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

Good afternoon, everyone. I'm pleased to be joined by Ferdinand, the CFO of ABN AMRO. Thank you for being with us today.

Thank you, Giulia.

I have a few questions for you, but let me start with the polling question for our audience. So what you think is most important for ABN share price performance over the coming 12 months? First, capital, lower RWA density as ABN gets through the modern migration phase and Basel IV comes into force; number two, NII stability as per guidance, with maybe even upside if savings rates go down; third, delivery on cost to remain stable as per the guidance; and then four, asset quality to continue benign. [Voting]

Okay. 1 and 2. So capital and NII. Perfect.

A good reflection of my meeting so far today, Giulia.

Great. So let me -- well, we will go into the detail of all of these points, but let me start with a broader strategic question. So what are your priorities at the moment? What are you most focused on as part of the management team of ABN?

Let me start there as a real keen focus this year on finalizing our programs related to data credit risk infrastructure and models. It is really focusing on further digitalization and automation. As you're well aware, we reduced our location footprint to only 25 branches. So the front end is really digitalized in terms of daily banking products, but it's really rejuvenating our IT landscape and then digitalize their end-to-end processes. And as you're well aware, also for automation, for example, related to our AML units, more automation should lead to further cost savings. Number three, I would say programs related to cyber and information security, also ahead of new regulation like DORA. These are big programs and DORA will be implemented as of 2025. And maybe also to add there, what's very important is to further disclosure requirements under a sustainable finance regulation. We just published our integrated annual report yesterday, and that is the first step towards CRD compliance. And that's really investing in nonfinancial data disclosures, but also in the infrastructure related to that. And it's also partly clarion environmental risk. So it's really the credit data and credit reporting on the back of that. And these last 2 points are also clear supervisory priorities for the coming years. So it's really on one-hand focusing on finalizing those programs because that will help us in lowering our cost base. It will help us in better servicing our clients. And lastly, it will also help us in run the bank at a more efficient capital level. So a big focus on those programs and at the same time, clearly focusing on growth as well as we set out in our strategy.

Perfect. So let's talk about your targets, and I would start with the 9% to 10% ROTE by 2026. So what are the main levers to achieve this?

Well, I focused a lot on the foundational programs we're working on, which are very important. But then hopefully, after 2024, we can gradually shift more of our change capacity towards clients and revenue-generating initiatives. Income growth is part of reaching that 9% to 10%. The increased capacity on the programs will lead to an increased cost base for 2024, but we expect the increased cost base of 2024 to remain fairly flat over the forecasted period. So we have existing and new cost savings programs to counter for further inflation. Then we expect a gradual normalization of impairments. We have a through-the-cycle cost of risk indication of 20 basis points. We expect a gradual normalization in deposit NII margins. And lastly, clearly, it's optimizing our capital structure. So for 2026, we have a core Tier 1 capital target of 13.5%. So all these elements should add up to an ROE of between the 9% and 10%.

And if we remain high level, then we will go to the detail. But ultimately, the ambition of management from what I hear is actually to be above 10%. So what will get you there?

Clearly, we have an ambition to go higher than that. And as I said, if we finalize our existing programs, it's really transferring our capacity to further grow the bank. If you see in the period we've gone through since our last strategy update in 2020, we have significantly restructured our corporate bank with now really a dedicated focus on the Netherlands and Northwest Europe, really with specific growth ambitions in transition sectors like mobility, digital and new energy. Number two, if you look at our retail bank and our 5 million retail customers in the Netherlands, we've digitalized the bank and it's really with more digital client proposition to increase the overall cost by our client base and also looking at our retail client base as a feeder channel towards our wealth operations, have really grown now from mass affluent to affluent to wealth. And in that context, we recently acquired BUX. That's one of the leading neobrokers in Europe. And that should really help us in bridging the segment to the relatively elderly client base of wealth with the younger, high affluent clients where they have a leading market share in terms of first-time investors. So -- and number 3 is really looking in the broader perspective of our wealth organization. We are clearly the market leader in the Netherlands, but we also have leading franchises, both in France and in Germany and really leverage them on that on an integrated concept between, on one hand, corporate lending and at the same time, also the world structuring for the entrepreneur. And I think where they are small enough to be flexible, but also large enough to be relevant to those clients. So it's clearly on top of what I just said is specifically focusing on revenue growth beyond that period, in combination with the other elements I just mentioned for 2026.

