Recorded. The conference is now being recorded.
To the ABN AMRO Quarter One 2018 analyst presentation. At this moment, all participants are in listen-only mode. Following the presentation, there will be a question and answer session. I would now like to hand the call over to the chairman, Mr. Kees van Dijkhuizen, CEO. Go ahead, please, sir.
Thank you very much, operator. Good morning and welcome to the analyst and investor call for ABN AMRO's first quarter results. I'm joined here by Clifford Abrahams, our CFO, and Tanja Cuppen, our CRO. Turning to slide two, I will briefly highlight the main points. I'm pleased with our financial results over the first quarter with a net profit of EUR 595 million. NII remains strong, reflecting growth in corporate and commercial banking lending at stable margins. Our capital position is strong, and we are well prepared for Basel IV. I'm disappointed with impairments this quarter. These were booked predominantly in specific international sectors. Our domestic business continues to perform strongly. We are progressing well on our strategic agenda. Our new Chief Innovation and Technology Officer, Christian Bornfeld, joined in March and is making a good start.
I'm pleased with cost savings coming through, and we are on track to achieve our 2020 financial targets. Our IT transformation is progressing well. I will elaborate on this later. I will also detail our transformation at private banking. We recognize that CIB is facing both cyclical and long-term challenges. All our businesses need to deliver adequate returns, and we are taking action here. Going forward, CIB will have more focus from a geographical, client, and product point of view. Related to this, we booked a restructuring provision for our markets division and are closing our Dubai office, for example. We have more work to do and will update you at Q2. Now I want to discuss the progress we have made on our cost-saving programs. On slide three. At the end of 2016, we announced our cost savings program with a 2020 horizon.
Working to a flat cost base from 2015 to 2020, we are lowering operational costs while at the same time investing in digitalization, innovation, and growth initiatives. One and a half years down the line, we have delivered over 50% of targeted cost savings of EUR 900 million. If I include Q1, total savings delivered amount to EUR 512 million since year-end 2015. A broad range of activities are contributing to this. We have lowered our IT run cost, and there is more to come. Head office functions have been scaled back as we simplify our operations, and the agile way of working is now implemented throughout the organization. FTEs are currently 10% below year-end 2015 levels, or 9% if we exclude the sale of PB Asia, out of our total target of a 13% reduction.
As clients increasingly use our digital channels, we closed more than 30% of our branches over the last nine quarters. Looking ahead, the remaining cost reductions will mainly come from lower IT run costs, further FTE reductions, and reaching full benefit of the agile way of working. We have good visibility on how we will accomplish this. I am confident we will reach our target 56-58 by 2020. Turning to the next slide, I will discuss where we are heading with our IT infrastructure. Following Christian's arrival, I am confident we are delivering transformation we have set out to achieve by 2020, and I am pleased with our progress so far. We have more to do. We have increased efficiency through our IT transformation, adopting the agile way of working, rationalizing applications, and cloud adoption.
Future focus will be on cost discipline and deploying the next round of efficiency levers such as artificial intelligence and automation. The agile way of working will be extended further. We will continue to modernize our existing core banking system and see no benefit in changing to another system. Digitalization has allowed us to enhance client experience. We have launched a number of award-winning apps, our main mobile banking app, as well as Tikkie and Grip. Overall, 59% of all retail products and services are now handled online, up from 35% year-end 2015. We will increase our innovation efforts, focusing on getting our services and expertise immediately at hand the moment our clients need them. On the next slide, I will highlight some recent programs on digital innovation. We are ready for open banking and PSD2. The Dutch PSD2 law is expected sometime this summer.
We are already gaining experience with our developer portal, which hosts a number of APIs. Tikkie, our peer-to-peer payment product, continues to grow rapidly and currently has now almost 3 million users. We reached record use during the last week of April with an average of one payment request per second. There is also a lot of interest from our business clients to integrate Tikkie in their own processes. Business clients' onboarding is accelerating, and some recent examples are KLM and SPAR University Supermarkets. Moving to Grip, this is our tool for clients to analyze personal spending, which we have co-developed with a fintech. With 450,000 users, we have the largest user base in the Netherlands. We have plans to expand the functionality in part related to PSD2, also to add targeted propositions. Turning to the transformation that is taking place in private banking on the next slide.
In recent years, we moved from a dispersed footprint to a focused core with strong local brands in Northwest Europe. With EUR 200 billion of assets under management, we have significant scale. However, outside our efficient domestic franchise, we need to improve to deliver acceptable returns in each country. We are focused now on delivering operational transformation, which will allow us to grow this franchise further profitably, and which may include build on acquisitions. So far, we have moved to functional management and are progressing towards common client segmentation, product offering, and IT platform. At the same time, we are investing in automating processes and a new client portal. Overall, we can achieve a substantial improvement to the cost-income ratio of the private bank, which already embedded in our cost-income ratio target for 2020.
The cost-income already declined to 72% compared to 80% for Q1 2017, and profit is up 23%. The transformation will strengthen our attractive position for clients using our open architecture investment platform. I want to highlight some recent sustainability activities on slide seven. In recent years, our sustainability efforts have significantly broadened. Most of our time is spent on delivering on our clients' sustainability goals. We are building a franchise around this, and we want to become the go bank for sustainability. I'm proud that we were awarded the Green Bond Lead Manager of the Year for our consistent commitment to the green bond market. We advise corporates as well as banks on how to structure green bonds and arrange the issue of these bonds. We also issued our own third green bond recently. Another area on which we're gaining traction is circularity.
We help our clients to make a step change towards a circular business model. Our ambition is to finance EUR 1 billion circular corporate assets by 2020. I will now hand over to Clifford to go into more detail in our Q1 results.
Thank you. As Kees mentioned, we had a solid first quarter with net profit of EUR 595 million. Operating income was up 4%, driven by strong NII and good private equity results, while operating expenses were flat. The impact of incidentals is limited this quarter, with similar amounts as for Q1 last year. Impairments are up, reflecting challenges in a number of specific sectors. Tanja will discuss these in more detail later. I will describe individual line items on the next slides, but first I'll show the trend in our client lending on slide nine. The left-hand chart shows the development of our mortgage loan book. Mortgage volumes in Q1 were flat, with new production compensating for increasing repayments. House prices continue to rise. However, transaction volumes are coming down. We saw competition increase somewhat, mainly from other banks.
