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

Okay. I think we can begin. We're still finishing up the breaks. So no doubt we'll have a few people coming in. But I think in the interest of time, we'll keep the sessions moving. It's my great pleasure to introduce Robert Swaak, Chief Executive Officer of ABN AMRO. Robert was appointed to this position in April 2020. Previously, holding various senior executive positions at PwC in the Netherlands, including CFO and Chairman of the Board of Management. Robert, thank you again for coming to the conference. .

Yes. It's my pleasure. It's good to be here again. Thank you.

So as with other sessions, we're going to do some Q&A here on stage. Ideally, hopefully, we'll leave some time for audience Q&A. When we get to the point, please do just raise your hand. I'll try and do my best to see you, and we'll get a microphone to you so that the rest of the group can hear the question. I think let's begin maybe actually thinking about something slightly different, right? So before we go through those usual P&L questions and capital questions, let's take a step back and think about how the overall strategy has evolved, in particular with regards to technology. So one example is in retail in the Netherlands, you have 129 branches in 2019. That number has now come down to 27. So provide some sort of color and context as to how you've managed to achieve that?

Yes. It's quite a significant drop off. Clearly, becoming a personal bank. And it did just a -- it is what we set out to do when we started our strategy in 2020. A lot of that has to do with making sure that all of our daily banking services right now are available remotely. So to close down branches, you actually need to understand what's happening in the branch in and of itself. So we've been very, very diligent in tracking actually customers across the branch and what do customers do. And so once we begin to analyze that and really applying the expertise that we have around our digital capability. We're able to come to the conclusions that 27 offices where we are now is -- it was quite a drop-off. And, the fact that we are now able to have our daily banking services being carried out remotely as evidenced by, for example, 90-plus percent of our mortgage conversations are now through video banking. Hardly, everyone comes into the bank to talk about mortgages. Now we have over 70% of our daily banking activities taking place through video. Clearly, you need to be very, very vigilant on the effectiveness of customer care and your contact centers. We've even developed propositions for people that are not able to transition into a digital environment. So these are the vulnerable groups that we need to ensure have access to the system. So we have financial care coaches. We actually visit people now in their homes to help them adjust or to help them provide them with the right tools. And that also means that we have to be very, very clear around the level of investments that we continue to do. So as you bring down your branches. We saw the effect of that in our branch cost, but we also continue to invest in our digital capabilities. So all in all, we will continue on this route because it actually allows us to provide the convenience that we -- now we need to [indiscernible] prevent as a bank and infusing the expertise when we actually need it. So it's been quite a journey.

And I suppose sort of 2 follow-up questions on that technology topic. First, what does that tangibly mean for group profitability as you look further forward? And secondly, you can't turn on the television or pick up the FT today without looking at AI, essentially in every industry currently. So how do you see the role of AI with regards to banking?

Yes. I welcome the role of AI, and we know we've been applying AI for quite some time. It's nothing new. So ChatGPT has clearly come online. And as everyone will discuss and debate the ethical applications thereof, I think we all need to get our head around. But it's actually providing an excellent way of further just elevating the client service and client delivered. In terms of the bank's; performance, what we've actually seen now is that, as I said, it does bring down costs in terms of carrying cost of branches. I think you need to be very much aware that once you begin that journey, there's a level of investment that you need to continue to do. I think we've highlighted that in the past as well. What's important to us, maybe even more or so than the absolute cost level is what is the customer satisfaction doing around the immediate closing of branches? And how quickly does the customer NPS begins to drive back up again. So there's a whole notion of, as you close branches, you expect to drop off, but can you maintain stable NPS? And as you then reassert yourself around the digital proposition. So again, that personal bank in a digital age focus on where the NPS is trending. And that will ultimately get to customer satisfaction in combination with cost effectiveness.

Let's give it slightly to a more traditional sort of macro topics we've clearly had a big rise in inflation and then success of interest rate hikes, et cetera. As CEO, one of the largest Dutch banks, how do you specifically see the macro outlook in your markets, specifically with regards to housing and mortgages, et cetera?

