Hello, welcome to the ABN AMRO Second Quarter 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, the CEO, to begin today's conference. Thank you.
Thank you. Thanks very much, good morning, everyone. Welcome to our Q2 results. I'm joined by Ferdinand Vaandrager, our interim CFO, and as always, by Tanja Cuppen, our CRO. I'll update you on the main topics for this quarter before we start the Q&A session. Let me first take you through the highlights on Slide 2. I'm very pleased with another quarter of strong results. Net profit reflects strong NII and is supported by impairment releases as credit quality remains solid. NII continued to benefit from the higher interest rate environment, our overall deposit volume remains stable while clients continue to transfer cash into interest-bearing accounts. Business momentum is also holding up for corporate lending. We again managed to show growth on our mortgage portfolio despite a slow housing market.
We have lowered our FY 2023 cost outlook to EUR 5.2 billion, as the SRF contribution this year was lower than expected. The tight labor market is causing a delay in sourcing qualified staff we need for a number of investments and therefore will lead to a cost overrun into 2024. In addition, the continued higher inflation and slower reduction of our AML costs than we had anticipated also means that we will not be successful in bringing down costs to EUR 4.7 billion by 2024. As we're nearing the end of our plan periods, we will also be updating you on our financial targets at our Q4 results. In addition, we will present a new capital framework and update you on potential share buybacks.
To round off the highlights, we've set our interim dividend at EUR 0.62 for the first half of 2023. Turning to Slide 3, let me say a few words on our progress on executing our strategy. Now, we are continuing to invest in our digital capabilities, including artificial intelligence, which has the potential to improve many aspects of our operations. In Q2, we launched an interesting pilot that used an on-prem ChatGPT server, which automatically records and summarizes client calls. In addition, during the call, the advisor is automatically prompted with the right product pages based on the conversation. The advisors involved in the pilot are very enthusiastic as it allows them to spend more time with their clients, and we are currently evaluating how we can incorporate this further and more broadly in our operations. We are progressing further on the simplification of our Wealth Management organization.
In this quarter, we established the branchification of Neuflize OBC. Our impact fund went live. What is unique for this type of fund is the low minimum threshold of EUR 50,000. This offers more clients the opportunity to continue to invest in companies striving for a positive impact on people, planet, and society. ABN AMRO Ventures invested in a company whose product we use to detect fraud and protect our clients against malware, for example. On the Dutch economy, which you'll find on Slide 4, the Dutch manufacturing PMI rose slightly in July, still indicates a contraction of activity. The outlook for the German industry worsened, however, which is an important export market for the Netherlands. On the positive side, many sectors still carry large order books. We are starting to see lower purchase prices coming through.
Bankruptcy remains low, confirming the resilience of the Dutch economy. House prices have now fallen 6% on average due to higher mortgage rates and deteriorated housing market sentiment. The end of the price correction is in sight. For 2024, we now expect a modest 3% decline. The affordability and financing of homes will gradually improve as wage increases come through to compensate for inflation. Also, the low number of transactions reflects the lack of new construction, which is hampered by higher interest rates, price inflation for materials and environmental restrictions. The second quarter performance, let's say first NII, and you'll find that on Slide 5. Looking back at the last four quarters, our NII showed a strong recovery from the negative rate environment, mainly as deposit margins improved.
Deposit margins still increased a bit further during Q2, with the effect of the higher rates starting to level off. The margin we locked in on new mortgage production was in line with our average portfolio margin, also the portfolio volume increased somewhat. Corporate margins are holding up, for deposits, the competitive forces we experience and the impact this has on volumes and margins will become the main driver going forward. We expect to start to see some margin pressure on savings accounts following the last increase of 25 basis points as of August 1. Treasury result was EUR 50 million lower this quarter, that was caused by unfavorable interest rates resets. This is not structural, we expect a recovery followed by a further increase as the Treasury result still stands to benefit from higher rates.
Looking ahead to the next quarter, I expect a recovery in Treasury results, while we may start to see some margin pressure on savings. Turning to Slide 6 on balance sheet developments. We are achieving good results in our strategic focus sectors, which are the digital sector, mobility, and new energy. We made further gains in all of these sectors, particularly in our Northwest European markets. In our home market, the mortgage portfolio held up despite the slow housing markets, and new mortgage applications are gradually increasing though, so the third quarter might end up a bit stronger. Consumer loans declined due to higher repayments and less demand. This quarter, we further reduced the remaining non-core portfolio, which is now down to just EUR 500 million. We are making good progress on winding down the non-core back office operations in the various countries. Moving to our client deposit base.
As expected, clients continued to optimize their cash by switching to interest-bearing accounts. Overall, our client deposit volumes remain stable, and we see limited deposits leaving the bank as most of our clients opt for the savings products we have on offer, in particular, our time deposits. Returning to fees and other income on Slide 7 . Fees were flat compared to last quarter. During the second quarter, the market's volatility was lower compared to the previous quarter, and this is reflected in clearance fee income. Debt and equity markets were quiet in Q2, and fees were lower as a result. Nevertheless, corporate banking showed an increase in fees in fee income due to a one-off fee booked in non-core.
Wealth management fee income was also stable, driven by stable results for asset management, other income was up versus Q1, largely related to fair value adjustments from IFRS 17 and higher Treasury results. Now turning to Slide 8 on costs. Our cost-saving programs continued to deliver cost reductions. We made further progress on winding down non-core operations, the implementation of our new client service model is also leading to savings. We booked a release related to the Single Resolution Fund, as the contribution was lower than we originally anticipated, this will bring down regulatory leverage for the full year to around EUR 340 million. As a consequence, we now expect full-year costs of around EUR 5.2 billion.
At the beginning of the year, we flagged a need to further invest in our data capabilities, our digitalization of our processes, and building up of our sustainable finance regulation capabilities. We are, due to tight labor markets, experiencing delays in sourcing staff for these projects, so we expect investment costs to increase in the second half of the year and to run over into 2024. This is in contrast to the assumptions we made on our cost target, where we, in fact, anticipated investments to decrease by EUR 100 million in 2024. More effort than expected is required to ensure our AML activities can be maintained at the high standards needed to fulfill our gatekeeper role, but it is clear that our AML processes are becoming increasingly more complex, and our original assumptions on related cost reductions need to be reviewed.
