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ABN Amro Bank NV
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Good morning, and welcome to the ABN AMRO Second Quarter 2021 Analyst and Investor Call. [Operator Instructions] I would now like to hand the call over to the Chairman, Mr. Robert Swaak. Please go ahead, sir.
Thank you very much. Good morning. Good morning, everyone, and welcome to ABN AMRO's Q2 results. Delighted to be joined for the first time by Lars. He's in the room next to me, our new CFO; and Tanja Cuppen, our CRO. Just stepping back on Lars for a minute. He has an extensive experience in the banking sector, joined us from the Hellenic Bank where he was group CFO and member of the Managing Board. And prior to that, he held various CFO functions within ING. We will now run through our Q2 results and update you on the progress on our strategic agenda. Lars will go through our second quarter results in more detail. Tanja, as always, will then update you on impairment developments in our loan portfolio. So turning to our second quarter results on Slide 2. It is very clear that COVID-19 has impacted all of us in some way or another, but the outlook is surely slowly improving. Beside to these gradually opening up, these vaccination programs across Europe are steadily progressing the restrictions are easing. We expect the economy to rebound in the second half of the year. The more optimistic outlook on the economy allowed us to release impairments this quarter. So I'm pleased with the results over Q2 of EUR 563 million, excluding CIB noncore. We indeed made a big step in the wind down of the CIB noncore portfolio this quarter, thanks to a number of portfolio sales. The wind down is one of the reasons why interest income was lower this quarter as well as the negative interest rate environment, which continues to put pressure on our deposit margins. Cost saving program are on track, yet at the same time, we are investing to lay the foundation for the future of the bank. We continue to work towards a cost base of EUR 5.3 billion for the full year. So given the good progress on the wind down and the optimistic outlook on the macroeconomic environment, we now expect the cost of risk for the whole bank to remain well below the through-the-cycle level of the year. ECB stated they will not extend the dividend recommendation, and this allows us to pay the final 2019 dividend in October. So let's turn to strategy on Slide 3. Just a brief reminder of the outcome of the strategic review we undertook in November. We have a strong foundation with leading market positions across all customer segments: retail, Private and Corporate Banking. We have strong digital capabilities, which have helped us to adapt rapidly to the COVID pandemic. The Dutch economy, which is our home market, is healthy and resilient. Lars will update you on this later on. And for our clients, we want to be a personal bank in the digital age. We choose to serve those clients where we can achieve scale in the Netherlands and Northwest Europe. We will continue to lead in sustainability, whilst we're also building a future-proof bank, which is digital first, with simple processes and products. We set ourselves an ambitious program. And on the next slide, I'll highlight the continued good progress we've made on our strategic agenda so far. Starting with the first pillar, customer experience. We are leveraging our video banking platform. And starting this quarter, mortgage clients can now be connected live with the specialist without prior appointment. Staying with mortgages, we have launched a new price competitive label, Moneyou, which will serve the important intermediary market. Moving to sustainability. We aim to be the first choice of our clients in sustainability, addressing a clear need and attracting target clients. This quarter, we announced the launch of our EUR 425 million Sustainable Impact Fund, and we closed the first in its kind green IPO. The AML remediation is well on track, and I expect completion in 2022. At the same time, the pace of branch closures has picked up this quarter, with the closure of all -- further 17 branches, bringing the total down to 79, as most clients now do all their business with us through digital channels and call centers. So turning to Slide 5. Let me update you on the progress of the CIB noncore wind down. I'm very pleased with the significant asset sales we achieved this quarter. These transactions significantly reduced our exposures in the U.S., especially in the oil and gas sector, intermodal and shipping. The overall discount we took on these transactions were modest given the size of these transactions. Looking at the overall wind down, we are now over 80% done in one year. Clearly, this is well ahead of schedule. And the remaining noncore portfolio could end up below the EUR 2 billion mark by year-end. This brings us into the tail end of the wind down. Looking ahead, costs will start to come down materially in 2022 as we start to hand in foreign licenses and winding down mid and office -- back office operations. So we have materially delivered on the noncore wind down ahead of schedule, and this is improving the overall risk profile of the bank. Tanja will discuss the risk growth of the remaining noncore portfolio as well as for the bank overall. So first, let me hand over to Lars, who will take you through the financial results of the quarter. Lars, go ahead.
