates for mortgages that you sell, while you pay higher funding costs for the needed capital, is a certain way to cannibalize on your profits and increase your risk profile.

On top of that, I don’t believe for one micro-second that these actions by SNS will really help to shake up the Dutch mortgage market.

People that really want to buy a house will not be stopped by a few euro’s more at their interest rates.

And people that doubt whether they will buy a house or not, will certainly not stop doubting in exchange for a few pennies less. Especially not, as the price of their favorite new house is still considered to be too high for many potential buyers. On top of that, a great many potential house buyers have currently their job on the line, as The Netherlands is still firmly in recession.

Of course, some potential buyers might get the final push by the cheaper mortgages offered by SNS, but this will only be a few dozen buyers per month, I presume.

I must admit, that I am symphatetic against SNS as the brave David, trying to fight its three Goliaths. And it is true that the Dutch banking industry desperately needs some extra competition.

Nevertheless, it would not be fair when this happened as a consequence of the state support and state-ownership that the bank received in February of this year.

The fact that SNS wants to become a price-fighter at the Dutch mortgage market is exactly the kind of thing that ‘the apparatchiks’ in Brussels want to prevent from happening. SNS could and would become a price-fighter at the Dutch mortgage market, due to the fact that the Dutch state saved SNS’ bacon. That is an undeniable fact.

Another fact is that SNS would profit after all from the circumstance that it is a state-owned bank, as this dramatically reduces the funding prices of its mortgages. Even without access to the capital markets, it remains an undeniable fact that borrowing money is less expensive for a small stateowned bank than for a small private bank.

This is exactly why Brussels doesn’t allow pricefightership and interest stuntership for banks that received state aid. If the EC would allow SNS to do so on Monday, then ING and ABN Amro would visit them on Tuesday, in order to claim a damage restitution for different treatment under similar circumstances.

Therefore I’m certain that SNS Reaal’s mortgage plan will be immediately tossed in the trashcan of the European Commissioner for Competition.