Good morning, ladies and gentlemen, welcome to the ABN AMRO Quarter Four Financial Year 2017 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, the CEO. Go ahead please, sir.
Thank you very much, operator. Good morning, everybody. Welcome to the analyst and investor call for ABN AMRO fourth quarter results. I am joined by Clifford Abrahams, our CFO, Tanja Cuppen, our CRO. First of all, I would like to say a few words about the announcement earlier this week of our chairman of the supervisory board to hand over some responsibilities as chairman not to opt for a second term. I respect her decision. There has been quite some coverage in the press, this kind of publicity is, of course, not helpful, not for the bank, not for our clients our employees. Thanks to our clients employees, ABN AMRO is in good shape is making great steps in the area of digitalization, sustainability, innovation. This is also very much valued by our clients is evidenced by our rising net promoter score.
We will continue to focus entirely on our clients. I hope you will understand that I will not go into further details on this matter. Now let us focus on the achievements results of ABN AMRO of 2017. On slide two, you can see that the fourth quarter, our net profit amounted to EUR 542 million, reflecting another solid quarter. Our commercial business lines continue to perform well, our cost-savings programs are delivering. We propose a total dividend of EUR 1.45 per share for the year, up strongly versus 2016. This amounts to 50% of the full-year result reported, which benefited from a number of incidentals. We have a strong capital position with a CET 1 ratio of 17.7%. We promised you an update on capital Basel IV, we will provide this today.
Going forward, our dividend payout will be 50% of sustainable profits, and we have formulated the context for additional distributions on top of this. Combined, these will deliver shareholders distributions of at least 50%. On the next slide, you can see that I would like first to remind you of the good track record we have made since IPO. The chart on the left shows our strong profit development, driven by high business returns and declining impairments. I'm pleased to say that 2017 was a record year for the new bank with net profit at EUR 2.8 billion. This result was helped by incidentals, including the sale of Private Banking Asia. As promised, we will pay out 50% of reported profit and dividends, and therefore, our shareholders will fully benefit from this strong result. Our dividend increases by more than 70% versus last year to EUR 1.45 per share.
As you know, our approach has been to accumulate capital ahead of Basel IV, as can be seen from the right-hand chart. Our capital position was already quite strong in 2014 at 14%. Since then, we have added another 3.6 percentage point, not withstanding the record dividends payouts this year. On the next slide, you can see that we have consistently said that Basel IV would have a material impact on us. We guided last quarter that 500, 600 basis points was possible. Following the Basel announcement in December, we are now in a position to estimate the impact on our RWA, which is an increase of around 35%. We ensured we were well-placed for this outcome by building up a strong capital position in recent years, thanks to our prudent capital management.
As a consequence, even today, we are well-positioned for Basel IV, which in fact will be implemented gradually between 2022 and 2027. Based on all this, we have set a new CET1 target range of 17.5%-18.5% for 2018. Against the backdrop of this clear capital target, we can now better determine shareholders' distributions. Going forward, distributions will consist of two parts: a payout of 50% of sustainable profit, and on top of this, we will consider additional distributions when our Quarter 1 ratio is within or above the target range. I will elaborate on this later. On the next slide, you can see that a fair number of transformation projects are underway. These programs aim to streamline and improve the way we run the business while always looking to improve the service to our clients.
I want to highlight the declining trend in staff levels on the right-hand chart. We previously announced a five-year reduction of FTEs by 13% in 2020. Currently, two years we are now down the road, we are now at 10% below the level at year-end 2015. Looking at the trend in our branch network, we currently have just over 200 branches. Our digitization efforts in retail bank led to fewer clients visiting our branches, allowing further closures going forward. We are showing good progress on our transformation programs. On the next slide six, we highlight a number of our initiatives. We are ready for PSD2. Our client applications are ready to include third-party bank accounts. We can turn this functionality on as soon as other banks release their PSD2 APIs. Our own developer portal was launched during Q4. Tikkie continues to grow rapidly.
Currently, we are at 2 million users, which is 1 million more than 6 months ago. There is a lot of interest from business to use this platform to make payment requests. The next area highlighted here is blockchain technology. We have been active in this area for a number of years now, which has led to concrete initiatives in real estate, shipping, and commodity transactions. Our online wealth manager, Prospery, was launched in Germany at the end of last year. It offers wealth management for a fixed fee and a low-price entry point. Even though Prospery is branchless, clients will still have access to a personal account manager. With Franx, we recently launched an online multi-currency account for SME clients to facilitate their international payments. Over the past year, we have launched new ambitious programs for socially responsible investment, real estate sustainability, and circularity.
For the latter, we received an award during the World Economic Forum in Davos for being at the forefront of financing new business models based on principles of circular economy. This year, our sustainability efforts were ranked in the top 5% of the global banking industry in the Dow Jones Sustainability Index. We scored 91 out of 100 points in this index compared to an average score of the banking industry of 58. Our efforts in human rights and transparency, particularly in relation to social and environmental issues, were rated highly. I am pleased with the score, but I believe we can do even more. Another area where we make good progress is diversity. The percentage of female employees in senior management has gone up from 23% to 38% since the introduction of the new management structure, as you can see from the chart on the right.
I would like to hand over now to Clifford for more details on our Q4 results.
Thank you, Kees. As Kees mentioned, we had a solid quarter. Our net profit was EUR 542 million. We had quite a few incidentals this quarter, the main ones we disclosed to you prior to our results. In aggregate, the impact on net profit of these incidentals is limited, unlike Q4 2016, where incidentals had a significantly negative effect. We have continued to benefit from low impairments during the year, thanks to the strong Dutch economy. I will now go into more detail on individual line items on the next slides. Turning to slide nine regarding client lending. The left-hand chart shows our development for mortgages. Volume was up by EUR 1.3 billion for the year, although declined during Q4 as usual, due to seasonal voluntary redemptions.
The mortgage book continued to grow in a strong market, we maintained our 20% market share despite increased competition from other banks in longer-dated mortgages. Client loans in commercial banking grew through 2017 and continued to grow modestly during Q4 before planned transfers to corporate banking. Lending in CIB increased by EUR 1.3 billion and was broadly based, coming from financial institutions, large corporates, and natural resources. Consumer lending was flat during the quarter. Turning now to net interest income. Our reported net interest income was up sharply during the quarter. However, looking through the incidental items and the sale of Private Banking Asia, net interest income was more or less flat compared to Q4 last year. Mortgages showed higher volume while margins were flat. Commercial banking showed higher volumes for both loans and deposits with stable margins. Volumes and, to a lesser degree, margins improved within CIB.
Margins improved for domestic deposits both in retail and private banking. Group functions had higher liquidity buffer costs and higher steering costs. Both commercial banking and CIB include the full-year benefit from the TLTRO, which was recognized this quarter. Net interest income, our main source of income, remained resilient, we see stable margins and some modest volume growth in our main portfolios. Moving now to fee income on the next slide. Fee income during Q4 recovered compared to the previous quarter, Q3. Q3 was weak for commercial banking and CIB, both showed a rebound this quarter. Compared to Q4 last year, excluding the impact of the sale of Private Banking Asia, fee income increased marginally. Private banking and global markets increased their fee income during Q4.
