Ladies and gentlemen, thank you for holding, and welcome to the ABN AMRO Q4 2019 analyst and investor call. At this moment, all participants are in listen-only mode, and after the presentation, there will be an opportunity to ask questions. I would like to hand over the conference to Mr. Kees van Dijkhuizen, CEO of ABN AMRO. Go ahead , please, sir.
Thank you very much, operator. Good morning, everybody. Welcome to ABN AMRO's Q4 results. I'm joined here by Clifford Abrahams, our CFO, and Tanja Cuppen, our CRO. I will update you on where the bank stands and take you through key developments in the last quarter. Clifford will go through the details on our fourth quarter results and also run you through capital, and Tanja will update you on the developments in our loan portfolio. This is my last quarterly statement, and before I brief you on our Q4 results, I want to give you my perspective on my time at ABN AMRO, our progress, and the actions we have taken to position the bank even better. If you turn, please, to slide two.
Over the last three years, together with the executive committee, I've worked diligently to deliver on our strategy and targets, and the bank is financially in good shape. Sustainability is now the core of our purpose, banking for better, for generations to come. I see sustainability as a clear business opportunity, but it's also the right thing to do for all stakeholders. I've accelerated the digital performance of the bank over the last few years. We have successfully built platforms , including Tikkie and Grip, and Tikkie alone has more than 6 million active users. I've sharpened the focus of the private bank to a scalable onshore franchise in Northwest Europe. Though clearly there's more work to be done, I've undertaken steps to improve profitability at CIB, reducing risk-weighted assets by EUR 5 billion.
I've delivered on our cost savings, and our ROE has been consistently 10% or above since the IPO, the highest ROE of large Dutch banks and in the top of European banks. We have a strong capital position, having anticipated Basel IV well ahead of time. Of course, we have challenges, and here we are taking firm action. We were the first bank to announce that smaller savers would be protected from charging negative rates. We were also the first large bank in the Netherlands to announce negative rates for clients with deposits over EUR 2.5 million . We have a detailed delivery plan in place now for both remediation and building a future-proof organization for detecting financial crime. Our EUR 5.3 billion cost level for 2019 is 2% lower than 2018 and will decline further this year and in the years thereafter.
Further cost savings will enable us more than to mitigate higher regulatory and compliance costs. TRIM is imminent and will be substantial, but we have a high capital buffer to deal with this. All in all, ABN AMRO is a solid bank and is ready to face the current headwinds when I hand over to Robert Swaak at the end of April. Let me now summarize the key highlights of the last quarter on the third slide. Profit for Q4 is EUR 316 million, reflecting high impairments and in line with Q4 2018. Our full-year result was solid with an ROE of 10%. We are on track to deliver on our cost programs. Capital remains strong with Basel III CET1 ratio of over 18% and Basel IV CET1 ratio of over 14%, even after RWAs add-ons anticipating TRIM and model reviews of EUR 10 billion.
We propose to keep the dividend payout ratio stable at 62%, which leads to a full-year dividend of EUR 1.28. Let me now update you on strategy execution on slide four. You will recognize our three strategic pillars: sustainability, customer experience, and building a future-proof bank. On sustainability, I'm pleased that we were once again in the top 10% bank in the Dow Jones Sustainability Index. We're now at EUR 19 billion sustainably invested client assets in the private bank, well ahead of our target a year early. I'm also pleased with the pace at which we are moving away from fossil energy. 15% of energy commitments in CIB are now renewable, compared with 7% in 2018. We're heading for 20% year-end. At the same time, we are making good progress on enhancing the customer experience.
Video banking is increasingly used in all segments, including our private banks in Germany and France. We team up with partners to broaden our product range. Last year, we entered partnerships on cybersecurity, corporate finance, and accounting software. New mortgage products, such as the fund for 30-year mortgages and the mortgage facility to invest in energy efficiency, have made a good start. Also , good progress is made in building a future-proof bank. Some 125 teams have now moved to DevOps, already providing efficiency gains by increasing automation further. We increasingly move applications to the off-premise cloud. We're one of the first banks to do so. We're making progress in product rationalization, aiming for a reduction of more than 50%, for example, in loan products in the retail bank. We got rid of, in the last couple of years, 2,000 applications.
Let's move on to how we are tackling the challenges the sector is currently facing. We have been focused on detecting financial crime or DFC for many years. We have built a solid foundation and continue to make progress. The review of CIB and Private Banking clients is concluded. We have centralized all our DFC activities. A detailed DFC plan has been developed , incorporating external findings. This plan has been shared with the regulator. Remediation programs in retail, including ICS and the commercial bank, are up and running, and we expect to complete them by 2022. Currently, over 2,000 FTEs are working on DFC, both on remediation and business as usual. We have invested in state-of-the-art tooling, including Fenergo , in which we now also participate through ABN AMRO Ventures.
We have a very good engagement with the authorities on the DFC industry approach, and we are keen to increase further cooperation, both with authorities and other banks. There's no update on the investigation by the Dutch Public Prosecution Service. We cooperate, of course, fully. As we have said before, strict compliance is a license to operate, and we will remain vigilant in detecting financial crime and continue to make the necessary investments. Now, I will update you on cost developments on slide seven. In the past few years, we have demonstrated strong cost discipline, keeping costs relatively flat despite increasing regulatory costs, wage inflation, and investment in digitalization and process optimization. In 2019, the cost run rate was around EUR 5 billion, excluding incidentals. Clearly, further ramping up of DFC activities creates material cost pressure. In 2019, we spent around EUR 400 million on DFC, including EUR 174 million on remediation provisions.
Future DFC costs are mostly business as usual, as we have already largely funded remediation through our provisions, which currently amount to over EUR 220 million in total. We expect total DFC costs to stabilize at around 2019 levels and then decline over time as remediation activities are completed and we automate the business as usual. We currently assume only a limited benefit from automation. In mitigation, we have a pipeline of savings initiatives underway, mainly in IT, as already flagged at our Investor Day in 2018. We are working on further rationalizing the IT landscape, making the move to DevOps and off-premise cloud. We are optimizing the offshore delivery model. We see further cost savings opportunities up to and around EUR 300 million by 2022, lowering our IT spend towards the sweet spot.
