Right, thank you for joining us for this session with Ferdinand Vaandrager, CFO of ABN AMRO, a role which he has held since November 2023, with a new CEO joining the bank and a capital markets day scheduled for later this year. It is certainly a dynamic and busy time. Ferdie, thank you for making the time to join us here at the conference. Let's start by discussing the trends that you have seen most recently. Clearly, Q1 was good in terms of business performance, but given everything that we have seen post the end of the quarter from April onwards, perhaps you could just update us a little on how the business is currently performing and what changes you have observed in client behaviour, if any.
Yeah, I think Chris has said that Q1 underlying commercial performance is healthy. If you look at our overall loan book, I think it grew with roughly 1% in Q1. Mortgage market, definitely an important driver, is 60% of our balance sheet. If you look overall Q1, I think new production was like 30% higher than Q1 2024. You do see that trend continuing in Q2. House prices continue to rise. House transactions are also still on the rise. That backdrop and the commercial momentum is actually quite good. We're really benefiting from the multi-brand strategy and multi-channel strategy through ABN and through the intermediary channel. If you look at the corporate side, yeah, clearly uncertainties are never helpful. The pipeline is there, but when do they translate into commercial opportunities? For us, the SME in the Netherlands is the demand is pretty good. If you look outside the Netherlands, we specifically have exposure in the transition sectors. It is digital, it is new energy, and on the third hand, it is also mobility. Also there, the transition demand is really there, but clearly with uncertainties in the markets, investment decisions might be postponed. Overall, the commercial momentum is positively continuing in Q2.
If we think about the full year guidance, you've guided for EUR 6.2 billion-EUR 6.4 billion on NII. You now expect to land in the middle of that range. What are the key sensitivities that could push you either towards the upper end or towards the lower end, particularly, I guess, in light of deposit beta management and also the volume equation as well?
Yeah, we provided a range at Q4 between the EUR 6.2 billion and EUR 6.4 billion. After Q1, we specified it more that the outlook will be EUR 6.3 billion. And that's really based on the impact of a first lowering of our main savings product of 25 basis points as of the 1st of May. That impact of roughly EUR 170 million is partly sort of countered by the forward curves, which are a little bit less favorable vis-à-vis what we provided end of January versus the 1st of April. Hence, we increased the overall lower end of the range to EUR 6.3 billion. What can surprise on the upside? Clearly, what's happening with forward rates in the current forecast of EUR 6.3 billion, there are no further lowerings of the saving rates included into that. Clearly there with the ECB taking further actions, they recently lowered by 25 basis points. You would assume that the deposit beta will follow deposit beta management that can be upsided in this.
Let's turn to hedging. Can you walk us through the hedging strategy and how that impacts NII and the outlook for the replicating portfolio this year and through the medium term? How has that changed recently given the moving forward rates and the steepening of the curve?
How long do we have, Chris?
[Crosstalk]
The hedging strategy of the banks never is too explained. But in a very simplistic way, we swapped the complete balance sheet to floating rates. So both assets and liabilities. So every bond we issue, we do that via a payer swap. And also on every loan we grant, we manage that via a receiver swap. And then the overall interest you get on that vis-à-vis what you pay out, that's the overall margin you make. And this also applies for our replicating portfolio. We manage that on the basis of a portfolio of receiver swaps. If you then look on what the outlook is there, we do expect the overall income from the replicating portfolio to go down this year at EUR 6.3 billion is an element in the guidance vis-à-vis where we were at the EUR 6.5 billion last year overall NII. This is one of the elements.
We expect it to stabilize next year and then increase in 2027. It will be very much dependent on what will happen underlying with the savings rate. As said earlier, in the current guidance, we do not take into account any further impact of lowering of the major saving rates. Every 10 basis points lowering has a sensitivity of roughly EUR 100 million annually on the income.
