Hello, welcome to the ABN AMRO Q1 2023 analyst and investor call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Robert Swaak, Chief Executive Officer of ABN AMRO, to begin today's conference. Thank you.
Thank you, and good morning, everyone. Welcome to ABN AMRO's Q1 results. Today I'm joined by Ferdinand Vaandrager, our interim CFO, Tanja Cuppen, our CRO. I'll update you on the main topics for this quarter and before we start the Q&A session. Let me first take you through the highlights on slide two. We had a very good start to the year with a net profit of EUR 523 million and an ROE of almost 10%. Dutch economy remained resilient and business momentum was good for corporate lending. Net interest income further increased, which was largely driven by improved deposit margins. Fees are resilient and underlying costs continue the downward trend. Our credit quality remains solid. Impairments were low while we kept prudent buffers in place. I am indeed pleased we finalized our second share buyback in the beginning of April.
In the first quarter, we saw turmoil in the financial markets in addition to the already existing macroeconomic challenges. However, banks in the Eurozone turned out to be resilient, supported by high capital buffers and conservative liquidity management. First turning to slide three, let me say a few words on the progress we're making on the execution of our strategy. We are a personal bank in a digital age with continued the three strategic pillars: customer experience, sustainability, and future-proof bank. These pillars still serve as our guiding principles. Recent developments confirm our strategic choices as we continue to benefit from our improved risk profile. Upon publication of our climate strategy, we've indicated that we will allocate a total of up to EUR 1 billion in early-stage capital to accelerate the transition to a decarbonized energy economy by 2030.
In the past few months, our Sustainable Impact Fund has announced several investments, including an acquisition in a provider of battery systems. With the plans of the European Payments Initiative platform to join forces with iDEAL and Payconiq, we are pleased to become part of an ambitious initiative to build a uniform European payment infrastructure. Partnering with other large European banks will also enable us to keep innovating for our clients. Recently, we won the WealthBriefing European Award 2023 for best overall European private bank for being a, quote, "distinctive client-focused bank that recognizes the importance of client relationships and our purposeful role in society," end quote. This is what our strategy is about, and I'm very pleased with this recognition. Let's turn back to the Dutch economy on slide four. The Dutch economy so far has remained resilient.
Our group economics team expects the Dutch economy to grow by 1.2 percentage points this year. To date, the economic impact of the energy crisis has been less severe than we expected. Consumer confidence has improved slightly, while growth in consumer spending is decreasing. Meanwhile, the Dutch Purchasing Manufacturing Index continues to decrease, indicating that business conditions are deteriorating. Bankruptcies did rise somewhat in the last quarters, but remain low from an historical perspective. This is expected to continue given the phase out of government support measures, elevated energy prices, and slowdown in consumer spending. House prices are expected by our group economics teams to decline by 6% this year and another 4% in 2024, driven by higher mortgage rates, waning interest, waning interest from private investors and lower disposable income. Overall, the Dutch economy has remained resilient.
However, we do see some deterioration of certain indicators causing the economy to cool down. Let me give you some insight on our deposit base. Let me start with the developments in our deposit base over the previous quarters. This is on slide five . As shown on the top left side of slide five, total deposits increased, mainly reflecting higher seasonal professional deposits. Underlying, we saw a shift from the current accounts to time and professional deposits. This development is a direct result of higher coupons on demand and time deposits and clients optimizing their cash position. Looking at the composition of our client deposit base on the bottom of the slide, it is highly diversified and over 40% is covered by deposit guarantee schemes.
Wealth clients generally hold more cash than covered by deposit guarantee schemes, still around 20% of these deposits are covered. The largest pocket of deposits sits with our around 5 million personal and business banking clients, with demand deposits being the main product. Here, 72% is covered by the Dutch deposit guarantee scheme. Our wealth management clients tend to be more focused on optimizing their cash position. Around 26% of volumes are currently in time deposits. Finally, our corporate clients in total hold around EUR 40 billion in deposits. This is generally used as working capital, so on current accounts, hence we see less volume in savings-type products here. Overall, our deposit is highly diversified and a significant part of deposits are covered by deposit guarantee schemes. Let's turn to slide six on balance sheet developments.
Pleased that we continue to see good business momentum in our corporate loan book. Corporate loans increased by EUR 0.7 billion in the last quarter. This reflects the progress we made in gaining business in our Northwest European focus sectors: digital, mobility, and new energy. We made good progress on the CB non-core wind down, which is now largely completed. Our mortgage portfolio was stable around EUR 151 billion, reflecting limited inflow due to fewer housing transactions and strong competition, but also limited outflow. Let's now look at the first quarter results in more detail, starting with the net interest income on slide seven. During the first quarter, we saw similar dynamics in NII as in Q4 last year, with a further improvement in deposit margins.
The increase in treasury result was also broadly in line with Q4 if you exclude the effect of the swap on wides we flagged the previous quarter. With regards to deposits, margins on current accounts continue to benefit from the higher interest rate environment. However, this is partly offset by clients switching from current accounts to savings and time deposits, which have lower margins. Competitive forces are driving the margins on the savings accounts. We have increased the rate by another 25 basis points for May first after an earlier increase of 25 basis points in the beginning of March. Pressure on mortgage NII is expected to continue given the weaker housing market and strong competition. We expect treasury NII to show a modest uplift in 2023 due to current rates.
