ABN Amro Bank NV

OTC:AAVMY

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to this ABN AMRO Second Quarter 2020 Analyst and Investor Call. [Operator Instructions] Following the presentation, we will conduct the question-and-answer session. I would now like to hand the call over to Mr. Robert Swaak, CEO of ABN AMRO. Please go ahead, sir.

[Robert Swaak, CEO & Chairman of Management Board]

Thank you very much, and good morning, everyone. Thanks for joining our investors and analyst call. I'm joined by Clifford Abrahams, our CFO; and Tanja Cuppen, our CRO. I'm looking forward to sharing my views with you on our progress on strategy and the outcome of the CIB review, as I promised to you earlier. Clifford will go through the details of the first quarter results and run you through -- sorry, made a mistake there. He will run you, that's on me, run you through the details of the second quarter results and run you through capital. Tanja will update you on developments in our loan portfolio, including Q2 impairments, and our latest guidance on full year 2020 cost of risk. After this, I will talk you through the outcome of the CIB review in detail. So let's turn to the highlights on Slide 2. As I said today, we announced the outcome of the CIB review. We will share the outcome of the strategy review in November. Q2 continue to be marked by COVID-19, and we made a modest loss of EUR 5 million, so around breakeven. Underlying operational performance was resilient, with costs on track, observing uplift from AML costs, and NII was flattish Q-on-Q. We expect NII to remain around EUR 1.5 billion this year, with further possible upside from TLTRO benefits over time. Q2 impairments of EUR 703 million are down from Q1, and we expect impairments in the second half of the year again to be lower. Our exposure to sectors most vulnerable to COVID-19 is limited, and where we are exposed, for example, in oil and gas, we've booked provisions and are winding down positions. Our capital is robust, and we've already absorbed the impact from DoD in Q2. With a well-diverse portfolio and a robust capital position, I am confident about our future, and we continue to support our clients through COVID-19.I'll now update you on progress on priorities on Slide 3. So as the new CEO of ABN AMRO last quarter, I set clear priorities: lead the bank through COVID-19; the strategy review, which includes the CIB review; our license to operate; and culture. We are making progress across all priorities. I know some of you will be wanting to hear about the strategy. Now rest assured, we are working on it. We want to take the time necessary to get it right and also reflect on how the world may be changing post COVID-19. Today, I can share with you the principles, which guide us in our work on our strategy. The bank has strong fundamentals. ABN AMRO is a well-recognized player in Dutch society, with a strong brand and an attractive market positions. To build on this, we want to focus on serving clients in segments where we can achieve scale. So we will focus on the Netherlands and Northwest Europe, where we have long-trusted client relationships. In the past few months, I have spoken to many clients. The client appreciation of our services in these challenging times support me in our ambition to be the best Dutch bank. And to achieve this, I recognize change is indeed necessary. Impairments are high again in Q2, mainly due to COVID-19, but also because of another exceptional client file, which is disappointing. We are overexposed to global sectors, and we've had more than our fair share of exceptional client files. While we know impairments are inevitable in the current environment, I am determined that CIB and, consequently, the bank returns to moderate risk profile. It was clear that the CIB review, which was initiated in February before I became CEO, was my first priority. By addressing the profitability profile of CIB, we can move on to achieving focus and scale in chosen client segments for the whole bank. Capital released from CIB over time will be used to invest in growth for the group as a whole, provided we can do so profitably. We are committed to resuming dividends and returning excess capital over time, when conditions allow. In November, we'll share the outcome of the CIB review, also addressing operational efficiency, capital and targets. On Slide 4, I'll give some more detail on the impact of COVID-19 in the Netherlands. So the pandemic continues to impact all of our lives all around the world, and our focus remains on the well-being of our clients and colleagues. In the Netherlands, the intelligent or soft lockdown measures have been eased gradually as of May 11, and we do see a clear recovery of economic activity. Life in the Netherlands in the past few months was more normal than in many other countries, as is demonstrated by the pickup on consumer expenditure. The number of COVID-19 cases in the Netherlands is low, although increasing just recently. The authorities remain vigilant and act appropriately. The Dutch housing market, so far, has remained robust as the shortage of houses, combined with low interest rates, led to continued market growth and a further rise in house prices in the last quarter. So now let me turn to the Dutch economy on Slide 5. As you can see in the slide, the Dutch economy is less severely impacted by COVID-19 than the Eurozone, in effect, benefiting from the relatively short and softer lockdown measures that I mentioned earlier. Clearly, there are uncertainties ahead. Nonetheless, the fundamentals of the Dutch economy are strong, and as we explained last quarter, the Dutch government is undertaking targeted actions to support the economy. The outlook is a bit worse than we assumed at Q1. In line with the views of the DNB and ECB, we now expect GDP in the Netherlands to decline by 2.6% over the 2-year period, 2020 and 2021. This is better than the 3.7% decline we expect for the Eurozone. So let me comment on how our business are performing right now on Slide 6. I'm pleased to see that our businesses generally are resilient through COVID-19. Retail Banking, our biggest business, continues to perform well, benefiting from our strong digital offering. Less than 40,000 retail clients were granted a payment holiday, of which, only some 20% in mortgages. Though fees in the Private Bank were impacted by lower equity markets, the business is resilient. New client take-on in Private Banking was high, with some 2,300 new clients in the past 6 months. Video banking is now widely adopted in all countries, strongly accelerated by COVID-19. In the Commercial Bank, most clients are still doing relatively well. And the effect of COVID-19, so far, is contained to specific subsectors, for example, travel and leisure. Credit demand is currently lower due to the payment holidays, the government support measures and the postponements of investments. The uptake of government-guaranteed loans in the Netherlands is still limited, also because of the payment holidays provided by banks. We are indeed more cautious into Q4 when the payment holidays end and the impact on the economy becomes clear. In CIB, impairments were again high. This underlines the need for the CIB review. More on that later. So our businesses are resilient, and we are keeping in close contact with our clients to support them in these tough times. So let me just turn it over to Clifford to take you through our second quarter results in detail.

[Clifford J. Abrahams, Vice]

Thank you, Robert. Turning to Slide 8, I am pleased that our operating result was good this quarter. The effects of COVID-19 led to a net result of around breakeven as impairments remained high. Interest income has held up well, while fees are lower, reflecting lower credit card usage and asset management fees. Expenses continue to trend down, thanks to our cost efforts, successfully offsetting the increase in AML costs. Tanja will run you through impairments and asset quality. Before I move on, let me first explain the rather high tax line. Our normal corporate tax rate level for ABN AMRO is slightly above Dutch corporate tax rates. However, this quarter, the net result comprises a decent profit in the Netherlands and a loss in our businesses outside of Europe. In the Netherlands, we accrue tax expense on profit here. But outside Europe, we cannot recognize in full deferred tax assets, given the outlook, so an overall tax expense this quarter of EUR 88 million. I will guide you through the individual line items on the next slide. But first, our client lending on Slide 9. You can see here the overall loan book was flat to down. We are working with our clients in government guarantee schemes to ensure needed support for our clients in tough times. At the same time, we remain focused on our margins and are cautious in our lending in the current environment. Our mortgage market share was 15% this quarter, with production higher than last year but not sufficient to offset prepayments. So the mortgage book decreased slightly. As a bank, we are strong in mortgage maturities of up to 20 years, but we are also seeing decent volumes in our originate-to-distribute 30-year mortgage proposition. In CIB, we saw a reversal of the drawdowns of Q1. Together with our derisking and some FX impact, the CIB book is EUR 3.8 billion lower than last quarter. In the Commercial Bank, credit demand was muted. We expect a modest increase in the second half of the year when the support measures phase out. For the rest of the year, we expect a further, albeit modest, decline of the total loan book. Now turning to NII on Slide 10. NII remained resilient during the quarter as we are mitigating the impact of negative interest rates by charging clients with deposits over EUR 2.5 million since the beginning of April. This was partly offset by some outflow of client deposits as clients spread their savings among banks. In addition, we will wind down all savings activities of Moneyou, which will lower deposits further and have a positive effect on NII as from Q4. So altogether, our guidance for NII for the rest of the year is around EUR 1.5 billion per quarter, which is in line with the previous 2 quarters. Volumes will be lower than we had expected as our clients need less liquidity and support. And also, we have been careful in extending credit in the current situation, and we expect a decline in the CIB due to derisking. The benefit we could get from TLTRO is not yet included and, if so, potential upside to the guidance I've just given. Turning now to fees and other income on Slide 11. I am pleased with fees, which remained resilient at EUR 374 million for the quarter, in a quarter which has been marked still by the lockdown. Compared to the last quarter, clearing fees normalized, while ICS, we saw the effect of the lockdown in reduced transactions, particularly in the early part of the quarter. And at the end of the quarter, in June and subsequently, credit card usage has been increasing, although not yet back to normal levels. Asset management fees were also down during Q2 as the client base was lower at the start of Q2, reducing the fee base. This will correct for Q3, reflecting improving equity market conditions. As of October, we will raise the rates for package fees in the Retail Bank as we have simplified the overall fee structure. So we -- altogether, we remain confident of our guidance of around EUR 400 million for fees per quarter long term, but perhaps a little lower in the next quarter or 2 as it will take time for credit card fees to return to normal levels. Other income this quarter was in line with our guidance of EUR 100 million per quarter. And going forward, we maintain this guidance as we expect to benefit from real estate disposals going forward. Now moving on to costs on Slide 12. We continue to be pleased with our cost development. While AML costs increased by around EUR 45 million this quarter, during the first half of the year, we have spent around EUR 170 million on AML, which is according to our plan. And currently, we have more than 3,000 FTEs committed to AML activities. As you know, AML costs are expected to peak this year and next. However, our existing cost programs delivered, and you see approximately EUR 50 million of incremental cost savings this quarter, lowering further both personnel costs and other expenses. We said we would achieve EUR 1.1 billion of cost savings at the end of 2020, and I'm pleased to say we're on track with the EUR 1 billion we have delivered so far, reflecting our cost discipline. So overall, we are comfortable with the guidance of EUR 5.1 billion of costs for 2020, albeit excluding the EUR 200 million provision that we expect to book for the CIB review in Q3. COVID-19 has opened up opportunities for accelerating digitalization and triggering a new way of working, which we will implement in our daily work going forward. We will see the benefit of further cost reduction in 2021 onwards, and we'll update you on this in November. I'll now hand over to Tanja to pick up impairments on Slide 13.

