ABN Amro Bank NV

OTC:AAVMY

Earnings Call Transcript 2019-Q1

[Operator]

Good day, ladies and gentlemen. Thank you for holding, and welcome to the ABN AMRO Q1 2019 Analyst Presentation. [Operator Instructions]I would like to hand over the conference to Mr. Kees van Dijkhuizen. Please go ahead, sir.

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

Thank you, operator, and good morning, everybody. Welcome to our investor and analyst call for Q1 results. Apologies for -- we could not get connection. We had connection until 1 minute before the meeting started and then something went wrong. We don't know why. So we're now on another set at the moment. Sorry for that.I'm joined here with -- by Clifford Abrahams, our CFO; and Tanja Cuppen, our CRO. And I will take you through the process -- progress we made on our execution of our strategy and financial targets. Clifford will then go through the details of our first quarter results and after that, Tanja will update you on developments in our loan portfolio.If I go to slide 2, I will run through the highlights of the first quarter. I'm pleased to see good progress on embedding our strategy. As we expect economic and interest rate environment to become more demanding, we are taking the necessary actions. We remain focused on strict cost discipline. And as you can see, our costs continue to trend down. We have actively derisked part of our loan portfolio in 2018, and I'm pleased to see this reflected in improved impairments this quarter. We have made further progress in sharpening our business focus with the announced sales of a majority stake in Stater and our private bank in the Channel Islands that makes us now a focused onshore private bank in our core markets to Netherlands, Germany, France and Belgium.There is more to do in our corporate bank to improve ROE, but our targeted RWA reduction is now largely delivered. Our Basel III capital position is strong, and we are well positioned to manage the transition through TRIM and Basel IV. In this more demanding environment, we remain clearly focused on our financial targets. So our strategy execution is well on track, and I will update you here on Slide 3.As I said in my introduction, we are making good progress on executing our strategy. We're increasing income through new sustainable propositions such as a mortgage facility allowing homeowners to invest up to EUR 25,000 in energy efficiency measures for their homes and a mortgage solution for seniors to cash out home equity without selling their property, and we're the first large bank in the Netherlands doing that. We also introduced a new app, Kendu, a digital platform offering asset management services for investments starting at EUR 50. We are working on building a future-proof bank through continued IT improvements, product and process rationalization, optimization while maintaining firm cost and pricing discipline. Strong compliance is our license to operate, and we remain vigilant in detecting financial crime. So we are further scaling up our FTEs to accelerate our client due diligence remediation programs, and we are making the necessary progress here too.Now I would like to update you on the economic environment and the effects on our business on Slide 4. We have recently revised down our economic outlook for this year and next, while the Dutch economy remains resilient with Dutch GDP expect to continue to outperform the eurozone. During the quarter, we grew our commercial banking book by almost 3% from Q4 to Q1, reflecting the strong Dutch economy. Also the Dutch housing market remains robust, although we see some signs of it cooling off with house price increase slowing and transaction volumes moderating. While competition in the Dutch mortgage market remains strong, we saw our mortgage market share stabilize at 14% this quarter. And looking forward, we see clearly positive development in our mortgage pipeline. So our market share will increase in Q2 again. We also expect the ECB to keep interest rates on hold for longer, at least till the end of 2020 and pressure on deposit margins will remain. So as the income environment becomes tougher, we are working hard to mitigate this through our focus on margins, developing new revenue opportunities and further reducing debt deposit rates. We also continue our strict cost discipline to mitigate headwinds related to general price inflation, compliance and regulatory cost. As I said, we remain focused on our financial targets.Moving to our capital position on Slide 5. I'll remind you here of our capital story. We're strongly capitalized on the Basel III as we have built up capital ahead of Basel IV, and we're comfortably within our target range. Our Basel IV ratio at year-end 2018 was 13.5% before mitigations and over 14% including mitigations. At Q1, this is largely unchanged. So we are already well capitalized for Basel IV and already well positioned to meet our Basel IV target of 13.5%. We do see headwinds going forward from TRIM, model and provision reviews, but these will largely impact our Basel III capital ratio only. If so, we will lower our Basel III target range accordingly. Following the legal merger over the summer, the leverage ratio will no longer be an issue.Now I would like to hand over to you, Clifford, to take you through our first quarter results.

[Clifford J. Abrahams, Vice]

Thank you, Kees. Turning to Slide 6, our net profit during Q1 was EUR 478 million. This quarter, our net interest income and fees are lower, I will explain the reasons for this later. I'm pleased to say that both operating expenses and impairments are down in Q1. Tanja will give you more background on our cost of risk at 15 basis points. But first, I will go through these results in more detail, starting with net interest income development on Slide 7.So here, we'll first run through Q1 and then discuss longer-term trends in net interest income. As you can see on the right, Q1 net interest income was down EUR 69 million versus Q4 last year, reflecting elevated liquidity management costs, various one-offs in Q4 and the limited impact from continued low interest rates. The elevated liquidity management costs relate to a non-Euro liquidity position, which was temporarily higher in Q1 largely related to Brexit. We prudently increased our non-Euro position ahead of a possible no-deal Brexit at the end of March, and this led to a shift of around EUR 40 million of interest income to other income quarter-on-quarter. The remainder of the decrease in net interest income of EUR 30 million from Q4 last year related to various small one-offs in Q4, positive ones, and only to a limited degree less than EUR 10 million due to the adverse effect of low interest rates in Q1. I consider around EUR 1.6 billion to be a normalized level of net interest income this quarter.Now moving to long-term trends, we continue to see net interest income in 2019 to be slightly lower than 2018. While we expect total lending volume and asset margins to remain broadly stable this year, deposit margins are gradually declining due to low interest rates. The pressure on our NII will continue into 2020 if interest rates stay low through that year. As Kees mentioned, we're working hard to mitigate the impact of a low interest rate environment. For example, for Moneyou, we have lowered our savings rate in the Netherlands by 5 basis points to 20 basis points in early May, and there's still room for some further reductions in deposit rates for Moneyou and other savings accounts.Turning now to fees and other income on Slide 8. Fee income is down modestly compared to Q1 last year. For Private Banking, this reflects lower client assets following the market downturn late 2018 and more clients opting for execution only. Clearing income was also affected by lower market volatility in Q1 2019. In particular, it's good to see the equity markets have recovered strongly from their lows at the start of the year, and this should feed through to improving fees in the private bank later in the year.You can see Q1 is more or less in line with Q4 fees, adjusting for the annual payments to ICS that took place in Q4. We expect total fees to remain stable in the short term, growing after that as our growth initiatives start to kick in. Other operating income was below our EUR 125 million guidance in this quarter. As you know, the EUR 125 million is based on the average we've seen for the past year -- past few years, and we stick to our guidance. But this quarter, private equity gains in particular were very low. And we took a provision of EUR 34 million for client compensation SME derivatives and this is booked in other income. I'm pleased to say that we're nearing the end of settling compensation relating to SME interest rate derivatives.Now moving to costs on the next slide, Slide 9. I am pleased with our performance on costs, which continue to trend down. As you can see from the left-hand chart, personnel expenses continued to decline, reflecting low FTEs. We have achieved a 12% reduction in FTEs since year-end 2015 and are well on track to reach our target of 14% in 2020. Other expenses, excluding incidentals and levies, are stable despite pressure from compliance and regulatory costs. Please note that regulatory levies were very high this quarter at EUR 161 million compared to EUR 131 million in Q1 last year. This is due to the fact that last year, part of the SRF contribution was in fact paid in Q2, not Q1 as was the case this year. This exacerbates the seasonal effect of levies this quarter on return on equity and cost income. In the right-hand chart, you see we have delivered further cost savings of EUR 37 million versus Q1 last year, bringing total cost savings delivered since 2015 to a run rate of around EUR 740 million. As you know, we target a total of EUR 1 billion cost savings, including CIB, and we're on track to reach cost base of around EUR 5 billion by 2020.I will now hand over to Tanja to pick up impairments on Slide 10.

