Hello and welcome to the ABN AMRO Q2 2022 analyst and investor call. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question. If at any point you require assistance, please press star zero and you will be connected to an operator. I will now hand over to your host, Robert Swaak, CEO, to begin today's call. Thank you.
Thank you very much. Good morning and welcome to ABN AMRO's Q2 results. As always, I'm joined by Lars Kramer, our CFO, and Tanja Cuppen, our CRO. I'll update you on the main topics for this quarter before we start the Q&A session. Let's turn to slide two for the main events of this quarter. Although the outlook is indeed uncertain, the Dutch economy continued to perform well during the second quarter. We managed to add new business to our lending portfolio, both for mortgages and corporate loans. As we know, on July 27th, the ECB ended the negative rate environment. As a result, our deposit margins are rapidly recovering, and this led to an improvement in our outlook of the full year NII. Fee income increased strongly year-over-year, driven by good results in our credit card business and clearing.
On costs, we are dealing with higher investments and regulatory levies. The full year 2022 costs are now expected at around EUR 5.3 billion, which I'll further detail shortly. We did have a quarter of net impairment releases, and this contributed to a strong net profit of EUR 475 million. Now, we set our interim dividend at EUR 0.32 per share, which represents 40% of our half year result, which is in line with our dividend policy. Our capital position remains strong with a 15.5% Basel III CET1 ratio, and we have obtained approval for a share buyback of EUR 250 million. Now, this approval is conditional and can only be used in case of a potential sell down by the Dutch government.
The approval does not come with an explicit end date, so we are able to support a potential sell down at short notice if and when it may come. Let's turn to slide three, where I'll say a few words about our delivery of the strategy execution. Starting with the first strategic pillar, the customer experience. Now, Tikkie started out as a peer-to-peer payment app. We are continuously broadening its use. Recently, we entered a partnership which offers restaurants contactless ordering and payments, which are handled through Tikkie. Our chatbot, Anna, is continually being upgraded, now allowing SME clients to check on the progress of their e-account request. The digital experience is highly valued by our clients with high net promoter scores.
Our relational net promoter score for SMEs is however impacted by a new fee structure where we pass on some of the KYC costs which we incur to clients. With regards to sustainability, we continue to make good progress in our overall climate strategy. We will present the climate strategy later to you this year. Straight through processing is an important aspect of making our bank future proof. Currently, 63% of our high volume products and services are now processed straight through, and it includes payments, savings, and mortgages within personal and business banking. Our target is to have 90% of our high volume processes working straight through by 2024. Let's talk a little bit about the Dutch economic indicators on the next slide four. Looking at consumer spending, bankruptcies, and house price developments, these are all holding up.
Our low impairment levels during the first half of the year reflect these macro indicators. However, looking at the low consumer confidence level, which is a good forward indicator, we do see a slowdown in economic growth from the impact of higher energy prices and the war in Ukraine. We expect a recession in the Eurozone with GDP contracting in the coming quarters, and we expect the Dutch economy to follow a similar trajectory. Inflation will remain high in 2023, but expected to drop toward the end as higher energy prices begin to feed through into the economy. Turning to our second quarter results. This is on slide five. During the second quarter, our mortgage share increased to 17.5%, making us market leader in the Netherlands. Our mortgage portfolio grew by EUR 1.7 billion.
Commercial momentum in corporate lending remained high, with the loan book growing by EUR 1.1 billion. Around 1/5 is due to new clients, and this includes further growth from our North West Europe strategy. Deposits grew by EUR 2.1 billion during the second quarter, helped by payment of holiday allowances. Now that the interest rates are back in positive territory, deposit growth will benefit NII. Turning to slide six, I'll update you on how positive rates are feeding through into our NII. During the second quarter, deposit margins improved strongly as the yield of the replicating portfolio is rising. As we flagged previous quarter, higher rates lead to lower prepayment penalties. Also, as rates rise, we assume clients with a low coupon mortgage will be less inclined to refinance their mortgage. The effect is an increase in the expected maturity and leads to higher hedging costs.
Lower prepayment penalties and higher hedging costs more than offset the increase in deposit margins this quarter. Now looking forward to the second half of the year, we expect a further increase in deposit margins, but to a lesser extent as negative client rates will be removed in two steps. On August 1, our negative rate was increased to - 25 basis points, and as of October 1, we will cease charging negative rates. We did not opt for early repayment of TLTRO, and this will support NII in the coming quarters. Prepayment penalties are close to bottoming out and will lead to limited further pressure on NII going forward. The impact of hedging costs for the mortgage portfolio is harder to predict as this depends on how interest rates will continue to move from here.