If we think about fees, fee growth was really strong in the first quarter, is up around 8% year over year. There were contributions from all the client units. Are you seeing structural drivers that could support that, I guess, continued growth beyond this year? Should we expect a normalization in that rate of growth over the coming years?
Yeah, if you look overall, we provide that earlier sort of indication compound annual growth rate of 3%-5%. If you look at the last five years, fee growth has been on average 5%. Last year was a bit higher, 7%-8%. Also the first quarter, if you compare that to the comparable quarter a year before, roughly 8%. I always say part of it has an element of financial markets because a big part is your assets under management at wealth management. We also have our clearing business, which were clearly a more volatile market. The fee tag will be higher there. You have your structural elements. We increased the payments package pricing as of the 1st of January. You see increased commercial efforts on net new assets, a combination between organic but also inorganic.
You've seen the announcement of the acquisition of, well, I can use the full German name here, Hauck Aufhäuser Lampe instead of HAL, to be integrated as well. Also on the inorganic side, that should really help and support to become less dependent of NII and make more a shift towards fees. There are definitely structural components. The other acquisition we closed last year was BEX, a NeoBroker. Also there that should really provide as a sort of feeder channel for younger customers who want to transition into first-time investors. Most of the initiatives we have are really sort of focusing on increasing our overall fee take.
M&A has basically been a key part of shifting the growth algorithm from, if you look at the revenue pool holistically, basically.
Yes, we've clearly said for inorganic, we like to grow on wealth management. Germany, with the acquisition here in Germany, we have a solid number three position. We almost are doubling our assets under management. Yeah, clearly also bolt-on opportunities in the core countries where we are present with wealth management might add to that, yes.
Maybe let's pivot to costs. Underlying costs declined sequentially in the first quarter. You've got the guidance out there for the full year, EUR 5.3 billion-EUR 5.4 billion. What are the main pressures that you may anticipate seeing in the second half of the year? How do you balance, I guess, internal full-time employee growth versus those externals being reduced?
Yeah, there are many questions and focus now on the FTE trajectory. It was explained at the full year that in the second half of last year, we were still in full execution on many of our foundational regulatory programs. That was also the explanation why in the second half of the year you saw an increase in FTE. Now we have reached a sort of inflection point in Q1. If you look on a net basis, internal and external, you saw a decrease of roughly 50 and still an increase of 200 in Q4. Number one is we are consciously transforming external into internal employees because they are filling a skill gap that we do not have. It is also often cheaper than being reliant on consultants and contractors.
You should start seeing where we're finalizing some of those more FTE-heavy programs that we, number one, start shifting capacity to revenue growth initiatives, but at the same time also start reducing our overall workforce. That's actually a trend you will start seeing from here on. Our guidance is explicit. We have a cost income target for 2026, but I really like to steer on absolute cost on a 12-month forward basis because that also provides rigor and discipline in the organization. We are guiding for a flat cost base, 2025 over 2024. That's between EUR 5.3 billion-EUR 5.4 billion. That is hard work because also the second part of the CLA increase will kick in in the second half of the year. We're comfortable that we can realize that, Chris. Cost management is a key attention.
On credit costs, in payments, I mean, essentially zero, EUR 5 million or so in Q1, you expect fully a cost of risk to remain below the through-the-cycle range you have of 15%-20%. What's been driving that lower for longer outcome on credit costs? Does that change at all how you think about where you want to grow the business or where you can harvest better risk-adjusted returns?
Yeah, if you look, yes, we have a through-the-cycle cost of risk of 15-20 basis points. But in the past three years, you are almost all on a net basis, zero impairments. I think number one is the result of significantly de-risking the bank. In 2020, we announced the wind-down of non-core and a better bank that has been finalized. Number two is 60% of the balance sheet is residential mortgages, where the cost of risk is very low. I think the one basis point in Q1, you should nuance that a little bit because there were some overlay releases and immobile adjustments. If you would normalize for that, the cost of risk was around 7-8 basis points.
