Earnings Call: Q4 2018

Feb 13, 2019

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 a listen only mode. And after the presentation, there will be an opportunity to ask questions. I would now like to hand over the conference to Kees van der Koozieen. 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 Abrams, our CFO and Tanja Koehler. Clifford will then go through the details of our 4th quarter results. And after that, Tanja will give you an update on developments in our loan portfolio. I'm now turning to Slide 2, and I will give I will highlight the main points of the 4th quarter. The headline profit figure is EUR 360,000,000 EUR 16,000,000 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 2 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 ROE of 11.5%, 11.4% and costincome ratio of 58.8%, just above our 2020 target. Costs are trending down, and we are on track to deliver on costs as laid out in our banking for better purpose. Capital generation is strong with our quarter 1 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 €145 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, and I will update you here on Slide 3. 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. Tiki has been fully embraced by the Dutch, and 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. And last but not least, the migration of our IT application to the cloud is nearing completion, and all identified applications have been decommissioned. Now turning to client due diligence and the provision we took this quarter on Slide 4. We take our role as financial gatekeeper very seriously, and we have laid a good foundation. Since 2013, the number of employees involved in client due diligence has tripled to around 1,000 FT feet feet feet feet feet feet feet feet feet feet feet feet Es. We can do better, however. We have decided to accelerate 2 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 Bornfeldt 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. Now moving to capital generation and dividend on Slide 5. 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, so we maintain our capital target range of 17.5% to 18.5% for 2019. Our fully loaded Basel IV ratio increased to around 13.5% and above 14% if mitigation actions were are taken into consideration. So 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 €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. Now I'd like to turn to the Dutch economy on Slide 6. 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 the 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. 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. All in all, 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 1st 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, and we have limited direct U. K. Exposure. However, the macroeconomic impact is difficult to assess. Now I'd like to hand over to Clifford to take us through our 4th quarter results. Thank you, Kees. Turning to Slide 7. Our 4th quarter net profit was €316,000,000 and included a cost provision and elevated impairments. However, I consider our full year results of €2,300,000,000 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 Q4. 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 8. 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 and we remain disciplined in our pricing and this explains our modestly lower mortgage volumes. CIB's loan book decreased during the quarter showing good progress on the business refocus. The trade and commodity finance portfolio declined by €1,000,000,000 during the quarter as planned, while the decline in clearing is more seasonal in nature. I'm pleased by our consistent growth 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. So 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 9. 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 than expected in early 2020. Funding spreads picked up for the banking sector as a whole recently, and we're looking for the business to pass on these costs to our clients. Net interest income. 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. Now 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 and this kept many private banking clients sidelined. In fact, equity market performance knocked off more than 5% from assets under management during the 4th 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. So 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 €125,000,000 guidance with some volatile items negative this quarter, namely hedge accounting and XBA. But for the year, we are well above our guidance driven by strong private equity results. Now moving to costs on Slide 11. I'm 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 €69,000,000 Kees discussed the work we have planned to further strengthen our client due diligence where we took a $85,000,000 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've increased cost savings from €65,000,000 last year. This brings total cost savings delivered since 2015 to just under EUR 700,000,000. You can also see we're bringing down the seasonal 4th quarter cost bump through better cost discipline. As you know, we're targeting EUR 1,000,000,000 cost savings, including Corporate Banking. So we're well on track to reach a cost base of around EUR 5,000,000,000 by 2020. I will now hand over to Tanja to pick up on impairments on Slide 12. Thank you, Clifford. 4th 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. 4th quarter impairments are predominantly taken in the same sectors. Full year impairments ended below the 2 to cycle level as guided. Looking at the Q4, 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 the remainder 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 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, and 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 to 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 $5,000,000,000 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 phasing 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 tend to go ahead with the merger of our holding bank 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 leverage ratio and so we will no longer be constraining for 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. Our 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, so I'm confident we will meet this target. We're also gearing up for further cost reductions to reach a costincome ratio below 55 by 2022. Our capital position and capital generations are strong, and 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. So before we go into Q and A, I would like to briefly recap the highlights on Slide 15. 