Good morning, ladies and gentlemen. Thank you for holding and welcome to the ABN AMRO Q4 2018 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 Kees van Dijkhuizen. Go ahead, please, sir.
Thank you very much, operator. Good morning, everybody. Welcome to the Investor and Analyst Call for ABN AMRO's Q4 Results. I'm joined by Clifford Abrahams, our CFO, and Tanja. Clifford will go through the details of our fourth-quarter results. After that, Tanja will give you an update on developments in our loan portfolio. I'm now turning to slide two. I will highlight the main points of the fourth quarter. The headline profit figure is EUR 360 million, EUR 16 million for Q4. Overall, I'm pleased with our solid operational delivery, with the net results impacted by higher provisions and impairments. Specifically, we took a cost provision related to the speeding up of two client due diligence remediation programs. While impairments were elevated this quarter, we ended the year below the through-the-cycle cost of risks as expected.
Our full-year result was good, as reflected by our ROE of 11.5%, 11.4%, and cost income ratio of 58.8%, just above our 2020 target. Costs are trending down. We are on track to deliver on costs as laid out in our Banking for better purpose. Capital generation is strong with our CET1 increasing from 17.7% to 18.4% this year. Our solid capital position allows us to increase the payout ratio to 62% as we propose a full-year dividend of EUR 1.45. While the economic environment has weakened somewhat since Q3, we are reconfirming our targets and financial guidance given at the Investor Day. Our strategy execution is well on track. I will update you here on slide three. You will recognize our strategic pillars we presented at Investor Day: support our clients' transition to sustainability, reinvent the customer experience, and build a future-proof bank.
I'm convinced that sustainability can drive our business results. Clients are embracing our initiatives, for example, by putting their money into our sustainable funds. Our employees also are very positive. We are making further progress on enhancing the customer experience. Last quarter, we introduced wearables as a new payment option. Tikkie has been fully embraced by the Dutch. We are now expanding its functionality into online purchases. I'm pleased with the progress private banking and CIB are showing, adapting their business for the future. Last but not least, the migration of our IT application to the cloud is nearing completion. All identified applications have been decommissioned. Now turning to client due diligence and the provision we took this quarter on slide four. We take our role as financial gatekeeper very seriously. We have laid a good foundation.
Since 2013, the number of employees involved in client due diligence has tripled to around 1,000 FTEs. We can do better, however. We have decided to accelerate two client due diligence remediation programs. For private banking and high-risk retail clients, our review is largely completed. Our efforts will be stepped up at ICS, our credit card issuer, and commercial banking. We will also centralize remediation activities to ensure a coherent approach. Christian Bornfeld and I will oversee this project at board level. We are also raising the bar to deal with increasingly sophisticated financial crime, as well as increasing regulatory requirements and scrutiny.
We are investing in new systems, new skills, and increasing the use of artificial intelligence. Moving to capital generation and dividend on slide five. We have demonstrated a solid return on equity over the years, and as you know, we are committed to delivering strong capital generation.
We will do this by diligent focusing on profitability. You know our capital targets. Our new SREP is almost unchanged from last year, except for the last year of phasing in of buffers, we maintain our capital target range of 17.5%-18.5% for 2019. Our fully loaded Basel IV ratio increased to around 13.5% and above 14% if mitigation actions are taken into consideration. Our capital position is strong and we are in a position to distribute additional dividends on top of our 50% target payout range. We proposed a dividend of EUR 1.45 per share for the year, in line with the cash dividend paid last year. This corresponds to a payout of 62%, up from 50% last year. We will continue to take a prudent approach to additional distributions, also take into account regulatory and other developments.
I'd like to turn to the Dutch economy on slide six. The guidance for ABN AMRO, which we gave at our Investor Day, assumed a healthy Dutch economy and housing market, leading to growth in commercial banking and impairment levels below the through-the-cycle rate. I currently see no reason to modify our guidance or our targets. It's true that the sentiment on the macro outlook of European economy has softened somewhat. However, looking at the Netherlands, confidence indicators are still very positive, although they have come down from peak levels. We see the housing market cooling, which is not a bad development. A continuation of recent years would inevitably have led to problems down the line. While prices are still increasing, the pace has slowed and transaction volumes are coming down.
We now forecast the growth of Dutch economy at around 2% for this year, outperforming the 1% of the Eurozone, with 2020 lower, but also positive.
We have pushed out our expectation for the first ECB rate hike to early 2020. However, the impact is not material on 2019. Our guidance is, of course, subject to no hard Brexit. We have the infrastructure and contingency plan in place for no-deal Brexit, we have limited direct U.K. exposure. However, the macroeconomic impact is difficult to assess. I would like to hand over to Clifford to take us through our fourth quarter results.
Thank you, Kees. Turning to slide seven, our fourth quarter net profit was EUR 316 million and included a cost provision and elevated impairments. However, I consider our full year result of EUR 2.3 billion to be good and more representative. Net interest income was good, both for Q4 as well as over the full year. Expenses are down, reflecting cost savings and lower FTEs. Kees explained the customer due diligence provision. Impairments were up again in the fourth quarter. Tanja will give you background on these numbers later. I will now go through these results in more detail, starting with developments in our loan portfolios on slide eight. You know we focus on profitability rather than volumes at ABN AMRO. The Dutch mortgage market remains very competitive.
We saw a number of banks increasing their market share, we remain disciplined in our pricing, this explains our modestly lower mortgage volumes. CIB's loan book decreased during the quarter, showing good progress on the business refocus. The trade in commodity finance portfolio declined by EUR 1 billion during the quarter as planned, while the decline in clearing is more seasonal in nature. I'm pleased by our consistent growth at good margins that commercial banking is delivering, reflecting the strong Dutch economy. We expect loan growth in commercial banking to continue this year, 2019, offsetting developments in the corporate bank and retail. We expect total volumes for the group to remain around the current levels for 2019, but there may be some seasonal effects through the year. Turning now to net interest income on slide nine. Net interest income remained strong during Q4.
Our focus on maintaining lending margins offset the impact of low rates, which is leading to declining margins on deposits and lower income on our duration position. As you know, we expect these factors to put pressure on our NII during 2019, easing once rates start to rise again, now expected in early 2020. Funding spreads have picked up for the banking sector as a whole recently, we're looking for the business to pass on these costs to our clients. Net interest margin rose on the back of stronger NII, supported by a decline of the balance sheet into year-end, reflecting active management and seasonal effects. Moving to fee income on the next slide. Fee income was up from Q3 and flat versus last year. Financial markets were volatile last quarter, this kept many private banking clients sidelined.
In fact, equity market performance knocked off more than 5% from assets under management during the fourth quarter. Markets have recovered from year-end levels subsequently. However, if markets stay at lower levels compared to 2018, this would clearly impact fee income from private banking going forward. Clearing, on the other hand, has benefited from recent market volatility. We expect total fees to remain broadly stable in the short term, growing thereafter once growth initiatives start to pick up. Other operating income was below the EUR 125 million guidance, with some volatile items negative this quarter, namely hedge accounting and XVA. But for the year, we are well above our guidance, driven by strong private equity results. Moving to costs on slide 11. I am pleased with our cost development.
