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ABN Amro Bank NV
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Hello, and welcome to the ABN AMRO Second Quarter 2023 Analyst and Investor Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Robert Swaak, the CEO, to begin today's conference. Thank you.
Thank you. Thanks very much, and good morning, everyone. Welcome to our Q2 results. I'm joined by Ferdinand Vaandrager, our interim CFO, and as always, by Tanja Cuppen, our CRO. I'll update you on the main topics for this quarter before we start the Q&A session. So let me first take you through the highlights on slide two.
I'm very pleased with another quarter of strong results. Net profit reflects strong NII and is supported by impairment releases as credit quality remains solid. NII continued to benefit from the higher interest rate environment, our overall deposit volume remained stable, while clients continue to transfer cash into interest-bearing accounts. Business momentum is also holding up for corporate lending. We again managed to show growth on our mortgage portfolio despite a slow housing market. We have lowered our FY 2023 cost outlook to EUR 5.2 billion as the SRF contribution this year was lower than expected.
The tight labor market is causing a delay in sourcing qualified staff in need for a number of investments and therefore will lead to a cost that will run into 2024. In addition, the continued higher inflation and slower reduction of our AML costs than we had anticipated, also means that we will not be successful in bringing down cost of EUR 4.7 million by 2024. Now as we're nearing the end of our plan period, we will also be updating you on our financial targets at our Q4 results.
In addition, we will present a new capital framework and update you on potential share buybacks. To run off the highlights, we set our interim dividend at EUR 0.62 for the first half of 2023. Turning to Slide 3. Let me say a few words on our progress on executing our strategy. And we are continuing to invest in our digital capabilities, including artificial intelligence, which has the potential to improve many aspects of our operations.
In Q2, we launched an interesting pilot that use an on-prem ChatGPT server, which automatically records and summarizes client calls. In addition, during the call, the adviser is automatically prompted with the right product pages based on the conversation. The advisers involved in the pilot are very enthusiastic as it allows them to spend more time with their clients, and we are currently evaluating how we can incorporate this further and more broadly in our operations.
We are progressing further on the simplification of our wealth management organization. In this quarter, we established the branchification of Neuflize. Our Impact Funds went live and what is unique for this type of fund is the low minimum threshold of EUR 50,000. This offers more clients the opportunity to continue to invest in companies striving for a positive impact on people, planet and society. ABN AMRO Ventures invested in a company whose product we use to detect fraud and protect our clients against malware, for example.
On the Dutch economy, which you'll find on Slide 4. Dutch industry PMI rose slightly in July, but still indicates a contraction of activity and the outlook for the German industry worsened, however, which is an important export market for the Netherlands. On the positive side, many sectors still carry large order books, and we are starting to see lower purchase prices coming through. Bankruptcy remains low, confirming the resilience of the Dutch economy. House prices have now fallen 6% on average due to higher mortgage rates and deteriorated housing market sentiment.
The end of the price correction is in sight and for 2024, we now expect a modest 3% decline. Affordability and financing of homes will gradually improve as wage increases come true to compensate for inflation. And also the low number of transactions reflects the lack of new construction, which is hampered by higher interest rates, price inflation for materials and environmental restrictions. Second quarter performance, let's say, first, NII, and you'll find that on Slide 5. Looking back at the last 4 quarters, our NII showed a strong recovery from the negative rate environment, mainly as deposit margins improved. Deposit margins still increased a bit further during Q2, with the effect of the higher rates is starting to level off.
The margin we locked in on new mortgage production was in line with our average portfolio margin and also the portfolio volume increased somewhat. Corporate margins are holding up. And for deposits, the competitive forces we experienced and the impact this has on volumes and margins will become the main driver going forward. We expect to start to see some margin pressure on saving accounts following the last increase of 25 bps as of August 1.
Treasury result was EUR 50 million lower this quarter, and that was caused by unfavorable interest rate resets. This is not structural, and we expect the recovery followed by a further increase as the treasury results still stands to benefit from higher rates. Looking ahead to the next quarter, I expect a recovery in treasury results, while we may start to see some margin pressure on savings. Now turning to Slide 6 on balance sheet developments. We are achieving good results in our strategic focus sectors, which are the digital sector, mobility and new energy. We made further gains in all of these sectors, particularly in our Northwest European markets. In our home market, the mortgage portfolio held up despite the slow housing markets and new mortgage applications are gradually increasing though. So the third quarter might end up a bit stronger.
Consumer loans declined due to higher repayments and less demand. This quarter, we further reduced the remaining non-core portfolio, which is now down to just EUR 0.5 billion. We are making good progress on winding down the non-core back-office operations in the various countries. Moving to our client deposit base. As expected, clients continue to optimize their cash by switching to interest-bearing accounts. Overall, our client deposit volumes remained stable, and we see limited deposits [ leaving ] the bank as most of our clients opt for the savings products we have on offer, in particular, our time deposits.
Returning to fees and other income on Slide 7. Fees were flat compared to last quarter. During the second quarter, the market volatility was lower compared to previous quarter, and this is reflected in clearance fee income. Debt and equity markets were acquired in Q2 and fees were lower as a result. Nevertheless, Corporate Banking showed an increase in fees in fee income due to a one-off fee booked in noncore. Wealth management fee income was also stable, driven by stable results for Asset Management and other income was up versus Q1, largely related to fair value adjustments from IFRS 17 and higher treasury results.
Now turning to Slide 8 on costs. Our cost saving programs continue to deliver cost reductions. We made further progress on winding down noncore operations and the implementation of our new client service model is also leading to savings. We booked the release related to the Single Resolution Fund as the contribution was lower than we originally anticipated, and this will bring down regulatory leverage for the full year to around EUR 340 million. And as a consequence, we now expect full year cost of around EUR 5.2 billion.
