ABN Amro Bank NV

OTC:AAVMY

Earnings Call Analysis

Strong Start to the Year

The company kicked off the year with impressive financials, showing a net profit of EUR 674 million and a return on equity of 11.6%. Their business momentum continued, supported by growth in both the mortgage portfolio and corporate loan book. Net interest income was resilient, strengthened by the current interest rate environment. Fee income saw a notable rise of 6% from the previous year, fueled by all client units.

Committed to Sustainability

Sustainability remains a core part of the company's strategy. They have set climate targets for additional sectors, now covering 68% of their total loan portfolio. Their commitment to the Net-Zero Banking Alliance is evident in these efforts.

Mortgage Market Leadership

The company's initiatives in improving mortgage customer journeys have paid off, making them the market leader with a 19% share in new mortgage production. This was significantly aided by their strong position in the first-time buyer market, an important strategic segment.

Resilient Dutch Economy

The Dutch economy has shown resilience with low unemployment, a buoyant housing market, steady consumer spending, and an optimistic manufacturing sector. Economic growth in the Netherlands is expected to increase, driven by domestic demand and anticipated interest rate cuts in the latter half of the year.

Net Interest Income and Fee Income

The company remains confident in their guidance to achieve around EUR 6.3 billion in net interest income (NII) for 2024. This forecast is bolstered by expectations of improved treasury results in the second half of the year. Additionally, fee income for the first quarter increased by 6% year-over-year, supported by performance across all client units.

Cost Discipline

Maintaining cost discipline is a key focus. Despite some increases due to higher consultancy and marketing costs related to rebranding, the company forecasts total costs of around EUR 5.3 billion for 2024. Investments in data capabilities and regulatory programs are expected to drive these costs.

Solid Capital Position

The company's capital position remains strong with a Basel III CET1 capital ratio at 13.8% and a Basel IV ratio around 14%. They successfully issued EUR 750 million in AT1 instruments, addressing their AT1 shortfall. Risk-weighted assets (RWAs) increased by EUR 4 billion this quarter, mainly due to rising credit risk RWAs.

Optimistic Outlook

Looking ahead, the company is optimistic about economic growth and their ability to maintain their strong financial performance. They are focused on continuing to optimize their capital position while generating and returning surplus equity to shareholders.

Earnings Call Transcript 2024-Q1

[Operator]

[Audio Gap]

[Operator Instructions] I will now hand over the call to your host, Robert Swaak, to begin today's conference. Thank you.

[Robert Swaak, executive]

Thank you very much, and good morning, everyone. Welcome to our Q1 results, joined by Ferdinand Vaandrager, our CFO; and Caroline Oosterloo, our interim CRO. I'll update you on the main topics for the quarter. And as usual, we'll be happy to take the Q&A at the end.

So let me first take you through the highlights of Q1 on Slide 2. We had a very strong start to the year with a net profit of EUR 674 million and a return on equity of 11.6%. Business momentum remained good and both our mortgage portfolio as well as our corporate loan book grew. Net interest income is resilient as we still benefit from the current interest rate environment.

Compared to the same period last year, our fee income went up by 6%, driven by good performance of all client units. Our credit quality remains solid, and we saw limited impairments. We maintained a strong capital position with Basel III CET1 ratio of 13.8% and a Basel IV ratio of around 14%. We continue to focus on the optimization of our capital position, pleased we finalized our third share buyback in the beginning of May.

So let's turn to Slide 3, where I'd like to say a few words on the progress of our strategy. Over the past 200 years, we've always been an enterprising bank with a wealth of expertise always putting our clients' interests first. Our new brand promise for every new beginning, which we launched in March, projects this history effectively into the future. With our brand promise, we aim to invoke the excitement of beginning, and we put our clients' mindset and their challenges first and promised to be ready with all our expertise in whatever way we can support them best. And to live up to this promise, we are focused on being a personal bank in the digital age with a clear license to grow.

And as you know, sustainability has always been at the heart of our strategy. We set climate targets for 2 more sectors, agriculture and inland shipping. That means that 68% of our total loan portfolio is now covered, and we're working hard to set targets for the additional sectors, all of which is in line with our NZBA commitment.

The ongoing improvements we've made in the mortgage customer journey has contributed to a market share in new production of 19% in Q1. This made us market leader, held by a strong position in the first-time buyer market, an important strategic client group for us. We aim to support our clients at all important financial steps in their life, and buying your first house, for example, is an important milestone for all our clients and supporting them in this decision is often the beginning of a strong and trusted relationship. All that we're doing in a Dutch economy, which we talk about on Slide 4.

Overall, the Dutch economy does remain resilient. Unemployment is still low. The housing market is increasingly buoyant. Consumer spending is holding up, and manufacturers are getting more optimistic. The Dutch manufacturing industry even seems to recover faster than in adjacent countries.

Looking ahead, our economic bureau expects that economic growth will slowly increase driven by domestic demand. And with interest rates expected to drop in the second half of the year, making financing of investments easier, we expect growth to pick up further. House prices have started to rise again, and we're almost back to the record level of July 2022. Our economic bureaus revised their house price forecast upwards from 4% to 6% for this year. The prospect of interest rate cuts and higher wages has helped sentiments among house buyers.

The number of transactions is also on the rise. It is expected to remain subdued for a while. Supply does remain limited also due to lagging new construction.

