The conference is now being recorded.
Good morning. Welcome to the ABN AMRO first quarter 2022 analyst and investor call. During this call, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session. I'd now like to hand the call over to the chairman, Mr. Robert Swaak. Please go ahead, sir.
Thank you so much. Good morning and welcome as always to ABN AMRO's Q1 results. Today I'm joined by Lars Kramer, our CFO, and Tanja Cuppen, our CRO. I will update you on the progress of our strategic agenda. Lars will then go through our first quarter results in more detail, and Tanja will update you on impairment developments in our loan portfolio and on capital. Let's turn to our first quarter results, as shown on slide two. As we all know, our world changed significantly in the last quarter. The war in Ukraine shook our sense of security and stability, causing further economic uncertainty and a sharp increase in inflation. Our thoughts continue to be with all those affected by the war, and we aim to provide support where possible.
Thanks to a joint effort with other Dutch banks and supervisory authorities, refugees from Ukraine can open a Dutch bank account with ABN AMRO which enables them to indeed receive living allowances or wages. We are helping out in many other ways, as are all of our colleagues, and we will continue to offer support where we can. Now turning to our first quarter results. We delivered a solid performance with a net profit of EUR 295 million. We again showed decent growth in mortgages as well as corporate lending. Net interest income was EUR 1.3 billion, the decline versus last quarter, mainly due to lower treasury results. Fees are up 10% year-on-year with all client units contributing. We're making good progress on our AML remediation programs, though our remediation programs will continue into 2023.
For this, we did take an additional EUR 50 million cost provision this quarter. We do remain fully committed to bringing our costs below EUR 4.7 billion by 2024. Then we finalized our first share buyback last week, returning EUR 500 million of capital to shareholders. We continue to focus on the execution of our strategy, and in 2022, we specifically focused on the new client service model and climate strategy. First turning to slide three, I'd like to say a few words on the progress we're making on the execution of our strategy. Across our three strategic pillars, we highlight some examples of our progress in each of the client units. Personal and business banking introduced a new mortgage product for clients that wanna let out their former dwelling.
We continue to invest in our mortgage back office, which helped us to become market leader in new mortgage production during February and March. Wealth management is making further progress in growing the entrepreneur and enterprise concept, adding clients and booking deals in the Netherlands and in Germany. I am indeed proud that we're the first bank in Europe to offer clients insight into the impact of their sustainable investments via internet banking. In corporate banking, we set up a desk for product as a service, a circular economy business model. To further accelerate the integration of sustainability, we now have set up a sustainability center of excellence across all client units, focusing on climate, circularity, and social impact. We are working on updating our climate strategy, which we will present later this year.
Now on the next slide, I'll tell you more about social impact, part of our purpose and our strategy. Social impact is part of our purpose, banking for better for generations to come, but also a business opportunity as part of the sustainability pillar. For us, social impact is about ensuring equal opportunity, financial inclusion, and making clients more financial resilient. A good example of financial inclusion is the inclusive banking team we started. This team is currently focusing on the needs of female clients, an important client target group. Transition loans and social bonds are gaining momentum, and we're helping our clients to structure these products. As part of our diversity and inclusion effort, we have recruitment programs aimed at refugees and disabled persons, also unlocking valuable talent.
one in five persons between the age of 16 and 28 years are unable to pay their bills, and we support this group, irrespective if they're clients of us, with budget coaches and aim to improve their financial resilience. We launched a Tikkie or Gimi app to familiarize children with a bank account while parents remain in control. Banking is becoming increasingly digital, and more and more clients no longer visit a branch. To ensure financial inclusion, also for clients who struggle to conduct their banking affairs online, we provide financial care coaches. Turning to slide five, let me update you on our new client service model. Last year, we focused on strengthening our digital and data capabilities. Also, we further simplified the organization. This year, our focus is on implementing our new client service model.
We defined three levels of service, which move progressively from fully self-serve through to personal expert advice. Clients looking for self-service expect easy digital delivery through apps, full digital services, and a seamless experience. Currently, 95% of daily banking products are available remotely, mainly through digital channels supported by telephone and video banking. I expect we can make all products available remotely by Q3, at which point there will be no need for any clients to visit a branch. Last year, our chatbot, Anna, handled more than 1 million requests, which 40% were fully handled by the chatbot. Clients can move seamlessly to the expertise service level. For example, our chatbot can connect clients to sales advisors or experts, and mortgage clients simply click for a video banking call with an expert.
Our clients very much appreciate the ease and comfort of video banking, as evidenced by the high Net Promoter Score for this particular channel. In addition to improving the client experience, the new client service model will be an important driver for more efficiency and enabling further growth. Now, before I hand over to Lars, I'll say a few words on the economy. The Dutch economy has indeed fully opened up and all restrictions are lifted. However, we went from COVID straight into a war in Ukraine. As you can see from the chart, this has impacted consumer confidence sharply. However, consumer spending has remained strong so far, and it is still too early to assess the full impact of the war. It is too early also to assess the impact it will have on consumer behavior and the economy at large.
Inflation is a source of concern, though we expect inflation to ease next year as past rises in energy prices dissipate. Bankruptcies have ticked up with government support measures now phased out, but are still very low by historical standards. Meanwhile, house prices in the Netherlands continue to rise, mainly due to lack of supply, and we expect the price increase to continue, though at a lesser rate, while the number of transactions will come down. Let me now hand over to Lars to discuss the first quarter results.
