ABN Amro Bank NV

OTC:AAVMY

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for holding and welcome to the ABN AMRO Q3 2021 Analyst and Investor Call. [Operator Instructions]I would now like to hand over the conference to Robert Swaak, CEO of ABN AMRO. Please go ahead, sir.

[Robert Swaak, CEO & Chairman of Management Board]

Thank you, and good morning, everyone. Welcome to ABN AMRO's Q3 results. I'm joined by Lars Kramer, our CFO, and as always Tanja Cuppen, our CRO. I will take you through the progress of our strategic agenda and then Lars will take you through our third quarter results in a bit more detail, and after which Tanja will update you on impairment developments in our loan portfolio and on capital.So let's turn to our third quarter results on Slide 2. Over the last quarter we did see the economy rebounding at the start of Q3, most restrictions were lifted and society continued to take a significant step towards normalization. Now this did have a modest positive effect on our results. Fee income was helped by higher credit card payment volumes loan growth is picking up, and we again released impairments this quarter. The low interest rate environment remains a challenge for us, and to counter the margin pressure on deposits, we started charging negative interest rates on balances above EUR 150,000 starting July 1. Cost-saving programs are on track as are our investments in the foundation for the future bank. The wind-down of the CIB non-court portfolio is now over 85% complete. And last, but in no way least, our capital ratios remain very strong. We are in a constructive dialog with the regulator on potential share buybacks following our full year 2021 results.So now turning to our longer-term strategic ambitions on Slide 3. I am very pleased that ABN AMRO was chosen as best mortgage provider by Dutch intermediaries for combining expert advice with fast and convenient services, 2 basic fundamentals. Over the years, we've been working hard to improve the customer experience, and we now see these awards show that we're well underway. This quarter we made further progress on our strategic agenda. Our Entrepreneur & Enterprise proposition went live in Germany, and in the area of sustainability we incentivize homeowners to improve the energy label of their home to label B by offering a discount on their mortgage. And we take inclusivity serious, and we've set up a team now to identify and remove any barriers our clients encounter. This team is currently working on improvements to our service for female entrepreneurs. Our first in the Netherlands is the introduction also of cash withdrawals from ATMs using only a mobile phone. Now the wind down of our CIB non-core is running well ahead of plan, and I expect less than EUR 2 billion in loans to remain at year end.Turning to Slide 4, let me update you on ESG client assets. Our strategy around sustainability has always been and will continue to be built on long-term ambitions in the areas of climate change, the circular economy, and social impact. And we have set a number of targets which are linked to these ambitions. Here I'll highlight our progress on our ESG client asset target. We target a volume of client loans and investments in sustainable assets of around 1/3 of total by 2024. Since 2014 we actively focus on offering clients the option to invest in ESG assets. Our clients are increasingly looking for societal return in addition to financial return. So we invested in new products, reporting tools, staff education, resulting in a consistent increase in client mandates. We made sustainable investing the default option for new clients in 2019. So in Q3, our ESG clients assets have grown to EUR 39 billion corresponding to 26% of total, and this is measured in line with SFDR definitions. We expect growth to accelerate further as ESG is becoming increasingly important in all of our investment decisions.Let me now turn to the new organizational setup that we announced a few weeks ago. We aim to bring convenience into the daily lives of our clients and expertise when it matters. Now this is a guiding principle of our strategy. And so to anchor this firmly within the organization, we are simplifying our own organizational structure to 3 units serving specific client segments. All 3 client units offer clients convenience, mainly through digital channels, combined with in-depth sector, product, and sustainability expertise that ABN AMRO is known for. Wealth management and corporate banking will be mainly expertise driven. Our digital capabilities and services will be centralized within personal and business banking as this unit is primarily convenience driven. Now going forward, there will be a single Executive Board which will foster a collective responsibility. I am convinced that the new organizational setup is an important step in achieving our strategic ambitions. I expect a more efficient organization as we remove duplication in management and further centralize the development of the IT infrastructure.So before I hand over to Lars, allow me a few words on the economy. Now during the third quarter, we saw a further economic rebound as restrictions were lifted for the most part. Recently a few measures had to be reimposed as intensive care units are slowly filling up again now autumn has arrived. Current measures allow most businesses to operate normally, though the leisure sector, of course, has some restrictions in opening hours. We do expect bankruptcies, which are currently at a historical low level, to increase to more normal levels now support measures have ended. Now this is expected to lead to a minor increase in unemployment. However, the Dutch unemployment rate is expected to remain well below the European average. Our economic bureau expects a continuation of low rates as we expect both inflation and longer-dated interest rates to come down during next year. The housing market will continue to remain very strong. Prices are expected to increase by about 50% this year and again by about 10% next year. Transaction levels are impacted by the lack of supply and this contributes to the sharp increase in house prices.So let me turn it over to Lars now to discuss our third quarter results.

