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

We can start. It's a great pleasure to welcome our next speaker, Lars Kramer, CFO of ABN AMRO. Lars has been appointed a year ago to his function. Lars was previously, 20 years, with ING, several functions, CFO for its wholesale banking at ING Direct, as an example. And very prior to ABN, he's been CFO of Hellenic Bank. So I'd like to just thank you very much for joining us in Rome here, making the way.

And yes, I think let's dive straight into the first question perhaps to start with the macro outlook to set the scene. Inflation has been top of mind and part of several discussions. So perhaps we start off with that one. How intense do you see the inflationary pressures in the Netherlands? In general, how do you see the monetary policy response and the impact on economic activity, the outlook for it? And are you picking up any signs of stress in the economy?

Yes. I mean, clearly, in the Netherlands as well as everywhere else, you're seeing quite a high headline inflation. So that is definitely there, running at about 8%. I would say our expectation is that as pressure comes on growth that we see that coming off to around 4%. So in terms of monetary response, I guess, we're all waiting for something to happen from the ECB. Now whether that will actually have a positive impact because a lot of this is imported inflation. In the Netherlands, again, it's very much driven by what's happening in energy prices. So that's feeding through into the economy generally. We are still quite fortunate that there are sort of fixed-term energy contracts in the Netherlands, so it doesn't immediately feed through into people sort of purchasing power or intercompany expenses. But I think it's also worthwhile remembering that companies, in general, and households, have actually gone into this with stronger balance sheets, even going from a COVID crisis straight into a Ukraine war situation. I mean there has been good resilience that has been built up as well. And I must say there, the Dutch government actually did a very good job during COVID in terms of also providing support measures, allowing companies to come through it. And now again, being in a position to actually -- yes, it's going to be a difficult time, but they come in from a resilient position.

Yes. And then in -- I mean, housing -- the housing market has been also top of mind in various regions in the Netherlands. House prices rose about 20% in 2021. That continued in the first quarter. How are you -- are you concerned with the housing market overheating? Is the regulator concerned? And what is your outlook in general for the housing market in the face of also higher interest rates?

I mean we've gone through a period of very strong house price growth over the last 2 or 3 years. I mean it's very much driven by the fact that there is still a lack of supply in the housing market, so that has been driving it. The Netherlands has got a very strong affordability framework. So in terms of also people being able to purchase houses, you go through quite a tough level of scrutiny. I would say in terms of what the regulators have also done is they have put in a mortgage floor in terms of the risk-weighted asset framework. So that has also helped in terms of ensuring that there is enough capital. Generally, as I said earlier, households are going in with quite a strong balance sheet themselves. The employment market is actually very tight. So that also helps support in terms of income levels and help support the mortgage market. So generally, as we sit here now, I would say, we watch the mortgage market very closely. I mean it's one of our core products. We are seeing very different dynamics emerging in the mortgage market. But in terms of affordability and therefore, any sort of impact in terms of spike and defaults, we don't anticipate that at the moment.

Okay. Yes. And we talked about -- or briefly touched on monetary policy. And I think ECB, it has another meeting today as we speak. Thinking about rate hikes and the benefits, the potential uplift to ABN could be quite a significant tailwind in the years to come, got very large deposit base and moderate profitability. Can you -- you gave some guidance in the -- or disclosure in the first quarter and also some guidance then looking forward. Can you just remind us of what -- of how exposed you are and the nuances around this?

