Good day, ladies and gentlemen. Thank you for holding and welcome to the ABN AMRO Q1 2019 analyst presentation. At this moment, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. I would like to hand over the conference to Mr. Kees van Dijkhuizen. Please go ahead, sir.
Thank you, operator. Good morning, everybody. Welcome to our investor and analyst call of the Q1 results. Apologies for we could not get connection. We had connection until one minute before the meeting started. Something went wrong. We do not know why. We're on another set at the moment. Sorry for that. I'm joined here by Clifford Abrahams, our CFO, and Tanja Cuppen, our CRO. I will take you through the progress we made on our execution of our strategy and financial targets. Clifford will then go through the details of our first quarter results. After that, Tanja will update you on developments in our loan portfolio. If I go to slide two, I will run through the highlights of the first quarter. I'm pleased to see good progress on embedding our strategy.
As we expect economic and interest rate environment to become more demanding, we are taking the necessary actions. We remain focused on strict cost discipline. As you can see, our costs continue to trend down. We have actively de-risked part of our loan portfolio in 2018. I'm pleased to see this reflected in improved impairments this quarter. We have made further progress in sharpening our business focus with the announced sales of a majority stake in Stater and our private bank, in the Channel Islands. That makes us now a focused onshore private bank in our core markets, the Netherlands, Germany, France and Belgium. There's more to do in our corporate bank to improve ROE. Our target of RWA reduction is now largely delivered. Our Basel III capital position is strong. We are well-positioned to manage the transition through TRIM and Basel IV.
In this more demanding environment, we remain clearly focused on our financial targets. Our strategy execution is well on track. I will update you here on slide three. As I said in my introduction, we are making good progress on executing our strategy. We are increasing income through new sustainable propositions, such as a mortgage facility allowing homeowners to invest up to 25k in energy efficiency measures for their homes and a mortgage solution for seniors to cash out home equity without selling their property. We're the first large bank in the Netherlands doing that. We also introduced a new app, Kendu, a digital platform offering asset management services for investments starting at EUR 50. We are working on building a future-proof bank through continued IT improvements, product and process rationalization optimization, while maintaining firm cost and pricing discipline.
Strong compliance is our license to operate, and we remain vigilant in Detecting Financial Crime. We are further scaling up our FTEs to accelerate our client due diligence remediation programs, and we are making the necessary progress here, too. I'd like to update you on the economic environment and the effects on our business on slide four. We have recently revised down our economic outlook for this year and next, the Dutch economy remains resilient, with Dutch GDP expected to continue to outperform the Eurozone. During the quarter, we grew our commercial banking book by almost 3% from Q4 to Q1, reflecting the strong Dutch economy. The Dutch housing market remains robust, although we see some signs of it cooling off, with house price increase slowing and transaction volumes moderating.
While competition in the Dutch mortgage market remains strong, we saw our mortgage market share stabilize at 14% this quarter. Looking forward, we see clearly positive developments in our mortgage pipeline. Our market share will increase in Q2 again. We expect the ECB to keep interest rates on hold for longer, at least till the end of 2020, and pressure on deposit margin will remain. As the income environment becomes tougher, we are working hard to mitigate this through our focus on margins, developing new revenue opportunities, and further reducing deposit rates. We continue our strict cost discipline to mitigate headwinds related to general price inflation, compliance, and regulatory costs. As I said, we remain focused on our financial targets. Moving to our capital position on slide five. I remind you here of our capital story.
We are strongly capitalized under Basel III as we have built up capital ahead of Basel IV, and we're comfortably within our target range. Our Basel IV ratio at year-end 2018 was 13.5 before mitigations and over 14% including mitigations. At Q1, this is largely unchanged. We are already well capitalized for Basel IV and already well-positioned to meet our Basel IV target of 13.5. We do see headwinds going forward from TRIM model and provision reviews, these will largely impact our Basel III capital ratio only. If so, we will lower our Basel III target range accordingly. Following the legal merger over the summer, the leverage ratio will no longer be an issue. I would like to hand over to you, Clifford, to take you through our first quarter results.
Thank you, Kees. Turning to slide six, our net profit during Q1 was EUR 478 million. This quarter, our net interest income and fees are lower. I will explain the reasons for this later. I'm pleased to say that both operating expenses and impairments are down in Q1. Tanja will give you more background on our cost of risk of 15 basis points.
I will go through these results in more detail, starting with net interest income development on slide seven. Here, we'll first run through Q1, and then discuss longer-term trends in net interest income. As you can see on the right, Q1 net interest income was down EUR 69 million versus Q4 last year, reflecting elevated liquidity management costs, various one-offs in Q4, and a limited impact from continued low interest rates. The elevated liquidity management costs relate to our non-euro liquidity position, which was temporarily higher in Q1, largely related to Brexit. We prudently increased our non-euro position ahead of a possible no-deal Brexit at the end of March, and this led to a shift of around EUR 40 million of interest income to other income quarter-on-quarter.
The remainder of the decrease in net interest income of EUR 30 million from Q4 last year related to various small one-offs in Q4, positive ones, and only to a limited degree, less than EUR 10 million, due to the adverse effect of low interest rates in Q1. I consider around EUR 1.6 billion to be a normalized level of net interest income this quarter. Moving to long-term trends. We continue to see net interest income in 2019 to be slightly lower than 2018. While we expect total lending volume and asset margins to remain broadly stable this year, deposit margins are gradually declining due to low interest rates. The pressure on our NII will continue into 2020 if interest rates stay low through that year. As Kees mentioned, we're working hard to mitigate the impact of the low interest rate environment.
For example, for Moneyou, we have lowered our savings rate in the Netherlands by five basis points to 20 basis points in early May, and there's still room for some further reductions in deposit rates for Moneyou and other savings accounts. Turning now to fees and other income on slide eight. Fee income is down modestly compared to Q1 last year. For private banking, this reflects lower client assets following the market downturn late 2018 and more clients opting for execution only. Clearing income was also affected by lower market volatility in Q1 2019. In particular, it's good to see the equity markets have recovered strongly from their lows at the start of the year, and this should feed through to improving fees in the private bank later in the year.
