ABN AMRO Bank N : Call Transcript 2021 Q4

Q4 2021 Analyst Call

Transcript

ABN AMRO Investor Relations

Wednesday, 9 February 2022

11:00 CET

Participants: Robert Swaak (CEO); Lars Kramer (CFO); Tanja Cuppen (CRO)

Conference call replay: https://channel.royalcast.com/landingpage/abnamroinvestors/20220209_1/

Robert Swaak: Good morning welcome to ABN AMRO is Q4 results. As always, I am joined by Lars Kramer, our CFO, for his last time, Tanja Cuppen, our CRO. I will update you on the progress of our strategic agenda and the share buyback that we announced today. Lars will go through our fourth quarter results in more detail, and then Tanja will update you on impairment developments in our loan portfolio and on capital.

Let's turn to our fourth quarter results on slide 2.

Our Q4 results reflect the underlying economic recovery, which is really gathering steam until December, when lock-down measures were re-imposed. During the fourth quarter, the corporate loan book of the core bank increased by over EUR 5 billion and as a result, we met the TLTRO-threshold and we booked the additional funding advantage for 2021.

We saw a strong fee income with our Clearing bank again turning in a good result. Our Q4 result was further boosted by the sale-and-leaseback of our head office. Combined, this led to a net profit of EUR 552 million for the fourth quarter.

Over the full year, costs were in line with guidance at EUR 5.3 billion, excluding the AML settlement.

We effectively absorbed an increase of AML costs as well as handling costs for the variable interest compensation scheme. Loan impairments showed a strong reversal from previous year and we ended with a net release of EUR 46 million over the year.

We propose a dividend of EUR 0.61 per share per share and I will later elaborate on the share buyback program of EUR 500 million we announced today.

Turning to slide 3, I want to look back on what we achieved in 2021. The wind-down of the CIB non-core, which we talked about quite a bit, has been largely completed well ahead of schedule and our attention is now turning to closing locations. We settled the AML investigation and progress on remediation is good.

Q4 2021 analyst & investor call transcript	ABN AMRO

In terms of our growth agenda we had a successful start of MoneYou mortgages and Enterprise & Entrepreneur (E&E) is now live in Germany and Belgium.

We further strengthened our digital and data capabilities and continue to further simplify our organizational structure.

We introduced new payment packages for SMEs with a successful uptake and, last but not least, we resume dividend payments, and today we also announced a share buyback program of EUR 500 million.

So looking forward to 2022 and beyond. We are, for the time being, still faced with continued pressure from low rates.

For next year I expect net interest income of EUR 5.0 billion to about EUR 5.1 billion. I do expect NII to bottom out sometime during the second half of 2023.

Our strategic agenda defines a comprehensive approach to deal with the impact of negative rates.

Growth in fee income helps the top line and leads to income diversification.

I expect we can deliver a compound annual growth rate between 5% and 7% on fee income up and until 2024.

We continue to execute on our well-substantiated saving plans which will bring cost below EUR 4.7 billion by 2024.

We will benefit from the de-risking of our balance sheet as we now expect a through-the-cycle cost of risk of 20 basis points going forward.

Of course, it is not all about financials. We will not lose sight of our clients. We will continue to work on putting into practice a personal bank in a digital age. I expect the full range of banking services to be available, remote or digitally as of Q3. We are mindful that not everyone is able to switch to online channels, and therefore we want to continue to ensure digital inclusivity for all of our clients. We are doubling the number of financial coaches our clients can turn to for help. Also, we will continuously focus on AML going forward, as this is our license to operate and also at the same time our license to grow.

On slide 4, I will update you on ESG. As you know, sustainability is core to our purpose and we firmly support the goal of limiting global warming to a 1.5 °C.

To reduce our own carbon footprint, we are developing a Paris-proof campus, which will become our main office building.

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Q4 2021 analyst & investor call transcript	ABN AMRO

Through our clients, we can leverage our influence greater to drive the energy transition. For example, we incentivise our mortgage clients to improve the energy rating of their property by offering discounts, as well as energy savings check.

To support corporate clients achieving their sustainability targets we can offer them sustainability-linked loans. These tailor-made loans link the margin to improvements in the ESG-rating or a specifically sustainability-related performance indicator.

We have developed a standardised version of the sustainability-linked loan, the transition loan, which is specifically tailored to SME clients.

Turning to our sustainability targets, we have made quite a lot of progress over the last year, and in many cases we are already achieving our longer-term targets.

In order for us to maintain momentum, we have raised our target of sustainable client loans and investments from 30% to 36% in 2024.

Now, if you allow me a few words on the Dutch economy which you will see on slide 5.

As we begin to emerge from the pandemic, the economy has proven remarkably resilient, reflecting healthy economic fundamentals and effective government support.

For 2022, Omicron and high inflation will have an impact on GDP growth, and yes, inflation is a source of concern.

However, we expect it to start coming down closer to the second half of this year as supply disruptions are resolved.

Bankruptcies were historically low in 2021 but are expecting to rise steadily again as government support measures are phased out.