We acknowledged at the beginning of the year that it would be challenging to reach our 2024 cost target. An increasing number of our original assumptions back in 2020 have come under pressure, we face an inflationary environment, continued delayed investments, or I should say delayed investments and new insight in our future AML operations. We will deliver on our non-core cost reduction, I also expect regulatory leverage, leverage to come down further. As we stand here today, it is clear we're not going to succeed in reaching our target of EUR 4.7 billion by next year, but I will add immediately that we will remain fully committed to cost effectiveness. That is not changing. We've started to work on a financial plan for the years ahead, therefore, we'll present you with our new financial targets with our Q4 results.
Turning to impairments on Slide 9. This quarter, we saw a release in impairments of EUR 69 million, which was for a large part related to the release of the remaining COVID overlay and a net release on individual corporate files. After an assessment of a larger number of clients, we concluded that the impact of COVID-19 on our clients has been absorbed in the credit risk metrics and an overlay was no longer warranted. The overlay related to the war in Ukraine is obviously kept in place. There were some new provisioning related to inflow in stage 3, however, more than offset by releases in individual corporate files, both in core and non-core. The inflow in stage 3 for mortgages was related to the introduction of stricter credit monitoring metrics.
The credit quality of our book remains solid, the impact of the economic slowdown in our loan portfolio is not visible so far, therefore, we expect the cost of risk for 2023 to remain well below our through the cycle cost of risk of 20 basis points. Slide 10 on capital. Our Basel III capital ratio stands at 4.9% and Basel IV at around 16%, we remain well capitalized. 50% of our net profit is added to Common Equity Tier 1 capital, the other half accrued to our dividend reserves. Offsetting the capital generations were higher RWAs due to model updates, this is only partially off-offset by credit quality improvements and business developments. The Countercyclical Capital Buffer increase as of May fifth, has raised the MDA trigger to 10.5%.
However, our capital position remains well beyond this level. To round out with our financial targets, we're off to a good year, a good start of the year, actually, with an ROE well above our 10% ambition. Our NII has recovered from the negative interest rate environment, we have more or less completed the de-risking of our balance sheet with the winding down of our non-core portfolio. A solid risk profile and a resilient Dutch economy have led to impairment releases over the first half of the year, which has further boosted our results. As I mentioned, cost targets for 2024 are no longer achievable, also given the delay we are currently facing in attracting staff. We've announced that we will present our new financial targets and capital framework with our Q4 results, given that we're nearing the end of our planned period.
In addition, we will present, or update you on our share buybacks. I guess this is the time to ask the operator to open the call for questions.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take our first question from Giulia Miotto at Morgan Stanley. Your line is open. Please go ahead.
Yes, hi, good morning. A couple of questions from me. The first one, maybe not necessarily related to the results, is rather on bank taxes. We have seen some headlines yesterday coming from Italy.
Sorry, say, say again, Giulia, on bank taxes?
Can we hear? Yes. Can you hear me well?
Yeah, I can hear fine.
Okay, perfect.
Bank taxes.
I was saying, we have seen some totally unexpected headlines yesterday.
Yeah
coming from Italy, and I was wondering if you sense anything similar coming in any of your markets. That is my first question. The second question on the NII line. ABN has a long dated replicating portfolio, and therefore, I was wondering how... whereas, you know, rates are expected to start coming down towards the end of next year, and then in 2025. How long do you think the NII can keep growing for? If you could maybe update the rate sensitivity guidance, that, that would be also very welcome. Thank you.
Okay. Yeah, thanks. Thanks, Giulia . I'll ask Ferdinand to take the questions on NII. Yeah, on the unexpected communication out of Italy, I'll leave it for the Italians to deal with the outcome of that. We translated it into our main markets. We haven't had any kind of suggestion of announcements of the kind. I would also say that the Dutch market right now, in way of interest rates and deposit rates, is a very transparent market. We have optionality for our customers in market. Customers can switch between banks, fairly easily, and, there is a wide variety of interest rates, if I can say that, on offer.
In addition, what we also had in particularly the Dutch market, the Dutch banks have been paying bank taxes for about 10 years now. It's about EUR 500 million on an annual basis for ABN AMRO, about EUR 100 million. We've had a-- we've already had some kind of a measure for banks to be taxed separately. We see a good functioning market on interest rates here in the Netherlands, with customers actually having a choice. Also I would say, you know, windfall gains, I mean, if you look at the way the development of ROEs generally in the past versus where we are now, and we're quite happy where we're ending up now.
To start to talk about windfall gains in light of financial, the financial results over the last few years, I think that's certainly trying to come to terms with that term, let me put it that way. In summary, a functioning market, a transparent market, customer choice, and bank taxes that are being paid. We haven't really heard any of these kinds of messages coming into our market. NII, Ferdinand?
Yeah. Hi, Giulia . If you look for this quarter to the underlying drivers, number 1 is the deposit margins, where we still see improvements, although it's clear that the effect of higher rates on the replicating portfolio starts gradually leveling off from current current levels. Secondly, you have the Treasury results, our equity mismatch, yeah, that will keep adding over the coming quarters as a positive driver, but already indicated this can be volatile. To provide a bit more transparency, we said it was a quarter on quarter negative from roughly EUR 50 million related to the repricing profile of our stock portfolio.
If you look for the next quarter, that's why we say it was, due to volatility, we can already see the roll-off from some shorter term receiver swaps, that will catch up in the next quarter. The last lever, clearly what's happening with asset margins on lending products, and there we see that they are holding up as pricing is catching up with the higher rates. Going forward, yeah, we are entering now more of a BAU situations, where deposit margins will be driven by the effect of, competition on volumes and markets. You've seen we have a stable, deposits, overall, deposit level, but you've also seen in the past four months, there were three rate increases.
