We managed to meet our financial targets despite the current situation on the financial markets. Profit continued to rise and returns remained stable. Net profit rose 12%, while return on equity stood at 10.7%. The Group continued to have an extremely robust capital position, with a Tier 1 ratio of 11.2%. The effects of the persistent turmoil on the financial markets, which caused net profit to drop by EUR 529 million, were partially offset by higher interest income and also by a number of incidental income items.
The number of mortgages and corporate loans provided to clients through the local Rabobanks increased, contributing to a 6% rise in lending to EUR 378 billion. Lending also continued to grow at Rabobank International, FGH Bank, De Lage Landen and Obvion.
At Rabobank Group, amounts due to customers – an important source of finance during these turbulent times – were up 4% at EUR 260 billion. The local Rabobanks financed the majority of their operations through a substantial increase in amounts due to customers.
In the first half of 2008 the interest result was 19% higher than in the same period last year. This reflects, to a large extent, the positive effect of the credit crisis on Rabobank's interest margin. We have the bank's low risk profile to thank for relatively favourable funding conditions on the financial markets. This was counteracted by downward pressure on trading results due to the crisis on the financial markets. At a trend-line growth of total commission income, earnings were up 7% on balance, rising to EUR 6,081 million.
Operating expenses fell 1% to EUR 3,836 million. Operating expenses dropped at Rabobank International in particular. Gross result was EUR 2,245 million on balance, i.e. 24% up on the first half of 2007. The item 'value adjustments' stood at EUR 486 million, substantially higher than in the first half of 2007, when there was no sign of the credit crunch. This item is currently affected by both bad debt expenses and downward repricing of the investment portfolio. Value adjustments amounted to 27 basis points of average lending, which was slightly above the long-term average of 24 basis points. Net profit stood at EUR 1,525 million, a 12% increase on the first half of 2007 and in line with the bank's financial targets.
We maintained our leading position in a number of important segments of the Dutch financial services market during the first six months of 2008. The local Rabobanks and Obvion increased their share of a shrinking mortgage market by 2 percentage points to 30%, and our share of the savings market remained stable at 41%, despite growing competition. We also held on to our 38% share of in the small and medium-sized enterprise market.
The local Rabobanks made further progress with the Rabobank 2010 Programme. This Programme, which will now become available to all local Rabobanks, will bring about further improvements in customer service.
During the first half of the year we increased our stake in Polish-based Bank BGZ, to a majority interest. This move is in line with our ambition of becoming the leading national and international bank for the food & agri sector. We also completed the sale of Alex, the investment bank, in 2008 and acquired interests in two successful partner banks through Rabo Development: a 40% stake in Banco Regional of Paraguay and 35% stake in Banque Populaire du Rwanda. We continued to integrate corporate social responsibility into our lending process. Our sector policy documents for vulnerable sectors, such as soy and palm oil, and advisory opinions from the Ethics Committee have provided us with new tools for handling corporate social responsibility.
The crisis on the financial markets is now over a year old. Time and again we hoped that the worst was behind us, only to be confronted with new problems and uncertainties. The US residential property prices still have not hit rock bottom, and the US economy has entered into a recession from which it will recover only slowly in 2009. The United Kingdom has been hit relatively hard by the financial crisis and recession in the US, and is seeing house prices fall and a sharp slowdown in economic growth this year.
Within the Eurozone there are national differences, with southern member states and Ireland suffering relatively badly. Economic growth will slow down in other parts of the world too, and since the current global slowdown in growth is accompanied by rising inflation, central banks have only limited opportunities to stimulate the economy by cutting interest rates. The Netherlands' open economy cannot avoid being affected by these developments, but, given its solid foundations and the good start to the year, we expect that despite a sharp slowdown in economic growth to around 2% in 2008, the Netherlands will continue to be at the forefront of the euro zone.
There are pros and cons attached to the international credit crisis for Rabobank's operations. Thanks, in part, to the 'safe haven effect', the bank has a comfortable liquidity position. In addition, access to long-term funding at relatively attractive conditions continues to be guaranteed. The interest margin is showing signs of improvement in line with this. Obviously, Rabobank is also experiencing adverse effects from the current crisis on the financial markets. Now that the subprime crisis is also affecting the real economy, repricing and downward revaluations did not remain confined to the relatively small subprime-related portfolio.
The investment portfolio, on the one hand, was subject to a revaluation based on IFRS by 1.7% (i.e. EUR 788 million after taxation). This minor adjustment reflects the high quality of the portfolio, which is mainly made up of public-sector institutions and banks. The credit crisis caused net profit to drop by EUR 529 million in total. On the other hand, this was offset by a sharp increase in interest income as a result of mounting spreads. In addition, a number of non-recurring income items were posted following the sale of Alex and the consolidation of Bank BGZ. The Group's net profit growth stayed at target level on balance. Equity rose to EUR 32 billion despite the above revaluations, which was partly attributable to retained earnings and the issue of Capital Securities.
The credit crisis is expected to continue for some time yet. The economy is also showing signs of slumping. Banking in such a climate warrants caution and prudence. Rabobank is well-positioned, with our exposure to subprime-related investments being extremely low, while liquidity and solvency levels are high. Nevertheless, it is more challenging than ever to make concrete pronouncements about expected earnings for the second half of this year. Growth in our activities means that amounts due to customers will continue to form a significant source of finance in the second half of the year. On the domestic front, we expect the savings markets to remain fiercely competitive. Tough competition will also continue to reign the mortgage market.
Financially sound margins and lower costs are key elements in the management of Rabobank Group, enabling us to continue to provide our customers with top-quality services, now and in the future. Abroad, Rabobank International will work on enhancing its profile as the leading bank in the food & agri sector, while its Global Financial Markets operations will start to focus more on client-oriented activities.
In the current challenging and sometimes difficult market, our group's employees have turned in a formidable performance. I am proud that together we have managed to achieve excellent results in what has been a turbulent first six months of 2008.
Bert Heemskerk,
Chairman of the Executive Board of
Rabobank Nederland