This will mitigate the DFC cost pressure, and we are on track for costs of EUR 5.1 billion in 2020 and below EUR 5 billion thereafter. On the next slide, I will discuss the CIB refocus and impairments. In CIB, we have some good client franchises, and the majority is performing well. For instance, the core Dutch clients, Northwest Europe, and Clearing. CIB is facing cyclical and long-term challenges. In 2020, we decided to refocus CIB to improve our profitability to an ROE of above 10% by 2021. I'm pleased that we have reduced our RWAs by EUR 5 billion. In the diamond sector, where exposures have been reduced, we have seen significantly lower impairments in 2019. We're also making progress on taking out costs and transforming CIB to a more capital-efficient operating model. This has not yet resulted in a structurally improved ROE, as impairments in Q4 were very disappointing.
A prolonged downturn in the offshore sector has led to high impairments in Q4. Though the bulk of CIB impairments were in sectors we have been actively de-risking, it's clear we need to do more. We will continue to de-risk highly cyclical sectors, and we'll review additional measures needed to structurally improve CIB's profitability. I would now like to hand over to Clifford to take you through our fourth quarter results. Clifford?
Thank you, Kees. Turning to slide nine, as Kees mentioned, Q4 profit was EUR 316 million, reflecting high impairments, while full-year profit was solid at EUR 2 billion, despite the low interest rate environment and low private equity results in 2019. NII was impacted by deposit margin pressure, both in the quarter and for the full year. I am pleased to say expenses continue to trend down, reflecting cost savings, lower FTEs, and lower restructuring costs despite the ramp-up of detecting financial crime activities. I'm disappointed with the high impairments in Q4, mainly in offshore. Tanja will give more background on this. I will now guide you through the individual line items on the next slides, but first, our client lending on slide 10. As background, I can say the Dutch economy remains strong, with low unemployment. For 2020, we expect GDP growth to be positive at around 1%.
The housing market remains resilient, and the housing shortage, combined with low rates, has led to a further rise in house prices. In this context, I'm pleased with our mortgage performance in 2019. We introduced some successful new products, including the platform for 30-year mortgages, together with a facility allowing homeowners to invest up to EUR 25,000 in energy-efficient measures for their homes. After a very strong performance in the second and third quarter, market share normalized in the fourth quarter to 18%, which meant overall for 2019, we had a market share of around 18%. The mortgage market remains competitive, and we maintain our pricing discipline. Due to the seasonal increase in voluntary redemptions, the mortgage book declined modestly during Q4. CIB's loan book also decreased due to the CIB refocus, as Kees mentioned.
While the Commercial Banking loan book is up slightly for the year, despite our focus on margins in a competitive environment , and our tight risk limits. Turning now to NII on slide 11. In line with our guidance, net interest income held up well in Q4. The impact from low rates was around EUR 20 million during the quarter, also in line with our guidance. Compared to Q3, however, liquidity management costs were higher as last quarter saw some larger FX positions roll off. Looking ahead to 2020, we expect NII in the range of EUR 1.5 billion-EUR 1.6 billion per quarter, but it won't be a linear movement. We're taking action on deposit margin pressure by charging negative rates to clients with balances above EUR 2.5 million and reducing deposit rates to 0% for other clients as of April 1st. We're also moving on rates in Germany.
This means as of April, we will charge negative rates on around 1/3 of deposits over EUR 100,000 previously not charged, which is equal to around EUR 30 billion of deposits. This leads to an additional EUR 150 million of income on a yearly basis. The remaining 2/3 of deposits, between EUR 100,000 and EUR 2.5 million, or around EUR 60 billion, are currently not subject to negative pricing. Of that EUR 60 billion, around EUR 14 billion of deposits are between EUR 1 million and EUR 2.5 million. Negative pricing, together with the ECB deposit tiering, will dampen the deposit margin drag from Q2 and beyond. Turning now to fees and other income on slide 12. Fees in Q4 were lower due to modestly lower clearing fees. Fees in all other businesses were largely unchanged. We continue to work on fee initiatives across all sectors, for example, in investment and insurance.
Other income was in line with our guidance of EUR 125 million for the quarter. Going forward, however, we are lowering the guidance for other income to around EUR 100 million per quarter as we expect lower private equity results reflecting the current outlook of the portfolio. Moving to costs on the next slide, 13. I continue to be pleased with our cost developments. We have delivered on the planned reduction in FTEs, as these have decreased by 19% since year-end 2015, despite the increase over the last quarter in both internal and external FTEs, reflecting detecting financial crime activities. Adjusted for restructuring and remediation provisions, costs continue to trend down despite higher DFC costs and wage inflation. On the right-hand chart, you see we have increased cost savings by EUR 45 million delivered, bringing total delivered cost savings since 2015 to EUR 900 million.
We continue our disciplined cost focus and expect further savings in 2020 of around EUR 200 million towards a total of EUR 1.1 billion of cost savings. As Kees mentioned, we expect costs of around EUR 5.1 billion in 2020, that is including DFC costs, and thereafter, we aim for total costs to be below EUR 5 billion, again, including DFC costs. I will now hand over to Tanja to pick up impairments on slide 14.
Thank you, Clifford. Fourth quarter impairments were high at EUR 314 million, despite the generally sound economic environment in the Netherlands. The impairments in the retail bank of in total EUR 55 million are largely a result of changes in the calculations of model impairments. Impairments for the commercial bank were at benign levels with a cost of risk of 55 basis points. In CIB, impairments were high, predominantly in the offshore sector, as it experiences a severe , prolonged downturn due to the low oil price. In the past few years, we have been actively de-risking the offshore portfolio, and we will continue to do so. Despite the high Q4 impairments, the cost of risk for 2019 still ended below the through-the-cycle level as guided. For 2020, we expect the cost of risk to be within the through-the-cycle cost of risk of 25 - 30 basis points.
I now hand back to Clifford to discuss capital developments on slide 15.
Our Basel III capital position remains strong with a CET1 ratio of 18.1%, reflecting the retention of full-year profit, offset by EUR 5 billion additional RWAs for TRIM and model reviews in Q4 and an increase in operational risk. The additional RWAs for TRIM and model reviews reduced the CET1 ratio by approximately 90 basis points in Q4. Without this effect, CET1 ratio would've been around 19%. To date, we have booked around EUR 10 billion in total , or 200 basis points of TRIM and model reviews ahead of receiving the final TRIM letters later this year. Nonetheless, at 18.1%, we are well above our current SREP requirement of 12%, despite the increase of 25 basis points reflecting required improvements in credit risk models and processes and our DFC activities. Alongside capital, the leverage ratio is strong at 4.5%.