The ability to predict what's going to happen there is low and competition behavior is unknown. What you do see, that the margins on current accounts clearly still benefit from higher rates, and also our Treasury results continue to benefit from that. As are also your link to the replicating portfolio, and then I'll stop there. Clearly, around 40% is on less than heavy prices in less than a year, and overall, is roughly 3-year duration, but you know, the investments there in swaps is in a barbell structure.
Thank you. Can I just follow up on one thing you said? Replicating portfolio is leveling off, so does this mean that you don't expect the benefit to continue to come through for a few quarters, or is that still a positive? I, I would have thought the replicating portfolio is still a positive, to your NII.
Yes, I'm just saying the rate of increases quarter-over-quarter is leveling off.
Oh, okay. Okay. Thank you.
Then they're still positive.
Yeah.
Thank you. We'll now move on to our next question from Flora Bocahut at Jefferies. Your line is open. Please go ahead.
Yes, thank you. Good morning.
Morning.
The first question I wanted to ask you is, coming back to the NII. I mean, I just heard, you know, all the details that you gave us, and thank you for this. The question I have is very simple. Based on everything you just described, it looks to me, also thinking that we are about to have rate cuts, probably next year. Should we expect, therefore, that this year is gonna be the peak of NII, and when we look forward toward 2024, 2025, there is a risk that NII declines? The second question is on RWA. I think you had guided on the past, that the model review impact would last all year. We had it in Q2, we had it in Q1. Should we expect further RWA increase from other reviews in H2 this year as well? Thank you.
For the NII? Then Tanja
Yeah, NII, I know it's a key topic. Is it peak NII or not? I just explained what the underlying elements and drivers are, as you already alluded to, the expectation of potentially the ECB pivoting that's happening end of year or next year. With all those elements, and also an unknown volume margin on the back of competition, it's very hard to predict that. I think it's definitely too early to start guiding what we expect NII to do in 2024 and 2025.
Okay. Yes. Hi. On RWA, yeah, as you indicated, we have taken significant steps already in simplifying our model landscape and preparing for the introduction of Basel IV. Thereby, the largest part of RWA increases is behind us. We do expect further RWA increases that can be results from, for example, model reviews that we are doing on an ongoing basis, but also methodology and policy changes. Still also moving IRB models to more standardized or foundation approaches. Yes, we will continue to work on our model landscape and adjust RWAs as it comes. I think important to know as well, that the impact of model-related increases in the Basel IV are lower than in the Basel III.
Thank you.
Thank you.
Thank you. We'll now move on to our next question from Farquhar Murray at Autonomous. Your line is open. Please go ahead.
Morning, all. Just 2 questions, if I may. Firstly, on the capital return update, could you just elaborate on the reasoning for timing this to year-end results? It feels a little bit like a deferral. Is ABN now committing to a strict annual pattern of updates from here, which seems perhaps a bit less frequent than peers? Secondly, just coming back to the NII conversation. Thanks for the details there. Just in terms of that EUR 50 million step down, should I therefore think of that as kind of a permanent kind of clunk down in terms of the Treasury book that probably gradually recovers? Or, are you suggesting that receiver swap conversation is actually going to recover a fair chunk of that relatively quickly? I just wouldn't mind understanding how much of...
How to, how to look through the volatility there, if that's okay. Thanks.
Yeah, thanks for the questions. Ferdinand, we'll follow up on NII. Just let me take capital return. You know, we, we, since we are updating our financial KPIs at, at, at the end of the year, because we're nearing the end of a plan period, we also thought it was good to then update our capital framework at the same time, because clearly we're getting nearer to the end of a plan period, based on assumptions that we had concluded off on in 2020. We felt it was better then to take both the update on our targets together with an update on capital framework, and therefore, then also can be able to conclude off on potential share buyback.
We'd rather do it together than start to do this piecemeal. I think from the, from where we are in the plan period, it makes, it makes good sense. In terms of the frequency that you've alluded to, I wouldn't, I wouldn't infer any conclusions from the fact that we're doing an update on our financial targets in Q1. We will review our capital framework, and we'll come back and revert then at that time, both on the framework and on share buybacks.
Farquhar, hi, just coming back on the more volatility in the Treasury result. As said, it's clearly still a positive, but the positive effect is lower than in the previous quarter. We've always said that this line item can be volatile because it's fully related to the repricing profile of the swap portfolio. Can this quickly reverse in the next quarter? As I said already in the previous comments, we are highlighting this and also expect this to recover if you look at the next quarter. As I said, that's potentially linked to the roll-off of some shorter term receiver swaps, which can then have the additional positive effect in the next quarter.
Okay, great. Many thanks.
All right, guys.
Thank you. We'll take our next question from Tarik El Mejjad at Bank of America. Your line is open. Please go ahead.
Hi, good morning, everyone. Just 2 actually follow-up questions on still on NII. I mean, I understand, and it's very helpful, the different moving parts you gave us, but I'm still really, like, a bit surprised by the fact that you can't give us a net guidance on the trend of NII, because if you think the main driver here is the competition from deposit rates, maybe you can give us sensitivity on where deposit beta would go or terminal 1 by the end of the year, and then we can, we can have at least a range of NII target there or guidance. That's the first one. Would you be able to give us then that, that range function of deposit beta?
Secondly, on the capital return, I hear your question about you want to do everything together with Q4 results, but I guess this is about the threshold of 15% and so on. Returning capital, progressively, at least some share buyback in second half could have been done independently from that, I guess, no? Were you rather planning to use some of the capital to do some acquisitions in Wealth Management that didn't happen, and then you had to delay distribution? Was it always the plan to not do anything this year and then wait for next year? Thank you.
Yeah, I'll, I'll take the your last question, and Freddy, I think, will expand a little bit more on NII, although, we have to say that there is, there is a high level of uncertainty, but I won't get ahead of that answer. Yeah, you know, it's, it's... When, when we, when we talked about share buybacks and the timing of announcing any further share buybacks, we did not commit to any, any timing, of those share buybacks.
