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ABN Amro Bank NV
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Good morning, ladies and gentlemen, and welcome to the ABN AMRO Quarter 4 Financial Year 2017 Analyst Presentation. [Operator Instructions] I would now like to hand the call over to the Chairman, Mr. Kees van Dijkhuizen, CEO. Go ahead please, sir.
Thank you very much, operator. Good morning, everybody. Welcome to the analyst and investor call for ABN AMRO's fourth quarter results. I'm joined by Clifford Abrahams, our new CFO; and Tanja Cuppen, our new CRO.First of all, I would like to say a few words about the announcement earlier this week of our Chairman of the Supervisory Board to hand over some responsibilities as Chairman and not to opt for a second term. I respect her decision. There has been quite some coverage in the press and this kind of publicity is of course not helpful, not for the bank, not for our clients and our employees. Thanks to our clients and employees, ABN AMRO is in good shape and is making great steps in the area of digitalization, sustainability and innovation. And this is also very much valued by our clients and is evidenced by our rising net promoter score. We will continue to focus entirely on our clients. I hope you'll understand that I will not go into further details on this matter.Now let us focus on the achievements and results of ABN AMRO of 2017. On Slide 2, you can see that the fourth quarter, our net profit amounted to EUR 542 million, reflecting another solid quarter. Our commercial business lines continue to perform well and our cost savings programs are delivering. We proposed a total dividend of EUR 1.45 per share for the year, up strongly versus 2016. And this amounts to 50% of the full year result reported, which benefited from a number of incidentals. We have a strong capital position with a core Tier 1 ratio of 17.7%. We promised you an update on capital and Basel IV and we will provide this today. Going forward, our dividend payout will be 50% of sustainable profits, and we have formulated a context for additional distributions on [ properties ]. Combined, these will deliver shareholders' distributions of at least 50%.On the next slide, you can see that I would like first to remind you of the good track record we have made since IPO. Chart on the left shows our strong profit development, driven by high business returns and declining impairments. I'm pleased to say that 2017 was a record year for the new bank with net profit at EUR 2.8 billion. This result was helped by incidentals, including the sale of Private Banking Asia. As promised, we will pay out 50% of reported profit and dividends and therefore, our shareholders will fully benefit from the strong result. Our dividend increases by more than [ 17% ] versus last year to EUR 1.45 per share. As you know, our approach has been to accumulate capital ahead of Basel IV, as can be seen from the right-hand chart. Our capital position was already quite strong in 2014 at [ 14% ]. Since then, we have added another 3.6 percentage point, notwithstanding the record dividends payout this year.On the next slide, you can see that we have consistently said that Basel IV would have a material impact on us. We guided last quarter that 500 bps, 600 bps was possible. Following the Basel announcement in December, we are now in a position to estimate the impact on our RWA, which is an increase of around 35%. We ensured we were well placed for this outcome by building up a strong capital position in the recent years, thanks to our prudent capital management. As a consequence, even today, we are well positioned for Basel IV, which in fact will be implemented gradually between 2022 and 2027. Based on all of this, we have set a new core Tier 1 target range of 17.5%, 18.5% for 2018. Against the backdrop of this clear capital target, we can now better determine shareholders' distributions. Going forward, distributions will consist of 2 parts, a payout of 50% of sustainable profit, and on top of this, we will consider additional distributions when our core Tier 1 ratio is within or above the target range. I will elaborate on this later.On the next slide, you can see there's a fair number of transformation projects under way. These programs are aimed to streamline and improve the way we run the business while always looking to improve the service to our clients. I want to highlight the declining trend in staff levels on the right-hand chart. We previously announced a 5-year reduction of FTEs by 13% in 2020. currently, 2 years, we are now down the road, we are now at 10% below the level at year-end 2015.Looking at the trends in our branch network. We currently have just over 200 branches. Our digitalization efforts in retail bank led to fewer clients visiting our branches, allowing further closures going forward. So we are showing good progress on our transformation programs.On the next slide, Slide 6, we highlight a number of our initiatives. We are ready for PSD 2. Our client applications are ready to include third-party bank accounts. We can turn this functionality on as soon as other banks release their PSD 2 API's. Our own developer portal was launched during Q4. Tikkie continues to grow rapidly. Currently, we're at 2 million users, which is 1 million more than 6 months ago. There is a lot of interest from business to use this platform to make payment request.The next area highlighted here is blockchain technology. We have been active in this area for a number of years now, which has led to concrete initiatives in real estate, shipping and commodity transactions. Our online wealth manager, Prospery, launched in Germany at the end of last year. It offers wealth management for a fixed fee and a low price entry point. Even though Prospery is branchless, clients will still have access to a personal account manager. And with Franx, we recently launched an online multi-currency account for SME clients to facilitate their international payments.Over the past year, we have launched new ambitious programs for socially responsible investment, real estate, sustainability and circularity. For the latter, we received an award during the World Economic Forum in Davos for being a forefront of financing new business model based on principles of circular economy. This year, our sustainability efforts were ranked in the top 5% of the global banking industry in the Dow Jones Sustainability Index. We scored 91 out of 100 points in this index compared to an average score of the banking industry of 58.Our efforts in human rights and transparency, particularly when it relates to social and environmental issues, were rated high. I'm pleased with this score, but I believe we can do even more. Another area where we make good progress is diversity. The percentage of female employee in senior management has gone up from 23% to 38% since the introduction of the new management structure, as you can see from the chart on the right.Then I would like to hand over now to Clifford for more details on our Q4 results.