As you can see from the left-hand chart, personnel expenses continue to trend down as FTEs have decreased 6% since year-end 2017. The decline is visible across all commercial segments as our restructuring efforts continue to deliver. As flagged, we took a restructuring provision at Q4 for further digitalization optimization measures amounting to EUR 69 million. Kees discussed the work we have planned to further strengthen our client due diligence, where we took a EUR 85 million cost provision. Other expenses are down when excluding incidentals and levies. Branch reductions and divestments contributed to lower expenses.
On the other hand, from time to time, we do need to recruit external staff, for example, for projects. We expect this to be temporary. On the right-hand chart, you will see we have increased cost savings from EUR 65 million last year. This brings total cost savings delivered since 2015 to just under EUR 700 million.
You can also see we are bringing down the seasonal fourth quarter cost bump through better cost discipline. As you know, we are targeting EUR 1 billion cost savings, including corporate banking. We are well on track to reach a cost base of around EUR 5 billion by 2020. I will now hand over to Tanja to pick up on impairments on slide 12.
Thank you, Clifford. Fourth quarter impairments were elevated despite the generally sound economic environment. At the beginning of the year, we highlighted the need to take impairments for specific clients in specific sectors, and that this would continue during the year. Fourth quarter impairments are predominantly taken in the same sectors. Full year impairments ended below the through-the-cycle level as guided. Looking at the fourth quarter, I will run through these sectors individually. For Dutch SMEs, around half of the impairments are from a limited number of clients in various sectors. The other half are model-related increases.
Impairments in natural resources were predominantly in offshore services, as this sector did not improve during Q4 and remained in oil and gas. Our base scenario is now a lower offshore market for a longer period of time. We have increased provisioning, assuming 2019 and 2020 will be weak in terms of new contracts.
For 2019, we expect lower impairments here, given we exited weak players and increased our coverage. The diamonds industry is going through a transition. This is visible in our impairments. This could continue into 2019. We reduced our exposure by around 20% this year as we are closing our Dubai activities. At Investor Day, I guided that impairments for 2019 are expected to remain below the through-the-cycle cost of risk of 25-30 basis points, assuming no hard Brexit. I will hand over to Clifford.
Thank you, Tanja. Our CET ratio ended the year strong at 18.4%, down slightly from Q3 and towards the top of our target range. RWAs were up during the quarter, reflecting around EUR 5 billion impact of TRIM and model reviews, partly offset by lower business volumes in CIB and mortgages into year-end. Our Basel IV CET1 ratio is around 13.5%, up nicely from 13.1% at Q3, being unaffected by the TRIM and model reviews and already strong, well ahead of the phase-in period. Going forward, I expect further TRIM and model review impacts as well as NPE guidance coming in, mainly affecting Basel III. We see underlying business volumes to be broadly stable, although we expect some unwinding of year-end seasonal effects, increasing RWA short-term for both Basel III and IV. Our leverage ratio rose to 4.2% during Q4.
This was driven by a decline in the exposure measure helped by seasonal effects. I'm pleased now to announce that we intend to go ahead with the merger of our holding company and the bank. We plan to obtain shareholder approval in April alongside the regulatory approval process. On completion, the merger will add around 20 basis points to the leverage ratio. We will no longer be constraining for our capital. In summary, we continue to have a strong capital position, and we're taking steps to improve our leverage ratio. I would now like to hand back to Kees.
Thanks, Clifford. As you can see, we are well on our way to achieving our financial targets. ROE remains firmly within our target range. The income ratio is just above our 2020 target, even after the provision for accelerating client due diligence programs. We have a good view on when and where further cost reductions will materialize. I'm confident we will meet this target. We're also gearing up for further cost reductions to reach a cost-income ratio below 55 by 2022. Our capital position and capital generations are strong. These allow us to increase our payout to 62% over 2018. While the economic environment has weakened somewhat since Q3, we are reconfirming our targets and financial guidance. Before we go into Q&A, I would like to briefly recap the highlights on slide 15.
Fourth quarter headline results impacted by cost provision and impairments, strong operational delivery and good overall result for the year. I laid out our plans with regard to client due diligence. Tanja gave some color on fourth quarter loan impairments. Our guidance from the Investor Day is unchanged as the Dutch economy continues to perform. We proposed an additional amount on top of our target dividend payout, our strong capital ratio puts us in a good position to consider additional distributions for 2019. In particular, I'm pleased with the progress on operational delivery of our banking for better strategy, which will underpin our future financial results. I would like to ask the operators to open the call for questions.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for the question and answer queue, please press star one. Star one for your questions or remarks, please limit the number of questions to three. Thank you. The first question is from Mr. Farquhar Murray. Go ahead, sir.
Morning, ladies and gentlemen. Just two questions, if I may. Both on capital, though. Firstly, on TRIM, you're indicating an impact in the final quarter an expectation of further headwinds to come. On the 4Q impact, I just wondered if you could split the EUR 5 billion RWA increase between the TRIM component the model updates component. Looking forward, what exactly has changed that is prompting you to now expect headwinds over 2019, is it possible to give a range of outcomes in terms of what you might foresee? Secondly, on Basel IV, we seem to have gone from about 13.0 to about 13.5. I know my number's about EUR 5 billion RWA decrease under Basel IV, I just wondered if you could give us a sense of what drove that. Is it seasonality? Could it reverse?
Is this volatility in the fourth quarter something we should get used to? Thanks.
Farquhar, I'll be pleased to pick that up. As you say, TRIM and model reviews together was around EUR 5 billion for Basel III. In fact, TRIM was quite a small proportion of that at around EUR 1 billion. That was in respect of our mortgage portfolio. We're through that process there. There were some other offsetting factors, which meant that retail banking RWAs were pretty flat. The bulk of it reflects model reviews in our corporate bank and clearing. The corporate portfolio extends to both commercial banking and the corporate bank, roughly 50/50. You can see in the commercial bank, RWA is up about EUR 2 billion. That pretty much reflects the model updates. These model updates are effectively ahead of TRIM.
We do our own model reviews, we're clearly working closely with the ECB ahead of TRIM, and we thought it was appropriate to update at Q4 on that. I think that deals with that first part of your question. In terms of headwinds into 2019, I think we were clear at our investor day, that we did see headwinds on Basel III, on TRIM. We also identified NPE guidance. TRIM and TRIM model reviews would not flow directly through to Basel IV because we're constrained by the standardized approach, would not impact there. I think the headwinds that we're flagging today are not new. We're just a few months on, we're looking further into 2019, and we see quite the possibility of TRIM and model re-effects coming through the year, but will not affect Basel IV directly. Turning now to Basel IV.
I think we're pleased to see the fully loaded figure of around 13.5. At our target early in the phasing period, four years ahead. We said in November that our Q3 number was around 13. It was in fact a little over 13 at 13.1. Your figure of around EUR 5 billion is right. Most of that reflects business development, volume impacts. We do expect some of that to unwind into Q1, perhaps around half. You see the corporate bank being the principal driver of that. We have a long-term plan that we set out in August to refocus and reduce that. We've seen in Q1, in Q4 rather, the effect of two things, that refocus as well as some seasonal effects that will bounce back. I don't think Basel IV is particularly volatile in Q4.