[Lars Kramer, CFO & Member of Executive Board]

Thanks, Robert. Just looking at Slide 7. I'll briefly highlight the main results of the bank before going into some further detail. Our net profit was EUR 343 million, and if I exclude the non-core, then we get to about EUR 406 million. The operating income was stable but with sizable incidental items in both Q2 and Q3. This quarter we took a provision to compensate clients with revolving consumer credits of about EUR 217 million, EUR 174 million of which was booked in the interest income and the remainder in the cost line. Operating expenses, in addition, increased due to higher regulatory levies and AML costs. Again, we had limited new impairments leading to a net release for the quarter. The non-core wind-down is also progressing well with both loans and RWAs decreasing further this quarter.Now turning to loan volume developments for the core bank, please take a look at Page 8. Here we have mortgage volume was slightly up for the quarter and the size of the overall Dutch mortgage market increased a bit further. And given our 15% market share in Q3, we still managed to increase our mortgage portfolio. Lending activity and commercial banking increased as government support ended. And at CIB core, we showed strong growth this quarter, both in corporate lending and financial institutions. The declining trend in consumer lending is also in line with the overall Dutch market.Now turning to take a look at deposits on Page 9. As Robert has already said, starting 1st of July, the threshold of charging negative rates was lowered from EUR 500,000 to EUR 150,000, but nevertheless, we've had limited outflows with deposits actually increasing during Q3. The threshold will be lowered further to EUR 100,000 on Jan 1, 2022, and this will impact a further EUR 9 billion of volumes. At that point, we'll have around 50% of our deposits, which is around 5% of all clients, who were being charged negative rates. And for those who are being charged, the rate is minus 50 basis points, though for some financial counterparties the rate is higher.Now turning to our net interest income. NII was impacted by incidentals, mainly the compensation scheme for revolving consumer credits. On a clean basis, NII increased EUR 14 million quarter on quarter. The lower threshold for charging negative rates contributed EUR 27 million to NII and mortgage prepayment penalties were high previous quarter and increased further as clients locked in low rates. I think it's worthwhile noting that at some point, these prepayment penalties will return to normal levels, but the timing is difficult to predict. This quarter also the margin pressure on deposits amounted to around EUR 23 million, and the increase in interest rates actually had very limited benefits as short-dated rates didn't move very much. Our outlook remains cautious given that our own economics bureau expects rates for longer maturities to come down again next year. This quarter there was some pressure on front book margins of especially our retail products. For now, this impact is limited. However, we are keeping a close eye on these developments. We did make progress on achieving the TLTRO threshold, and actually remain quite optimistic that we'll reach the threshold by December.Moving to Slide 10 to look at fees and other income. During the quarter we saw an improvement in credit card usage and payment fees. The credit card usage in our domestic market is actually now back to about pre-COVID levels. The transaction volume outside of Europe is still limited due to travel restrictions. Clearing continued its strong performance as trading volumes across global financial markets remain high. The higher stock markets also helped fee income in private banking. Under other incomes for the non-core bank, and it was again boosted -- or for the core bank, was again boosted by positive equity participation and venture fund revaluations. And together these delivered about EUR 56 million of the other income in Q3.Turning to costs on Slide 12. Expenses were slightly up this quarter, and this was mainly from the rising AML costs and the higher regulatory levies, and the AML costs is expected to peak this year and we are continuing to increase FTEs in order to really try to finalize the remediation by the end of next year. I just want to emphasize that despite this increase in costs, we do still expect our costs for the year to come in at the EUR 5.3 billion guidance without the restructuring of the Guardian penalty, and that for the longer term 2024, our cost savings are also on track and that year-to-date we've already booked about a EUR 100 million of the cost savings that we anticipated in our plan.So I'll leave it at that and I'll hand over to Tanja to give us some insights into impairments and capital.