Then turning to our first quarter performance on Slide 5. As I mentioned earlier, our market share of new production in the Dutch mortgage market rose to 19%, leading to EUR 800 million growth in the mortgage portfolio. That indeed is helping business momentum also for our corporate loans in Northwest Europe. That continued, and we welcome new clients in our focus segments, new energies, digital and mobility.

The downward trend in consumer lending continued, driven by runoff of several products and lower client demand from stricter lending criteria. Looking at our client deposits, we saw a decrease this quarter, mostly in current accounts. This drop was mainly in January as some of our retail and private banking clients face payment requirements for taxes, dividend payouts and invoices, for example, at the beginning of the year.

We also saw some further migration to term deposits. The outflow of client money to other banks remains very limited. Our total deposits actually went up due to an increase in professional deposits. This mainly reflects movements in Clearing, as clients brought down their position towards year-end and reverse this in Q1.

Turning to Slide 6 on our NII. We saw that NII improved in Q1. Our treasury result benefited from the current interest rate environment. Margins on our assets, as well as deposits, declined somewhat this quarter. The latter was driven by migration from current accounts into professional on time deposits.

At current interest rate levels, it does remain beneficial for clients to move cash into term deposits. Given the current interest rate environment, we are confident to reach our guidance of around $6.3 billion net NII for 2024. Now this is based on an expectation that our treasury results will improve in the second half of the year, and this will be partly offset by gradual normalization of deposit margins and some limited asset margin pressure.

Turning to fee income on Slide 7. Again, a good start of the year for fees, with an increase of 6% compared to the same period last year. This increase was driven by all client units. Retail banking fees increased due to higher payment volumes and the increased pricing of payment packages as of the start of the year. Fees as Wealth Management benefited from the continuation of the good performance of equity markets leading to higher assets under management.

In this quarter, we also saw an increase in net new assets driven by around EUR 800 million inflow in securities.

In Corporate Banking, we had a successful first quarter in capital markets, which led to high fee income. And looking at other income, which is volatile by nature, we saw an increase compared to Q4 last year. We booked higher asset and liability management results in treasury, and XVA results were higher also.

Turning to Slide 8 on costs. Now we will continue to remain focused on cost discipline. And as you can see, our underlying costs, so excluding regulatory levies and incidentals, came down from the elevated Q4 cost level. Now in addition to the cost discipline, this was partly related to high consultancy and marketing costs in Q4, latter related to the launch of our new brand promise.

As we mentioned last quarter, we do expect cost to increase during 2024 from additional investments. We continue to upscale our resources, especially for data capabilities and regulatory programs. Also, our CLA is up for renewal at the end of June. So given these developments, we expect a full year 2024 cost lend at around $5.3 billion.

Turning to Slide 9 on impairments. Credit quality remained solid with limited impairments of EUR 3 million. inflow in stage 3 was mainly in our corporate loan book and somewhat higher than we've seen in previous quarters. This was not in one specific sector and was largely offset by Stage 1 and 2 releases from improved macroeconomic scenarios.

Additionally, we had a small release of management overlays related to products and runoff. We still have prudent management overlays in place currently around EUR 250 million. As we mentioned in Q4 last year, we expect a gradual normalization of impairments this year. So the full year cost of risk is expected to be at the lower end of our through-the-cycle cost of risk of 15 to 20 basis points. Now this actually does underline the good quality of our loan book and the derisking that we've done over the past years.

So then turning to capital. Our Basel III CET1 capital ratio stands at 13.8%, and we continue to be well capitalized with 320 basis points headroom above our NDA. Fees set in February, we have largely addressed our AT1 shortfall through a successful issuance of EUR 750 million AT1 instrument.

Moving to RWAs. RWAs increased by $4 billion in the quarter, mainly reflecting a rise in credit risk RWAs and to a lesser extent, higher operational RWAs. Now the increase in the credit risk RWA can be largely explained by 2 drivers. Firstly, we took $1.7 billion model-related add-ons as part of an ongoing effort to simplify our model landscape. And secondly, we saw a reversal of the year-end balance sheet reduction of clients and clearing leading to a seasonal business growth in Q1. Or CET1 capital remained stable despite our strong first quarter profit, as it was impacted by approximately $300 million of capital deductions.

Looking forward, we see upside as we progress on our data capabilities and downside can still come from further model-related add-ons. Our Basel IV CET1 ratio declining to one, more or less in line with Basel III and is now around 14%. We still expect that the implementation of Basel IV will have a favorable effect on our CET1 ratio.

So let me wrap up. We had a strong start of the year with an ROE of 11.6%. We were a market leader in mortgages and also saw growth in our corporate loan book. Both our NII and fee income were strong this quarter, and we remain committed to cost discipline. A solid risk profile in the resilient growth economy have led to limited impairments in Q1, and we continue to focus on the optimization of our capital position and are fully committed to generating and returning surplus equity to shareholders in combination with targeted growth.

So with that, I would like to ask the operator to open the call for questions. Operator, if you could open the call?

[Operator]

[Operator Instructions] We will take the first question from Giulia Miotto to from Morgan Stanley.

[Giulia Miotto, analyst]

I have 2 questions from me. The first one on capital. Would you have more visibility now versus what you had in Q4 to sort of guide us to when the end of this model updates can be. So, what sort of order of magnitude do you still have coming? And how can these model updates also impact Basel IV ratio so much? Because I thought part of this process was to prepare ABN to Basel IV and sort of front loading, but they seem to also impact Basel IV. So this is my first question on capital.

