As other banks across the see posted major investment banking earnings, ABN Amro cut back its investment banking activities. Revenue remains under pressure as ABN Amro like many other banks had to cut back on operation expenses, forcing the loss of many vacancies at the Dutch bank. The low interest-rate environment makes it hard for small banks like ABN-Amro to find enough credit space to make profits. The negative interest rate environment set by the ECB hurts the bank hard, as ABN-Amro was one of the banks to start charging negative interest rates to clients holding a deposit above a certain threshold. This painful decision will most likely cause a shift of large capital holders towards the already overheated housing market in the Netherlands, as equity in the liberal country is only taxed at 1,2 up to 1,6%.
Now that banks start charging negative rates on clients holding large shares of capital, the housing market could explode even more. This will mainly come at the cost of non-capital holders.
More on this in next week’s The Golden Investor article
However, European banks are forced to make these decisions as revenues across the banking sector are not only under pressure, but could still encounter major hits once the lockdown-imposed damage starts to bankrupt businesses that for now have been kept alive due the large governmental spending. Not surprisingly, the Netherlands was one of the countries with a lower amount of bankruptcies in 2020 than in 2019.
Rising Inflation Could Revive The European Banking Sector
As inflation rose to 4.2% in the United States in April, a potential shift could occur for the banking sector. If the rise of inflation is persistent on the long term, central banks could see itself being forced to raise interest rates. Higher interest rates will make it easier for banks to make a margin on loans. And as ABN-Amro saw loan revenues plunge 11% in the first quarter from a year earlier, this could be a major boost for the struggling Dutch bank. As many governmental spending programmes in the United States and Europe remain in operation, inflation could become a real problem for central banks that want to keep interest rates low. However, if the current rise in inflation is only transitory then there is not much to gain for banks and ABN-Amro will suffer from large corona write-offs.
The Boomerang Effect Of Rising Interest Rates
However, suddenly rising interest rates in a still recovering economy could be very hurtful as companies have been refinancing debt with new debt for the last decades as interest rates continued to fall due to excessive amounts of quantitative easing by central banks. If the ECB will find itself in a position in which it has to let interest rates rise to suppress rising inflation, many so-called zombie-companies will find itself in trouble. As previously stated, many non-viable companies which otherwise would have gone bankrupt have been saved with large amounts of governmental spending. Once governmental spending dries out and at the same time interest rate start to rise, this could offset a domino-effect of falling companies. So while modestly rising interest rates could spice up profits for ABN-Amro, this scenario could also boomerang in a way that will potentially offset a new European debt crisis. However, on the short term ABN-Amro share price is most likely to profit from upped inflation outlooks and the re-opening of the economy.
With inflation rising, some exposure to banks could boost portfolios to the short term. ABN-Amro has already recovered slightly from their ten percent slump after reporting the loss following the fine for their involvement in money-laundering schemes. So even though this bank should reconcile on their ethics, as they should not want to become the next HSBC, ABN-Amro (ABN:AMS) seems cheap at these levels and could potentially benefit from a persistent surge of inflation. Gold prices are at these levels pretty stable, however, rising interest rates could suppress further rises in the safe-haven asset. However, on the long term if inflation remains strong for a longer period of time, then it is time to re-balance portfolios from financials towards safe-haven assets.
Disclaimer: The writer of this article holds ABN-Amro (ABN:AMS) stock, this article should not be interpreted as investment advice or anything like that.