The combination of all these drivers is currently net positive, how this will develop further out is hard to predict. Let's turn to fees and other income on slide eight. Compared to last quarter, fees are flat. Fee income did increase in wealth management from positive stock market performance. In addition, we saw net new assets of about EUR 0.4 billion.eight. At personal and business banking, the slowdown in the housing market and a decline in the payment transaction volume resulted in somewhat lower fees. Other income is always volatile, compared to Q4, mainly the results at treasury were lower this quarter. Turning to slide nine on costs. The decline in underlying costs continued during Q1 and was mainly driven by a reduction of external FTEs.
Our cost programs delivered further savings. In aggregate, around EUR 370 million cost reductions have been achieved since 2020. Full year costs are expected at around EUR 5.3 billion as investments will be higher in the remainder of the year. Staff costs will be higher in the second half of the year as the CLA increase of 2.5% kicks in in the beginning of July. We will continue to work hard to reduce costs further. Given the high inflation and higher investments, it will be challenging to achieve our 2024 target. Slide 10 now on impairments and asset quality. Credit quality further improved in the last quarter. Impairments were EUR 14 million in Q1, resulting in a cost of risk of 4 basis points.
We saw net inflow into Stage three, mainly from new and existing client loans in our corporate loan book. The prudent management overlays, largely related to uncertainties for the war in Ukraine, remain in place, and the impaired ratio continued the downward trend as our non-performing loans decreased further. The decline in the Stage three coverage ratio is largely due to the impact of introduction of IFRS 17 on consumer loans. The good performance of the loan book reflects our strong risk management, good diversification, and strict adherence to our risk appetite. We feel we're well-positioned in case we encounter an economic downturn. Now turning to capital and liquidity. We remain well-capitalized with a Basel III CT1 ratio of 15% and Basel IV ratio of around 16%.
Basel three six CT1 ratio declined slightly, reflecting the increase in RWAs and a deduction from capital due to the first time adoption of IFRS 17. The RWA increase is related to business developments, mainly growth in clearing and an adjustment to the application of the SME supporting factor and model updates. Our models are reviewed on an ongoing basis. This can lead to model updates and/or add-ons. Our liquidity position remains strong with all ratios well above the regulatory requirements, and we continue to have a large liquidity buffer in place, which is fully hedged against the interest rate risk. The recent turmoil in the financial markets did not impact our liquidity position. Let me wrap up with our financial targets.
All client units contributed to our very good result of an ROE of 9.6%, in line with our ambition of a 10% ROE by 2024. The recovery of our top line continued reflecting higher interest rates. Costs are under control, with underlying costs declining further. We benefit from a solid risk profile and a resilient Dutch economy. The quarter's cost of risk of four basis points is well below the through-the-cycle level, and our capital ratios remain strong as we recently finalized our second share buyback program amounting to EUR 500 million. With that, I'd like to ask the operator to open the call for questions.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll take our first question from Farquhar Murray at Autonomous. Your line is open. Please go ahead.
Morning all. Just two questions from me. Firstly, on the deposit details on slide five, that's really helpful. Actually, many thanks for that. It does show a decline in the current account balances, presumably into time deposits. Can you just confirm that the vast bulk of that actually occurred within the wealth management business and not personal? Actually, would you have the comparable for 4Q for the 26% figure on slidem five in terms of time deposits in the wealth business? Secondly, just with regards to the capital update to come at 2Q results, could you possibly just confirm where we are in terms of the discussions with the regulator around that? In terms of approach and philosophy, could you just confirm the 15% threshold for buybacks relates to the 16% Basel IV figure?
Might you actually possibly update us around targets and thresholds at 2Q, or is it too early? Thanks.
Yeah. Let me take the second one question. I'll ask Freddy now to take the first. Yeah, it is too early to talk about any updates. We would still confirm the thresholds that we're using, the 15% and the 16% current Basel IV CT1 ratios around the 60% that we're showing now. To your question, that would be too early to talk about any further updates at this point.
Cool.
Yes. Hi, Farquhar. In more detail, we don't provide exactly the detail on a quarter-by-quarter basis. As you see overall, you see on the client deposits, you see a decline of EUR 3.7 billion. There you do see a shift out of current accounts of EUR 10 billion into time deposits of EUR 7 billion. Next to that, you see an increase of just over EUR 10 billion in the professional deposits. The professional deposits is mainly a seasonal recovery because for some parts of the business, like clearing in the fourth quarter, we always steer the business down. You also see some un-inflow from client deposits. Those inflows in professional deposits, you're right, it's mainly coming from the Corporate Banking side that flow into money market time deposits.
If you look in the other time deposits on the clients, that's mainly wealth management shifting from current accounts into short-term time deposits. Those are the underlying drivers there. Also keep in mind that normally you do see in the first quarter or you can see, but that might also be in the month of April, that due to a tax payment reasons, you might see some of a seasonal outflow out of deposits as well.
Okay. Many thanks.
All right. Thank you.
Thank you. We'll now take our next question from Chris Hallam at Goldman Sachs. Your line is open. Please go ahead.
