Good morning, and welcome to this ABN AMRO third quarter 2020 analyst and investor call. During this call, all participants are in listen-only mode. Following the presentations, we will conduct a question and answer session. I would now like to hand the call over to Mr. Robert Swaak, CEO. Please go ahead, sir.
Thank you very much. Good morning and welcome to ABN AMRO's Q3 results. As always, I'm joined by Clifford Abrahams, our CFO, and Tanja Cuppen, our CRO. This time is different as each of us is dialing in from different locations, which reflects the reimposed lockdowns here in the Netherlands. Also the U.K. It shouldn't impact our results call, though. Please bear with us during the Q&A session. You'll understand that our focus today is on our Q3 financials. I'll share Q3 highlights, update you on economic developments. Our good progress on my priorities, including the wind down of CIB non-core. We'll present on strategy and longer-term plans and outlook at our investor update at the end of November. Clifford will go through the details of the third quarter results and run you through capital.
Tanja will update you on developments in our loan portfolio, including Q3 impairments and our latest guidance on full-year 2020 cost of risks. Turning to the highlights. The Dutch economy has proven to be resilient as society adapted to limit the spread of COVID-19. The Dutch government has the financial clout to sustain large-scale support measures, and these measures indeed have been effective. Very happy to see that our impairments this quarter are moderating and the bank is returning to profit. Over the full year, we now expect impairments to be below the EUR 3 billion guidance we gave last quarter and closer to our Q1 guidance of EUR two and a half billion. We remain cautious, however, looking forward. Interest rates remain low. Our NII is under pressure despite further action we are taking on charging negative rates.
Our capital position is robust despite significant further TRIM add-ons this quarter. I now expect Basel III to converge to Basel IV largely by the end of 2021. During this period, we will continue to face capital and uncertainties. I think we should ask everyone to go on mute. Thank you. Let's also make sure that to help you, all callers go on mute until we're in Q&A. That might help. Let me just pick up where I left off. I was talking about the expectation of Basel III to converge to Basel IV, largely by the end of 2021. During this period, we will continue to face capital headwinds and uncertainties. COVID-19 is a big example of this. I do remain cautious in coming quarters.
Recent news on the development of a vaccine is very much encouraging, but it is, in all honesty, too early to assess the full impact. We are progressing well on the strategic priorities I've set, especially the non-core wind down. I'll come back to that later. I'll now update you on the Dutch economy on slide three. As I mentioned, the Dutch economy has been resilient. Two key metrics I'd like to highlight are the low unemployment rate and the bankruptcies are the lowest in 21 years. Now, these metrics do demonstrate the strength of the Dutch economy, as well as the effectiveness of support measures by both governments and banks. Payment holidays have ended, and we've resumed servicing our clients via regular processes. Coming months will provide more insight into payment behavior of our clients. Government support measures have been extended.
The scope and eligibility is gradually being brought down. We feel the impact of low rates, which we can only partially mitigate through negative deposit pricing. I remain cautious looking forward. Let me give you some details on the Dutch housing market. I feel confident about the Dutch housing market, which has remained strong throughout the year. Low rates underpin the rise in our house prices and transaction volumes. The credit quality of our mortgages is very strong as loan to values continue to decline and unemployment remains low. Only a small part of our clients made use of the payment holiday, and most have resumed regular payments. Our market share is stable, and we now also offer competitive 30-year mortgages, which we originate to distribute.
Looking ahead, based on the current pipeline of applications, I expect the market to remain strong and our market share to increase in the coming quarter. Let me now update you on the progress on our priorities on slide five. I'm pleased that the progress continues around these priorities. Let me highlight recent developments and how we're dealing with COVID-19. On COVID-19, our primary focus is the well-being of our clients and staff. Our video banking capabilities are proving its worth, and we are taking extra care for special need groups. We are in an ongoing dialogue with all of our corporate and commercial clients and are closely monitoring developments of their businesses. I personally have been involved in quite a few conversations with clients myself to ensure service of the bank in these exceptional times. I briefly want to touch on our investor update, which we're finalizing.
At the start of our strategy review, we decided to bring focus to CIB through exiting all non-European activities. I'll discuss progress in a minute. In order to ensure a clear navigation of any crisis, we need to be explicit about the vision of the bank post-crisis. This is why we continued and are now finalizing our strategy review. Yet we are in the middle of a global pandemic, and that is why we also need to be realistic about the formulation of targets. Turning to slide 6, I want to highlight our progress on the wind down. Progress on the wind down of our non-core activities is orderly and good. I'm pleased our clients are able to find sources of funding elsewhere without difficulty, notwithstanding the current environment.
This has allowed us to make good progress, reducing loan volumes by around 20% or almost EUR 4 billion of loan volume. We are also driving down undrawn commitments. We aim to accelerate the natural rundown through loan disposals where value accretive. Provisions have been strengthened further for the added risk of the wind down. Overall, we maintain our loan loss reserves at EUR 1.4 billion, while loans declined by 20%, and so provision coverage has increased materially. I'll now hand over to Clifford to take you through the third quarter results in more detail. Clifford?
Thank you, Robert. As you said, we returned for solid profit this quarter. As Robert explained, the Dutch economy showed resilience, and this is reflected in moderating impairments for the third quarter. Interest income is down due to continued pressure on deposit margins. I'm pleased with the gain on sale of our Paris office, which was a major real estate deal earlier this year. At the same time, impairments improved significantly from the last two quarters. Tanja will run you through these developments later on. Robert described the good progress we're making on winding down our non-core portfolio. However, from a P&L perspective this quarter, CIB non-core has contributed not only to lower NII and fees, but also materially to expenses through restructuring provisions, as well as impairments being mostly non-core, as well as taxes through the write-off of DTA.