So now if we can get into the details of capital, which will partly be...

Absolutely, as I see from the polling here as well. So, yes.

Correct. So the RWA density incorporates, in particular, is very high. So how does the process to move to a more efficient capital model look like? So what should we expect over the next few quarters?

I think in the transition period where we've been in, we've seen quite a significant increase, let's call it, under regulatory RWA inflation over the past few years. There are a few elements in that, I think number 1 is really the constant review of your existing credit risk models. And there, you can have changes in, for example, a more stricter definition of defaults. Which will lead to front-loading of some of those more inflation on RWAs on top of your current models. Number 2 is ahead of Basel IV we're really simply -- we are in a simplification process of our overall IRB model landscape. So it's moving more of our credit risk models to less advanced approaches like foundation and standardized ahead of Basel IV. And number three, it's also related to limitations in your model, you have because some of the processes or data are not too up to the regulatory expected standards. So over this year, we expect to have more clarity and stability on our capital outlook with the adoption of Basal IV as of 2025 and we're also ending the process of the simplification of the model landscape. So that will also mean that once the stability is there and we get in sort of a period with more balanced add-ons and releases that will also be the moment that we can be more -- become more ambitious in terms of capital return beyond the EUR 500 million we announced at Q4.

Exactly. So just to make sure that we understand it correctly, is it correct to expect some potentially further small increases, but then ultimately, the RWA density should decrease by the end of the year because the Basel III CET1 is converging to Basel IV, and that should allow for buybacks higher than EUR 300 million.

Yes. And it's also the adoption right, the process towards adopting of Basel IV as we have already gone through the trajectory of more simplified approaches, the impact of Basel IV is sort of being front-loaded for the bank. You will always have on a quarter-by-quarter volatility in terms of approval of models and/or limitations being removed because certain data issues have been solved. So we're entering a phase where it will be more of a balance of add-ons and releases. And it's also -- we are towards the end of moving certain portfolios, specifically low default corporate portfolios to less advanced approaches. So towards the end of the year, there are still some final portfolios we will migrate. But it's clear towards the end of the year, we have a much better and more stable outlook on our capital.

Perfect. And if you think about capital, but from a competition standpoint, because now you have a materially higher RWA density than some of your competitors, does that put you out to this advantage when you compete for business when you price loans? Or how are you approaching that?

Yes, that's a good question. And I think it also came back in my discussions today as you have significantly restructured your corporate bank, and the bank has derisked. And if you look at the RWA density, with all the front-loading ahead of Basal IV, the density is now above the 100%. It's always a question how do you price and specific sectors we are focusing on had the transaction sectors outside the Netherlands, we can grow there profitably, but it's also a question, will there be more of a level playing field next year because it's not completely clear if all the banks are already pricing in RWA levels on the Basel IV in the current loan proposals. So we are very strict on the returns, we want on both a credit ROE, but as well on the client ROE, so including the cross-sell opportunities you have there. And we see enough opportunity for our corporate book to grow profitably, also pricing in already the Basel IV assumptions.

Perfect. And if I can conclude the capital topic.

Yes.

What -- so you have excess capital. How do you look at the potential for M&A?

Yes. I said, it's capital. I mean it's my task. It's our task to generate capital and distribute it to shareholders in combination with growth. We have an organic strategy and we see enough opportunity in the key segments where we focus on. So it is SMEs, it is more concession in the Netherlands and it's really affluent and wealth in the Northwest European countries as well as the corporate bank on the transition sectors. Next to that, if there are any bolt-on opportunities which will accelerate the execution of our strategy. If it makes financially sense, we always have strict criteria on any M&A. And the third, lens. You should always look at is how easy is a transaction to integrate. So looking through those 3 lenses, we're very explicit, it should fit the current existing strategy. And as both in terms of client segments with surface as well as the current regional footprint where we are active in. So Bux, for example, is a good example of that, specifically because we've already invested via the ventures funds, so as the back end is already integrated in the ABN clearing organization, it really reduces the risk of such a transaction.

