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

Everyone, thanks for joining us the session with Ferdinand Vaandrager, the CFO of ABN AMRO. Thanks Ferdinand for joining me today.

Thanks, Tarik.

So I think the natural start of this chat would be asking you on the budget been presented last week. It was very eventful budget last year. Can you update us what the key highlights this year in being on taxes, on buybacks, banking tax and any other topics as well on this.

Yes, Tarik, there were no real surprises. And I think overall for us, the takeaway was, it's really focusing relatively business-friendly and also the importance of having a good and predictable investment climate in the Netherlands. What is relevant for us is number one, but it was already known that the proposal for a share buyback has been pulled back, so that will not be an impact for us. And number two, also, if you talk about business climate, for example, the tax relief for expats where you don't pay any tax of your first 30%, that was also in the pre-proposal, but that was also retracted. So that's also a signal that the business environment is important. So those were 2 of the highlights.

Perfect. So that's something we don't have to worry about. Then I will move to one of the key lines of your P&L, net interest income and probably one of the most debated topics for your story. I mean we often get pushed back from the market on visibility of your NII trends. And I mean, can you go through the key moving parts of the NII? We'll discuss basically deposits and so on. But I think the one that maybe we can start with is the treasury reserves and how this function and -- because that is your main swing factor from here. Then we'll go, obviously, discuss about the margins on asset deposits and so on.

Now to start, take a step back. So we started the year with a guidance of around EUR 6.3 billion for the full year. We upgraded that guidance at Q2 results to a minimum level of EUR 6.4 billion. And it was already based on our own economic scenario. So despite quite some changes, if you look at the forward curves, we're very comfortable with the above EUR 6.4 billion. And number one, clearly, is a replicating portfolio. And yes, with lower ECB rates, we expect sort of inflection point in the second half of the year that it will start to become from a tailwind, a slight headwind and a more pronounced impact in 2025 on deposit margins. And your reference to the treasury results. Yes, we expect that to be a continuing supporting factor. It's really on the back of the repricing of our swaps portfolio, where you have a visibility, more shorter-term swaps, which are reset at more favorable rates. Then number three is, I think, the migration. And we said that already Q2 results as well. Last year, we've seen significant migration and that has slowed down. So we don't expect any significant further effect from that. And then lastly, still supportive in terms of loan growth, specifically in mortgages.

Very clear. On the loan growth side, can you go through the competition dynamics in the Netherlands, on both maturities of the mortgage products and also in terms of the pricing.

So specifically on mortgages, I think what you're seeing is that really 2023 was a bottom in terms of volumes in the Dutch market. If you look at the overall volume mortgages in the Netherlands in the first half of the year was just shy of EUR 40 billion, so that is 23% higher than the comparable period last year. And what you've also seen clearly rate-driven is with higher interest rates means that the maturities for the fixed rate mortgages has transitioned from 20-year or 20-year plus to 10-year or even a sweet spot of 5 years, which is definitely more the sweet spot of what is attractive for the banks. So what you've also seen this year that you see more of a switch between the nonbanks pension fund insurance companies, where the duration of 20 years mortgages was clearly very beneficial back more to the bank. So the overall market share of banks in this increased mortgage markets went from 42% to 60%. And then secondly, if you look at ABN specifically, we've been a market leader in the Netherlands for the second quarter in a row with a market share of around 20%, really benefiting that we have a multi-label strategy in the market. So we have different price points and different channels. We also went to a much more dynamic daily pricing and also the benefit of the investments we've done in our client experience over the past half year. So clearly, it is a competitive market. It's about pricing. So I'm not saying we will continue to keep a 20% market share, but we're very happy with the underlying growth we see in the increased market.

So if we look at these different moving parts. So treasury results second half positive then more uncertain. Volume picking up, asset spreads probably established here, and on deposit margin slightly, maybe improving. So above EUR 6.4 billion this year, can you give us some indication of '25 and beyond? I mean what will be actually the swing factor for you in terms of doing better or less?