For Q2, we expect a modest drop in our market share. All this leads us to expect a flat mortgage loan book going forward as we look to maintain our pricing discipline. At commercial banking, I am pleased with our broad-based lending growth at good margins during Q1. We expect further growth given the strength of the Dutch economy. Loans in corporate banking ticked up, reflecting solid underlying growth, together with a reclassification of EUR 1.8 billion from professional lending, as well as some short-term positions in financial institutions which unwound in April. Corporate banking is growing in areas where we can achieve profitable growth, while we are scaling back in other activities. We are growing in neighboring countries by leveraging our infrastructure in Amsterdam. We started this initiative in 2017 and currently have around EUR 1 billion of outstanding loans in near Netherlands, Europe.
Turning now to net interest income on slide 10. Our reported net interest income for the quarter was up EUR 75 million versus the first quarter last year. Due to an accounting change, fees related to mortgage term renewals will now be amortized over a short time frame. This resulted in a one-off impact of EUR 25 million this quarter related to 2017. In addition, this leads to a recurring uplift to net interest income of around EUR 30 million each quarter over the next few years, which will decrease thereafter. Underlying growth in net interest income reflects a number of developments. We saw volume growth in corporate loans, both at commercial banking and corporate banking at good margins. Further lowering of deposit rates and the bonus rate on retail savings allowed us to protect margins on deposits.
As you know, we manage our interest rate sensitivity, limiting the impact on net interest income of rising or falling rates. Nonetheless, as our deposit rates are within a whisker of being zero across the board, margin pressure on deposits will build up as interest rates stay low. For our loan book, the outlook is broadly stable margins with modest volume growth on the corporate side. Together with margin pressure on deposits, we expect NII to remain flat from here, excluding the one-off impact of EUR 25 million this quarter. Moving now to fee income on the next slide. This quarter is a fair reflection of our current underlying fee income run rate, given that there were no incidental items. The high fee income in Q4 last year was due to a reclassification from NII to fees in commercial banking.
We see fee income has stabilized now following the divestment of Private Banking Asia and reduction in payment package fees within retail and SMEs last year. Looking ahead, we aim to gradually increase fee income from here. We recently announced increases for a number of package fees. We are also planning fee increases for a number of other products during the remainder of the year. Other income was above our general guidance, as this quarter we had good private equity results as well as a revaluation of an equity stake. Now moving to costs. Our operating expenses are moving down. As you can see on the left-hand chart on slide 12, personnel expenses are trending down, reflecting steady FTE reductions. We took a restructuring provision this quarter for further reducing our support and control activities, and also for markets.
The right-hand chart shows how we are progressing in relation to our cost guidance. You see, we delivered EUR 76 million of savings over the past year, mainly from lower IT costs and staff reductions. We are also driving down external staff levels, and we see these costs are coming down too. As Kees mentioned, cost savings allow us to mitigate higher levies and inflation, but also to invest in digitization, leading to a lower cost-income ratio going forward. I will now hand over to Tanja for an update on impairments.
Thank you, Clifford. Our Q1 impairments were high at EUR 208 million. First, let me say that the high level is not related to IFRS 9, but relates to several clients facing difficulty. Our domestic commercial banking book faces generally positive economic conditions. However, we provisioned EUR 44 million, mainly in healthcare. Within the former ECT sectors, we took EUR 97 million of impairments, mainly related to the offshore sector, both in transportation and energy. 2018 looks to become a transition year for shipping. For some segments, for example, offshore, new contracts are urgently needed, and we may need a second round of restructuring for some clients. It takes time before the higher oil price will feed through into new contracts. On the other hand, we see other segments improving. For example, the dry bulk and container sector. During Q1, we were able to book releases here.
Both these developments will be relevant this year. In addition, EUR 41 million of the provisions was taken for a handful of clients in the diamonds and jewellery business, where our loan book has been declining over a number of years. The challenging market circumstances in the sectors I mentioned will likely require some additional impairments in the coming quarters. Nonetheless, timing of impairments was largely coincidental. For the full year, we expect impairments below the through-the-cycle cost of risk range of 25 to 30 basis points. I will now hand back to Clifford.
As you can see on slide 14, the CET ratio amounted to 17.5% at Q1. As we indicated, IFRS 9 adoption led to a small impact of 12 basis points. Retained earnings net of 50% payout added 0.3% to the CET1 ratio. During Q1, this was offset by higher RWAs, an increase of EUR 1.8 billion, reflecting principally business growth in commercial banking and corporate banking, both of around EUR 0.7 billion each. The positive revaluation of our equity stake in Equens led to a higher RWAs in group functions. Furthermore, credit deterioration in specific sectors also led to higher RWAs. We see some quarter-on-quarter volatility in RWAs, but are looking to deliver a moderate growth in RWAs from volume growth over time. Our leverage ratio is stable at 4%.
As you're aware, there is new regulation in the pipeline, which will fix the excessive exposure measure attributed to the clearing business. This will improve the leverage ratio by between 50 to 60 basis points. However, we expect it may still take two years before legal adoption. Finally, the MREL framework is now based on RWAs. We are currently at 27.8% of RWAs, and we aim to be above 29.3% by year-end 2019. I'd like to say a few words on capital management on slide 15. At the top, I've set out the key points of the capital update we gave you last quarter, showing our capital target, dividend payout policy, and our approach to additional distributions. We are focused on both Basel III, our current reporting basis, as well as preparing for the transition to Basel IV. Basel III remains our primary framework.
We expect moderate growth in risk-weighted assets on a Basel III basis from underlying business growth. However, in any quarter, RWAs may be affected by a number of regulatory and other factors, for example, TRIM, credit, model developments. These may lead to volatility and risk weightings in the coming quarters. Regarding Basel IV, we are awaiting important regulatory decisions over the coming years as we move to implementation. In the meantime, we are working through the consequences and determining where we need to update our business. We will update you later in the year on our plans here. I will now hand back to Kees.
Thank you, Clifford. The slide 16 sets out our current targets. Over the first quarter of 2018, our ROE was 11.5%, which is within our target range of 10%-13%. Our cost-income ratio at just below 58% this quarter is pleasing. However, this was a strong income quarter, we need to continue to work hard to get the cost-income structurally within our target range. As you are aware, we will be focusing on delivering cost savings and moderate business growth to achieve this target. Our quarter one ratio is strong at 17.5%. We intend to pay out 50% of sustainable profit over 2018, and we'll consider additional distributions if we are within or above our target capital range of 17.5%-18.5%, so combined at least 50%. Before I open up the call for questions, I will briefly summarize. I'm pleased with our results for the quarter.
Our strategic initiatives are on track, leading to better service to our clients at lower cost. The Dutch economy continues to perform well, we see good demand for new corporate loans across all sectors. Our margins are holding up well. Impairments were disappointing this quarter, I do expect we'll end up below the through-the-cycle level for the year. Our capital is strong at 17.5%, now including the effects of IFRS 9. We are progressing well on our strategic agenda, and our IT transformation is taking shape. We're improving our existing franchises, such as private banking, and are building new franchises, for example, in the area of sustainability. We are taking steps to focus CIB, we'll update you on this at the half year. All in all, we're on track to achieve our 2020 financial targets.