4th quarter headline results impacted by cost provision and impairments with strong operational delivery and good overall results for the year. Are there other plans with regard to client due diligence, and Tanja gave some color on 4th quarter loan impairments. Our guidance from the Investor Day is unchanged as the Dutch economy continues to perform. We top of our target dividend payout, and our strong capital ratio puts us in a good position to consider additional distributions for 2019. In particular, I'm pleased with the progress and operational delivery of our Banking for Better strategy, which will underpin our future financial results. Now I would like to ask the operator to open the call for questions. Thank you, sir. Ladies and gentlemen, we will start the question and answer The first question is from Mr. Farquhar Murray, Cowen, sir. Good 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 and an expectation of further headwinds to come. On the 4Q impact, I just wondered if you could split the €5,000,000,000 RWA increase between the TRIM component and the model updates component. And then looking forward, what exactly has changed that is prompting you to now expect headwinds over 2019? And 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. And on my numbers, that's about 5,000,000,000 RWA decrease under Basel IV. And I just wondered if you could give us a sense of what drove that? Is it seasonality? Could it reverse? And is this volatility in the Q4 something we should get used to? Thanks. Yes, Farquhar, I'll be pleased to pick that up. As you say, TRIM and model reviews together was around €5,000,000,000 for Basel III. In fact, TRIM was quite a small proportion of that at around $1,000,000,000 and that was in respect of our mortgage portfolio. So we're through that process there. And there were some other offsetting factors, which meant that retail banking RWAs were pretty flat. And so the bulk of it reflects modern reviews in our Corporate Bank and Clearing. And the corporate portfolio extends to both Commercial Banking and the Corporate Bank roughly fifty-fifty. So you can see in the Commercial Bank, RWAs up about €2,000,000,000 That pretty much reflects the model updates. These model updates are effectively ahead of TRIM. We do our own model reviews and we're clearly working closely with the ECB ahead of TRIM and we thought it was appropriate to update at Q4 on that. So 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. But TRIM and TRIM model reviews would not flow directly through to Basel IV because we're constrained by the standardized approach, so would not impact there. So I think the headwinds that we're flagging today are not new. We're just a few months on and we're looking further into 2019. And we see quite the possibility of TRIM and Model Rear effects coming through the year, but will not affect Basel IV directly. So turning now to Basel IV. I think we're pleased to see the fully loaded figure of around 13.5%. So our target for early in the phasing period but 4 years ahead. We said in November that our Q3 number was around 13%, it was in fact a little over 13 at €13,100,000,000 So your figure of around €5,000,000,000 is right. Most of that reflects business development, so volume impacts. We do expect some of that to unwind into Q1, perhaps around half. So 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. But we've seen in Q1 in Q4 rather the effects of 2 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. So get used to it. But I think the big picture is that we're strong on capital both for both Basel III and Basel IV. Okay. Thanks so 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 Because I was on the impression that you basically have a fully loaded Basel IV target range of a level of 13 0.5% and that getting to the 17.5% to 18.5% Basel 3 target zone is basically a reflection of the RWA inflation on the Basel 4. Now I think you're telling us that, that gap has materially decreased also on the back of this model related RWA inflation you report. So why with a flat SREP ratio for 2019, haven't you adjusted this building block in your Basel III target range? That's question 1. 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. So 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? And I also struggle a little bit how to see this is just a one off. So maybe some comforting talk on that would be very helpful. Thank you. Yes. So 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, say material developments. So we 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%. And so that buffer, 4% to 5%, we want to keep that fairly stable. But if there are material developments, for example, like significant TRIM, further trim coming through in 2019, we'll clearly look at it. But I think frankly, you should take comfort from the fact that we are 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 3 months ago at Investor Day, we said that we already invested a lot in that area. And as we mentioned today, that actually means that we have tripled in the last 5 years the amount of money and the people, so 1,000 people these days and over €100,000,000 spending. However, what we also see, of course, in the last periods last period is that, of course, the scrutiny of regulators across the banking sector has increased. And so we feel now that it's good to do this acceleration actually of 2 of our programs. We decided on that in December. And that's on top of our regular already budgets, which is over €100,000,000 last year, I said, and even higher this year. Well, we think it basically should be a one off. We don't know, of course, because as said 3 months ago, we did not flag this one. So down the road this year, we might have other provisions, but it's not in the plans, of course, because if that was the case, we would have done it now. But basically, it's on top, and we feel comfortable to do that. But indeed, it was we were not foreseeing that 3 months ago. But to follow-up on that, so you're basically I think you mentioned somewhere that you temporarily take on 400 FTEs. So that you can let them go offer, I don't know, a 2 year period to get things where you want it to be and then you don't need those people anymore. That's the current thinking? Absolutely. And 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. And also in commercial banking, there are a lot of clients involved. So it's indeed programs which are often 2 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 for me, please. 