As the SA-CCR methodology for clearing guarantees becomes effective in 2021, this will add another 70 basis points to the leverage ratio, bringing it to 5.2%, well in line with our peer group. Our capital position is strong, but we need to consider forward developments, which are relevant for how we manage our capital position today. I will explain this further on the next slide, 16. Looking at the top left, we are focused on Basel IV and are well positioned to absorb the associated RWA inflation under Basel IV, given our ratio of over 14% at year-end 2019. It's a clear positive that the uncertainty on NHG mortgages is now addressed, and they will be treated as sovereign under Basel IV.
We update our Basel IV figures regularly, and we will update these again when the European Commission comes up with its proposal for Basel IV implementation during the summer. Turning now to Basel III. The graph on the right shows approximately 10% of RWA inflation that we have already taken from TRIM and model reviews. You can see that the effect of this is to reduce the RWA inflation arising from Basel IV from around 35% in 2017 to around 25% in 2019. We expect a significant further impact on Basel III RWAs over and above our current add-ons from the final TRIM letters later in 2020. There will also be RWA inflation arising from the DNB mortgage add-ons and the implementation of the new definition of default for 2020. Generally, all these developments won't impact our fully loaded Basel IV position, for which we are already well placed.
The effect of these developments will be to increase Basel III RWAs further, bringing them closer to Basel IV levels, thereby reducing again the incremental RWA inflation for Basel IV. That's the gray box on the far right of that chart, which you can see narrows further from 25% in 2019 into 2020 and beyond. We expect clarity on these developments later this year, and we will update you on capital in the second half of this year. I'll now hand back to Kees to update you on the dividend.
Thank you. We have demonstrated every year a solid ROE of at least 10% since 2014, underpinning our commitment to deliver strong capital generation. I'm proud of our track record on payouts. As indicated by Clifford, our Basel III capital position remains strong with a CET1 ratio of 18.1%, one of the highest in the sector, enabling us to pay an additional amount on top of the 50% of sustainable profit. Clifford explained that TRIM's additional model reviews and the announced risk weight floors on mortgages will have a very significant impact on RWAs in 2020, lowering our Basel III CET1 predominantly . As we also mentioned, in the second half of 2020, we will update you on capital. There is also the transition to Basel IV. We remain subject to an investigation by the Dutch Public Prosecution Service. We're also mindful of the current economic outlook.
We have decided to maintain the payout ratio of 62% and an additional distribution of 12% of sustainable profit. We propose a dividend of EUR 1.28 per share for the year. Moving on to our targets on slide 18. As you can see, we have again delivered on our ROE target despite the low-interest environment. Not many banks in Europe have realized a double-digit return for 2019. We have delivered on our CET1 target despite TRIM and model reviews. We recognize that the sector is currently facing major challenges, especially the continuing low-interest-rate environment. I expect that the ROE in 2020 will be below the target range. Given these circumstances, it will also take longer to reach our cost-income target of 56%-58%, as mentioned before. Before we go into Q&A, I would like to briefly recap on slide 19.
The highlights of my final analyst presentation. Our full-year result was solid with an ROE of 10%, one of the highest in Europe. I'm pleased that costs declined in 2019 despite extra DFC costs and continue to further trend down. Capital remains strong with Basel III CET1 ratio of over 18% and Basel IV CET1 ratio of over 14%. The bank is in good shape, and the full executive committee continues to diligently focus on the execution of our strategy. We maintain the dividend payout at 62% and propose a full-year dividend of EUR 1.28, an additional payout of 12%. I would like to ask the operator to open the call for questions.
Thank you. Ladies and gentlemen, we will start a question-and-answer session now. To be registered for questions and ask a queue, please press star one. Please limit the number of questions to two. If you have a question, please press star one. Go ahead, please. First question is from Mr. Farquhar Murray from Autonomous. Go ahead, please.
Morning. Just two questions, if I may. Both really focused on the Basel IV capital position. Starting with slide 16, I just wondered if you could clarify. I'm presuming that , in a sense, the 25% RWA inflation applies to the full-year 2019 position based only on recognizing the EUR 10 billion of TRIM so far. I think that's the right way of understanding. I think that's what you're saying, but the bullet actually possibly leaves a little bit of ambiguity there. Specifically moving on to the definition of default, can you just confirm for me that that will be incremental to the Basel IV RWA, and can you yet give a bit of a sense of a broad magnitude around that impact? More broadly, is that the only upcoming regulatory change that is going to impact Basel IV RWA in 2020? Thanks.
Thank you. Clifford .
Yeah. I'll answer that, and Tanja, chip in if you have further to add. I think your first question is correct. In 2019, that sort of dark greenish- blue bar reflects our EUR 10 billion of TRIM and model reviews , and we've anticipated the final letters. In terms of assumptions, maybe I'll turn it into a comment on DoD. We continue to fine-tune our Basel IV assumptions. I think DoD is something we'll reflect on. TRIM may have a read across into constrained IRB. When we talk about Basel IV, we're talking about the revised standardized approach under the output floor, which is a much simpler methodology. We will, for example, look at the EC's proposal when it comes over the summer and fine-tune further, if necessary, our assumptions, whether it's the numbers themselves , timing , or various approaches.
You shouldn't see Basel IV as a fixed calculation, but something that we evolve over time to ensure we have a smooth transition into its actual implementation.
Yeah. On the Definition of Default, we expect to be able to implement that in the next quarter. We have applied for a two-step approach under the Definition of Default, and expect to get some add-ons in RWAs for that. That will be based on the Basel III models. It's very hard to say whether there's any implication for Basel IV as well. For sure , you cannot aggregate the Basel III impact into the Basel IV number. That will not be the case.
There was a final third question, I think. Is there more to come around Basel IV?
Yeah, I think as I indicated, Kees, I think it's possible that the EC proposals cause us to revise our assumptions. We feel we're up to date on our assumptions for AMA. I'll give you an example. We slightly strengthened our approach to operational risk, so our multiplier is above one in our calculation, and we'll continue to fine-tune things because we don't want to see jumps either up or down in our estimation as we glide through to implementation.