You can see Q1 is more or less in line with Q4 fees, adjusting for the annual payments to ICS that took place in Q4. We expect total fees to remain stable in the short term, growing after that as our growth initiatives start to kick in. Other operating income was below our EUR 125 million guidance in this quarter. As you know, the EUR 125 million is based on the average we have seen for the past few years, and we stick to our guidance. This quarter, private equity gains, in particular, were very low, and we took a provision of EUR 34 million for client compensation for SME derivatives, and this is booked in other income. I'm pleased to say that we're nearing the end of settling compensation relating to SME interest rate derivatives. Moving to costs on the next slide nine.
I am pleased with our performance on costs, which continue to trend down. As you can see from the left-hand chart, personnel expenses continue to decline, reflecting lower FTEs. We have achieved a 12% reduction in FTE since year-end 2015 and are well on track to reach our target of 14% in 2020. Other expenses, excluding incidentals and levies, are stable despite pressure from compliance and regulatory costs. Please note that regulatory levies were very high this quarter at EUR 161 million compared to EUR 131 million in Q1 last year. This is due to the fact that last year, part of the SRF contribution was in fact paid in Q2, not Q1, as was the case this year. This exacerbates the seasonal effect of levies this quarter on return on equity and cost income.
In the right-hand chart, you see we have delivered further cost savings of EUR 37 million versus Q1 last year, bringing total cost savings delivered since 2015 to a run rate of around EUR 740 million. As you know, we target a total of EUR 1 billion cost savings, including CIB. We are on track to reach a cost base of around EUR 5 billion by 2020. I will now hand over to Tanja to pick up impairments on slide 10.
Thank you, Clifford. First quarter impairments are down compared to all quarters last year with a cost of risk of 15 basis points. While the impairments we have seen are predominantly in the same specific sectors in CIB as last year, I'm pleased to see they are considerably lower. This is partly due to actively risking of specific portfolios in offshore and diamonds in 2018. For diamonds, we continue to focus on reducing our exposure to this sector. Inflows and provisions are low this quarter. In CB, we've seen a number of small impairments across multiple industry sectors.
We reconfirm our full-year expectation of below the through-the-cycle cost of risk of 25 to 30 basis points. Now we'll hand back to Clifford, who will take you through the capital ratios.
Thank you, Tanja. Our Basel III CET1 ratio for this quarter was 18% and comfortably within our target range. This quarter, we did not add part of the interim profit to CET1 capital, unlike previous years. This follows stricter interpretation of the rules in close consultation with the regulator. If we would have accrued profit based on 62% payout of sustainable profit as dividend, which was the payout ratio of last year, our CET1 ratio would have been 16 basis points higher. Of course, at the end of the year, we will add full year profit not paid out as dividend to the capital position in the normal way. During the quarter, our RWAs increased from seasonal volume recovery, TRIM model reviews, and the private banking acquisition in Belgium.
We are pleased with the progress made by CIB to refocus as the targeted RWA reduction of EUR 5 billion is now largely delivered. Our reported RWAs for CIB are EUR 36.9 billion, down from EUR 38.8 billion at Q1 2018. The EUR 36.9 billion includes around EUR 3 billion for TRIM and model reviews. Excluding these, we are already around EUR 34 billion versus EUR 39 billion last year, like for like. We expect headwinds from further TRIM model and provision reviews, which will mainly impact our Basel III number, we will lower our Basel III target ratio accordingly. As Kees mentioned, our Basel IV CET1 ratio remained largely unchanged compared with year-end 2018. Basel IV also does not include interim profits, and Basel IV is more stable than Basel III as it is not affected by TRIM and model reviews.
Our leverage ratio is 4.1%. On completion of the merger, the leverage ratio will improve by around 20 basis points, it will no longer be a constraint. As Kees said, we have a strong Basel III capital position and are well-positioned to manage the transition through TRIM and Basel IV. I would now like to hand back to Kees to update on our targets.
Thanks very much, Clifford. We are well on our way to achieving our financial targets, I would also like to emphasize that both ROE and CI ratio reflect seasonally high regulatory leverage this quarter. If we divide regulatory leverage evenly over the year, CI ratio would be over 3 points lower at 60.2%, and the ROE around 1% higher at 10.2%. I'm pleased with our cost performance, Our capital position and capital generation remain strong. We expect a further impact from TRIM and model reviews on the Basel III, If this materializes, we will lower the capital target rates accordingly. Before we go into Q&A, I would like to briefly recap the highlights on slide 13. All in all, I'm pleased with our progress and operational delivery on our Banking for Better strategy, which will underpin our future financial results.
Our Basel III capital position is strong, and we are well positioned to manage the transition through TRIM and Basel IV. While the environment is becoming more demanding, we are taking action to deliver on our promises, and we remain focused on our financial targets. I would like to ask the operator to open the call for questions. Operator.
Yes. Thank you. Ladies and gentlemen, we will start the question and answer session now. If you have a question, please press star one on your telephone. As a reminder, please limit your questions to three. If you have a question, please press star one on your telephone. The first question is from Mr. Pawel Dziedzic, Goldman Sachs. Your line is open. Please go ahead, sir.
Good morning, and thank you for the presentation. I have two questions, and both are on your top line. The first one is on the comments you made on NII pressure and in particular on slide seven. If we strip out noise around the impact of liquidity management, then take on board your comments on strong mortgage pipeline and potential mitigating actions still on deposit, do you still expect to be able to deliver NII run rate of EUR 1.6 billion to the rest of the year? If you can maybe give us an idea about that. In other words, you showed here in this slide EUR 29 million of other NII decline and how recurring that would be in the coming quarters. That's the first question.
The second question is on your other revenues, and it's essentially how comfortable do you feel about your income guidance of around EUR 125 million you gave us before? Again, we can strip a number of one-offs this quarter, and we still end up with quite a lower number. Any comments there would be helpful. In particular on private equity, do we expect it to rebound? How the sale of part of your stakes in last year impact the run rate? Thank you.
