ABN AMRO Bank N.V. (ABN) Earnings Call Transcript

Good morning, everyone. It's my pleasure to welcome Ferdinand Vaandrager, CFO of ABN AMRO. So Ferdinand, 10 months ago, from the Capital Markets Day, profits are up 30%. ROE back above 12% guidance raised on income and cut on costs and CET1 ratio that even on 100% payout still sits at above 15%. Budget Day was actually a nonevent for Dutch banks, which is a positive, nothing taken from a pocket, and we can call it a good year. So let's spend the next 40 minutes to see how this nice story could continue or even improve and was from. So importantly, to what point do we really reset the targets rather than keep beating them. So Ferdinand, welcome.

Thank you.

So maybe you can just say very quick words on the budgets to clear on this. What you see as potential? I mean it's not a topic for you, but it's ongoing for many other big jurisdictions in Europe and could be actually a big impact for [indiscernible] so on for you, what do you see there?

No. And I think it's very important. Number one, you need to realize, we have a minority coalition in the Netherlands. So for all proposals, they need to find support from the opposition, so that what also means before it's adopted by the Senate, it will take more time. You mentioned already what is important, if you look what will potentially impact capital or earnings of banks. In the Netherlands, we have already a banking tax for much more than 10 years. So it's already in our planning, and we have not seen any proposals in increasing those. Also there, you have not seen any proposal in significant increases in corporate taxation, which might impact the earnings for banks as well. And the third point is there have been lots of talks about the Box 3 is the wealth taxation in the Netherlands and unrealized gains. Also, that is off the table for now. So I think it will take longer, but up until now, no elements in there which might impact our execution of the strategy. I think the positive thing there is budget discipline. We have a debt to GDP of low 40s. So I think if you look at Europe on context, that is quite healthy. And also the growth in the Dutch market is good. And as 1 of the important points of this coalition is really start building houses and really supported by financial incentives towards the municipalities and secondly, also reducing red tape. So they have an ambition of around 100,000 houses and that should really be helpful to our business model as well, with 60% of our balance sheet in residential market. So overall, it looks no worrying signs spread to.

It sounds like a safe haven versus the neighbors. So then maybe move on to NIBC integration. You've closed the transactions in the summer. Maybe you can update us on how this progress operation on the ground in terms of teams integration and accounting as well?

Yes. I think NIBC is an example what we said before, if in our core geographic footprint and business mix, we find attractive opportunities. We might look at bolt-ons. I think NIBC, we closed the transaction. Now we're full working towards a legal merger. So we need to wait until the legal merger is somewhere pre-summer 2027, and then the real integration can start. So overall, I think the discussions are really going in the right direction, and we really have the road map towards integration. And I said before, deployment of capital had this brings a return on invested capital of around 18%, and we are really leveraging on both deposits and mortgages in the Dutch market. And what I really like that we also get a quite significant OTD platform for mortars, which we were lacking. So now I'm looking forward and the indications of integration are going in the right direction.

On CMD next year, November last year. So it started clearly great, and you've been ahead in many fronts. So can you maybe tell us at a high level, and then we'll go into detail what are the areas where you've been actually seeing some challenges to achieve the targets? Or the opposite, you thought you've been conservative?

Well, I know what you think, Tarik. But let's, yes, if you see where we are today in the third quarter was the strategic plan I think we are delivering and on quite a few elements, we are doing better than planned. Number 1 on costs. I think we have a we already almost realized 50% of our FTE target of a reduction of 5,200. We realized around EUR 300 million absolute cost savings of the EUR 900 million. So if you look in terms of cost, we lowered our cost guidance twice this year at Q1 and Q2 with EUR 100 million. So clearly, we're delivering faster on cost, but you should be mindful trajectory will start to slow down because a lot of the FTE reduction is externals and people with fixed-term contracts. Number two, if you look in terms of capital also in terms of RWA reduction, I think we realized already around EUR 9 billion, EUR 6 billion of the EUR 10 billion with the corporate bank. So also there, we are going faster than planned, and we are going to see an additional benefit, which was not part of our plan is a removal of the market or which brings around EUR 7 billion relief in Q4. But also there the next phase in RWA optimization should really come from a portfolio management and being very strict on refinancing of corporate clients, which don't meet ROE hurdle. Fees are also quite good. Also there, you should take into account also partly some cyclical elements in there because financial markets are very good for assets under management as well and also our clearing operation is really benefiting from a significant volatility in the market. So I think on all 3 key elements we're doing better than expected. What is more outside our own control, but clearly, a very big driver for our profitability is the liability side of the balance sheet. Forward curves have improved significantly. So far, you've not seen any pass-through of those rate hikes into the Dutch market. So where we stand today, and we've seen an upgrade underlying of EUR 250 million in our NII guidance is really on the back of the improvement of the forward curve rate.