And then secondly, on the NII guidance, $6.3 billion, despite the better curve versus Q4? And is this conservative? Or is this because maybe, I don't know, deposit migration is worse than what you were expecting? Or is there any sort of negative compensating the better curve versus the previous time you gave the guidance?

[Robert Swaak, executive]

Thank you, Giulia. Let's let Ferdinand take NII and Caroline comment on capital? Go ahead, Caroline.

[Caroline Oosterloo, executive]

Yes. So thank you for the question and an understandable question. So I think there's 2 elements to the CET1 ratio, of course, the capital side and the RWA side, let me for now focus on the latter. So we are continuing, as also announced before, to simplify our model landscape and to review our models. And that will be continuing.

There are upsides and downsides today. So there are upsides when we have improved our model landscape -- sorry, our data landscape. And we have downside if we have to take add-ons for reviews of our model landscape.

We have anticipated by moving certain portfolios to less sophisticated approaches, indeed for Basel IV, and some of the add-ons we have taken will come through to Basel IV. Others will not the will be absorbed by the floors in Basel IV.

[Ferdinand Vaandrager, executive]

Yes. And then Giulia, then coming back to your question on NII, We're confident with the guidance we provided at Q4, and that was given at the then current interest rate outlook at the start of February. If you look at the underlying trends for this quarter, treasury results quarter-on-quarter net up. So there you still see really the benefit from higher interest rates and also less steering costs, specifically for our markets portfolio.

Deposit income was slightly down. But as Robert said already in his opening remarks, the outflow we've seen in current accounts were mainly seasonal Q1 related. I should normally see payments at year-end tax payments and also dividends and distributions.

And then lastly, the asset side of the balance sheet, we are becoming definitely a bit more optimistic on the back of the economic outlook. So March's market is stronger, and our market share was 19%, so market lever in new production.

And also on the corporate side, you see a reasonably well-filled pipeline. The only thing still on the asset side is the consumer loans, where we still have some portfolios in rundown.

So to conclude here, and we're confident with the outlook we provided, and let's see how the year develops before potentially updating our guidance here.

[Operator]

We will take the next question from line Sam Moran-Smyth from Barclays.

[Samuel Moran-Smyth, analyst]

Two questions. Unfortunately, on the same topics as Julie -- so firstly, on the RWA developments intra-quarter, I understand that $1.4 billion of that is due to the seasonal Q1 rebound of the clearing business. So am I correct that we should assume in Q4 this year, the majority of that would reverse as you get the other side of the seasonal impact, and that your capital return announcements with Q4 results will be based on that Q4 CET1 ratio?

And then secondly, on the NII, you've noted that you are the market leader for new production this quarter. Should we read into that, that your pricing has been more competitive? And then perhaps more broadly, could you expand a bit more on your outlook for lending margins going forward?

[Robert Swaak, executive]

Yes, thanks for the question. I think we'll give a short answer on your first question, you should expect to see that reverse. And when we determine our share buybacks, we will then absolutely take the CET1 ratios that are relevant at that time to come to a decision on share buybacks.

I think on NII, we can confirm that we've been competitive in the pricing. But what we always do in terms of our pricing points determination is that we look at market share as an objective. But at the same time, what we don't want to do is sacrifice margins if it does not contribute to our overall position of our mortgage book.

So if you look at this as a very dynamic process in which we have indeed been extremely active, and this has now been ongoing for a number of quarters on what I would call very active pricing continuously. And that is -- and that actually proves not only the maturity of the -- of our ability to act in that market, but it also -- what it again proves is the knowledge we have of the client base, but also our knowledge of our intermediaries, and that allows us to price very actively and therefore, now get to a market share that we're extremely happy with.

[Ferdinand Vaandrager, executive]

Yes. And maybe, Sam, to add to that, if you look at the new production, we've been in the segments where a big part of the growth was -- that was in the 5-year segment and also the starters and that's why we price competitively. And if you look at the new production for us, $3.9 billion in the quarter, that was up 16% versus the previous quarter, and you still see limited redemptions.

In terms of pricing, you do start seeing that front book margins are actually at the same level or slightly higher than our overall back book in a more stabilized rate environment, but we do still see some outflow of higher-margin markets.

But the picture in terms of margin, yes, we price competitively, but of the margin is starting to bottom out.

[Operator]

We will take the next question from line Farquhar Murray from Autonomous.

[Farquhar Murray, analyst]

Just 2 questions, if I may. Just firstly, with regards to capital modeling, it was made very clear that we should expect a kind of mix of add-ons mitigations to come this year. 1Q has obviously been a bit more add-ons and deductions. So I just wondered if you could give a sense of what we might expect from here to the year-end just in terms of net outcome.

And then more broadly, just on the data mitigation exercises, are those on track versus where you thought we were be at the start of the year?

And then secondly, there was a report from the CBRE on Monday on potential repayments of overpaid rent, and potentially read those -- read across from that into the buy-to-let market. I just wondered if you could frame the size of your buy-to-let mortgage book. I think it's actually quite small, but also maybe the underwriting characteristics of that book, I kind of suspect the LTVs are probably lower than primary residences, but I just wouldn't mind checking.