Thank you very much, Pawel. Your first question around the development you mentioned, I think that's fair to say. If you take the EUR 40 million as mentioned, we are above 1.6 this quarter with an improvement of the mortgage portfolio. We do actually expect at least in the coming quarters, we can't of course make a forecast for all the quarters in the coming year or next year, but for the coming one, two quarters, I would say guidance at 1.6 above should be possible. The guidance around other income stays at EUR 125 million. As said, private equity gains were very low this quarter, EUR 10 million. EUR 150 a year ago, so that is low. That very much depends, of course, on stock exchange. We cannot give that as a separate part of the EUR 125.
In general, the EUR 125 you can use for the coming quarter.
All right. That's very clear. Thank you.
The next question is from Mr. Nick Davey, Redburn. Your line is open. Please go ahead, sir.
Good morning, everyone. Three questions, please. The first one, if I could ask you to comment a bit on this move towards not accruing any earnings into capital. I understand your comments in the release about prudency. It is an unusual step, and you're obviously making the point about discussions with regulators. Could you just give us any insight into what that discussion is actually about, if not about dividends, because no other bank is reading the rules in the same way as you are. The second question, please, on domestic mortgage margins. One of your orange peers is more enthusiastic these days about the trend in margins. I just wondered whether you had seen anything that makes you equally enthusiastic. The third question, please, on Dutch corporate lending trends.
Just looking at some central bank data, which seems to suggest decline or an increased problem through the quarter in terms of Dutch corporate lending. When I look at your balance sheet trends, it seems to be actually quite encouraging growth. I'm just trying to square those two, if you're seeing anything changing in terms of corporate appetite and/or if you're offsetting that with international growth. Thank you.
Thank you, Nick. Clifford will answer the first question. I will take 2 and 3. Domestic mortgage market margins. Yes, we see increased margins indeed due to development in long-term interest rate and also the market developments in general with players in the market and less in the market. That's the reason why we also guided our 14% market share last quarter. Q1 will increase in Q2. We're positive about that because margins are very important here. As we said, we have been disciplined. That was the reason we're only at 14% in Q1, and we see improvement going forward. Dutch corporate lending. We have had a very good quarter with 2.8% growth on a quarterly basis. That actually is a yearly rate of over 10. That is not something we normally guide and also not expect for this year actually, going forward.
This was a good quarter, and we do not see at the moment people in trouble and not taking up loans at this moment in time. Let's see. We did well in the first quarter, very well. We're still positive about the market also the rest of the year. Clifford?
Nick, I'll pick up the approach to interim profits and just spend a little bit of time on it so we're all clear. Just to make the obvious statement, the money's still in the bank. This is merely a reporting thing, but an important one, which is why we've highlighted it. We don't feel we're being prudent per se. This follows, as we said, a stricter interpretation of the rules in close consultation with the regulator. The rule in question is CRR Article 26(2), and you need approval of the regulator to book interim profits as capital. The relevant clause is the institution, that's us, needs to demonstrate to the satisfaction of the regulator that any foreseeable charge or dividend has been deducted from those profits. Now in our case, our dividend policy, as you know, is a minimum of 50% plus additional distributions.
A strict interpretation of that, of what I indicated, means that we're excluding the full amount. I would say it's theoretical. We're making no commitments or comments about dividends at this stage, but it reflects that strict interpretation when we have a lower bound to our payout ratio, but not the upper bound. I think my expectation is that this approach would be adopted across the sector, but one needs to take into account the dividend policy, in the context of this rule. I hope that's clear, and happy to pick it up outside the call.
Okay. Thank you.
The next question is from Mr. Benoit Petrarque, Kepler Cheuvreux. Your line is open. Please go ahead, sir.
Questions. The first one was on net interest income. Just to come back on your EUR 1.6 billion guidance. It seems that we're going to stay around that level in the coming quarters. Looking into Q1, it seems that you indicated a EUR 10 million drag from low rates Q on Q. Is this type of pressure the pressure you also expect in the coming quarters and also going into 2020? Is that something we can plug in the models? The second one was on the originate and distribute model you plan to implement on the 20-year-plus mortgages in the Netherlands. Just wondering where you are. Have you started actually to produce for third parties? And how much fees you will expect, fee growth you will expect from that? The last question was on the NPE coverage ratio.
I think that was one of the items you mentioned last quarter. Do you have an idea about the impact you could expect, and could you guide us a little bit more on this item specifically? Thank you very much.
Thanks, Benoit. With respect to the guidance around interest, I would say the EUR 1.6 billion. Let's be careful not to really guide above that. Perhaps that's the right thing we guide. It shows because there's, of course, upward pressure from more mortgages, but as said, there's also downward pressure from interest rate development in general. With respect to the originate to distribute 20-year mortgages, or 30, I think also we look into, that's work in progress. I think we want to do our first deal this year.
Yeah.
That's the plan. Fees aligned to it, not yet clear, I think, at this moment in time. Let's see what the first tranche will be, and then we can update you on that. NPE, Tanja?
Yeah. Developments on NPE are that the European Commission, in the meantime, has approved regulations which force banks to take a potential backstop in Pillar 1 for newly originated assets. We also have ECB guidance, and we need to see how we deal with our existing NPE from before this date. All these measures are coming in right now, and I think we can update you in Q2 more on what all these new regulations mean if you bring them all together.
Okay. Thank you very much.
The next question is from Mr. Adrian Cighi, RBC. Your line is open. Please go ahead, sir.
Hi there. This is Adrian Cighi. Thank you very much for taking my questions. Three questions from me, please. The first one is on cost. The environment has deteriorated quite considerably since you've set the initial cost reduction target. Do you think you have the ability to increase this a bit further? The second one is a follow-up on the cost of risk. Your guidance remains unchanged to 25, 30 basis points, potentially a meaningful increase from the Q1 level. Do you see any reason for this to increase, or is this just a particularly conservative guidance? On the Basel IV, just a clarification. You said it remains largely unchanged quarter-on-quarter, despite obviously the private bank acquisition and the lack of the organic capital build. Are we seeing some of the initial results of mitigation, or what explains the sort of unchanged despite the headwinds?
Thank you very much.
Thanks, Adrian. I would say cost and Basel IV, Clifford. Then cost of risk, Tanja?