All in all, we now expect full-year NII around EUR 5.2 billion and the NII to bottom out sometime during the second half of this year. Turning to slide seven on fees. Fees are up 12% year-over-year, and all client units have contributed to this result. Both clearing and payment services fees showed strong performance. Stock markets were down in Q2, leading to less trading activity and lower asset management fees. Although slightly down from last quarter, other income was again strong, driven by hedge accounting-related results at ALM and decent private equity results. Turning to cost then on slide eight. This quarter, we added EUR 34 million to the AML remediation provision. We agreed with our regulator to incorporate some additional requirements and are committed to finalize the remediation in 2023.
As you can see from the chart, underlying costs are stable, showing small declines over the past two quarters. We are making good progress on cost savings, though this is not fully showing through due to an increase in investment spend. These additional investments are, for example, in the area of data sourcing. We are also faced with a delay in migrating applications to the cloud, among others caused by Schrems II developments. As a result, we're bolstering our on-prem cloud infrastructure, which was not in our original plan. Looking ahead to the second half of the year, we plan to bring down IT costs by reducing external FTEs and decreasing our spend on contractors. In addition, we expect to make a good step in bringing down our business as usual AML costs, again, by reducing external FTEs.
Many processes are still manual, and we will increasingly automate processes and focus our efforts on areas with the highest AML risk. Now, partially offsetting these savings will be, among others, higher regulatory costs as we face higher contributions for local bankruptcy and some inflationary pressure. Taking all factors into consideration, I expect the underlying cost base to start declining, leading to full-year cost of around EUR 5.3 billion, of course, excluding the incidentals. Now, that takes us to our 2024 cost target on the next slide nine. Shown here on the left is our expected cost base for 2022 of EUR 5.3 billion. We split out the EUR 1 billion of costs for non-core, regulatory levies, and AML. On this part of our cost base, we are looking to achieve an aggregate over 40% cost reductions toward 2024.
This is versus our original strategic plan. We now assume the SRF and DGS contributions to decline in 2024 once these funds are filled, resulting in around EUR 200 million lower regulatory levies. I discussed how we plan to bring down AML costs, and this will contribute to over EUR 100 million. In addition, the non-core wind down is on track, delivering another EUR 100 million . Moving to the main cost base at EUR 4.3 billion for the full year 2022. Here, we're looking to achieve a cost reduction of around 5% by 2024 or around EUR 200 million. Overall, our cost savings programs need to exceed inflation by around EUR 100 million. Savings will be achieved through lower IT run and change costs and further organizational and product simplifications, for example.
The final component I already mentioned being the heightened investment spend for strategic initiatives. We assume a normalization further reduction towards 2024 of around EUR 100 million. I remain optimistic we can drive our costs below 4.7% by 2024. Turning to loan impairments. Our impaired loan portfolio decreased compared to the previous quarter by around half a billion as we saw repayments, sale of non-performing loans, and cured loans. This led to impairment releases, which were partly offset by model adjustments related to our residential mortgage portfolio. These adjustments captured some of the effects of the strong rise in house prices and increased refinancing risk for interest-only mortgages. We continued an overlay for the uncertainties following from the war in the Ukraine on the economic developments.
Looking ahead, we expect the cost of risk to remain below the through-the-cycle rate of 20 basis points in the second half of 2022. Now, turning to slide 11 on our long-term financial targets. Let me just recap the main messages. We had two good quarters, leading to an ROE of 7% over the first half year. This result was helped by impairment releases this quarter. We are at an important junction in terms of our operating income. The positive interest rate environment means NII is indeed bottoming out, and underlying costs are peaking as our cost savings are delivering. These positive jaws will lend support to our results as we go into an uncertain future. We are well prepared in terms of capital buffers, given our strong capital ratio.
So far this year, including final dividend, the completed share buyback, and this interim dividend, our total distributions amounted to around 14% of our current market cap. With the approval for our EUR 250 million share buyback, we can support our majority shareholder in a potential sell-down if and when they decide to do so. Our intention to use share buybacks to optimize the capital position has not changed. We will evaluate next steps on capital distributions, as we talked about previously in the fourth quarter, and of course, we will then take into account the capital position and the outlook at that time. Now that brings me to the end of our Q2 presentation. I'd like to ask the operator to open the call for questions.
