Thanks to everyone for joining this session. I'm Delphine Lee from the European Banks Equity Research Team. I'm absolutely delighted to host this fireside chat with ABN AMRO CFO Ferdinand Vaandrager. Ferdinand, first of all.
Thank you.
Thank you so much.
Thanks for having me.
It's a pleasure to have you.
Beautiful, beautiful hall.
Indeed. So maybe we could start and get this out of the way, the management changes. How should we think about succession planning, given Robert Swaak's expected departure in the first half? And how does that impact the next strategic planning cycle?
First of all, the search is being led by the Supervisory Board. So it's up to the Supervisory Board to come with the preferred candidates, either external or internal. And it's also we've been making quite explicit, and also Robert, that Robert is there to lead the bank until a successor is found. So in that perspective, it's really business as usual. The expectation is somewhere in the first half of next year, the successor will be there, because the processes, not only the search, but also the regulatory processes to get someone approved are normally quite lengthy. So that's linked to the period first half next year. But at the same time, we're also strengthening the board. Last month, Serena Fioravanti started as Chief Risk Officer. So in that perspective, the board is being strengthened, and Robert is there to lead the bank until the successor is there.
Great. Now, if we could turn to growth strategy and wealth management.
Yeah.
Can you talk about the M&A opportunities under consideration, whether that's wealth management or other area, and what are the criteria for an acquisition, given you've just bought HAL when the stock's still traded at 0.5 times the tangible book? What are the ambitions in general for wealth management and net new money growth? And what synergies do you expect from the HAL acquisition? And what does that mean for Belgium and France, the adjacent markets?
Oh, I should have brought my pen, Delphine.
Sorry.
There's quite a few questions, but let me try to bucket them. First of all, our strategy, we have an organic strategy. And we see ample growth opportunities specifically on our existing footprint and our existing businesses in wealth management. But we've also said if we can accelerate on our strategy execution by looking at inorganic bolt-on acquisitions, we will look at it. But we will really look at strict criteria. Number one, does it fit our strategy? And that's the existing strategy and the existing regional footprint. Number two, the financial criteria. We're really rigorous. You're mentioning own valuation. So can we do an acquisition out of own funds, excess capital, and is it accretive? And number three is integration. Every M&A transaction always depends, are you successfully integrating it? So those are the three lenses you look at.
If you then look at the acquisition in Germany, I think it was a great opportunity because we were able to buy it quite a bit below trading multiples for private banks. Economies of scale are important, and we're almost doubling our presence in Germany and be a solid number three player. Return on invested capital, we think, is around 15%. So that's really healthy from a financial point of view. So these are the type of transaction where we can accelerate on the execution we will look at. The second part of your question in terms of France and Belgium. In France, we are.
The synergies as well.
Yeah, and the synergies, sorry. The synergies are crucial elements. And we communicated to the markets that we expect around EUR 60 million run rate synergies, which is, I think, conservative. But this links to quite a healthy return on invested capital. And then in France and Belgium, yes, in France, we are solid number five. In Belgium, we are below that level. So if there are any opportunities, we will look at it. But first of all, it all depends on the opportunities. And secondly, the three very critical lenses before we would go after a potential candidate apply. So yes, economies of scale are important. And yes, we want to grow organically. But if opportunities like this arise, we are willing to act on it.
OK, understood. Now, if we could turn to volume growth. So ABN has been outperforming the market on mortgage new production to date. What are your expectations for 2025, 2026? How much of a catalyst do you think rates are going to be? And also, your expectations for deposit competition and deposit migration, also because in your market in the Netherlands, you also have smaller challengers?
Yes, let's first start with the asset side of the balance sheet, just growth. I mean, some have been surprised by the strength or the growth in the mortgage market this year. Overall, the mortgage market is up volume-wise 25%. We are up 50%. We are now a market leader with 19% market share. So really reaping the benefits of all the investments we've done in our operational capabilities, dynamic pricing, but also having a multi-level strategy, and not only selling through our own network, but also the intermediary channel. So really, that helped in becoming a market leader with a 19% market share. There's a structural undersupply of property in the Netherlands. So that is really sustained demand is there. So also the outlook, we're comfortable with the outlook that we will see sustained growth in our mortgage book. If you look at corporates, I think more muted.
