ABN AMRO; go or no-go?

Tomorrow is the big day for ABN AMRO. After the bail-out in October 2008, ABN AMRO is now going back to the market again in an IPO ranging between 17-19 Euro. Which makes us wonder: did ABN AMRO overcome their problems? If so, what issues might still arise? Is it time to buy the stock during their IPO?

First, we note that ABN generates most of its revenues in The Netherlands, a staggering 80%. It is worth noting that the Dutch financial markets experienced stagnation since 2008. Yet, there is light at the end of the tunnel as the Dutch financial market is expected to grow with 2.4% next year. Moreover, the company reported a quarterly net profit increase of 13%, amounting €509 million. Second, the IPO premium seems on the low side compared to one of its major competitors, ING Bank, which is currently trading at 15% of its book value, whereas ABN is expected to trade for a premium of 6% of its book value. It would not be surprising if ABN reached this premium too if we take the fundamentals into account. Third, ABN is generous when it comes to dividend. After its IPO, ABN is planning to pay 50% of net income as dividends (up from 40%).

Yet, not all that glitters is gold. ABN engaged in some dubious interest-swap activities, where clients did not receive the proper instructions and explanations concerning these financial products. Recently, the verdict by a court in The Netherlands resulted in ABN paying back the money lost on interest-swaps by one client, a total sum of €2 million. This verdict may cause other victims to also issue a claim against ABN and could result in a total claim of €2.5 billion as estimated by Pieter Lakeman, specialist in financial market claims, which is not even the worst case scenario. There are also some long-term threats to keep an eye on. Companies like Apple and Google are entering pay-transaction markets, which increases competition and may harm profits for ABN in the long run. The innovative nature of these companies could mean that they are able to emerge in this market fairly quick and establish themselves well in a relatively short amount of time.

Overall, we consider this stock reasonably defensive as growth opportunities are present, but limited. Looking at competitors it seems to be a valuable investment, especially if dividends are taken into account. If you are a value investor, this stock is a definite buy.