This was offset by clearing, reflecting lower market volatility and retail due to the lowering of fees charged for payment packages in earlier periods. Other income overall was up and up in most segments, but mainly reflects the sale of Visa shares, which delivered around EUR 100 million, which was recorded in retail banking. Hedge accounting effects for Q4 2017 amounted to EUR 54 million, CVA, DVA, FVA was EUR 32 million. Combined, this is EUR 18 million lower compared to Q4 last year. Moving on to costs. There are quite a few incidental items within expenses during the quarter. However, looking through these numbers, we can see expenses were up compared to Q3 2017, reflecting seasonal patterns, down compared to Q4 2016, last year. Personnel expenses are down over the year, reflecting the steady decline in FTE levels.
We took another severance provision in Q4 of EUR 90 million in anticipation of further FTE reductions during 2018. Other expenses are also lower when compared to Q4 2016, again, looking through incidental items. This is a result of our progress on the various cost control programs, which Kees discussed earlier. I will now hand over to Tanja for an update on impairments in our current capital position.
Thank you, Clifford. Turning to slide 13 on impairments. The strong Dutch economy and global economic developments resulted in low new impairments. We have a fair amount of reversals leading to a net release of impairments. IBNI reduces with EUR 7 million, while a model update led to a release of EUR 31 million, mainly within commercial banking. Looking at our ECT portfolio, we booked EUR 33 million impairments during Q4. The impairment edits during 2016 and 2017 remain well within the scenarios we modeled for the energy and shipping portfolios for those years. As of January, IFRS 9 will replace our current impairment rules. The impact of the first-time adoption is limited, reflecting the benign economic outlook. The impact will be around 15 basis points on our CET1 ratio, in line with our earlier guidance. Under IFRS 9, impairments are more forward-looking.
Going forward, we expect more P&L volatility through the business cycle. Turning to our capital position. At year-end, our CET1 ratio amounted to 17.7%. Looking at the RWA developments, credit risk RWAs increased mainly due to business growth. This was partly offset by the sale of the Visa equity stake and higher house prices, which benefited collateral values. Market risk RWAs declined as well due to lower volatility in financial markets. The leverage ratio increased to 4.1% at year-end on a fully loaded basis. We issued a new AT1 instrument. The effect of this was partly offset by applying the EBA Q&A interpretation. As you will remember, this has put a limit on the amount of capital instruments which are eligible as regulatory capital at holding company level. The leverage ratio was further helped by the decline in exposure measures, mainly the result of lower on-balance-sheet exposures.
Turning to Basel IV and the impact on our RWAs. As Kees mentioned earlier, we estimated the impact of Basel IV on our RWAs. Based on a steady balance sheet and without taking into account mitigating actions, we estimate RWAs to increase by around 35%. The biggest impact is on credit risk in our corporate loans and mortgages. These numbers assume, amongst other things, loan splitting to be applied for mortgages and commercial real estate as less operational risk RWAs. Uncertainties remain, for example, due to the room Basel IV gives local regulators for setting certain parameters and the fact that it's not always 100% clear how we should be interpreting the rules. I will now hand back to Kees.
Thank you very much, Tanja. As you know, we have been consistent on the need to prepare for a possible but significant Basel IV outcome. We now understand the impact more clearly, being inflation of RWAs of 35%, which Tanja described. We recognize it will take some time before this will materialize. Also, the EU may make some modifications, and we will mitigate some of the impact as we adapt the business ahead of the gradual implementation in the period 2022-2027. Nonetheless, we need to manage our capital prudently through the transition. We have determined what this means for our current capital in Basel III terms, namely Basel IV implementation buffer of 4% or 5% of CET1 on top of our current target of 13.5%. This leads to a new capital target range of 17.5%-18.5% for 2018. We are already in this range.
This target range is not a static number. It will be reviewed at year-end. We will, for example, incorporate a possible impact for TRIM, as well as Basel IV, SREP, and other regulatory developments. We now have a clear target range we wish to operate in. This forms the backdrop for our distribution policy. On the next slide, there are two components you can see to our shareholder distributions going forward. The first is a dividend payout of 50% of sustainable profit. On top of this, additional distributions will be considered. Together, shareholder distributions will amount to at least 50%. I will explain each in turn. Our payout ratio will be 50%, as we feel this level is sustainable under various scenarios, giving a resilient profile we can expect to maintain. We will exclude from profit exceptional items of an incidental nature, both positive and negative.
For instance, EUR 270 million derivatives SME in 2016 or EUR 200 million sale Private Banking Asia last year. These items will, of course, reflect if they are present in any quarter. On top of the regular payout, additional distributions will be considered if we are within or above the target range of 17.5%-18.5%. As I mentioned before, this range will be reviewed at year-end to incorporate relevant developments. With regards to capital distribution, it's important that we target modest business growth, leading to low single-digit growth in our loan book. Also, we expect any M&A opportunities to be funded from earnings. There's no buffer earmarked for M&A. Finally, I want to update you on our overall targets. This slide 18 lists our current targets, showing our updated CET1 and dividend targets. Over 2017, our return on equity was 14.5%.
When adjusted for the sale of Private Banking Asia, it amounted to 13.4%. We are performing clearly above target for our ROE. Cost income is also clearly moving closer to the cost income target of 56%-58%, declining 2016 to 2017 from 66% to 60%. This target of 56%-58% is set for the year 2020. We will be focusing on further cost savings and modest business growth to achieve this target. I've discussed in depth our new CET1 target of 17.5%-18.5% for 2018. With a quarter one ratio of 17.7%, we are within this range. As you can see, we intend to pay out 50% reported profit for 2017, in line with the old dividend policy, amounting to a total dividend of EUR 1.45 per share. Before I open up the call for questions, I will briefly summarize.
On the next slide, you can see I'm pleased with the solid results for the quarter. Our strategic initiatives are on track, leading to better service to our clients at lower cost. We have had a record year in terms of profitability, helped by the Dutch economy, which is performing very well. Our sustainability efforts have received a number of awards this year. We're actively involving our clients on the topic of sustainability, using our influence to make an impact far beyond our own footprint. As promised, we updated you on capital. We have carefully analyzed the December Basel IV announcement. This has given us good understanding of the impact on our RWAs. It's clear that even today, we are well-positioned for Basel IV, which is reflected by our new capital target.
We've given you the factors with which we will look at when deciding on additional shareholder distributions on top of the 50% payout ratio. With that, I would like to ask the operator now to open the call for questions.
Thank you, sir. 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 your questions or remarks. May I please remind you to limit the number of questions to three. Our first question is from Mr. Pawel Dziedzic of Goldman Sachs. Go ahead, sir. Your line is open.