[Tanja J. A. M. Cuppen]

Thank you, Clifford. Impairments are high this quarter at EUR 703 million and mainly in CIB. COVID-19 and low oil prices continue to play a significant role and are further impacting the macro economic outlook. We split impairments in 3 buckets like we did last quarter. The first category reflects our regular impairment amounting to EUR 229 million. The second category is related to COVID-19 and oil price and totals around EUR 315 million for Q2. Incidentals are the third category, which includes a potential fraud case in Germany, unfortunately, the second significant fraud case we witnessed this year. On the right-hand side of the slide, you see that we made significant transfers from stage 1 to stage 2 in Q1. Despite further economic deteriorations, transfers to stage 2 were limited this quarter. We saw some outflow from stage 2 back to stage 1 for clients and sectors quickly recovering after the gradual lifting of the lockdown measures in June. Stage 3 additions in CIB, mainly related to oil and gas, offshore and TCF, following an individual review of all clients in these portfolios. For the other business line, we have seen limited inflow into stage 3 as the government measures in the Netherlands and the payment holidays have provided sufficient support, so far, to bridge the impacts of the lockdown. Most support basis will mature later in the year, and we do expect to see some impact. I now turn to Slide 14 to discuss the outlook of the cost of risk for 2020. In the first half of 2020, our impairments were, in total, EUR 1.8 billion. We have increased our outlook for impairments for the full year to EUR 3 billion, and this now includes the exceptional file in Germany and adverse factors, such as a more negative outlook on U.S. GDP and global trade. We expect lower impairments in the second half of the year. In 2021, we expect the impairments to be down from 2020, though still remain above the through-the-cycle cost of risk level of 25 to 30 basis points. Clearly, we are disappointed by the level of impairment, especially the exceptional client files. Risk is part of banking, and COVID-19 is unprecedented. Nonetheless, there were too many incidentals. We learned from these incidents and have taken action. These learnings are included in the CIB review, and Robert will give more details on this. In addition to the existing strict portfolio limits that we have in place for leveraged finance, commercial real estate and other sectors, we have tightened our single-exposure approach, including further differentiation based on credit rating, asset class and geography. Also, in clearing, we have taken significant derisking measures following a full review of the business and client base. I'm confident that we have taken appropriate action to reduce the risk profile of CIB and align with that of the bank as a whole. I now hand back to Clifford to discuss capital developments on Slide 15.

[Clifford J. Abrahams, Vice]

Thank you, Tanja. As you can see, our capital position remains robust at 17.3% CET1 ratio, the same as last quarter, while Basel IV remains around 14%. Please bear in mind this ratio excludes the 2019 full year dividend that we have reserved, and which equates to some 60 basis points in capital. RWA developments this quarter were flattish as we absorbed the impact of the definition of default, offset by lower business volumes. The benefit of the SME support factor, some EUR 1.5 billion of RWAs, will be included in the coming quarters. I still expect TRIM later this year and the add on for mortgages from the DNB next year, in addition to credit migration going forward. These additions will have limited impact on Basel IV and, together, further lowering the expected Basel IV RWA inflation from the current 20%, already down from our 35% estimate back at the end of 2017. The wind down of CIB activities, of which more details later, will have a further favorable effect on the Basel IV RWA inflation impact. Robert will update you on CIB in a few moments. We want to remain well capitalized coming out of the crisis as we expect regulatory easing to be temporary. We will give you an update on capital in November. I'll now hand back to Robert to discuss the outcome of the CIB review, starting on Slide 17.

[Robert Swaak, CEO & Chairman of Management Board]

Thank you, Clifford. So let's indeed move to the CIB review. First, I'll run you through our existing CIB business. And as you can see, CIB is predominantly lending-driven. CIB has shown good performance, historically, within Northwest Europe, where it serves corporate and financial clients. In the global sectors, it is clear we lack scale and product breadth and impairments have been consistently too high. Our Markets division is small and serves as a support function for client visits in CIB, but also Private and Commercial Banking as well as Treasury. Clearing is a global leader in derivatives clearing. So on Slide 18, I'll show the CIB's performance. As you can see, returns from CIB have been structurally below our 10% target. In 2018, measures were taken to improve profitability, mainly through reducing RWAs and costs. However, the ROE improvement did not materialize as RWAs increased further from TRIM add-ons. Overall, CIB consumes around 35% of group capital, making it the largest capital consumer across the bank. COVID-19 has led to very significant impairments within CIB, and the right profile and performance is clearly a group strategic issue. So the size of action is needed, and I'll run you through our decisions on Slide 19. I discussed our group strategy principles earlier. Applying these principles to CIB, a clear set of actions follow. We start with clients that we wish to serve. We want to focus on markets where we can play a leading role. This means focus on domestic clients and leverage this strong position in the Netherlands into Northwest Europe using Amsterdam as a hub. This will match the geographical footprint of Private Banking and Commercial Banking, and I expect this will benefit all 3 business units. We also carefully reviewed our Clearing business. It has historically been a very stable contributor, and I believe it will continue to be so following the changes we made to risk management here. To maintain the desired risk profile of the bank, CIB will reduce risk positions by largely reducing or completely exiting the global sectors, which have led to high impairments in the past. In addition, we will apply a tighter risk and concentration limits in the remaining business. And finally, we want tighter alignment with group strategy. I am indeed a strong believer in cooperation between business lines, this is key, also to achieve our sustainability ambition of becoming a partner of choice for clients dealing with, for instance, the energy transition. We have a clear ambition to reach a 10% ROE for CIB over time. It is also clear that this will take time, given COVID-19, TRIM and Basel IV. On the next slide, I'll discuss the implications for the individual businesses. We will exit all activities outside Europe, except for Clearing. For natural resources, transport and logistics, we will continue to serve our European clients, but will wind down activities further afield. We will exit TCF completely, both in Europe and globally. A noncore unit will be set up to manage the wind down of these activities. This means that focus will be on corporate and financial clients within Northwest Europe, and we call that CIB core. In addition to a leading position at home, we are focused -- we are a focused partner in Northwest Europe in a select number of sectors and transition teams. So focus will be on mid-market Corporate Banking clients, where we can offer product excellence across the liability spectrum of our clients' needs. Clearing will be the only business operating globally going forward. This is a significant change to CIB. Capital employed will be reduced by 1/3. And compared to the total group, CIB will decline from 35% of group RWAs to 25%. Clifford will now take you through the financials of CIB core and CIB noncore.