[Tanja J. A. M. Cuppen]

Thank you, Clifford. First quarter impairments are down compared to all quarters last year with a cost of mix of 15 basis points. While the impairments we've seen are predominantly in the same specific sectors in CIB as last year, I'm pleased to see they are considerably lower. This is partly due to active derisking of specific portfolios in offshore and diamonds in 2018. And for diamonds, we continue to focus on reducing our exposure to the sector. Inflows and provisions are low this quarter. In CB, we've seen a number of small impairments across multiple industry sectors. We reconfirm our full year expectations of below the through-the-cycle cost of risk of 25 to 30 basis points.And now will hand back to Clifford who will take you through the capital ratios.

[Clifford J. Abrahams, Vice]

Thank you, Tanja. Our Basel III CET1 ratio for this quarter was 18% and comfortably within our target range. This quarter, we did not add part of the interim profit to CET1 capital, unlike previous years. This follows strict interpretation of the rules in close consultation with the regulator. If we would have accrued profit based on 62% payout sustainable profit as dividend, which was the payout ratio of last year, our CET1 ratio would have been 16 basis points higher. Of course, at the end of the year, we will add full year profit not paid out as dividend with the capital position in the normal way.During the quarter, our RWA increased from seasonal volume recovery, TRIM, model reviews and the Private Banking acquisition in Belgium. We are pleased with the progress made by CIB to refocus as the targeted RWA reduction of EUR 5 billion is now largely delivered. Our reported RWA to CIB of EUR 36.9 billion, down from EUR 38.8 billion at Q1 2018. The EUR 36.9 billion includes around EUR 3 billion to TRIM and model reviews so excluding these, we're already around EUR 34 billion versus EUR 39 billion last year like-for-like. We expect headwinds from further TRIM, model and provision reviews, which will mainly impact our Basel III number so we will lower our Basel III target ratio accordingly. As Kees mentioned, our Basel IV CET1 ratio remained largely unchanged compared with year-end 2018. Basel IV also does not include interim profits and Basel IV is more stable than Basel III as it is not effected by TRIM and model reviews. Our leverage ratio is 4.1%. And on completion of the merger, the leverage ratio will improve by around 20 basis points and so it will no longer be a constraint. As Kees said, we have a strong Basel III capital position and are well positioned to manage the transition through TRIM and Basel IV.I would now like to hand back to Kees to update on our targets.

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

Thanks very much, Clifford. So we are well on our way to achieving our financial targets. And I would also like to emphasize that both ROE and C/I ratio reflect seasonally high regulatory levies this quarter. If we divide regulatory levies evenly over the year, C/I ratio would be over 3 points lower at 60.2% and the ROE around 1% higher at 10.2%. I'm pleased with our cost performance, and our capital position and capital generation remains strong. We expect a further impact from TRIM, the model reviews and the Basel III. And it is materialized through a lower to capital target rates accordingly.So before we go into Q&A, I would like to briefly recap the highlights on Slide 13. So all in all, I'm pleased with our progress and operational delivery on our banking for better strategy, which will underpin our future financial results. Our Basel III capital position is strong, and we're well positioned to manage the transition through TRIM and Basel IV. While the environment is becoming more demanding, we are taking action to deliver on our promises, and we remain focused on our financial targets.Now I would like to ask the operator to open the call for questions. Operator?

[Operator]

[Operator Instructions] The first question is from Pawel Dziedzic, Goldman Sachs.

[Pawel Dziedzic, Equity Analyst]

I have 2 questions and both are on your top line. And the first one is on the comments you made on NII pressure and in particular on Slide 7. So if we strip out noise around the impact of liquidity management, then take onboard your comments on strong mortgage pipeline and potential mitigating actions still on deposit. Do you still expect to be able to deliver NII run rate of EUR 1.6 billion to the rest of the year? If you can maybe give us an idea about that. In other words, you showed here in this slide, EUR 29 million of other NII decline and how recurring that would be in the coming quarters? So that's the first question. And the second question is on your other revenues. And it's essentially how comfortable do you feel about your income guidance of around EUR 125 million you gave us before? Again, we can strip a number of one-offs this quarter, and we still end up with quite a lower number. So any comment there would be helpful. And in particular, on Private Equity, do we expect it to rebound? How the sale of part of your stakes in last year impacted the run rate?

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

Thank you very much, Pawel. Your first question around the developments you mentioned, I think that's fair to say. If you take the EUR 40 million, as mentioned, we're above EUR 1.6 billion this quarter. With an improvement of the mortgage portfolio, we do actually expect at least -- in the coming quarters, we can't, of course, make a forecast for all the quarters in the coming year or next year, but for the coming 1, 2 quarters, I would say guidance at EUR 1.6 billion above should be possible. The guidance around other income stays at EUR 125 million. And I said, Private Equity gains were very low this quarter, EUR 10 million. EUR 150 million 1 year ago, so that is low. That very much depends, of course, on stock exchange. So we cannot give that as a separate part of the EUR 125 million. But in general, the EUR 125 million, you can use for the coming quarter.

