Welcome, everyone. Final fireside chat of today. I trust you all agree that we've been saving the best till last. I'm joined on stage by Ferdinand Vaandrager, CFO of ABN AMRO. Ferdinand, first question: How are you?
I'm well. Very productive day. Always like it to be in the flow for two days, seeing most people back from from holiday. So, no, happy to be here.
Great. So we'll go through Q&A. We've got some multiple-choice questions for the audience that you can answer with your kind of BlackBerry-looking devices, which we'll pepper in. So yeah, first question: A week today is Prince's Day in the Netherlands. For financial investors, we call that Budget Day.
Yeah.
Last year, we saw the surprise proposal of additional deposit taxes and a now-scrapped tax on share buybacks. Should we be expecting any direct policy changes on the banking landscape, specifically anything on the state's ownership of ABN?
We always have the tradition that at least plans will leak before the Budget Day, so I'm sure we will learn more about it before the end of the week. Yes, number one, I mean, with the new government, there's really a majority in the parliament which is in favor of a banking tax, but we dealt with it already in the past 10 years.
Mm-hmm.
So I think that will be a continuation of, there have been earlier proposals to significantly increase it, but it settled at an increase of 30%, but that was already effective at the start of the year. So I think there will be no changes, so the banking tax will stay. On the other parts, there has been a lot of debate about, they call it vestigingsklimaat in the Netherlands, so the business environment for corporates in, in the Netherlands, and there, I think you will see a pullback from the proposals on share buyback tax. And that's in combination, for example, for tax benefits for, expats.
So really there, I do expect the confirmation next week that there will be a rollback from the proposal to start taxing share buybacks as of the first of January, twenty twenty-five.
Great. Sounds good. So staying in the Netherlands, but now looking at your balance sheet, I'd like to touch on the outlook for domestic mortgages. So it's a significant asset class for you, almost two-thirds of your loan book. You noted with Q2 some positive dynamics, notably the big banks received 62% of applications last quarter, compared to 48%-
Yeah
One year prior. Could you perhaps expand and educate us all on the drivers behind that, and how structural we should consider it to be?
Yeah, I think if you look at the mortgage market in the Netherlands, and clearly for us, important, it's 60% of our balance sheet. The first half of the year was good. If you look at the total volume in the market, it was up, like, 23-24% compared to the same period last year. A big driver there is house prices. If you look at Q2, a new all-time record in house prices, and also if you look for the coming six months and next year, our own economists expect as well a further rise of house prices also into 2025, so that's a big driver. Driver number two is also the supply side. We always have quite restrictions on the supply side in the Netherlands.
It's very strict regarding very strict nitrogen rules, restrictions on new builds, so it also depends on the Budget Day, what I will say about facilitating more new builds in the Netherlands. Another trend there has been what we have seen with the changes in interest rates, that the maturities over the past years was around 20-25 years. During the period of very low interest rates, clients chose for longer maturities. Now, it's down to around 10 years is the sort of sweet spot, or even lower to that, and that's more beneficial, the sweet spot of the banks. So you have seen in the past two quarters already a gradual shift of the overall market from the non-banks back to the banks.
So overall, if you look at the first half of the year, roughly 60% of the market was with the banks. Then, if I look at ABN specifically, I am pleased with our overall market share. That has increased to 20% of the new production, so for the second quarter in a row, we are the market leader in the Netherlands. So there, what really starts paying off, number one, we're much more proactive in dynamic pricing on a daily basis, both on our own label, but also towards the intermediaries. That's one, and we invested significantly in our whole operations, so that also means that the throughput time we deal with has shortened a lot, and also the whole sort of customer experience process of new mortgages has improved.
So overall, we're more positive on the mortgage market and I'm glad we are sustaining our number one position in that market.
Great, and just to clarify, the directional shift away from non-bank lenders to banks, as long as we stay in a positive interest rate environment, is that something that you would expect to continue going forwards?
