The conference is now being recorded. Good morning, ladies and gentlemen. Thank you for holding and welcome to the ABN AMRO Q2 2017 results call. At this moment, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. I would like to hand over the conference to Mr. Kees van Dijkhuizen, CEO. Please go ahead, sir.
Thank you very much, operator. Good morning. Welcome to the analyst and investor call on ABN AMRO's second quarter results. Together with Wietse Reehoorn and Alexander Rahusen, our CFO ad interim, we will share our views on the results. Thereafter, we will open up the call for Q&A. We are diligent executing our strategic initiatives. We grow our activities. Costs are being controlled. IT transformation is progressing well, and we have been investing in new and digital products. For Q2 2017, this resulted in a net profit of EUR 960 million, up 45% year-on-year and leading to an ROE of 20%. The net profit benefited from the divestment of our private bank activities in Asia and the Middle East, which had a net effect of EUR 200 million. In addition, we made some refinements to our risk models, which led to a release of approximately EUR 100 million pre-tax.
If we exclude these items, the ROE amounts to 14%. Alexander will discuss the results in more detail later during the call. I turn to slide three, progress on strategy. If we look at our growth strategies, we see that in our domestic business, we are currently showing growth predominantly SMEs, six percent on a yearly basis in the first half of the year, and mortgages. Helped by our investments in further digitalization, digitalizing our product offering. Within commercial banking, we are looking now to grow also in countries surrounding us, targeting midsize corporates with multi-bank relationships. We are currently building small sales teams on the ground. First deals are already being booked. With regard to cost, we said that by 2020 we would fully compensate cost increases due to inflation, investing in growth and innovation. We are on track here as well.
If I go to slide four, moving to the topic of sustainability, we are gearing up for a new initiative. Almost two-thirds of our client lending consists of Dutch real estate financing and most of our business lines engage in real estate financing. ABN AMRO is committed to making residential and commercial real estate in the Netherlands more sustainable. We aim to improve the average energy efficiency of our own and our clients' properties from an energy label D to an energy label A by 2023, our own properties, and 2030 our clients' properties. This represents a reduction of two megatons of carbon emissions in the Netherlands, which is equivalent to the annual emissions produced by 800,000 passenger cars. We will focus on making clients aware of opportunities for improving sustainability of their properties by offering online tools and advice in addition to financing products.
The transition to sustainable real estate is a long-term commitment, and we will develop and announce further products, initiatives, and tools over time. Turn to slide five. Innovation is a very broad subject, which I would like to limit myself now to the upcoming Revised Payment Services Directive, PSD2. We are not only ready for PSD2, but are also developing products that can benefit from open banking. A number of our current products are pre-positioning our bank for PSD2. For example, our peer-to-peer payment application called Tikkie is rapidly approaching 1 million users, making it the largest peer-to-peer payment service in the Netherlands. Currently, Tikkie uses an external online payment service to transact the payments. Once PSD2 goes live, we will bypass this platform, eliminating the costs we currently incur. Tikkie has now also been rolled out to the business market, where companies can use the platform for a fee.
Transavia Airlines is now using Tikkie for the on-spot payments for additional services, such as excess baggage. Another example is University of Groningen that has started using Tikkie to remind students to pay their tuition fees, replacing the more cumbersome debt collection process. Finally, I want to mention the hackathon we recently organized this summer. This event allowed FinTech companies to experiment with our API platform. The hackathon was a success as it generated several ideas for new products. It also demonstrated that developers are able to rapidly build applications that integrate directly with our systems. This is just a flavor of what's going on and how we are preparing for the future. Returning to our target, slide six. We have made clear progress in recent years, but also over the last quarter. Cost income in Q2 amounted to 54.9%.
Excluding impact of private banking divestment, the Q2 cost income amounts to 58.6%, which is moving towards our target 2020 of 56%-58%. The ROE for Q2 amounted to 20%, excluding the divestment and refinements to the risk models, the ROE amounts to 14%, which above the target range of 10%-13%. Our capital position improved further with a fully loaded quarter one of 17.6%. RWA declined, especially in the Corporate Institutional Banking, driven by a lower US dollar as well as lower commodity prices. Our leverage ratio improved by 20 basis points to 3.9% as we also managed the exposure measure down. We will pay an interim dividend of EUR 0.65 a share compared to EUR 0.40 last year. For the full year, we intend to pay 50% of reported profit over the full-year results.
Lastly, on Basel IV, there are a lot of different opinions on where it will end up. We want to be prudent, as you know, and build up a capital position which is able to cope with any possible outcome. We still expect an agreement to be reached this year. However, if by the end of the year, there is still no outcome on Basel IV, we will present an updated view on our capital position in Q1 2018. With that, I would like to give the floor now to Alexander, who will discuss our results over this quarter. Alexander.