[Tanja J. A. M. Cuppen]

Thank you, Lars. We are now at Page 13. For the third consecutive quarter, we showed a net release of impairments EUR 12 million for this quarter. The inflow in stage 3 remains limited, most of which is related to a number of individual oil and gas in the non-core portfolio. In commercial banking, model updates and improved economic outlook led to releases. The total management overlay amounts to EUR 355 million, following a small net addition this quarter. Around half of the overlay is COVID related, reflecting uncertainty as government support measures ends. For the full financial year 2021, cost of risk should end around breakeven. As Robert mentioned, we expect impairments in commercial banking to rise as government support measures ended. I consider the tail risk of the non-core portfolio well covered, though we do expect limited impairments will materialize in the coming quarters. Looking at the right-hand chart, the difference in risk profile of the non-core portfolio versus the core bank is evident. Although non-core is now down to 1% of total exposures, non-core still constitutes over 10% of stage 3 exposure. I expect to update you on our revised cost-of-risk target for the core bank in the coming quarter.Now turning to Slide 14 on our capital position. Our capital position remains strong with a Basel III capital ratio at 17.8%. The decline compared to previous quarter mainly reflects an RWA increase of EUR 3.3 billion due to a net increase in loans and a model update. We took notice of the Basel IV proposal of the European Commission published on October 27. In line with the industry view, we consider these proposals on balance marginally positive. Given that for us the output floored RWAs are only marginally different from the constrained IRB RWAs, there is no benefit from the phase-in period. We will effectively move straight into a fully-loaded Basel IV on implementation expected by January 2025 at the earliest.With that, I want to hand back to Robert.

[Robert Swaak, CEO & Chairman of Management Board]

Thanks, Tanja. Just turning to Slide 15 then where we revisit our long-term targets and the outlook for 2021, which clearly was -- will be impacted by some of the incidentals we talked about. We managed to further grow our mortgage portfolio. I think that's very clear, and it's also showing up in Slide 15, which shows our financial targets. The quality of our mortgage products and services acknowledged this quarter with a number of awards, and that's thanks to our hard work, we are now well placed in this very competitive market.On cost, I'm confident we can achieve our 2024 target. And for this year, we expect a cost base of EUR 5.3 billion, as Lars had already alluded to, excluding the AML settlement and restructuring costs. With a large part of the non-core assets now wound down, the risk profile of the bank has improved. And over the full year, we expect impairments of around zero. Our capital position continues to be strong and with our Q4 results, we will update you on the thresholds for share buybacks and dividends. And as I mentioned at the start, we are in a constructive dialog with the regulator on potential share buybacks.So let me ask the operator now to open the call for questions.

[Operator]

[Operator Instructions] And the first question is coming from Mr. Benoit Petrarque from Kepler.

[Benoit Petrarque, Head of Benelux Equity Research]

Benoit from Kepler Cheuvreux. 2 questions, one on capital, one on loan growth. So first of all, on capital, you have a 100 bps buffer versus your buyback threshold. If you put that in Euro terms, that's about EUR 1.2 billion. I was wondering if you could help us to understand all your constructive dialog with the ECB on buyback [ takes form ]. Trying to understand if you will be pitching potentially for a 100 bps share buyback, or you have a different view on that. And also I was wondering if you started also this discussion with the Dutch government on the potential share buyback. And also finally on a third point on that, whether you still consider to lower the threshold of currently 15% to potentially a lower figure if this is still something you have in mind. So sorry, that's a bit of a long question but that's the first one on capital.And the second one on loan growth really, clearly, on TLTRO benefit things seems to go in the right direction. What about 2022? Do you also expect beyond the probably more short-term effect of trying to get this benefit from TLTRO? 3, do you expect also more long-term -- the long-term loan growth to be also back on your Dutch business, especially thinking about 2022 if you expect positive loan growth there?