[Operator]

And the next question is from Mr. Nick Davey, Redburn.

[Nick Davey, Research Analyst]

Three questions, please. The first one, if I could ask you to comment a bit on this move towards not recurring any capital -- any earnings in the capital. I understand your comments in the release about prudency, but it is an unusual step. And you obviously making the point about discussions with regulators. So if you could just give us any insights into what that discussion is actually about, if not about dividend? Because no other bank is reading the rules in the same way as you are. The second question, please, on domestic mortgage margins. One of your orange peers is more enthusiastic these days about the trend in margins. So I just wondered whether you had seen anything that makes you equally enthusiastic. And then the third question, please, on Dutch corporate lending trends. Just looking at some central bank base, which seems to suggest decline or increased problem through the quarter in terms of Dutch corporate lending. Yet when I look at your balance sheet trend, it seems to be actually quite encouraging growth. So I'm just trying to square those 2. If you're seeing anything changing in terms of corporate appetite and/or if you're offsetting that with international growth.

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

Well, thank you, Nick. Clifford will answer the first question. I will take 2 and 3. Domestic mortgage margins. Yes, we see increased margins indeed due to development in long-term interest rate and also the market developments in general with players in the market, then less in the market. So that's the reason why we also guided our 14% market share last quarter Q1. Will increase in Q2. So we're positive about that because margins are very important here. And as we said, we have been disciplined. That was the reason we're only at 14% in Q1, and we see improvement going forward.Dutch corporate lending. Yes, we have had a very good quarter with 2.8% growth on a quarterly basis that actually is a yearly rate of over 10%. So that is not something we normally guide and also not expect for this year actually going forward. But this was a good quarter, and we do not see at the moment people, well, in trouble and not taking up loans at this moment in time. So let's see. We did well in the first quarter, very well, but we're still positive about the market also the rest of the year. Clifford?

[Clifford J. Abrahams, Vice]

Yes. Nick, I'll pick up the approach to interim profits and just spend a little bit of time on it so we're all clear. Just to make the obvious statement, the money is still in the bank. So this is just merely a reporting thing, but an important one, which is why we've highlighted it. And we don't feel we're being prudent, per se. This follows, as we've said, a strict interpretation of the rules in close consultation with a regulator. And the ruling question is CRR Article 26.2. And you need approval of the regulator to book interim profits as capital. And the relevant clause is the institution, that's us, needs to demonstrate the satisfaction to the regulator that any foreseeable charge or dividend that's being deducted from those profits. And now in our case, our dividend policy as you know is a minimum of 50% plus additional distributions. So a strict interpretation of that -- of what I indicated, means that we're excluding the full amount. I would say, theoretical. So we're making no commitments or comments about dividend at this stage. But it reflects that strict interpretation when we have a lower bound to our payout ratio, but not the upper bound. And I think my expectation is that this approach would be adopted across the sector, but one needs to take into account the dividend policy in the context of this rule. So I hope that's clear, and happy to pick it up outside the call.

[Operator]

Your next question is from Benoit Petrarque, Kepler.

[Benoit Petrarque, Head of Benelux Equity Research]

The first one was on net interest income. So just to come back on your EUR 1.6 billion guidance. So it seems that we don't stay around that level in the coming quarters. Just looking into Q1, so it seems that you indicated a EUR 10 million drag from low rates Q-on-Q. Is it -- is this type of pressure kind of the pressure you also expect in the coming quarters and also going into 2020? Is that something we can plug in the models? Second one was on the originate-to-distribute model you plan to implement on the 20-year plus mortgages in the Netherlands. Just wondering where you are, have you started actually to produce for third parties? And you -- how much fees you will expect -- fee growth you will expect from that? And then last question was on the NPE coverage ratio. I think that was one of the items you mentioned last quarter. Have you -- do you have an idea about kind of the impact you could expect? And could you guide us a little bit more on this item specifically?

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

Thanks, Benoit. With respect to the guidance around interest, I would say the EUR 1.6 billion. So let's be careful not to really guide above that. Perhaps, that's the right thing we guide. And it shows -- if you go through this of course, upward pressure from more mortgages. But as I said, there is also downward pressure from interest rate development in general. With respect to the originate to distribute EUR 20 million is mortgages, EUR 30 million I think also, we'll look into. That's work in progress. I think we want to do our first deal this year. That's the plan. Fees align to it not yet clear, I think, at this moment in time. So let's see what the first tranche will be and then we can update you on that. NPE, Tanja?

[Tanja J. A. M. Cuppen]

Yes. So developments on NPE are that the European Commission in the meantime has approved reservations, which force banks to take a potential backstop in Pillar 1 for newly originated assets. We also have ECB guidance, and we need to see how we deal with our existing NPE from before these dates. So all these measures are coming in right now, and I think we can update you in Q2 more on what this -- all this new regulations mean if you bring them all together.

[Operator]

The next question is from Mr. Adrian Cighi, RBC.

[Adrian Cighi, Equity Analyst]

This is Adrian Cighi. Three questions for me, please. The first one is on cost. The environment has deteriorated quite considerably since you've set the initial cost reduction target. Do you think you have the ability to increase this a bit further? The second one is follow up on the cost of risk. Your guidance remains unchanged to 25, 30 basis points. Potentially, a meaningful increase from the Q1 level. Do you see any reason for this to increase? Or is this just a particularly conservative guidance? And then on the Basel IV, just a clarification, you said it remains largely unchanged quarter-to-quarter despite obviously the Private Bank acquisition and the lack of the organic capital built. Are we seeing some of the initial results of mitigation? Or what explains that sort of unchanged, despite the headwinds?

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

Thanks, Adrian. I would say, cost and Basel IV, Clifford. And then cost of risk, Tanja.