1 on capital and 1 on impairments. On capital, you're above your target Basel IV ratio 3 years early or many more if you include the phase in of the ARPA-four, probably one of the very few banks in Europe in this position. And 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? And then on impairments, what components have 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. Yes. Thanks, Adrian. I'll pick up the first question and Tanja the second. I think we gave a full account of our approach to capital management in November, and 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, so we expect to continue to strongly generate capital. And 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 also we need to reflect on where we are in the economic cycle. So we've clearly had an economic upswing over the last 8 years or so. Looks like it's unwinding a little bit further to your second question. And we just want to remain prudent at this point of the cycle. So 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, but we'll continue to be prudent about how we apply that judgment. Thank you. Okay. And then on your question on impairments, So what is new on IFRS 9 is, of course, Stage 2 provisioning. And actually, there you see very, very little movement based on the economic outlook. And where I refer to was especially the outlook also on the oil price and that has the most significant effect on a small part of our portfolio and especially in Stage 2 Stage 3 files around individual provisions. So the majority is in individual provisioning and that is a part of the increase in Stage 3 models provisions, but it very much has to do with the model update. So, 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. And two questions as well from my side, One on costs, one on capital. On costs, another year with a significant number of nonrecurring items, again, several €100,000,000 relatively consistent since the IPO. So just wondering how comfortable you are that we will finally see also the progress you're making on underlying costs seen more in reported terms? And the second question is, you mentioned the housing market is cooling slightly. So does it mean that you don't see a risk to any macro potential measures by the Dutch Central Bank on the mortgage book? And that's impacting your capital, of course? Thank you. Yes. I think that you identified really one off costs. There are really 2 chunks. So that's restructuring provisions in respect of cost reduction programs and 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 900,000,000 EUR 900,000,000. We also announced further cost reduction programs last year in respect to the Corporate Bank and in particular IT in November. And so I don't expect material further restructuring costs that need to be taken in respect to, for example, staff reductions for those particular programs. I think around compliance related, I mean, 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. And Kees commented on the KYC or client due diligence provision that we took in Q4. Thanks, Clifford. And with respect to housing markets already mentioned by Clifford, the TRIM exercise is done in our it's a large portfolio, €150,000,000,000 So we're through that process actually. And despite what they 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 on the back to the provision and provision guidance. In terms of thinking through sort of IFRS 9 impacts and how those will flow through, how confident are you on your I mean, obviously, you're giving us guidance for sub-twenty 5 to 30 bps again. But if, say, Dutch GDP drops by 10 bps, what's the kind of sensitivity around provisions? And how should we think through that? And just to clarify, you're saying that the IFRS 9 impact in Q4 really related to a select part of the sort of offshore oil book rather than more broadly? And then secondly, just on TRIM impacts into 2019, just to clarify. So are you saying that you've taken upfront the expected TRIM impacts in Q4? Or can you remind us how much in basis points, if you've given a guide, how much headwinds you expect in 2019? And 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. And unfortunately, it's not so simple to say and expect it as a multiplier, for example, on basis point GDP growth. So the impact of IFRS 9 comes through the scenarios that we apply, the amount of assets we have in the different stages, so the transition from one stage to another, which course, takes time. So 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. So there are several elements in there. In our guidance, we include, of course, also the Stage 2 provisioning. We don't expect a significant impact from Stage 2 in 2019. And then you had a question on the offshore outlook, but I wasn't sure exactly what your question was. Sorry, your comments on IFRS 9 impact in Q4, it sounds like those principally relate just to a select few energy exposures rather than to a broader impact on the book? Yes. Yes. So I think I guided at the beginning of the year that we are quite cautious in our outlook on the offshore book. Well, in the lead time, we have reduced the exposure in this book quite considerably, 20% overall exposure. And then especially on the drilling segments where we were, well, most negative, we have reduced it even by 50%. So how we feel also a lot more comfortable on our exposure in this book given that we have exited the weak clients here. Very good. So 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. But 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. So 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. And so I just I think we need to be clear on 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. I mean we have a very large buffer over and above our SREP on Basel III and that reflects Basel IV. So 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 sort of point out that the leverage ratio remains our sort of 