No, you explained the levers as well, but deposit margin is not improving from here. We expect them to start normalizing in the second half of the year. A muted effect in the second half of the year, but then a larger effect in 2025. If you look at 2025, I think as I stand it today, it will be unrealistic to expect the same level of NII in 2025, of which the biggest driver clearly is a further expectation of normalization of interest rate -- of deposit margins, but clearly also depending on what will happen with the saving coupons for now in our guidance we have the underlying assumption, it will stay flat or at least that is the assumption on getting to this guidance. And then it can be partly compensated on the asset side of the balance sheet, mortgages growth. But for the rest, yes, we operate in mature markets with high competition. So I think we should not be overly optimistic on the growth to compensate for a normalization of deposit margins.

Very clear. Another key line of your revenues is the fees. It's a key line for the sector, but for you, it's lower as a proportion of total revenues than the average in the sector. You gave a guidance for this during your full year. But longer term, I mean, do you have strategy to accelerate that fee line and changed the mix? I mean, you certainly will talk us through your private banking business, but what are the initiatives you can do longer term strategically to ship that mix?

Yes. Clearly, you see underlying also the guidance we're providing there, right? As I talked about loan growth, you should look in our financial planning assumptions, GDP, GDP+. But for fees, we have an ambition of an annual growth of 3% to 5% on an organic basis. . We are clearly looking where can we accelerate. So we want to be less NII dependent and growing fees faster. So in our organic strategy, all 3 client units, wealth management, personal and business banking as well as corporate banking, we have the initiatives there in terms of package pricing, in terms of switching deposits into securities. If you look at our corporate banking side, specifically capital markets, but also transitioning financing. But we're also looking where can we accelerate potentially inorganically. And I think a good example are the 2 acquisitions. Number one was a very small acquisition that was the neobroker, BUX, and that should really support our more affluent, younger clients to switch into first-time investing, so that should add to fees. And secondly, we acquired Hauck Aufhäuser Lampe; however, now in the face of getting the regulatory approvals for that. But that also fits perfectly in the strategy we have where we want to increase our economies of scale in the wealth countries. Germany is one. It's predominantly fees, and it's capital light. So also there, both from organic and potentially if the opportunities are there also inorganically to accelerate the fee income.

Clear. Moving on to your costs. Another absolute number guidance you gave EUR 5.3 billion. This one is true the next 3 years. Looking at your first half and we annualize that, including the savings you will implement. But when you add the higher regulatory costs, higher fees, CLA agreements that you had in July, I mean, how confident you are to achieve this guidance? And take us through after for next year, what are the different moving parts on the cost, what will be like lower or higher than that?

Now first of all, Tarik, cost management is very important. And that's also why we have an absolute cost target. We really want to steer on a more efficient organization, and also improve on our cost income ratio of the plan -- of the planning periods we provided targets on 2026. If you look now for the EUR 5.3 billion, yes, the good thing is we finalized our CLA negotiations. It was 6% year 1, 3.7% -- 3.75% year 2, that adds around EUR 100 million to the cost base for this year. On the other hand, regulatory levies are becoming lower than expected and the target size of the funds of the deposit guarantee scheme and the [indiscernible] solution fund has been reached. So basically, on the regulatory levies, the only part there is the banking tax of around EUR 130 million. But if the average is around EUR 150 million, that's 50% lower than what we've seen in the previous years. And number three, we significantly ramped up capacity and FTEs in the foundation or regulatory programs we're running. We refer to that during the Q2 results. So there, we should start seeing over the coming years a gradual decrease of those regulatory programs. So the EUR 5.3 billion, as I stand today, confident that we'll steer to that cost level. Then your question to remain stable for the years after towards 2026. Number one, on the CLA, the impact for next year will be less because we renegotiate the pension contribution of the bank. So that there is a buffering effect that the net impact is only EUR 20 million. We still have our existing cost-saving programs, which should support in there. And number three, as I said, I think there is still opportunity for self-help in the organization. So if and when we see a higher inflation than expected, we should do more on the saving initiatives we currently have. So that's also where we say it's important to realize a roughly flat level for the coming years to come to a more acceptable cost income ratio flow.

So then if we look at the NII, I think you're suggesting that it'd be difficult to keep it growing or...

I said it's difficult to keep 2025 at the same level as 2024's.