So let's start with the net interest income and your rates a tank. So you pointed out that you've already upgraded with Q2 net interest income. But how much is more debt? Because I mean, the curve has moved since Q2 and if you look at your assumptions of pass-through 100%, which some could argue is conservative. On the other hand, you not expect any flow from current account to term deposits. So if you can give us some sensitivity to the current curve and what makes you comfortable to actually translate that into a new guidance?

Are your challenge also earlier that were conservative so far you've been right, okay? So you've not seen the path for yet, but every quarter with improved curves, your assumption of stable margins. So I would translate a full pass-through that the margin of your savings accounts or interest-paying deposits stay at the same level. Every quarter for extrapolating is a higher starting point. So it is more potentially ambitious to have that. Yes, if you look overall at deposit, as I said, deposit market is growing in the Dutch market, less than 20% is in current account. So most of the migration has taken place. But if you look at Q2, for example, in our analysis under the flat margins for interest paying deposits. Yes, our liability margin in 2018 would be 10 basis points higher than our assessment at the Capital Markets Day. So clearly, the benefit of the replicating portfolio of refinancing at higher rates really start to come through and might have a significant benefit most pronounced in '26 and '27.

Can you touch please, on the deposit competition in Netherlands. I mean, Rabobank increased the rates by 10 basis points so far after 2 hikes at DCB. So how do you see the competition there? And maybe you can draw in the previous rate hike cycle, which we admit is very different in magnitude and the reasons. And yes, so how do you see the players moving?

Yes, the players. I mean, the majority with the deposits are with the incumbent banks in the Netherlands. It's a rational market. a pie of the replicating portfolio. Yes, it's true. The only base rate increase in savings you've seen with 1 player you just mentioned. But there are clearly around 30, 35 players in the Dutch market with a deposit license. So there's definitely competition. but it has not resulted in any significant outflow. If you look at our market share in deposits of around 15% has stayed relatively stable this year. So yes, there is competition, but there are no significant aggressive marketing campaigns happening in the Dutch market. And you also see a tendency that the deposit with the bank are actually quite sticky. And that's partly related that you are the house bank for most of those depositors, you have more product, et cetera. So the loyalty and the stickiness of those clients is proven to be there. And as you said, the migration from current accounts to savings we've seen most of that migration. So we expect also the base of current accounts to remain relatively stable. But the margins increased, that's why I always say like a stable margin, which is elevated compared to history at a certain point that might also attract a tougher competition. So we should be able to offer more products as an alternative to lower savings rates.

So you mentioned cost of turkey deposit license given. So if we focus on those probably more into the competition, the digital banks, I mean Netherlands is we can call it digital, I mean, with 20 branches. So how -- 26, okay. So how do you see the competition from those specific players shaping up? I mean you see in Germany is picking up in France, there's a big player with huge ambitions?

Of course, it's there, right? We are fully prepared for the more digital offerings. But as you say, I mean, the market is digital already. we moved to 26 branches and all our daily banking services are a digital or remote. So that will not be a sea change. Of course, the expectation if you move to a genetic world that the competition might intensify for where they are here and where they stand today. But we are also investing in our capabilities and products we offer, Tarik. So up until now, the competition is there. The stickiness is also there, and we keep investing in our offering as well. So we're not sitting still while not passing through the recent increases we see.

So moving to the lending part. So you have a very healthy lending growth on mortgages in Netherlands. I think your own economics expect a slowdown in transactions 3%, 4% in the coming quarters. So how do you see the lending evolving in the region? And is it more I mean organic and self have say, market share ambitions to take? Or are you going with the market's growth and you see that slowing down as well?

