ABN Amro Bank NV

OTC:AAVMY

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the ABN AMRO Quarter One 2018 Analyst Presentation. [Operator Instructions] I would now like to hand the call over to the Chairman, Mr. Kees van Dijkhuizen, the CEO. Go ahead, please, sir.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

Thank you very much, Operator. Good morning, and welcome to the analyst and investor Call for ABN AMRO's first quarter results. I'm joined here by Clifford Abrahams, our CFO, and Tanja Cuppen, our CRO. Turning to Slide 2, I will briefly highlight the main points. I'm pleased with our financial results over the first quarter, with a net profit of EUR595 million. NII remained strong, reflecting growth in corporate and commercial banking lending at stable margins. Our capital position is strong, and we are well-prepared for Basel IV. I'm disappointed with impairments this quarter. These were booked predominantly in specific international sectors. Our domestic business continues to perform strongly. We are progressing well on our strategic agenda. Our new Chief Innovation and Technology Officer, Christian Bornfeld, joined in March and is making a good start. I'm pleased with cost savings coming through, and we are on track to achieve our 2020 financial targets. Our IT transformation is progressing well. I will elaborate on this later. I will also detail our transformation at private banking.We recognize that CIB is facing both cyclical and long-term challenges. All our businesses need to deliver adequate returns, and we are taking action here. Going forward, CIB will have more focus from a geographical, client, and product point of view.Related to this, we booked a restructuring provision for our markets division and are closing our Dubai office, for example. We have more work to do, and we'll update you at Q2.Now, I want to discuss the progress we have made on our cost-saving programs on Slide 3. At the end of 2016, we announced our cost savings program with a 2020 horizon. Working to a flat cost base from 2015 to 2020, we are lowering operational cost while, at the same time, investing in digitalization, innovation, and growth initiatives. One and a half years down the line, and we have delivered over 50% of targeted cost savings of EUR900 million. If I include Q1, total savings delivered amount to EUR512 million since year-end 2015.A broad range of activities are contributing to this. We have lowered our IT run cost, and there's more to come. Head office functions have been scaled back as we simplify our operations, and the Agile way of working is now implemented throughout the organization.FTEs are currently 10% below year-end 2015 levels, or 9% if we exclude the sale of PB Asia, out of our total target of a 13% reduction. As clients increasingly use our digital channels, we closed more than 30% of our branches over the last 9 quarters. Looking ahead, the remaining cost reductions will mainly come from lower IT run cost, further FTE reductions, and reaching full benefit of the Agile way of working.We have good visibility on how we will accomplish this. I am confident we will reach our target, 56%, 58%, by 2020.Now turning to the next Slide, I will discuss where we are heading with our IT infrastructure. Following Christian's arrival, I'm confident we are delivering transformation we have set out to achieve by 2020, and I'm pleased with our progress so far, but we have more to do. We have increased efficiency through our IT transformation, adopting the Agile way of working, rationalizing applications, and cloud adoption. Future focus will be on cost discipline and deploying the next round of efficiency levers, such as artificial intelligence and automation. The Agile way of working will be extended further. We will continue to modernize our existing core banking system and see no benefit in changing to another system. Digitalization has allowed us to enhance client experience. We have launched a number of award-winning apps, our main mobile banking app, as well as Tikkie and Grip. Overall, 59% of all retail products and services are now handled online, up from 35% year-end 2015. We will increase our innovation efforts, focusing on getting our services and expertise immediately at hand the moment our clients need them.On the next Slide, I will highlight some recent programs on digital innovation. We are ready for open banking and PSD 2. The Dutch PSD 2 law is expected sometime this year, this summer. Nonetheless, we are already gaining experience with our developer portal, which hosts a number of APIs. Tikkie, our peer-to-peer payment product, continues to grow rapidly and currently has now almost 3 million users. We reached record Qs during the last week of April with on average of one payment request per second. There's also a lot of interest from our business clients to integrate Tikkie in their own processes. Business clients on-boarding is accelerating, and some recent examples are KLM and SPAR University Supermarkets.Moving to Grip, this is our tool for clients to analyze personal spending, which were co-developed with a FinTech. With 450,000 users, we have the largest user base in the Netherlands. We have plans to expand the functionality in part related to PSD 2, but also to add targeted propositions.Now turning to re-transformation that is taking place in private banking on the next Slide, in recent years we moved from a disbursed footprint to a focused core with strong local brands in Northwest Europe. With EUR200 billion of assets under management, we have significant scale. However, outside our efficient domestic franchise, we need to improve to deliver acceptable returns in each country. We are focused now on delivering operational transformation which will allow us to grow this franchise further profitably, which may include bolt-on acquisitions.So far, we have moved to functional management and are progressing towards common client segmentation, product offering, and IT platform. At the same time, we are investing in automating processes and a new client portal. Overall, we can achieve a substantial improvement to the cost/income ratio of the private bank, which is already embedded in our cost/income ratio target for 2020. The cost/income already declined to 72% compared to 80% for Q1 2017, and profit is up 23%. The transformation will strengthen our attractive proposition for clients using our open architecture investment platform.Now I want to highlight some recent sustainability activities on Slide 7. In recent years, our sustainability efforts have significantly broadened. Now, most of our time is spent on delivering on our client sustainability goals. We are building a franchise around this, and we want to become the go bank for sustainability. I'm proud that we were awarded the Green Bond Lead Manager of the Year for our consistent commitment to the Green Bond market. We advise corporates, as well as banks, on how to structure green bonds and arrange the issue of these bonds. We also issued our own third green bond recently. Another area in which we are gaining traction is circularity. We help our clients to make a step change towards a circular business model. Our ambition is to finance EUR 1 billion circular corporate assets by 2020.I will now hand over to Clifford to go into more detail in our Q1 results.

