Asking you on the budget being presented last week. It was very eventful budget last year. Can you update us what's the key highlights for this year being on taxes, buybacks, banking tax, and any other topics as well on this?
Yeah, Tarik, there were no real surprises, and I think overall for us, the takeaway was it's really focusing relatively business-friendly, and also the importance of having a good and predictable investment climate in the Netherlands. What is relevant for us is, number one, but it was already known, that the proposal for a share buyback has been pulled back, so that will not be an impact for us. And number two, also, if you talk about the business climate, for example, the tax relief for expats, where you don't pay any tax on your first 30%, that was also in the pre-proposal, but that was also retracted. So that's also a signal that the business environment is important. So those were two of the highlights. Yeah.
Perfect. So that's something we don't have to worry about, then I will move to one of the key lines of your PNL, net interest income, and probably one of the most debated topics for your story. I mean, we often get pushback from the market on, you know, the visibility of your NII trends, and I mean, can you go through the key moving parts of the NII? We'll discuss basically deposits, and so on, but I think the one that maybe we can start with is the treasury reserves and you know how this function and... 'cause that is your main swing factor from here, then we'll go obviously discuss about the margins on asset deposits and so on.
Yeah. Now, to start, take a step back. So we started the year with a guidance of around EUR 6.3 billion for the full year. We upgraded that guidance at Q2 results to a minimum level of EUR 6.4 billion, and it was already based on our own economic scenario. So, despite quite some changes, if you look at the forward curves, we're very comfortable with the above EUR 6.4 billion. Number one, clearly, is a replicating portfolio, and yes, with lower ECB rates, we expect a sort of inflection point in the H2 of the year, that it will start to become from a tailwind, a slight headwind, and a more pronounced impact in 2025 on deposit margins.
And your reference to the treasury results, yes, we expect that to be a continuing supporting factor. It's really on the back of the repricing of our swaps portfolio, where you have a visibility, more shorter term swaps, which you reset at more favorable rates. Then number three is, I think, migration, and we said already the Q2 results as well. Last year, we've seen significant migration, and that has slowed down, so we don't expect any significant further effect from that. And then lastly, still supportive in terms of loan growth, specifically in mortgages.
Very clear. On the loan growth side, can you go through the competition dynamics in the Netherlands, on both maturities of the mortgage products, and also in terms of the pricing?
So specifically on mortgages, I think, what you've seen is that really 2023 was a bottom in terms of volumes in the Dutch market. If you look at the overall volume, mortgages in the Netherlands in the H1 of the year was just shy of EUR 40 billion, so that is 23% higher than the comparable period last year. And what you've also seen, clearly rate-driven, is with higher interest rates, means that the maturities for the fixed rate mortgages has transitions from 20-year, 20-year plus to 10-year, or even a sweet spot of, five years, which is definitely more the sweet spots of what is attractive for the banks.
So what you've also seen this year, that you see more of a switch between the non-banks, pension funds, insurance companies, where the duration of twenty-year mortgages was clearly very beneficial back more to the banks. So the overall market share of banks in this increased mortgage markets went from 42% - 60%. And then secondly, if you look at ABN specifically, we've been a market leader in the Netherlands for the Q2 in a row, with a market share of around 20%. Really benefiting that we have a multi-label strategy in the market, so we have different price points and different channels. We also went to much more dynamic daily pricing, and also the benefit of the investments we've done in our client experience over the past half year.
So clearly it is a competitive market. It's about pricing, so I'm not saying we will continue to keep a 20% market share, but we're very happy with the underlying growth we see in the increased market.
So if we look at this, different moving parts, so treasury results, H2 positive.
Yeah
... then more uncertain. Volume picking up, asset spreads probably establish here or and on deposits, margin slightly maybe improving. So above EUR 6.4 billion this year? Can you give us some indication of 2025 and beyond? I mean, what will be actually the swing factor for you in terms of doing better or less?
No, you explained it clear as well, but deposit margin is not improving from here. We expect them to start normalizing in the H2 of the year. A muted effect in the H2 of the year, but then a larger effect in 2025. If you look at 2025, I think as I stand here today, it will be unrealistic to expect the same level of NII in 2025, of which the biggest driver clearly is a further expectation of normalization of interest rates of deposit margins, but clearly also depending on what will happen with the saving coupons. For now, in our guidance, we have the underlying assumption it will stay flat, or at least that is the assumption on getting to this guidance.
