ABN Amro Bank NV

OTC:AAVMY

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. Welcome to the ABN AMRO First Quarter 2022 Analyst and Investor Call. [Operator Instructions] I would now like to hand the call over to the Chairman, Mr. Robert Swaak. Please go ahead, sir.

[Robert Swaak, executive]

Thanks, Lance. Good morning, and welcome, as always, to ABN AMRO's Q1 results. Today, I'm joined by Lars Kramer, our CFO; Tanja Cuppen, our CRO. I will update you on the progress of our strategic agenda. Lars will then go through our first quarter results in more detail, and Tanja will update you on impairment developments in our loan portfolio and on capital.

So let's turn to our first quarter results as shown on Slide 2. As we all know, our world changed significantly in the last quarter. The War in Ukraine shook our sense of security and stability causing further economic uncertainty and a sharp increase in inflation. And our thoughts continue to be with all those affected by the war and we aim to provide support where possible. Thanks to a joint effort with other Dutch banks and supervisory authorities. Refugees from Ukraine can open a Dutch bank account with ABN AMRO, which enables them to indeed receive living allowances or wages.

We are helping out in many other ways as are all of our colleagues, and we will continue to offer support where we can. Now turning to our first quarter results. We delivered a solid performance with a net profit of EUR 295 million. We, again, showed decent growth in mortgages as well as corporate lending. Net interest income was EUR 1.3 billion, the decline versus last quarter, mainly due to lower treasury results. Fees are up 10% year-on-year with all client units contributing. We're making good progress on our AML remediation programs, though our remediation programs will continue into 2023. And for this, we did take an additional EUR 50 million cost provision this quarter.

We do remain fully committed to bringing our costs below EUR 4.7 billion by 2024. And then we finalized our first share buyback last week, returning EUR 500 million of capital to shareholders. We continue to focus on the execution of our strategy. And in 2022, we specifically focus on the new client service model and climate strategy.

So first, turning to Slide 3. I'd like to say a few words on the progress we're making on the execution of our strategy. Across our three strategic pillars, we highlight some examples of our progress in each of the client units. Personal & Business Banking introduced a new mortgage product for clients that want to let out their former dwelling. We continue to invest in our mortgage back office, which helped us to become a market leader in new mortgage production during February and March. Wealth Management is making further progress in growing the entrepreneur and enterprise concept and in clients and booking deals in the Netherlands and in Germany. And I am indeed proud that we are the first bank in Europe to offer clients insight into the impact of their sustainable investments via Internet banking.

In Corporate Banking, we set up a desk for product as a service as circular economy business model. And to further accelerate the integration of sustainability, we now have set up a sustainability center of excellence across all client units focusing on climate, circularity and social impact. And we are working on updating our climate strategy, which we will present later this year.

Now on the next slide, I'll tell you more about social impact, part of our purpose and our strategy. Social impact is part of our purpose banking for better for generations to but also a business opportunity as part of the sustainability pillar. For us, social impact is about ensuring equal opportunity, financial inclusion and making clients more financial resilience. A good example of financial inclusion is the inclusive banking team we started. This team is currently focusing on the needs of female clients, an important client target group. Transition loans and social bonds are gaining momentum, and we're helping our clients to structure these products.

As part of our diversity and inclusion effort, we have recruitment programs aimed at refugees and disabled persons also unlocking valuable talent. One in 5 persons between the age of 16 and 28 years are unable to pay their bills, and we support this group irrespective if they're clients of us, with budget coaches and aim to improve their financial resilience. We launched Jemi or Gimi app to familiarize children with the bank accounts while parents remain in control. Banking is becoming increasingly digital and more and more clients no longer visited branch to ensure financial inclusion also for clients who struggle to conduct their banking affairs online, we provide financial care coaches.

So turning to Slide 5. Let me update you on our new client service model. Last year, we focused on strengthening our digital and data capabilities. Also, we further simplified the organization. This year, our focus is on implementing our new client service model. We defined three levels of service, which moved progressively from fully self-served through the personal expert advice. Clients looking for self-service expect easy digital delivery through apps, full digital services and a seamless experience. Currently, 95% of daily banking products are available remotely, mainly through digital channels supported by telephone and video banking. I expect we can make all products available remotely by Q3, at which point there will be no need for any clients to visit a branch.

Last year, our chatbot Anna handled more than 1 million requests of which 40% were fully handled by the chatbot. Clients can move seamlessly to the expertise service level. And for example, our chatbot can connect clients to sales advisers or experts and mortgage clients simply click for a video bank and call with an expert. Our clients very much appreciate the ease and comfort of video banking as evidenced by the high Net Promoter Scores for this particular channel. In addition to improving the client experience the new client service model will be an important driver for more efficiency and enabling further growth.

Now before I hand over to Lars, I'll say a few words on the economy. The Dutch economy has indeed fully opened up, and all restrictions are lifted. However, we went from COVID straight into a war in Ukraine. As you can see from the chart, this has impacted consumer confidence sharply. However, consumer spending has remained strong so far and it is still too early to assess the full impact of the war. It is too early also to assist the impact it will have on consumer behavior and the economy at large. Inflation is a source of concern that we expect inflation to ease next year as past rises in energy prices dissipitate. Bankruptcies have ticked up with government support measures now phased out, but are still very low by historical standards. Meanwhile, house prices in the Netherlands continue to rise mainly due to lack of supply, and we expect the price increase to continue, though at a lesser rate, while the number of transactions will come down. So let me now hand over to Lars to discuss the first quarter results.

[Lars Kramer, executive]

Thanks, Robert. So just looking at Slide 7 now. Over the first quarter, our mortgage share increased to 17%, and the portfolio grew with EUR 800 million. What we're seeing now is mortgage rates rising at unprecedented speed, and we are pretty much back to the 2014-2015 levels. And there's also starting to be an impact on the prepayment markets, which, although still strong this quarter, we expected this decline going forward. We're seeing the first signs of clients actually opting for shorter terms, so around 10 years rather than locking in rates for the 20 years or more, that's been happening for a while now. And for us, this is encouraging as traditionally, banks have been stronger in the shorter maturities versus the nonbanks.