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. So I think around dividends, I think we're in a transition period. And 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. So we'd like we want to put that all together and arrive at a judgment as to what our surplus capital is. And we made that judgment in respect of 2018, hence, the further 12% payout ratio. So we remain capital generative. We remain in 2019 well positioned to consider additional distributions for the year end 2019, and we'll finalize that judgment this time next year. Thank you. And just so I could follow-up very quickly. On the leverage impact from the structure change, how long will that how long will it take for that to come into effect? I mean is that something you should be in position by this time next year when you pay the next dividend? Yes. I mean, 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. So we're not calling out a date, that 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 coming back to Basel IV, but I'm still quite a bit unclear on your guidance. When I look at Slide 5 of the deck, you basically say in footnote 2 implementation of mitigations to reduce Basel IV RWA inflation by 1 5th. So that seems to be implying around 100 basis points of mitigation. And at the Investor Day, you were talking about 50 basis points or so. So there's 50 basis points more here. And therefore, what you say on Slide 5, Basel IV should be more than 14%, both mitigation is looking more like 14.5%. So can you please confirm whether my reading is correct, number 1? And number 2, what are these extra mitigation activities that you're thinking about? And 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 on corporate or is it something else? Yes. So 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. So the onefive that you flagged is entirely consistent with what we said in November. So we said we could mitigate approximately 20% of the RWA inflation. And 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. And some of that, you'd expect to see dripping through our formal estimate for Basel IV through that period. And in fact, we booked some of that already in Q4. So 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. So 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. And so our CET1 ratio for Basel III is lower because we booked €5,000,000,000 of TRIM and model reviews. And frankly, that figure was not in consensus. There's no reason why it would be. And 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%. And so that inflation would then decline further in respect to mitigations, but those mitigations will be delivered over time. So I hope that's given some clarity to your questions and happy to pick it up afterwards. Yes, sure. Just to follow-up. So you have always guided implicitly to 100 basis points of mitigations? No, we've guided to 20%. And always, we gave that guidance in November. So since November, we've guided to 20% around Right. Because I thought that in November, you were guiding to a little bit above 13% pre mitigations and 13.5% after mitigations. Yes. I mean, we I think we tended to give rough figures. You can see on Page 5. So we said around 13.5% and above 14%. 20% is around 100 basis points. But we want to convey comfort that we're well placed at Basel IV 4 years ahead of phasing. But we don't want to give, call it we don't want to report specifically on mitigations on a capital regime, which is yet to be Sure, sure. I understand. That's the caution. Okay. Completely, 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. So I mean it is good to know that at the end of the day, you have 50 bps up your sleeve. Yes. I think the 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 and 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, is the pricing environment book probably get a little bit worse from here? And then second, book probably get a little bit worse from here? And then 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. So is it still a priority for you? And how easy or difficult are you finding it to get outside investors for that book? And 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 €1,800,000,000 on a €150,000,000,000 portfolio last year. And 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, and that was the reason why it went down a bit. And also together with it, it's more in the 2030 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. So but we're also looking at, of course, market share should not go down too far. So 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, we have that's done in Q4, so that's no longer in our figures. Okay. Could you quantify the benefit there because it's not mentioned? Clifford? No. It's part of the reason for the decline in RWAs, pretreatment model reviews. It's not a big figure because we have retained we sold a minority in existing funds, but also made a commitment to further funds. So we deconsolidated that business. It's done, as Kees said, it's enclosed. We see some modest RWA benefits of that in the figures. You'll see that in the corporate bank. So going forward, don't expect a further sort of 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? And by that, I mean, is there was there an issue in the origination of your loans in the past and you're going through the cleaning up if you want? Or is it really cyclical due to change in economic environment or sector conditions? And is there any change in your origination policy, which you have in the pipeline or implemented? Thank you. Tanja? Yes. So and 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. So I would not call it general economic circumstances and also diamond sector again is very different from energy and then specifically offshore. Sorry, should I repeat it? I understand. Sorry, sorry, I don't know whether it was you could clearly hear me? I could clearly hear you. Thank you. Okay, thank you. So 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. And more generally, I can say that we follow the developments in the industry. So leverage lending has, for example, our attention. And if we look at the Dutch SME, you mentioned various sectors, very limited sectors. Can you specify, is it health? Is it transportation? Yes. So in the Dutch economy, what we see in very different segments, we see provision. So there's really no line to say. But