Ladies and gentlemen, thank you for holding, and welcome to the ABN AMRO Q3 2019 Analyst and Investors Conference 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 Dijkhuizen. Go ahead, please.
Thank you very much, operator. Good morning, everybody. Welcome to the investor and analyst call for ABN AMRO's Q3 results. I'm joined here by Clifford Abrahams, our CFO, and Tanja Cuppen, our CRO. I will take you through the key developments in the last quarter, including the investigation by the Dutch prosecutor. Clifford will go through the details of our third-quarter results and run through capital, and Tanja will update you on the developments in our loan portfolio. Turning to slide two, I will update you now on the third quarter. The last quarter for us was mixed. Operationally, the bank is doing well, delivering an ROE of 11%. I'm pleased with our robust financial results and solid operational delivery during the quarter. Net interest income remains strong, also on the back of the profitable growth of the mortgage book. Excluding divestments, net fee income increased this quarter.
Excluding detecting financial crime or DFC-related costs continue to trend down due to our strict cost discipline. Impairments continue to be moderate at 16 basis points. We are making good progress on the CIB refocus, as demonstrated by the ROE of 9% for this quarter. We are well-capitalized and well-positioned to manage the transition through TRIM and Basel IV. Meanwhile, we also face challenges. As you are well aware, the bank is currently subject to an investigation relating to requirements under the Dutch Act on the Prevention of Money Laundering and Financing of Terrorism. More about that later. A major sector challenge is the continuing low interest rate environment, hence our strong focus on operational performance. We continue to execute our strategy and purpose banking for better for generations to come.
I was very proud to personally have signed the United Nations Principles for Responsible Banking on behalf of ABN AMRO, as one of the 130 founding banks. We believe that responsible relations with our clients, investors, employees, and society as a whole gives us an advantage in building trust, supporting sustainable development, and creating positive impact through banking. This year, we have once again been ranked among the world's most sustainable banks in the annual RobecoSAM assessment, achieving 79 out of 100 points, putting us in the top 10% of the most sustainable banks. Let me now update you on some developments in the mortgage market on slide three, as this is one of the drivers of our solid operational performance. I'm really pleased that in this third quarter, our market share in mortgages increased to 22% from 17% last quarter.
We currently see good margins in the market, so we let our market share move up. Our strength in the mortgage market is supported by new products such as the mortgage solution for seniors to cash out on home equity, as well as the 30-year fixed mortgage offer we do now as part of our mortgage originate-to-distribute platform. We also benefit from our strong operational capabilities. We have a speedy turnaround time for new mortgage loan applications, and this is important for clients in the current housing market. Also, more than 2/3 of our mortgage meetings are done via video banking, enabling a fast, flexible, and personal service. As the Dutch economy is expected to grow by around 1% next year, overall, the outlook for the mortgage book remains positive. To update you on the interest rate environment and our actions, I take you to slide four.
As I said before, NII was strong this quarter despite a challenging interest rate environment. Our asset margins have remained resilient as we are focused on margins over volume. We also remain focused on asset quality in this part of the cycle. Even so, we continue to expect further pressure on NII going forward of around EUR 20 million sequential quarterly impact into 2020 through lower deposit margins. As you are aware, we already charge negative rates to CIB clients and the largest clients in commercial and Private Banking. We have followed a step-by-step approach. We have decided that we will not charge negative rates on deposits below EUR 100,000. This commitment means around 95% of our clients will be safeguarded from negative rates, representing approximately 40% of our deposit base.
In addition, around 40% of deposits are above EUR 100,000 threshold and are currently not subject to negative rates. Of course, w e also focused on developing more fee propositions as well as opportunities to increase fees where we can. For example, in Commercial Banking, in cybersecurity, and bookkeeping propositions. In Retail Banking, great focus on investments and insurance, and in CIB, our increasing focus on originate to distribute. Let me update you on the investigation of the Dutch public prosecutor and our DFC activities on slide five. In September, we were informed by the Dutch public prosecutor that we are subject of an investigation relating to requirements under the Dutch Act on the Prevention of Money Laundering and Financing of Terrorism.
The investigation follows our announcement last August that we are to review all our retail clients in the Netherlands and that sanctions such as an instruction, fines, may be imposed by the authorities. The investigation focuses on whether we have complied with requirements to having client files in good order, the timely reporting of unusual transactions, and the prompt discontinuation of client relationships. For us, it's a key priority that we fulfill our duties and responsibilities as a gatekeeper of the financial system in detecting financial crime. While the timing of the investigation is uncertain, we are getting on with ensuring we are fully compliant and future fit. We have already centralized our DFC activities, enabling further specialization, consistency, and leveraged knowledge across the bank. As you know, we have remediation programs running at ICS, Commercial Banking, and Retail Banking.
For these programs, we have now taken in total, EUR 226 million in provisions for external expenses alongside significantly increasing [audio distortion] spend on DFC. We expect the step up in spending to continue. We have completed a comprehensive independent review of our organization to ensure full compliance with legislation. We have incorporated recommendations arising from this into a new delivery plan in collaboration with the regulator. We will further update you on this in Q4. We're also in dialogue with public parties to investigate further cooperation to fight financial crime. We'll explore possibilities of setting up a joint organization to monitor payment transactions with other Dutch banks. We are pleased with the Dutch Cabinet's plan to clamp down on money laundering, improving cooperation between the government and banks, and among banks.