Thank you, Kees. As Kees mentioned, we had a solid quarter. Our net profit was EUR 542 million. We had quite a few incidentals this quarter, the main ones we disclosed to you prior to our results. In aggregate, the impact of net profit of these incidentals is limited, unlike Q4 2016 where incidentals had a significantly negative effect. We have continued to benefit from low impairments during the year, thanks to the strong Dutch economy. I would now go into more detail on individual line items on the next slide.Turning to Slide 9, regarding client lending. The left-hand chart shows our development for mortgages. Volume was up by EUR 1.3 billion for the year, although declined during Q4 as usual due to seasonal voluntary redemptions. The mortgage book continued to grow in a strong market, and we maintained our 20% market share despite increased competition from other banks in longer-dated mortgage.Client loans in commercial banking grew through 2017 and continued to grow modestly during Q4 before client transfers to corporate banking. Lending in CIB increased by EUR 1.3 billion and was broadly based coming from financial institutions, large corporates and natural resources. Consumer lending was flat during the quarter.Turning now to net interest income. Our reported net interest income was up sharply during the quarter. However, looking through the incidental items and the sale of Private Banking Asia, net interest income was more or less flat compared to Q4 last year.Mortgages showed higher volume while margins were flat. Commercial banking showed high volumes of both loans and deposits with stable margins. The volumes in, to a lesser degree, margins improved within CIB. Margins improved for domestic deposits, both in retail and private banking. Group Functions had higher liquidity buffer costs and higher steering costs. Both Commercial Banking and CIB includes the full year benefits from the TLTRO, which was recognized this quarter. So, net interest income, our main source of income, remained resilient, and we see stable margins and some modest volume growth in our main portfolios.Moving now to fee income on the next slide. Fee income during Q4 recovered compared to the previous quarter Q3. Q3 was weak for Commercial Banking and CIB and both showed a reboundthis quarter. Compared to Q4 last year and excluding the impact of the sale of Private Banking Asia, fee income increased marginally. Private Banking global market increased their fee income during Q4. This was offset by clearing reflecting global market volatility and retail due to the lowering of fees charged for payment packages in earlier periods. Other income overall was up and up in most segments but mainly reflects the sale of Visa shares, which delivered around EUR 100 million, which was recorded in retail banking. Hedge accounting effects for Q4 2017 amounted to EUR 54 million and CVA/DVA/FVA was EUR 32 million. Combined, this is EUR 18 million lower compared to Q4 last year.Now moving on to costs. There are quite a few incidental items [ within ] expenses during the quarter. However, looking through these numbers, we can see expenses were up compared to Q3 2017, reflecting seasonal patterns and down compared to Q4 2016 last year. Personnel expenses are down over the year, reflecting the steady decline in FTE levels. We took another severance provision in Q4 of EUR 90 million in anticipation of further FTE reductions during 2018. Other expenses are also lower when compared to Q4 2016, again looking through incidental items. This is a result of our progress on the various cost control programs, which Kees discuss earlier.I will now hand over to Tanja for an update on impairments in our current capital position.