In the corporate lending space, we saw another quarter of loan growth with volumes increasing by EUR 1.3 billion and also our business momentum remains high, and our activities in Northwest Europe are starting to materialize.

Turning to the impact of this on our interest income on Slide 8. So business NII has held up, especially at higher volumes have offset some of the lower margins, but treasury NII continues to decline. The mortgage margins also on new production remain under pressure. And -- I mean this is mainly as a result of struggling to keep up with the rapid increase in long-term rates, where we've been pricing behind the curve, which is a structural effect in the market. But as expected, the prepayment penalties were lower following a very strong fourth quarter. And we also expect clients to be less inclined to sort of break open long-dated mortgages with a low coupon. So we're also lengthening the expected maturity of our mortgage book, and this does lead to higher hedging costs.

On the deposit margin front, they held up as the threshold for charging negatives was lowered as of January 1. And overall, taking into account the sort of much improved rate outlook, we now expect NII for this year to be at the top end of our guidance, so around the EUR 5.1 billion mark. With current rates of replicating portfolio will actually turn into a tailwind going forward and mortgage prepayment penalties are expected to decline.

In the previous quarter, we did talk about NII expectations to be bottoming out next year in the second half of 2023, but given the strong increase in rates, we've now changed to expect that this will happen in the first half of 2023.

Moving on to Slide 9, where we talk about interest rate sensitivity on the NII. Before I go into more detail, I just want to stress that this is a scenario analysis on sensitivity and not a forecast. We only show the impact of different rate scenarios on the components of NII that are actually rate sensitive specifically treasury results and deposit margins. We also assume all volumes remain constant, and we also keep asset margins constant in these scenarios. The left-hand chart shows rates that are used in the scenarios and these are based on the actual market rates as of April 29. And what the analysis shows is that for 2023, the tailwind from deposits is pretty much offset by the mortgage prepayment penalties drying up and the impact of the higher hedging costs to cater for the longer mortgage duration.

Though the replicating portfolio does become a significant tailwinds in the forward rate scenario, it's important to note that we do, in the analysis, cap our deposit margins. And I won't discuss the actual margin that we use, but the cap that we used is in line with the levels that we did attain in the previous positive rate environment. And the thinking behind this is that as client rates move into positive territory, the margins will start becoming increasingly driven by competition and less by interest rates. And the treasury results, on the other hand, will remain interest sensitive. And this is due to the yield we're earning on the duration of equity, which is also sometimes referred to mismatched results. So pretty much the increase in NII shown in years 2 and 3 are largely related to this increase in mismatched results.

Now looking at Slide 10, we talk about fees. Fees are actually up 10% year-on-year, and all the client units have pretty much contributed to this result. Partly, we're looking at the normalization from the impact of COVID, but equally, we continue to work hard to structurally increase our fee income, and we did recently announce an increase in payment fees, which will start benefiting our fee income starting in July. The other income line was also stronger due to ARM results and a decent private equity return. But given the economic environment, we only expect moderate private equity results for the remainder of the year.

Now lastly, looking at costs on Slide 11. As you've already heard, in this quarter, we took an additional EUR 50 million of cost provisions for the AML remediation on certain projects because these will take longer and will run into 2023. We also see an increase in our regulatory levies, especially a step-up in the SRF contributions, but it's also important to note that the strategic investments that we're making are not a straight line inclusion in the cost base, you do see some front loading continuing in Q1 for these investments. But the cost savings programs that we're also running in the bank are progressing very well, and we have, to date, booked about EUR 185 million of cost savings. So in terms of cost savings, we remain firmly on track in terms of meeting the EUR 4.7 billion guidance that we put out there for 2024. I now turn to Tanja.

[Tanja Cuppen, executive]

Thank you, Lars. I'm now at Slide 12. In Q1, we took EUR 62 million of impairments, largely related to the weakened macroeconomic outlook. As Robert already mentioned, the economic impact of COVID eased, but now the war in the Ukraine is causing further economic uncertainty and sharp increase in inflation. To reflect this, we gave a higher rate to the negative economic scenario. Also, we took a new management overlay for the potential second order effect of the war in Ukraine, and we leased the largest part of our COVID-related management overlays. .

State ratios further improved this quarter, reflecting the progress on the non-core wind-down and disciplined credit risk management for the core portfolio. So far, the war in Ukraine has led to a credit downgrade only for a very limited number of files.

Now turning to Slide 13 on capital position. We remained very well capitalized with a Basel III capital ratio of 15.7% and a Basel IV capital ratio of around 16%. The decline in our Basel III CET1 ratio versus previous quarter reflects a strong RWA increase largely related to a EUR 5 billion add-on for model reviews and model redevelopments. Due to these ongoing model redevelopments, Basel III and Basel IV CET1 ratios have now converged. With this, I want to hand back to Robert.

[Robert Swaak, executive]

Thanks, Tanja. So let's turn to Slide 15, where we list our long-term targets. The strong increase in interest rates should benefit our return on equity over time. And as mentioned previous quarter, we shared some insight on our rate sensitivity towards 2024. Market share for mortgages has improved, and I see encouraging signs that we can sustain this market share and perhaps continue to improve. Cost saving programs are on track to reach a cost base below EUR 4.7 billion by 2024. And our cost of risk is loaded through the cycle level. However, the economic outlook is uncertain with inflation up sharpening. Our capital ratios remain strong, and we recently finalized our EUR 500 million share buyback program. So if I could ask the operator to open the call for questions.

[Operator]

[Operator Instructions] Our first question is from Giulia Miotto from Morgan Stanley.