I mean, clearly, it's very helpful that we are going into a period now of rising rates again, and the expectations will benefit us like everyone else. What we did put out in terms of guidance in the first quarter were not guidance, on the stress sensitivity, not guidance, please, was that we effectively expect to see the benefit coming through in the medium term to longer term. And when I say medium term to longer term, I'm talking about the sort of middle of next year, onwards. We effectively, as a result of seeing the benefit coming through, we've increased our expectation for this year in terms of our NII. We've raised it from -- to the top end of our range. We've gone up to the EUR 5.1 billion mark. And the other thing where we're seeing the benefits and that we've talked about is the fact that the trough on our NII evolution, which we previously expected to be at the tail end of next year will actually come forward into the sort of middle of next year. So I think those are 2 clear benefits. What we -- what holds us back a bit in terms of the immediate kicker is very much, as you talked about, we have quite a big mortgage portfolio. And that mortgage portfolio has 2 impacts in the near term, and I'm talking about the next 12-month period now is that, one, with rising rates, you're going to start seeing, and we actually already started seeing it in quarter 1, you're seeing customers not refinancing as much. And we've been having quite a strong earnings push in terms of prepayment fees that we've been earning. I mean, to the extent that there's about EUR 260 million plus of earnings that we've been earning every year. Last year, it was about EUR 250 million. Now as people sort of reduce their refinancing, it's worthwhile also noting that the current rates that we're charging on mortgages are roughly about 3%, which is back to 2014 levels. And if you look at our total mortgage portfolio, it's probably 80% of that book is actually already priced at lower than the 3%. So there's no real incentive now to start refinancing. So that revenue stream is going to dry up. I mean, pre the big spree in refinancings, we were earning maybe about EUR 70 million a year on that. So you can see that level of drag will have to normalize. The other area that comes directly from the mortgage book is the fact that we -- as people stop refinancing, you see a duration extension on the mortgages. And we actively manage that duration. We do -- we have a dynamic hedging program. And what that actually means is that we are swapping and as a result of now having to swap longer dated duration at higher prices, that costs as well while the book resets over this window of 12 months. So that's the second drag coming from the mortgage book. The other area that's worthwhile noting is we've actually been very successful in terms of repricing our deposit base in this negative rate environment. And we've effectively got about EUR 95 billion -- well, half of our deposit base sitting at negative 50. So that as well is something that, as the ECB starts increasing rates, we are going to have to pull back to par. So I think that effect is also going to play through. And it's those 3 effects that really in terms of the short term between now and the middle of next year will hold us back a bit. And then we will start seeing the real positive impact in terms of our equity that we reinvest that's about EUR 20 billion worth to see that coming through. And then also in terms of deposits replicating portfolio, it will also start feeding through more positively.

Yes. And if I pick up on one point here is on the deposit pass-through as first rates are increasing from negative 50 to 0. I guess that will be a key focus for investors on how that exactly then progresses as we move beyond 0. In the U.K., we saw that deposit pass-through was perhaps something around 20% as rates got raised from 0.1, onwards. How do you think about the moving parts that will influence the deposit betas in the Netherlands in general?

Yes. Look, I would say you're probably going to have different stages. The first stage is very much going to be the stage from minus 50 to 0. And I would expect, if you want to put it in terms of deposit beta, I would say there, it's going to be a very high deposit beta because the expectations also from the customer side has been, well, you've gone negative as a result of the ECB going negative. Now when the ECB starts going back to normal, we will need to follow. So that's going to be the first step. I think once you get into a positive rate environment, again, let's say, a more normal rate environment, I think then you're going to start seeing competitive pressures coming back. I mean -- and the first stage will be there isn't -- there's so much liquidity around that there's not necessarily going to be a fight for deposits at that stage when you're starting to normalize, but there's still ample liquidity. And what we see there is there will be a period where we'll be able to actually rebuild some margin on deposits back to what we say is historic levels in the sort of previous positive rate environment. But then the fight for deposits will start again. And at that point, pretty much any increase in rates, we will have to pass back to the customer. So you'll sort of have a high beta and then probably a much lower beta and then a high beta again. So it's going to be those sort of 3 stages how I see the deposit evolution in terms of pricing that makes sense.

And other than NII growth through NIM expansion, how do you see the scope for revenue growth across your business lines, personal, wealth and corporate banking for the rest of the year and beyond? And in that context, perhaps you can expand a bit on the strategic initiatives and the mix shifts from NII to fees? And having talked about rates, maybe if you can also share your thoughts on whether the rate hikes and higher interest rates have somewhat shifted these ambitions?

