ABN AMRO Bank N.V. (ABN) Earnings Call Transcript & Summary

I'm delighted to be joined today by Clifford Abrahams, Chief Financial Officer for ABN AMRO. Good afternoon, Clifford. Welcome.

Good afternoon. Thank you. Good to be here.

And so Clifford, clearly, a lot has changed over the past couple of weeks. And I would like to start really from the most recent developments. Let's talk about coronavirus and its potential impact on ABN, both from a business and operational perspective.

We -- I think we've got a short presentation that we're ready to deliver that.

Oh, you do. I'm sorry. Perfect. I will...

That's all right.

Please. Let's start with that and then we'll go into Q&A.

That's fine. And we'll clearly touch on the current situation in my prepared remarks, and then happy to take Q&A. So we've got a very short presentation which will maybe cover some of the highlights, and then we can get into the details. So we've covered the introductions. I understand I'm one of the last speakers on this unusual day, and it's clearly not business as usual. Welcome to Chair Abrahams. So I'd like to make the point that ABN AMRO is well positioned to weather this storm. So I'll update a little bit before I get into the detailed slides on the situation in the Netherlands where the Dutch government announced over the weekend that all schools, sports clubs, bars and coffee shops will be closed for 3 weeks until early April. And the government is advising people to work from home. Here at ABN AMRO, we already started working in shifts early last week. And we were one of the first companies in the Netherlands to do so. So we work in A and B teams, working 1 week from the office and the next week from home, teams alternate. And we'll continue to do so to safeguard the business and our continuity for clients. And I think operationally, we've been extremely resilient during this difficult period. On the other hand, clients are going through tough times. We're in close contact with them, and we are monitoring our positions, including credit lines. And what we see is that liquidity right now is really more than sufficient. We've been able to fund ourselves in the market, both euros and dollars, and there are additional facilities available from the authorities as well, so we have a large liquidity buffer. And clients are not withdrawing money from the bank, nor are unused credit lines yet to be drawn on heavily. More importantly, we're looking to measure to help our clients through difficult times, and I'll talk about these in my -- later in the presentation. I would say that upfront, but I won't be revising our guidance today nor will I give estimates for loan losses as things are just too early in that respect. So turning to the presentation to Slide 2. Very good. Look, this was a slide that we presented with our Q4 results a little over a month ago. And it sets out that over the last 3 years, we've worked diligently to deliver on our strategy and our targets, and the bank is in good shape as it entered this critical period. We reconfirmed our commitment to sustainability. We made good progress on digital and IT. We've sharpened the private bank, so we're now an onshore-only private bank, and we've taken steps to refocus the corporate bank. And the derisking that we've done over the last couple of years will serve us well as we navigate this storm to come. I think in terms of the challenges, so these were the challenges as we saw them a month ago. We've clearly got new challenges. But at least from a bank's perspective, I'm pleased that we were the first large bank in the Netherlands to announce negative rates for clients with deposits over EUR 2.5 million. And we are on track with our detecting financial crime activities, costs of which are offset by further IT savings beyond 2020. So all in all, ABN AMRO is a very solid bank going into this critical period. So on the next slide, Slide 3, I'll update you on our COVID-19 preparedness. I think, as you can see on the left, going into the crisis, the Dutch economy was really quite strong. And I've mentioned the measures taken by the Dutch government recently to support the society and businesses, which I think is very pleasing. They've been early and proactive in that respect. So the government indicated it increased its debt-to-GDP ratio from around 50% to 60% as a first measure. So that frees up EUR 90 billion of budget to support the economy. That's 10% GDP. Also, the Dutch state announced initial actions to temporarily postpone tax payments and subsidize reduced working hours. That relieves some pressure on our clients. Also, the government will increase the guarantee they give to a bank for an SME loan from 50% to 75% so that SMEs can increase their facilities if they are severely affected by