Hi. Thank you for the presentation. A few questions from me. First, just clarification on your dividend policy. You mentioned that you consider additional distribution if your capital is within or above the range. Can you help us understand what scope for additional distribution you have when your capital is within the range? I understand that if it's above, you can pay out more. Second, just technically, you mentioned buybacks as well as the option to return capital. Can you clarify at what point in time you will be ready to initiate such a program? What needs to happen, and do you think that can take place before the year end? The second question will be on Basel IV.
Your guidance today for 35% risk-weighted asset inflation implies a hit not that far off from 500-600 basis points that you previously seen as possible outcome. I was wondering if you can walk us through any mitigating actions that you are considering at this point in time are possible, and if you're looking to review any of your business lines in the scope of perhaps higher capital requirements. I leave it at that.
Okay. Thank you very much. Clifford, would you answer the questions?
Yes. Thank you, Kees. There are three questions. We think about the range as the amount of capital that we want to comfortably operate in, at least until we review the capital range going forward. You asked about scope for capital return within the range. Any consideration of distributions while we're within the range will reflect a range of factors, capital, but also other considerations. Importantly, we want to operate comfortably within that range, so clearly in practice, that would impose a limitation, recognizing that range is 1%. In thinking about buybacks, I would note that buybacks require regulatory approval, which can be up to three months. Further, that we don't comment on our process with the regulator. In terms of the timing of any buybacks, we don't rule out buybacks, and we don't rule them in.
In thinking about additional distributions, we'll reflect on a range of factors. Clearly, we're not ready to do that now as we are at the bottom of the range after IFRS 9 impact, and we want to operate comfortably within the range, so any such distributions will be later. Maybe I'll comment on risk-weighted assets, and perhaps Kees pick up more general business considerations. We said that an impact of 500-600 basis points was possible in November when we last spoke together as a group. The announcement regarding the rules came out a few weeks later, so I don't think it should be a complete surprise that we are somewhat lower. 35% corresponds to 450 basis points. Somewhat lower impact than we were considering at Q3. That reflects, I think, the widely reported, somewhat more favorable terms when compared to previous consultations.
Some of the ratios were somewhat lower, references to loan splitting and so on. In terms of business impact, Kees, perhaps you care to comment on how we're thinking about the business going forward in relation to Basel IV.
Yes. Thank you very much, Clifford. I think indeed, we've said it before, that when Basel IV would be in place, at least known, not in place, but known, that of course we will analyze all the rules, look into all our business lines, how we can adapt here and there ways of doing business. That is something which is in process right now. We will take, of course, some time for that. Of course, also repricing in this respect is important. That, of course, will not happen immediately, but I think that is something which over the coming presumably years we'll get more clear. There are several elements, of course, European Union I mentioned. There are still a lot of items which should be analyzed, but also our business lines, and that's what we're doing right now.
Thank you very much. Maybe just one very quick follow-up. When we think about the timing of potentially additional capital returns, that is very unlikely to happen before, let's say, you update us on your capital position again at the end of the year. Is that more or less correct?
I think it will not logically be in the first half of the year, presumably. Saying something about the second half of the year, I would say, is perhaps too early. We'll see during the year.
Perfect. Thank you very much.
The following question is from Ms. Sofie Peterzens, JP Morgan. Go ahead, your line is open.
Yeah. Hi, here is Sofie Peterzens from JP Morgan. On one of your slides, you also briefly comment other regulatory impacts, including TRIM. Could you just give us an update on how your discussions with regulators are going with regards to TRIM? Also, if you are seeing any impact from the new EBA guidelines. My second question would be, you also briefly mentioned M&A, that if you have any M&A opportunities, that those will be funded through profits. At the moment, are you looking at anything, planning to expand to new markets, or how should we think about it? My third question is on fees. They rebounded in the fourth quarter. How should we think about fee growth in 2018? Thank you.
Tanja, will you take the first?
Yeah. Thank you, Sofie, for your question. I will take your first question on TRIM. Well, as you are aware, TRIM is an ongoing exercise. We have had our TRIM reviews of mortgages and market risk so far. Well, the final results still need to be communicated. We expect limited impact so far, but this is a continuing exercise. If I can link it will take 2018 and 2019 to basically become fully clear what the impacts will be. We see TRIM as front-running on Basel IV. It will harmonize models across Europe. What you will see is that the impact of TRIM will be reducing the impact of Basel IV. That in relation to our capital targets.
Thank you. With respect to M&A, no, we have not something in mind at the moment. In the past, we have mentioned, for instance, in the private bank in France or Germany as an example, where we could create a bit more scale. Fees, Clifford?
Yeah. Finally, on fees. Look, you do see some volatility regarding fees, we've called that out. We're pleased that it's bounced back in Q4. I would say this is a more steady level. We see some opportunity to grow fees in certain of our businesses, we see ongoing pressure in others. Hopefully that gives you the guidance you need to think about our fees going forward.
Thank you.
The following question is from Mr. Benoît Pétrarque of Kepler Cheuvreux. Go ahead, your line is open.
Yes, good morning. It's Benoît Pétrarque from Kepler Cheuvreux. A couple of questions on my side. Sorry to come back on the distribution, I would like to better understand how you will think about additional distribution when you are within the range of 17.5, 18.5. What are the kind of positions? It looks like it will be somewhere probably above 18% at the end of the year. Can we expect already more than 50% for 2018? Also, how do we need to see when you hit the level of 18.5, above 18.5, can we assume this is a substantially higher Pillar than the 50% limit? The second question will be on net interest income for 2018. Could you provide maybe a bit of guidance in terms of how do you see margins moving into the year?
Looking at your replication portfolio and current rates, do you see still headwinds or are things looking a bit better? I was curious about that. Finally, maybe you could update us on the cost savings program, the 900 million you've put to the market last year. I think you realized a lot of FTE reductions already, also cost cutting. I was wondering where you are in this big program of 900 million cost reduction by 2020. Thank you very much.
Thank you, Benoît. Clifford?
Benoît. We think a range is the right way to think about our capital position right now. We want to operate comfortably within that range. I think it's important not to get too mechanical regarding CET1 ratio. We do think it's the most important driver, it's also our way of reflecting the uncertainty regarding Basel IV implementation and our flight path to full compliance from 2022 onwards. In thinking about the factors that we would consider would be how we're positioned within that range, or indeed above that range. The trajectory, our momentum from that, I'd highlight IFRS 9 as a bit of a wild card this year. There are other factors to consider regarding capital. We talked about TRIM, this year there's an industry-wide stress test underway.
We have the normal SREP process, and we have other commercial considerations like the interest rate and the impairment cycle. You asked what are the things we consider. It's rather a long list. I think in practice, that means, as Kees said, look, it's not something that's very likely in the early part of this year. I think towards the end of this year, and in particular, as we head into our final and the usual time we pay a dividend, all these factors will be fully considered, and we will clearly update you then. Hopefully that gives you a bit more color. I think on net interest income, you've seen our margins resilient. I think we see some positive developments on net interest income from modest volume growth. When you look through some of the incidentals that we called out.