With that, I would like to ask the operator to open the call for questions.
Thank you, sir. Ladies and gentlemen, we're starting the question and answer session now. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. May I please remind everyone to limit the number of questions to three. Our first question is from Mr. Pawel Zytnik of Goldman Sachs. Go ahead, your line is open.
Good morning. Thank you for the presentation. The first question I wanted to ask you is just a follow-up on your impairment guidance below 25-30 basis points. Can you give us any sensitivity around what would need to happen for you to be at this level currently? Any sensitivities around developments in shipping segment and so on. Also, if you can maybe help us understand slightly elevated costs in Dutch SMEs. What are your expectations there going forward? The second question is on cost. In the past you always reiterated your EUR 5.2 billion guidance for 2020, but you were reluctant to give us milestones of how to get there, only mentioning that you would expect to see higher expenses in 2018 and 2019.
I think now, you said during your opening remarks that you have much better visibility on how you get to the target and also that expenses are moving down. Should we understand that you are past the peaking cost and we should see a steady decline going forward? Thank you.
Okay, thank you for your questions. Let me answer your questions with respect to impairments. Your first question was related to the sensitivity of impairment, especially around the shipping sector, and our guidance of cost below the through the cycle of 25 to 30 basis points. There's actually not a lot more I can say in this area. As you are aware, the provisioning and impairments in these CIB segments are quite lumpy, and we see certain segments definitely improving. Other segments continue to be under pressure. We expect that there will be some uncertainty still for the remainder of the year. With respect to the Dutch markets, we see the improvement and the strong economy in the Dutch market feeding through into impairment levels.
Especially the healthcare sector is under pressure, both at the cure and care segment of the healthcare sector, and that is related to the changes in regulations that we've seen over the years. Some clients have been less successful in absorbing these changes.
Thank you, Tanja. With respect to cost, I think I mentioned in the past indeed several times that it's 5.2 in 2015 and 5.2 in 2020, and that we would not increase in 2016, 2017, 2018, 2019, and then in the final year, get to the 5.2. We've always been cautious with guiding in the intermediate years, like today, because still some restructuring costs, there's always a possibility of some extra costs. You are right that we are progressing well during the first quarter. As we have guided also, we think we have seen most of the restructurings, the largest restructurings in the past. If you look at the 2017 cost figure, which was clearly higher than 5.2, we expect this year to be clearly lower.
Having said that, a clear guidance that we will be already at 5.2 is not something we want to guide at this moment in time.
Our next question is from Miss Sophie Peterzens, JP Morgan. Go ahead, your line is open.
Yeah. Hi, here is Sophie Peterzens from JP Morgan. Just going back to asset quality. The provisions we saw were quite lumpy and in a number of different industries. I'm just wondering, what are you doing differently compared to peers, given that most of the European banks that we have seen reporting so far have actually been seeing beats on the provisioning line. Are you more prudent in your provisioning, or what do you think is the difference between ABN and your peers? That would be my first question. The second question is that you mentioned, in the beginning of the call, that you would potentially consider bolt-on acquisitions in the private banking space. How should we think about this in terms of which markets, what size, and also timing? My third question would be around RWAs.
You mentioned that you could be impacted by TRIM and other regulatory measures in coming quarters. Do you have any visibility on potential impact from TRIM or other regulatory changes in the coming quarters that we should be aware of? If you also could give an update on TRIM. Thank you.
Go ahead, Tanja.
Okay, thank you. First, your question with respect to asset quality and how we compare to other banks. Of course, that's always hard to comment on other banks, as we don't have detailed insight into their portfolios. Of course, we have a prudent way of provisioning. What we see in this quarter especially, is that certain clients in the offshore segment have run into problems, and that is related to the fact that, especially in this segment, market circumstances have not recovered regardless of the fact that the oil price has increased. It's a limited number of clients, but lumpy provisioning. I think the diamond segment is very specific for ABN AMRO. That about asset quality. With respect to the impact of TRIM, so far we have seen the reviews of our mortgage models and our market risk models.
For our market risk models, we actually have received the final results, and there was no material impact on RWA. For mortgages, that's still in process. We expect final feedback later this year with also no indication that there would be a material RWA impact at this point in time. Later this year, ECB will start its review on the low default portfolios. That will be in Q4. We don't expect any impact of that in 2018, but we expect to receive the feedback in 2019.
With respect to your question on bolt-on acquisitions private banking. Market-wise, as said in the past, Northwest Europe, France, Germany, Belgium. Size, yeah, bolt-on what we did in Germany the last couple of years ago, two times around EUR 5 billion to EUR 10 billion, I think it was. Timing, since IPO, we have stated this. We're open for that already for some time.
Thank you.
Our next question is Mr. Farquhar Murray, Autonomous. Go ahead, your line is open.
Morning, gentlemen and lady. Just two questions, if I may. Firstly, on the presentation, you mentioned giving an update on CIB in the second quarter. I just wondered if you could run through the nature of the review exercises you're undertaking as part of that, and perhaps what options and scenarios you might be exploring, and also ideally, the criteria you'll be using to drive the decisions there. Secondly, just on a point of detail. You mentioned compensating lower interest mismatch results in the group functions. Could you just maybe explain that a little bit more and maybe the offsetting magnitude? Finally, is that going to be recurring or is it essentially one-off? Thanks.
Clifford.
Yeah, Farquhar. On corporate banking, I think we talked about focus on this call. Focus around geography, markets, and products. I think now is a good time to be thinking that through, not least because of Basel IV that's come in. I mean, as Kees mentioned, a number of those businesses are experiencing cyclical developments. We're not calling out sort of knee-jerk response to a cycle. It's more a timely review of that business as it's developed, reflecting, if you like, how that business has developed over time, where we see opportunities for profitable growth, and not least, the impact of Basel IV. We'll look forward to updating later in the year. I'd caution about a sort of a once-and-done approach, because Basel IV in particular, will take a number of years to implement.
We think it's appropriate that we update on a big part of our business in the near future, hence Q2. I think around interest mismatch, that was sort of EUR low tens of millions. I think we called out in group functions the effect of the revaluation of an equity holding, that was a material amount. That positive effect is mitigated by this interest mismatch, hence a more muted overall impact. I think in terms of interest mismatch, effectively, that's the income related to the term or duration that we take on our capital of EUR 20 billion. It reflects interest rates, but also how long that duration is. What we've done is, clearly interest rates have come down over the last few years, that's reduced it. We've also reduced the duration of our equity.