At the beginning of the year, we flagged the further -- need to further invest in our data capabilities, our digitalization of our processes and building up of our sustainable finance regulation capabilities. We are due to tight labor markets experiencing delays in sourcing staff for these projects. So we expect investment costs to increase in the second half of the year and to run over into 2024. Now this is in contrast to the assumptions we made on our cost target, where we, in fact, anticipated investments to decrease EUR 100 million in 2024.
Also, more efforts than expected is required to ensure AML activities can be maintained at the high standards needed to fulfill our gatekeeper role. And it is clear that our AML processes are becoming increasingly more complex and our original assumptions on related cost reductions need to be reviewed. We acknowledged at the beginning of the year that it would be challenging to reach our 2024 cost target. An increasing number of our original assumptions back in 2020 have come under pressure, and we face an inflationary environment, continued delayed investments, I should say, delayed investments and new insight in our future AML operations. We will deliver on our noncore cost reduction, and I also expect regulatory levies to come down further.
So as we stand here today, it is clear, we're not going to succeed in reaching our target of EUR 4.7 billion by next year, but I will add immediately that we will remain fully committed to cost effectiveness. That is not changing. We started to work on a financial plan for the years ahead, and therefore, we'll present you with our new financial targets with our Q4 results.
Turning to impairments on Slide 9. This quarter, we saw a release an impairment of EUR 69 million, which was for a large part related to the release of the remaining COVID overlay and a net release on individual corporate files. After an assessment of a large number of clients, we concluded that the impact of COVID-19 on our clients has been absorbed in the credit risk metrics and an overlay was no longer warranted. The overlay related to the war in Ukraine is obviously kept in place. There's some new provisioning related to inflow in stage 3, however, more than offset by releases in individual corporate files, both in core and noncore. The inflow in stage 3 for mortgages was related to the introduction of stricter credit monitoring metrics.
The credit quality of our book remains solid and the impact of the economic slowdown in our loan portfolio is not visible so far. And therefore, we expect the cost of risk for 2023 to remain well below or through the cycle cost of risk of 20 basis points. Slide 10 on capital. Our Basel III capital ratio stands at 4.9% (sic) [ 14.9% ] and Basel IV at around 16%, and we remain well capitalized. 50% of our net profit is added to Common equity Tier 1 capital and the other half accrued to our dividend reserves. Offsetting the capital generations were higher RWAs due to modeled updates, and this is only partially offset by credit quality improvements in business developments. Countercyclical buffer increase as of May 25th has raised the MDA trigger to 10.5%. However, our capital position remains well beyond this level. Now to round out with our financial targets. We're off a good year. A good start of the year actually with an ROE well above our 10% ambition.
Our NII has recovered from the negative interest rate environment, and we have more or less completed the derisking of our balance sheet with the wind-down of our noncore portfolio. A solid risk profile and a resilient dutch economy has led to impairment releases over the first half of the year, which has further boosted our results. As I mentioned, cost targets for '24 no longer achievable also given the delay we are currently facing and tracking staff.
We've announced that we will present our new financial targets and capital framework with our Q4 results given that we're nearing the end of our planning period. In addition, we will present -- update you on our share buybacks.
With that, I guess this is the time to ask the operator to open the call for questions.
[Operator Instructions] We will now take our first question from Giulia Miotto at Morgan Stanley.
A couple of questions from me. The first one, maybe not necessarily if it the results is rather back taxes. We have seen some headlines yesterday coming from Italy...
Sorry, say again, Giulia.
I was saying, we have seen some totally unexpected headlines yesterday coming from Italy. And I was wondering if you sense anything similar coming in any of your markets. So that is my first question. Then the second question on the NII line. So ABN has a long dated replicating portfolio. And therefore, I was wondering how whereas rates are expected to start coming down towards the end of next year and then in 2025. So how long do you think the NII can keep growing for? And if you could maybe update the rate sensitivity guidance that will be also very welcome.
Yes. thanks, Giulia. I'll ask Ferdinand to take the questions on NII. Yes, on the unexpected communication out of Italy, I'll leave it for the Italians to deal with the outcome of that is, we translated it into our main market. We haven't had any kind of suggestion of announcements of the kinds. I would also say that the Dutch market right now in way of interest rates and deposit rates is a very transparent market. We have optionality for our customers in market. Customers can switch between banks fairly easily, and there is a wide variety of interest rates, if I can say that on offer.
In addition, what we also had in particularly the Dutch market, the Dutch banks have been paying bank taxes for about 10 years now. It's about EUR 500 million on an annual basis for ABN AMRO about EUR 100 million. So we've had a -- we've already had some kind of a measure for banks to be taxed separately. We see a good functioning market on interest rates here in the Netherlands with customers actually having a choice.
And also, I would say, windfall gains, I mean, if you look at the way the development of ROEs generally in the past versus where we are now, we're quite happy where we're ending up now but to start to talk about windfall gains in light of the financial results over the last few years. I think that's certainly trying to come to terms with that. So let me put it that way. So in summary, a functioning market is a transparent market, customer choice and bank taxes that are being paid. So we haven't really heard any of these kinds of messages coming into our market. NII, Ferdinand?