Thanks, Robert. Good morning, all. I'm delighted that this is my first quarter as CFO of ABN and to have joined this great institution. And I also look forward to meeting you guys as well as the investors in the coming months. Let me highlight a few of the main pro forma results of the core bank. So this will be excluding the CIB noncore. We showed a net profit of EUR 563 million, and this was helped by impairment releases. The operating income held up as the NII declined due to the low rate environment, but this was offset by some higher other income. Operating expenses were down due to the seasonally lower regulatory levies, while there was some cost increase in the AML front. And we again released impairments this quarter as our macroeconomic outlook turned more positive and new additions to impairments were very limited. I'll run through the developments we're seeing in the Dutch economy on Page 7. So while the Dutch economy is feeling the impact of COVID, the extensive government support measures have been very effective over here. The success of the support measures is evidenced by the exceptionally low level of bankruptcies. And we can also see unemployment decreasing towards pre-pandemic trend sort of pandemic levels. Consistent with these developments is the rebound we observe in consumer and corporate confidence. While COVID cases rose strongly following easing of many restrictions, we see cases coming down quickly as the number of the measures were reinstated. And the willingness to vaccinate is high in the Netherlands, with over 85% of adults now vaccinated at least once. Given these developments, we are optimistic about the economic outlook for the second half of the year as restrictions are lifted further. Now turning to Slide 8, I'll discuss how this affects our business. Mortgage volume was up again for the quarter as the number of housing transactions remained strong. With the launch of Moneyou as a low-price label, we have another tool in our chest to increase our market share. Corporate lending volumes for the core bank stabilized, and demand is still muted by the extensive government support measures. We do expect volumes to pick up, however, in the second half of the year, which will help us in achieving the TLTRO threshold. Now turning to interest income on Slide 9. The NII of the core bank came down compared to Q1, reflecting deposit margin pressure and the wind down of CIB noncore. Higher prepayment penalties for mortgages were more than offset by EUR 30 million of incidentals. Mortgage margins will be low back book margins due to the ongoing strong competition in the market. However, the effect on NII was partly offset by growth in volume. Looking ahead, we do face deposit margin pressure of around EUR 20 million per quarter, which will be mitigated partly as we lower the threshold to EUR 150,000 for negative pricing, which started already on July 1. The wind down of CIB noncore leads to NII declining by around EUR 10 million per quarter during the remainder of the year. And together with all of this, I expect that NII will be between EUR 5.3 billion and EUR 5.4 billion for the year, and the range reflects whether we achieve the TLTRO threshold or not. We are optimistic on the outcome, but we do have some work to do to reach this threshold. Now moving to Slide 10 for fees and other income. Fee income for the core bank was stable. Positive stock market development supported the results in Private Banking, and we saw another strong quarter for Global Markets. Fee income from Clearing is still strong, however, slightly below Q1 as markets have settled down. For the second half of the year, I expect fee income of around EUR 400 million per quarter. And while the strong markets related income may not hold up, we are seeing credit card usage improving as restrictions are lifted. Moving to other income. Positive equity participation revaluation has boosted the results for the core bank this quarter. And other income for CIB noncore was negative due to EUR 121 million haircuts on asset dispersals. Turning to Slide 11 on costs. Expenses were slightly up this quarter, mainly from rising AML costs, impacting both personnel as well as other expenses. AML costs are expected to peak this year at around EUR 425 million as we are ramping up FTEs. Expenses also rose due to the investments we're making in our strategic agenda. And Robert already highlighted a number of products and services which we brought to the market recently. For this year, we expect costs to peak at EUR 5.3 billion, also reflecting some additional regulatory levies and general cost inflation. Cost savings are on track to reach our target in 2024 of EUR 0.7 billion of absolute cost base being no higher of GBP 4.7 billion. And now turning to capital on Slide 12. We'll pay the full year 2019 dividend in October, as the ECB has announced that the dividend recommendation won't be extended past September. As we announced previously, we'll not pay an interim dividend this year, only full year dividends. We're committed to resuming dividend payouts amounting to 50% of net profits, as stated in our dividend policy. And capital ratios increased further, reflecting the Q2 net profits and lower RWAs, specifically driven by the noncore wind down. In addition, Basel III operational risk-weighted assets decreased following the AML settlements. Basel III RWAs are expected to converge towards Basel IV in the coming quarters, as we shift some portfolios to the foundation and standardized approach and as well as the DNB mortgage flow kicking in sometime around the 1st of January. Our leverage ratio is also strong. And as SA-CCR has now been implemented, these numbers are no longer pro forma. So with that, I'd like to hand over to Tanja.