[Clifford J. Abrahams, Vice]

So turning to Slide 21. You can see here the charts which show the track record of CIB core for the last few years, which has been pretty good, albeit before 2020. In some years, private equity results were very strong, but we have also had significant costs from settling the SME derivatives files. So looking through these distorting items, you can see that for CIB core, performance has been good pre-COVID-19. Unfortunately, this year, we've had 2 exceptional files. And when these are excluded, the first half of 2020 impairments were around EUR 180 million, which is higher compared to recent years, reflecting COVID-19, but much lower than for the total of CIB as a whole. Our aim is for CIB core to operate through the cycle towards the group-wide cost of risk. Looking beyond the credit cycle, we know that credit risk-weighted assets will increase further due to TRIM, model changes and, ultimately, Basel IV. So we still have some work to do to structurally realize our ambition of returns of around 10% going forward. Now turning to CIB noncore on Slide 22. I will start with describing the wind down of the portfolio and then discuss the capital impact. So on the left-hand chart, you can see that CIB core contains -- noncore contains around EUR 18 billion of client loans. I'd like to emphasize that this is a lending portfolio and quite different from some other CIB restructurings you may be familiar with. You can see here on the left the maturity profile of this loan portfolio. Around half the portfolio matures by the end of 2021 and around 80% by the end of 2023. We need to be realistic, however, that in current market conditions, some clients will need to be refinanced. So we want to carefully wind down this portfolio in order to optimize value. We expect the cost of the wind down to be around EUR 300 million to be booked in Q3, and this consists of a staff-related cost provision of around EUR 200 million and a write-off of deferred tax assets of between EUR 80 million and EUR 120 million. Now moving on to capital. On the right hand, you can see that we currently hold around EUR 1.4 billion of loan reserves against this loan portfolio, mainly against defaulted loans. Regular personnel costs during the rundown will be covered by interest and fee income from the remaining portfolio. In the second half of this year, we expect around another EUR 400 million of impairments in relation to CIB noncore, and this is already included in the full year impairment guidance for the group of around EUR 3 billion. In addition, the bank holds around EUR 2.5 billion of capital against this loan portfolio, according to Basel IV risk weightings. So together, the loan reserves and EUR 2.5 billion of capital provide considerable buffer against future impairments beyond 2020 and any possible haircuts from asset sales, if any. I expect the wind down of CIB noncore, as a consequence, to be capital accretive overall. This release of capital will occur gradually over time and will flow into our overall group capital position. Within our capital management framework, we will carefully balance the different uses of capital, being maintaining our buffers, profitable growth as well as returns to shareholders. Now handing back to Robert for the highlights.

[Robert Swaak, CEO & Chairman of Management Board]

Thanks, Clifford. So going forward, CIB will focus on Northwest Europe. This leads to a clear and coherent geographical profile for the bank as a whole and more cross-business synergies. We had a close look at our Clearing business, and I am convinced it will continue to contribute profitably to the bank. We will wind down all other activities outside Europe, and we'll exit TCF completely. Now this is a significant decision for the bank, reducing the CIB lending book by around 45% and CIB capital usage around 1/3. Winding down noncore is expected to be capital accretive over time, as Clifford said. We aim for a through-the-cycle cost of risk towards group level for CIB core at an ROE of 10% over time. So summarizing our Q2 results on Slide 24. We have made progress on the 4 priorities I've set. The strategic direction in CIB is clear. 2020 will be marked by high impairments, making it a loss-making year. But the overall operational performance of the bank continues to be good. Winding down a significant part of CIB is capital accretive over time. The capital released will be used to invest and grow the core businesses, if we can do so profitably. At the same time, we are committed to resuming dividend payments and returning excess capital over time when conditions and the ECB allow. This brings us to the end of our presentation, and I'd like to ask the operator to open the call for questions.

[Operator]

[Operator Instructions] Our first question is from Mr. Farquhar Murray, Autonomous.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions for me to start with, really. Firstly, on the CIB restructuring. With regards to the cost savings from the CIB restructuring, should we expect those to come in faster than or slightly slower than the runoff in the loan book, obviously, maybe framing it against the 50% run off by the end of next year? And then, actually, within that, you've very helpfully identified EUR 300 million of cost base there, with EUR 200 million kind of from the network and EUR 100 million from support costs at the group level. Should I regard that EUR 100 million as potentially more at risk of having stranded costs as you wind down the franchise? And then second question, really, on the negative deposit rates. How is your thinking on those developed since your first announcements? Obviously, you've got a slightly better sense of the elasticity there. I just wondered whether you think there's more to go there. And potentially maybe a bit of an update on where you sit versus your competitors in the current environment.

[Robert Swaak, CEO & Chairman of Management Board]

Clifford, do you want to take the questions?

[Clifford J. Abrahams, Vice]

Yes. Happy to do that. Thank you, Farquhar. I think on costs, those savings, well, will follow income, so they'll lag somewhat. It's important that we maintain our service to our clients and our regulatory duties through the wind down. So while we expect the portfolio and related income to wind down relatively quickly, costs are likely to lag that. You highlighted the split in costs. I think I'd agree with the direction or travel of your comments. Around EUR 200 million of the EUR 300 million, I'd call network costs, and is really linked to servicing the portfolio that we're talking about. I think that EUR 100 million, we call it group support functions, it's a combination of, call it, overhead and semi-fixed sort of IT costs. You'd expect us to work hard at that as some of those costs are shared by other parts of the group. And you can expect our comments in relation to group overheads, in general, and that amount, in particular, in November when we update on operational efficiency more generally. In terms of negative rates, I think we always expected some elasticity and some spreading of deposits. I think it was a decent amount in these circumstances. The other banks have followed us, actually, in terms of passing on negative rates to this -- at the similar sort of level, structured somewhat differently. And we've highlighted in the pack the deposits in the range below EUR 2.5 million, which is really quite considerable still. And that is above the commitment that we've given for clients below EUR 100,000, that we won't pass on negative rates. So you could consider that amount above, which is in the order of EUR 50 billion, within possible scope. But as you'd expect, we're not in a position to give forward guidance in our pricing strategy.

[Operator]

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

[Raul Sinha, Analyst]

I've got a couple of questions, just staying on the noncore unit. Just looking at Slide 34, which I thought was quite interesting and useful to contextualize what you're trying to tell us. Just firstly, on the loans that are in the noncore unit, it looks like more than half are in the U.S. and Asia, and you have a coverage ratio of about 55% on stage 3. So I guess my question is, what is -- could you give us some detail on what type of assets relate to the books in the U.S. and Asia region, particularly? And what are the areas that you think disposals might be more likely, or where there might be a sort of market for some of these loans? And how that ties in with your thinking around disposal losses, if any, that we should be thinking about? And then the second question, just broadly on the strategic direction of the group. I hear you what you're saying on Clearing, but I'm still struggling to understand how Clearing ties in with the rest of ABN AMRO in terms of strategy. And what makes the loss so exceptional in Q1? What are the benefits that Clearing brings to the group? And the reason I ask that is if I go back and look at the last Investor Day, where you had presented an ROE of the various divisions, I think Clearing was right on the cusp of just above 10% ROE on your analysis at that time. So I'm just wondering -- some more color on the Clearing decision would be really helpful.

[Robert Swaak, CEO & Chairman of Management Board]

Yes. Thank you, Raul, for your questions. So let me take the Clearing questions, and I'll ask Clifford to answer your first question. So yes, on Clearing, I think what needs to be recognized here that Clearing has had a historical strong performance. So the ROEs have been good. Clearing also offers diversification to the group, and it is indeed very countercyclical. So these are -- and then, also, it's one of the top 3 global players in the world. So those are 3 or 4 important considerations as we looked at Clearing. The next step we actually took in Clearing is assess our situation around risk management as a result of our first quarter loss. That's resulted in an extensive review around risk management. We've done work on credit limits. We've significantly reduced -- derisked. And we've also indicated and have reviewed the overall risk management at Clearing, supported by external analysis as well. And that entire package has led us to conclude that Clearing is part of our core CIB, and then for the primary reasons that it provides diversification. It is anti-cyclical. And risk management, with the changes that we have made and some changes that will be made going forward, is at an acceptable level for the group as a whole.