We've seen growth this year, where we do expect to see the growth specifically in the transition sectors, and we come out of a significant deleveraging period internationally, but we're partly recycling that into financing the transition sectors in Northwestern Europe, and there, we think we can achieve both GDP growth, so overall, the outlook there is on asset volume growth is positive for next year, then your question on deposits and what will interest changes in interest rates do. Deposits have been stable if I look at the past two quarters. The migration is sort of over. You've not seen any adjustment yet in the pricing levels on savings accounts, and yes, we have our replicating portfolio, so we will always dampen the effect of ECB rates coming down, both on the way up, but also on the way down.
Clearly, shorter rates coming down will have an impact on our replicating portfolio. We also provided some sensitivity analysis on that last week. But we also have buffering effects for that. We still see the benefit from the Treasury results. And so far, we have not seen any changes in real competitive behavior. On the way up, the challenger banks were much faster in increasing the saving rates in line with the ECB rates. But those are also the first one to start adjusting downwards. And we will price much more related to the yield we make on our replicating portfolio.
OK, so when we think about NII in 2025, in terms of the moving parts between asset margins, replicating portfolio, the deposit cost coming down potentially, if you could just elaborate a bit on where we would end up.
Yeah, it's also too early to provide, Delphine, the explicit guidance for next year. We increased our guidance a quarter ago for this year, so above 6.4%. So some were surprised by the strength in our NII for the third quarter. We tried to provide some sensitivity analysis because the forward curves have moved quite a bit. So we said if everything would stay the same and no changes in deposit pricing, our NII on the replicating portfolio could come down by EUR 400 million. But then we expect that partially to be offset by an increase in the Treasury results. And this assumes no changes in deposit pricing despite ECB rates coming down. So that might be a very conservative assumption. And we also provided every 10 basis point changes in savings rates would be an additional EUR 100 million in NII. So we tried to provide some building blocks.
Analysts and also investors can put their own assumption in to come to a fair estimation where NII might end up next year.
Sure. And do you think there is a level of rates under which NII pressures intensify?
Yeah, I think what we've seen, clearly increasing rates have helped. But also with rates coming down, I expect we can maintain very healthy margins and good profitability. Clearly, if we would go back to an almost zero or even negative rate scenario, that would be punitive. But if I look at the current forecast of rates, we can still be healthy profitable under those scenarios.
Okay, great. Now, moving on to costs. The group targets a cost base of EUR 5.3 billion, not just for 2024, but also going forward. What are the moving parts to consider for the next few years as the collective labor agreement will have a bigger impact? And also, maybe more generally to open up the question is, do you feel ABN is well positioned in terms of digitalization, IT, cost efficiency?
Let's start with the first one, well-positioned cost efficiency. It's clear we need to work on that. Cost efficiency, if I look at cost-to-income ratio, and if I look at our benchmark, ourselves, and our profile, this is really the opportunity there is to improve. We have a cost-to-income target for 2026, but we are always very explicit in steering on absolute cost on a one-year forward basis. That really enforces discipline in the organization. Yes, if I look at this year, I'm very happy we have a new collective labor agreement for two years. It has been at slightly higher levels than what might have been expected. That's an additional EUR 100 million this year.
But we've been very explicit that we will absorb that in the existing target we provided of EUR 5.3 billion, because we have enough levers on the cost savings programs to achieve that. Then towards 2026, we said we want to keep a roughly flat cost base. Number one is we have been upscaling a significant amount of capacity on our large change and regulatory-related programs. So it's all related to cybersecurity, investment in digitalization of the end-to-end processes, really an overhaul of our IT data landscape where we're phasing out the applications. It's new regulation like SFDR, investing in data capability. So lots of investments we still need to do. But it's my expectation that towards the end of 2025 and then going into 2026, we can start switching capacity from those main change programs related to those topics to investing in growth, but also an opportunity to start savings.
