Earnings Call: Q1 2019

May 15, 2019

Good day, ladies and gentlemen. Thank you for holding, and welcome to the ABN AMRO Q1 2019 Analyst Presentation. 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 after Q1 results. Apologies for we could not get connection. We have connection until 1 minute before the meeting started and then something went wrong. We do not know why. So we're on another set at the moment. Sorry for that. I'm joined here with by Clifford Abrams, our CFO and Tanja Koppen, our CRO. And I will take you through the process, progress we made on our execution of our strategy and financial targets. Clifford will then go through the details of our Q1 results. And after that, Tanja will update you on developments in our loan portfolio. If I go to Slide 2, I will run through the highlights of the Q1. 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. And as you can see, our costs continue to trend down. We have actively derisked part of our loan portfolio in 2018, and I'm pleased to see this reflected in improved impairments this quarter. We have made further progress in sharpening our business focus. We did announce 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, but our targeted RWA reduction is now largely delivered. Our Basel III capital position is strong and 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. So our strategy execution is well on track and I will update you here on Slide 3. 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 25 ks dollars in energy efficiency measures for their homes and a mortgage solution for seniors to cash out home equity without selling their property and with the 1st large bank in the Netherlands doing that. We also introduced a new app, Can Do, 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. So we are further scaling up our FTEs to accelerate our client due diligence remediation programs and we are making the necessary progress here too. Now I'd like to update you on the economic environment and the effects on our business on Slide 4. We have recently revised down our economic outlook for this year and next. But 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. Also the Dutch housing market remains robust, although we see some signs of its 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. And looking forward, we see clearly positive developments in our mortgage pipeline. So our market share will increase in Q2 again. We also 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. So 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 debt deposit rates. We also 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. Now moving to our capital position on Slide 5. I remind you here of our capital story. We are strongly capitalized on the 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. So 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, but 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. Now I would like to hand over to you, Clippet, to take you through our Q1 results. Thank you, Kees. Turning to Slide 6. Our net profit during Q1 was €478,000,000 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. But first, I will go through these results in more detail, starting with net interest income development on Slide 7. So 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 €69,000,000 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 €40,000,000 of interest income to other income quarter on quarter. The remainder of the decrease in net interest income of €30,000,000 from Q4 last year related to various small one offs in Q4, positive ones, and only to a limited degree, less than €10,000,000 due to the adverse effect of low interest rates in Q1. I consider around EUR 1,600,000,000 to be a normalized level of net interest income this quarter. Now 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 MoneyYou, we have lowered our savings rate in the Netherlands by 5 basis points to 20 basis points in early May, and there's still room for some further reductions in deposit rates for MoneyYou and other savings accounts. Turning now to fees and other income on Slide 8. 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 €125,000,000 guidance in this quarter. As you know, the €125,000,000 is based on the average we've seen for the past year past few years and we stick to our guidance. But this quarter, private equity gains, in particular, were very low. And we took a provision of €34,000,000 for client compensation to 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. Now moving to costs on the next slide, Slide 9. 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've achieved a 12% reduction in FTEs 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 €161,000,000 compared to €131,000,000 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 €37,000,000 versus Q1 last year, bringing total cost savings delivered since 2015 to a run rate of around €740,000,000 As you know, we target a total of €1,000,000,000 cost savings, including CIB, and we are on track to reach cost base of around CHF 5,000,000,000 by 2020. I will now hand over to Tanja to pick up impairments on Slide 10. Thank you, Clifford. 