Yes. I think it's really interesting. If you look at the economic environment in which we're now currently present, I mean, something really good about this, the fact that interest rates for banks anyway have begun to come up, and we'll touch upon that in a minute. There is the downside of interest rates coming up, which is the inflation consequence and the energy crisis that we've seen. And then there's the continuing concern that you have around uncertainty in the market, which is predicated by a war that's still ranging on the eastern side of Europe. So if I drill down into that, I think the Dutch economy, when you look at these 3 factors has proven to be quite resilient. In that we are now still predicting the economy trend to slow down over '23 with a 0.7% GDP growth at the end of the year. So that actually means that the economy is starting to settle down and started to cool down, if you will, that has immediate impact clearly for consumer confidence, consumer spending. We were back in 2020 in a period where we saw consumer confidence dropping off, with consumer spending still tracking up. That has now started to slow down as well. So you're actually now seeing in an environment in the Dutch environment. where you've got consumer confidence slowing down spending starting to slow down. Global trends and global output will absolutely impact a Dutch economy because it is very much oriented around exports. So if I were to track that down into the inflation that we're now currently seeing. Inflation, I think, is still trending around that 4% toward the year-end, it will be around that level as well. Interestingly enough, unemployment is still low. So we have a -- we have evidence of nearing recession in that 0.7 GDP growth, but unemployment continues to be very, very low. So that is, in a sense, counterintuitive, but it translates into how the economy operates. If I project that on mortgages, very clearly, we have these types of market dynamics. Nothing unexpected. What you would then see as volumes begin to drop off and pricing begins to drop off. So high interest rates, volumes begin to stagnate. So we expect about a 5% to 6% of both prices and volumes to slow down in '23. And that, again, is on the back of consumers actually now holding back given where interest rates are. For us, in terms of our book, we have about $151 billion last quarter, we were -- we saw a decrease in input, but we also saw a stable output. So there's not a lot of change happening within that mortgage book. We had about a 50% market share. So we continue to see that. So on the corporate side, interestingly enough, we're still seeing volumes continue to come up. So I would say, in general, an environment where inflation and interest rates will continue to determine how we play out ultimately into the GDP environment at the end of the year.

And there's a lot of focus in the last few months and particularly around deposits, the velocity of the deposits and you talked a little bit about deposit funding costs as well. So perhaps if you could just share some perspectives on what you're seeing on deposits, both for yourself or so from competitor behavior. And how those trends compared to what we saw in your numbers in the first quarter?

Yes. I think that's a topic that I think we're all looking at is how the deposits will continue to behave in this environment and coming back into what we would call a positive interest rate environment. I think we're back into the dynamics that we were in many years ago, where certainly in a Dutch market, the deposit base is for a large part sits with the 3 systemic banks. So what we're now seeing is that the level of competitiveness is coming back again. So for us and ABM AMRO basically means that we very, very carefully watch the dynamics from competing banks that will determine how we set our deposit levels. The behavior in the Netherlands right now is that the current accounts tend to be quite stable. There's not a significant flight into other markets just right now or at this point. It's very consistent with the behavior we've seen in the past. So consumer tends to be or customers tend to be quite consistent on what they do in terms of their deposits. The other good thing, I think, in the Netherlands, there is competition. So there's alternatives that customers can actually go to. So right now, on our side in terms of monitoring deposits -- monitoring the margins on deposits. It is very much about making sure we understand what's happening on the competitive field and then we will price accordingly and also clearly depending on dynamics in our own balance sheets. But it's that consistent policy we've had for a quite some time.

That consistent policy you talked about, I think, sort of leads nicely on to the next question around, NII and particularly margins, and how to think about margins. You've talked before about thinking about the historic margins that we've seen and how those would trend going forward. What are the latest dynamics you see in terms of NIMs? And is that the right sort of way to continue to think about it for 2024, looking at historical margins and flowing that forward?