[Clifford J. Abrahams, Vice]

Yes. I said picking up costs. I think in terms of the more demanding environment, we've seen some pressure on income from lower longer that we discussed earlier on the call. And that's slightly to extend into 2020. So in that sense, income has got more demanding, which challenges the cost/income ratio. And then on compliance and regulatory cost, yes, we do see incremental costs coming through. I think as Kees said, we are focused on our financial targets. So next year, the target of 56% to 58% cost/income ratio remains our target. We reconfirm that in November and then February this year, it's go a little bit more difficult to achieve, but we're working hard to deliver on further cost savings in order to mitigate the headwinds we see regarding costs. You'll recall the presentation we gave in particular around IT at our Investor Day, and we're working hard to deliver more for less in our IT area.Moving on to Basel IV. I think we were just trying to call the difference between Basel III and Basel IV. So Basel IV is down 0.4% in the quarter. Basel IV is down less negligible amount, which is why we reconfirmed it's largely unchanged, and that reflects the movements you talked about earlier. It's less the benefits and mitigations that we expect to see over time and more relates to the fact that the TRIM and model review impact that has an adverse impact on Basel III, and we've disclosed them out a little over EUR 1 billion, does not carry through to Basel IV because on a different basis. So those 2 approaches are converging slightly during Q4 -- during Q1 rather.

[Tanja J. A. M. Cuppen]

Yes. Okay. And on your question on cost of risk. Of course, we are pleased with the impairment levels this quarter. But you cannot extrapolate these forward. Because, well, some of the provisions are quite lumpy. And also we remain cautious on specific sectors. We shared that with you before, especially in oil and gas and also for the diamond sector, we remain cautious. So that's why we stick to the guidance that we have provided before.

[Operator]

Your next question is from Mr. Benjamin Goy, Deutsche Bank.

[Benjamin Goy, Research Analyst]

Two questions, please. Maybe one follow up on cost of risk, in particularly, in your commercial bank. We've seen some trend around EUR 60 million per quarter or 60 basis points roughly. Initially, it was driven by a single sector and now it feels more broad-based. So wondering whether it is also the guidance going forward for this segment? And then secondly, on costs, you'd rather conservative approach to capitalizing software investments. Now the European Commission might change that and you could get benefits in your capital if you capitalized. So wondering whether that is something that you currently think about changing your approach here?

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

Thanks, Benjamin. Tanja, can you take the first question and Clifford, the second?

[Tanja J. A. M. Cuppen]

Yes. On Commercial Banking, indeed, how we see cost of risk levels for CIB, well, in the similar range as we saw it last year. And indeed, what you see right now is that, well, impairments are taken more across sectors. There is really not a real trend to be seen there. We still see some elevated provisions in the healthcare segment that apart from that it's actually across sectors. It's too early to say whether there is a trend, but definitely certain sectors are struggling a bit more. And then you need to think of every business and retail where clients are struggling. But as said, it's too early to say that it's a trend. And we don't provide a cost of risk guidance by segment. So I cannot show you in there any further.

[Clifford J. Abrahams, Vice]

Yes. Ben, I'll pick up the approach to IT. As you know, we charge our IT spend through the P&L. So it's a very little capitalization going on which we think is the right thing to do in terms of running the business. We've been following developments closely. We understand that EBA will opine on this principle by the end of next year. So it could come into force in 2021. So it's a little way off. We're monitoring closely to see if there are potential benefits. We do want to be consistent our reporting, but also we want to be aware of regulatory developments and adapt to that. So we don't take a principled approach there. We're open-minded, and we will follow developments as they take place.

[Operator]

Your next question is from Mr. Bruce Hamilton, Morgan Stanley.

[Bruce Allan Hamilton, Equity Analyst]

Firstly, one on capital. I realized we're sort of converging between Basel III and Basel IV. But can you just remind me what the TRIM impacts were in Q1? And then any sort of quantification of TRIM and the sort of guidance on NPEs through the rest of the year? Or if you can't quantify which should we expect will be bigger and how will those fall across the quarter? And secondly, on the NII, really looking to 2020. In terms of mitigants, could you just summarize again what those are? I think you mentioned deposit costs low. I didn't think there was a much scope there. I guess volumes would be another. But is it going to be more driven by faster fee growth trying to offset NII? Or is there something else that would help? And then finally on the cost of risk. I guess the coverage ratio is dropped to this and you gave some explanation in the report, but to the sub-30%, so optically it at least looks quite low. Can you remind us reasons why that's not the case? Or what we should bear in mind that drives maybe the coverage ratio lower than some of your peers?

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

Thanks, Bruce. Clifford, can you take 1 and 2 and Tanja, #3?

[Clifford J. Abrahams, Vice]

Yes. So on -- we call it TRIM and model reviews. And the amount we took in Q1 was EUR 1.3 billion and in addition to the EUR 5 billion in Q4. I think TRIM is a process that will take place over time, but it's important for us as management to see the early signs of TRIM and book the possible effects of that early if we see it's appropriate. So we're seeing somewhat of a phasing in of that as we -- as some of the information comes to light regarding TRIM. So it's quite possible there will be further impact of model reviews this year ahead of, call it, the final determination of TRIM, which may well expand into next year or even beyond. And that, we are clearly flagging in all our disclosures this year. I think NPE make a broadly similar point. I mean, I think there are a range of rules regarding NPE that come out of EBA and the ECB, and many of them point to 2020 and beyond. But it is possible that the effect of this take place earlier, which is why we have used the term, provision reviews, which captures NPE, but possible other factors. And so I can't give any more specific guidance for that, but it may be that the effect is earlier than the formal target dates, which extend off into the future. And I think Tanja can comment further when she responds on the cost of risk.I think on 2020, I think we've been clear on the more demanding environment, but also the action we're taking. Kees talked about volume, and we will pursue volume where we can profitably. And we gave example, mortgages, where we've been encouraged by recent developments. I think we gave example of Moneyou. We're also looking carefully at how and where we're passing on negative rates. So our corporate clients receive negative rates. But it can be appropriate to extend that elsewhere, particularly clients that have very large balances. And we would consider that, particularly if rates stay low for longer. So we do see some scope there as well as fees from the -- whether it's new products or originate to distribute, which Kees talked about. And we're working hard on those initiatives in particular.

[Tanja J. A. M. Cuppen]

Okay. On your question with respect to the coverage ratio. Indeed, that has dropped a bit comparing Q4 to Q1. And the reason for that is and I think it's indeed in the reports is that we have written-off some exposure with a large -- with a high coverage ratio. Also we are focusing on our nonperforming exposure, especially when it's around for some time to actively work that out. So that's one reason. And secondly, we saw some new inflow where we, well, took some impairments as well, but at a lowest coverage ratio. So that combination led to somewhat of a drop, but, well, thinking of around 30% that is the level that you should think of. So this is -- yes, just the outcome of the developments that happened in the last quarter.