Thank you, Clifford. Turning to Slide 13 on impairments. The strong Dutch economy and global economic developments resulted in low new impairments. We have a fair amount of reversals leading to a net release of impairments. IBNI reduces with EUR 7 million, while a model update led to a release of EUR 31 million, mainly within Commercial Banking.Looking at our ECT portfolio. We booked EUR 33 million impairments during Q4. The impairments added during 2016 and '17 remained well within the scenarios we modeled for the Energy and Shipping portfolios for those years. As of January, IFRS 9 will replace our current impairment rules. The impact of the first time adoption is limited, reflecting the benign economic outlook. The effect will be around 15 basis points on our CET1 ratio, in line with our earlier guidance. Under IFRS 9, impairments are moving -- are more forward-looking. So going forward, we expect more P&L volatility to the business cycle.Now turning to our capital position. At year-end, our CET1 ratio amounted 17.7%. Looking at the RWA development. Credit risk RWAs increased mainly due to the business growth. This was partly offset by the sale of the Visa equity stake and higher house prices which benefited collateral values. Market risk RWA declined as well due to lower volatility in financial markets. The leverage ratio increased to 4.1% at year-end on a fully loaded basis. We issued a new AT1 instrument. The effect of this was partly offset by applying the EBA Q&A interpretation. As you all remember, this has put a limit on the amount of capital instruments which are eligible as regulatory capital at holding company level. The leverage ratio was further helped by the decline in exposure measures, mainly the result of lower [indiscernible] exposure.Now turning to Basel IV and the impacts on our RWAs. As Kees mentioned earlier, we estimated the impacts of Basel IV on our RWAs. Based on our steady balance sheet and without taking into account mitigating actions, we estimate the RWAs to increase by around 35%. The biggest impact is on credit risk in our corporate loans and mortgages. These numbers assume, among other things, loan splittings to be applied for mortgages and commercial real estate, has led operational risk RWAs. Uncertainties remain, for example, due to the room Basel IV gives local regulators for setting certain parameters and the fact that it's not always 100% clear how we should be interpreting the rules.I will now hand back to Kees.
Thank you very much, Tanja. As you know, we have been consistent on the need to prepare for possible but significant Basel IV outcome, and we now understand the impact more clearly, being inflation of RWAs was 35%, which Tanja described. To recognize this will take some time before this will materialize. Also, the EU may make some modifications, and we will mitigate some of the impact as we adapt the business ahead of the gradual implementation in the period 2022-2027. Nonetheless, we need to manage our capital prudently through the transition. We have determined what it means for our current capital in Basel III terms, namely Basel IV implementation buffer of 4%, 5% of CET1 on top of our current target of 13.5%. It leads to a new capital target range of 17.5%, 18.5% towards '18. We are already in this range. This target range is not a static number, it will be reviewed at year-end. And we will, for example, incorporate the possible impacts for TRIM as well as Basel IV, SREP and other regulatory developments. We now have a clear target range we wish to operate in, and this forms the backdrop for our distribution policy.On the next slide, there are 2 components you can see to our shareholder distributions going forward. The first is the dividend payout of 50% with sustainable profits. On top of this, additional distributions will be considered. So together, shareholder distributions will amount to at least 50%. I will explain each in turn.Our payout ratio will be 50% as we feel this level is sustainable in the various scenarios given the resilient profile we can expect to maintain. We will exclude from profit exceptional items of an incidental nature, both positive and negative. For instance, EUR 270 million derivatives SME in 2016 for EUR 200 million sale Private Banking Asia last year. These items will, of course, reflect if they are present in any quarter. On top of the regular payout, additional distributions will be considered if we are within or above the target range of 17.5%, 18.5%. As I mentioned before, this range will be reviewed at year-end to incorporate relevant developments.With regards to capital distribution, it's important that we target modest business growth leading to low single-digit growth in our loan book. Also, we expect any M&A opportunities to be funded from earnings. There is no buffer earmarked for M&A.Finally, I want to update you on our overall targets. This Slide 18 lists our current targets, showing our updated quarter 1 and dividend targets. Over 2017, our return on equity was 14.5%. When adjusted for the sale of Private Banking Asia, it amounted to 13.4%. So we are performing clearly above target for our ROE. Cost income is also clearly moving closer to the cost income target of 56%, 58%. It's declining [ 2016-2017 ] from 66% to 60%. This target of 56%, 58% is set for the year 2020, and we will be focusing on further cost savings and modest business growth to achieve this target.I've discussed in depth our new quarter 1 target of 17.5%, 18.5% for 2018, and with a quarter 1 ratio of 17.7%, we are within this range. As you can see, we intend to pay out 50% reported profits for 2017, in line with the old dividend policy, amounting to a total dividend of EUR 1.45 per share.Before I open up the call for questions, I will briefly summarize. On the next slide, you can see, I'm pleased with the solid results for the quarter. Our strategic initiatives are on track, leading to better services to our clients at lower cost. We have had a record year in terms of profitability, helped by the Dutch economy, which is performing very well. Our sustainability efforts have received a number of awards this year. We're actively involving our clients on the topic of sustainability, using our influence to make an impact far beyond our own footprint. As promised, we update you on capital. We have carefully analyzed the December Basel IV announcement, and this has given us good understanding of the impact on our RWAs. It's clear that even today, we are well positioned for Basel IV, which is reflected by our new capital target. We've given you the factors with which we will look at when deciding on additional shareholder distributions on top of the 50% payout ratio.With that, I would like to ask the operator now to open the call for questions.
[Operator Instructions] Our first question is from Mr. Pawel Dziedzic of Goldman Sachs.