For example, we digitalized the bank. All our daily banking services are available remotely or digitally. We went from the IPO in 2015 from 500 branches in the Netherlands to only 25 today. But the real cost savings will come where you can digitalize your processes end to end. So if you have a longer-term outlook for the coming one to five years, there are significant opportunities to have more savings on the back of that. So that's why I'm confident that despite an inflationary environment, we can keep for the coming at least two years the cost base flat. And then we might have the opportunity to really start steering back to a more benchmarked cost-to-income ratio. Sorry, a long answer.
No, no, no, no. That was helpful. Thank you. OK, now moving on to capital. So ABN's Basel IV CET1 ratio is at 14% right now, around. What are the Basel IV impacts? And how do they interact with the model changes you've done? So if you take everything you've add-ons, RWA add-ons you've taken since 2016, which is, I think, EUR 53 billion, what parts of the book are still under review and could still see some pressure? And what's the time frame for having a bit more positive RWA development reduction? Is that going to be in 2025, or is it much later on?
No, very topical question. Yes, the 55 you refer to sounds like an enormous amount. And that's just the growth of all the add-ons. But clearly, once a model is approved, then it becomes part of the model. So it's not that we have a stack of EUR 55 million in add-ons. But we try to say, yeah, we have gone through a process of simplifying our model landscape. We are largely done, and largely was defined like 90%-95%. And we intend to do one final submission of a few of our corporate models towards year-end or beginning of next year. And on the back of that, you might see still some inflation or add-on in RWA. It will come at the same time as a transition to Basel IV.
If you look under Basel IV, under less advanced approaches, it's quite a significant impact on all the regulations about risk weights, have prescribed risk weights on different exposure classes. It has significant implications on collateral eligibility and collateral valuation, a lot related to data. So everything coming together, there are still some uncertainties in the calculation. And this has been the reason that we said we're going to take a quarter longer. We all need to report Basel IV numbers at Q1. Then we've also done the last application towards simplification of some of our models. So as of Q1, it will be a much more stable base on which we can have a fair adjustment. What is our capital position? And what potential room we have for share buybacks or other means of capital return?
So it's really those two coming together and still the remediation part being done in Q1, that it makes much more sense to do it at Q1. And then also the acquisition of Hauck Aufhäuser Lampe most likely has been closed. So then you have a much more stable and better outlook.
OK. And so transitioning to capital return, so I guess the market was a bit surprised by the delay in the share buyback process. And I mean, I guess you've provided some elements of response already. But do you think the delay can result in a better outcome for buyback amounts? And then also just more generally, is the intention to increase buyback amounts over time, given your CET1 ratio is you have excess above 13.5%? Or are you keeping some buffer still for, I don't know, more acquisitions or more regulatory impacts?
Let's start with the last one now. We don't have a dedicated buffer in our capital stack for M&A. We used to have it when we had the threshold for share buybacks. We don't have that anymore, and also related to the questions, if you look at our targets for 2026, we intend to be at our capital target with the 13.5% in 2026. The uncertainties, I said, do you get to a better outcome? I think you get to a higher quality outcome at Q1. Because if there are still some implementation uncertainties, if you would apply for a share buyback and also for your own planning, that would mean you would need to take a prudent approach, i.e., or very conservative assumptions, or you're going to take. You need to take proxies.
That would come to a diluted picture of potentially your RWA impact on Basel IV. Yes, to come to a better judgment on the quantification of the size is exactly the reason why we are saying we can do that after Q1. If you look at approval processes by the regulator to get the share buyback approved, a logical moment to communicate to the market is at Q2 results in August next year.
OK. So in the long run, it's 13.5%.
Yeah, 13.5% is the target. We're very happy to run the bank at 13.5%. So it's also our intention is not only capital return. It's also looking at growth and also both organically, but also potentially inorganically. If there are opportunities, we're clearly looking on executing on those as well. So it will always be a balance view between the two through the lenses I earlier said. But really, capital return is always also from a management perspective top of mind.