[Giulia Miotto, analyst]

Two questions from me, please, one on costs and one on capital. If I look at costs, I hear your guidance EUR 5.2 billion, but year-on-year in Q1 and excluding one-offs, costs are already up 6%. And so the guidance would imply that costs need to be down 4% year-on-year for the remainder of the year. Whereas it seems that all the increases are coming from IT, AML investments, which are not something that fades away in a quarter. And also you have, if I remember, well, the negotiations with the unions coming up in June. So any elements that you can give us just to make the EUR 5.2 billion guidance a bit more tangible? And also, if you can remind us of the one-offs because I had EUR 100 million of restructuring costs and now EUR 50 million of AML. I don't know if there is anything more coming on the AML side. So that's the broader question on costs. And then the one on capital is fairly quick. The EUR 300 million buyback is now completed. When can we expect the announcement of another tranche? Is this Q2? Or later in the year or next year?

[Robert Swaak, executive]

Giulia, thanks for the questions. I'll take them both. In terms of the cost and the guidance on the EUR 5.2 billion. So I'd just like to reiterate -- we did book exceptionals incidentals in this first quarter. So clearly, the EUR 50 million AML, any SRF levies that were coming through the cost lines for this quarter. When you look at our overall cost base and the way we are managing the cost base, it is very clear that we've also, during this quarter, front-loaded some of our IT investments to make sure that we keep pace to further digitization of the bank. But when we look at the measures that we can still and that we are taking around realizing the cost saves, we're looking at a number of -- and executing on a number of items.

One is locations as we continue to close down locations. The other is continued efficiency through the digital applications that we've launched into the market. We are looking to increasingly automate our AML activities, but also by continuing to simplify our client service model, we're allowing ourselves to be set up for a much more efficient and effective operations. So even though we saw a bit of a spike and certainly caused by incidentals that we're seeing coming through in this quarter, it hasn't changed our expectations on the --below than EUR 5 2 billion actually in -- for this year.

Your question on inflation and CLA, we were able to conclude off with the unions on our social impact plan. So that's locked in. We did agree that we would sit with the unions again over the course of this summer. And I would then have the conversation using the financial results -- the 6 months results for the bank as we will have been further guidance also inflation. We do expect, though, whatever is the result of that conversation, that we still have sufficient room in terms of our cost base to absorb anything that may come out of this.

In terms of capital, yes, I'm happy we were able to complete our first share buyback program, I think it was the first one. And what we're also now saying is that in light of the uncertainties that we're seeing certainly playing out the rest of this year, what I'd like to have is just full visibility on the bank's results. Clearly, when the economic conditions are as uncertain as they currently are, I think it would be prudent to take a view as to what the full year results of the bank would be. And I expect that, that would be towards the latter end of the year before we announce any further share buybacks. At that point in time, when we have that full visibility, we will then conclude, and then we will continue the constructive conversations with the regulator on this.

[Giulia Miotto, analyst]

Perfect. And just a clarification. The one-offs expected for the year. Is there more to come on the AML front or restructuring?

[Robert Swaak, executive]

Lars, do you want to.

[Lars Kramer, executive]

Yes. So I mean these are AML remediations are pretty much across retail and corporate banking. So we will have a look at -- on the corporate banking side, whether there are still more files, but I think this is materially the number.

[Operator]

Our next question is from Mr.Benoit Petrarque of Kepler Cheuvreux.

[Benoit Petrarque, analyst]

So a couple of questions on my side. I'd like to start with the full year 2022 guidance of, say, EUR 5.1 billion. If I strip out the TLTRO 3 benefit of EUR 88 million I come to roughly EUR 5 billion. I guess it is a good starting point to think about 2023. I guess the way we need to look at it is there will be potentially upside from the forward curve on the top. But can you talk a bit more about the net between, say, margin development and volumes in light of what you see currently on the market. I'm especially referring to the front book versus back book margin development very recently. Could you talk a bit about that? And also if the EUR 5.1 billion guidance whether that's real, that EUR 5.1 billion will look the same, assuming DCB will lag by 50 bps in July, whether that will be roughly the same figure or that will be a different figure?

Second question is actually on the kind of very high steering cost at treasury level, I guess, EUR 30 million, EUR 40 million this quarter. It's kind of now fair to assume that, that will hit most of the upside from the current curve on the replicating portfolio. Could you talk about the drag you expect in the coming quarter from the steering costs and potentially higher steering costs, hedging costs for the coming quarter? What could that be a quarter for the rest of the year? And just finally, you keep your return on equity of 10% for the long run, assuming normalized rates. Is that still a level you have in mind maybe looking at your forward rate scenario? Or would that be different today? Just wanted to check that. .

[Robert Swaak, executive]

Thank you. Lars, could I ask you to take the questions on NII and treasury and then we'll conclude off on ROE?

[Lars Kramer, executive]

Yes. So in terms of margins against volumes, here, what we are actually seeing is on the corporate book, we -- well, actually both mortgages and corporates. We're actually seeing quite a nice continued buildup of volumes, despite the big buildup that we had at the end of last year, it's actually quite pleasing to see that the demand continues. Now clearly, in terms of our sort of high-level GDP assumptions, we are expecting a little bit of a GDP lowering in terms of expectations versus what we guided before, and this feeds into expectations on volume, but we are still expecting GDP growth. So I do expect volumes to continue growing sort of in line with GDP.

The margin pressure is evident both in mortgages and corporates. Corporates a bit because of the TLTRO pass-through that we had. So there is some near-term pressure on the margin. But in terms of some of the new production, which is not under the TLTRO, we actually see margins hold up quite nicely. The mortgages, this has been a continued pressure for the last couple of years in terms of the front book being lower than the back book. And as I said earlier, with the price rises, you're always roughly about 9 days behind the curve in terms of adjusting your prices.