Thank you, Kees. On slide seven, we show the results for Q2 2017. Let me first point out that we are comparing underlying results year-on-year. Q2 2016 underlying results exclude provision for settling client compensations related to SME derivatives of EUR 271 million. Looking at the segments, most were able to show higher profits. Retail remained unchanged. However, last year, Retail booked a EUR 100 million gain on the stake in Visa Europe. Excluding the gain, the operating result improved by 7%, driven by growth in mortgages and delivery of our cost reduction efforts. Private Banking is showing the [EUR 200 million after-tax gain] on the divestment, and if you exclude a release related to the sale of the Swiss activities booked in Q2 last year, the result for Private Banking is flat year-on-year. Both our corporate business segments showed better results.
Commercial Banking showed a 12% higher profit, mainly due to a EUR 107 million impairment release. Corporate and Institutional Banking benefited from better results for equity participations and CVA, DVA, FVA results. This was partly offset by an additional provision for project costs to settle client compensations related to SME derivatives. On slide eight, you can see NII amounted to EUR 1.6 billion, unchanged from previous quarter, but up 1% year-on-year. This increase compared to Q2 2016 is mainly volume-driven. Total outstanding mortgages are EUR 151 billion, up by EUR 3 billion from last quarter, as the Dutch housing market continues its upward trend. Our market share for new production was 21% over the last quarter, which is around our natural market share. The loan volume for Commercial Banking, which consists of our SME portfolio, again showed an increase. NII was also helped by non-performing loans migrating to performing.
ECT, part of Corporate and Institutional Banking, recorded a higher portfolio year-on-year. Looking at deposits, the rate paid on retail savings stood at 15 basis points at the end of the quarter, and 10 basis points as per the end of July. Margins on deposits for Commercial Banking declined somewhat. Client rates are zero for most clients, with negative rates charged to a selected group of clients. On slide nine, you can see that fee income declined year-on-year, mainly as a result of the Private Banking Asia divestment. Correcting for this, fee income remained flat for the group and Private Banking showed an increase. Stock market sentiment improved compared to Q2 last year, leading to higher fees and higher client assets. However, within Retail, fees declined as the result of a reduction in fees charged for payment packages.
Other operating income includes EUR 255 million from the sale of Private Banking Asia in Q2. Excluding Private Banking Asia, the run rate was above the EUR 125 million indicated earlier because of relatively high private equity participation results, EUR 52 million, and positive hedge accounting-related income of EUR 68 million. Turning to slide 10. At first glance, the expense line does not show the underlying trend, which is lower costs. Expenses increased by 9% year-on-year due to a number of factors. First, we booked EUR 56 million in expenses related to the Private Banking divestment. Secondly EUR 54 million of additional costs were booked for handling the SME derivative settlement. Furthermore, personal expenses include EUR 25 million of additional restructuring provisions. If you exclude these costs as well as regulatory levies, we see a decrease of EUR 43 million thanks to progress made in cost savings programs.
The effects are also visible in our FTE levels as these declined by 1,183 over the last 12 months, including 300 related to the Private Banking Asia divestment. Lower FTE levels were partly offset by wage inflation and higher pension costs. FTEs for non-employees declined by 475 to around 4,200. This reduction is the early result of a number of cost savings programs. We have quite a bit further to go still. With that, I'd like to hand over to Wietse.
Thank you, Alexander. Ladies and gentlemen, good morning. Let me take you to slide 11, loan impairments. This slide shows that for Q2 overall, 14 basis points of releases were booked. For Dutch SMEs, a net release of EUR 107 million was booked. Mortgages showed a release of EUR 40 million. The releases were driven by the good performance of the Dutch economy, as well as some refinements to our risk models. Approximately EUR 100 million of releases are due to model refinements and are therefore incidental. For SMEs, we went from a model based on individual assessments to a collective model, which enables better modeling of the fact that some of the files will cure. For mortgages, we refined our model, which allows us to better capture the current economic circumstances and in combination with the significant improved Dutch housing market, this has led to an additional release.
Corporate institutional banking recorded EUR 67 million of impairments, excluding ECT. The other businesses all showed releases. Let me take you to slide 12, some detail on ECT. If we look into this, the on-balance sheet loan portfolio decreased by 8% during the second quarter versus Q1 2017. This decrease is explained by a weakening U.S. dollar as the vast majority of the loan portfolio is dollar-denominated and lower commodity prices. In dollar terms, the energy portfolio grew, particularly in the U.S., whereas the transportation portfolio remained stable. Declining commodity prices, especially oil prices, led to a decrease of the utilization within commodities. Impairment charges for Q2 2017 amounted to EUR 82 million and were almost equally divided across the three sectors. Loan impairments for transport and oil and gas-related exposures have stayed within the loss scenarios we gave last year.
Impairments for oil and gas remained even below the mild scenario. Impairments for transport are currently between the mild and severe outcome. We are able to cope with these impairment levels and continue to write new business where we see opportunities. We're also expanding into a number of new and adjacent sectors, being food production, renewables, utilities, and basic materials, and have done some initial deals in these sectors. With that, I would like to hand back to Kees.