But it is fair to say that if you consider inorganic, it will be more bolt-on rather than something bigger for transformation.

Yes. At the moment, as I said, the strategy is organic, but you will always review if opportunities arise, and we always said that the potential in our segments, we will always review on the bolt-on scenario. Yes.

Perfect. So then if I change topic and let's go to the point number 2 of the polling question, so the net interest income, of course.

Yes.

And I thought guidance at Q4 was quite bullish versus expectations, so having NII flat with EUR 100 million more for every 10 basis points lower savings rates in the Netherlands. So let's look at the different components. First of all, in terms of migration to savings and terms, what are you baking in, in your assumptions? And what are you seeing so far, year-to-date?

Yes, you're saying bullish, but at least it was higher than expectations.

Yes, correct. Sorry. Were you mean higher than...

So it's also the time where the expectation is and then translate it is it bullish or not. I mean, it's really predicated, right? We want to be transparent in what our expectations are and that's really based on what is our forward-looking outlook, in terms of interest rates, but it's all based what trends have we seen in Q4, and if you talk about deposit migration, indeed, we have quite a significant deposit base in Wealth Management. And in Wealth Management are the more price-sensitive clients. So we've seen quite a significant migration from current accounts into term deposits of over EUR 20 billion in 2024. But you saw a divergence in the trend in Q4 where we actually saw, again, an increase in current accounts and only a very limited migration to term deposits. So in our current guidance on NII for 2024, we expect that the biggest part of the deposit migration to term deposits is behind us.

And what are you seeing year-to-date in terms of trends?

I think what you normally see in terms of trend always at the start of the year, you will always see some outflow from current accounts because you normally have -- we have a significant amount of retail clients and also wealth client. Normally, it's your -- first quarter is your tax payment. So then you always see some outflow from current accounts, but I think of what the trends we're seeing in the first quarter is sort of continuation of what we have seen in Q4. And it's also -- in terms of outlook, if you say you're bullish or not, it's also -- we also explicitly said that in our forward-looking guidance, we expect savings rate to stay at the current level of 1.5%. First of all, it's very difficult for us and also not possible to provide any forward-looking indication on pricing. But I think it's also a fair reflection if the expectation is that rates will come down. It will always be my expectation that there will also be a delay in sort of adjusting in saving coupon. So you can translate it to the way you want, but for us, in the guidance, we have assumed that the saving rates would stay at the same level also in the declining rates environment.

Perfect. And MRR, you were assuming 1%?

Yes. In our -- we were also -- I know it's -- I think it's not -- if it's wisdom or not, but we assumed as it currently is. So as MRR of 1%, we're quite deposit-rich. So an increase there would clearly have an impact. But I think the confirmation as we saw today, is a firm indication that it will stay at 1%. And that was also in our assumption on flat NII.

Perfect. And if we think about loan growth, there seems to be some number of coming back to the mortgage market. So can you tell us what are you seeing at the moment? What sort of demand are you seeing on the loan side?

Yes. Mortgages, as you say, already, clearly very important because that's 60% of our balance sheet. And I think if you look at 2023, it was a slow market. If you look at the amount of new transactions, which was significantly below the previous year. There was also much less refinancing because most of the refinancing is at not very attractive rates. So if you look at your overall back book. And then secondly, also, in a smaller market, also the competition from nonbanks was quite significant throughout the year despite the average markets then are coming down from 20 years to 10 years. What has really changed, I think, in the outlook towards the end of the year, where we earlier expected house prices to decline in 2024 and also transactions to come down, what we're actually seeing now that house prices are rising again. So we have only seen a drop from peak levels in '22 of only 4% in 2023 and house prices rising again, and it's now also our expectation that the amount of house transactions is also going to increase, partly supported by increased affordability. If you look at the overall CLA increases in the markets and also the expectations of mortgage rates coming down. So if I look at the first 2 months of the year, we tried to price on a specific buckets where the real demand is. For us, it's now for the combination of the 5 and 10 years, and then you immediately see if you're very proactive to the intermediaries that your market share picks up. So over the start of the year in terms of new mortgage product of -- production is positive today.