Yeah. Picking up costs, I think in terms of the more demanding environment, we're seeing some pressure on income from lower longer that we've discussed earlier on the call. That's likely to extend into 2020. In that sense, income has got more demanding, which challenges the cost income ratio. Then on compliance and regulatory costs, yeah, we do see incremental costs coming through. I think as Kees said, we're focused on our financial targets. Next year, the target of 56%-58% cost income ratio remains our target. We reconfirmed that in November and February this year. It's got a little bit more difficult to achieve, we're working hard to deliver on further cost savings in order to mitigate the headwinds we see regarding costs.
You'll recall the presentation we gave, in particular around IT at Invest Today, and we're working hard to deliver more for less in our IT area. Moving on to Basel IV, I think we were just trying to call the difference between Basel III and Basel IV. Basel IV is down 0.4 in the quarter. Basel IV is down less or a negligible amount, which is why we've reconfirmed it's largely unchanged. That reflects the movements you've talked about earlier. It's less the benefits and mitigations that we expect to see over time, and more relates to the fact that the TRIM and model review impact that has an adverse impact on Basel III, and we've disclosed the amount, a little over EUR 1 billion, does not carry through to Basel IV because it's on a different basis. Those two approaches are converging slightly during Q4.
During Q1, rather.
Yeah. Okay, on your question on cost of risk, of course, we are pleased with the impairment levels this quarter, but you cannot extrapolate these forward. Well, some of the provisions are quite lumpy, and also we remain cautious in specific sectors, and we shared that with you before, especially in oil and gas and also for the diamond sector, we remain cautious. That's why we stick to the guidance that we have provided before.
Thank you very much. Very helpful.
The next question is from Mr. Benjamin Goy, Deutsche Bank. Your line is open. Please go ahead, sir.
Yes. Hi, good morning. Two questions, please. Maybe one follow-up on cost of risk, in particular in your commercial bank. We've seen a trend around EUR 60 million per quarter or 60 basis points, roughly. Initially, it was driven by a single sector, and now it feels more broad-based. Wondering whether this is also the guidance going forward for this segment. Secondly, on costs, you have a rather conservative approach to capitalizing software investments. Now, the European Commission might change that, and you could get benefits in your capital if you capitalize. Wondering whether this is something you currently think about changing your approach here. Thank you.
Thanks, Benjamin. Tanja, can you take the first question and Clifford the second?
Yeah. On commercial banking, indeed, well, how we see cost of risk levels for CB, well, in the similar range as we saw last year. Indeed, what you see right now is that impairments are taken more across sectors. There's really not a real trend to be seen there. We still see some elevated provisions in the healthcare segment. Apart from that, it's actually across sectors. It's too early to say that there is a trend, but definitely certain sectors are struggling a bit more. Then you need to think of every business and retail where clients are struggling. As I said, it's too early to say that it's a trend. We don't provide a cost of risk guidance by segment, so I cannot fill you in there any further.
Yeah. Ben, I'll pick up the approach to IT. As you know, we charge our IT spend through the P&L, so there's very little capitalization going on, which we think is the right thing to do in terms of running the business. We've been following developments closely. We understand that EBA will opine on this principle by the end of next year, so it could come into force in 2021. It's a little way off. We'll monitor it closely to see if there are potential benefits. We do want to be consistent in our reporting, also we want to be aware of regulatory developments and adapt to that. We don't take a principled approach here. We're open-minded, we will follow developments as they take place.
Okay. Thank you.
The next question is from Mr. Bruce Hamilton, Morgan Stanley. Your line is open. Please go ahead, sir.
Hi. Morning, folks. Thanks for taking my questions. Firstly, one on capital. I realize that we're sort of converging between Basel III and Basel IV, could you just remind me what the sort of TRIM impacts were in Q1? Any sort of quantification of TRIM and the sort of guidance on NPEs through the rest of the year, or if you can't quantify, which should we expect will be bigger and how will those fall across the quarters? Secondly, on the NII, really looking to 2020. In terms of mitigants, could you just summarize again what those are? I think you mentioned deposit costs, although I didn't think there was much scope there. I guess volumes would be another, but is it going to be more driven by faster fee growth trying to offset NII, or is there something else that would help?
Finally, on the cost of risk, I guess the coverage ratio has dropped a little, and you give some explanation in the report, but at sort of sub 30%, still optically at least looks quite low. Can you remind us reasons why that's not the case or what we should bear in mind that drives maybe the coverage ratio lower than some of your peers? Thank you.
Thanks, Bruce. Clifford, can you take one and two, and Tanja, number three?
Yeah. We call it TRIM and model reviews. The amount we took in Q1 was EUR 1.3 billion, in addition to the EUR 5 billion in Q4. TRIM is a process that will take place over time. It's important for us as management to see the early signs of TRIM and book the possible effects of that early if we see it's appropriate. We're seeing somewhat of a phasing in of that as some of the information comes to light regarding TRIM. It's quite possible there will be further impact of model reviews this year ahead of, call it, the final determination of TRIM, which may well extend into next year or even beyond. That we're clearly flagging in our disclosures this year. NPE, I make a broadly similar point.
There are a range of rules regarding NPE that have come out of EBA and the ECB, and many of them point to 2020 and beyond. It is possible that the effects of this take place earlier, which is why we have used the term provision reviews, which captures NPE, but possible other factors. I can't give any more specific guidance for that, but it may be that the effect is earlier than the formal target dates, which extend off into the future. Perhaps Tanja can comment further when she responds on the cost of risk. On 2020, we've been clear on the more demanding environment, but also the action we're taking. Kees talked about volume, and we will pursue volume where we can profitably. We gave the example of mortgages, where we've been encouraged by recent developments.
We gave the example of Moneyou. We're also looking carefully at how and where we're passing on negative rates. Our corporate clients receive negative rates. It can be appropriate to extend that elsewhere, particularly clients who have very large balances. We would consider that, particularly if rates stay low for longer. We do see some scope there, as well as fees from whether it's new products or originate to distribute, which Kees talked about. We're working hard on those initiatives in particular.