Thank you very much, Wietse and Alexander, I would like now to ask the operator to open the call for questions.
Ladies and gentlemen, we will start the question and answer session now. If you have a question, please press star one. Can you please limit your questions to three? The first question is from Mr. Bernard Petarku. If I said it correctly, I am sorry. You can ask your question. Go ahead.
Yes, good morning. It is Bernard Petarku from Kepler Cheuvreux. The first question will be on the capital. Assuming there will be no deal on Basel IV by year-end, would you kind of agree that a 50% payout is probably a bit low for ABN, looking at loan growth potential? I would like to get your view on that, on distribution going forward, potentially. The second one will be on the PB business. Net new money of EUR 3.2 billion. I was wondering where it comes from, whether you have seen some inflows in discretionary mandates, and also in which asset class it went, just to get a feel about potential impact on a fee business going forward, on a fee line going forward. Then maybe on the volume side, clearly the domestic market is doing well. I think commercial banking posted a 1.6% loan growth quarter-on-quarter.
What is the kind of loan growth outlook for the Netherlands for the rest of the year? Could you share that with us? Thank you.
Can I start with the first question, and then Alexander, if you would like to take the other two.
In when there is no deal, your question was 50% not too low due to, well, not a high loan growth of the bank. What we want to do is in six months' time, if there is no deal, of course, come up with an analysis where we stand, what we expect at that moment in time, our best guesstimate in six months' time around Basel. Hopefully, there is clarity. If not, we have to make a guesstimate there. Of course, also make an assessment of our future capital position related indeed to growth of the business, growth of the market, and so on. It's too early now to draw conclusions already, so I can't do that. We acknowledge that, of course, we hope Basel, first of January, then it was summer, then it was September, now it's October, now nobody knows. We'll see.
If there's no agreement, we will communicate to investors our position then, but it's now too early to come up with a conclusion yet.
Okay. Your second question, the net new asset growth. I don't exactly know by heart what percentage is cash and what is investments. At this moment, I would expect it to be more or less in line with the portfolio that we currently have. We see growth in the Netherlands, and we see it also in some of our outside activities outside the Netherlands. I would expect it to be broadly in line with the composition of our current portfolio. When we talk about loan growth outlook for the rest of the year, starting with the mortgages. The mortgage, as earlier said, mortgage book has shown some growth over the last quarters. Our guidance is that we more or less expect it to be flat going forward, the size of the book. Being able to compensate redemptions with a sufficient writing of new mortgages.
If you look at the Dutch SME book, we have seen some growth now for the last couple of quarters. We would expect to see some more growth going forward on that book. With respect to the corporate institutional banking book, disregarding the effect of the commodity prices and the FX, we have seen growth there over the last large number of quarters. That is in line with our growth strategy, in which we have said that we would like to grow in that particular activity. Again, there we would see a further growth taking place going forward. Please bear in mind that on an absolute level, the FX and commodity price effects can have a dampening or, depending on the direction, an increasing effect on face value.
Okay. Thank you very much for that.
The next question is from Mr. Benjamin Hoy from Deutsche Bank. Go ahead, sir.
Yes, good morning. Two questions on cost, please. Stripping out the negative one-offs you mentioned in the quarter and also the regulatory levies, I get to more or less an underlying cost base of EUR 1.2 billion in the quarter. Is that something we should take as a run rate going forward, or is there any cost inflation projects and investments likely to increase? Secondly, specifically on the SME derivatives, you booked another charge in the second quarter. For how long can we expect this topic to drag on, or do you expect to find a final conclusion in the next month on that? Thank you.
On the first question. We still need to pay regulatory levies. That's not in EUR 1.2 when stripping out everything. First of all, I think we should take that into consideration. Secondly, yes, we will be confronted with inflation and wage drift going forward. As said earlier, our long-term cost goal is to keep the costs flat compared to 2015. I would like to reiterate that we still firmly believe that is achievable target, that we will be able to free up sufficient means to compensate for wage inflation, for the additional regulatory levies, and for the additional costs that we are doing with respect to innovation and digitalization. The exact development of our costs between now and 2020, I don't want to allude too much to it.
The only thing that we can state is that we have seen until now underlying a positive trend as of the results of the various cost measures that we've taken, and which has resulted in the number that you've seen in the second quarter of this year.
SME derivatives, indeed, addition this quarter. We indeed hope that this is now the last one we have to realize. Having said that, of course, every quarter we have to look into this issue again, but we hope that this was the last addition.
Thank you.
Next question, Albert Ploeg, ING Bank. Please go ahead.
Yes. Good morning, all. A few questions from my side. First, to come back to the Dutch mortgage book. The risk-weighted asset density declined slightly now to 2.9%. How do you look at this trend and also in relation to the ECB TRIM exercise? Second, on the mortgage book, you mentioned more or less flat-ish going forward. Should I see that also a little bit in the context of you trying to manage the margin on the book so that you're willing to sacrifice a little bit market share, which seemed also to have come down a bit in the second quarter? The third question I have, if I may, is on the risk models, the two models that have been reviewed. Can you give a little bit more color on that and can we expect any more modules to be also explored for further optimization? Thank you.