And we take fees growing [ 3.5% ], but from a very low proportion of revenues and the costs, I mean, flat. So we are into thin or negative operating jaws for the next year, too. I mean this is something with an ROE of below 10%, not very encouraging. I mean, strategically longer term, maybe this is not a strategy for this term and this mandate for the CEO. But what's the next leg basically of improving because rates will normalize [ to 2 ] . I mean the economy will be where it will be but not expecting anything spectacular and the cost you're already doing a lot. So...

Yes, we're doing a lot, but I think a lot more can be done, but I agree with you. And as I said before, we're operating in mature markets. So what is the growth going to be? And yes, you will start seeing impact of a normalization on deposit margins on NII. And also overall, if you look at ROE, we come out of a year of 2 years of virtually no impairments. And you should start seeing at some point a gradual normalization although to a much lower level because we significantly derisked and delevered the bank over the past 3 years. So yes, you can have -- if you look forward into 2025 potentially, you enter a period of some negative jaws, but we set our ROE target of 9% to 10% for 2026. And we've also said that we clearly have the ambition over time to have an ROE above 10% and be able to cover your cost of equity because at the end of the day, that should be part of your longer-term planning and ambition where you want to be as a bank.

I can't agree more. I mean asset quality, you alluded to it, and I think that could be a source of upside because although you lowered your through-the-cycle cost of risk with Q4 results, you're still running well below that level. As you indicated, there will be some normalization, but we don't see really that's on the ground. And do you think there's still more upside there to -- for lower through-the-cycle cost of risk? Or you still see some pockets of risk that could still with the delay materialize?

Well, first of all, you always see a lag in delay, right? So I'm saying, at a certain point, you will start to see a gradual normalization. We set a 15 to 20 basis points that was lower than our previous indication of through-the-cycle. Yes, if you look at the current outlook, but also if you look at what we've realized over the past 2 years, a through-the-cycle level can be lower. But on the other hand, we've not seen a real recession, right? So we haven't tested it yet. Am I comfortable that we really derisk the bank, and that's not only via divestment of non-core, it's also the single client exposures what we used to have, we really changed the overall risk framework of the banks. Also, the volatility should be much less. But yes, if 60% of your balance sheet is mortgages where over through-the-cycle, we've never seen any significant losses there and the LTVs are much lower than the previous cycle, I think you could argue at a certain point that you can operate below the through-the-cycle cost of risk we currently indicated. But we all know, if you would see a real recession, specifically, your financing to SMEs in the Netherlands is normally the part of your loan book you should be most concerned of.

I mean you've derisked materially your corporate or your wholesale division. That should be one area that should not generate new [indiscernible] losses. But I'm surprised when you say we didn't know any recession. I mean we had a few shocks in the last 3, 4 years. Yes, there were government supports, rates helped. But still, I mean, we had some realized stress tests.

No, absolutely. But I was saying in the new ABN post deleveraging. Clearly, we've seen that before, but that was also one of the reasons for setting up a noncore operation and restructured the corporate bank was on the back of that, right? It was the significant single customer exposure. And specifies, what is your recovery rates in countries outside Northwest Europe. So clearly, we have seen that. But under the new fully sort of wound down of noncore, that we've not seen clearly, we've seen it in the economy, but it hasn't translated yet into impairments.

And on the SME book, it's true in the Netherlands, this was with the COE in post GFC, one of the main source of cost of risk in Netherlands. I presume, I mean, given the stress test on the SSM and all the scrutiny, this area has been derisked as well. So it wouldn't come naturally to me as an area of concern for the Dutch banks.

No. And as I stand here today and also looking, as I said, the credit quality indicators and how we really sort of go through all the sectors, underlying customers. I am quite comfortable that we will remain for the shorter term, as we said, significantly below through-the-cycle cost of risk.

And you have a management overlay as well that's eventually...

No, we have management overlays and clearly, it's always the debate also with our auditor, right? On the IFRS purposes, how long can you have general management overlay. So you can also expect it's currently around EUR 230 million being actually for that you start to see some releases from the overlays as well.