We've shortened our exposure to interest rates in anticipation, frankly, of an environment where interest rates are more likely to go up and down. We see that as a sort of permanent, if you like, or sustainable tactical position that we've taken, which we think is wise in the current interest rate environment.
Okay, great. Thanks much.
The next question is from Mr. Benoit Petrac, Kepler Cheuvreux. Go ahead, your line is open.
Yes, good morning. It is Benoit Petrac from Kepler Cheuvreux. Couple of questions on my side. The first one will be on the risk cost, which has been a drag on the capital generation in Q1. Could you talk a bit more specifically in the coming quarters? If you imply the 25 basis points loan of the risk cost guidance implies roughly EUR 650 million loan loss provision on a full year basis. Is that a figure you have in mind when you guide us towards just below the through-the-cycle average? Or could you guide a bit more specific, like well below, for example, the average or could be a bit more specific because that could imply a relatively high figure. Also, if I look at the stage 3 loans, I think you have EUR 6.8 billion.
If you look on the corporate side, you have actually an improvement of the quality. Can we conclude that Q1 was a bit of a cleanup quarter, in a way, because there's no new, let's say, non-performing exposure in the pipe? The final question will be on the NII. You said that you expect flat NII. Can we conclude that you kind of offset the impact of low rates with some loan growth? When do you expect actually the impact of low interest rates to kind of become less relevant and NII kind of loan growth being more visible on NII? Thank you.
Okay. Thank you for your questions. On the risk cost, the guidance is that we expect it to be below the 25-30 basis points range. We cannot provide any further guidance on this. I cannot be more specific. With your comment on the existing non-performing loan portfolio in the corporate segment, indeed, you're right that we have seen a very limited inflow in our restructuring department, and that indeed existing clients were not able to recover or have seen unsuccessful restructurings. We have seen some limited inflow in the area of commercial banking with respect to healthcare. I've mentioned that as well. We've seen some provisioning there, but also some new inflow from the business.
From your perspective, it's relatively a kind of cleanup quarter, if I understand correctly.
Well-
It's not linked to the fundamental development of the macro and what you see around. Which could explain the difference we see with peers.
It's related to specific developments in these specific segments and then also with specific clients.
NII, Clifford.
Benoit, your summary was pretty good. We've seen a pick up year-on-year 2017 to 2018, that principally relates to the accounting change, but also good growth in corporate and commercial banking. We expect, if you like, for this year, if you annualize Q1, you strip out that incidental, that's broadly flattish from here. As you say, we're looking for growth in lending, to mitigate call it margin compression in deposits. That's based on a couple of assumptions that may prove not to be the case, picking up your point. We're assuming modest lending growth in corporate and commercial. Clearly if we underperform or we outperform, that will affect the flattish outlook I indicated. I think around deposit margins, that we expect short-term rates to pick up towards the end of next year.
That underpins that sort of a gentle reduction in margins on deposits. Clearly, if rates stay lower for longer, that would be a negative. If rates picked up, that would be helpful. We have reached pretty much the end of our ability to lower rates to customers. We've seen the benefit of that in Q1 and maybe the next few quarters. We don't see any further step change there. Hopefully that gives you some color on how we're thinking about NII going forward.
Yeah. Thank you very much.
The next question is from Mr. Benjamin Goy, Deutsche Bank. Go ahead, your line is open.
Yes. Hi, good morning. Two questions, please. First, coming back on asset quality and loan losses. Can you give a bit more color, from which time basically these files originate from? Is it pre-2015, so before the commodity prices came down, or are also more recent exposures in there, let's say 2016, 2017, when you started to regrow or to grow your book again? Then secondly, on private banking. First, on inflows were quite significant this quarter. How sustainable are these, do you think? Also on net interest income in private banking, quite an increase quarter-on-quarter, off an underlying basis. How sustainable is that in your view, that run rate? Thank you.
Okay. On your first question on asset quality and when these files were originated. Well, these are all long-term clients. I don't have any detailed information when exactly individual exposures were originated. Given the fact that I've not been part of this history, so I don't have all the details there, but we would be happy to come back on that with a bit more detail. What I can say is that in general, we finance these clients over a longer period and through the cycle. These are long-term clients and not recently acquired clients.
Yeah. I'll comment on private banking. As we said, we're pleased with our performance in private banking. We have seen a strong NNA or net new asset performance in Q1 at around EUR 3.6 billion. Some of that was transfers, but really a modest part. I think it's pleasing because of the operational transformation that business is going through. The team have been doing a lot of work in right-sizing the cost base, and we've been really quite sensitive to ensuring that we offer our clients continuity of service, and we really focus on that. It's quite pleasing to see strong net new assets for the quarter. It's only one quarter. For example, we've seen Germany as being a big contributor to that, so that's helpful. I think from a deposit perspective, deposits margins or net interest income, which is largely deposit in that business, was strong.
That reflects the cautious nature of asset allocation through the quarter, a bit more deposit allocation. Also the further benefiting of the lower rates I talked about. We think it's sustainable, but clearly, as I mentioned earlier, in an environment where rates stay very low, that will come under pressure in due course. In total, we're feeling quite positive about private banking and see the potential for both organic and modest inorganic growth going forward to build that business further.
Okay. Thank you.
Next question is from Bart Joris, Degroof Petercam. Go ahead, your line is open.
Yes. Hi, good morning. Thank you for taking my questions. Can I come back again on your impairments, did these come as a sudden surprise to you when you saw some breaches that they all suddenly occurred in the first quarter? How severe are those breaches? Could you give us some more detail on that? Coming back on that, will that also have an impact on your CIB restructuring, or is that more purely Basel IV based? A small question on the CLA impact. It's something that's described as a one-off and in the first quarter. Could that reoccur annually, or is that again a new negotiation starting next year?
Tanja, can you take impairments?
I will comment on the impairments. Whether this came as a surprise. I think I can say, well, the accumulation of impairments was higher than expected. As said, was related to individual files, but it all accumulated in Q1, and that had as a result this elevated number.
I'll make the link to the corporate banking update. I think it's important that we get Q1's impairments in proportion. I think we're being open that it's disappointing at 32 basis points, but it's one quarter, and within that roughly half focused in the cyclical offshore services and vessels sector. We've seen good costs of risk over the cycle. We think we have a good franchise, and clearly no one likes impairments, but it reflects a sector where you really need to know what you're doing, and we think we do know what we're doing in that sector. We'll have quarters where we see impairments, but over time, we think we earn returns over the cost of capital in that sector. We've seen other areas like diamonds, where we have reduced our exposure consistently over time to that sector.