There, there is a preference to once you begin to update and to begin to review the financial performance of the bank, particularly going forward, in the, in the next, into, into a next plan period, and at the same time, want to be very clear on share buybacks and your capital framework, that you do need to take that together. We do think that given where we are right now, we have a good view as to how we expect to land in 2023, what the potential is for landing in, in 2024, including insights further in, in some of the other choices that we've been making, as it relates and has effect on our capital framework, that it's good to do that all together.
I'll just remind you that when we came up with our capital framework, this is back in 2020, with a number of variables that, as we talked about in previous calls, have either changed or have been adjusted. We'd like to have that overview. Absolutely appreciate that there is a need for more information on share buybacks. We still remain committed to the capital return. Indeed, we'd like to present that together so you have a one view in one time rather than starting to do this in chunks, which I don't think we've ever done, and we'd much rather have that complete overview.
Yes, Hi, then maybe following on, on pass-through, expectations and what guidance. Well, it's pretty clear we can observe what the peak or the pass-through has been so far, and it's, it's, it's relatively low. It's around 20%. I said before, over the past 4 months, we've seen 4 rate increases. We definitely do not price based on the beta, and that's where I had the earlier comments, because it's really dependent on the competitive behavior, as well as the yields on the replicating portfolio. If you look at our deposits, do we see a shift or migration from current accounts? EUR 97 billion, most of that, we pay 0% on. Yes, you start see some optimizing there.
In Q1, you saw a migration of roughly EUR 10 billion into time deposits or savings accounts. That slowed down now to around EUR 6 billion. Even there, despite the gap between the saving rates and the current accounts increasing, we don't see a significant, a significant migration. As said, also for ABN, where by far the majority of the deposits comes from the Netherlands, we don't provide any sort of forward-looking expectation on a beta, because that would sort of implicitly sort of guide what our pricing expectation, expectation is. For now, it's. The beta is around 20%. We don't see any outflow. You see some transfer into interest-bearing deposits.
Our loan-to-deposit is almost at historic low levels, so there's no incentive for us to be a price leader in terms of rate increases on savings accounts. That's give it.
Thank you. The 20% deposit beta is after the August rate hikes?
Yeah. So, so, so that's if you include all, so that's also including then your current accounts, where you pay zero in. If you just look at the savings accounts, then clearly the beta is 30%-35%. It depends on what your definition-
Yeah.
of
Yeah.
Beta is.
Okay. Thank you.
Is that clear? Okay.
Thank you.
Thank you. We'll now move on to our next question from Marta Sanchez Romero at Citi. Your line is open. Please go ahead.
Good morning. Thank you very much for taking my questions.
Morning.
The first one, could you please remind us your priorities in terms of capital allocation? Do you think you need to make the bank more efficient, and hence you would prioritize cost restructuring or even M&A before increasing capital repatriation to shareholders? My second question is related to the first one, really. Do you think your commitment to reduce costs will imply additional restructuring charges? The third one is a quick follow-up on Flora's question on risk-weighted asset inflation. Ballpark, what fully loaded regulatory CET1 headwind should we expect from the review of internal models? Thank you.
Could you repeat your last question? 'Cause you're, you're coming through a-
Yeah. Oh, do I need to repeat it?
Yeah, just very quickly.
Yeah. Just ballpark, what is the impact on fully loaded regulatory one expected from the ongoing review of internal models? Thank you.
Yeah. Yeah, I'll take your first question. I'll ask Ferdinand to take the second, and Tanja will take the third. On, on prioritizing capital allocation, I think we've always been very clear that the way we execute our strategy, we've made a very clear choice in the segments we serve and the Northwest European geographies that we serve. So that's an organic execution of our strategy with a, an associated capital allocation, if you will, in terms of executing our strategy. M&A has been, always has been, the, a part of a strategy that we would always consider. As we've talked about M&A in the past, it hasn't changed today.
If there is an opportunity that, that would help us execute our strategy more effectively and therefore be accretive, but also financially accretive, certainly M&A is something that we take under consideration, and that would then lead to the to necessary capital allocations. The way we're executing our strategy means that we stay committed to the choices we've made around the segments, the growth segments, the geographical areas, and that will carry with it an associated capital allocation. When M&A opportunity comes up, we will then take the consequences, review, and clearly allocate as necessary.
Yeah, maybe follow on cost. First of all, the outlook for this year, so we guide now to around 5.2. The major reason for lowering that was the announced Single Resolution Fund contribution, which was around EUR 70 million lower. It's also, we said, we have an underrun in certain investments we're doing, and Robert said already by the introduction, it's investment in digitalization of our processes. Also, for example, significant investments in data capabilities and data infrastructure. What we need, as we need to report more and more on non-financial data, also linked to sustainable finance regulation. In the second half, also, the second phase of our increased CLA of 2.5% kicks in.
That's why we guide for 5.2, and if you annualize the current run rate, you will be below that. Then if you go for the outlook for cost for 2024, in the previous quarters, we always link this to five levers. Two of them are still very much relevant. First of all, is the cost in non-core. It's over last year, it was roughly EUR 160 million, so we still expect definitely EUR 100 million of cost to come out of there. Secondly, it's a lowering of the regulatory levies of up to EUR 200 million, and I think with the lower SRF contribution, you've seen the first part of that. On the other levers, and that's also the reason why we don't see any head despite really focusing on cost, we think the 4.7 is not achievable.
Number one is much higher inflation than expected in 2020. The EUR 100 million lower costs coming from cost savings being higher than inflation, that is less achievable now. The number two is the investment. As I said, we have an underrun in some of the investments, so that will flow through into 2024. Also there, that was earlier guided for roughly EUR 100 million. Lastly, you have the AML sort of expected cost coming down when we end up in a BAU situation, while Robert alluded to that. Also there, the up to EUR 100 million reduction might be postponed beyond 2024. That's why you get some sense of the direction of travel towards towards 2024.
Your last question, how do you link that to a potential restructuring cost? I know we mentioned the restructuring cost in 2020. We have not booked any significant restructuring costs, but as I'm saying, we have an underrun currently in some of the priorities we're doing. We're reskilling staff, and you also see that specifically from external staff, the headcount has come down quite significantly in a year's time. So the conclusion of that is that I do not expect any significant restructuring professional cost in 2024.