Thanks, Robert. So just looking at slide seven now. Over the first quarter, our mortgage share increased to 17% and the portfolio grew with EUR 800 million. What we're seeing now is mortgage rates rising at unprecedented speed, and we are pretty much back to the 2014, 2015 levels. There's also starting to be an impact on the prepayment market, which although still strong this quarter, we expected this decline going forward. We're seeing the first signs of clients actually opting for shorter terms, so around 10 years, rather than locking in rates for the 20 years or more that's been happening for a while now. For us, this is encouraging, as traditionally banks have been stronger in the shorter maturities versus the non-banks.
In the corporate lending space, we saw another quarter of loan growth, with volumes increasing by EUR 1.3 billion. Business momentum remains high and our activities in northwest Europe are starting to materialize. Turning to the impact of this on our interest income on slide eight. Business NII has held up, especially as higher volumes have offset some of the lower margins, but treasury NII continues to decline. The mortgage margins also on new production remain under pressure. I mean, this is mainly as a result of struggling to keep up with the rapid increase in long-term rates, where we've been pricing behind the curve, which is a structural effect in the markets. As expected, the prepayment penalties were lower following a very strong Q4 .
We also expect clients to be less inclined to break open long-dated mortgages with a low coupon. We're also lengthening the expected maturity of our mortgage book, and this does lead to higher hedging costs. On the deposit margin front, they held up as the threshold for charging negatives was lowered as of January 1. Overall, taking into account the much improved rate outlook, we now expect NII for this year to be at the top end of our guidance, around EUR 5.1 billion. With current rates, the replicating portfolio will actually turn into a tailwind going forward, and mortgage prepayment penalties are, however, expected to decline. In the previous quarter, we did talk about NII expectations to be bottoming out next year in the second half of 2023.
Given the strong increase in rates, we've now changed to expect that this will happen in the first half of 2023. Moving on to slide nine, where we talk about interest rate sensitivity on the NII. Before I go into more detail here, I just want to stress that this is a scenario analysis on sensitivity and not a forecast. We only show the impact of different rate scenarios on the components of NII that are actually rate sensitive, so specifically treasury results and deposit margins. We also assume all volumes remain constant, and we also keep asset margins constant in these scenarios. The left-hand chart shows rates that are used in the scenarios, and these are based on the actual market rates as of April 29.
What the analysis shows is that for 2023, the tailwind from deposits is pretty much offset by the mortgage prepayment penalties drying up and the impact of the higher hedging costs to cater for the longer mortgage duration. Though the replicating portfolio does become a significant tailwind in the forward rate scenario, it's important to note that we do, in the analysis, cap our deposit margins. I won't discuss the actual margin that we use, but the cap that we used is in line with the levels that we did attain in the previous positive rate environment. The treasury results on the other hand will remain interest sensitive.
This is due to the yield we are earning on the duration of equity, which is also sometimes referred to as mismatch results. Pretty much the increase in NII shown in years two and three are largely related to this increase in mismatch results. Now looking at slide 10, we talk about fees. Fees are actually up 10% year-on-year, and all the client units have pretty much contributed to this result. Partly, we're looking at the normalization from the impact of COVID, but equally, we continue to work hard to structurally increase our fee income. We did recently announce an increase in payment fees, which will start benefiting our fee income starting in July. The other income line was also stronger due to ALM results and the decent private equity return.
Given the economic environments, we only expect moderate private equity results for the remainder of the year. Now, lastly, looking at costs on slide 11. As you've already heard, in this quarter, we took an additional EUR 50 million of cost provisions for the AML remediation on certain projects because these will take longer and will run into 2023. We also see an increase in our regulatory levies, especially a step up in the SRB contributions. It's also important to note that the strategic investments that we're making are not a straight line inclusion in the cost base, and you do see some front loading continuing in Q1 for these investments. The cost savings programs that we're also running in the bank are progressing very well. We have to date booked about EUR 185 million of cost savings.
In terms of cost savings, we remain firmly on track in terms of meeting the EUR 4.7 billion guidance that we put out there for 2024. I'll now turn to Tanja.
Thank you, Lars. I'm now at slide 12. In Q1, we took EUR 62 million of impairments, largely related to the weakened macroeconomic outlook. As Robert already mentioned, the economic impact of COVID eased, but now the war in Ukraine is causing further economic uncertainty and sharp increase in inflation. To reflect this, we gave a higher weight to the negative economic scenario. Also, we took a new management overlay for the potential second-order effects of the war in Ukraine, and we released the largest part of our COVID-related management overlays. Stage ratios further improved this quarter, reflecting the progress on the non-core wind down and disciplined credit risk management for the core portfolio. So far, the war in Ukraine has led to a credit downgrade only for a very limited number of files. Now turning to slide 13 on capital position.
We remain very well capitalized with a Basel III capital ratio of 15.7% and a Basel IV capital ratio of around 16%. The decline in our Basel III CET1 ratio versus previous quarter reflects a strong RWA increase, largely related to a EUR 5 billion add-on for model reviews and model redevelopments. Due to these ongoing model redevelopments, Basel III and Basel IV CET1 ratios have now converged. With this, I want to hand back to Robert.
Thanks, Tanja. Let's turn to slide 15, where we list our long-term targets. The strong increase in interest rates should benefit our return on equity over time. As mentioned previous quarter, we shared some insight on our rate sensitivity towards 2024. Market share for mortgages has improved, and I see encouraging signs that we can sustain this market share and perhaps even continue to improve. Cost saving programs are on track to reach a cost base below EUR 4.7 billion by 2024, and our cost of risk is below the through-the-cycle level. However, the economic outlook is uncertain with inflation up sharply. Our capital ratios remain strong, and we recently finalized our EUR 500 million share buyback program. If I could ask the operator to open the call for questions.
Thank you, sir. We're starting the question and answer session now. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. May I remind you to limit yourself to two questions only. If you have any remaining questions afterwards, you can press star one again to rejoin the queue. Thank you. Star one for your questions or remarks. Go ahead, please. Our first question is from Giulia Miotto of Morgan Stanley. Go ahead. Your line is open.