[Clifford J. Abrahams, Vice]

Yes. I'll pick up the international portfolio. The U.S. portfolio comprises a big chunk of our oil and gas portfolio. We've talked about the quality of that and our provisioning around that. So that business is really centered around energy and oil and gas. And that portfolio is the longer maturities of the details we gave on the slide earlier. So it tends to extend out. In terms of Asia, that business is built around the Trade & Commodity Finance business and tends to be shorter maturity, and you can see that in the profile. We've guided to a plan, which shows a natural wind down of that portfolio. And I think it's pleasing to see that, that -- it's really a relatively short portfolio. We're not reliant on market disposals in order to release that capital over time. We think market conditions, though improved on a few months ago, are still not conducive to significant disposals. We'll clearly monitor that going forward. We have the capital to manage a really well-controlled wind down over time. And we're looking to optimize the capital release from noncore over time rather than look for accelerated exits. So that should give you a flavor of the profile of both the balance sheet and the P&L going forward.

[Raul Sinha, Analyst]

If I can just come back on the same point, really. If we assume that you lose all of the income in the noncore unit, and you've got some of the cost base still remaining on your 3-year-plus horizon, that would still mean a net downgrade to the preprovision operating profitability of the group. So just wondering if you've got any thoughts on that. Is there any way you can help us? Because obviously, the -- it's a 67% cost-to-income ratio business, it looks like.

[Clifford J. Abrahams, Vice]

The -- you're referring to core, that's the 67%.

[Raul Sinha, Analyst]

No, I mean, the noncore. So if I look at the CIB noncore preimpairment in the first half, obviously, you made a preimpairment profit. And if you assume that you lose all of the income, but you keep some of the costs, then obviously, that would mean...

[Clifford J. Abrahams, Vice]

Yes. I mean that's the nature of a noncore wind down, right? So our -- the way -- what we're focused on, the sort of primary metric for that business, aside from doing the right thing for our clients, is to, well, maximize the NPV, the capital release. I think you can see that we have -- we've already started that derisking. If you look this year, it's making a negative contribution. And in the past few years, it's a negligible contribution. So I'd say, another way of looking at it is that we are releasing capital representing 10% of the group's overall capital allocation that has made a negligible contribution to earnings in recent years and a negative one this year. So I think it makes sense, both from a capital and a P&L perspective. I think in the short term, yes, you can expect some drag from noncore. And the way we look at it is, in terms of overall capital release, if we can take opportunities to accelerate that, we will. And we'll obviously have regard for running costs. But we have the capital. We're not going to adopt a fire-sale approach here. We'll do it in a measured way and support the business in order to release that capital in an optimal fashion.

[Operator]

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

[Robin van den Broek, Research Analyst]

First one is on capital release. I mean you provided good detail on the gross capital release, the initial restructuring costs and the cost of risk that's taken into 2020. I was just wondering, if you look at comparable rundowns in the sector, I think the loss to RWA reduction run rate seems to be around 7.5%. Do you think that, that could apply to you as well? I think, Clifford, you also mentioned somewhere in your introductory remarks that this group might be less complex than some other CIB books out there. So that will be a helpful comment. And in addition to that, I mean, in the past, you've always been quite adamant in denying the existence of excess capital. But now it seems that the tone of voice is slowly changing, with a 14% starting point. And clearly, some of that capital release coming in addition to that buffer. So your comment there would be helpful. And second question is on the core CIB. I think in your slides, you're still aiming for a 10% return on equity. I'm presuming that's under Basel IV conditions. I think your total CIB inflation was around EUR 15 billion, of which EUR 5 billion, I think, is now cut off due to the rundown. So at least another EUR 10 billion for the core, which would make your ROCE for the banking drop from 9% to 6.5% growth. So I was just wondering, do you think that you can get that 6.5% NOI and Basel IV growth for the core CIB up to 10%? And what kind of measures do you think you need to put in place to get there?

[Robert Swaak, CEO & Chairman of Management Board]

Clifford, do you want to...

[Clifford J. Abrahams, Vice]

Yes. Yes.

[Robert Swaak, CEO & Chairman of Management Board]

Do you want to take it? And I'll take the question on excess capital.

[Clifford J. Abrahams, Vice]

Yes. So in terms of, call it, the cost of wind down, I think I'll make a few comments here. Obviously, we've had a look at other CIB restructurings over the years. I do believe ours is really quite different because it's loans, right? And many of those rules of thumb relate to markets-intensive businesses with long derivative books, for example, that are just tough to unwind. We're not underestimating the execution risk here, but it is a loan portfolio with limited markets-related positions with very short duration. We've taken fair provisions to date, and we don't think the wind down, in and of itself, will add to further impairments or material impairments. In the current environment, clearly, it's tough, but that's -- a decision to wind down does not lead to incrementally difficult economic scenarios. So I think that should give you a feel. I mean -- I think one of the other questions highlighted the strong coverage ratio that we've already got in relation to the stage 3 exposure. In terms of core ROE, yes, you can see that we've, until this year, delivered actually around 10% Basel III returns. Last year, 2019 already included an amount for TRIM, which is an acceleration of Basel IV. We do expect further Basel IV inflation. And for that business, it's around 1/3. So your figures are around right. I think our perspective is -- a couple of things. We will continue to work hard to improve the returns of our business in Europe. We think there's more -- a lot more that we can do in respect to that business. We also think that Basel IV will enable some selective repricing, and we think there's a better chance of our ability to do that in our core markets of the Netherlands and Northwest Europe. And that underpins the ambition that we've indicated, which is to get to our overall ambition of 10% for CIB.

[Robert Swaak, CEO & Chairman of Management Board]

And maybe I can take your question on the excess capital. And clearly, as we stated, we expect there to be -- the whole wind down to be capital accretive. Also, we should keep in mind, this will happen over time, so there will be a time lag as capital then becomes available. Certainly, what we're looking at in terms of our activities in Northwest Europe in the sectors we've described, we are looking to carefully invest where there's profitable growth. That, clearly, will be part of our considerations going forward as we do remain committed, as we indicated, to dividend payments and also to capital return when and if conditions allow.

[Robin van den Broek, Research Analyst]

Okay. And these investments, are they still concentrated on Private Banking activities in Northwestern Europe? Or has that scope broadened now?

[Robert Swaak, CEO & Chairman of Management Board]

Well, what we intend to do as we are now -- we've affected the decision or affecting the decision around CIB. We'll come back in November with an overall view as to how this decision affects the rest of the bank. But we are seeing -- one of the reasons why we've chosen the markets that we have chosen is because it brings CIB very much closer in line with the geographical footprint of the Private Bank and the Commercial Bank. But I would propose that we give you a much more overall picture in November.

[Operator]

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

[Benoit Petrarque, Head of Benelux Equity Research]

Yes. The first one is on the speed of the runoff. It seems that you guide for a relatively small figure for 2020, about 5%, and a more significant figure in 2021, around 50%. It's a good chance to be surprised positively on the 5%. It seems that you've done -- I mean, if I take 5% on EUR 17 billion, that's less than EUR 1 billion. I think you've already started the TCF rundown, probably in Q2. So where are you already? And where do you expect actually to be by the end of 2020? And also linked to the speed, if you look at the long-tail business, probably more energy and transport, are you still planning to kind of wait 2023 and 2024? Or I think it could be logical to expect disposals. So where do you stand there on this long-term business, basically? The second one is on dividends. Clearly, the CET1 is strong. The CIB restructuring may be a bit complex. But how do you see the basis for the dividend in terms of payer? Do you consider to pay the dividend based on the core ABN AMRO, so the core profitability excluding the rundown? Or do you still think it's going to be a payout on the group earnings? And then maybe just a small one on the NPE deduction from capital, the EUR 200 million per year, building up to EUR 1.2 billion by 2024. Can we consider this EUR 1.2 billion kind of reserve deduction to capital as a potential reserve for also the CIB restructuring? Or this is something else?

[Robert Swaak, CEO & Chairman of Management Board]

Clifford, if you want to...

[Clifford J. Abrahams, Vice]

Okay. I'll do that. A few -- quite a few points. And then, maybe dividend, Robert, I'll leave it with you. I think on rundown, interesting comments. I mean I think it's going to be pretty modest in 2020. You can see that we've already commenced some derisking, reflecting, I would say, the cycle. But now that we've made a strategic decision, we'll do it in an orderly way. So it will be pretty modest this year. We plan for that wind down to take place over 3 to 4 years. But if there are opportunities to accelerate it that makes sense from a capital and cost and regulatory perspective, we'll clearly look at that seriously. I think on NPEs, we don't book the NPEs. But we -- that guidance hasn't substantially changed. It's primarily commercial banking, not the -- not CIB. And I don't think we want to get into the details at this stage. That guidance fundamentally remains in place. I think, on dividend, Robert, any comments you're prepared to make in this stage?

