Good morning, ladies and gentlemen. Thank you for holding, and welcome to the ABN AMRO [Q3 2016] Result event call. At this moment, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Please limit the number of questions to three. I would now like to hand over the conference to Mr. Van Dijkhuizen. Please go ahead.
Thank you very much, operator. Good morning, everybody. Welcome to the analyst and investor call for ABN AMRO third quarter results. I'm delighted to be joined for the first time by Clifford Abrahams, our new CFO, and Tanja Cuppen, our new CRO. Tanja joined us from Rabobank, where she was Chief Risk Officer in North America, and Clifford joined us from Deloitte, where he was the group CFO, and before that, he worked for Aviva and Morgan Stanley. We will now run through our Q3 results and respond to your questions. Turning to slide two, I will briefly highlight the main points. We had a good third quarter with net profit of EUR 673 million, up 11%. Mortgage and corporate loan books are all up in constant currencies. Our net interest income is resilient despite low rates.
I'm pleased that our costs continue to trend down as our cost-saving programs deliver. Loan impairments remain low, benefiting from the strong Dutch economy. ROE for Q3 2017 was 13.8%, and our cost income ratio was 56.9%. We are on track to achieve our financial targets. Our new leadership team is completed with the announcement of Christian Bornfeld as Chief Innovation and Technology Officer. Our fully CET1 ratio is strong at 17.6%, and our leverage ratio is now 4% if you incorporate the recent AT1 and EBA guideline. I will now briefly discuss the macroeconomy of our home market on the next slide three. You can see on the left that Dutch GDP is forecast to grow above the Eurozone average at 3.1% this year and 2.4% next year. The housing market is performing strongly, with higher prices and transaction volumes remaining high.
The new plans from the coalition government should be positive for the Dutch economy, a view supported by rating agencies. We are well-positioned to benefit from the strong Dutch economy. We're also moving ahead with our strategic agenda. I will update you now on our areas for focus, cost, customer experience, digital innovation, and sustainability. Starting with cost. Next, slide four. As you know, to realize the same cost level in 2020 compared to 2015, we have targeted EUR 900 million in cost savings. We expect around EUR 300 million of these from lower IT costs. We started in 2014 by cleaning up legacy systems and have so far decommissioned 1,400 applications. We are delivering on our milestones to achieve contractual savings. For example, porting applications to the private cloud environment. We have ported over 300 applications already and expect to do the remaining 450 by year-end 2018.
We have also simplified our organization and changed the way we work. Developers now work in multidisciplinary agile teams. This lowers the cost to develop new and innovative services. We have also simplified our head office functions. Looking at staff levels, in the right-hand chart, you see a clear declining trend. We previously announced we will reduce FTEs by 13% by 2020 compared to the year 2015, so in five years' time. In one year and nine months, we have already achieved a reduction of 8%. We are showing good progress on our cost reductions programs. On the next slide, I will update you on client developments. The left chart shows the decline in branches as a result of the growth in digital banking. We have been quick to close branches from 654 after the merger to 206 today. This number will go down further.
We do this because our clients use and value our digital services. On the right, you see that of all sales and services processes within retail, 50% are fully digital, so not requiring any human intervention. This is a big increase from 30% at the end of 2015. We will not be able, of course, to digitalize every process, so this number will not go up to 100%. We see clients are quick to adopt new digital services. Already 50% of mortgage advice is through webcam. We are putting a lot of effort into digitalizing our services. However, we must also think out of the box and innovate. On the next slide, we show some examples of ideas which we have made it to the commercial phase. The first example is award-winning Tikkie, which now has 1.4 million of users.
Tikkie is simple, effective, and our clients are really using this service. 50% of payment requests are paid within 30 minutes, with 80% paid on the same day. This is a key attraction also for business clients, and we are onboarding new corporates and institutions and have a long list of interested prospects. Recently, we announced two new digital platforms. In September, we launched a digital SME lending platform in the Netherlands called New10. Within 15 minutes, new clients know if they are able to obtain a loan anywhere between EUR 20,000 and EUR 1 million. Today we announced Prospery, which will go live in Germany shortly. Prospery is a digital wealth manager targeting clients with a net worth starting at EUR 250K. It is a fully digital platform for wealth planning and investments, combined with a personal financial expert and a fixed fee. That makes it unique.