Giulia. If you look for this quarter to the underlying drivers, number one is deposit margins where we still see improvements, although it's clear that the effect of higher rates on the replicating portfolio starts gradually leveling off from current half from current levels. Then secondly, you have the treasury results, our equity mismatch, yes, that will keep adding over the coming quarters as a positive driver but already indicated, this can be volatile. So to provide a bit more transparency, we said it was a quarter-on-quarter negative from a roughly EUR 50 million related to the repricing profile of our swap portfolio. But if you look for the next quarter, that's why we say it was a due to volatility, we can already see the roll-off on some shorter-term receiver swaps that will catch up in the next quarter. Then the last lever clearly what's happening with asset margins on lending products. And there, we see that they are holding up as pricing is catching up with higher rates. So then going forward, that we are entering now more of BAU situations where deposit margins will be driven by the effect of competition on volumes and markets. You've seen we have a stable deposits overall deposit level, but you've also seen in the past 4 months, there were 3 rate increases.
So the ability to predict what's going to happen there is low and competition behavior is unknown. But what you do see that the margins on current accounts clearly still benefit from higher rates, and also our treasury results continue to benefit from that. And so also, you're linked to the replicated portfolio and then I stop there, clearly around 40% is on less than -- reprices in less than a year and overall is roughly 3-year duration, but you know the investments there in swaps is in a barbell structure.
Can I just follow up on one thing you said. So replicating portfolio is leveling off. So does this mean that you don't expect the benefit to continue to come through for a few quarters? Or is that still a positive? I would have thought that the replicating portfolio is still a positive to your NII?
Yes. But I'm just saying the rate of increases quarter-over-quarter is leveling off.
And then they are still positive.
And we will now move on to our next question is from Flora Bocahut at Jefferies.
Yes. The first question I wanted ask you is coming back to the NII. I mean I just heard all the details that you gave us, and thank you for this. The question I have is very simple. Based on everything you just described, it looks to me also thinking that we are about to have rate cuts probably next year. Should we expect, therefore, that this year is going to be the peak of NII. And when we look forward toward '24, '25, there is a risk that NII declined. The second question is on RWA. I think you had guided in the past that the model review impact would last all year. We had it in Q2. We had it in Q1. Should we expect further RWA increase from other reviews in H2 this year as well?
Ferdinand, NII and then Tanja.
Yes. NII and I know it's a key topic. Is it peak NII or not. I'll just explain what the underlying elements and drivers are, and it's already alluded to the expectation of potentially the ECB start happening end of the year or next year. So with all those elements and also an unknown volume margin on the back of competition, it's very hard to predict that. And I think it's definitely too early to start guiding what we expect NII to do in at '24 and '25.
Okay. Yes, on RWA. Yes, as you indicated, we have taken significant steps already in simplifying our model landscape and preparing for the introduction of Basel IV and thereby the largest part of ROE increases is behind us. We do expect further RWA increases that can be result from, for example, model reviews that we are doing on an ongoing basis, but also methodology and policy changes and still also moving IRB models to more standardized or foundation approaches. So yes, we will continue to work on our model landscape and adjust RWAs as it comes. I think important to know as well that the impact of model-related increases on the Basel IV are lower than Basel III.
We'll now move on to our next question from Farquhar Murray at Autonomous.
Just 2 questions, if I may. Firstly, on the capital return update, could you just elaborate on the reasoning for timing this to year-end results? It feels a little bit like a deferral and is ABN now committing to a strict annual pattern of updates from here, which seems perhaps a bit less frequent than peers? And then secondly, just going back to the NII conversation. Thanks for the details there. Just in terms of that EUR 50 million step-down should I, therefore, think of that as kind of a truck permanent kind of clunk down in terms of the treasury book that probably gradually recovers or are you suggesting to receive a swap conversation actually going to recover a fair chunk of that relatively quickly. I just wouldn't mind understanding how much -- how to look through the volatility there if that's okay.
Yes. Thanks for the questions. Ferdinand will follow up on NII. Just let me take capital return. We -- since we are updating our financial KPIs at the end of the year because we're nearing the end of the plan period. We also thought it was good to then update our capital framework at the same time because clearly, we're running into the end of our -- we're getting near to the end of a plan period based on assumptions that we had concluded off on it in 2020. And we felt it was better done to take both the update on our targets together with an update on capital framework and therefore, then also can be able to conclude all on potential share buybacks. So we'd rather do it together, then start to do this piecemeal. And I think from the -- from where we are in the plan period, it makes good sense.
In terms of the frequency that you've alluded to, I wouldn't infer any conclusions from the fact that we're doing an update on our financial targets in Q1. We will review our capital framework, and we'll come back and refer them at that time, both on the framework and on share buybacks.
Yes, Farquhar, just coming back on the more volatility in the treasury results. As said, it's clearly still a positive, but a positive effect is lower than in the previous quarter. We've always said that this line item can be volatile because it's fully related to the repricing profile of the swap portfolio. So can this quickly reverse in the next quarter, as I said already in the previous comments, we are highlighting this and also expect this to recover if you look at the next quarter, as I said, that's potentially linked to the roll-off of some shorter-term receiver swaps, which can then have the additional positive effect in the next quarter.
We'll take our next question from Tarik El Mejjad at Bank of America.
Just 2 actually follow-up questions on -- still on NII, I mean, I understand that it's very helpful the different moving parts you gave us. But I still really like it, surprised by the fact that you can't give us a net guidance on the trend of NII. Because if you think the main driver here is the competition from deposit rates. Maybe you can give us a sensitivity on where deposit EBITDA would go or terminal one by the end of the year, and then we can -- we can have at least a range of NII target there or guidance.
So that's the first one. So would you be able to give us that range function of deposit beta. And secondly, on the capital return, I hear your question about you want to do everything together with Q4 results. But I guess this is about the threshold of 15% and so on. But returning capital progressively, at least some share buyback in second half have been done independently from that, I guess. So were you rather planning to use some of the capital to do some acquisitions in wealth management that didn't happen. And then you had to delay distribution? Or was it -- or was the plan to not do anything this year and then wait for next year?