1st quarter impairments are down compared to all quarters last year with a cost of risk 16 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 active derisking of specific portfolios in offshore and diamonds in 2018. And 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. And 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 strict interpretation of the rules in close consultation with the regulator. If we would have accrued profit based on 62% payout sustainable profit as dividend, which was the payout ratio of last year, our CET round 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 €5,000,000,000 is now largely delivered. Our reported RWAs for CIB are €36,900,000,000 down from €38,800,000,000 at Q1 2018. The €36,900,000,000 includes around €3,000,000,000 for TRIM and model reviews. So excluding these, we are already around GBP 34,000,000,000 versus GBP 39,000,000,000 last year like for like. We expect headwinds from further TRIM, model and provision reviews, which will mainly impact our Basel III number, so 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 percent and on completion of the merger, the leverage ratio will improve by around 20 basis points and so 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. So we are well on our way to achieving our financial targets. And I would also like to emphasize that both ROE and CI ratio reflect seasonally high regulatory levies this quarter. If we divide regulatory levies evenly over the year, CI ratio would be over 3 points lower at 60 0.2% and the ROE around 1% higher at 10.2%. I'm pleased with our cost performance and our capital position and capital generation remains strong. We expect a further impact from TRIM and model reviews on the Basel III. And if this materializes, we will lower the capital target range accordingly. So before we go into Q and A, I would like to briefly recap the highlights on Slide 13. So 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. Now 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. The first question is from Mr. Pavel 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. And the first one is on the comments you made on NII pressure and in particular on Slide 7. So 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 1,600,000,000 to the rest of the year? If you can maybe give us an idea about that. In other words, you showed here in the slide €29,000,000 of other NII decline and how recurring that would be in the coming quarters. So that's the first question. And the second question is on your other revenues. And it's essentially how comfortable do you feel about your income guidance of around EUR 125,000,000 you gave us before. Again, we can strip a number of 1 offs this quarter and we still end up with quite a lower number. So any comments there would be helpful. And 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 developments you mentioned, I think that's fair to say. If you take the EUR 40,000,000 as mentioned, we are above EUR 1,600,000 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 1, 2 quarters, I would say guidance at 1.6 above should be possible. The guidance around other income stays at €125,000,000 And as said, private equity gains were very low this quarter €10,000,000 €150,000,000 a year ago. So that was that is low. That very much depends of course on stock exchange. So we cannot give that as a separate part of the $125,000,000 But in general, the 125,000,000 you can use for the coming quarters. 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 capital or any earnings into capital. I understand your comments in the release about prudency, but it is an unusual step. And you're obviously making the point about discussions with regulators. So could you just give us any insight into what that discussion is actually about, if not about dividend because no other bank is reading the rules in the same way as you are? The second question, please, on domestic mortgage margins. 1 of your orange peers is more enthusiastic these days about the trend in margins. So I just wondered whether you had seen anything that makes you equally enthusiastic. And then the third question please on Dutch corporate lending trends. Just looking at some central bank data, which seems to suggest decline or sort of increased problem through the quarter in terms of Dutch corporate lending. Yet when I look at your balance sheet trends, it seems to be actually quite encouraging growth. So I'm just trying to square those 2 if you're seeing anything changing in terms of corporate appetite and or if you're offsetting that with international growth. Thank you. Well, thank you, Nick. Cliff will answer the first question. I will take 23. Domestic mortgage 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. So that's the reason why we also guided our 14% market share last quarter. Q1 will increase in Q2. So we're positive about that because margins are very important here. And 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, yes, we have had a very good quarter with 2.8% growth on a quarterly basis. That actually is a yearly rate of over 10. So that is not something we normally guide and also not expect for this year actually going forward. But this was a good quarter and we do not see at the moment people, well, in trouble and not taking up loans at this moment in time. So let's see. We did well in the Q1, very well, but we're still positive about the market also the rest of the year. Clifford? Yes. Nick, I'll pick up the approach to an 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 is still in the bank. So this is a just merely a reporting thing, but an important one, is why we highlighted it. And 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. And the ruling question is CRR Article 26.2. And you need approval of the regulator to book interim profits as capital. And 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. And now in our case, our dividend policy, as you know, is a minimum of 50% plus additional distributions. So a strict interpretation of that of what I indicated means that we're excluding the full amount. So I would say it's theoretical. So 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. And 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. So 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. Your line is open. Please go ahead, sir. Questions. The first one was on net interest income. So just to come back on your EUR 1,600,000,000 guidance. So it seems that we're going to stay around that level in the coming quarters. Just looking into Q1, so it seems that you indicated a EUR 10,000,000 drag from low rates Q on Q. Is this type of pressure kind of 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 3rd parties? And how much fees you will expect fee growth you will