I have been impressed by the short timeframe in which both Prospery and New10 have been built from scratch, in between 6 to 10 months. To achieve this, we collaborated with IT and Fintech partners. This type of rapid development will become more and more important in the future. Turning now to sustainability. Next slide. Today, we announce our ambition to double sustainable invested assets within private banking from EUR 8 billion-EUR 16 billion in the next three years. We see that clients increasingly take sustainability into account when investing. We will publish impact reports starting in 2018, which will raise clients' awareness of their investment. Clients with traditional investment portfolio will also receive these reports. In this way, we hope to encourage them to switch from traditional to sustainable investments.
This sustainable initiative leverage our relationship with our clients to achieve a much bigger impact than we can achieve on our own. I'm also proud of the improvements we made in the RobecoSAM's annual sustainability assessment. With a score of 91 points out of 100, ABN AMRO is one of the best performing banks worldwide. This score serves as the base for the Dow Jones Sustainability Index, which will be published in January, and hopefully we will be in the best 5% category. I will update you on how we are performing on our financial targets. Next slide. Our cost income ratio amounted to 57.3% year to date. Excluding the gain of the sale of the Private Banking Asia, this becomes 58.6%, showing our progress on cost reductions I mentioned earlier.
Our return on equity amounted to 15.7% year to date, excluding the impact of the Private Banking Asia divestment and model releases, this was 13.6%. With regards to our capital position, you all know our strategy here. Thanks to our profitability and payout of 50%, we have been building up a large buffer for the potential impact of Basel IV. During the first quarter of next year, we will give you an update on capital. In summary, we're making good progress on our strategic agenda, this is showing up in our financial results. I will now hand over to Clifford to go into more detail on our Q3 results.
Thank you, Kees. This is my first quarter as CFO of ABN AMRO. I'm delighted to work for this fine institution with its tremendous heritage, with a great domestic franchise, a clean balance sheet, and a lot of potential. I will highlight here the main points of our Q3 results. Our net profit is up 11%, driven by lower costs, partly offset by lower non-interest income. Our net interest income is resilient, while low impairments remain exceptionally low. All in all, this quarter was relatively clean in terms of few incidental items. Moving to the next slide, I will describe the trends in loan volumes. The left-hand chart shows the steady growth in our mortgages. Our market share declined somewhat to 19.2% during Q3 as competition from banks increased while we maintained our pricing discipline.
Commercial banking is continuing its growth, while corporate banking is showing underlying growth when you look through U.S. dollar movements. Finally, for consumer loans, the decline has stopped with the loan book stabilizing. Overall, I'm pleased with the developments in our volumes. Turning to the next slide on net interest income. During the quarter, our net interest income was modestly up year-on-year, excluding the effects of the sale of Private Banking Asia. Mortgages and commercial banking are driving up net interest income as margins were stable and volumes up. This was partly offset by group functions, which suffered from higher liquidity buffer costs. Corporate banking showed lower interest income, reflected elevated global markets results last year. Moving now to deposits. The main retail client rate was further reduced down to 10 basis points in Q3 and currently stands at five basis points.
Overall, deposits had a limited impact on net interest income during the quarter. Net interest income, our main source of income, remained resilient through the year, and we see stable margins and continued steady growth in our main portfolios in the short term. Moving to fee income on the next slide. Fee income is lower by EUR 24 million, excluding the impact of the sale of Private Banking Asia. As you know, we lowered the payment package fees in retail banking last year. Global markets had a softer quarter, and clearing suffered from low volumes as a result of low volatility in financial markets. Partly offsetting these developments was the effect of increased client assets at our private bank due to improved stock market valuations. Other operating income amounted to EUR 160 million. The only incidental item this quarter was the release of a EUR 27 million provision.
Excluding this, other operating income this quarter is in line with our general indication of around EUR 125 million per quarter. Moving on to costs. Personnel expenses include a number of restructuring provisions, EUR 29 million this quarter and EUR 144 million in Q3 last year. Excluding these, costs are trending down due to lower FTEs, partly offset by wage inflation and higher pension costs. Other expenses are also lower. Cost savings from our IT transformation are coming through, and as you know, Q3 has below average regulatory levies. As Kees mentioned, costs are increasingly benefiting from our cost reduction programs delivering. Our retail, private, and commercial banks are further reducing their workforce. Consequently, I expect an additional restructuring provision of EUR 50 million to EUR 100 million in the fourth quarter of this year. Moving on to loan impairments. Slide 14.