Hello. Thank you very much for taking my question. Following up on the Farquhar's NI questions, has there been any change to the size of your retail replicating portfolio over the last few quarters? Looking ahead, are you planning any changes over the next several quarters? I think that somewhat relates to that mix shift that you might be seeing. On your comments on the treasury result, I think last quarter you had an uptick, a clean uptick of around EUR 50 million. Is that roughly then what we saw in addition? Basically, you saw a tailwind of EUR 50 million this quarter. Am I reading this correctly, your introductory comments?
Would you be able to comment on how much, what headwind you have seen from the asset margin side? Thank you very much.
Thanks. Thanks, Andrea. Freddy.
Yeah, sure. morning, Chris. Yeah, I am aware that in the previous quarter, we provided more detail on those three elements as you mentioned. Clearly, the rise of EUR 160 million quarter-over-quarter is mainly driven by improved deposit margins, but clearly also increase in treasury results. To give you some indication, I think, the delta is brought in line with the increase we saw in Q4. You need to adjust that as we disclosed as well as Q4, that was roughly EUR 35 million significant positive effect from the effect of the swap unwinds. If you would look at that, it should be, you can sort of rationalize that to around EUR 50 million.
More specifically, asset margin pressure, maybe a bit of volume. I think specifically on mortgages, we said the previous as well, there is fierce competition. The market is clearly lower, declining. If you look at new production, for example, for ABN, it was EUR 2.9 billion. That was almost 30% down versus Q4. Also, if you look at the more general land registrations in the Netherlands, the number of transactions were down 21% quarter-on-quarter. It's a smaller market, and the same competitors are there, as we did have in the roughly 20 years segment.
On mortgages, you still see that the inflow of new production is below the outflow. What the positive thing is that also on the outflow redemptions, they were fairly limited around EUR 3.1 billion, mainly because refinancing is unattractive, and you also see people taking along their mortgage when they move home. That's also limited then on the overall book. If you go to corporate loans, there you see the margins are relatively stable, also helped by a few refinancings of TLTRO, shorter-driven facilities towards our corporate clients. The last element there is consumer margins, but that's something we reiterate every quarter that it is impacted by an industry-wide shift to lower-risk products and also a cap on the maximum client interest, which is set by the regulator, which is 12%.
Thank you. Just briefly on the size of the replicating portfolio, has that, of the retail one, has that changed over the last few quarters?
No.
Do you expect it to change?
No, it's not something we specifically disclose on. We've earlier said what the size was, around EUR 185 billion. Also we said in earlier quarters that the duration average was around three years, but also that the big part is below one year. Has it structurally changed? No. Do you see some migration out of your current accounts? Yes, but it has not changed significantly versus the previous one.
Okay. Thank you very much.
Thank you.
Thank you. We'll now take our next question from Benoît Pétrarque at Kepler Cheuvreux. Your line is open. Please go ahead.
Yes, good morning, gentlemen. The first one is on net interest income, which was very strong in Q1. You know, what is your read on such a level? You know, do you think this is a sustainable run rate? I think in February, you said that, you know, the deposit margin was running at historical level, that you were likely to overshoot in the short term. I guess now you are overshooting. You know, what is your view on deposit margin going forward, just to give us a bit more feeling about the direction going forward? The second question is, let's say on capital and on distribution. I wanted to...
'Cause last year you updated us on capital with the EUR 250 million conditional buyback in the second quarter. Can we expect an update in the second quarter, so in August, on capital? Also maybe on M&A, I think there are a couple of files coming to the market, actually, both in the Netherlands and Belgium. You know, are you still keen to look into potential M&A? Could that maybe be a reason for, well, keeping a bit more capital in the bank for the rest of the year? Thank you.
Yeah, thanks, Benoit. Thanks. I'll take those three questions. In terms of outlook on NII and on margins, you know what we said is that, as Ferdi just also indicated, it is very difficult to predict where we're gonna end up at the end of the year. What we are seeing, you're right, we did guide toward historical margins, at the beginning of or at the end of last year, I should say. I think you could safely conclude that we're above those margins. The question is, when will that begin to taper off? Clearly, we need to, we'll be taking into consideration the dynamics on the deposit base that we've just alluded to.
Customer behavior in this quarter has been fairly predictable as our customers are rebalancing their different balances across the different accounts. Then of course, there's the competitive side to this, which, you know, we indicated that if you've got such a significant share of the deposits being held by the major banks in the Netherlands, you know, clearly the competitive pressure that we have or the competitive monitoring that we do will also be determinant. I think those factors make it very hard to predict where NII is gonna end up this year, which signal, as I said, we are above historical margins. At some point, you know, that should begin to come down. In terms of
Just maybe moving to capital. Sorry on that. Sorry. On competitive pressure on deposits, do you see something happening? Do you see a bit more competition, or is that still like similar to February? Thank you.
Yeah, it's actually very consistent where you see smaller banks and international banks are in the Netherlands, moving at rates that, you know, are not unexpected in terms of the shifts that we're seeing from the major banks. You know, that is. We're a fast follower. You know, we'll take a look at what the others are doing before we make our final calls. So far what we've seen is not entirely unexpected, but maybe Ferdie.