[Operator]

The next question is from Ms. Alicia Chung, Exane.

[Alicia Marianne Chung, Analyst on the Pan]

Just a couple of questions from me. Firstly, on cost. I mean costs have -- cost of spend has clearly been very encouraging for numbers of quarters now at ABN and has tended to surprise on the upside. And underlying costs came in comfortably under EUR 5.1 billion last year. So I suppose my question is, can we expect an improvement on this, this year, given that you still expect to have a further EUR 150 million of cost savings to come in your strategic plan. So in the absolute terms, can we improve on the less than EUR 5.1 billion underlying that we saw last year? And in particular, now that you've completed the RWA deleveraging in CIB, can we expect a greater focus on restructuring the business from here, particularly given the staff number, the scale of 4% or 5% higher than they were 2 years ago. That's my question on cost.And then just to go back on the point on provisions and coverage ratio. Appreciate that, of course, part of the reason for the drop in the coverage ratio pulling back from 32% to 29% was because of the derisking of the portfolio. But also can you help us to try and understand why we are still reducing the NPL coverage ratio at a time when you have concerns around headwinds from calendar provisioning. When I look -- particularly, when I look at your coverage ratio in CIB, for example, versus peers, it already looks quite low. And I wouldn't necessarily assume that it's because it is -- because you have lower risk business mix. And then actually, if I may, just one final question on your capital target. You've flagged that, of course, the Basel III and Basel IV ratios now appear to be converging because of TRIM and model updates that are effecting Basel III. And you said that as that -- if that convergence continues, which you expect it to, you will update your target at the Tier 1 range, which is of course still on a Basel III basis. At what point do you expect to update that ratio? And how should we think about how that will move going forward?

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

Thanks, Alicia. With respect to cost, I would say, we -- as Clifford already mentioned also, we're very much focused on that, especially when there is pressure on income line. As explained and I think, Clifford, mentioned all the examples where we're working on. So we, indeed, want to bring down cost also notionally -- on a notional value, the absolute value. With respect to CIB, indeed, in general, by the way, the leverage ratio was constraining, indeed, sometimes -- some parts of CIB. For instance, clearing department. So that's helpful that this constraint is -- well, presumably no longer there or somewhere over the summer. So that's good.Second question, Tanja will answer that one. With respect to your last question, capital target and converging and the likes and our update on target. Well, we set accordingly so that the banks -- if a lot happens in the second quarter, we might do it then after the second quarter. If not much happens, we might do it later, but that's more or less where -- it will be driven by the underlying -- what happens underlying and we will do it like that. But the second quarter could be the first moment. Yes. Tanja?

[Tanja J. A. M. Cuppen]

Yes. On the coverage ratio, I know you're alluding especially on CIB. As you mentioned, it is indeed related to the fact that we have been derisking that portfolio and have a very much focus on the more of cyclical segments there. You see that back as well in the amount of impairment exposures in this business line. And that is excluding as well, taking out the assets with higher provisions, influences the coverage ratio. And I feel comfortable with coverage ratio that we have to date for this business. And as said, well, levels around the 30% is something you should think of for us.

[Alicia Marianne Chung, Analyst on the Pan]

Okay. And just to circle back on the cost, you mentioned that you will, of course, aim to bring down cost, but is that in 2019? Or you -- or is that more for the late years?

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

Clifford?

[Clifford J. Abrahams, Vice]

Yes. We're focused on the target for next year, and we indicated around EUR 5 billion. I've given you a sense of headwinds. I mean there are genuine headwinds. We are upgrading our focus and resources around compliance in particular, as we should. So that EUR 5 billion as got a little bit tougher, which is why we're working hard on it. But I don't give any further guidance on '19 versus '20. And clearly, some -- while we feel well provisioned for our existing cost plans, if we do, if we come up with extra things, we'll have to -- we may well be costs associated with those. So we managing all that carefully with a view to frankly delivering on our commitments for next year.

[Operator]

The next question is from Kiri Vijayarajah, HSBC.

[Kirishanthan Vijayarajah, Analyst]

Yes. Just a couple of questions. On the scaling up of the due diligence capabilities there. Really just get a feel so where are you in the process in terms of ramping up the FTEs? And one of your close peers, they're talking about sort of special projects within that. So maybe some of the costs falling away in 2020. Or is it more a case of all of the buildout you're doing is kind of recurring costs that you're putting on? And then in kind of the similar topic, but on the registry side, are you finding any kind of client relationships that need to exit because they don't need those higher due diligence requirement? So just some color on how that whole sort of project is impacting your business.

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

Thanks, Kiri. With respect to due diligence, I think we step up at this moment in time with EUR 85 million we took as provision in Q4, especially this year and next year, so for the 2 years period. Having said that, and already -- Clifford also mentioned it, of course, depends on developments going forward. But at this moment in time, we have, of course, an amount of people of 1,000, which are working on it already. The extra 400 is actually planned for -- well, also to remediate backlogs we have at the moment in time, especially in the Commercial Banking asset and in our credit card department. We have set up, by the way, a special product here. We call it Detecting Financial Crime with -- well allocated people, budgets and a lot of focus. So it's really top of the mind in the bank at this moment in time, but it's too early to say something about after 2020. I would say, at this moment in time, of course, we hope that we have sold a lot of -- well, that we solved the problems anyway. But -- and then also are able in our process as to have it more ingrained there and lower cost again going forward. But that's too early to speculate about that. Yes. With respect to clients relationship, we do not comment on that, but indeed, of course, our due dil can lead to exiting clients, but we do not comment on that publicly. But that's, indeed, of course, can be part of -- can be a result. But it's not harming our business in a way that you would see that in our figures.

[Operator]

The next question is from Mr. Albert Ploegh, ING.

[Albert Ploegh, Research Analyst]

I've got 2. First, coming back on the TRIM and model reviews. It's clearly more worthwhile to look at the Basel IV impact as you alluded to and it will reflect also going forward your Basel III capital target in case of future impacts. Can you say something on the timing of that potential review of the target? Is this still possible that it will occur somewhere in the second half of this year? Or is it more, let's say, Q4 kind of general update when we move into 2020? That's my first question. And the second question is a bit broader on the topic of M&A. Let's say, with the NII headwinds, yes, probably being longer than maybe expected, let's say, back at the Capital Markets Day. In terms of order of priorities, is M&A, let's say, higher on the general look bit more proactive to certain thousand maybe before? Or is this anything you can add on, let's say, M&A appetite is welcome.