Thank you, Lars. And good morning, everyone. This quarter, we again released impairments as the macroeconomic outlook improved, and we made significant progress on the noncore wind down due to portfolio sales. The improved macroeconomic outlook led to significant releases in stage 1 and stage 2 of totaling -- total EUR 99 million. We increased the management overlay by EUR 12 million, reflecting the current unprecedented economic circumstances not fully captured by our models. The total management overlay now amounts to EUR 343 million. With the stage 3 ratio improving from 3.3% to 3%, stage 2 ratio improving as well to 9% and an adequate stage 3 coverage ratio of 64% in noncore covering some of the tail risk, the outlook for credit risk is positive. For the bank overall, I'm therefore confident our cost of risk for this year will be well below the through-the-cycle cost of risk level of 25 to 30 basis points. With that, I would like to hand back to Robert.
Thank you, Tanja. So then let's turn to Slide 14, which shows our financial targets and strategic KPIs. Our Net Promoter Score is well on track for mortgages, but we have indeed work to do on SMEs. Now the current score on SMEs is very much influenced by the negative sentiment around the AML settlement, closing of branches, fee increases and some operational changes as we are transforming our client service model. I am pleased with how our mortgage business is doing. Despite strong competition, we managed to grow our loan portfolio. The launch of our new mortgage label should help to increase market share going forward. And as economic growth resumes, we aim to capture our fair share of the business in the SME sector. I'm pleased with the progress we continue to make on our sustainability KPIs. We see clients further increasing their investments in ESG and impact related investments as interest remains high in these products. Our costs are under control. And I'm confident we can achieve our 2024 targets as set up by Lars just now. With a large part of the noncore assets now wound down, the risk profile of the bank continues to improve. This year, we expect our cost of risk to remain well below the through-the-cycle level. Our capital position is strong. And with our Q4 results, we will update you on the threshold for share buybacks and dividends. So to wrap up. We showed a good net result over the second quarter helped by releases from impairments. We feel the impact of the low interest rate environment in our deposit margins and competition in long-dated mortgages. We expect an economic rebound in the second half of the year, which has returned to growth in corporate lending volumes. We made a significant step in the wind down of the CIB noncore portfolio this quarter. Cost savings programs are on track. And at the same time, we're making investments to lay the foundation for the future of this bank. And lastly, by no means least, the final 2019 dividend will be paid in October. Next, I'd like to ask the operator to open the call for questions.
[Operator Instructions] Our first question is from Mr. Benoit Petrarque of Kepler Cheuvreux.
Welcome, Lars, to this call. Just a few questions on my side. First one will be on the cost. I think your guidance is clear on EUR 5.3 billion for this year. But given the good progress on the runoff, how do you see cost developing in 2022? I think you target EUR 4.7 billion for 2024, which is quite far away. So could we trend towards the EUR 4.7 billion earlier than expected? That will be the first question. The second one is on capital with your 16% CET1 ratio on the Basel IV, which is extremely strong. So how do you think about share buyback in this context? And are you currently in discussion with the ECB? And I'm just wondering how the discussion is going actually on the potential additional distribution on the top of the one you announced for the fourth quarter. And just maybe just finally, on the legal side, any update you want to provide on the valuable interest rate for consumer loans? Have we seen that Rabobank announced a settlement? And I was wondering if -- on the kind of basis of this settlement, if you can -- how much provision will you -- will be taken on your side? And any thoughts on the kind of new ruling around the mortgage -- variable mortgages as well which came lately as well? So any thoughts on that?
Thanks for the question. So I'm counting 4 of those. So I'll take them in order. I think you're absolutely right. The runoff has accelerated. We've talked about this before, when it was -- we'll look at the cost base in '22. As indeed, we are handing back licenses. Offices will close. We'll see how much we can bring forward. We will still maintain our guidance of EUR 4.7 billion. By the time we've completed the overall analysis, I would expect we'll come back to you on the effect of accelerating further cost line down related to the wind down. In terms of your question on the share buyback, we think I've been very consistent in stating that, A, we'll pay our dividend -- on 2019 dividend this year when restrictions ease. And B, we will look at potential share buybacks in the first quarter of '22 on the basis of the results of '21. That is a conversation we will then have with the JSB clearly as we need to continue to engage in constructive dialogue with our supervisors, and we expect to do so as we begin to firm up our positioning on buybacks. Keep in mind, as I said before, this will be done on the basis of the full year result '21. In terms of the legal files on Kifid, your specific question, that is indeed an issue which we flagged before. We continue to be in constructive dialogue with the local, the Dutch Consumer Agency in order to determine an overall position, whilst taking note of the earlier announcements in the Kifid case. So we provided what we can provide for at this stage, what we know of. And we will continue to have a constructive dialogue with the consumer agency in order to reach some conclusion. And as soon as we have those conclusions, clearly, we will communicate. On mortgages, remind me again of your question.