[Robert Swaak, executive]

Thanks for the question, Caroline, the capital and then Ferdi on the buy-to-let.

[Caroline Oosterloo, executive]

Yes. So first, your question on the data mitigation, as these activities are on track, these days are on track. And then the capital deductions in RWA add-ons, maybe good to explain a little bit more about the capital deductions and how that works.

So we have seen regular capital deductions, mainly in NPE deductions and in IRB shortfall calculations, they're just due to normal movements in our portfolio. We see these each quarter. They can come up and they can come down. And then we have an impact that is related specifically to moving our large corporate portfolio to less sophisticated approach. And you can see that in the Pillar 3 report.

Then we move that portfolio, anticipating Basel IV to foundation. And I think that's a good example where the treatment under Basel IV is more positive as the prescribed LGT percentages are lower on the Basel IV than they are on the Basel III.

[Ferdinand Vaandrager, executive]

Yes. And Farquhar, you read newspapers well. The case is not new. This is on the back of a CBRE study against the sort of residential rent increases and potential over-payments there. So this is specifically for the houses in the private sector. As you say, mitigated here for us buy-to-let is a very small part. And as you mentioned already, the LTV there is significantly lower as well. And if you look at the very short supply in the market and rising house prices, I would say there is a limited risk.

But for us, and let's wait for the Supreme Court to see if we're actually going to see a ruling against these so-called arbitrary indexation over the past few years. But I expect limited impact of this for ABN, though.

[Operator]

We will take the next question from line Krii Vijayarajah from HSBC.

[Kirishanthan Vijayarajah, analyst]

Yes. A couple of questions from my side. So firstly, on the current accounts outflow because it sounds like they were already factored into your NII guidance for the full year, so all kind of anticipated there. But my question is more is what proportion of those outflows from current accounts have you been able to recapture on the AUM and fee side? And is there kind of a little bit more momentum to come through, particularly as interest rate cuts come through at the back end of this year?

And then just coming back to the treasury NII result. It sounds like that's remaining stronger for longer than you previously guided. I just wondered, is there any feel on what's the capital or RWAs associated with those treasury revenues? And does the capital consumption in treasury eventually come down as the NII contribution also comes down at some point next year. So just sort of line of sight on how the treasury balance sheet and capital might move going forward?

[Robert Swaak, executive]

Ferdi?

[Ferdinand Vaandrager, executive]

Yes, let's start with your first question, Kiri, that is related to the seasonal outflow. Overall, it's a normal trend you see, and it is not only the higher number of in-forces and tax payments or dividend distribution. It is also what you see for tax reasons that customers switch into savings out of investments and then switch back at the start of the year.

So clearly, underlying here, if you look at net new assets, we have been able to recap some of that outflow in current accounts into our net new assets in Wealth Management. If you look at the overall migration within our deposits, as signaled already at Q4, we really expect that to slow down. So you still saw some migration towards term deposits.

But with the current outlook in rates and for us also lowering our contribution on term deposits, I really think the mix will not really change from here.

Then your question on the outflow of treasury results, it's very difficult ahead because it's really an overall portfolio where all our hedging is done. And also you have in there, your steering cost, for example, for your mortgage portfolio. As we say here, you can sort of -- if you look at your specifically equity mismatch results, it's a sort of portfolio with a duration up until 3 to 4 years. So there, we really expect the current interest rate curve to be supportive throughout the rest of the year.

Any sort of potential capital RWA related to those revenues? Yes, that is clearly fairly limited, but that's not something we disclose here.

[Operator]

We will take the next question from line Johan Ekblom from UBS.

[Johan Ekblom, analyst]

Maybe first, just to come back to the capital. And I think Giulia asked if you could quantify kind of the headwinds from model changes. And I don't know if you did. So to just see if we can get any more steering on kind of how much further you expect?

And then maybe related to the capital, I mean, given where your average risk weights are today, there should be quite a lot of capital optimization and SRT is all the hype at the moment, and you haven't used then as far as I can see. Why not use significant risk transfer to at least bridge the gap between Basel III and Basel IV and not show this recurring pressure on your capital ratios? So that's the first question.

And then the second, just to pick up on what you said in the answer to the last question. If I look at the net new assets in Wealth Management, you had 10% net inflows in the quarter. So 40% annualized. How is that possible organically? Or is there anything funny going on there?

[Robert Swaak, executive]

Okay. I'll ask Ferdinand to take M&A. And on your -- your 2 questions on models, just let me maybe put a little more clarification on this. It is hard to quantify. What we've always said, we will continue to update, upgrade our models, simplify our model landscape. I think in previous calls, we indicated that the majority of RWAs taken are well behind us. And what you're seeing is actually the effect of us continuing to do so.

That goes hand-in-hand with what Caroline already talked about, the data remediation that we undertake as we review models. And that means that it's hard for us to guide on what -- and therefore, give you a quantification.

As we said, the majority of RWAs take-ons should be behind us given we've been at this for quite some time. But we've always said it could well be that we would expect some RWA growth to continue. The optimization that you talked about, RWA optimization, clearly, that's something that we will utilize as we steer the business going forward and as we have been doing. That means that we will continue to look for ways to optimize, but also to use the allocated RWAs in the business itself.

So that is a process that we have ongoing in the relevant parts of the bank, and we will continue to execute that portfolio allocation very diligently.

On M&A, Ferdi?