Okay. Just a follow-up on in terms of being as up to date as we possibly can, given the way the Basel IV landscape stands, am I right in then taking your maths as presumably guiding you to about a 14.5% Basel IV ratio?
Yeah, you can work it out from the 25%, as you've done. I think we feel confident to say it's above 14% at the full year. Our balance sheet is always a little bit smaller at the year-end than it is during the year. We feel good about being in a position above 14%. I think estimates to the nearest EUR 0.1 billion, I think are not all that sensible , given there still are some moving parts around this number, both on assumptions, but also how we implement it in the business.
Okay. Thanks very much.
Thank you.
Next question is from Mr. Stefan Nedialkov, Citi. Go ahead, please.
Hi. Good morning. It's Stefan from Citi. A couple of questions on my side. When it comes to impairments, you are already taking a cumulative EUR 1 billion deduction through capital at the insistence of the ECB. How should we think about the provisioning in 4Q 2019 and future provisioning? Is this basically taking the capital deduction and converting it into an actual provisioning item? Is the provisioning that we're seeing in 4Q 2019 and potentially later in 2020 on top of the EUR 1 billion ECB deduction?
Okay.
Okay.
The second question. When it comes to thinking about negative rates on deposits of more than EUR 2.51 million, yes, you guys were the first, but then somebody else came out in the Netherlands and announced negative rates on deposits above EUR 1 million. Could you potentially go down to EUR 1 million down the road? How fast could that be?
Tanja, will you refer to the first one? I think it's NPE related, that question, or not? NPE. Non-performing exposure, or not, the minus EUR 1 biliion.
Yeah. That's my expectation as well, that with the EUR 1 billion you refer to-
NPEs, yeah.
Capital from the prudential backstop.
Okay. Yeah.
Yeah. The provisioning that we take, well, we take on existing exposure and new exposure in default. It's not related to the potential backstop in itself because that's only on existing stock and only on the older stock in non-performing loans. The provisioning level you really need to see as developments in the offshore sector that I was referring to.
Does that cover your question?
The NPE question, yeah. The EUR 1 billion capital deduction, which you are taking EUR 200 million at a time per year, is separate from the 4Q 2019 and the potential 2020 provisioning strengthening?
Yeah. Correct. The guidance on the impact of NPE has been unchanged.
Okay. Great.
Thanks. I will respond to your question around negative rates. We were the first indeed, and have said that EUR 30 billion of deposits, as Clifford said, is related to the area of above EUR 2.5 million for us. Meaning EUR 150 million on a yearly basis. This year , not fully because we start the 1st of April, of course, but on a yearly basis, EUR 150 million, 50 basis points times EUR 30 billion. The amount that is left between EUR 2.5 million and EUR 100,000 is EUR 60 billion in deposits. If you would have 50 basis points , that would mean another EUR 300 million. We are not allowed to guide in this sense , so we will do whatever. EUR 1 million or EUR 100,000 or whatever, we're not allowed to guide there.
What you can do, of course, is compare not only the EUR 2.5 million bracket that we use, but we also gave an amount, and I think other banks also gave on the one hand a bracket and also an amount there.
Okay, great. Thank you, Kees, and good luck.
Thank you.
Next question is from Mr. Robin van den Broek from Mediobanca. Go ahead, please.
Yes. Good morning, everybody. Thank you for taking my questions. The first one is more about the NII guidance. I think the range you've given, EUR 6.0 billion-EUR 6.4 billion, is rather wide. If I take your underlying run rate of today at the fully phased level for tiering in there, then you're basically at EUR 1.590 billion. If I expect that to degrade by EUR 20 million per quarter and add EUR 35 million-EUR 40 million as of Q2 on the back of the rate mitigations you've already announced, that will get me closer to EUR 6.3 billion, which is more on the upper side of your range, obviously.
I was just wondering if you could retake us through the asset side effects, because in the past , you've been fairly clear that these effects should be positive for your NII, but in the last few quarters, we haven't really seen that. Are you building in some cautiousness on the CIB de-risking for NII , or maybe the mortgage volume drop off , where the amortization side of the balance sheet is starting to kick in? More color there would be very helpful. The second question is, I'll keep it as a smaller one. You mentioned the CumEx litigation in Germany, and I was just wondering why you're making that so specific, because I think the largest lender in Germany settled that for, I think, EUR 4 million or something like that. Why are you bringing this forward so specifically at this stage? Thank you.
Thank you very much, Robin. Clifford, you will take the first one?
I think on NII, I think there isn't a huge amount of new information that we think is conveyed in our guidance. You've analyzed it, but we've given the NII per quarter , rounded to the nearest EUR 0.1 billion. We wanted to convey that we see it as lower than EUR 1.6 billion going into 2020, reflecting that deposit margin pressure. You've gone through the calculation, which I think is perfectly reasonable, but we expect the deposit, the negative pricing to kick in from Q2, so it'll go down. That Q2 negative pricing will support it, and then we'll get the drag thereafter on the deposit margins. I think on the asset side, it's very early in the year, but you've seen our balance sheet broadly stable, and that reflects our caution in the current interest rate environment and our focus on defending our margins.
That's really what's going on around NII. We also wanted to move away from the guidance of a drag per quarter because at this point, we've already got tiering in our numbers , and we've announced negative deposit pricing. Just focusing on one component, being the deposit margin pressure, we didn't think it was very helpful to you, and we thought it was better to just guide you to total NII. I think you'll need to take your own view on the roundings within that range. Finally, I would say we always see a little bit of volatility during any quarter. We saw that again this quarter in our NII, and I think you need to factor that in and understand that when we give a range, we want to make sure that there's a high degree of confidence of landing within that range.
Okay. Maybe if you lower the deposit threshold to EUR 1 million, could you confirm that that's roughly EUR 15 billion of the remaining EUR 60 billion that you still have available to charge negative rates to?
Yeah. As I said, it was EUR 14 billion, actually.
EUR 14 billion. Okay. Sorry.
