Fortis reshaped by government bailout

29th September 2008, Comments 0 comments

Belgium, the Netherlands and Luxembourg agreed late Sunday to cash injection for Fortis Bank to renew financially stability.

29 September 2008   

AMSTERDAM -- Fortis NV said Monday it will become a smaller but financially stable bank after three European governments agreed on a EUR 11.2 billion (USD 16.4 billion) bailout package.

Belgium, the Netherlands and Luxembourg agreed late Sunday to the cash injection to avert a run on Fortis, taking a 49 percent stake in exchange and demanding Fortis resell the share of ABN Amro it bought a year ago - the very decision that brought about all its troubles.

Fortis, with headquarters in Brussels, Belgium and Utrecht, Netherlands, is Belgium's largest retail bank, while ABN Amro is the largest in the Netherlands.

The bailout orchestrated by the three neighbouring countries and European Central Bank chief Jean-Claude Trichet was meant to restore confidence in the bank before the reopening of markets on Monday after a tumultuous week of imploding share values at Fortis.

Insolvency fears caused the company's shares to tumble to EUR 5.18 (USD 7.56) Friday, their lowest level in 15 years. The shares have lost more than three-fourths of their value since the ABN buy.

Fortis paid EUR 24 billion for its share of ABN in October 2007, and said prior to Sunday's bailout it needed to raise around EUR 5 billion (USD 7.3 billion) in cash to maintain financial ratios as it integrated ABN's Dutch retail operations next year.

Fortis had insisted it could meet that shortfall by selling other assets, but analysts were increasingly sceptical as there are few buyers in the market and many sellers.

Traders too, appeared to think the bank was over-leveraged. Based on its closing share price Friday, the bank's total market capitalization was EUR 12.1 billion (USD 17.5 billion), half what it paid for ABN.

Nout Wellink, the head of the Dutch central bank, said the U.S. financial crisis was partly to blame.

"What is happening in the U.S. has most certainly had an impact on the financial sector in the rest of the world," he told reporters. "Due to rumours, I have to say, Fortis became a bank in a special position."

Monday Fortis said it would be left with excess capital of EUR 9.5 billion (USD 13.8 billion) after its transformation. However it noted that to the extent ABN Amro's retail operations fetch less than EUR12 billion (USD 17.4 billion), capital would be depleted.

Fortis Chief Executive Filip Dierckx said in a statement Monday the moves would "ensure the financial strength and stability of our company going forward."

Dierckx has had an eventful first two days on the job after his appointment Friday as Fortis' third chief executive in as many months. The previous two chief executives resigned.

As part of the bailout deal, Chairman Maurice Lippens will also be forced to resign and will be replaced by a candidate from outside the company.

In a press statement, Fortis said it expected to write down EUR 5 billion (USD 7.3 billion) worth of evaporated value in ABN, lost tax credits, and losses on its derivatives portfolio.

The company said that it has written down 78 percent of the value of "collateralized debt obligations" (CDO) it wrote itself.

CDOs are packages of loans such as mortgages, bundled and sold like bonds.

The deterioration in the bank's portfolio is noteworthy, since few European banks have gone as far in revealing such woes, and analysts fear they will eventually do so.

Fortis added that it expected further impairments on "the remainder of the structured credit portfolio," CDOs it owns but didn't create, but it didn't say how big that portfolio is or how large the impairments will be.

Fortis' nearly fatal misstep was participation in a three-bank consortium led by Royal Bank of Scotland PLC that acquired ABN Amro in a EUR 70 billion (USD102.5 billion) deal that was the largest takeover in the history of the banking industry.

[AP / Expatica]

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