[Clifford J. Abrahams, CFO & Vice]

Thank you. As Kees mentioned, we had a solid first quarter, with net profit of EUR595 million. Operating income was up 4%, driven by strong NII and good private equity results while operating expenses were flat. The impact of incidentals is limited this quarter, with similar amounts as for Q1 last year. Impairments are up, reflecting challenges in a number of specific sectors. Tanja will discuss these in more detail later. I will describe individual line items on the next Slides, but first, I'll show the trend in our client lending, on Slide 9. The left-hand chart shows the development of our mortgage loan book. Mortgage volumes in Q1 were flat, with new production compensating for increasing repayments. House prices continued to rise. However, transaction volumes are coming down. We saw competition increase somewhat, mainly from other banks, and for Q2 we expect a modest drop in our market share. All this leads us to expect a flat mortgage loan book, going forward, as we look to maintain our pricing discipline.At commercial banking, I'm pleased with our broad-based lending growth with good margins during Q1. We expect further growth, given the strength of the Dutch economy. Loans in corporate banking ticked up, reflecting solid underlying growth together with the reclassification of EUR 1.8 billion from professional lending, as well as some short-term positions in financial institutions which unwound in April. Corporate banking is growing in areas where we can achieve profitable growth, while we are scaling back in other activities. We are growing in neighboring countries by leveraging our infrastructure in Amsterdam. We started this initiative in 2017 and currently have around EUR 1 billion of outstanding loans in near-Netherlands Europe.Turning now to net interest income on Slide 10, our reported net interest income for the quarter was up EUR75 million versus the first quarter last year. Due to an accounting change, fees related to mortgage term renewals will now be amortized over a short timeframe. This resulted in a one-off impact of EUR25 million this quarter related to 2017. In addition, this leads to a recurring uplift to net interest income of around EUR30 million each quarter over the next few years, which will decrease thereafter.Underlying growth in net interest income reflects a number of developments. We saw volume growth in corporate loans, both at commercial banking and corporate banking, at good margins. Further lowering of deposit rates and the bonus rate on retail savings allowed us to protect margins on deposits. As you know, we manage our interest rate sensitivity, limiting the impact on net interest income of rising or falling rates. Nonetheless, as our deposit rates are within a whisker of being 0 across the board, margin pressure on deposits will build up as interest rates stay low.For our loan book, the outlook is broadly stable margins with modest volume growth on the corporate side. Together with margin pressure on deposits, we expect NII to remain flat from here, excluding the one-off impact of EUR25 million this quarter.Moving now to fee income on the next slide, this quarter is a fair reflection of our current underlying fee income run rate, given that there were no incidental items. The higher fee income in Q4 last year was due to a reclassification from NII to fees in commercial banking. We see fee income has stabilized now following the divestment of private banking Asia and reduction in payment package fees within retail and SMEs last year.Looking ahead, we aim to gradually increase fee income from here. We recently announced increases for a number of package fees. We're also planning fee increases for a number of other products during the remainder of the year. Other income was above our general guidance, as this quarter we had good private equity results, as well as a revaluation of an equity stake. Now, moving to costs, our operating expense are moving down. As you can see on the left-hand chart on Slide 12, personnel expenses are trending down, reflecting steady FTE reductions. We took a restructuring provision this quarter for further reducing our support on control activities, and also for markets. The right-hand chart shows how we are progressing in relation to our cost guidance. You see we delivered EUR76 million of savings over the past year, mainly from lower IT costs and staff reductions. We are also driving down external staff levels, and we see these costs are coming down, too. As Kees mentioned, cost savings allow us to mitigate higher levies in inflation, but also to invest in digitization, leading to a lower cost/income ratio, going forward.I will now hand over to Tanja for an update on impairments.

[Tanja Cuppen]

Thank you, Clifford. Our Q1 impairments were high at EUR208 million. First, let me say that the high level is not related to IFRS 9, but related to several clients facing difficulty. Our domestic commercial banking book faces generally positive economic conditions. However, we provisioned EUR44 million, mainly in healthcare. Within the former ECT sectors, we took EUR97 million of impairments, mainly related to the offshore sector, both in transportation and energy.2018 looks to become a transition year for shipping. For some segments, for example offshore, new contracts are urgently needed, and we may need a second round of restructuring for some clients. It takes time before the higher oil price will feed through into new contracts. On the other hand, we see other segments improving, for example, the dry bulk and container sector. During Q1, we were able to book releases here. So both these developments will be relevant this year.In addition, EUR41 million of provisions was taken for a handful of clients in the diamonds and jewelry business, where our loan book has been declining over a number of years. The challenging market circumstances in the sectors I mentioned will likely require some additional impairments in the coming quarters. Nonetheless, timing of impairments was largely coincidental. So for the full year, we expect impairments below the [through-the-cycle] cost of risk range of 25 to 30 basis points.I will now hand back to Clifford.

[Clifford J. Abrahams, CFO & Vice]

As you can see on Slide 14, the CET ratio amounted to 17.5% at Q1. As we indicated, IFRS 9 adoption led to a small impact of 12 basis points. Retained earnings net of 50% payout added .3% to the CET1 ratio. During Q1, this was offset by higher RWAs, an increase of EUR 1.8 billion, reflecting principally business growth in commercial banking and corporate banking, both of around EUR 0.7 billion each. The positive revaluation of our equity stake in Equens led to higher RWAs in group functions. Furthermore, credit deterioration in specific sectors also led to higher RWAs. So we see some quarter-on-quarter volatility in RWAs but are looking to deliver a moderate growth in RWAs from volume growth over time. Our leverage ratio is stable at 4%. As you are aware, there is new regulation in the pipeline which will fix the excessive exposure measure attributed to the clearing business. This will improve the leverage ratio by between 50 to 60 basis points. However, we expect it may still take 2 years before legal adoption.Finally, the MREL framework is now based on RWAs. We are currently at 27.8% of RWAs, and we aim to be above 29.3% by year-end 2019.Now I'd like to say a few words on capital management, on Slide 15. At the top, I've set out the key points of the capital update we gave you last quarter, showing our capital target, dividend payout policy, and our approach to additional distributions. We are focused on both Basel III, our current reporting basis, as well as preparing for the transition to Basel IV. Basel III remains our primary framework. We expect moderate growth in risk-weighted assets on a Basel III basis from underlying business growth. However, in any quarter, RWAs may be affected by a number of regulatory and other factors, for example, trim, credit, model developments. These may lead to volatility in risk weightings in the coming quarters.Regarding Basel IV, we are [weighting] important regulatory decisions over the coming years as we move to implementation. In the meantime, we are working through the consequences and determining where we need to update our business. We will update you later in the year on our plans here. I will now hand back to Kees.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

Thank you, Clifford. This slide, Slide 16, sets out our current targets. Over the first quarter of 2018, our ROE was 11.5%, which is within our target range of 10% to 13%. Our cost/income ratio at just below 58% this quarter is pleasing. However, this was a strong income quarter, so we need to continue to work hard to get the cost/income structurally within our target range.As you are aware, we will be focusing on delivering cost savings and moderate business growth to achieve this target. Our quarter one ratio is strong at [17.5%]. We intend to pay out 50% of sustainable profit over 2018 and will consider additional distributions if we are within or above our target capital range of 17.5% to 18.5%, so combined at least 50%.Before [I] open up the call for questions, I will briefly summarize. I'm pleased with our results for the quarter. Our strategic initiatives are on track, leading to better service to our clients at lower cost. The Dutch economy continues to perform well, and we see good amount for new corporate loans across all sectors. Our margins are holding up well. Impairments were disappointing this quarter, but I do expect will end up below the through-the-cycle level for the year. Our capital is strong at 17.5%, [not] including the effects of IFRS 9. We are progressing well on our strategic agenda, and our IT transformation is taking shape. We are improving our existing franchises, such as private banking, and are building new franchises, for example in the area of sustainability. We are taking steps to focus CIB and will update you on this at the half-year.So, all in all, we're on track to achieve our 2020 financial targets. With that, I would like to ask the operator to open the call for questions.