Okay.
Sorry, a bit of a long answer, but I hope it provides you with some context. Now, we're not fully subscribing to the 4.7....
Maybe on your third question on the, on RWA, well, once we do model reviews, and have visibility on the impacts, we, we do include it in our, well, calculations and in our financials. All the visibility that we, we do have, we have included, and once we finalize a new model review set, there might be implications, but that's not something we can predict what the size will be in the, in the future.
Does that answer your question?
Yes, kind of. Thank you.
Okay, thanks.
Thank you. We'll now move on to our next question from Benoît Pétrarque at Kepler Cheuvreux. Your line is open. Please go ahead.
Yes, good morning. Thanks for taking my questions. The first one is on, on NI. Maybe just to take a bit of long-term perspective, on, on the deposit margin. Clear to us to understand where, where your deposit margin is currently versus the, the long-term average. I think, ING is actually disclosing a lot on, NI as pre-deposit margin versus lending, margin. That's very useful, and I think it will be nice to have the same type of disclosure for, for ABN. I'm just wondering where you are now currently on the deposit margin. On the capital framework, what do you have in mind currently? I know you had this 15% in the past.
Is that still something you, you want to keep, where you, happy with that, or, you've seen some, maybe limits to setting, kind of a threshold? Just kind of try to get a bit of direction, into what we, we could get, in February. Sorry, it's not clear to me yet fully, what is holding you back to announce a share buyback in, in H2. I guess it's maybe a bit of an M&A angle to that, but again, just wanted to, to have that clear, because I think on your profitability level and, and KPIs, I think, you know, I'm not sure if it is something you really need to, to, to, to, give an update on, an update on, on share buyback.
Then maybe just finally on the, on the fees, you had a EUR 23 million one-off positive. Is that a real positive or do, do we need to strip that out, i.e., to get it to a clean level of, of fees or in Q2, or you think Q2 was especially low because of, you know, low volatility, a weak, financial market and, and so on? Thank you.
Yeah. Thanks, Benoit, the deposit margin fees are fair enough, we'll say. I. You know, on, on, on, on the, on what we expect to announce in terms of the capital framework at Q1, let, let me just say that all components of our current capital framework will be under review to ensure that what we come up with again, is something that we can carry for a period. We will be reviewing all the components. That's probably as far as I can say at this point, because we're, as you can imagine, we're still in the midst of working our, our way into that, into what the capital framework actually would look like, all components will be on the review.
I appreciate the question on, on timing of, of share buybacks, and, and your, your second year, or sorry, the suggestion on the second half of the year. Again, I just revert to what I would say earlier. If we are in a situation where we have good reason to review our plans, I mean, we want to continue to instill the cost discipline. We want to ensure that, as we are in an inflationary environment, which is changing, we come to the right conclusions in terms of, our cost levels, but also at, at various income levels over a plan period, that will have ultimately, will, will be drawn into, the, share buybacks that we want to do.
It is very clear, and I, I hopefully, I, I just confirmed it also in this call, that we will stay committed to regular share buybacks, as we did also over the course of the last, the last periods. That will continue to feature, but as I said, we'd like to have the overall view and then communicate what the outcome of that is and do that all in one go.
Yes, Benoit, first of all, on your fees, why are we highlighting EUR 23 million? It's basically because we still have our disclosures on non-core, and this fee came from non-core. And as you know, our overall loans are now down to roughly EUR 500 million. So there's a very small tail remaining there, and we're in the process of transferring the residual from the countries to the Netherlands. So as it is a non-core, it's something we highlight. So if you look, quarter on quarter, this is something you as an analyst could, could, could strip out. Then on margin development, we had the discussion before.
I know the disclosures, you just mentioned from, from another bank, but do realize for us, the deposits are fully related to, or almost fully related to, to the Dutch market. That's also one of the reasons why we're not explicitly stating what our margins or forecasts are there. What I did say is that we still see an increasing deposit margin this quarter. I also said, if you look overall to the asset margin side, it is roughly flat for, for, for corporates. If you look for, a consumer loans, it's a relatively small portfolio where you do have clearly some pressure on margins because your funding costs go up and you have statutory interest of maximum, at 12%.
On mortgages, we do start in a phase now, although lower productions, where a new inflow of margins clearly are at a higher level than what we saw last year. The new production is now more or less at the level of what the back book back book margin is. That should give you some color on the underlying levers of the alpha margin development. The most important reason is, as I just said, our fully dependence on the Netherlands, that we don't want to provide an explicit overview of deposit deposit margin.
Thank you very much.
Thanks, Benoit.
Thank you. Ladies and gentlemen, if you find that your questions has been answered, you may remove yourself from the queue by pressing star two. Thank you. We'll now move on to our next question from Gelong at BNP Paribas Exane . Your line is open. Please go ahead.
Yes, good morning. Thanks for taking the time. Two questions on capital. The first one is on the table where you show the Tier 1 ratio, et cetera. The regulatory and other adjustments has increased from a - 120 to - 330. I was wondering what that was. The other element is still on the RWA and the change in the models, because A, you're losing all of your return earnings to an increase in RWA. B, as far as I know, not many banks are experiencing such an impact from changes in models. So I was wondering whether you can elaborate a little bit more as to what's wrong with your models. Thank you.
Thanks, thanks for the question. Tanja?
Yes. I'm looking for the header table that you're referring to.
It's page, maybe-
Yeah, it's, it's page 31 in the report.
Thank you.
Is it okay, it's a rather detailed question that we start with the second part of your question first?
Sure.
Also, maybe because we don't have the full report here readily available for us, that the investor relations will pick up with you after this call. Is that okay?
Sure.
Okay.
Maybe, hey, you can repeat, the, the second question?
The second question still is with regard to the change in the models, because not many banks are seeing such an impact from changes in model on RWA. I was wondering what is wrong with your model, because you've, you've changed them already quite a lot since four years?