Yes. I mean we had a very good year last year in terms of growth. I think we saw growth in terms of our corporate book. It was really helped a lot also by our emphasis on getting back to the table with our customers in terms of the TLTRO program and that really gave us a seat at the table and we were able to help our customers in terms of passing on cheaper funding. So we saw a really strong fourth quarter. And actually, that growth in the corporate space carried through into the first quarter as well, which was actually very pleasing to see after such a strong fourth quarter that we saw a continuation in quarter 1. On the mortgages front, again, we sort of were able to keep growing last year and continue to grow in quarter 1. Yes, helped by refinancing, but we are growing. You also saw our market share increasing quite nicely in quarter 1. We've got our new price point out there with Moneyou, which has definitely helped retain customers on the mortgage front. And what you are also seeing in the mortgage market is the market is moving back towards where the banks would prefer to be in terms of tenor of mortgages. So for a long time now, it's been out of 20- to 30-year mortgages, which has been much more the insurance company space for mortgage production. But now it's back more to the 10- to 15-year level, which is where we, our risk appetite, that's where we prefer to play. So that is actually also helping. So even though there is margin pressure, and we do still see margin pressure in terms of new production, but over the last 6 months, you've seen that margin actually rebuilding, but it's still not back to the same levels as, let's say, our back book. But in terms of then maybe the market moving back towards the banks and us being able to get our fair market share of that, that will help underpin I would say, our sort of mortgage levels. You talk about the fee to NII. I mean, clearly, our strategic emphasis is really to be less NII dependent, and that does not change. It's helpful to have a stronger NII, but it does not sort of take our strategic emphasis away in terms of also building up the fee activities of the bank. We've done a real structural shift in the bank in terms of reducing from 4 divisions to 3 divisions. And those divisions are much more focused around clients. So very much around the sort of personal and business banking, the wealth and the corporate and really looking at broadening the relationships rather than just being a very product-focused bank, really broadening the customer relationships. And I think that's -- you're starting to see the benefit of that in terms of also that helps in fees. So it's not just doing lending. We're also broadening products where we can earn fees. We have recently announced an increase in fee pricing. I mean, we offer a very good -- in terms of a current account package, in terms of services and functionality, it's as good as anything in Europe. But in terms of pricing, it's at the very low end of European pricing. And there, we've done a step change in terms of pricing that up, come the 1st of July. And that will be quite a good boost in terms of our fee revenues as well in terms of -- we're expecting about EUR 50 million of additional revenues from that alone. And generally building that sort of our fee offering or service offering and product offering with a fee angle, we are incorporating bookkeeping packages in terms of what we offer to our customers. We're doing a lot more in terms of also advising in the space of sustainability, being sparring partners for our customers in that space. And these all offer up sort of fee opportunities. So definitely, the emphasis is still on getting a better ratio between NII and fees. Now clearly, if NIIs pick up strongly, the pure percentages might not play out. But on an absolute basis, the focus is still very much on building out the fees.

If we move on from the revenue side to the cost side and I guess partly the flip side of higher inflation, higher rates, is somewhat perhaps cost pressures coming through seen that across industries. It has been a topic also in the first quarter at your results. Can you update us on the trends in your cost base over the course of this quarter and your initiatives that will help you achieve the targets? And then perhaps also how confident are you that the budgeted IT investments will be sufficient to meet your return goals?