Okay. On your question with respect to the coverage ratio, indeed, that has dropped a bit comparing Q4 to Q1. The reason for that is, it's indeed in the report, is that we have written off some exposure with a high coverage ratio. Also, we are focusing on our non-performing exposure, especially when it's around for some time, to actively work that out. That's one reason. Secondly, we saw some new inflow, where we took some impairments as well, but at a lower coverage ratio. That combination led to somewhat of a drop, but thinking of around 30%, that is the level that you should think of. This is just the outcome of the developments that happened in the last quarter.
Thank you.
The next question is from Miss Alicia Chung, Exane. Your line is open. Please go ahead.
Morning, everyone. Just a couple of questions from me. Firstly, on costs. Cost discipline has clearly been very encouraging for a number of quarters now at ABN, and has tended to surprise on the upside. Underlying costs came in comfortably under EUR 5.1 billion last year. I suppose my question is, can we expect an improvement on this this year, given that you still expect to have a further EUR 150 million of cost savings to come in your strategic plan? In absolute terms, can we improve on the less than EUR 5.1 billion underlying that we saw last year? In particular, now that you've completed the RWA de-leveraging in CIB, can we expect a greater focus on restructuring the business from here, particularly given that staff numbers are still 4% or 5% higher than they were two years ago? That's my question on costs.
Just to go back on the point on provisions and coverage ratios. Appreciate that, of course, part of the reason for the drop in the coverage ratio falling from 32% to 29% was because of the de-risking of the portfolio. Also, can you help us to try and understand why we are still reducing the NPL coverage ratio at a time when you have concerns around headwinds from calendar provisioning? Particularly when I look at your coverage ratio in CIB, for example, versus peers, it already looks quite low, and I wouldn't necessarily assume that is because you have a lower risk business mix. Actually, if I may, just one final question on your capital target. You've flagged that, of course, the Basel III and Basel IV ratios now appear to be converging because of TRIM and model updates that are affecting Basel III.
You said that if that convergence continues, which you expect it to, you will update your target equity Tier 1 range, which is, of course, still on a Basel III basis. At what point do you expect to update that ratio, and how should we think about how that will move going forward? Thanks.
Thanks, Alicia. With respect to cost, I would say, as Clifford already mentioned also, we are very much focused on that, especially when there is pressure on income line. As explained, I think Clifford mentioned all the examples where we're working on. We indeed want to bring down costs, also notionally, on a notional value, absolute value. With respect to CIB, indeed, in general, by the way, the leverage ratio was constraining, indeed, sometimes some parts of CIB, for instance, the clearing department. That's helpful that this constraint is, presumably, no longer there somewhere over the summer. That's good. Second question, Tanja will answer that one. With respect to your last question, capital target and converging and the likes, and our update on target.
We set accordingly, that depends if a lot happens in the second quarter, we might do it then after the second quarter. If not much happens, we might do it later, but that's more or less what it will be driven by the underlying, what happens underlying, and we will do it like that. The second quarter could be the first moment. Yes. Tanja?
On the coverage ratio, you're alluding it especially on CIB. As you mentioned, it is indeed related to the fact that we have been de-risking that portfolio, have very much focused on the more cyclical segments there. You see that back as well in the amount of impaired exposure in this business line. That is explaining as well, taking out the assets with higher provisions influences the coverage ratio. I feel comfortable with the coverage ratio that we have today for this business. As said, the levels around the 30% is something you should think of for us.
Okay, thank you. Just to circle back on the costs. You mentioned that you will, of course, aim to bring down costs. Is that in 2019 or is that more for the later years?
Clifford?
Yeah. We're focused on the target for next year. We've indicated the around EUR 5 billion. I've given you a sense of headwinds. There are genuine headwinds. We are
We're upgrading our focus and resources around compliance in particular, as we should. That EUR 5 billion has got a little bit tougher, which is why we're working hard on it. I won't give any further guidance on 2019 versus 2020. Clearly, while we feel well-provisioned for our existing cost plans, if we come up with extra things, there may well be costs associated with those. We're managing all that carefully with a view to, frankly, delivering on our commitments for next year.
Okay, thank you very much.
The next question is from Mr. Kiri Vijayarajah, HSBC. Your line is open. Please go ahead, sir.
Yes. Good morning, everyone. Just a couple of questions on the scaling up of the due diligence capabilities there. To really just get a feel for where are you in the process in terms of ramping up the FTEs. One of your close peers, they're talking about special projects within that, maybe some of the costs falling away in 2020, is it more a case of all of the build-out you're doing is recurring costs that you're putting on. In a similar topic, but on the revenue side, are you finding any kind of client relationships that need to exit because they don't meet those higher due diligence requirements? Just some color on how that whole project is impacting your business. Thank you.
Thanks, Kiri. With respect to due diligence, I think we step up at this moment in time with EUR 85 million, we took as a provision in Q4, especially this year and next year. For a two-years period. Having said that, already Clifford also mentioned it, of course, it depends on developments going forward. At this moment in time, we have, of course, amount of people of 1,000 which are working on it already. The extra 400 is actually planned also to remediate backlogs we have at this moment in time, especially in the commercial banking asset and in our credit card department. We have set up, by the way, a special product here. We call it Detecting Financial Crime, with allocated people and budgets, and a lot of focus. It's really top of mind in the bank at this moment in time.
It's too early to say something about after 2020, I would say at this moment in time. Of course, we hope that we have solved the problems anyway. Also are able, in our processes, to have it more ingrained there and lower cost again going forward. That's too early to speculate about that. With respect to client relationship, we do not comment on that. Indeed, of course, our due dil can lead to exiting clients. We do not comment on that publicly, but that's indeed, of course, can be a result. It's not harming our business in a way that you would see that in our figures.
Got it. Thanks.
The next question is from Mr. Albert Ploeg, ING. Your line is open. Please go ahead, sir.
Yes. Good morning. Thank you for taking my questions. I've got two. First, coming back on the TRIM and model reviews. Clearly, it's clearly more worthwhile to look at the Basel IV impact as you alluded to, and that you will reflect also going forward your Basel III capital target in case of future impacts. Can you say something on the timing of that potential review of the target? Is this still possible that that will occur somewhere in the second half of this year, or is this more, let's say, Q4 kind of general update when we move into 2020? That's my first question. The second question is a bit broader on the topic of M&A. Now, let's say with the NII headwinds probably being there longer than may be expected, let's say back at the Capital Markets Day.