And then it can be partly compensated on the asset side of the balance sheet. More it could just growth, but for the rest, yeah, we operate in mature markets with high competition, so I think we should not be overly optimistic on the growth to compensate for a normalization of deposit margins.
Very clear. Another key line of your revenues is the fees. It's a key line for the sector, but for you, it's lower as a proportion of total revenues than the average in the sector.
Yeah.
You gave a guidance for this during your full year, but longer term, I mean, do you have a strategy to accelerate that fee line and change the mix? I mean, you certainly will talk us through your private banking business.
Yeah.
But what are the initiatives you can do longer term strategically to shift that mix?
Yes, clearly, you see underlying also the guidance we're providing there, right? As I talked about loan growth, you should look in our financial planning assumptions, GDP plus. But for fees, we have an ambition of annual growth of 3%-5% on an organic basis. We are clearly looking where can we accelerate, so we want to be less NII dependent and growing fees faster. So in our organic strategy, all three client units, Wealth Management, Personal and Business Banking, as well as Corporate Banking, we have the initiatives there in terms of package pricing, in terms of switching deposits into securities. If you look at our Corporate Banking side, specifically Capital Markets, but also transitioning financing.
But we're also looking where can we accelerate, potentially inorganically, and I think good example are the two acquisitions. Number one was a very small acquisition. That was the neo-broker BUX, and that should really support our more affluent, younger clients to switch into first-time investing, so that should add to fees. And secondly, we acquired Hauck Aufhäuser Lampe. We're now in the phase of getting the regulatory approvals for, for that. But that also fits perfectly in the strategy we have, where we want to increase, our economies of scale in the wealthy countries. Germany is one. It's predominantly fees, and it's, it's capital light. So also there, both from organic and potentially, if the opportunities are there, also inorganically to accelerate, the fee income.
Clear. Moving on to your costs, another absolute number of guidance, you give EUR 5.3 billion.
Yeah.
This one is through the next three years. Looking at your H1 , and we annualize that, including the savings you will implement, but when you add the higher regulatory costs, higher fees, CLA agreements that you had in July-
Yeah
... I mean, how confident you are to achieve this guidance? And take us through after from next year, what are the different moving parts on the cost? What will be, look lower or higher there?
Now, first of all, Tarik, cost management is very important, and that's also why we have an absolute cost target. We really want to steer on a more efficient organization and also improve on our cost-income ratio over the plan over the planning period we provided targets on 2026. If you look now for the 5.3%, yes, the good thing is we finalized our CLA negotiations. It was 6% year one, 3.7%, 3.75% year two. That adds around EUR 100 million to the cost base for this year. On the other hand, regulatory levies are becoming lower than expected. The target size of the funds of the Deposit Guarantee Scheme and the Single Resolution Fund has been reached.
So basically, on the regulatory levies, the only part there is the banking tax of around EUR 130 million, but if the average is around EUR 150, that's 50% lower than what we've seen in the previous years. Number three, we significantly ramped up capacity and FTEs in the foundational regulatory programs we're running. We referred to that during the Q2 results. So there we should start seeing, over the coming years, a gradual decrease of those regulatory programs. So the 5.3, as I stand today, confident that we will steer to that cost level. Then your question to remain stable for the years after, towards 2026, number one, on the CLA, the impact for next year will be less.
because we renegotiate the pension contribution of the bank, so that there's a buffering effect, that the net impact is only EUR 20 million. We still have our existing cost-saving programs, which should support in there. And number three, as I said, I think there is still opportunity for self-help in the organization. So if and when we see a higher inflation than expected, we should do more on the saving initiatives we currently have. So that's also where we say it's important to realize a roughly flat level for the coming years to come to a more acceptable cost/income ratio.
So then if we look at the NII, I think, you're suggesting that, you know, it'd be difficult to keep it growing or-
Yeah, I said it's difficult to keep 2025 at the same level-
Stable
... 2024.
We take fees growing 3%-5%, but from very low proportion of revenues, and then costs, I mean, flat. So we are into thin or negative operating jaws for the next year or two. I mean, this is something with an ROE of below 10%, not very encouraging. I mean, strategically and longer term, maybe not. This is not strategy for this term and this mandate for the CEO, but what's the next leg, basically, of improving? Because rates will normalize to 2%. I mean, the economy will be what it will be, but-
Yeah
... not expecting anything spectacular, and the cost, you're already doing a lot. So.