[Robert Swaak, CEO & Chairman of Management Board]

Yes. At this point, I would say we're not changing our dividend policy. This is -- that remains as it currently is, and we will update you further in November.

[Operator]

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

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. Unsurprisingly, continuing on the topic of the CIB restructuring. Please correct me if I'm wrong, but I didn't see the stage 3 ratio for the noncore business. Just looking at the overall corporate loans in stage 3, they're between EUR 6 billion to EUR 7 billion. How much of that is effectively in noncore as of today? That obviously would be corresponding to the EUR 1.4 billion reserve that you mentioned in your presentation, plus EUR 400 million in 3Q. Just trying to understand what the current coverage ratio for the noncore, and where do you think that should be heading into the year-end 2020 and, potentially, 2021. My second question is for Robert. What did you find the most difficult thing to change from a cultural point of view within CIB? Obviously, the context here is you guys wanted to be very international. The easiest way to be international was via CIB. How is the culture changing? How is risk management governance changing? Is there going to be any leakage in terms of revenue attrition from the core business into the noncore business? Or are they pretty much sealed-off businesses? Any color around that would be fantastic.

[Robert Swaak, CEO & Chairman of Management Board]

Could I ask Tanja maybe to answer your first questions, and I'll take the culture.

[Tanja J. A. M. Cuppen]

Yes. So on your question with respect to the impairment in relation to noncore, well, Page 34 of the presentation gives an overview, where you can see that 11% of the portfolio is in stage 3. And indeed, as you mentioned, a high coverage ratio, 55%. That has to do with some files where we -- some incidentals where we have taken significant provisions over the past period. As indicated, we do expect to add some additional impairments of EUR 400 million to this portfolio for the remainder of the year. So that's in our projections. And for 2021, we actually didn't provide any guidance. We -- it's quite uncertain market. It's a cyclical sector. So you can imagine that it's above the average of the portfolio of the bank, but no specific guidance there.

[Robert Swaak, CEO & Chairman of Management Board]

And if I could, on your question around culture. Important in all of this is a culture of execution. And the way this decision has come together has been a process in which we have seen both core and noncore being very committed to execution as we worked up the plans and as we decided. So I expect that to continue. That is certainly something that's important for me, given where we are as a bank that the execution part of any decision we take is -- becomes part of the culture of who we want to be.

[Stefan Rosenov Nedialkov, Director]

Okay. But just in terms of targets, for example, within [ CIB ]...

[Robert Swaak, CEO & Chairman of Management Board]

I think you've just...

[Operator]

Yes. His call -- his line dropped. We'll continue with the next question, sir.

[Robert Swaak, CEO & Chairman of Management Board]

Okay. When he comes back, we'll take it back.

[Operator]

Okay. Our next question is from Thomas Dewasmes of Goldman Sachs.

[Thomas Dewasmes, Associate]

So I have 2 questions. The first one is on the release of the RWAs from the noncore unit. It's obviously a lot of capital, and you already have a large buffer even on Basel IV metrics compared to requirements. So what profitable opportunities do you see now in Northwest Europe that are incrementally more attractive than they were before the strategy review and then you would normally reinvest in the business from your organic capital generation? And the second question is also on Slide 34. From the comments that you've made before on this call, is it fair to assume that the ideal coverage ratio for the -- your stage 3 is around 55%, 60% of impaired exposures? What type of collateral do you have on this type of exposures?

[Robert Swaak, CEO & Chairman of Management Board]

Thank you, Thomas. Let me take the first part of your question. Clearly, the choices we've made have been around and focus on Northwest Europe. The choice was -- the decisions we took around Northwest Europe are based on the fact that we see opportunity in the sectors that we've traditionally served very, very well from an ABN AMRO perspective. And whether that's shipping, whether that's banking or insurance, there's a number of sectors that we've been traditionally very good in. We know these markets very well. We have a presence in these markets. So we do see opportunities for modest growth. To be more explicit or to give you more details than that, I would rather wait until we do the November update because then I can give you a more complete picture as it concerns the bank as a whole.

[Tanja J. A. M. Cuppen]

And shall I take the second question on the coverage ratio for noncore? And indeed, currently, it's 55%, but I would not take that as a guidance for future impairments. Indeed, we do have mostly collateralized loans in noncore, and collateral is for trade and commodity finance. The commodities for energy, it's reserve-based lending or other types of security related to the asset base there. And in the shipping portfolio, of course, the shipping -- the ships are collateral. So as a better guidance, I would say 30% to 35% coverage ratio on average for new files that we would have to add stage 3.

[Operator]

Our next question is from Albert Ploegh of ING. [Operator Instructions] The next question is from Mr. Omar Fall of Barclays.

[Omar Fall, Analyst]

So just to make things very simple. You had 14% CET1 on the Basel IV, which [ really ] can't be miles away from whatever target you tell us in November. I don't want to front you on that, but given where your MDA is, that seems to make sense. Is it then as simple as whatever is left, the EUR 4 billion of reserves and capital from the noncore runoff, is then available for shareholders or for growth? What am I missing? Because that math is very interesting to shareholders. What's really not interesting, which we've seen historically at ABN, is that the spread sheet slipped grades, but we're then surprised by a large further use of capital down the line or some added caution that we didn't know about that we'll only hear about in November. Because we cannot make up our minds around whether using that capital for growth or return is realistic. But if there's some one-off elements, it would be good to [ reference ] now. And then on that front, I know you're maintaining the markets business in CIB, and it's not balance sheet intensive. But when you used to report the P&L for that business way back in 2016, it wasn't really profitable at pre-provision profit level, and I can't imagine that's improved since. So is that an area where you'd be looking at extracting some savings, potentially to feed some of the -- to offset some of the pre-prov losses on the loan side? Or are you not looking to touch that? Because I recall back then, the cost base was pretty large, like 500 or 600. And then secondly, just wanted to get some more detail on the EUR 1.2 billion of impairments you expect in the second half. Sorry, if I'm confused, but if you're just saying that you only expect EUR 400 million of that to come from CIB noncore, which leaves us with EUR 800 million elsewhere. Where is that coming from? Because obviously, non recall has been the key contributor. So like in the first half, it was half of group impairments.

[Robert Swaak, CEO & Chairman of Management Board]

Can I just ask Clifford to take your first question. I'll take markets, and then Tanja will take impairments.

[Clifford J. Abrahams, Vice]

So I think your math is right, so around 14%. The CIB noncore also has quite a high RWA inflation with respect to Basel IV attached to it. So as that comes out, that will further considerably strengthen our capital position over time. I think in terms of -- I won't comment on your characterization of the past. I think it's clear, however, that where there've been, call it, surprises, they've not been in terms of capital allocation or capital use decisions of the bank that have been in respect of the developing regulatory situation that we've had in the past. I think looking forward, I would highlight a couple of themes. One is the economic uncertainty. We haven't discussed COVID much on this call, but that remains a -- the backdrop to where we are. I think from a regulatory perspective, we currently have a recommendation from the ECB not to distribute any capital in 2020. So I think the -- while the environment has eased in the short term, we expect that to be temporary. We do expect TRIM to crystallize likely this calendar year, and we'll need to navigate our way through that. So our plan is to give an update in November. We'll update you where we can at that point. I think the key issues will be navigating through TRIM and Basel IV. But the CIB noncore wind-down will take place over a number of years, and we'll look to give you as good a long-term outlook as we can in November.

[Robert Swaak, CEO & Chairman of Management Board]

Tanja, on the impairments.

[Tanja J. A. M. Cuppen]

Yes. On the level of impairments, indeed, we expect EUR 1.2 billion for the remainder of the year. And we -- in the context, we have discussed quite a bit on CIB, but we haven't discussed the commercial bank yet. The commercial bank had EUR 300 million in impairments over the first half of this year. And we do expect that, that will be more in the second half, especially in the last quarter of this year. As you are aware, the support measures, but also the payment holidays provided by the bank are late and will mature this quarter or at the end of this quarter. And we do expect that some companies will run into problems and will add to impairments in the commercial bank. It can be that we are a bit cautious here and it runs into next year in the first quarter. But we do expect a part of this EUR 1.2 billion to be related to the commercial bank. And maybe to be a bit more specific, it's less than half, say, 40%, 45%.