Strict compliance is a license to operate, so we remain vigilant in detecting financial crime and will continue to make the necessary investments. I would now like to hand over to Clifford to take you through our third quarter results. Clifford?
Thank you, Kees. Turning to slide six. As Kees mentioned, we are pleased with our robust third quarter result with a net profit of EUR 558 million. Net interest income remains strong. Fees are higher when you exclude the sale of Stater. Other income was low this quarter, mainly due to low private equity gains, which can be volatile. Operating expenses are well- controlled. I'm pleased that impairments are moderate again this quarter at 16 basis points. Tanja will give you more background on this. I'll guide you through the individual line items on the next slides, but first, our client lending on slide seven. Kees updated you on developments in the mortgage market. I'm pleased that our mortgage volumes are somewhat higher again this quarter, reflecting our strong market share of new production of 22%.
We continue to deliver on our CIB refocus, and the more capital-efficient business model is shaping up. Total CIB volumes are down somewhat this quarter. We've reduced our exposure specifically in TCF, Trade and Commodity Finance , including diamonds and global transport and logistics. SME lending saw a slight decline, reflecting our focus on margins. Turning now to NII on slide eight. NII remains strong this quarter. Let me remind you that last quarter included EUR 45 million in one-offs, largely related to DSB. As you can see on the right, lower liquidity management costs largely offset the around EUR 20 million decrease in NII due to low interest rates. Liquidity management costs were lower again this quarter, largely due to the roll-off of some larger FX positions.
The EUR 20 million decrease due to low interest rates is in line with our guidance from last quarter of around EUR 20 million sequentially into 2020, excluding mitigations. It's possible that interest rates have recovered somewhat in the last few weeks, after first declining materially following our Q2 results. Looking through the recent volatility, our outlook on deposit margins has not changed materially from Q2. Hence our guidance remains the same. Following the announcement by the ECB, we expect a positive net impact of the ECB deposit tiering of approximately EUR 60 million per year, and this will mitigate some of the impact. In addition, we continue to work on mitigating the impact of the low interest rate environment. As discussed by Kees, we're developing new products, selectively charging negative interest rates to clients, and continue to work on our cost initiatives.
As we've said before, we expect NII to be around EUR 1.6 billion next quarter. Turning now to fees and other income on slide eight. I'm pleased that excluding divestments of Stater and Channel Islands, fees are higher somewhat compared to last quarter due to the acquisition of Private Banking activities in Belgium and a strong quarter by clearing. As you know, in CIB, the business model is becoming less capital intensive and is starting to generate more fees from distribution. We're also working hard to grow income with initiatives on investments and insurance in retail. Other operating income was low, as I said previously. In general, last year, all volatile items were relatively high, while this quarter, more or less every item was low. Truly some volatility there.
This is especially the case for private equity gains, which were EUR 107 million in Q3 last year, compared to only EUR 20 million this quarter. XVA was actually negative this quarter, driven by low interest rates and increasing derivative exposures. We maintain our long-term guidance for other income of around EUR 125 million per quarter, although it can be volatile, as you've seen, in any one quarter. Moving to costs on the next slide. I'm pleased with our performance on costs, which have continued to steadily trend down for a number of years now as a result of our strict cost discipline. As you can see here in the left-hand chart, personnel expenses continue to decline, reflecting lower FTEs. However, o ther expenses increased this quarter due to higher DFC costs, including an additional provision for Commercial Banking of EUR 27 million.
In the right-hand chart, you see we have realized further cost savings of EUR 53 million versus Q3 last year, bringing the total to a run rate of almost EUR 850 million, and on track for a EUR 1 billion target in 2020. Year to date, we're running at a cost level of around EUR 5 billion annualized, excluding remediation provisions. Going forward, we expect further material cost pressure for DFC and ongoing wage inflation, but we see some offsetting movements in respect of cost programs. We do not expect major cost programs in the near future, but we'll continue our proven approach of executing ongoing cost initiatives. For example, the greater use of cloud-based services, the introduction of DevOps in our IT teams. We also continue the product rationalization and process improvement across the business lines and support functions.
Continuing steady progress on costs, which will balance the cost inflation that we see from DFC and ongoing wage inflation. I'll now hand over to Tanja to pick up impairments on slide 11.
Thank you, Clifford. Third quarter impairments were moderate at EUR 112 million. This amounts to 16 basis points cost of risk for the quarter and year to date. Well below the through-the-cycle cost of risk. We are pleased with our progress in de-risking CIB, and we are happy to see that this is paying off. Impairments in CIB were modest and are mainly in energy, in offshore services and midstream, and in diamonds. Impairments in Commercial Banking were due to the offshore support vessel sectors and a new file in the utility sector. We expect an uplift in impairments in Q4, reflecting in particular in offshore services and in Retail Banking, predominantly from model refinements. We reconfirm our full-year expectation of below the through-the-cycle cost of risk of 25-30 basis points. I now hand back to Clifford to discuss capital.