Yeah, that's, that's true, and we are actively working on simplifying our model landscape, also, ahead of Basel IV. Well, a significant part of our models is related to what is called the low default portfolios. Well, because of the fact that there are low defaults, it's a bit counterintuitive. It's not always easy to develop models that meet the requirements that are set today. If the number of defaults are too low, then, yeah, it's not possible to develop an advanced model. That's why we are reviewing our model landscape and also, moving portfolios to less advanced approaches.
We do that also ahead of Basel IV, because on the Basel IV, you get input floors, that put in the floor and in any case, and for other parts of the portfolio, even require to go to an LGD that is prescribed by regulation, that's the case for the large corporates. That explains our moves. Of course, I cannot see what choices other banks are making in terms of transitioning from where they are today to the Basel IV environment.
Okay. Thank you.
We'll come back on your, on your first question on the rec and other adjustments in the queue.
Yeah. Thank you. Because it's, it's a half of your return earnings, so it's quite an impact, quite a non-negligible impact.
Thank you. We'll now take our next question from Benjamin Goy at Deutsche Bank. Your line is open. Please go ahead.
Yes. Hi, good morning. Two questions, please. One on asset quality, one on your deposits. First, maybe you can speak a bit more about your stage 3 inflows, any trends you're seeing on whether typically isolated cases. The second question on deposits, because you two, you have been, let's say, a fast follower on the deposit side, but sometimes following with a lag. I was just wondering whether 25 basis points really makes a difference to your clients to switch banks, or is there some inelasticity in the deposit base? Because so far, deposits are stable, and we only see the mixtures within ABN AMRO. I was just wondering how it affects competition. Thank you.
Yeah. Yeah, Tanja, if you want to take the stage 3, I'll take the deposits.
Yeah. So on, on stage 3, and you see that also in our disclosure set, the stage 3 exposure for corporates came down a little bit, and that's the net impact of outflows and inflows. We did see some inflow, although, yeah, I would say nothing extraordinary, and also no specific trend there in terms of sectors.
You see kind of, well, heavy inflow, while getting to, I would say, more normal levels, and leading to, to some additions in provisions, but as said, offset by the fact that we were successful in resolving files at, of course, at the non-core site, but also in the core portfolio, we were able to generate outflow in stage 3.
On your, your question on deposits and the reaction of customers, it, it is actually obvious now in, in, you know, for the, for the second quarter, we've had a. We've had a number of, of rate hikes. We see some migration. We've seen for this, for this quarter, about a EUR 7 billion migration away from current accounts into, into saving, savings accounts and, and time deposits. It actually, what it tells you is that the, whereas the overall deposit space then remains stable, is that our clients are, are clearly opting for the, for the, for the, for the interest rates that we've offered them in conjunction very, very often with some of the other banking relationships that they have with us.
I think it's good to see that there is that clients continue to make use of an interest rate that we've offered whilst they're continuing the relationship with our bank as well. The market in the Netherlands, I guess, to earlier comments, is competitive in that sense that there's different interest rates being offered, but at this point, the migration away from ABN AMRO is indeed very limited. I, I would, I would subscribe to the reason here that it's also due to the relationship that these clients have with our bank, among many of the other products that they will have with ABN AMRO, and not just only their current accounts or savings accounts.
That's good. Thank you.
Thank you.
Thank you. We'll take our next question from Rahul Sinha at JP Morgan. Your line is open. Please go ahead.
Good morning. Thanks for taking my questions. Can I have two, please? Maybe one on detail and one broader question. The one on detail is just coming back to your comment on the replicating portfolio tailwind leveling off. I'm sorry to come back to that, but obviously, it's numbers that we cannot see from the outside. I just wanted to explore a little bit of why that might be the case, you know, for the bank. I'm just assuming that this is probably because the short-term element of your replicating barbell has completely repriced, and I guess you probably still have some tailwind from the long-term, long-duration element of it. If you confirm that?
The second related point to this replicating question is, can I check if this is also because the equity replication is booked in other income rather than NII? Is that one of the reasons why perhaps some of the repricing of the replication is not in NII, and that's probably why you're making the comment of leveling off? That's the first question. I don't know if you want to answer that first, and then we can take the second one.
Yeah, go ahead, Daniel.
No, it's fine. As I said, on the replicating, so the leveling off, to, to put it in context, we're definitely not saying that we don't think there are further increases ahead, but the rate of increases underlying will gradually slow down. As you rightfully say, 40% to 45% of the replicating portfolio reprices within a year, so we've seen already quite a bit of that benefit, and the outflow duration is roughly 3 years. There will still be a tailwind, although the quarter on quarter increases will gradually start to will start to level off. On, on, on equity replicating, I don't know if you refer to the outflow equity mismatch?
I'm just talking about the, the equity base, whether.
Yeah, the equity base. Yeah, but that's also in NII, and that's a book there under under Treasury income.
Got it. Thank you. I guess the second one-
The Treasury result in, in other income is more related to outflow hedge ineffectiveness, what's in there. Outflow, the equity income is also booked under, under NII. That's included.
Got it. Thank you. That's very clear. The, the second one, maybe for Robert, is just on fee income growth, which is, which is running, you know, well below its plan. It's running well below your sort of medium-term aspirations, of 5%-7%. I just wanted to, to get your thoughts on the evolution from here and whether, whether you're coming to the conclusion that M&A might be really needed to supplement your, your, you know, your, your franchise in order to really kick-start sort of longer-term, fee growth from here. Thank you.
Yeah, thanks. Thanks for the question. Yeah, fee income has been flat for this quarter, but I think it's good to realize that fee income, for some part of fee, the fee income, about half of it is, is also very attributable to market performance. Both Wealth Management and clearing, have had the, the effects of, of, relatively quiet markets, come through in, in terms of the fee-generating, capability that we saw. We came off of a very strong clearing performance in Q1, and we've had, over the last periods, we've had fee growth of around 7%.
I would still say, you know, based on the fee generating capabilities that we have also in terms of the segments that we've identified in our strategy, which would generate fees, we're still very much investing in those areas, and we still think that those are areas that will continue to generate sufficient fees for us, but in part, we're depending on market circumstances. Overall, we would look to maintain the 4%-7% CAGR that we set out for 2020-2024. In terms of your question on M&A, and look, you know what I said before, if we think that M&A is relevant to any of these components of our strategy, but it is also very clear that we would consider the...