We show the pro forma group P&L excluding CIB non-core in the appendix on page 25. Overall pro forma Q3 profit is EUR 691 million, equivalent to an ROE of around 9% excluding incidentals. I will run through the details of CIB non-core on slide 8. On the right-hand chart, you can see a good decline in trade and commodity finance of EUR 1.6 billion. Natural resources declined, reflecting quarterly reserve rebasing on current low oil prices. These could go up in the short term if prices revert. The other category is mainly financial institutions, which have recently drawn on commitments, but we expect these to reduce in coming quarters. The consequence of the good initial reduction is lower income. Fee income almost halved, driven by the strong reduction in undrawn commitments and off-balance sheet products within TCF.
Net interest income decline is somewhat slower than the reduction in loans, as margins are lower on the short-dated, secured, and hedged TCF loans. Non-core Q3 results included the one-off cost of restructuring and the tax asset write-off. The restructuring cost of EUR 144 million is lower than we indicated previous quarter, as we no longer reserve for retention costs, but rather book these each quarter as they are incurred. At Q2, we showed the natural wind down profile of non-core in our analyst presentation, and we expect the portfolio to roughly halve from the first half of 2020 to the end of 2021. You can see we're running a little faster than this today, but it remains early days. We expect NII to broadly follow in line with the declining portfolio, while fees will be lower from 2021.
Overall, the reduction in RWAs was partly offset by a TRIM add-on in respect of non-core of EUR 0.7 billion. There may be further TRIM impact ahead as we are awaiting the TRIM letter on commodity financing. Turning now to slide 9. I'm pleased the lending volume of the core bank held up in challenging markets. Mortgage volume held up well, given the strong housing market and high transaction volumes that Robert described. Commercial banking volumes were slightly lower as clients currently have limited funding needs, reflecting the current economic circumstances. We also see this in the limited intake in the various government guaranteed schemes reflecting support measures from the government. Overall, client lending is expected to stabilize into next year for the core bank, driven by the phasing out of the support measures. I will now discuss interest rate developments on the next slide 10.
As you can see, NII declined for the core bank, reflecting margin pressure on deposits. The decline in our NIM, our net interest margin, is mainly a reflection of the increase of our balance sheet from participating in TLTRO3 and the corresponding increase in cash and liquid assets. Looking ahead, we face further deposit margin pressure of around EUR 20 million per quarter at current rates, which we can mitigate to a certain extent through negative deposit pricing. As you know, the threshold for negative deposit pricing will be lowered from EUR 2.5 million per client to EUR 500,000 per client from January 1st next year. The wind down of CIB non-core leads to NII declining by around EUR 10 million per quarter and slowing down from here into next year. I expect NII to be around EUR 1.4 billion for the coming quarter Q4 and looking into 2021.
This is based on end of October rates, so before the recent market reaction to vaccine developments. So far, these movements are not material to our guidance. Overall, we are cautious on being able to achieve the threshold for the low TLTRO rate, given COVID-19 and the appetite from our clients, and therefore, no benefit for this is currently included in both our numbers and our guidance going forward. We've not included in the guidance I've just given you the one-off charge that we expect in Q4 due to an expected change in accounting estimate for amortization of penalty interest on mortgages relating to recent client behavior. Now turning to slide 11. Our other income this quarter was very strong due to a large gain from the sale of our Paris office of EUR 263 million before tax.
We will move to a more energy efficient office and building in due course, which is also smaller, as employees will be increasingly working from home. Looking ahead, fee income in coming quarters is expected to remain low while COVID-19 continues to impact credit card usage and asset management fees. I see this decline as mostly temporary, as these are linked to the duration of restrictions, and I expect fees to recover in due course. To support our fee income, we recently increased package fees on current accounts, for which new pricing started on October the 1st. Fees for CIB non-core, which declined around EUR 14 million for Q3, will run up significantly into 2021. Now turning to costs on slide 12. Cost reductions will remain a priority for us going forward, and we'll update you further at our November update on cost programs in the future.
During this period, we have absorbed considerable increases in AML costs this year, given our cost saving programs and good cost control we've delivered. AML costs are running at around EUR 100 million per quarter, excluding provisions, and are expected to land around EUR 400 million this year as we guided previously. However, we do see some upward pressure into next year. We have achieved EUR 1 billion of cost savings to date and are well on track to reach our EUR 5.1 billion cost target by the end of this year. With that, I'd like to hand over to Tanja to discuss asset quality developments.
Thank you, Clifford. This quarter, we saw impairments moderating as we had limited individual impairments and no exceptional files. Most impairments were within CIB non-core, in total EUR 171 million. This mainly consisted of a management overlay of EUR 106 million on the CIB non-core portfolio to capture incremental wind down risk for performing loans. The remainder were additions to existing stage 3 files in offshore oil and gas and food sectors. Within commercial banking, EUR 51 million out of total impairments of EUR 102 million were related to the more negative outlook following stricter COVID-19 measures recently imposed by the Dutch government. Overall, our stage 3 exposure remains stable as limited inflow offsets write-offs. Stage 2 declines as clients in impacted sub-sectors and classified as stage 2 have now been individually assessed, moving many clients back to stage 1.
For retail and private banking, very limited change on a net basis this quarter as a consequence of lower consumer spending, adding to a drop in past due rates. I now turn to slide 14 to discuss the outlook of impairments for 2020. As mentioned by Robert, the support measures of the Dutch government have been very effective, leading to low bankruptcy numbers. Q3 cost of risk was 42 basis points and lower than prior guidance, reflecting support measures and following an economic recovery during the summer. For the full year, I now expect impairments to end below earlier guidance of EUR 3 billion and closer to our Q1 guidance of EUR 2.5 billion. The bank's payment holidays have mostly ended, and regular payment schedules have been reinstalled. Based on conversations with our clients, we do not expect a cliff effect.
I remain cautious for next year as impact of the second lockdown in the Netherlands is uncertain, and it's too early to assess the impact of recent vaccine developments. I expect impairments for impacted sectors to carry over into 2021. The outlook for 2021 is uncertain, and I don't want to give a precise forecast at this point, though our base case scenario expects impairments to remain below the 2020 levels. With this, I would like to hand back to Clifford.