OK, great. Now, turning to a question on return on tangible equity for the outlook. So you target 9%-10% in 2026, which is slightly above market expectations, which are closer to the 9% level. So what would you say are the moving parts to get to 10% on normalized credit costs, given the pressure from lower rates clearly that we're going to see?
Yeah, number one, our forecast was based at that time at the rate outlook of our own economists. And we've always been a bit of an outlier. So at the time when we set the targets, the forward curve is almost where our expectation was at that time. So the underlying assumptions there, you mentioned already one, is a roughly flat cost base. The underlying assumption is slight GDP plus growth on corporate loans and mortgages. And it's also there a fee growth of between 3% and 5%, 3% and 5% annually, and managing your capital towards the 13.5%. So those are sort of the building blocks.
Underlying the assumption is as well that on deposit margins, where we're clearly in a territory where we are achieving above historic margins on deposits, on the basis of those targets is also that we're going to see gradual normalization of deposit margins. And also there, you refer to cost of risk as well. We have a 15-20 basis points through the cycle. We have communicated that earlier. But clearly, at the moment, we are a fair bit below that in the second year of a negative cost of risk.
Actually, on that topic of cost of risk, I mean, with the group de-risking the majority of the non-core exposures, I mean, are there any particular areas in the loan book that are under focus in the current environment? I mean, clearly, now with Trump victory, I mean, we could have some downside to GDP, right, for the coming years. Any concern for asset quality in general?
Of course, if you look what's happening geopolitically, you should always be cautious. And you should really look at all your underlying portfolios. You mentioned already we started the de-leveraging via non-core as of 2020. So non-core was unwound of roughly EUR 20 billion of exposure. So we really de-risked the bank. 60% plus is residential mortgages in the Netherlands, where we are very comfortable with the outlook. But clearly, there on the corporate side, you should always be vigilant in what's happening. And with the clean sweep of Trump in the U.S. and the risk of significant trade tariffs and potentially resulting in retaliation actions in Europe, really causing a fragmentation of international trades will also impact an open and export economy like in the Netherlands. So clearly, this is a concern.
Second concern there as well that you might start to see a wider divergence in monetary policy in the U.S. with an increasing inflation, that you're going to see rate hikes. And in Europe, on a lower economic outlook, that you're going to see a faster pace of rate cuts, which might also have an impact. So clearly, there are uncertainties. But coming back to your questions, are you comfortable with the quality of the loan book? We're very comfortable with the de-risking we've done and the underlying quality of our loan book under the different potential scenarios we might see.
Great. Perfect. OK, so I think we have a bit of time for questions from the audience, if there's any. The mics are on the tables.
Thank you. It's Gigi Sparling from J.P. Morgan.
Hi, Gigi.
Can you perhaps give us any color? I know the government have announced another drip feed in ABN. Anything else that you could tell us about their long-term intentions for the stake, please?
The drip feed, and I like the term, yes, it's a trading plan they have. We have recently a new government in the Netherlands, and they've been very explicit that they want to continue from the previous government that they want to fully privatize ABN AMRO. The recently announced trading plan is another 10%, going down from 40% to 30%, so some under the relationship agreement we have with the NLFI, which holds the shares, some of those rights will disappear when they are below one-third, and it's really my expectation that they will look at fully privatizing ABN AMRO. So it could be, if it will be follow-on programs in a drip feed way, that that can be as soon as the next three or four years. Expectation is if you do a trading plan like they're currently doing, a dribble out.
The last program, I think, took about eight months. So it also depends can you pick up flow directly in a share buyback program or not. But 8-10 months is a sort of indication what the program will entail for them.
Great. Any other questions? Maybe I can ask you another one, if I may.
Sure.
That's an ESG question, actually. Now that you've reduced your exposures to oil and gas and commodities finance, how do you see the shape of your loan book evolving in the long term, given ESG is becoming a focus, particularly considering flooding risk?