Yes. Costs, clearly, in terms of -- you just have to look at the inflation and your immediate conclusion is, okay, that's going to put pressure on costs. I would say we are still totally committed to the 2024 target where we put a cost level -- an absolute cost level out there of EUR 4.7 billion, which is quite a step downwards from where we are today, which is at about EUR 5.3 billion. So there's a lot of work that has to be done. But that work in terms of -- you talk about structural initiatives that we've got on the run, I mean we have some very clear initiatives that are maturing, and they are becoming more effective. I've always said that in terms of this cost trajectory, it shouldn't be looked at as something that's going to be a straight-line trajectory. It is something where by the mere nature of putting some of these initiatives into place, you have to invest, you have to build, you have to sort of contract things. It takes some time. So there will be some back-end loading to this. But if you think about the major initiatives that we do have on the run, there is very much the unwinding of the noncore. So that's quite a big reduction in terms of geographic footprint, where we've sort of shrunk from quite an international footprint to Northwest Europe. Now we've been very successful there in terms of bringing down the actual asset exposures and probably 2 years ahead of where we wanted to be because we were able to sell into a very sort of well-priced market. So we brought the asset levels down from about EUR 18 billion to only about EUR 1 billion now. But the cost trajectory of the physical footprint and the branches and the countries that supported this business, that you can't close as quickly as you can close the positions. You have to get tax approvals, you have to get regulatory approvals, you have to sort of shrink the thing down. So that takes time. I mean just in the first quarter alone, we still have EUR 50 million just in the quarter of this cost base, which will eventually pull down. So that's one of the -- that's sort of one of the key strategic initiatives. The other area that we're very focused on is changing the channel mix like everyone else, moving people from branches on to digital. COVID helped a lot in terms of that physical shift. But we do still see a lot of people using the telephone banking in the service centers, which is still quite people-hungry. So the next step is really to get them fully onto a sort of mobile self-service or a lot more. So that will help in terms of as we add that functionality, get the reduction in terms of volume to service centers to come off. There's a lot of work being done in terms of product simplification and that has an immediate sort of benefit also in terms of the IT landscape. We have a large number of legacy systems that we will be able to decommission as we sort of simplify the product landscape, reduce to make it more vanilla. And the other big push on the IT side is very much moving from On-Premises infrastructure to the Cloud, which not only gives you more flexibility, but in a way, should also improve the costing. So these initiatives are all on the run and they will sort of come to fruition. The other big area that's in terms of our cost base, where out of the EUR 5.3 billion, we probably have about EUR 450-plus million being spent in the space of detecting financial-crime AML. Out of our 25,000 people, we have about 4,000, 4,500 people deployed in this space. So -- and most of them are working in the Netherlands, so quite an expensive geography to be working in. So there's a lot of opportunity in that bucket as well for us to segment and stratify customer base in terms of risk, for the customers that are high volume but low risk to maybe do a lot of automation in terms of artificial intelligence and only really focus on working on those areas where you get a signal that this is a risky event or a risky transaction. So -- and then you deploy people to that, but you don't have to use people for the entire spectrum. So that's another area of opportunity. So all these things are being worked on, and that's why I could sit here and say, look, if it comes to inflation, and we're going into a collective labor negotiation in the second half of this year, the sensitivities of this -- of any impact of any increases on our salary base, every 1 percentage point translates into about EUR 15 million of cost increase. So it's that sort of level on a EUR 5.3 billion cost base. So for us, we still see the opportunity to actually absorb any increases there with additional productivity, additional initiatives that we can find. So for now, it's not going to add to the structural cost base. It's something that we believe we can absorb.

Okay. Thank you for that. You talked about the wind-down of the noncore portfolio, this has also somehow lowered your estimate -- contributed to the lowering of your estimate of your cost of risk going forward. Could you talk about the outlook for loan impairments from here? And whether you're seeing currently any signs of stress that would make you worry about where you are sort of spending the most time thinking about where these risk -- areas of risk could potentially materialize?