So few questions from me. First, just a clarification on your dividend policy. You mentioned that you'll consider additional distribution if your capital is within or above the range. Can you help us understand what's called for additional distribution you have when your capital is within the range? I understand that if it's above, you can pay out more. And then second, just technically, you mentioned buybacks as well as an option to return capital. Can you clarify at what point in time you will be ready to initiate such a program? What needs to happen? And do you think that can take place before the year-end? And then the second question will be on Basel IV. Your guidance today for 35% risk-weighted asset inflation implies a hit not that far off from 500 basis points to 600 basis points that you've previously seen as a possible outcome. So I was wondering if you can walk us through any mitigating actions that you're considering at this point in time are possible and if you're looking to review any of your business lines in the scope of perhaps higher capital requirements. And I leave with that.
Okay. Thank you very much. Clifford, would you answer the questions?
Yes. Thank you, Kees. I think on the 3 questions, so we think about the range as the amount of capital that we want to comfortably operating in, at least until we review the capital range going forward. So you asked about scope for capital return within the range. Any consideration of distributions, while within the range, will affect a range of factors -- capital, but also other considerations. But importantly, we want to operate comfortably within that range. And so clearly in practice, that would impose a limitation recognizing that range is 1%. And thinking about buybacks, I would note that buybacks require regulatory approval, which can be up to 3 months. And further, we don't comment on our process with the regulator. In terms of the timing of any buybacks, we don't rule out buybacks and we don't rule them in. In thinking about additional distributions will reflect on a range of factors, but clearly, we're not ready to do that now as we are in the bottom of the range after IFRS 9 impact, and we want to operate comfortably within the range. So any such distributions will be later. In thinking about -- maybe I'll comment on risk-weighted assets, [ perhaps the case ], pick up more general business considerations. Yes, we said an impact of 500 basis points to 600 basis points was possible in November when we last spoke together as a group. The announcements regarding the rules came out a few weeks later, and so I don't think it should be a complete surprise that we are somewhat lower. 35% corresponds to 450 basis points, which is somewhat low impact than we were considering Q3, and that reflects, I think, the widely reported somewhat more favorable terms when compared to previous concentrations. So some of the ratios were somewhat lower references, the loans getting and so on. In terms of business impacts, Kees, perhaps, you care to comment on how we're thinking about the business going forward in relation to Basel IV.
Yes. Thank you very much, Clifford. I think indeed, and we've said that before that when Basel IV would be in place, at least known, contemplate with know, that of course, we will analyze all the rules and look into all our business lines, how we can adapt, [ here and there ], ways of doing business. So that is something which is in process right now, and we will take of course some time for that. Then, of course, also repricing in this respect is important. That, of course, will not happen immediately, but I think that is something which, over the coming gap, presumably years, will get more clear. So there are several elements. Of course, European Union I mentioned. So there are still a lot of items which should be analyzed but also our business lines, and that's what we're doing right now.
Maybe just one other quick follow-up. So when we think about the timing of potentially additional capital returns, that would-- that is very unlikely to happen before, let say, you update us on your capital position again at the end of the year. Is that more or less correct?
I think it will not logically be in the first half year, presumably, but saying something about the second half the year, I would say it's perhaps too early to see during the year.
The following question is from Ms. Sofie Peterzens, JPMorgan.
In one of your slides, you also briefly comment other regulatory impacts, including TRIM. Could you just give us an update on how your discussions with the regulators are going with regards to TRIM? Also, if you are seeing any impact from the new EBA guidelines? And my second question would be on -- you also briefly mentioned M&A, that if you have any M&A opportunities, those will be funded through profits. At the moment, are you looking at anything [indiscernible] planning to expand the new markets? Or how should we think about it? And my third question is on fees. They rebounded in the fourth quarter. How should we think about fee growth in 2018?
Tanja, will you take the first?
Yes. Thank you, Sofie, for your question. I will take your first question on TRIM. Well, as you are aware, the [ hedge room ] is an ongoing exercise, and we have had our TRIM reviews of mortgages and market risk so far. While the final results still need to be communicated, we expect limited impacts so far, but this is a continuing exercise. If I can link it -- and it will take 2018 and '19 to basically become fully clear what the impacts will be. We see TRIM as a frontrunning on Basel IV. It will harmonize models across Europe. So what you will see is that the impact of TRIM will be reduced -- reducing the impact of Basel IV. So that's in relation to our capital targets.
Thank you. And with respect to M&A, no, we have not something in mind at the moment. And in the past, we have mentioned, for instance, in the Private Banking in France or Germany as an example where we could create a bit more scale. Fees, Clifford?