Yeah. Correct. With respect to your question on litigation in Germany, one party settled for EUR 4 million. This is related to what's called the CumEx files, meaning trading around the dividend date. A lot of those things are looking back to the period before 2012. The reason we have mentioned it is that prosecutors have stepped up , actually , in Q4 in Germany. We see a legal risk there. We have a lot of information about this, by the way, on our website. If you want, you can look there. We have settled with tax authorities, as said, there is a legal risk. The EUR 4 million you mentioned, I think , there are a lot of cases out there. Yeah, it's too early to tell if and when prosecutors will decide on this.
Okay. Thank you.
Next question is from Mr. Benoît Pétrarque from Kepler Cheuvreux. Go ahead, please.
Yes, good morning. Benoît from Kepler Cheuvreux. Yeah, coming back on the NII. If you want to get my view, I will rather get NII drag guidance. I think this is very useful. We can figure out what the impact of lower negative rates will be on NII. If you look at it, obviously, negative rates will not stop at the end of 2020. Can we expect further drag on NII from low rates around the EUR 20 million you have guided before in 2021? Because if I worked around that assumption, NII before mitigations like negative pricing on deposits will be below the actual EUR 6 billion level. To come back to the previous question, is the EUR 6 billion-EUR 6.4 billion range also translating a bit the downward pressure also going further in 2021? That's the first question.
The second one was on the dividend DPS of one full year, EUR 1.28 per share. I just wanted to understand why you've set it at this level. It looks like a stable payout was something you had in mind, but just wanted to confirm that actually whether 62% was a requirement on your side to keep it stable. Is there any reason behind it? Also, did you take into account any settlement risk into account in setting the DPS? Thank you.
Thank you very much, Benoît. Clifford, the floor is yours.
Yeah. Benoît, thanks for the feedback on the guidance approach. I think one way to think about this, if you want to analyze it further in detail, as we've said, is to look at the five-year swap rate, and you need to look at the delta between what it is now and what it was five years ago. This is quite a simplistic approach, but it'll give you a sense of the severity of the drag and how it ebbs and flows. When you look at that, you can see it moves around a bit, but actually, we expect that drag pressure to be roughly stable into around about the half point of this year and then actually get a little bit better, as in more beneficial to the company as you head into the second half of the year. You can run the numbers and draw your own conclusions.
There are a few moving parts, but that gives you a sense. I think the other thing I would pick up is that we know consensus, and consensus was about EUR 6.3 billion of NII, and I heard the range earlier of EUR 6 billion - EUR 6.4 billion. I think our guidance or what we're trying to telegraph is that we see some, if you like, softening of the EUR 6.4 billion. We note the consensus of EUR 6.3 billion. EUR 6.0 billion would mean EUR 1.5 billion every quarter this year. That's not our expectation. We expect to operate in that range and sort of drifting within that range, reflecting the margin pressure, but mitigated by the deposit actions and tiering that we've communicated.
I think that should give you a little bit more color as you think about consensus and how you might want to change your estimates for this calendar year.
If I understand correctly, we could get towards a EUR 1.5 billion run rate towards Q4 or towards the end of the year. Will that be the new run rate for 2021?
I think it's possible. I think rates can go up as well as down. You'll note that rates are higher than they were in Q3 last year. We've talked about the benefit of the deposit margin pricing that we put through. That's roughly two quarters of drag. I'm not going to give another decimal point on the EUR 1.5 billion, but I think it would be too cautious for you to assume EUR 1.5 billion every quarter. That's just not what we're saying.
Thank you, Clifford. With respect to the dividend, Benoît, the 62%, I would say we did not lower that percentage because we have a good capital position. We did not raise it because of the uncertainties that are around at the moment.
Great. Thank you very much.
Next question is from Mr. Albert Ploegh from ING Bank. Go ahead, please.
Yes, good morning. Yeah, two questions from my end. First, to come back to the impairments and the outlook for 2020. You guide basically expect to stay within the 25 - 30 basis points going through the cycle range. Yeah, with the bump in Q4, that has been well explained. You're ending the year at 24 basis points, still a bit cautious , it seems, given where the state of the economy is. Is this more a reflection of general caution on economic outlook, or are you still concerned that maybe the further de-risking of CIB could result in some more impairments? A bit to frame that line of thinking in terms of the guidance. The second question is on the operating cost base guidance, which is quite helpful also for the coming years. Appreciate that.
To be clear, also linked to the review of the CIB division and any other things you may still contemplate. It does not include any restructuring costs. It's only the operating cost base, including all the DFC costs, to make that point clear. Should we also expect any restructuring costs coming out of the CIB review, or is that more on portfolio optimization and not so much on the cost base? Thank you.
Tanja, can you take the first? Clifford, the second?
Yes. Thank you. Your question on the cost of risk guidance. Indeed, that is reflecting, on one hand, a slowdown of the economy, but also importantly, the way we look at the CIB portfolio, we continue to be negative on the outlook for the offshore sector, and we are also cautious on the oil and gas sector, and that is included in our guidance for the coming year.
Maybe one small follow-up on that. Can you give us a little bit of the latest numbers in terms of the sizes of these different loan books and what the Stage 3 ratios are?
If you look at offshore, and I don't have the exact percentages, but the offshore segment is mentioned in the presentation on page eight. About half of that is in Stage 3.
Okay.
For the oil and gas sector, that is a much lower percentage. That sector is definitely doing a lot better. We see a downside in that sector given the development of oil and gas prices.
Okay.
I'll pick up on the cost side. We've given the pipeline of future cost savings. Those largely relate to IT. We gave further details on the IT plans at our November Investor Day and subsequent analyst lunches. You'll recall, Christiaan, our IT director, talked about what he was planning to do. Kees described that we're making good progress on those. Most of those initiatives are not, I call it restructuring cost-heavy. They involve changing our relationships with our outsourcing partners to have more of that support offshore , or moving to the cloud , or restructuring the way we go about our change. You should not expect very material restructuring costs to emerge associated with that pipeline of savings, the EUR 0.1 billion, EUR 0.2 billion, and EUR 0.3 billion.
I think it's too early to say where any review of CIB might get to in terms of restructuring costs. I think the goal of any review or further review will be to reduce exposure to cyclical sectors and volatility of impairments and to give us comfort that that business will deliver on its return targets in due course.
Thank you.
Next question is from Mr. Benjamin Goy, Deutsche Bank. Go ahead, please.