[Ferdinand Vaandrager, executive]

Yes. Yes, on M&A, if you look at the total assets, that can be volatile because it can be relate to short-term custody, for example, related to M&A transactions or other elements in there. So the 2 elements in there are, number one, clearly a group market performance. So you see a rise in total assets. And secondly, you will see quarter term volatility on the back of short-term custody accounts. Underlying, as said, net new assets, you saw some outflow in cash and inflow in securities. So we see that as a positive trend.

[Johan Ekblom, analyst]

Maybe just to follow up. I mean, the largest increase you've had in the last 5 years is $2.6 billion in Wealth Management and it's $19.7 million this quarter. So I mean this is not normal volatility, right?

[Ferdinand Vaandrager, executive]

Yes, it's 19 million. So this is specifically related to a very short-term costly money, Johan. So this is really a one-off. And for example, cash-to-finance and M&A transaction by wealth clients as an indication. So this can be volatile, but is mostl likely one-off and [indiscernible] next quarter.

[Johan Ekblom, analyst]

But we should assume there's a big negative next quarter then?

[Ferdinand Vaandrager, executive]

Yes, correct. Johan.

[Johan Ekblom, analyst]

Okay. And then just on the capital, I mean, maybe it's for you to take away and think about that. I mean when you say the majority is behind us, I mean, you had $55 billion or $53 billion of add-ons now. It'd be really helpful to get a sense of if the majority -- does that mean $10 billion is left? Or does it mean $40 billion is left, right? So if we can maybe try and get some better steer on not an exact number, but just the order of magnitude of headwinds that we face because it's clearly a key input into capital return and ROE assumptions, et cetera, which look increasingly stretched after today's results.

[Robert Swaak, executive]

I appreciate that question very much, Johan, and we'll see what we can do. What we are trying to do is be as clear as we can be given what we know today. But I think your question is fair. We'll take that into consideration. If there's any further clarification or a quantification, I think, is a better word to give.

[Operator]

We will take the next question from line Guillaume Tiberghien from BNP.

[Guillaume Tiberghien, analyst]

The first question, sorry about that. It's still again about the RWA add-on. The question, I guess, the way I would phrase it is to say we don't really understand how fast they go up, how far they will go up. And maybe when they start going backwards, is it going to be also a question of, we want to know how low they will go and how far they will go down all these add-ons because you seem to have suggested that there's going to be some mitigation. So I think trying to understand whether the 51 of Q4 is definitely the end gain that would be useful.

The second question is relating to the year-end buyback. Will it be driven by the Basel IV equity Tier 1 because ultimately, you will announce a buyback based on Q4 results, which is Basel III, but we will already be in a Basel IV world by the time you announce it.

And I guess, join to that question, do you expect to build capital from the level of Q1 level at 13.8%?

[Robert Swaak, executive]

Yes. Thank you very much for the question and very understandable. Let me take your second question, and I'll ask Caroline to comment on your first question.

So when we determine our share-based buyback, that will -- sorry, share buyback that will be based on our capital framework. Our capital framework, we've utilized is a threshold, which we've identified of 13.5% of Basel IV. So that will be our reference. So we will be using a Basel IV, as we have been very clear about what our capital framework actually is like.

You're absolutely right. This is a first quarter that we're now looking at. We've seen a very strong result coming into the quarter. And as you look at our guidance and also we have the outlook for the rest of the year, we continue to see ample opportunity for capital generation. That's something to not forget as we navigate a full year by the time we will determine share buybacks. So I would definitely confirm that we're looking at capital generation for the duration of the year.

And then maybe Caroline, you can give a bit more on RWA ups or downs.

[Caroline Oosterloo, executive]

So Robert, you said on the earlier question that we can't quantify exactly -- and you asked about, I think, the timing also of the upward and the downward movement, and that is actually not easy to predict. And when we do model reviews, it takes a long throughput time until we know the final impact, which we will then take immediately. And when we improve our data, we can only take it when we know the complete impact and it flows through our models. And so there is this timing issue that is difficult to predict.

What we have, what we do guide, and I think that gives some more clarity is that we expect that Basel IV CET1 ratio is favorable to the Basel III ratio.

[Guillaume Tiberghien, analyst]

So maybe if I can rephrase. Let's assume your add-ons go to $70 million just for the point of the exercise. And then they're going to start going down. Are we going to stop at $50 million? Or are we going to be surprised that maybe they end up only at $40 million, for example?

[Robert Swaak, executive]

As understandable of your questions, I think that's a very difficult question to answer. We need to have more visibility, as Caroline said, as we undertake these reviews. But I think it's important just to keep in the back of your mind that as we determine our capital framework and we determined our guidance over the course of the year.

As we discussed also in Q4, there is a view that we have as we develop our models. And there is a commitment on our side to share buybacks. We've talked about this before, and I think we've executed that also over the last couple of years. So we will take into consideration the question is, is there any more specifics that we can give on RWA movement.

At this point, just given exactly as Caroline said, I think as we also said in the previous quarter, it does take some time to actually get these models either validated or the analysis completed, it is very difficult to give you right now the, as I would call it, the up or down movement that you've requested. But we absolutely appreciate the question, and we'll see what we can do in terms of a bit more granular information on this. But you give more sight on the space.

[Operator]

We will take the next question from Tarik El Mejjad from BofA.