So -- but what we are starting to see is at least that the margins have been improving, even though they are lower than the back book, they have been improving over the last few months. And with the curve being as volatile as it is with us having stepped up the prices. Sometimes when the curve does drop in the odd reap, we don't necessarily follow it down. So that does give us some sort of lock in of a bit of a higher margin. You're asking about the ECB and if they were to increase by 50 bps by July. I would say, as we've talked before, the impact in the year '22 and '23 is pretty insensitive to what happens to -- on the ECB side, and you see that in our sensitivity table that we put out there as well because -- and this ties into your treasury steering costs.

The three elements that effectively eat up any benefit that we have in the near term while, let's say, customer behavior normalizes and therefore, sort of our book normalizes also in terms of the mortgage early or refinancing behavior that we expect to come off significantly. And then we also see, at some point, the negative rates will start shifting back up to 0 if the ECB really does start raising. And bearing in mind that we have about EUR 95 billion, now booked at negative EUR 50 million. That's a pretty large first step that we have to absorb. And hence, we don't see this big sensitivity in '22 and '23. And then there is a balance of the steering costs in terms of the longer duration. So really very little near-term pickup. And that's why we've also sort of kept our guidance for 2022 at the top end of the range rather than going beyond the range. .

[Robert Swaak, executive]

And then the final question on ROE, I would say we would still stick to our guidance of the 8% in 2024. And clearly, we'll have to see how the forward rates will continue to evolve before we would change that guidance. Initially, we had indicated and we continue to indicate that if the forward curves continue to shift the way they are, that 10% is tenable, but it's not changing our overall guidance. So our guidance remains 8% in 2024.

[Operator]

Our following question is from Mr. Johan Ekblom of UBS.

Hello. Can you hear us? I'll continue to the next person. The next question is from Mr. Tarik El Mejjad, Bank of America.

[Tarik El Mejjad, analyst]

I have 2 quick questions, please. The first one, I'll come back to costs, but more towards '24 rather than the -- just the EUR 4.7 billion, but then the EUR 5.2 billion. So this guidance was given before we observed inflation costs and that's back of last year and early this year and then inflation has doubled post Russia-Ukraine crisis, and you continue to reiterate the same absolute numbers and you haven't moved to, which I understand will be more adequate kind of jaws or cost income. So -- I mean, and the last two reporting demonstrated a bit of acceleration in costs explained by what you just described, but there's also some underlying increase in there.

So should we expect some actions from you in the second part of the year to keep that guidance? Or you're comfortable that EUR 4.7 billion could be achieved even with double the inflation you assumed initially in your strategic plan? And the second question is on growth. Sorry to sound a broken record on that topic, but I really want to understand what's your engine for growth in your whole strategy? I mean now you've completed the deleveraging of the CIB, but I want to understand what are the main drivers for growth in CIB in terms of sectors and regions. And maybe you can give us some outlook probably adjusted for the global economic slowdown. .

[Robert Swaak, executive]

Thank you. I'll take both those questions. So in terms of -- unless Lars, says anything to add on the cost side, but I would just reiterate the EUR 4.7 billion, even in light of the inflationary pressure we've seen. This is also partly relating to longer-term contracts that we have been able to close on, for example, major components of our costs related to IT. We currently are still projecting that not only the EUR 5.2 billion, but the continued decrease to EUR 4.7 billion . But I would say that's not a smooth glide path, if you will. I mean clearly, that's over a period of leading into 2024. But at this point, we certainly see no reason to adjust the guidance. But Lars, if you want to add anything?

[Lars Kramer, executive]

Yes, can I just also say because you mentioned cost-to-income ratio. And for me, one of the clear I suppose, benefits of having an absolute number is the discipline it also gives to the internal organization. And if you start having now this tailwind in terms of interest rates, there is potential that people think, well, there's all this extra income. So we don't need to be as disciplined on cost. So I think from my side, that is the key of store holding very firmly to an absolute number and not switching to sort of a cost income ratio driven approach.

[Robert Swaak, executive]

So let me confirm that. There is no sense at this point to change to relative numbers on cost control. In terms of the -- your question on the engines of growth, Actually, that is indeed why I think our first quarter performance. When you look at the underlying trends, as Lars described, when we see the volumes continuing to grow in mortgages, which we named as one of our value segments. The progress we've made in making sure that our operations in the mortgages side is so efficient and so effective that we -- our throughput times have been significantly reduced.

So I would still expect irrespective of price pressure volumes to continue to pick up. On the corporate banking side, we've been very, very clear that we would begin to focus our efforts in Northwest Europe. That, indeed, is now paying off across the corporate bank operations. We're seeing volumes increasing in the sectors that we've highlighted, but also the themes that we've begun to prioritize around digitization, themes related to sustainability, transition themes. These are all focus areas of the corporate bank that have now begun to drive results.

Increasingly, on Wealth Management, which we also have continued to emphasize one of the named potential growth areas, we have seen solid performance over the last few quarters, and we indeed expect that to continue. We've also, as part of this strategy, identified a shift where we can away from NII to fee and fee growth continues to remain strong into this quarter. And actually, it is reflecting some of the strategic choices that we've made as a bank. For example, our clearing operations continue to contribute as expected. And as you recall, that was a very clear decision on our side to continue with our clearing operations. Our credit card operations, which we also said we would continue to incorporate in our overall strategy, is also now showing continued fee increases -- sorry, increased performance.

On our Personal and Business Banking, we were very clear about the digitation of our operations, which we continue to execute against, but also that we would look for opportunities to increase rates where we can. So what you see now is an envisaged tariff rates increase on our -- on the retail side of the operations. And at the same time, we're continuing our development of payment packages to our SMEs, which are also contributing to the overall fee performance. So in short, whilst I know we're understandably focusing on cost, the actual decisions we took in terms of our strategy review are beginning to show results now in the underlying choices that we've made. And in that sense, continuing to contribute to a growth model at the bank.