Yes, if you look historically, it was also the same shift, like roughly 60% with the banks, 40% with the non-banks, and that's insurance companies, that is pension funds, but it's also brokers and challengers. As long as the interest rates go down significantly and a bigger portion of the fixed interest rates around 30 years or 20 years, that matches very well with the balance sheets of insurance or pension funds, which have longer dated liabilities, as well. I do expect with interest rates coming down, customers might start choosing for longer maturities, but at the same time, there are also alternatives for higher-yielding assets for non-banks as well. So I would not expect a drastic sort of change in the behavior we are currently seeing in terms of maturities. So yeah.
Okay, great. So I guess if I could ask a question a bit more broadly on NII.
Yeah.
You recently upgraded your FY 2024 guidance, I think mostly predicated on a higher rate curve than we saw at the start of the year.
Yeah.
Could you please talk us through the key moving parts when we think about NII into 2025? So including but not limited to, any commentary on the replicating portfolio, your treasury result, and also your views on deposit mix shift and pass-through of any rate cuts. We should see the next rate cut next week or later this week.
Yeah, there were lots of questions, specifically on the direction of NII. You're right, Sam, at the start of the year, we provided an absolute outlook for this year, and at our Q2 results, we were already at a run rate above that, and also the commentary there, that we still expect the trend to be supportive in the second half of the year. Hence, we upgraded our outlook. I think it's too early to start looking into 2025, but if I take a step back and look at the underlying building blocks of the trajectory there, number one is what will happen with the savings coupons, so the coupons we pay on the savings accounts. There, we don't provide any specific expectation.
95% of our deposits are in the Netherlands, and then it would almost force you to provide some forward-looking statement on pricing, which from a competitive and commercial perspective, is not something you can do. But in terms of sensitivity, a 10 basis points change in our saving rates is an impact of roughly EUR 100 million in NII. Moving to the replicating portfolio, and as you know, our non-maturing deposits, we invest in a portfolio of swaps in different buckets, linked to the behavior of clients and stickiness of those deposits.
Up until the second quarter of the year, that was a tailwind, but with interest rates expected to come down more significantly in second half this year, we are at an inflection point that it start translating potentially in a slight headwind. We are currently in an environment of above historic margins on deposits, and it is our expectations that over time, this will start normalizing, then if you go. And it's also related, because we always try to give you some more insight. Our replicating portfolio of around EUR 155 billion, 40%-45% is invested in shorter than one year.
Yeah.
You will start seeing the impact if ECB rates start coming down. And then the third element is our treasury results. It's a bit more volatile, but what we do, we swap basically all our assets and liabilities of the balance sheet into floating rates, and the residual interest rate risk is put into a portfolio of receiver swaps. And there, we do expect the effective duration is four years, that the current interest rate environment will continue to be a support factor for the NII treasury results. And then maybe the last element, and we said it at the start of the year as well, that we expect, in terms of deposits, a significant slowdown of migration from current accounts to either savings or term deposits.
That's a trend we saw in the second quarter, and that's also a trend we expect to continue. Most customers have optimized already their their savings, so we don't expect also with an interest rate outlook of declining rates, that much more of our deposits will move there. So those are the sort of underlying building blocks also looking at 2025.
Great. And if I could just come back to the, where you said on the replicating portfolio that 40%-45% is shorter than one year.
Yeah.
Beyond 2025, the 55%-60% of that, that's at longer durations, that should start to become a gradual tailwind for NII?
It still is, and it is. If you look at that, we invested in a sort of barbell structure of the whole curve. Yeah, so elements of that are up to 10 years, so they will keep benefiting clearly from an interest rate environment we have seen over the past two years. So it's more the shorter part of the replicating portfolio, and it's also a gradual process, because if you look at the interest rate sensitivity for us as ABN AMRO on the way up, it was more gradual than some other banks have seen, and exactly that is also going to be on the way down of interest rates, as it will only be a gradual effect.
Sure. Yeah. Thank you. So I think we'll now turn to the audience. We'll start with the first three ARS questions available on the devices. So question one, what would cause you to become more positive on ABN shares? So better NII, stronger fees or non-interest income, better cost control, better asset quality, greater capital return, or better RWA optimization? Give you all a minute. Okay, so it's fairly mixed, but ultimately-
Ultimately, one is standing out.
Yeah.
It's better NII. Yeah.
Hopefully, you just gave people in the room some building blocks to put into their models and hopefully get to better NII. Question two, please. Question two: What are you most concerned about at ABN? First option is weaker earnings, weaker capital, lower distributions, regulatory/legal risk, political risk, and M&A risk. Okay, also pretty split, but weaker earnings.
Yeah, and that's then also linking into, I think, the lower distribution. If you look at our dividend policy, where we pay out 50% of our earnings on an annual basis. Yeah, and the political risk is also mentioned here. Yes, I think that's more a trend in continental Europe, although there's always a form of consistency in the Netherlands.
Yeah.
You're also pointing out, too, we get many questions on that because we're still a major shareholder, still the Dutch government. And since November, they're in the phase of a dribble out program to go from 50% to 40%. But also, there is an expectation of just a continuation, also of the new government, to keep reducing the stake in ABN AMRO. So the political risk, I'm a little bit less concerned about if it's specifically related to the Netherlands with the sovereign government.
Great. Question three: What do you expect for ABN's revenues into 2025 ? So growing, driven by NII, growing, driven by other revenue, flat year-on-year, falling, driven by NII, or falling, driven by other revenues.
That's good input for you as a sell side analyst.
Yeah, this is going straight in my-
The wisdom of the crowd is often good, so...
Yeah, we're effectively using the crowd to try and extrapolate some forward-looking guidance from you. So growing, driven by NII and flat year-on-year are the two key answers.
Yeah, I think it's also explaining what the building blocks are. Yes, we are clearly focusing on increasing our fee income with a growth expectation between 3% and 5% on an annual basis. As said, NII is more gradual process, but also there, it fully depends on the elements I said before. Yeah.
Absolutely. So, leading on from the second question and the answers there, I feel obliged with your story to touch on capital and capital return prospects.
Yeah.
Firstly, elephant in the room, risk-weighted assets. You've guided to continued add-ons from model reviews this year-
Yeah
before some offsets in the mid to long term. You've moved a significant number of portfolios already, and we're nine months into the year, so are you feeling more comfortable about how manageable the add-ons for the rest of this year will be?
Yeah.
Perhaps any color you could give on the drivers behind the potential offsets that we could see next year or the year after?
Yeah, and if you look specifically on those RWA increases on top of what is the regular business developments, we've been quite explicit that we have seen significant add-ons over the past few years, actually, adding up to a significant number. But we've also said we're entering now a phase where the majority of our portfolios are on their ultimate credit risk model, where we want it to be.
Yeah.
So that also means that the majority of those transfers, more from IRB to foundation or standardized, is behind us. I expect to do one more submission towards the end of the year, so you might see some effect of that. But the majority of that is behind us. And then you're entering a phase of more normal balancing of add-ons and releases, based on your normal review cycle you have on your models. Yeah.
Great. And if I could just follow up on the potential offsets. ABN is seemingly one of the few banks that hasn't looked down the SRT avenue yet. Are those kind of synthetic offsets things that you might consider going forward?
Yeah, of course. I mean, if you look at RWA management, an increasing velocity of your balance sheet is becoming more important. We have been steering over the past few years with our non-core portfolio, but that was more related to the more riskier assets of our balance sheet. So we're really looking at, number one, is data quality for your models, because that is an important driver for your ultimate RWA. Number two is also the choices you make on your models, because once you've moved to, for example, standardized, then at least you are at a fixed, more predictable level....
We are more looking and have been looking at the cost benefit analysis of the model choices you make, because also the bar of the ECB in terms of requirements for IRB models is being raised on a constant basis.
That's also a reflection you should have. And then number three is also how do you start steering more? That's under the model choices you have and potential add-ons you have, that you should look at your lower return assets on your balance sheets, what your options are there. And there, I think, a full toolbox of tools like, as you mentioned, significant risk transfers, but also others, is something you should deploy in order to achieve that. Yes, to really optimize your ROE and where you have the assets on your balance sheets, which are less favorable from return perspective, look at an outlook potentially with investors. And that's clearly something we are considering, yes.
Great, thank you. So just before we get on to buybacks, on the topic of capital and capital return, I think it's worth touching on M&A. So you recently gained ECB approval for the acquisition of HAL. Perhaps you-
Yeah
can hear the full pronunciation of that asset. Should deliver a top three market share of the private banking market in Germany. Are you continuing to look at bolt-on acquisitions of that style? Should we continue to consider the key kind of consideration is growing your non-interest income, and any kind of particular markets you could perhaps be looking at?
Yeah, number one, it's good. It's Hauck Aufhäuser Lampe. It's a well-established name. I think it has its origin, I think, 250 years ago, and we're used to running multi-brand, brand strategies. It clearly fits into the strategy we have, become less NII dependent and look at fees. But we've also said our, so you're referring to, that we have a specific acquisition strategy? No, our strategy is based on, organic.
Yeah.
But if in our organic strategies, there are bolt-on options which can accelerate the execution of strategy, we will look at it, but it should always be in the framing of the strategy we're executing on. And so we look at bolt-on more in the countries where we are active, so that's Germany, France or Belgium, from a wealth perspective, and it should also be in existing business lines. And for me, also from a CFO perspective, I look at M&A through three lenses. Number one is strategy. I said already, it should fully fit that, and we want to grow our wealth management business. And number two is integration. I mean, at the end of the day, every M&A you do is all about the integration and how successful are you to extract the synergies you forecast.
And number three is price. And if you look at this acquisition, I think it was received by the market also positively, because we paid significantly below trading multiples at around one times price to book. But in our strategy, it's really almost doubling our assets under management of our wealth manager in Germany. Economies of scale are important, so that can really accelerate the ambitions we have in that market. So also other potential bolt-ons , this is something you should see as a blueprint for that. Then you were asking about approval. Yeah, it looked like European Commission approval, but that's not the main approval. It's still the ECB approval.
You will need BaFin approval in Germany, and they have a small entity, specifically at custody in Luxembourg. That always takes a while. So our expectation for closing the transaction is somewhere in the first half of next year.
Okay, great. So you mentioned that you trade at less than one times book, and as a result of that is that at least on my math, buybacks seem extremely accretive for you. You stated earlier this year that they remain a major part of your capital-
Yeah
return armory. Could you perhaps provide some color on the decision-making process between further M&A and further buybacks specifically? And also perhaps just give some color on the buyback outlook for ABN AMRO.
Yeah. Well, I think important is that at our Q4 results, when we updated our capital framework and let go of the 50% threshold for share buybacks, we were also quite explicit that we will come back on potential additional returns on top of the 50% dividends at year-end. So that's at Q4 results in February. So it's too early already to provide any indications of that. Yes, I mean, capital return is very high up on the agenda if we have excess capital. If you look at the past three years, I think we returned in total over EUR 4 billion to shareholders, so that's roughly one third of our market cap. So we really take it seriously to do additional return on top of our dividends.
I don't see it as a direct trade-off. You always look at your capital planning, and on the back of your capital planning, you should be prudent enough for uncertainties, and it should also be attractive enough for shareholders, but clearly also looking at our own strategy, and that's also predicated on growth, both organically and inorganically, so you have all these three in your mind when you look at the capital planning for the coming year. I think on M&A, you can never really plan on that or hold a buffer on that.
So, it is really the outlook you have. And in terms of M&A, I think it's very important we focus now on integration instead of have a very outspoken continuation of doing acquisitions. Yeah. But Q4 is the time, and then it will be a balance view. But for now, the focus is really on getting predictability and stability in our RWA outlook, because that's clearly a very important element going into this acquisition.
Yeah, of course. Great. I think we'll once again involve the audience, so if we could get the next ARS question, please. Relevant to what we were just talking about, what will ABN's capital and dividends do versus market expectations? So beat on better earnings, beat on lower regulatory requirements, miss on weaker earnings, or miss on higher regulatory requirements, or miss because of inorganic acquisitions.
And the market expectations is, among others, your view, Sam, or not?
Yeah, of course. Apologies, I'm assuming everyone in the room knows the consensus has a lesser capital return.
Okay.
Yeah, interestingly, most popular answer, beat on better earnings in line with the answers we saw earlier about better earnings. But also some people now think you're going to miss on earnings, so.
No, and it's also there. You always look at the balance. So you were rightfully saying if you close a transaction, it's also how far so longer that will have a capital impact around 45 basis points. Then you also have to transition to Basel IV, et cetera. So you have to take everything in the mix and then decide from it.
Absolutely. Next question, please. What do you expect from ABN's risk-weighted assets in 2025 relative to 2024? So higher, driven by asset volume growth, higher, but beyond asset volume growth, higher, but lower than asset volume growth, and then four, five, and six, lower year-on-year with the same arguments.
You need to have a good read. So,
Yeah, we'll leave this one up for a minute.
You see, it takes longer to read it, huh?
Yeah.
Ooh.
Let's all have a drink.
At least we have a very positive audience, if I look at all the, all the answers. That's good.
So it looks like-
But at the end of the day, that also says something, right? So...
It looks like the general consensus is that RWA will grow. I think what's positive there is that question two, where the RWA growth would exceed volume growth, which has been the case-
Yeah
... for a few quarters, is not up for granted. Yeah. Appreciate I'm not going to extract any guidance out of you.
No, it is, it is like this. You know, if you look at asset volume growth, we all know there, yes, there will be, but also, if you look at the business profile on the growth in Northwest Europe, we've exited non-core, so we are definitely looking for growth or for expectation. If you look at asset volume of our portfolios, will be slightly above GDP growth. It's our expectation, but it's not a significant growth, of course. I don't think.
Next question. That's the end of the ARS questions, I think, so if we could just talk about Robert Swaak's recent announcement that he'll be stepping down from CEO in the first half of 2025. I'm not going to ask you to comment on Robert or that announcement, but what was interesting was that the announcement alluded to a new strategic phase for the bank, which I expect you can't provide much kind of color on, but I'm just wondering about what that means for ABN AMRO in the interim. Are you still working towards the current strategy? Do you still, behind closed doors, have a new strategy that you're kind of working towards?
And then also in your market communication, should we still expect forward-looking guidance in the quarters to come and new targets for the bank, perhaps with Q4 results?
Yeah, let me start then with the last part of your question, and that relates clearly also to the announcement that Robert's intention to leave. I think it's really business as usual, and also setting targets executing on a strategy. At the announcement, it was very clear that after his first term, the second term would be his last term, and then you start thinking about succession, and he has been very explicit that he wants to have an orderly transition, so he will stay as acting CEO until the successor is there, so you should also see a continuation of the strategy that we are currently executing on. I think it's normal that you work in cycles.
For us, it's normally cycles of four a year, that you critically look at the strategy as you set it out. For us, it was end of 2020. Are you still in track? Do you need to course adjust? And what does it mean for your longer term financial planning, potentially also translating and setting longer term targets? That is also there. We will fully continue in the normal process as we are doing that. So you can expect for us that process always also towards Q4 or Q1, that it is total normal course of business.
Business.
So at the end of the day, it's a personal decision. You always need to go out, regulatory-wise because it's being price-sensitive information, if there's an intention to start looking for succession. And I think it's very good that you take a longer period of time, because we all know the regulatory approval processes, et cetera, will take time, until the point you have a new CEO on board. And I think timing-wise, clearly, it will be good if a new CEO can also fully commit to the new targets you commit yourself to as an organization, and also be there to be accountable at the end of, throughout the delivery on those.
Absolutely. So I do have a couple more questions, but I think I'll take an opportunity to ask if anyone in the audience has a question they'd like to ask.
You can just,
No, sticking with me? That's fine, so perhaps we've spoken about revenue, we've spoken about capital.
Yeah.
Perhaps a question on cost. Despite a higher-than-expected impact from wage negotiations, you're on track to meet your FY 2024 guidance on cost?
We are committed to achieve.
Committed to-
Yeah
... achieve. I'm interested to understand, if you have the wage negotiations pushing in one direction, perhaps there are other parts of the cost base that have surprised positively relative to your expectations on the start of the year. Any color you can give us on those and how much we should extrapolate those going forward?
Yeah. Number one, I think if you set target on absolute cost, you can hold the management accountable because that's, I think, the one target you can actually steer on and be responsible for. So I'm very firm that I want to see, at the end of the year, the guidance we have provided. Yes, the CLA negotiations were at a slightly higher level than expected, so the overall impact for this year is roughly EUR 100 million, and then an additional EUR 20 million for next year. So the headlines look relatively high, with 6% in year one and 3.75% in year two, but there's also a benefit for us in the pension contribution will go down as of the first of January, so that will also be a buffer effect.
Although that is higher, roughly 50% of our cost base is personal cost, so we can sort of balance what the impact is going to be. But for us, it's clearly, and we said it before, if it's in terms of inflation or other elements, then we need to steer harder on the cost measures we have. So we're really looking at simplification, and we're also really looking at finalizing some of the foundational, more regulatory programs we are running, which costs a lot of capacity for the bank. And number one is really the digitalization of all our processes. And we moved towards only 25 branches in the Netherlands, and I think at the time of the IPO, it was roughly 600. So we've gone through a massive process of digitalizing the bank.
So all, all our daily banking services are available digital online, but now digitalizing the processes and getting much less manual work or tactical work around it, that is number one. Number two, but it was clearly coming back on RWA's investments in data and credit risk infrastructure and models, and then it's also new regulation. I mean, it's cybersecurity with DORA, it is SFDR with CSRD. For all that, you still need to invest in your data infrastructure, in your technology setup, but I'm a true believer that we're entering a phase where we can start shifting capacity of those regulatory programs much more towards those client-related programs linked to top-line revenue, so that is the ambition, so shift from regulatory programs towards growth, towards next year.
Right.
But it's clearly, once inflation is higher, we need to work harder on optimizing, the organization and deliver on the promises we make.
Sure. I guess, one more question, making our way down the P&L. So cost of risk,
Yeah
... very strong performance in recent years. I know that you've been taking some small provisions on interest-only mortgages and preparing, and you have your management overlay balance. How should we think about that line going forward? Should we expect some level of normalization?
Yeah. I think half the credit is there. If you look historically back at ABN, there was also criticism on the higher risk profile of the bank and the volatility of impairments, and that was a very important element of our strategy review in 2020, that we significantly restructured our corporate bank internationally. And we run down roughly EUR 20 billion of our corporate loan book since 2021. We revised down our guidance on the through-the-cycle cost of risk to 15 to 20 basis points . You're talking about evidencing in the past years. Well, it was specifically last year and this year, that we have on net balance zero impairments or even impairment releases. I do expect a gradual normalization towards the through-the-cycle level, Sam, but I think-...
Yeah, we significantly de-risk the bank, and that is part of the strategic avenue we chose for. If you look at overlays, because you're mentioning, do you still have overlays as well? Yes, we still have a balance of overlay, roughly 20% of our overall provision balance, and that is still specifically related to interest-only mortgages, but also, for example, for geopolitical uncertainties and risks. And number three, clearly also for climate and environmental risk. So we're comfortable there, and also, if I look, the zero impairment will not keep continuing. But if I look at the credit quality indicators we have, it still looks, I'm still sitting comfortably here if I look at those for the foreseeable future. Yeah.
Great. So we've got one minute left, if any in the audience would like to ask a question.
Just a quick follow-up on point of credit quality.
Yeah.
Legislation, so rent-friendly change to legislation. More in the context, I think, of the Dutch insurers.
Yeah.
I was wondering, in the context of commercial lending, whether you foresee that potentially being an impact going forward as maybe rent income could be restricted to some of these commercial landlords, and what you see in that context.
Yeah, so you follow it closely, the Dutch politics. Very good. Yeah, that's it. But it's also helping, and it was from the former cabinet really steering on that and trying to solve the housing problem. And what has happened, yeah, the stricter regulation and landlords are almost forced to sell. It's helpful, what I said earlier, to the overall availability because we have a significant shortage of houses for sale in the Netherlands. On the other hand, it starts impacting now the rental market. As for us, our buy to let market, if you look commercially for ABN AMRO, is only a very, very small part of our portfolio. So I do not expect any impact from that, for us, for us commercially. But it is really top of mind also for this cabinet, how to solve that issue.
Because you solve one issue, but on the other hand, you create an issue on the affordability and availability of rental properties in the Dutch market. Yeah. Thanks for your question.
Okay, if no other questions, I'll close the session now. Say thank you to the audience for listening, and thank you, Ferdinand, for a very-
Thank you very much. Thank you.