Yes. The noncore unwind has clearly helped our asset quality. I mean, as I say, we pulled back EUR 18 billion of CIB assets, which would have been at the risky end of our asset base. So these have been pulled down over the last 1.5 years. So that has immediately had an improvement because we are now much more skewed to the lower risky mortgage portfolio. The -- like everyone else, we've seen an impact in terms of potential from COVID and layer on top of that the potential of Ukraine. So that's really, clearly how we sort of look at our asset portfolio at the moment in terms of the lens. What you would have seen in terms of quarter 1 is we already prepositioned a buffer for the Ukraine. We're not seeing any sort of immediate activity in the files where we're starting to see increase in defaults or an increase in overdues, but we've definitely shifted our sentiment to more negative in terms of our macro expectations, and that has resulted in higher provisions in terms of putting a buffer in place. And we've also done a sort of vulnerability assessment of our underlying loans. And really here, it's the second order effect impact. And we've taken a look at, well, how to high energy prices potentially feed through all the loss of business. Those companies that were maybe doing direct business into the Ukraine or into Russia or Belarus, those sorts of knock-on consequences. And we did identify a portion of the portfolio, which is at risk. And what we did there was we restaged a portion of that portfolio from Stage 1 to Stage 2 under IFRS. And even a small portion, we sort of factored in as potentially unlikely to pay into Stage 3. So that added another buffer or overlay in terms of expectations on future asset quality pressure. But again, here, we're talking about an assumption-based calculation. We put in EUR 150 million worth of overlay and about EUR 60 million worth of macro impact. But in order to avoid double counting, and we've also seen some catch-up in our models and some of the overlays that we had in for COVID, for example, we released. So you've seen us positioning in terms of provisions. Clearly, we've looked at the portfolio, we continue to sort of monitor. And again, something we've learned during COVID is to stay in very close touch with customers. So there's a very quick response time. We have all sorts of recovery options available as well, if people do get into trouble, but we're not seeing it yet. So we are in this sort of period of seeing, well, how does the removal of support measures that were in place for COVID from the government because those were removed for the second time in March, how does that play out? And then how does the Ukraine sort of second order effect potentially play out on this portfolio, but we have prepositioned the buffer.

Now I think moving on to one of the last topics, capital return. I have 2 questions on that and then maybe start opening up to the audience, see if there are any questions. You finished a EUR 500 million share buyback program earlier this year and will likely not be conducting any further buybacks until the end of the year. Does your plan remain to conduct buybacks on a regular basis? And in terms of the sizing, isn't annual buyback similar to the size of this year's one, something that we should be thinking about? And then perhaps as a follow-on to that, and related on what time frame do you have in mind to reach a 13% capital target?

I'm very pleased that we actually got the first buyback off the shelf and actually got it done. So I think that, for me, as an organization, is an achievement because you can talk a lot, but to get it done is another thing. The next buyback, and you're right, we did say in quarter 1 that we will have a period now of what I call an observation period in terms of seeing exactly what I've just said in terms of how the COVID with the support measure withdrawal, how the Ukraine war, how that impacts customer behavior in terms of the sort of the asset portfolio. So that -- even when we did the first buyback, we anticipated to have a sort of 6-month review period to see -- and this was October last year when government support measures were first withdrawn. When the Netherlands went back into locked on, those measures were reintroduced, and they were only withdrawn in March again. So we really -- the clock starts ticking again from March in terms of this observation period. And in the meantime, of course, you've now have the Ukraine war layered on top of that. So that determines a little bit as to the time frame and what we -- how we want to see things evolve before we go back and do the second one. The sizing and the timing, it's very dynamic. It's very much determined or did -- are things panning out better than we expected or worse than expected. I mean that is obviously what informs it. We are in continuous discussion with regulators. And bear in mind here there has to be a regulatory approval on the share buyback. So the sizing that we chose for the first buyback was very much so that we could have something which was repeatable. And it was something that we could do on a measured basis that we could, together with our dividend payout, have something which was a bit consistent on a multiyear basis. And I think that's what will inform it going forward as well.

And what are your discussions you're having inside the firm of what to do with the NII benefit, the rates benefit that you're getting from higher rates? Do you see the additional income as room to invest into growth of the company? You're looking at angles for M&A? Or are you thinking of returning this to shareholders? Or perhaps a combination of all of them?

I mean the first thing I'd like to see is a real improvement in the bottom line and in things like our cost to income ratio and our ROE. So with the NII projected by the forward curves as they are today, we will potentially get to an ROE of 10%. So if they materialize. Our own house view is a little bit more conservative, and that's why we're sticking with our sort of 8% ROE. But really, that is for me the first sort of ambition is to get the bottom line improved, which will, therefore, translate then into with our payout ratios on dividends into improved dividends going to the shareholders. So that's probably the first priority. If it comes to reinvesting in the business, we -- our plans already have quite a bit of investment in terms of affecting the strategy. So if we do see some opportunities where maybe we need to channel a little bit more investment in order to accelerate something, yes, we will do that. On the M&A front, here, we are being extremely selective and extremely careful. I mean, so you see we haven't really done any M&A. There's nothing at the moment on the radar. We do a lot of analysis and desktop and due diligence and looking for opportunities, but being very circumspect in terms of -- of course, it has to fit strategically into our sort of Northwest European footprint in the businesses that we do and has to provide some sort of catalyst to a step change in terms of scale. But ultimately, before we do anything like that, I always reflect on, well, what is the sort of IRR on this. What can we actually achieve in terms of return versus giving the money back to the shareholder or to the investor and the return that they are earning on that. So that's very much the forefront of my mind.