Yes. Actually particularly related to deposits, clearly, margins on mortgages is a bit of a different dynamic right now. But Yes, we're still trying to determine are we getting near those historical margins. And I think it's fair to say that we've seen you progress -- continue to progress well on deposit margins. At some point, depending on how the interest rates will continue to evolve, we would expect margins to stabilize. . The question is very much own and that's the question on everyone's mind, well, when will that begin? And when is that moment? And it is indeed very hard to predict, and that's why we're -- we tend to be -- we follow what's happening on a quarter-to-quarter basis rather than trying to give an outlook of what's happening on the years on an annual basis. So very much linked to what the interest rates overall are going to do. And then depending on competitive pricing, how we would deal with pricing ourselves, knowing and appreciating that we're getting near those historical margins. But it is very hard to say, well, when is that actually occurring and when do you -- because I think that ultimately has to be the question. When do you expect those margins to come back down again? Or when do they stabilize? That is very much depending on what the market dynamics actually will result in.

And we spend a lot of time thinking about margins, et cetera. But if we just more broadly think about growth, you've got ambitious growth targets. Could you talk a little bit about what are the segments, the businesses, the line items, the divisions where you're trying to -- where you think you'll be able to achieve that growth and which are going to drive that franchise growth over the next few years. .

Yes, we've been very much very clear over the last couple of years around the strong market positions that we're protecting in terms of growth, very good areas for ABN AMRO. Mortgages, we just talked about, clearly, the position that we've had there for many years now continued to be a market leader. We have clear ambitions around market shares of new production that we intend to capture. And of course, all of that within the realm of the economic environment in which you operate. The other is SMEs, 350,000 SME clients in the Netherlands. That's another one of those areas that we are continuously evaluating our service delivery and growth delivery into the SMEs, particularly around the digital agenda. We just talked about the digital developments that we have within the bank. Then we have the affluence in wealth management. I think those are strong areas of the bank that we continue to target, and we continue to adjust our propositions. We see that as growth areas of the bank segments that we've identified, the corporate bank, just a step back for a minute and all the changes that we put through in the corporate bank, but we've identified a noncore part of the bank. We've completed the noncore operations. But then the real challenge is how do you regenerate the volumes that you've unfortunately had to determine we're noncore. Well, again, we saw growth in our corporate book also this year or this quarter. And that is particularly around the growth sectors that we've identified for the growth bank. So we're very focused on the sectors in as they relate to mobility to digital and energy -- new energies. Those are very focused elements for our corporate bank and particularly also in Northwest Europe. So all in all, what that tells you is that the growth areas of the bank that we're still very comfortable around the geographical areas for the bank, which is predominantly in Northwest Europe, where I would add on the locations that we have for our shipping sectors in Athens and Norway -- Athens and Oslo continue to be important sectors for the bank, in combination with our global cleaning practice. So I think those growth sectors, the geographic areas that we've identified were the right areas. And we're seeing exactly in the areas where we would expect to see growth coming in that is now actually occurring. So I'm actually quite pleased with that.

Let's pivot a little bit from revenues down to costs. I think for this year, you're targeting flat costs EUR 5.3 billion. For 2024, EUR 4.7 billion. What are some of the -- and that's in the context of an inflationary environment. So what are the key measures that you're putting in place to be able to deliver that sort of efficiency to deliver on those efficiency targets. And I suppose if you think back over the last 12 months or so, what surprised you positively and negatively about the ease or the difficulty of meeting [indiscernible] cost hurdles?

Yes, that's -- I think that's in effect you're saying putting the hurdle or the -- your ambitions in context. And I think you go back in 2020 when we did all this, it is indeed very difficult to predict where the economy ultimately will end up. We would have thought that after a COVID prices you're now in the midst of a well, call it a global crisis of some sorts, whether it's energy or whether it's stability. So that EUR 4.7 billion was set in that time frame. I would still say the one thing that clearly had an effect is inflationary environment. I think we've been also very clear that we were very -- happy is not the right word, but at least we're able to provide consistency in our CLA. We were able to lock in CLA agreements at some point that clearly took a lot of work as the dynamics in local labor markets did change in order for us to have those conversations. That has led to an additional cost we will have to pick up in '24, which is about EUR 120 million. So if you say, what has surprised you? It's not a surprise, because it's very consistent with the economic circumstances in which we're in, clearly we didn't factor that back in 2020. We did identify a number of levers that we continue to track. So I just talked about our noncore operations. We're nearly done. We've nearly completed the noncore in quite a fast pace. That means that we still expect about EUR 100 million of cost savings to come through. We will continue to monitor our regulatory leverage that we now expect to start, will have to start to drop off in '24. We think it's around EUR 200 million item. And then we clearly work in AML, and we expect AML costs to begin to track down. So the levers that we still have in place are still the levers that we continue to target. And I think more importantly, we're very focused on the absolute cost discipline. And I think that's something that we will need to -- we will continue because it allows us to be very, very clear on the messaging. So whilst we're concentrating also on the growth segments of the bank to ensure that we have a maintained cost discipline. So still visible. Our leverage -- our levers are still within reach to us. And yes, there are circumstances that have changed that make that [indiscernible] more challenging.