Yeah, ESG is top of mind. And if you look at trade and commodities, you say already, but also oil and gas. If you look at upstream, for example, total exposure is now below EUR 1 billion. And we have a sort of indication that renewable energy, new energies, will grow towards EUR 10 billion. So that already shows what a massive difference and a different profile we have. We're really investing in, together with our clients, really deliver on the max 1.5% global warming and really deliver on our commitment to the Net Zero Banking Alliance, so being net zero. And it's really, how do you do that together with your clients? And that's really the transition readiness and also the support you can provide your clients to really measure the transition readiness. So it's really a collective approach we have in getting there.
But it's very important for us that it's going to be a just transition. So just saying I'm completely excluding certain sectors is not a possibility. So we really choose for the inclusive approach in getting there. But it is really important. And as I said before, also when our exposures outside Europe have been wound down, really the focus is on the transition sectors, because we also truly believe this is where our added value is. And we invested significantly in our capability where we can advise our clients. So that will also be helpful in getting a higher return in terms of cross-sell with certain products and services on those clients as well. Because you should always be mindful in investing in new technologies might also come hand in hand with additional risk.
Then if you look at risk like flooding, yeah, clearly, you look at the potential effects of climate change. Flooding in the Netherlands, I mean, the ones who know Netherlands, but a big part of the Netherlands is below sea level. So clearly, also there, you will look at the flooding risk, for example, for our mortgage book. And we are very explicit in also providing disclosures on those, where are those risks. And the next phase is going to be that more and more you're going to implement that in the pricing of your credit to clients, that you really have an integrated approach there in your credit risk models and your pricing towards the client where the risk is embedded in there.
Great. Thank you.
Thank you, Delphine.
Any other questions from the audience, from the group? Yes, Mike.
Hello, from Gothaer, actually. I have a question about Dutch mortgage market.
Yeah.
Housing price is increasing again and strongly. Is ABN ready to fund higher loan-to-value mortgages? Are you going to have more risk on that, willing to take more risk on that business?
Yeah, you're pointing right out. I mean, house prices are on record levels, and I said earlier on Delphine's questions, Delphine's question as well. This year, house prices are up 11% and transactions 15%. So the market is growing. If you look at our mortgage book, our loan-to-value is around 55%. So it has significantly come down over the past few years. If you look at loan-to-value above 100%, we will only finance that if the part above the 100% is dedicated use for sustainability improvement. So if you look at which part is an LTV of above 100%, I think it's between the 3% and 5%. And those additional is specifically for home improvement. So yes, we are willing to do that, but not to take more risk.
That we truly believe that sustainability improvement to your house will, in the end, also over term ensure that your collateral value will be at a higher level as well. But there are no direct concerns I see in significant changes in the Dutch market, where there's a structural undersupply in the risk of a significant correction in house price, and as said, with an LTV of 55%, the buffer is significant.
Yes, I see you have room about. You mentioned flooding, which is one risk. What other risks do you see in the mortgage market?
No, I think that number one is a house price correction. I mean, if you've seen in the previous crisis what will happen if the house prices would come down 30%? What a buffer is there? Then which mortgages are underwater. What you normally see is, of course, economic impact, but I think the most important indicator will be unemployment. If the unemployment rate would go up significantly, that's mostly the first signal of a deterioration of the housing market. In the Netherlands, we have an extremely tight labor market below 4%, I think around 3.8%, so it's a tight market, so also there, there's no indication that this is changing, as you say, flooding risk or pole rot related to that, to the climate change, yeah, we're getting a much better and better grip on that.
And as said before, that should become much more part of also how we're pricing in that risk for new loans we're still going to originate. But how I sit here today, I'm very comfortable with the exposure we have on Dutch residential mortgages.
Great. Any other questions?
No.
Great. Well, thank you, everyone, for attending this session. Ferdinand, thank you again.
Thank you.
It was a pleasure to have you.
Yeah. Thank you.
Hope we can do this next year again.
Of course. Thank you.
Thank you, everyone.
Thank you.