I can mention that in certain sectors, we see a bit more stress and 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. But you cannot say there is really a trend. There's no common factor to those? No. I think they are very specific. Yes, well, retail, the pressure we have, well, we all read that in the newspapers. There is a structural change in this segment. And the issues we see in the health care sector are again related to other developments. So 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. Yes. Actually, one just to add further. I think on the commercial bank SME, around half of that reflects sort of a portfolio model type review rather than sector specific. So I don't know if that qualifies as structural cyclical, but worth pointing out. And 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. So I think that goes to the sort of secular versus cyclical nature of the question you've asked. Great. Thank you very much. The next question is from Mr. Albert Plueg, ING Bank. Yes, good morning. Thank you for taking my questions. Maybe the first question, I know a lot has been said on Basel IV and Basel III capital range target. But 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? Or and 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? Or should we also take a bit caution there, as you pointed out, that where we are currently in the economic cycle to better understand this and also maybe manage expectations there a bit? And the second part of the question is, again, on the risk costs. Looking at 2018, the diamond sector, I think, Q1, if not mistaken, also clearly now in Q4, quite elevated impairment charges, so quite, I don't know, sector specific. And also on your previous question, the health care was also already flagged quite specific elements in 2018. But together, there were quite a big material amount of the total EUR 655,000,000 charge you've taken in over the whole year 2018. So it feels that you still also have built in some headroom in your guidance being below the 25, 30 basis points across the cycle, the best guidance you can give for 2019. Is that a fair reflection? Or am I missing something? And then maybe my final question is more on P and L on the NII. It was a pretty good quarter in terms of NII. And I was wondering, you maybe share some comments on what's happening on the mortgage market? Because it feels that some of your peers are telling that, let's say, the new underwriting on the new production, the margin has actually started to improve basically from the second half of the fourth quarter onwards. Is that something you see as well? Okay. Should we take them in order? I think now that you had a good handle on how we think about the target capital. So 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 relook at the target capital range under Basel III. And we don't want to keep moving it every quarter and we will reflect on where we're on the economic side. But fundamentally, the Basel III reported range is driven by our view of Basel IV. And I think at some point, we'll move to a more formal Basel IV target, but we think now is not the time to do that. It's still a bit early given the uncertainty around that particular regulation. Yes. So on the guidance of risk cost and you outlined already the provision for 2018, the specific sectors, also the sectors in some of these sectors we reduced our exposure. So indeed, we feel better positioned for 2019, given the reduction measures that we have taken in these segments. But 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. And well, depending on how that will pan out, there will be an impact on even the Dutch economy, and that's very hard to judge how that exactly will pan out. I think with respect to the mortgage market where you referred to, I would say that 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. So a bit of a change compared to, let's say, the 1st 9 months of 2018? Yes. I think we it depends, I think, a bit on the period interest rate period. I don't think it's across the board actually. I noted those remarks. I mean, I would say it depends where you're coming from, I suppose. I mean, we've 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. Thank you. We'll do again. The next question is from Ms. Alicia Chu, Exane. Good morning, everyone. So sorry to just go back on the capital one more time. So it's very clear now that you said that Basel IV is the primary constraint and it now looks like you're at 13.5% pre mitigations, 14% post mitigations. Then looking forward in terms of the potential headwinds, obviously, we only care about the ones related to the Basel IV Equity Tier 1 ratio. So in a lot of ways, the is a bit of a red herring, for example. And it sounds like IFRS 16 shouldn't substantially impact you either. So then the main other regulatory headwind is the NPE regulations. Just wondering what exactly is it that concerns you about this regulation, just simply because your peers haven't really bought out, which makes me think that you think it's potentially 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? So that's my first question. And then a couple of just smaller ones. First of all, you mentioned in your press release that you have a 60 bps AT1 shortfall. What are your plans to fill this? Will you look to see this year? And then finally, on the leverage ratio, do you have any better view as to when CCR2 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? Yes. So on NPE, the nonperforming exposure and the prudential 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. But 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 on the existing stock of nonperforming exposures. Well, our nonperforming exposure is quite decent with a 2.2% impaired ratio, but still we feel that we should prepare for that. So that's why we have mentioned this. So what exactly could be the issue? Is it that you're not is it that they could increase the risk weights on your NPEs? So on the NPEs, we take a provision. And then they say if your nonperforming exposure is for a certain period nonperforming, then you need to provision regardless of your position. And for uncollateralized exposure, it's 100% after 2 years. And for collateralized exposure, it steps up over time and it's 100% after 7 years, if I'm correct. So that means that regardless of your collateral position, if