We would consider M&A, and components of our strategy would be feeder lines within the bank. It would be around wealth management, as we've indicated before. Yeah, I mean, that's, those are if those opportunities present themselves, we'll review them. We still stick very much with the organic growth capability and the segment choices that we've made as it relates to fees.
Thank you very much.
Thank you.
Thank you. We'll now take our next question from Amrit Gill at Barclays. Your line is open. Please go ahead.
Hi. Thank you. Two questions from me. First on capital. I think you mentioned that all aspects of the capital framework are under review, and a lot has changed since it was originally set. Just wanted to check, you know, from your perspective, what are the key changes that have happened? In general, are you thinking about more or less capital return? Secondly, on costs, I'm pretty sure we'll get an update with Q4. Also, I just wanted to check your expectations for 2024, 2025. Do you think you can do better than the EUR 5.1 billion of costs that's in consensus for 2024?
If the EUR 4.7 billion isn't achievable by then, you know, should we think about it as achievable for 2025 or, or, or not? Thank you.
On, on capital, I mean, clearly we're in different economic circumstances than we were back in 2020. We, we took up some, some considerations in those 200 basis points on the economic situation. We did not have the inflationary environment in which we're, to which we're currently operating. At the same time, we've taken out some uncertainties that we had at the time, predominantly related to settlements that we needed to, to conclude off with the Dutch public prosecutor. There were a number of those components that began to constitute, to build up to a threshold, have either changed or been adjusted. That is why we definitely want to review, the, the, all the aspects of our capital framework.
Yeah, in terms of costs, you know, I would suffice to say, at this point, the, the cost discipline will continue to be there. Clearly, we have to as, as Ferdinand has indicated, the various components that we currently have under review. I, I don't think you should defer anything from that in terms of the, where we're going to end up ultimately, other than the fact that we will continue to execute a high level of cost discipline as we come up with that new number for 2024. I think, in all fairness, it's a bit too soon to begin to indicate what that number potentially could be. But the, the cost discipline will remain. That's not changing.
I think some of the factors that have led us to release the 47 right now, in a way, are just unavoidable given the situation we are in terms of inflationary pressure in light of the pressure on the labor markets. At the same time, you will have seen us realize some of these cost savings and continue to execute on some of the cost savings. For example, as Ferdinand has already indicated, non-core, we'll still continue to execute against those programs and some other existing programs that we have in place. But too soon, at this point to give you a final number, but we will do so, on, at Q4.
Got it. Just also to understand from what you're saying, so the 2024 also then starts to provide a new run rate, going forward into 2025 and, and beyond, given the.
We will-
pressures that are driving it.
Yeah. Let us complete the analysis, and then we can give you that complete view in Q1.
Thank you.
Sorry, Q4. Apologies.
Thank you. We'll now take our next question from Carey at HSBC. Your line is open. Please go ahead.
Yes, good morning. A couple of questions from my side. Firstly, just a very quick one. In, in terms of the, the persistence of those AML remediation costs into 2024, can we just have some reassurance that no fresh issues have actually popped up on the radar screen that you might need to address here? That it really is just a timing issue in terms of winding down the resources you've got deployed there on AML remediation. Secondly, just on Wealth Management and picking up on some of your comments about organic growth. Have you got specific plans to make opportunistic hires of private bankers in Western Europe, say, you know, basically accelerate the growth and hiring plans in Wealth Management?
You know, just because there's this big integration project involving two of the biggest players in private banking globally, going on at the moment.
Yeah.
Is it more a case that, you know, current cost pressures on issues with your cost targets for next year means you maybe have to take your foot off the pedal there, in terms of chasing organic growth, and maybe, you know, take a backseat given some of those concerns there? Thank you.
Yep. Yeah, I'll take, I'll take both your, your questions. Let me just be clear that we expect to complete our work on remediation programs on our AML client files. We still expect to complete those in 2023. That will continue. Indeed, as we said, as we're nearing the completion of the client file remediation, we are also wanting to ensure that we continue to maintain the levels required, so to make the AML, the ongoing AML activities much more continued sustainable and keep them at an adequate level for the various regulatory requirements. We will complete the client file remediation programs in 2023, and then beyond 2023, we will continue to ensure that we have our ongoing AML activities at par.
Therefore, we do think that that will need either more cost or it will drive cost to an extent that we do not see yet our AML reduction as we had envisioned initially to come in, in the period within which we had indicated. The AML benefits will come in more gradually. We will continue to invest to ensure that our BAU AML activities are of the quality that is required. Then on your question, in terms of, are we open for team grabs or are we continuing to invest? You know, we've done so over the last over the last over the last plan period, so we will continue to invest and, and explicitly to a point of team grabs. Where we can, we will.
We've done that in certain areas. Our current indications on cost and cost levels are not preventing us from executing the strategy as we set out for our Wealth Management practice. We are very much committed to the markets we're currently in, so in Germany, in France, and in Belgium. We continue to invest where necessary, and that does include hiring corporate bankers or hiring, sorry, hiring Wealth Management bankers to come into our practice. We will continue to do that. That's, that stands aside from the discussion we have on costs.
Great. Thank you.
Thank you. We'll now take our next question from Anne Khan at RBC. Your line is open. Please go ahead.
Yeah, thank you for taking my question at this stage. Just 2 small ones. Firstly, really, on the buyback. Apologies for coming back. Would you already apply for approval before disclosing your plan, or would it be you present your plan in February and then ask for approval, which then obviously would mean you only start later? Secondly, with respect to your costs and your continued focus on cost discipline, do you think do I understand this correctly, your focus, the focus on absolute costs do you think is the right thing, or is it in the current environment better to focus on a cost-to-income ratio? Thank you.
On the on buybacks, we're always in a what I would call constructive dialogue with our regulators, both in terms of the planning that we're doing, the what we're communicating to you today, so that, that, that communication will be ongoing. We have yet to decide, based on the analysis that we do, exactly what we're looking at in terms of the capital framework and any potential share buybacks, we will carry that into the conversation, obviously, with our, with our regulator, as we, by the way, always do. Just remind me again, your second question.