On the left, you can see that the strong Dutch economy means impairments are low. During Q3, we booked only EUR 5 million of impairments. Mortgages, consumer loans, and Dutch corporate loans all showed releases. We had another release related to last quarter's mortgage model refinement. On the right-hand chart, you can see that corporate impairments were again lower this quarter. The EUR 12 million impairments for ECT in the quarter was one of the lowest levels in recent years, although still EUR 153 million year to date. Our ECT impairments continue to track well within our forecasted scenarios. Overall, the loan book continues to perform well below through the cycle cost of risk. Turning to our capital position on the next slide. I know you're all interested in our capital update to take place in Q1 2018. I will just focus on our current capital position.
We have a strong CET1 ratio of 17.6%, and as you can see over the last quarter, the increase in capital due to earnings was offset by higher risk-weighted assets. In particular, our credit risk risk-weighted assets increased by EUR 2.4 billion during the quarter. This was unusually high for any one quarter. I would highlight that only EUR 0.7 billion of the increase was due to volume growth in our loan books. The remaining increase of around EUR 1.7 billion being unrelated to business growth and includes model revisions, for example. In addition, during the first half of 2017, we took EUR 2 billion to EUR 3 billion add-ons for operational risk related to our implementation of the advanced approach. We had expected these would largely be reversed by Q1 2018. The regulatory assessments are taking longer, and we now expect any reversals to be delayed until later in next year.
Finally, at Q3, our pro forma fully loaded leverage ratio was 4%. This reflects our recent AT1 issue and is stated after the adverse impact of last week's EBA Q&A on certain capital regulations. With that, I'd like to hand back to Kees.
Thank you very much, Clifford. Let me recap. We had a good third quarter. We are progressing on our strategic agenda. Dutch economy is showing a good performance. Loan portfolios are showing growth, and loan impairments remain very low. We are seeing costs coming down as a result of our cost reduction programs coming through. We launched finally a number of exciting new digital and sustainability initiatives. With that, I would like to ask the operator now to open the call for questions.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. If you have a question or remark, please press star one. Go ahead, please. Star one for questions or remarks. The first question is coming from Mr. Pawel Dziedzic from Goldman Sachs. Please go ahead, sir.
Good morning, and thank you for the presentation. I have 2 questions. The first one is on cost. Can you please clarify if the progress that you made changes in any way scale of savings that you target under the restructuring program? I know you referred to this EUR 5.2 billion flat cost base in 2020, and I was wondering if this is still the best case estimate that you have or perhaps if the savings can be achieved earlier. The second question that I have is on your slide 11 and progress on margin. You maintained NIM broadly flat this quarter, and we can see on the slide that it steadily increased since start of 2016. You also made remarks today that point to pressure.
You talked about higher liquidity buffer cost. You talked about limited ability to cut savings rates that now are at five basis points. Perhaps you also mentioned competition for mortgage and so on. With all that in mind, do you think you would be able to maintain margin at current levels as we go into 2018, or we should expect to see a decline there? Thank you.
Thank you very much, Pavel. Start with cost. I think we are not going to update our EUR 5.2 billion guidance 2020. As you have noticed, we are making a lot of progress quickly at this moment in time. The target still is the EUR 5.2 in 2020. Of course, the earlier we can realize that, the better. That is our official target. With respect to NII, I think indeed what you notice at this moment in the market is that volumes are on the asset side, a bit up. If look at mortgages, look at SME, it's a bit down in the corporate book, but that's due to the USD. Underlying is also up. That's a positive for NII, I would say. With respect to margins, there is indeed pressure already for some time in the SME world.
Also I would say mortgage world as we speak, there's some pressure on margins. Of course, as you mentioned, at the liability side, there of course, with deposits with a rate of five basis points, there's of course also pressure on NII. On balance, our assessment at this moment in time is a flattish NII on balance of all those developments.
Thank you. Very clear.
The next question is coming from Mr. Farquhar Murray from Autonomous. Please go ahead, sir.
Morning, gentlemen. Just two questions, if I may. Firstly, with regards to the EBA interpretation, obviously in your circumstances, the economic rationale for the minority haircuts kind of escapes me. Given the interpretation, please could you outline any practical impediments, material disadvantages, or obvious regulatory objections to either legally merging the group holding into the bank or perhaps redesignating the resolution entity? Secondly, on the interest income of EUR 1,566 million in the quarter, it's a little bit light. I just wondered if you could decompose the Q on Q4, and it looks like some of the weakness is coming from group treasury. Is that just a reflection of elevated cash balances in the quarter that might reverse, or is it something more than that? Thanks.
Thanks very much. Clifford, you want to answer this question?