I think on margins, I'm pleased with how we've managed that. Our interest rates have remained low. We've also reduced further rates to customers. I think it's fair to say that process is nearing its end, and if rates remain as low as they are for an extended period, we'll continue to see some margin pressure in that area. Putting all those factors together is behind our calling out flattish net interest income. I think from a cost savings perspective, I'll comment, and Kees, if you wish to comment further. I think we're making progress. You see that through the FTE reductions. I think I'd like to see those also come through in the bottom line expense savings. We also see cost pressures. It costs us money to save money. You've seen our recently announced wage settlement.
That adds to cost inflation, and there's money that we want to spend in developing the business. It's management's job to manage all of that and hit our targets, which Kees indicated we're comfortable with and remain on track.
Just to clarify on the 18.5% and above question. What will happen when you hit the 18.5%? Can we think about a substantially higher payout ratio than the 50%?
I think clearly if we're at the top of our announced range, then we're more comfortable. That will support a consideration of distribution. We also need to see where the Basel IV developments have arisen. As Kees indicated, that will reflect EU implementation. There are a number of other moving parts. I think as Kees indicated, we're looking to deliver on modest loan growth. Organically, we expect to continue to accumulate capital, which will move us more comfortably within our range, which in isolation will support distribution consideration. We need to reflect on other factors, which a board sensibly needs to consider when paying out discretionary additional capital.
I'm sorry I can't be more specific, but the nature of our dividend policy now is really to give comfort regarding an underlying 50%, frankly, retain discretion to top that up in the light of business and regulatory developments.
Right. Thank you.
Thank you, Clifford. I would like to add one other one, which is also part of the consideration, of course, in the fourth quarter of each year. Also, Dutch Central Bank looks at the 3% Dutch add-on, capital add-on. That is also something which will be evaluated by regulators every year. That is also something. Well, that's a Q4 element.
Thank you very much.
Our following question is from Mr. Robin van den Broek, Mediobanca. Go ahead. Your line is open.
Yes. Good morning, gentlemen. My first question is on operational risk. The RWA inflation you mentioned, is there any consideration in there for potential internal loss effects? What the Basel Committee has basically left to the discretion of the local regulator. I think if you look at the SME derivatives file, you've incurred a pretty high additional OpEx. Also the compensation scheme might be considered as internal losses, which could potentially further inflate the RWA impact. Secondly, if you look at the mortgage book dynamics, I think velocity in Q4 was at its highest level almost historically, and house prices, of course, are very supportive, and still the book is only up a very little bit. That's flagging, of course, the underlying redemption of that book that at some point will go even further due to the new annuity framework.
I was wondering if the comment you made. Could there be something on the table that you might look for a new growth pillar, given the fact that your mortgage book might start to release capital at some point? The third question is on Payconiq. You have stopped the initiative together with the incumbent banks to work together on that. Can you maybe discuss how you feel Tikkie is positioned on the market, and why going for something alone could be a better way to fend off new entrants on the market after PSD2? Thank you.
Thank you very much. Well, you greeted us as gentlemen, I will give the first question to a lady.
Okay. Well, thank you very much, Kees. I will take the question on the operational risk RWAs. Well, of course, historic losses will go into the calculation of operational risk RWAs on the Basel IV. You mentioned as well that this is also subject to local implementation, we cannot comment on that yet. I can mention that for our own assessment, we have used our current situation, as of the end of 2017, we have applied a multiplier of one.
Thank you very much, Tanja. With respect to the mortgage book, I think your analysis is right, of course. It's very hard work these days to keep the book stable or grow. We've been able now to grow it for some period right now. If you look at other banks, you will see a decline in the Netherlands. We've been able to grow it. There is pressure, of course, as you mentioned, from redemptions here. We expect house price to increase, by the way, this year significantly, volumes are presumably down. There's no such thing at this moment in time that we look at for an organic growth, as asked. With respect to Payconiq, it's too early to tell. I think you should not look this only from a Dutch perspective, by the way.
It's a more European approach, where also fintechs and all kinds of other solutions will be there in the payment area. Our decision has been here to work further with Tikkie and other possibilities we see also in the fintech environment. Thank you.
Okay. Thank you very much.
Our following question is from Miss Phelbé Pace of Société Générale. Go ahead, your line is open.
Yes, good morning. I just have two questions really on your capital planning. The first one relates to the 13.5% capital target that you have maintained. Can you just explain why you decided to maintain a 50-basis-point management buffer on the top of your SREP and P2G? I guess the remark that goes along with this question is that if you have factored in a 50-basis-point management buffer on the top of regulatory requirements, why would you ever need to consider a 5% buffer for regulation to be binding? Because this is already 40 basis points higher than your estimated capital cost from Basel IV. The second question is that I just want to take out your view about what you expect the ECB to do on future SREP requirements, if you have any view.
Do you think that the new Basel proposals, now that the new Basel proposals have been issued, the supervisor will be prone to reduce regulatory requirements in the future? Thank you very much.
You take the first one, Clifford?
I think we're comfortable with our target. Our target is 17.5%-18.5%. We've explained the rationale, which is our, call it our existing target in the Basel IV buffer. In coming to that consideration, frankly, there are risks as well as opportunities. You've highlighted some opportunities around double counting of buffers. There's some risks in terms of possible unfavorable treatment of further rulings. We've got IFRS 9 coming in, I think the whole sector is learning about the volatility of impairments that that will bring. We also need to work through the volatility of the Basel IV capital requirements themselves. We understand how it works with respect to our internal models, but a cap applied to the standardized approach, I think is new territory for us as well as the industry.
I don't think it's right to unpick particular elements. That's not the way we thought about it. We've looked at it in the round. We're comfortable with this range. I think we've been open that we will review it annually, particularly the end of this year, as things develop, because a whole regulatory process is still evolving despite the clarity that we saw from Basel IV in December.
Thanks, Clifford. With respect to new Basel regulation leading to other regulators to lower their regulatory requirements. We have no indication from ECB at this moment in time. With respect to the Dutch regulator, I would say they have, of course, a Dutch add-on. I think their decision-making process would not so much look at now Basel is there, we will lower, but more how is the European integration and the banking union and the deposit guarantee schemes working out with backstops in case of crises and the likes. I think that's more the things they look at than just some other regulator have increased their regulatory requirements. Thank you.
Okay, thank you very much.
Next question is from Mr. Johan Ekblom of UBS. Go ahead, sir. Your line is open.
Thank you very much. I think we've probably covered capital from every angle. Maybe going back to net interest income. I guess if we look both in the retail business as well as in the private banking and adjust for some of the incidentals, there seems to have been quite an improvement on the level we saw in prior quarter. Is that a sustainable margin in Q4? Are there any sort of other effects we need to bear in mind there?
Yeah. Well, looking through incidentals is an art as well as a science. I think we've called out a few. We see the underlying as more flat, to be honest. I don't know how you've treated the TLTRO. We obviously see the benefit of that going forward, but we booked, call it, the full annual amount last year in one quarter. I think we're pleased with how we've managed it, particularly on the deposit side. I think we've remained, I would say, disciplined on margins, and you can see volumes are, call it, modestly higher, but not significantly higher despite, call it, the benign market conditions. We're focused on managing NII as a whole. We see it as resilient, and we see, frankly, the prospects that I described earlier for flattish development going forward with some pluses and minuses and some risks and opportunities around it.