Yes. We've seen this Kifid case on mortgages as well, I mean going in the same direction than the consumer loans -- at variable loans. So any thoughts on that? Could that be a potential risk for your? Or are you confident that you can take the legal actions?
As far as I know, at this point, that's not a risk for us.
Our next question is from Mr. Stefan Nedialkov of Citi.
It's Stefan Nedialkov from Citi. A couple of questions from my side. The first one is on NII. Just to confirm that the EUR 30 million in NII as a one-off from the German dividend tax withholding issue, that proper one-off. There's no repeat of guide going forward. Similarly, the EUR 22 million of funding cost breakage in the noncore CIB, that's also a one-off. And just more broadly on NII. You have made some comments that your front book spreads are below your back book spreads, and that you're repositioning your money. You're offering to be a price competitive product. I just wanted to understand here, what's the value proposition to the customer in mind? And what's the value proposition for you? Are we talking about sacrificing margins a little bit going forward at the expense of higher volumes? So a couple of different parts to the NII question. Apologies for that. But there is a [indiscernible] going on here. And my second question is on fees, the EUR 400 million of guidance that you have for the quarter, how much of that relative improvement versus your previous guidance is driven by your confidence in CIB, core CIB lending? Those fees held up pretty well this quarter. And I guess that's also key to meeting your TLTRO target.
All right. Thanks for the questions. Lars, could I ask you to comment?
Yes. Stefan, on the NII, definitely, the EUR 30 million is a one-off. So that's -- and then on the EUR 22 million break funding cost in terms of the noncore is also a one-off. I mean these things happen as you're unwinding funding as you're selling off positions. In terms of the uniqueness of the -- or the money you offer, I would say that from a customer point of view, there is definitely some -- I mean, this is really a channel that is focused at the intermediaries firstly. And for us, it is a straight through channel. So in a way, what we get there is an improvement in efficiency, and therefore, one of the sort of steps for us at least in terms of our cost savings and digitalization efforts and straight-through processing efforts. This is probably the biggest benefit. And therefore, also, some of that benefit, we do pass on to the customer. In terms of fees, I would say the EUR 400 million level, I mean, we've got 2 impacts. We've had a positive impact in the first half of the year really coming from more volatility in the markets as well as a strengthening of the share markets, which has obviously helped the private banking fees. Now we do expect that volatility, and we're already seeing it. It's actually calming down a bit. So maybe that won't carry through so much into the second half of the year. But on the flip side, we are seeing a pickup in terms of our credit and debit card usage. And that should sort of more than compensate anything that happens in terms of the market. The fee pickup in terms of CIB lending, definitely, we do -- we are seeing in terms of at least stabilization in volumes on CIB. And in terms of pipeline, there is definitely something happening in terms of a more positive pipeline, which is also what we would expect to see in terms of our economic outlook as well for the second half of the year. I mean we definitely should be getting some good tailwind there. So yes, that could be a supportive factor as well in terms of fees.
Our next question is from Mr. Omar Fall of Barclays.
Just a couple of questions for me. Firstly, if I take CB and core CIB as kind of proxies for the TLTRO benchmark, it looks like you maybe need 4% volume growth for the rest of the year to meet the threshold. I mean that seems awfully ambitious even if corporate loan demand picks up and the pipeline you mentioned crystallizes. So just some more color on that would be helpful. And then one for Tanja. I think I just want to revisit the 25 to 30 bps through the cycle cost of risk target that you presented at the last Investor Day, which continues to, frankly, make very little sense to me when it's the same as it was in the last cycle when noncore made a small proportion of the overall bp that drove more than half the loan losses. So what's the real through-the-cycle cost of risk for ABN when noncore is almost gone? Because based on history, it looks like barely 10 basis points.
Thanks. I'll ask Lars to comment on TLTRO and Tanja on the cost of risk.