Thank you, Tanja. As you can see, our capital position remains strong with a CET1 ratio of 17.2% under Basel III and around 15% for Basel IV. Please bear in mind this ratio excludes the 2019 full year dividends that we reserved and which equates to some 56 basis points of capital. Basel III RWAs increased during the quarter, reflecting the EUR 6 billion TRIM add on, partly offset by the implementation of the SME support factor and the wind down of CIB non-core. The leverage ratio is strong and currently benefits from a temporary exemption allowing exclusion of central bank reserves from the exposure measure. CRR2 will be implemented next year, greatly reducing the clearing exposure measure around the same time the exemption ends. These effects more or less offset each other, so our leverage ratio remains strong going forward.
I will now go into more detail on TRIM and Basel IV on slide 16. Now that I've updated you on our Q3 results, I'd like to talk you through our capital outlook for next year. I want to give you this detail as it represents important background to our approach to capital management going forward, which we will set out at the investor update end of November. First, let's look back to the announcement of the Basel IV framework at the end of 2017, and here the RWA inflation we were faced with was over 35%. On the chart on the left, you see this gap has closed considerably, largely the result of TRIM and model reviews, and to a lesser extent, due to Basel IV mitigations.
We've currently taken a total of around EUR 20 billion of RWA add-ons for Basel III and are still awaiting two additional letters as the TRIM process finalizes during 2021. Next year, the deferred DNB mortgage add-on may well be implemented, which could add another EUR 6 billion RWAs. We tend to switch some portfolios to the Basel III foundation approach, leading to another EUR 5 billion additional RWAs. These developments will largely close the gap between Basel III and Basel IV by end of 2021. Against this backdrop, we expect headwinds and uncertainties on both capital position and capital generation. Low rates put pressure on NII, and we expect further impairments from COVID-19. We're facing the AML investigation.
Our full year 2019 dividends are currently reserved, and payment will be prudently considered following our Q4 results, taking into account the status of the ECB dividend recommendation, as well as conditions and prospects at that time. Now handing back to Robert for the highlights.
Thank you, Clifford. To summarize, it is indeed good to see us returning to profit for the quarter. The bank is resilient, showing a good performance, especially including non-core financials. We've made good progress on our non-core portfolio wind down, although this has also impacted our P&L this quarter. We continue to be strongly capitalized with a Basel IV ratio of around 15%. Nonetheless, we remain cautious on the short-term future, given current circumstances. Looking ahead, it is indeed essential to have a clear vision on the bank we want to be, and this will be part of the investor update on November 30th. With that, I'd like to ask the operator to open the call for questions. As we are in different locations, I'll be a bit more disciplined about directing the questions as usual. Operator, may I have the first question?
Thank you, sir. Ladies and gentlemen, we're starting the Q&A now, the question and answer session. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. May I please remind you to limit yourself to two questions. If you have any remaining questions afterwards, you can press star one again to rejoin the queue. Star one for your questions. Go ahead, please. Our first question is from Mr. Omar Fall of Barclays. Go ahead, sir. Your line is open.
Hi. Thanks for taking my questions, actually. A few of them. Firstly, on NII, where I wanted to understand the drivers a bit divisionally. If I look at NII for retail, it's flat sequentially. It's also flat sequentially for commercial banking. When I look at the chart on the right on slide 10, you have basically the EUR 34 million or so of core NII headwinds, which would presumably relate to those businesses. Yet the decline in NII this quarter is really coming from non-core in the corporate center. Could you explain what's happening there? Secondly, sorry to be pedantic, but would you say that NII should see a EUR 10 million decline per quarter from here?
It makes a material difference for our 2021 NII estimates, like over EUR 200 million, if the base we start with is exactly EUR 1.4 billion in Q4, or is the Q3 level minus EUR 10 million. If you could give us a slightly more precise indication of how we should think about that so that there's no confusion. If I take the slide 14, and I take a ruler out, and I look at the chart on the right, it seems to be suggesting something around a EUR 2 billion impairment charge next year. I know your guidance is kind of below 2020, but is that kind of the message that you're trying to give us? That would be helpful. Thank you.
Well, thank you for your question. I'll ask Clifford to take the NII, and maybe Tanja, you can take the impairment.
Yes, happy to take that. I think you're quite right regarding the segment accounting. Most of the reduction this quarter has been in group functions. Our approach to group functions is to pass on a lot of the funding cost to the businesses. This quarter, we've had the benefit of TLTRO, and we've passed on that funding cost. For this quarter, that has flattered the segment. I would draw your attention to the bridge that you referred to on slide 10 to give the underlying movements. In terms of NII, I won't be drawn on a second decimal point for our Q4 guidance for NII. I was clear that it was around EUR 1.4. You know the rules around rounding. Won't be more precise than that.
I think the headwinds into Q4 are the ones I referred to, which was the low rates. The rate guidance I gave reflect the end of October interest rates, also non-core. We gave an indication of that. Also during Q4, we're halfway through Q4, we see balance sheet development as pretty muted, reflecting the partial lockdown that we're in. That gives us some caution into Q4, which is why around EUR 1.4. That should be the platform going into next year.
Thank you, Clifford. Tanja, if you could take the question related to impairments.
Yes. Thank you. Yes, we have included a chart on this page 14, but it was not intended to give any further guidance beyond what I've said. The guidance I can share is indeed below the 2020 level, but still elevated impairment, so above the through-the-cycle cost of risk. I understand it's a very wide range, but it's also early days. At this point in time, I'm not able to provide a more precise guidance.
Great. Thanks.
Thank you.
Our next question is from Mr. Tarik El Mejjad of Bank of America. Go ahead, please.
Hi. Good morning, everyone. A couple of questions, please. More on top-down on your strategy. I was a bit confused why you would preempt your investor day by managing expectations. When I look at consensus ROE and my numbers, we are quite low ROE in 2021 and 2022. Where do you think we should manage our expectations? Is it probably on costs where we think that you do something material? That would link to the second question on cost, where you mentioned that there's an upward pressure on AML costs in 2021. Can you maybe give us more color on that and where you see this pressure is coming from? When do you expect the AML cost to plateau, actually? Thank you.
