ABN AMRO Bank N : Investor Call Transcript 2024 Q1

ABN AMRO Q1 2024 Results

Transcript

ABN AMRO Investor Relations

Wednesday, 15 May 2024

Participants: Robert Swaak (CEO); Ferdinand Vaandrager (CFO); Caroline Oosterloo (interim CRO);

Operator: - only-mode. However, you will have an opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you'll be connected to an operator.

I will now hand over the call to your host, Robert Swaak, to begin today's conference. Thank you.

Robert Swaak: Thank you. Thank you very much and good morning, everyone. Welcome to our Q1 results. I'm joined by Ferdinand Vaandrager, our CFO, and Caroline Oosterloo, our interim CRO. I'll update you on the main topics for the quarter, and as usual, we'll be happy to take a Q&A at the end.

Let me first take you through the highlights of Q1 on slide two.

We had a very strong start to the year with a net profit of €674 million and a return on equity of 11.6%. Business momentum remained good and both our mortgage portfolio as well as our corporate loan book grew. Net interest income is resilient as we still benefit from the current interest rate environment. Compared to the same period last year, our fee income went up by 6%, driven by good performance of all client units.

Our credit quality remains solid and we saw limited impairments. We maintain a strong capital position with Basel III CET1 ratios of 13.8% and a Basel IV ratio of around 14%. We continue to focus on the optimization of our capital position. Pleased, we finalised our third share buyback in the beginning of May.

So let's turn to slide three, where I'd like to say a few words on the progress of our strategy.

Over the past 200 years, we've always been an enterprising bank with a wealth of expertise, always putting our clients' interest first. Our new brand promise 'For every new beginning', which we launched in March, projects this history effectively into the future. With our brand promise, we aim to evoke the excitement of beginning, and we put our clients' mindset and their challenges first and promise to be ready with all our expertise in whatever way we can support them best. And to live up to this promise, we are focused on being a personal bank in the digital age, with a clear licence to grow. And as you know, sustainability has always been at the heart of our strategy.

We set climate targets for two more sectors, agriculture and inland shipping, and that means that 68% of our total loan portfolio is now covered, and we're working hard to set targets for the additional sectors, all of which is in line with our NZBA commitment.

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Q1 2024 analyst & investor call transcript

The ongoing improvements we've made in the mortgage customer journey has contributed to a market share and new production of 19% in Q1. This made us market leader, held by a strong position in the first-time buyer market, an important strategic client group for us. We aim to support our clients at all important financial steps in their life, and buying your first house, for example, is an important milestone for all our clients, and supporting them in this decision is often the beginning of a strong and trusted relationship.

All that we're doing in a Dutch economy, which we talk about on slide four.

Overall, the Dutch economy does remain resilient. Unemployment is still low, the housing market is increasingly buoyant, consumer spending is holding up, and manufacturers are getting more optimistic. The Dutch manufacturing industry even seems to recover faster than in adjacent countries. Looking ahead, our economic bureau expects that economic growth will slowly increase, driven by domestic demand and with interest rates expected to drop in the second half of the year, making financing of investments easier, we expect growth to pick up further.

House prices have started to rise again, and we're almost back to the record level of July 2022. Our economic bureau has revised their house price forecast upward from 4% to 6% for this year. The prospect of interest rate cuts and higher wages has helped sentiment among house buyers. The number of transactions is also on the rise. It is expected to remain subdued for a while as supply does remain limited, also due to lagging new construction.

Then turning to our first quarter performance on slide five, as I mentioned earlier, our market share of new production in the Dutch mortgage market rose to 19%, leading to €800 million growth in the mortgage portfolio. That indeed is healthy business momentum. Also for our corporate loans in Northwest Europe that continued, and we welcomed new clients in our focus segments, New Energies, Digital and Mobility.