Yes. Hi, good morning. Two questions, please. One follow-up on the CIB and then one on costs. On CIB, now you have reduced your portfolios in the troubled sector quite a bit. Is there some level where you say it is critical from a scale point of view, meaning that you have in-house all the capabilities to be able to do offshore lending, to do diamonds , or do oil and gas? Would that be part of the review , or maybe even say, well, there are some portfolios we're in and some we are really out , instead of just running it down? Secondly, on the client due diligence and its impact on costs, you say Retail Banking is ramping up, and the Commercial Banking is accelerating. What's the risk we get more provisions here as you go along in 2020? Thank you.
Thank you very much. I think around the CIB, these minimum lending levels is of course, something we will also look into when we analyze and review. Not something to update now at this moment in time. Will definitely be part of our review. With respect to the CDD, no, I think we've done our analysis, and we feel comfortable with the figures that are out there. We do not expect any extra cost at this moment in time . That does not mean it cannot happen. We've seen it in the derivative file. It was also a difficult file, so it's a big file, this one. At this moment in time, we feel comfortable with what we have, well, set to the market, not only on the CDD itself, but also on the total cost level we have guided out to you guys.
Okay, understood. Thank you.
Next question is from Mr. Tarik El Mejjad, of BofA. Go ahead, please.
Hi, sorry. Hi, Tarik from Bank of America. Two questions, please. First of all, on the dividend. You commented that , given the uncertainty on the AML issue, on the rates transition to Basel IV , and so on, 62% or keeping payout flat is probably fair enough. Now the consensus is at 70% for 2020, so I presume it's still high there. Do you believe that 2020 could be a better year in terms of, or at the end of the year, you'll have better visibility , and you could potentially increase the payout?
Secondly, on the costs, I would like to understand, please, what's the assumptions you put in terms of remediation plans to come with EUR 5.1 billion and then below EUR 5 billion in 2021, especially how far you think the prosecutor will go into reviewing your books, because that, I think, has direct implications on how much you need to spend to review these books. Lastly, if you can give us some update on the AML case. I know that you've put in your slides that there's no update. I'm sure you can give us some flavor. Thank you.
Thank you for the questions. Three. Clifford, if you take the second, I'll take one and three. With respect to dividends, and as you said, stable, you understand because of the uncertainties. What end of the year can there be a higher payout? I think that with respect to that, I would say, and I've read it also in analyst reports now more and more, and that's also our feeling that we might have seen now , in a way, peak regulation around capital in the sense that we do not expect a lot of new regulation to come up in the coming period. It's more, I would say, the execution of existing regulation, be it the European Commission finalizing Basel IV in the summer, be it TRIM. We get letters this year, and presumably earlier this year than later this year. The definition of default, Tanja refers to Q1.
We actually think that all that stuff, and then of course , the mortgage add-on of De Nederlandsche Bank Q3. All that stuff is more or less known. We think somewhere around the second half, some of the time in the second half of next year. I think we also need Basel IV, the European Commission, that's relevant. If we have all that, and that's the reason why we have said we will update you , then on capital. Well, it's too early to say now that we can then increase the payout. I think, in a way, all options are open at that moment in time, because we have to update you on where we stand with capital, what we expect from regulators at that moment in time. We feel, and hopefully we know also , perhaps a bit more about the AML case.
We feel that we are then in a better shape to say more than we can do right now, and as said, we do not expect and of course, CRD V coming up in next year. That's a relief, the CRD V coming up next year. We think actually there's more clarity around that, and that's the reason why we have a guide now to have a capital update at that moment in time , without being able to say anything about direction at this moment in time, because we really need to have all the figures in place.
Tarik, your question about our level of confidence in our DFC cost. I'm looking at page seven in the presentation. To give you a bit more color on the process we went through, you'll understand how that relates to our last quarterly update. We commissioned an independent expert to review our DFC activities. It was through the summer last year, it was during Q3, and that process was looking at what our plans say, where we are, and what the gap might be between what we're doing and best practice. That was an expert with a global expertise, but obviously a focus on what we're doing here in the Netherlands. We're very clear on where there may be gaps and how and when we may choose to close those. Those plans were then further updated and shared with the regulator.
That process bridged our November Q3 results process. We have detailed plans in execution now that reflect our dialogue with the regulator and our judgments about where we are with respect to best practice and priorities. That's what's behind page seven, and you can see the bars. There's actually relatively limited remediation in 2021, and that reflects the fact that we have over EUR 200 million of remediation provisions on the balance sheet in 2019. We've kept the gray bars constant, as you can see there, at around EUR 300 million. That reflects the fact that , based on our existing plans, we'll do that manually, but we believe there's plenty of scope to automate and get more efficient with these activities, whether it's on our own or in combination, in partnership through utility with other banks here in the Netherlands.
I think you raised the issue of the prosecutor and what the outcome of that process might be. I don't really want to speculate on that. What I can, if you like, give you comfort on is that our comprehensive plans that we share with the regulator reflected a well-informed view of current and best practice, and those were constantly updated, but that landed in Q4 last year.
Thank you. About an update on the or was it that's your last answer on that, on the case?
Yeah, I think Clifford said something but-
Okay. Yeah. Okay.
Not more to be said, unfortunately.
Okay.
We don't know yet. We hope, of course, that by the end of the year we will know much more, but we do not know.
Okay. Thank you very much. All my best wishes for the future, Kees. Thanks.
Thank you very much, Tarik.
Next question is from Mr. Gregoire de Salins from Morgan Stanley. Go ahead, please.
Yeah. Hi. Hello. Two questions from me, please. The first one is on asset quality. What kind of actions are you contemplating to reduce your exposure to offshore energies and other cyclical sectors, such as through hedging, loan sales, et cetera? What cost do you think will be associated with it? Maybe finally, if you start reducing your exposure to these sectors, would you revisit your estimates of the NPE impact related to the NPE guideline implementation from the ECB? Thank you.
Tanja?
Yes. On your first question, how do we reduce our exposure to cyclical sectors? We do that actually in many different ways. We sell exposure if that's possible. We use insurance and hedges, also run off portfolio at the refinancing date. It's a combination of efforts. You've seen that in this way we have reduced the offshore exposure with 30% over the past two years, and diamonds, for example, with 45%. We are very much focused on the cyclical sectors here and have been successful in reducing our exposure. I think your second question was?
Revisit NPE as a result.