For the full year, we definitely expect to stay below the through-the-cycle cost of risk guidance of 15-20 basis points. For sure, also in the strategy review we're currently undertaking, we're clearly looking at what specific pockets do we want to grow and also how do we look at the risk-reward balance? Because at the end of the day, increasing the returns, one hand is also looking at your risk profile and where can you take the conscious risk to increase the returns.
Let's talk about returns for a second. You delivered essentially 10% ROE in Q1. That's in line with the upper end of your target for 2026. What are the key drivers, both positive and negative, through the rest of this year that we all need to be mindful of when considering where group performance, I guess, eventually settles in terms of 2025 as a whole?
Yeah, so the 10% is, yes, you were there over 2024. I think we addressed already the key elements. Last year, we had an NII of EUR 6.5 billion. As said earlier, we expect deposit margins to start normalising. The current outlook is EUR 6.3 billion. That is a negative delta on NII. We expect the cost base to remain flat. At a certain point, cost of risk will start to normalise. Adding those three elements together, you would come to an ROE outlook for this year, which will be below the ROE result of 2024. For now, we have a target for 2026 of around 10%. We said at the time as well that clearly the longer-term ambition should be above the 10%. That will be a key topic we will discuss during the capital markets day in November, what the key levers are for that, Chris.
Part of the outcome on return on equity is capital optimization, RWA optimization. Clearly, there's been an increased focus on RWAs in recent years. Maybe to begin with, there's a few parts, but can you set the scene by just running through the challenges that you've been addressing in the last few years in terms of the digital landscape, the TAM model, and then model simplification as well, and as well the RWA add-ons that you've been doing?
Yeah, I think, and this has been a process for several years, which started with the trim exercise, I think, in 2016, 2017. We've gone through the whole phase of a rigorous assessment of our model landscape. It's also from a regulation, which historically really sort of pushed for internal models. Also there, you've seen a shift towards less advanced approaches. For us, we made very conscious decisions for a big part of our non-retail portfolios to move it to less advanced approaches, including the standardised approach. That should really start helping in improving the predictability and stability of our credit risk RWA outlook. It should also start providing benefits in terms of overhead.
Because at the end of the day, you should also start looking at the cost of investments of remaining on IRB on certain portfolios, where the historic data is very difficult to collect, and where upfront you know you need to deal with add-ons on top of your clean IRB model. If you have the output floor kicking in from Basel four and at the same time an IRB with add-ons, then the benefit you're aiming for with significant additional investments is getting smaller. I am happy that we went through this phase. I think the first quarter was really an indication that we become much more comfortable what the stability and the outlook is of our credit risk RWA.
For us, where do we see the additional benefits is number one, still in terms of data repair and improving the data quality because there are still benefits also under standardized to lower your RWA. Number two is have a much more strategic approach towards capital management. We have been investing in doing our first transactions. We did a transaction on digital infrastructure with an American investor in a risk transfer. We did our first SRT with the European investment banks on SME. Also, a structural approach to capital optimization is a second part of this.
Before I jump over to risk transfers, just if we look in Q1, the outcome on RWAs was much better than expected. In part, that was some of the work on the data quality side that you have alluded to. The risk weight on corporate loans, again, you have touched on this, was still well over 100%. That is notably higher than some of your peers. I guess, you know, why is that number still high today? To what extent is there low hanging fruit still to go on the risk density side of things in the corporate book?
Yeah, I think some of the elements were addressed. Number one, your focus should always be on data because that is the cheapest way in order to improve your return. I think it's over 100%, yes, but you should also look at your off-balance sheet exposure. If you add that together for your exposure at default, it will be around the 80% or 85%. At the low hanging fruit, I mean, the improvements in data quality, it's also there in sourcing more external ratings. It's still investing in data in order to capture the benefit, for example, of the SME support factor. On the data side, yes, the low hanging fruit has really been materialized, but there's still opportunity there. As I said before, the capital optimization tools also there. In order to have a more programmatic approach on SRTs, it requires investments.