The downward trend in consumer lending continued, driven by run-off of several products and lower client demand from restricted lending criteria. Looking at our client deposits, we saw a decrease this quarter, mostly in current accounts. This drop was mainly in January as some of our retail and private banking clients face payment requirements for taxes, dividend payouts and invoices, for example, at the beginning of the year. We also saw some further migration to term deposits. The outflow of client money to other banks remains very limited. Our total deposits actually went up due to an increase in professional deposits. Now this mainly reflects movements of clearing as clients brought down their position towards year-send and reversed this in Q1.

Turning to slide six on our NII, we saw that NII improved in Q1. Our Treasury result benefited from the current interest rate environment. Margins on our assets, as well as deposits, declined somewhat this quarter. The latter was driven by migration from current accounts into professional and time deposits. At current interest rate levels, it does remain beneficial for clients to move cash into term deposits. Given the current interest rate environment, we are confident to reach our guidance of around €6.3 billion net NII for 2024. Now this is based on an expectation that our Treasury result will improve in the second half of the year, and this will be partly offset by gradual normalisation of deposit margins and some limited asset margin pressure.

Q1 2024 analyst & investor call transcript

Turning to fee income on slide seven, again, a good start of the year for fees, with an increase of 6% compared to the same period last year. This increase was driven by all client units. Retail banking fees increased due to higher payment volumes and the increased pricing of payment packages as of the start of the year. Fees at Wealth Management benefited from the continuation of the good performance of equity markets, leading to higher assets under management. And this quarter we also saw an increase in net new assets driven by around €800 million inflow in securities.

At Corporate Banking, we had a successful first quarter in capital markets, which led to high fee income. And looking at Other income which is volatile by nature, we saw an increase compared to Q4 last year. We booked higher asset and liability management results at Treasury, and XVA results were higher also.

Turning to slide eight on costs.

Now, we will continue to remain focused on cost discipline and as you can see, our underlying costs, so excluding regulatory levies and incidentals, came down from the elevated Q4 cost level. Now, in addition to the cost discipline, this was partly related to high consultancy and marketing costs in Q4, latter related to the launch of our new brand promise. As we mentioned last quarter, we do expect costs to increase during 2024 from additional investments. We continue to upscale our resources, especially for data capabilities and regulatory programmes. Also, our CLA is up for renewal at the end of June. So given these developments, we expect a full-year 2024 cost land at around $5.3 billion.

Turning to slide nine on impairments. Credit quality remains solid, with limited impairments of €3 million. Inflow in Stage 3 was mainly in our corporate loan book and somewhat higher than we've seen in previous quarters. This was not in one specific sector and was largely offset by Stage 1 and 2 releases from improved macroeconomic scenarios. Additionally, we had a small release of management overlays related to products and run-off. We still have prudent management overlays in place, currently around €250 million.

As we mentioned in Q4 last year, we expect a gradual normalisation of impairments this year, so the full-year cost of risk is expected to be at the lower end of our through the cycle cost of risk of 15 to 20 basis points. Now, this actually does underline the good quality of our loan book and the de-risking that we've done over the past years.

Then, turning to capital, our Basel III CET1 capital ratio stands at 13.8%, and we continue to be well- capitalised with 320 basis points1 headroom above our MDA. I am pleased that in February we have largely addressed our AT1 shortfall through a successful issuance of new €750 million AT1 instrument.

Moving to RWAs, RWAs increased by €4 billion in the quarter, mainly reflecting a rising credit risk RWAs and to a lesser extent higher operational RWAs. Now, the increase in the credit risk RWA can be largely explained by two drivers. Firstly, we took €1.7 billion model-relatedadd-ons as part of an ongoing effort to simplify our model landscape. And secondly, we saw a reversal of the year-end balance sheet reduction of client clearing, leading to a seasonal business growth in Q1.

1. Correction: 300 basis points

Q1 2024 analyst & investor call transcript

Our CET1 capital remained stable despite our strong first quarter profit, as it was impacted by approximately €300 million of capital deductions. Looking forward, we see upside as we progress on our data capabilities and downside can still come from further model-relatedadd-ons.

Our Basel IV CET1 ratio declined in Q1 more or less in line with Basel III, and is now around 14%. We still expect that the implementation of Basel IV will have a favourable effect on our CET1 ratio.