Okay. I will take the first and third question, Albert. Thanks for the questions. The first one is on the somewhat lower indeed risk weight on the mortgages compared to the last quarter. Reason simply is because we have been seeing an improved credit quality, better credit ratings, better collateral value, i.e., a lower RWA weight. Your question, what would be the result of TRIM in respect of the mortgages? We don't know yet. It's one of the portfolios TRIM is looking into in our bank. We will have an outcome at the end of this year. I expect some findings there, so probably we will see some impact there. As to your question to the revirement of the models, which has an incidental input and effect of EUR 100 million. Partly of that actually is in an IBNR release. It's two models.
It's the model for the SME type of clients we have, the impaired and defaulted clients. What we've done, we switched from a manual to a collective model, which has the better impact of fewer activities and fewer rates of clients, which we now see into releases. It's also dealing with improved collection processes, et cetera. The other one is on the residential mortgage. There we move to one point in time model. That's regarding defaulted and performing portfolio. That explains a part of that benefit is in an IBNR release. My guess is that we will see for the next quarters, somewhat more actually releases from that. Your question, what kind of other model changes could we expect? As you know, in the last analyst call we explained something on operational risk. There were some additional risk-weighted assets.
We still expect actually that we will see a EUR 2 billion-EUR 3 billion reduction in risk-weighted assets as to operational risk end of this year, beginning of next year. Well, for that, I would say, for the moment, that's it. The second question.
Same question. Yes, indeed. We manage our mortgage book on the basis of optimizing our net interest income, which entails that we indeed look at our volume in relation to the margin that we produce on the book. As stated earlier, on the one hand, we believe that 20% market share is our natural market share. On the other hand, if we see opportunities to increase our market share with margins that we find sufficiently attractive, we are happy to increase our market share. On the other hand, if we see pressure on the margins or margin development that are depressing the margins, we also accept somewhat lower volumes. All in all, I think we look at the development of the book on a margin and volume basis, and that's how we manage our volume.
Okay, thank you.
Next question is from Mrs. Alice Cheung, Exane. Please go ahead.
Morning, everyone. Just a couple of questions from me. Obviously, we're still seeing some fee pressure from payment fees in retail banking, more from the business segment side this time because of some of the payment package phasing that we're seeing, but also some higher competition in fees from commercial banking. Just wondering how we should think about that going forward. As we think about PSD2, which of course is coming into play next year, it sounds like you have been positioning yourselves for that now, but can we assume some structural pressure on the payment fee side from that as well? That's the first question. The second question, just on NII. Firstly, are you able to quantify how much of the NII uplift in commercial banking was due to the release from reperforming loans?
How should we think about margin pressure and market share pressure going forward now over 2017 to 2018? Because that seems to be one of the points that you've flagged a couple of times. Thanks.
Okay. On the payment packages, yes, we have seen some price cuts in the course of the year. At this moment, I don't foresee any changes at this moment, going forward. With respect to PSD2, yes, that is a question where you can look at it from an offensive and defensive side. Indeed, we are positioning ourselves to also play an active role and take benefit of the possible developments as a result of PSD2. However, given the quite big change that the competitive landscape might show as of the introduction of PSD2, it is for us too uncertain to exactly assess how that will look like and whether that will net-net result in fee income increase or net result in fee income pressure. Therefore, current insight in how we will compare to our competitors is still too foggy.
For me, very difficult to give you guidance from that angle. With respect to your question on the income as a result of the loans being active again. On group level, the effect is marginal, minimum, I would say. I'm not able to give you an amount to it, but the only thing I would say is that, this is an effect that we clearly see every quarter, also in commercial banking, given the fact that we have seen quite some releases going forward. The only reason that we mentioned it in this quarter is that it was this quarter, maybe somewhat higher than in other quarters. Also again, here, this is another one of meaningful big event in the second quarter. It's just to give you some color to what extent the NII is also being influenced by this effect.
Well, clearly, given the improvement of the economy, this is an effect that we probably will see going forward. On margin pressure, I think the market is becoming competitive again, increasingly competitive, and that will entail probably similarly as with respect to our mortgage volume, that we will constantly make an assessment to what extent we find the pricing attractive compared to the risk.
Okay, thank you. Just on that, would it be fair to assume that the current net interest margin stability that we've seen so far will continue, or would you expect more pressure going forward on a group level?
Well, if you talk about the SME book in the Netherlands, it indeed has been quite flat over the last quarters. I would view that as flat going forward. Flattish. If we talk about the Corporate Institutional Bank, there we have embarked on growth towards clients which have a lower risk profile, and that entails that we are also happy with margins slightly decreasing there because of the pickup in the credit profile of that particular client group that we are now looking at.
Mm-hmm. Okay. Thank you.
Mr. Lambert.
Oh, yes.
You can ask your question.