And in terms of corporate since then?

Yes, corporates. We all know what the overall corporate outlook is if you look at the ECB lending survey, for us specifically as we come out of a period of over 3 years of deleveraging, specifically now looking at reallocation, some of our capital to specific transition sectors. And in those transition sectors, we really have the expertise in the Netherlands, and we're leveraging on the current infrastructure we have in the countries to add more commercial -- had to add to our commercial footprint there, and those are also the sectors where there is a specific demand in terms of transition finance. So it's a combination in first instance, quite a bit of project finance, but also broader than that. So overall, also looking towards 2026, we do expect that also our corporate loan book should be able to grow slightly above GDP.

Okay. And if I can instead talk about fees. So you have a 3% to 5% growth target, which has come down from 5% to 7%, which are the areas that you think have the most potential to grow. So can you walk us through that?

Yes. And 5% to 7% was set in 2020. And I think, overall, if you look at what was realized that was over the period, really more front-loaded because our overall fees have been fairly flat over the past few quarters. Number one is really the cross-buy initiatives we have on the retail sides. I think the Netherlands in general is still underpenetrated in terms of cross-buy. If you look at our overall payment package pricing, I think in 2020, in a lower-for-longer scenario, we would have expected that our pricing of our payment packages will be at a faster trajectory. But now we have seen that really the tail end of our client base is also profitable. The trajectory is a bit more moderate there. But if we price current accounts at EUR 3.25 on a monthly basis in European context, that is still quite low. Then secondly, really looking at Wealth Management franchise, we really target growth there, not only in the Netherlands, but specifically in the countries. And I already mentioned some of the investment we do in our theater channels and also in our entrepreneurial enterprise concept, where we have the combination between corporate lending and well structuring. We have our clearing operation, clearly benefiting from the financial markets and the overall volatility and also benefiting from a structural trend of more products being centrally cleared, also, that will be a driver for our outflow fee forecast for the year. So it's really coming from both the retail side in terms of further cross-buy and smarter pricing of our payment packages is coming from wealth where we really target growth outside the Netherlands. And number three, it's really the cross-sell opportunities, on the specific transition sectors we focus on in Northwest Europe on corporate lending side?

Yes. Actually, I was going to follow upon the cross-buy initiatives that you talked about. Can you perhaps shed a bit more light on those, some examples?

Yes. And I think part of that is also related to can you really start investing in your digital infrastructure. That's why I started our discussion. We really want to invest in the key programs we have and really building the foundation and future-proofing of the bank, so we can spend more in our infrastructure for the digital enablement of more products. I think Netherlands in general is still an underpenetrated market in terms of -- yes, consistently said cross-buy, we use cross-buy instead of cross-sell. It sounds a bit more client-focused, but you do see opportunities in terms of pension, in terms of insurance, in terms of other products as well. So it's really an incentivization of products, and it's also an incentivization in terms of upstreaming our retail clients into affluent into first-time investing. So really starts linking cash into securities transformation of the young affluent client base. So those are some of the initiatives on the retail side.

Perfect.

And then lastly, it's clearly also, if you look, "Hey, if I specifically focus on mortgages, hey, it's clearly also where we have a dedicated focus in the energy transition in really making homes more sustainable and really getting better energy levels of the houses of our clients." So it's also additional services linked into further sustainability investments in the clients. So those are also sort of initiatives we're thinking along.

And if I can now touch up on the cost base, so you said 2024 costs are going to remain innovated. So can you talk a bit more about costs, for example? When are the next negotiations with the unions coming up?

Sensitive topic.

Yes, I know. And the EUR 200 million of cost saves, where are these coming from? Are they enough to offset the inflation, which seems according to your inflation base case to be EUR 350 million? So yes, walk us through the cost outlook, basically.