If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally as you will be advised when to ask your question. We ask that you please limit yourself to two questions at a time. Once again, that's star one if you would like to ask a question. The first question comes from the line of Robin van den Broek from Mediobanca. Please go ahead.
Yes, good morning, everybody. Two questions I have to pick. First of all, on NII, I was just wondering if you could give us an update on the constant rate scenario that you've given at the Q1 stage. Basically, what kind of uptake can we expect on NII from replication and treasury in 2023 and 2024, if rates stay flat for a certain date? In relation to that, I was just wondering if there's any changes going on, considering your hedging strategy. In the past, you've always talked about the barbell with an average maturity of five years. We're sort of wondering if that's still the same or that you have a view there and are moving it around a bit. The second question, I'll concentrate on costs.
You're below EUR 4.7 billion is reiterated, but as opposed to before, you're now also leaning on lower regulatory levies. It does sound like the underlying narrative on cost has deteriorated here to date. I was just wondering what exactly was that? Was that inflation? Were there other factors that were driving that? What can give us the certainty that this does not continue to slip? Thank you.
Yeah. Lars, could I ask you to take the question on NII and give a little further detail on cost?
Yeah.
Give us some of the assumptions.
On the NII, I mean, we haven't updated our sensitivity that we shared in the first quarter. What we have obviously done is upgraded the guidance for the current year, and that guidance is driven by you know the non-early repayment of the TLTRO. That is one of the bigger contributors as well as we did say in the last quarter with the sensitivity, there is a component of additional pickup even this year, and we are seeing that coming through. Now, in terms of future expectations, I think we need to see what the forward rates do actually pan out to be.
I mean, the one thing I can say is that at current forward rates, we do continue to see that we will get to a 10% ROE if they play out by the end of 2024. In terms of the hedging strategy, no, we haven't really changed our hedging strategy at the moment. I mean, that is dynamic. It is very sensitive, obviously, to how things are evolving in terms of customer behavior. At the moment, we haven't changed any strategies materially. I mean, we're obviously doing more hedging as the curves steepen. On the costs, the deterioration in terms of our longer-term prospects, we are still firmly sticking to and committed to our EUR 4.7 billion.
What we've tried to give you this quarter is a little bit of line of sight as to how we expect to get there. You're right, the levies that we are including at a lower amount of EUR 200 million. We've also looked at the core cost base that Robert was referring to. In that core cost base, net of inflation, we are seeing, you know, we're building an additional reduction. The inflation that we've built in there for some insight is around 2%-3%. That is something that we are also having to take into account. That's probably where the deterioration comes from that you're referring to.
Okay. That's very helpful. Thank you.
Thanks.
The next question comes from the line of Tarik El Mejjad from Bank of America. Please go ahead.
Hi. Good morning, everyone. Two questions, please.
Great.
First of all, on NII, can you please clarify why you couldn't go back to 0% in terms of charging for retail deposit rates whereas the ECB went to 0% in July? How confident you are that, you know, from political point of view, you don't have any resistance to that? I think some of your competitors already moved to 0% straight away. What would be then the guidance on NII if you have to move to 0% in August instead of October? Second question, maybe I will then focus on capital. In your final remarks, you reiterated the 15% threshold for buyback.
Last year—I mean, this year in February, when, you know, everything was fine before the war, we were expecting you to return everything above 15% and be constructive on capital return. You didn't deliver that. Why do you still keep this policy of 15% above a share buyback, where clearly you are building above that, way above that at 16% plus by year-end? How you can give us confidence that you will distribute that capital? Thank you.
Let me take the question on NII. Lars, you wanna reflect on the CET1 threshold, the 15%. Yeah, on NII, as far as I'm aware, there's only one competitor that's moved directly to 0%. We communicated a very clear two-stepped approach. We moved up 25 basis points. We would remove 25 basis points of negative interest around the first of August. Remove the remaining 25 basis points first of October. That doesn't change our NII guidance, those steps that we have taken. We would, including the steps we are currently taking to phase out the negative rates, still stick to the guidance around EUR 5.2 billion. Then maybe Lars, on threshold.
Yeah, in terms of the threshold, you know, at the moment, and what we also have reiterated in Q1 is that this threshold is not a constraining factor for us at the moment. And therefore, our framework stays in place. As you can see in terms of our conditional share buyback that we've worked on this quarter, we are still committed to returning capital. We've also been consistent in saying that we want to have a deliberate but moderate strategy of capital return over time, and that it is a multi-year approach. The intention was never to immediately return everything above the 15%. I think we are still continuing with that sort of approach.