corona. Also, regulatory actions have been taken. We've seen the ABA announcement last week, which I think is helpful in terms of the impact on banks. As I mentioned, we've already done significant derisking of highly exposed sectors. We have a strong capital position, strong liquidity buffer, and we're already charging -- we've already announced that we're charging negative rates. So what we're doing today is we're monitoring unused credit lines. So far, no significant moves. In terms of interest rates, interest rates clearly have fallen in the last few weeks. But I can see here on the chart, bottom right, you can see the interest rates, but not yet lower than what we saw in Q3 last year, which means that our guidance for NII, we still feel okay at least for now. Moving to the next slide on Slide 4. We've set out some highlights of our loan book. And as you can see on the left, most of our loan book is Dutch mortgages with low risk, and those loans performed very well during the last crisis. We have a diversified loan book, split between commercial bank, corporate bank, and the commercial banking exposures are relatively limited in size. Our sector concentration is also limited. So you can see we've highlighted the largest sectors which I think in the current environment are all defensive. We do have exposures to sectors or subsectors that will be impacted by recent events. In transport logistics, manufacturing, oil and gas, travel and leisure and retail, we have recently released the report you can get on our website which sets out our assets by granular subsector. So it's around 100 subsectors. And you can see in this report, for example, within the entire travel and leisure sector, we have EUR 3 billion of exposure. That's the 1% you see here. But within that, our direct exposure to airlines is really quite limited at less than EUR 200 million. I'd encourage you to take a look at that report for a granular subsector exposure measures. Now moving on to Slide 5. I think many of you would have seen this, detecting financial crime. We've been focused on detecting financial crime for many years. We currently have over 2,000 FTEs working on it. That activity is continuing as we speak now. We have very good home working where, frankly, most of our staff are now working from home using our virtual private network. And we have around 15,000 connections for staff numbers of approximately that number in the Netherlands, so we're well placed to continue our work. We have good engagement with the authorities on detecting financial crime. And there's no update -- we gave no update on the investigation of the Dutch public prosecutor in February and no further update today. Now moving on to costs on Slide 6. This was a chart that we set out in February. You can see in the middle that we've already taken in 2019 the step-up in costs relating to detecting financial crime, so expect those to be stable this year and next, and over time, come down. That reflects the benefit of our provisions of a little over EUR 200 million that we have in our balance sheet at the end of 2019. Our cost run rate is around EUR 5 billion. So with the cost elevations of detecting financial crime, combined with cost savings, which we set out on the right, that gives us confidence that we can absorb detecting financial crime costs and maintain a run rate of around EUR 5 billion. And we've announced in February that we were on track for cost of around EUR 5.1 billion in 2020, and we'll consider how recent events affect that guidance going forward. On the next slide, I've updated around capital. This sets out our capital as we saw it in February. I think the important context here is that our CET1 ratio under the current rules is a little over 18%. And our SREP is around 12%. So based on the current rules, we have around 600 basis points of headroom, which means we're comfortable going into this crisis based on the current rules. We've set out here some of the details around RWA inflation from Basel IV and TRIM. We do expect significant impact from these developments. However, the timing of that, I think, is now uncertain given recent developments. And I think the whole sector, including regulators, are focused on ensuring that the industry and we are robust under the current rules. And we're very stable and comfortable in that respect. I now open the floor up to Q&A.

Thank you very much, Clifford. So if I can go back to the coronavirus impact, of course, you said you won't provide a precise provisions guidance. And I totally understand that, but is there -- are there any early signs that you see or potentially that you could see over the past -- over the next weeks on, for example, corporates withdrawing credit lines or SMEs being closer to you? What are you seeing on the ground?