Yes, Omar. In terms of the growth expectation, I mean, clearly, you've got to take it from the background of the first half of the year was still very much impacted by COVID. And therefore, loan demand and working capital demand was still muted. We also still in the Netherlands have this -- have the government measures going directly to companies. Now these government measures, we expect to be lifted come Q3. And therefore, there's quite a bit of pent-up demand here that we're seeing that's built up. So 4% in a half year, I agree with you, in a normal year would seem very ambitious. But in a period where we are really coming out of COVID and certainly every sort of forward-looking that we are doing at the moment is skewing towards the positive, it is doable. And the other thing to take into account is that in CIB, you are looking at much bigger tickets. So you can actually move the dial with not having to wait for a lot of smaller tickets. So we're definitely not depending on this coming from consumer lending. I mean, we are very much seeing CIB as the driver and then flowing through into the commercial banking.
Okay. And Omar, on your question on cost of risk. Indeed, you're right, our risk profile for the core bank is a clear improvement once noncore has been wound down. Indeed, we didn't update our cost of risk guided during Investor Day because noncore will be part of the bank for quite a bit of time up until 2023 and beyond. Right now, we see actually this quarter that we made significant steps in winding down noncore, which, well, feeds into the guidance for this year as well, well below this through-the-cycle cost of risk. We haven't updated our guidance yet, but that's something we will look into at some stage.
Our next question is from Ms. Giulia Aurora Miotto of Morgan Stanley.
2, please. So the first one, I want to go back to the capital distribution question. So at the moment, CET1 is up 16% if you look at the Basel IV. And the target for buybacks is basically above 15%. So on this basis, could we assume that the whole 1% excess could come back in terms of buybacks, or that optically is too high in terms of a payout based on basically 2021 results? And then perhaps a sub-question on capital. Given all this excess capital, is there a chance that you might consider perhaps some further restructuring or some further actions to basically improve profitability structurally given that revenues are -- especially NII are a bit weak? And then my second question is a bit of a technicality on NII. If I look at the trends in the key divisions quarter-on-quarter, especially retail and commercial banking, they are down quite a bit. But then corporate center, especially once we remove the EUR 30 million one-off, NII actually went from minus EUR 13 million in Q1 to plus EUR 52 million in Q2. And so I was wondering what what drove that big change? And what is the realistic level of NII for the corporate center?
Giulia, thank you for your questions. On the -- let me take the first 2. And Lars, maybe take the second. The -- so go back to the 16% of Basel IV -- sitting around the 16% Basel IV that we've gotten to. We have said that we would consider the discussions on buybacks, as I've said previously to the previous question, in the first part of next year. So I don't want to get ahead of that conversation. Just at the same time, I will say that what we will also engage in that part -- during that discussion is a recalibration also of the thresholds that we have considered in terms of buybacks. Now without really getting into the details of what that conversation will entail, I will confirm, again, as I've done consistently, that we will have those conversations both within the bank and then subsequently to get to a decision on that based on our full year results in '22. As to your question on further restructuring, at this point, we continue to execute against the strategy. That is -- that has been designed around an anticipated ROE in 2024 with a cost base of around EUR 4.7 billion or lower. That's what we clearly guided toward as we talked about our expected cost basis. So we will always look at the potential to accelerate our cost decreases. We just talked about noncore and the potential there for an acceleration for their costs. So we will continue to evaluate this as the year continues.
Yes. And I think on the technical question around the corporate center, it relates a bit back to the earlier question about the break funding cost where the break funding cost is a one-off. But actually, in terms of the organization as a whole, we have a EUR 21 million prepayment pickup as well against that overall for the organization. It's neutral. So I think it has to be looked at in that slide.
Our next question is from Ms. Anke Reingen of RBC.
Apologies for coming back on the capital. Just one thing. In terms of the speed of running down the excess capital, are you considering special dividends as well? Or is it mainly ordinary dividends plus the buyback you have in mind? And then secondly, on the private bank, [indiscernible] gave you a strategic update. It was in that one of the growth engines. And you -- one of the momentum areas. And I just wonder how happy you are here with respect to the performance? I mean they seem to be impacted by the charging of deposits. And just if you can maybe just talk about your general -- how you think it's positioned? And then also if M&A is still one area that you think you could consider strengthen that business [indiscernible]?