[Operator]

[Operator Instructions] Pawel Dziedzic, Goldman Sachs.

[Pawel Dziedzic, Equity Analyst]

The first question I wanted to ask you is just a follow-up on your impairment guidance below 25 to 30 basis points. Can you give us any sensitivity around what would need to happen for you to be at this level currently? Any sensitivities around developments in shipping segment and so on? And also, if you can maybe help us understand slightly elevated costs in Dutch SMEs, what are your expectations there, going forward.The second question is on costs. So in the past, you always reiterated your EUR 5.2 billion guidance for 2020, but you are reluctant to give us milestones of how to get there, only mentioning that you'd expect to see higher expenses in '18 and '19. I think now you said during your opening remarks that you have much better visibility on how you get to the target, and also that expenses are moving down. Should we understand that you're past the peaking costs, and we should see steady decline, going forward?

[Tanja Cuppen]

Thank you for your questions. Let me answer your questions with respect to impairments. Your first question was related to the sensitivity of impairments, especially around shipping sector and our guidance of costs below the through-the-cycle of 25 to 30 basis points. There's actually not a lot more I can say in this area. As you are aware, the provisioning in impairments in these CIB segments are quite lumpy, and we see certain segments definitely improving. Other segments continue to be under pressure. So we expect that there will be some uncertainty still for the remainder of the year.With respect to the Dutch markets, we see the improvement and the strong economy in the Dutch market feeding through into impairment levels, but especially the healthcare sector is under pressure, both at cure and care segment of the healthcare sector, and that is related to the changes in regulations that we've seen over the years. And some clients have been less successful in absorbing these changes.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

With respect to cost, I think I mentioned in the past, indeed several times, that it's EUR 5 billion 2015 and EUR 5.2 billion in 2020, and that we would not increase in '16, '17, '18, '19, and then in the final year get to the EUR 5.2 billion. We've always been cautious with guiding in the intermediate years, like today, because still some restructuring cost, there is always a possibility of some extra costs.So you are right that we are progressing well during the first quarter, and as we have guided also, we think we have seen most of the restructurings, the largest restructurings in the past. So if you look at 2017 [net] cost figure, which was clearly higher than EUR 5.2 billion, we expect this year to be clearly lower. Having said that, [a] clear guidance that we will be already at EUR 5.2 billion is not something we want to guide at this moment in time.

[Operator]

Sofie Peterzens, JP Morgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

So just going back to asset quality, the provisions we saw were quite lumpy, and in a number of different industries. I'm just wondering, what are you doing differently compared to peers, given that most of the European banks that we have seen reporting so far have actually [indiscernible] on the provisioning line? So are you more prudent in your provisioning, or what do you think is the difference between ABN and your peers? So that would be my first question.The second question is that you mentioned in the beginning of the call that you would potentially consider bolt-on acquisitions in the private banking space. How should we think about this in terms of which markets, what size, and also timing?And my third question would be around RWAs. You mentioned that you could be impacted by TRIM and other regulatory measures in coming quarters. Do you have any visibility on potential impact from TRIM or other regulatory changes in the coming quarters that we should be aware of, and if you also could give an update on TRIM?

[Tanja Cuppen]

First, your question with respect to asset quality and how we compare to other banks, and of course that's always hard to comment on other banks, as we don't have detailed insight in their portfolios. Of course, we have a prudent way of provisioning, and what we see in this quarter especially is that certain clients in the offshore segment have run into problems. And that is related to the fact that, especially in this segment, market circumstances have not recovered regardless of the fact that the oil price has increased. So it's a limited number of clients, but -- well, lumpy provisioning. I think the diamond segment is very specific for ABN AMRO. So that about asset quality.With respect to the impact of TRIM, so far we have seen the reviews of our mortgage models and our market risk models. For our market risk models, we actually have received the final results, and there was no material impact [for known] RWA. For mortgages, that's still in process. We expect final feedback later this year, with also no indication that there would be a material RWA impact at this point in time. Later this year, ECB will start its review on the low [default] portfolios. That will be in Q4, so we don't expect any impact of that in 2018, but we expect to receive the feedback in 2019.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

And with respect to your question on bolt-on acquisitions, private banking market-wise, as I said in the past Northwest Europe, so France, Germany, Belgium, size bolt-on, so what we did in Germany the last -- couple of years ago, 2 times around EUR 5 billion to EUR10 billion, I think it was. And timing, since IPO, we have stated this, so we're open for that already for some time.

[Operator]

Farquhar Murray, Autonomous.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions, if I may. Firstly, on the presentation, you mentioned giving an update on CIB in the second quarter. I just wondered if you could run through the nature of the review exercises you're undertaking as part of that, and perhaps what options and scenarios you might be exploring, and also ideally the criteria you'll be using to drive the decisions there.And then secondly, just on a point of detail, you mentioned compensating lower interest mismatch results in the group functions. Could you just maybe explain that a little bit more and maybe the offsetting magnitude? And finally, is that going to be recurring, or is it essentially one-off?

[Clifford J. Abrahams, CFO & Vice]

On corporate banking, I think we talked about focus on this call, so focus around geography, markets, and products. And I think now is a good time to be thinking that through, not least because of Basel IV that's come in.As Kees mentioned, a number of those businesses are experiencing cyclical developments, so we're not calling out sort of knee-jerk response to a cycle. It's more a timely review of that business as it's developed, reflecting, if you like, how that business has developed over time, where we see opportunities for profitable growth, and, not least, the impact of Basel IV. So we'll look forward to updating later in the year. I'd caution about a sort of once-and-done approach because Basel IV, in particular, will take a number of years to implement. But we think it's appropriate that we update on a big part of our business in the near future, hence Q2.I think around interest mismatch, that was sort of low tens of millions. I think we called out in group functions the effect of the revaluation of an equity holding, and that was a material amount. But that positive effect is mitigated by this interest mismatch, hence a more muted overall impact.I think in terms of interest mismatch, effectively, that's the income related to the term or duration that we take on our capital of EUR20 billion, so it reflects interest rates, but also how long that duration is. What we've done is, clearly, interest rates have come down over the last few years, so that's reduced it, but we've also reduced the duration of our equity. So we've shortened our exposure to interest rates in anticipation, frankly, of an environment where interest rates are more likely to go up than down. So we see that as a sort of permanent if you like, or sustainable tactical position that we've taken, which we think is wise in the current interest rate environment.