expect from that? And then last question was on the NPE coverage ratio. I think that was one of the items you mentioned last quarter. Have you do you have an idea about kind of the impact you could expect? And could you guide us a little bit more on this item specifically? Thank you very much. Thanks, Benard. With respect to the guidance around interest, I would say the €16,000,000,000 So let's be careful not to really guide above that perhaps that's the right thing we guide. And it shows because there's of course, upward pressure from more mortgages, but I said there's also downward pressure from interest rate development in general. With respect to the originate to distribute 20 years mortgages, 30, I think also we look into. That's work in progress. I think we want to do our first deal this year. That's the plan. Fees aligned to it, not yet clear, I think, at this moment in time. So let's see what the first charge will be and then we can update you on that. NPE, Tanja? Yes. So developments on NPE are that the European Commission in the meantime has approved registrations, which forced 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 these dates. So all these measures are coming in right now and I think we can update you in Q2 more on what these all these new regulations mean if you bring them all together. Okay. Thank you very much. The next question is from Mr. Adrian Siggi, RBC. Your line is open. Please go ahead, sir. Hi, there. This is Adrian Siggi. Thank you very much for taking my questions. Three questions for 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? And then on the Basel IV, just a clarification, you said it remains largely unchanged quarter on quarter despite, obviously, the private banking 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 part of Fort Clifford and then cost of risk, Tanja. Yes. So picking up costs, I think in terms of the more demanding environment, we've seen some pressure on income from lower longer that we've discussed earlier on the call. And that's slightly to extend into 2020. So in that sense, income has got more demanding, which challenges the cost income ratio. And then on compliance and revenue costs, yes, we do see incremental costs coming through. I think as Kees said, we are focused on our financial targets. So next year, the target of 56% percent to 58 percent cost income ratio remains our target. We reconfirm that in November and then February this year. It's got a little bit more difficult to achieve, but we're working hard to deliver on further cost savings in order to mitigate the headwinds that we see regarding costs. You'll recall the presentation we gave in particular around IT at our Investor Day, 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. So Basel IV is down 0.4 in the quarter. Basel IV is down less on a negligible amount, which is why we reconfirmed it's largely unchanged. And 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 relate 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 SEK 1,000,000,000 dollars does not carry through to Basel IV because on a different basis. So those two approaches are converging slightly during Q4 during Q1 rather. Yes. Okay. And on your question on cost of risk, of course, we are pleased with the impairment levels this quarter, but you cannot extrapolate these forward because well, some of the provisions are quite lumpy and also we remain cautious on specific sectors and we shared that with you before, especially in oil and gas and also for the diamond sector, we remain cautious. So 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 some trend around EUR 60,000,000 per quarter or 60 basis points roughly. Initially, it was driven by a single sector, and now it feels more broad based. So wondering whether it is also the guidance going forward for this segment. And then 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. So 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 Cliff for the second? Yes. On the commercial banking indeed, we see cost of risk levels for CB, well in the similar range as we saw it last year. And indeed, what you see right now is that, well, 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. But 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 and then you need to think of every business and retail where clients are struggling. But as I said, it's too early to say that it's a trend and we don't provide a cost of risk guidance by segment. So I cannot sell you in there any further. Yes. Ben, I'll pick up the approach to IT. As you know, we charge our IT spend through the P and L. There's very little capitalization going on, which we think is the right thing to do in terms of running the business. And we've been following developments closely. We understand that AVA will opine on this principle by the end of next year. So it could come into force in 2021. So it's a little way off. We'll monitor it closely to see if there are potential benefits. We do want to be consistent on our reporting, but also we want to be aware of regulatory developments and adapt to that. So we don't take a principled approach here. We're open minded, and 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. Good 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. But could you just remind me what the sort of TRIM impacts were in Q1? And then any sort of quantification of TRIM and the sort of guidance on NPEs through the rest of the year? Or I just can't quantify which should we expect will be bigger and how will those fall across the quarters? And 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? And then finally, on the cost of risk, I guess, the coverage ratio has dropped a little and you give some explanation in the report. But it's a sub-thirty percent, 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 coverage ratio lower than some of your peers? Thank you. Thanks, Bruce. Clifford, can you take 1 and 2 and Tanja on number 3? Yes. So on we call it TRIM and model