In terms of order of priorities, is M&A, let's say, higher on the agenda to look a bit more proactive to certain files than maybe before, or is just Anything you can add on, let's say, M&A appetite is welcome. Thank you.
Thanks, Albert. With respect to your question around the review, as said, it may be the next quarter, it may be the quarter after the quarter after, depending about what happens around TRIM and model review in that quarter, which is Basel IV-related. Depending on what happens, we will come up with a review of the target or a lowering of the target at that moment in time. It can be from Q2 onwards, potentially. With respect to M&A, we have been open for bolt-on acquisitions in private banking already for some time. As already illustrated, by the way, Sogejam last year and before in Germany two times. We're still open in Germany, France, and Belgium for bolt-on acquisitions in private banking. We also look at other areas where we can find perhaps fee options or interest-generating options. We're looking more broad.
We'll be bold on if we do it. The more broader M&A discussion, I think, well, that's a different one. We now are working on standalone basis, that's what we're going to continue in the future. Thanks.
Yeah. Thank you.
The next question is from Mr. Marcel Hoeben, Credit Suisse. Your line is open. Please go ahead, sir.
Good morning. Thank you for taking my question. I have two left, please. On the fee side, especially in the retail business, there was quite a significant drop Q and Q, whereas I thought that the high 90s was the run rate. Is that all driven by online brokerage, so people not trading much in the first quarter? Or because the majority, I thought, was just current account pricing, and that was stable going forward. That was my first. The second was more, I know it's quite early in the year, but just the narrative on the capital and excess capital return. Is it your ambition to grow the capital base beyond, for example, the 18.5?
If we assume, say, ceteris paribus that the capital target doesn't change, would you aim to grow this capital base, or do you think we will never see a higher core CET1 ratio of 18.5, for example? Thank you.
Thanks, Marcel. With respect to fee side, perhaps Clifford, you can take that question.
Yeah.
With respect to capital return, it's indeed, as you say, early in the year. That's true. We have not said a lot about dividend yet. 18.4 last year went down to 18 Q1. What we actually expect is a set due to when there is Basel IV elements, the TRIM and the model reviews earlier on, then actually that will lower the difference between Basel III and Basel IV. That's actually more a, I would say, some downward pressure on the CET1 quarter one, Basel III than upward. I'm not going to say anything about never something. The pressure is more in the other direction, I would say. Clifford, can you say something on fees?
Maybe just a little bit building on that and just maybe a different angle. I think clearly we're in a transition period between Basel III and Basel IV, it's a challenge. We continue to feel that the right way to communicate the target range is Basel III, because that's our reported basis. The principle is we want to keep them well aligned. You can see this quarter, we've said Basel IV is unchanged from Q4 when it was 13.5%, so well capitalized. 18% is in the middle of our current Basel III range. They're well aligned. If TRIM and model reviews makes them misaligned, we'll look at it. As Kees said, it could be as early as Q2. It's the alignment that we're looking for to ensure that we manage that smooth transition.
I think that was the second.
Fees in retail.
Fees.
Yeah.
I think looking at the sequential trends, Q4, I'll put it this way, was a little bit high. Q4 in retail benefited from the ICS payment to our credit business, our credit card business. That was a high single-digit EUR amount. If you look at fees year-on-year, they're actually more or less in line. There's some seasonality to our fees. That explains most of the movement between Q4 and Q1. Kees commented on the outlook going forward regarding fees.
Got it. Thank you.
The next question is from Mr. Stefan Nedialkov from Citi. Your line is open. Please go ahead, sir.
Hello?
Yeah.
Hi guys. It's Stefan from Citi. A couple of questions on my side. A lot of questions on TRIM. Let me throw mine as well. TRIM, basically EUR 3 billion of RWAs thus far. You have guided overall Basel IV inflation of EUR 30 billion-EUR 40 billion effectively of RWAs, 30%-40%, call it EUR 30 billion-EUR 40 billion of RWAs. We're really only talking about 10% of the Basel IV impact having been phased in. Would you say that probably there's another 10% to be phased in by 2020? Overall, really, the vast majority of the Basel IV impact will happen from 2022 onwards rather than being front-loaded before 2022. I would just note that that's different from your other orange peer, who is phasing in 80% of the impact in the next one to two years. Do you agree with this statement or not?
Basically, that's my question. The second question is on costs. Retail costs surprised positively. Retail banking costs surprised consensus quite positively. We don't really have too much granularity in terms of what has driven that. If you can comment on how sustainable that beat is going forward. Related to that cost question, when ABN AMRO talks about headwinds on the cost side of things from compliance, you did indicate in the pre-close call that compliance costs on an ongoing basis are likely to rise from sort of EUR 100 million to EUR 125 million per year. That's just a EUR 25 million negative delta. In the context of EUR 5 billion cost base, it doesn't strike me as a huge negative delta. Yet you are talking about compliance cost pressures. Am I missing something here?
Thanks, Stefan. With respect to TRIM, I think the EUR 3 billion you mentioned, if we take Q4 last year, Q1 this year, it's altogether already EUR 6 billion, which is more of course year-to-date already. Forecasting this is not easy because it depends very much also on what regulators discuss with you and decide upon discussions around discussions. It's not easy to forecast, but the figures you mentioned are, I would say low actually, for what we would expect. The 2 times 10% is I would say low. Can you say anything on the retail cost?
Yeah, I'm looking at the sequential. I think it's important to just break out some of the incidentals. Q4 to Q1, retail costs were down a decent amount. You've got to look through the allocation of levies, and also because Q4 is a heavy levy quarter, and also Q4, we book the provision for CDD remediation. A lot of that fell on retail. I don't think I'd be calling out specific trends on costs regarding all our businesses. I think the retail bank is focused on costs because some of those income headwinds are landing on that business in particular. If you look at it over time, I think the performance is more or less in line with some of the other businesses.
Okay, thanks.
I think that's
Just to follow up on the compliance, the pressures of EUR 25 million extra per year.