[Operator]

Benoit Petrarque, Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

Couple of questions on my side. The first one will be on the risk cost, which has been a drag on the capital generation in Q1. Could you talk a bit more specifically in the coming quarters? I know the 25-bps low end of the risk cost guidance implies roughly EUR650 million loan loss provision on the full-year basis. So is that figure you have in mind when you guide us towards just -- or below the [cross-cycle] average, or could you guide a bit more specific, like well below, for example, the average, or could be a bit more specific, because that could imply a relatively high figure?And also, if I look at the stage 3 loans, I think you are at EUR 6.8 billion. If you look on the corporate side, you have actually an improvement of the quality. So can we conclude that Q1 was a bit of a cleanup quarter in a way because there's no new nonperforming exposure in the pipe?And then, the final question will be on the NII. You said that you expect slight NII. Can we conclude that you kind of offset the impact of low rates with some loan growth? And when do you expect actually the impact of low-interest rates to kind of become less relevant and, i.e., kind of loan growth being more visible on NII?

[Tanja Cuppen]

On the risk cost, yes, the guidance is that we expect it to be below the 25 to 30 basis point range, but we cannot provide any further guidance on this. I cannot be more specific.With your comment on the existing nonperforming loan portfolio in the corporate segment, indeed you are right that we have seen very limited inflow in our restructuring department, and that, indeed, existing clients were not able to recover or have seen unsuccessful restructurings. Have we see some limited inflow in the area of commercial banking with respect to healthcare, I have mentioned that as well. We've seen some provisioning there, but also some new inflow from the business.

[Benoit Petrarque, Head of Benelux Equity Research]

So from your perspective, it's relatively a kind of cleanup quarter, if I understand correctly. It's not linked to the [indiscernible] development of the macro and what you see around -- which could explain the difference we see with peers.

[Tanja Cuppen]

Yes, so it's related to specific developments in these specific segments, and then also with specific clients.

[Clifford J. Abrahams, CFO & Vice]

So Benoit, your summary was pretty good. We've seen a pickup year-on-year '17 to '18 that principally relates to the accountings change, but also good growth in corporate and commercial banking. But we expect, if you like, for this year, if you annualize Q1, you strip out that incidental, that's broadly flattish from here. And as you say, we're looking for growth in lending to mitigate margin compression in deposits. So that's based on a couple of assumptions that may prove not to be the case, picking up your point. So we're assuming modest lending growth in corporate and commercial. So clearly, if we underperform or we outperform, that will affect the flattish outlook I indicated.I think around deposit margins, we expect short-term rates to pick up towards the end of next year, and that underpins that sort of a gentle reduction in margins on deposits. Now clearly, if rates stay lower for longer, that would be a negative, but if rates picked up, that would be helpful. We have reached pretty much the end of our ability to lower rates to customers, and we've seen the benefit of that in Q1 and maybe the next few quarters, but we don't see any further step change there. So hopefully that gives you some color on how we're thinking about NII, going forward.

[Operator]

Benjamin Goy, Deutsche Bank.

[Benjamin Goy, Research Analyst]

Two questions, please. First, coming back on asset quality and loan levels, can you give a bit more color from which time basically these files originate from? Is it pre-2015, so before the [indiscernible] came down, or are there also more recent exposures in there, let's say 2016, 2017, when you started to regrow or to grow your book again?And then secondly, on private banking, first of all, inflows were quite significant this quarter. How sustainable are these, do you think? And also on net interest income in private banking, quite an increase quarter-on-quarter, also on underlying basis. How sustainable is that, in your view, that run rate?

[Tanja Cuppen]

On your first question on the asset quality and when these files were originated, well, these are all long-term clients, and I don't have any detailed information when exactly individual exposures were originated. Also, given the fact that that has not been part of this history, so I don't have all the details there, but we would be happy to come back on that with a bit more detail.What I can say is that, in general, we finance these clients over a longer period, and through the cycle, so these are long-term clients and not recently acquired clients.

[Clifford J. Abrahams, CFO & Vice]

I'll comment on private banking. As we said, we're pleased with our performance in private banking. We have seen a strong NNA, or Net New Asset performance in Q1 at around EUR 3.6 billion. Some of that was transfers, but really a modest part.I think it's pleasing because of the operational transformation that business is going through. So the team have been doing a lot of work in right-sizing the cost base, and we've been really quite sensitive to ensuring that we offer our clients continuity of service, and we really focus on that. So it's quite pleasing to see strong net new assets for the quarter. It's only one quarter. And for example, we've seen Germany's been a big contributor to that, so that's helpful.I think from a deposit perspective, deposits margins, or net interest income, which is largely deposits in that business, were strong. That reflects, if you like, the cautious nature of asset allocation through the quarter, so a bit more deposit allocation, but also, if you like, the further benefiting of the lower rates I talked about. So we think it's sustainable, but clearly, as I mentioned earlier, in an environment where rates stay very low, that will come under pressure in due course.But in total, we're feeling quite positive about private banking and see the potential for both organic and modest inorganic growth, going forward, to build that business further.

[Operator]

Bart Jooris, Degroof Petercam.

[Bart Jooris, Analyst]

If I can come back again on your impairments, did these come as a sudden surprise to you? You show some breaches. Have they all suddenly occurred in the first quarter? And how severe are those breaches? Could you give us some more detail on [that]? And coming back on that, will [that] also have an impact on your CIB restructuring, or is that more purely Basel IV based?And then a small question on the CLA impact. It's something that's described as a one-off in the first quarter. Could that reoccur annually, or is that, again, a new negotiation starting next year?

[Tanja Cuppen]

I will comment on impairments. Whether this came as a surprise, I think I can say that accumulation of impairments was higher than expected, was related to individual files, but it's all accumulated in Q1. And that had, as a result, this elevated number.

[Clifford J. Abrahams, CFO & Vice]

I'll make the link to the corporate banking update. But, I think it's important that we get Q1's impairments in proportion. I think we're being open that it's disappointing at 32 basis points, but it's one quarter, and within that, roughly half focused in the cyclical kind of offshore services and vessels sector.So we've seen good costs of risk over the cycle, so we think we have a good franchise. And clearly, no one likes impairments, but it reflects a sector where you really need to know what you're doing, and we think we do know what we're doing in that sector. So we'll have quarters where we see impairments, but, over time, we think we earn returns over the cost of capital in that sector. And we've seen other areas, like diamonds, where we have reduced our exposure consistently over time to that sector. So that's about recognizing both long-term and short-term where we should be playing.I think finally, on healthcare, you saw releases in commercial banking last year. I think we were clear that we don't expect consistent releases from commercial banking, and we've seen generally benign circumstances, but our health care [clients'] going through difficulties. So I think we've been open about that. I don't feel that impairments in and of themselves cause triggering reviews. I've set out the reasons why we're undertaking the review. You can see we're starting to take action around focus, and we'll update further in Q2 in that respect.As far as the CLA is concerned, there were a couple of elements to CLA. It's an agreement with our staff regarding wages for 2 years, so we agreed 2% for '18 and '19. It also had an element of a one-off payment of around EUR16 million in total, which we made in Q1, and that is a one-off payment that we don't expect to repeat for the next 2 years.