Sorry, just to follow up on this last point. I mean, if I remember well, the idea was that you return above 15%, and then conversions from 15% - 13% would be done over time. What you are saying now is that even going to 15% will be gradual?
Well, going to 15% was in terms of, you know, also where we set the first share buyback at about EUR 500 million. At that point, we said that we would try to come back on a multi-year approach, and the EUR 500 million to become something a bit more consistent. From the perspective of the EUR 500 million over how many steps and when does it hit the 15%, you know, that's. I wouldn't say the two aren't immediately linked. It's only when it becomes a constraining factor that we would then address it.
Okay. Thank you very much.
Thank you.
The next question comes from the line of Giulia Aurora Miotto from Morgan Stanley. Please go ahead.
Yes. Hi, good morning. One clarification first on capital distribution. I believe previously you said that to launch the new tranche of the buyback, you will need clarity or visibility on the full year results. My read of that was that it was open between basically Q3 results or full year results. Is this still the case, or would you say that really we should not expect any new capital announcement before the full year results, which will be most likely in February, I guess. That's the first question.
The second question, I know the Netherlands is not particularly reliant on Russian gas, but if there was a cutoff, of course, this would have an effect on, you know, overall macro assumptions and, I guess potentially also, the links that the economy has with other European countries. Have you run a scenario of a Russian gas cutoff and what that could mean for cost of risk for ABN? Thank you.
Yeah. I'll ask Tanja to address the second question. Giulia, thank you for your questions. You know, in your first question, it is still our intention to review the capital return as we talked about in Q4 or around the period in Q4, having then a full visibility of full year results. The share buyback that we've now announced, which is conditional on NLFI, doesn't change that intention at all.
Can be also in November because then you would have enough visibility or not really? It would be February.
When we have sufficient visibility on the full year results. You know, that could be November, but it's you know, it really depends on how this year further evolves, as I'm sure you'll appreciate.
Okay. Perfect. Yes.
Yes. Giulia, on your question, with respect to dependency on Russian gas, indeed, the Netherlands is not that dependent on Russian gas, but of course is an open economy and will be impacted by the developments in Europe more broadly. We have run a scenario to include a complete cut-off in Europe from Russian gas. That's actually our negative scenario. That's also included in our quarterly report. That impact is mainly then through the macroeconomic variables that deteriorate. You will see that it leads to a recession in the Netherlands in case that would happen. Of course, it's very difficult to estimate which individual companies will be impacted because that depends very much also on all kind of supply chain effects that we will see at that point in time.
Do you quantify it? Sorry, I might have missed it.
No, we don't. Quantify it externally. The only thing that you can read in our report is the effect of the negative scenario for Stage 1 and Stage 2 provisioning. That would lead to additional Stage 1, Stage 2 provisioning of, I think, around EUR 75 million.
Okay. Thank you.
Next question comes from the line of Farquhar Murray from Autonomous. Please go ahead.
Morning, all. Just two questions, if I may. Firstly, thanks for the details on slide nine on cost. That's actually really helpful. I'd like to focus on the net cost savings figure of EUR 0.1 billion that you flag on the core cost base. Could you possibly decompose that between inflation and actual cost-saving elements that you currently anticipate? Could you also update me on how this compares or tallies to the original cumulative cost-saving target of EUR 700 million? I'm presuming you've possibly incorporated some incremental savings to offset inflation. I just wanted to understand that. Finally, apologies if I missed this earlier, but how did you arrive at the EUR 250 million buyback approval figure? Was there any math around that, or is it just an informed guesstimate? Might you seek, incremental approvals later this year if necessary? Thanks.
All right. Thanks for the questions. Lars, can you take the cost questions, and then I'll address the EUR 250 million.
Yeah, on the net cost of saving of EUR 0.1 billion, what we've done there is effectively looked at an inflation amount of about EUR 200 million, which translates into roughly about 2%-3% on that core base, and then looking at savings of around EUR 300 million. These savings are pretty much in terms of the underlying initiatives are very much broadly part of the same underlying initiatives that you're referring to in terms of the EUR 700 million. We just continue with those and execute.
Okay. Cool.