Yeah, the comment on compliance. We have booked a provision for compliance costs. They were for some very specific programs. We expect the run rate of compliance related costs to go up from the roughly EUR 100 million that we've seen in previous years, of that order of magnitude. I think as Kees said, we're not expecting an imminent reduction in those costs. We're not going to declare victory and stand down the teams. I think we expect the environment to remain rightly focused on this, and we're putting the resources behind it appropriately.
Okay, Clifford, just to confirm here. You're saying that the pressure from compliance cost is around EUR 25 million per year. Is that correct?
We've given previous indicator. I don't want to update every quarter on compliance cost. We see compliance and regulatory generally as a source of headwind on costs, which is how we characterized it. We remain focused on our overall targets, and I think the guidance we've given for next year remains appropriate in that context.
All right. Thank you.
The next question is from Mr. Jason Kalamboussis, KBC. Your line is open.
Yes. Hi, guys. Jason from KBC. I just had a couple of questions. The first one is just coming back on M&A. There have been news mentioning possibly that Degroof Petercam in Belgium would be open for discussing a sale. Now, putting aside, I'm sure that you cannot comment on specific files and cases. Putting that aside, given that it would be something that could be worth just north of EUR 1 billion, I was wondering if your bolt-on would extend to what I would call, or I think you call your running profit. If that firepower, basically, you would look at it and say, "Look, within my running profit, which actually goes roughly to EUR 1 billion, it's something that I would consider." Do you find that this is exceptional?
In general, if you could comment, would you go for something that is a larger deal at this stage because that could help to alleviate the pressure that we can see over the next couple of years, at least on your top line. The second question was on diamonds. EUR 7 million low, but it can change a lot in quarters. I just wanted to have an outlook and a comment if there is in general, some improvement in the market versus what we have seen last year, or if it's still very much a market that hasn't shown any such signs. The third quick question is on NII.
From both questions that came on it, is it fair just in general to assume that this quarter, the EUR 10 million is roughly the impact that we should assume so that this year, the EUR 10 million per quarter, you absorb it by increasing your market shares, et cetera. As I think Bruce was mentioning, looking, for example, in 2020, it is roughly a good number to use. Everything else being equal. Of course, there are actions you can take to alleviate that. Without giving guidance for 2020, is the EUR 10 million per quarter a good figure to have in mind? Thank you.
Thanks, Jason, for your questions. Indeed, M&A Degroof, we will not comment on that, of course. Your more general question, what kind of size would you look into? If I take the last three deals, I think two were in the range of EUR 5 billion-EUR 10 billion assets under management. One was EUR 5 billion, Oxiana, the latest one. I would say it's not a case that we would only look at EUR 5 billion or EUR 10 billion. It might also be larger. We will look at every specific situation and of course, specifically at the business case around that. Diamonds. Tanja, you can comment on that. With respect to your NII guidance, the EUR 10 million and absorbing it by volume growth, that's, I would say, the right guidance. We can confirm more or less this reasoning you have. Thanks. Tanja?
On diamonds, indeed, as you mentioned, this quarter limited additions to provisions. As I mentioned already, we remain cautious with respect to this market. It's a market under pressure. You see consolidation and competition also from, I think you call them artificial diamonds. You see pressure on the sector, we expect that to remain. We remain cautious.
Thank you very much.
The next question is from Mr. Rahul Sinha, J.P. Morgan. Please go ahead, sir.
Hi. Good morning, guys. Thanks for taking my questions. Just maybe a couple. I think on fees, we have had this discussion already, but I just wanted to link back, especially your comments at the investor day, where you talked, I think, about stable fees in the short term and then a modest pickup from growth initiatives. I was wondering if you could refresh for us a little bit, the timing or how you expect the growth initiatives to kick in, maybe over the rest of the year into next year, in terms of driving that fee income line. The second one is just slightly more specifically on the Stage 3 book. If I look at the disclosure, and correct me if I've got this wrong, I think the Stage 3 corporate loans are up something like EUR 600 million in Q1, from EUR 4.3 billion to EUR 4.9 billion.
I think you've talked about inflows and outflows, and obviously the point on coverage is obviously very clear already. My question was more, EUR 600 million increase in the Stage 3 corporate loans is obviously quite a big number. Is there any color you can provide in terms of what sector is driving that? Thank you.
Thanks, Rahul. Cliff will answer question one, and Tanja, question two.
I think on fees, by way of an update, I think we have made disposals of some fee heavy businesses, and that's a headwind on our number. I think we should factor that in. I also think Q1 was impacted by the downward movement in equity markets at the end of Q4. There's some, I call it some short-term factors there are impacting the number that is perhaps extending out the period from which we hope to grow fees. If I look at the prospects going forward, whilst I'm pleased with the fee initiatives we're working on, and Kees talked about the mortgage fund and Kendu, and all of these will add fees in due course.
I think taking the mortgage fund as an example, it will take, frankly, a few years to build up to a meaningful stock on which we'll earn fees that would be meaningful to the EUR 400 million or so that we report each quarter. The same is true of investments. Going forward this year, now clearly markets can be volatile, but we were pleased to see the market pick back up again, and you see that in the value of our investments. That's meaningful to fees going forward. I think it's more those tactical cyclical things that will drive a movement in the next few quarters as we work on these more medium-term fee initiatives.
Got it.
Okay. On the Stage 3 book, any inflow there? I would say it's too much to say that there is a trend in certain sectors, but I can call out a few. We saw some inflow from offshore energy, the sector that we have very much in focus. We also saw some inflow in short-sea shipping and food and beverage. I would say the rest is across the board. As mentioned, looking at these files and also the impairments level that we felt are appropriate, they are below the average coverage ratio that we have for our total book. That explains the coverage ratio as well.
Thank you. That's really helpful. I guess I was wondering whether these are largely domestic or largely international in terms of exposures.
I think it's a combination. Some of that you see domestically and some of that is international. It's really a combination. I would not have the numbers to say, 'Well, it's really 50/50,' but it's not that you can say it's purely domestic at all.
Thank you so much.
The next question is from Mr. Robin van den Broek, Mediobanca. Your line is open. Please go ahead, sir.