[Operator]

Stefan Nedialkov, Citi Bank.

[Stefan Rosenov Nedialkov, Director]

Two questions on my side. In terms of the fee growth, you did mention that you're anticipating raising prices on certain packages. I don't know if you gave specific guidance on fees. From what I heard, you're basically guiding to growth in 2018 versus '17. Anything more specific than that, please?And the second question, you did mention EUR 1 billion commercial lending book in the near Netherlands. What's the potential for that to grow? How much appetite do you have for that type of growth? And why do you think that that's the right fit for you, and why is that something that you will do better compared to other domestic peers or near-Netherlands peers? Thank you.

[Clifford J. Abrahams, CFO & Vice]

Yes, so answering the fee growth, I think we said we expected fee income to gradually increase. So we're not looking for a dramatic acceleration in fees, but we do feel we've stabilized fees at a lower level, and looking to grow that gradually from here.I think in terms of growth outside the Netherlands, we feel we have the ability to build a profitable modest book that we'll add to our overall franchise in terms of diversification, but also profitable growth. So we see the potential to grow that further from the EUR 1 billion, I'd say sort of low single digits at least to start with. Why do we feel that? We're leveraging sector expertise that we have in Amsterdam, so we have sector teams in corporate banking that really know particular sectors, and in many cases, our clients and their competitors are cross-border traders. So we know those clients and those sectors well. We're targeting the mid-large client base that isn't over-banked at the top end, but where we can really add to the syndicates of our clients.We have seen, following the crisis, some retrenchment in terms of banking opportunities that our client have available to them in these markets. So we're following our trade routes and being really quite selective about which sectors and which clients we support. And we're pleased with the results in terms of our ability to grow a modest but attractive, from a margin perspective, portfolio in these markets over the next few years.

[Operator]

Alicia Chung, Exane BNP.

[Alicia Marianne Chung, Analyst on the Pan]

Just a few questions from me. Firstly, on Basel IV, you mentioned that the private bank's RWAs are Basel IV-neutral. Can you also tell us how much of the 35% expected RWA inflation is driven by CIB and the commercial bank? And do you have any early-stage sense of how much of this impact could be mitigated away by a repricing or otherwise?Then, secondly, on capital distribution, you stated before, and then again in these results, that you'd consider additional capital distributions when capital is within or above the target range. Consensus currently estimates about 18.1% in 2018. If for whatever reason you don't feel comfortable to make additional distributions at that point, then when would be the next point that you'd consider making further distributions? Would that be at the interim point, or at full-year '19?And then finally, just on provisions, again, can you tell us what your provision charge would have been under the previous standard, IAS 39 versus IFRS 9?

[Clifford J. Abrahams, CFO & Vice]

So on Basel IV, we indicated in February overall uplift of 35%, as you said, neutral for private banking. We expect the retail [bank] to be broadly in that range of 35%, commercial banking similarly, and somewhat high in respective corporate banking than the average of 35%.As I mentioned, we're working through mitigations, and they comprise sort of working through the rules, remediation, pricing, as you said, but also looking at our business model and mix. I think it's too early to draw conclusions. However, as Kees mentioned, it's important that all businesses earn adequate returns, and we have a target of 10% to 13% ROE for the group as a whole. And that's the case for each of our businesses over time.I think in terms of capital distribution, we don't want to get into a speculation of what happens after this year. I think we've indicated that the natural time for us to consider additional distributions is towards the end of this year, and we'll update you at that point, and no doubt give further guidance in respect to 2019 at that time.And I think finally, on provisions, yes, essentially, the effect of the accounting change has no material impact on the impairments that we announced in Q1. The impairments that we indicated in Q1 are very largely stage 3, which is defaulted positions, and the effect under the previous rules would have been very similar.

[Operator]

Nick Davey, Redburn.

[Nick Davey, Research Analyst]

A couple of questions, please. First question, do you know, by any chance, how much of your offshore book is in stage 2 and stage 3 buckets? I'm just wondering, as I think one of the other big offshore lenders in Europe is getting some write-backs from that book now and claims that nearly all of it already stage 2 and stage 3. So any kind of comparison would be helpful.Second question, also IFRS 9 related, just wondering, you commented I think earlier that some of these files may still be restructured a second time later this year, and I think I get the sense that you're sort of warning us that there may be slightly elevated provisions for the rest of the coming quarters. Just under IFRS 9, why would those not have been booked as provisions this quarter already if you can sort of see danger coming down the pike already?Third question, just sort of high level, back to the 56% to 58% cost income, it does feel that the shape of the revenue and cost guidance that you gave originally is slightly [running] below it on revenue, slightly better than it on cost. So when might you come back and give us more on how the business is adapting for those targets and whether you need to update the component parts of them?

[Tanja Cuppen]

Well, first, on your question with respect to offshore, we actually don't distinguish offshore as a separate segment, so we have offshore in energy and in transportation. And we don't provide any further disclosures. What you can see there, this says nonperforming loans have not increased, so it was on existing clients in the restructuring department that we have written additional provisioning, and also significant movements into stage 2 here.With respect to future quarters, we feel that we are rightly provisioned for all the information that we have today. Of course, we provide an outlook as well, based on what we see developing in the different sectors. But this is still uncertain, and the question is how it develops, so that's why we cannot take any provisions for that at this point in time.

[Clifford J. Abrahams, CFO & Vice]

Just commenting on our cost/income ratio target, I think we felt we gave an update today. I think we're pleased with our track record of a little over half of our targeted cost savings, and you've seen we've reported a cost/income ratio of 57.9% in Q1. Now, that's only one quarter, but that should demonstrate that we're on track. And as a management team, we're committed to delivery of our 56% to 58% target.Now, clearly, back in 2016, the team were not on a position to forecast with precision income growth, but what we can say is that we're very much on track in terms of the delivery. You can see, as we've shown today, visibility in the delivery of those cost savings as well as the FTE reductions, and we remain confident in the delivery of those targets as set out for 2020.

[Operator]

Bruce Hamilton, Morgan Stanley.