Yes. Thanks for your question. Yes. On the -- on your question on dividends, just let me reiterate. So 2019 dividend will be paid during '21, in October '21. And then any other considerations in terms of buybacks, we will have or consider during the first quarter of '22 based on those full year results. At this point, we are thinking about the potential for buybacks. We will discuss, as I've said before, with calibration of thresholds. And when we've decided, we will then communicate what the outcome is. On the private bank, actually, I've been quite pleased with the performance over the second quarter. Net-net, although we've seen a significant cash outflow which is a direct result of the negative interest that we began charging, pushing out cash as we intended to do. We've also seen an increase on NNA of about EUR 1.9 billion for the 6 months. That implies that we've indeed received also new customers. We've seen an increase on the back of market conditions of fees as well. And at the same time, we continue, as I considered a Northwest European strategy around our private bank, we continue to expand on our strategy to serve entrepreneurs and their enterprises. Now we're uniquely positioned for that particular segment because we do carry the sectoral knowledge of our corporate bank, making it available to entrepreneurs as we serve them around their own private needs. So strategically, that makes a lot of sense in terms of the uniqueness of the proposition. And therefore, when we consider M&A, as I've said before, a bolt-on M&A could well be in that direction as well. So strategically, I'm happy with the performance of the Private Bank. Clearly, we will continue to ensure that, that performance will continue to benefit from the economies further opening up. And we will consider M&A as and when appropriate.
Our next question is from Mr. Guillaume Tiberghien of Exane BNP Paribas.
I have a question on the corporate center, whether you could give us a guidance of what to expect, maybe a PBT level, maybe this year and going forward, please?
Yes. I think that's going to be a short answer. We're not going to give any specific guidance in that sense.
That's a very short answer. Maybe then if I try to rephrase it a little bit. Do you think your revenues can be around 0 in the corporate center?
Yes. I think you were rephrasing your question, but I guess the essences are still the same. We're not going to get into those specifics.
Our next question is from Mr. Robin van den Broek of Mediobanca.
I was just wondering if you could specify how you deal with your private equity investments in your other income line. Some gains came through. This time, I think was related to the Tink sale. But that asset has seen quite a few refinancings over the last few quarters. So you would expect basically that you capture those gains when those events happen. So I was just wondering if you could comment on that. And also, if there's more gains in the pipeline. So that's number #1. Secondly, also in relation to Omar's question on TLTRO. Did you confirm that the core CIB and the CB divisions are a good proxy for where you stand on getting through that benchmark? With Q1, you sounded pretty optimistic on making that benchmark. Do I understand correctly from your narrative today that you're a little bit more cautious now? And maybe lastly, and sorry to come back on this, on the buyback levels. I mean, if you were to lower your threshold based on the AML settlement, I think 1.5 percentage points is quite a bit of a potential buyback, especially given your average daily volume with a shareholder that still has sort of 56%. I was just wondering, to what extent is this limitation driven by the liquidity for stock consideration in settling a buyback off those levels?
All right. Thanks for the questions. Lars, would you mind taking the first 2? I'll take the buyback.
So I mean our accounting treatment here for the private equity is very much a mark-to-market treatment. So we are continuously every month looking at what the best fair value is. And for the Tink one, there was basically new information. So this is going to be a volatile item. I mean this tends to be the nature of all these investments that we hold in a mark-to-market portfolio. So I can't give you an outlook on that. I mean, this quarter, it was a positive outlook. In terms of the TLTRO, I don't think we're changing our views. In fact, I think we are sort of supporting the view that we really believe that we can make this threshold and that we are working extremely hard to get there. And for sure, the CIB and the CD are going to be the primary engines that are going to get us there.
Yes. In that sense, our outlook has not changed versus Q1. The -- so to your question on any potential buyback and the resulting role of the stock or the majority shareholder, we're going to get to our own assessments around the potential for buybacks. It will then be -- it will then go through the usual governance that you should expect from us. And that's what we will then do, and the results of that will be communicated.
We have a follow-up question from Mr. Stefan Nedialkov from Citi.
Just a follow-up on the number of questions that have been asked on the buyback. If you will, can you give us a targeted buyback 101, so to say? Are they feasible in the Netherlands? How quickly can they be implemented under your governance structure, if at all? And is this something you will consider?