[Robert Swaak, CEO & Chairman of Management Board]

Let me take your questions on the capital. So on the 100 bps between the 15% and the 16%, clearly, what we've indicated as we get closer to that 15% threshold, which we are, around the Basel IV 16%, that would mean that we would start our conversations around potential share buybacks. Now that is exactly what we're now doing. We're having that conversation as we speak. Hence, we indicated as such in the presentation just now.Are we then also talking about a potential reconsideration of that threshold? We also indicated as we consider our conversations on share buybacks, we would indeed take a look at the threshold and that again is predicated on the fact that we had identified factors leading up to that threshold of 15%. So that also forms part of our dialog. As we said indeed, a constructive dialog with the regulator, and as to your question on NLFI, you'll appreciate that as we go through this process, we have to have a conversation with all of our stakeholders, including NLFI. I think it's fair to say we also have a constructive dialog with them as well.So in terms of TLTRO, the question, yes, we are comp -- well, we're increasingly confident that we'll get to recognizing the benefits of TLTRO and that is indeed predicated on the volume growth that we've seen in this quarter, which clearly is a sign it's -- it actually signals a number of things. It signals ABN AMRO in the market and our activities in the market in which we're operating right now. It also is indicative of a Dutch economy that's beginning to open up and therefore, driving volume growth both in terms of the corporate client loans but also, I should say, in the CB areas where we've seen some growth continuing. Now our GDP forecasts for '22 still remain at around a, I believe, a 3 point percent -- percentage point. So for all intents and purposes, if we continue to see the economies opening up the way we have seen over this quarter, what you're actually seeing is ABN AMRO being well positioned on the back of some of the strategic choices that we've made. So we're not -- I'm not going to provide you any guidance in that sense but more from a generic point of view let me just leave it at that.

[Operator]

And the next question is coming from Mr. Omar Fall, Barclays.

[Omar Fall, Analyst]

I've just got just a few questions entirely on costs -- on OpEx. Where are we on the cost elements you highlighted at the last Investor Day? So at the time, you'd said that we'd see around EUR 100 million of savings in 2021, which you're highlighting you've achieved. And then -- but then you said EUR 300 million in '22-'23. As we're close to '22, then you clearly seem to be slightly ahead. Would you expect most of that EUR 300 million to come through in '22 or is it a bit more back-end loaded?Then on the strategic investments of EUR 300 million and restructuring costs of EUR 150 that you targeted, how much of that has actually happened? And then lastly, if you could just confirm that you still plan the 15% FTE decrease, because since the plan was given, FTEs have actually gone up by 4% of the group? Sorry, for all of those, but it's just the 2024 cost target is a long way from now. So it'd be great to get some building blocks for our modeling.

[Robert Swaak, CEO & Chairman of Management Board]

So let me take your last question on the 15%. Then I'll ask Lars to talk about the various components of our cost and CapEx. So on the 15% we've guided -- that we'd go to 15% FTE reduction by 2024, and that still stands on the basis of the measures that we're taking. So Lars, maybe on the components of costs.

[Lars Kramer, CFO & Member of Executive Board]

Yes. So I would say for 2021, yes, we have materially locked in the EUR 100 million and that's also actually enabled us to spend a little bit more on the AML remediation. So instead of then pushing the costs up overall for the year, we've had -- we've been able to compensate some of that saving. What I would say for next year is that the AML cost base will be roughly the same as this year. So -- and then we will start seeing the tailing off in probably '23, '24. So that's the aim.In terms of the strategic investments, we are -- and we've set aside about EUR 100 million a year on strategic investments and those -- that money is being well spent, and definitely being deployed and that will continue. In terms of the restructuring costs where we're trying to cut the EUR 700 million out by 2024, again, yes, we've made a step change this year. We will again see a step-change next year. But I do caution that because of the AML where we still have one more year of cleanup to do, I would say a chunk of the savings will probably come more towards the back end rather that we see the EUR 300 million you're talking about coming through next year.

[Robert Swaak, CEO & Chairman of Management Board]

I think that covered your question.

[Omar Fall, Analyst]

Yes. Just as a very quick follow-up. Of the FTE declines the targeted 15%, how much of -- can you give a sense of how much of that is from AML-related staff, because I guess we know how much is coming from the non-core exit, but just to get a sense of what's then core or what's then AML which is a bit more back-end loaded?

[Robert Swaak, CEO & Chairman of Management Board]

Yes. Let me just reiterate that, that 15% and the composition of which we'll get to when that's applicable.