And maybe this is a bit unfair in June 2023 asking a question beyond 2024. But when you think -- talk about those levers, are those the same sort of levers used to aim to be working on to drive further progress beyond 2024.

I mean these are the levers that we have for now. I would always be focused on maintaining cost discipline. So in addition to what I've just highlighted, we're carrying on the usual cost-saving programs within the bank, and we will continue to do so. And I think that will have to continue because simply on the back of the effectiveness and the efficiency of the bank, we will need to keep our focus there. So we'll continue to review.

We've talked a little bit about what higher rates and inflation mean both to revenues and for costs. But maybe if we pivot slightly to think about how those same factors impact asset quality. What are the most recent trends you're seeing in terms of asset quality and maybe specifically around CRE.

Yes, I'm happy -- I'm actually quite happy with the quality of our assets right now in our loan book. To start off with, again, the operations that we carried out, significantly changed the risk profile for the bank. And so therefore, we were able to now come to through the cycle cost of risk of about 20 basis points coming down from where we were before. We would expect through the cycle cost of risk at the end of '23, we don't fall into recessionary environments, probably come below that -- coming below the 20. Through the cycle cost of risk for the first quarter was around 4 basis points. But I think more importantly, you're looking at the way we're managing the bank. And so in this type of an environment, we're quite happy with the diversification we have in our sectors at this point. We stress test our sectors continuously. So what we don't want to have is a concentration where we don't visit it. So concentration limits are continuously being evaluated in changing economic environment. So if you don't have an overexposure into a sector, you have a diverse sector book, particularly related to SMEs. I think that's exactly where we want to be. Commercial real estate, most of our commercial real estate would sit in residential commercial real estate. We monitor loan-to-value there continuously. So those are well below the levels that we would anticipate it to be. I think on leveraged finance is another one of those areas that we continue to watch for private equity. We also, again, keep within very strict limits of what we set for the bank. So overall, and I can translate all of that into the staging, that you then have to -- that's oftentimes in the outcome. And you saw in Q1 that are staging Stage 3 and 2 actually improve. In terms of the numbers that we're producing our provisioning, we still carry a 15% management overlay in the overall provisioning. And so for me that actually, those are all indications. And then finally, clearly, what you look at, your macro indicators are, well, what are the bankruptcies doing in the Netherlands. Bankruptcies have actually started to take up, which is not unexpected in an economic environment, which is starting to slow down. And then you correlate that to what's happening into your own FR&R. And we actually see FR&R slowly picking up it's natural levels that are greatly concerning. So changing economic environment, yes, but comfortable on the quality of our assets.

So these aren't cyclical improvements in credit costs, they're more structural improvements in terms of...

That's exactly the reasons why we implemented the changes that we did because there's -- in cyclical change, you have to affect systemic changes in your institutions because you don't want to continuously be subjected to cyclical changes, but the real challenges, well, what is that systemic change you need to put through. And for us, it was very, very clear given the profile of the bank, but we needed to put through the changes. And I think just stepping back on the mortgage book for a minute, certainly, when you look at the quality of the book, mortgages in the Netherlands and no mortgage speaking about a significant part of our balance sheet. We know that the quality of that book will be impacted when unemployment increases. So whilst we're continuously monitoring the performance of the book, we're still seeing an environment where unemployment is also low. Now again, those are choices we make in terms of choosing our growth segments. You do that with a longer-term view to understand what the implications are to the risk profile of the bank. And I think we've been quite effective in managing that risk profile over the last couple of years.