Yeah, we're doing a lot, but I think a lot more can be done.
Yeah.
But agree with you, and as I said before, we're operating in mature markets. So what is the growth going to be? And yes, you will start seeing impact of a normalization on deposit margins on NII. And also, overall, if you look at ROE, we come out of a year of two years of virtually no impairments, and you should start seeing, at some point, a gradual normalization, although to a much lower level, because we significantly de-risked and de-levered the bank over the past three years.
So yes, you can have, if you look forward into twenty twenty-five, potentially you enter a period of some negative jaws, but we set our ROE target of 9%-10% for twenty twenty-six, and we've also said that we clearly have the ambition over time to have an ROE above 10% and be able to cover your cost of equity. Because at the end of the day-
Yeah
... that should be a part of your longer term planning and ambition, where you want to be as a bank.
I can't agree more. I mean, asset quality, you alluded to it, and I think that could be a source of upside, because-
Yeah
... although you lowered your through the cycle cost of risk with Q4 results, you're still running well below
Yeah
... that level. As you indicated, there will be some normalization, but we don't see really that on the ground. Do you think there's still more upside there for a lower through the cycle cost of risk? Or you still see some pockets of risk that could still, with a delay, materialize?
Yeah, well, first of all, you always see a lag and delay, right? So I'm saying, at a certain point, you will start to see a gradual normalization, and we set a 50-20 basis points. That was lower than our previous indication of through the cycle. Yes, if you look at the current outlook, but also if you look at what we've realized over the past two years, and through the cycle, level can be lower. But on the other hand, we've not seen a real recession, right? So we haven't tested it yet? Am I comfortable that we really de-risk the bank, and that's not only via divestment of non-core, it's also the single client exposures, what we used to have.
We really changed the overall risk framework of the bank, so also the volatility should be much less. But yes, if 60% of your balance sheet is mortgages, where over through the cycle, we've never seen any significant losses there, and the LTVs are much lower than the previous cycle, I think you could argue at a certain point that you can operate below the through the cycle cost of risk we currently indicated. But we all know, if you would see a real recession, specifically your financing to SMEs in the Netherlands, is normally the part of your loan book you should be most concerned of.
No, I mean, you've de-risked materially your corporate or your wholesale division.
Yeah.
That should be one area that, you know, should not generate new significant losses.
No.
But on... I'm surprised when you say we didn't know any recession. I mean, we had few shocks in the last three, four years. Yes, there were government supports, rates helped, but, but still, I mean, you know, we had some real-life stress tests.
No, absolutely.
And-
Sorry. I was saying in the new ABN post-deleveraging, clearly we've seen that before, but that was also one of the reasons for setting up a non-core operation, and a restructure the corporate bank was on the back of debt, right? It was the significant single customer exposure, and specifically, what is your recovery rate in countries outside Northwest Europe? So clearly we have seen that, but under the new, fully sort of wind down of non-core, yeah, we've not seen clearly. We've seen it in the economy, but it hasn't translated yet into impairments.
And on the SME book, it's true, in the Netherlands, with the CRE in post GFC-
Yeah
One of the main source of cost of risk in the Netherlands. I presume, I mean, given the stress test on the SSM and all the scrutiny, this area has been de-risked as well, so it wouldn't come naturally to me as an area of concern for the Dutch banks.
No, and as I stand here today, and also looking, as I said, at the credit quality indicators and how we really sort of go through all the sectors and client customers, I am quite comfortable that we will remain, for the shorter term, as we said, significantly below and through the cycle cost of risk.
And you have a management overlay as well, that eventually...
No, we have management overlays, and clearly it's always the debate also with our auditor, right? On the IFRS purposes, how long can you have general management overlay? So you can also expect it's currently around EUR 230 million, being ex-IFRS, that you start see some-
releases
... releases from, the overlays as well. Yeah.
Very clear. Let's move to the other big topic for you, which is capital.
Yeah.
You've been engaged into for last few quarters into a big shift moving your big part portfolio to with model approvals through the ECB. So where are you now in this process, and how progressed you are in that?