Yeah. Maybe Benoît, you read the Dutch newspapers as well. You have some of the challenger banks like bunq or Openbank, which is from Santander. They're offering already 2%. If you look at LeasePlan Bank, 1.5%, and NIBC 1%. Despite these very competitive rates in the market, we do not see yet the effect of migration, of saving deposits, outside the bank.
As Robert said already, it's very difficult to predict at what level the clients might become more, more price sensitive. For now, the challenges are there, the competitive rates are there, but we don't see the effect in the migration.
Thanks, Ferdinand. Benoît, in terms of your question on the updates and then M&A. As I said, you know, we just completed the second round of share buyback, we're still in Q1. At this point, I do think it is too early to talk about new share buybacks. In terms of your last question on M&A, our point of view hasn't changed. That has been the same every single quarter we've talked about M&A. We continue to look at potential deal flow. We'll continue to look in the direction that we've always indicated, which basically goes as far as to say, you know, if any M&A is strategically accretive, then we would be interested in reviewing.
We're also very well aware that there is a, it's not about the strategic accretiveness, it's also very much about the comparative ROEs that we have on share buybacks that we take into consideration. That factors into our ongoing monitoring of M&A. Great. Thank you very much.
Thank you. We'll now move on to our next question from Jon Peace at Credit Suisse. Your line is open. Please go ahead.
Yeah, thanks. Morning, everybody. My first question is on costs, please. I mean, I guess the message about the target next year being challenging is one that you've had before. I think since you first gave that EUR 4.7 billion target, the CLA probably adds about EUR 120 million onto it. If I look at consensus, it's about 10% higher than your guidance next year. I'm just wondering how challenging is it? Should we be thinking of adjusting the EUR 4.7 by the EUR 120, or could you really come in above EUR 5 billion like consensus is suggesting? My second question, please, about the cost of risk.
Just as you're sort of seeing trends go into the second quarter, could we again possibly see a cost of risk which is, you know, closer to the first quarter level than the through-the-cycle rate if Stage 3 is still staying very, very low? Thank you.
I'll ask Tanja to take on the second question. I'll take the first. Go ahead, Tanja.
Yeah. On cost of risk, it's very hard to give some guidance on cost of risk for the quarter because inherently by individual files, there can be some fluctuation. I'm not going talk about the Q2. What I can say for the full year is that I do expect that we will end up within the cost of risk guidance of 20 basis points, provided that we will not get a recession, and that's currently our baseline scenario as well. That's what I can say. Well, you can make your own assessment.
I think for Q2, I think so far, the economy in the Netherlands and also in the rest of Northwest Europe is resilient. That of course translates into the performance of our credit book, which I would say in any case, is performing very well given the, well, the strict risk appetite that we have applied to our credit underwriting.
Thanks, Tanja. In terms of your question on costs, yeah, I'm well aware that consensus sits above the 4.7. Indeed, we did signal the 4.7 will be harder to attain if only you take into consideration the CLA that we've happily just concluded of, giving us at least certainty on that part of the spectrum. We'll continue to focus on cost discipline. I think that's the essence. The target dates back from 2020, as we talked about before. Yeah, new conditions now prevail in the circumstances that we're in. You know, to your question as to, you know, is it the 4.7? Is it higher than the 4.7?
With 120 CLA consequences already coming into that 2024 cost base, we're still looking at a number of levers that we will continue to execute against that we've highlighted at the end of 2022, which will also be relevant of 2023. Before I go on with those levers, I also think it's important to note that even though we have a current run rate, which we're quite happy on in Q1, we're still emphasizing we'll end up at around five three, and then you get to the levers that we continue to target. One clearly sits around the non-core wind down, which, you know, you can see, as we've disclosed, is still proceeding at pace. We still expect to see about EUR 100 million cost savings coming in from the wind down.
There's still some movement around reg levies that we would expect to see coming through in 2024. We will continue to monitor the effectiveness of our AML costs, so we expect to see some of that cost base coming down. All of that will give us still pathways into at around that 4.7. At this point, we're maintaining. Keep in mind, it is a target. To your point, the quality of that target was certainly not the same as back in 2020. The cost discipline is what we focus on.
Great. Thank you.
Thank you. We'll move on to our next question from Flora Bocahut at Jefferies. Your line is open. Please go ahead.
Yes, thank you. I have, really one key question left, which is around the RWA growth, this quarter, which you have explained well in the slide. Just thinking forward here, how much should we expect, you know, in terms of RWA move, considering also the volume growth on the loan side, but then obviously also the regulatory impact and model changes, please. Thank you.
Tanja.
Yeah. As you are aware, we expect RWA to continue to grow during the year as well for to support business growth and maybe to some extent as well as some impact of the, well, the economy and some deterioration in credit risk profile. Also as you mentioned, there will be ongoing model reviews and model updates that will add to RWA as well in the coming period. I cannot size this at this moment given that we are going through these exercises.
If I can, just follow up on this. The model reviews, they don't impact the Basel IV RWA, right?
They do to some extent, but to a much lesser extent, because the Basel IV has several floors included, and therefore are less sensitive to changes in the models. They're still so, it's still model-based, so there are still inputs through models, but the impact is much lower.
Okay. Thank you.
Thank you.
Thank you. We'll take our next question from Benjamin Goy at Deutsche Bank. Your line is open. Please go ahead.