We're going to be -- as we consider the structure of the buyback, we will have ongoing conversations clearly on how to best execute a buyback. And I there's a number of options you consider on buybacks. And I appreciate the need to know and the type of scenarios that we'd like to run. I really don't want to get ahead of that discussion before we've had a clear indication of what the buyback would actually entail. And then as I said before, and I appreciate there is a need to know and there's a desire to know. But I do think we need to go through our own governance before I give any further details around how we would potentially structure a buyback. Now rest assured, if that's applicable in the questions may -- very well understood questions on buybacks. I've been very clear about returning 2019 dividend. We've also been very consistent and clear around when and how we would consider buybacks. And as soon as we have any details as how we intend to structure if and when we consider the buybacks, I will come back to this audience post haste.
So Robert, just to make sure I understood your answer. My question was, is there anything legally preventing a targeted buyback for any bank in the Netherlands? And is there anything in your governance that currently prevents you from doing a targeted buyback?
There is nothing in there that would keep us back now.
Our next question is from Mr. Tarik El Mejjad of Bank of America.
Just one question, please, on capital. The CET1 ratio build was driven by material drop in margin away from operational [indiscernible] risk. I wanted to know if there is anything on this [indiscernible] that could reverse in the coming quarters? [indiscernible] the whole decrease is actually there to stay. And also, when you mentioned your...
Could I? Could I? Sorry, could I ask you to speak a bit clearly into the mic. We're having a -- your line is breaking up a bit.
Sorry. I was saying -- is it better now?
Yes, that's much better. Thank you.
So I was saying your CET1 ratio build was mainly driven by a significant drop in your RWAs from operational and credit risk. I want to know if there's anything in this drop in RWAs that could reverse or increase in the next quarters due to technicalities or is it there to stay? And the second question on capital is the 16% CET1 ratio in Basel IV that you currently give us an indication, if that includes all Basel IV impacts like certification, implementation and everything? Or is it just a part of it? That's it for me.
Tanja, could I ask you to comment?
Yes. So on your first question on RWAs. And I think it was already mentioned previously in the call, what we still expect in the coming period. It's one related to reversion to different approaches, standardized and foundational approaches that will lead to some increases in credit risk RWAs. And also, the DNB add-on is expected in the first quarter of next year. So yes, there will be some ongoing developments in RWA and the Basel III. And what was the next -- the second question? Sorry, I forgot.
Could you repeat your second question?
Yes, of course. The second question was on Basel IV number you gave us of 16%. Did that incorporate all above full impact or only a part of it?
I couldn't hear the question. So the first part of your question was -- you're breaking up a little bit.
What the Basel IV 16% incorporates?
Tarik, are you still there? Or could you maybe just repeat? Because, again, you were breaking up.
Yes, can you hear me now? I'm on landline so I'm not sure what's happening.
Yes.
So my question was the 16% CET1 ratio in Basel IV, if that includes all Basel IV impacts or only partial impacts of Basel IV?
Well, that is the Basel IV number based on how we interpret Basel IV at this stage. And of course, as you are aware, the Basel IV regulations are not final yet. So this is based on what we know today. And everything we know today is incorporated there.
Our next question is from Mr. Benjamin Goy of Deutsche Bank.
Just one follow-up from my side. Maybe you can give us a bit of context on how important prepayment fees are for the net interest income normally. Now in Q2, it was a good mood. I think Q4 is also seasonally strong. But just trying to understand how important this is to your quarterly NII generally?
Thank you. Lars?
Okay. I think prepayment fees, yes, in the second quarter was particularly strong. I mean there is some seasonality attached to this. And it basically has to do, I think, with this COVID period as well people having saved a lot, they have used some of that additional cash to pay off. I mean, the seasonality here would normally be probably Q2 and Q4. So is it important? Well, it's important that we do get some payback for prepayments, because clearly, this is lost income for the future, but I don't think it's going to be at these sorts of levels carrying through. And when we're paying out -- when we're giving our projection of the 5.3 to 5.4, I mean we're not building in there that it's EUR 20 million a month or a quarter.
We have a follow-up question from Benoit Petrarque of Kepler Cheuvreux.
Yes. So on the head office disposal, could you update us on that one? Any -- in terms of timing, do you still expect that to be happening in the second part of the year? And then just to -- on the capital, so leaving aside the kind of question on the excess capital versus your threshold of 14.5% or 15%, whatever, you are going to be paying 50% payout ratio. Well, arguably, it's not a -- you could actually push it to kind of almost 100%, right, in a year where your CET1 ratio on the Basel IV is 16%. So what is your thoughts on the adequacy, let's say, on the more kind of long term or your 50%? Yes. That's it.