Very clear. Let's move to the other big topic for you, which is capital. You've been engaged into for the last few quarters into a big shift, moving your big path portfolio to -- with one of the approvals through the ECB. So where are you now in this process? And how progressed you are in that?

Yes, we're at a point, as we communicated already at Q2 that for the vast majority of our portfolios are now on the ultimate model where we want to be in a Basel IV environment. So that also led that the vast majority is behind us. But we also said that there are still a few portfolios, a number of portfolios where we still need to decide the ultimate model approach and then subsequently sent a request to the ECB for potential change in model approach. What normally happens if you do a submission at a time when you submit a request for your new model, you already take the RWA impact as if the model was implemented, then you take it as an add-on, and then it can take 1 up to 2 years in order to really implement the model and before that get a regulatory approval. So we're really going towards the end of this whole cycle where we went through. That should really start. On the shorter term, you can still see some increases in RWA, but it should really help our much more stable forward-looking for 2025. And also there, we front-loaded by far the biggest part now of a transition to Basel IV on the more simplified model landscape for the bank.

I mean, clearly, you seem in control and confidence about the process and the interaction with ECB. But by the full year, let's say, in February next year with full year results, do you think we'll have enough progress confidence to have visibility on your -- I mean you're at -- where you will land in terms of Basel IV, CET1 post model adjustment and so on to be comfortable to start to return excess capital above [ 13.5 ] targets? Or that process can actually slip knowing that you only announce distributions once a year. So once we missed the February time, we'll have to wait another year for potential excess capital return?

Yes. What we said that it makes sense to have -- when you have full visibility on your capital planning the year ahead. And then there's always going to be a balance, what potential further risk do you see? What potential further growth that you see in your portfolio? Do you see potentially strategic opportunities as well. But clearly, capital return is also, for us, as a management team, a key priority, right? Over the past 3 years, I think we returned roughly 1/3 of our market cap to shareholders. So it is a key priority. But if you look at where we ended Q2 in our core Tier 1 ratio, 13.8%, that's clearly lower than where we were at the end of 2023. So the room for excess capital to return to shareholders is clearly lower where we stand now. But I think in deciding on share buybacks, you always have a forward-looking element in that. So as long as you have a stable outlook at what point you're going to end up on your RWA and start managing that more proactively, then you have a clearer view, which enables you to look at your net capital generation and make a decision on that. The only point is you see where we are. So the room is a bit less. And we also still in the first half of the year, we'll need to absorb if we get the regulatory approvals, our acquisition in Germany, which will also have an impact on our core Tier 1 capital.

So that's a good transition because beyond the headroom you have for more distribution and the model process you're going through, there's also the strategy and the capital allocation. And you've shown recently that you clearly see better benefits on fixing the business model and finding a source for growth into the private banking. So with the whole, I will not venture into pronouncing the name of the -- into whole, you fixed your German private banking. So now you are top 5 or top 3, correct me, top 5?

No, no, no. We are now by a decent now #3.

Number 3. In Netherlands, you are clearly leader.

Market leader.

And then there is France and Belgium where you are a bit behind. So the logic would be that you're continuing to scaling up the private banking, which will be a win-win in terms of profitability improvement. And that could actually -- given the size of the deals you've done, 50 bps for whole and so on, that could consume actually all this excess capital market is hoping for the buyback. So I mean it's a way to return capital. But I think the clarity for the market is not obvious where your priorities are.

No. Let me be clear there. We switched our capital framework from a target and a threshold with an M&A therefore, we try to simplify that. You always look ahead what your capital planning is and you can always look at potential opportunities, right? It is very clear that we like wealth management. We like the diversification in fee income. And it's also there scale is important in the countries. So next to Germany, we have our presence in France and in Belgium. So we will always look are there potential opportunities to accelerate, but we are very critical on M&A. And this is a bolt-on transaction in Germany, where we had very lengthy discussions early on with Fosun, the seller. And I'm really looking through 3 lenses. Number one is, as you say, is the strategy and growth going forward. But the second lens is clearly what does it add financially. And, I think, Hauck Aufhäuser Lampe, we were able to acquire its around 1x price to book with a very good ROI, so there are not a lot of assets there where you can acquire at that price. And number three, it's -- in the end, it's all about delivery and integration. So how do you look at the potential integration risk there. So I think it's not at the point that you're saying like you're integrating it, let's do another 1, 2 acquisitions at the same time. You should really look at sort of how do you face that and how much effort are you putting to make it a successful integration here. But it should always be a balance where you look at our all stakeholders and capital return will always be also one of the elements we're really seriously looking at.