[Robert Swaak, CEO & Chairman of Management Board]

Okay. Tanja, thank you. And then on markets, let me just say that looking at global markets, we've had, I think, 2 reviews already on markets. We've reduced the RWAs contributed to markets from, I think, about EUR 10 billion to about EUR 5 billion. Markets has a function in the bank, not just for CIB, but a function also for our corporate -- our commercial bank and our private bank. And of course, we will continue to monitor associated costs very, very closely.

[Operator]

We will continue with Mr. Stefan Nedialkov of Citi.

[Stefan Rosenov Nedialkov, Director]

My line decided to drop exactly as I opened my mouth to ask you a quick follow-up question, so I'm just going to ask it now. I mentioned in terms of the core versus noncore before. I was quite interested to know if there's any leakage between these 2 businesses. So for example, if there is a multinational that you lend to in the Netherlands and then in the U.S., is there any sort of recessions in terms of your restructuring here? Are you -- are we likely to see revenue attrition in the core business because of the noncore being wound down? And the second follow-up, I wanted to ask Robert. Just really strikes me how the CIB business at ABN has been a story of Jekyll and Hyde, so to say, a really well-performing low cost of risk domestic business, extremely high cost of risk internationally. So what was the underlying reason for this? Obviously, culture is important, and you're trying to change that somehow, risk management, governance, et cetera. But what was it at the end of the day? Was it different targets for the different businesses, different incentives for employees, different type of people you're hiring in the various part of the organization within CIB? Just some color on that would be really, really useful for us to understand how this business is likely to be changing going forward from a more culture point of view.

[Robert Swaak, CEO & Chairman of Management Board]

Yes. Thank you for your -- yes, yes, no worries. So on your first question, these units are going to be managed separately, which they'll consist of separate client franchises as we have them and then managing more separately. So I wouldn't expect, at this point, any leakage just for the very fact that we are managing these separately. As to your second question, it is a -- looking at the business, we've had our international CIB business build up a practice in oil and gas, in trade commodity finance, and these are all sectors that were highly volatile, that are very cyclical. And one of the choices we've made as a bank is that we wanted to be present in areas where we can achieve scale and where we can achieve focus. And I think if you drill down into it, we were actively building positions in these sectors, but we're also then exposed to volatility, and we were also exposed to, if you will, subscale sizes of these businesses. And therefore, we've taken a choice to operate in focused businesses in areas that are close to our geographical profile. So I think if you take a 30,000 foot and you look through the history of how CIB evolves, that's kind of the conclusion you then come to, and that kind of has driven our choices as we communicated them today.

[Stefan Rosenov Nedialkov, Director]

Okay. So it really just sounds like risk selection itself has been okay, but because you guys haven't been able to scale up in those volatile businesses, you haven't really been able to absorb the volatility historically, and therefore, this retrenchment.

[Robert Swaak, CEO & Chairman of Management Board]

Yes. I would just repeat what I've said before. There's been an exposure in these sectors which are volatile. It's the subscale size of the business you then get to. And therefore, you take the decisions that we've just taken.

[Operator]

Our next question is from Mr. Albert Ploegh from ING.

[Albert Ploegh, Research Analyst]

A few questions left. First, on the NII guidance and the -- and how the inclusion works with the TLTRO because it seems that you, in your footnotes, say something about a further benefit. So can you maybe help us out what is now included and what could come on top, it would be helpful. The second question is on the, yes, somewhat overlooked P&L line, other income. In Q1, you mentioned that given the markets, it could be a little bit below for the time being compared to the EUR 100 million guidance. Now you basically reconfirm the EUR 100 million. I think in the opening remarks, it was something mentioned on the real estate gain. So is there some visibility you have on certain pipeline there that could still impact, let's say, the second half positively? And the final question to come back on the core part of the CIB. In an earlier question, you confirmed that the RWA inflation for Basel IV is something like 32% as well on the EUR 25 billion. But it was not entirely of clear to me whether you think you can optimize that inflation or the absolute amount on RWAs as part of getting to the 10% ROE? Or is it more on the repricing of the existing loans in the core business?

[Clifford J. Abrahams, Vice]

Okay. I'll tackle those quite briefly. So the TLTRO, we pay -- we receive minus 50 basis points on that facility. If our lending goals are met, then that -- then we receive minus 100 basis points on that facility. So the uplift is 50 basis points on EUR 32 billion, so it's EUR 160 million. So it's a considerable amount. And that's consistent with the treatment of other banks across Europe. And that relates to our track record, and it's a fairly short-term hurdle that's required. So it's potential upside. We do see loan growth as modest over this period. So we see it as upside rather than baking it into our current guidance. On other income, yes, you're right, we have good visibility on real estate disposals, and that underpins the confidence for the other income guidance that we've given, at least in the short term. On the RWA inflation, the Basel IV inflation for CIB is around 1/3. We do see plenty of opportunities to optimize that beyond repricing, including both looking at the way we do business, further originate-to-distribute where we have considerable further scope as well as optimization of the portfolio. So it's not all going to come from repricing by any means. And we are very focused on that, and we need to realize that potential in order to deliver on our ambitions.

[Albert Ploegh, Research Analyst]

And one small follow-up on the core part of CIB. Do you really also be exploring, maybe some partnerships going forward as well to also have a further optimization? Or is this basically a stand-alone business as it is now?

[Robert Swaak, CEO & Chairman of Management Board]

Yes. I'd suggest that this is too early to answer those questions. If we'll do any considerations on that, we will update you further in November.

[Operator]

Our next question is from Giulia Aurora Miotto of Morgan Stanley.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

Yes. A couple of questions from me as well, please. The first one on Clearing. You mentioned that you took a number of measures, right, to reduce the risk profile of this business. I was wondering, will this result into higher costs perhaps or lower revenues, therefore impacting the profitability of the core bank? So this -- the core CIB, the bank, I meant. This is my first question. And then the second question, outlook for costs. So you mentioned that AML costs -- related costs are peaking in 2020. So aside from the cost reduction coming from the noncore CIB that we expect from 2021, but can we expect some cost reduction also in the rest of the bank?

[Robert Swaak, CEO & Chairman of Management Board]

Tanja, could I ask you to take this one?

[Tanja J. A. M. Cuppen]

Yes. On Clearing, yes, indeed, we have taken action on Clearing. Risk limits have been tightened, and actually, we have gone through the whole client list. And well, quite a few of the clients where we have perfectly within our risk appetite, but also it meant that we have asked certain clients to reduce their positions and also had to let go on some of the clients. So yes, it does have some impact on top line. And also, we've made further investments in terms of strengthening the risk management, although that fits within the existing investment programs of Clearing. So if you look at the overall impact on profitability, the analysis has shown that we can -- that Clearing can continue to meet the return targets that we have set for Clearing. So yes, some impact, but not that material that it moves it away from its targets.

[Robert Swaak, CEO & Chairman of Management Board]

Thank you, Tanja. Clifford, on the...

[Clifford J. Abrahams, Vice]

Yes. On costs, with our investor update in November, you'd expect us to be cagey about costs through next year. I think we've been clear that we're on track for our goal of EUR 5.1 billion this year. We do see potential for further cost reduction. We've spoken in the past about our pipeline of IT costs. That was in our February analyst presentation. That remains very much on track. I think in an environment of low rates and slow economic growth, it's clearly critical that we maintain cost efficiency, and we see opportunity to do that, and we'll update in November.

[Operator]

Our next question is from Benjamin Goy of Deutsche Bank.

[Benjamin Goy, Research Analyst]

Two questions from my side as well, please. First, on CIB noncore. Can you maybe talk a bit more about 13% stage 2 loans in noncore? What is this exactly? And what is the risk? Or what are the downside risk in terms of stage migration here? And then second, on 2020 costs. You now had reported EUR 2.5 billion. You reiterated EUR 5.1 billion. But I think the Q2 run rate on reported and even more on an underlying basis is quite good. So just wondering why not ambitious or more ambitious this year? Was there some underspend given COVID-related impacts or other reasons like H2 investments?

[Robert Swaak, CEO & Chairman of Management Board]

Clifford, you want to take -- sorry, Tanja, on the stage 2 and Clifford...

[Tanja J. A. M. Cuppen]

So I'll take the first question on CIB noncore. And indeed the exposure in stage 2, it's 17% of the total portfolio, so around EUR 2.4 billion. And well, about half of that is in natural resources, so oil and gas and offshore, but mainly oil and gas. And there we do expect indeed some transition to stage 3. That's why we also give this outlook of EUR 400 million of additional provisions because that will partially be on efforts that move from stage 2 to stage 3.

[Robert Swaak, CEO & Chairman of Management Board]

And Clifford on...