Yes, finally on fees. You do see some volatility regarding fees, and we've called that out. So we're pleased this bounced back in Q4. I would say this is a more steady level. We see some opportunity to grow fees in certain of our businesses, but we see ongoing pressure in others. So hopefully, that gives you the guidance you need thinking about our fees going forward.
The following question is from Mr. Benoit Petrarque from Kepler Cheuvreux.
It's Benoit Petrarque from Kepler Cheuvreux. Yes, a couple of questions on my side. Sorry to come back on the distribution, but I would like to better understand how you will think about additional distribution when you are within the range of 17.5%, 18.5%. What are the kind of [ positions ] because it looks like you will be somewhere probably above 18% at the end of the year? So can we expect already more than 50% for 2018? And also how do we need to see kind of the -- when you kind of hit the level of 18.5% -- above 18.5, can we assume this is a most, well, substantially higher payout than the 50% limit? The second question will be on net interest income for 2018. Can you provide maybe a bit of guidance in terms of how do you see margins moving into the year? And also looking at your [ replication ] portfolio and current rates, do you see still headwinds? Or are things going -- are things looking a bit better? I was curious about that. And then finally, maybe you could update us on the cost savings program, the EUR 900 million you've put to the market last year. I think you realized a lot of FTE reductions already, also cost-cutting, so I was wondering where you are in this kind of big program of EUR 900 million cost reduction by 2020.
Thank you, Benoit. Clifford?
Yes. Benoit, so we think the range is the right way to think about our capital position right now. We want to operate comfortably within that range. And I think it's important not to get too mechanical regarding CET1 ratio. We do think it's the most important driver, but it's also our way of reflecting the uncertainty regarding Basel IV implementation and our flight path to full compliance from 2022 onwards. In thinking about the factors that we will consider will be -- how we're positioned within the range or indeed above that range, the trajectory, our momentum from that, [ at higher average 9 ] as a bit of a wildcard this year. There are other factors, as you can see there, regarding capital. We talked about TRIM, but this year, there is an industry-wide stress test under way. We have the normal SREP process, and we have, call it, other commercial considerations like the interest rate and the -- an impairment cycle. So you ask all the things we consider. It's rather a long list. I think in practice, that means, as Kees said -- look, it's not something that's very likely in the early part of this year. I think towards the end of this year; and in particular, as we head into our final and the usual time we pay a dividend, all these factors will be fully considered, and we will clearly update you then. So hopefully, that gives you a bit more color. I think on net interest income, you've seen our margins resilient. I think we see some posted developments on the interest income from modest volume growth. When you look through some of the incidentals that we've called out, I think our margins -- I'm pleased with how we've managed that. So our interest rates have remained low. We've also reduced further rates to customers. I think it's fair to say that process is nearing its end. And if rates remain as low as they are for an extended period, we'll continue to see some margin pressure in that area. And then putting all those factors together is the [indiscernible] calling out sort of flattish net interest income. I think from a cost savings perspective, I'll comment, and Kees, if you wish to comment further, I think we're making progress. You see that through the FTE reductions. I think I'd like to see those also come through in the bottom line expense savings. We also see all the cost pressures. It costs us money to save money. We've also -- you've seen obviously announced wage settlement, that adds to cost inflation, and there's money that we want to spend in developing the business. So it's management's job to manage all of that and hit our targets, which Kees indicated, we're comfortable with and remain on track.
Just to clarify on the kind of 18.5% and above question. So what will happen when you hit the 18.5%? Can we think about a substantially higher payout ratio than the 50%?
Well, I think, clearly, if we are at the top of our announced range, then we are more comfortable. And that will support a consideration of distribution. We also need to see where the Basel IV developments have risen. And as Kees indicated, that will reflect EU implementation. There are a number of other moving parts, but I think as Kees indicated, we're looking to deliver modest loan growth. So, organically, we expect to continue to accumulate capital, which will move us more comfortably within our range, which, in isolation, will support distribution consideration, but we need to reflect on other factors which a board sensibly needs to consider when paying out [ some ] discretionary additional capital. Sorry, I can't be more specific, but the nature of our dividend policy now is really to give you -- to give comfort regarding an underlying 50%, but then frankly, retain discretion to talk that up in the line of business and regulatory developments.
Thank you, Clifford. And I would like to add one other one, which is also part of the consideration, of course. In the fourth quarter of each year also, Dutch Central Bank looks at the 3% Dutch add-on -- capital add-on, so that is also something which will be evaluated by regulators every year. So that is also something which is --- that's a Q4 element.
Our following question is from Mr. Robin van den Broek, Mediobanca.