[Operator]

And the next question is from Mr. Stefan Nedialkov, Citi.

[Stefan Rosenov Nedialkov, Director]

Just a couple of questions on my end. In terms of fees, are you reiterating the EUR 400 million per quarter going forward given the better level of activity that we're seeing? And secondly on Basel IV, you do mention that the latest proposal -- the final proposals are marginally positive. Can you quantify how marginal -- how marginally positive that is and is that included now in the 16% Basel IV that you reported?

[Robert Swaak, CEO & Chairman of Management Board]

Yes. On fees we'll just reiterate the EUR 400 million guidance that we've given quarter on quarter and I would remind you that we've come off lower numbers as we're navigating a COVID-19 timeframe. And as the -- as economies continue to open up, we do see that EUR 400 million in terms of fee guidance to continue to hold. And on Basel IV, I'll ask Tanja to comment.

[Tanja J. A. M. Cuppen]

Yes. And as said, indeed, the impact we expect to be marginally positive. We see some components are definitely positive, but are also ones that have a slight negative impact. And we don't have the exact details yet. So we are doing the calculations right now, so I cannot give you a more precise guidance at this stage. And therefore, also in the -- around [60%] that we are disclosing right now, the new proposals are not included in there. So it's based on the same methodology that we have been using over the past quarter, so to be consistent there as well.

[Operator]

And the next question is coming from Ms. Kiri Vijayarajah, HSBC.

[Kirishanthan Vijayarajah, Analyst]

Just a couple of questions on the CIB, if I may. So your cost base on the CIB non-core, as guided, that's coming down nicely, but the cost in the CIB core seemed to be creeping up again, I guess not in a major way. But I just wondered if we could have some color on what's happening there, what investments you're making there, and how much is coming from maybe an increase in the variable comp pool there. And then just to try and understand on the clearing business, whenever you have a good quarter for revenue, say, does that benefit? Will the delta mainly come through on the net interest income line, or do we see on some of the other revenue lines? So just trying to understand how that clearing business feeds through into some of the individual revenue line volatility that we're seeing in recent quarters. Those are my 2 questions.

[Robert Swaak, CEO & Chairman of Management Board]

Let me just take the clearing one and Lars, I'll ask you to comment on the cost levels at CIB. Clearing is mostly coming through fees and commissions lines, irrespective of what quarter we're in. So maybe, Lars, for you to comment on CIB.

[Lars Kramer, CFO & Member of Executive Board]

Yes. The increase is not coming from variable remuneration that I can state. In terms of if you look at it quarter 2 on quarter 3, it's not really materially that different. I mean there's a little bit more going into personnel costs. We're, obviously, building some teams in various areas also in northwest Europe to specifically focus on the enterprise and entrepreneur area. So that is somewhere where we are seeing some personnel expenditure increases. And I think in terms of the other expenses, which are up by EUR 1 million quarter on quarter, I think that's a little bit of rounding here or there. There's nothing particular that we are spending extra money on.

[Operator]

And the next question is coming from Ms. Giulia Aurora Miotto, Morgan Stanley.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

2. if I may. So on NII, of course, I hear your guidance for 2021, but if I think about NII evolution sequentially, do you think we could say that we have bottomed or not yet, and when do you expect to see any positive impact from the recent move in the 5-year swaps? So that's my first question on NII. And then more strategically on potential M&A targets. So I understand you've been looking at this now for a few months. Is there any update on opportunities that you've seen or any updated thoughts on your inorganic growth strategy?

[Robert Swaak, CEO & Chairman of Management Board]

Lars, if I could ask you to comment on the 5 years, I'll take the M&A. Indeed we've been looking at -- as I've talked about in previous quarters, we've been looking at the potential for any M&A. I would just reiterate that any M&A that we would consider to do would be in the areas of bolt-ons. The M&A has to fit very much so within our current business, our geographical footprint. So as I said before, it has to be accretive in terms of the choices we have made as a bank, the strategic directions that we've made as a bank. We've talked about -- previously about private banking. I've also mentioned previously activities that could serve as a feeder to private banking. These are all areas that we would potentially look at. So that gives you a little bit of color around -- as I've said before, around how we are considering M&A at this point. And Lars, on the replicating...