Yes, if we look at our business as a whole, I think you're right to focus on the corporate sector. But briefly, retail is largely, I would say, pretty much largely unaffected because we're largely digital at ABN AMRO. And even our contact centers, people can work from home, so our centers are virtual. So retail is largely unaffected so far. The private bank, again, largely unaffected operationally. We clearly will have lower balances and lower fees going forward. But operationally, we're operating more or less as normal. We haven't seen deposit outflows. The movement we've seen is clients taking advantage of what they see at lower prices and we've seen clients starting to step in. I think the most urgent impacts have been on our corporate businesses, as you say. I think on the corporate banking side, so our large corporates, we've seen very limited, at this stage, use of unused committed or uncommitted lines. I think those dialogues are starting, so I would expect to see that picking up in the near future. We are seeing bond issues not happening, and so relying on bank financing. So we're seeing some increased balances in that respect, but fairly modest at this stage. I think the biggest impact in the short term is around our SME and commercial banking business in the Netherlands. And actually, in the early part of last week, matters were really quite, quiet. I think we were all expecting the phones to ring fairly soon, and they've started ringing. And we are ringing our clients to see how we can help tide them through the sort of imminent liquidity events that many good borrowers are going through, solid businesses are going through liquidity difficulties, and we are close to our clients, but it's really too early to see any financial impact of that.

Got it. And is there any lesson that you can learn from previous cycles on how to risk manage these SME positions?

I think all crises are different. I mean we've all got gray hairs. We've all lived through certain crisis. And there are some commonalities. There's some differences, frankly. So I think it's clear that this is a crisis in the real economy. The last big crisis was one that started in the banking sector. So we, as a bank, and the 6 sector overall are really well placed right now. I think the other lesson from the last crisis was the importance of government action. I think governments are really stepping in quite soon, certainly in the Netherlands, across measures, so that's good to see. I think operationally, I think people are calm and focused. I think in terms of managing credits, where we have experience of managing credits, small and large, I think the challenge is the numbers involved. And we're looking at how we can make such measures mechanical rather than case by case. We just don't have operational capability or time to manage things on a case-by-case basis. So we've looked at the measures that other banks have taken across Europe. And I'm thinking carefully about how we can support our clients in the same way.

Got it. And any comment at this stage on the potential impact from the procyclicality of IFRS 9? Do you expect that...

Yes, I think it's -- yes, go ahead.

No, I was just going to say do you expect that to be a major driver of your provision, even if you don't see it in the economy but just the move of the macro assumptions could actually move the provisions line quite clearly?

I think I've had a number of questions from investors today on that. I think there are -- as you know, there's stages in respect of IFRS 9. I think the material impact in the short term, so that's Q1, we'll see in Stage 3 for clients that are already in Stage 3, as we take a more prudent view of recovery and resolution of those clients. So I expect to see Stage 3 movements from existing defaulted portfolios, not from new. I think we may see some new, but we're only 2 weeks ahead of March, so I think it will take longer for Stage 3 portfolios to increase significantly. I think the area that we're focused on, and I've had a number of questions on the Stage 2, just how the Stage 2 work. And I think there are a couple of drivers -- there are a few drivers here. One is macroeconomy, so Stage 2 reflects scenarios. And I think we're clearly more prudent around the economic scenario, so that will be a driver. We'll tackle that in Q2. We -- there may be -- we need to take a view on certain subsectors. So there are exposed subsectors right now. And I hope you can still see me okay. I'm getting a flashy warning, but I'll just carry on.

I can still see you.

Okay. So there are certain subsectors that we may choose to move into Stage 2 because the credit quality has materially deteriorated. I think we're also working through -- I've noted the moratorium on interest and debt payments that banks across Europe are starting to offer their clients. We're working through the mechanics of that. So IFRS 9 has a number of triggers around Stage 2, so we're working those through because this is really an industry-wide, banking-wide matter. And that's something to look out for in Q2.

Understood. And just to have the last bit always on provisions and asset quality, so the oil price has moved quite materially. How does that impact? Well, can you remind us what the ABN exposure to this commodity, and what impact you could potentially see here?