We do expect quarter on quarter some movements as our methodology gets refined and as business developments flow through to those numbers. Get used to it. I think the big picture is that we're strong on capital both for both Basel III and Basel IV.
Okay, thanks very much.
The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, please, sir.
Yes, good morning, everybody. My question is also on capital, and mainly why your Basel III target zone has not moved. I was on the impression that you basically have a fully loaded Basel IV target range of a level of 13.5%, and that getting to the 17.5%-18.5% Basel III target zone is basically a reflection of the RWA inflation on the Basel IV. I think you're telling us that that gap has materially decreased, also on the back of this model related RWA inflation you report. Why, with a flat SREP ratio for 2019, haven't you adjusted this building block in your Basel III target range? That's question one. The second question is on the know your client process cost provisioning.
I think at the capital markets day, we did talk about how you are positioned on this. Back then, you indicated you were very comfortable where things stand, and now all of a sudden we have this charge coming through. I was just wondering what kind of step changes do you see at the regulator? Is ING being used as a scapegoat, basically, to up the game for others in the industry? How should we look at that? I also struggle a little bit how to see this is just a one-off. Maybe some comforting talk on that, which would be very helpful. Thank you.
Yeah. I'll pick up the first question. Look, we set the target capital range annually, for consistency and predictability. Although we reserve our position to change it if there are material developments. We've kept it constant. You can see that we are well set under both metrics. I'd note that in Q3, you saw that RWA inflation going up, from 35 to 43. It's come back down again to 36. That buffer of 4%-5%, we want to keep that fairly stable. If there are material developments, for example, like significant TRIM, further TRIM coming through in 2019, we'll clearly look at it. I think frankly, you should take comfort from the fact that we're well-placed within our Basel III target range, and we are comfortable regarding Basel IV capital, as I said earlier.
With respect to KYC, I think three months ago at Investor Day, we said that we already invested a lot in that area. As we mentioned today, that actually means that we have tripled in the last five years, the amount of money and the people. 1,000 people these days, and over EUR 100 million spending. What we also see, of course, in the last period is that, of course, the scrutiny of regulators across the banking sector has increased. We feel now that it's good to do this acceleration actually of two of our programs. We decided on that in December, and that's on top of our regular already budgets, which is over EUR 100 million last year, I said, and even higher this year. We think it basically should be a one-off.
We don't know, of course, because as I said three months ago, we did not flag this one. Down the road this year, we might have other provisions, it's not in the plans, of course, because if that was the case, we would have done it now. Basically, it's on top, and we feel comfortable to do that. Indeed, we were not foreseeing that three months ago.
To follow up on that, I think you mentioned somewhere that you temporarily take on 400 FTEs so that you can let them go after, I don't know, a two-year period to get things where you want it to be, and then you don't need those people anymore. Is that the current thinking?
Absolutely. Indeed, exactly what you say, those programs, both in the world of ICS, I mean, that's credit card, that's a lot of people, of course. Also in commercial banking, there are a lot of clients involved. It's indeed programs which are often two years.
Okay. Thank you very much.
The next question is from Mr. Adrian Cighi, RBC Capital Markets. Go ahead, sir.
Thank you very much. Two follow-up questions from me, please. One on capital and one on impairments. On capital, you're above your target Basel IV ratio three years early or many more if you include the phase-in of the Basel IV. Probably one of the very few banks in Europe in this position. While the 62% payout is generous in normal times, it is less so in the context of a declining loan book. What are you seeing that we're not that justifies this level of cautiousness? Then on impairments, what components of the increase in impairments come from the IFRS 9 procyclicality from the softening economic outlook you talked about, and maybe can you provide us with some sensitivities from a potential further decline in GDP outlook? Thank you.
Yeah. Thanks, Adrian. I'll pick up the first question, Tanja, the second. I think we gave a full account of our approach to capital management in November, we stated clearly that we will distribute surplus capital over and above our needs. We expect underlying business and business volumes to be sort of flattish, we expect to continue to strongly generate capital. You've seen that during the course of 2018. I think in terms of what are we seeing that you're not, I think we flagged both in November and here. We call it headwinds around TRIM and NPE guidance. We need to reflect on where we are in the economic cycle. We've clearly had an economic upswing over the last eight years or so. Looks like it's unwinding a little bit, further to your second question.
We just want to remain prudent at this point of the cycle. The 62% represents, if you like, our first additional distribution over and above our targeted payout of 50%. That remains our policy through 2019. We're well-placed to consider additional distributions in respect of 2019, we'll continue to be prudent about how we apply that judgment.
Thank you.
Okay. Then on your question on the impairments. What is new on IFRS 9 is, of course, stage two provisioning. Actually there you see very little movement based on the economic outlook. Where I refer to was especially the outlook also on the oil price. That has the most significant effect on a small part of our portfolio, especially in stage three files around individual provisions. The majority is in individual provisioning, there is a part of the increase in stage three modeled provisions, it very much has to do with the model updates. So far, limited impact of the new scenarios.
Thank you very much.
The next question is from Mr. Benjamin Goy, Deutsche Bank. Go ahead, sir.
Yes. Hi, good morning. two questions as well from my side. One on costs, one on capital. On costs, another year with a significant number of non-recurring items. Again, several hundred million, relatively consistent since the IPO. Just wondering how comfortable you are that we will finally see also the progress you're making on underlying costs, see more in reported terms. The second question is, you mentioned the housing market is cooling slightly, does it mean that you don't see a risk to any macro potential measures by the De Nederlandsche Bank on the mortgage book? That's impacting your capital, of course. Thank you.
Yeah. I think that you identified really one-off costs. They're really two chunks. That's restructuring provisions in respect of cost reduction programs. I call it compliance related over the last few years. In terms of restructuring provisions, we've now very largely taken the restructuring provisions in respect of cost saving programs that we announced in 2016. If you remember the EUR 900 and the EUR 900.
We also announced further cost reduction programs last year in respect of the corporate bank and in particular IT in November. I don't expect material further restructuring costs that need to be taken in respect of, for example, staff reductions for those particular programs. I think around compliance related, clearly there was a big chunk in relation to our SME derivatives program. That's not completed, although you see very little movement in the provision there in Q4 as our progress on that file has become a lot more confident and certain. Although further work to do, I think the provision is pretty solid. Kees commented on the KYC or client due diligence provision that we took in Q4.
Thanks, Clifford. With respect to housing market, as already mentioned by Clifford, the TRIM exercise is done in our large portfolio, EUR 150 billion. We're through that process actually. Despite what I said around the housing market, we don't expect something special to happen there from Central Bank at this moment in time.
Okay. Thank you.
The next question is from Mr. Hamilton, Morgan Stanley. Go ahead, please.
Hi. Morning, guys. Thank you for the presentation. Two questions from me. Firstly, just back to the provision and provision guidance. In terms of thinking through IFRS 9 impacts, and how those all flow through, how confident are you on your You're giving us guidance for sub 25 to 30 basis points again. If, say, Dutch GDP drops by 10 basis points, what's the kind of sensitivity around provisions and how should we think through that? Just to clarify, you're saying that the IFRS 9 impact in Q4 really related to a select part of the offshore oil book rather than more broadly. Secondly, just on TRIM impacts into 2019, just to clarify, are you saying that you've taken upfront the expected TRIM impacts in Q4?