Then staying on M&A, there were discussions that your government would be through the NLFI own still 40% -- around 40% stake in, ABN AMRO and also a full owner of Volksbank, another banks based in Utrecht. So the discussions that being the same owner, they would have some industrial plan to integrate. So I'm not asking you to say if this is happening or not. But geologically, is that something that would fit the business model for going forward? Or it's not something that you will contemplate?

Well, first of all, Tarik, I can't never comment on specific potential acquisitions or integrations. But on Volksbank, you're right. Volksbank is managed at least a holding by NLFI. NLFI has provided the previous finance minister on potential longer-term options for the Volksbank. And there being said that the sale either through an IPO or a direct sale will be the most preferred option. This advice was provided to the finance minister during the caretaker government, we have a new government now. So specifically on Volksbank, nothing was said or communicated during the budget day. Would you always look if there are opportunities for in-market consolidation as one of the leading banks in the Netherlands, you would always look at opportunities, right? But for Volksbank, that's really up to the NLFI and clearly, the finance minister to make a decision there. What is important and that was reiterated by the current government, and you started that already. NLFI just finalized their sell-down to just above 40%. There's a clear commitment from this government as well to continue the reduction of the stake in ABN AMRO. So also, there is confidence at these levels to continue that process.

Yes, especially, we've seen at the moment that governments exiting could give an opportunity to others to answer the story. So -- but yes, I mean, I remember one of the IPO a few years ago, the idea was to exit in 2, 3 years. It took a bit longer time. But...

Yes, it took a bit longer time, but what is important and that was also communicated that the full recovery of the acquisition price is not the main objective. So there's a nuancing also there in the planning of and the willingness of to reduce their stake further.

I'll open the floor to questions if there's any question. No. So I will carry on. So one question on the Robert Swaak, CEO, mentioned with -- recently that you would announce to step down as the CEO once a new CEO would be appointed. So I really struggled with that. I think I expressed it to you a few times, Ferdinand. I understand the governance aspect of it. But generally, end of mandate, you prepare it, you don't have to go public, you look and then you end up at the end of the term. Why would be a departure at midterm, especially that's when has been renewed recently. Robert explained that what be his program in the next mandate. And also, when he announced stepping down, he mentioned that whoever will takeover will have to come with the new strategy and so on. So I understand the rationale and then what other strategy should we...

Now to start with and it was also a discussion as it seems sudden, that you come with an announcement a week before the results, what you said that already, once you have a discussion about certain topics then you need to go public with that immediately, right? So it's more timing, and that is you cannot always control that. First of all, I think continuity and really a well-coordinated progress of process of succession is very important. It was very clear that Robert accepting a second term that it will his final term. So once you start your final term, succession becomes the topic that you start thinking about how and when. And then it's really up to the Board to start the succession planning and reviewing the process for that. It was very clear that Robert said, I will stay on until the successor is there. So from a continuity perspective, I think this is really the correct way to do this because we all know the fit and proper processes you go through always take longer than expected. So now you have a proper period to find a successor and starts still under the leadership of Robert's. Number two, the strategy we view, I think there has been misread a little bit. It's absolutely not the case that we're really working on a significant new strategy is a normal process that every 4 year, you spend more time on a review of your strategy. It is an ongoing process but every 4 years, you link that into your financial planning. And we've said it's very good if a new CEO starts at the start of your new planning cycle also with the commitment of the longer-term financial targets you communicate externally. And that is exactly the same way how Robert started as well. The strategy review was largely done, and he came there really to execute on the strategy and the financial commitments, which lay there. So it might seem sudden, but I think the process chosen should really support a very good continuity from Robert to a potential successor.

Okay. Thank you very much, Ferdinand, for your time. Thank you.

Thank you, Tarik.