Yes. I think as you know, we've been derisking in offshore, in particular. But our overall exposure to oil and gas was EUR 4 billion at year-end and an additional EUR 2 billion to offshore services. Some of those will be oil-price related. So certain upstream assets, oil price has a direct impact on their business. In terms of downstream and services, actually, the spot oil price often doesn't have an impact. It's more the long-term view and the contracts that those clients have with majors, for example. And that won't be impacted or materially impacted by short-term developments. I think where we're cautious is the coverage ratio associated with existing impaired assets in that sector, where, as I mentioned, we'll just need to take a more cautious view around restructuring versus recovery given the current market circumstances. So expect to see, I think, further impairments on existing positions rather than perhaps a lot of new positions, certainly as early as Q1. And we'll have to see how long the low oil price, in fact, is sustained.

Moving on to the recent market volatility. So that has reminded us of 2008, perhaps even 1987, so how does this type of volatility impact ABN? Well, I can think of 2 businesses. One is CIB, the other one is perhaps private banking. Can you give us an overview on that?

Yes. Yes. I think it's important to recognize that our portfolios are diverse, right? So we're now -- we're using broadband. We're paying for electricity. Many of our businesses are not at the front of this crisis. And so you really need to look at the subsectors to see the impact of volatility. I think the -- I've mentioned some in my presentation. So leisure is clearly impacted, retail -- certain retail subsectors, travel airlines. I think if you go through our detailed disclosure, you can see our exposure to these subsectors is relatively modest. I think volatility, in and of itself, I think is good for our clearing business. That business is having a great month and serving its clients in conditions that they find attractive. It's certainly not helping our global markets business. We are -- we still have a global markets business. It's relatively small. It's less than 5% of our risk-weighted assets. It's there to support our overall business, but it will be impacted by declining rates and increasing spreads. I think on the private bank, as you mentioned, I think volatility or -- I think the decline in asset values, more specifically, will clearly have an effect on fees. Those get booked each quarter, so you won't see it immediately, but clearly, over time, and we'll see how long that last. I mean I've seen many forecasts around that. I think our primary current focus is more around -- I think, operationally, we're resilient. Our businesses are operating fine. I think we are comforted that liquidity is currently not really an issue. I think our focus is on the SME and our exposed corporate clients and working through how we can help them and what the financial impact will be on us in due course.

Understood. And on this point, there is a question coming through from the audience. So with regards to your clearing business, was there any concern at all with respect to perhaps margin costs created by the current market moves?

I think we were certainly monitoring that business closely from a head office perspective. The volatility calls for increasing liquidity requirements from our clients. However, I'm pleased to say that clearing is operating within our current liquidity facilities. So the parent makes facilities available to the clearing business that's operating within the limits we've agreed, that our clients are operating within their concentration limits. There have been margin calls. But so far, that business is operating within our current risk appetite that we set before the crisis. So I've been pleased with that. I think also operationally, there's huge volume of trades going through that business, tens of millions. And today, the business is operating operationally fine. So I think clearing is a bright spot in what is clearly a difficult economic scenario.

Excellent. That's good to hear. And on the same topic, I'm getting another question about the margin call in potentially the Lombard lending portfolio in the private banking. But that is quite small, so just check -- okay.

Yes. It is quite small. And clearly, there has been a need to -- for clients to put up more collateral or sell positions to fund margin calls, but all of that is relatively modest so far.

Understood. And I would like to move -- to shift gear a little bit and talk about costs, if possible. So of course, we discuss provisions of plants, and it is clear that they will go up. Nobody knows by how much, but they will go up. Revenues come under pressure. You said NII, so far, you're confident with the guidance, but fees will be under pressure. So it's obvious to then ask about costs. You have a clear guidance for 2020, EUR 5.1 billion. But are there any projects that perhaps you can put on hold? Or is there any way you can perhaps go beyond what you were planning before?