On the EUR 250 million, basically, we took a view as you recall, in Q1, we came off of our inaugural share buyback. We wanted to have for any further decision on share buybacks, we needed to have more clarity on full-year results. We knew because the minister had signaled that she had asked NLFI to investigate conditions under which a potential sell-down could occur. We took a view that in order to support if and when such a sell-down would occur, in order to support it, we would have to come up with a number for it in terms of a potential share buyback.
That number of EUR 250 million was predicated on the fact that it's an open-end permission that we have from the JST, from the regulator, because clearly, this is an approval that is conditioned on a sell down by the government. So it's, in that sense, open-end. We also take into consideration the uncertain economic times, clearly that we're all up against and therefore we came to a number of EUR 250 million. We feel that this is a number that would adequately support a potential sell down by NLFI.
Just as a follow-on, how does that 2%-3% inflation assumption compare to, say, what you've achieved in terms of the CLA conversations to date?
Well, we're yet to have the CLA conversations, so those conversations are due to start at the end of August.
Okay, great. Thanks.
The next question.
Thank you.
The next question comes from the line of Benoît Pétrarque from Kepler Cheuvreux. Please go ahead.
Yes. Good morning.
Morning.
Yeah, a couple of questions on my side. First of all, on NII. If I understand correctly, you still guide for EUR 0.2 billion incremental in 2023 versus 2022. Probably we need to adjust for the lower TLTRO benefits then coming in 2023. If you could just confirm that. Also, what is your view on the pass-through going forward? It seems that the exit of negative rates went a bit faster than expected. You know, does that change potentially your view on a potential pass-through above 0%, a bit more intensive versus your expectations? Also on NII, sorry to go further on that, but what is your view currently on the mortgage market?
Clearly, we see extremely high margins on front book margins, but we also see volumes coming down. How does that play into NII for the rest of the year? Will that be a net positive on NII, or will that be broadly neutral? That's the first set of questions on NII. The second one is more on cost, thinking of the EUR 5.3 billion for 2022. Do you expect restructuring costs for the second part of the year, also maybe linked to a potential agreement on the CLA? Just very final, I don't understand why a regulator approves a buyback conditional to, well, the exit of the state, the sell-off of the state.
I mean, could you still be able to execute a buyback, if the state say in a couple of days or weeks, well, it's not the right timing for first to exit? Just wanted to understand why a buyback can be conditional to a shareholder selling, basically.
Thank you. Okay. I'll take the share buyback questions, Lars, do you wanna address NII costs?
Yeah.
Yeah, that condition is just indeed predicated on a decision that the NLFI will take. If they don't take a decision, there's no share buyback. There's no EUR 250 million in share buyback. If they do take that decision, then we have permission and approval to execute the EUR 250 million share buyback. I think you should see that irrespective of an overall consideration that we will have towards the end of the year, as we discussed just previously on share buyback. This is a specific share buyback approval conditioned on a sell-down. If the sell-down occurs, there's a share buyback, and if the sell-down does not occur, there's no EUR 250 million share buyback. In that sense, it is indeed open-ended.
Okay. On the NII, if I remember, your first question was about a EUR 200 million impact next year. I mean that EUR 200 million, I think if you're referring to what we showed as the sensitivity, I mean, we haven't updated our sensitivities for next year. What we have done is, you know, apart from upgrading the current year to EUR 5.2 billion on NII, we've also moved forward the bottom of the NII from first half of next year to the end of this year. I think that gives some indication that things have improved. In terms of mortgage markets, you're right. I mean, the margins at the moment are elevated in terms of, you know, over the past six months.
Definitely the volumes are well down, and you can see that also in terms of refinancing volumes, and the prepayments that we were talking about. If I take a sort of combination of margins and volumes, I would say that on this one I'm, you know, looking forward for the rest of this year, I'm pretty neutral. Because the bulk of the movement really comes from margin improvement on the deposit book. Then any offsets to that, and that probably links through in terms of your negative rate question is, the negative rates will start feeding through partially in Q3, and then, pretty much they'll catch up in Q4. Then on an annualized basis, it'll be out fully next year. In terms of reorganization provisions, we'll flag reorganization provisions as and when they come. At the moment, I don't have a line of sight yet.
Yeah. Thank you very much. Okay. Thank you.
The next question comes from the line of Benjamin Goy from Deutsche Bank. Please go ahead.
Yes. Hi, good morning. Two questions from my side, please. The first on net interest income, you booked EUR 41 million of TLTRO III benefit in the second quarter. Should we expect the same run rate in the second half? For how long would you book this benefit going forward? Secondly, just a quick one on management overlays. Could you update us on the total amount you have reserved so far? Thank you.