Thanks for your questions. I'll take the question on strategy, and Clifford, if you could take the AML cost. What we are reflecting here is caution. That's what you're hearing in our disclosures around Q3. I think that is very reflective of the situation we all are in a COVID-19 period where there's a number of unknowns, and that's what you see coming through in the disclosures that we are utilizing today. I don't want to get ahead of what we're going to be talking about on November 30th. I would leave it to say, though, that we will give an update on our targets. We'll give an update on our capital as well. I'm actually looking very much forward to it as it would also entail an update on the overall strategy of the bank. With that, Clifford, do you want to take cost?
Yes. On AML, I think we gave some guidance on AML costs a few quarters ago. We expected them to be sort of plateauing round about now. The guidance that I refer to is we do see a little bit upward pressure. I think it's in the low tens of millions of EUR. It's material in the context of AML costs. We just wanted to guide on that. On the other hand, we feel good about the cost-saving programs that we've had in place. You can see those delivering. We're on track for the EUR 1.1 billion overall, despite some of the lockdown challenges of 2020. Clearly, you'd expect cost to feature in our investor update at the end of November, particularly going forward. We think that's the best time to talk about longer-term plans and guidance.
If I can just follow up on the strategy question, maybe I'll rephrase my question. The plan was supposed, I guess, to give us a view over the next three, four years, seeing 2021 as a transition year, probably. This is why I'm a bit confused why we wouldn't see through the uncertainty of the next 18 months with your business model, basically, that will be a positive, where you kind of suggest it won't be. I understand we'll leave it here, and maybe we'll reconvene in the end of the month.
Yeah, I suggest we do that. Let's follow up on your questions when we've given you the full insight into the strategy update.
Okay. Thank you very much.
Sure.
Next question is from Mr. Albert Ploegh, ING. Go ahead, please.
Yes. Good morning. Thanks for taking my questions. I've got two.
Sure.
Maybe first to come on the CIB non-core wind down, it was clearly a positive surprise in a way, and I think also ahead of your own expectations as well, set out with the Q2 results. How should I think a bit about this, looking at the fourth quarter and let's say your original plan to wind it down by 80% by 2023. How much acceleration can we see? These clients apparently were able to find financing elsewhere more quickly. Also, how should I square that also into the NII guidance, and sorry to come back to that one, for next year as well. Can we get some insight, let's say, on what kind of NII drop, so to speak, you have in terms of size in your mind for 2023? 2021 compared to 2020, to also understand that a little better. Thank you.
All right. Thanks for your question. Indeed, we are pleased at the progress we're making around the CIB non-core wind down. Let me ask Clifford to comment on the effects of NII, and any related issues on that.
Yeah. Just picking that up. We haven't changed the overall profile of the CIB non-core, so that 80% by 2023 remains. That profile reflected the natural wind down, but we're pleased that we're running a little bit ahead of that. It is early days, and that reflects largely the short-dated portfolio and success there. In terms of NII guidance, I gave a few angles, and I'll just comment on those. I talked about EUR 10 million per quarter sequential. We also give a breakdown of non-core numbers at the back of the presentation, and we gave that last presentation. I think you can figure out that if the portfolio will be roughly halving from the first half of 2020 to the end of 2021. That would mean all things being equal, NII would shrink by a little less than 50%, if you work through the numbers.
It's more like 60%. I think it's important, and the reason we obviously made that point is the shrinkage of non-core, which is a good thing, obscures the underlying trends in core. While we're cautious in the short term, we clearly see upside potential, and that will be something we'll talk about at the end of November.
Okay. Thank you. Maybe one smaller follow-up on the alternatives to potentially accelerate or do a sell to portfolio. I know that this was all mentioned in Q2.
Yeah
many things are in flux in the world as well. Is there, let's say, you mentioned explicitly on the slide again, has there been already some dialogue on this or interest expressed in potential parts of the book?
I think there has been. Actually, the liquidity generally has been maybe better than we thought in Q2, globally for all assets. We see it in the equity market. During the quarter, we did sell, I'd say, a handful of loans at good value. Where we can safeguard value, we'll free the capital up in the short term. We're not looking to trade off value for an accelerated timeframe. We don't think it's in our interest to do so. We don't think we need to do so, actually. We'll update you quarter on quarter, but so far so good, and conditions, and I think we're doing a good job, and I give credit to the team that are hard focused on that right now.
Thank you very much for that.
Next question is from Mr. Benjamin Goy of Deutsche Bank. Go ahead, sir.
Yes. Hi, good morning. Two questions, please, from my side. First, on fee income, looking at the quarter-on-quarter , also year on year performance at the group level, also when we look at retail. I think it's disappointing also as compared to peers. Just wondering, are you overly reliant on credit card fees as compared to your competitors? What else do you see as a reason, and what measures do you plan to address that? Secondly, on net interest income and the passing on of negative rates to deposits now above half a million. I'm just wondering theoretically, the repricing of those should be EUR 150 million on an annual impact. You say you only partially mitigate a EUR 20 million quarterly impact from lower for longer.
Is there any behavioral effects factored in or why is it a comparatively modest impact from charging negative rates to almost EUR 30 billion of deposits? Thank you.
Clifford, do you want to take that?
Yeah. I'll pick up both of those. I think on fees, you're quite right. I think we have seen a decline in retail. We're the largest credit card operator in the Netherlands, and credit cards actually in the Netherlands are used primarily for travel purposes. It's different behavior than in other markets. We've seen fees really sharply down in that business. We support credit cards, not just at ABN AMRO, but for third party issuers as well, retailers. Naturally, that's sharply down as well. That was behind my call. I expect that to rebound in due course. You'll have as good a view as me on the timing of that. On the negative deposit pricing, I think the EUR 20 million per quarter sequential based on current rates reflects all the deposits, if you like, not subject to negative deposit pricing. Those from zero up.