you have exposure that is nonperforming for quite a bit of time, restructuring taking time, then that has an impact on, yes, provisioning and you need to take it as a potential provision. So your provisioning guidance for 2019 of less than the through the cycle level of 25 bps. Does that include some impact from NPE guidance? Or should we consider that on top off? Yes. So it's prudential. So it's not the same as I don't have to make it complex IFRS 9 provision. So it will probably flow through the way we calculate our capital ratios, so Pillar 2. And 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 7 years because that's the horizon in the guidance that was issued in 2018 on nonperforming exposure. But that will impact all measures of all capital ratios, leverage ratio, Basel IV, Basel III. So I think you put your finger on something there, Alicia. In terms of the AT1 shortfall, that is a function of the Q and A guidance we got 18 months ago and will be resolved when we execute the legal merger. Okay, got it. And your third question relates to leverage and SACAR is, well, at the moment, still planned for 2021. We hope earlier, but that's with the date. Okay. So there still is a debate of some sort? Not yet. No. Okay. Brussels. Okay. Thank you. Your next question is from Benoit Petrarque, Kepler Cheuvreux. Go ahead, sir. Yes. Good morning. To come back on the nonperforming exposure, for sure, you book extremely well. You know how much is still nonperforming after 2 years. So and you probably know as well how much impact this could have on your book over time. So could you provide a little 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%. And then on the re side, so coming back to the reduction of non core and cyclical clients you were aiming for. So how much have you executed so far in 2018, especially looking at the oil and gas book and also offshore books? How much have you implemented? And just more generally, it looks like you have been increasing your NPL ratio on the corporate exposure over several quarters now. So it seems that you're 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 uptick small uptick in 2019? Thank you. Yes. So maybe first on the nonperforming exposure guidance. So the guidance is for new exposure that becomes nonperforming as of the first, I think, well, some date in, I think, 1st March in 2018. And of course, well, it comes in after 2 years or gradually in a period of 7 years. So we will manage towards and there is no immediate impact there. And we will take it into considerations in our restructuring activities. Then the other piece is the phase in for the stocks that we have currently, and that is something we are working upon. I cannot provide you guidance. Of course, we have a number on 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. So yes, 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 20 19 as guidance for provisioning. It's a multiyear activity that we embark upon. With respect to the offshore market, yes, I said we have reduced quite a bit. Our for example, our offshore drilling portfolio where we have reduced most has reduced by EUR 500,000,000 in during 2018. And that's a relation of that's a combination of sale of assets, repayments and some write offs. So that is a significant reduction. But also in other segments, we have made some smaller reductions. On this point, how much losses have you been did you take on this kind of cleanup in 2018? Do you have a figure? No, I don't have that. That's at hand. And also what you have seen 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. So that's on offshore. And then on the NPL coverage ratio, yes, 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 Marcia Rubin, Credit Suisse. Go ahead, sir. Yes. Good morning. Thank you for taking my questions. Sorry to keep hammering on the loan provisions there. Just on the diamond sector for 2019, is it 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 as on the management in Private Banking. You've seen an outflow of €3,200,000,000 Is there a particular driver? Or is that just seasonality? And then 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. Yes. So on the diamond sector, we follow that sector very closely. We know all individual clients. And well, the provision that we have taken, that is our yes, that's based on all the information that we have today. Well, it is a sector with risk, so we continue to watch it closely. And yes, so 2019 will be a year that we pay a lot of attention to this segment again. And it's very hard for me to put a specific number on this portfolio. But I think the good thing is that we are reducing exposure quite a bit and therefore also our downside risk. Yes. So I'll pick up the other two questions. So on NII, you're right, in group functions, that was positive €40,000,000 About that amount was, I'd call it, a one off catch up that we don't expect to recur. But if you look at the figures quarterly, they bounce around small negative, small positive. So I think the full guidance is roughly 0 there, but there's a big swing between Q3 and Q4. I think in terms of Private Banking, we saw EUR 3,000,000,000. They were fairly low margin custody type assets in the 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 is 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. And we've seen some migration from discretionary to advisory to self execution in that portfolio during that period. Markets have come back again. But I think volatility combined with secular trends means we see 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 at 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, Tania, unfortunately, on the coverage ratio. When we look at your corporate NPL book, the coverage ratio on that in the sort of mid-30s level doesn't seem very high from the outside. I guess, perhaps 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. I guess, that is probably going to be a source of impairments going forward. So just trying to understand how much comfort you might have there. The second question is on dividends. And I think you guys have been very clear in terms of the various moving parts, but consensus does have a mid-70s percent payout ratio here. So 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 payout. So I was wondering if apart from regulatory development, is there something