Can I just follow up there? Of the TLTRO benefit, where is that booked divisionally?
Yeah.
Then maybe just to follow up on, when you say flat, should we think flat on Q4 ex incidentals or flat on full year 2017 ex incidentals?
Yeah. The TLTRO is booked in commercial banking and corporate banking. I would say Q4 is the level. When you look through the incidentals, it's been fairly flat through the year in our view.
Perfect. Thank you.
The next question is from Mr. Adrian Cighi of RBC Capital Markets. Your line is open. Go ahead, please.
Hi there. Thank you. It's Adrian Cighi from RBC. Just two follow-up questions, please. One on NII, and particularly on NIM. You've seen a pretty meaningful increase in NIM quarter-on-quarter, can you provide us some more color behind the drivers of this increase? Is this repricing mix or other drivers? One more follow-up on capital, if I may. You've outlined essentially two measures today. One is the 4%-5% CET1 buffer, and the other one is the 50% payout target. Now, even assuming that 35% risk-weight asset inflation, you're still generating somewhere around 150 basis points of capital a year pre-dividend. Even post the 50% payout and some risk-weight asset inflation or growth, you're still building 50 basis points organically a year.
You have 10 years before Basel comes into place, you're essentially already meeting the target, given the 4%-5% buffer, which realistically comes as a buffer and buffer strategy or a very cautious strategy. How much of this is regulatory driven, or regulator driven rather, and how much of this is self-imposed? Thank you.
Clifford, you start on the NIM.
A couple of things. I think there were around EUR 100 million of incidentals in that NIM. If you look at the chart that we've disclosed, you can see the dotted line is quite close to the trend line. We don't see a step up in NIM in Q4 when you look through those incidentals. I would say those corrections and some truing up in relation to mortgage penalties. I refer you to my comments earlier regarding the trend. I think on capital, there are a few elements there. I think being called prudent, I take that as a compliment. We've tried to provide an approach that gives some comfort around resilience of the stated payout, also the prospect of incremental distributions when they're there.
In particular, those distributions not setting a new platform to grow beyond that. We don't think that's the way to manage a transition in the regulatory developments. I think your figures, I would say, are roughly right in terms of organic capital generation. Those were behind our statement that we would expect to move upwards within our capital target range. That we are now currently at the bottom reflecting IFRS 9. We're hopeful of moving upwards within that range given the trends that Kees described. Life isn't mechanical. There are a number of other drivers of risk-weighted assets, including credit quality developments, modeling developments. I think we've all been used to a benign economic environment where those credit quality developments have been coming through moderating any growth in our risk-weighted assets to date. We need to manage the transition cautiously as well as the economic cycle cautiously.
When there's excess capital, we've called out what we would do with it, which would be clear consideration of additional distributions.
That's fair. Thank you very much.
Our next question is from Mr. Jean-Pierre Lambert of KBW. Go ahead, your line is open.
Good morning. I listened to the call from the beginning. I still have some clarification or angles on the capital. I'm sorry about that. The first question is, practically, are you going to evaluate the excess capital quarterly or at the end of the year? Is it going to be a quarterly process, or it will be a sweep at the end of the year? Second question related to that is the leverage ratio, which is normally a constraint for dividend payments, I would say, or for your CET1 management. How do you incorporate that? Thirdly, there's a trade-off for you between share buybacks and special dividends. How do you see it planning? Why do you need to keep these options open? Finally, the M&A, just to clarify what you said, M&A buffer, does it come on top of the 18.5%?
Thank you very much.
Clifford, can you start it?
One of your colleagues said that we'd done capital sufficiently. Obviously there isn't consensus there. I think there are a few comments. We think about capital all the time, real-time. I think the more material review would be at year-end. You should not expect to see quarterly changes in our capital range of 17.5%-18.5%. We think that expressing it in Basel III terms gives you comfort that you can calculate it and is clear to everybody. The major developments that Kees talked about, we see happening through the year. We'd expect really the year-end to be the opportunity to do that. Now, clearly, if there were material developments, we'd need to reflect on those. In thinking about special dividends in particular, the natural time to consider that seriously would be at the year-end with our regular dividend.
I think in terms of leverage ratio, we're pleased with the current leverage ratio of 4.1%. Tanja talked about the drivers. We will look to maintain that at above 4% going forward. We don't think that would be a material constraint on what we've been talking about, but it does need managing, and there are regulatory developments in that space as well. In thinking about buybacks versus special dividends, I think we're clear we're open-minded about any form of capital return, when the board considers it appropriate. Each has advantages and disadvantages depending on circumstances and frankly, depending on the share price. We want to keep those open. I think, special dividends, I commented on the timing considerations regarding that. I think buybacks also requires a more formal process with the regulator, which could take up to 3 months.
Both tools have pluses and minuses. We want to express to you we're open-minded about those depending on the circumstances. First, we need to determine where there's an excess, for which to distribute. I think regarding M&A-
Yeah, M&A, what I tried to say is that there's no buffer on top of the 17.5, 18.5. If we do small acquisition, we would finance it from our profit.
Great. Thank you very much.
Our next question is from Mr. Bruce Hamilton, Morgan Stanley. Go ahead, sir. Your line is open.
Hi there. Morning, guys, thanks for the presentation and all the answers. I've got one more on distribution. I think I understand the message is quite clear that you want to move towards the upper end of the range or a comfortable level. I assume you haven't thought about trying to make the total distribution progressive as we think about what you paid for 2017 is the first question. Secondly, just looking at SME demand dynamics in the Dutch market. The loan growth in your commercial book looks pretty good. Indeed, if I look at the system-level data, it looks like growth has been pretty lackluster on the corporate side.
I was just trying to understand, A, it looks like you're taking market share, but are you seeing any underlying signs of improvement driven by the improving GDP backdrop? Finally, on cost of risk, in terms of the IBNI reserve outstanding, just thinking about 2018 cost of risk, we should assume normalizing back towards the cross cycle average, but presumably running below that. Any words you have on guidance there would be helpful. Thanks.
Clifford.
I'll deal with the first two, and Tanja Cuppen perhaps the third. Look, we're aware of and pleased with our dividend for 2017. That reflects a step up from 2016 relating to a disposal, but also I think cyclically low impairments. We can't really comment on distributions regarding 2018 beyond the comments we've made. We're clearly looking to sustain the stated 50% payout, and we'll consider additional distributions on top of that in light of the circumstances we described earlier. I think around SME, I think your comments are interesting around that. We've seen, I would call it steady growth in the commercial banking book which we're pleased with. We've introduced a new sectoral approach to the team there, which is quite a big change for the market, and in terms of our relationship with our clients.
We're pleased we've traded quite well through those material changes. I think medium term, I'm hopeful that will sustain our market share going forward. We do need to recognize, I think we're pleased with the economic conditions, but we don't want to do things we'll regret in a few years' time when the cycle inevitably turns. I think cost of risk, Tanja.
