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Benelux banks turn to fees as low rates stunt net interest income


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Benelux banks turn to fees as low rates stunt net interest income

As pressure from low interest rates lingers, big banks in the Netherlands and Belgium are turning their focus to fee income to hold their profitability steady.

The banks in the region are highly dependent on net interest income, or NII, and this reliance endangers their profitability due to the effects of low rates. NII in full year 2020 accounted for more than 75% of total operating income at Dutch lenders ING Groep NV, Rabobank and ABN AMRO Bank NV, and around 60% of total operating income at Belgium-based KBC Group NV.

For Benelux banks, growing their fee-related income is one way to cushion the blow to NII.

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"Growing our fee business is important to balance our income generation in a low-interest environment," ING said in an emailed response to questions, adding that daily banking fees have been raised in Spain, Poland and Romania. It has set a growth target for fee income of 5% to 10% per annum.

ABN Amro is aiming for fees of around €400 million each in the third and fourth quarters, on the back of high volatility in the clearing business and strong markets in private banking during the first half, a spokesperson said.

KBC said its asset management and banking fees have been doing well, while entry fees are "a bit softer." The bank is also working on "anchoring" more of the deposit inflows it continues to receive.

Meanwhile, Rabobank is banking on insurance intermediation, asset management, payment services and other advisory business. It is also banking on fees generated by its Carbon Bank arm, which helps Dutch farmers to decarbonize their business and presents opportunities to offer new mortgage products.

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Analysts and bank executives echo this view, predicting that rate-related pressure will remain even as economies rebound from a pandemic-induced downturn.

NII under pressure

Low rates will continue weighing on ING's revenues for the next couple of years, UBS Research said. Rabobank CFO Bas Brouwers has also said "structural pressure" is still present in the lender's NII.

It is tougher for ABN Amro, with Berenberg saying the bank's revenue headwinds are among the "most severe" of the eurozone banks and that its growth outlook "is constrained by an overreliance on Dutch mortgages." The bank is also implementing a wind-down of noncore business in its corporate and investment banking division.

KBC upgraded its 2021 NII guidance to €4.4 billion, considering volume growth and two potential additional rate hikes in the Czech Republic, one of its key markets.

The impact will also likely drag on the banks' return to pre-pandemic operating profit levels, analysts have said. The recovery will largely depend on the pace of economic rebound, and the outlook remains uncertain until at least 2021-end.

Profit-making solutions

The banks have also started charging negative rates on retail deposits and plan to lower the threshold further. Moreover, they expect benefits from the ECB's targeted long-term refinancing operations, or TLTRO III, which offer cheap long-term funding.

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ABN Amro charges negative rates on about €69 billion of deposits.
Source: Yuriko Nakao/Getty Images News via Getty Images

Negative charging would cushion the impact from NII pressure by about €200 million this year for ING. ABN Amro expects a mitigating effect of about €20 million per quarter from negative rates, which has been applied to about €69 billion of deposits. Rabobank plans to further lower the threshold for negative-rate charging, which currently applies to only 5% of its customers. It is also exploring new businesses, such as SmartBuilds, a green home rental business expected to drive currently stalling housing demand in the Netherlands.

ING has been benefiting from TLTRO III, which had a €83 million effect in the second quarter, and it expects a similar trend over the next four quarters. ABN Amro anticipates as much as about €88 million in TLTRO III funding in the fourth quarter. It expects NII to be between €5.3 billion and €5.4 billion this year, marking another year-over-year decline.

Capital strength

Despite the headwinds, analysts said Benelux banks are still among the best capitalized in Europe, particularly ING and KBC. Both lenders have declared attractive capital returns.

Berenberg said KBC has a war chest for future acquisitions, which could be useful, as weakly capitalized banks could consider off-loading assets.

ABN Amro's capital return potential has also increased, according to UBS research, and the bank is expected to launch a share buyback next year. Rabobank also intends to return to its usual payment policy in 2022.