Thank you. Yes, good morning. Two questions from me, please. One on costs and one on capital. If I look at costs, I hear your guidance, 5.2. Year-on-year in Q1, excluding one-offs, costs are already up 6%. The guidance would imply that costs need to be down 4% year-on-year for the remainder of the year. Whereas it seems that all the increases are coming from IT, AML investments, which are not something that fades away in a quarter. You have, if I remember well, the negotiations with the unions coming up in June.
Any elements that you can give us just to make the EUR 5.2 billion guidance a bit more tangible. Also if you can remind us of the one-offs, because I had EUR 100 million of restructuring costs, now EUR 50 million of AML. I don't know if there is anything more coming on the AML side. That's the broader question on costs. Then the one on capital is fairly quick. The EUR 500 million buyback is now completed. When can we expect the announcement of another tranche? Is this Q2 or later in the year or next year? Thank you.
Giulia, thanks for the questions. I'll take them both. In terms of the cost and the guidance on the 52. I'd just like to reiterate, we did book exceptionals and incidentals in this first quarter. Clearly the EUR 50 million AML, any SRF levies that were coming through the cost lines for this quarter. When you look at our overall cost base and the way we are managing the cost base, it is very clear that we've also, during this quarter, front-loaded some of our IT investments to make sure that we keep pace with the further digitization of the bank. But when we look at the measures that we can still and that we are taking around realizing the cost saves, we're looking at a number of and executing on a number of items.
One is locations as we continue to close down locations. The other is continued efficiency through the digital applications that we've launched into the market. We are looking to increasingly automate our AML activities, but also by continuing to simplify our client service model, we're allowing ourselves to be set up for much more efficient and effective operations. Even though we saw a bit of a spike and certainly caused by incidentals that we're seeing coming through in this quarter, it hasn't changed our expectations on the lower than 52% actually in for this year.
Your question on inflation and CLA, we were able to conclude off with the unions on our social impact plan, so that's locked in. We did agree that we would sit with the unions again over the course of this summer, and would then have the conversation using the financial results, the six-month results for the bank, as we will have then further guidance also inflation. We do expect, though, whatever is the result of that conversation, that we still have sufficient room in terms of our cost base to absorb anything that may come out of this. In terms of capital, yes, I'm happy we were able to complete our first share buyback program. I think it was the first one.
What we're also now saying is that in light of the uncertainties that we're seeing certainly playing out in the rest of this year, what I'd like to have is just full visibility on the bank's results. Clearly, when the economic conditions are as uncertain as they currently are, I think it would be prudent to take a view as to what the full year results of the bank would be, and I expect that that would be towards the latter end of the year before we announce any further share buybacks. At that point in time, when we have that full visibility, we will then conclude, and then we will continue the constructive conversations with the regulator on this.
Perfect. Thanks. Just a clarification, the one-offs expected for the year, is there more to come on the AML front or restructuring?
Lars, do you wanna-
Yeah. I mean, these AML remediations are pretty much across retail and corporate banking. We will, you know, have a look at on the corporate banking side, whether there are some more files. I think this is materially the numbers.
Thanks.
Our next question is from Mr. Benoît Pétrarque of Credit Suisse. Go ahead, your line is open.
Yes, good morning. A couple of questions on my side. I'd like to start with the full year 2022 and our guidance of say EUR 5.1 billion. If I strip out the TLTRO III benefit of EUR 88 million, I come to roughly EUR 5 billion. I guess it is a good starting point to think about 2023. I guess the way we need to look at it is there will be potentially upside from the forward curve on the top. But could you talk a bit more about the net between say margins and margin development and volumes in light of what you see currently on the market? I'm especially referring to the front book versus back book margin development very recently.
Could you talk a bit about that? Also, if the EUR 5.1 billion guidance, whether that's really that EUR 5.1 billion will look the same, assuming ECB will hike by 50 bps in July, whether that would be roughly the same figure or that will be a different figure. Second question is actually on the kind of very high steering cost at treasury level, I guess EUR 30-40 million this quarter. It's kind of now fair to assume that will eat most of the upside from the current curve on the risk-taking portfolio. Could you talk about the drag you expect in the coming quarter from the steering cost and potentially higher steering cost, hedging cost, for the coming quarter?
You know, what could that be per quarter for the rest of the year? Just finally, you keep your return on equity of 10% for the long run, assuming normalized rates. Is that still a level you have in mind, maybe looking at your forward rate scenario, or would that be different today? Just wanted to check that. Thank you.
All right. Thank you. Lars, could I ask you to take the questions on NII and treasury, and then we'll conclude off on ROE.
Yeah. In terms of margins against volumes, here, what we are actually seeing is, on the corporate book, well, actually both mortgages and corporates, we actually seen quite a nice continued build-up of volumes. Despite the big build-up that we had at the end of last year, it's actually quite pleasing to see that the demand continues. Now, clearly, in terms of our sort of high-level GDP assumptions, we are expecting a little bit of a GDP lowering in terms of expectations versus what we guided before. This feeds into expectations on volume. We are still expecting GDP growth. I do expect volumes to continue growing sort of in line with GDP. The margin pressure is evident both in mortgages and corporates.
Corporates a bit because of the TLTRO pass-through that we had, so there is some near-term pressure on the margin. In terms of some of the new production, which is not under the TLTRO, we're actually seeing margins hold up quite nicely. The mortgages, this has been a continued pressure for the last couple of years in terms of the front book being lower than the back book. As I said earlier, with the price rises, you're always roughly about nine days behind the curve in terms of adjusting your prices. What we are starting to see is at least that the margins have been improving. Even though they are still lower than the back book, they have been improving over the last few months.