Yes. I think there are 2 things. So there's short term and long term. So in the short term, we're very focused on operational resilience, right, so I think our operational resilience isn't costing us a lot more money. But our primary mission for the next little while is to keep operating effectively as a bank. And I think that's important for all of our stakeholders. So I need to say that first off. I think it's clear, however, that working from home, you're less effective, that many projects, for example, that we'd like to progress are either less urgent or not possible to pursue. Many of those of the regulatory nature. So we need to discuss that with the regulator. But there may be some cost benefit there. I'm not clear what the pluses and minuses are, how that nets out. And frankly, as CFO, I think it's -- I think the important thing, we're talking tens of millions, 100 million people, is just to keep the bank operating effectively during a difficult period, which we're doing. I think longer term, and you expect me to start to think about this, I think it's clear that the economic outlook, however we manage through the crisis, is likely to be less benign than we thought before. And so we need to think hard about costs in that respect. I also think that the last week or 2 has demonstrated the potential of digital working and digital engagement with our clients. So my view is that all the things we've been working on and thinking about, I think there'll be opportunities to accelerate that in the medium term, whether that's digitizing the bank. We're already down to 130 branches in the Netherlands. But further benefits of digitization clearly is self-evident. And we've announced in Q4 the review of our corporate bank. I think in the short term, the focus of the corporate bank needs to be working with its clients. But that's clearly something we'll have to come back to when the crisis has abated, and that will have a consequence of cost as well, I'm sure.

And if I can focus on the costs coming from the DFC project. So those have impacted the overall cost line a few times over the past quarter -- quarters. So what type of visibility do you have on those? And yes, is there anything that -- any room for maneuver there?

Yes, I think the -- and I mentioned that in my slides, Slide 6. So we have taken provisions and add, call it, disappointments from a cost perspective over the last 5 quarters. So our first material provision was at the end of '18. I think what I can say is over the summer last year and Q3, we finalized our plans with the benefit of an independent review, reflecting all the dialogues we've had with the DNB. We've shared those plans with the DNB, and we're executing those plans and work well in execution. And that continues after some disruption as a result of the last few weeks. So that gives us confidence and we're confident enough to share the numbers that you've seen in that slide. I think there clearly may be some risks. It's not without risk. So we need to -- the detective financial crime costs relate to both remediation and business as usual. And I think on the remediation side, the risk would be if it takes us longer. But we think we've put together a prudent plan that we can execute. It's well underway, and we'll update in due course. But I think what gives me some comfort is that those plans have been in place for some time, and they're well into execution. So I can't -- I'm not guaranteeing on the fees, but I think we're confident enough to share the figures that we showed on Page 6.

Understood. And what sort of time line do you have for this project for us -- when do you expect to have final clarity from the investigation?

Well, I think there's 2 aspects there. So on the project, call it, on the remediation and upgrade of detecting financial crime, we've got, I think, good visibility. And we see that remediation completing through 2022. I think on the investigation itself, I think it's hard to say. We've seen the length of time the investigation took at our biggest competitor in the Netherlands. I've been hopeful that it could be quicker, but we're in the hands of the public prosecutor there.

Understood. And let's now talk about capital. Of course, you highlighted the very good 13 points for ABN. But I'm also interested in your thoughts around the most recent ECB announcements. So will that change at all the way you manage the bank? That's my first question. But also, do you think that the possibility to operate at a significantly lower capital offers the banks a chance to cover for credit losses? Or will that additional capital be used for loan growth? What do you think?

I think I was pleased to see the ABA announcement last week, and it was in line with my expectations, which was commitment to the current framework. So I don't see the framework changing. But I think it was good to see the ability to operate flexibly within that framework. I do think that the regulators across Europe recognize the role that the banks can play to support the real economy. And that's the primary motive for demonstrating that flexibility. So I think loan growth will be about extending credit to support clients through a difficult period rather than issuing a lot of growth for its own sake. I don't expect that we can use that flexibility to pay big bonuses and dividends, and that's within the announcement itself. But I think it does demonstrate recognition that buffers are there for a reason, and those are to support the system in times of distress, which is where we are. So that was good to see. I think in terms of running the bank, I think I've hinted at it earlier, which is that I think our focus is on the current rules, right? And we're well capitalized at Basel IV. We're a little over 14%. But I think Basel IV can wait. And I think the buffer that we have in our current capital of over 6% in much of that plays to help the transition to Basel IV. That's available to support the business now. And it's good to see that the regulator will take a flexible approach to the interpretation of rules and that will enable us to do our job for our clients without worrying about breaches.