Yeah. I think as we stated on Friday regarding our announcement, we agree with you, actually. There's no major change from an economic perspective regarding the EBA rules. We see our primary capital metrics as remaining unaffected. Whilst there may be possibilities from a restructuring perspective, which we're giving some consideration to, we see this as more of a complication rather than anything that would fundamentally affect the way we run the group from a capital perspective. I think just moving on to net interest income, I think you're right, Q on Q net interest income is down around 2%. That's around EUR 30 million. There are really three effects, all of roughly equal size. We had the benefit of what we call unearned interest income relating to some improving loans in the commercial banking area. That was about a third.
We also had the impact of U.S. dollar depreciation on a U.S. loan book. That was about a third. Similarly, the remaining third was around what we call effectively shifts in the liquidity position between the global functions and the rest of the businesses. The increased cost of the liquidity buffer was more a year-on-year impact rather than a Q on Q impact.
Just as a follow-on. I appreciate, obviously, the kind of restructuring of it. You're looking into the complications, but my question to a certain extent is, are there any obvious complications to, say, merging or legally merging the group holding?
I think we've been clear that we don't see this as a material issue, I'd be surprised if I updated in detail about the practicalities of resolving what we don't think is a material issue. I think legal entity restructurings is something that's pretty common across the financial sector. Generally speaking, companies have been able to do that, there's quite a lot of legal work involved. We have branches in different parts of the world. We have a state that owns our shares through a particular legal structure. All financials tend to be a bit complicated, even as one is focused with ABN AMRO, legal entity restructures can be done, it just may take time and hassle, money, and we'd rather be doing other things. We don't feel that the change affects our capital position.
That's not something we focused on in terms of legal entity restructurings.
Okay, thanks very much.
The next question is coming from Mr. Benjamin Goy from Deutsche Bank. Please go ahead, sir.
Yes. Hi, good morning. Two questions please from my side. First of all on costs. I appreciate your guidance around 2020, but maybe a bit nearer term. Sounds like there's still more FTE reductions to come, and you're further decommissioning your applications in the next four quarters. Wondering whether near term the outlook remains rather positive on the cost development, or should we be aware of any major investments you plan to do? Secondly, on the ECT loan losses, these finally came down. Do you think now it is your, like the worst is over, or should we expect more volatility going forward? Thank you.
If you want to do first, then second.
Regarding costs, I think that I'm pleased with our delivery around the cost saving programs. You know these things take time. These have been in the works for some time, and we're starting to see the benefits earning through. I expect to see the benefit of reductions in FTEs coming through earnings next year in addition. I think Kees was quite clear in the answer to the earlier question that we're really looking to manage costs flat over time over a five-year period. Frankly, we expect cost inflation through wages, but also incremental investments that we want to do, some of which we've announced today. We will compensate that by continuing to bear down on costs. I would say in any one period, you will see those two offsetting.
We're not calling a continuous quarter-on-quarter cost reduction because we do have investments that we want to do to improve our service to customers and to realize cost benefits. What we are saying is we're seeing those benefits coming through and we are certainly committed to our target of managing to a flat cost base over time.
On your question with respect to the ECT sector and the loan losses, we definitely see a stabilization in the loan losses in these segments, although we cannot say that it's all over. We seem to subsector still under pressure like oil services. We feel things are under control. If it comes to volatility in loan losses, that is something that is typical for this segment with large exposure. We see some chunkiness in provisioning during the quarter.
Thank you.
The next question is coming from Mr. Benoît Pétrarque from Kepler. Please go ahead, sir.
Yes. Good morning, Clifford. Good luck as well for you. Just wanted to come back on the cost. I think you said in the past that in fact the cost should remain flat, but you had also revenue ambitions as well, obviously. I think overall the 56%, 58% cost income target was really a key target in the old seeking process. I was wondering if your kind of revenue growth ambitions versus a year ago are on track. It looks like, based on Q3, that revenues is a bit weaker than we had expected. I wanted to come back on the 5.2. Is the 5.2 really the right figure to look at or should we more focus on the cost income 56%, 58% target over time?
The second question was on NII, just on this liquidity buffer, is that temporary or just we'll see that in the coming quarters? Just wanted to check if it will be an uptick in the coming quarter, just back to normal. On the initiatives Prospery in Germany, are you going to also launch that in more countries? I was wondering if you could tell more about kind of the AUMs growth you are looking for on that side. On Tikkie as well, this is all for free, Tikkie. It's a very nice tool. You were mentioning that you are in contact with corporates. Will that be a free package or could you get fees on that? Thank you very much.