else that you would also look at and 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, yes, we are comfortable with the coverage ratio that we have today indeed in the mid around the mid-30s. And yes, it's not that we correct for collateral or whatsoever. That is an integral part of our analysis. And yes, and valuations of collateral, we take, of course, into consideration. So 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 said 50 plus additional. And with respect to additional, indeed, commercial, depending on the growth and or decline in portfolios and indeed a leverage ratio, but also MPA and other developments in the area, trim, add ons and the likes. So yes, it's a mixture. And 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? And 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 they could be of? And then secondly, just coming back to the CIB restructuring. I mean, we've seen a big drop in both loan volumes and risk weighted assets, and I think you highlighted that some of this is seasonal. But if we look at the revenues, at least NII, it's holding up very well. So how should we think about sort of where you are in the process of exiting the exposures you want to there? Should we still be looking at this EUR 34,000,000,000 RWA in 2020? And 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. So I'll pick up those. I think on legal merger, we don't it's a technical process, clues in the name, legal. So there's lawyers' fees, but no material I wouldn't it's not material to the group. I think the cost savings and simplification, again, is not material. But it's we produced 2 annual reports, for example, one for the group and one for the bank. So we'll only need to do one going forward, that sort of thing. So 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. So we called out the trading commodity finance business where we've seen that business make good progress. That business is by definition shorter term. It's also some of the 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. So that will have a limited impact on income. I would summarize and Kees said earlier, we're making good progress on the corporate bank. The RWAs, €35,000,000,000 even including TRIM and model reviews, is materially down on €39,000,000,000 in Q1 last year. We retain the targets we set out both RWAs but also NII. We gave some indications of the impact on revenue and costs as well. So we're very much on track. But don't expect further material RWA declines from here. What you'd expect is more of a kind 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. So 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. All of my questions have already been answered. Sorry, I have some noise here and the last thing, maybe that has been answered. Could you give us an update on where you are exactly in reducing the diamonds portfolio now after this quarter? And when will this be finished? And how much will that be? Then on the CCD measures, do you believe that, that will have any commercial consequences? And could you give us an idea on what those will be? And then finally, a small update on the SME derivatives case. Do you expect that to close in Q1 or the first half of this year? Okay. Well, first, your question on the diamond segment. And I think you are aware that we have closed our office in Dubai, and that's where we are reducing our portfolio. This is a multiyear process. We're making significant process, but I do expect this will take the coming 2 years at least to achieve the reductions that we focused upon. And if I may follow-up on that, the impairments, too, there is also a possibility that these closings lead to additional impairments? Yes. Of course, we have I mentioned that before, we have matured this portfolio very closely. Exclude that, that will happen what 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. Asia will be in the world in South America. Okay. Thank you very much. The next question is from Nick Davey, Redburn from Kepler Cheuvreux. Good morning, everyone. Two questions, please. The first one on the dividend, and I know you said a lot about this already. But short question, my question is, is why not pay why not have announced some sort of progression in the ordinary? I understand we talked a lot about Basel III, Basel IV, but and the payout ratio going up in all of this. But I suppose when all is said and done, we're at a stable ordinary for the full year. And in the year, you become incrementally more positive about Basel III mitigation, about the Basel IV, about leverage. Your underlying earnings power has improved. So was there some discussion at the board level about this progressing dividend in absolute term? And could you just give us any sense as to why not have shifted it on at all and some of your peers in a less luxurious position of capital is showing some of the quarters, quarterly dividend progression? And the second question, please, I think you mentioned funding spreads going out and we expect our partners to pay. So my question is, can you give us more detail on that that sends the market where you're beginning to see re pricing or that vision that you're putting through higher in group funding costs and you're expecting to compensate because of the sense of where it's located without the EMEA loan book repricing? Thank you. Thanks very much for the questions. Two 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 fee. Euros 2,800,000,000 included a was the sale of Private Bank Asia, and it included actually negative impairment, EUR 63,000,000 instead of well, instead of any other normal figure. So actually, the last year, in a way, with 50% and 1 for 5% was actually high compared to what the underlying situation was. The issue increased to 62%. KPIs gave now a new percentage for this year. And as said, we will look into it later this year. And everything you said with respect to developments, I appreciate the investment we also see. Yes. I think around funding spreads, I wouldn't highlight any business in particular, but we have a quite mechanical approach to funds transfer pricing. So when the spreads go up in terms of the our own funding costs that gets passed through the transfer pricing in 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. And just to get a sense then, so do you think some transfer pricing based on the experience