[Operator]

Our following question is from Mr. Stefan Nedialkov of Citi.

[Stefan Nedialkov, analyst]

I have a couple of questions on the cost side of things. At your last Investor Day, you guided to investments if I recall correctly, around EUR 100 million per year, more or less. And so I just wanted to circle back to what we saw in 1Q, did you take most of that EUR 100 million in 1Q? And was that driven by your upcoming negotiations with the unions? Then on the AML charges, EUR 50 million is quite high when you look at the run rate of around EUR 400 million of AML costs per year. Is that run rate changing at all? And if it's not, how do we square off the EUR 400 million with the fact that around 20% of your FTEs are engaged in compliance efforts?

[Robert Swaak, executive]

Lars, could you elaborate a bit.

[Lars Kramer, executive]

I think on the investments, it is about EUR 100 million a year, you're right. In terms of did we take it all in the first quarter? No, definitely not. It comes through a little bit more throughout the year. And it certainly hasn't been linked to any inflation negotiations on collective labor because those negotiations will only start in the second half of this year. So -- and we continue to make investments. That's clear. And moving the infrastructure and the new service model does require that investment and that will continue. And we are trying to be pretty disciplined as well in terms of making sure we have some oxygen to continue to invest in the business rather than using it all to absorb any sort of cost inflation.

On the AML, in terms of here as well, you have to take a bit of a look in terms of what we do for remediation efforts and what we do for business as usual. And this EUR 50 million is very much in terms of a set of files that have to be relooked at, reremediated in a way, and that will take a bit longer. So it is an isolated portion of the entire footprint of our 5.3 million clients, the bulk of which have been remediated.

So here, I would say, our expectation in terms of run rate on business as usual is very much, as we spoke about earlier, was that this year would be roughly the same as last year and that we would then start seeing a decline in the run rate carrying into 2023 in terms of also all the efforts we're trying to make are focusing on much more a risk-based approach in terms of selection, the fact that we are starting to see a lot more automation in terms of also identification of what needs to be remediated. So that effort of trying to move from people-based large teams to a bit more artificial intelligence base will continue to happen, and we should start seeing more of that traction actually manifesting in the run rates coming down next year.

[Stefan Nedialkov, analyst]

If I may just follow up on the EUR 50 million. It was driven by a longer-than-expected time to remediate all the files. I know you had mentioned previously that your efforts might continue in 2022. Just trying to understand why this was not included in the big charge you took last year, whether this is purely time-driven, effort driven or something new has come up?

[Robert Swaak, executive]

Yes. Let me maybe just expand a little bit on this. So, to build on what Lars has said, these are files, which we identified needed to be remediated. Very clearly, what we're preferring here is quality over speed. So basically, what we've done, we do quality reviews on the files that we remediate. We then come to a conclusion whether these are files are fully compliant or not. So in that process, you identify a number of items that need to be remediated that are just not living up to the quality standards that we have concluded off. So rather than pushing this through in terms of speed, we have decided to then postpone that complete remediation until 2023, take a bit more time to ensure the quality of the file is fully up to standard.

[Operator]

Next question is from Ms. Anke Reingen of RBC Capital Markets.

[Anke Reingen, analyst]

Apologies, on one more on costs. Just in terms of the Q1 base, what can we sort of like take out as we want to consider it as a run rate for the rest of the year, I guess, because there would need to be some quite -- some material step down in order to meet the EUR 4.7 billion. And within this, the EUR 50 million you have in Q1 for non-core costs, how quickly can that come down? And maybe the EUR 185 million of cost savings, how quickly are they coming through over the years?

And then secondly, can you give us a bit more -- maybe an outlook about your expectations of loan loss charges for the year? I mean, in terms of maybe underlying and the Russia, Ukraine overlay, can you use this against a quite easily -- can use it against other economic impact or is it quite specific? In what areas you can use? And then sorry, just lastly, in the negative scenario still assumes quite -- I mean GDP got this year, Feb next year, how sensitive is it to an assumption that GDP is actually always negative?

[Robert Swaak, executive]

Thanks for the questions. Lars could you elaborate a bit more on costs, and I'll ask Tanja to answer the other questions 2 and 3.

[Lars Kramer, executive]

In terms of specific run rates, I can't give you the specific run rates. But what you already did see is that the -- if you look at outside of the incidentals and the levies you actually do already see in Q1, the overall sort of, call it, structural cost base starting to turn and coming off to a lower amount. So I expect to see some build pretty much across the board in terms of what I would call the non-personnel expenses, which does have a lot of the contracting base in it in terms of also the IT build. It also has a large chunk of the offshoring that we are doing in it as well.

And that is also the line item where you see in terms of any investments that we make in terms of infrastructure, which would have had a higher run rate in the first quarter. So those are the areas where I would expect to see some benefit coming through. I mean we have a continuous also in terms of working towards the overall 15% reduction in terms of personnel levels by 2024. We've just gone through another step of reorganizing ourselves. So that organization is also settling down. So I expect to see some of that coming through. And then as you rightly say, the non-core will unwind over the next 2 years. So it's not as if it's going to come all this year. And I think that will be quite an even sort of unwind over the next 2 years.

[Robert Swaak, executive]

Okay. Tanja?

[Tanja Cuppen, executive]

Yes. So on your question related to loan losses -- loan loss charges for the year, maybe one step back. As Robert mentioned already, well, the uncertainties are quite, big at this point in time. Nobody knows how the year will pan out. So from that point of view, it's difficult to give a guidance for the full year cost of risk. What I can say is that we have this cost of risk guidance of around -- well, we have this to the cycle cost of risk guidance of around 20 basis points in an average year. And if you look at our base case scenario that is actually, an average economic development.