Yes. I'll take your last question, and Ferdi, I think will expand a little bit more on NII, although we have to say that there is a high level of uncertainty, but I won't get ahead of that answer. It's -- when we talk about share buybacks and the timing of announcing any further share buybacks, we did not commit to any timing of those share buybacks. And there is a preference to once you begin to update and to begin to review the financial performance of the bank, particularly going forward in the next -- into the next plan period.
And at the same time, I want to be very clear on share buybacks and your capital framework that you do need to take that together. We do think that given where we are right now, we have a good view as to what we expect and how we expect to land in '23, what the potential is for landing in '24, including insights further in some of the other choices that we've been making. As it relates and has an effect on our capital framework that is good to do that all together. I'll just remind you that when we came up with our capital framework business back in 2020 with a number of variables that, as we talked about in previous calls, have either changed or have been adjusted.
So we'd like to have that overview. I absolutely appreciate that there is a need for more information on share buybacks. We still remain committed to capital return. But indeed, we'd like to present that together. So you have a one view in one time rather than starting to do this in chunks, which I don't think we've ever done, and we'd much rather have that complete overview.
Yes, and then maybe following on pass-through expectations and what guidance, it's pretty clear we can observe what the beta or the pass-through has been so far, and it's relatively low. It's around the 20%. But I said before, after the past 4 months, we've seen 4 rate increases. We definitely do not price based on a beta, and that's where I had the earlier comments because it's really dependent on the competitive behavior as well as the yields on the replicating portfolio. If you look at our deposits, do we see a shift or migration from current accounts EUR 97 billion, most of that, we pay 0% on. Yes, you start to see some optimizing there. So in Q1, you saw a migration of roughly EUR 10 billion into time deposits or saving accounts that slowed down now to around EUR 6 billion. So even there, despite the gap between the saving rates and the current accounts increasing, we don't see a significant migration. But as said, also for ABN, where by far, the majority of the deposits comes from the Netherlands, we don't provide any sort of forward-looking expectation on a beta because that would sort of implicitly sort of guide what our pricing expectation is.
But for now, the beta is around 20%. We don't see any outflow. You see some transfer into interest-bearing deposits. And our loan to deposit is almost at historical low levels. So there's no incentive for us to be a price leader in terms of rate increases on segments.
So the 20% deposit EBITDA is after the August rate hikes?
Yes. So that's -- if you include also that's also including then your current accounts where you pay zero in. So if you just look at the saving accounts, then clear that EBITDA is 30% to 35%. So it depends on what your definition is on deposit EBITDA.
And we will now move on to our next question from Marta Sánchez Romero at Citi.
The first one, could you please remind us your priorities in terms of capital allocation? Do you think you need to make the bank more efficient and hence, you could prioritize cost restructuring or even M&A before increasing capital repatriation to shareholders. My second question is related to the first one, really. Do you think your commitment to reduce costs will imply additional restructuring charges and the third one is a quick follow-up on Flora's question on risk-weighted asset inflation. Ballpark, what is the fully loaded core Tier 1 headwind should we expect from the review of internal models?
Repeat your last question because you're coming through...
So I need to repeat it?
Yes. And just very quickly.
Yes. just ballpark, what is the impact on fully loaded core Tier 1 expected from the ongoing review of internal models?
Yes. Yes, I'll take your first question. I'll ask Ferdinand to take the second and Tanja will take the third. On prioritizing capital allocation, I think we've always been very clear that the way we execute our strategy. We've made a very clear choice in the segments we serve and the Northwest European geographies that we serve. So that's an organic execution of our strategy with an associated capital allocation, if you will, in terms of executing our strategy. M&A has been -- always has been a part of a strategy that we would always consider. As we've talked about M&A in the past, it hasn't changed today. If there is an opportunity that would help us execute our strategy more effectively and therefore, be accretive, but also financially accretive and certainly M&A is something that we take under consideration and that would then lead to necessary capital allocations.
So the way we're executing our strategy means that we stay committed to the choices we made around the segments, the growth segments, the geographical areas, and that will carry with it an associated capital allocation. And when M&A opportunity comes up, we will then take the consequences and review and clearly allocate as necessary.
Yes. And maybe a follow-on on costs. First of all, the outlook for this year. So we guide now to around EUR 5.2 billion. So the major reason for lowering that was the announced Single Resolution Fund contribution, which was around EUR 70 million lower. But it's also we said we have an underrun in certain investments we're doing. And Robert said already by the introduction, its investment in digitalization of our processes, but also, for example, significant investments in data capabilities and data infrastructure what we need as we need to report more and more nonfinancial data also linked to sustainable finance regulation.
Secondly, in the second half, also the second phase of our increased CLA of 2.5% kicks in. So that's why we guide for 5.2. And if you annualize the current run rate, it will be below that. And then if you go for the outlook for cost for '24 and the previous quarters, we always linked this to 5 levers. Two of them are still very much relevant. First of all, it's the cost in noncore, it's over last year, it was roughly EUR 160 million. So we still expect definitely EUR 100 million of cost to come out of there.