Yes. Hi, good morning. One question left, that's on your mortgage market share. I see it's below your back book market share, I think it makes sense given the competition you cited. Why is it even lower, and why you don't shift it either to the corporate book or, yeah, to shareholders via higher payouts? Maybe the returns you generate still with these lower mortgage margins. It will be interesting to know in that context. Thank you.
Yeah. It's really two questions in one. I understand the question. At this point, our market share, we're targeting a certain amount of market share every single quarter. What we saw in the market share in new production in Q4 continued to be, it is down from Q4, but it's still at a healthy 15% in an overall market that has been shifting down, as Ferdinand indicated previously. You know, we do look to maintain a healthy presence in the mortgage market. We have a significant part of our book in the mortgage market and, you know, we're acting in very different segments of the mortgage market as well.
It's not a one size decision to shift margin development more in a corporate book. It's more it'll be the continued emphasis on the corporate book where we see good margin development in this environment, and also being very mindful of how we develop our market share in the mortgage book. That means that we're not gonna sacrifice profitability at all costs for market share, but we do maintain a very strategic outlook on how we want to maintain market share in these economic conditions.
It makes a lot of sense, but you wouldn't disclose your returns to generate at these margins.
No, Benjamin. The only thing we said is that the margin of inflow is below outflow in general. That does not say that the margin on new production is below your back book, right? We've explained in previous quarter, at those moments when you're in a very fast rising environment, very often the margins, once the mortgage is closed, might often be lower, right? We are really sort of sticking to steer on margin as well, so not winning market share at any price. Also reflected in a little bit lower market share than the previous quarter.
Once you come in an environment where interest rates are more stable or you're going to see months where interest rates are actually coming down, then you see fairly quickly an expanding margin on your new production. There are several different levers. It doesn't say that if the inflow is still below outflow, that it would be unprofitable or below our target. We should shift our capital allocation out of mortgages. That's clearly not the case.
Understood. Thank you.
Thanks.
Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We'll now move on to our next question from Gulnara at Morgan Stanley. Your line is open. Please go ahead.
Hi, good morning. This is Gulnara from Morgan Stanley. Thank you for taking my question. First question on the asset quality. If we look at the Netherlands, this country saw one of the fastest house price appreciation in Europe in the last few years. And you mentioned in the presentation that you now expect the house prices to drop by 6% this year and 4% next year. Dutch households are also amongst the most levered in Europe. What could be the implications for the asset quality in the case if house prices decline will be higher than expected? My second question on fee income. You previously stated that you are looking to grow fees by 5%-7% target growth rate. Does this target still stays?
Could you talk about your key ambitions here and where you expect the growth to come from? Thank you.
Yeah. On the, Tanja, you want to take the question on the housing?
Yeah.
I think that's the LTV and unemployment, yeah.
Yeah. I can take the question on the asset quality of our mortgage book here, because that's very much related to the house prices. What we have in the appendix also a slide on the leverage, the loan to value of our book. You see that only 3% has a loan to value of above 100%, and only 12% would be above the 100% if house prices would drop by 20%. The expectation is 10, but if it would go down by 20%, the house prices, that would be 12% of the mortgages that would have a loan to value of over 100%.
A loan to value is, of course, one of the components, I would say more important, well, the income side of households and that very much relates to unemployment. As you are aware, in the Netherlands, unemployment is very low. Although we do expect that it will go up a little bit, it will still be at historic low levels, and that's why we are very comfortable as well with the quality of our mortgage book.
Thank you, Tanja. On your questions on fees, yeah, we will continue to have the ambition of 5%-7% CAGR. That will remain in place. As we disclosed in previous quarters, our fee growth are really a combination of some of the strategic initiatives that we've begun to build. It includes business development that we have. It includes effects on payment packaging pricing that we've seen come through over the last couple of years. I would remind you in terms of the realization of the 5%-7% CAGR, we had a growth of about 7% back in 2022 versus 2021.
We think we indicated at the time that the growth trajectory within that 5-7 is probably not as smooth as we'd like it to be. It's probably, as half of the fees are dependent indeed on market performance, on wealth management, for example, and clearing. You're seeing the effects of that this quarter as well. We are maintaining, as I said, the ambition. I think if you were to look at fees as we're now seeing them appear in the quarter, it is very clear that because the consumer spending is down, we've just, you've just alluded to house price, house transactions, but also lower appetite for capital market services. You know, clearly that will have an effect on fees market-wide.
We're in conditions right now that would explain a, you know, the our fees staying resilient and staying at the same pace as we had in the quarter-on-quarter, so they stay flat. Like I said, we'll maintain that 5%-7% CAGR. We've given you a little bit of color around it.
Thank you.
Thank you. We'll move on to our next question from Kiri at HSBC. Your line is open. Please go ahead.
Yes. Good morning, everyone. Firstly, just a clarification on the threshold for the share buybacks. Right now, does the ECB look at Basel III or Basel IV? Or is it more a case, you know, the ECB being the ECB, they simply just take the lower of the two for now, and until we get industry-wide implementation of Basel IV, you know, the focus is more towards the kind of more conservative Basel III number, your 15.0. Secondly, on the contraction in the mortgage book, I just wonder, do you see household deposits potentially being run down in order to potentially pay down household mortgages? You don't really flag it as an issue on your really useful slide five, but just wondered if you see that as a potential risk going forward. Thank you.