Thank you very much, Benoît. I will take three out of the four questions and perhaps Clifford, you can elaborate on the NII. With respect to cost, indeed, fair to say the 56 to 58 is the real target which we have given. The guidance we gave on cost was, well, the max 5.2. That means by implication that revenues would grow on average 15, 20 by, well, almost 2%. But the 56, 58 is the real thing. If there's less revenue growth, we have to cut more costs. With respect to initiatives, for instance, Prospery in Germany, other countries, I think we start in Germany. You know its private banking, you know our sweet spot is outside the Netherlands, is Germany and France.
We might go to other countries as well at some moment in time, but we start in Germany at this moment in time. Tikkie is indeed free for clients and non-clients retail. Indeed in the area of corporates, they have to pay for the package.
Finally, on net interest income. I think our position, as Kees said, is we think net interest income will be flattish from here, right? Whilst we've seen the adverse impact of the liquidity buffer, that was one of a number of impacts, which meant that Q3 to Q3 net interest income was roughly flat. You saw Q2 is somewhat elevated this year. I would say that Q3 that we've just announced is a sensible sort of starting point for our flattish guidance. Your good luck is appreciated, by the way.
That's it. Thank you.
The next question is coming from Mr. Marcel Houben from Credit Suisse. Please go ahead, sir.
Yes, good morning. Thank you for the presentation. Taking my questions. I have two as well. The first one on Basel IV. You stated today on Basel IV should we read this statement as you don't believe that there will be a long phase-in period of Basel IV like the market believes? The second part of the question is on if we assume an hard output floor and a long, let's say 10 years phase-in period, how could this impact ABN's thinking about the dividend policy? I guess the final question on there is, I was just wondering what makes you say the statement that you believe there will be implementation in the short term. What kind of signals did you see in the market for this statement? Thank you.
Thank you very much for your questions. To start actually with the last, I think we as a bank have consistently for a couple of years and also this year when the market at some moment in time in the second quarter was not expecting Basel IV anymore, I think we were one of the only banks saying that we still expect it to happen. That is still our base case scenario. No special new signals in the market. It's just that we have always communicated that that was what we expected to happen at the end of this year or perhaps in January. There's a GHOS meeting in January, as you know, first half. That is still our expectation, and I would say no change of ideas about that.
With respect to the Basel IV, I think Clifford has mentioned that analysts make calculations around 500-600 basis points for ABN AMRO, and we have said that that is possible. Capital is in the detail. We should see, of course, all the communication if it's ready. That is what we've said is possible. We think there will be a long phase-in, by the way. We don't know, but it might become 2024, 2025, 2026. We think there will be a long phase-in, and then of course it depends very much on the market. We have to look at the market at that moment in time. In earlier processes around Basel IV, the market demanded actually quite quickly to have a fully loaded result.
What you now hear in the market now and then is that they say, "Look, banks have doubled their capital, so perhaps they can take a bit more time this time with phasing in." That is to be seen. We don't know. We will look at the market at that moment in time, as said, we have communicated we will come back to you with a capital update in the first quarter of next year, which also then will include, of course, dividend policy.
Very clear. Thank you. Just a follow-up. Regardless of we're going to hear something on Basel IV, you are still going to update us on the excess capital and dividend policy in the first quarter of 2018. Is that correct?
Yeah.
Excellent. Thank you.
Thanks.
The next question is coming from Miss Sofie Peterzens from J.P. Morgan. Please go ahead.
Hi, here is Sofie Peterzens from J.P. Morgan. I have also two questions. My first question is on your Basel III fully loaded core equity tier 1 and also the RWA increases that we saw this quarter. Some of the RWA increases were due to negative rating migration, you downgraded some credit files. You also said that you think next year we should see some positive impact from the add-ons for operational risk weights to disappear, clearly IFRS 9 will have an impact. Taking all these three things together, how should we think about risk-weighted assets going forward? Do you expect more negative rating migration, or this was really it? If you could comment on risk-weighted assets going forward. The second question is on the tax changes in the Netherlands.
Could you just give a little bit more details how you think about the different tax changes, corporate tax, dividend tax, and the changes to the mortgages. Thank you.
Okay, thank you. On your first question on RWA increases and in the context of negative rating migration, only a part of the increase in RWA is related to negative rating migration, and it's mostly related to our FRN portfolio for certain files going from restructuring to recovery, where they are well provisioned, and it's actually a very conservative approach in our modeling that causes this increase in RWA. I'm not concerned about it that this would be a trend. Also our outlook on RWA is very much in line with our outlook on the economy, which we feel is solid.