Thank you. Good morning. I have two questions. First of all, how much of the risk-weighted assets, quote-unquote, reduction has been driven by FX and by model change? Secondly, regarding the day one effect, you're going to see the IBNR provisions. Do you expect the volatility under IFRS 9 to be higher than the IBNR provisions? If you can give indications of what you expect. Thank you.
Yeah. The impact of the RWA reduction was EUR 2 billion related to credit RWA. A good part of that was indeed related to the FX movement that we've seen. Partly, it was also related due to the commodity prices that has gone down. I don't have an exact number for you now, what exactly has been the FX part with respect to the RWA reduction on credit risk.
Let me take the second question as to the impact of the IFRS 9, but also the kind of composition IBNR and impairments going forward. The last one is very difficult to assess at this moment. What we can say, of course, is what we also said in the communication. We expect an impact, the so-called first-day impact, which we will not phase in, by the way, because we think it's rather small. It will be lower than the 45 basis points, as in the broader EBA assessment. Your question, I think, was to volatility. We do expect more volatility in the impairments going forward. That is actually a result of the IFRS 9 methodology. I said, again, this has nothing to do with the risk profile of the bank, the risk in the books, whatever. The only thing which is changing is the timing of the impairments.
Well, we could be refining our models right now. We have to see what will happen in the near future, at what moment exactly. For example, the stage 2 impairments, which were the more higher impairments for the lifetime expected loss, should kick in. I said again, and small impact day one. Going forward, more volatility in terms of impairments.
Thank you very much.
You're welcome.
The next question is from Mr. Matthew Clark, MainFirst Bank. Please go ahead, sir.
Good morning. Couple of questions. Firstly, on mortgage margins, could you just give us an update on where your frontbook mortgage margins are relative to your backbook mortgage margins? From the outside, it looks like mortgage rates haven't picked up as much as swap rates, so maybe there's some pressure there. Perhaps you could comment. Could you also comment on the swing in corporate center, net interest income? That was quite a big move, second quarter versus first quarter, and whether that's sustainable going forward. Finally on Basel IV. Do you have any thoughts on whether you would want to move quickly to full compliance with a fully loaded Basel IV ratio on day one, or would you be prepared to use transitional measures to get there over time? Any thoughts there, please? Thank you.
Yeah. As earlier mentioned, we have seen the mortgage book margin on the more total mortgage book improve over a long set of quarters. As earlier indicated, our prediction was that in the second quarter of 2017, the, let's say, improvement in our total book would flatten out. That is exactly what happened in this quarter. In this quarter, the total margin of our book remained flat. Just redeeming at the same as mortgages that we are writing.
Do you expect that to persist?
Well, to be honest, that is a difficult question because that will depend on the further development of the competition and as said earlier, it's very difficult to exactly evoke that. We are happy with the total margins we see in the book, and we'll try to find a right equilibrium in terms of margins and volumes to maximize our net interest income moving forward.
Okay.
The decrease in our net interest income in Group Functions was primarily driven by higher costs that we have this quarter compared to the first quarter of last year, mainly related to maintaining our LCR ratio.
With respect to Basel IV, I think your question on will we from the start comply with fully loaded already, that is typically a question we will, of course, discuss in the next six months with respect to our update we will give you in the first quarter of next year. That is absolutely one of the questions.
Okay. Just coming back to the Corporate Center Net Interest Income. Should we see the second quarter as a run rate level then? Is that now typical of where your LCR is currently, or how should we judge what's a normal-like level there?
Well, to be honest, the Net Interest Income at Group Functions is to a certain extent, also a technical line, given that many effects ultimately come together in the Net Interest Income line at Group Functions, and they relate to LCR, but also to the way that we internally transfer price. Probably you've seen that there is quite some volatility on that line, sometimes above zero, sometimes below zero. I would think it will be best to take just a number of quarters, look at the average of that, and take that as a run rate going forward.
Okay. Thanks very much.
Miss Anke Reingen, RBC, you can ask your question.
Yeah. Thank you very much. Two questions, please. The first is on your provision guide, what you said previously, the 25 to 30 basis points. Does it still apply under an IFRS 9 world? Also considering your earlier comments about shifting towards lower risk portfolios. Secondly, on the leverage ratio, you seem to have changed the potential benefit from a change in the clearing exposure treatment from [240] to 50 basis points reduction. If that changes, has there been any recalculation or anything else? Why has this changed in spite of the higher leverage ratio in the quarter and the lower leverage exposure? Thank you very much.
I will take the first question as to the guidance on risk costs, cost of risk. I said again, IFRS 9 has nothing to do with the risk profile of the bank, nor with risk in books or loan books, whatever. It's simply a difference in timing of taking the impairments, and that in itself causes some volatility, but with the risk profile of the bank, it has nothing to do. The guidance we have given on group level for cost of risk, 25, 30 basis points stands where it is this moment.
Okay. Could you please repeat your second question? I didn't exactly catch your question.