With the curve being as volatile as it is, with us having stepped up the prices, sometimes when the curve does drop in the odd week, we don't necessarily follow it down, so that does give us some sort of lock-in of a bit of a higher margin. You were asking about the ECB and if they were to increase by 50 basis points by July. I would say, as we've talked before, the impact in the year 2022 and 2023 is pretty insensitive to what happens to, you know, on the ECB side. You see that in our sensitivity table that we put out there as well. Because this ties into your treasury steering costs.
You know, the three elements that effectively eat up any benefit that we have in the near term while, let's say, customer behavior normalizes, and therefore sort of our book normalizes also in terms of the mortgage early re- or refinancing behavior, that we expect to come off significantly. Then we also see at some point the negative rates will start shifting back up to zero if the ECB really does start raising. Bearing in mind that we have about EUR 95 billion now booked at negative 50, that's a pretty large first step that we have to absorb, and hence you don't see this big sensitivity in 2022 and 2023. Then there is a balance of the steering costs in terms of the longer duration. Really very little near-term pickup.
That's why we've also sort of kept our guidance for 2022 at the top end of the range, rather than going beyond the range.
Then the final question then on ROE, I would say we would still stick to our guidance at the 8% in 2024. And clearly we'll have to see how the forward rates will continue to evolve before we would change that guidance. Initially we had indicated, and we continue to indicate that if the forward curves continue to shift the way they are, that 10% is tenable, but it's not changing our overall guidance. Our guidance remains 8% in 2024. Okay. Thank you very much.
Our following question is from Mr. Johan Ekblom of UBS. Go ahead, your line is open. Mr. Ekblom? Hello? Can you hear us? I'll continue to the next person. The next question is from Mr. Tarik El Mejjad of Bank of America. Go ahead, sir, your line is open.
Hi. Good morning. I have two quick questions, please. The first one, I'll come back to costs, but more towards 2024 rather than the EUR 4.7 billion rather than the EUR 5.2 billion. This guidance was given before we observed inflation costs. That's end of last year and early this year. Inflation has doubled post Russia-Ukraine crisis. You seem to reiterate the same absolute numbers, and you haven't moved to, which I understand will be more adequate kind of JOEs or cost income. I mean, the last two reporting demonstrated a bit of acceleration in costs explained by what you just described, but there's also some underlying increase in there.
Should we expect some actions from you in second part of the year to keep that guidance, or you're comfortable that EUR 4.7 billion could be achieved even with double the inflation you assumed initially in your strategic plan? The second question is on growth. Sorry to sound as a broken record on that topic, but I really want to understand what's your engine for growth in your whole strategy. I mean, now you've completed the deleveraging of the CIB, but I want to understand what are the main drivers for growth in CIB in terms of sectors and regions. Maybe you can give us some outlook already adjusted for the global economic slowdown. Thank you.
All right. Thank you. I'll take both those questions. In terms of unless Lars has anything to add on the cost side, but I would just reiterate the 47% even in light of the inflationary pressure we've seen, this is also partly relating to longer term contracts that we have been able to close on. For example, major components of our costs related to IT. We currently are still projecting that not only the 52% but the continued decrease to 47%. I would say that's not a smooth glide path, if you will. I mean, clearly that's over a period of leading into 2024. At this point, we see no reason to adjust the guidance.
Lars, if you wanna add anything.
Yeah. Can I just also say, 'cause you mentioned cost income ratio, and for me, one of the clear, I suppose, benefits of having an absolute number is the discipline it also gives to the internal organization. If you start having now this tailwind in terms of interest rates, you know, there is potential that people think, well, there's all this extra income, so we don't need to be as disciplined on cost. I think from my side, that is the key of still holding very firmly to an absolute number and not switching to sort of a cost income ratio driven approach.
Let me confirm that there is no sense at this point to change to relative numbers on cost control. In terms of your questions on this, the engines of growth. Actually, that is indeed why I think our first quarter performance, when you look at the underlying trends, as Lars has described, when we see the volumes continuing to grow in mortgages, which we named as one of our value segments, the progress we've made in making sure that our operations in the mortgages side is so efficient and so effective that our throughput times have been significantly reduced. I would still expect irrespective of price pressure, volumes to continue to pick up.
On the corporate banking side, we've been very, very clear that we would begin to focus our efforts in Northwest Europe. That indeed is now paying off across the corporate bank operations. We're seeing volumes increasing in the sectors that we've highlighted, but also the themes that we have that we've begun to prioritize around digitization, themes related to sustainability, transition themes. These are all focus areas of the corporate bank that have now begun to drive results. Increasingly on wealth management, which we also have continued to emphasize one of the named potential growth areas. We have seen solid performance over the last few quarters, and we indeed expect that to continue.
We've also, as part of this strategy, identified a shift away from NII to fee, and fee growth continues to remain strong into this quarter. Actually, it is reflecting some of the strategic choices that we've made as a bank. For example, our clearing operations continue to contribute as expected. As you recall, that was a very clear decision on our side to continue with our clearing operations. Our credit card operations, which we also said we would continue to incorporate in our overall strategy, is also now showing continued fee increases. Sorry, increased performance.
On our personal and business banking, we were very clear about the digitization of our operations, which we continue to execute against, but also that we would look for opportunities to increase rates where we can. What you see now is a envisaged tariff rates increase on our, on the retail side of the operations. At the same time, we're continuing our development of payment packages to our SMEs, which are also contributing to the overall fee performance. In short, while I know we're understandably focusing on cost, the actual decisions we took in terms of our strategy review are beginning to show results now in the underlying choices that we've made, and in that sense, continuing to contribute to a growth model at the bank.