reviews. And the amount we took in Q1 was $1,300,000,000 and in addition to the $5,000,000,000 in Q4. I think TRIM is a process that will take place over time. But 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. So we're seeing somewhat of a phasing in of that as some of the information comes to light regarding TRIM. So 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. And that we're clearly flagging in our disclosures this year. I think NPE, and make a broadly similar point, I mean, I think there are a range of rules regarding NPE that have come out of ABAR and the ECB and many of them point to 2020 beyond. But 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. And so I can't give any more specific guidance of that, but it may be that the effect is earlier than the formal target dates, which extend off into the future. And that Tania can comment further when she responds on the cost of risk. I think on 2020, I think 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. And we gave the example of mortgages where we'd be encouraged by recent developments. I think we gave the example of MoneyYou. We're also looking carefully at how and where we're passing on negative rates. So our corporate clients receive negative rates, but it can be appropriate to extend that elsewhere, particularly clients have very large balances. And we would consider that particularly if rates stay low for longer. So we do see some scope there as well as fees from the whether it's new products or originate to distribute, which Kees talked about. And 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. And the reason for that is, and I think it's indeed in the report is that we have written off some exposure with a large 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. So that's one reason. And secondly, we saw some new inflow where we took some impairments as well, but at a lower coverage ratio. So that combination led to some drop, but thinking of around 30% that is the level that you should think of. So this is yes, just the outcome of the developments that happened in the last quarter. Thank you. The next question is from Ms. Alicia Chung, Exane. Your line is open. Please go ahead. Good morning, everyone. Just a couple of questions from me. Firstly, on costs. I mean, costs have cost discipline has clearly been very encouraging for a number of quarters now at ABN and has tended to surprise on the upside. And underlying cost came in comfortably on the €5,100,000,000 last year. So I suppose my question is, can we expect an improvement on this this year given that you still expect to have a further €150,000,000 of cost savings to come in your strategic plan. So in absolute terms, can we improve on the less than €5,100,000,000 underlying that we saw last year? And in particular, now that you've completed the RWA deleveraging in CIB, can we expect a greater focus on restructuring the business from here, particularly given that staff numbers are still 4%, 5% higher than they were 2 years ago? So that's my question on costs. And then just to go back on the point on provisions and coverage ratios. I appreciate that, of course, part of the reason for the drop in the coverage ratio falling from 32% to 29% was because of the derisking of the portfolio. But 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? When I look 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 it is because you have a lower risk business mix. And then 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. And you said that as that if that convergence continues, which you expect it to, you will update your target equity Tier 1 rate, 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, we as Clifford already mentioned also, we're very much focused on that, especially when there is pressure on income line. As explained, and I think Clifford mentioned all the examples where we're working on. So 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. So that's helpful that this can is well presumably no longer there somewhere over the summer. So that's good. The second question, Tanja will answer that one. With respect to your last question, capital target and converging and the likes and update our update on target. Well, we set accordingly. So that depends. If a lot happens in the Q2, we might do it then after the Q2. 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 will do it like that. But the Q2 could be the first moment. Yes. Tanja? Yes. On the coverage ratio and you're alluding especially on the 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. And that is explaining as well taking out the assets with higher provisions influences the coverage ratio. And I feel comfortable with the coverage ratio that we have today for this business. And as said, well, the levels around the 30% is something you should think of for us. Okay. Thank you. And just to circle back on the costs. You mentioned that you will, of course, aim to bring down costs. But is that in 2019? Or are you or is that more for the years? Yes. We're focused on the target for next year, and we indicated around EUR 5,000,000,000. I've given you a sense of headwinds. I mean, there are genuine headwinds. We are upgrading our focus and resources around compliance in particular as we should. So that GBP 5,000,000,000 has got a little bit tougher, which is why we're working hard on it. But I won't give any further guidance on 2019 versus 2020. And clearly, some while we feel well provisioned for our existing cost plans, if we do if we come up with extra things, we'll have there may well be costs associated with those. So 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 Vijaya Raja, 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? And one of your close peers, they're talking about sort of special projects within that, so maybe some of the costs falling away in 2020? Or is it more a case of all of the build out you're doing is kind of recurring costs that you're putting on? And then