Can you remind us how much in basis points, if you've given a guide, how much headwinds you expect in 2019? If significant, it sounds like you're saying the distribution is based more on the Basel IV capital outcome, not the Basel III capital outcome. Just to clarify that I've heard that correctly.
Okay. Thank you. I will take the first question on IFRS 9 and the impact of GDP. Unfortunately, it's not so simple to say and expect it as a multiplier, for example, on basis point GDP growth. The impact of IFRS 9 comes through the scenarios that we apply, the amount of assets we have in the different stages. The transition from one stage to another, which of course takes time. Even in a deteriorating economy, it takes time before you see it in the credit, and then it has an impact on the underlying collateral value. There are several elements in there. In our guidance, we include, of course, also the stage two provisioning. We don't expect a significant impact from stage two in 2019.
You had a question on the offshore oil book, but I wasn't sure exactly what your question was.
Sorry. Your comments on IFRS 9 impacts in Q4. It sounds like those principally relate just to a select few energy exposures rather than to a broader impact on the book.
Yeah.
If I heard correctly.
Yeah.
Okay.
I think I guided at the beginning of the year that we are quite cautious in our outlook on the offshore book. In the meantime, we have reduced the exposure in this book quite considerably, 20% overall exposure, and then especially on the drilling segment where we were most negative, we have reduced it even by 50%. We feel also a lot more comfortable on our exposure in this book, given that we have exited the weak clients here.
Thanks.
Very good. Bruce, just actually a couple of points. A follow-up on the provision. One thing to note is we expect to take an expense provision in respect of our Belgian acquisition, which is pretty modest. I just for completeness, wanted to mention that given my answer to the prior question. On TRIM, I think it's quite possible that we have material further TRIM over and above the model review figures that we took in Q4. I think we've been flagging TRIM consistently. I think we've now booked it in Q4, and we're clearly flagging the possibility of material TRIM this year for Basel III, and that's likely to be in the corporate space. I think we need to be clear on that.
As you indicated, Bruce, that would be a Basel III matter and would not flow through to Basel IV, in terms of TRIM and model reviews. In thinking about our capital target range, and our ability to pay dividends, I think you're quite right that from a capital point of view, it's Basel IV that's, call it the primary constraint. We have a very large buffer over and above our SREP on Basel III, and that reflects Basel IV. Currently we continue to think giving a Basel III target range is the right way to think about things, but it's very much informed by our Basel IV RWA inflation. I'd further point out that the leverage ratio remains our tightest constraint. We indicated that in November, and we're really pleased that we're getting on with the legal merger now, as that would substantially relieve that constraint.
I think around dividends, I think we're in a transition period. I think while we'd all like a mechanical approach, the fact is we're going through what might be an inflection point in the economy, as well as a transition in terms of the capital rules. We want to put that all together and arrive at a judgment as to what our surplus capital is. We made that judgment in respect of 2018, hence the further 12% payout ratio. We remain capital generative. We remain, in 2019, well-positioned to consider additional distributions for the year 2019, and we'll finalize that judgment this time next year.
Thank you. Just so I could follow up very quickly. On the leverage impact from the structure change, how long will it take for that to come into effect? I mean, is that something that should be in position by this time next year when you pay the next dividend?
Yeah. We expect the legal merger to be executed during 2019. We're looking for approvals from our shareholders during Q2, and the regulatory process will run along in parallel with that. We're not calling out a date, but it's very much a 2019 matter, a calendar year 2019 matter.
Great. Thank you.
The next question is from Mr. Stefan Nedialkov, Citi. Go ahead, sir.
Hi, guys. Good morning. It's Stefan from Citi. A couple of questions on my end. Sorry to be coming back to Basel IV, but I'm still quite a bit unclear on your guidance. When I look at slide five of the deck, you basically say in footnote two, implementation of mitigations to reduce Basel IV RWA inflation by one-fifth. That seems to be implying around 100 basis points of mitigation. At the Investor Day, you were talking about 50 basis points or so. There's 50 basis points more here. Therefore, what you say on slide five, Basel IV should be more than 14% post-mitigation, is looking more like 14.5%. Can you please confirm whether my reading is correct, number one and number two, what are these extra mitigation activities that you're thinking about?
A related second question, if you can explain a little bit more the underlying growth Basel IV impact, going from 43% inflation to 36%. How exactly does the corporate volume effect play into that? Do you have better calculations now on the impact of Basel IV-
Yeah
on corporate, or is it something else?
Yeah. I'll pick that up. I think this is a challenge for all of us, given the transition, and it's not our formal reporting basis at this point. The 1/5 that you flagged is entirely consistent with what we said in November. We said we could mitigate approximately 20% of the RWA inflation. You're right, it's about 100 basis points. That was true in November, and it's still true today. Those mitigations we expect to implement over time and to be in place by the phasing period. Some of that you'd expect to see dripping through our formal estimate for Basel IV through that period. In fact, we've booked some of that already in Q4. There's no change in there.
I think the 13.5% I explained earlier has gone up, reflecting the decline in our underlying business volumes, in particular in the corporate bank, some of which is seasonal. We'll see some unwinding of that, but not all of that 0.4, 0.5 difference. The big explanation in terms of 43 to 36 reflects the TRIM and model reviews that we have booked in Q4. Our CET1 ratio for Basel III is lower because we've booked EUR 5 billion of TRIM and model reviews. Frankly, that figure was not in consensus. There's no reason why it would be. That accounts for the somewhat lower Basel III CET1 ratio. TRIM and model reviews does not flow through to Basel IV, so the gap between the two is narrowed to 36%.
That inflation would then decline further, in respect to mitigations, those mitigations would be delivered over time. I hope that's given some clarity to your questions, and happy to pick it up afterwards.
Yeah, sure. Just to follow up. You have always guided implicitly to 100 basis points of mitigations?
No, we've guided to 20%. Always, we gave that guidance in November. Since November, we've guided to 20%, around.
Right. I thought that in November, you were guiding to a little bit above 13% pre-mitigations and 13.5% after mitigations.
Yeah. I think we've tended to give rough figures. You can see on page five. We said around 13.5% and above 14%. 20% is around 100 basis points.
Right
We want to convey comfort that we're well-placed at Basel IV four years ahead of phasing. We don't want to report specifically on mitigations on a capital regime which is yet to be -
Sure.
So that's-
I understand. Sure.
That's the caution.
Okay. Completely understand. It's just that when you say more than 13.5%, most of us would automatically assume 13.5%, and I personally never came across the 20% number before. It is good to know that at the end of the day, you have 50 basis points up your sleeve. Thank you.
Yeah. I think other banks can choose to report the way they see fit. We know others do it. We think the right way is to report our best estimate of Basel IV based on today's balance sheet, and be really clear on that. Also be clear on the mitigations that we see possible and that we're working on. That's how we see the right way to report these things.
All right. Thanks, Clifford.
The next question is from Mr. Kiri Vijayarajah, HSBC. Go ahead, sir.