[Lars Kramer, CFO & Member of Executive Board]

Yes, on the NII, in terms of giving guidance for next year, we're not going to give guidance for next year at this point. What I can sort of reiterate is that what we have seen for most of this year, which is the pressure on the deposits and we've talked about the EUR 20 million a quarter on average, that will continue into the next quarter, most likely a little bit less. The unwinding of about EUR 10 million will come through next quarter as well. And then we are starting to see in terms of the pressure on the retail margins on the front book, both in terms of mortgages as well as in terms of consumer, that is continuing as well, and that's something we are really watching quite carefully. We've been able to pass on some price increases over the past quarter, but again, with the swap curve increasing, you can only get so much in terms of margin increase.In terms of the prepayment penalties, I think this is another quite unpredictable area, because definitely mortgage refinancing continues and with lower rates for longer, that seems to be a bit open-ended at the moment. So we do see seasonality in that. So if anything, at least in Q1, we expect that you'll have the normal lower prepayment levels. And so that would certainly be some stepdown. And then the negative pricing is the other one. We've been able to get quite a positive impact on the negative pricing from the EUR 150,000 already this quarter that will obviously continue into next quarter, and then having already signaled the drop to EUR 100,000 which will be effective Q1. That will give a little bit of a positive tailwind. Again, what we don't know is how much deposit outflow there will be as a result of this when it takes effect, because we are actually being, let's say, the most penal on our customers because we charge this first on an aggregated basis whereas my understanding is other banks do this at account level. So this could mean that there is some shift in deposits away from us to the other banks.

[Operator]

And the next question is from Mr. Johann Scholtz, Morningstar.

[Johann Scholtz, Equity Analyst]

2 from my side. Firstly, in terms of the management overlay on the provisioning side, you'd indicate that there was a slight expansion in the management overlay. Just maybe a little bit more color. Is that structural in nature, trends that you're seeing, or if this is more of a technical change? And then secondly, just on capital return. Would you say that the dialog that you're having with the regulators is really the only impediment that remains before you in a position to return capital and that there's no internal impediments in the sense that you want to preserve capital for a potential worsening of COVID or any anything like that?

[Robert Swaak, CEO & Chairman of Management Board]

So on let me take the one on capital and Tanja, I'll ask you to comment on the management overlays. Just to kind of reiterate, we go through a process in the bank. So there's a governance process we go through when deciding on share buybacks. And one of the steps also clearly on share buybacks is approval from the regulator. And that is known around share buybacks. But as I said and let me just reiterate that, the conversation with the regulator is constructive on that end.In terms of your other questions, we have very much highlighted the various components that went into that 200 basis point threshold from the 13% to the 15%. We've signaled that we're now north of that 15%, hence our dialog and hence our conversations around share buybacks. Part of that conversation, as I answered to an earlier question, is about recalibration of that 15%. So both on the outcome of the share buyback and the recalibration on that 15%, we expect to come back to all of you at full year.

[Tanja J. A. M. Cuppen]

Okay. And then I'll take the question on the management overlays. Actually, indeed, a net addition. There are some smaller releases related to the management overlays that we took for COVID and the additions are related mainly to 2 aspects, one is a model update or an update of the definition of defaults that we will implement in Q4 and already have included in our provisioning calculations. So that is one that will disappear again next quarter. And the other one -- the other part is related to a wind-down portfolio in commercial banking and well, getting more to detail, we have basically concluded that our models not fully capture the developments there and therefore, taking the management overlay. And this one will, of course, also disappear over time, but it will take a bit longer dependent on the speed of runoff of this portfolio. So nothing structural. I would say, mostly technical.

[Operator]

And the next question is coming from Ms. Anke Reingen, RBC.

[Anke Reingen, European Banks Analyst]

I just wondered if you can maybe go back to your commentary about the NII, the EUR 20 million headwind and the EUR 10 million non-core. I'm just a bit surprised given long rates have moved up and as well the non-core has come down in absolute volume. So why that wouldn't look better? And then on the capital, you indicated there will be some headwinds in the next quarter. You can maybe just give us a bit more detail about the RWA inflation? And I think there's also, if I'm not wrong, on this Q4 headwind to capital, but maybe I've got the quarter wrong here.