That's about recognizing both long term and short term where we should be playing. I think finally on healthcare, you saw releases in commercial banking last year. I think we were clear that we don't expect consistent releases from commercial banking. We've seen generally benign circumstances with our healthcare clients going through difficulties. I think we've been open about that. I don't feel that impairments in and of themselves are cause for triggering reviews. I've set out the reasons why we're undertaking the review. You can see we're starting to take action around focus, and we'll update further in Q2 in that respect. As far as the CLA is concerned, there were a couple of elements to the CLA. It's an agreement with our staff regarding wages for two years. We agreed 2% for 2018 and 2019.
It also had an element of a one-off payment of around EUR 16 million in total, which we made in Q1. That is a one-off payment that we don't expect to repeat for the next two years.
Okay. Thank you very much.
Our next question is from Mr. Stefan Nedialkov of Citigroup. Go ahead, your line is open.
Hi, guys. It's Stefan Nedialkov from Citi. Two questions from my side. In terms of the fee growth, you did mention that you are anticipating raising prices on certain packages. I don't know if you gave specific guidance on fees. From what I heard, you're basically guiding to growth in 2018 versus 2017. Anything more specific than that, please? The second question. You did mention EUR 1 billion commercial lending book in the Netherlands. What's the potential for that to grow? How much appetite do you have for that type of growth? Why do you think that that's the right fit for you, and why is that something that you will do better compared to other domestic peers or the Netherlands peers? Thank you.
Answering the fee rate, I think we said we expected fee income to gradually increase. We're not looking for a dramatic acceleration in fees, but we do feel we've stabilized fees at a lower level and looking to grow that gradually from here. I think in terms of growth outside the Netherlands, we feel we have the ability to build a profitable modest book that will add to our overall franchise in terms of diversification, but also profitable growth. We see the potential to grow that further from the EUR 1 billion. I'd say low single digits, at least to start with. Why do we feel that? We're leveraging sector expertise that we have in Amsterdam. We have sector teams in corporate banking that really know particular sectors, and in many cases, our clients and their competitors are cross-border traders.
We know those clients and those sectors well. We're targeting, as you call it, the mid large client base that isn't over banked at the top end, but where we can really add to the syndicates of our clients. We have seen, following the crisis, some retrenchment in terms of banking opportunities that our clients have available to them in these markets. We're following our trade routes and being really quite selective about which sectors and which clients we support. We're pleased with the results in terms of our ability to grow a modest, but attractive from a margin perspective, portfolio in these markets over the next few years.
Okay, thank you.
Our next question is from Miss Alice Cheung of HSBC. Go ahead, your line is open.
Morning, everyone. Just a few questions from me. Firstly, on Basel IV. You mentioned that the private bank's RWAs are Basel IV neutral. Can you also tell us how much of the 35% expected RWA inflation is driven by CIB and the commercial bank? Do you have any early stage sense of how much of this impact could be mitigated away by a repricing or otherwise? Secondly, on capital distribution. You stated before, and again in these results, that you consider additional capital distributions when capital is within or above the target range. Consensus currently estimates about 18.1% for end 2018. If for whatever reason you don't feel comfortable to make additional distributions at that point, when would be the next point that you'd consider making further distributions? Would that be at the interim point or at full year 2019? Finally, just on provisions.
Again, can you tell us what your provision charge would have been under the previous standard, IAS 39 versus IFRS 9? Thanks.
Clifford, you take Basel? Yeah. On Basel IV, we indicated in February an overall uplift of 35%, as you said. Neutral for private banking. We expect the retail banks to be broadly in that range of 35%. Commercial banking, similarly, and somewhat higher in respect of corporate banking than the average of 35%. As I mentioned, we're working through mitigations. They comprise working through the rules, remediation, pricing, as you said, but also looking at our business model and mix. I think it's too early to draw conclusions. However, as Kees mentioned, it's important that all businesses earn adequate returns, and we have a target of 10%-13% ROE for the group as a whole, and that's the case for each of our businesses over time. I think in terms of capital distribution.
Look, we don't want to get into a speculation of what happens after this year. I think we've indicated that the natural time for us to consider additional distributions is towards the end of this year. We'll update you at that point, and no doubt give further guidance in respect of 2019 at that time. I think finally on provisions. Yeah, essentially, the effect of the accounting change has no material impact on the impairments that we announced in Q1. The impairments that we indicate in Q1 are very largely stage 3, which is, call it defaulted positions. The effect under the previous rules would have been very similar.
Okay. Thank you very much.
Our next question is from Mr. Nicholas Davey of Redburn. Go ahead, your line is open.
Yes. Good morning, everyone. A couple of questions, please. First question, do you know by any chance how much of your offshore book is in stage 2 and stage 3 buckets? I'm just wondering if, I think one of the other big offshore lenders in Europe is getting some write backs from that book now and claims that maybe all of it's already stage 2 and stage 3. Any kind of comparison would be helpful. Second question also IFRS 9 related. Just wondering, you commented I think earlier That some of these files may still be restructured a second time later this year, and I think I get the sense that you're sort of warning us that there may be slightly elevated provisions for the rest of the coming quarters.
Just under IFRS 9, why would those not have been booked as provisions this quarter already if you can sort of see danger coming down the pipe already? Third question, just sort of high level back to the 56%-58% cost-income. It does feel that the shape of the revenue and cost guidance that you gave originally slightly rang below it on revenue, slightly better net on cost. When might you come back and give us more on how the business is adapting to those targets and whether you need to update the component parts of them? Thanks.
Okay. Thank you. Well, first on your question with respect to offshore. We actually don't distinguish offshore as a separate segment, so we have offshore in energy and in transportation. We don't provide any further disclosures. What you can see there is that, well, non-performing loans have not increased, so it was on existing clients in the restructuring department that we have written additional provisioning. Also no significant movement into stage 2 here. With respect to future quarters, we feel that we are rightly provisioned for all the information that we have today. Of course, we provide an outlook as well based on what we see developing in the different sectors. This is still uncertain, and the question is how it develops. That's why we cannot take any provisions for that at this point in time.
Yeah, just commenting on our cost-income ratio target. I think we felt we gave an update today. I think we're pleased with our track record of a little over half of our targeted cost savings. You've seen we've reported a cost-income ratio of 57.9% in Q1. Now, it's only one quarter, but that should demonstrate that we're on track, and as a management team, we're committed to delivery of our 56%-58% target. Now, clearly, back in 2016, the team were not in a position to forecast with precision income growth. What we can say is that we're very much on track in terms of the delivery. You can see, as we've shown today, visibility in the delivery of those cost savings as well as the FTE reductions. We remain confident in the delivery of those targets as set out for 2020.
Okay, thank you.
The next person is Mr. Bruce Hamilton, Morgan Stanley. Go ahead, your line is open.
