ABN AMRO Bank N : Investor Call Transcript 2023 Q2

ABN AMRO Q2 2023 Results Transcript

ABN AMRO Investor Relations Wednesday, 9 August 2023

Participants: Robert Swaak (CEO); Ferdinand Vaandrager (CFO a.i.); Tanja Cuppen (CRO);

Operator: Hello, and welcome to the ABN AMRO Second Quarter 2023 Analysts and Investor Call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator.

I will now hand you over to your host, Robert Swaak, the CEO, to begin today's conference. Thank you.

Robert Swaak: Thank you. Thanks very much, and good morning, everyone. Welcome to our Q2 results. I'm joined by Ferdinand Vaandrager, our interim CFO, and as always, by Tanja Cuppen, our CRO. I'll update you on the main topics for this quarter before we start the Q&A session. So let me first take you through the highlights on slide two.

Very pleased with another quarter of strong results. Net profit reflects strong NII and is supported by impairment releases as credit quality remained solid. NII continue to benefit from the higher interest rate environment. Our overall deposit volume remained stable while clients continue to transfer cash into interest- bearing accounts.

Business momentum is also holding up for corporate lending. We again managed to show growth on our mortgage portfolio despite a slow housing market. We have lowered our FY2023 cost outlook to €5.2 billion as the SRF contribution this year was lower than expected. The tight labour market is causing a delay in sourcing qualified staff we need for a number of investments and therefore will lead to a cost overrun into 2024.

In addition, the continuing higher inflation and slower reduction of our AML costs than we had anticipated also means that we will not be successful in bringing down cost of €4.7 billion by 2024.

Now, as we're nearing the end of our plan period, we will also be updating you on our financial targets at our Q4 results. In addition, we will present a new capital framework and update you on potential share buybacks.

We've gone over the highlights. We set our interim dividend at €0.62 for the first half of 2023.

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Q2 2023 analyst & investor call transcript

Turning to slide three, let me say a few words on our progress on executing our strategy. We are continuing to invest in our digital capabilities, including artificial intelligence, which has the potential to improve many aspects of our operations.

In Q2, we launched an interesting pilot that used an on-prem ChatGPT server which automatically records and summarises client calls. In addition, during the call, the advisor is automatically prompted with the right product pages based on the conversation. The advisors involved in the pilot are very enthusiastic as it allows them to spend more time with their clients and we are currently evaluating how we can incorporate this further and more broadly in our operations.

We are progressing further on the simplification of our Wealth Management organisation. In this quarter we established the branchification of Neuflize. Our Impact funds went live. And what is unique for this type of fund is the low minimum threshold of €50,000. This offers more clients the opportunity to continue to invest in companies striving for positive impact on people, planet and society.

ABN AMRO Ventures invested in a company whose product we used to detect fraud and protect our clients against malware, for example.

On the Dutch economy, which you'll find on slide four. The Dutch industry PMI rose slightly in July but still indicates a contraction of activity. And the outlook for the German industry worsened however, which is an important export market for the Netherlands. On the positive side, many sectors still carry large order books and we are starting to see lower purchase prices coming through.

Bankruptcy remains low confirming the resilience of the Dutch economy. House prices have now fallen 6% on average due to higher mortgage rates and deteriorated housing market sentiment. The end of the price correction isn't cited for 2024. We now expect a modest 3% decline.

The affordability and financing of homes will gradually improve as wage increases come through to compensate for inflation. And also the low number of transactions reflects the lack of new construction, which is hampered by higher interest rates, price inflation for materials and environmental restrictions.

The second quarter performance, let's take first NII, and you'll find that on slide five. Looking back at the last four quarters, our NII showed a strong recovery from the negative rate environment, mainly as deposit margins improved. Deposit margins still increased a bit further during Q2 with the effect of the higher rates starting to level off.

The margin we locked in on new mortgage production was in line with our average portfolio margin and also the portfolio volume increased somewhat. Corporate margins are holding up. And for deposits, the competitive forces we experienced and the impact this has on volumes and margins will become the main driver going forward. We expect to start to see some margin pressure on saving accounts following the last increase of 25 bps as of 1st August.

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Q2 2023 analyst & investor call transcript

Treasury result was €50 million lower this quarter, and that was caused by unfavourable interest rates resets. This is not structural, and we expected the recovery followed by a further increase as the Treasury results still stands to benefit from higher rates.

Looking ahead to the next quarter, I expect a recovery in Treasury results while we may start to see some margin pressure on savings.

So turning to slide six on balance sheet developments. We are achieving good results in our strategic focus sectors, which are the digital sector, mobility and new energy. We made further gains in all of these sectors, particularly in our Northwest European markets. In our home market, the mortgage portfolio held up despite the slower housing markets. And new mortgage applications are gradually increasing now. So the third quarter might end up a bit strong.