Yeah, it's, we're at a point, as we communicated already at Q2, that, for the vast majority of our portfolios are now on the ultimate model where we want to be in a Basel IV environment. So that's also led that the vast majority is behind us. But we also said that there are still a few portfolios, number of portfolios, where we still need to decide the ultimate model approach, and then subsequently, send a request to, the ECB for potential change in model approach. What normally happens if you do, a submission, at the time when you submit a request for your new model, you already take the RWA impact-
as if the model was implemented, then you take it as an add-on, and then it can take one up to two years in order to really implement the model, and before that, get a regulatory approval. So we're really going towards the end of this whole cycle where we went through. That should really start. On the shorter term, you can still see some increases in RWA, but it should really help our much more stable forward looking for 2025. And also there, we front loaded by far the biggest part now of the transition to to Basel IV on the more simplified model landscape for the bank.
I mean, clearly, you seem in control and confident about the process and the interaction with ECB, but by the full year, let's say in February next year, with full year results, do you think we'll have enough progress, confidence to have visibility on your, you know, I mean, your where you will land in terms of Basel IV, CET1, post model adjustment, and so on, to be comfortable to start to return excess capital, above 13.5 target? Or that process can actually slip, knowing that you only announce distributions once a year, and once we miss the February time, we'll have to wait another year for potential excess capital return.
Yeah, what we said, that it makes sense to have, when you have full visibility on your capital planning the year ahead.
Mm-hmm.
Then there's always going to be a balance. What potential further risk do you see?
Mm-hmm.
What potential further growth do you see in your portfolio? Do you see potentially strategic opportunities as well? But clearly, capital return is also, for us as a management team, a key priority, right? Over the past three years, I think we returned roughly one third of our market cap to shareholders, so it is a key priority. But if you look at where we ended Q2, in our Core Tier 1 ratio of 13.8%, that's clearly lower than where we were at the end of 2023. So the room for excess capital to return to shareholder is clearly lower where we stand now. But I think in deciding on share buybacks, you always have a forward-looking element in that.
So as long as you have a stable outlook, at what point you're going to end up on your RWA and start managing that more proactively?
Mm-hmm
Then you have a clearer view, which enables you to look at your net capital generation and make a decision on that. The only point is, you see where we are, so the room is a bit less, and we also still, in the H1 of the year, will need to absorb, if we get the regulatory approvals, our acquisition in Germany, which will also have an impact on our Core Tier 1 cap.
It's a good transition, because beyond the headroom you have for more distribution-
Yeah
... and the model process you're going through, there's also the strategy and the capital allocation.
Yeah.
You've shown recently that you clearly see better benefits on fixing the business model and finding a source for growth into the private banking. So with the whole, I'm not venturing into pronouncing the name. You fixed your German private banking, so now you are top five or top three, correct me, top five?
No, no, no, no, we are now, by a decent mile, number three in Germany.
Number three?
Yeah.
In Netherlands, you are clearly leader.
Part market leader.
And then there is France and Belgium, where you are a bit behind. So the logic would be that you continuing to, you know, scaling up this, the private banking, which will be a win-win in terms of profitability, improvement and that could actually, given the size of the deals you've done, no, 50 bits for Hauck and so on, that could consume actually all this excess capital the market is hoping for the buyback. So, I mean, it's a way to return capital.
Yeah.
But I think the clarity for the market is not obvious where your priorities are.
No, and let me be clear there. We switched our capital framework from a target and a threshold with an M&A buffer. We tried to simplify that. You always look ahead what your capital planning is, and you can always look at potential opportunities, right? It is very clear that we like, wealth management, we like the diversification in fee income, and it's also there, scale is important in the countries. So next to Germany, we have our presence in France and in Belgium, so we will always look, are there potential opportunities to accelerate? But we are very critical on M&A, and this is a bolt-on transaction in Germany, where we had, very lengthy discussions early on with Fosun, the seller. And, I'm really looking through three lenses.
Number one is, as you say, the strategy and growth going forward. But the second lens is clearly what does it add financially? And I think how Hauck Aufhäuser Lampe, we were able to acquire it around one times price to book, with a very good ROI. So there are not a lot of assets there where you can acquire at that price. And number three, it's in the end, it's all about delivery and integration. So how do you look at the potential integration risk there? So I think it's not at the point that you say, like, "You're integrating it, let's do another one, two acquisitions at the same time." You should really look at sort of how do you face that, and how much effort are you putting to make it a successful integration here?