So we've walked through sort of step by step, the macro backdrop, revenues, costs, credit conditions. If we try and wrap that all together with regards to profitability, I think before, you've talked about sort of 10% return on tangible in the normalized interest rate environment, I would just love to hear your perspectives on what do you think the mark-to-market effect of that, our target is today in the current rate environment in the...

And it's interesting to see how quickly that the market changes in that sense. I mean, when we came out in 2020, we talked about 8% ROE, and we signaled 10% if we would get to a normalized interest rate environment. And absolutely, to your point, we're now in a positive interest rate environment we'll see what normal is, a positive interest rate environment, and that's why actually where we do see the 10% to be attainable. And I think that is indeed, again, very consistent with what we talked about back in 2020. Right now, we're at 9.6%. So we're progressing quite well, and I would say that 10% for '24 given the environment in which we indicated we would get to the 10% is something that we would strive for. So that 10% for '24 is attainable. And again, just going back to where we were in Q1 with 9.6%. I think that's -- we're well on our way.

So profitability being in a good place sort of leads us nicely on to capital and capital distribution. You recently talked about the potential to revisit share buybacks and share repurchases if the macro picture was to allow for that, or what to support that. How do you see that situation currently? And maybe perhaps if you could also just touch on or remind us of the latest position by the government in regards to that.

Yes, let's back up a bit. We've always said that we will be very focused on capital return to look at a gradual capital return over time. And clearly, falling on the back of constructive dialogue with regulators. That's how we started. We completed our second share buyback program, just recently another EUR 500 million. and we review continuously ongoing the potential for share buyback, and that has not changed. So we review as I said, continuously. We have to do that on an ongoing basis to determine when and if we would a next round of share buybacks. The -- another fines has indeed -- so the government has started a [indiscernible]. They very clearly indicated coming off of a 56.3% in shareholding that they would begin to reduce their shareholding to at some point below 50%. That is progressing at this point. We don't know where that stands. I do know that they do have a, I think, a disclosure requirement once to get below 50%. So yes, that's ongoing as we speak, and nothing has changed since that process started.

I I think at this point, if I look at how much time we have that, this is maybe a good time to go to the audience and see if there are any questions out there if I can't see any hands right. There's a question right here at the front.

Two questions on my side. First, on M&A, if you can elaborate on potential M&A even [indiscernible] border? And the second question on the competitive landscape in Netherlands, given the higher rate environment relative to nonbank institution because the pension has an important role in the mortgage market. But I wonder if the higher rates are changing something in the competitive landscape.

Yes. Thank you. Thanks for the questions. On M&A, I've always said and we'll continue to say -- we -- part of our strategy -- our strategy is predicated on organic growth, and that's everything we've just talked about. But it doesn't mean we don't look at inorganic growth. And so we will continue to monitor opportunities that present themselves for the bank. There are quite a few hurdles for us to actually engage on M&A. The hurdles would be quantified by the financial returns that we would expect from M&A. And we also have a very clear benchmarks of what we expect for the return. So it has to be -- any M&A has to be strategically accretive, but it also has to be financially accretive. So those are some of the kind of the benchmarks we will use in evaluating M&A. Direction, we've also been very clear. We just talked about growth segments. Our wealth management practice has been and has been -- will continue to be identified as a growth area. And we've also been very clear, I guess, over the last 3 years that we would look at anything that could potentially help to feed our lines into wealth management. So we will continue to review if opportunities arise, and then we will have the clear measures against which we would evaluate M&A. As to your second question, it is fascinating to see how the competitive landscape in the Netherlands has evolved. And previously, you would have said with higher interest rates and therefore, the tenure of mortgages is starting to come down from the 20% plus to more 10% to 20% kind of range or maybe even 10% to 15% kind of range, which would be more naturally the logical domain for banks. In the past, you would see as the nonbanks or the other players actually begin to leave the market only to come back again once interest rates begin to drop off. We're not seeing that now. So we're still faced with a -- will continue to be faced with a highly competitive environment. Clearly, that has effects on margins. So we talked about volumes, we talked about pricing. But margins will be under pressure because of the competitive landscape. I'm actually quite comfortable where we sit from a bank's perspective. We -- as you may know, we're in the market with 3 different labels. We cover a wide range of customer segments in our mortgage markets, so whether it's the wealth management side, whether it's the retail side, whether it's fluent, whether it's the young. We do have propositions in all those segments. And so therefore, right now, it is actually quite a -- that's why I call it fascinating, interesting place to be because it's almost week on week that you determine how do you -- and how do you determine pricing for the longer outlook given the competitive dynamics. But given the fact that we've got strong labels in the mortgage market, and we are well diversified in terms of customer segments, and we now continues to be well placed.