[Bruce Allan Hamilton, Equity Analyst]

Two questions from me. Firstly, just on the NII, I think it sounds like you're saying for the next few years we should expect that sort of EUR32 million or EUR30 million-ish due to the accounting change to be sustainable. So I just wanted to confirm, so we should really think to your end of your 2020 plan even if there are no further renegotiations, that's kind of what the impact should be, just to make sure I've completely understood that.And then, secondly, for Q2, obviously you're indicating we'll get a bit of an update on the footprints in the corporate bank. Should we also expect an update from the new Head of Technology around what other possibilities might exist around AI or robotics? I mean, you've indicated those are areas where you see some potential savings. You've also indicated you're not planning anything radical in terms of a new platform shift. So will we get a bit more color? Because it sounds as though you're guessing there could be some more opportunities within the various technology improvement linked to that.

[Clifford J. Abrahams, CFO & Vice]

So on NII, I think you had it broadly right. So we expect that EUR30 million to crystallize per quarter for the next few years, '18, '19, and it starts to tail off after that. But our estimates are based on a view of interest rates reflect our anticipated behavior around clients renewing and how they renew. So there's clearly some uncertainty, but we think it would be helpful to guide on that basis.And then on technology…

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

Yes. On technology, Bruce, I think indeed we will update on CIB. I think, as we already mentioned today, no new big bang or overhaul of the total system here. That's been evaluated already. I think we will give some updates, some moment in the second half of next year. I do not know exactly if it will be the second quarter. We will look into that, but second half of the year, definitely.

[Operator]

Matthew Clark, Mainfirst.

[Jonathan Matthew Balfour Clark, Director]

So firstly, could you give us an update on mortgage margins, where they are versus back book and how the front book has developed year-to-date, given the moves we've seen in the longer-term swap rate?And then, secondly, just on your ECT book, and I guess the commodities and commodities trade finance book, in particular, it would seem that with rising commodities prices, that there's an opportunity to maybe be a bit more aggressive there that you've held back from. Could you just talk about why that was?And then also, on your clearing bank, could you just talk about, or maybe give a bit more granularity on what the fees did there? Because, again, I just thought that would have been a pretty lucrative environment in the first quarter for the clearing fees. And you mentioned this being a positive versus the fourth quarter, but it doesn't look to have had that big an impact versus maybe some of the movements we've seen there historically.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

Mortgage markets I think had a very good position in the first quarter of the year. Margins held up well. There is more competition at this moment in time. [You've seen] the more recent weeks, months, actually. So we always are disciplined with respect to margin. So in the end, we have to choose between margin and market share. We will definitely look at margins first, so if we take [indiscernible] lower market share some moment in time, if margins get a bit depressed, we will do that.But having said that, beginning of the year, margins were good. TCF clearing bank, can you say anything?

[Clifford J. Abrahams, CFO & Vice]

Yes, I think TCF, I mean, we're looking to trade profitably through the cycle of all our industries. I think you've seen rising commodities. [You're] also seeing the dollar weakening a little bit. So I think that reflects a focus on profitable business, so we didn't call out commodities as a particular growth area in Q1. We have seen natural resources growing quite strongly in Q1, so we're sort of growing and maintaining discipline where we see profitable opportunity.I think in terms of fees generally, I think it's always a challenge comparing year-on-year, so I think clearing did have a strong Q1. The global markets business, which is in that business, had a less strong Q1 against a very strong Q1 last year. So I actually think it reflects the diversity of our business, both within CIB and for the group as a whole, that we've traded through, and you can see fees broadly flat for the group as a whole this quarter.

[Jonathan Matthew Balfour Clark, Director]

Could I just follow up on the mortgage margins? You said that they held up well despite the competition. That sounds a bit counterintuitive. Are you able to elaborate a bit more? Is it because your competition was still focused in certain areas of the curve or product types? Is there any mix effects there that are leading the margins to hold up well, or is it holding up well across the product range?

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

Well, it also indeed has to do with maturity levels. I think in the 15, 20 years, mortgage area where more clients go these days. Of course, insurance competitors and pension funds are better equipped to go into that market. We are more at the 10 years part of the market, 5 years, 10 years, and the market is [going a big more in 20 years at this moment in time. And so, those developments indeed, and there's more competition there from insurance and pension funds.

[Operator]

Jose Coll, Santander.

[Josema Coll, Equity Analyst]

Three questions, please. The first one is on NII. It appears that risk-weighted asset growth driven by lending growth in CIB and commercial banking is taking a toll on capital generation. I suppose that these new loans also come with a higher yield above the average of the current loan portfolio. So when you guide for a flat NII for the year, are we to understand that [repricing] pressure on the current loan portfolio is offsetting the higher loan yield coming from this new business? Also, are you seeing some sort of repricing upwards in the CIB and commercial lending, maybe banks are trying to prepare for potential TRIM impacts, which are likely to be before Basel IV even starts phasing in?And then a couple more questions. Can you give us guidance on capital generation after dividends for the year? And then, could you please quantify, if any, what would be the impact of the weaker dollar in the quarter?And the last one is why were noncontrolling interests so high in the quarter? We saw EUR 21 million versus an average of EUR 1 million to EUR 4 million in past quarters. Thank you.

[Clifford J. Abrahams, CFO & Vice]

I think in terms of NII, I think you might be over-analyzing things a little bit. We have grown in commercial banking and corporate bank, as you say. We're achieving our target returns in that space. Margins remain sound, and it's pleasing in particular to see that in commercial banking.In terms of pricing, I think it's, frankly, too early to say anything regarding pricing for Basel IV. I think I expect that to be a kind of medium-term phenomenon, but I think it's helpful that Basel IV will have forced on all banks a greater focus on capital discipline, and you see that from the announcements our peers have made over the past week or 2.Capital generation after dividend, we haven't got much further to add than we said in February, which is 50% sustainable profits, and we expect moderate growth in RWAs from underlying business. I think as Tanja mentioned, there are other factors that drive RWAs, and it's possible to get some volatility quarter-on-quarter. And so while TRIM might end up being '19 and '18, there are other factors that can affect cap generation in any one quarter.I think in terms of noncontrolling interest, part of our revenue growth this quarter was through private equity participations, and we have the usual sort of carried interest arrangements around that. So that, together with the issue of [a tier one] last year in Q4 explains the increase in noncontrolling interest compared to a Q1 comparative last year.

[Operator]

Albert Ploegh, ING Bank.

[Albert Ploegh, Research Analyst]

Basically one question still around NII in relation to the prepayment, the recurring element of the EUR32 million. This is basically I guess the stock of people that have already refinanced. I understand probably most already did, but I guess if you wanted this refinancing, going forward, that will add to that EUR32 million in a positive sense. So that's my first question. Can this number still grow? And is that also an expectation you will have?And second question to that is that you were guiding clearly for '18 and '19 this kind of run rate to be sustainable per quarter. Is there any logic or any reason to think that, after 2019 -- here you said it was phasing out, might actually at some point also become a headwind, and how does this exactly work with the offsetting swap that's probably a negative drag on this, going forward as well? So maybe a little bit better understanding on those 2 elements to this recurring element.