My first question is on operational risk. The RWA inflation you mentioned, is there any consideration in there for potential internal loss of facts? The basic committee has basically left this question of the local regulator. I think if you look at the SME derivatives file, you've incurred pretty high additional OpEx and also the compensation scheme might be considered as internal losses, which could potentially further inflate the RWA impact.Secondly, if you look at the mortgage book dynamics, I think velocity in Q4 was at its highest level almost historically and the house prices, of course, are very supportive and still the book is only up a very little bit. That's sliding, of course, [ underlying ] redemption of that book that at some point will go even further due to the new annuity framework. And I was wondering if the comment you make on organic growth, could there be something on the table that you might look for a new growth pillar given the fact that your mortgage book might start to release capital at some point? And the third question is on Payconiq. You have stopped the initiative together with the incumbent banks to work together on that. Can you maybe discuss how you feel Tikkie is positioned on the market and why going for something alone could be a better way to fend off new entrants on the market of the PSD 2?
Thank you very much. Well, you greeted us as gentlemen, but I will give the first question to a lady.
Okay. Well, thank you very much, Kees. I will take the question on operational risk RWAs. Well, of course, here, we started to look as well, we'll go into the calculation of operational risk RWAs and the Basel IV. And you mentioned as well that this is also subject to local implementation. So we cannot comment on that yet. I can mention it for our own assessment. We have used our current situations as of the end of 2017, and we have applied the most viable one.
Okay. Thank you very much, Tanja. With respect to the mortgage book, I think your analysis is right, of course. It's very hard work these days to keep the book stable or grow, and we've been able now to grow it for some period right now. If you look at other banks, you will see a decline in the Netherlands, but we've been able to grow it. But there is pressure, of course, as you mentioned, from redemptions here. We expect house price to increase, by the way, this year significantly, but volumes were presumably down. There is no such thing at this moment in time that we look at for an organic growth. I wouldn't pick on it, it's too early to tell. I think you should not look this only from a Dutch perspective, by the way, it's a more European approach. We're also fintechs and all kind of other solutions will be there into payment area. So our decision has been here to work further with Tikkie and other possibilities we see also in the fintech environment.
Our following question is from Ms. [indiscernible] of Societe Generale.
I just have 2 questions really on your capital planning. The first one related to the 13.5% capital targets that you have maintained. Can you just explain why you decided to maintain a 50 basis point management buffer on the top of your SREP and P2G? I guess the remark that goes along with this question is that if you have factored in a 50 basis point management buffer on the top of regulatory requirements, why would you have a need to consider a 5% buffer for regulation to be binding because this is already 40 basis points higher than your estimated capital cost on Basel IV? And then the second question is that I just wanted to get your view about what you expect the ECB to do on future SREP requirements, if you have any view. Do you think that the new Basel proposals -- now that the new Basel proposals have been issued, the supervisor will be prone to reduce regulatory requirements in the future?
Can you take the first one, Clifford?
Yes. I think we're comfortable with our target. So our target is 17.5% to 18.5%. We've explained the rationale, which is our [ existing ] targeting in the Basel IV buffer. In coming to that consideration, frankly, there are risks as well as opportunities. So you've highlighted some opportunities around double counting of buffers. I think there are some risks in terms of possible unfavorable treatment of further rulings. We got IFRS 9 coming in, and I think the whole sector is learning about the volatility of the impairments that, that will bring. I think we also need to work through the volatility of the Basel IV capital requirements themselves. So we understand how it works with respect to our internal models. The cap applied to this standardized approach, I think, is a new territory for us as well as the industry. So we think -- I don't think it's right to unpick particular elements, that's not the way we thought about it. We've looked at it in the round. We're comfortable with this range, and I think we've been open that we will review it annually and particularly the end of this year as things develop because how regulatory process is still evolving despite clarity that we saw from Basel IV in December.
Thanks, Clifford. With respect to new Basel regulation leading to other regulators to lower their regulatory requirements, well, we have no indication from ECB at this moment in time. And with respect to the Dutch regulator, I would say they have, of course, Dutch -- kind of a Dutch add-on and I think their decision-making process would not so much to look at. Now Basel is there, we will lower [ a bit ] more. How is the European integration and the banking union and deposit guarantee schemes working out with backstops in case of crisis and the likes? So I think that's more the things they look at than just some other regulator have increased their regulatory funds. Thank you.
Next question is from Mr. Johan Ekblom of UBS.
I think we've probably covered capital from every angle, so maybe going back to net interest income. I guess if we look both in the retail business as well as in the Private Banking and just summing of the incident, there seems to have been quite an improvement on the level we saw in prior quarter. Is that a sustainable margin in Q4 if we just -- or are there any sort of other effects we need to bear in mind there?