Thank you, Tanja. Turning now to slide 12. You can see our Basel III capital position remains strong, with a CET1 ratio of 18.2%, well within our target range. The small uplift reflects the divestment of our share in equensWorldline in the Channel Islands. No additional TRIM or model review add-ons were recorded in Q3 2019. Looking forward, we do expect a serious impact on Basel III RWAs from TRIM, model reviews, definition of B IV , and the announced risk weight floor mortgages by the DNB taking place in 2020. From our perspective, all of this is front-loading of Basel IV, for which we are already well- positioned. We have a strong Basel IV capital position at around 13.5%, again, excluding our year-to-date profit. Our leverage ratio was also stable at 4.2%.
As you know, our prudent capital management reflects the context of commercial and economic circumstances, including lower for longer, as well as the tough regulatory outlook. We will decide on our dividend at full year. I now hand back to Kees to update on our targets.
Thank you, Clifford. Operationally, the bank is doing well, and I'm pleased, as I said, with our ROE of 11% this quarter, well within our target range. However, we need to recognize that the sector is currently facing major challenges, including the continuing low interest rate environment. We are under investigation by the Dutch prosecutor. Strict compliance is our license to operate, and we will continue to make the necessary investments. Given the lower for longer interest rate environment, it will take longer to reach our cost income target of 56%-58%. Our capital position and capital generation remain strong. With a Basel III CET1 ratio of over 18%, we are well- positioned to manage the transition through TRIM and Basel IV. As Clifford indicated, the dividend is a year-end decision. Before we go into Q&A, I would like to briefly recap the highlights on slide 14.
As said, the last quarter was mixed, I'm pleased with our robust financial results and solid operational delivery during the quarter, given challenges across the sector. While dealing with these challenges, we continue to take the necessary action and to focus on our operational delivery. Now I would like to ask the operator to open the call for questions. Operator.
Ladies and gentlemen, we will start a question- and- answer session now. To be registered for a question, please press star one on your phone. For questions, star one. We would like you to limit the numbers of questions to three. First question is from Mr. Pawel Dziedzic , Goldman Sachs. Go ahead, please.
Good morning, and thank you for the presentation. I have two questions. The first one is on cost, and you highlighted that you will no longer be able to reach your cost income target, and you made some remarks on your absolute cost base, but I was wondering if you can dive a little bit deeper into that. Are you still confident that you can get to around EUR 5 billion cost base next year? Can you give us a little bit more sense and at least a scale of cost inflation that relates to the step-up in those costs related to financial crime that you mentioned in your opening remarks? That would be very useful. The second question is on your pricing of deposits.
You are again clear that you will not charge negative rates to deposits below EUR 100,000, but you also highlighted that 40% of balances would not fall under this restriction and are currently not charged negative rate. Can you help us understand what exactly is the strategy there, going forward, and how it differs between, let's say, retail, Private Banking, and corporate clients? Essentially, what prevented you, as you see now, from charging the negative rates to those clients in the past, and do you think it can change going forward? Thank you.
Well, thank you very much. I will take the second question. Clifford, you can take then the first. With respect to the pricing of deposits, it's correct indeed that around 40% of our deposit base, which is around EUR 100 billion, at this moment in time, has negative rates. What we've done in the past is that, as I said, we charged our CIB clients and our largest CB and Private Banking clients. We started with thresholds above EUR 25 million, went down to EUR 10 million. We see lower amounts in the market right now. We are not allowed to guide on that at this moment in time. You will have to await our action. Then we will communicate. That's the way we have done it in the past. If we take action in the future, we will do the same.
You're right, there's EUR 100 billion, let me put it that way, territory where we can apply negative rates going forward.
Pawel , on costs. I'll just say, I'm looking at page five in the slide deck, but as I said, we're traveling at around EUR 5 billion costs already. That's our base position, and that's consistent with our planning that we've set out in the past. That already includes the step-up in DFC costs that you see on page five. You see year to date, business as usual, detecting financial crime costs actually well ahead of the total spend for last year. Annualized, a step up. We expect that step up to continue, I would say, significantly in relation to amount of around a little over EUR 100 million for the first nine months. I think going forward, we've taken the benefit of provisions in the past, and that will shield some of the incremental costs going forward.
You can see the significant provisions we've taken on page five. We do expect DFC business as usual costs to step up further, and in due course, they may well come down. For the time being, it's an increase. What I would highlight, and I use the word balance on the presentation, is you should see those incremental DFC costs balanced by our further cost saving programs, and we're pleased with progress at EUR 850 million. That means we have another EUR 150 million of cost savings further to go through next year. Quite some potential, and that would give us a balance. I note the consensus that you indicated, but I'll leave it at that, and we'll give further guidance next year as we're closer to the results. I think actually just on cost income ratio, I say a final comment there.
I think as Kees indicated, we think the cost income ratio target will be delivered later, primarily as a result of income coming down, not cost. I talked about factors balancing out on the cost front, but it's really the income movement that's caused us to defer that, and I don't think that should come as much as a surprise. We've reconfirmed the EUR 20 million sequential reduction, and that gives rise to hundreds of millions of NII pressure, which we can't mitigate over a period of one year. It's really that that's prompted us to indicate today that the target will take longer to achieve. Any further questions?
I don't think so, sir. I'm going to follow with the next question. It's from Mr. Adrian Cighi, RBC Capital Markets.