Yes. Hello there. Firstly, can I go back to the shrinkage in the Dutch mortgage book? I appreciate there's some seasonal impacts there, but I wondered if the pricing environment got a bit more challenging for you there. With the slower Dutch housing market that Kees was mentioning earlier, could that shrinkage in the Dutch mortgage book probably get a little bit worse from here? Secondly, could we have an update on where you are in terms of reducing your exposure to private equity? Because there's no mention of it in the slide. Is it still a priority for you, and how easy or difficult are you finding it to get outside investors for that book? Importantly, should we see any movement on the capital from the private equity side before the end of 2019, please? Thank you.
Thanks for the questions. With respect to the mortgages, indeed, a decline of the book of EUR 1.8 billion on a EUR 150 billion portfolio last year. That is indeed due to that we have been cautious on if we have to choose between market share or volume and profitability, we chose for the last. That was the reason why it went down a bit. Also, together with it's more in the 20 and 30 years mortgage interest rate mortgages, which is more the sweet spot of insurance companies and pension funds in the Netherlands, actually. We're looking into that area as well, by the way, to make up funds which we can originate to distribute in that area. We're also looking at, of course, market share should not go down too far.
We're looking into that area, where in the mortgage area we can perhaps make some inroads where possible. With respect to the exposure of private equity, that's done in Q4, so that's no longer in our figures.
Okay. Could you quantify the benefit there? Because it is not mentioned.
Clifford?
No. It is part of the reason for the decline in RWAs pre-TRIM and model reviews. It is not a big figure because we have sold a minority in existing funds, but also made a commitment to further funds. We have deconsolidated that business. It is done, as Kees said, it has been closed.
Okay.
We see some modest RWA benefits of that in the figures. You will see that in the corporate bank. Going forward, don't expect a further step change there.
Understood. Thank you.
The next question is from Mr. Jean-Pierre Lambert, KBW. Go ahead, sir.
Yes, good morning. Thank you for taking the questions. I have a general question about the impairments. If you could give some colors of what you see as impairment, as cyclical or structural. By that, I mean, was there an issue in the origination of your loans in the past and you're going through the cleaning up, if you want? Is it really cyclical due to change in economic environment or sector conditions? Is there any change in your origination policy which you have in the pipeline or implemented? Thank you.
Tanja?
Yeah. This is, of course, a very broad question. If you see what has happened this year, you see definitely that the issues that we have are related to certain sectors and also very much the conditions in these sectors. I would not call it general economic circumstances. Also diamond sector, again, is very different from energy and then specifically offshore. Sorry. Should I repeat it?
I understood.
Sorry. I don't know whether you could clearly hear me.
I could clearly hear you. Thank you.
Okay. Thank you. That were the sector conditions. In certain segments, we definitely have adjusted our underwriting standards, specifically in the energy sector, where we clearly look at what are the structural developments in this sector. More generally, I can say that we follow the developments in the industry. Leveraged lending has, for example, our attention.
If we look at the Dutch SME, you mentioned various sectors, very limited sectors. Can you specify, is it health? Is it transportation?
In the Dutch economy, in very different segments, we see provisions. There's really no line to say, but I can mention that in certain sectors we see a bit more stress. Transportation is one of them, but also retail. I've mentioned hospitals before, and also in the agri sector, we see in some specific segments some pressure. You cannot say there's really a trend.
There's no common factor to those.
I think they are very specific. Retail, the pressure, we all read that in the newspapers, there is a structural change in this segment. The issues we see in the healthcare sector are again related to other developments. I would say there's no general trend. Economic development in the Netherlands is sound, and it's not an underlying economic reason that we see these issues.
Thank you very much.
Yeah, actually one. Just to add further, I think on the commercial bank, SME, around half of that reflects a portfolio model type review rather than sector specific. I don't know if that qualifies as structural cyclical, but worth pointing out. I think around the corporate side, we've downsized or we're continuing to downsize our exposure to some of the sectors that have been challenged last year. I think that goes to the secular versus cyclical nature of the question you've asked.
Great. Thank you very much.
The next question is from Mr. Albert Ploegh, ING Bank. Go ahead, sir.
Yes, good morning. Thank you for taking my questions. The first question, I know ABN AMRO has been set on Basel IV and Basel III capital range target. Should I take from all the statements that, let's say, keeping the target unchanged is more a question of timing in the light of the things you reflect to, meaning that basically by year-end, if all things are equal, that you could indeed lower this, as most of the impacts are not Basel IV related? Should we also take a bit caution there, as you pointed out where we are currently in the economic cycle to better understand this and also maybe manage the expectations there a bit. The second part of the question is again, on the risk cost.
Looking at 2018, the diamond sector, I think Q1, if not mistaken, also clearly now in Q4, quite elevated impairment charges, also quite sector specific. Also in your previous question, the healthcare was also already flagged as a quite specific element in 2018. Together, they were quite a big material amount of the total EUR 655 million charge you've taken over the whole year 2018. It feels that you still also have built in some headroom in your guidance, being below the 25-30 basis points across the cycle for the best guidance maybe for 2019. Is that a fair reflection or am I missing something? My final question is more on P&L on the NII. It was a pretty good quarter in terms of NII, I was wondering, can you maybe share some comments on what's happening on the mortgage market?
It feels that some of your peers are telling that, let's say, the new underwriting on the new production, the margins have actually started to improve, basically from the second half of the fourth quarter onwards. Is that something you see as well? Thank you.
Okay. Should we take them in order? I think, Albert, you had a good handle on how we think about the target capital. If we see, let's call it very material TRIM and model reviews coming through in 2019, that will squeeze the RWA inflation in respect to Basel IV and will trigger us to re-look at the target capital range under Basel III. We don't want to keep moving it every quarter, we will reflect on where we are in the economic cycle. Fundamentally, the Basel III reported range is driven by our view of Basel IV. I think at some point, we'll move to a more formal Basel IV target, we think now is not the time to do that. Still a bit early given the uncertainty around that particular regulation.
Yeah. On the guidance of risk cost, and you outlined already the provisions for 2018, the specific sectors. Also the fact that in some of these sectors, we reduce our exposure. Indeed, we feel better positioned for 2019, given the reduction measures that we have taken in these segments. It's early in the year, and it's also early in the year to give a guidance for the full year. We feel comfortable with the guidance that we provide, but we see also uncertainty in 2019, especially if you look at Brexit that is coming up. Depending on how that will pan out, there will be an impact on even the Dutch economy. That's very hard to judge how that exactly will pan out.
I think with respect to the mortgage market where you refer to, I would say there has been some change in market shares in the market indeed last year, especially ING.
No, it's a bit more on the margins. It seems that some peers are saying that the margins are improving a bit in the late part of Q4, a bit of a change compared to, let's say, the first nine months of 2018.
Yeah, it depends, I think a bit on the interest rate period. I don't think it's across the board, actually.
No, I noted those remarks. I would say it depends where you're coming from, I suppose. We focus on delivering our hurdle rates on mortgages, and haven't seen material change in share from Q3 to Q4. We'll continue to manage that book for profitability. We'll see where conditions develop, but nothing new beyond what Kees said. You'll have to ask those other banks what they're seeing.
Okay. Thank you. Will do again.