So that would be in line, but of course, situations could develop very differently as well. In our negative scenario, we actually don't expect that GDP goes negative already this year, at least not for the full year, although that could happen in the later quarters. very dependent on what will happen in the area of sanctions. And I think it is important to know that the economic scenario that is included in our calculations for Q1. Also included in the pack are the scenarios of end of February.

So just before the war when we always use these scenarios to calculate our provisioning, but that's why the weight of the negative scenario is a lot higher. And actually, our current base scenario is in between the base scenario that is in the slide deck and the negative scenario. Yes, I said we have also taken a management overlay for second order effects. And these are generic. So the second order effects are in the area of higher energy prices, higher commodity prices, supply chain issues, inflation effect. And therefore, they are quite generic, and we do expect them to be absorbed by developments that we will see in the remainder of the year. .

[Operator]

Following question is from Mr. Farquhar Murray Autonomous.

[Farquhar Murray, analyst]

Just one question, if I may. There's been some debate around the cliff edge on SME loans post COVID. I just wondered if you could give us an update on what you're seeing on the ground in that respect? Has that debate been able to progress with the regulator? Or should we take it that the Russia and inflation uncertainties are essentially pushing that discussion now later into the year? .

[Robert Swaak, executive]

Tanja, would you care to comment?

[Tanja Cuppen, executive]

Yes. So we have not seen any cliff effect in relation to SMEs coming out of COVID or COVID support. The COVID support and our SME portfolio is predominantly in the Netherlands. So I'm talking about the Netherlands. COVID support has been phased out gradually and a very limited number of our clients still have support over the last period. I think the main outstanding effect that we can still expect is that there are deferred taxes.

So clients could choose to defer their tax payments and now need to repay that in the coming period until 5 years. So it's a gradual effect that will not be a cliff effect, but of course, is an additional burden for SMEs. And maybe good to know that also we have reduced our management overlays related to COVID quite a bit this quarter, given that we have reviewed our clients for these type of effects, and we are comfortable with where they are. .

[Operator]

And we have a question -- a follow-up question from Stefan Nedialkov from Citi.

[Stefan Nedialkov, analyst]

It's Stefan. I didn't want to overload you with the questions on the first stride. So here are some other ones. On the NII, your assumption for stable -- for constant asset margins, I should say. I think that's quite fair because asset margins are driven by competition. But in reality -- and I know that we haven't had a lot of periods where rates have been rising in the past 10 years, but if you look back maybe in the middle of 2010, how did asset margins behave for you when rates were rising I would say, 2016, 2017, if you can talk a little bit about that, that would be really helpful.

My second question on NII is you're not disclosing your cap on the deposit margins in the replicating portfolio. Can you, however, talk a bit about the deposit beta that we should be thinking about, above 0% and heading closer to 1.5% as we go there? Third question, ROE of 8% in 2024. Is that based on the current spot curve? And the last question for Tanja, I guess. The Basel IV is now 30 bps better than Basel III. What is driving that benefit, please?

[Robert Swaak, executive]

Lars, could you comment a little bit on the NII?

[Lars Kramer, executive]

Yes. I mean in terms of looking back as to how asset margins performed historically, that one, honestly, we'll have to come back to you on because personally I wasn't here, so I don't have that built into my memory base. So we will come back to you on that one. In terms of the deposit margin cap, also I don't want to get drawn on what our working assumptions are. It's also a little bit competitive sensitivity on it, but we do build in a reasonably healthy margin. And that's a little bit where once we get to 0, then we start building up that margin.

And we have tried to use in our cap something which has been historically the sort of average level. So it's not as if we are being overly conservative or overly exuberant in terms of what we are capping in there. On the ROE, I mean, I think the curve that we're using in terms of this ROE is very much that forward curve at the end of April. And on that front, if that curve really does materialize in the long run, then the 10% in 2024 is definitely achievable. .

[Robert Swaak, executive]

Okay. Thanks, Tanja?

[Tanja Cuppen, executive]

Yes. And Stefan, maybe you can repeat your question because I didn't fully capture what your question was.

[Stefan Nedialkov, analyst]

Sure. Basel IV of 60% CET1 ratio is 30 basis points above your Basel III CET1 ratio. We're, obviously, usually used to seeing it the other way around. Some banks in Europe do benefit from Basel IV on a net-net basis, you guys have, obviously, absorbed all the Basel IV impact. So now that we are here, why -- what is driving the 30 bps benefit on the Basel IV versus Basel III?

[Tanja Cuppen, executive]

Your question is clear to me. And maybe first to mention that our Basel IV number is -- we still present a rounded number of around 16%. So you cannot conclude that it's 0.3% higher. We really see the Basel III and Basel IV number converging, but the Basel IV number is, still surrounded with uncertainty. As you know, the Basel IV rules are still not final. And also, we are still working on the implementation in our system. So we don't have a fully accurate number, and that's why we present 16%. So you really need to see this as a convergence of numbers as opposed to a difference or the conclusion you're drawing.

[Stefan Nedialkov, analyst]

I see. I see. So not much to read into that basically?

[Tanja Cuppen, executive]

No.

[Operator]

Our following question is from Mr. Jason Kalamboussis of ING.

[Jason Kalamboussis, analyst]

I have just one quick question. The additional remediation in the first quarter on AML. Was it due to discussions you had with the regulator and was driven by that? And a side little question. I may have missed it onto for it. What are currently the numbers of FTEs involved in AML? And how do you expect this number to evolve in '23 and '24? And same question on the euro amount for '22, '23, '24?

[Robert Swaak, executive]

So on your first question, any time we take any decisions on timing of remediation that is always done with the regulator. So we've had constructive dialogue with the regulator around our timing. And so therefore, we were able to communicate what we communicated around completion of remediation in '23 and directly related to the provision taking. In terms of FTEs, we would expect over time. FTEs that are directly related to the detecting financial crime to begin to come down because, a, we've got a -- we'll have a continued transfer to business as usual, also, b, because we are continuing to further automate the processes.