I'll take the first question. Ferdinand, you can take the second question. The framework that we've set against, so that's 16% against the 15% threshold, so the around 16% where we're at is against Basel IV. That's how we are also communicating with the regulator. Clearly, you look at Basel III developments, we've set our capital framework against Basel IV. That's the conversation that we also would have with the regulator.
Specifically, Kerry, hi. Is there a risk? I mean, there's always, right? That's also one of the reasons it's very difficult in this environment to provide any guidance on NI going forward, right? We still expect upsides, although it will most likely be at a diminishing rate until what we've seen so far. A few were already mentioned. It's your pass-through rates, driven by a competition. It's potential migration, also related to your question, can it be used for pay down of debt. For both of them, it's difficult to say. We do not see that effect as of yet. Can it start have an impact? Yes, it can always have an impact, but so far we don't see that.
As a reminder, we still have the tax deductibility in the Netherlands as well, which is an important element why people might not pay down on their mortgages.
Great. Thank you.
These are a few of the reasons, and the last one not mentioning yet, clearly, it's also dependent on your view on the ECB trajectory, right? It's been an upward trajectory, but it's also, what will happen with March and when the ECB will pivot. There are some expectations, including our own economist, that the first pivot will start at the end of the year. Okay, great. Thanks, guys.
Thank you.
We'll take our next question from Amit Goel at Barclays. Your line is open. Please go ahead.
Thank you. Got 2 questions. The first, actually just going on, I guess, the slight adjustment to the return on equity target. I just want to check in terms of the term ambition versus target. I just wasn't 100% sure what the difference is there. You know, within that 10%, are you factoring in a EUR 4.7 billion cost base in 2024 or using that as an exit rate? The second question, just coming back on capital, I just want to understand a bit better in terms of why you don't actively, you know, look to get the CT1 on a Basel IV basis down to the 15% level.
Is it, is it uncertainty over that kind of final Basel IV impact and/or are there a couple of items that, you know, could shift meaningfully in that calculation? Thank you.
I'll take your first question. We're now at 9.6. Back in 2020, we indicated an ambition of 10% in normal interest rate environments, I think is the way we phrased it. I think we're now at that level. That 10% is where we're at. It will continue to be our ambition to end up around that 10%. That's effectively where we are today. Tanja, if you could answer the question or answer.
Yeah. On the, on Basel IV, as you are aware, the framework is not final yet. We hope that... Well, the discussions will continue and that clarity will come in the second half of this year, then the implementation date would be the 1st of January 2025. Given that it's not final, we have also not implemented all the Basel IV rules in our systems yet. That means as well is that we cannot present, well, very accurate numbers yet. That's why we give this rounded number, which is 16%. So it's rounded up to 16%.
Once the Basel IV rules become clear and final, we will also work towards giving more detail on the Basel IV outcome, and then there will also be more certainty around it.
Thank you. On the cost assumption within that 10% ambition.
That's still that 4.7%. We're at 9.6% now with the cost level that we currently carry. When we came up with that ambition back in 2020, we had the 4.7% as part of the ROE calculation. I think from the numbers today, you can see that we're already at 9.6% with the current cost levels that we carry. I think that will give you enough signal.
Okay. Thank you.
Thank you. We'll now move on to our next question from Anke Reingen at RBC. Your line is open. Please go ahead.
Yeah, thank you very much. I just one follow-up question. You just said the Basel IV ratio is rounded up to 16%. I know you obviously don't want to give us the exact number, but maybe if you can give us a feel for by how much you would be considered to round from around the 16%. Secondly, and obviously your profits benefit from the rising rates environment, although obviously been hit in the past. How much do you see a risk that there is more political pressure for you to, yeah, adjust customer rates or that the Deposit Guarantee Fund could go up in response to current events or something like bank levies as we've seen in other countries? Thank you very much.
Tanja, if you could take the first question, I'll take the second one.
On Basel IV, on purpose, we provide this round number and the around with the signal that we rounded up. We cannot give an accurate number because there are so many assumptions still underneath that the number would not be valuable without having all the assumptions and the moving parts, as I just explained. We still need to implement it in our system. I cannot provide further detail there.
Okay.
On your second question, at this point, we're not experiencing any political pressure. We have the arrangements that are currently in place are in place. In the Netherlands, that is still a very consistent discussion. We're not at this point, experiencing any undue political pressure.
Maybe Anke on, on your regulatory levies, and it's also explained in the slide in the analyst presentation of the cost bridge. We still do expect 2024 vis-à-vis 2023, a significant reduction both in the deposit guarantee scheme as well as the Single Resolution Fund. As earlier indicated, the target size of the fund should be reached for SRF at year end 2023, and deposit guarantee scheme somewhere Q2 2024. Might it change or increase the size on the back of higher deposits overall? It's a possibility, but we have not seen any signs that it might change from here. Also potential windfall taxes. You see it in some European countries. It really not a focus point in the Netherlands. It's much more the political debate-
On the excessive profits, for example, in the energy sector currently, where they're looking at additional taxation. We have had the bank tax already for several years, which has not been the case in several other European countries. Also keep that in mind.
Okay. Thank you.
Thank you.