Thank you. Lars on TLTRO and then Tanja.
Yes. In terms of the TLTRO, EUR 41 million, we expect to see that coming through for second half of this year as well as probably through until June next year when we have contractual maturity. We'll have to you know, that's the best prognostication.
Maybe on the management overlays. Total management overlays amount EUR 350 million, and about 40% of that is related to Russia-Ukraine, and some 10% still COVID related for the smaller end of our corporate portfolio.
Okay. Thank you.
Thank you.
The next question comes from the line of Kiri Vijayarajah from HSBC. Please go ahead.
Yes. Good morning, everyone. A couple of questions. Firstly, in terms of the NII outlook for the second half, you've given us some really helpful guidance there. I was just wondering, between the third quarter and the fourth quarter, is it fair to assume it's gonna be a bit of a V shape? That the 3Q is gonna dip a bit, and then it's really fourth quarter when we see meaningful improvement, or is it gonna be a bit more kind of linear between 3Q, 4Q? Just some color on the timing of the NII evolution.
Quickly turning back to the management overlays on the mortgage book, could you just have a bit more detail on what you've changed in terms of your assumptions there, say in terms of, you know, what your expectations are for future house price declines that you've now baked into the numbers? Have there been any specific triggers within the mortgage portfolio that's been the prompt here, or is it more just a kind of forward-looking, kind of general caution in terms of the outlook? Thank you.
Tanja, do you wanna start on mortgages? We'll take the NII question.
Yes.
Lars.
On mortgages, maybe first on overall, what you see in on the provisioning levels for mortgages. The first item that has an impact on the levels that we provision is the economic outlook. That of course is more negative than what we have seen before, and that is well in models. Additionally, we indeed take a haircut on the house price projections. We do that already consistently over time, but that's well you need to see these in combination.
The third item that we also include in the management overlay, the EUR 350 million that I just mentioned, is looking at the refinancing risk for interest-only mortgages. At the end of the term of an interest-only mortgage, the principal is still outstanding and, with the increased interest rates, it needs to be refinanced at a, well, an increased interest rate. Therefore, for some of our clients, that will mean an increased risk. For that's a calculation we also do every quarter, but because rates have gone up, that amount is bigger. You see that also in the coverage ratio for mortgages, that went up from 4.5%, I think, to 7.2%. We are better protected there for downturn risks.
Thank you, Tanja.
Yeah. Then in terms of the NII evolution over the next two quarters, I mean, I'd rather just stick with the fact that we are gonna hit bottom in the second half. I mean, again, there are quite a few moving parts in terms of where prepayments go. If rates go up sharper and we have to do more hedging, it could have an impact. I think the negative rates clearly will have a bigger impact in the fourth quarter than they will in the third quarter, because in the third quarter it's 25 basis points for effectively two months, and then you get the full 50 basis points coming for the last pretty much full three months.
You know, those are gonna be the impact factors. You know, we're comfortable saying things are gonna turn around by the end of the year, but I don't want to really go into the shape on a quarterly basis.
Okay. Great. Thanks, guys.
The next question comes from the line of Anke Reingen from RBC. Please go ahead.
Yeah. Thank you. Good morning. Thank you for taking my question. The first is on the EUR 250 million. I mean, how quickly or is it possible for you to scale it up in case the NLFI, the government decides to sell a larger stake and you could take more of those shares up? On your comment to gradually reduce your excess capital, could further placings of government stakes accelerate that reduction excess capital. I mean, I'm not sure if you can comment, but could basically further placings of government stakes accelerate that reduction excess capital. Secondly, on costs, how quickly should we get to the EUR 4.7 billion apart from the levies? Is it pretty much back-end loaded, or should we think about a gradual decline? Thank you very much.
Yeah. Let me take capital and Lars back on cost. Yeah, on the EUR 250 million. The EUR 250 million right now is the EUR 250 million. We will await when and if NLFI communicates, and then clearly we'll see what we need to do next. The share buyback in relation to a sell down by the government, as we've communicated today, will remain EUR 250 million. Now, what may happen in the future, any potential other sell downs at any given point in time, clearly we will have to assess then what we then need to do. For now, this is the EUR 250 million associated with a potential sell down of the government, yet to be communicated. Lars.