Questions from my side, one on capital and one on NII. On capital, your target capital ratio of 17.5%-18.5%. How confident are you that it captures the latest uncertainty on the Dutch prosecutor investigator? Or put it differently, are you still aiming for additional distribution above 18.5% range while the AML investigation is ongoing? On NII, you mentioned that you maintained a EUR 20 million quarterly headwind. While it's understandable, given the volatility in the swap rate, it has been showing quite a material improvement versus the 7th of August, almost 23 basis points to now 27 basis points negative. Can you give us an indication what the EUR 20 million figure would translate into, assuming the current run rate on the swap? Thank you.
Thank you for your questions. I'll take the first one. Clifford, can you take the second one?
Yeah.
On capital, our guidance has not changed. The guidance we have had before as a result of the investigation. Of course, at the end of the year, we will take everything into account, so also that. The 17.5%, 18.5%, and where we are at this moment in time has not changed.
Yeah, I think on NII and sensitivities, I think we're one of the few banks that give very clear indications of the financial impact. I think sensitivities would be further best practice in this respect. I'm looking at the rates in Q1 and Q2 and Q3, and we've given guidance. In Q1 we said EUR 10 million, in Q2 we said EUR 20 million, and now we're saying roughly EUR 20 million. I think the rate picked up relatively recently. It's really at the tail end of Q3 and October, November. It looks to me like it's somewhere in between. I think given those data points that I've set out, you can form your own views. When we give guidance, we don't mark to market every quarter. We reflect on our own views of interest rates as well.
It's a judgment rather than a specific estimate reflecting forward rates. We do see the benefit of rates having picked up. If they sustained, we'll update our guidance again in Q4. Let's see how sustainable these rate increases are.
Perfect. Thank you very much.
Next question is from Mr. Stefan Nedialkov , Citi. Go ahead, please.
Hi. Good morning. It's Stefan from Citi. Two questions from me as well. Just coming back on the provisions for KYC, financial crime detection, et cetera. EUR 226 million. Could you provide us with a breakdown of what those provisions were for? Was it extra external costs for consultants? Is it IT, hardware, software, et cetera? Color on that would be extremely useful. Also related to that, I see in your report you talk about 200-240 FTEs more or less, being hired for these compliance initiatives. Are these employees, or I should say FTEs, here to stay? Are they hired for a period of, say, 12 months? Just give us a breakdown of how many people work on these initiatives, how many of them are internal employees, how many of them are external, and the external ones, when are they likely to leave?
We would just like to get a bit more of a grip on this escalation in the compliance band, ideally. A second question, hopefully, a quicker one. Any update on the CEO succession? Thank you.
I will take the second one. Thank you very much, Stefan. No, there's no update on CEO succession. Process is going well. When we can, of course, say something, when Supervisory Board, of course, they will do that. With respect to the first question, Clifford, do you want to say one?
We'll give some color, but we also guided to Q4 where we'll give more detail. I think on provisions, you're right. It is external expenses. Particularly where we have remediation programs, where we are upgrading our KYC files, we take on external staff which we can ramp up quickly, and those are the bulk of the current increases in FTE. For those specific costs, we can book a provision for those. Those remediation programs also incur internal costs, and you'll see those come through the P&L later. I think in terms of FTE, over the last 6- 12 months, a lot of the FTE increases have been around these remediation programs. I think going forward, we expect to see some change in mix of that.
As those remediation programs get going, you'll see those numbers flatten off and eventually come down. We will build up further our business as usual FTEs in relation to detecting financial crime. Those folks will be engaged in transaction monitoring and ongoing file reviews. In the medium- term, we see opportunity to automate and get efficient at these activities. We'd expect to see costs and FTEs coming down, but that's a little bit far off. That gives you a flavor for the ramp-up and the ongoing developments. Obviously, we'll update you going forward.
Clifford, just to follow up on this. Do you have around 1,500 people, I have something like that at the back of my mind from previous updates, working on KYC more or less?
Yeah. Yeah, in that order.
Okay. Of that amount, around 200-250 would be external people right now?
No, I won't give a breakdown on that. I mean, it's just under 10% of our total staff. We were trying to give an indication of the resource commitment in this area. It's a mix. It's a mix of internal, but the externals are primarily engaged in remediation. That we use external or shorter-term staff so we can ramp it up quickly, and then in due course, bring it down cost effectively when those programs have been completed.
Okay. The 1,500, that includes internal people who have been moved from other roles to help with KYC.
Yeah. Includes. Yeah.
Permanent KYC plus external.
Yeah, I think if you think about the ramp-up of our costs, we've already got a significant commitment. It's in the numbers that were in the slide we talked about and is also in the EUR 5 billion run rate. When you think about DFC inflation, we've already absorbed quite a lot of it, although we do expect further inflation going forward, will be balanced by the cost-saving programs I indicated.
Okay. Thank you so much.
Next question is from Mr. Robin van den Broek, Mediobanca . Go ahead, please.
Yes. Good morning, everybody. Thank you for taking my questions. The first one is on NII. If I take your underlying run rate for Q3 of EUR 1.61 billion, and I factor in the EUR 20 million sequential headwind from replicating portfolio, and I add EUR 60 million for deposit tiering next year, I basically get to consensus for next year. I was just wondering if you could talk a little bit about loan growth perspectives, better loan margin repricing, and the prospects of negative deposit rates. Presumably, those should still be positively driving NII next year. I know in the CIB, I think you are still aiming to go up the quality curve, That probably leaves some NII on the table. Some comments around that would be quite helpful. The second comment is, I am sorry to come back on this, but it's on capital.