[Jason Kalamboussis, analyst]

And starting from -- so how many FTEs do you have currently in AML?

[Lars Kramer, executive]

It's about 5,000, and we've got about EUR 450 million of spend in terms of business as usual. So in terms of trying to pinpoint what is that number going to be in 3 years' time? I mean we expect it to be significantly lower, but we don't have an exact figure that we can share with you now.

[Jason Kalamboussis, analyst]

Okay. And part of the AML reduction of this 5,000 is included in your 15 -- minus 15% by 2024. Is that correct?

[Lars Kramer, executive]

Part of it, yes. But I mean a large part of it is also in the externals, right? So the 15% is based on our internal FTE. So it's a balance, but it's also a mix between internal and external.

[Operator]

We have a question coming through from Omar Fall Barclays.

[Omar Fall, analyst]

Just one, please. Why are you locking us in to wait until full year results to come back on capital return that's 8 months that shareholders have to wait your direct peer, which has 100 bps plus less capital, some Russia issues and the same domestic regulators just announced a new buyback and capital return to start imminently. So why are you so different to them and other European banks engaging in capital return? Is it that the regulator maybe would have an issue with a buyback at the same time as the added remediation efforts? I know you'd like to be prudent, but, obviously, a higher cost of equity because the market thinks you're holding capital for some unknown reason is also not particularly prudent, I guess.

[Lars Kramer, executive]

Yes. So firstly, there's no linkage between the remediation and the capital. In terms of what we are trying to achieve in terms of buybacks is something which is a bit consistent over time. So not necessarily a sort of lumpy return. We are in time working towards this 13% level. And at the moment, our 15% threshold is not really a constraining factor. So from that perspective, the timing of any capital return really is being dictated by the uncertainties of what is happening in the Ukraine materially.

And I mean somebody mentioned the converge effect on SMEs earlier, we do still have to see how that all evolves. And we are being -- I don't want -- prudence is a word, but we want to be realistic as well that looking at the situation in the world today, it does make sense to push the pause button a bit on this and to really see how the next 6 to 8 months do evolve. I also -- I don't want to comment on other banks' capital returns because I don't know how the discussions are -- it's our direct competitors and their regulators.

[Omar Fall, analyst]

Got it. And to be clear, we should wait until full year results and kind of not Q3 or some point in the second half?

[Robert Swaak, executive]

So what I -- yes, so what I said is that we want to have the visibility of full year results that we can consider. So that is what we're now working toward getting full year visibility, understanding the consequences, as Lars has just alluded to, of the current crisis, then we will have the conversation here around share buybacks.

[Operator]

We have a follow-up question from Giulia Miotto of Morgan Stanley.

[Giulia Miotto, analyst]

It's a question on the new disclosure around the discussion with the regulator or regulatory levies and I just don't quite understand the disclosure. Is there any more color you can give us on what this is and what impact this could potentially have in the timing?

[Robert Swaak, executive]

Lars, would you comment?

[Lars Kramer, executive]

Yes. This is the -- in terms of SRF contribution, the discussion we're having with SRB in terms of calculations. So once we have some more clarity on that, those discussions have only just started. So I would expect by Q2 to be able to come back to you and give you more clarity. But I think this is just a signal that we are in discussions on SRF contributions to the SRB.

[Giulia Miotto, analyst]

And this is for 2022?

[Lars Kramer, executive]

This is for a portion of it could be for '22, but there's also a look-back component to it.

[Operator]

We have a question from Kiri Vijayarajah of HSBC.

[Kirishanthan Vijayarajah, analyst]

Yes. A couple of questions. Firstly, a follow-up on the cost. I think you said you were exiting some locations or closing locations. So are we talking about kind of further branch closures going on in the Netherlands? Or was that kind of more back office functions? And I see headcount in Personal and Business Banking is also coming down. So with that kind of natural attrition, there's very real severance costs or anything to speak of. And then, of course, forward-looking in terms of your cost targets for 2024, what have you allowed for in terms of your operational headcount numbers, so outside this non-core CIB runoff and outside of the AML related headcount.

What's your operational headcount is going to be looking like? And are you proactively thinking of managing that down in terms of tracking that 2024 cost number? And then quickly, just on the capital return, I fully understand what you said, you need the clarity of full year results before the next deployment announcement, but does the same also apply in terms of using capital for bolt-on acquisitions? So for instance, deals in Wealth Management are effectively also off the table for the same reasons that you want to wait until full year results and you've got some clarity around some of the risks out there.

[Robert Swaak, executive]

So taking your last question, there is no concrete opportunities. We look at results at this point around any potential M&A. In terms of the question you asked around our cost rate as it relates to closing of branches, those do relate to continued closing where we see the potential for the closing of branches. So indeed, that will continue. As consumers behave, we track the traffic across the branch and then we close as necessary. So what you're actually seeing is the continued effect of further digitization of our services, but also allowing us to continue to close branches as warranted by consumer traffic. And yes, indeed, you see those numbers coming through PMBB in terms of FTEs as they begin to come down.

In terms of your question on 2024, I would just reiterate that we guided towards that 15% over FTE reduction. That still stands. So that's as much detail as we would give at this point in time, but we still hold to that 15%.

[Operator]

We have a question from Robin van den Broek of Mediobanca.

[Robin van den Broek, analyst]

Just a couple left. On NII, I appreciate the color you have really given on margins and volumes. But I think with the Q4 results, you were very specific that this would be a EUR 100 million headwind for this year. I was just wondering if you could update us on that number and also talk a little bit on how persistent do you think those dynamics are for future years? So that's question one.

Question two is, again, coming back on costs. I don't really get the improvement on the underlying basis because Q4 normally has the hockey stick effect and you're flat basically Q-on-Q. So I think it will be extremely helpful if you just give us the number of the form loaded IT expense in the quarter across to help on the standard trajectory for the year. And thirdly, I think on 2024, I think you didn't do anything on regulatory levies. I think you didn't assume that to go down by them. Could you just confirm that?