Yes. Good morning, everybody. Thank you for taking my question. My first one is related to a comment your peer made in the Netherlands, that is that they were using higher FTP rates for the lending side of the bank, basically implying that commercial rates were up and lending margins were sort of flat. To me, that gives the impression that the higher credit spread movements of Q4 were basically passed on within the bank. Given the sizable tightening of credit spreads year-to-date, I was just wondering whether that is sustainable or not. We've talked about rates, is the pressure a factor? Credit spreads are down as well. Just wondering also on the mortgage side, you're more supportive of the margin, but is that not more just a factor of the lack of pricing in new commercial rates or if it's really something sustainable.
That's my first question. Second question, sorry for coming back to this, is about lowering the budget. You said that depends on the data, the significance of the move between the quarters that you could potentially update it in Q2. Apparently EUR 6 billion of RWA uplift on the back of TRIM model updates was not high enough. I was just wondering if you could give us a number there. In relation to the gap between Basel III and Basel IV, I think last year we were expecting some tailwind on the operational risk RWAs to come through due to meeting the disclosure requirements of the ECB. I was just wondering what happened to that, if there's still something to come or that it doesn't even matter under a Basel IV scope. Last question is just something to get confirmation on.
How about six? Isn't that your favorite question?
Sorry. No, I was just wondering about the procyclicality on the Basel IV. Presumably because it's mostly output floor driven, I presume that that is for you.
Okay
not a reason at all to be above your target range on capital.
Okay. I'll try and tackle most of that, and maybe Tanja, you can chip in on operational risk.
Yeah
If I need help. I think on FTP, I saw those comments. We have a similar methodology by which we pass on credit spreads, if they go up, we seek to pass that on. There is some, call it smoothing around that. It isn't all automatic. We have a methodology there. I think we behave in a similar way. I think in terms of mortgages, there are a number of things going on around mortgages. Competitive behavior, where the pension insurance companies are, where the other banks are. We find it helpful to focus on our own measures of hurdle rates and profitability and let the share take the strain. As Kees said, look, we're encouraged by the pipeline. I can't forecast how long that will be maintained. I think around, and I'm happy to tackle this again, sort of the target range.
I'd refer back to the comments we made about alignment. We don't want to keep moving the Basel III range as our Basel IV numbers change or TRIM change. Our strategic focus is to meet the 13.5 under Basel IV early in the phase-in. Based on that, we triangulate the appropriate Basel III target that we will seek to maintain where it remains aligned with that Basel IV goal. You pick Q4, you can make the case for Q3, why didn't we raise the target range? We don't want to keep moving it around, and we have a view of forward-looking developments, and we try and factor that in. It's clear as of today that we're well capitalized under Basel IV at unchanged from year-end 13.5 and are comfortably within our range. They seem quite well aligned.
If TRIM moves them out of alignment, we will change the range to bring them back into alignment. I think on op risk, if you
Yeah. On op risk, what I can say there is that the model in the meantime that we have has been reviewed by the regulator, and as a consequence of that, we could reduce some of the add-ons in capital. As you see, and it's also in our quarterly report, we've also updated scenarios for the developments in the market, and that led net net to somewhat of an increase in operational risk, RWA. This is, of course, on the Basel III and the Basel IV. We don't expect a big change for operational risk, but the exact guidance is still uncertain there. We need to wait as well for the regulation to settle, to exactly know what it will be for the operational risk.
Okay. Thanks, Tanja.
Then-
On the
Oh, go ahead.
I'm sorry.
Your sixth question. Yeah.
Yeah. Sorry. To come back on the first one, could you just talk whether credit spreads coming down directionally is in headwind, and whether that has been absorbed in the EUR 1.6 billion NII guidance? The sixth question was on the procyclicality, which I think is still open, but happy to leave that behind if you think I don't have time.
I think we haven't got anything further to add to the EUR 1.6 billion. I think we're getting too granular in terms of micro movements. I can confirm what you said. Basel IV is a more stable metric and less influenced by credit because we're quoting the fully loaded end state position, and that's part of the rationale for the stability we've seen in the last quarter or two. As you say, happy to discuss it offline.
Cheers. Thanks, and sorry for the magnitude of questions.
No problem. Thank you very much. Operator, I think there's still one question.
Yes, there is, from Mr. José Coll. Your line is open. Please go ahead, sir.
Hi. Thank you. Three quick questions, please. The first one is, the five-year EURIBOR swap is down more than 20 basis points here today. I wonder if you could quantify how much of the EUR 30 million fall in various impacts in NII would be due to the swap portfolio repricing, and what level of impact you would expect in the coming quarters. Second, does the cost-to-income guidance of below 55% by 2022 include expectations of interest rate hikes? If so, how much and when? The third question is, do you expect that Basel IV will have an impact on MREL requirements? In other words, do you think that the MREL requirement as a percentage of risk-weighted assets will remain constant when calculated over Basel IV RWAs? Thank you.
Thanks, José. Clifford, if you can take question one and three. Number two question is CI, you mentioned 65, it's below 55. Below 55 CI 2022, which we have communicated at Investor Day, is mentioned in a way that it's related to the, at that moment in time, economic forecast, so both growth, interest rates, and the like. It's linked to that. Of course, we will see later on how these things develop. Clifford?
Yeah. I think I'll answer the first question this way. The EUR 30 million that we called various was not impacted by the interest rate move you referred to. If you look at the quarterly movements, it related to positive one-offs in Q4, not negative one-offs in Q1, that EUR 30 million, which is why we're guiding to the around EUR 1.6 billion, just to reflect the FX swap impact that we talked earlier. We can take any further details there offline. I think around MREL, I think in the short term, we are focused on the RWA-related target. To the extent that we take TRIM and model review additions to Basel III RWAs, that will raise the MREL requirement in the short to medium term.
In the long term, yeah, it's possible it changes, but I don't really want to speculate at this stage on possible regulatory relief that may, in fact, not take place.
All right. Thank you very much. Operator, I would like now to conclude this Q1 result update. I would like to thank you all very much for your questions, and goodbye. Thanks.
Ladies and.