The fact that your capital ratio on last year's payout ratio is at 18.8% should imply, in fact, that probably your payout ratio year on year should go up, assuming that you will adhere to the 17.5%-18.5% target range, as you seem to indicate. Is there any risk that you're going to front-load some of the headwinds you see coming in next year, amongst others, the more sizable mortgage density risk increase, which is imposed by the Dutch central bank? A small follow-up on capital is that your Basel IV position is still flat year to date, while also in Q3, you sold some assets. Why isn't that reflecting your Basel IV position? Thank you.
I'll start with answering and Clifford, please add. I think portfolio-wise, we're doing good as a bank, and we also expect that to continue next year. As said, mortgages were well-placed. We're making good margins, and portfolio's grown in the third quarter by EUR 800 million, so that's good. The Dutch economy is performing well. Also on the back of that, we expect to continue SME to finance themselves also via bank, of course. That's good. We see growth in that portfolio as well. CIB has delivered a year earlier than expected on the EUR 5 billion reduction risk-weighted assets. They did a great job there. I said the third quarter, a 9% ROE result. That's actually very good. We're happy with that. Indeed, they're looking for better quality deals, more fee-driven, originate to distribute opportunities, and the likes. From that side, we are positive about that development.
On the asset side development, we're positive about NII. With respect to the deposits, Clifford has mentioned the EUR 20 million sequential, and I talked about the EUR 100 billion deposits not having negative rates. That's the position over there. You have to make your calculation there. With respect to capital, I cannot guide you anything new. I said before, your figure is right, 18.8%. Basel IV is 13.5% indeed, excluding profit, but including profit is close to 14%, I think. Your asset question, why it's not further improved.
Yeah, I'll pick that up. I think we need to recognize these are quite modest movements. They're actually a couple of things, they're a bit technical. Basel III was a little stronger than Basel IV. In respect to the disposals, actually, the risk weighting for these sold assets was higher under Basel III than Basel IV, because under Basel IV, we have the benefit of the output floor. That benefit was lower in Basel IV. We also shifted some of our sovereign exposures and the Basel III regime is actually a bit more favorable risk-weight for these assets in the target credit weightings than they are under Basel IV. Some very specific explanations, but you can see the regimes are slightly different. At the margin, the effects are a little bit different.
Big picture, excluding accrued profit, our Basel III is pretty flat and our Basel IV is pretty flat. I think that gives us confidence given the strength of the business and the more challenging market environment.
Maybe one follow-up on the NII question. Okay, I appreciate what you said, that you're positive on the asset side of the balance sheet. If I would take similar rationale from the Q2 starting point of EUR 1.64 billion, your underlying seems to have dropped by more than EUR 20 million. Is there any specifics on why that is the case?
I think I highlighted the incidentals. You see our bridge on page eight. Again, these are quite small movements. There's always a few things going on in the numbers. We see underlying around EUR 1.6 billion, hence our guidance for Q4. I think Kees has run through the developments for next year.
Okay, cheers. Thanks, guys.
Thank you.
Next question is from Mr. Benoît Pétrarque , Kepler Cheuvreux . Go ahead, please.
Yes, good morning. Questions on my side. First one is on the money laundering part. Could you update us on the main outcome from the review you have done of the DFC? I think you said in your presentation that you put recommendations in a new delivery plan submitted to the regulators. Could you give us the main corollaries or highlights from this plan? Is there any serious issues reported to the regulators? Second one is on the other income. I think you still maintain your EUR 125 million per quarter guidance. I think the underlying is much weaker than that. Why are you confident to maintain the EUR 125 million? Do you expect higher private equity gains next year, or what makes you confident on this guidance? The last one was just maybe on this negative rate opportunity.
I don't think there are much banks putting a threshold at EUR 100,000 . Could you give us a bit more details, for example, putting a threshold at EUR 1 million instead of EUR 100,000 ? How much of your deposit will actually be in scope for a deposit cut? Thank you.
Thank you very much for your questions. I'll take the first and the last. Clifford, can you take the second?
Yeah.
With respect to money laundering, I think it's best practice that you hire also in these cases, an external party, to also check if you have done everything to best practices in market. That's what we've done. We had a plan already sent to central bank, and we have augmented that further after the benchmarking we also got from the external party. I think that is best practice. Used improvements from their sides, incorporated that in our plans and send that now to regulator. That's there. With respect to negative rates, yeah, I think we can further break down. I don't have all the figures. For instance, to give you one indication around, it's a bit over EUR 30 billion, for instance. You see some amounts in the market around EUR 2.5 million.
This actually is for us around a bit over EUR 30 billion, for instance, to give you an indication, which is above EUR 2.5 million for us.
Just on other income, Benoît, I think if you look at the chart, and I concur with your view that other income has been, call it, at the low end of the range or lower than our guidance in the last few quarters, but was actually materially higher prior to that. When we look at the volatile items, we can't see a structural change. We know there's clearly volatility. If we do see a structural change, we would update our guidance. I think the nature of that bucket is you always get volatile items, and just to exclude them all and look at underlying, I don't think is the right way of doing it. I think look at it over time and then consider whether there's structural changes to it, which we don't think they're the case.