And secondly, it's a lowering of the regulatory levies of up to EUR 200 million. And I think with the lower SRF contribution, you've seen the first part of that. On the other levers, and that's also the reason why we don't see -- and despite refocus on costs, we think the EUR 4.7 billion is not achievable. And number one is much higher inflation than expected in 2020. So the EUR 100 million lower cost coming from cost savings being higher than inflation that is less achievable now then the number 2 is the investment. As I said, we have an underrun on some of the assessment. So that will flow through into 2024. Also there, that was earlier guided for roughly EUR 100 million. And lastly, you have the AML sort of expected cost coming down when we end up in a BAU situation, while Robert alluded to that, also there, the up to EUR 100 million reduction might be postponed beyond 2024.
So that's why you get some sense of the direction of travel towards 2024. Then your last question, how do you link this to a potential restructuring costs. I know we mentioned the restructuring cost in 2020. We have not booked any significant restructuring costs but as I'm saying, we have an underrun currently in some of the priorities we're doing. We're reskilling staff and you also see that specifically from external staff, the headcount has come down quite significantly in a year's time. So the conclusion of that is that I do not expect any significant restructuring provisional costs in 2024.
Okay. Sorry, a bit of a long answer about how it provides you with some context. Now we're not fully subscribing to the EUR 4.7 billion.
Yes. And then maybe on your third question on RWA. Well, once we do model reviews and have visibility on the impact we do include it in our calculations and in our financials. So all the visibility that we do have, we have included and once we finalize new model reviews that might be indications, but that's not something we can predict what the size will be in the future.
We will now move on to our next question from Benoit Petrarque at Kepler Cheuvreux.
So the first one is on NII. Maybe just to take a bit of a long-term perspective on the deposit margin. Could you help us to understand where your deposit margin is currently versus the long-term average. I think ING is actually discussing a lot on NII split deposit margin versus lending margin. And again, that's very useful and I think it will be nice to have the same type of disclosure for ABN. But I'm just wondering where you are now currently on the deposit margin. On the capital framework, what do you have in mind currently, you had this 15% in the past. Is that still something you want to keep, were you happy with that? Or you've seen some maybe limits to setting kind of a threshold.
So just kind of try to get a bit of duration into what we could get in February. And sorry, it's not clear to me yet fully what is holding you back to announce share buyback in H2. I guess it's maybe a bit of M&A goal to that. But again, just wanted to have that clear because I think on your profitability level and KPIs, I think I'm not sure if there's something you really need to give an update on share buyback. And then maybe just finally, on the fees, you had a EUR 23 million one-off positive.
Is that a real positive? Or do we need to strip that out, i.e., to get it to a clean level of fees or in Q2? Or do you think Q2 was especially low because of low volatility, weak financial markets. And that's all.
Thank Benoit, the deposit margin and fees, Ferdinand will take. On the -- on what we expect to announce in terms of the capital framework in Q1. Let me just say that all components of our current capital framework will be under review to ensure that what we come up with, again, is something that we can carry for a period. So we will be reviewing all the components. That's probably as far as I can say at this point because we're -- as you can imagine, we're still in the midst of working our way into that -- into what the capital framework actually would look like. but all components will be on the review.
And I appreciate the question on timing of share buybacks and your second year -- or sorry, the suggestion on the second half of the year. Again, I'd just refer to what I would say earlier. If we are in a situation where we have good reason to review our plans, I mean, we want to continue to instill cost discipline, we want to ensure that as we are in an inflationary environment, which is changing, we come to the right conclusions in terms of our cost levels, but also at various income levels over a plan period that will have ultimately will be drawn into the share buybacks that we want to do.
And it is very clear, and I -- hopefully, I just confirmed that also in this call, that we will stay committed to regular share buybacks as we did also over the course of the last period. So that will continue to feature. But as I said, we'd like to have the overall view and then communicate with the outcome of that is and do that all in one go.
Yes, Benoit. First of all, on your fees, why are we highlighting EUR 23 million is basically because we still have our disclosures on noncore, and this fee came from non-core. And as you know, our overall loans are now down to roughly EUR 500 million. So that's a very small tail remaining there, and we're in the process of transforming the residual from the countries to the Netherlands. So as it is in noncore, is something we highlight. So if you look quarter-on-quarter, this is something you, as an analyst, could strip out.
Then on margin development, we had the discussion before. I know the disclosures you just mentioned from another bank. But to realize for us, the deposits are fully related to or almost would be related to the Dutch market. And that's also one of the reasons why we're not explicitly stating what our margins or forecasts are there. What I did say is that we still see an increasing deposit margin this quarter. I also said if you look overall to the asset margin side, it is roughly flat for corporates. If you look for consumer loans.
It's a relatively small portfolio where you do have clearly some pressure on margins because your funding costs go up and you have statutory interest of maximum 12%. And on mortgages, we do start in a phase now, although lower productions where a new inflow of margins clearly are at a higher level than what we saw last year. So the new production is now more or less at the level of what the back book margin is. So that should give you some color on the underlying levers of the overall margin development. But the most important reason is, as I just said, our fully dependency on the Netherlands that we don't want to provide an explicit overview of deposits.
[Operator Instructions] We'll now move on to our next question from Guillaume at BNP Paribas Exane.
Two questions on capital. The first one is on the table where you show the Tier 1 ratio, et cetera. The regulatory and other adjustments has increased from a negative 120 to a negative 330. So I was wondering what that was. And the other element is still on the RWA and the change in the models because, a, you're losing all of your retained earnings to an increase in RWA. B, as far as I know, not many banks are experiencing such an impact from changes in model. So I was wondering whether you can elaborate a little bit more as to what's wrong with your models.
Thanks for the question. Tanja?
Yes. I'm looking for the table that you're referring to.
It's Page 31 in the report.
Thank you.
Is it okay? It's a rather detailed question that we start with the second part of your question first and also maybe because we don't have the Q report here readily available for us that Investor Relations will pick up with you after this call. Is that okay?