Thank you. With respect to tax changes, I think that indeed corporate tax, of course, is a clear positive for the bank, 25%-21%. That of course, you know what we pay as tax amount, so you can see that effect. There is one other thing which is negative also for banks, and that has to do with the thin cap rule and 92% of your interest being deductible instead of 100%. That is something we have not seen yet the details. It depends, of course, is it average interest? Is some netting allowed or whatever? That is too early to tell. On balance, we think it is positive for the bank at this moment in time. We have to see, of course, the final proposals yet.
Miss Peterzens, are you there?
Yes. Thank you very much. That was very clear.
The next question is coming from Mr. Bruce Hamilton from Morgan Stanley. Please go ahead, sir.
Hi. Morning, guys, and thank you. Just circling back on the leverage ratio question. It sounds as though you're saying you don't feel there's any need to fundamentally, legally restructure the group. I just wanted to think, given that the ratio looks like the biggest constraint on capital distribution, how do you think about what other levers you have under your control to improve that ratio from here? It looks like you should theoretically build about 40 basis points of leverage ratio per annum before any distribution. Just thinking about you, what else you can do to try and accelerate that, given it's the binding constraint it appears for you.
Thanks, Bruce. I think two remarks here. First, as you know, in the clearing area, we still expect around 50 basis points to recover some moment in time in the coming period. That's one. Secondly, the new coalition agreement has mentioned that with respect to the leverage ratio, the Netherlands should align more with Europe than in the past. That, of course, we do not know exactly what the implication will be and what timeframe, but that shows you that at least there was that the new government has a bit of a different opinion here. We'll await that. Together with also the clearing, I think we feel comfortable, yeah.
Can I just-
Please.
I just want to add something, Bruce, because just really the premise of the question, clearly we keep an eye on the leverage ratio, but as we've discussed on this call, we're flagging the imminent prospect of Basel IV and its likely impact on our CET1 position. So when we think about our overall position, we need to manage both those metrics. Clearly, leverage ratio may have been perceived as the, call it, the primary constraint in a Basel III world. We need to manage all our metrics going forward.
Understood. Thank you.
The next question is coming from Mr. Jean-Pierre Lambert from KBW. Please go ahead.
Yes, good morning. Three questions, please. The first one is on the cost base for this quarter. Is there a way to indicate what is the underlying cost base? We have some restructuring charges, is there an indication of investments ongoing so that we have an idea of the underlying cost base? The second question is regarding PSD2. As you know, it's supposed to be implemented in January, there were indications that perhaps the Netherlands is delayed, perhaps not. Do you see PSD2 overall as an opportunity or as a risk for your bank, what kind of actions are you taking? The third question is on the cost of risk for the automatic or robots or SME lending. What makes you confident about the cost of risk, how do you see the cost of risk with such a product? Thank you.
Can you take the first one on the cost? I will do PSD2.
I think we issue details regarding what we see as incidentals, restructuring costs and the like. I think our team will be issuing a spreadsheet today regarding that. Big picture, although the headline cost numbers have gone down quite materially, a big part of that was restructuring costs. We also sold Private Banking Asia during the period. I think on balance, I would say it's 2%-3% expenses down, both Q3 to Q3, year to date to year to date, something of that order. Which if you think about the wage inflation, pension costs we have, is a, call it, a decent contribution of cost reduction, more than offsetting our inherent cost pressures.
Okay. Thank you very much, Clifford. PSD2, indeed, in the Netherlands, some delay. It will be later in the year. That's true. I think originally, perhaps a couple of years ago, we thought this is a risk predominantly. Now we see it also as an opportunity. I mentioned already Tikkie, there are also other open banking opportunities for us. We see it now also as an opportunity, of course. With respect to your third question, can you repeat that? At least I did not exactly follow.
Yes. It is regarding the new product you have introduced, which is New10, the cloud-based SME lending. I just want to understand how you tested the cost of risk, and how you see the cost of risk with some form of remote lending.
Okay, thanks. Tanja?
Yeah. Thank you for that question. Well, the benefit of having an existing organization is that we can use our existing credit risk framework and credit risk experience with modeling and our governance framework on credit risk to support this initiative. We are confident that we can manage the credit risks of this new initiative within our appetite.
Great. Thank you very much.
The next question is coming from Miss Alicia Chung from Exane. Please go ahead.
That is now me.