[Clifford J. Abrahams, CFO & Vice]

So the uplift reflects versus our previous position and expectation. So the way the accounting rules change means that we're shortening the period in which we amortize this benefit, so there's a one-off benefit associated with that, which we've now booked in Q4 last year and Q1 this year. And the EUR32 million per quarter then reflects a revision relative to our previous expectations.Now, our anticipation of how long it will last is a function of interest rates, and clearly, our clients have an incentive to refinance, given the current very low-interest rate environment. Now, if interest rates move up, that may well change. I think as you say, at some point, it will become a headwind because it's a change in amortization period, the headwind versus our previous expectations. And as I indicated, I think we expected to remain at '18, '19 at similar levels to come down thereafter, and then beyond 2021, it would be a headwind versus our current if you like, projections.

[Operator]

Kiri Vijayarajah, HSBC.

[Kirishanthan Vijayarajah, Analyst]

A couple of questions. Firstly, just a clarification on your guidance, the flat Dutch mortgage volumes. Does that apply just for this year? And would you be more optimistic going into next year?And then secondly, on the leverage exposure, the seasonal increase looks quite muted compared to previous years, so I'm just wondering, in CIB, if some of the effects of the rationalization are already kind of in there a little bit, or is it more that [indiscernible] your balance sheet in areas such as clearing have been a bit more muted than the usual kind of 1Q uptick that we've seen in previous years?

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

Our flat volumes in mortgages is indeed a difficult one to guide because it's a balance of quite a few billion of new production and quite a few billion re- and prepayments. But for this year, that's what we expect. We see other large banks in the Netherlands have lower volumes on balance. We have been able, in the last couple of years, to keep it more or less stable, or even grow it a bit by I think EUR 1 billion or EUR 2 billion. But as I said also before, if there would be a discussion around the margins or volumes, we will be disciplined with respect to the margins. And if that would lead to a bit lower volumes, we would accept that also.

[Clifford J. Abrahams, CFO & Vice]

Just commenting on leverage ratio, I think as you know, we have an ambition to deliver a 4% leverage ratio, and we're managing within that. So we're looking to serve our clients, deliver profitable business whilst maintaining with our various capital and leverage metrics.

[Operator]

Robin van den Broek, Mediobanca.

[Robin van den Broek, Research Analyst]

Sorry to circle back to the EUR32 million of NII, but I was always under the impression that you're basically asking compensation for the negative value of the swap that's related to the mortgage. Of course, you do it on a balance sheet level, so not on a product level. But shouldn't these things basically have a sum 0 impact over a longer period of time so that the EUR32 million -- you just said that, from 2021 onwards, you're basically expecting it to turn into a headwind, but if you take the sum of the next 10 years, for example, in [this element], shouldn't that effectively be a 0? And if it's not, how would that be in relation of the mortgage directive, basically, where you are supposed to ask a normal penalty, basically, from your clients that compensates for the cost of the bank? Because it feels that somehow you're making a profit on these refinancings if it's not like that.The second question is I think last year you had an uplift in your operational RWAs, and I think you indicated back in the day that you would see that revert in the second quarter of this year, and I think it was around EUR 2 billion. Is that still valid? And a third question is on M&A. Given the fact that you're currently at the low end of your target range, what does that imply for the opportunity on shorter-term M&A?

[Clifford J. Abrahams, CFO & Vice]

The short answer is yes, you're right, over a long period of time it will net out to 0 because it's a change in amortization period. So I agree with your statement.

[Tanja Cuppen]

RWAs with respect to operational risk, indeed the model is being reviewed by the ECB as we speak, so we don't expect that to be finalized before the end of Q2. And then, dependent on the outcomes, there will be an adjustment on the add-ons.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

With respect to M&A, we will look at those opportunities when they occur. We have not a special amount reserved for it like some other banks, that's true, but [I said] in private banking before, if there would occur something, we would look into it at that moment in time.

[Operator]

Adrian Cighi, RBC Capital Markets.

[Adrian Cighi, Equity Analyst]

Two very quick questions, please, one on capital and one on deposit. On the capital, as we've noted on earlier, Q1 saw the organic capital generation being consumed by risk-weighted asset growth. And in light of the capital target, you are now at the very bottom of that range. Would you feel comfortable if you remained there for the rest of the year, or would you feel the need to restrict loan growth to remain within that range? Also, can you clarify if the target assumes a [counter-cyclical] buffer of 0, or if an increase in that wouldn't change your target range?And then, just one follow-up question on deposits, please. There seems to be a relatively large reallocation between time deposits and savings this quarter. Can you provide any color as to what is driving this, if there is any impact on margins from this?

[Clifford J. Abrahams, CFO & Vice]

I think just commenting on capital generation, we want to grow the business profitably, and it's important that we retain that as a mission, and you see we've done that this quarter in a couple of our businesses. We do have a target for capital, the ['17 after '18 and a half], and we'd like to see the business within that target. And we'll manage the business to try and walk and chew gum at the same time.I did make the point that RWAs can be volatile. We talked about TRIM operational risk add-ons that may or may not come [on]. We don't want to be kind of managing the business in a knee-jerk way, reflecting what might be volatility in the capital metrics. So we need to find a balance there.A big driver of that range was our view of Basel IV, and that view is, frankly, developing all the time, and we'll update that later in the year. The underlying numbers I think I agree with what you said, reflect our overall position of SREP plus the buffer, which includes the components that you've outlined.I think around deposits, I don't want to comment specifically there on time versus savings, but we've managed to maintain deposit margins through this period largely through the lever of rates that I mentioned earlier, the [indiscernible] that we've reached very much the end of that process now.

[Operator]

Marcell Houben, Credit Suisse.

[Marcell Houben, Research Analyst]

I have 2 left. First, just to come back on the loan loss provisions there, apologies, these scenarios for the oil and gas and shipping for 2017, do they still apply, or can you give an update on those, please?And the second one is on the [over-risk] reversal. I believe that you were a little bit uncertain whether you're going to see the EUR 2.5 billion or EUR 2 billion RWA back. Has something changed? Because I was pretty certain that you were going to see those back. I was just wondering if anything changed at all.

[Clifford J. Abrahams, CFO & Vice]

I think on [alt] risk, I'm being realistic, so I think we feel we've done a good job around that, but clearly, we have the review from the regulator. And I think we've seen sometimes regulatory response can be unpredictable. There are a whole slew of developments around Basel IV. We see TRIM as something of a -- call it a glide path into Basel IV. And frankly, we're working through how [alt] risk might change Basel III to Basel IV. So that's the context behind my caution around risk-weighted assets generally and the volatility that that can give rise. We've seen some of that this quarter in respective credit developments. So we're managing the business and the capital position for the long-term, and I wanted to be transparent on that.