on that from both? Yes, it's a bit of both. And so we have a we're trying to weight those 2. We also take if you want to have frequently. We don't want to do it all the time because we're in the market with clients. But when you see material moves, both up or down, we think it's important to pass that on to the benchmarks that our front office staff are dealing with. And then it's their judgment to see what they can get in 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. And then and the fact that you said you don't do the solar farms, I hope that's been a sort of reset in Q4. Well, I think it's clear that Sprint has gone up in the last few months. So we Yes, that's the NTP response. Yes, yes. But we don't do it mechanically to clients. That's the job of our front up teams is to sort of trade through that. But over time, we expect them to deliver the hurdle rates, at least the hurdle rates. Okay, very interesting. Thank you. Next question is from Mr. Omar Fall, Barclays. Go ahead, sir. Hi there. Just two questions, please. So firstly, just coming back to the NPE guidance for a potential impact from the NPE update from the DSSM. 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 7 years. I'm not sure how updated it is for for the latest guidance that given the average bank includes the Southern European banks with significantly greater stock of NPLs than you. I struggle to understand how this is a meaningful impact at less of those models at an extremely generous level, which is awesome, I guess. And so what is the value of lender that makes you more susceptible to this regulation relative to anyone else? The volatility around the capital ratio, but it'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 5,000,000,000 of RWAs that you've guided to? Thank you. Yes. So 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. Well, that's not what we believe is the case, but we want to make sure that we are well prepared. And 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, that will become clear and that we can provide some more insights here. And as I 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-fifty basis points over several years, why is that even part of the debate? Yes. I think we haven't given you've driven all sorts of implications regarding NPE. We're flagging NPE. I think we are I mean, 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 have to ask other banks, why they're being less open about those regulatory headwinds and maybe it's relate they're not in this discussion. That's lower capital ratios and the prospect of material dividend increases and perhaps more academic. So we do see headwinds. We've discussed those. If they were immaterial, we wouldn't have flagged it in our few reports. And 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. But it's possible. The economy is perhaps weaker than we all expected 6 months ago. And so this is the background that you can call it prudence, but we think 62% reflects a material uplift in payout for the reasons that Kees set out. Got it. Yes. So was there a second part to the question? I think we've probably dealt with it. All right. Thank you. Thanks. Your next question is from Mr. Ebrahim Saeed, 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. So when you talk about the 60 basis point shortfall, is that on a pro form a basis? I'm just trying to think about what quantum you're talking about because Yes. To your current RWAs, I guess, like a $630,000,000 shortfall. Are you saying that if you merge them, that requirement will go down? Have I understood that correctly? Yes. I mean, we set out the when we did our inaugural AT1 issue that substantially dealt with the shortfall. And then the Q and A meant that we couldn't include the element surplus associated with the AT1 issue, hence the 60 basis points. So the legal merger substantially addresses that. Okay. So the floor is just the merger itself will close the gap. So it's not incremental issuance? Yes. 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. Yes. Hi, guys. Just the 2 quick follow ups, please. On the dividend accrual for 2019, so given your target is 50% plus a special dividend, do we model the accrual at 50 percent in 2019? Or do we assume the actual 62% paid out in 2018? That's the number one follow-up. And the number 2 follow-up, if you can just to cut through all this Basel IV and mitigation noise, can you just very simply tell us what is the input versus output floor impact of Basel IV inflation? So of the 400 to 500 basis points impact before mitigations, Could you tell us what percent is input floors and therefore phased in by 2027? Thank you. To your first question, we will accrue 62% this year. Input output floor, Clifford? Yes. 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. So we expect a more gradual phased in approach to Basel IV through the phase in period. We've not disclosed the delta between those 2. The rules are not entirely clear. I think it's quite possible that TRIM impacts the RWA input floors. So we think it's premature to give that sort of guidance. Okay. 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 2 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 these donker, if possible. And there is one question coming up from Okay. Let's have that one, please. Jose Coe, Santander. Yes. Yes. Hi, good morning. Very quickly, I think we didn't touch upon this, thinking about the stake that the NLFI still was at 56% stake. I just wanted to hear you say this, I guess. Is there any sort of in your capital targets, is there any sort of guidance from the NLFI of how much capital you have to have? And then 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? That's indeed a new question, so 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, so some time has gone between now and then. And 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. But I don't I can't guide because I don't know, and it's up to the ministry. And just to be clear, so there is no sort of discussion with the NLFI regarding your capital targets? No. No. Thank you. Thank you very much. Thank you all very much for all the questions. Operator, we're also thanking you for handling that. I would thank you also and say again that this concludes our Q4 results update. And goodbye, see you on a roadshow or next quarter. Thank you very much.