[Robert Swaak, CEO & Chairman of Management Board]

All right, Lars, do you want to expand on NII?

[Lars Kramer, CFO & Member of Executive Board]

Yes. So in terms of the EUR 20 million, I think if you see this quarter, we were at about EUR 23 million, so there is definitely a bit of an improvement expected next quarter to just below EUR 20 million. I mean the long end of the curve increasing in pricing is also quite volatile. It's been up before and it's come all the way back down again. But in terms of our investment positioning, it's pretty much across the curve. So it's not as if the bulk of it is at the long end and is immediately sensitized to rate increases. So we really do need to see the short end coming up to sort of have a material impact in terms of where our investments are positioned in terms of replication.And you're right on the non-core. Clearly, this is coming off faster and the EUR 10 million I think is going to be around EUR 8 million next quarter. So there is going to be a reduction, but it's not an improvement, but again, on average we're still looking at this EUR 20 million and EUR 10 million over a period of time.

[Tanja J. A. M. Cuppen]

Okay. Yes, I'll take the question on capital and actually it is indeed related to the credit risk RWAs. You've seen in this quarter credit risk RWAs went up. It's related also to, apart from business development and business growth that we have been talking about, also to a model update and the impact is actually EUR 2.4 billion. This is in line with what we guided before. I think we guided EUR 5 billion for the year. So we do expect an additional step in the next quarter and this has to do with the fact that we are updating our models and bring them all in line with the guidelines for internal rating-based models by the end of this year.And then also into next year, we do expect that there will be some further inflation into credit risk RWAs because we ahead of Basel IV we will move some models to more or less advanced approaches and that will increase RWAs a bit, but of course, will reduce the difference between Basel III and Basel IV RWAs.

[Anke Reingen, European Banks Analyst]

If I may just follow up on your comment on the interest rate sensitivity. You're saying that the short end would need to go up to see -- to really make a difference. How sensitive do you think your deposit charging is to a rise in short rates?.

[Lars Kramer, CFO & Member of Executive Board]

There in terms of a rise in short rates up to 0% there is quite some sensitivity. I think beyond 0%, that is where we are able to manage it probably a bit better in terms of timing. But the fact that we are pricing it below 0% and if those short rates really do start improving back to 0% and above, we would have to track reasonably quickly on that front.

[Operator]

And the next question is coming from Mr. Robin van den Broek, Mediobanca.

[Robin van den Broek, Research Analyst]

I would like to dwell a little bit deeper into the credit risk RWAs, because I think at the beginning of the year you indicated that you were expecting roughly EUR 9 billion of RWA impacts, which probably is the EUR 5 billion you just mentioned and the EUR 4 billion coming from the mortgage floors from the Dutch Central Bank. So if I take the EUR 2.4 billion out, that basically leaves another EUR 6.5 billion to come in Q4, which would raise your RWAs towards EUR 117 billion. In previous presentations, you've shown that your Basel III RWAs per year-end 2021 would be less than 10% off your Basel IV level. Of course, less than 10% is basically gives you a very wide range. But am I right in assuming that the residual Basel IV inflation is more likely to be around 5% given the building blocks I've just mentioned? So that's the first question.And the second question is more about I guess the political situation in the Netherlands. I mean I guess you would prefer to do a direct placement with the government when it comes to buybacks. But yes, I mean there's no Dutch government at the moment, only the missionary one. And formation process doesn't seem like it's speedy enough to have something in place even when you come out with the Q4 results. So how could this affect your thinking? I mean if the Dutch government can't make a decision on participating directly in a buyback, the liquidity of your stock is not that great to do a very large buyback program that would be suggested. But yes, if your 15% threshold would go to 14.5% on the back of the AML settlement, that would imply quite a hefty buyback potential, but doing such a thing, giving you liquidity, it might constrain you in a different way. So I was just wondering if you could give your thinking around that.

[Robert Swaak, CEO & Chairman of Management Board]

Let me take the political situation in the Netherlands and the associated consequences for buybacks and Tanja, maybe for you to comment on the first part of the question. We are discussing right now our thoughts on our buyback program. So we are identifying and debating the various components of the buyback program. We do that within the bank and clearly we do that with the regulator. We're in conversation, as I also said, with NLFI as a direct representative. So I can't really talk for the government whether they're missionary or not. What I can say is that the conversations that we're having also with NLFI are constructive. We first have to decide which direction of travel we choose and then we'll get to the next steps in the conversations. But we're keeping both the regulator and the NLFI very close in our conversations. So let me just leave it at that. And again, for any questions as to how the government reacts, it's really up to the government. And then, Tanja?