It was about the change in your guidance about the potential benefits in the leverage ratio from a change of the treatment of the clearing exposure.
I think before you said it is about 30, 35 basis points benefit to the leverage ratio. Now you have changed this to 40-50 basis points benefit.
Yeah.
The leverage exposure has come down quarter-on-quarter. I just wondered about how this comes.
There is actually two questions. The first question is, yes, we have updated our impact analysis as stated in our quarterly report. This is how we currently look at it. Please be aware that the timing of this possible release is still very unclear. That is probably the thing that we are mostly are focusing ourselves. If we would come to a SICR world, there will be a significant impact. Secondly, yes, we have seen a decline in the second quarter compared to the first quarter, and this was also partly related to market movements we saw in the last couple of days in the second quarter of this year.
Okay. Thank you.
Next question, Bart Horsten, Kempen. Please go ahead, sir.
Yes. Good morning. I also have a few follow-up questions. First, on your loan growth. You referred to loan growth outside of the Netherlands in other markets. Could you indicate which markets that are and what percentage of your loan growth now comes from foreign countries? Secondly is on your interim dividend. You pay out EUR 0.65, which is a payout ratio of 40%. If I remember correctly, last year it was around 45%. I was wondering why it's lower now in combination with the fact that you still stick to your 50% payout for the full year. My final question relates to potential share buybacks. Recently, you got approval from the AGM to buy back shares, and I was wondering how likely it would be that you buy back shares, for instance, in the next sell-down by NLFI, before you disclose your new capital plan in Q1.
Thank you.
Okay. The first question relates to loan growth outside the Netherlands. We don't show our loan growth outside the Netherlands. What I can share with you is that the corporate and institutional bank showed a growth of EUR 0.6 billion in the second quarter, if we eliminate the FX effect and the effect of commodity prices. Half of that related to growth in the ECT portfolio, which is, I would say, almost predominantly outside the Netherlands. I think that would give you a good indication of our loan growth outside the Netherlands.
Okay.
We've seen a small growth with respect to the initiative with respect to commercial banking outside the Netherlands, but that has been a significantly smaller.
Okay.
With respect to your interim dividend question, I think here you should take into account last year we had a negative SME derivative item in the reported profit of around EUR 270 million, which made us decide to give 45%, so actually the yearly figure also on the interim. This year, we have actually a positive effect, PB Asia, but also the incidental one-offs in the risk models. This year we have a positive one of, say, EUR 275 net. The reason there is that we decided to do a 40%, while of course, keeping the 50% on reported for the year intact. Share buybacks, we will not communicate on if we would ever do that up front.
Okay. Thank you.
Next question, Vardhman Jain, Macquarie. Please go ahead.
Yes. Hi there. This is Vardhman Jain from Macquarie. Just had a couple of questions. First is on your cost savings program. You mentioned at several places that you saw the benefit from your cost savings this quarter. Could you quantify those cost savings for us? Where exactly did you see those cost savings coming through? Is it from the plans that you announced last year, or is it still from the TOPS 2020? Second question is on loan growth. You mentioned about you are seeing small loan growth in the commercial banking outside Netherlands. Could you just give a bit more color given that your strategy is to grow in the selective markets outside Netherlands? Thank you.
Okay. The benefits that we see are the result of various cost program initiatives. First of all, we see the initiative of the TOPS 2020 program that was announced a couple of years ago. That has resulted in lower costs for our third-party providers. That cost reduction is visible in the general and administrative line item. We also see further reduction in staff and non-staff FTE because of the reduction on the retail program, the retail digitalization program. In addition to that, we see also the benefits of the cost programs that were announced last year. We had a program with respect to reducing the cost for our controlled support functions. That has resulted in a reduction in internal and also external staff in our Group Functions.
In addition to that, we have also seen a reduction in staff because of the program around digitalization and innovation, which has resulted in a reduction on staff in our TOPS activities, which were also booked in Group Functions. You can see more on that, by the way, on slide 10 of the presentation. It gives you a good overview of the cost development over the last quarters. Your second question. If you look at our strategic announcement that we announced last year, on one hand, we said that we would also look in financing around the Netherlands mid corporate clients, especially in Belgium, France and Germany. We are in the progress of developing that business. In addition to that, we also have asset-based financing activities, in Germany, France, and in the U.K., where we have also seen some developments.
Okay. Thank you.
Next question, Damien Sosset, Morgan Stanley. Please go ahead.
Hi. Morning, everyone. Two questions from me, please. In private banking, I think you indicated that more than half of the net new assets in the quarter was driven by internal client transfers from retail banking. It is a process that is completed as of today, or do you expect further onboarding of retail clients into your private bank in the coming quarters? My second question is on risk-weighted assets. You had this EUR 3 billion increase in OpRisk RWA in the previous quarter due to regulatory add-on, and this number remained flat in the second quarter. Do you still expect this increase in OpRisk RWA to reverse? What would be the timing for this, please?