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

Thanks, Albert. With respect to your question around review as set by -- it may be the next quarter, it may be the quarter after, the quarter after, depending about what happens around TRIM and model review in that quarter, which is to Basel IV related. And then depending on what happens, we will come up with a review of the target or lowering of the target at that moment in time. So it can be from Q2 onwards, potentially.With respect to M&A, we have been open for bolt-on acquisitions in Private Banking already for some time as already illustrated by SocGen last year and before in Germany 2 times. We're still open in Germany, France and Belgium for bolt-on acquisitions in Private Banking. We also look at other areas where we can find, perhaps, fee options or interest-generating options. So we're looking more broad -- will be bolt-on if we do it. And the more broader M&A discussion, I think, well, that's a different one. We now are -- will be on stand-alone basis and that's what we're going to continue in the future.

[Operator]

The next question is from Mr. Marcell Houben, Crédit Suisse.

[Marcell Houben, Research Analyst]

I have 2 left, please. On the fee side, especially in the retail business, it was quite a significant drop Q-on-Q whereas I thought that, yes, sort of EUR 90 million -- high EUR 90s million was sort of the run rate. Is that all driven by, like, online brokerage? So people not trading much in the first quarter? Or because the majority of that was just current account pricing? And that was sort of stable going forward? That's my first. And my second was more -- I know it's quite early in the year, but just a narrative on the capital and capital return. Is it your ambition to grow the capital base beyond, for example, the 18.5%? So if we assume, say it was payables that the capital target doesn't change. Would you aim to grow this capital base? Or do you think we will never see higher equity Tier 1 ratio of 18.5%, for example?

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

Thanks, Marcell. With respect to fee side, perhaps, Clifford, you can take that question.

[Clifford J. Abrahams, Vice]

Yes.

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

And with respect to capital return, it's indeed, as you say, early in the year. That's true. So we have not said a lot about dividend yet. 18.4% last year went down to 18% Q1. And what we actually expect is, I said, due to -- when there is Basel IV elements, the TRIM and the model reviews earlier on and actually that will lower the difference between Basel III and Basel IV. So that's actually more, I would say, some downward pressure on the CET Tier 1 Basel III than upward. I'm not going to say anything about never something, but so the pressure is more in the other direction, I would say. Clifford, can you say something on that, please?

[Clifford J. Abrahams, Vice]

Yes, maybe just little bit building on that and just maybe a different angle. I think, clearly, we're in a transition period between Basel III and Basel IV, and it's a challenge. We continue to feel that the right way to communicate the target range is Basel III, because that's our reported basis. But the principle is we want to keep them well aligned. And you can see this quarter, we said Basel IV is unchanged from Q4 when it was 13.5% so well capitalized. And 18% is in the middle of that -- of our [comp] Basel III range. So they're well aligned. That TRIM and model reviews makes them misaligned and then we'll look at it. And as Kees said, it could be as early as Q2. It's the alignment that we're looking for, to ensure that we manage that smooth transition.

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

I think that was -- fees.

[Clifford J. Abrahams, Vice]

Fees, yes. So I think looking at the sequential trends, Q4 -- actually Q4 -- I put it this way, it was a little bit high. So Q4 in retail benefited from the ICS payment or our credit -- due to our credit business -- our credit card business. And that was sort of high single-digit amount. And if you look at fees year-on-year, they're actually more or less in line. So there's some seasonality to our fees. And that explains most of the movement between Q4 and Q1. And Kees commented on the outlook going forward regarding fees.

[Operator]

Your next question is from Mr. Stefan Nedialkov from Citi.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. A couple of questions on my side. So a lot of questions on TRIM. Let me throw mine as well. TRIM, basically EUR 3 billion of RWA thus far. You have guided over Basel IV inflation of EUR 30 billion to EUR 40 billion effectively of RWAs. 30% to 40%, call it, EUR 30 billion to EUR 40 billion of RWAs. So really talking about 10% of the Basel IV impact hasn't been phased in. Would you say that probably there is another 10% to be phased in by 2020? So overall really the vast majority of the Basel IV impact will happen from 2022 to onwards, rather than being front-loaded before 2022? And I would just know that that's different from your other orange peer who is phasing in 80% of the impact in the next 1 to 2 years. Do you agree with this statement or not? Basically, that's my question. The second question is on costs. Retail costs surprise positively -- retail Banking costs surprise consensus quite positively. We don't really have too much granularity in terms of what has driven that. If you can comment and how sustainable that beat is going forward? And related to that cost question, when you guys talk about the headwinds on the cost side of things from compliance, you did indicate in the pre-close call that compliance costs from an ongoing basis are likely to rise by -- from sort of EUR 100 million to EUR 125 million per year. So that's just the EUR 25 million negative delta. In the context of EUR 5 billion cost base, it doesn't strike me as a huge negative delta. Yet you are talking about compliance cost pressures. Am I missing something here?

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

Thanks, Stefan. With respect to TRIM, I think the EUR 3 billion you mentioned, if we take Q4 and -- Q4 last year, Q1 this year, it's altogether already EUR 6 billion, which is around -- well, it's more, of course, year-to-date already. Forecasting this is not easy because it depends very much also on what regulators discuss with you and the site upon discussions around -- around discussions. So it's not easy to forecast, but the figures you mentioned are, I would say, low, actually for what we would expect. So the 2 times 10% is, I would say, low. Can you say anything on the retail?

[Clifford J. Abrahams, Vice]

Yes. I think I'm looking at the sequential -- I think it's important to just break out some of the incidentals. So Q4 to Q1, retail costs were down a decent amount. You got to look through the allocation of levies and also as Q4 is a heavy levy quarter. And also Q4, we booked the provision for CDD remediation. A lot of that fell on retail. So I wouldn't -- I don't think I'd be calling out specific trends on costs regarding all of our businesses. I think the retail bank is focused on costs because some of those income headwinds are landing on that business in particular. But if you look at it over time, I think the performance is more or less in line with some of the other businesses.

[Stefan Rosenov Nedialkov, Director]

Okay. And just to follow up on the compliance, the pressures for EUR 25 million extra per year?