Sure.
And maybe you can repeat the second question?
The second question still is with regard to the change in the models because not many banks are seeing such an impact from changes in model on RWA. And so I was wondering what is wrong with your model because you've changed them already quite a lot since 4 years.
Yes, that's true, and we are actively working on simplifying our model landscape. Also ahead of Basel IV. And a significant part of our model is related to what is also the low default portfolios, Well, because of the fact that our low default, it's a bit counterintuitive, it's not always easy to develop models that meet the requirements that are set today. So if the number of defaults are too low, then yes, it's not possible to develop an advanced model and that's why we are reviewing our model landscape and also our moving portfolios to less advanced approaches.
And we do that also ahead of Basel IV because on the Basel IV, you get input floors that put in the floor and in any case and for other parts of the portfolio even required to go to an LGD that is prescribed by regulation, and that's the case for the large corporates. So that explains our moves. Of course, I cannot see what choices other banks are making in terms of transitioning from where they are today to the Basel IV environment.
We'll come back on your first question on the reg and other adjustments in the queue.
Yes. It's half of your retained earning. So it's quite an impact quite a non-negligible impact.
We'll now take our next question from Benjamin Goy of Deutsche Bank.
Two questions, please. One on asset quality, one on your deposits. Firstly, you can speak a bit more about your Stage 3 inflows and trends you're seeing typically [indiscernible] cases. And the second question is on the deposits because you have been, let's say, a fast follow-on on the positive side, but sometimes following with a lag. I was just wondering whether the 25 basis points really makes a difference to your clients to switch banks? Or is there some inelasticity in the deposit base because so far deposits are stable and we only see the mix shift within ABN AMRO. I was just wondering how [indiscernible]?
Yes. Yes, Tanja, if you want to take the stage III, I'll take the deposits.
Yes. So on Stage 3, and you see that also in our disclosures, the Stage 3 exposure for corporates came down a little bit, and that's the net impact of outflows and inflows. So we did see some inflow, although, yes, I would say, nothing extraordinary and also no specific trend there in terms of sectors. So you see kind of, well, how the inflow were getting to, I would say, more normal levels and leading to some additions in provisions. But as said, offset by the fact that we were successful in resolving but of course, at the noncore side, but also in the core portfolio, we were able to generate outflow in Stage 3.
And on your question on deposits and the reaction to customers, it is actually obvious now in -- for the second quarter. We've had -- so we've had a number of rate hikes. We see some migration. So we've seen for this quarter, about a EUR 7 billion migration away from current accounts into savings accounts and time deposits. And it actually what it tells you is that the -- whereas the overall deposit space then remains stable is that our clients are clearly opting for the interest rates that we've offered them in conjunction very, very often with some of the other banking relationships that they have with us. So I think it's good to see that there is a -- that clients continue to make use of an interest rate that we've offered whilst they're continuing our new relationship with our bank as well.
The market in the Netherlands, I guess, to earlier comments, is competitive in the sense that there's different interest rates being offered. But at this point, the migration away from ABN AMRO is indeed very limited. And I would subscribe to the reason here that it's also due to the relationship that these clients have with our bank among many of the other products that they will have with ABN AMRO and not just only their current accounts or saving accounts.
We'll take our next question from Raul Sinha at JPMorgan.
I have 2, please, maybe one on detail and one broader question. The one on detail is just coming back to your comment on the replicating portfolio tailwind leveling off. I'm sorry to come back to that, but obviously, it's numbers that we cannot see from the outside. And I just wanted to explore a little bit of why that might be the case for the bank. And just assuming that this is probably because the short-term element of your replicating barbell has completely repriced. And I guess you'd probably still have some tailwinds from the long-term, long-duration element of it. So if you confirm that?
And then the second related point to this replicating question is, can I check if this is also because the equity replication is booked in other income rather than NII? Is that one of the reasons why perhaps some of the repricing of the replication is not in NII, and that's probably why you're making the comment of leveling off. That's the first question. I don't know if you want to answer that first and then we can take the second one.
Go ahead, Ferdinand.
No, it's fine. As I said on replicating sort of leveling off to put it in context, we're definitely not saying that we don't think there are further increases ahead, but the rate of increases underlying will gradually slow down, as you rightfully say, 40% to 45% of the replication portfolio reprices within the year. So we've seen already quite a bit of that benefit and the overall duration is roughly 3 years. So there will still be a tailwind, although the quarter-on-quarter increases will gradually start to level off. And on equity replicating. I don't know if you refer to the overall equity mismatch.
I'm just talking about the equity base, whether...
Yes, the equity base yes, but that's also in NII, and that's a book there on the treasury income.
Got it. I guess the second one...
So the treasury result in other income is more related to overall hedging effectiveness what's in there. But for the equity income is also booked on the NII. So that's included.
Got it. That's very clear. The second one, maybe for Robert, is just on fee income growth, which is running well below, it's flat. It's running well below your sort of medium-term aspirations of 5% to 7%. And I just wanted to get your thoughts on the evolution from here and whether you're coming to the conclusion that M&A might be really needed to supplement your franchise in order to really kick start sort of longer-term fee growth from here?
Yes. Thanks for the question. Yes, fee income has been flat this quarter, but I think it's good to realize that fee income for some part of the fee income, about half of it is also very attributable to market performance. So both wealth management and clearing have had the effects of relatively quiet markets come through in terms of the fee-generating capability that we saw.