Meanwhile, house prices in the Netherlands will continue to rise, mainly due to the low mortgage interest rates and declining supply, so we expect the price increase to continue, though at a lower rate. The number of transactions will therefore come down, however.

We expect the new government to implement measures to increase housing supply and curve demand.

Now turning to slide 6 on capital.

We announced a EUR 500 million buyback program, which will start tomorrow. Let me talk you through our rationale behind this share buyback.

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Q4 2021 analyst & investor call transcript	ABN AMRO

The choice we made was for a gradual release of capital, potentially resulting in multiple buybacks over a period of time, rather than a large buyback without follow up. Going forward, share buybacks will be an integral part of our capital management practice and a tool to optimise our capital position. Our current capital ratio puts us in a good position to discuss a subsequent share buyback with our regulator in due course.

Now, given a gradual release of capital, the threshold is for the time being not constraining. For share buybacks further out we will evaluate the uncertainties we face at that point in time and reassess the appropriate size for our strategic M&A buffer. In dialogue with our regulator we will then decide on the amount of capital we should prudently preserve and if there is room for a further share buyback.

Over time, I expect the amount of capital we preserve over and above our target to gradually decrease, as we work through our regulatory changes and uncertainties are resolved. So therefore, I trust this framework will lead to more predictable capital distributions going forward.

Let me now hand it over to Lars to discuss the fourth quarter results.

Lars Kramer: Thanks, Robert, I will briefly highlight the full year developments.

Last year, net interest income, excluding incidentals, but including TLTRO, amounted to EUR 5.5 billion. The beat versus our NII guidance is mainly due to the higher-than-expected mortgage prepayment penalties and comparing NII to 2020, the decline is mainly due to the non-corewind-down, the effect of margin pressure on deposits, and also the mix between margin and volume pressure on our lending products.

The fee income rose year on year driven by good results from clearing as well as private banking.

Excluding incidentals, expenses amounted to EUR 5.3 billion, as previously guided.

In stark contrast to 2020, we booked a net release on impairments in 2021.

I am pleased with the good profit of 2021 and despite the impact of the settlement of the compensation schemes.

Moving to page 8, we can have a look at some of the loan volume developments.

Over the year, our mortgage portfolio grew by EUR 700 million, which reflects a stable market share of around 15% mortgage prepayments were generally higher towards year end. This led to a small decline in volume during the final quarter. Corporate lending increased in Q4, supported by the TLTRO-incentive that we were able to offer our clients. Consumer lending was actually stable this quarter.

Looking at interest income on page 9, as I have just mentioned, last year's net interest income on a clean basis amounted to EUR 5.5 billion. From this base we estimate NII to decline between EUR 400 million to EUR 500 million in the coming year. Therefore, components to this decline.

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Q4 2021 analyst & investor call transcript	ABN AMRO

• One is the rapid wind-down, which means that limited NII will come from the non-core activities going forward.
• We also expect further margin pressure on deposits though to a lesser extent than last year.
• The margins on our lending business have declined and this could continue during 2022.
• Treasury results include mortgage prepayment penalties as well as interest income on our duration and hedging positions.

Now, we expect the treasury results to partly reverse the good result of last year, as we expect mortgage prepayment penalties to be lower in 2022. So, we estimate that these four components will decline around EUR 100 million each, but looking further ahead, we expect NII may bottom out towards the latter half of 2023, treasury results may decline further, that non-core will only have a minimal effect in 2023, and a gradual rise in interest rates and growth in our corporate books should help to turn NII around.

Moving to fees and other income on slide 10. Here, we delivered another strong quarter in fee income, reflecting particularly good results in our clearing bank as well as in asset management fees. Our strategic initiatives are starting to materialise, for example, the new SME packages, which have kicked in. Going forward, I expect fees to grow on average between 5% to 7% through to 2024.

Our other income of course was boosted by the sale and leaseback of our headquarters in Q4. And excluding the sale, other income improved from higher trading results as well as strong private equity gains. It is worth noting that we do not expect the private equity to repeat the strong performance, so the income in this level would be lower in 2020.

Moving to costs on slide 11. Excluding the incidentals, the total cost for 2021 amounted to EUR 5.3 billion, as we guided. Over the year, the cost of AML increased and the regulatory levies were higher due to the AT1 million tax clawback. We expect our cost base to start declining during 2022 and end below the level of EUR

5.2 billion. The clawback will drop out this year, so regulatory levies will decline by around EUR 50 million. Also operating expenses in CIB Non Core will come down further. Furthermore, our strategic cost saving programs will broadly offset cost increases and we do remain firmly on track to drive our costs below the EUR 4.7 billion level in 2024.

At this point I will hand over to Tanya.

Tanja Cuppen: Thank you Lars.

In Q4 we booked impairments of EUR 121 million. These impairments are largely related to corporate loans reflecting a management overlay for Stage 3 loans in Commercial banking and a limited increase on existing Stage 3 files for both CIB Non Core and Commercial banking.

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