A few comments on cost of risk. Also in IFRS 9, we still believe that through the cycle, cost of risk will be between 25 to 30 basis points. Of course, last year was not a normal year. If you correct for all kind of model changes we have had, then the cost of risk would be around six basis points. Our outlook for 2018 is well above that number, which was I think historically low, but well below the through-the-cycle cost of risk.
Thank you.
Our next question is from Mr. Bart Jooris of Degroof Petercam. Go ahead, your line is open, sir.
Yes, good morning. Thank you for taking my questions. Regarding IFRS 9, if I can come back on risk cost. Do you have already a more quantitative view of what that would mean for 2018 impairments? On costs, given that you already reduced FTEs by 10% of your 13%, does that mean that we should no longer see significant restructuring charges? What about your expected ICT investments this year?
Okay. Thank you. On the expectations for 2018, I cannot add anything to what I just said. It will be above the levels that we've seen in 2017, but still below the through-the-cycle cost of risk.
Just to clarify that, is that because of IFRS 9, or it's just because you have less releases planned?
No, it's not specifically related to IFRS 9. What you will see as a consequence of IFRS 9, that some of the cost of risk will be front-loaded through the introduction of stage 2 cost of risk. Given the economic outlook, we don't expect a very major impact in 2018.
Okay, thank you.
Yeah. I think just commenting on costs. I think we're pleased with our digitization progress. We do expect costs to require further work going forward, and it's possible that there are further FTE trends that play out over the medium term. I don't think we're calling the end of FTE reduction. Any business in this environment needs to continue to bear down on costs, and people costs are an important part of the business. I think in terms of restructuring charges, they've been meaningful last year and this year, and we are conscious of the need to continue to improve our processes and work on that. It's possible that there are restructuring charges going forward, and we'll call those out to you. I think in terms of ICT, there are a few things going on.
We do need to see cost of technology, cost of change as part of our overall ongoing expenses, not a sort of lump sums that are spent and then disappear going forward. We're investing in our new challenger propositions that Kees described. We also have a new innovation and technology director, and we'll update you further on plans and thoughts around that. We're not looking or expecting major programs, but I'll be disappointed if Christian hasn't got good ideas about how we can improve our business going forward. We will update you further on that later in the year.
Okay. Thank you very much.
The next question is from Mr. Stefan Nedialkov of Citi. Go ahead, sir, your line is open.
Yeah. Hi, guys. It's Stefan from Citi. I got three questions, hopefully quick ones. Number one, on the leverage ratio benefit from the clearing redefinition. You've upped the guidance to 50-60 basis points. Wanted to confirm that this is already net of the off-balance sheet factors, and to get some color on what exactly early adoption means. Are we talking 2018, 2019, et cetera? That's question number one. Question number two, in terms of M&A, can you please refresh us on your M&A targets? What type of criteria does Target need to meet in order for you to go ahead, especially with respect to cost of equity or ROI or ROAC, et cetera? The last question, when you talk about M&A being funded out of earnings, just looking at consensus. Consensus has you basically making anywhere between EUR two-2.3 billion per year through 2020.
You're paying 50% of that leaves you EUR 1 billion or so for an acquisition. Assuming one times book value, RWA additions, et cetera.
That basically lets you buy something for, I guess, EUR 20, EUR 25 billion in assets. Does that make sense? Am I thinking about it the right way? What sort of EUR 20-25 billion worth of assets make sense to you from a strategic point of view, domestically or outside of the Netherlands? Thank you.
Leverage ratio?
Yeah. I think so. On leverage ratio, I think we're calling out the impact as slightly larger, reflecting growth in the business of clearing and our overall balance sheet dynamics. I think the confirmation you were looking for was yes, in terms of your first question. In terms of timing, I think it reflects the implementation of CRD V, CRR II proposals. We don't expect that in the short term, in particular, not in the timescale that you talked about. I think what's on our minds is we do see the likelihood of this benefit in the medium term, and we want to reflect that in terms of how we manage it in the short term, which means we're frankly more comfortable being at around four, knowing there's a prospect of a meaningful, call it uplift in the medium term. That's how we're thinking about it.
We don't expect that uplift short-term, but it's giving us comfort that it's there in the medium term, and we think about this in terms of a glide path.
M&A, thanks, Clifford. M&A, I think we've communicated, I think it was around IPO, and actually our stance is still the same. Is that if there would be the private bank in, say, Germany or France, would be add-ons which would add scale, but onshore, impeccable positions and the like. There are not so many opportunities around. That's what we said, so that's small. Your third question about the EUR 20 billion-EUR 25 billion assets, that's not the kind of calculations we make right now.
Okay, thank you.
Our following question is from Mr. Tarik El Mejjad of BAML. Go ahead, sir, your line is open.
Hi. Good morning. Yes, I think I have another angle to the capital question topic. You guide for a review of your capital return once you are above or within the range. If you look at your capital generation, given negative migration in RWAs and so on, and some growth, you won't be there before 2020 or 2021. Is that correct thinking? Also, the TRIM. I'm a bit surprised by your comments that your TRIM was front-run Basel IV. My understanding is that there's no really overlap between the two, but maybe you can tell us why you come to this conclusion that actually a higher Basel IV will mean lower TRIM. On the asset quality review, the idea, last time 2016, you didn't score very well. With the drawdown on the stress test was very high.
What have you done since then to make sure you pass it better? My understanding is that the Pillar 2 G is probably highly impacted by that result. Maybe you can actually disclose to us the Pillar 2 G as some of your colleagues did, to give us more comfort that actually your 13.5% includes some decent management buffer. Last point, which is not really a question, is a comment. I understand market wants to get some capital back, it's clearly stated today that there is no excess capital as such in the medium term. I think you better keep any capital built and try to find routes for growth rather than hoping for some special, which at the end, I'm not sure this adds much to shareholder, but that was my personal view. Thank you.
I think the TRIM-
Yeah.
Tanja, you can start.
Should I start with your question on TRIM? As you are aware, we have quite low RWA levels for certain asset classes, and if that would increase because of TRIM, it would still be below the output floor for Basel IV. That's why it will reduce the impact of Basel IV. On the EBA stress test, of course, we have done a full exercise and lessons learned based on the last stress test in the past three years. A full remediation plan has been implemented to be well prepared for this year's exercise. On the P2G, I cannot give any comments.
It's included the P2G in the 1.7%, which then indeed includes the management buffer and the P2G. I think you can make more or less your own calculation. With respect to growth, I think what we're aiming for is, of course, growth if it's profitable, and that's our perspective. It's not just growth by itself.
Okay. Thank you.
Yeah. There
Sorry. Our following question is from Mr. Matthew Clark of Mediobanca. Go ahead, please. Your line is open.
Good morning. A few questions on net interest income and growth and that sort of thing. Firstly, you gave a flattish net interest income outlook last quarter. The yield curve is materially higher since then, and you're still talking about a flattish net interest income. Outlook from here. Has the higher yield curve really changed anything from you? Maybe if you could also just talk about mortgage spreads here, given that the yield curve's moved and mortgage rates don't seem to have done yet. Is it still attractive for you to be writing new mortgages at the current level of spreads? Any commentary there would be appreciated. Second question is on CIB loan growth. Obviously pretty strong. I think it's 11% or 12% in your slide. Are you happy with that kind of level of loan growth going forward from a risk perspective?