We came off of a very strong clearing performance in Q1, and we've had, over the last periods, we've had fee growth of around 7%. So I would still say, based on the fee-generating capabilities that we have also in terms of the segments that we've identified in our strategy, which will generate fees. We're still very much investing in those areas, and we still think that those are areas that will continue to generate sufficient fees for us. but in part were depending on market circumstances. So overall, we would look to maintain the 4% to 7% CAGR that we set out for '20 to '24.
And in terms of your question on M&A and look, what I said before, if we think that M&A is relevant to any of these components of our strategy, but it is also very clear that we would consider the -- we would consider M&A and components of our strategy would be feeder lines within the bank. It would be around wealth management, as we've indicated before.
So yes, I mean, that's -- those are -- if those opportunities -- these present themselves, we'll review them. But we still stick very much with the organic growth capability in the segment choices that we've made as it relates to fees.
We'll now take our next question from Amit Goel at Barclays.
So 2 questions from me. First on capital. I think you mentioned that all aspects of the capital framework are under our view and a lot has changed since it was originally said. I just wanted to check from your perspective, what are the key changes that have happened. And in general, are you thinking about more or less capital return? And then secondly, on costs. I appreciate we're getting up to Q4. But also, I just wanted to check your expectations for '24, '25. Do you think you can do better than the EUR 5.1 billion of costs the same consensus for 2024? And if the EUR 4.7 billion isn't achievable by then, should we think about it achievable for 2025 or not?
Yes. So on capital, I mean, clearly, we're in different economic circumstances than we were back in 2020. So we took up some considerations in those 200 basis points on the economic situation. We did not have the inflationary environment in which we're -- which we're currently operating. At the same time, we've taken out some uncertainties that we had at the time, predominantly related to settlements that we needed to conclude off with the public prosecutor. So there was a number of those components that begin to constitute to build up to a threshold have either changed or been adjusted. So that is why we definitely want to review the -- all the aspects of our capital framework.
Yes. In terms of costs, I would suffice to say at this point, the cost discipline will continue to be there. Clearly, we have to, as Ferdinand has indicated the various components that we currently have under review. I don't think you should defer anything from that in terms of the -- where we're going to end up ultimately, other than the fact that we will continue to execute a high level of cost discipline as we come up with that new number for '24.
I think in all fairness, it's a bit too soon to begin to indicate what that number potentially could be. But the cost discipline will remain. That's not changing. And I think some of the factors that have led us to release the EUR 4.7 billion right now in a way or just unavoidable given the situation where we are in terms of inflationary pressure in light of the pressure on the labor markets. And at the same time, you will have seen us realize some of these cost savings and continue to execute on some of the cost savings, for example, as Ferdinand has already indicated noncore, we'll still continue to execute against those programs and some other existing programs that we have in place.
But too soon at this point to give you a final number. We will do so on -- at Q4.
Got it. But just also to understand what you're saying, so the '24 also then starts to provide a new run rate going forward into '25 and beyond given the pressures that is driving it?
Yes. So let us complete the analysis and then we can give you that complete view in Q1 -- sorry, Q4, apologies.
We will now take our next question from Kiri at HSBC.
A couple of questions from my side. Firstly, just a very quick one. In terms of the persistence of those AML remediation costs into 2024. Can we just have some reassurance that no fresh issues have actually popped up on the radar screen that you might need to address it, but really is just a timing issue in terms of winding down the resources you've got deployed there on AML remediation.
And then secondly, just on Wealth Management and picking up on some of your comments about organic growth. Have you got specific plans to make opportunistic hires of private bankers in Western Europe, say, basically accelerate the growth in hiring plans in Wealth Management just because this big integration project involving 2 of the biggest players in private banking globally going on at the moment? Or is it more a case that the current cost pressures on the issue of your cost targets for next year means you maybe have to take your foot off the pedal there in terms of chasing organic growth and maybe take a backseat given some of those concerns there.
Yes. Yes, I'll take both your questions. So let me just be clear that we expect to complete our work on remediation programs on our AML client files. We still expect to complete those in '23. So that will continue. But indeed, as we said, as we're nearing the completion of the client file remediation, we are also wanting to ensure that we continue to maintain the levels required to make the AML or the ongoing AML activities much more continued sustainable and keep them in an adequate level for the various regulatory requirements. So we will complete the client file remediation programs in '23 and then beyond '23, we will continue to ensure that we have our ongoing AML activities at par and therefore, we do think that will need either more cost or it will drive cost to an extent that we do not see yet our AML reduction as we had envisioned initially to come in, in the period within, which we have indicated. So the AML benefits will come in more gradually. We will continue to invest to ensure that our BAU AML activities are of the quality that is required.
And then on your question, in terms of what we are hoping for team grabs or are we continuing to invest. We've done so over the last plan period. So we will continue to invest and exclusively to a point of team grabs where we can, we will. We've done that in certain areas. Our current indications on cost and cost levels are not preventing us from executing the strategy as we set up for our Wealth Management practice. So we are very much committed to the markets we're currently in. So in Germany, in France and in Belgium, and we continue to invest where necessary, and that does include hiring corporate bankers or sorry, hiring wealth management bankers to come into our practice. So we will continue to do that. that stands aside from the discussion we have on costs.
We'll now take our next question from Anke at RBC.
Just 2 small ones. Firstly, really on the buyback [indiscernible] for coming back. But would you already apply for approval before disclosing your plan? Or would it be you present your plan in February and then ask for approval, which then would mean you only start later. And then secondly, with respect to your costs and your continued focus on cost discipline. Do you think -- does that -- do I understand this correctly, your focus -- the focus on absolute costs, do you think is the right thing? Or is it in the current environment better to focus on the cost income ratio?