The next question is from Miss Alicia Chung, Exane BNP Paribas. Go ahead.
Good morning, everyone. Sorry to just go back on the capital one more time. It's very clear now that you've said that Basel IV is the primary constraint, and it now looks like you're at 13.5% pre-mitigations, 14% post-mitigations. Looking forward in terms of the potential headwinds, obviously we only care about the ones related to the Basel IV equity Tier 1 ratio. In a lot of ways, the TRIM is a bit of a red herring, for example, and it sounds like IFRS 16 shouldn't substantially impact you either. The main other regulatory headwind is the NPE regulations. I am just wondering what exactly is it that concerns you about this regulation, just simply because your peers haven't really brought it up, which makes me think that you think it could potentially have a more substantive impact for you.
Are you able to give any guidance as to what the potential impact could be, or how we should think about it? That's my first question. A couple of just smaller ones. First of all, you mentioned in your press release that you have a 60 basis points AT1 shortfall. What are your plans to fill this? Will you look to issue this year? Finally, on the leverage ratio, do you have any better view as to when CRR II will be in place? I know you said previously that there were some discussions underway at the regulatory level about possible early adoption. Is that still up for debate or is it just 2021? Thanks.
Alicia, we love to talk about capital, so perhaps Tanja, can you say something on NPE?
On NPE, the non-performing exposure, and the credential backstop, because that's really where it's about. That's a regulation that will have an impact in the future, and where we as banks will need to manage towards. We see regulators and also the European Commission looking into this as well and looking into early phase-in. It's a bit uncertain how that exactly will pan out, and that's why we are cautious in mentioning this, because it's only existing stock of non-performing exposures. Our non-performing exposure is quite decent with a 2.2% impaired ratio, but still, we feel that we should prepare for that. That's why we have mentioned this.
What exactly could be the issue? Is it that they could increase the risk weights on your NPEs?
On the NPEs, we take a provision, then they say if your non-performing exposure is for a certain period non-performing, then you need to provision regardless of your position. For uncollateralized exposure, it's 100% after two years. For collateralized exposure, it steps up over time, and it's 100% after seven years, if I'm correct.
Yeah.
That means that regardless of your collateral position, if you have exposure that is non-performing for quite a bit of time, restructuring taking time, then that has an impact on provisioning, you need to take it as a prudential provision.
Yeah.
So it's-
Your provisioning guidance for 2019 of less than the through the cycle level of 25 basis points, does that include some impact from NPE guidance or should we consider that on top of?
It's prudential. It's not the same as, to make it complex, IFRS 9 provision. It will probably flow through the way we calculate our capital ratios, Pillar Two. It's also not expected that it will have an impact in 2019, but in the years to come, to phase in over the next seven years, because that's the horizon in the guidance that was issued in 2018 on non-performing exposure.
That will impact all measures of all capital ratios.
Yeah.
Leverage ratio, Basel IV, Basel III. I think you've put your finger on something there, Alicia. In terms of the AT1 shortfall, that is a function of the Q&A guidance we got 18 months ago and will be resolved when we execute the legal merger.
Okay. Got it. Yeah.
Your third question related to leverage and SA-CCR is, well, at the moment, still planned for 2021.
Okay.
We hope earlier, but that's the date. Yeah.
Okay. There still is a debate of some sort.
Not yet. No.
Okay.
[Brussels.]
Okay. Thank you.
The next question is from Benoît Pétrarque, Kepler Cheuvreux. Go ahead, sir.
Yes, good morning. To come back on the non-performing exposure, for sure you know your book extremely well. You know how much is still non-performing after two years. You probably know as well how much impact this could have on your book over time. Could you provide a bit more guidance in terms of impact on your Basel IV CET1 from this NPE guidance? That would be very useful because it looks like, frankly, it's one of the main constraints actually on the Basel IV, because you already reached the 13.5%. On the risk side, coming back to the reduction of non-core and cyclical clients you were aiming for, how much have you executed so far in 2018, especially looking at the oil and gas book and also offshore books, how much de-risking have you implemented?
Just more generally, it looks like you have been increasing your NPL ratio on the corporate exposure over several quarters now. It seems that you are happy to bring it up further up. Could you give a bit of direction for next year in terms of NPL coverage? Are you happy with the current level, or do we need to expect a bit small uptick in 2019? Thank you.
Maybe first on the non-performing exposure guidance. The guidance is for new exposure that becomes non-performing as of some date, I think, the March 1st, 2018. Of course, well, it comes in after two years or gradually in a period of seven years. We will manage towards, and there is no immediate impact there, and we will take it into considerations in our restructuring activities. The other piece is the phase-in for the stock that we have currently. That is something we are working upon. I cannot provide you guidance. Of course, we have a number of what the impact would be if it would be introduced today, but that is not happening. There will be a phase-in, and of course, we will not just wait and see, but also manage our portfolio towards this.
Yeah, it's very hard to give an exact number at this point in time, but I don't expect this will impact the number for 2019 as guided for provisioning. Yeah, it's a multi-year activity that we embark upon. With respect to the offshore market, as I said, we have reduced quite a bit. For example, our offshore drilling portfolio, where we have reduced most, has reduced by EUR 500 million during 2018. That's a combination of sale of assets, repayments, and some write-offs. There is a significant reduction, but also in other segments, we have made some smaller reductions.
On this point, how much loan losses did you take on this kind of cleanup in 2019? Do you have a figure?
No, I don't have that at hand.
Okay.
What you have seen there, the provisioning level on some of them, indeed, we have taken write-offs and on some, we still sit on the provision, and we can recover the amounts as well. That's on offshore. On the NPL coverage ratio, yeah, we don't have a target for that. You have seen that increasing a bit, and that has very much to do with the scenarios that we use for future cash flows and the valuations of collateral. If these become more negative, that has an impact as well on our recovery rates and therefore our coverage ratio.
Okay. Thank you very much.
The next question is from Marcell Houben, Credit Suisse. Go ahead, sir.
Yeah, good morning. Thank you for taking my questions. Sorry to keep haranguing on the loan provisions there. Just on the diamond sector, for 2019, what is your visibility on this portfolio? Is the provision taken in 2018, is that the best guess for 2019, or do you expect it to be lower or either higher? That was my first question. The second question is on the management in private banking, we've seen an outflow of EUR 3.2 billion. Is there a particular driver? Is that just seasonality? The third question is on the NII in the corporate center, which has turned positive. Is that sort of the run rate going forward, or is there a one-off in there we should take into account? Thank you.
On the diamond sector, we follow that sector very closely. We know all individual clients. Well, the provision that we have taken, that's based on all the information that we have today. It is a sector with risks, so we continue to watch it closely. 2019 will be a year that we pay a lot of attention to this segment again. It's very hard for me to put a specific number on this portfolio. I think the good thing is that we are reducing exposure quite a bit and therefore also our downside risk.
I'll pick up the other two questions. On NII, you're right, in group functions, that was a positive EUR 14 million. About that amount was, I'd call it a one-off catch up that we don't expect to recur. If you look at the figures quarterly, they bounce around small negative, small positive. I think full guidance is roughly zero there. There's a big swing between Q3 and Q4. I think in terms of private banking, we saw EUR 3 billion. They were fairly low margin custody-type assets primarily in the Netherlands. I think what I would point out to that business is certainly Q4 was a challenging environment for that business. The equity market's down and during that sort of environment, you see clients thinking about how they're positioned.