Any comment there would be appreciated. Thanks very much.
Yeah.
Yeah, Tanja? On loan growth.
Yeah. On the CIB loan growth. Yeah. Of course, we carefully look at the economic cycle. If it comes to loan growth, we have seen in our main sectors, the ECT sector, we have seen considerable improvement in terms of credit quality and also the modest loan growth projected, we are comfortable with from a credit risk point of view.
Yeah. I think on margins, we hedge our position with respect to interest rates. We're not all that sensitive to interest rates. Although we welcome a gently rising interest rate environment. I think you sort of answered your question in a way, which is, look, it takes time for the business to adapt to a different interest rate environment. I think it's possible that interest rates may well be higher this quarter than last. I think we'd need to see that persisting and maturing before we called general change in trends in the business. Let's monitor it quarter-on-quarter and look forward to catching up later in the year.
Great. Based on the forward curve as it is, do you still see a headwind from the kind of falling calculatory asset yield 2018 versus 2017?
Yeah. On the deposit side, we're looking to actively manage margins. We're reaching towards the end of that. We're kind of at an inflection point, which was behind my comments earlier on margins. If rates stayed lower, that would put pressure on margins. If rates are ticking up, that would relieve pressure on margins. We'd need to see where consumer rates move in that direction.
You say if rates. Are you talking from the current level as of today or from a kind of a 2017 average level or from a fourth quarter average level, just because the yield curve's moved so far year-to-date or since the fourth quarter average, just trying to work that?
Yeah. Look, I understand. I can understand. We don't manage the business in that way and don't give guidance in that way. I think I gave the guidance earlier, really keying off Q4. I mean, we'll update that later in the year if there's structural change. Clearly, week-to-week, month-to-month, you can take a real-time snapshot and frankly form your own views on the direction. We need to operate the business in a stable way, which I think reflects some of the stickiness in consumer rates that you referred to earlier.
Okay. Understood. Thanks so much.
With respect to the, I mentioned the 1.5 P2G management buffer, but as mentioned on slide 16, it's 1.7. Sorry for that.
Our next question is from Miss Natacha Blackman of Société Générale. Go ahead, your line is open. Miss Blackman, your line is open. Go ahead and ask your question.
Hello. Hi. Sorry, I was having some technical problems. This is Natacha from the credit research team at SG. My questions are on funding. First of all, do you have any subordinated debt funding to do this year? It looks like you're now full on the AT1 side. Second, would you be able to provide an update on timing of non-preferred senior issuance and how much you're looking to do? Thank you.
Yeah. I mean, we don't comment on our issuance plans at that level of detail. I think in non-preferred senior, we're looking to build our MREL over time and take advantage of new market opportunities, which we expect towards the end of this year, early next year.
Okay. Thank you.
Following question is from Mr. Kiri Vijayarajah of HSBC. Go ahead, your line is open.
Yes. Good morning. It's Kiri Vijayarajah, HSBC. Just a couple of follow-up questions on your volume ambitions. Firstly, where do you expect your mortgage market share on new origination in the Netherlands to be this year? Do you expect it to be up or down on last year? When I look across at slide nine and the mix of growth in the different loan segments there, is there any rebalancing we need to think about back towards the Netherlands when we look at some of the macro indicators? Or is it more of just the same where actually the international book continues to drive the growth for you guys? Thanks.
I think with respect to the mortgage market, over the year, we had a 21% market share, fourth quarter 19%. That's a bit of the margin. We are, I think, the largest bank in the Netherlands with a 22% Rabobank. We like this market share, but it's definitely, in the end, related to making hurdles and doing profitable business. With respect to the growth, well, this means it's difficult to forecast the mortgage book. We hold flat-ish or a small growth there. With respect to the growth of the SME, we always guide Dutch growth and with international, we guide world trade, and we still do.
Our following question is from Miss Alicia Chung. Go ahead, your line is open.
Morning, everyone. Just one question from me. The underlying cost for 2017 was around EUR 5.2 billion, including the reg costs. If we look at 2018 specifically, what can we expect in terms of investments and cost savings this year? Can you give any guidance around what kind of cost growth we can expect when you combine the two together? More broadly, given the way underlying costs are progressing, is it possible that you undershoot your EUR 5.2 billion target by 2020? Is the intention to reinvest any cost savings or any of your undershooting back into the business? Thank you.
Yeah. I agree with your calculations, in terms of costs, excluding incidentals for last year. We're focused on driving down costs sustainably over time, and in particular, to meet our cost-income ratio target for 2020. There will be some movement. We do want to invest in the business, and we expect to see that happening further, both technology and client developments, but also investments in call it further cost reduction. We want to see that happening in 2018 and 2019. We're very committed to our cost-income ratio targets in 2020. Hopefully, that gives you the guidance. It's possible that the cost levels drift up, reflecting those investments, but we don't want that to drift up too much, quite frankly, because it's important that the whole business manages its cost in a disciplined way and hits that cost-income ratio target in a way that's sustainable going forward.
Our following question is from Mr. Maxence Le Gouvello of Jefferies. Go ahead, your line is open.
Yeah, good morning. I have no question on capital. Just focusing on business. The first one is on retail and private banking. Can you give us how much assets have been moved over 2017 from retail banking to private banking, which kind of ability you're going to have to increase the profitability by the transfers on those assets? The second question is a follow-up on the corporate institutional banking comment from Tanja on the offshore segment in your interim report. You're saying that we reached a bottom. The comment is meaning that you are feeling more comfortable in terms of managing your cost of risk, or you are going to have the ability to accelerate the loan growth? Many thanks.
Yeah. I think on net flows, we saw EUR 1.7 billion net flows into private banking, about half that represents the transfers. That's for Q4.
Okay. On full year?
Yeah. It's a similar sort of trend, I would say.
Okay. By how much are you able to increase the profitability? Because I believe you are going to be able to offer to those clients moving to the private banking more adequate products. How long do you expect to improve?
Well, I'd say that business, as you know, is a EUR 200 billion private client asset. We're working hard to deliver value to all our clients, I think we'd like to see improved growth and financial performance across that business. I wouldn't call out that specific chunk of assets in particular. We think those kinds are best managed within the Private Bank.
Okay.
Okay. Then with respect to your question on CIB, you mentioned specifically offshore. With respect to offshore, we will continue to be cautious, want to see some more fundamental improvements as well. My comment was more broadly as well on the ECT sector.
Okay. Many thanks.
Next question is from Mr. Marcell Houben, Credit Suisse. Go ahead, your line is open.