The NPE guidance it's early days. All the regulations have come in now, and we will see actually the first impact by the end of this year. We will continue to revisit this. We are actively also managing the impact of NPE. As said before, the impact only kicks in after, well, five, six, seven years in default, so it takes some time. We very much look at the existing stock today and manage the new assets proactively in default. As said, we stick with the guidance that we have provided before, and I think the current downturn will not impact NPE in the short run.
Okay. Thank you.
Next question is from Mr. Kiri Vijayarajah from HSBC. Go ahead, please.
Yes, good morning. Thanks for taking my questions. It's Kiri Vijayarajah, HSBC. Can I just go back to the DFC provisions you just mentioned, Clifford? There's over EUR 200 million of provisions sitting there. Did I interpret that rightly that you're not really planning to utilize those provisions during 2020 to cushion the cost number? It's more about protecting that EUR 5 billion cost target for 2021 and beyond. Really, what's the kind of timeline in terms of utilizing the EUR 200-odd million, actually more than EUR 250 million of DFC provisions? On capital, the Dutch mortgage risk weight floors that come in later this year. It sounds like it's pretty neutral to the Basel IV capital ratio. I imagine it probably doesn't really impact your behavior or bank behavior generally in the Dutch market.
My question is really, what's the risk that the regulator tries to use other macroprudential levers to cool down the housing and the mortgage market in the Netherlands? Thank you.
Clifford, can you take one?
Yeah. I think you read too much into my comment on the provision. On page seven, I was making the point that because we have that provision, the little light blue bar with respect to remediation costs is quite small, despite the FTEs going up quite a lot. You can see the FTEs going from 2,000 to 3,000, although the remediation costs themselves are only going up modestly, and that reflects our drawing down on the provision. I think the point I was making regarding the provision is that you shouldn't expect a further ramp-up in costs from 2019 to 2020 as we ramp up FTEs, for example, because we've already booked the provisions in 2019 and 2018, and that will substantially mitigate that going forward. That's the point I'm making.
Based on these figures on page seven, the effect of DFC is sort of flat to gently down on our total figures. As the savings kick in, that gives us confidence that after , call it, a transition year of this year, the EUR 5.1 billion, we'll see costs stabilize , and then we expect to be below EUR 5 billion in short order after that.
With respect to your second question, this mortgage add-on of De Nederlandsche Bank, indeed, is more or less a macroprudential measure they take. We see it in practice, indeed, as a more or less kind of front-loading of Basel IV. Having said that, of course, the shorter tenors, we now have to include in our pricing a bit of a different risk weight now from Q3 this year onwards, while it would kick in later normally with the phasing of Basel IV later. For the longer maturities where most of the market is, the 20 and 30 years, it will not make, I think, any big difference at all in pricing.
Okay.
Next question is from Ms. Anke Reingen from RBC. Go ahead, please.
Thank you very much for taking my questions. The first is just to follow up on slide seven. Should we understand that the cost bars shown for the next years are net of you taking the remediation provisions? Just to confirm, in BaU cost below EUR 5 billion, which basically starts from 2021. I have a second question on your loan loss charge guidance of the 25-30 basis points. Relative to the 24 basis points in 2019, that doesn't really look that conservative, but I guess I understand that there were some one-offs in there , as well as you no longer have these exposures.
Is there any way for us to look at an underlying 2019 loan loss ratio to say this is a step up? Otherwise, it might just be a flat. That comes from a very high Q4 level. Thank you very much.
Thank you very much. Clifford, can you take it?
Yeah.
And then Tanja second.
On slide seven. Yeah. 2020 and beyond , DFC costs is the P&L expense. If we draw on the provision, then it wouldn't affect our P&L. I think that's what you mean by net.
Yes. Thank you.
W ell, we wrote in due course rather than writing 2021. We've not committed to it to be in 2021. We can obviously give more clarity on that as we get closer to the end of the year. Our ambition and our plans are to bring costs down below EUR 5 billion, but we're not giving a commitment regarding timing at this point.
Okay. On your question, in relation to the guidance for the cost of risk for next year. It's clearly the case that the Q4 impairment levels were disappointing and high. We don't expect that for next year. We do expect some elevation, compared to the average for the full year of 2019. That also relates to CIB and to the sectors that I've mentioned before. That's why we are somewhat more cautious.
Okay. Thank you very much.
Ladies and gentlemen, if there are any additional questions, please press star one. The next question is from Ms. Daphne Tsang , Redburn. Go ahead, please.
Hi, Daphne from Redburn here. Two questions, please. One on capital. Just wondering, while waiting for more clarity from the authorities regarding the AML investigation, how much of your capital buffer would you hold back in case of any large fines coming up, as a precaution? I'm wondering if you can give a sense of that. Second question on cost. You previously guided EUR 1 billion, total cost saving by 2020, and now, it's pleasant to hear that you expect an additional EUR 100 million, next year would be around EUR 200 million cost saving. Just wondering because you are still running your DFC remediation program.
Are you allocating your resources away from cost-saving programs to a degree, or are you completely adding new staff to work on the DFC program if you have to, i.e. , leaving the current cost-saving program to run as planned? Also , just to clarify, if the DFC provision you have taken so far has been fully utilized, i.e. , nothing is left now for next year , and everything would go to P&L, or do you still have some provision left? Maybe I don't understand the slides completely .
Can I take the first?
Yeah.
On capital and then buffers for AML, going forward, I would say, of course, internally, we have scenarios, but externally, we will not guide on that.
In terms of cost savings, I think , as I said, that pipeline of cost savings is something we've talked about qualitatively, but we've not given numbers before. Those programs have been well on their way since 2018. We thought it was about time to indicate some of the numbers , as we are now getting closer to that. In terms of resource allocation, look, we're committed to ensuring we're fully compliant and delivering on our detecting financial crime activities. In some cases, we've added staff. You see, we've recruited a lot of people, trained them, and deployed them. Yes, there is a limited bandwidth in terms of change. We need to stay compliant, reduce costs, and innovate for our clients. I think it's always a balance. Right now, I think it's a challenge to do all three.