Thank you.
Our following question is from Mr. Stefan Nedialkov of Citi. Go ahead, sir. Your line is open.
Yeah. Hi guys. Good morning. I have a couple of questions on the cost side of things. At your last Investor Day, you guided to investments, if I recall correctly, around EUR 100 million per year, more or less. I just wanted to circle back to what we saw in 1Q. Did you take most of that EUR 100 million in 1Q? And was that driven by your upcoming negotiations with the unions? On the AML charges, EUR 50 million is quite high when you look at the run rate of around EUR 400 million of AML costs per year. Is that run rate changing at all?
If it's not, how do we square off the 400 with the fact that around 20% of your FTEs are engaged in compliance efforts?
Yeah, thanks for the question. Lars, could you
Yeah
Elaborate a bit?
I think on the investments it is about EUR 100 million a year. You're right. In terms of did we take it all in the first quarter, no, definitely not. It comes through a little bit more throughout the year. It certainly hasn't been linked to any inflation negotiations on collective labor, because those negotiations will only start in the second half of this year. We continue to make investments, that's clear. Moving the infrastructure and the new service model does require that investment, and that will continue. We are trying to be pretty disciplined as well in terms of making sure we have some oxygen to continue to invest in the business, you know, rather than using it all to absorb any sort of cost inflation.
On the AML, in terms of here as well, you have to take a bit of a look in terms of what we do for remediation efforts and what we do for business as usual. This 50 million is very much in terms of a set of files that have to be re-looked at, re-remediated in a way, and that will take a bit longer. It is an isolated portion of the entire footprint of our 5.3 million clients, the bulk of which have been remediated.
Here I would say our expectation in terms of run rate on business as usual is very much as we spoke about earlier, was that this year would be roughly the same as last year, and that we would then start seeing a decline in the run rate, coming into 2023 in terms of also all the efforts we're trying to make, of focusing on much more a risk-based approach in terms of selection. The fact that we are starting to see a lot more automation, in terms of also identification of what needs to be remediated. You know, that effort of trying to move from people-based large teams to a bit more artificial intelligence-based will continue to happen, and we should start seeing more of that traction actually manifesting in the run rates coming down next year.
Thank you. If I may just follow up on the EUR 50 million. Was this driven by a longer than expected time to remediate all the files? I know you had mentioned previously that your efforts might continue into 2022. Just trying to understand why this was not included in the big charge you took last year, whether this is purely time driven, effort driven, or something new has come up.
Yeah, let me maybe just expand a little bit on this. To build on what Lars has said, these are files which we identified needed to be remediated. Very clearly what we're preferring here is quality over speed. Basically what we've done, we do quality reviews on the files that we remediate. We then come to a conclusion whether these files are fully compliant or not. In that process, you identify a number of items that need to be remediated, that are just not living up to the quality standards that we have concluded on. Rather than pushing this through in terms of speed, we have decided to then postpone that complete remediation until 2023. Take a bit more time to ensure the quality of the file is fully up to standard.
Okay, thank you.
Next question is from Miss Anke Reingen of RBC Capital Markets. Go ahead, your line is open.
Yeah, thank you very much for taking my question. Apologies, one more on costs. Just in terms of the Q1 base, what can we sort of like take out if we want to consider it as a run rate for the rest of the year? I guess it would need to be some material step down in order to meet the EUR 4.7 billion. Within this, the EUR 50 million you have in Q1 for non-core costs, how quickly can that come down? Maybe the EUR 185 million of cost savings, how quickly are they coming through over the years? Then secondly, can you give us a bit more, maybe an outlook about your expectations of loan loss charges for the year?
I mean, in terms of maybe underlying and the Russia-Ukraine overlay, can you use it quite easily against other economic impact, or is it quite specific in what areas you can use? Then just sorry, just lastly, in your negative scenario, it just still assumes quite, I mean, GDP growth this year, flat next year. How sensitive is it to an assumption that GDP is actually, or goes negative? Thank you very much.
Okay. Thank you. Thanks for the questions. Lars, could you elaborate a bit more on costs? I'll ask Tanja to answer the questions 2 and 3.
In terms of specific run rates, I can't give you the specific run rates, but what you already did see is that. If you look at outside of the incidentals and the levies, you actually do already see in Q1 the overall sort of, call it structural cost base, starting to turn and coming off to a lower amount. I expect to see some build pretty much across the board in terms of what I would call the non-personnel expenses. Which does have a lot of the contracting base in it in terms of also the IT build. It also has a large chunk of the offshoring that we're doing in it as well.
That is also the line item where you see in terms of any investments that we make in terms of infrastructure, you know, which would have had a higher run rate in the first quarter. Those are the areas where I would expect to see some benefit coming through. I mean, we have continuously also in terms of working towards the overall 15% reduction in terms of personnel levels by 2024. We've just gone through another step of reorganizing ourselves. That organization is also settling down, so I expect to see some of that coming through. Then, as you rightly say, the non-core will unwind over the next two years, so it's not as if it's going to come all this year.
I think that'll be quite an even sort of unwind over the next two years.
Okay. Tanja.
Yeah. On your question related to loan losses, loan loss charges for the year, maybe one step back. As Robert mentioned already, well, the uncertainties are quite well big at this point in time. Nobody knows how the year will pan out. From that point of view, it's difficult to give a guidance for the full year cost of risk. What I can say is that we have this cost of risk guidance of around, well, we have this through the cycle cost of risk guidance of around 20 basis points in an average year. If you look at our base case scenario, that is actually a well an average economic development. That would be in line.