[Clifford J. Abrahams, Vice]

Yes. On costs, look, we feel good about the EUR 5.1 billion guidance. I think it's -- you're right. I'm pleased that we're on track. You see the benefit of not just cost saving programs, but also appropriate cost control in the environment. We also have quite considerable programs around detecting financial crime and other regulatory-related programs that we see -- well, were occurring now and into the end of the year and beyond. So I think we feel good about our EUR 5.1 billion, but we're not excessively managing expectations, I don't believe. And we'll pick up costs longer term, again, as I said, in November.

[Operator]

Our next question is from Tarik El Mejjad of Bank of America.

[Tarik El Mejjad, Equity Analyst]

Just very quick 2 questions. First one on the CIB. I mean that was -- I mean the restructuring is very much welcome. And I understand the importance and the historic level, given like the trade finance and so on that you decided to shut down. But I'm a bit surprised that after all the restructuring, you only look at 10% ROCE because the previous plan, you targeted 10% ROCE as well with much milder, I would say, actions. So is it because this time -- or things have deteriorated since, that's true. But in the current 10%, are you factoring in some recovery in the market or really like just, let's say -- I mean assuming the same currency environment in the next 3 years or 4? And then when you put that in context with the group targets, I mean, I know that you'll disclose more detail in November. But -- so what's the big lines? I mean are we here within a group that will be, more controlled, less risky with obviously less ROE because 10% will still remain a drag to the retail business with ex cap excess return? Or you have something for us in terms of growth, and you will be able to return -- to provide returns that similar to those you presented during the IPO? And then very quickly at the end, do you have any updates on the AML case now that the prosecutors and all the machines back post lockdown?

[Robert Swaak, CEO & Chairman of Management Board]

So Clifford, if you could take that -- the first part of the question, I'll take the other one.

[Clifford J. Abrahams, Vice]

Yes. I think, look, ambition of 10%, I think it reflects, well, 3 things, I would say. Look, we have a track record in core of, I'd say, just under 10% pre-COVID. So that -- so we feel good about the 10% ambition. However, we need to recognize we've got TRIM coming up as well as Basel IV over the next few years. So I think that means -- that gives us caution around the 10%. So we need to work hard to deliver on that. I still think the reality, we haven't spent much time talking about COVID. But this is a business, including core, that has incurred substantial impairments in a tough economic environment. And the bank is resilient, but none of us have a crystal ball as to when the economies are firing on all cylinders, and we can move back to through-the-cycle cost of risk. So I think timing on that, we need to be -- we just need to be sensible about that. I think it's good that we will be moving CIB down to around 25% of group cost allocation. And as and when it's delivering that 10% under Basel IV, we can consider whether further capital allocation makes sense. But we're taking it step by step.

[Robert Swaak, CEO & Chairman of Management Board]

Yes. And on your questions, AML and update on the public prosecution. Unfortunately, I can't make any comments around the status of the public prosecution of the investigation. I would reiterate that we continue to cooperate fully, as we've indicated before, with the ongoing investigation.

[Operator]

Our next question is from Mr. Kiri Vijayarajah of HSBC.

[Kirishanthan Vijayarajah, Analyst]

Just a couple of questions on my side. So on those gains on real estate disposals you've hinted in the pipeline, I'm just trying to link back to your restructuring plan. So is that coming from domestic branch closures? Or is that from shutting down the overseas offices? So just a little bit of color on that and linking it to the restructuring plans. And then just turning back to the markets business. I appreciate you've taken the RWAs down there from EUR 10 billion down to EUR 5 billion. But it's just not clear from your slides, whether it's coming down a little bit more because there are some small subunits within markets that I think are going to go into noncore. So how much of that EUR 5 billion in market split between core and noncore, please?

[Robert Swaak, CEO & Chairman of Management Board]

Clifford?

[Clifford J. Abrahams, Vice]

Yes, briefly. So the real estate, I would say, is more sensible resource allocation. We typically owned our properties, both here in the Netherlands and overseas. So we're realizing some of the value of that and reallocating the capital. So we're quite confident of that, certainly for this year. And there may be more to do going forward as the bank becomes even more digital. I think on global markets, as Robert said, look, we've brought it down quite considerably. It is a support function for the CIB and the rest of the bank. There are some elements of global markets that are, call it, noncore. The -- in relation to the U.S. and some of the commodities book, it's a small part of that overall EUR 5 billion. And as Robert said, we'll continue to optimize global markets going forward, both from a cost and capital perspective, consistent with it being a support -- primarily a support function for the client-facing businesses.

[Operator]

Our next question is from Ms. Anke Reingen of RBC.

[Anke Reingen, European Banks Analyst]

Yes. Just 2 questions. The first is on the Basel IV impact and the avoided inflation because of your change in strategy. Is it about a 40 basis points benefit, I assume -- if I assume the 30% inflation? And then you mentioned a number of times, TRIM inflation to be taken this year. Is there -- can you be a bit more specific, if possible? And then just one question on the second half dividend for 2019, which you still accrue. I mean it looks pretty unlikely that you report a profit for 2020. Do you still think that will not play -- you will be able to pay that out in spite of the fact you report a loss because of the strong capital ratio? And if this question isn't answered, then I have a follow-up question, which is, can you please give us the payment holiday volume?

[Robert Swaak, CEO & Chairman of Management Board]

Okay...

[Clifford J. Abrahams, Vice]

I can answer your 4 questions.

[Robert Swaak, CEO & Chairman of Management Board]

I'll take the [ 2 ]...

[Clifford J. Abrahams, Vice]

[ No, then I'll take 2 ] -- that was a new approach. So I commend you for that for wanting the other questions. I think on -- maybe Tanja can pick up the payment volumes. I think on Basel IV, I think we've given you all the elements of the numbers. I'm not sure about the 40 basis points. But we are clear that CIB is a high RWA inflation unit of around 1/3. And for the bank as a whole, our Basel IV RWA inflation is about 20%, right? So I think you can work through the numbers based on our disclosures. I think on TRIM, I'll comment and maybe Tanja can pick up further. But we've had some communication around TRIM, and that's reflected in our actions as well as the add-ons. We do expect further TRIM communications later this year, and we're hopeful that lands before our update to you in November. But I'm going to pass on to Tanja to provide any further comments and comment on the Basel...

[Robert Swaak, CEO & Chairman of Management Board]

Tanja, would you like to take that? And then I'll answer the dividend questions.

[Tanja J. A. M. Cuppen]

Yes. So actually, not a lot to add on TRIM because there are still 3 letters outstanding in relation to, well, general corporate lending, financial institutions and specialized lending, [ REIT ], TCF. And we do expect, well, at least to receive the first letter in the next quarter, maybe 2. And of course, there is an interaction with the CIB review as well since there's some overlap, at least for the trading commodity finance exposure.

[Clifford J. Abrahams, Vice]

Yes. I think the gross amounts on the payment holidays are set out in our Q report, actually, they're all set out there. It's a little over EUR 20 billion and most of that is in the commercial bank, EUR 17.5 billion in the commercial bank. But that will -- all of that will roll off during the course of Q3, unless it's otherwise extended.

[Robert Swaak, CEO & Chairman of Management Board]

And on the dividend, your question on dividend, clearly, dividend remains accrued. As you've seen, we've not added it back into capital. But as you know, there is guidance right now around restrictions. And we will monitor, again, the situation in November, and then we will update our stance on the dividend.

[Operator]

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

[Johan Ekblom]

Just 2 quick questions for me. Clifford, you were mentioning about exit losses, and you were referring to the EUR 200 million cost restructuring and the DTA write-down. Should I take that to assume that you're not expecting any further marks on potential asset sales? Or is that something we'll have to take sort of as and when they happen? And then secondly, maybe a question for Tanja on how do you see your through-the-cycle cost...

[Operator]

Unfortunately, we lost him. I'll go ahead with the next question, that's from Mr. Guillaume Tiberghien of Exane BNP Paribas.

[Guillaume Tiberghien]

I have 2 questions. The first one relates to the NII guidance of about EUR 1.5 billion per quarter. Other than the impact of the noncore, which obviously could reduce this level of EUR 1.5 billion, is there any other elements that could mean that the NII could fall below EUR 1.5 billion as we go into 2021? And the second question relates to the capital release which we expect from noncore. You currently have EUR 2.5 billion capital allocated. So if I remove the EUR 400 million provision, the DTA and the restructuring charge, and I tax all of that, maybe that could mean EUR 2 billion of capital should come back to us. Is there any reason to expect that this EUR 2 billion is a wrong number?