Some clients are looking to step up, others are more nervous, we've seen some migration from discretionary to advisory to self-execution in that portfolio during that period. Markets have come back again. I think volatility combined with secular trends means we see quite secular margin pressure, which is why we're looking to grow that business to deliver on scale benefits in what is still a very strong ROE business.
All right. Thank you.
The next question is from Mr. Raul Sinha, JPMorgan. Go ahead, sir.
Hi. Good morning. I'd just like to come back to follow up on a few things that we probably already have discussed on the call. I think the first one, Tanja, unfortunately on the coverage ratio. When we look at your corporate NPL book, the coverage ratio on that in the mid-30s level doesn't seem very high from the outside. I was wondering if you might be able to share the amount of collateral you have and what the coverage ratio might be adjusted for collateral. That is probably going to be a source of impairments going forward. Just trying to understand how much comfort you might have there. The second question is on dividends. I think you guys have been very clear in terms of the various moving parts, but consensus does have a mid-70% payout ratio here.
When we think about the various issues you have to keep in mind, I think you mentioned Kees regulatory as well as other developments when it comes to dividend payouts. I was wondering if apart from regulatory development, is there something else that you would also look at? Obviously put the leverage ratio in the regulatory development around the dividend. Thanks so much.
On your first question with respect to the coverage ratio, we are comfortable with the coverage ratio that we have today indeed around the mid-30s. It's not that we correct for collateral or whatsoever. That is an integral part of our analysis and valuations of collateral we take, of course, into consideration. That's all I can say about it.
With respect to dividends, as you know, we have always been cautious with respect to guidance of percentages. We have set 50 + additional, and with respect to additional, indeed, commercial, depending on the growth or decline in portfolios. Indeed, a leverage ratio, but also NPE and other developments in the area, TRIM, add-ons and the likes. Yeah, it's a mixture. As said, we're not going to discuss that every quarter. That's not the idea. We do that at the end of the year and try to guide you in between as good as possible every quarter, as we do today.
Okay. Thank you.
The next question is from Johan Ekblom, UBS. Go ahead, sir.
Thank you. Just two quick things to follow up on. First, in terms of the legal merger, do you expect any upfront costs to execute that? You also mentioned that it should give some cost savings in the longer term. Can you give us an indication of roughly what the size that could be of? Secondly, just coming back to the CIB restructuring. We've seen a big drop in both loan volumes and risk-weighted assets, and I think you highlighted some of this is seasonal. If we look at the revenues, or at least NII, it's holding up very well. How should we think about where you are in the process of exiting the exposures you want to there? Should we still be looking at this EUR 34 billion RWA in 2020?
What kind of revenue impact should we expect and why is it not more visible in Q4 given the large reduction in the loan book?
All right. I'll pick up those. I think on legal merger, it's a technical process. Clue's in the name, legal. There's lawyers fees, but it's not material to the group. I think the cost savings and simplification, again, is not material. We produce two annual reports, for example, one for the group and one for the bank. We'll only need to do one going forward. It's that sort of thing. It's helpful simplification, but the primary driver is to deal with our capital ratios. I think in terms of the corporate bank, what you've seen is, as you'd expect, is a decline in the short-term business. We called out the trade and commodity finance business, where we've seen that business make good progress. That business is by definition, shorter term.
It's also more of a lower margin business, which is why you've seen limited effect on NII. Some of the seasonal effects are really quite late in the year in clearing and the likes. That will have a limited impact on income. I would summarize it, and Kees did earlier, we're making good progress on the corporate bank. The RWAs, EUR 35 billion, even including TRIM and model reviews, is materially down on EUR 39 billion in Q1 last year. We retain the targets we've set out, both RWAs but also NII, where we gave some indications of the impact on revenue and cost as well. We're very much on track, but don't expect further material RWA declines from here.
What you'd expect is more of a rebalancing as we shrink the portfolios that we are less keen on, and Tanja indicated the progress we're doing there, and continue to grow the portfolios where we have a long-term interest. Hopefully that gives you the sort of balanced guidance you're looking for on CIB restructuring.
Thank you.
The next question is from Bart Jooris, Degroof Petercam. Go ahead, sir.
Yes. Hi. My questions have already been answered. Sorry, I had some noise here in the last thing. Maybe that has been answered. Could you give us an update on where you are exactly in reducing the balance portfolio now after this quarter, and when would this be finished, and how much would that be? On the CDD measures, do you believe that that will have any commercial consequences, and could you give us an idea on what those will be? Finally, a small update on the SME derivatives case. Do you expect that to close in the first quarter or the first half of this year?
First your question on the diamonds statement. I think you are aware that we have closed our office in Dubai, that's where we are reducing our portfolio. This is a multi-year process. We are making different progress, I do expect this will take the coming two years at least to achieve the reductions that we focused on.
If I may follow up on that, the impairments, there is also a possibility that disposings lead to additional impairments?
Yes, of course. I mentioned that before. We have monitored this portfolio very closely, and I cannot exclude that will happen. We provide to the best of our knowledge at this stage.
With respect to client due diligence, we actually don't expect a material commercial effect there. These are being made to outline this plan.
Okay, thank you very much.
The next question is from Nick Davey, Redburn. Go ahead, sir.
Good morning, everyone. Two questions, please. The first one on the dividend. I know you've said a lot about this already, but the short version of my question is why not have announced some sort of progression in the ordinary? I understand we've talked a lot about Basel III, Basel IV, and the pay pressure going up and all of this. I suppose when all said and done, we're in a stable, ordinary, fruitful year. In the year you've become incrementally more positive about Basel III mitigation, about the Basel IV, about leverage. Your underlying earnings power has improved. Was there some discussion at the board level about this progression dividend in absolute terms? Could you just give us any sense as to why not have shifted it on at all?
Some of your peers in a less luxurious position while capital returns some sort of dividend progression. The second question, please. Clifford, I think you mentioned funding spreads going up and we expect our partners to pay. My question is, can you give us more detail on that, the sentiment to the market, what you're beginning to see repricing or the tension that you're putting through higher intra-group funding costs and you're expecting to compensate? Just to give us a sense of where to look if we're partners here, loan book repricing. Thank you.
Thanks very much for the questions. With respect to the first one regarding dividend, I think what we should take in mind as well is that last year, of course, there were a lot of incidents influencing actually the figure. The EUR 2.8 billion included what the sale of Bank of Asia, and it included actually negative impairment, EUR 63, instead of any other normal figure. Actually last year, in a way, with the 50% and EUR 145 was actually high compared to what the underlying situation was. This year, we increased to EUR 62, gave guidance, gave our new percentage for this year. As said, we will look into it later this year. Everything you said with respect to developments, appreciate the personal improvement we also see.
I think around funding spreads, I wouldn't highlight any business in particular, but we have quite a mechanical approach to funds transfer pricing. When the spreads go up in terms of our own funding costs, that gets passed through to transfer pricing. The businesses are very focused on delivering hurdle rates. So those businesses will seek to earn those spreads and will probably through in terms of margin volume in order to deliver that over time.