in the kind of 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? So just some color on how that whole sort of 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 85,000,000 we took as provision in Q4, especially this year and next year, so for the 2 years period. Having said that, and already Clifford also mentioned it, of course, it depends on developments going forward. But at this moment in time, we have of course a amount of people of 1,000, which are working on it already. The extra $400,000,000 is actually planned for well 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 well allocated people and budgets and a lot of focus. So it's really top of mind in the bank at this moment in time. But 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 a lot of well, that we have solved the problems anyway. But and then also are able in our processes to have it more ingrained there and lower cost again going forward. But that's too early to speculate about that. Yes, with respect to client relationship, we do not comment on that. But indeed, of course, due deal can lead to exiting clients, but we do not comment on that publicly. But that's indeed, of course, can be part of can be resolved. But it's not harming, but 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 Ploegh, ING. Your line is open. Please go ahead, sir. Yes. Good morning. Thank you for taking my questions. I've got 2. 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. And the second question is a bit broader on the topic of M and A. Now with, let's say, with the NII headwinds, yes, probably being there longer than maybe the M and A, let's say, higher on the agenda to be a bit more proactive to certain files than maybe before? Or is that anything you can add on, let's say, M and A appetite is welcome. Thank you. Thanks, Albert. With respect to your question around the review, as I 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 to Basel IV related. And then depending on what happens, we will come up with a review of the target or lowering of the target at that moment in time. So it can be from Q2 onwards potentially. With respect to M and A, we have been open for bolt on acquisitions in private banking already for sometimes for some time as already illustrated by the way Sochen 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. So we are looking more broad. We'll be bold on if we do it. And the more broader M and A discussion, I think, well, that's a different one. We are working on a stand alone basis, and that's what we're going to continue in the future. Thanks. Yes. Thank you. The next question is from Mr. Marcell Houben, Credit Suisse. Your line is open. Please go ahead, sir. Good morning. Thank you for taking my question. I have 2 left, please. On the fee side, especially in the retail business, there was quite a significant drop Q on Q, whereas I thought that, yes, sort of the 90 high 90s was sort of the run rate. Is that all driven by like online brokerage, so people not trading much in the Q1? Or because the majority of that was just current account pricing and that was sort of stable going forward. That was my first. And the second was more I know it's quite early in the year, but just the narrative on the capital and extra capital return. Is it your ambition to grow the capital base beyond, for example, the 18.5% So if we assume, say, to Sparebus, that the capital target doesn't change, Would you aim to grow this capital base? Or do you think we will never see kind of a higher core equity ratio of 8.5%, for example? Thank you. Thanks, Marcel. With respect to Fisai, perhaps Clifford, you can take that question. And with respect to capital return, it's indeed, as you say, early in the year. That's true. So we have not said a lot about dividend yet. 18,400,000 last year went down to 18,000,000 Q1. And what we actually expect is, as said, 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. So that's actually more a, I would say, some downward pressure on the CET Quarter 1 Basel III than upward. I'm not going to say anything about never something, But so the pressure is more in the other direction, I would say. Clifford, can you say something, please? Yes, 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, and 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. But the principle is we want to keep them well aligned. And you can see this quarter, we said Basel IV is unchanged from Q4 when it was 13.5%, so well capitalized. And 2018 is in the middle of that of our current Basel III range. So they're well aligned. Now if TRIM and model reviews makes them misaligned, then we'll look at it. And as Kate 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. I think, yes. So I think looking at the sequential trends, Q4 actually Q4, I'll put it this way, was a little bit high. So Q4 in retail benefited from the ICS payment or our credit to our credit business our credit card business, And that was sort of high single digit amount. And if you look at fees year on year, they're actually more or less in line. So there's some seasonality to our fees. And that explains most of the movement between Q4 and Q1. And 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? Yes. Hi, guys. It's Stefan from Citi. A couple of questions on my side. So a lot of questions on TRIM. Let me throw mine as well. TRIM, basically EUR 3,000,000,000 of RWAs thus far, you have guided overall Basel IV inflation of €30,000,000,000 to €40,000,000,000 effectively of RWAs, 30% to 40%, call it €30,000,000,000 to €40,000,000,000 of RWAs. So 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? So overall, really, the vast majority of the Basel IV impact will happen from 2022 onwards rather than being front loaded before 20 22. And I would just note that that's different from your other orange beer who is phasing in 80% of the impact in the next 1 to 2 years. Do you agree with the 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 and how sustainable that