[Clifford J. Abrahams, Vice]

Yes. I think the -- in the comment on compliance, we have booked to provision for compliance costs. There were some very specific programs. So we expect to -- we expect the run rate of compliance-related costs to go up from roughly EUR 100 million that we've seen in previous years, about order of magnitude. I think as Kees said, we're not expecting an imminent reduction in those costs. We're not going to declare victory and stand down the team. I think we expect the environment to remain rightly focused on this, and we're putting the resources behind it appropriately.

[Stefan Rosenov Nedialkov, Director]

So -- okay. Perfect. Just to confirm here, so you're saying that the pressure from compliance costs is around EUR 25 million per year. Is that correct?

[Clifford J. Abrahams, Vice]

We've given previous indication. I don't want to update every quarter on compliance costs. We see compliance and regulatory generally as a source of headwind on costs. This is how we characterized it. But we remain focused on our overall targets as to -- and I think the guidance we've given for next year remains appropriate in that context.

[Operator]

The next question is from Mr. Jason Kalamboussis, KBC.

[Jason Kalamboussis, Executive Director Research]

Jason from KBC. I just have a couple of questions. The first one is just coming back on M&A. I mean, there have been news mentioning possibly that the [indiscernible] petrochem in Belgium would be open for discussing a sale. Now putting aside, I'm sure that you cannot comment on specific files and cases -- but putting that aside, given that it would be something that could be worth just north of EUR 1 billion. I was wondering if within -- if your bolt-on would extend to what I would call or I think you called your running profit. So if that firepower basically you would look at it and say, "Look, within my running profit, but actually goes roughly to EUR 1 billion, it's something that I would consider?" Or do you find that this is exceptional? And in general, if you could comment, would you go for something that is a larger deal at this stage because that could help to alleviate the pressure that we can see over the next couple of years, at least on your top line? The second question was on diamonds, EUR 7 million low. But you know it can change a lot in quarters. I just wanted to have an amount to kind of comment if there is, in general, some improvement in the market, reverse of what we have seen last year? Or if it's still very much a market that hasn't shown any such signs? And the third quick question, is on NII. I mean from both questions that came on it, is it fair just, in general, to assume that this quarter the EUR 10 million is roughly the impact for -- that we should assume so that this year, the EUR 10 million per quarter, you absorb it by increasing your market shares, et cetera, but you know, as I think Bruce was mentioning, look, for example, in 2020, it is roughly a good number to use everything staying -- everything else being equal? So of course, there are actions you can take to alleviate that, but without giving any guidance for 2020, is the EUR 10 million per quarter good for you to have in mind?

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

Yes. Thanks, Jason, for your questions. Indeed, M&A deferrals, we will not comment on that, of course. But to your more general question, what kind of size would you look into. If I take the last 3 deals, I think 2 were in the range of EUR 5 billion to EUR 10 billion assets under management. One was EUR 5 billion, SocGen, the latest one. I would say, it's not the case that we would only look at EUR 5 billion or EUR 10 billion. It might also be larger. So we will look at every specific situation and of course, specifically, at the business case around that. Diamonds, Tanja, you can comment on that. And with respect to your NII guidance of EUR 10 million and absorbing it by volume growth, that's, I would say, the right guidance. So we can confirm more or less this reasoning you have. Thanks. Tanja?

[Tanja J. A. M. Cuppen]

Yes. And on diamonds, indeed, as you mentioned, this quarter limited additions to provisions. But as I mentioned already, we remain cautious with respect to this market. It's a market under pressure. You see consolidation and competition also from, I think, you call them artificial diamonds. So you see pressure on the sector, and we expect that to remain. So we remain cautious as well.

[Operator]

The next question is from Mr. Raul Sinha, JPMorgan.

[Raul Sinha, Analyst]

Just maybe a couple. I think on fees, we have had a discussion already, but I just wanted to link back, especially a comment at the Investor Day where you talked, I think, about stable fees in the short term and then more of a spec from growth initiatives. So I was wondering if you could refresh for us a little bit the timing. How you expect the growth initiatives to begin maybe over the rest of the year into next year in terms of driving that fee income line? And then the second one is just slightly more specifically on the stage 3 book. If I look at the disclosure, and correct me if I've got this wrong, I think the stage 3 corporate loans are up something like EUR 600 million in Q1 from EUR 4.3 billion to EUR 4.9 billion. And I think you talked about inflows and outflows. And obviously, the point on coverage is, obviously, very clear already. But my question was more, EUR 600 million increase in the stage 3 corporate loans is obviously quite a big number. Is there any color you can provide in terms of what sectors are driving that?

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

Thanks, Raul. Clifford will answer question 1 and Tanja question 2.

[Clifford J. Abrahams, Vice]

Yes. I think on fees, by way of an update, I think we have made disposals of some fee heavy businesses. And that's a headwind doing on our number. So I think we should factor that in. I also think Q1 was impacted by the downward movement in equity markets the end of Q4. So there's some, I call it, some short-term factors that are impacting the number that is perhaps extending out the period from which we hope to grow fees. So if I look at the prospects going forward, whilst I'm pleased with the fees initiatives working on and Kees talked about the mortgage fund and Kendu and all of these will add fees in due course. I think taking the mortgage fund as an example, it will take frankly a few years to build up to a meaningful stock, on which we earn fees that would be meaningful to the EUR 400 million or so that we report each quarter. And same is true with investments. But going forward this year, clearly markets can be volatile, but we were pleased to see the market pick back up again, and you see that in the value of our investments. That's meaningful to fees going forward. And I think it's more those tactical, cyclical things that would drive the movement in the next few quarters as we work on these more a medium-term fee initiatives.

[Tanja J. A. M. Cuppen]

Okay. And then on the stage 3 book and the inflow there, well, it's -- I would say, it's too much to say that there is a trend in certain sectors. But I can call out a few. So we saw some inflow from offshore energies and the sectors that we have very much -- well, in focus. We also saw some inflow in short sea shipping and food and beverage. And I would say, the rest is across the board. And well, as mentioned, looking at these files and also the impairment levels that we felt are appropriate. They're well below the average coverage ratio that we have for our total book. So that explains the coverage ratio as well.

[Raul Sinha, Analyst]

That's really helpful. I guess I was wondering whether these are largely domestic or largely international in terms of exposures.

[Tanja J. A. M. Cuppen]

I think it's a combination there. So some of that you see domestically and some of that is international. So yes, it's really a combination. And I would -- don't have the numbers to say was it really 50-50? But it's -- now that it's -- that you can say it's purely domestic at all.