Okay. Thank you. So on the disposal of our headquarters, I'd say the transaction is proceeding. It's continuing. We've targeted completion by -- for the end of the year. And when we have announcements to make, we'll make announcement.In terms of our dividend policy, we've just recalibrated our dividend policy just last year. And at this point, I don't see any reason to change the policy as is. So we will stick to the policy of 50% as we communicated in November last year.
We have a follow-up question from Giulia Aurora Miotto of Morgan Stanley.
Just on net promoter score, so I understand why it has decreased, but you highlight a number of things, fees and AML settlement. But how do you plan to turn that around, also in light of targeting market share growth and that -- both in mortgages and in SMEs, please?
Yes. Yes. Thanks for your question. Giulia, I'm glad you referenced that because these are important indicators to us as we continue to execute our strategy. On mortgages, I'm actually quite pleased with where we are in terms of our ultimate goal set in -- on NPS for mortgages. And all the initiatives we talked about during this call, particularly as we work very, very closely with our intermediaries, allowing opening up with digital channels, particularly speed of offering with the relevant pricing levels that go with these types of offerings, will continue to help impact our mortgages NPS. On SME, clearly, the reasons that we've indicated are the reasons and -- why the NPS scores decreased. It's never good that it happens yet again on the back of negative publicity as it related to the settlement, as it related to some of these offices that we were closing. It was to be expected.The way we're offsetting this is to continue to ensure that our digital capability to the SMEs continues to improve. And that's actually why we've launched the various initiatives that we've also highlighted in our quarterly report. And I think the first indications are actually quite positive. And I can speak for my own personal experience in talking to many of these SMEs about, A, the digital packages that we're making available to them. But at the same time, starting to combine some of our expertise around private banking in a service offering to SMEs actually does do very well for NPS. Now clearly, as you know, for NPS scores to begin to change, that will take a few months to actually see the effects thereof. That we will continue to monitor, and we will continue to adjust as necessary.
And we have a follow-up question from Anke Reingen of RBC.
Apologies to follow up. And you might as well say I have to wait till February. But just trying to understand as -- this payout ratio consisting of the dividend, 50%, and the buyback, above 100%. Is that possible? Or you see 100% payout ratio as basically as much as you can go? I mean, obviously, aside of the 2019 actual payment you want to do this year.
Yes. Again, I appreciate the question, but I'm just not going to get into the details of what the potential buyback in combination or in relationship payout ratios look like. I think it's -- I think we've been very clear that we need to get our facts on the table as it relates to full year results '21. That will be the time that we will then consider buybacks as we said all along. And as soon as we have the details on how we expect to structure a buyback, we will provide those details.
And we have a follow-up question from Omar Fall of Barclays.
I just wanted to ask about M&A, please. So historically, there's been disappointment on capital return at the group prior to your time here because the spreadsheet maths have been attractive in terms of excess capital, but then were surprised by unforeseen uses of that capital. So what confidence should shareholders have that the same might not happen now in terms of M&A, i.e., that any transactions are truly bolt-on? Because I guess a lot of the confusion around capital stems from the fact that, unless we're really talking about paying out more than 100%, the maths suggests that your high starting point of capital is just going to keep growing at infinite even with the -- a reasonable payout.
Yes. So I can't really talk about the M&A that's happened before at the bank. Hopefully, the track record was -- is telling you right now, in a year's time, we've made some very conscientious choices, and we've executed consistently against it. So that means that any time I will consider M&A, it has to be accretive in terms of the strategic choices that we have made, keeping in mind of the dynamics of any transactions that we would have to do. So that's -- obviously, it's keeping the strategic priority for the bank front and center. But it's also keeping the -- any potential consideration for shareholders of front and center in the way we would structure any deal. So the only way I can show that to you is by actually concluding a transaction and let the record then speak for itself. We will only consider transactions when and if they are accretive to our overall strategy. That will consume some capital. Hence, we said in our calibrations, 200 bps, 13% to 15% calibration. There is something in there that is allocated to M&A, but we'll be very consistent as we have been all along around the actual execution of M&A.
We have no further questions, sir. Please continue.
Okay. Well, that then wraps up the call for today. Again, really love to -- thank you for all your questions. I know we're going to be speaking soon again. So I'm sure we'll have a follow-up with some of the questions that we were talking about today. But for now, see you later.
This concludes the ABN AMRO Second Quarter 2021 Analyst and Investor Call. Thank you for your attention. You may now disconnect your lines.