beat is going forward. And related to that cost question, when you guys talk 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 by from sort of €100,000,000 to €125,000,000 per year. So that's just the EUR 25,000,000 negative delta. In the context of EUR 5,000,000,000 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 $3,000,000,000 you mentioned, if we take Q4 and Q4 last year, Q1 this year, it's altogether already €6,000,000,000 which is around 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 discussion. So it's not easy to forecast, but the figures you mentioned are, I would say, low actually for what we would expect. So the 2 times to 10% is, I would say, low. Can you say anything on the retail cost? Yes. I think I'm looking at the sequential. I think it's important to just break out some of the incidentals. So 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 booked the provision for CDD remediation. A lot of that fell on retail. So I wouldn't I don't think I'd be calling out specific trends on costs regarding all our businesses. I think the retail brand is focused on costs because some of those income headwinds are landing on that business in particular. But 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 And just to follow-up on the compliance, the pressures of €25,000,000 extra per year? Yes. I think the I mean the comments on we have booked a provision for compliance costs. They were some very specific programs. So we expect to we expect the run rate of compliance related costs to go up from the roughly 100 that we've seen in previous years of that order of magnitude. And 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. So okay, Clifford, just to confirm here. So you're saying that the pressure from compliance cost is around EUR 25,000,000 per year. Is that correct? We've given previous indicator. I don't want to update every quarter on compliance costs. We see compliance and regulatory generally as a source of headwind on costs, which is how we characterized it. But 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 and A. I mean, there have been news mentioning possibly that the Hroof Pettercam in Belgium would be open for discussing a sale. Now putting aside, I'm sure that you cannot comment on specific files and cases. But putting that aside, given that it would be something that could be worth just north of €1,000,000,000 I was wondering if within if your bolt on would extend to what I would call or I think you call your running profit. So if that firepower basically you would look at it and say, look, within Iranian profit, it actually goes roughly €1,000,000,000 It's something that I would consider? Or do you find that this is exceptional? And 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 7,000,000 low, but it can change a lot in quarters. I just wanted to to have a quick and now to kind of 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? And the third quick question is on NII. I mean, from both questions that came on it, is it fair just in general to assume that this quarter, the EUR 10,000,000 is roughly the impact for that we should assume so that this year the EUR 10,000,000 per quarter you absorb it by increasing your market shares, etcetera. But as I think Bruce was mentioning, looking, for example, in 2020, it is roughly a good number to use, everything else being equal. So of course, there are actions you can take to alleviate that. But without giving guidance for 2020, is the EUR 10,000,000 per quarter a good figure to have in mind? Thank you. Yes. Thanks, Jason, for your questions. Indeed, M and A growth, we will not comment on that, of course. But your more general question, what kind of size would you look into? If I take the last three deals, I think 2 were in the range of €5,000,000,000 to €10,000,000,000 assets under management. 1 was €5,000,000,000 SocGen, the latest one. I would say, it's not the case that we would only look at €5,000,000,000 or €10,000,000,000 It might also be larger. So we will look at every specific situation and of course specifically at the business case around that. Diamond, Stanja, you can comment on that. And with respect to your NII guidance €10,000,000 and absorbing it by volume growth, that's, I would say, the right guidance. So we can confirm more or less this reasoning you had. Thanks. Diane? Yes. And on Diamonds and Gimme, as you mentioned this quarter, limited additions to provisions. But 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. So you see pressure on the sector and we expect that to remain. So we remain cautious. Thank you very much. The next question is from Mr. Raul Sinha, JPMorgan. Your line is open. 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. So 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? And then 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 600,000,000 in Q1 from EUR 4,300,000,000 to EUR 4,900,000,000. And I think you've talked about inflows and outflows, and obviously, there's the point on coverage is obviously very clear already. But my question was more EUR 600,000,000 increase in the Stage 3 corporate loans is obviously quite a big number. Is there any color you can provide in terms of what sectors are driving that? Thank you. Thanks, Raul. Cliff will answer question 1 and Tanja at question 2. Yes. I think on fees, I'll give an update. I think we have made disposals of some fee heavy businesses, and that's a headwind on our number. So 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. So there's some, call it, some short term factors that are impacting the number that is perhaps extending out the period from which we hope to grow fees. So 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 $400,000,000 or so that we report each quarter. And the same is true of investments. But 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. And I think it's more of those tactical cyclical things that will drive the movement in the next few quarters as we work on