Okay. I'll take the first question. We have not finalized that referral program. We are, however, I think more than halfway. You would expect the next one or two quarters to see some more flows because of this change in limits through our numbers.
Let me answer the question on operational risk-weighted assets there. Indeed, more or less flat this quarter. Still what we expect, the addition of EUR 2 billion-EUR 3 billion in the first quarter, we noted will be reversed in the second half or the beginning of 2018.
Okay. Thank you.
Welcome.
Next question, Marcel Halbe, Credit Suisse. Please go ahead.
Good morning, gentlemen. Thank you for taking my questions. I have two left on OpEx. Could you elaborate a little bit more on the investments in digitization and innovation, the EUR 0.2 billion? How much of it has already been implemented by now? Just to come back on the capital return, can you confirm that we can exclude any special dividends or share buybacks before the end of the capital review in the first quarter of 2018? Thank you.
Your first question, when we announced last year that we would increase by 2020 the amount of investments in innovation and digitization by EUR 200 million compared to the year 2015. That's been the announcement. We have not given you exact numbers with respect to how much that will be within the intermediary years. However, what I can say, in addition to the general announcement, is that part of the additional investments in innovation and digitization need to be financed by the savings that we are able to generate. I would say that compared to 2015, we have increased already our investments for innovation and digitization. The exact amount, I cannot give you an exact number on that.
With respect to capital-- With respect to your capital return question, I think we have stated now for a lot of quarters, every time that we await Basel IV, before doing anything. I think now we have made the announcement that in the first quarter of 2018, we will look into our capital position again. So I would like to stick to those two statements.
Okay, fair enough. Thank you.
Next question, Tarik El Mejjad, Bank of America Merrill Lynch . Please go ahead.
Hi, this is Tarik El Mejjad from Merrill Lynch. Just a few follow-up questions, please. First, on capital return. I just want to understand here your thinking on that because you wait few months, know what's happening on Basel IV, then decide to do what you do with excess capital. What do you think, next six months will change if there's no deal in next October meeting? What if, like, in October, No one knows what's happening, then another meeting is scheduled in February, let's say. Would you just consider that basically that nothing has happened? You've been always highly concerned about Basel IV, so I'm surprised by this reaction. Would that mean that any special dividend or higher payout would be quite symbolic or slightly higher, or should we expect something transformational? My second question is on the leverage ratio.
Thanks for the updates on the impacts of the new rules on derivatives exposure. What about the negative impact from the credit conversion factors? Previously, you've indicated around 15 basis points. How much is that now? That's it. Thank you.
I take the first one, capital return. As I said, when it will be the same as in the last, say, six to 12 to 18 months, that all the time risk performance and so on, I think there will be a moment in time in the first quarter, and we have not decided yet exactly when. I don't know about the question then, if there is a February meeting, what can we do? That's too early to tell. We will see at that moment in time what to do, depending also on the state of play around Basel. In Q1, if there is no agreement, we will come with communication on capital position. I think with respect to the question around Basel IV, that we have always been very cautious there. That's correct.
We still are, because as you know, Northern European countries, also countries with low risk rates for mortgages, of course, are seriously influenced by discussions around a 70/75 output floor.
Your second question with respect to the impact of credit conversion factors, I don't think that that has changed since earlier announcements.
Okay, thank you.
Next question, Stefan Nedialkov from Citi. Please go ahead.
Hi, guys. Good morning. It's Stefan from Citi. Just to follow up on Tarik's question. In terms of your guidance, is it correct for us to assume that if Basel IV, we have a definite answer on, obviously you get the go ahead and you can give us your capital guidance. If Basel IV has not been cleared, then you're very likely to give guidance KBC style, where you basically put in a buffer, relative to your peers, on the basis of Basel IV impact. That's my first question. The second question is, I apologize if this has been asked already. Currently, what are the risk weights on Dutch mortgages? The third question, in terms of the FX effect on capital, how should we think about that?
Is it fair to assume that obviously your underlying exposure in US dollars is US dollars and that is not hedged, i.e., you keep capital in euro terms and that euro capital base is not hedged, therefore you get benefits like we just saw in the second quarter. Thank you.
First question, I think good question, but still not decided on our side what we will do then. Just too early to tell. Risk weights on mortgages, 10.9.
With respect to your third question, we do hold a small amount in capital in US dollars.
Most of it would be in EUR terms, basically, and therefore you get the unhedged benefit.
Correct.
Okay. Thank you.
Next question, Brajesh Kumar, Associate at Generale. Please go ahead.
Hi. Good morning, all. Just one quick one for me. Can I get some additional color around your issuance plan for rest of 2017 or say early 2018, especially around sub-debt or impact, and you have said that you're looking to meet the 4% leverage by end 2018, and that may include some AT1 issuance. When can we expect you to be in the AT1 market? Talking about 8% MREL, where are we on potential NPS issuance? Thank you.