Of course, situations could develop very differently as well. In our negative scenario, we actually don't expect that GDP goes negative already this year, at least not for the full year, although that could happen in the later quarters, very dependent on what will happen in the area of sanctions. I think it is important to know that the economic scenario that is included in our calculations for Q1, also included in the pack, are the scenarios of end of February. Just before the war. We always use these scenarios to calculate our provisioning. But that's why the weight of the negative scenario is a lot higher.
Actually, our current base scenario is in between the base scenario that is in the slide deck and the negative scenario. As said, we have also taken a management overlay for second-order effects, and these are generic. The second-order effects are in the area of higher energy prices, higher commodity prices, supply chain issues, inflation effect, and therefore, they are quite generic. We do expect them to be absorbed by developments that we will see in the remainder of the year.
Okay. Thank you.
Thank you. Following question is from Mr. Farquhar Murray, Autonomous. Go ahead, sir. Your line is open.
Morning, all. Just one question for me. There's been some debate around a cliff edge on SME loans post-COVID. I just wondered if you could give us an update on what you're seeing on the ground in that respect. Has that debate been able to progress with the regulator or should we take it that the Russia and inflation uncertainties are essentially pushing that discussion now later into the year? Thanks.
Tanja Cuppen, would you care to comment?
Yes. We have not seen any cliff effect in relation to SMEs coming out of COVID or COVID support. The COVID support and our SME portfolio is predominantly in the Netherlands. I'm talking about the Netherlands. COVID support has been phased out gradually, and a very limited number of our clients still have support over the last period. I think the main outstanding effect that we can still expect is that there are deferred taxes. Clients could choose to defer their tax payments, and now need to repay that in the coming period up till five years. That's a gradual effect. That will not be a cliff effect, but of course, is an additional burden for SMEs.
Under discussion.
Yeah. Maybe good to know that also we have reduced our management overlays related to COVID quite a bit this quarter, given that we have reviewed our clients for these well type of effects, and we are comfortable with where they are.
Okay. Thanks a lot.
Thank you. We have a question, a follow-up question from Stefan Nedialkov of Citi. Go ahead, sir. Your line is open.
Yeah. Hi, guys. It's Stefan. I didn't want to overload you with questions on the first try, so here are some other ones. On the NII, your assumption for constant asset margins, I should say, I think that's quite fair because asset margins are driven by competition. In reality, I know that we haven't had a lot of periods where rates have been rising in the past 10 years. If you look back maybe in the middle of the 2010s
How did asset margins behave for you, when rates were rising? I would say 2016, 2017. If you can talk a little bit about that would be really helpful. My second question on NII is, you're not disclosing your cap on the deposit margins in the replicating portfolio. Can you, however, talk a bit about the deposit beta that we should be thinking about above 0% and, you know, heading closer to 1.5% as rates go there? Third question, ROE of 8% in 2024, is that based on the current spot curve? The last question for Tanja, I guess. The Basel IV is now 30 bps better than Basel III. What is driving that benefit, please? Thank you.
Lars Kramer, could you comment a little bit on NII?
Yeah. I mean, in terms of looking back as to how asset margins performed historically, that one I honestly will have to come back to you on because personally, I wasn't here, so I don't have that built into my memory base. We will come back to you on that one. In terms of the deposit margin cap also, I don't want to get drawn on, you know, what our working assumptions are. It's also a little bit competitive sensitivity on it. But you know, we do build in a reasonably healthy margin. You know, that's a little bit where once we get to zero, then we start building up that margin. We have tried to use in our cap something which has been historically the sort of average level.
It's not as if we are being overly conservative or overly exuberant in terms of what we are capping in there. On the ROE, I mean, I think the curve that we're using in terms of this ROE is very much that forward curve at the end of April. On that front, if that curve really does materialize in the long run, then the 10% in 2024 is definitely achievable.
Okay, thanks. Tanja?
Yeah. Stefan, maybe you can repeat your question because I didn't fully capture what your question was.
Sure. Basel IV of 16% CET1 ratio is 30 basis points above your Basel III CET1 ratio. We're obviously usually used to seeing it the other way around. Some banks in Europe do benefit from Basel IV on a net-net basis. You guys have obviously absorbed all the Basel IV impacts. Now that we are here, why? What is driving the 30 basis points benefit on the Basel IV versus Basel III?
Your question is clear to me. Maybe first to mention that our Basel IV number is, we still present a rounded number of around 16%. You cannot conclude that it's 0.3% higher. We really see the Basel III and Basel IV number converging, but the Basel IV number is, well, still surrounded with uncertainty. As you know, the Basel IV rules are still not final. We are still working on the implementation in our system. We don't have a fully accurate number, and that's why we present 16%. You really need to see this as a convergence of numbers, as opposed to a difference, the conclusion you're drawing.
I see. Not much to read into that, basically.
No, no.
Thank you. Thank you very much.
All right. Thanks, Stefan.
Our following question is from Mr. Jason Kalamboussis of ING. Go ahead. Your line is open.
Yes. Hi. I have just one quick question. The additional remediation in the first quarter on AML, was it due to discussions you had with the regulator, and was it driven by that? And a side little question, I may have missed it, so apologies for it. What are currently the numbers of FTEs involved in AML, and how do you expect this number to evolve in 2023 and 2024? Same question on the euro amount for 2022, 2023, 2024. Thank you very much.
Yeah. On your first question, anytime we take any decisions on timing of remediation, that is always done with the regulator. We've had constructive dialogue with the regulator around our timing, and therefore, we were able to communicate what we communicated around completion of remediation in 2023, and directly related to the provision taking. In terms of FTEs, we would expect over time FTEs that are directly related to the detection of financial crime to begin to come down because A, we'll have a continued transfer to business as usual. Also, B, because we are continuing to further automate the processes.