these more medium term fee initiatives. Got it. Okay. And then on the Stage 3 book, any inflow there? Well, it's I would say it's too much to say that there is a trend in certain sectors, but I can call out a few. So we saw some inflow from offshore energy, the sector that we have very much in focus. We also saw some inflow in short shipping and food and beverage. And I would say the rest is across the board. And well, as mentioned, looking at these files and also the impairments level that we felt are appropriate, they are well below the average coverage ratio that we have for our total book. So 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. So some of that you see domestically and some of that is international. So yes, it's really a combination. And I would have not had the numbers to say why it's really fifty-fifty, but it's not that it's 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 pyramid in the Netherlands, and 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. And to me, that gives the impression that the higher credit spread movements of Q4 were basically passed on within the bank. And 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. This is a pressure factor. Credit spreads are down as well. So 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 is this really something sustainable? So that's my first question. Second question, sorry for coming back to this, is about lowering the budget. You said that, that depends on, yes, the significance of the move between the quarters that you could potentially update in Q2. But apparently, euros 6,000,000,000 of RWA uplift on the back of TRIM model updates was not high enough. So I was just wondering if you could give us a number there. And 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 even matter under a Basel IV scope? And last question is, even matter under a Basel IV scope? And last question is just something to get confirmation on. How about the second question? Sorry. I was just wondering about the procyclicality on the Basel IV. I mean, presumably because it's mostly output floor driven, I presume that, that is 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 if I need help. I think on FTP, I saw those comments. We had a similar methodology by which we pass on credit spreads that we if they go up, we pass we seek to pass that on. There is some, call it, smoothing around that. It isn't all automatic. We have a methodology there. But that 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. And as Kees said, look, we're encouraged by the pipeline. And we 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 think I'd refer back to the comments we made about alignment. And 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 be to meet the 13.5% under Basel IV early in the phase in. And then 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. And so you pick Q4, you can make the case for Q3, why didn't we raise the target range. So 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. But it's clear as of today that we're well capitalized under Basel IV and unchanged from year end 13.5 and comfortably within our range. So they seem quite well aligned. And 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 want to Yes. So 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, but in capital. But 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. And this is of course on Basel III. On Basel IV, we don't expect a big change for operational risk, but the exact guidance is still uncertain there. So 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. And on the go ahead. I'm sorry, I took the questions. Yes. 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 SEK 1,600,000,000 NII guidance? And I still the 6th question was on the procyclicality, which I think is still open. But happy to leave that behind and take it offline. I think the we haven't got anything further to add to the 1.6. I think we're getting too granular in terms of micro movements. I think on I can confirm what you said. I mean Basel IV is a more stable metric and less influenced by credit because we're quoting the fully loaded sort of end state position. And that's part of the rationale for the stability we've seen in the last quarter or 2. And we 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. Jose Coll. Your line is open. Please go ahead, sir. Hi, thank you. Three quick questions, please. The first one is the 5 year Euribor swap is down more than 20 basis points year to date. So I wonder if you could quantify how much of the EUR 30,000,000 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? 2nd, does the cost to income guidance of below 55% by 2022 include expectations of interest rate hikes? If so, how much and when? And 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 NREL requirement as a percentage of risk weighted assets will remain constant when calculated over Basel IV RWAs? Thank you. Thanks, Jose. Clifford, if you can take question 13. Number 2 question is CI, you mentioned 65, it's below 55, so 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. So it's linked to that. And of course, we will see later on how these things develop. Clifford? Yes. I think on I think I'll answer your first question this way. The $30,000,000 that we called various was not impacted by the interest rate move you referred to. And if you look at the quarterly movements, it was actually it related to positive one offs in Q4, not negative one offs in Q1, that $30,000,000 which is why we're guiding to around 1,600,000,000 dollars just to reflect the FX swap impact that we talked earlier. And 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. So 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. And in the long term, yes, 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. Thank you very much. Operator, I would like now to conclude this Q1 results update. I would like to thank you all very much for your questions, and goodbye. Thanks.