No, it's a good point, right? Because earlier, we had a fixed cost target for 2024, which we clearly didn't realize what it was set in 2020 when we were in a different environment. So that's one. Number 2 is clearly the big programs we're running. Also over last year, we find it difficult to find the talent in a scarce labor market to really scale up and execute there. So I think we will gradually start finalizing those programs, and we can start scaling off some of our capacity there. That is number one. inflation baked in our forecast, we said at Q4, it's around 3% per year. Indeed, we just started the process with the unions for CLA negotiations, the current CLA, which we agreed 2 years ago, so that was July 2022. That was a 2-year CLA of 4.5% and 2% over 2 years. This year, it will be wait and see, and there's clearly some risk with 50% of your cost, staff cost that it will be higher. On the other hand, we have enough cost levers of existing cost savings programs also related to automation and digitalization. And it's very clear if inflation is higher that we will compensate in terms of further cost savings. And some of them are still the cost saves we projected in 2020. So that's really getting the cost out of the wind-down of the noncore operations, really getting your any money laundering units more in a BAU situation with more automation, those type, and then number 3 is really sort of our IT infrastructure from the history of ABN, which is quite complicated. We're making very good progress in sort of simplifying our application landscape, which should start lowering down our IT run costs as well. So those are the sort of bigger elements of our current cost savings programs, which will continue. But it's clear, if inflation is higher, Giulia, if we set out explicit cost/income ratio, then we will need to work harder on self-help and further cost initiatives.

Great. So last question, then I'm going to open it up to the audience. Provisions. Asset quality continues incredibly benign. For the past essentially 3 years, the cost of risk is kind of negligible or even negative. And on top, you have got EUR 260 million of overlays. So are you seeing any signs at all of any sort of normalization? And by when do you expect cost risk to ultimately normalize?

Difficult question. Number one, and if you look at the credit quality indicators, we do not see any significant change of the trends we've seen in the fourth quarter. I clearly have to say a year where you have a negative cost of risk of 5 basis points is quite exceptional. I'm very comfortable with the overall risk profile. We have significantly restructured the corporate bank. We have a very good diversification of our loan portfolio. We have very strict concentration limits. So our whole risk management framework has strengthened. And also in the new setup, mortgages is now 60% of our overall loan book. And there, historically, we are very comfortable with the risk there with very low unemployment and a loan-to-value below 60%. Of course, when you do your projections over term, clearly, we expect a gradual normalization, how fast that trajectory will be, I cannot say, but the only thing I can say, nothing warrants in the current forward-looking indicators we're looking at, that it will significantly change in the shorter run. But clearly, on an outlook, you can -- if an outlook worsens, you cannot take provisions for that. And we still have, as you rightfully mentioned, still around EUR 260 million in management overlays. What are they for? Clearly, still a part is for geopolitical uncertainties. A part is more, I think, Dutch-oriented. It's the nitrogen, let's call it, crisis or impact, specifically for our [ ARTIS ] portfolio. Next to that is the new one is for client and environmental specifically for the transition risk for future stranded assets. And then we also have some overlay for interest only mortgages. So the overlays are still there. So that provides a very solid buffer. And on any sort of more sensitive portfolios, for example, commercial real estate, it's 6% of our loan book. We do very regular deep dives, internal stress test, looking at the refinancing risk there. And also there, we are relatively comfortable more than 50% is in Dutch residential apartment blocks, no direct exposure to any U.S. real estate or other troubled subsegments. So also with our commercial real estate, which is more of our focus there, we do not see any sort of negative signals at the moment.

Offices?

Yes, offices. There's always there clearly, and that's something what you really look at, you really look at, okay, what are the tendency periods and specifically also looking what are the refinancing moments, and that's why you recurrently do your deep dives on, but nothing indicates for now that the exposure we have, which is fairly well spread out with smaller size tickets provides any reason to start provisioning for that.

You disclosed the return office?

Yes. We disclosed the split. If you look at our investor presentation, which is online, we always have very detailed slide of the underlying subsegments of our commercial real estate exposure.

Perfect. Let me pause here for a second and let's see, if we have questions from the audience. Otherwise, I'm very happy to ask you a couple more. Do you have questions? Yes. Okay, we have one here.