[Clifford J. Abrahams, Vice]

Okay. I'll pick that up briefly. I think on NII, we've now said around EUR 1.5 billion, so we're currently a bit above that. I would say we're comfortable to 1 decimal place per quarter. The noncore wind-down, I think, will be modest this year. We -- I think we're likely to get further deposit margin pressure, reflecting low interest rates. And I've guided you on volumes earlier today. I think in terms of capital release from noncore, just following your calculations, I think we need to think hard about the tax. You'll recall the comments I made about tax during the presentation. The -- I think the other 2 things to consider are future impairments. So the guidance -- Tanja's guidance of EUR 400 million was for this year. I think it's -- we should expect further impairments in the future. And then you've got the, call it, the running P&L of noncore. I mean to the extent we choose to sell assets, we will only do that with a view to optimizing capital in a rational way, right? So I'm not ruling out asset disposals, but we'll be rational in terms of trying to optimize overall capital release in respect of disposals.

[Operator]

Our next question is from Ms. Daphne Tsang of Redburn Europe Limited.

[Daphne Tsang, Research Analyst]

I just want to ask a couple, please. First, on your AML-related costs. So you have booked EUR 170 million year-to-date. I'm just wondering how much of your previous KYC provision has been released as parts of that EUR 170 million? And how much AML-related costs you expect to come in H2? I think on KYC provision, you've previously guided around EUR 200 million provision unutilized. So curious how much of that has been utilized now. And then my second question is a follow-up on moratorium. Based on your EUR 20 billion in terms of absolute volume you mentioned earlier, how much provision you have made against those? Or are you not booking any, but wait for Q3 for these to be -- for these to kind of roll off or extend it and then assess the impairment situation over there? My question is on NIM, if I may. Are you able to give any guidance in terms of how this will evolve for the rest of the year and beyond 2020 as well? I mean looking at this quarter, the NIM has been weak, but I assume it is largely TLTRO-driven because of the impact to denominator. The -- on TLTRO, are you saying that you have included 50 bps of the benefit in the current guidance with extra 50 bps potentially you could add on top in terms of the benefit? And isn't that very likely to be achieved given the loan volume you see and also connected to the government's guarantee scheme? And if I can squeeze one more. Are you able to provide guidance on TRIM impact in absolute terms like your peer has done?

[Robert Swaak, CEO & Chairman of Management Board]

Could I ask Tanja to take the TRIM question, and then we'll go back to Clifford. But I'd ask everyone to maybe -- I know there's a tendency to continue to squeeze more questions into the questions, but really in the interest of time, could we limit the questions to 2 persons? So thank you.

[Tanja J. A. M. Cuppen]

Yes. And I can be very brief on the TRIM question because we cannot give any further guidance right now. We have taken some additional -- additions already earlier in the year and last year, and we are waiting the letters of the ECB to take final steps here. So we will update you in Q3.

[Clifford J. Abrahams, Vice]

Yes. I think on -- I don't think I've got anything further to add on TLTRO. I think we've been pretty clear.

[Robert Swaak, CEO & Chairman of Management Board]

We've given the...

[Clifford J. Abrahams, Vice]

Yes. And on NIM, I think on provision release, we're really getting into the weeds. I mean it's -- we've booked considerable provisions with respect to AML. We're clearly utilizing some of that. And we'd expect that provision in respect to remediation to be fully utilized over the next 2 or 3 years. So the EUR 170 million I referred to is the total P&L impact for the half year.

[Daphne Tsang, Research Analyst]

Are you be able to guide how much of your KYC provision has been released so far? Or are you...

[Clifford J. Abrahams, Vice]

No, I don't want to go into that sort of detail on this call.

[Operator]

Our next question is from Kian Abouhossein of JPMorgan. We'll go on to the next question, that's Mr. Jason Kalamboussis of KBC Securities.

[Jason Kalamboussis, Executive Director Research]

I'll try to keep it short. The first thing is on the impairments in 2021. With what we know now, so keeping the same macro scenario and the same outlook that we have on COVID, when you think that you're going to be above the 25 to 30 basis points across the cycle cost of risk, should we understand that it should be something that still would remain below the 40s? Can you give us some comfort that at the end of the day, also with the EUR 400 million you're putting for the second half, we are not going to have next year these kind of negative large quarterly surprises that we have had over the last few years? And that in a certain way, you have bulletproof yourself for that with what you have done this year. So that would be very helpful. And then it's just a follow-up on a bit on Tarik's question. Do you think that you're going to be able to give a timing on when you will reach the cost of equity of 10% for the CIB in November? And if not, why not? Other -- the -- is it possible to have, for example, in the Slide 34, a split between what is the ROE on Clearing and especially on private equity, which has been very supportive? So like that, we can understand better what the rest of the business is doing? So these are my questions.

[Robert Swaak, CEO & Chairman of Management Board]

Thank you. Tanja, do you want to take impairments? And I'll turn it over to Clifford.

[Tanja J. A. M. Cuppen]

Yes. So on impairments and guidance for 2021 what I can say, and I cannot give you any numbers, but I can say and confirm that we tightened risk management quite a bit. And we have also set very clear risk appetite for CIB core. And of course, there is very dedicated management and risk management also on the noncore part to make sure that we run that off in a controlled way. So these elements, I can confirm to you. And it's very hard to provide guidance at this stage for 2021, so that's not something I will do.

[Clifford J. Abrahams, Vice]

Okay. I mean in the same spirit, I think we've made great effort with footnotes this quarter. So have a look at the footnotes in respect of the ROEs. You can see the core actually delivered pretty much 10% or 10%-plus over the last 3 years. If you normalize that, that's also the case looking back, that we disclosed private equity gains each quarter. So take a look, particularly for year '17 and '18. I think we're not going to give dates. I mean I think it's -- we're clear in our ambition, and that ambition will apply notwithstanding changes in capital requirements over time. And we'll update more broadly on targets in November.

[Operator]

And our next question is from Mr. Kian Abouhossein of JPMorgan.

[Kian Abouhossein]

Yes. Just very quickly. Out of the 1,000 clients you split half into core, half into noncore, of the noncore ones, could you just give an indication how many of these are actually buying other products from you that are part of the core business? Can you give some indications so we understand the overlap? And on the core client base, the other 500, could you just talk a little bit about profitability? Are you having the normal 80-20 rule that you're seeing in terms of profit generation on the 500?

[Clifford J. Abrahams, Vice]

Yes. I'll do it briefly because I think Robert's covered this. But the core and noncore really are quite 2 distinct client bases. So the core in Europe reflects our Dutch client base and near Netherlands. The noncore is primarily a local-to-local business. So whether it's global TCF clients in Asia or U.S.-based oil and gas producers, so we don't see material leakage from the core client base. And you see, we're proposing to exit TCF completely, both globally and within Europe. I think in terms of our core business going forward, look, we've got our ambitions. We see potential to deliver on those ambitions, and we'll look forward to updating you on that in due course.

[Robert Swaak, CEO & Chairman of Management Board]

All right. Thank you, Clifford. Operator, I think in the interest of time -- sorry?

[Tanja J. A. M. Cuppen]

And the heat.

[Robert Swaak, CEO & Chairman of Management Board]

And for some, the heat, maybe, I'd like to -- if that's okay, I'd like to conclude the analyst call. And let me just -- maybe briefly to summarize. The bank will focus on the Netherlands. Northwest Europe CIB will align to this. And this would ensure focus and scale in chosen client segments for the whole bank. Q2 was marked by COVID-19, maybe we didn't talk about that as much, but -- and high impairments, which we did talk about, but operating results were resilient. Impairments are down from Q1 and expected to be lower in the second half of the year. And with a well-diversified portfolio and a very robust capital position, I am confident about our future. We'll further update you in November, as we discussed just now on the call, on strategy, including capital financials targets. Now before I say a formal goodbye, there's somebody I'd like to thank who's also on this call, who's been on these calls for 15 years, and that person is sitting to the right of me. Dies, I think on behalf of many of you on the call and certainly on behalf of us, I'd like to thank you, because Dies is moving on. She'll stay within the bank, but she is taking on a new position in the bank. But certainly on behalf of all of us, I would like to thank you for all those many years that you've sat here next to us and were with us. Thank you.

[Dies Donker;Head of Investor Relations]

Thank you very much.

[Robert Swaak, CEO & Chairman of Management Board]

Thank you all for attending, and for now, goodbye.