Morning, everyone. Three questions from me, please. Firstly, just to loop back on the capital position, just to clarify, exactly how much of the credit risk migration was due to negative credit risk migration, and can we expect this to recur? Is it possible that we've reached the trough in terms of lower RWAs from better credit risk? Secondly, just on the mortgage lending. Your mortgage market share fell again this quarter. Do you see this as volatility or is it more structural if it's driven by domestic peers? You seem to be holding the line on the net interest margin, which is of course important for the bottom line, but I'm just wondering at what point do you sacrifice some of the mortgage spread to maintain market share.
Thirdly, just on the operational risk RWAs, it looks like the add-on that you expected to be removed end of this year, Q1'18, that now looks like that will be more like Q2. Is that likely to be the earliest date? Is it possible that could be postponed for longer if it's just the ECB taking its time, or do you expect it will definitely come in in Q2? Thank you.
Thanks very much, Alicia.
Can you take the first and third question? I take the second.
Yeah.
The first question on RWA deterioration with respect to credit deterioration, that is around EUR half a billion. That is something, as I said, related to our FRN portfolio. I don't expect that to happen consistently towards the future. It's more an incidental development, I would say. Did I answer your full question?
Yes, that was great. Thank you.
First question.
Next question.
Sorry. There was also a question on RWA, Q2 earliest.
On the AMA, yeah.
The postponement of regulators taking more time.
Yeah.
Can also be later in the year.
Yeah. That's something that we don't have under control, of course, but that's Q2, that's what they have indicated to us. Afterwards we will evaluate the results, that can take some time as well. I cannot give any guidance on specific timing of this.
No. Also not on the amount which we then are able to get back. That's also something which, of course, we have to see what the regulator comes up with. With respect to mortgage lending, we are cautious there, prudent. For instance, I think in the third quarter, we had a market share of 19, while at the beginning of the year we had 25. If the market is good, we take a bit more in the market, but we are always prudent with respect to our margins. If necessary, we take a bit less market share as we did in the third quarter, if that's necessary to keep up the margins we want to have.
Okay. Thank you very much.
The next question is coming from Mr. Bart Horsten from Kempen & Co. Please go ahead, sir.
Yes. Good morning. Thank you for my questions. First, on the commission income. You had another relatively weak quarter, I think one of the lowest in the last few years. I see some of your peers actually reporting quite decent growth in commission income. Can you elaborate a bit on that and also what you can do there to turn the corner? Secondly, on loan growth. It is good to see that in all major client groups, loan growth is kicking in. In commercial banking, it was EUR 0.1 billion. I was wondering in the current market, and economic market environment, would you expect an acceleration of growth over there, and what is the outlook? My final question is on the first-time adoption impact of IFRS 9.
In Q2, you said would be lower than 45 basis points, the average EBA assessment. I think now you report as well below 45. Would it be fair to assume a number of 5 to 10 basis points as a fully loaded impact of this? Thank you.
Okay. Start with your last questions. It is well below. Well below is well below. If we could have given more guidance, we would have done it. That is it, I am afraid. Loan growth, commercial banking. I would say the 0.1% in the quarter was a bit low because actually our guidance is here with the commercial client loan book, that that should be more, we think, on average related to Dutch economic growth, which is, as you know, more in line with the 4.5%, by the way, that we have seen in the first nine months, which is actually a kind of a 3% real economic growth and say a bit 1% plus inflation. Commission, Clifford?
Yeah. I think, as I mentioned on the presentation, there are really two major impacts. We have reduced our payment packages for SME and retail clients. We did that last year and in January this year. We do not see that as an ongoing basis. We think we have rebased from a retail perspective there. More recently, Q2, Q3, we saw fees coming down reflecting global markets and clearing, I think in common with our competitors, reflecting the low volatility environment. I think we are hopeful that things will have stabilized. I agree, we have a challenge, which is we need to grow it from here. I think that is really around serving our broader clients' needs. We are seeing a number of promising ideas. We talked about Prospery earlier, but it is the hard work of delivering on our clients' needs, demonstrating value, and getting paid for it.
Okay. Would you consider increasing fees throughout your private banking or even your retail banking activities, or introduce new fees?
Yeah. Our principle is we need to provide value and charge our clients fairly for that. I think there is frankly ongoing pressure on fees for any one product. We are looking to deliver value and to serve broader needs, that will drive ongoing fee improvements.
Yeah. Thank you.
The next question is coming from Mr. Tarik El Mejjad from BAML. Please go ahead, sir.