[Tanja Cuppen]

And with respect to the scenario analysis that we updated end of 2017, what we see now with the current provisions, that they are within these scenarios, within the [indiscernible] year scenario that we applied [were at the energy side]. We are towards the severe scenario, what we call shipping, transportation. We are closer to the moderate scenario at this point in time.

[Marcell Houben, Research Analyst]

So just to come back, Tanja, so the scenarios still apply for 2018?

[Tanja Cuppen]

Well, we have done this analysis in -- updated them in end of 2017. And while scenarios are not a prediction of the future, but they are meant to analyze the sensitivity for certain developments. So from that point of view, these scenarios we still use to analyze a sensitivity to certain developments.

[Operator]

Paul Fenner-Leitao, Societe Generale.

[Paul Jon Fenner-Leitao]

I just wanted to know if – you’ve been very clear about not needing to issue NPS until 2019. Just wondered if you had any plans for either 81, 81 in particular I guess, to cover your shortfall or tier 2 for the remainder of the year? Thank you.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

We have no plans for this year.

[Operator]

Stefan Nedialkov, Citi Bank.

[Stefan Rosenov Nedialkov, Director]

Just 2 follow-up questions. Can you just tell us a little bit about your assumptions on how higher rates will impact on bank competition potentially, going forward? Are you assuming anything with that in mind when you come up with your estimates for margins, volume growth, et cetera, especially from 2019 onwards?And given that -- was previously at [indiscernible], maybe we can have a little bit of a head-to-head between the CEO and the CFO to be a bank and non-bank perspective if you will. That will be very useful.And secondly, in terms of the private bank, are you seeing competition by the private bank operations of bigger established competitors in France, Germany, et cetera on margins or client service or technology? Do you feel that you do need to transform the private banking franchise quite substantially in order to compete effectively and maybe grow net new money more, going forward? Thank you.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

I think, indeed, that the private bank international, as we've mentioned I think also last year, is that we indeed want to further harmonize both the products, Germany, France, Belgium, and IT systems. So indeed, we want to further harmonize system there, which we, by the way, sometimes also see by the bigger companies in that market. That's true. So that is definitely an area where we're working on, and that will take this year and also presumably next year.With respect to higher rates?

[Clifford J. Abrahams, CFO & Vice]

Yes, it's an interesting question. I think it may be tough to answer in a minute on these sorts of calls, but we look at, in terms of our projections, really basing them on where the swap curve is with maybe some scenarios around that. So that doesn't reflect dramatic increase in rates. I do think, as you say, as a former CFO of an insurance company, I think a low rate environment is one where clients have a real appetite for long-term mortgages, which is a natural asset opportunity for insurers and pension funds, and you've seen that the last few years. You've seen us and other banks also engaging in long-term mortgages, but there's a limit, over time, to how much of the balance sheet you want in those sorts of assets, as it being reliant on shorter-term funding.So I guess underlying your question, I think if we were in a very different rate environment, we'd probably be in a different competitive environment. We're seeing adequate returns on mortgages currently in Basel IV terms, and that's the basis on which we plan.

[Operator]

Lee Street, Citigroup.

[Lee Street, Head of IG CSS]

Can I have a couple of questions about stage 2 loans, please? I was just trying to reconcile. You've got, I think, EUR16.4 billion of stage 2 loans on Page 36, but that compares to only about EUR 3.7 billion of past due loans. So I was just trying to reconcile why the difference was quite so big and what sort of explains that.Secondly, just on the same topic, you look at your corporate [planning] book, you've got about 16% in stage 2 and stage 3 loans in total, and it feels quite high [to] where we are in the cycle. So I guess what comfort can you give us on the [indiscernible] book? And then finally, just on your allowance for credit losses, just once again, looking at the corporate lines, you've got about EUR127 million allowance versus EUR10.3 billion of those stage 2 loans in the corporate. It just feels quite light. I'm just wondering how that's calculated, what was supposed to be [indiscernible] from that.

[Tanja Cuppen]

That was very fast, so maybe I will ask you to reiterate some of your questions.So [all the] difference with the [indiscernible] stage 2 loans are the loans with [indiscernible] deterioration in their [indiscernible], so in their [technical difficulty] your first question. I think your section question was related to corporate loans and the 16% in stage 2 and stage 3. That reflects the number of clients [indiscernible] so-called [indiscernible] in our restructuring department. These are [indiscernible] across the board, so I would not [indiscernible] signal this as any new developments. So we don't have the experience yet of how stage 2 will develop over time. I think that in due course, we will be able to get [indiscernible]. And as [indiscernible] stage there, there has been very little movement [indiscernible].And your last question, that was [indiscernible]. Maybe you can repeat that question.[Technical difficulty] So your last question -- I understand that I was hard to hear.

[Lee Street, Head of IG CSS]

Yes, it was a bit hard to hear all 3 answer, I'm afraid, actually.

[Tanja Cuppen]

Let me reiterate my responses to your first 2 questions, and then ask me to reiterate your third question. So with respect to your first question, stage 2 loans include loans that have significantly deteriorated in credit quality, so that doesn't equal to defaulted loans, so that explains the difference.With respect to the 16% in stage 2 of corporate loans, I think that was your second question, in stage 3 we actually didn't see any new development, so the same loans and segments that were in this space and impaired as previously. Stage 2 is actually a new segment, and we are building up experience there, but we see that it very much aligns with the watch list that we used previously. So I think in terms of percentages, I think we will be able to give you some more flavor over time to see how this develops.And then your last question, maybe you could reiterate that one because I couldn't follow that one.

[Lee Street, Head of IG CSS]

In stage 2 corporate loans, you've got EUR10.3 billion of carrying amount of stage 2 corporate loans, but you've got an allowance for credit losses of EUR127 million. I was just saying that the EUR127 million looks remarkably low versus the EUR10.3 billion, given it sounds like the bulk of stage 2 due to a significant deterioration in credit quality. So it was just to try and understand how could that loss provision be enough relative to that size of stage 2 corporate loans, basically my question.

[Tanja Cuppen]

Yes, and that has to do with the fact that we have a lot of well-collateralized loans. So although the probability of default has increased and the collateral has still value, especially [under] the current economic circumstances, and that means still a low level of lifetime expected loss.

[Operator]

Chairman, we have no further questions. Please continue.

[Kees C. van Dijkhuizen, Chairman of Executive Board & CEO]

Okay. Thank you very much, Operator. Thank you all for your questions. Then this concludes our Q1 results update, and I hope to talk to you again next quarter, or perhaps at an earlier occasion. Thank you. Good-bye.

[Operator]

This concludes this conference. On behalf of ABN AMRO, thank you for attending. You can disconnect your line now.