But there should always be a balance where you look at all stakeholders, and capital return will always be also one of the elements we're really seriously looking at.
Then staying on M&A, there were discussions that your government would be, or through the NLFI-
Yeah
... owns still 40% or around 40% stake in ABN AMRO, and also full owner of Volksbank and other banks based in Utrecht. So the, you know, the discussions that, you know, being same owner, they would have some industrial plan to integrate. So I'm not asking you to say if this is happening or not, but theoretically, is that something that would fit the business model for either going forward or, or, or is it not something that you would contemplate?
Well, first of all, clear target, I can never comment on specific potential acquisitions or integrations. But on Volksbank, you're right. Volksbank is managed, at least the holding by NLFI. NLFI has provided the previous finance minister on a potential longer-term options for the Volksbank. And there's being said that the sale, either through an IPO or a direct sale, would be the most preferred option. This advice was provided to the finance minister, but during the caretaker government. We have a new government now. So specifically on Volksbank, nothing was said or communicated during the budget day. Would you always look if there are opportunities for in-market consolidation as one of the leading banks in the Netherlands? You would always look at opportunities-
Yeah
... right? But for Volksbank, that's really up to the NLFI and clearly the finance minister to make a decision there. What is important, and that was reiterated by the current government, and you started that already. NLFI just finalized their sell-down to just above 40%. There's a clear commitment from this government as well to continue the reduction of the stake in ABN AMRO. So also there, there's confidence at these levels to continue that process.
Yeah, especially we've seen at the moment that governments exiting could give an opportunity for others to answer the stories. So but, but, yeah, I mean, I remember one of the IPO a few years ago, the idea was to exit in two, three years.
Yeah.
It took a bit longer time, but,
Yeah, it took a bit longer time, but what is important, and that was also communicated, that a full recovery of the acquisition price is not the main objective. So there is a nuance also there in the planning of and the willingness of-
Mm
... to reduce that stake further.
I will open the floor to questions, if there's any question. No, so I will carry on. So one question on the Robert Swaak, CEO, mentioned recently that he would announce to step down as CEO once-
Yeah
... a new CEO would be appointed, so I really struggled with that. I think expressed it to you a few times-
Yeah
Ferdinand. I understand the governance aspect of it, but generally, you know, end of mandate, you prepare it, you don't have to go public, you look, and then you end up at the end of the term. Why would be a departure midterm? Especially that's when he's been renewed recently. Robert explained that what his be, his program in the next, next-
Yeah
... mandate. And also when he announced stepping down, he mentioned that whoever will take over will have to come with a new strategy and so on. So understand the rationale, and then-
Yeah
... what other strategy should we?
Now, to start with-
Yeah
... with, and it was also discussion, as it seemed sudden, that you come with an announcement a week before the results. But you said that already, once you have a discussion about certain topics, then you need to go public with that immediately, right? So it's more timing, and that is, you cannot always control that. First of all, I think continuity and really a well-coordinated progress of process of succession is very important. It was very clear that Robert accepting a second term, that it would be his final term. So once you start your final term, succession becomes a topic that you start thinking about how and when, and then it's really up to the boards to start the succession planning and reviewing the process for that.
It was very clear that Robert said, "I will stay on until a successor is there." So from a continuity perspective, I think this is really the correct way to do this, because we all know the fit and proper processes you go through always take longer than expected. So now you have a proper period to find a successor and start still under the leadership of of Robert. Number two, the strategy review, I think it has been misread a little bit. It's absolutely not a case that we're really working on a significant new strategy. It's normal process that every four year you spend more time on a review of your strategy.
It is an ongoing process, but every four years you link that into your financial planning, and we've said it's very good if a new CEO starts at the start of your new planning cycle, also with the commitment of the longer term financial targets you communicate externally, and that is exactly the same way how Robert started as well. The strategy review was largely done, and he came there really to execute on the strategy and the financial commitments which lay there. So it might seem sudden, but I think the process chosen should really support a very good continuity from Robert to a potential successor.
Okay. Thank you very much, Ferdinand, for your time. Thank you.
Thank you, Tarik.