So, let me wrap up. We had a strong start of the year with an ROE of 11.6%. We were market leader in mortgages and also saw growth in our corporate loan book. Both our NII and fee income were strong this quarter, and we remain committed to cost discipline. Our solid risk profile in the resilient Dutch economy have led to limited impairments in Q1, and we continue to focus on the optimization of our capital position and are fully committed to generating returning surplus equity to shareholders in combination with targeted growth.

So with that, I would like to ask the operator to open the call for questions. Operator, if you could open the call.

Q1 2024 analyst & investor call transcript

Questions and Answers

Operator: Sure. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the first question from line Giulia Miotto from Morgan Stanley. The line is open now. Please go ahead.

Giulia Miotto (Morgan Stanley): Hi, good morning. Two questions from me, the first one on Capital. Would you have more visibility now versus what you had in Q4 to sort of guide us to when the aim of these model updates can be so you know, what sort of order of magnitude do you still have coming? And how can these model updates also impact Basel IV ratio so much? Because I thought part of this process was to prepare ABN to Basel IV and sort of front-loading, but they seem to also impact Basel IV. So this is my first question on capital.

And then secondly on the NII guidance of 6.3 despite the better curve versus Q4, is this conservative, or is this because maybe, I don't know, deposit migration is worse than what you were expecting or, you know, is there any sort of negative compensating the better curve versus the previous time you gave the guidance? Thank you.

Robert Swaak: Thank you. Let's Ferdinand, you take NII, and Caroline, you want comment on capital? Go ahead, Caroline.

Caroline Oosterloo: Yes. So thank you for the question and an understandable question. So I think there's two elements to the CET1 ratio, of course, the capital side and the RWA side. Let me for now focus on the latter.

So we are continuing, as also announced before, to simplify our model landscape and to review our models and that will be continuing. There are upsides and downsides to this. So there are upsides when we have improved our model landscape, sorry, our data landscape, and we have downside if we have to take add-ons for reviews of our model landscape. We have anticipated by moving certain portfolios to less sophisticated approaches. Indeed, for Basel IV and some of the add-ons we have taken will pass through to Basel IV, others will not, as they will be absorbed by the floors in Basel IV.

Ferdinand Vaandrager: Yeah. And then, Giulia, hi, good morning. And then coming back to your question on NII, we're confident with the guidance we provided at Q4 and that was given at the then current interest rate outlook as the start of February. If you look at the underlying trends for this quarter, Treasury results quarter- on-quarter net up. So there you still see really the benefit from higher interest rates and also less steering cost, specifically for our mortgage portfolio. Deposit income was slightly down, but as Robert said already in his opening remarks, the outflow we've seen in current accounts were mainly seasonal Q1-related, as you normally see, payments at year-end, tax payments and also dividend distributions. And then lastly, the asset side of the balance sheet, we are becoming definitely a bit more optimistic on the back of the economic outlook. So mortgage market is stronger, and our market share was 19%. So market leader in new production

Q1 2024 analyst & investor call transcript

and also on the corporate side, you see a reasonably well-filled pipeline. The only thing still on the asset side is the consumer loans, where we still have some portfolios in rundown.

So to conclude here, we're confident with the outlook we provided, and let's see how the year develops before potentially updating our guidance, Giulia.

Giulia Miotto: Understood. Thank you.

Robert Swaak: Thank you, Giulia.

Operator: Thank you. We will take the next question from line Sam Moran-Smyth from Barclays. The line is open now. Please go ahead.

Sam Moran-Smyth(Barclays): Hi. Morning. Thanks. Two questions, unfortunately on the same topics as Giulia. So firstly, on the RWA developments intra-quarter, I understand that €1.4 billion of that is due to the seasonal Q1 rebound of the clearing business. So, am I correct that we should assume in Q4 this year the majority of that would reverse as you get the other side of the seasonal impact and that your capital return announcements with Q4 results will be based on that Q4 CET1 ratio? And then secondly, on the NII, you've noted that you were the market leader for new production this quarter. Should we read into that that your pricing has been more competitive? And then, perhaps more broadly, could you expand a bit more on your outlook for lending margins going forward? Thanks very much.