[Tarik El Mejjad, analyst]

Just a few questions from my side. The first one back on NII. So if you take the moving parts for NII, I mean I'm already struggling with the $6.3 billion. So on to clarify where the sweet factor is. And I think the treasury reserves is where you could miss or achieve the guidance. So can you give us comfort on why you think this is higher because the steering costs should go down, should go up because you expect volumes to go up. And then the rates will come down. So what makes you confident that this will remain high?

And can you confirm that my view that -- I mean, asset spreads still under pressure volumes. Yes, you argue volumes are going up. But actually, when you take the corporate mortgage and net of lower consumer is up 0.4% quarter-on-quarter. And then you have the replicate portfolio, the short part of it that actually will become a headwind. So can you just maybe, I mean, comfort us on the treasury results because that's the, obviously, lower quality part of the NII.

And then can I dare ask a question about 25? And what do you think could the evolution will be for 2025 because that's the most relevant, I guess, for everyone.

And then second question is on the SMEs legal case. There were some headlines a few weeks ago. If you can comment on that, perhaps what can be maximum size and timing for this? That would be very helpful. And that -- has there been any provisions for it? Would that be booked in costs or in provisions? And how that impacts your EUR 5.3 billion guidance for the full year? Thank you.

[Robert Swaak, executive]

I'll take your question on the SMEs and Ferdi, a bit more explanation on NII.

[Ferdinand Vaandrager, executive]

Yes, Tarik, if I look at your question on treasury results. So yes, if you look at the underlying NII run rate, NII need to go up to get to our guidance of 6.3 million. Clearly, we saw quarter-on-quarter a positive trend on the treasury results. But I also said to the previous question, the mismatch results is not a re-invest portfolio of swap contracts but it's all on and off balance interest rate. All in off-balance interest rate risk exposure, what we manage there.

But to give you a sort of direction, and we said that before as well, the remaining maturity is up to 4 years. So you will see a continued tailwind from treasury results throughout the year.

And yes, the steering costs have come down, but the steering costs are significantly elevated if you see a lot of prepayments because then the duration changes of your markets book. And we do see good new production, but that does not mean that the steering cost will need to go up.

Then replicating portfolio, yes? We said that last time as well. We expect it still to be a tailwind towards mid-year. but then aligned with the market, we expect the first rate cut in June, and it's our expectations, rates will go down to 2.75% at the end of the year. So then you will start seeing a shift from a tailwind into a slight headwind in the second half of the year.

And then also, asset spreads, yes, it is roughly flat, but I said earlier, [indiscernible] you really start seeing the margins bottoming out.

On the corporates, it's indeed wait and see. But with TLTRO out of the market, we do expect that towards the coming quarters, margin might start improving here. And yes, we still see the pressure of our consumer book -- but on our total balance sheet, it's less than $10 billion. So that effect is not significant of the rundown of portfolios we're doing there.

So if you add this all up together and if you look at the current curve, we are confident in the $6.3 billion for this year. But let's see how the year evolves before we start giving any sort of look-through of expectations for 2025, Tarik.

[Robert Swaak, executive]

Does that answer your questions, Tarik? And then we'll take the SME part.

[Tarik El Mejjad, analyst]

Yes. I mean look, it answers it's very -- given this detail is I think there's a sense that there's many moving parts that it's difficult to appreciate, especially treasury reserves from the outside, and that gives this lack of confidence, at least from my side, on the guidance, but thanks for the efforts of explaining it.

[Ferdinand Vaandrager, executive]

Yes. But Tarik, it's also what we said clearly in our guidance earlier was it's based on the current interest rate outlook. And if you compare that to February, it's an important driver. Economic outlook is an important driver. And then we also said in the guidance that we expect deposit migration to slow down. And I said earlier, I think the mix will not really shift from here. And then it's also the price tracking on our savings accounts and in our assumption is that that will not change. So with interest rates going down, it's implicitly an increase in the better. So I think that might be seen as conservative.

[Robert Swaak, executive]

Then maybe on the -- your question on the SME claim, we're very much aware of this claim. We received at least a writ of summons to start -- or to commence the collective action. What we actually continue to state is that we don't have any substantiation of any of the claims or damages claimed and that continues to be the case today.

It is apparent that there is an argument that's being used by the claim foundation that earlier Kifid rulings that actually relied on revolving consumer credits with variable interest should now be applied to small enterprises. We continue to state that the Kifid rulings was exactly for consumer credits, so cannot be one-for-one applied to smaller entities.

We've also said that we believe that what they're probably registering is a product we call in Dutch [Dutch Language], but this is a credit for smaller entities that we've actually stopped, that we're phasing out, and we can also state that if we've received any complaints, we've settled with the very client.

So at this point, there is no provision for the reasons that I've just indicated, and we'll just have to see how this further evolves.

[Tarik El Mejjad, analyst]

Okay. If I can just add a quick one on capital. The -- maybe for Caroline. So you said that the Basel IV went down in light of Basel III by 50 bps quarter-on-quarter, that means that your full year Basel IV CET1 was 14.5% because we tried all to figure out what was the around level, yes?

[Caroline Oosterloo, executive]

I fully get that you would like to know the exact decimal number--

[Tarik El Mejjad, analyst]

Important, no?

[Caroline Oosterloo, executive]

But, you can always -- and I understand that, but first making around more movement of the last 3 quarters, and we've given rounded numbers. And I would like to say that the decrease over the last 3 quarters, and we believe is closer to 1% than to 2%. I think that gives some better indication.