Hi. Good morning, guys. Two questions from me. Firstly, just on the NII. It sounds like you're saying for the next few years, we should expect that sort of EUR 32 million or EUR 30-ish million due to the accounting change to be sustainable. I just wanted to confirm, so we should really think to the end of your 2020 plan, even if there are no further renegotiations, that's kind of what the impact should be, just to make sure I've completely answered that. Secondly, for Q2, obviously, you're indicating we'll get a bit of an update on the footprint in the corporate bank. Should we also expect an update from the new head of technology around what other possibilities might exist around AI or robotics? I mean, you've indicated those are areas where you see some potential savings.
You've also indicated you're not planning anything radical in terms of a new platform shift. Will we get a bit more color? Because it sounds as though you're suggesting there could be some more opportunities within the area of technology and improvement linked to that.
Do you want to take NII, I'll take the second one.
On NII, I think you had it broadly right. We expect that EUR 30 million to crystallize per quarter for the next few years, 2018/2019, and it starts to tail off after that. Our estimates are based on a view of interest rates, reflect our anticipated behavior around clients renewing and how they renew. There is clearly some uncertainty, but we think it would be helpful to guide on that basis. On technology.
On technology, Bruce, I think indeed we will update on CIB. I think as we already mentioned today, no new big bang or overhaul of the total system here. That has been evaluated already. I think we will give some update some moment in the second half of next year. I do not know exactly if it will be the second quarter. We will look into that. Second half of the year, definitely.
Thank you.
Next question is from Mr. Matthew Clark, MainFirst. Go ahead, your line is open.
Good morning. Firstly, could you give us an update on mortgage margins where they are front book versus back book, and how the front book has developed year-to-date given the moves we've seen in the longer term swap rate. Secondly, just on your ECT book, and I guess the commodities and commodities trade finance book in particular. It would seem that with rising commodities prices, that there's an opportunity to maybe be a bit more aggressive there that you've held back from. Could you just talk about why that was. Also on your clearing bank, could you just talk about or maybe give a bit more granularity on what the fees did there? Because again, I just thought that would have been a pretty lucrative environment in the first quarter for the clearing fees.
You mentioned this as being a positive versus the fourth quarter, it doesn't look to have had that big an impact versus maybe some of the movements we've seen there historically. Thank you.
Mortgage margins, I think, had a very good position in the first quarter of the year. Margins held up well. There is more competition at this moment in time, the more recent weeks, months actually. We always are disciplined with respect to margins. If we, in the end, would have to choose between margin and market share, we will definitely look at margins. We will take a bit lower market share for a moment in time. If margins get a bit depressed, we will do that. Having said that, beginning of the year, margins were good. TCF Clearing Bank, can you say anything?
I think TCF We're looking to trade profitably through the cycle of all our industries. I think you've seen rising commodities. You've also seen the U.S. dollar weakening a little bit. I think that reflects a focus on profitable business. We didn't call out commodities as a particular growth area in Q1. We have seen natural resources growing quite strongly in Q1. We're sort of growing and maintaining discipline where we see profitable opportunity. I think in terms of fees generally, I think it's always a challenge comparing year-on-year. I think clearing did have a strong Q1. The global markets business, which is in that business, had a less strong Q1 against a very strong Q1 last year.
I actually think it reflects the diversity of our business, both within CIB and for the group as a whole, that we traded through, and you can see fees broadly flat for the group as a whole this quarter.
Great. Thank you. Could I just follow up on the mortgage margins? I mean, you said that they held up well despite the competition. That sounds a bit counterintuitive. Are you able to elaborate a bit more? Is it because the competition was still focused in certain areas of the curve or product type? Is there any mix effects there that are leading the margins to hold up well, or is it holding up well across the product range?
Yeah. Well, it also indeed has to do with maturity levels. I think in the 15-20 years mortgage area where more clients go these days, of course, competitors in the insurance, competitors and pension funds are better equipped to go into that market, where more at the 10 years part of the market. 5 years, 10 years. The market is growing a bit more in the 20 years at this moment in time. Those developments indeed, and there's more competition there from insurance and pension funds.
Okay. Thank you.
Our next question is from Mr. José Coll, Santander. Go ahead please, your line is open.
Hi, good morning. Three questions please. The first one is on NII. It appears that risk-weighted asset growth, driven by lending growth in CIB and commercial banking, is taking a toll on capital generation. I suppose that these new loans also come with a higher yield above the average of the current loan portfolio. When you guide for a flat NII for the year, are we to understand that repricing pressure on the current loan portfolio is upsetting the higher loan yield coming from this new business? Are you seeing some sort of repricing upwards in the CIB and commercial lending? Maybe banks are trying to prepare for potential TRIM impacts, which are likely to be before Basel IV even starts facing in. A couple more questions. Can you give us guidance on capital generation after dividends for the year?
Could you please quantify, if any, what would be the impact of the weaker U.S. dollar in the quarter? The last one is, why were non-controlling interests so high in the quarter? We saw EUR 21 million versus an average of EUR 1 million-EUR 4 million in past quarters. Thank you.
Right. I think that's about five questions. Forgive me if I only answer a few. I think in terms of NII, I think you might be overanalyzing things a little bit. We have grown in commercial banking and corporate bank, as you say. We're achieving our target returns in that space. Margins remain sound. It's pleasing in particular to see that in commercial banking. In terms of pricing, I think it's frankly too early to say anything regarding pricing for Basel IV. I expect that to be a kind of medium-term phenomenon. I think it's helpful that Basel IV will have forced on all banks a greater focus on capital discipline, and you see that from the announcements that our peers have made over the past week or two.
Capital generation after dividends, we haven't got much further than we said in February, which is 50% sustainable profits, and we expect moderate growth in RWAs from underlying business. As Tanja mentioned, there are other factors that drive RWAs, and it's possible to get some volatility quarter-on-quarter. While trend might end up being 19 and 18, there are other factors that can affect cap generation in any one quarter. In terms of non-controlling interest, part of our revenue growth this quarter was through private equity participations, and we had the usual sort of carried interest arrangements around that. That together with the issue of our AT1 last year in Q4 explains the increase in non-controlling interest compared to a Q1 comparative last year.
Thank you.
Yeah. Very good.
Next question is from Mr. Albert Ploegh, ING Bank. Go ahead, please.
Good morning. One question still around NII in relation to the prepayment, the recurring element of the EUR 32 million. This is basically, I guess, the stock of people that have already refinanced. I understand probably most already did, I guess if everyone that is refinancing going forward, that will add to that EUR 32 million in a positive sense. That's my first question. Can this number still grow, is that also an expectation you have? The second question to that is that you were guiding clearly for 2018 and 2019, this kind of run rate to be sustainable per quarter. Is there any logic or any reason to think that after 2019, you said it was fading out, that it might actually at some point also become a headwind? How does this exactly work with the offsetting swap?