Robert Swaak: Yes, thanks for the question. I think we'll give a short answer on your first question. You should expect to see that in reverse. And when we determine our share buybacks, we will then absolutely take the CET1 ratios that are relevant at that time to come to a decision on share buybacks.

I think on NII, we can confirm that we've been competitive in the pricing, but what we always do in terms of our pricing points determination is that we look at, one, on market share as an objective, but at the same time, what we don't want to do is sacrifice margins if it does not contribute to our overall position of our mortgage book. So you should look at this as a very dynamic process in which we have indeed been extremely active, and this has now been ongoing for a number of quarters on what I would call very active pricing continuously. And that is, it actually proves not only the maturity of our ability to act in that market, but it also, what it again proves is the deep knowledge we have of the client base, but also our knowledge of our intermediaries, and that allows us to price very actively and therefore now get to a market share that we're extremely happy with.

Sam Moran-Smyth:Thank you.

Ferdinand Vaandrager: Yes. And maybe, Sam, to add to that, if you look at the new production, we've been in the segments where a big part of the growth was, that was in the five-year segment and also the starters, and that's where we priced competitively. And if you look at the new production for us, €3.9 billion in the quarter, that was up 16% versus the previous quarter, and you still see limited redemptions. In terms of pricing, you do start seeing that front book margins are actually at the same level or slightly higher than our overall back book in a more stabilised rate environment. But we do still see some outflow of higher margin

Q1 2024 analyst & investor call transcript

mortgages. But the picture in terms of margin, yes, we price competitively, but overall the margin is starting to bottom out.

Sam Moran-Smyth:Great. Thank you.

Robert Swaak: Thanks, Sam.

Operator: Thank you. We will take the next question from line Farquhar Murray from Autonomous. The line is open now. Please go ahead.

Farquhar Murray (Autonomous): Morning, all. Just two questions if I may. Just firstly, with regard to capital modelling, it was made very clear that we should expect a kind of mix of add-ons and mitigations to come this year. Q1's obviously a bit more add-ons and deductions. So I just wondered if you could give a sense of what we might expect from here to the year-end, just in terms of net outcome? And then more broadly, just on the data mitigation exercises, are those on track versus where you thought we would be at the start of the year?

And then secondly, there was a report from the CBRE on Monday on potential repayments of overpaid rent. And potentially there's read across from that into the buy-to-let market. I just wondered if you could frame the size of your buy-to-let mortgage book, I think it's actually quite small, and also maybe the underwriting characteristics of that book? I kind of suspect the LTVs are probably lower than primary residences, but I just wouldn't mind checking. Thanks.

Robert Swaak: Thanks for the question. Caroline, the capital on inferiority on the buy-to-let?

Caroline Oosterloo: Yeah. But first your question on the data mitigation. These activities are on track. Then the capital deductions in RWA add-ons, maybe good to explain a little bit more about the capital deductions and how that works. So we have seen regular capital deductions, mainly in NPE deductions and in IRB shortfall calculations. They're just due to normal movements in a portfolio. We see these each quarter, they can come up, and they can come down, and then we have an impact that is related specifically to moving our large corporate portfolio to less sophisticated approach. And you can see that in the Pillar 3 report that we moved that portfolio anticipating Basel IV to foundation. And I think that's a good example where the treatment under Basel IV is more positive, as the prescribed LGD percentages are lower under Basel IV than they are under Basel III.

Robert Swaak: Okay. Thanks, Caroline.

Ferdinand Vaandrager: Yeah, I know, Farquhar, you read the newspapers. Well, the case is not new. This is on the back of a CBRE study against the sort of residential rent increases and potential overpayments there. So this is specifically for the houses in the private sector, As you say, mitigants here for us, buy-to-let is a very small part. And as you mentioned already, the LTV there is significantly lower as well. And if you look at the very short supply in the market and rising house prices, I would say there is a limited risk. But for us, and let's wait for the Supreme Court to see if we're actually going to see a ruling against these so-called arbitrary indexation over the past few years. But I expect limited impact of this for ABN.

Q1 2024 analyst & investor call transcript

Farquhar Murray: Great. Thanks a lot.

Robert Swaak: Thank you.

Operator: Thank you. We will take the next question from line Kiri Vijayarajah from HSBC. The line is open now. Please go ahead.

Kiri Vijayarajah (HSBC): Yes, good morning, everyone. A couple of questions from my side. So firstly, on the current account outflows, it sounds like they were already factored into your NII guidance for the full-year. So all kind of anticipated there. But my question is more, is what proportion of those outflows from current accounts have you been able to recapture on the AUM and fee side? And is there kind of a little bit more momentum to come through, particularly as interest rate cuts come through at the back end of this year? And then just coming back to the Treasury NII result, it sounds like that's remaining stronger for longer than you previously guided. I just wondered, is there any feel for what's the capital or RWAs associated with those Treasury revenues? And does the capital consumption in Treasury eventually come down as the NII contribution also comes down at some point next year? So just sort of line-of-sight on how the Treasury balance sheet and capital might move going forward. Thank you.

Robert Swaak: Ferdi?

Ferdinand Vaandrager: Yeah. Let's start with your first question, Kiri. That is related to the seasonal outflow. Overall, it's a normal trend, you see, and it is not only the higher number of invoices and tax payments or dividend distribution, it is also what you see for tax reasons that customers switch into savings out of investments and then switch back at the start of the year. So clearly underlying here, if you look at net new assets, we have been able to recap some of that outflow in current accounts into our net new assets in Wealth Management. If you look at the overall migration within our deposits as signalled already at Q4, we really expect that to slow down. So you still saw some migration towards term deposits, but with the current outlook in rates and for us, also lowering our contribution on term deposits, I really think the mix will not really change from here.

Then your question on the overall Treasury results, it's very difficult because it's really an overall portfolio where all our hedging is done. And also you have in there your steering cost, for example, for your mortgage portfolio. As we say here, you can sort of, if you look at your specifically equity mismatch results, it's a sort of portfolio with a duration up until three to four years. So there, we really expect the current interest rate curve to be supportive throughout the rest of the year. Any sort of potential capital RWA related to those revenues, yeah, that is clearly fairly limited, but that's not something we disclose here.

Kiri Vijayarajah: Okay, that's helpful. Thank you, guys.

Robert Swaak: Did that answer your question?

Operator: Thank you. We will take the next question from line Johan Ekblom from UBS. The line is open now. Please go ahead.

Q1 2024 analyst & investor call transcript

Johan Ekblom (UBS): Thank you. Maybe first, just to come back to the capital, and I think Giulia asked if you could quantify kind of the headwinds from model changes. And I don't know if you did. So just see if we can get any more steering on how much further you expect. And then maybe related to the capital, I mean, given where your average risk weights are today, there should be quite a lot of capital optimization. And SRTs is all the hype at the moment. And you haven't used any as far as I can see. Why not use significant risk transfers to at least bridge the gap between Basel III and Basel IV and not show this recurring pressure on your capital ratios? So that's the first question.

And then the second, just to pick up on what you said in the answer to the last question, if I look at the net new assets in Wealth Management, you had 10% net inflows in the quarter, so 40% annualised. How is that possible organically, or is there anything funny going on there?

Robert Swaak: Okay, I'll ask Ferdi to take the NNA. And on your two questions on models, just let me maybe put a little more clarification on this.

It is hard to quantify, but we've always said we will continue to update our models, simplify our model landscape. I think in previous calls we indicated that the majority of RWAs taken are well behind us, and what you're seeing is actually the effect of us continuing to do so. That goes hand-in-hand with what Caroline already talked about, the data remediation that we undertake as we review models. And that means that it's hard for us to guide on and therefore to give you quantification. As we said, the majority of RWAs take-ons should be behind us, given we've been at this for quite some time. But we've always said it could well be that we would expect some RWA growth to continue.