Any more questions? Maybe just if we could talk a little bit about the climate strategy that you presented in December, I mean, including the sort of dilemma or in dependencies on how are you going about achieving your targets?

I think the presentation of the climate strategy was an excellent moment for the bank to continue to capitalize on something that we started back in 2017. The bank has always been very clear on where we stand in terms of the choices we need to make, when we talk about our climate strategy. And what we actually did in December is we developed transition paths to ensure that you get to a net-zero environment in 2015. And actually by identifying these transitions paths, and we did that for the sectors that we feel have the immediate impact. So oil and gas clearly is a sector, our mortgage book will be a sector, our commercial real estate would be a sector, our shipping and logistics would be a sector. So we've identified transition paths into that net-zero. We're very clear about our own responsibilities in terms of scope 1 requirements in 2030. So we've been very adamant on that. We will continue to ensure that we make funding available in terms of our sustainability impact funds. We're actually putting quite a sizable amount now up to invest in new stage technologies. And we also want to ensure that within a certain time frame that we invest in renewables. So we've been very clear in the articulation of what our ambitions are. But we've also been clear that we can't do this by ourselves. Because oftentimes, we all publicize our climate plans. Climate is not the only issue we're facing. It is climate in conjunction with social impacts. So any time you come up with your climate strategy, there has to be a notional consideration of what the social impact is. And so we've been also very clear on what we need in order for us to be successful. And that means -- that was also a message to anyone who is currently engaging in that climate environment to ensure that as we go through climate change and the effects that we want to affect that we have a view on what's happening within our own societies and the societal impact some of the changes that we're now starting to put through. And that clearly means that yes, we will monitor our transition paths. We believe in a just transition. So we will stay in the sectors that we've identified, but we will engage on a just transition, and that means that we work very, very clearly with our clients now in accomplishing the transition they've set out to do. And I have to say the added value that we have as an institution is the expertise that we've built up over many, many years and shipping is just a great example of how you're engaging now with our shipping clients as they have to go through a transition on their own fleet and fleet management. So it's actually been an excellent strategy to go through to ensure that everything you've talked about and we've executed before comes into the core of the bank and contributes to ultimately the profitability of the bank as well.

So I think we just have time for one sort of maybe a quick wrap up quick fire question. The last 3 years have obviously been an incredibly busy time to be the CEO of one of Europe's largest banks. But looking forward, what sort of gives you cause for concern, but also what gives you cause for optimism?

Yes. So I tend to be more on the optimism side than the concerned, but I'll start with the concerned. And I think it actually is. So the concern clearly will be settled around the economic circumstances. That is a longer-term concern that underpins the longer-term concerns around where is inflation ultimately going to end up, will we be able to maintain the economic -- the resilience that we've shown to date. And certainly, we've got another season coming up of energy, demand and supply and matching those 2. So that, in the back of my mind, will continue to play out. What gives me optimism is the fact that we have made some very clear and distinctive choices back in 2020, and we've delivered against those choices. And that tells me something about the resilience of the bank. It tells me something about the adaptability of the bank, but also the stakeholders which we work with and clearly, a large group of stakeholders here today. That we're starting to establish a pattern that what we say what we do. And I think that's -- and the circumstances changed, yes, they did indeed. But the fact that we've been able to view very clear about our geographical footprint, very clear about the growth segments. We've adjusted the risk profile to the bank. We are in certain cost discipline and at the same time, begin to execute against our capital return policies that we set for ourselves, gives me great confidence that we can continue this way. And then whether whatever uncertainties will throw at us.

Well, that's a good night to one and all. Thank you so much for joining us and hope to see you again soon.

Thanks for the questions here. Thank you.