I think we've been disappointed on relatively few private equity gains this year, and we've got meaningful capital still committed and expect a return on that, which will come through the other income line going forward.
Thank you for the answers. Could you update us on the size of the portfolio for the private equity portfolio?
Yeah. It's around EUR 600 million.
EUR 600 million. Okay, thanks.
Yeah.
Thank you.
Next question is from Mr. Albert Ploegh, ING Bank. Go ahead, please.
Yes, good morning. Thank you for taking my questions as well. The first one, to come back to the negative rates. Basically today, 20% of the deposit base already is subject to negative pricing. Can you maybe help us a little bit how much that is in terms of NII on an annualized basis and what kind of levels is currently being charged? Also to understand, as mentioned earlier, 40% of the deposit base is not yet subject to negative pricing, but could potentially. The current clients already have negative rates, and apparently, they have accepted this. To also understand a bit what kind of headroom you have on the existing deposit base that is subject to negative pricing. That's the first question.
The second one is on the capital, sorry to come back a little bit to previous question on the RWA outlook also for Q4 and hence also the dividend. I know there are a lot of known unknowns in that respect on RWA headwinds, but are there already some you think you already know that will come in Q4? Are you very much expecting to get some feeling on what the RWAs may end up for the full year at least? Q3 obviously wasn't actually in that respect and a positive surprise. Thank you.
I'll tackle those two . Tanja, please help if I lose my way. I think on negative rates, look, the bulk of that is in CIB that we charge currently. I would just look at the CIB segment disclosure. Effectively, we're passing on or at the market rate in those areas. We're not making material margins on CIB deposits, but neither are we losing money, because those are not part of our replicating portfolio typically. The margin pressure is really on, reflects the two buckets of 40% that Kees talked about. He gave you some guidance around pricing in that context.
I think on RWAs, I talked about inflation. We see that very largely in 2020, all those regulatory headwinds. It's possible some of that lands before Q4, so TRIM, it's possible, but we think more likely next year. Clearly as you'd expect, I think one of the early calls is the dividend is not a mechanical calculation. If we don't get the inflation in Q4, but we expect it in Q1, we're not going to ignore that in our judgment around dividends. That capital target is the zone in which we would consider additional distributions, not a mechanical framework.
Yeah. Maybe to come back on the follow-up on that, because I know your dividend policy in a way is formulated quite mechanical, and we all know the environment that banks operate in. In a way, you've been paying [EUR 145] for the last two years. Consensus was always way above those levels, and in the meantime, it can come below for 2019 and also for 2020 on the EUR 145. How important is it for ABN AMRO to have at least a stable dividend or is it not sacred, so to speak?
We don't guide on that right now, Albert. Sorry for that.
Okay. I understand.
That is a Q4 decision.
Nice try. Next question.
Next question is from Mr. Tarik El Mejjad, Bank of America . Go ahead, please.
Hi. Good morning. Just one question actually on the cost to come back to that. In the slide 10, you effectively mentioned that yesterday the annualized run rate is around EUR 5 billion, but that's excluding the remediation provisions. How are you confident to still reiterate the EUR 5 billion despite actually mentioning that this remediation and DFC cost and compliance will continue to ramp up? I understand that there's still some cost savings to come around EUR 150 million, but these were already factored in your initial EUR 5 billion guidance. I'm just trying to really understand here the different moving parts. Maybe just quickly on the dividend to follow up on the previous questions. Do you have in mind progressivity of dividend or just sustainability in a sense that you still want to be able to pay a decent dividend over time? Thank you.
I'll take the second one. We don't have the progressive dividend, as you know, and the guidance is, as mentioned before, that Q4 we will look at the target range and all our expectations around that at that moment in time. With respect to cost, Clifford?
Yeah. Look, we haven't reconfirmed the EUR 5 billion for next year. We're careful in how we choose our words. I think you're right. When we indicate the run rate of EUR 5 billion, that does exclude the remediation provisions, that EUR 200 million or so. The current EUR 5 billion does include this step up in detecting financial crime costs in business as usual to date. I would say I'm pleased that we've managed to absorb that meaningful inflation and still be today at around EUR 5 billion and still have EUR 150 million of cost savings. That gives you a feel for our buffer or headroom in our ability to absorb further detecting financial crime costs going forward of a business as usual nature. Look, as Kees said, look, we'll make the necessary investments.
We think ensuring that we're fully compliant is money well spent, and we'll spend the money to do that. We're doing that cost efficiently, but we need to make the necessary investments. Outside that, the business is very focused on continuing our track record of consistent cost discipline, which you've seen quarter-on-quarter over the last few years, and that will continue.
Okay. Sorry, I didn't get really the full answer to be fair. I know you tried. So you're not confirming the guidance. You're trying. You do your best to achieve it, but at this stage, given the compliance costs and so on, it's still difficult to get to the EUR 5 billion.
What we're saying-
No, I'm not sure.
What we're saying is that we are currently at around EUR 5 billion. There are cost headwinds, which we flagged, but there are also further cost savings. Precisely where that balance lands, we're not calling today. Given the quantums, you can form your own view.
Okay. In terms of these extra investments, in your previous answer in the call, you mentioned that some of them might decrease over time. Fair enough, you said it's not soon, but later. The experience shows that other banks that were involved in monitoring in the past. This becomes quite sticky in structural costs, and probably you need a new savings program to offset these and absorb these. If I understand, this is not something you contemplate at the moment, to put in place saving programs to offset these costs.
