Early in April, Fortis And Ping An finalized a joint venture agreement under which the Chinese insurance giant will invest €2.15 billion ($3.33 billion) to become a 50/50 partner with Fortis’s asset management arm. The move was widely seen as an effort by the Dutch-Belgian banking and insurance conglomerate to shore up a weakened capital position by selling the family silver. After all, some critics reasoned, Fortis could not be happy to be selling any of its asset management business so soon after having paid €24.3 billion, or about 17 times prospective earnings, to buy ABN Amro Asset Management, as well as ABN Amro’s wealth management and Dutch retail banking assets last summer.
“Nothing could be further from the truth,” says Richard Wohanka, chief executive of Fortis Investments, which will be renamed Fortis Ping An Investments. “This very much has the full support of us inside the asset management company because it does these two things: It opens up a second home market for us, and it gives us this insight into what’s going on in China.” Wohanka says the deal will be a “huge advantage” for Fortis, both for its asset management business in China and globally. Fortis already had an asset management presence in China through its Fortis Haitong Investment Management Co. joint venture, which manages $7 billion of assets.
Outside Fortis, however, skepticism about the bank’s motives for selling half of its newly enlarged asset management business isn’t hard to come by. “They have to,” says Ton Gietman, analyst at Petercam Group in Amsterdam. “It’s not their first choice to sell the asset management business because it’s probably one of the areas where they could generate the most synergies.”
Fortis’s capital position was weakened just as credit markets were seizing up. Standard & Poor’s shifted the outlook for its A+ rating on Fortis to negative from stable on January 30. In early March, just before Fortis released its full-year results, Moody’s Investor Service changed its AA3 rating outlook on Fortis to negative from stable. Both rating agencies cited deterioration in Fortis’s financial flexibility and capitalization levels, in part because of €2.7 billion of write-downs on its portfolio of subprime collateralized debt obligations. For 2007, Fortis posted a net profit of €3.99 billion, down 8.3 percent from €4.35 billion the prior year, though this also reflected €1 billion in gains, mostly from the sale of Fortis’s stake in CaiFor, its Spanish insurance joint venture with Caixa d’Estalvis i Pensions de Barcelona.
Fortis’s Tier 1 capital was well below its 6 percent target at the end of last year. Gietman says: “They are now at 5.4 percent including the deal, so excluding the deal they would have been below 5 percent.” That’s hardly comforting, especially considering securitization is no longer an option for getting assets off the balance sheet. Gietman also says “there wasn’t that much to sell in the first place” to help the bank lift its capital ratio.“If they fall below 6 percent for any length of time, probably their rating will be cut, and that’s not something they’re going to want to see happening,” he says.
Société Générale analyst Michael van Wegen in London says, “They have no room for error anymore.” He adds that Fortis still faces considerable integration risk going forward. Both analysts see Ping An as having gotten the better of the deal, which cost it only 1.8 percent of assets under management, versus the nearly 3 percent that Fortis paid for the ABN Amro assets it bought last year.
But Ralf Breuer, a banking analyst at WestLB in Düsseldorf, says asset management needs to be seen in the wider context of growing customer needs and a quickening pace of globalization. “On the one hand, Ping An provided capital,” Breuer says. “On the other, it provides a market, and we all know how difficult it is to secure a foothold in China. So I’m thinking less about basis points and/or percentages of AUM and more about prospects going forward.”
Fortis, whose three main divisions — banking, insurance and asset management — leverage one another’s skill sets and customer bases to gain revenue synergies in services to institutional, wholesale and retail clients, could do particularly well from the scale and growth opportunities in China say some analysts.
Farquhar Murray, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, says that from that perspective, Fortis got “a remarkably good valuation.”