Yeah. Indeed, we've said that we would be above 4% by the end of 2018. As earlier mentioned, there are various instruments to get there. Capital generation, the management of our exposure measure and sub-debt. I think that these three are still all relevant and applicable. I have no intention now to talk about what we're going to do when, but we still have these three elements in our position to manage the leverage ratio towards our target.
Okay. What about NPS? Any color on that? What's happening there, Non-Preferred?
Yeah. Unfortunately, we have no news on that since the last quarter. Very unfortunate for us. This is a important piece of legislation that we're still desperately waiting for. As soon as the market is being opened, we'll let you know.
Okay. Fair enough. Thank you.
Next question, Matthew Clark, MainFirst Bank. Please go ahead.
Hi. Sorry, just to follow up on your comment earlier. I appreciate that you don't want to and won't signal any intention to buy back ahead of time. I just wanted to check whether you have all the necessary regulatory approvals in place, so that it would be an option if you wanted to, or would you need to seek special additional permissions from the ECB or whoever before you could do that, hypothetically? Thank you.
Sorry, Matthew. No comment.
Thank you.
Next question, Robin van den Broek, Mediobanca. Please go ahead.
Yes, good. Good morning, everybody. First of all, it seems that cutting the deposit rate in the Netherlands has still been a mitigating factor to manage your margin. You're now 10 basis points in the Netherlands after three cuts this year. Once we're at zero, presumably, this mitigating factor is no longer going to be available. Should we assume margin pressure to increase after that point? Secondly, can you remind us about the TLTRO funds you've taken and how you're accruing NII on this? Presumably you're using 0%, you're growing now. I was wondering to hear your thoughts on potentially booking 40 basis points or 20 basis points on the TLTRO funds and when will that decision take place? Thirdly, I was just wondering, you've been speaking about M&A in the past for private banking, for example, in Europe. Are there any files on the table here?
fourthly, can you remind us what part of your balance sheet is in US dollars? Because Q2 to date, I think the average US dollar on spot has also decreased by 7%, so there's potentially some NII slip-ins for the third quarter.
I will take your first question.
Deposit rate then.
yes, we have indeed managed down to 210 basis points now. As you said, also in the previous quarter, we are not in the position and not allowed to give any guidance with respect to pricing of our deposit rates going forward. I'm unfortunately not able to give you any guidance going forward on that. Your second question on TLTRO. Yes, at this moment we indeed use the 0% as a basis for booking the interest that we pay or receive on the TLTRO. In the numbers for Q2, you see the 0%. Indeed, once we have sufficient proof and, how do you call it, comfort with respect to the growth of our portfolio, we will be booking the minus 40 basis points going forward.
With respect to your question as to use the exposure on your balance sheet, approximately 10%-15% of our total loan book is in USD. However, bear in mind that a large part of that is being booked in the Netherlands. The capital being housed to that is in EUR. An M&A question filed on the table. You know, we never comment on that. Sorry.
To come back on the margin question. If there's no deposit cuts possible anymore, will margin pressure increase? That's the right way of putting the question now.
Yes.
Thank you.
Next question, Corinne Pange, Analyst, Société Générale, please go ahead.
Hello. Thank you very much for taking my questions. Two quick questions on my side. First of all, on the NII trends in commercial banking. You reported continued pressure on deposit margins this quarter and mentioned that only a selected group of clients are charged negative interest rates. Do you plan to change your policy on this at any point this year? The second question comes back to the CIB and to the portfolio shift you operated towards better-rated clients. You still recorded a quite elevated number of impairments this quarter, despite this. Can you just give us a bit of color on when you think you should get some positive effects from this change of portfolio mix and cost of risk trends in the CIB? Thank you.
Yeah. On your first question, indeed, we have seen margin pressure. I again cannot comment on what our policy will be going forward with respect to pricing negative rates to clients. The only thing is I can say that we are always looking at this, but I can't give you any forward guidance on that.
Your second question as to the shift between the increasingly more targeted as to the better rate of clients instead of the current situation. Put it somewhat in perspective, we are of course, facing downturn markets in the ECT markets. That in itself justifies why we have been coming out with the scenarios a couple of quarters ago, especially in areas around the offshore services, oil-related services. We face some issues still. The scenarios being given there are holding up to this moment. You may expect that as we are now from the business perspective, writing more business with the better-rated client in, for example, the commodity markets. You may expect that over the next year, we will slowly see kicking in some of the advantages of that.
Bear in mind that that is something different than now the scenarios or the impairments being given in those specific business segments.
Okay. Thank you very much.
There are no further questions at this moment. You can continue.
Okay. Thank you very much, operator, and thank you all for your questions. I'd like to briefly wrap up. As we've shown, I think, we have been diligently executing our strategic initiatives, growing our activities and costs being controlled. We have worked hard on our IT transformations, progressing well. We have been investing in a lot of new products and digital channels. We're, of course, also very proud of our sustainability initiative this quarter. That leads me then to conclude that we are on track to achieving our 2020 targets. With that, I wish you a nice day or a nice continuation of your holiday. Thank you very much. Or a new holiday.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for your participation and have a nice day.