Yes. I would like to ask that you mentioned the position of the residential portfolio in terms of...

There is a microphone, so we can hear you better.

Sorry. Yes, you mentioned the transition of the properties in your residential portfolio in terms of sustainability. But if you look at your corporate loan book, do you see -- do you have any exposure to sectors that can be affected by the necessary green transition, their business models will be challenged or et cetera? And is that something you are taking into account in your modeling of the impairments, et cetera?

Yes, it's a very good question. We're clearly looking at that and I already mentioned one of the, also, overlays we have, specifically, if you talk about the physical transition risk, what is the risk of future potential stranded assets? We put a lot of effort last year, and we published on that this morning, actually with our integrated annual reports, where we have for the different sector of our climate strategy the decarbonization pathway. So how do we intend to go there? What is our ambitions towards 2030 and how do we steer on that? So we definitely look at that. I was more looking also trying to incentivize our homeowners with specific loans for the transition, the same as transition loans within the corporate sector. So it's not only steering where can we have an impact in terms of transition for the sectors we are focusing on. Next to that, we're also really financing, for example, new energy where we had an ambition of EUR 4 billion. And you compare that with upstream or where we have an exposure of EUR 1 billion. So there was a significant growth in that portfolio. And there, we increase our ambition to have more room to grow there further beyond targets we set ourselves. So we really look through the lens, what are the sustainable business models before we finance, and it's an incremental part of the whole climate of the whole intake of the loan, the discussion we have with the client, but also then the monitoring and steering on it.

Okay, in terms of -- what is the biggest, transition risk or fiscal risk? I would actually expect that transition risk be the biggest risk in terms of the [indiscernible].

Yes, transition risk you mean? Yes, absolutely. Yes, yes, yes. I would fully agree with you, and there is always the question, what is the risk of really assets becoming stranded or not? And what is your view on that, specifically for the longer term? Because if you wait until 2030, then you will be too late. And you always have the risk that it becomes part of your overall capital framework as well. So no, I would fully agree with you there. Yes.

Yes, we have another question here.

Could you please give us some color about the AML issues still pending? What is sold, what is provisioned?

Yes. If you look over at AML, we had significant investment over the past few years because we had under the instruction with the DNB very much strict timelines to finalize our client remediation after the settlement we have there, those client remediation has been done end of 2023. So the investments we're currently doing is really into getting the BAU operation into a steady state. And what do I mean by a steady state, that is really having your complete client life cycle processes, digital. So if you have onboarded your clients, it's your periodic reviews. It's our event-driven reviews, it's your transaction monitoring, all integrated in an automated way, those are the investments we have been doing. So you're talking about the provisioning. The provisioning was specifically meant for finalizing the client remediation. Now we really get in a BAU forward-looking phase, where we invest in further automation of our processes, so the overall run cost of our AML unit can come down. So that does not mean as it's forward-looking that this will lead to further provisioning.

Let me check if we have other questions. Doesn't look like it. So let me ask you one of a digital question. I'm intrigued by the fact that you managed to be one of the main banks in the country with only 25 branches. So how does that work?

Yes. Sometimes people are surprised, They think, like we still have around 300 or 350, so 25 is for many has not been landed well. And I think that's part of the transition we have gone through and also a part of really investing in a just transition to be a digital bank. Had there still work to do? As I said, specifically, you can digitalize the front end. And I think the Dutch customer base is quite digital adapt, but really then your complete client life cycle process and also the end-to-end digitalization is still investments we need to do. But I think so far, it works good, but you need to ensure it is just transition. So what do you do with the less digital-enabled clients. So what we have done here, we have a wide network of over 100 care cultures. So they are available in the country. specifically for the elderly, who have difficulty in transitioning from going to a branch to doing it digitally yourself. So we really support that in a just way, which is well appreciated. But it is a significant change and transition we have gone through in digitalizing the bank because I don't know where we were like 4 years ago, but it was still more around the 300-plus branches.

Okay. Wonderful. With that, thank you very much.

Thank you. Thank you.