We've lowered the threshold to 500,000, and that will apply to roughly EUR 30 billion of deposits. It's possible some flow out as clients spread their deposits across multiple banks. The way I think that will absorb to that one and a half quarters of headwind. As you think about the reason we said into 2021 is it won't be a steady decline. You'll see those headwinds coming in. We'll see some volume impacts. Currently, we're cautious. That could pick up next year depending on the economy. We'll see a benefit in Q1 of the negative deposit pricing, and then all things being, it will come down further. We don't charge below 500,000. In the case of fees, I said also that we've raised package fees. That kicks in in Q4. It's a pretty modest amount, but it's double digits on an annualized basis.
You'll see that come through the retail banking fee line as well.
Understood. Thank you.
Thanks for the question.
Next question is from Giulia Aurora Miotto of Morgan Stanley. Go ahead, please.
Yes. Hi, good morning. A couple of questions from me as well. The first one on capital, just a clarification. Basically, between the EUR 6 billion of potential mortgage add-on and the EUR 5 billion of further TRIM, you are almost done with Basel IV. There is a difference of less than 10%. Do I understand it correctly? I assume yes.
Yes. I think the answer is yes.
Perfect. The real question comes. A competitor of yours has announced a target of 12.5 CET1, and they will also use that for pricing purposes. Wouldn't it be rational to expect ABN to move to a similar level?
Yeah.
Yes.
Yeah, sorry. Go ahead and ask your questions, and then I'll take the capital one. Is that it?
I'll stop there. Yes. Thank you.
I don't want to, at this point, talk about any capital ratios. It is important to realize that we want to give an overall picture at our strategy review because it will allow us to give you the full scope of what we've been working on. If you don't mind, I'd like to take that question when we discuss our strategy review and the outcome thereof.
Okay. Thank you.
Next question is from Ms. Anke Reingen of RBC. Go ahead, please.
Yeah. Thank you very much for taking my question. Just, sorry, one question on the NII. Your comment was that the NII decline should have tracked the decline in volume. Is the Q3, does it already reflect most of the rundown in the volume, or given the difference in decline, the hit to NII is yet to be seen? On the provision guidance, you said 2021 will be down versus 2020. I guess that's also true for the core bank, rather than just a function of the non-core coming down. Given your overall cautious comments on provisions, wouldn't have been any possibility to maybe stick to the EUR 3 billion and be a bit more positive for the next years? Thank you. Next year. Thank you.
Thank you. Clifford, you take NII, and Tanja, do you want to comment on the provisions?
Yeah. On NII, on page 8 of the presentation, you can see between Q2 and Q3, non-core NII down, it rounds up to EUR 14 million. You can see that's slightly less than the 20% decline in loan and advances. You get some averaging during the quarter. It's primarily the low-margin TCF business that's running down. We called out, we expect roughly EUR 10 million, it's slowing from here. You get a geometric effect. It is declining, that rate of decline is slowing, I would refer you to the guidance I gave earlier, looking at the annualized rates.
Thank you, Clifford. Tanja?
Yes. I had two questions basically on provisioning. First, on our guidance for 2021. Although that was related to the core bank versus the non-core bank, indeed, we do expect also for the core bank as a total to be below the levels in 2020. We see that across the board. For your second question on the guidance for 2020, indeed, our guidance had been at Q2 at EUR 3 billion for the full year. We then expected to see more impairments actually for commercial banking in the Netherlands on the basis of the fact that we expected government support measures to mature after the summer, and also the payment holidays provided by banks. What we have seen since then is that the government have extended their support and also while the impact of measures has been positive.
We see that a limited number of clients run into problems. You've seen our individual impairments for commercial banking have been around EUR 50 million, which is more or less a normal quarter. The outlook is still negative also on the basis of the second wave that we are seeing. Especially for commercial banking, we do expect some impact to see in 2021. We cannot basically go ahead of the game and front-load this. We follow the IFRS rules for taking impairments, and that means that some of it will fall in 2021 once the companies run into problems.
Thank you. Did you say that most of your payment holidays have expired now?
Yes. We have two schedules. One, we had an opt-in approach for three months, and some clients were given a second three months, and some of these have not matured yet. For the opt-in approach that was provided to the corporate clients, they did run from April 1st till September 30th. All of them have been reinstalled, and the first collection took place in October. Actually, what we see there is that short-term days past due are actually in line with what we saw pre-COVID. We don't see any immediate problems or any cliff effect because of that.
Thank you.
Thank you.
Next question is from Miss Daphne Tsang of Redburn (Europe) Limited. Go ahead, please.
Hi. Thank you for taking my questions. Two, please. First, on cost. You mentioned that KYC cost is now expected to stay slightly upward next year, while previously you guided it to be peaking this year. What does it mean for your cost target for next year, previously guided under EUR 5 billion cost? Do you expect you have incremental cost save from probably, lockdown measures to offset the higher business as usual KYC cost for next year? Secondly, on NII. I understand that on volume, you're impacted by the CIB wind down of EUR 3.5 billion this quarter. Even if I exclude that, quarter-on-quarter, you are still down 2%. I think there are two parts to it. One, can you please give some color on the underlying dynamic and whether you see some improvement closer to the end of the quarter or post-quarter?
Secondly, in terms of meeting the TLTRO requirement, it seems that you are 5% short compared to your Q1 level, excluding non-core wind down and mortgages. Is it your strategy in the coming quarters to try to bridge that gap by lowering potentially lending rates in order to help volume and potentially achieve the TLTRO3 bonus? Or do you see this as not commercially or economically meaningful to do? Thank you.
Thank you. Let me take the TLTRO questions, and on NII and cost, maybe Clifford. On TLTRO, it's clear we're not yet at our thresholds. We're taking measures, and we're being responsible about getting to those thresholds, and we'll continue to do so over the course of the next period. On cost and NII, Clifford?