No, we are thinking about it, but I think it's early days in terms of how we communicate externally, and I think the key message is that we expect the ramp-up to continue. I do think big picture, I think the business' usual costs on AML will be higher in the future than the past. I don't think that should become as any surprise to you, even after the benefits of automation. These costs are meaningful at the margin of our cost base. In terms of our overall spend, still relatively small proportion, but it's clear that we and the banking sector as a whole will need to put material resource commitments to this going forward, even if we can automate a lot of these activities.
Okay. Thank you very much.
Next question is from Mr. Bart Jooris , Degroof Petercam. Go ahead, please.
Yes. Hello. Sorry to come back on the dividend policy. You are now already on target. If you include profits above target regarding your Basel IV ratio, your Basel III ratio range was set so high because of the Basel IV impact. The regulatory pressures you expect in 2020 are only having an effect on the Basel III impact. I was wondering, when you decide about the dividend, will you also look at what the Basel IV ratio is at that time, or are you simply keeping a look at the Basel III ratio, including what you foresee as regulatory pressures? Do you have already any idea on a quantified impact of those pressures, by the way? My second question is relating to NII, how much do you plan or have you decided already to put in TLTRO?
Also there was a speech yesterday by Benoît Cœuré saying that even also Dutch banks are starting to lend money to Italian banks in order to offset further their cash surplus. Are you participating in that?
Thank you. We will, at year-end, also look at Basel IV, not only Basel III. We will look at both. Any indication about the regulatory pressures? I don't think so.
No. On the other elements, I think we don't have current plans to take advantage of new TLTROs given our funding alternatives and our exposure to Italy generally is pretty modest.
Has not increased in the last month, let's say.
No.
No.
Okay. Thank you.
Next question is from Jean-Pierre Lambert at KBW. Go ahead, please.
Hello, good morning. Thank Thank you for taking my questions. Two questions, please. The first one is regarding the risk of a fine. As you are in discussions with the authorities, at what point would you consider prudent to take provisions for such a fine to build up a buffer, if you want? The second question is regarding to the cost. I'm sorry to come back to the EUR 5 billion cost base. You have about EUR 133 million already included if you annualize, and that's the green part of the stack in page of slide five. If you do some calculations with cost inflation and the savings you're indicating, EUR 150 million potentially, you could afford about EUR 207 million . The total you could afford to have flat cost base, if you want, or the EUR 5 billion, would be for DFC around EUR 320 million , let's say.
What are the chances of your costs of DFC going above the level of EUR 240 million ? What are the chances of the cost base for DFC next year to be above EUR 340 million ? Thank you.
Thanks, Jean-Pierre. Clifford, you take the second one. First one, I think we can only take that into account when we have a clear indication about a fine. We cannot do that just randomly.
Yeah. IFRS tests would apply. I think your calculation sounded pretty good to me, in terms of measuring the bar and thinking through the ability to absorb further inflation on DFCs. That sounded pretty good. I'm not going to give a likelihood on above or below. If you work through that approach, which I thought was good, the delta is pretty small in relation to EUR 5 billion, right? It should give you a feel for the balances involved, and we're not calling above or below, but in order of magnitude, it feels like you've got the right approach to me.
Thank you. I can see you're mentioning that you have a plan, a new delivery plan. You must have some idea of the potential cost in 2020.
Yeah. We do. I think, as you'd expect, we're very much on top of these matters. I think the caution in giving, well, we're not giving a specific forecast for the, f or the total cost base. We're not going to give specific forecasts for individual items. I think where our caution is, in some parts of the plan, things will go well, and sometimes in some areas things may go less well, and we'll adapt the plans to reflect that. We recognize this is an area of focus and we'll be happy to update on Q4, and we'll have more to talk about at that point.
Great. Thank you very much for your help.
Next question is from Mr. Kiri Vijayarajah, HSBC . Go ahead, please.
Yes. Good morning, everyone. First question on the Dutch mortgage volumes, you usually get a year-end spike in repayments. I just wondered, do you expect that to be a bit more severe this year because you've increased the incentives for people to run down their deposits and then simultaneously pay down their mortgages? In other words, does the push into negative rates further encourage household deleveraging, particularly if the other big banks in the Netherlands follow your push today? Secondly, just to follow up on your guidance for model updates and increase in the 4Q cost of risk. It's primarily just IFRS 9 stage 1 and stage 2 provisions we're talking about, or is there something else going on that we should expect in 4Q? Thank you.
Thank you very much. Tanja, if you take the second, I'll take the first. Indeed, Q4 is always a quarter where people, because the 1st of January is a taxable moment, people look into opportunities to pay back some extra mortgages. We don't expect it actually to be more severe. Of course, it's new, what we've decided today, communicated today. We don't know. Of course, it's the first quarter. We'll see. We have no expectations yet that that will be clearly more severe. Portfolio will go down in the fourth quarter, that we have seen in the last couple of years. Tanja?
Thank you for your question. On the model updates, indeed, we are reviewing the IFRS 9 models. Actually, all models, stage 1, 2, and 3. It will probably mean some changes in the model provisions in all these three stages.
Okay. Got it. Thanks.