No. If you look at the lending, let's start, as you say, with marketers. We have a market share of around 18%, 19%. When NBC joins the family that will add 2% to 2.5%. What we do see is a competitive market. And you do see that in margins on new production. One element is that we've seen quite a significant shift from -- at lower rates from longer maturity more gas 20 to 30 years where you have much more competition from insurance companies and pension funds. Now around 65% the mortgage market is with the banks. But specifically in the state guaranteed mortgages with a maturity up until 10 years there are significant competition. And we don't target for market share targets for profitability. So we are very strict on pricing in meeting the ROE hurdle. So that might mean that you're going to see a little bit more fluctuation in terms of market share. we have in our plan that we have a gradual pressure on asset margins on the back of this, but at the same time, the profitability because the risk weight is low is quite good. you do start seeing and you mentioned that correctly, is that the housing market starts to cool. If you look in terms of transactions, if you look in terms of house price rises, and also, if we see further increases in rates, that will start to impact the affordability for new markets. So the more market is healthy. If you look at the corporate loan side, also there, you see a healthy growth. I mean the Netherlands is the right [indiscernible]. You also see there the benefits of the spillover effect of the ASML in the Netherlands and the ecosystem around that. And also on the lending side, we're really looking at financing the larger transition trends in Northwestern Europe, so that is defense, digital infrastructure and new energy. So also there, the loan demands on the bus products is actually rather resilient.

Very good. So you mentioned a under pressure a bit like asset margin liability margin, we discussed with all the caveats of the market. So putting all this together, it points to growth in AII and margin, which is in your guidance but I guess we have to wait a bit more to see how that really will translate into versus your current guidance?

No, that's it in the current guidance. I think we're quite transparent there, right? We provide an absolute guidance on cost and NII on months forward-looking basis. Again, we're updating that on a quarterly basis. And of course, you have set your target in November, where in the third quarter of execution, we're very happy with the progress, but it's for clear some elements and also benefits from different rate environment means that the outlook can be is where we stand today is more positive.

So moving to fees, which is another record delivery you have in the quarter in 2 quarters in a row above EUR 600 million. So this is greatly driven by the wealth, but also the clearing business. Do you see this again as a structural trend? I mean you've been mentioning yourself that you've been above or grid tracking well ahead of your own targets. So should we just stick with your targets? Or there is some -- really some -- you discovered some hidden gems there?

Where do I start? Yes. I mean if you look at the fee growth over the past 12 months, it has been around 25%, right? But then let's build this up. Number one, it includes now our German acquisition, [indiscernible]. If you strip that out, you come to around underlying. We have provided a CAGR of 6% to 7%, including M&A at the Capital Markets Day, we're still confident with that growth outlook. And then the second step is what is structural and what is cyclical. You mentioned already wealth management and clearing. Yes, with the backdrop of the financial markets, you see the AUM increase on the back of market performance has been significant, right? So there is a certain sensitivity partly cyclical of market performance. Secondly, if you look at clearing the volatility in the market, we have seen record quarters in terms of transaction cleared -- to give you an example, we see peak days where we clear around 80 million transactions on a daily basis, right? So also there, you see elevated fees on the back of volatility in the market. So yes I would stick to the 6% to 7%, but we provided at the CMD. So you should see this year that part of it is also potentially a little bit more cyclical install structural. So don't start extrapolating the trend completely, Tarik.

So then there may be another new opportunity for you with all and then the acceleration of growth organic and organic in the wealth, how is actually underpenetrated the corporate clients from being advisory or discretionary mandates? How is that a new opportunity? I don't think you've touched much on that on the CMD.

No. And I think it's a very fair point because now fees were really focused on what's happening in wealth and clearing, clearing as part of the corporate bank. But also there, if you look fees in our retail bank, it's also important, right, if you look in terms of payment transactions and payment package fees. On the other hand is the corporate bank. I mean at the CMD, it was very clear. Priority is improve the profitability of the corporate bank. It has been steered historically too much on top line growth. We have now implemented a very strict client selection framework. It really needs to meet the return hurdles of the bank. And that means that on the back of the stricter selection framework, we're more selective and onboarding new clients, and that's more a move to the mid-market where we have a broader product relationship for cross-sell. And number two, it also means that the tail end of clients who are unprofitable at refinancing. So according to the maturity schedule that will be refinanced with potentially more profitable clients where you have a boproducts. So yes, also from that side and it's not only the advisory capital market business, et cetera. It's a broad range transaction banking products, where we're really focused in the corporate on profitability. So it is ROE and it's also income of RWA.