You need to get the plumbing in place. You need to get the regulatory approvals. You need to get your governance, et cetera, set up. We are investing in that so we can deploy that more actively where we think we can improve the return on several of the underlying portfolios.
Let's talk about those capital optimisation tools. Can you talk through how much opportunity you see from SRTs and maybe also conceptually whether you think about the capital that's unlocked or released from risk transfers in the same way that we would think about capital organically generated by the business? Does that difference, if any, result in a change to how you'd put that capital then to work, particularly in terms of whether it's distributed or whether it's reinvested in the business?
Yeah, for sure. You always look at that, right? You will always look where can we have accretive growth. That is always in order of prioritization. If you have accretive growth, that will always be a prioritization in terms of where the organic opportunities are. SRTs you would only do if you can free up at a certain cost of capital, which you can redeploy at a higher cost of capital. You are always dependent on what the market appetite is, what the pricing is, if the market is open or not. You need to take into account that you cannot do it once with one big transaction. You need to look at your maturity profile. You need to look at potential cliff effects in there. It really requires a strategic approach. Are there opportunities? Yes.
Quantifying the opportunity, I think this is better suited if you ask that question in November, Chris. Yes, there are opportunities, but we also see opportunities in being more rigorous on new loan intake at origination in terms of really requiring commitments to have a client ROE, which is at a hurdle level. Number two, what we're also doing is really looking at those portfolios, specifically in the corporate bank, which are not meeting return hurdle and are not of really strategic importance for the bank. An example of that is asset-based financing outside the Netherlands. It is not meeting the return hurdles. It is mostly being used by clients as a single product offering. We take the strategic decision to exit such a business and freeing up capital there. It has been on numerous levers. Overall, this should sort of lead towards the overall capital allocation to a corporate bank vis-à-vis wealth management and PMBB will have a different direction than what we've seen over the past years.
Okay, and then one last question for me before I open up to the audience. We were talking at the back earlier. This made sense when I wrote it two weeks ago, but now look at it. It is a very long question. You are going to host the capital markets day in November, and let's not prejudice what may or may not be announced there. I suppose from my perspective, it seems as though there are almost two distinct potential narratives around that event, right? The first is that the focus is going to be almost quite like inward looking, so focusing on freeing up capital, lowering the risk densities, significant improvements in the cost to income ratio. You talked about FTE strategy, external staff reduction, IT savings. In that scenario, profitability improves, capital efficiency improves, ROE steps up, and more capital can be distributed to shareholders.
That's one side. The other avenue, I guess, which is a bit more outward looking, more focused on profitable growth, there you'd see the investments you've made in Boot Hauck Aufhäuser Lampe, the desire to diversify the revenue streams, grow outside of the core banking business, and at the same time, protecting market share and lending, et cetera, et cetera. If you think about those two avenues, to a degree, they're mutually exclusive to a degree. If you, I guess, fully commit to putting capital to work and growing the business, then there might not be much left over for that multi-year turnaround and savings plan and vice versa. I guess the two questions, and that was just the intro, the two questions, you know, A, is that a fair characterisation of the choices you and the management team are making and currently working through and B, the trade-off and long-term impact from that inward looking and outward looking approach, is that a fair characterisation?
Thank you. You're really putting the key elements for a CMD on the table, yes, Chris. Very good. The short answer then is see you in November. Clearly, I mean, we have a new CEO, Marguerite. She just joined. I think also there, the timing of the capital markets there is good. We always had a strategy review planned for this year, but then she can be a very active part of defining that. We were really focused on the solid foundation and the sort of strong segments currently within the bank. Marguerite has been very clear as well. We're very well aware that we're still one of the lower valued banks in Europe. That's on the back of the ROE outlook we currently have. Addressing the profitability of the bank is a number one key priority.