Next question is from Miss Alicia Chung, Exane. Go ahead, please.
Morning, everyone. A couple of questions from me. First of all, you highlighted to us not so long ago that the definition of default would be one of the headwinds for ABN in terms of capital. Is this something that you can now come back to us and give us some sense of the quantification of that headwind? At least a ballpark view. Also, can you give us an update on how we should be thinking about the risk weighting of NHG mortgages under Basel IV, which may or may not be another 90 basis points headwind. Then secondly, on provisions, your coverage ratio now stands at 28% on a group level, and the coverage ratio on corporate loans has been falling every quarter now for the last four quarters, while stage 3 loans have been picking up. Can you explain what is driving this?
Also, given the ongoing challenges in CIB and the very low coverage ratio there, how should we think about the provision outlook for next year? Is it fair to expect it to move within your through-the-cycle range now? Thanks.
Thanks, Alicia. Can you answer them, Tanja?
On your question with respect to definition of default, well, I think not a lot we can say at this stage yet. We are in the midst of implementing this into our systems and are looking at impact, but also at regulatory feedback. We expect that to come either this quarter or in Q1. Hopefully, we can update you more on that in the next update, in the next quarter.
On the, I think, NHG, yeah, there have been no developments there, so we continue to include it in our Basel IV guidance as we did before. With respect to the coverage ratio on our stage 3, you've seen that indeed over the past year coming down somewhat. Last quarter, that had to do with the fact that we changed our definition of default and unlikely-to-pay figures for mortgages, and that led to an increase in stage 3 loans and a drop in coverage ratio, given the low coverage on these assets. This quarter, we had some inflow from CIB assets that are covered by collateral and therefore have a low coverage ratio as well. There are the reasons. Yeah, towards next year, I think you mentioned that already. The economy is doing okay. We expect a 1% GDP growth in the Netherlands. You need to consider that in our outlook.
You can expect that our provisions will move somewhat towards the average cost of risk that we guide.
Okay, thank you. Very clear. Just sorry to clarify on the NHG mortgages, you said that that is within your Basel IV guidance. In your Basel IV guidance, what risk weighting do you give to NHG mortgages?
No. It's a 0% weighting.
Sorry?
A 0% weighting.
Okay, fine. Thanks.
Ladies and gentlemen, if there are any additional questions, please press star one on your phone. For any additional questions, please press star one. Go ahead, please. There is a question from Mr. Robin van den Broek, Mediobanca. Go ahead, please. Mr. van den Broek, your line is open. Go ahead, please.
Sorry. Sorry to come back on the queue. Just one question on the remediation provisioning. I was just wondering what's driving the forward-looking guidance potentially here. Is it simply the temporary FTEs, the external FTEs, and the speed of their file handling that could make you provision more or less going forward? What are the drivers there? Secondly, on the IT investments, I think you've been hinting that they can come down. That's not part of the EUR 150 million remaining cost-save program, if I understand correctly. Is that correct?
Yeah. I'll pick up both. You're right. On the remediation provision, we make a series of assumptions about the number of files that we need to remediate, how long it takes, and the cost of doing that. A key driver is the velocity and quality of our file reviews. I would highlight that as a key factor. What you see typically is when you start, it takes a while for these files to be reviewed to quality. As you get going, you get the machine working, quality improves, velocity improves. There's more uncertainty at the beginning. That's generally how these things work. I think in terms of IT investments, I think you're right that we had a series of cost programs. We had the original cost program that was announced in 2016.
We had further cost savings identified in respect of the corporate bank . That's our round of EUR 1 billion. Then we set out yet further cost savings in respect of IT and moving towards the sweet spot in IT. That was always expected to take place over a period of years, but we're expecting some of that into next year. We feel good about our cost-saving programs alongside the necessary buildup in detecting financial crime resources.
Okay, that's clear. Just one silly follow-up, but the fact that we're moving into Christmas doesn't affect the speed of file handling for the remediation provisioning in Q1?
We plan for Christmas.
Okay, that's great. Cheers.
Thank you. Any other questions?
There's a question from Mr. Bart Jooris, Degroof Petercam. Go ahead, please.
Yes. Hi. Sorry, also two follow-up questions. You state that the fees in Private Banking were up, thanks to the acquisition. Could you give us some underlying flavor, what fees were doing without the acquisition? You also took a very small provision for SME derivatives. Could you confirm that that is now completely behind us, that that is now completely finished?
Yeah. I think on Private Banking fees, we saw the benefit also this quarter of recovered equity markets. Our fees in the private bank reflect all sorts of things, but in particular, the quarter start valuation levels. We're pleased to see that equity markets have moved up this year, and that's also supported fees coming through the private bank.
There is some underlying growth also there.
Yeah. There's structural changes, developments going on in that industry year-on-year, but quarter-on-quarter, we were pleased with developments and NII was positive in that business. That was one reason for my confidence around fees earlier.
The second question-
SME derivatives?
Oh, yeah. Is it-
It's done. Are we done?
Yeah.
I think so, yes.
Okay. Thank you very much.
There are no more questions. Please continue.
Okay. I would like to thank you all for your questions. This concludes our Q3 results update, and thank you very much. Goodbye.
Ladies and gentlemen, this concludes the ABN AMRO Q3 2019 Analyst and Investors Conference Call . You may now disconnect your line, and have a very nice day.