The optimization that you talked about, RWA optimization, clearly, that's something that we utilise as we steer the business going forward and as we have been doing. That means that we will continue to look for ways to optimise, but also to use the allocated RWAs in the business itself. So that is a process that we have ongoing in the relevant parts of the bank, and we will continue to execute that portfolio allocation very diligently.

On NNA, Ferdi?

Ferdinand Vaandrager: Yeah, on NNA, if you look at the total assets, that can be volatile because it can be related to short-term custody, for example, related to M&A transactions or other elements in there. So the two elements in there are, number one, clearly a good market performance, so you see a rise in total assets. And secondly, you will see shorter-term volatility on the back of short-term custody accounts, underlying, as said, net new assets. You saw some outflowing cash and inflow in securities. So we see that as a positive trend.

Johan Ekblom: But maybe just to follow up, I mean, the largest increase you've had in the last five years is €2.6 billion in Wealth Management, and it's €19.7 billion this quarter. This is not normal volatility, right?

Ferdinand Vaandrager: Yes, it's €19 billion. So this is specifically related to very short-term custody money, Johan. So this is really a one-off. And, for example, cash to finance and M&A transaction by wealth clients, as an indication. So this can be volatile, but this most likely will not be seen the next quarter.

Q1 2024 analyst & investor call transcript

Johan Ekblom: But we should assume there's a big negative next quarter, then?

Ferdinand Vaandrager: Yes, correct, Johan.

Johan Ekblom: Okay. And then just on the capital, I mean, maybe it's for you to take away and think about. But, I mean, when you say the majority is behind, I mean, you had €55 billion or €53 billion of add-ons. Now, it'd be really helpful to get a sense of if the majority, does that mean $10 billion is left, or does it mean €40 billion is left, right? So if we can maybe try and get some better steer on not an exact number, but just the order of magnitude of headwinds that we face because it's clearly a key input into capital return and ROE assumptions, etc., which looks increasingly stretched after today's results.

Robert Swaak: I appreciate that question very much, Johann, and we'll see what we can do. What we are trying to do is be as clear as we can be, given what we know today. But your question is fair. We'll take that into consideration. If there's any further clarification or quantification, I think is a better word to give.

Johan Ekblom: Thank you.

Operator: Thank you. We will take the next question from line Guillaume Tiberghien from BNP Exane. The line is open now. Please go ahead.

Guillaume Tiberghien (Exane BNP Paribas): Yes, thank you very much. The first question, sorry about that, is still again about the RWA add-on. The question, I guess the way I would phrase it, is to say we don't really understand how fast they go up, how far they will go up, and maybe when they start going backwards, is it going to be also a question of we won't know how low they will go and how far they will go down, all these add-ons because you seem to have suggested that there's going to be some mitigation. So I think trying to understand whether the €51 billion of Q4 is definitely the endgame, that would be useful.

The second question is relating to the year-end buyback. Will it be driven by the Basel IV equity tier one? Because ultimately, you will announce a buyback based on Q4 results, which is Basel III. But we will already be in a Basel IV world by the time you announce it. And I guess joined to that question, do you expect to build capital from the level of Q1 level at 13.8%?

Robert Swaak: Yeah. Thank you very much for the question, and very understandable. Let me take your second question, and I'll ask Caroline to comment on your first question.

So when we determine our share-based buyback that will - sorry, share buyback - that will be based on our capital framework. Our capital framework we've utilised is a threshold which we've identified of 13.5% of Basel IV. So that will be our reference. So we will be using a Basel IV. As we have been very clear about what our capital framework actually is like, you're absolutely right. This is a first quarter that we're now looking at. We've seen a very strong result coming into the quarter, and as you look at our guidance, and also we have the outlook for the rest of the year, we continue to see ample opportunity for capital generation. That's something to not forget as we navigate a full year, by the time we will determine share buybacks. So I would definitely confirm that we're looking at capital generation for the duration of the year.