How many FTEs do you have currently involved in AML?
It's about EUR 5,000. We've got about EUR 450 million of spend in terms of the business as usual. In terms of trying to pinpoint what is that number going to be in three years' time, I mean, we expect it to be significantly lower. We don't have, you know, an exact figure that we can share with you now.
Okay. Part of the AML reduction of this 5,000 is included in your -15% by 2024. Is that correct?
Part of it, yes. I mean, a large part of it is also in the externals, right? You know, the 15% is based on our internal FTE. It's a balance, but it's also a mix between internal and externals.
Great. Thank you very much.
All right. Thank you.
We have a question coming through from Omar Fall of Barclays. Go ahead. Your line is open.
Hi. Good morning. Thanks for taking my question. Just the one, please. Why are you locking us in to wait until full year results to come back on capital return? You know, that's eight months that shareholders have to wait. You know, your direct peer, which has 100 bps plus less capital, some Russia issues and, you know, the same domestic regulators just announced a new buyback and capital return to start imminently. Why are you so different to them and other European banks, you know, engaging in capital return? Is it that the regulator maybe would have an issue with a buyback at the same time as the added remediation efforts?
You know, I know you'd like to be prudent, but obviously, you know, a higher cost of equity because the market thinks you're holding capital for some unknown reason is also not particularly prudent, I guess. Thanks.
Yeah. Firstly, there's no linkage between the remediation and the capital. In terms of what we are trying to achieve in terms of buybacks is something which is a bit consistent over time, so not necessarily a sort of lumpy return. We are over time working towards this 13% level. At the moment, our 15% threshold is not really a constraining factor. From that perspective, the timing of any capital return really is being dictated by the uncertainties of what is happening in Ukraine materially. I mean, somebody mentioned the spillover effect on SMEs earlier. We do still have to see how that all evolves. You know, I don't want.
You know, prudence is a word, but we want to be realistic as well that looking at the situation in the world today, it does make sense to push the pause button a bit on this and to really see how the next 6-8 months do evolve. I also don't want to comment on other banks' capital returns because I don't know how the discussions are with you know, let's say our direct competitors and, you know, and their regulators.
Got it. To be clear, we should wait until full year results and, you know, kind of not Q3 or some point in the second half.
What I said is that we want to have the visibility of full year results and that we can consider. That is what we're now working toward, getting full year visibility, understanding the consequences, as Lars has just alluded to, of the current crises, then we will have the conversation here around share buybacks.
Very clear. Thank you.
We have a follow-up question from Giulia Miotto of Morgan Stanley. Go ahead, please. Your line is open.
Thank you. It's a question on the new disclosure around the discussion with the regulator or regulatory letters. I just don't quite understand your disclosure. Is there any more color you can give us on what this is and what impact this could potentially have and the timing? Thank you.
Lars, would you comment?
Yeah. In terms of SRF contributions, this is a discussion we're having with the SRB in terms of calculation. Once we have some more clarity on that, those discussions have only just started. I would expect by Q2 to be able to come back to you and give you more clarity. I think this is just a signal that we are in discussions on SRF contributions to the SRB.
A-and this is for twenty twenty-two?
This is for. Yeah. A portion of it could be for 2022, but there's also a lookback component to it.
Okay. Thank you.
We have a question from Kirishanthan Vijayarajah of HSBC. Go ahead. Your line is open.
Yes. Good morning, everyone. A couple of questions. Firstly, to follow up on the cost. I think you said you were exiting some locations or closing locations. You know, are we talking about kind of further branch closures going on in the Netherlands? Or was that kind of more back office functions? I see headcounts in personal and business banking is also coming down. Was that kind of natural attrition? There's no real severance costs or anything to speak of. Then, of course, forward looking, you know, in terms of your cost targets for 2024, you know, what have you allowed for in terms of your operational headcount numbers? Outside of, you know, non-core CIB runoff and outside of the AML related headcount, you know, what's your operational headcount gonna be looking like?
You know, are you proactively, you know, thinking of managing that down in terms of trying to hit that 2024 cost number? Quickly, just on the capital return, I fully understand what you said. You need, you know, the clarity of full year results before the next deployment announcement. Does the same also apply-
In terms of using capital for bolt-on acquisitions. For instance, you know, deals in wealth management are effectively also off the table for the same reasons that, you know, you want to wait till, you know, full year results and you've got some clarity, around some of the, risks out there. Thank you.
Yeah, thanks. Taking your last question, there is no concrete opportunities where we're looking at results at this point around any potential M&A. In terms of the question that you asked around our cost income ratio as it relates to closing of branches, those do relate to a continued closing where we see the potential for the closing of branches. Indeed, that will continue as consumers behave. We track the traffic across the branch, and then we close as necessary. What you're actually seeing is the continued effect of further digitization of our services, but also allowing us to continue to close branches, as warranted by consumer traffic.
Yes, indeed, you see those numbers coming through, P&B in terms of FTEs as they begin to come down. In terms of your question on 2024, I would just reiterate that we guided towards that 15% FTE reduction. That still stands. That's as much detail as we would give at this point in time. We still hold to that 15%.
Great. Thank you.
All right.
We have a question from Robin van den Broek of Mediobanca. Go ahead, your line is open.
Yes. Good morning, everybody. Thank you for taking my questions. Just a couple left. On NII, I appreciate the color you've already given on margins and volumes, but I think with the Q4 results, you were very specific that this would be EUR 100 million headwind for this year. I was just wondering if you could update us on that number and also talk a little bit on how persistent you think those dynamics are for future years. That's question one. Question two is again, coming back on costs. I don't really get the improvement on the underlying basis because Q4 normally has the hockey stick effect, and you're flat, basically, Q-on-Q.
