ABN-AMRO’s Grand Diamond Financing Strategic Blue-Print

So long as the Dutch government-owned ABN AMRO Bank remains the world’s largest diamond-industry financing institution, the transformation process at its International Diamond and Jewelry Group (ID&JG) is as crucial to the industry as, for example, production and sales figures of De Beers and Alrosa.

Actually, in the next few years, liquidity challenges will largely outweigh any supply concerns. When reporting on developments within ABN AMRO's ID&JG, the overriding questions are: how do they affect the industry? How do they affect liquidity? How do they affect access to finance? Will they remove any lingering uncertainties about the commitment to the industry?

In the last quarter of this year the Dutch government announced that, “the businesses that were acquired by the Dutch state are planned to be separated from RFS Holdings (the consortium made up of Royal Bank of Scotland, Fortis and Santander Bank that initially acquired ABN AMRO) and become an independent and separately capitalized and regulated entity under the supervision of the Dutch Central Bank (DNB).”

In plain English, what the government is doing is creating a completely new bank with new licenses, new business strategies and everything that comes with it. The only thing that will remain the same is the old name (which will also be applied to the acquired part of the business which is Dutch Fortis).

Victor van der Kwast, the ABN AMRO “diamond czar,” is now tasked with actually creating an entirely new international diamond-financing structure. For this task, ID&JG is understood to be aiming for continuity in key diamond locations such as Belgium, Hong Kong, UAE and Switzerland, while undergoing major changes in other locations.

What was is not what will be.

For instance in New York, the Royal Bank of Scotland (RBS), which bought the U.S. business of ABN AMRO (but not the bank’s diamond business), filed a request with the New York State banking regulators to change the name of ABN AMRO to Royal Bank of Scotland. That leaves the diamond business in the U.S. without a full-fledged banking license. Accordingly and logically, the ABN AMRO diamond branch there has filed an application to become a representative office. It will be the only office in the U.S. with an ABN AMRO name plate on its door.

A representative office is able to carry out many of the functions a bank can do, but it cannot do all the same operations as a fully licensed bank can do. For example, those customers holding a simple checking account at the New York bank were recently informed that this service would no longer be offered. The bank’s diamond and jewelry-financing business will henceforth be conducted through the Antwerp operations of ABN AMRO’s ID & JG, the current relationship management team will remain in New York. This for itself is not unusual.

ABN AMRO's main competitor in Antwerp, the Antwerp Diamond Bank (ADB), traditionally conducted part of its overseas business through representative offices, including in New York. The difference is that ADB is owned by KBC. This company provides it with certain back office support services in the U.S., compared to ID&JG being centrally served from Belgium.

Mumbai: The New Bank’s Asian Growth Engine

Another question rises regarding the future of the bank’s Mumbai diamond business. Basically, Mumbai’s ABN AMRO office is in the same situation as the U.S. office. At the moment, it has a cooperation agreement with the Royal Bank of Scotland, under which it still enjoys support services. The Mumbai office has the advantage “that it is in India…”

The new bank management considers India a very good growth potential market in Asia for general banking business. The rather profitable diamond operation can serve as a stepping stone for expansion in India. Therefore, the new ABN AMRO bank will apply for a full banking license in India, and when it is obtained, the business there will continue as is.

We have reason to believe that it may take considerable time. RBS must first change the ABN-AMRO name in India. This is because the Reserve Bank of India will not issue a second license to a business with a similar name. Sounds like a mundane issue, it’s relevant nevertheless.

However, this application allows a glimpse into understanding ABN AMRO’s overall strategy. It is not, as many believe, content with just being another regional bank within Europe. The new bank seems set on becoming a key player in select markets for private and corporate banking (including ID&JG) outside of Europe as well. This should increase the clients’ comfort level that the newly emerged bank is serious about its commitment to the diamond business.

If "in the back of its mind," ABN AMRO still contemplated divesting its International Diamond and Jewelry Group, it would restructure all of its business through representative offices. These have less equity value but are easier to spin off. The bank is not doing so – to the contrary. It is pursuing full banking licenses in both India and Africa – something a bank doesn’t do for just one client sector. Indeed, it seems that the role that the bank’s ID & JG plays in Mumbai is quite similar to the role foreseen in Africa.

Spearheading the Bank’s African Expansion

In Africa, ID&JG will close its Johannesburg office and will make Botswana the center of its operations in that continent. It has secured two licenses – one for providing local banking services and one for international business transactions.

In the grand scheme of things, ID&JG will provide its “local” and “regional” services in the Southern African diamond business.

It has of course the added benefit of being the executive arm of the joint venture it is concluding with Lazare Kaplan International and the Overseas Private Investment Corporation (OPIC). According to OPIC, this involves “a $333 million revolving guaranty framework facility in which OPIC will share credit risk for up to $250 million with ABN AMRO in loans to Botswana-based diamond cutting and polishing companies underwritten and administered by ABN AMRO.” Thus, ABN AMRO will provide up to $83 million in revolving credits as part of the total Facility.

Some experienced bankers have called lending and trade financing in Africa “a bureaucratic nightmare.” Six years ago, the Botswana government created an International Financial Services Center tasked with fulfilling the government's policy of creating an active international financial services center, which will make a significant contribution to achieving economic diversification and increasing the country's integration into the regional and global economy. Botswana wants to position itself as an active cross-border financial services center, serving clients domiciled in other countries. Botswana’s neighboring countries are far from “thrilled” with this policy.

The Dutch government did announce that it will eventually sell the bank, back into the private sector. It is expected that the sale will be conducted by taking the bank public again – in due time. In the near future, it must be expected that the diamond lending business in Antwerp will seemingly go much higher because of the U.S. representative office’s framework.

This structure may indeed yield some additional positive unintended consequences. American diamantaires getting their financing in Antwerp may visit the city located on the Schelde more frequently and conduct more of their business there. To the Americans, Antwerp may become like an offshore diamond-business financing center. This may have advantages the bank may not have thought about. Or did it?

Have a nice weekend.