[Operator]

The next question is from Mr. Robin van den Broek, Mediobanca.

[Robin van den Broek, Research Analyst]

For my first one is related to a comment your peer made in the Netherlands and that is that they were using higher FTP rates for the lending side of the bank, basically implying that commercial rates were up and lending margins were sort of flat. And to me that gives the impression that the higher credit spread movements of Q4 were basically passed on within the bank. And given the sizable tightening of credit spreads year to date, I was just wondering whether that is sustainable or not? I believe we talked about rates. Is this pressure a factor? Credit spreads are down as well. So just wondering also on the mortgage side, there you're more supportive of the margin. But is that not more just a factor of the lack of pricing in new commercial rates? Or is this really something sustainable? So that's my first question. Second question, sorry for coming back to this, is about lowering the budget. You said that, that depends on -- yes, the significance of the move between the quarters that you could potentially embed it in Q2. But apparently, EUR 6 billion of RWA uplift on the back of TRIM model updates was not high enough. So I was just wondering if you could give us a number there. And in relation to the gap between Basel III and Basel IV. I think last year, we were expecting some tailwind on operational risk RWAs to come through due to meeting the disclosure requirements of the ECB. Was just wondering what happened to that if there is still something to come? Or that doesn't even matter under Basel IV scope? And last question is just something to get confirmation on...

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

Confirm your set of questions.

[Robin van den Broek, Research Analyst]

Sorry. And I was just wondering about the procyclicality on the Basel IV. I mean presumably because it's mostly output floor-driven, I presume that is not a reason at all to be above your target range on capital.

[Clifford J. Abrahams, Vice]

Okay. I'll try and tackle most of that and maybe Tanja you can chip in on operational risk, if I need help. I think on STP, I saw those comments. We had a similar methodology, by which we pass on credit spreads that we -- if they go up, we pass -- we seek to pass them on. There is some, call it, smoothing around that. It's not all automatic. We have a methodology there. But that -- I think we behave in a similar way. I think in terms of mortgages, there are a number of things going on around mortgages compared to behavior where the pension and insurance companies are, where the other banks are. We find it helpful to focus on our own measures of hurdle rate and profitability and let the share take the strain. And as Kees said, look, we're encouraged by the pipeline. And we -- I can't forecast how long that will be maintained. I think around -- and I'm happy to tackle this again. So for the target range, I think -- I'd refer back to comments we made about alignment, and we don't want to keep moving the Basel III range as our Basel IV numbers change or TRIM change. Our strategic focus is to be -- to meet the 13.5% under Basel IV early in the phase in. And then based on that, we triangulate the appropriate Basel III target that we will seek to maintain where it remains aligned with that Basel IV goal. And so you pick Q4, you can make the case for Q3, why didn't we raise the target range? So we don't want to keep moving it around, and we have a view of forward-looking developments, and we try and factor that in. But it's clear as of today that we're well capitalized under Basel IV at unchanged from year-end 13.5% and are comfortably within our range. So they seem quite well aligned. And if TRIM moves them out of the alignment, we would change the range to bring them back into alignment. I think on op risk, you can...

[Tanja J. A. M. Cuppen]

Yes. So on op risk, what I can say there is that the model in the meantime that we have has been reviewed by the regulator. And as a consequence of that, we could reduce some of the add-ons, but -- in capital. But as you see and it's also in our quarterly report, we've also updated scenarios for the development in the market and that led net-net to somewhat of a net increase in operational risk, RWA. And this is a problem of Basel III and the Basel IV. We don't expect a big change for operational risk, but the exact guidance is still uncertain there because we need to wait as well before -- for the regulation to settle to exactly know what it will be for the operational risk.

[Clifford J. Abrahams, Vice]

Thanks, Tanja. And on the -- go ahead. Your 6 questions, yes?

[Robin van den Broek, Research Analyst]

To come back on the first one. Could you just talk whether credit spreads coming down directionally is in a headwind? And whether that has been absorbed in the EUR 1.6 billion in the high guidance. And then still -- the sixth question was on the procyclicality, which I think is still open. But happy to leave that behind and take it offline.

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

I think the -- we aren't going any further to add to the EUR 1.6 billion. I think we're getting too granular in terms of micro movements. I think on -- I can confirm what you said. I mean, Basel IV is a more stable metric and less influenced by credit because we are quoting the fully loaded sort of in-state position. And that's part of the rational for the stability we've seen in the last quarter or 2. And as you say, we're happy to discuss it offline.

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

Operator, I think there's still one question.

[Operator]

Yes, there is, from Mr. José Coll.

[Josema Coll, Equity Analyst]

Three quick questions, please. The first one is the 5-year LIBOR swap is down more than 20 basis points year-to-date. So I wonder if you could quantify how much of the EUR 30 million falling barriers impacts in NII could be due to the sharp portfolio repricing. And what level of impact you would expect in the coming quarters. Second, does the cost to income guidance of below 55% by 2022 include expectations of interest rate hikes? If so, how much and when? And the third question is, do you expect that Basel IV will have an impact on MREL requirement? In other words, do you think that the MREL requirement as a percentage of risk-weighted assets will remain constant when calculated over Basel IV RWAs?

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

Thanks, José. Clifford, if you can take question 1 and 3. Number 2 question is C/I, you mentioned 65%, it's below 55%. So below 55% C/I 2022, which we have communicated at Investor Day. It's mentioned in a way that it's related to the -- at that moment in time, economic forecast. So both grow, interest rates and the like. So it's linked to that. And of course, we will see later on how these things develop. Clifford?

[Clifford J. Abrahams, Vice]

Yes. I think I'll answer your first question this way. The EUR 30 million that we saw there was not impacted by the interest rate move that you referred to and if you look at the quarterly movements, that's the -- it related a positive one-off in Q4, not negative one-offs in Q1, that EUR 30 million, which is why we guide into around EUR 1.6 billion, just to reflect the FX swap impact that we talked earlier. And we can take any further details there offline.I think around MREL, I think in the short term we are focused on the RWA-related target. So to the extent that we take TRIM and model review additions to Basel III RWAs, that will raise the MREL requirement in the short to medium term. And in the long term, yes, it's possible that it changes but I don't really want to speculate at this stage on possible regulatory release that may in fact not take place.

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

All right. Thank you very much. Operator, I would like now to conclude this Q1 result update. I would like to thank you all very much for your questions and goodbye. Thanks.

[Operator]

[Audio Gap]