I think it will be extremely helpful if you just give us the number of the front-loaded IT expense in the quarter for us to help understand the trajectory for the year. Thirdly, I think on 2024, I think you didn't do anything on regulatory levies. I think you didn't assume that to go down by then. Could you just confirm that? Thank you.
All right. Thanks. Lars, it's back to you on the cost.
Well, on the NII first, in terms of the EUR 100 million. In terms of what we spoke about the last time, we had the four buckets of about EUR 100 million each, which was the asset bucket, the deposit bucket, the non-core, and the treasury. Now, the mix is changing between those buckets. That's why you're not in terms of, you know, the sensitivity. You're still not seeing any real pickup in the 2022 or 2023 in terms of a net change. Clearly the mix in terms of those buckets is changing, with the deposit bucket benefiting a bit more, but the treasury bucket feeling more pain. In terms of costs, I'm not gonna sit here starting to give run rates.
I mean, we are working on the savings programs in terms of our IT transformation. A lot of that comes through. If you're aware that there's been the Schrems II ruling in Europe, which has in a way sort of delayed migrations for us, for example, onto the cloud. We've now found a way of actually getting comfortable to restart those migrations. These are some of the sort of underlying things where you start seeing a pickup in terms of, savings run rate. The front office transformation, for example, where you've just been talking about the sort of shift from branches. You also start seeing there, you know, we had to get our organizational structure resolved, and that has now stabilized in terms of pretty much in quarter one.
That in itself now adds some additional momentum in terms of getting some savings out there. Then there is a continuous digitization and a move. You know, we talk a lot about people starting to use video banking more in the mortgages space. As a result of that, you are getting direct contact between customer and ourselves and agent rather than having to go through call centers. You've got the dynamic of branch, call center and digitization. Again, that's a mix that will continuously be evolving more and more towards the digital channel. But in terms of absolute pacing and being able to put a run rate on that, I think that's gonna be a bit too difficult.
I think in summary, Lars, to add on, so we still deem our existing plans to be sufficiently flexible to absorb any unexpected increase.
Your question on the reg levies. Yes, we are still including all reg levies as of with a continued sort of run rate as we have this year. We haven't taken anything out in the 2024 year for potential fund being fully funded.
Yes. Thank you. I appreciate what you said on the four buckets on NII, but I'm not sure you actually gave color on the volume times margin effects. I think you only touched upon moving elements between the deposit bucket and the treasury bucket. But any thoughts on volume times margins and also the persistency of that throughout the years?
In terms of the volume and margin, it's basically what I said earlier, which is, we do have a continued pressure on the mortgage margin, and this is really in terms of the price increases, being tracked, let's say, by a nine-day lag. But there is an improvement in that margin, but it is still, you know, lagging what the back book is at. In the corporate space, what we're seeing is there has been some negative impact as a result of the TLTRO. So that is feeding through. But in terms of real new production outside of the TLTRO, we are seeing basically an improving margin. In terms of the volume itself, while you can see that in Q1, we had quite a nice follow-through in terms of volume, despite the very strong Q4, and that is encouraging.
You know, again, here I take the lead a bit that we do look at GDP as still being positive, even though it is a bit depressed based on previous expectations, but it is still positive.
Is it fair to say that on the mortgage repricing, that the part of the book that's actually up for repricing had an above back book margin?
Well, above back book or back book margin, I would say. Not necessarily above back book. I mean, that's an average margin across time. Clearly, the stuff that is repricing is at a higher margin, so you've got that running off, and you're replacing it with effectively lower margin.
Yeah. It's more a question. It seems that the margins between 2010 and 2015 were particularly good, and that might be the bit that's more up for repricing at the moment. That was the reasoning behind the question. Thank you for the comment.
Yeah. A lot of that. I mean, if you take what has been refinanced, you know, it's a huge volume of the book has been refinanced. Pretty much there's a very small proportion of our book, our residual book, that is still at, call it, rates that are higher than today's rates. That's why we
Okay.
the refinancing prepayment fees that we've been receiving, what's it, about EUR 260 million a year to really come off because that, you know, demand for refinancing is going to come down quite steeply.
Thank you very much.
Okay. Thank you.
We have a follow-up question from Benoit Petrarque of Kepler Cheuvreux. Go ahead. Your line is open.
Yes. Thank you. Just wanted to a bit better understand the steering costs on the treasury and especially how it works on a quarterly basis. It's clearly linked to the level of prepayment. Can we assume that in a quarter where you get lower prepayment, you'll see an even more negative treasury results? Or did you take some of it upfront? Or how does that work in practice, actually? Assuming you will be doing a much more substantial part of your mortgage production on the ten-year, could that soften a bit your steering cost assumptions as well, the asset duration will automatically come down a bit? Thank you.
Lars, go ahead.
Yeah. I mean, none of these things are absolute. It also depends a little bit as to where the market is at, and where we maybe do some pre-positioning in terms of steering. But generally, we do operate within some pretty tight sort of duration limits that we have to stay within. It does tend to feed through quite quickly and immediately that we have to do the steering. Yes, there is, if prepayments, for example, were to effectively not slow down as much as expected, then we could do some, you know, some steering in terms of bringing it to a shorter duration, which is also, as you say, if things move to 10 years, that could be a benefit, as well.
Perfect. Thank you.
We have no further questions, sir. Please continue.
Okay. Well, if there's no further questions, this indeed does conclude the analyst call. As always, thank you for your questions and look forward to speaking to you again. Bye-bye.
Thank you.
This concludes the ABN AMRO Q1 2022 analyst and investor call. Thank you for your attention. You may now disconnect your line.
The conference is no longer being recorded.