[Tanja J. A. M. Cuppen]

Yes. So there was the question on the credit risk RWAs and indeed you were right on the different components. And I didn't mention in my previous response the mortgage floor. The mortgage floor is now final. DNB has announced this and this will kick in January 2022 and in indeed is estimated to be around EUR 5 billion. And yes, so -- and the difference between the [indiscernible] Basel III and the Basel IV, we have guided this is less than 10% and of course, we will update the guidance for the new information that has come in on Basel IV where we have said, well, this will be marginally positive for us. So that will reduce the difference as well. But what the exact difference will be that is to be determined and of course, we will continue to work to refine our guidance in that respect. I cannot give a new number today.

[Robin van den Broek, Research Analyst]

Okay. And then maybe on Q4. I mean should we still expect maybe an impact from a sale-leaseback of back quarters or...

[Robert Swaak, CEO & Chairman of Management Board]

Well, we're working hard to complete that transaction before year-end, so.

[Lars Kramer, CFO & Member of Executive Board]

Yes. And I think just on this, it's key to note that if we do book something, please, because you're also chalking your models, do factor in that this would be a taxable event as well as that under IFRS 16 we'd have to book some lease liabilities as well. So that would come off any sort of book profit. So please factor that in as well.

[Robin van den Broek, Research Analyst]

I'm sorry, the capital gain itself is also subject to taxes?

[Lars Kramer, CFO & Member of Executive Board]

Yes.

[Robin van den Broek, Research Analyst]

Okay. Why is that, because I thought normally in the Netherlands capital gains are not subject to taxes?

[Lars Kramer, CFO & Member of Executive Board]

Yes. I mean on this transaction, it would be.

[Operator]

[Operator Instructions] And there is a follow-up question from Mr. Benoit Petrarque, Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

Just to follow-up. First one on the charging of negative rates, the discussion between charging it on an aggregate basis or a per account basis. What are your thoughts on that? Do you think you could move towards a per account charging? And then on the inflation we see now that's broad-based in several countries, is your EUR 4.7 billion properly capturing, well, the -- let's say, the current inflation we see, or do you see maybe headwinds from inflation on your EUR 4.7 billion figure? That would be my 2 follow-up questions.

[Robert Swaak, CEO & Chairman of Management Board]

So on your first question, the aggregate is what we apply and that's what we will continue to apply. So we think that is better. And on EUR 4.7 billion, the guidance we've given that stands.

[Operator]

And the last follow-up question is coming from Stefan Nedialkov, Citi.

[Stefan Rosenov Nedialkov, Director]

A quick follow-up. On the Basel IV RWA inflation being less than 10% as of year-end, is that before or after the DNB floor? It looks like DNB is in place from the 1st of January, but I just wasn't sure whether you're going to book it officially in 4Q or in 1Q.

[Tanja J. A. M. Cuppen]

Yes. Actually, I would have to look at the numbers. It's probably around that number, but I have to come back to you on that one because whether it's just above or just below the 10% by year-end I need to check. We previously anticipated indeed that the DNB floor would come in still this year. It's now as of January and we haven't decided yet when we will book it. That depends also a little bit on the guidance there. I don't have the exact response for you here.

[Stefan Rosenov Nedialkov, Director]

But based on the previous assumption of the DNB floor coming in, in 2021, you were always going to be at 10%?

[Tanja J. A. M. Cuppen]

Yes.

[Stefan Rosenov Nedialkov, Director]

Okay.

[Robert Swaak, CEO & Chairman of Management Board]

That is correct.

[Operator]

There are no further questions. Please continue.

[Robert Swaak, CEO & Chairman of Management Board]

Okay. Well, then thank you all for your questions. As always, this will then conclude the analyst call, and really look forward to speaking to many of you over the next few weeks. So for now, see you later. Thank you.

[Operator]

Ladies and gentlemen, this concludes this ABN AMRO event call. You may now disconnect your lines. Thank you.