We're very focused on ensuring we're fully compliant. In terms of the provision, you can see we've taken a total of EUR 85 million plus EUR 174 million, so that's roughly EUR 260 million in provision. We have at year-end 2019, over EUR 200 million of that provision remaining. We've not spent it all year to date. We will release that provision against the remediation activities that will take place in 2021 and 2022. Those provisions, as Kees mentioned, are for external costs. When we hire contractors, for example, we can book that as a provision, but we will also undertake further costs, the little blue bars that you see there in respect of internal costs for remediation. Hopefully, that answers your question.
Very clear. Thank you.
Yeah.
Next question is from Mr. Bart Jooris from Degroof Petercam. Go ahead, please.
Yes. Hi. Thank you for taking my questions. Most of them have been answered. Two more clarification questions, if I may. Looking back at slide seven, you see around EUR 300 million DFC cost business as usual. You stated that that could be automated. Would that mean that there could be cost savings on top of the, let's say, EUR 100 million, EUR 200 million, and EUR 300 million you foresee for the next three years? Secondly, in the decision of the dividend , you took into account an AML settlement. Could you confirm that if such a settlement were to come, that would not be included in the sustainable profit to calculate the dividend on?
Clifford, the first, I will do the second.
Yeah. I think the short answer to your first question is yes. I think we have clear plans in place that are very people-intensive . You can see that the FTEs are going up to over 3,000, because we're committed to doing this right, getting on with it , and doing it at the right quality. Those plans extend through to 2022. My expectation is that at least a good part of that can be either automated or combined with other banks. There's much discussion here in the Netherlands regarding utilities for this. It will take time to do that. I think, frankly, we have the time while we're getting on and implementing.
We also have the time to think about the right end state operating models for these activities, and those will come over and above the EUR 0.3 billion that we set out. It's a long way off. We need to consider other activities, other initiatives, both cost savings and growth that we want to factor in through this period. This should give you comfort that costs are well controlled, notwithstanding our commitment to DFC.
That should be beyond 2022 , then?
Yeah. In the latter part of that period and beyond, yeah. The remediation activity we expect to conclude during 2022. That's our current plan. That you see that gray box, which represents the business-as-usual activity. We've almost doubled it over a short period of time. You can see that 2018, 2019, and 2020, as we ramp up. I think we're doing the right things there, but we've had that on a focus on speed and compliance. At this stage, not about efficiency and effectiveness in an end state model. We have some time to work that through. That gives an opportunity in those later years.
With respect to your question around whether the AML is taken into account in sustainable dividend or not, I think in a year's time, the team will look into the total capital position of the bank at that moment in time. Of course, first of all, if there's an AML fine in a year's time, we don't know, and if so, how big.
Okay. Thank you.
Next question is from Mr. Jason Kalamboussis from KBC Securities. Go ahead, please.
Yes. Hi, gentlemen. Just a quick one on Private Banking fees. They have been better this quarter, and I just wanted to have an idea of how you're looking at those next year , and also the assets under management. We have seen outflows, but they have been within it , from what I understand, some structural moves that we may not see next year. Again, if you could comment on these two, that would be great. Sorry, to come back on the payout ratio, the 62%. Given the negative surprise on earnings, this gives the signal that basically you just follow earnings because you probably are holding back just in case you have a relatively large fine. Is that the case?
I would have thought that it would have been possible for you to at least give some positive signal by increasing slightly the payout without, in a certain way, endangering or having any issues no matter what the fine will be, especially that you seem to be slightly more positive that at the end of the day, it's not going to take two and a half years, it's going to come earlier, et cetera. Thank you.
With respect to the fees and assets under management, let me start, Clifford, and perhaps you can chip in.
Yeah.
The assets under management decline indeed is a bit over EUR 5 billion, that is, I think, related, as mentioned, that around EUR 3 billion is related to less custody. On custody, of course, the fees are much, much lower than, of course, on mandates in general. Around, I think, EUR 1.5 billion is cash. We actually don't have a problem with that. Actually, with the decline, it's not all mandates and the stuff where we really have bigger fees on. With respect to development, perhaps you can say something on that, Clifford. And then the payout ratio-
Yeah.
We have said in the past that we basically have a payout approach at work. The 62%, you say, as you mention all the time, the fine, but actually , what we mention is actually all the developments that are, at this moment in time, unclear. That's much more related to TRIM, actually, and the definition of default and the likes, and the last four European Commission decisions. The fine is also, of course, but it's not only related to the fine. That's not our reasoning. Clifford?
Yeah. I think we've covered fees. I think that you were referring to the outflows. We're pretty pleased with how the private bank's performing. We've seen some net new asset outflows, which were largely lower margin custody business. We've seen inflows elsewhere. A general uplift in the market. We had a strong market, as well as a shift back from cash into discretionary assets that we saw in Q4. Net net, you see that tick up in fees, which is pleasing to see. We always expect some volatility in that business and beyond, which is probably now clearing as the negative in Q4. Volatility goes both ways, so I would expect some normalization of that going forward. Private Banking is a business we like; we think we can grow.
Following the decision to charge negative rates, which benefits the private bank in particular, where those clients have large balances. Clearly, it's for clients to decide what they do with their money, and we want them to do the right things. By passing on negative rates, our peers and we are demonstrating, call it the cost of low risk right now. That's frankly what the ECB is trying to do, and that should encourage a switch into riskier but potentially higher return assets that we will benefit from.
Thank you very much. If I may have just a quick follow-up. The cash into discretionary assets, is it something that we should be continuing to think about EUR 0.5 billion-EUR 1 billion per annum?
No, I was making a comment about portfolio management, so it reflects our clients' risk appetite-
Perfect.
And the advice we give them, not the switch from the retail bank to the private bank. We've all got views on this, but as markets have got higher, our clients have been quite cautious last year through volatility. I think we're seeing increasing signs that , as the cost of holding cash comes through, and in the Netherlands , there's also a wealth tax, we may see more risk appetite on the part of our clients, and we want to support them in that, and that should benefit the business.
Great. Thank you very much. All the best.
Thanks.
It appears that there are no further questions, so I'll hand back to you, sir.
Thank you very much, operator, and thank you very much to all for all the questions you raised. This concludes the Q4 result update, my last one as CEO. I would like to thank you all for all your questions and valuable feedback in the last few years. It was a real pleasure to work with you in the last seven years as CEO and CFO. Thank you very much, and goodbye.
Ladies and gentlemen, this concludes the ABN AMRO Q4 2019 analyst and investor call. You may now disconnect your line. Thank you, and have a nice day.