The key elements, that is what she said already at Q1 as well, will be number one. We addressed it, capital optimisation, capital management. Number two is cost efficiency. We run at a cost income ratio of 60%. Every outside-in benchmark will show you that the business model we have should be 55% or even lower. Number three is we operate in mature markets. Where is the growth going to come from? There is very consciously what we have shown already that we want to diverge more into fee-generating businesses and the setup of the wealth management business and the opportunity to grow there are going to be the three key elements for this. How do you look at your capital trajectory and growth versus capital return? That is always the balance there as well. I think we have shown so far that we are very critical and selective on inorganic growth.
It really should fit in the existing strategy, what we are executing, if we can accelerate there. It really needs to meet the financial criteria. Number three is we need to be comfortable with the integration risk and that we can deliver on the spreadsheet exercise an M&A transaction brings in terms of returns. It will be balanced. It will be looking at all lenses, but the key levers to improve the profitability, that's what we're on, is going to be a blend for that. We will tell you more about that in November, Chris.
Great. Yeah. Okay, with that, let's see if we have any questions anywhere in the audience. Okay, I've got a couple of follow-ups that I want to walk through. Maybe just in the core, you know, personal and business banking business, you had 18% market share in new mortgage production. But maybe just talk to a little bit about how you see pricing in that market. It's a very competitive market. So just where are you seeing there in terms of balancing price versus market share?
That's key. We're not chasing market share at the expense of margins. The good thing is if you currently look at the growth in the markets and a much bigger part of the new mortgage intake is under the state guarantee because all house prices up until EUR 450,000 you can have under the state guarantee. It has an overall lower margin, but the RWA you hold against it are minimal. From a return perspective, it's still very attractive. Despite that, you see the new production at or even slightly above the backbook margin. Also therefore, from a margin perspective, this market is holding up quite well.
I guess from the outside in, when we look at the accounts, you know, there's the IT investment line, the IT spending line, but within that, there's a lot of digital investment going on. If we look at, you know, you've had improved net promoter scores, you've got new digital tools like Tikkie gaining traction. How is the division or how is the group, I guess, measuring the ROI of those specific digital investments?
Yeah, that's never easy. I think the transition we've made and for some, it's still sometimes an eye-opener. If you look back at the IPO of ABN AMRO, we had like 550-600 branches in the Netherlands. We only have 25 branches left in the Netherlands. We have made the transition already to digital and remote banking. All our daily banking services are available remote. What we are now really investing in is digitalizing the client processes end to end. That really requires investments. A part of your staff in the branches have moved to your customer care and operations division. Also, your customer care and operations division, you can really start applying the benefits of GenAI. There we have already some very promising use cases.
The second thing is how do we look at growth and customer growth because we have seen attrition over the past few years is really looking at new initiatives as well. For example, we launched at Money 2020 last week, Boot is a new neobank for 11- to 17-year-olds. For you, the app might not be the best suited, Chris, definitely not for me, but it is really for parents to get with their children, making them much more financially aware. It is really very intuitive. We built it outside the bank on a separate capital stack. We are really starting to leverage here on the payment request app we launched in 2016. It is called Tikkie. It is even in the dictionary now in the Netherlands. That is a payment request app which has 10 million users. It is owned by ABN AMRO.
It's not really whereas the business case behind it. We can start using that as a sort of feeder channel towards our new neobank, neobank Boot. That should really start translating in onboarding primary clients of the future as well and rejuvenating the client base. Also on this perspective, yes, we're really looking at how can we grow personal and business banking. Yes, there are IT investments. We're really tracking that in terms of what's happening in terms of net promoter score, what's happening into the feeder channel into our overall client base, et cetera, what we track on that.
Okay, I think that's a good point at which to conclude the conversation. So Ferdinand, thank you very much for joining us today and sharing those insights. We look forward to November.
Yes, thank you, Chris.
Thank you.
Thank you.