Yes. I think -- well, looking for incidentals is an art as well as a science. I think we've called out a few. We see the underlying is more flat, to be honest. So I don't know how you've treated the TLTRO. I think that -- we obviously see the benefit of that going forward when we booked the full annual amount last year in 1 quarter. So I think we're pleased with how we've managed it, particularly on the deposit side. I think we've remained, I would say, disciplined on margins, and you can see volumes are modestly higher, but not significantly higher despite the benign market conditions. So we're focused on managing NII as a whole, we see it as resilient, and we see frankly the prospects I described earlier for flattish development going forward with some pluses and minuses and some risks and opportunities around it.
Can I just follow up? I mean, of the TLTRO benefit, where is that book divisionally? And then maybe just a follow-up on, when you say flat, I mean, should we think flat on Q4 ex-incidentals or flat on full year '17 ex-incidentals or on a reported basis, I guess?
Yes. So the TLTRO is booked in commercial banking and corporate banking. I think in terms of -- I mean, I would say Q4 is the level, but when you look through the incidentals, it's been fairly flat through the year in our view.
The next question is from Mr. Adrian Cighi of RBC Capital Markets.
Just 2 follow-up questions, please. One on NII and particularly on NIM. So you've seen a pretty meaningful increase in NIM quarter-on-quarter. Can you provide us some more color behind the drivers of this increase? Is this repricing mix or other drivers? And one more follow-up on capital, if I may. You've outlined essentially 2 measures today. One is the 4% to 5% CET1 buffer, and the other one is the 50% payout target. Now even assuming the 35% risk-weighted asset inflation, you're still generating somewhere around 150 basis points of capital a year predividend. So even post 50% payout and some risk-weighted asset inflation or growth, you're still building 50 basis points organically a year. You have 10 years before Basel comes into place, and you're essentially already meeting the target, given the 4% to 5% buffer, which realistically comes as a buffer-on-buffer strategy or a very, very cautious strategy. How much of this is regulatory driven and how much of it a regulator-driven rather and how much of this is self-imposed?
Clifford, you start on the NIM.
So a couple of things. I think there were around EUR 100 million of incidentals in that NIM. So if you look at the chart that we've disclosed, you can see the dotted line is quite close to the trend line. So we don't see a step-up in NIM in Q4 when you look through those incidentals. And I would [indiscernible] directions and some truing up in relation to mortgage penalties. So I refer you to my comments earlier regarding the trend. I think on capital, there are a few elements there. I think the [ incorporating ], I take that as a compliment. I think there are -- we've tried to provide an approach to give some comfort around resilience of the sort of the stated payout, but also the prospect of incremental distributions when they are there, and in particular, those distributions are not setting a new platform to grow beyond that because we don't think that's the way to manage a transition in the regulatory development. So the things -- I think your figures, I would say, are roughly right in terms of organic capital generation and those were behind our statements that we would expect to move upwards within our capital target range, but we're now currently at the bottom reflecting the IFRS 9. We're hopeful of moving upwards within that range given the trends that Kees described. It's not a -- life isn't mechanical. There are a number of the drivers of risk-weighted assets, including credit quality developments, [ modelling ] developments. I think we've all been used to a benign economic environment where those credit quality developments have been coming through moderating any growth in our risk-weighted assets today. We need to manage the transition cautiously as well as the economic cycle cautiously. And when there is excess capital, we've called out what we would do with it, which would be [ pay ] a consideration to the different distributions.
The following question is from Mr. Jean-Pierre Lambert of KBW.
I listened to the call from the beginning and I still have some clarification or anger on the capital, I'm sorry about that. So the first question is, practically, are you going to evaluate the excess capital quarterly or at the end of the year? So is it going to be a quarterly process? Or it will be a sweep at the end of the year? Second question related to that is the leverage ratio, which is normally a constraint for dividend payments, I would say, or for your core equity Tier 1 management. How do you incorporate that? Thirdly, you give -- there is a trade-off for you between share buybacks and special dividend. How do you see it planning? And why do you need to keep these options open? And finally, the M&A, just to clarify what you said, M&A buffer, does it came on top of the 18.5%?
Clifford, can you start with?
Yes. So one of your colleagues said that we've done capital sufficiently, but obviously, [ I think ] a consensus there. I think there a few comments. We think about capital all the time, so real time. I think the more material review would be at year-end and you should not expect to see quarterly changes in our capital range, 17.5% to 18.5%. We think that expressing in Basel III terms gives you comfort that you can calculate it and it's clear to everybody. But the major developments, that Kees talked about, we see happening through the year. And so we'd expect really the year-end to be the opportunity to do that. And clearly, if there were material developments, we would need to reflect on those. But in thinking about special dividends, in particular, the natural time to consider that seriously would be at the year-end with our regular dividend. I think in terms of leverage ratio, we're pleased with the current leverage ratio at 4.1%. Tanja talked about the drivers. We will look to maintain that at about 4% going forward. We don't think that would be a material constraint on what we've been talking about, but it does need managing and there are all regulatory developments in that space as well. In thinking about buybacks versus special dividends, I think we're clear we are open-minded about any form of capital return when the board considers it appropriate. Each has advantages and disadvantages depending on circumstances and frankly depending on the share price. So we want to keep those open. I think special dividends, I've commented on the time and considerations regarding that. I think buybacks also requires a more formal process with the regulator, which could take up to 3 months. And so they -- both tools have pluses and minuses. We want to express to you we're open-minded about those depending on the circumstances. But first, we need to determine whether there's an excess and wish to distribute. I think regarding M&A...