Yeah. Again, in terms of the cost trajectory, the EUR 4.7 billion is clearly our goal for the end of 2024, so full year cost 2024. In terms of trajectory, we are now getting into that window where, you know, initially a year ago, we were talking about things would be more back-end loaded, into years two and three, and we are now approaching years two and three. I would say there will be a bit more of a, I won't say a perfectly even path, but, there will be step downs in 2023 and 2024 rather than it all being loaded into 2024.
Okay. Thank you very much.
Thank you.
The next question comes from the line of Guillaume Tiberghien from BNP Paribas Exane. Please go ahead.
Good morning. I've got two questions. The first one relates to AML costs on slide nine. If I understand correctly, you want to go from EUR 500 million to just less than EUR 400 million in 2024. That still seems quite a huge number, as it would be, like, about 8% or 9% of your overall cost base. So any more room to cut beyond that level? The second one is with regard to the NII in the corporate center. You highlight the steering costs. Should we expect that this will now be allocated to the divisions from Q3 onwards? Maybe a final one, if I may. On the RWA, any more headwinds to come, either from models or from regulation, please? Thank you.
Okay. I'll take AML remediation, steering cost, Lars, then RWA, Tanja. I think what you're seeing, the reduction we're looking at here and a more efficient AML process. This is the BAU, so this is the business as usual process that we are continuously upgrading, and that will come through the automation that we're currently investing in. Again, this is AML related to our business as usual activities. We are continuously looking at improved risk-based approaches, which will make our work on AML much more effective, and we'll continue to put those risk-based approach to use. We do expect, and we've actually seen, continuous improvement around our AML BAU processes. That's why you know, we are quite confident on the number that we've included here. On steering costs, Lars?
In terms of steering and the accounting or the allocation of steering, I think we're being quite consistent in our accounting. I mean, the steering is not something new. It's elevated at the moment because of the, you know, the interest rate dynamic, but we do steering on a continuous basis, so we're not planning on changing any of our allocations.
On RWA, so maybe first of all to mention that, how you see already for some time that our Basel III and Basel IV RWAs are converging. The Basel III number is coming up. That has to do with redevelopment of models. We will continue to redevelop models, but everything that we can see right now and have visibility on that, we have included in our RWAs. Also, we take steps to go to less advanced approaches to a standardized approach or foundation ahead of Basel IV. The visibility that we have there, we incorporate to the extent possible. I think there's no new regulation on the horizon with respect to Basel III. Of course, for Basel IV, the translation into regulation is happening as we speak. We hope that in the course of next year, we will get full visibility on the impact of that.
Thank you.
I hope that answers your question. Yeah.
Thank you.
Thank you.
Next question comes from the line of Robin van den Broek from Mediobanca. Please go ahead.
Hi, guys. Sorry for coming back in the queue. The first question is I don't really understand why the ECB cares about the NLFI participating in a buyback. Could you maybe specify clearly what kind of participation does that entail? Can I just do one share and still basically raise their overall stake, or does the stake have to come down in that scenario? If you do further buyback initiatives in Q4, would that have a similar restriction, or can that just be a normal buyback? I noticed that there was still a bit of an uptick in wealth management. There was some net new money in wealth management.
Just wondering what was driving that and how that would affect your outlook. 'Cause I think in Q3, there's also a EUR 50 million annualized bump from the increase in payment packages. Just wondering how you are thinking around the developments there. Thank you.
I'll take the buyback, and Lars will take the second question. This is a buyback that we had applied for, a share buyback of EUR 250 million. As you know, the regulator has to approve the requests that we put in for share buybacks. It is conditional on a potential sell-down by the government. Clearly that aspect plays into the open-ended approval that we then get from the JST. We have to get permission, and the reasoning for the regulator at least to the regulator. We got the permission. It is open-ended, and it is contingent on the state selling down or beginning the sell-down process.
Does this decision impact in any way, a potential other conversation we may have on share buybacks when and if we decide to proceed with share buybacks, at the end of the year? We will have, again, the conversation that we continue to have with the regulator, which is a very constructive dialogue. I would expect that then at that time to occur as well.
Just to be clear, in this specific buyback approval, you yourself added this restriction into the mix, and when you go for other buyback approvals, you can leave that out?
Yes. Yeah. This is a very special.
Okay.
Because it was basically we wanted to anticipate, also the approval timings would be very tight. So to get something done, so that we have it on the shelf, actually required us to have something conditional, to have something which was tailor-made in terms of size as well, taking into account, you know, the existing risks that we all face with this Russia crisis. I mean, we still have a lot of unknowns coming our way.
The conditionality is that the NLFI stake goes down or, you know?