That's probably a negative drag on this going forward as well. Maybe a little bit better understanding on those two elements to this recurring element.
Okay. The uplift reflects versus our previous position and expectation. The way the accounting rules change means that we're shortening the period in which we amortize this benefit. There's a one-off benefit associated with that, which we've now booked in Q4 last year and Q1 this year. The EUR 32 million per quarter then reflects a revision relative to our previous expectations. Our anticipation of how long it will last is a function of interest rates, clearly, our clients have an incentive to refinance, given the current very low interest rate environment. If interest rates move up, that may well change. I think, as you say, at a certain point, it will become a headwind because it's a change in amortization period. It's a headwind versus our previous expectations.
As I indicated, I think we expect it to remain at 2018, 2019, at similar levels to come down thereafter. Then beyond 2021, it would be a headwind versus our current projections.
Okay.
Our next question is from Mr. Kiri Vijay Arya of HSBC. Go ahead, your line is open.
Yes. Good morning. A couple of questions. Firstly, just clarification on your guidance for flat Dutch mortgage volumes. Does that apply just for this year? Would you be more optimistic going into next year? Secondly, on the leverage exposure, the seasonal increase looks quite muted compared to previous years. I'm just wondering, in CIB, are some of the effects of the rationalization already kind of in there a little bit? Is it more that the demand for balance sheet in areas such as clearing has been a bit more muted than the usual kind of 1 Q uptick that we've seen in previous years? Thank you.
Flat volumes in mortgages is indeed a difficult one to guide because it's a balance of quite a few EUR billion, of course, new production and quite a few EUR billion re- and prepayments. For this year, that's what we expect. We see other large banks in the Netherlands have lower volumes on balance. We have been able in the last couple of years to keep it more or less stable or even grow it a bit by, I think, one or two EUR billion. As I said also before, if there would be a discussion around margins or volumes, we would be disciplined with respect to the margins. If that would lead to a bit lower volumes, we would accept that also. Just commenting on leverage ratio, I think as you know, we have an ambition to deliver a 4% leverage ratio, and we're managing within that.
We're looking to serve our clients, deliver profitable business whilst maintaining with our various capital and leverage metrics.
Okay, great. Thanks.
Next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, your line is open.
Yes. Good morning, everybody. Sorry to circle back to the EUR 32 million of NII, I was always under the impression that you're basically asking a compensation for the negative value of the swap that's related to the mortgage. Of course, you do it on a balance sheet level, not on a product level. Shouldn't these things basically have a sum zero impact over a longer period of time? You just said that from 2021 onwards, you're basically expecting it to turn into a headwind. If you take the sum of the next 10 years, for example, on this element, shouldn't that effectively be a zero? If it's not, how would that be in relation of the mortgage directive, basically, where you are supposed to ask a normal penalty from your clients that compensates for the cost of the bank?
It feels that somehow you're making a profit on these refinancings, if it's not like that. The second question is, I think last year you had an uplift in your operational RWAs, and I think you indicated back in the day that you would see that revert in the second quarter of this year, and I think it was around EUR 2 billion. Is that still valid? The third question is on M&A. Given the fact that you're currently at the low end of your target range, what does that imply for the opportunity on shorter-term M&A? Thank you.
I'll give it to Tanja.
The short answer is yes, you're right. Over a long period of time, it will net out to zero because it's a change in amortization period. I agree with your statement.
Operational RWA.
RWA with respect to operational risk. Indeed, the model is being reviewed by the ECB as we speak. We don't expect that to be finalized before the end of Q2. Then dependent on the outcomes, there will be an adjustment on the add-ons.
With respect to M&A, we will look at those opportunities when they occur. We have not a special amount reserved for it, like some other banks. That's true. As said in private banking before, if there would occur something, we would look into it at that moment in time.
Okay. Thank you.
We have a question now from Mr. Adrian Cencioni of RBC Capital Markets. Go ahead, your line is open.
Hi there. Two very quick questions, please. One on capital and one on deposit. On the capital, as we've noted on earlier, Q1 followed the organic capital generation being consumed by risk-weighted asset growth. In light of the capital target, you are now at the very bottom of that range. Would you feel comfortable if you remain there for the rest of the year, or would you feel the need to restrict loan growth to remain within that range? Also, can you clarify if the target assumes a countercyclical buffer of zero or if an increase in that wouldn't change your target range? Then just one follow-up question on deposits, please. There seems to be a relatively large reallocation between time deposits and savings this quarter. Can you provide any color as to what is driving this, if there's any impact on margins from this? Thank you.
I think just commenting on capital generation. Look, we want to grow the business profitably, and it's important that we retain that as a mission, and you see we've done that this quarter in a couple of our businesses. We do have a target for capital, the 17 after 18.5, and we'd like to see the business within that target. We'll manage the business to try and to walk and chew gum at the same time. I did make the point that RWAs can be volatile. We talked about TRIM operational risk add-ons that may or may not come on. We don't want to be managing the business in a knee-jerk way to reflecting what might be volatility in the capital metrics. We need to find a balance there.
A big driver of that range was our view of Basel IV, and that view is frankly developing all the time and will update later in the year. The underlying numbers, I think I agree with what you said, reflect our overall position of SREP plus the buffer, which includes the components that you've outlined. I think around deposits, I don't want to comment specifically there on time versus savings. We've managed to maintain deposit margins through this period, largely through the lever of rates that I mentioned earlier. You'll see that we've reached very much the end of that process now.
Perfect. Thank you.
Next question is from Mr. Marcel Hubers, Credit Suisse. Go ahead, your line is open.
Good morning. Thank you for the presentation. Thank you for my questions. I have two left. Just to come back on the loan loss provisions there. Apologies. The scenarios for the oil and gas and shipping for 2017, do they still apply, or can you give an update on those, please? The second one is on the op risk reversal add-on. Given you were a little bit uncertain whether you were going to see the EUR 2.5 billion or EUR 2 billion RWA back. Has something changed? I was pretty certain that you were going to see those back. I was just wondering if anything changed at all. Thank you.
Should I tackle the second one and turn over the first?
Yeah, I'll do first one.
I think on op risk. Look, I'm being realistic. We feel we've done a good job around that. Clearly we have the review from the regulator. I think we've seen sometimes regulatory response can be unpredictable. There are a whole slew of developments around Basel IV. We see TRIM as, call it a glide path into Basel IV. Frankly, we're working through how op risk might change Basel III to Basel IV. That's the context behind my caution around risk-weighted assets generally and the volatility that that can give rise. We've seen some of that this quarter in respective credit developments. We're managing the business and the capital position for the long term, and I wanted to be transparent on that.