And on Basel IV uncertainties, although the regulation is now approved, still all the technical standards are actually not ready. So the final implementation, and we get these -- well, they come out now and they have impact on the actual calculation standards and data definitions. And until we have them, we just can't calculate very precisely and then it doesn't make sense to give you any precise number.

[Operator]

We will take the next question from line of Raul Sinha from JPMorgan.

[Raul Sinha, analyst]

I think on the model add-ons, we've asked enough times about all the details. So I'll spare you another question on that. But I just wanted to come back to the timing aspect of this. I guess in the context of what's going on, we understand your prudence in moving to an annual approach and buybacks last quarter. But my question is to -- just to understand whether you think that these data quality issues will be largely resolved by the time you get to the year-end process where you kind of, I guess, need some clarity around your capital position to be able to decide the capital surplus and distribution. So that's the first question.

And I guess the second question, Ferdi, just coming back to your assumption or your confidence around the deposit migration is over and that there will not be further mix changes from here. I was wondering if you could give us some sense of what the current deposit data is, as you see it, so that we can try to estimate deposit tracking and when rates go down, what happens to the data.

[Robert Swaak, executive]

So thanks for your questions. So look, on data quality, we -- as we identify issues on data quality, we work hard to resolve them. We talked about some examples in the past, are we completely finished? That's very difficult to state because we have ongoing reviews. And we do want to simplify. This is something that we've been at for quite some time, and we'd like to do this right. So you can rest assure that as we identify data quality issues that we then work to resolve them as fast as we can. That is the reason why we're also being transparent about what we are actually doing in simplifying our model landscape.

But to tell you, we're going to be completely done by the end of the year, that's almost trying to predict what we're going to be finding over the next couple of periods.

And whilst we're executing this is, exactly as Caroline said, to pace and to timing, and we resolve the issues as quickly as we get, I cannot say that we can completely resolve anything, but we are working as fast as we can to resolve them. And we have line of sight on what it takes to get it done.

On deposit migration, Ferdi?

[Ferdinand Vaandrager, executive]

Yes, role on migration and beta. If you would look at the simple sort of calculation safeties component of ECB deposit rates had a saving components 1.5%, with a 4% ECB deposit rate. So the deposit that is 35% to 40%.

If you look at European context, the saving rates are actually at a higher level than many of the surrounding countries. In our assumption, the 1.5% stays the same. So with the ECB deposit rate coming down, most likely as of next month, that implicitly means that in our forecast, there is an increase in the deposit data in our assumptions for the rest of the year. If the tracking is down here as well, every 10 basis points of client rate has an impact of $100 million if you look at the total savings base we have.

Then on migration, as specifically there, if you look at the switch, I think most clients have optimized their saving portfolios by now. And it's also in the second half of the first quarter, we started lowering our remuneration on term deposits.

So also with the current interest rate ISO, I think it is unlikely we're going to see any significant further migration of our deposit base. Hence, my confidence that it will stay around the same levels.

[Operator]

[Operator Instructions] We will take the next question from Benoit Patrarque from Kepler Cheuvreaux.

[Benoit Petrarque, analyst]

Yes. So the question is on share buyback. And actually, your convergence towards the 13.5% CET1 ratio by '26. How fast you want to converge because when I look at your Basel IV, it's 14%, 14.5% range. Consensus expects $750 million share buyback next year. So that will put the pro forma today at a range of 13.5%, 14% already.

Now I appreciate you will be generating capital in the next 3 quarters, but you are also talking about risk-weighted assets, add-ons. I mean we're also talking on the market about potential provisioning on the SME revolving credit. So will that be fine for you to be actually relatively close to the 13.5% Basel IV by end of '24? That's something you don't want to see at this stage, and you are willing to push towards more '26? So that's the first question.

Number two will be on the treasury result on the NII results. So you sat on duration of the equity, you have a 5-year -- 4- to 5-year duration. How much is kind of short term within that bucket? I'm asking because I'd like to get a bit of feeling about how sensitive the treasury and NII result will be to ECB cuts. I understand that 25 bps might not be significant -- 25 bps may not be significant, a significant impact. But maybe in '25, that could be a bit more negative. So just checking that.

Third one is on the cost guidance. I know you're in discussion now with unions on this new CLA. But could you remind us how much you have in terms of salary increase in the new CLA in your cost guidance for the next 3 years.

And just on -- finally, on the net new money, it will be useful to get a kind of clean net new money, excluding all the noise we've seen. Also money market, so kind of quality net new money kind of type of figure, which will make sense given your -- we are talking about wealth management and that should be quite clean at the end.

[Robert Swaak, executive]

Thank you, Benoit. Let me take the share buyback and the cost guidance, and maybe Ferdi take a comment on treasury and net new money.

So on your question on share buybacks, look, we've given you where we now currently stand and what our thinking is in terms of the RWAs as much as we can. Yes, indeed, we still have a full year or 3 quarters to go in terms of capital generation, and we've targeted 13.5% in 2026 as a framework. All that will go into determining a magnitude or a magnum of a share buyback towards the end of the year.

But I would also continue to emphasize that as we generate capital, as we work to resolve issues as we've identified them, that all will go into the factoring of quantums. So I think it's really, a, it's early in the year; b, we will give all the considerations that have gone into quantum of share buybacks at the time we communicate about the share buyback.