Yes. The conditionality is that they actually do a sell-down and trigger a sell-down.
They set an absolute number of shares, or they set any percentage of
No, no. It's basically triggering a sell-down is the trigger. On the NNA for wealth, the net new money there was predominantly in our custody business. There was a little bit of additional cash that was coming in, so it wasn't really in discretionary portfolio management. I don't expect that to have a significant boost to the overall fees in the second half. It is still pleasing to see that there is new money coming in. I mean, obviously on the wealth side, we're getting much more negative impact as a result of the whole portfolio under management coming down in value.
Really, if you look at fees overall. We are now getting the final, I guess, tailwind of the card activity, coming back to sort of pre-COVID levels also for the international component, not just the local component. With the volatility in the markets, really, our earnings in the clearing space are holding up very nicely. That more than offsets. Certainly on a year-to-year basis, it offset. On a quarter-to-quarter basis, we were able to maintain fee levels overall.
Thank you for that color. Cheers.
The next question.
Thank you.
Comes from the line of Omar Fall from Barclays. Please go ahead.
Hi there. Just two questions, please. Sorry, I must be a bit slow or I've missed something, but the conditionality around this specific EUR 250 million buyback is that there would be no transactions with minority, well, non-NLFI shareholders. Is that correct? That this is an entirely targeted buyback with NLFI. That's the first question. The second question, just going back to NII and slide six and those two components, the mortgage prepayment sequential -EUR 40, and then the steering costs -EUR 50. You've highlighted that we're, you know, near the bottom for mortgage prepayments, which is kind of in line with one of your peers. And then the steering costs, I understand the bulk of that is, you know, front loading of changing in the swaps, putting the mortgages.
To be clear, mechanically, if rates don't move, these two components don't see any sequential change. Is that right? I'm not asking for guidance, just the mechanics of, you know, how those two elements work. That if rates don't move and therefore you don't get a change in duration of the average mortgages, and/or, you know, changes in prepayment activities, that those two components don't move at least Q on Q. Thanks.
Okay. Let me take the first question. Lars, you can take the second question. The way the transaction will be structured will be by the NLFI, but we can do minority shareholders. That is included. So this is predicated on a transaction that the NLFI will instigate. We don't know what the transaction would look like. It is for the NLFI then to decide and communicate. We will take next steps as to how we would structure the share buyback.
In terms of the prepayment impact and the hedging impact, yeah, if everything stays perfectly stable and pari passu, in terms of no more prepayments or no more additional sort of significant interest rate rises, then you could say if we're comfortable with our position now, yes, then it stays stable. Again, you know, these things are dynamic. We may take some views on duration management, which are different to today.
Maybe, sorry, just a quick follow-up. I think the prepayment penalties were just over EUR 250 million or so last year. What's the run rate at now?
I would say what we anticipate is that these prepayment penalties would probably drop back down to about EUR 17 million a year. We're not fully there yet.
Got it. Thank you very much.
Thank you.
There are currently no questions in the queue. As a reminder, please press star one if you'd like to ask a question. The next question comes from the line of Rahul Sinha from JP Morgan. Please go ahead.
Hi. Good morning. Thanks for taking my question. I've just got one follow-up on costs. I was just trying to understand what has changed, relative to your previous cost trajectory in terms of, you're now assuming EUR 200 million of additional reduction in your cost from DGS in 2024. What was the offsetting increase on the other side in your original plan? If you can clarify that'd be really helpful to understand where the cost might have changed or gone up relative to your previous sort of targeting. Related to that, can I just ask the basis for the assumption of 2%-3% inflation, is that linked to any kind of external indicators that you're tracking? Just to understand what might cause that to move higher or lower going forward. Thanks.
Lars.
Yeah. I mean, the main thing that has changed in terms of our initial estimates is obviously the impact of that inflation number that you're talking about. In terms of linking it to external indicators, I mean, we do try also to look at what is the sort of core inflation over time, rather than just the headline inflation. Obviously, that is in terms of our economic bureau as well as part of the information that we would use. That inflation increase is about 2%-3% per annum, but we've included that.
Got it. Thank you. That's 2%-3% per annum till 2024?
Yeah. Correct.
Got it. Thank you.
There are no further questions in the queue, so I will hand the call back to your host for some closing remarks.
Okay. Thank you very much. Thanks everyone for all the questions. I look forward to speaking again, very soon. For now, goodbye.
Thank you for joining today's call. You may now disconnect your lines.