Thank you. We'll move on to our next question from Marta Santos at Citi. Your line is open. Please go ahead.
Thank you very much. My first question is a follow-up on deposit costs. Most banks in Europe are providing today some sort of guidance around deposit betas by the end of the year and where they expect to deposits generally to settle, provided EURIBOR stays at around 3%. Can we extract from you some sort of guidance on where you expect the blended cost of deposits for you over the next 2 years? The second question is on the outlook for volumes. Can you provide some sort of guidance on where do you see the mortgage book by the end of the year and the corporate book as well? Just a clarification, sorry, on your comments on the ongoing review of internal models. Can you?
I'm not sure if you said, can you provide a guidance on potential regulatory headwinds that you're expecting in your ratio this year and next? Thank you.
Okay. I'll take the first question. Ferdinand, if you could take the second question on volumes and Tanja on the potential reg headwinds. The price savings that we currently or the pricings that we actually do or commit to are not based on beta. That's why, you know, for us, beta really is a resultant. So far, I think roughly speaking, the pass-through of until today has been around 25%. That's really a resultant, and it's not how we steer on deposits. I think we've talked about this before.
I think it's important to realize that for us, the, both the competitive behavior, some effects from the replicating portfolio yields, and a number of other effects come into play, for us to set pricing, so not determined by beta as such.
Yeah. Maybe also to add to that, if you look at our interest rate sensitivity we provided last year, it was definitely different from some of the other banks because it was not based on an expected deposit beta. It was really based on a cap on historic margins. As Robert already earlier explained, we're currently in the phase where we are above historic margins. You are in an area that's, it's definitely not something that for further rate increases, we have any predictions or forecast on what deposit beta might be. As Robert said, it's only 25%. If you look at the last two rate increases, that has increased to 50% pass-through in the Netherlands.
Yeah.
Then.
Sorry.
And-
Go ahead. Go ahead.
Shortly on your volume, as Tanja said already, also RWA, we do expect a volume growth. Difficult to say for mortgages now. It's currently a slowdown in the market with new production clearly lower. As said, we still balance that out with limited redemptions of our books. The book is overall flat, but clearly depending what the outlook is, which is currently uncertain. If you look at corporate loans, coming back out of the presentation, the positive thing here is if you look at our Corporate Bank core, if you exclude the wind down still of the tail of non-core, we did see a growth of almost EUR 800 million, that was specifically generated in the focus sectors outside the Netherlands in digital mobility and new energy.
What you do see in consumer loans, it's a relatively small book of just below EUR 10 billion. Yeah, there, we don't expect any significant growth because I said earlier, that's a book which is a structural changing and being a de-risk. Overall, we still do expect growth, but most importantly at corporates, you've also seen the ECB lending survey. The outlook is limited, but we still expect with the focus on our strategy that we can grow.
Thanks. Ferdinand Tanja, on any expected,
Yeah. In these internal models, as I mentioned, indeed, we do expect further, well, as you call it, headwinds on RWAs going forward, because we are indeed evaluating our models on an ongoing basis and also evaluate whether we can move certain portfolios to a more, well, less advanced, more simplified approaches. Yeah, we haven't made up our decisions there yet. Also from that point of view, we cannot give a trajectory on what that would mean for our RWA. This will be an ongoing discussion I expect in the coming period. Well, once we have visibility on this, we will of course update you.
rounding error, 10 basis points or something on capital. Is this something that could be more meaningful?
Sorry, we lost you for the beginning of your question.
Sorry. No, I was just saying that, to provide some reassurance today what the headwinds may be, is this something that it could be just a rounding error of 10 basis points or could be something more material, the review of your internal models?
As I said, we are going through the review, and I think it's too early to say what the outcome of this will be. Thank you.
Thank you. We'll now move on to our next question from Raul Sinha at JP Morgan. Your line is open. Please go ahead.
Good morning. Thank you for taking my questions. Maybe two, if I can. One to follow up. Just to try and understand, you know, how you approach the discussions around the buybacks going forward. Would it be fair to assume that, you know, as and when you come to a decision that another buyback is, you know, is on the table, is required at a board level, would you expect to then apply for regulatory approval after you have kind of decided that? Or do you think that this could happen, perhaps, the regulatory approval for the buyback could happen in advance of, you know, any announcement to the market, so, you know, we might actually see a buyback in the second quarter?
That's just trying to explore the timing. The second question is just around page 21 where, you know, you've been flagging this discussion around the calculation method for your Single Resolution Fund contributions for the past few quarters. You're saying that the SRB is disagreeing with ABN AMRO's position on how you calculate the SRF contributions, and you flagged EUR 120 million potential payable in the first half of 2023. Can I just check what the timing of this would be? Would we find this out with the second quarter results if it was to go any other way? Would this also have a kind of ongoing impact in terms of regulatory costs, or is this just kind of a one-off catch-up payment? Thank you.
Freddy, if you take the SRF question, I'll take the share buyback. Go ahead.
Yes, Raul, hi. I think it was only a small change towards disclosure we had in our integrated annual report, and that's on the potential impact of EUR 120 million pre-tax. Yeah, as said, we are still in discussion, and it's for the contribution of the period 2016 up until 2022. We're talking here about a one-off. We still think, and as you know, it's a bank levy introduced in 2016, so the calculation methods there, based on your exposure, we think we have calculated it correctly. We disagree with the sort of repayment of the period 16, 20, 22.