But we have a 13.5% target for '26. That capital framework in and of itself is not changing.

On treasury, Ferdinand?

[Ferdinand Vaandrager, executive]

Yes, Benoit, it's difficult to start providing indications how much is short-term first 2, 3, 4 years on the treasury result. We have been always quite open on our replicating portfolio.

But here, it's also the more flexibility you have. It's not 4 to 5 years. I've said before, it's maximum 4 years, but also what we've seen in the previous quarter with an inverse curve where you have a pickup on the shorter term, then we will steer towards that.

But overall, it's just the overall resulting exposure and what we manage within the treasury buckets. And it includes also the effects of past interest rate steering. So we will not provide any sort of more underlying sort of indicators of that.

Then looking at net new money, it's a fair argument, Benoit, and we will look into that to make it very clear, what is the net new assets. I think we disclosed that. But also if you have some shorter-term volatility, specifically in -- related to what we mentioned earlier as our short-term custody that we make that more visible, so you can see the underlying climate.

[Robert Swaak, executive]

And Benoit, then in your question on cost guidance in relation to the CLA, as we said, the CLA is now do end done so negotiations currently are ongoing. But when we talked about a 60% cost income in 2026, so to give you a little bit of feel how we dealt with inflation generally as we began to determine an absolute cost base for '24, but also a 60% cost income ratio, we took an average of around 3% inflation. So that's on average for the calculations that we did to come into a 60% cost income ratio. So that's an assumption.

Clearly, to go into any further details, and let's let the negotiations take place, and we'll see in due course with that reveals.

[Operator]

We will take the next question from Patrick Nelson from Goldman Sachs.

[Chris Hallam, analyst]

It's Chris Hallam from Goldman Sachs. So I just have 2 housekeeping questions left. So first, can I just check in terms of OpEx, what your latest view on regulatory levies is for this year? With Q4, you said you'd expect that to be around $200 million this year, but given Q1 was lower, is that still the right figure for 2024?

And then second, on the capital deductions, are there any more sizable portfolios moving to a less sophisticated approach either this year or early next year?

[Robert Swaak, executive]

Okay. Thank you for the question. Yes. So on the -- on reg levies, we do expect full year '23 to be around $335 million. Yes. And sorry, full year '24 -- sorry. Full year '23 was around $335 million. Full year '24 will come in significantly lower. Our estimates run about $175 million.

[Ferdinand Vaandrager, executive]

Yes. And that is specifically, Chris, here, what changes. On one hand, they're going to see in 2024, an increase in the Dutch banking tax for us that will go up by $30 million. And secondly, last year in Q1, we had $200 million in single resolution fund contribution and the target size of the fund has been reached. So that has gone to 0.

So overall, on the regulatory levies for this year, we expect actually a bit lower than the $200 million we indicated earlier because we have not expected SOF to go to 0.

[Chris Hallam, analyst]

And then on capital?

[Caroline Oosterloo, executive]

Based on your question of moving any other portfolios to the sophisticated approaches, we don't expect any of those to be happening this year. But for '25, as we announced before, we do expect some smaller portfolios to still move to the sophisticated approaches. And really depending on the composition of those portfolios at the time we move them, we'll determine any capital reduction at that point in time.

[Operator]

We will take the next question from the line Farquahar Murray from Autonomous.

[Farquhar Murray, analyst]

Apologies as a very quick follow-up. I know you've not updated the guidance commentary, and it's quite early in the year arguably. But on costs, you have come in must be better than consensus expected. I just wondered as a management team, do you think costs were coming in a bit better than expected, you may have thought at the start of the year? And maybe also obviously probably within the rounding of the guidance. I just wondered what directional sense of how you felt the quarter came through?

[Robert Swaak, executive]

Yes. That's a very fair question. Keep in mind that the quarter came in when you referenced, for example, Q4, Q4 was slightly elevated with particular costs relating to brands and brand release. But certainly, we continue to exercise good cost discipline. And at the same time, we want to continue to invest in the capabilities that we need for the bank as we continue to execute our strategy.

And that means that we will continue to invest in areas of data requirements, IT requirements, regulatory requirements. So those levels of investments will continue. So that's why we are still sticking to a $5.3 billion guidance for this year.

We will continue, as I said, to exercise tight discipline. We know exactly where we want to invest. And this goes also hand-in-hand with the fact that we're looking at a cost income ratio in 2026, where we really want to make sure that as we invest, we allow the bank to grow. And I think those are -- that's the reason why we're creating the room for the investments whilst we exercise strict discipline on cost control.

[Farquhar Murray, analyst]

Okay. Just for the question-- just as a follow-on, did you think you had a bit more room for investment in 1Q than you expected there?

[Robert Swaak, executive]

Well, I thought we're coming in lower than expected by default, and we'll carry that incident into next quarters if that's necessary. So bottom line, the $5.3 billion will stand, and we'll continue to exercise exactly the discipline that you've seen now in this quarter.

[Operator]

It appears no further questions at this time. I'll hand it back over to the host for closing remarks.

[Robert Swaak, executive]

Okay. Thank you very much. And thank you all, as always, for your questions. We've absolutely taken your questions on capital to heart, and we'll see if there's anything we can do to further clarify. And I look forward to talking to many of you over the next few weeks. Thank you. Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect.