At more than 275 years old, Van Lanschot is the oldest independent private bank in the Netherlands. With an eye on the rapidly changing market, last year the bank decided to change its strategy. Evi Van Lanschot is now the young face of the oldest bank and is focusing on the wealthy client of the future.

2013 was an important turning point in Van Lanschot’s development. Under Karl Guha, the new CEO, the bank implemented its new strategy for the coming five years based on three key points: focus, simplification, and growth. “Focus means that we concentrate on what we are really good at, i.e., the retention and growth of our clients’ capital,” explains Martin Van Oort, Van Lanschot’s financial risk management director. “Over the past few years we have increasingly become a ‘small large bank’, with a business banking portfolio. As a result of consolidation in the sector, this will be scaled down even more. As a specialist and independent wealth manager, we think we can really make a difference for our clients.” Customers also wanted simpler and more transparent products. “And we want to extend this line through our organization, in our IT systems and in operations – it has to be simpler and more efficient,” Van Oort continues. “That means rigorous internal reorganization in order to serve our clients in the best possible way. The growth we strive for has to come from the capital management area.”

Synergy with Kempen

Van Lanschot and Kempen are strong labels, which enables the bank to offer a combination of private banking, asset management, and merchant banking. “This offers clients huge advantages; they enjoy an even more tailor-made service,” says Van Oort. The bank’s changed service concept is particularly visible from the outside. For the personal banking segment, Evi Van Lanschot is a clear proposition targeting starters on the capital markets. With the idea that there is private banking potential present, Evi’s entry threshold is much lower. Van Oort says: “Medical specialists and business professionals have differing requirements over the course of their careers and we can assist them in the best possible way over the whole cycle. The Evi bid is going very well; in the Netherlands and Belgium we have approximately €1 billion in savings and managed capital.”

At the same time, clients who currently belong to the personal bank but who require private banking services can – if they pay for it – choose this option. Finally, the bank has a Private Office for extremely wealthy clients. “They too of course profit from the synergy between Van Lanschot and Kempen,” adds Van Oort. Van Lanschot is parting company with another section of the bank – the corporate banking portfolio, which includes commercial real estate financing. “We will do that in a respectable and professional manner. By winding down slowly but retaining service levels, losses can be minimized and clients will have enough time to get a new roof over their heads. Running down this portfolio is going according to plan. We are taking leave of something which no longer fits in with our new strategy and we are putting a lot of effort into private banking. This gives direction and clarity to all of our stakeholders.”

Shorter lines

 All of the bank’s departments are occupied with change. “It’s going well. The shop is open during the reconstruction phase and so customer experience should also stay at a good level. Even the balance sheet ratios – solvability and liquidity – which are so important for the bank, are ahead of our anticipated long-range targets.”

The bank’s culture is changing as well: the traditional bank, where change sometimes appears to be dragging its feet, is becoming younger and more modern. Van Oort explains: “The Evi customer needs a transparent digital service, preferably with a handy fancy app on their mobile. You can see that the bank is also changing in that respect into one with a dynamic culture. For professionals who embrace change, it’s a really great and exciting time. We hear more often that people would like to work for Van Lanschot since so much is happening and we are in the thick of it. Lines are shorter and your ideas have an impact. The fact that it is going well on the personnel front is, of course, important as after all, it is the people who make the bank.”

Parallel to strategy changes, the bank is also investing a good deal in specialist staff functions. Last year it was decided to revise the bank’s risk management; as of March 2013 Van Oort is in charge of a new department – Financial Risk Management. The creation of this department, which was an amalgamation of various teams, was the first step towards further professionalizing risk management. “This second-line department is responsible for consolidated financial risk management within the bank,” he explains. “Besides setting limits and the integral monitoring of the bank’s risk position, this department is also a negotiating partner and advisor to the bank’s senior management.” The department is made up of a group of young and highly educated professionals who are extremely driven. Van Oort adds: “Our traineeships contribute a great deal to recruitment and internal dynamism.”

Forecasting

It is important that the bank is now capable of looking ahead to future developments with the use of forecasting tools. “The classic risk management function of monitoring, reporting and, if necessary, adjusting risk is possible using models and systems, but the world is changing fast – that is a huge challenge,” says Van Oort. “In addition, there is a mountain of rules and regulations that continue to descend on us and which has a great influence on the playing field. As a bank, you have to be more and more critical of the various balance sheet components. Partly because of the low interest rates, it depends on basis points and it is essential to look ahead using various scenarios to see what the impact on the balance sheet ratios and profit could be. The basic model Van Lanschot deployed has to be developed still further, last but not least because of the implementation of Basel III. Therefore, as of 2013, the development of a new forecasting tool was initiated which generates an integrated capital and liquidity forecast based on the expected balance sheet developments. “Zanders made an important contribution here. The good thing about Zanders is that they are real specialists with insight and a lot of practical know-how. But their pragmatic approach also appealed to me. It has resulted in a tool where we can detail the expected development of core ratios and where we can easily and quickly analyze the impact of mitigating measures on these ratios,” Van Oort says. “We are going to continue fine-tuning the good foundations we now have and by constantly carrying out back tests we can see if the forecasts tie in sufficiently. Where necessary, we will adapt the tool. After that, we will further integrate the tool with our ALM systems.”

A more complicated playing field

Van Lanschot is listed on the stock exchange but a large proportion of the shares belong to large financial institutions. “We are active in the capital markets and rating agencies look critically at how our ratios develop and how we cope with risk management. The playing field has become more complicated and the supervisory body also makes its presence felt. Shareholders are of course critical and look at our figures differently to how they did in the past.” The question is whether or not the rapid regulation changes have not overshot their goal in some areas. Van Oort adds: “You see that in the current lending climate: the required growth of capital buffers puts the brakes on possible lending. A new balance has to be found. Extra regulations were necessary, but the amount and complexity of these regulations results in higher costs. Banks’ buffers have increased enormously and also the quality of these buffers has never been so high. The AQR (Asset Quality Review) has confirmed that most banks are on track on this point. Last year it was clear that this was also true of Van Lanschot.” The rating agencies have recently reconfirmed Van Lanschot’s rating, and S&P has upgraded its ‘negative outlook’ to ‘stable’. This is a clear sign that Van Lanschot is on the right track. “It is still closely monitoring the execution of the strategy, in which profitability will be an important factor. Wealth management strategy implies that the interest company reduces in value but is compensated for by increased commissions. In the meantime, we have to maintain our healthy capital and liquidity position. Over the next few years, we will have to prove that the new strategy has been a success.”

Excellent

In the new banking territory, Van Lanschot, with its new strategy, is focusing more than ever on the customer. “Customer satisfaction is up there on top, as it is a very competitive business and for our bank it is essential for us to be an excellent service provider and offer customer value. The strategy we have set out provides a clear answer to how we see ourselves in the future. Within the field of risk management and ALM we are looking for professionals who feel at home in a specialist and dynamic private bank. The added value of our department is to be a sparring partner and advisor to the bank, all the while keeping in mind our penchant for discerning risk. That is a role which will develop along those lines. With all these changes we have a wonderful challenging time ahead of us.”

The UFR is a method of adjusting the market rate at which future commitments are discounted. Interests for durations of more than 20 years are adjusted by converging the one-year forward rate towards the Ultimate Forward Rate of 4.2%.

The regulatory changes in the healthcare sector have put smaller establishments with specific care functions in a tight corner. Audiological centers, such as those run by Pento, are among them. In audiological care, the outlay precedes the benefits, yet the bank is setting more stringent financing conditions. How is Pento dealing with this?

The causes of hearing loss are many and varied, from congenital to ‘acquired’ or even psychogenic. Fortunately, thanks to audiological care, there are also many solutions that enable people with hearing impediments to participate in society. The first audiological initiatives in this regard originated in the Netherlands, in the 1960s, when the measurement of hearing using scientific - and therefore reliable - methods became a specialist field in itself. Developments and support in the sphere of language and speech soon followed, because these are closely associated with hearing.

Tensions

In 2007, five audiological centers (AC) decided to merge to form Pento. ‘Penta’ refers to the Greek word for five. There are now six centers and a hearing support service, all located in the central, eastern, and northern areas of the country. Following a referral by a doctor, an AC advises the audiological patient on the appropriate hearing aids and other solutions.

The AC itself does not provide any medical treatment and only employs paramedical staff. Working according to a multidisciplinary approach—which often also involves speech therapy, psychology, and social work—its staff ascertains and analyzes the possible cause of the hearing problem and what can be done about it or offers assistance with the initial use of a hearing aid. The techniques are improving, and hearing impairment is becoming less of a taboo subject.

However, audiological centers too are feeling the effects of the major changes affecting healthcare sector budgets. A free-market system has been introduced along with a new funding system, bringing with it a whole host of changes to the billing process. There are around 30 audiological centers in the Netherlands, a market worth approximately 40 million euros. This means that the audiological sector accounts for less than one percent of the entire healthcare sector. “This is reflected in the tensions that arise whenever you are faced with new government regulations or new policies introduced by health insurers,” explains Jeroen Taalman, director at Pento. “Less account is taken of you. They don’t want to make exceptions to their policies for a small player.” Pento represents a market share of roughly 20% of the audiological sector, making it a big fish in what is a small pond relative to the healthcare sector as a whole. “Consequently, the outside world looks at you differently; people sometimes expect more professionalism in our internal operations than we were able to offer.” The same can be said of Pento’s position and its role as a model within FENAC, the Federation of Dutch Audiological Centers, which represents the centers’ interests. “

In the early years, we took a ‘sticking plaster’ approach to most of our financial decisions,” says Taalman. “So we were often closing the stable door after the horse had bolted, and that was unsustainable. Now, all the necessary arrangements are in place and the structure is clear. We have appointed a financial manager, and an audit committee has been formed, made up of members of the supervisory board. All of which is positive, but our approach remains pragmatic; there are few organizational layers, and we deal with situations as and when they arise. And we are aware that there is a lot more scope for development.”

No capital

What we needed was scenario thinking: what scenarios can we develop for the future and how can we create a future-proof financing structure?

Jeroen Taalman, Director at Pento

The new laws and regulations in the healthcare sector created a quagmire of uncertainties for Pento, chiefly due to the changes in the funding system. “In the space of six months, it all mounted up to such an extent that we felt the ground was slipping away beneath us,” says Taalman. “There were still no contracts in place with health insurers, the fees for each consultation weren’t transparent, and yet we had to calculate the number of consultations we had to reach from a cost perspective. In other words: both the price and the volume were under scrutiny.”

As regards the volume it can achieve, Pento is largely reliant on the referrers, although the law stipulates that various treatments may only be provided by an AC. At the same time, the purchasing ceiling for health insurers means that Pento is only allowed to carry out a maximum number of treatments for a specific fee. Taalman says: “Health insurers are now recognizing that the only way to be able to estimate volume is to form a partnership. The healthcare sector is riddled with inter-dependencies and mutual responsibilities. If we were to suddenly stop or refuse AC care, we would create problems for the health insurer.”

Meanwhile, Pento was contending with another serious financing problem because, until the end of 2011, it was not allowed to build up any equity capital. Under the original funding system, ACs did not generate any profits or losses. Taalman adds: “Being ‘budget-funded’, we had to post a nil result. And if we didn’t, we had to offset the surplus or shortfall against fees the following year. So we were faced with a plethora of rules but weren’t allowed to form any buffers.” This system was dropped in its entirety with effect from 1 January 2012.

Scenario thinking

Back in 2004, FENAC had already warned that if an AC got into financial difficulties, there would be no funds in the coffers to get them out of trouble. Moreover, under the new funding and billing system, ACs would have to finance around half of their annual turnover in advance. Taalman notes: “For a lot of long-term, and therefore expensive, treatments, you can’t send a bill until a year after the first patient visit. So the introduction of a free-market system meant that our bank was also faced with all kinds of uncertainties. As a result, it adopted a very commercially-driven view of us, introducing financial ratios and subjecting them to critical review. A bank expects a certain amount of equity, an order portfolio, and contracts with health insurers. All of which were uncertain factors for us.”

In the spring of 2012, health insurers were locked in negotiations chiefly with the large hospitals. The ACs would follow later. Says Taalman: “They were in no hurry, so we had to ask the bank to keep us afloat. But the bank wasn’t going to readily agree. The bank placed Pento under ‘special management’, setting special, stricter requirements with regard to the provision of information and increasing its risk premiums. We had our backs up against the wall.” Pento felt this problem was becoming too big for it to solve alone. “What we needed was scenario thinking: what scenarios can we develop for the future and how can we create a future-proof financing structure? To do this, you need to bring in outsiders who can think fast and develop models. That’s how we began working with Zanders. It bought us some time with the bank.”

A cure for financial ailments

“Continuity was a very real problem; there were doom scenarios of having to shut down certain Pento centers or services,” says Taalman. “When we were up to our neck in problems, we consciously sought media contact through the newspapers. We were taking a risk, but it opened the health insurers’ eyes. They felt a responsibility to help us.”

During that period, Zanders analyzed the situation and created various scenarios for the financing structure. This went hand in hand with an analysis of internal management and the viability of the Pento organization. The bank then had a clear picture of Pento’s prospects and financing risks. At the same time, Pento was able to conclude contracts with insurers, including a generous advance for the care provided in 2012. These developments earned Pento more time from the bank and led to constructive talks about provisional financing arrangements.

“We were able to work out the impact of the fees and volumes from the contracts on Pento’s liquidity position. Things were soon looking up. In the end, our financial ailments only lasted six months,” Taalman continues. “We now have good arrangements in place with the bank, including regarding the anticipated definitive amount of a residual expense that has to be met in connection with the end of the budget-based funding system, with its adjusted fees. We’re talking a huge sum of money, hardly an amount we can readily afford, so it’s very reassuring that we are now discussing the situation with the bank. It means we can start focusing more on care again, which is our raison d’être.”

Billing for 2012 couldn’t even start until January 2013—a problem affecting the whole of the healthcare sector. Because a new funding and billing system has been introduced, the turnaround times for both healthcare providers and health insurers are even longer. “Billing takes place retrospectively, and yet, historically, Pento has not been able to form any buffers. And that puts huge pressure on your working capital,” explains Zanders’ consultant Marlous Pleijte. “Consequently, agreements have been reached with the bank and the health insurers so that Pento can maintain its working capital at a reasonable level.”

Quality improvements

The agreements have worked for 2012, but the whole palaver is starting again for 2013, says Taalman. “According to the Ministry of Health, Welfare and Sport’s macro-management instrument, from 2010 onwards, the healthcare sector is allowed to grow by a maximum of 2.5% above inflation. The expectation is that we will remain within that limit in 2013, because of the internal budget targets we have set and the highly critical review we have undertaken of our investment policy. Moreover, from 2012 onwards, Pento can build equity capital.”

A number of measures have been taken to enable it to satisfy the bank’s requirements. Pleijte explains: “In the end, we set up a financing structure with a loan portfolio and repayment schedules that work well for Pento, with a clear distinction between working capital and long-term loans. Zanders has also designed some practical tools for managing cash flows and long-term financial planning. Taalman concludes: “This gives us a much better overall picture and, by extension, greater clarity, so we are also better equipped to fulfill our obligations, both internally and vis-à-vis the bank. The result has been a huge improvement in quality. We are now in better shape than ever; business was good last year, and the outlook is healthy. All of which is in stark contrast to the situation a year ago.”

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