Yeah. With respect to the scenario analysis that we updated end of 2017, what we see now with the current provisions, that they are within these scenarios, within the moderate and severe scenario that we applied were at the energy side. We are towards the severe scenario and what we call shipping transportation. We are closer to the moderate scenario at this point in time.
Just to come back, Tanja. Do the scenarios still apply for 2018?
Well, we have done this analysis, updated them in end of 2017. Well, scenarios are not a prediction of the future, but they are meant to analyze the sensitivity for certain developments. From that point of view, well, these scenarios we still use to analyze sensitivity to certain developments.
Okay, thank you.
Next question is from Mr. Paul Fenner, Societe Generale. Go ahead, your line is open.
Morning, gents. I just wanted to know, you've been very clear about not needing to issue SNP until 2019. Just wondered if you had any plans for either AT1, particularly I guess, to cover your shortfall, or Tier 2 for the remainder of the year. Thank you.
Yeah.
We've no plans for this year.
Okay, very clear. Thank you.
We have a question, another one from Mr. Stefan Nedialkov of Citi. Go ahead, your line is open.
Yeah. Hi, guys. Just two follow-up questions. Can you just tell us a little bit about your assumptions on how higher rates will impact non-bank competition potentially going forward? Are you assuming anything with that in mind, when you come up with your estimates for margins, volume growth, et cetera, especially from 2019 onwards? Given that Clifford was previously an insurer, maybe we can have a little bit of a head-to-head between the CEO and the CFO to the bank and non-bank perspective, if you will. That'll be very useful. Secondly, in terms of the private bank, are you seeing competition by the private bank operations of bigger established competitors in France, Germany, et cetera, on margins or client service or technology?
Do you feel that you do need to transform the private banking franchise quite substantially in order to compete effectively and maybe grow net new money more going forward? Thank you.
I'll start with the last one. I think indeed at the Private Bank International, as we've mentioned, I think also last year, is that we indeed want to further harmonize both the products, Germany, France, Belgium, and IT systems. Indeed, we want to further harmonize systems there, which we, by the way, sometimes also see by the bigger companies, in that market. That's true. That is definitely an area where we're working on, and that will take this year and also presumably next year. With respect to higher rates-
Yeah. An interesting question. I think maybe tough to answer in a minute on these sorts of calls. We look at, in terms of our projections, really basing them on where the swap curve is, with maybe some scenarios around that. That doesn't reflect dramatic increase in rates. I do think, as you say, as a former CFO of an insurance company, I think a low rate environment is one where clients have real appetite for long-term mortgages, which is a natural asset opportunity for insurers and pension funds. You've seen that in the last few years. You've seen us and other banks also engaging in long-term mortgages. There's a limit over time to how much of the balance sheet you want in those sorts of assets as they being reliant on shorter-term funding.
I guess underlying your question, I think if we were in a very different rate environment, we'd probably be in a different competitive environment. We're seeing adequate returns on mortgages currently in Basel IV terms. That's the basis on which we plan.
Okay. Thank you, Clifford.
We have a question now coming through from Mr. Lee Street, Citigroup. Go ahead, your line is open.
Hello. Morning. Thanks for the call. Can I have a couple of questions about stage 2 loans, please? I was just trying to reconcile, you've got I think EUR 16.4 billion of stage 2 loans on page 36, but that compares to only about EUR 3.7 billion of past due loans. I was just trying to reconcile why the difference was quite so big, and then what to explain that. Secondly, just on the same topic, you look at your corporate loan book, you've got about 16% in Stage 2 and Stage 3 loans in total. It feels quite high from where we are in the cycle. I guess what comfort can you give us on the clarity of that loan book? Finally, just on your allowance for credit losses.
Once again, looking at the corporate loans, you've got about EUR 127 million allowance versus EUR 10.3 billion of Stage 3 loans on the corporate. It just feels quite light. I'm just trying to wonder how that's calculated. What we're supposed to be determining from that? Those are my three questions. Thank you.
Thank you. These, that was very fast, so maybe I will ask you to reiterate some of your questions. Of the difference with the Stage 2. Stage 2 loans are the loans that have seen material deterioration in their creditworthiness, so in their probability of default. Default Stage 2. Default people's loans are included in Stage 2. That was your first question. I think your second question was related to corporate loans, correct?
Yeah.
The 16% in Stage 2 and Stage 3, that reflects the number of clients, the so-called watchlist in our restructuring department. These are across the board. I would not signal this as any new development. I think we don't have the experience yet of how Stage 2 will develop over time. I think in due course, we will be able to give some more feedback. As I said, in Stage 3, there has been very little movement in terms of the second three. Your last question, that was actually too quickly. Maybe can you repeat that question? Your last question, I understand that I was hard to hear.
Yeah. It was a bit hard to hear all three answers, I'm afraid, actually. Would you mind just repeating them?
Oh, okay. Sorry. I think my mic was kind of far away. Let me reiterate my responses to your first two questions, and then ask me to reiterate your third question. With respect to your first question, Stage 2 loans includes loans that have significantly deteriorated in credit quality. That doesn't equal to defaulted loans. That explains the difference. With respect to the 16% in Stage 2 of corporate loans, I think that was your second question.
Yeah.
In Stage 3, we actually didn't see any new developments. The same loans and segments that were in this stage and impaired as previously. Stage 2 is actually a new segment, and we are building up experience there. We see that it very much aligns with the watchlist that we used previously. I think in terms of percentages, I think we will be able to give you some more flavor over time to see how this develops. Your last question, maybe you could reiterate that one because I couldn't follow that one.
Yeah. The last question. In Stage 2 corporate loans, you've got EUR 10.3 billion of carrying amount of Stage 2 corporate loans, but you've got an allowance for credit losses of EUR 127 million. I was just saying that the EUR 127 million looks remarkably low versus the EUR 10.3 billion, given it sounds like the bulk of Stage 2 is due to a significant deterioration in credit quality. Just to try and understand how could that size of provision be enough relative to that size of Stage 2 corporate loans, basically my question.
Yeah. That has to do with the fact that we have a lot of well-collateralized loans. Although the probability of default has increased, the collateral has still value, especially under the current economic circumstances. That means, still, a low level of lifetime expected loss.
Okay. All right. Thank you. Thank you very much, and thanks for repeating it. Thank you.
Chairman, we have no further questions. Please continue.
Okay. Thank you very much, operator. Thank you all for your questions. This concludes our Q1 results update, and I hope to talk to you again next quarter or perhaps at an earlier occasion. Thank you. Goodbye.
This concludes the conference. On behalf of ABN AMRO, thank you for attending. You can disconnect your line now.