Yes. Okay. Now there are several minutes remaining. I do have one more question. However, I'd like to just see if anybody has any particular questions from the audience? Yes, you go ahead.

Yes. Can you remind us what the shareholding of the government currently is and how the further privatization will run? And whether you would envisage any directed buybacks, for instance, to help the state get -- or the government get out of it?

Well, they currently own about 56%. So that level hasn't changed for a while. We have got a new government in place, a new Minister of Finance in place. The first message is that came out was a restatement of the fact that the ambition was to return ABN to the private sector. There have been some recent statements about making a first step to go below 50%. But as I sit here today, I mean, I don't have anything directly that says to me there's going to be a direct share buyback or how that will be done. But I would imagine the options are on the table. But ultimately, we have to ask the government and the ministry and the NLFI as to what their strategy is there. But for sure, the direction of travel does seem to be reducing the stake. And the other shift seems to be that the reduction in the stake doesn't have to be contingent on full recovery of the money that was put into the bank. There does seem to now be a move towards being prepared to take a sort of fair value approach rather than a recoverability approach. So I think that is a change in the last sort of 6 months.

Could you talk a bit about your IT investments? You talked about product simplification, business simplification. Does that mean when you're done with that, then you start to invest more into a, say, modern banking platform, you thinking like that?

I mean there's a lot happening in the IT space. I mentioned the fact that we are doing sort of transition from On-Prem to Cloud, and that's a major one in terms of infrastructure, but there's a lot of development going on in terms of providing digital functionality, and this really goes across pretty much every business line, whether it's the wealth, whether it's personal banking. In a lot of the products, we have a lot of core banking upgrades that are happening as well. So really, in the space of security, there's a lot of work being done. So it's really quite a broad-based sort of IT program.

One more question from my end. ABN will publish its climate goals or climate strategy later this year. And realize it's quite a broad question, what does ESG mean for ABN? Has it changed your approach to conducting business?

Well, ESG is really at the center of our strategy. If you look at the pillars of our strategy in terms of the client side, the -- having the license to really operate in the future, and then we have sustainability as a core building block. So it's their front-end center. As a result, clearly, it also plays in every single business line and a customer unit that we have. And what's really pleasing is it's already there in terms of our offering -- in terms of our service offering. I mean if you see in our mortgages space, we do a lot of work in terms of helping our customers become more efficient in terms of their houses. We offer financing in terms of solar panels or heat pumps or insulation. So that's happening as we speak. In the space of our corporate banking really, there is a clear focus on trying to help our customer base really transition from potentially sort of -- gray sort of business to more green business and us being there to provide the financing, but also they advise as to how to do that. That's what I was referring to earlier also in terms of there's a fee angle to this as well. So -- and then if you look at our wealth side, very much in terms of the discussions our customers as to which funds to invest in, it's very much around the ESG space. And we have a very high percentage of our assets under management are already qualified in that ESG space. So also, if you look at how we've been performing against our own targets, we're roughly trying to shift our ESG profile across, let's say, loans and customer assets under management, and this is corporate loans and mortgages to somewhere from about 20% on average across those 3 areas to sort of the mid-30s somewhere in the sort of 2024, end of 2024. And I would actually say we are ahead of that across all of those sectors. So there, we're also sort of increasing our ambition levels, and we're getting the traction. So I think this is very much at the core of what we do.

Perfect. I think that's great now to finish today's presentation. Thank you very much for joining us, Lars. And I think this was the last session of the day. I think there might be one more in another room, but otherwise, it would be great to see you all next year in Paris. Thank you very much.

Look forward to it. Thank you.