Maybe with Judith's comment, I think it's going to be hard for the whole sector to deliver on the TLTRO, right, given the economic circumstances. I think whilst we want to support our clients, we're cautious about squeezing margins in the short term that we're going to have to live with over the term of the loans for that short-term benefit. That's how we're managing through. On AML, I gave you some guidance on AML because we wanted to be open given the guidance we'd given in the past. Those extra costs are quite small in the context of the group, that increase. As we go into next year, I think there have been some benefits from lockdown measures, travel and the like.
We don't pay huge bonuses at ABN AMRO, we're not in a position to cut bonuses in the same way as other banks, given our business profile. I think I'd also say that it's very hard to start new cost programs in lockdown, that's actually like a headwind that we're facing. Also we've been clear on regulatory pressure, not just AML, that all the trends that we've talked about also cost money to address. That's my caution. We do see scope for further cost savings over time. Digital, for example, has come into its own during lockdown, it'll be a feature of our update at the end of November.
Overall, you feel comfortable with the 2021 cost being under?
No, I didn't say that. I didn't say that.
Okay.
I didn't say that at all, actually.
Got it.
I refer you to my previous comments. I think frankly, that was at a different time. Under Robert's leadership, we've got the opportunity, the strategy review across the bank, and we'll update fully on that at the end of November. On NII, I'm looking at page 10 in the chart in the slide deck. You can see on the right-hand chart that it looks like CIB non-core wind down contributes, I would say, considerably less than half of the decline. The deposit margin pressure is around EUR 20 million down, which I referred to. Asset volumes and margins. You can see, aside from CIB non-core during Q3, we've seen volumes down somewhat in CIB and the corporate bank, down marginally in mortgages. That's one quarter. Whilst the Dutch economy is resilient, I think that was recovered nicely during Q3.
Given the support measures that the banks and the government have been able to provide, funding needs have been fairly muted. In a perverse way, as those support measures phase out, obviously it gives us some worries about impairment, but it will help loan volumes, and that was behind our view that we expect the core bank volumes to stabilize, grow modestly from here before any sort of strategic thinking that we might present to you at the end of November.
You're less cautious on mortgage, but remain conservative on corporate lending. Can I say that?
I think on mortgages, you see we're 15% market share. We see that rising into the end of the year. Margin conditions are okay. Robert talked a lot about the robust housing market. We feel good about, call it the retail sector, the mortgage sector, personal finance. I think the commercial banking and corporate has different drivers, there you heard both Robert and Tanja, I think, quite cautious about particularly the SME sector as support measures phase out.
Got it. Very clear. Thank you.
Our next question is from Mr. Chris Pitcher of Kepler Cheuvreux. Go ahead, please.
Yes. Good morning, everybody. A couple of questions on my side. The first one was on the accrued dividend for 2019. I think you put a bullet on your presentation mentioning that the payout or the release of this amount is subject to certain couple of events, especially obviously ECB, it's quite obvious, but also conditions and prospects. I wanted to get your brain on, let's say, a situation where ECB will give a green light on dividends. Looking at the current lockdown and the fact that we have a vaccine now, or vaccine is quite efficient, let's say. Also looking at your current macro assumptions, if ECB will give a green light on dividends, can we expect this accrued to be paid? That would be the first question. The second one is on NII, the EUR 20 million drag you've mentioned for Q4 and Q1.
I was trying to understand also going into 2021, Q1, and the impression that looking at the shape of the curve, that the pressure from low rates was definitely less than EUR 20 million a quarter. I'm talking about Q2, Q3, and probably Q4 next year. Could you confirm that, or is the EUR 20 million drag per quarter kind of run rate for the full year 2021? Then just following up on the moratoria. You were, I think, EUR 22 billion now. How much do you have basically as of today in terms of outstanding, please? Thank you.
Thanks for the question. I'll take the dividend and then maybe Clifford, you can take the question on NII, Tanja on moratoria. On dividends, I appreciate that you're staying away from the ECB ban, because clearly that's precluding us from doing anything. You've noticed us using the word caution and prudence, that's for a reason. I appreciate your comment about the vaccine. I think we all did, and we all do. We saw the reactions just the last two days on the movement in financial markets. I would caution us, because we are still in the midst of a pandemic. I've said this before, in the Netherlands, we're now in a second lockdown.
The reason why we're exercising caution on paying out dividends is because we do want to take an assessment at that time when that is relevant, which will be after our Q4. For the reasons that I've talked about. We are in a period of uncertainty. We have COVID-19 still around us. We've talked about some of the expectations around Q4, Q1, and Q2. Clifford has highlighted in his discussion on results some of the capital headwinds that we're at this time dealing with and working our way through. I think it's only reasonable to make a fair assumption, a prudent assumption, at the time when that's relevant, which will be after our Q4. Clifford?
Yeah.
NII.
I think on NII, I think the EUR 20 million is really a proxy. I think it's quite hard to calculate from the outside. We've given some guidance around the replicating portfolio, the shape of it, the size of it. As I look at our internal forecast, it seems to me that the guidance I gave of around EUR 20 is pretty good. As we've discussed, we expect negative pricing on that other tranche of deposits to kick in from January. There's always going to be a little bit of noise in these numbers. Even EUR 20 million is, what is that? That's 1% or 2% of the quarterly number. We're talking about the differences are quite small numbers, but that should give you a feel. I think we had expected early this year that that negative drag would abate.
As we all know, rates took another step down for reasons we're fully aware of, and so that drag now continues. I think it looks like we're not alone. Interest rates don't just apply to us by the looks of things, looking at the peer group this quarter.
Thank you, Clifford. Tanja, do you want to take the question on moratoria?
Yes, of course. Yeah, maybe here to remind people, we provided payment moratoria to a total exposure of EUR 23 billion.
Both around these schemes of opt-in and opt-out. As of the end of September, however, that says September 30th, there was still EUR 19 billion outstanding. As of the 1st of October, all the payment moratoria that we provided to commercial banking clients in the Netherlands did expire, and that is around EUR 17 billion in total. If you ask as of today, and while I don't have the end of October numbers at hand, but that would be around EUR 2 billion, which is still outstanding and which will mature in the coming three to six months.