Understood. And so if I understand you correctly, you will probably expect the Basel IV implementation to be delayed?

Well, I think it's possible. But I think the -- we've been quite focused on TRIM and our expectation that TRIM would be imminent. I think when we're talking to our regulator today, I think TRIM is the priority as of today. So clearly, the initiative is with the regulator to announce on TRIM. But it was pleasing to see the stress test, for example, postponed to next year. I think regulators understand their roles and duties in the current environment. So we feel comfortable in our current capital position under the current rules, and that's the current focus. I do think, when all things return to normal, clearly, Basel IV, TRIM are all important initiatives, and we can't ignore those, but for the here and now, we're focused on the current rules.

Excellent. One question from our investors. So AT1, what would be the criteria to call or not to call?

Yes, I think, it's early days. I mean we know -- I think that the market knows AT1 call period opens in September. And I think as soon as we make any statements regarding calling, that would trigger nonadmissibility. So I need to be very cautious about that. So I don't I've got any -- we'll take sensible economic decisions at the right time. That's all I can say about that.

Got it. And then if I take another question from investors, it goes back to coronavirus.

Yes, understand.

Understandably. Will that perhaps accelerate a restructuring of the investment bank? And if so, could we see potential losses on disposals?

Well, we don't have any investment. I mean at the corporate bank. We have a few -- I just want to make the point that we're not -- we have a very modest markets operation, for example. So it's primarily a corporate bank. I think the -- we announced in February that we were conducting a review. I think it's possible that the current crisis and the world after that crisis, it will impact that review. It should impact that review. I think the -- we'll make sensible economic decisions. So I think we should not be afraid to take losses, if necessary. But equally, we talked about derisking. We're not going to derisk into a market that's not there. I mean that doesn't make any sense. So we have been derisking for at least 2 years on our offshore portfolio as well as start to make good progress. We work with our borrowers. The markets are not there. We're not going to force assets through and take big discounts. We're well capitalized. We don't need to do that. But we will -- we'll make sensible derisking decisions over time. And some of that may come at a loss, and we'll make those decisions in the interest of the bank.

Understood. And there's another question on the business model. So private banking is an area with very high return, where potentially you have signals in the past, growth, both organic and inorganic. The current market volatility and market levels, of course, will challenge its profitability a little bit. But is that still an area of focus? Is that -- perhaps could the current market condition bring some assets to the market that are interesting for ABN?

I think I've long had the view that the private banking industry needs to consolidate. I think negative interest rates really make the economics that medium and smaller-sized players really quite challenging. And the effect of that has yet to fully work through P&Ls. I think with the market sell-off, who knows, if it snaps back, we may get back to where we were in February. But if we enter a period of sustained market weakness, that's straight off the top line of private banks. Now clearly, we're not immune to it. But I think, in my view, it will encourage a consolidation across private banking. It has to. And so those businesses are capital-light, high ROE in the right economic conditions. So low rates and low equity markets are not good for private banking, ROEs in the short term. And I think that would encourage consolidation. I would say we're not thinking about M&A right now. I think -- but it's good that you are thinking -- that your clients are thinking a little bit more long term. We do think about the long term, but our primary focus right now is dealing with the current situation.

Fantastic. Clifford, thank you very much for your time and your insights. And thank you, everyone, for watching.

Thank you very much. I think the technology worked very well. It just shows what you can do digitally.

Indeed, excellent. Thank you.