Yes. So on the -- on buybacks, we're always in a what I would call a constructive dialogue with our regulators. Both in terms of the planning that we're doing the -- what we're communicating to you today so that communication will be ongoing. We have yet to decide based on the analysis that we do exactly what we're looking at in terms of the capital framework and any potential share buybacks but we will carry that into the conversation, obviously, with our regulator, as we, by the way, always do. And just remind me again, your second question.
Are you going to focus on absolute cost? Or do you think the cost to income ratio is a better [indiscernible]?
So we will continue to focus on absolute cost because that does provide very, very clear focused also within the bank, and we've seen some very good results over the last 2 years. Our focus on an absolute cost. But of course, in terms of the comparables and comparisons we do to assess our overall performance. We use cost to income as a ratio to new benchmarks. But the guiding will continue to be on absolute costs.
Okay. If you can just clarify on the first question, the point that your ongoing dialogue does not -- would imply you could also already talk about the buyback when you present your plan and we don't have -- you don't have to wait to ask for approval after you present your full plan?
Yes, we always have to -- we always will carry a complete dialogue with the regulator, and that's also about the intentions we have on any potential share buybacks.
I'll take a follow-up question from Flora at Jefferies.
Please go ahead. Just 2 quick clarifications, please. The one is regarding the MDA, where on the Slide 10, you have a footnote that mentions the MDA went up, but is expected to go up again next year. So I just wanted to check, I have the right numbers there. My understanding is, it is now going to be at 10.5% for this year, and you expect it will go to 11.1% next year? And then the second question is on the Single Resolution Fund. You had talked before about a discussion with the SRB on the calculation method. Can you maybe remind us how much is at stake here and the timing that you expect for the resolution of this conflict with the regulatory authority on this?
Tanja, if you take the MDA and then Ferdinand a bit more color.
Yes, I can also take the MDA, it is fine. If you look at the MDA trigger based on SREP now as communicated, it's 10.5, that's already increased because the countercyclical buffer first effect of 1% is included in there. And clearly, if you look from Q2 next year, this will increase again because the countercyclical buffer. Therefore, the Netherlands will move from plus 1% to plus 2%. So that will be the increase as of Q2 2024. The second question is on the disputes with the Single Resolution Board. I think overall we disclosed before what the overall costs are. That is what I'm claiming. That's EUR 120 million pretax of the period 2016 to 2022, and that's really related to what the calculation methods, they are using specifically related to our Mortgage Bank. So since the start in 2016. So we did pay the EUR 120 million under protest just to comply with the Dutch regulation. But we booked it as other assets. So it has no P&L impact, and we will keep challenging this SRB decision also in courts, but clearly, the outcome is always uncertain.
Okay. So to be clear on this, there is a risk that if you lose this dispute, you have to take EUR 120 million through your P&L, right?
Yes, correct.
We will now take our last question from Jason at ING.
Yes. The first thing -- the first question is on Wealth Management. I'm coming back to the point that was made before on fees and commission. Where you say that there is a due to volatility in markets, the progression has been a bit slower. But if I go back to about all 10 quarters, I mean it has been remarkably stable. So it was [ 145 ] in second quarter '21, it's [ 146 ] this quarter. So there doesn't seem to be a benefit in wealth management from markets and also from inflows. So could you comment on that? That would be great. And also if you could provide us with a split of discretionary versus nondiscretionary in your wealth management.
The second question is on missing out on the Degroof Petercam acquisition. Could you comment on why [indiscernible]? And putting the price aside, just a generic question is do you find that the company may not be ready to pursue more aggressively such deals? Or do you find that's not an issue. And finally, on the share buyback.
I mean, the consensus was expecting this EUR 250 million, nearly everyone had in the numbers. And over the last 4 years, we seem to be quite often having a disconnect between the quantum and the timing on this issue. So which we'll announce in February, do I understand that over the period of 3 years or whatever, there is going to be total clarity on threshold, timing, quantum, including some way M&A plans so that we don't need to go through this start and stop that we have seen over the last 4 years. And if you could include there in your comments, is the reason regulation with the Dutch state stake reduction and if it has any bearings on the share buyback, just thinking about the contingents last year so that we get an overall picture of what to expect for February.
Yes. To start off with your -- the last part of your question, there is no relation there. The state continuing to execute their programs in a potential share buyback. The second part of your question, we will review, as I said, we'll review all the components that we need for a capital framework to ensure that we have, again, just a complete communication on how we look at our -- the various components of the capital framework and the associated share buyback. So we'll be as complete as we can be at Q4. And in terms of your Wealth Management question, it's more about the different parts of wealth management that may be more susceptible to market performance.
I also mentioned clearing. So it does very much depend on inflow, clearly, also of our NNA, which we, again, also this year -- or this quarter, we've seen a positive inflow in terms of cash. But yes, it is very much a component within wealth managers that are affected by market performance. It's not a one-to-one relationship in of itself, but it is very clear that if market performance turns up, then on our management, asset management, we'll see the fees starting to increase as well. But so are sensitive to market movements. The -- I don't have the split to discretionary...
No, we don't disclose the discretionary portfolio management from the FY, so we don't disclose.
Okay. Okay. And on the Degroof Petercam acquisition or if at least you can comment on the [indiscernible]
Yes. I don't comment on individual transactions that are reported in markets. I would suffice to say that what I said earlier in the call, and I've said in previous calls, we'll continue to hold through that we're ready for the type of M&A that we feel we need to do in light of the business models that we currently have, and I would leave it at that.
There are no further questions in queue. I will now hand it back to Robert for closing remarks. Thank you.
Okay. Well, thank you very much, and thanks, everyone, for joining again today and look forward to the follow-up conversations. Thank you.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.