Thank you.
Thank you.
Next question is from Mr. Robin van den Broek of Mediobanca. Go ahead, please.
Yes, good morning, everybody. I would like to start with a suggestion actually, because the consensus polling is focused on the group P&L. I was wondering if you could maybe focus on the core instead, because now you've got a speedy rundown of the CIB, which is also leading to impacts on NII and fees, which makes the comparison compared to consensus very in your disadvantage basically. It's also distracting from the 9% growth return on equity that you've actually delivered on the core bank. I was just wondering if that is an option for you to consider going forward. My first question is on your real estate deal in Paris. To me, it seems like you can actually utilize the benefits from working from home in that transaction.
You take a gain on the real estate and then basically downsize the office space, which hopefully will also lead to lower costs. Can you replicate that transaction in other parts of your business? Could you specify that? Second question is on volumes. I appreciate the wording you gave on mortgages and commercial banking already, but I was just wondering, in the last years, you've had a sizable tailwind for your mortgage book from housing prices, 7.5% you expect this year, but next year it will be zero. Just wondering on your mortgage book, and we haven't really seen the positive effect from housing prices going up in the size of your mortgage, which is also a reflection of people prepaying and the annuity framework basically giving pressure on the size of that book.
I was just wondering if we should also expect more pressure on the size of your mortgage book during 2021 on the back of flat housing prices. Thank you.
Why don't I take the first two questions, and maybe Clifford, you can talk to the volumes in our housing markets. Thanks for the suggestion. Clearly, we're going to look at how we report out, because we don't want to mix non-core and core, and we are reporting this quarter on a group. We have included a pro forma at the back of our slide deck. We will consider our reporting requirements going forward for sure. In terms of the deal in Paris, that was a deal that we were in the process of concluding, and it has now been concluded.
I think more generically, we can say, I think as everyone is now facing the same kind of discussion, that as we've all gone through a lockdown and some of us now in a second lockdown, we're finding actually the bank's ability to be able to work off-site. It's actually working very well based on a digital infrastructure that this bank has. Therefore, as part of any analysis that we do around ways of working, there is always considerations on how you can improve, and that is a consideration that we're currently looking at, as we've always done. Clifford, maybe to talk about the volume.
Yeah. No, I'm happy to talk about mortgages. I think that you're quite right, that we do expect some moderation of the mortgage business into next year. I think we've all been actually pleased and positively pleased with how robust the housing market's been. We expect that to moderate, as maybe the unemployment picks up. What you see in market share terms, 15%. 15% is okay, but what it represents is 20% plus in the areas where we are highly competitive, in the shorter maturity mortgages, but substantially lower than that in the 20-year plus segment. You can see we've only recently introduced a 30-year product, which enables us to compete more effectively in that area. We do see the mortgage market as attractive, and we're building our capability and skills to make sure we tap the whole market.
I'm sure we'll talk about that at the end of November.
Okay. The ability to replicate the Paris deal elsewhere is also something for end of November or?
I apologize. I was using my phone while I was still on mute. We'll give you an overview on our strategy in November. Let me not get ahead of that.
Okay.
Next question is from Mr. Thomas Dewasmes of Goldman Sachs. Go ahead, please.
Thank you, and good morning. I wanted to ask my first question on the non-core CIB. I think you had said last quarter that you would try and preserve shareholder value. You reiterate that today, but I think what has changed is that you are opening the door to potential disposals as opposed to a pure amortization of your books. I wanted to know whether you'd be open to give more detail on the type of assets that clients or investors might have appetite for, and if those are rather longer maturity or shorter maturities. My second question is on the redeployment of capital of this non-core CIB wind down. Your main competitor has lowered their capital target, and therefore, as indicated, they would be able to compete a bit more. In European CIB, you have key competitors that have lower capital requirement than yours.
Are you concerned at all for your ability to actually redeploy that capital efficiently if you are elsewhere, for instance, in mortgages trying to preserve the margins? If you could develop a bit on that as well. Thank you.
Yeah. Let me take that last question, and I'll ask Clifford to talk about non-core. What we've talked about is that the transactions that we are undertaking and the wind down of non-core CIB will be capital accretive. That's going to happen over time. We will see how that plays out, how the capital accretion actually takes place, and then we will take a responsible view on how we then redeploy that capital based on the strategic decisions that we are making. Clearly, we need to be aware of any potential excess capital. That's a discussion for the future. Let's first get the wind down, execute on the wind down. We will see how capital accretive it is. We will redeploy capital in a responsible manner and take any further decisions as necessary. Clifford, do you want to
I think that's a good summary. I don't think we've changed our approach. I think we said that on non-core We showed you the natural wind down, but we would take sort of capital accretive. If we can sell a loan very close to our wind down value, why not get the money up front? Why not get the money now rather than wait? That's the approach we've taken. There's no change to strategy. We're not in a rush because we've got capital as an organization, and so we don't want to encourage people to call us up and give us big discounts on things that we're quite happy to run off. That's not where we are.
Orderly was the word we used, and orderly will be the word we continue to use. That's the approach we're taking.
Thank you.
Next question is from Mr. Johann Scholtz, Morningstar. Go ahead, please. Mr. Scholtz?
Hi, guys. Can you hear me?
We can hear you fine.
Two questions, actually. First one, sort of top-down question. I'm just battling to reconcile what I'm seeing in terms of provisioning coming through from the banks and some comments that we've seen from some of the regulators. Last month, there was a comment from the ECB that there's a severe but plausible scenario, NPLs could reach EUR 1.4 trillion in the Eurozone. Today there was another kind of bearish comment coming through from the Single Resolution Fund. I just battle to reconcile those two. I know I'm looking at the provisions and NPLs, but especially under an IFRS9 situation, one would actually think that those two would be more closely aligned. Secondly, just quickly on fees. Some of your competitors have indicated that they're increasing daily fees, they're introducing new fees, account fees, and behavioral fees to offset pressure on NII.
Is that something that's a feasible strategy going forward? Thank you.