Thanks. Just to get a sense then, do you take some transfer pricing based on the experience from it, possibly have to be issuing and refinancing higher rates for that?
Yeah.
I think because it's reflecting market rates.
Yeah
From both.
Yeah. It's a bit of both. We kind of weight those two. We also take a view on how frequently. We don't want to do it all the time because we're in the market with clients. When you see material moves, both up or down, we think it's important to pass that on to the benchmark that our front office staff are dealing with, and then it's for their judgment to see what they can get in the marketplace, knowing they need to deliver on their hurdle rates over time. They need to trade through that sort of volatility. That's how we do it.
Interesting. Thank you. The fact that you don't do this all the time, has there been a sort of reset in Q4?
Well, I think it's clear that spreads have gone up in the last few months.
Yeah. The FTP has responded.
Yeah. We don't do it mechanically to clients. That's the job of our front office teams, is to sort of trade through that. Over time, we expect them to deliver the hurdle rates, at least the hurdle rates.
Okay. Very interesting. Thank you.
The next question is from Mr. Omar Fall, Barclays. Go ahead, sir.
Hi there. Just two questions, please. Firstly, just coming back to the NPE, the guidance for potential impact from the NPE update from the SSM. The EBA had an impact study, I think last year, showing a cumulative negative impact of 56 basis points for the average European bank over seven years. I'm not sure how updated it is for the latest rule, the latest guidance that given the average bank includes suddenly banks with significantly greater stock of NPLs than you. I struggle to understand how this is a meaningful impact, unless both models at an extremely generous level, which is possible, I guess. It doesn't look like your loan book makes you more susceptible to this regulation relative to anyone else.
The second question is, there's obviously I think a lot of uncertainty around needing to potential rate impact and the volatility around the capital ratio. There's something that you as management can action, and that's to more aggressively address the loan book. If you take the risk-weighted asset volatility, the asset quality issues that were evident today, why is it right for shareholders that you don't do more than the EUR 5 billion of RWAs that you've guided to? Thank you.
Your first question on the NPE guidance, and how you're concluding that we would be more susceptible to the impact of this new guidance. That's not what we believe is the case, but we want to make sure that we are well-prepared. As said it's a bit unclear how the impact on existing stock will pan out. I do expect that in the coming quarters that will become clear and that we can provide some more insights here. As said, for new non-performing loans, we will manage that actively.
I guess the broader point is that you seem to be painting it as the last meaningful impediment to returning more capital to shareholders. I'm just thinking if we're talking about sub 50 basis points over several years, why is that even part of the debate?
Yeah. You've drawn all sorts of implications regarding NPE. We're flagging NPE. I'll just be direct. We appear to be very well capitalized under Basel III, and we're having a discussion about capital return. We're being open about the regulatory headwinds. You'll have to ask other banks why they're being less open about those regulatory headwinds, and maybe it's they're not in this discussion. They have lower capital ratios and the prospect of material dividend increases is perhaps more academic. We do see headwinds. We've discussed those. If they were immaterial, we wouldn't have flagged it in our few reports. We need to manage the transition of a challenging Basel III to Basel IV environment in a prudent way. We're not overly negative regarding the economy. You've seen our positive statement regarding guidance.
It's possible the economy is perhaps weaker than we all expected six months ago. This is the background. You can call it prudence, but we think 62% reflects a material uplift in payout for the reasons that Kees set out.
Got it.
Yeah. Was there a second part to the question? I think we've probably dealt with it.
All right. Thank you.
Thanks.
The next question is from Mr. Ibrahim Said, Deutsche Bank. Go ahead, sir.
Hi. Thanks for taking my call. Just a little bit more clarity to come back on the AT1. You talked about the legal merger impacting the deduction.
When you talk about the 60 basis point shortfall, is that on a pro forma basis? I'm just trying to think about what quantum you're talking about.
Yeah
If I apply it to your current RWAs, I get EUR 630 million shortfall. Are you saying that if you merge them, that requirement will go down? Have I understood that correctly?
Yes. When we did our inaugural AT1 issue, that substantially dealt with the shortfall. The Q&A meant that we couldn't include that element of surplus associated with the AT1 issue, hence the 60 basis points. The legal merger substantially addresses that.
Okay. Just the merger itself will close the gap.
Yeah.
It's not incremental issuance.
Yeah, that's right.
Understood. Okay. Thank you very much.
The next question is from Mr. Stefan Nedialkov, Citi. Go ahead, sir.
Hello?
Yes, sir, go ahead. Stefan Nedialkov, Citi. Go ahead, sir.
Yeah. Hi, guys. Just the two quick follow-ups please. On the dividend accrual for 2019, given your target is 50%+ a special dividend, do we model the accrual at 50% in 2019 or do we assume the actual 62% paid out in 2018? That's the number one follow-up. The number two follow-up, just to cut through all this Basel IV and mitigation noise, could you just very simply tell us what is the input versus output floor impact of Basel IV inflation? Of the 400 to 500 basis points impact before mitigations, could you tell us what percent is input floors and therefore phased in by 2022, and how much is output floors and therefore phase- in by 2027? Thank you.
To your first question, we will accrue 62% this year. Input output floor, Clifford?
Yeah. Look, it's very large. We're constrained by the output floor, and that is the dominant driver. The input floor gives a RWA that's meaningfully less than the standardized approach. We expect a more gradual phased-in approach to Basel IV through the phase-in period. We've not disclosed the delta between those two. The rules are not entirely clear. I think it's quite possible that TRIM impacts the RWA input floors, and so we think it's premature to give that sort of guidance.
Okay.
Thank you.
Operator, I think that we don't have any further questions. Is that the case, or did new questions come up? Because it's 12:30, so we actually have to close the call.
There are two more additional questions coming up, sir.
Okay. If it's new questions, then please add. If it's already discussed, then I would like to ask not to connect with this, Donker, if possible.
There is one question coming up from-
Remaining? Okay. Let's have that one, please.
Sorry. Jose Coll, Santander.
Yeah.
Hi, good morning. Very quickly, I think we didn't touch upon this. Thinking about the stake that the NLFI still bought, that 56% stake. I just wanted to hear you say this, I guess. In your capital targets, is there any sort of guidance from the NLFI of how much capital you have to have? I think, as you've made comments on the press regarding that you would expect that in 2019, the NLFI kept reducing their stake. Is there any comment that you can any update that you can make there? Thank you.
That's indeed a new question, thank you. No, we cannot guide you on that. That's really a decision taken by the Ministry of Finance around the stake. They have not sold since September 2017, some time has gone between now and then. Indeed, I have expressed my hope and perhaps even my expectation, but at least my hope, that with a full new year, and market permitting of course, that there might be some further sell-downs this year. I can't guide because I don't know, and it's up to the Ministry.
I understand. Just to be clear, there is no sort of discussion with the NLFI regarding your capital targets?
No.
Thank you.
Thank you very much. Thank you all very much for all the questions. Operator, also thanking you for handling that. I would thank you also and say again that this concludes our Q4 results update. Goodbye. See you on a roadshow or next quarter. Thank you very much.