That's also the reason that we have no provision for it, because we think it's not more likely than not that it will result into a payment. Can we already expect something in the next quarter there? We cannot provide any sort of indication on timing for this.
Thanks, Freddy. To give you a little bit more insight in process, typically, you know, we will come to a decision on any potential share buyback, and we will then engage with the regulator. The regulator approves, has to approve the applications. We first make up our minds internally, as we've done before, and then we submit for approval.
Got it. Thank you.
All right. Thanks.
We'll take our follow-up question from Benoît from Kepler Cheuvreux. Your line is open. Please go ahead.
Yes. Sorry to ask a follow-up question here. On the pass-through rate of, like, 25%, I think you referred to retail. I was wondering what is your kind of overall blended pass-through rate as we speak. I'm asking because we've seen a bit of a weak NI on the core banking, or sorry, corporate banking. I was wondering if this is coming from maybe a bit of a higher pass-through in the quarter on the corporate. Thanks.
Freddy, you?
Benoît. It's not something, it is come back to what I've said earlier. The pass-through, specifically for wealth is a bit higher. As you have seen is, the saving rates for higher deposits is currently higher, so that's a different pricing strategy than some other banks are doing. If you look specifically to corporate clients, it's difficult to say, right? On one hand, they have current accounts. Clearly, they don't have any savings accounts, and that's normally, that's working capital. A few things can happen. You can see an outflow of current accounts into more money market related term, or it can actually be put to work into the business.
That's not something we can give a clear sort of a view on what exactly the underlying levers are. Those are the two elements you should think about. There you see the migration having the biggest impact. If you do see a shift towards term, yeah, margins on term are clearly lower than margins on savings accounts.
Okay, great. Thank you very much.
Thanks, Benoît.
Thank you. Once again, ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take another follow-up question from Farquhar Murray at Autonomous. Your line is open. Please go ahead.
Morning again. Just a quick question. Really just coming back to NII in terms of the main surprise today. If we take the base of EUR 1,620 million of NII in the first quarter, and we look at the commentary you've made around replicating portfolio, which you're saying kind of the dynamic there was similar at one Q as four Q. Should we expect a material drop-off in that in the second quarter? I suspect it will be a bit more graduated than that, and similarly on the deposit pass-through. Add in volume, I presume two Q must be up Q on Q. At that point, I presume it's difficult to really see the full year number being much less than 4 times the first quarter.
I'm just wondering if that's a fair summary of what we might be looking at. I do appreciate there's obviously uncertainties around all of it. Thanks.
Farquhar, it's a fair question. It's a sort of base case, your Q1 times 4 and what's the upside from here. I come back to the reasons I provided before. Yes, your replicated portfolio benefit keeps coming through, but at a diminishing rate until we've seen so far. That's one. Number two is your treasury results. Also there, yes, it was again a positive delta this quarter, but also here, this might be more volatile. This is not a sort of a direct benefit at the same level you will see a quarter-over-quarter. Number three is all your assumptions. One, on what is the ECB going to do? Number two, what will the competition on a savings accounts be?
At what point do consumers start shifting towards savings accounts with the challenger banks? Number three is deposit migration from current accounts into savings accounts. If you see from the disclosures in our Q report, it's now roughly evenly spread, current versus a savings account, 100 each. Historically, that has been around the one-third current, two-third savings. Also there, you can still see some migration there as well. There are so many variables, it's very difficult to say what the NII will be towards the end of the year. It's clearly positive at the moment, but the overall impact will clearly be at the expectation at a diminishing rate going forward.
Many thanks.
There are no further questions oh, there you go. There's another follow-up question, I'm sorry. Once again from Anke at RBC. Your line is open. Please go ahead.
Yeah, sorry for following up and going on about this. That treasury result, is there? I mean, it's quite large in terms of the quote, totally impact. Is it as long as rates are rising, we should expect this like to be a positive, but then when they stabilize, it could be a negative? Is there any direction you can give us on the treasury, if that's possible, given the magnitude of the impact? Thank you.
Yes. Hi, Anke Reingen. It's difficult, and we said that previous as well because our duration of equity is not a sort of ring-fence portfolio of swap contracts? We earlier disclosed that the remaining maturity bandwidth is somewhere between the one and three years, which you already saw quite a substantial benefit in Q4. It includes all on and off balance interest rate exposures. The resulting exposure is managed. That includes past and present interest rate steering. It's very difficult to say. It's clear that higher interest rates are beneficial, but you cannot sort of exclude the effects of historical interest rate steering.
On a quarter-on-quarter basis, the behavior of our equity mismatch, so the treasury NII, can falsely differ from the long-term trends you've been seeing now over the past two quarters.
Okay. Thank you.
Thank you.
Thank you. There are no further questions in queue. I will now hand you back to your host to conclude today's conference. Thank you.
Well, thank ou very much. Thanks all. Obviously, this concludes the analyst call. Thanks again, as always, for all your questions. Look forward to talking to everyone very soon. For now, see you later.
Thank you. Ladies and gentlemen, this conclude today's call. Thank you for your participation. Stay safe. You may now disconnect.