Yeah. Maybe I'll take both those questions. Starting with your last one, we always review the appropriate fee level at a given point in time, take into considerations the circumstances that we're in, then we'll make appropriate adjustments when and if necessary. On the overall provisioning, what you're actually now seeing is a Q3 provisioning that is very reflective of and indicative of the economic situations we find ourselves in. Provisioning consistent with IFRS9. There is overall assessment very much aware of what overall provisioning indeed can do in the Eurozone. I think what that points to is a uncertainty, and I think we've highlighted that on this call a number of times. Uncertainty around what's going to happen in Q4, Q1, and Q2 of next year. Whilst there's all kinds of projections around it is an uncertain time.
We really do need to see what happens in the markets now that some of these government measures begin to recede. Then see what the actual effect in the economies are. I think it's on the institutions to be consistent about provisioning, whilst at the same time recognizing what might play out in the markets over the next three quarters.
Perfect. Thank you very much.
Next question is from Mr. Stefan Nedialkov of Citi. Go ahead, please.
Hi, good morning. It's Stefan from Citi. A couple of questions on my side as well. NII, just to wrap up the big discussion we've all been having. You are including in your guidance the deposit margin pressure, obviously. You are not including the TLTRO, and you are including the benefit from the negative deposit rate. Just to probe a little bit here, on the TLTRO3, could you give us where you are in terms of your Eurozone benchmark lending as of today, and a bit more color on your expectations of whether you will meet the 0% target by the end of March? Just a bit more color around that would be very helpful because obviously, this does make a big difference.
Also connected to NII, what are you guys seeing in terms of pricing when it comes to Dutch retail lending as well as commercial banking lending in light of Basel III/Basel IV? You're obviously very close to absorbing most of the Basel IV impact. So are some of your peers. Are you seeing a change in how banks are approaching pricing on a Basel III versus Basel IV basis on mortgages as well as commercial banking? Thank you.
Yeah, thanks for your question. Let me just say your assumptions are correct. Clifford, could you expand on it?
No, that's right. I think you talked about three assumptions there, is correct.
Yeah.
The guidance reflects the negative deposit pricing that we've announced above EUR 500,000. There's clearly still some headroom there, and we've sized the deposits, but I'm not indicating any action on this call. I think that deals with NII. In terms of meeting the threshold, I don't want to give a figure. The perimeter or the scope of those assets excludes mortgages, and it's Eurozone commercial. We've talked about, call it the portion. You see the balances that we've given. Non-core is all outside or primarily outside the Eurozone. It's primarily core non-mortgages. I've seen some other banks. I think we're not a million miles away from where they are. I'd note that the deadline is quite soon. It's the end of next quarter, Q1.
We will safeguard the quality of our portfolio over the medium term rather than sacrifice it to hit a hurdle in the short term that we'll have to live with. You've heard us make cautious noises around that. I think the key driver, personally, I think, is not pricing so much as where the economy is, where the support measures are, and you've seen the Dutch government continue to support the real economy. Hence our caution. I think in terms of pricing, big picture, we've been clear, we've been pricing in Basel IV for mortgages for some time and are able to achieve actually good share based on our target segments and our good service. In times like these, when borrowers want quotes and turnarounds quickly, our excellent service to the brokers is really worth something.
We see that really helping in terms of market share. I think in terms of pricing in the other non-mortgage sectors, my view is that Basel IV has not been fully priced in yet. That TRIM is effectively anticipating Basel IV for all banks in Europe. We've been talking about it publicly for some time, but I've noted the statements about TRIM made by many, many banks actually this quarter. Not so much being written, but listening to the calls. That's encouraging that there's a level playing field, and that playing field is increasingly a Basel IV one.
Okay. Thank you, Cliff.
Thank you.
Next question is from Mr. Kiri Vijaya rajah of HSBC. Go ahead, please.
Yes, thank you. A couple of questions from my side. Firstly, coming back to CIB non-core. Just trying to understand the revenue dynamics there. Look, as you notify clients that you won't be renewing the credit when it comes up to maturity, saying one or two years' time, does that mean that clients are taking their fee business elsewhere right now? Timing-wise, you're losing or you seem to be losing fees faster than you're losing the NII, certainly this quarter. Just trying to sort of understand the revenue attrition in the CIB non-core between fees and NII. Fees on the ongoing CIB business, particularly on the clearing business. Would you say that's kind of running above or below trend? I know we've had a bit of volatility this year, but in the Q3, is that kind of sort of normal run rate?
If you look out to some of the market volatility, the fourth quarter, to what extent do you think that's been a good environment for your clearing business, please?
Hi, Clifford. Clifford, do you want to take those?
I think on fees, these are quite small numbers now in a group context, but fees has fallen faster than NII non-core, and that reflects we're doing much, much less new business, negligible. Because we're winding that business down, and often new business comes with fees. We've also shrunk our kind of guaranteed off-balance sheet business, which you'll see come through fees and not NII. That's on fees. I'm just trying to recall the second question. Just remind me of that.
Oh, the clearing business.
Oh, yeah.
The fees you earn.
On clearing.
Was it around fees?
Yeah. It's clearing. There's a few things going on in clearing. Q3 was, I would say, a more normal quarter, so volatility return. We have de-risked that business, for obvious reasons. That would come at the expense of fees as the business is operating on a much tighter risk framework. At the same time, we've seen some market repricing in that sector, maybe also not surprising given the challenges that that whole sector, including us, had in Q1. I think the market's behaving rationally. We won't chase volume in clearing. We're managing it within a tight risk envelope, and it's pleasing to see fees holding up.
Great. Thanks.
Thank you.
We have no further questions, sir. Please continue.
Okay. Well, I would say that this concludes our analyst call. Thank you so much for all of your questions. As I've referenced a couple of times during the course of this call, really look forward to updating you on the strategy review and the associated investor update on November 30th. For now, we'll talk to you very soon. Thank you.
This concludes the ABN AMRO quarter 3 2020 analyst investor call. Thank you for your attention.