Are you going to focus on absolute cost, or do you think-
Oh, yeah, yeah.
a cost to income ratio is a better way to look at it?
Yes. We will continue to focus on absolute cost, because that does provide very, very clear focus also within the bank, and we've seen some very good results over the last 2 years. Our focus on an absolute cost, of course, in terms of the comparables and comparisons we do to assess our overall performance, we use cost to income as a, as a, as a ratio, to do benchmarks, but the guiding will continue to be on absolute cost.
Okay. Thank you. If you can just clarify on the first question, the point that you're in ongoing dialogue does not ... would imply you could also already talk about the buyback when you present your plan, and you don't have to wait to ask for approval after you present your full plan.
Yeah, we always, we always have to. We always will carry a and complete dialogue with the regulator, and that's also about the intentions we have on any potential share buybacks.
Thank you very much. Thank you.
Thank you. We will now take a follow-up question from Flora at Jefferies. Your line is open. Please go ahead.
Yes. Thank you. Just 2 quick clarifications, please. The one is regarding the MDA, where, you know, on the Slide 10, you have a footnote that mentions the MDA went up, but it is expected to go up again next year. I just wanted to check I have the right numbers there. My understanding is it is now going to be at 10.5% for this year, and you expect it will go to 11.1% next year. Then the second question is on the Single Resolution Fund. You know, you had talked before about a discussion with the SRB on the calculation method. Can you maybe remind us how much is at stake here and the timing that you expect for the resolution of this conflict with the regulatory authority on this? Thank you.
Tanja, if you take the MDA, and then maybe another bit more color.
Yeah, I can also take the MDA. It's fine. If, if, if you look at the MDA trigger based on SREP now, as communicated, it's at 10.5. That already increased because the Countercyclical Capital Buffer first effect of 1% is included in there. Clearly, if you look from Q2 next year, this will increase again because the Countercyclical Capital Buffer there for the Netherlands will move from +1 to +2%. That will be the increase as of Q2 2024. The second question is on the disputes with the Single Resolution Board. I think overall, we disclosed before what the overall costs are.
That is, or what they're claiming, that's EUR 120 million pre-tax over the period 2016-2022, and that's really related to what the calculation methods they are using, specifically related to our mortgage, mortgage bank. Since the start in 2016. We did pay the EUR 120 million on the protest just to comply with the Dutch regulation, but we booked it as other assets, so it has no PNL impact, and we will keep challenging this SRB decision also in court, but clearly the outcome is always uncertain.
Okay, to be clear on this, there is a risk that if you lose this dispute, you have to take EUR 120 million through your PNL, right?
Yes. Correct.
Okay. Thank you.
Thank you. We'll now take our last question from Jason at ING. Your line is open. Please go ahead.
Yes. Hi, good morning. The first thing, the first question is on Wealth Management, coming back to the point that was made before on fees and commission, where you say that, due to volatility in markets, the progression has been a bit slower. If I go back to about, let's, all 10 quarters, it has been remarkably stable. It was EUR 145 in second quarter 2021. It's EUR 146 this quarter. There doesn't seem to be a benefit in Wealth Management from markets, and also from inflows. Could you comment on that? That would be great. Also, if you could provide us with a split of discretionary versus non-discretionary, in your Wealth Management.
The second question is on missing out on the Hauck Aufhäuser Lampe acquisition. Could you comment on why you dropped out of the race? Putting the price aside, just a generic question is, do you find that the company may not be ready to pursue more aggressively such deals, or do you find that's not an issue? Finally, on the share buybacks, I mean, the consensus was expecting this EUR 250 million. Nearly everyone had seen the numbers, and over the last four years, we seem to be quite often having a disconnect between the quantum and the timing on this issue.
With what you will announce in February, do I understand it that, you know, over the period of three years or whatever, there is going to be total clarity on threshold, timing, quantum, including it in a certain way, M&A plans, so that, you know, we don't need to go through this start and stop that we have seen over the last four years? If you could include there in your comments, if there is any relation with the Dutch state, state reduction, and if it has any bearings on the share buyback, just thinking about the contingent last year, so that we get an overall picture of what to expect for February. Thank you very much.
Yeah. To start, to start off with your, your, the last part of your question, there, there is no relation there. Just the, the state, continuing to execute their programs in a potential share buyback. The second part of your question, As I said, we'll review all the components that we need for a capital framework, to ensure that we have, again, a, just a complete communication on how we look at, our, the various components of the capital framework and the associated, share buyback. We'll be as complete as we can be, at, at Q4. In terms of your Wealth Management questions, it's more about the, the different parts of Wealth Management that may be, more, susceptible to market performance. I also mentioned clearing.
It, it does very much depend on inflow, clearly also of our, our NNA, which we've, again, also this year or this quarter, we've seen a, a positive inflow in, in terms of cash. Yeah, it, it is very much a components within Wealth Management that are, that, that, that, that, are affected by, by market performance. It's not a one-to-one, relationship in of itself, it is very clear that if market performance trends up, then on, our, management, asset management, we'll see the, fees starting to, to increase as well. Are sensitive to, to market movements. The, I don't have the splits for discretionary.
No, we don't disclose the discretionary portfolio management from, from, from the F5, so we don't disclose that.
Okay. Okay. Thank you very much. On the Hauck Aufhäuser Lampe acquisition, or if at least you can comment on the, you know-
Yeah, there's a reason, there's a reason-
To be.
Yeah, you know, I don't comment on individual transactions that are reported in markets. I would suffice to say that what I said earlier in the call, and I've said in previous calls, will continue to hold true, that we're ready for the type of M&A that we feel we need to do in light of the business models that we currently have. I would leave it at that.
Okay, great. Thank you very much.
Thank you.
Thank you. There are no further questions in queue. I will now hand it back to Robert for closing remarks. Thank you.
Okay, well, thank you very much, and thanks, everyone, for, for joining again today, and, look forward to, the follow-up conversations. Thank you.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.