Consumer loans declined due to higher repayments and less demand. This quarter, we further reduced the remaining non-core portfolio, which is now down to just €0.5 billion. We are making good progress on winding down the non-core back office operations in the various countries.

Moving to our client deposit base. As expected, clients continue to optimise their cash by switching to interest-bearing accounts. Overall, our client deposit volumes remain stable. And we see limited deposits leaving the bank as most of our clients opt for the savings products we have on offer, in particular our time deposits.

Returning to fees and other income on slide seven. Fees were flat compared to last quarter. During the second quarter, the market volatility was lower compared to previous quarter, and this is reflected in clearance fee income. Debt and equity markets were acquired in Q2 and fees are lower as a result.

Nevertheless, Corporate Banking showed an increase in fees and fee income due to a one-off fee booked in non-core. Wealth Management fee income was also stable driven by stable results for Asset Management. And other income was up versus Q1, largely related to fair value adjustments from IFRS 17 and higher Treasury results.

Now turning to slide eight on costs. Our cost saving programmes continued to deliver cost reductions. We made further progress on winding down non-core operations, and the implementation of our new client service model is also leading to savings. We booked a release related to the Single Resolution Fund as the contribution was lower than we originally anticipated. And this will bring down regulatory leverage for the full year to around €340 million. And as a consequence, we now expect full year cost of around €5.2 billion.

At the beginning of the year, we flagged a further - a need to further invest in our data capabilities, our digitalisation of our processes, and building up of our sustainable finance regulation capabilities. We are, due to tight labour markets, experiencing delays in sourcing staff for these projects. So we expect investment cost to increase in the second half of the year, and to run over into 2024. Now this is in contrast to the assumption we made on our cost target, where we, in fact, anticipated investments to decrease by €100 million in 2024.

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Q2 2023 analyst & investor call transcript

Also more effort than expected is required to ensure AML activities can be maintained at the highest standards needed to fulfil our gatekeeper role. But it is clear that our AML processes are becoming increasingly more complex and our original assumptions on related cost reductions need to be reviewed.

We acknowledged at the beginning of the year that it would be challenging to reach our 2024 cost targets. An increasing number of our original assumptions back in 2020 have come under pressure and we faced an inflationary environment, continued delayed investments or I should say delayed investments, and new insight in our future AML operations. We will deliver on our non-core cost reduction. And I also expect regulatory levies to come down further.

As we stand here today, it is clear we're not going to succeed in reaching our target of €4.7 billion by next year. But I will add immediately that we will remain fully committed to cost effectiveness. That is not changing. We started to work on a financial plan for the years ahead, and therefore we'll present you with our new financial targets with our Q4 results.

Turning to impairments on slide nine. This quarter, we saw a release in impairments of €69 million, which was for large part related to the release of the remaining COVID overlay and a net release on individual corporate files. After an assessment of a large number of clients, we concluded that the impact of COVID-19 on our clients has been absorbed in the credit risk metrics and an overlay was no longer warranted.

The overlay related to the war in Ukraine has obviously kept in place. For some new provisioning related to inflow in Stage 3, however, more than offset by releases in individual corporate files both in core and non- core.

The inflow on Stage 3 for mortgages was related to the introduction of stricter credit monitoring metrics. The credit quality of our book remains solid and the impact of the economic slowdown in our loan portfolio is not visible so far. And therefore, we expect the cost of risk for 2023 to remain well below our through-the-cycle cost of risk of 20 basis points.

Slide 10 on capital. Our Basel III capital ratio stands at 14.9% and Basel IV at around 16%. And we remain well capitalised. 50% of our net profit is added to common equity tier one capital and the other half approved to our dividend reserves. Offsetting the capital generations were higher RWAs due to model updates, and this is only partially offset by credit quality improvements and business developments. The countercyclical buffer increased as of 25th May, has raised the MDA trigger to 10.5%. However, our capital position remains well beyond this level.

Now, to round out with our financial targets. We're off to a good year, a good start of the year, actually, with an ROE well above our 10% ambition. Our NII has recovered from the negative interest rate environment and we have more or less completed the de-risking of our balance sheet with the wind down of our non-core portfolio. A solid risk profile and a resilient Dutch economy have led to impairment releases over the first half of the year, which has further boosted our results.

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Q2 2023 analyst & investor call transcript

As I mentioned, cost targets for '24 are no longer achievable. Also given the delay, we are currently facing in attracting staff. We have announced that we will present our new financial targets and capital framework with our Q4 results, given that we're nearing the end of our plan period. In addition, we will present or update you on our share buybacks.

With that, I guess this is the time to ask the operator to open the call for questions.

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