[Robert Swaak, executive]

Lars, it's back to you on the cost.

[Lars Kramer, executive]

Well, on the NII first, in terms of the EUR 100 million. I think if you -- in terms of what we spoke about the last time, we had the 4 buckets of about EUR 100 million a piece, which was the asset bucket, the deposit bucket, the non-core and the treasury. Now the mix is changing between those buckets. And that's why you're not in terms of the sensitivity, you're still not seeing any real pickup in the '22 or '23 in terms of a net change. But clearly, the mix in terms of those buckets is changing, but the deposit bucket benefiting a bit more, but the treasury bucket feeling more pain.

In terms of costs, I'm not going to sit here starting to give run rates. I mean we are working on the savings programs in terms of our IT transformation. A lot of that comes through if you're aware that there's been the strength to ruling in Europe, which is, in a way, sort of delayed migrations for us, for example, onto the cloud. We've now found a way of actually getting comfortable to restart those migrations. So these are some of the sort of underlying things where you start seeing a pickup in terms of savings run rate. The front office transformation, for example, where you've just been talking about the sort of shift from branches, you also start seeing there.

We had to get our organizational structure resolved and that has now stabilized in terms of pretty much in quarter 1. So that's in itself -- now adds some additional momentum in terms of getting some savings out there. And then there's a continuous digitization and a move we talk a lot about people starting to use video banking more in the mortgages space. As a result of that, you are getting direct contact between customers and ourselves and agent rather than having to go through call centers. So you've got the dynamic of branch call center and digitization. And again, that's a mix that will continuously be evolving more and more towards the digital channel. But in terms of absolute pacing and being able to put a run rate on that, I think that's going to be a bit too difficult. .

[Robert Swaak, executive]

But I think in summary, Lars, to add on, we still deem our existing plans to be sufficient and to be sufficiently flexible to absorb any unexpected increase.

[Lars Kramer, executive]

And then your question on the reg levies Yes, we are still including all reg levies as of -- with the continued sort of run rate as we have this year. So we haven't taken anything out in the 2024 year for potential fund being fully funded.

[Robin van den Broek, analyst]

I appreciate what you said on the four buckets on NII, but I'm not sure you actually gave color on the volume times margin effects. I think you only touched upon moving elements between the deposit bucket and the treasury bucket, but any thoughts on going through [indiscernible] times margins and also the persistency of that throughout the years?

[Lars Kramer, executive]

In terms of the volume and margin, it's basically what I said earlier, which is we do have a continued pressure on the mortgage margin, and this is really in terms of the price increases being tracked, let's say, by a 9-day lag. So you're not -- but there is an improvement in that margin, but it is still lagging what the back book is at. In the corporate space, what we are seeing is there has been some negative impact as a result of the TLTRO.

So that is feeding through. But in terms of real new production outside of the TLTRO, we are seeing basically an improving margin. And in terms of the volume itself, while you can see that in Q1, we had quite a nice follow-through in terms of volume despite the very strong Q4, and that is encouraging. And again here, I take the lead a bit that we do look at GDP still being positive, even though it is a bit depressed based on previous expectations, but it is still positive.

[Robin van den Broek, analyst]

And then is it fair to say that on the mortgage repricing that the part of the book that's actually up for repricing had an above back book margin?

[Lars Kramer, executive]

Well, about back book or back book margin, I would say, not necessarily above back book. I mean that's an average margin across time. But clearly, the stuff that is repricing is at a higher margin, so you've got that running off, and you're replacing it with effectively lower margin.

[Robin van den Broek, analyst]

Yes.it's no question. It seems that the margins between 2010 and 2015 were particularly good, and that might be the bit that's more up for repricing at the moment. So that was the reason behind the question, but thank you for the clarification.

[Lars Kramer, executive]

Yes. But a lot of that -- I mean, if you take what has been refinanced, it's a huge volume of the book has been refinanced. So pretty much -- there's a very small proportion of our book, our residual book that is still at, call it, rates that are higher than today's rates. So that's why we expect the refinancing prepayment fees that we've been receiving with what's at about EUR 260 million a year to really come off because that demand for refinancing is going to come down quite steeply.

[Operator]

And we have a follow-up question from Benoit Petrarque of Kepler Cheuvreux.

[Benoit Petrarque, analyst]

Just wanted to better understand the steering costs on the treasury and especially how it works on a quarterly basis. So it's clearly linked to the level of prepayment, so can we assume that in a quarter where you get lower prepayments, you'll see an even more negative treasury results? Or did you take some of it upfront or others that work in practice, actually? And then assuming you will be doing a much more substantial part of your mortgage production on the 10 year, could that soften a bit your tiering cost assumptions as the -- well, the asset duration will automatically come down a bit.

[Robert Swaak, executive]

Lars, go ahead.

[Lars Kramer, executive]

Yes. I mean none of these things are absolute. So it also depends a little bit as to where the market is at and where we maybe do some prepositioning in terms of steering. But generally, we do operate within some pretty tight sort of duration limits that we have to stay within. So it does tend to feed through quite quickly and immediately that we have to do the steering. So yes, there is -- if prepayments, for example, were to effectively not slow down as much as expected, then we could do some steering in terms of bringing it to a shorter duration, which is also, as you say, if things move to 10 years, that could be a benefit as well. .

[Operator]

We have no further questions, sir, please continue.

[Robert Swaak, executive]

Okay. Well, then if there's no further questions, this indeed does conclude the analyst call. As always, thank you for your questions, and look forward to speaking you speaking to you again. Bye-bye.

[Lars Kramer, executive]

Thank you.

[Operator]

This concludes the ABN AMRO quarter 1 2022 Analyst and Investor Call. Thank you for your attention. You may now disconnect your lines.