Good morning. Thank you for taking my questions. I have two left. The first one is to come back on your interest rate hedging. Could you disclose to us the interest rate sensitivity in year three or post year three? I think you have disclosed it in year one, but I just would like to know year three, if you just adjusted your hedging program as some of your peers have done. The second question is on, again, Basel IV capital. Am I just right to assume that the 35% RWA inflation is assuming no watering down of the output floor? It seems ultra-conservative to me. Would that in turn also mean that if there's watering down, your target would decline by that? Thank you.
Just on picking up these questions. On Basel IV, look, the rules are just out. We think the most transparent way is to provide an estimate on the rules as published, in line with our best judgment. I'm not completely clear what others have done, but I think we've been quite transparent on that. As the rules emerge, we will reflect on our estimates and reflect on our capital range. As we stated earlier, we need to prudently manage the transition, not snap backwards and forwards in the light of the latest sort of speculation regarding rules. I think that's on the first question.
The question related to Basel IV 35 being too prudent, no watering down of output floor included. That's correct. That's not included. To be honest, I don't know what the effect that will be in Europe. The output floor is, of course, quite a real Basel outcome. To change that, I don't know if that's possible. Let's see. That in Brussels, also discussions will concentrate, for instance, on mortgages and the likes, or growth in Europe as a mean. I don't know. We don't know yet, but it's too early to tell that it is too prudent.
Just picking up your first question. Look, we hedge our interest rate. We match that. We are exposed to rising rates. We'll disclose that in our annual report when it's out in a few weeks. In terms of our overall position, we have shortened our equity duration towards the end of last year. I don't regard it as hugely material because our overall interest rate position is fairly modest. In hindsight, so far, that looks smart, frankly, but we need to see how rates develop going forward, and you'll see a few more details in our annual report when that comes out in March.
Okay. Excellent. Just a follow-up, if I may, on the cost programs. I was just wondering, now underlying for 2017 is roughly EUR 5.2 billion. This is in line with your target for 2020. How much more cost savings would you need to keep this nominal level, EUR 5.2 billion, sort of flat for 2018 and 2019? How many cost savings programs additionally or incrementally should we expect to keep it flat? Thank you.
Well, I think we're working on our existing programs at the moment, and we think that we can manage then the needed cost development in line with the 56/58.
Okay. Thank you.
Our next question is from Mr. Davey. No. Excuse me, Nick Davey of Redburn. Go ahead, please. Your line is open.
Yes. Good morning, everyone. Three questions, please. The first one just sort of high level question, really, thinking ahead to the next three quarters. If I sort of sum total lots of your areas of guidance, you have talked about flattish NII. I think you have talked also about some pushes and pulls on fees, which alludes to flattish. You are talking about costs with some pushes and pulls, maybe flattish, and you have postponed the dividend debate for another year. When we tune in over the next three quarters, what are our sort of benchmarks of success? What do you hope to be sort of showing us between now and this time next year, by way of progress, just some tangible things for us to look for, please. Second question, back to the sort of revenue and cost dynamic.
You are sticking to the 56%-58% cost income, but again, the revenue momentum at the moment is not as you planned. At what point would you revisit the shape of revenue and cost aspirations to give us a clearer path to the 56 to 58 if the revenue environment is tough? The third question, sorry, it is another sort of interest rate and yield curve one. I just wonder if there is any other help you can give us really on the deposit hedge or replication portfolio, how it is constructed, so we can understand or make our own estimates from the outside in on where the yield curve would need to get to for you not to be worried about this deposit hedge reinvestment. I think ING were talking about savings accounts at a five-year duration, current accounts at seven. Does that resonate at all? Thank you.
Thanks for your question. Let me take the first one. I think when you have a high income level and a low cost level, I think indeed, in some circumstances, keeping some NII, to give an example, flattish and so on, is something we also think would be a good result. We already mentioned, I think the pressure on the mortgage book as a result of redemptions. We have to work hard there. I think you should also take into account the levels of ROEs we have right now. I think that should also be taken in consideration, I think, with respect to this question. We will work hard, of course, to grow and to diminish costs and the likes. No worries about that. You have to take it in the context of the figures.
Yeah. I think on replicating portfolio, I've actually read the transcript. I think those orders of call it duration, are not unfamiliar. We're operating in the same market, following the similar sort of analytical process. I don't think giving specific guidance around that is all that helpful. What we've done is called out some of the pluses and minuses. We've reduced our deposit rates, including bonus rates, so we're able to manage, at least so far, the consumer rates. I think I've called out the challenges if low rates continue in the medium term, that would pressure margins in the medium term. We're frankly managing margins across the business, including the asset side and on the funding side, and that's what's driving our guidance around NII. We don't plan to give specific yield curve guidance on specific products. Based on what you've said, that sounds broadly familiar.
Very helpful. Thank you. Sorry, if I could just ask a follow-up on the shape of the plan to get to 56 to 58. At what point, if the revenue environment is still tough, would you update us on maybe a more punchy cost aspiration?
Yeah. I think we're committed to the 56 to 58 cost-income ratio target, because we think that reflects an efficient business in this market, rather than a specific number. That triangulated to the EUR 5.2 billion. I think we're broadly on track with those numbers. We'll continue to update you. I think we're also conscious on some of the comments earlier around growth, and the need to invest in growth. I think our challenge is to ensure we do both, which is to invest selectively in profitable growth areas, but also continue to bear down on costs and digitize processes so that we are serving our customers cost effectively. I think Kees updated briefly on that at the start of his presentation, and we'll look to do that on an ongoing basis each quarter.
Very helpful. Thank you.
We have another question from Mr. Stefan Nedialkov, Citi. Go ahead, your line is open.
Hi, guys. It's me back again, hopefully a very quick one. In terms of costs, could you update us on the overhaul of your core banking systems, the simplification process that you started several years ago? Where are we, and should we expect in 2018 more of a cost pressure coming from there? Secondly, in terms of the ATM consolidation with all of the other Dutch banks, can you just give us again some color on how that is likely to impact the ongoing costs in 2018 plus? Thank you.
Thank you. I think the ATM is actually too early to white labeling over there, too. I've not seen figures yet in that respect. I think it's on the EUR 5.2 billion. It will not be very big, I presume.
No.
The first.
That's exactly the sort of thing you'd expect us to be doing. It's not hugely material to the EUR 5.2 billion, but sensible cost management on the part of the industry. I think in terms of I'm not sure, frankly, we've got much further to add regarding costs. We've discussed it in detail. I think what we call our Tops 2020 program is proceeding well. We gave an update on the migration of the systems to the cloud at the last quarter. I wouldn't necessarily call it an overhaul of our core banking system. I think it's more in terms of a simplification and modernization of our IT. It remains on track, and that underpins our update and our confidence regarding our long-term cost-income ratio target.
Okay, thank you.
I think it's 12:30. I think that we more or less need to finish this one. If there is still an urgent question, but if not, I would like to end the call. Operator, are there still questions?
Sir, we have no further questions. Please continue.
Okay. Okay, that's great. I would like to thank you all very much for attendance of this call, and hope to speak to you later. Thank you very much. Operator, thank you as well.
Thank you very much, sir. Ladies and gentlemen, this concludes this conference. On behalf of ABN AMRO, thank you for attending. You can disconnect your line now.