Hi. Good morning, everyone. Thank you for taking my questions. First of all, on NII, I just wanted to clarify when you say flat from here or Q3 as a run rate. Are you suggesting for the next in 2017, or are you looking beyond that? Would you clarify that? Same on your guidance on costs. When you say flat costs, is that versus a 2016 base? That's for 2018-2019. I get the 2020 guidance. Just on leverage again. Thank you for updating the guidance on the benefits from the clearing derivatives. If that includes the impact from the credit conversion factors or that's a gross amount you gave. Very quick last question on SREP. In one of the footnotes, you mentioned that the SREP 2019 is 1,175, which would be flat year-on-year.
Do you have already indication about what will be SREP in 2019, or it is just your assumption at this stage? Thank you very much.
Thank you. Start with your last one. No, we have not a indication there of 2019. That's too early, but that's our own estimation. The clearing 50 basis points is indeed gross, so only the clearing advantage and not the credit conversion. We think that credit conversion, as we have heard right now recently, that we do not think that that will mean a big negative. Of course, it's not a positive. It might be a small negative. What the cost we guide actually is, the official guidance is the 2020 guidance, so that's the 5.2. I think as Clifford mentioned, that we try as much as possible, of course, not to grow it in the meantime. That does not mean that in a quarter we cannot see some growth. With respect to NII guidance, flattish, I would say that's not for the whole year too.
I think that's too early to mention. That depends on market developments. Every quarter, we more or less try to guide going forward for one or two quarters, but not for a longer period.
That is very clear. Thank you very much.
The next question is coming from Mr. Bart Jooris from Degroof Petercam. Please go ahead, sir.
Yes, good morning. Thank you for taking my question. Just some follow-up questions left regarding the lower prices for payment packages. Have you seen any market share effects of these, or is your competition more or less in line now? Second, you talked about the guidance on IFRS 9 regarding the CET1 impact, but do you also have an idea already on what it will mean for your cost of risk in 2018?
Thank you. No, not big changes in payment packages. I think we are more or less now in line with the other banks. IFRS, the cost of risk. Tanja?
Yeah. Under IFRS 9, the cost of risk, our expectation is it will become more volatile, but we cannot give any guidance on where we expect it to be in 2018.
Okay, thank you.
The next question is from Matthew Clark from Mainfirst. Please go ahead, sir.
Good morning. A few questions, please. Firstly, on your savings deposit rates, could you quantify what proportion of your savings deposits pay a bonus rate? You talked about the five basis point rate earlier, which I think is the base rate, but some of your savings deposits are still paying relatively generous 25 basis point bonus rates. Just trying to see what scope there is to cut those back going forward. Secondly, on your private equity gains, just want to check that you see these as being a sustainable part of your EUR 125 million per quarter other revenue run rate going forward, not something that's a temporary legacy benefit that we should plan to have in there through to the 2020 kind of cost income horizon.
Finally, just to come back to this cost income target and the comment that if revenues aren't growing, you need to cut costs more. Revenues aren't really growing at the moment. Only NII isn't in terms of your guidance. Why aren't you guiding for more cost cuts and preparing for more cost cuts now? A more strategic question. Is it satisfactory for you to be a no revenue growth bank? Is that sustainable in the long run, and how do you think about that? Thank you.
Thank you very much. We definitely look for growth in revenue. That's the target. Of course, profitable growth. As I already mentioned with respect to the mortgages, if it's not profitable, we will not go for market share and the likes. It should be profitable revenue growth, our goal is to have profitable revenue growth going forward as a bank. As we have promised with respect to cost, if revenues would grow less, which we have not seen since 2015 year to date. Take that on average. If that would be the case going forward, of course, we should be more stringent on cost. We will do that. Of course, we prepare ourselves for that. Private equity gains, yes, on average, we expect them to be there. Of a magnitude, I think more or less which we see right now.
It can be lumpy, of course. That is not all the quarters the same, but on average. With respect to savings, it's right you mentioned this bonus rate. Indeed, we pay 20 basis points, not five basis points on certain accounts. Do you know?
Roughly 40% of our deposits are savings deposits, and roughly a third in total are retail, so it'd be some proportion of that. It's by no means the whole chunk of our deposits, as you know, because for many of our balances, we're not paying interest at all in respect of demand deposits, for example.
In terms of the savings deposits, which are 40% of your overall deposit base, what proportion of them pay a bonus rate?
We can follow up on that.
Okay. Thank you very much.
Yeah. Okay, thanks.
Chairperson, there are no further questions. Please continue.
If there are no further questions, then I would like to recap. I would like to thank, first of all, you for all your questions, and then conclude actually this result update. We hope to talk to you again next quarter and perhaps earlier on different occasions. Thank you very much. Goodbye.
Ladies and gentlemen, this concludes the ABN AMRO event call. You may now disconnect.