Cost overruns hit 1998 targets
h"%
Rl performance
The usual tough budget targets set for 1998 proved even tougher due to
significant cost overruns on some projects, including the transition to the euro,
the millennium problem and the need for major investment in back office
systems. Add to this higher than anticipated costs relating to investment
banking. The Group as a whole suffered from adverse market conditions, and we
were no exception. All of these factors contributed to make our centenary a
high-cost and high-provision year for Rabobank International (Rl).
Huge investment
Provisional problem
Substantial additions
ROS and risk
Consolidation phase
What'sNewS Issue 4 -April 1999 3
Rabobank Internationale 1998 results*
are hardly pleasant reading, especially
when the whole network contributed so
much energy, commitment and skill. A
nuniber of factors, some external,
converged to hit budget targets hard. Our
gross results were 18.5 percent below bud
get and net profit was only 18.1 percent of
the targeted figure. The underlying causes
are clear and in ways, unsurprising.
'Turbulent market conditions, economie
contagion, and the rapid pace of change
within Rl itself were contributory factors,'
says head of control Rl Alison
Straszewski. She did point out that the fig-
ures are anything but bad news only.
Although costs were up by a serious 33
percent on 1997, income was also up by
24 percent on the previous year.
'However,' she adds, 'that does not com-
pensate for an unacceptable cost overrun
in 1998 of 22 percent above budget.'
One of the major problems was the
systems on which we have become so
dependent that people today talk about
'system risk' in the same breath as
market risk. Rl was slow to invest in the
extensive - and expensive - IT and other
systems essential to financial business
today. Last year saw a turning point as
Rl injected huge funds into both euro
and millennium compliance (NLG 140
million (EUR 63.5 million) to date) and
the stabilization of our back office
systems. Obviously, the millennium
project is still ongoing. 'In fact,'
Straszewski explains, 'these particular
overruns followed the same pattern as in
1997 when costs rose by more than one-
third over 1996 figures and were no less
than 46 percent over 1997 budget.' Our
budget for this year, 1999, is aimed at
achieving the stabilization and
consolidation required to contain these
unmanageable growth levels.
Alison Straszewski of control Rl
A further factor in reduced results was the
level of provisions required to compensate
the high bad debt and country risk ensuing
from the Asian crisis. Rl had already made
considerable provisions when the
Netherlands' Central Bank imposed
further requirements. All in all, NLG 522
million (EUR 236.9 million) was required
to cover our loan portfolios. On the bright
side, we came through both the Russian
crisis and the failure of a number of hedge
funds almost unscathed and opened six
new offices.
Windfalls for the results were generated by
the sale of PIBA's mortgage portfolio and
RI's stake in Spain's Banco Popular. The
planned expansion of global financial mar
kets (GFM) activities also generated
income as well as contributing to the cost
side. Front office teams are now in place in
Europe, Asia and New York. GFM busi
ness, especially in reverse repos and securi-
ties, added substantially to the balance
sheet. The loan portfolio also grew consid-
erably. Interest profits far exceeded budget,
while fee income lagged behind. Other
income was also considerably higher than
targeted. Regarding costs, human
resources remains high on the balance
sheet. In 1998, we saw a 27 percent
increase in permanent staff for RL
However, we also employed around 600
temporary and consultancy staff on vari-
ous projects, including the Opex back
office system which was well above budget
owing to implementation problems.
Return on solvency has long been the buzz
word of the organization; the past year
was no exception. A solvency reduction
exercise was pursued vigorously world-
wide in 1998 and achieved the year-end
target of NLG 6 billion (EUR 2.7 billion)
comfortably, especially with the support of
the Atlantis 2 securitization program. In
1998, it offered solvency relief of NLG
900 million (EUR 408.4 million), although
its structure means loans remain on our
own balance sheet. We have also managed
to remain within average levels of market
risk, in spite of expanded GFM activities.
At year-end, RI's value at risk was no
higher than NLG 16 million (F1UR 7.3 mil
lion), although it had been somewhat
higher through the year. This is very good
news, showing how successful we have
been in moving from straight risk-taking
to more brokerage and intermediation
business, as well as the stringent manage
ment of liquidity in STIR trading books.
Obviously, there were bright spots in
1998. A number of very interesting and
profitable deals were done. The essential
integration of global financial markets
capability and knowledge-driven relation-
ship management continued to bring in
enhanced results for customers and by
extension, for RL But the reality remains
that cost overruns are both serious and
unacceptable. Budgets for the present
reporting year have been designed to man
age overruns more effectively. As Alison
Straszewski noted recently (WNS3/99): 'It
is never easy to move from an expansion-
ary phase into one of consolidation.' She
could just as well have added that it rnay
not be easy, but it has to be done.
*Please note: actual figures have heen
avoided in this piece for reasons of
confidentiality and security.