M&A. What I tried to say is that there is no buffer on top of the 17.5%, 18.5%. If we do a small acquisition, we would finance it from our profit.
Our next question is from Mr. Bruce Hamilton, Morgan Stanley.
So I've got one more on distribution. So I think I understand -- the message is quite clear that you want to move toward sort of the upper half of the -- or the upper end of the sort of range or a comfortable level. So I assume you haven't thought about trying to make the total distribution progressive as we think about what you paid for '17 is the first question. Then secondly, I'm just looking at sort of SME demand dynamics in the Dutch market. The loan growth in your commercial book looks pretty good, indeed. I mean, if I look at the system level data, it looks like growth has been pretty lackluster on the corporate side. So I was just trying to understand if you -- hey, it looks like you're taking market share, but are you seeing any underlying signs of improvement driven by the improving GDP backdrop? And then finally on cost of risk, in terms of the IBNI reserve outstanding, I guess we should -- just thinking about '18 cost of risk, we should assume sort of normalizing back tools to cross cycle average but presumably running below that. Any words you have on guidance there would be helpful.
Clifford?
Yes. So I'll deal with the first 2 and Tanja patch the third. Look, we're aware of and pleased with our dividend for 2017 and that reflects a step-up from '16 relating to a disposal, but also I think [ cyclically ] low impairments. We can't really comment on distributions regarding 2018 beyond the comments we've made, but we're clearly looking to sustain the stated 50% payout, and we will consider additional distributions on top of that in the light of the circumstances we described earlier. I think around SME, I think your comments are interesting around that. I mean, we've seen, I would call it, steady growth in the Commercial Banking book, which we're pleased with. We've introduced a new sector approach to the team there, which is quite a big change for the market and in terms of our relationship with our clients, and we're pleased we've traded quite well through those material changes and I think medium term, and I'm hopeful, that will sustain our market share going forward, and we do need to recognize. I think we're pleased with the economic conditions, but we don't want to do things we'll regret in a few years' time when the cycle inevitably turns. I think cost of risk, Tanja?
Yes. A few comments on cost of risk. Also in the IFRS 9, we still believe that the through-the-cycle cost of risk will be between 25 to 30 basis points. Of course, last year was not a normal year. If you correct for all kind of model changes we have had, then the average -- the cost of risk would be around 6 basis points. Our outlook for 2018 is above that number, which was I think historically low but well below the through-the-cycle cost of risk.
Our next question is from Mr. Bart Horsten, Kempen.
Regarding IFRS 9, if I can come back on risk cost. Do we have already [ a mark ] on the view of what that would mean for 2018 impairments? And then on costs, given that you already reduced FTEs by 10% of your 13%, does that mean that we no longer see significant restructuring charges? And what about your expected ICT investments this year?
Okay. Thank you. Well, on the expectations for 2018, I cannot add anything to what I just said. Well, it will be above the levels that we've seen in 2017, but still below the through-the-cycle cost of risk.
And just to clarify that, is that because of IFRS 9? Or it's just because you have less [indiscernible] planned?
No, it's not specifically related to IFRS 9, which you will see as a consequence of IFRS 9 that some of the cost of risks will be front-loaded through the introduction of stage 2 cost of risk, but given the economic outlook, we don't expect a very major impact in 2018.
Yes, I think just commenting on costs, I think we're pleased with our digitization progress. We do expect the costs to require further work going forward, and it's possible that there are further FTE trends that play out over the medium term. So we're not -- I don't think we're calling the end of FTE reduction. Any business in this environment needs to continue to bear down on costs and people costs are an important part of the business. I think in terms of restructuring charges, they've been meaningful last year and this year, and we are conscious of the need to continue to improve our processes and work on that. It's possible with their restructuring charges going forward, and we will call those out to you. I think in terms of ICT, there are a few things going on. I mean, we do need to see cost of technology, cost of change as part of our overall ongoing expenses, not a sort of lump sums that are spent and then dissipate going forward. We're investing in new challenger propositions that Kees described. We also have a new Innovation and Technology Director, and we will update you further on plans and thoughts around that. We're not looking or expecting major programs, but I'll be disappointed if Christian hasn't got good ideas about how we can improve our business going forward, and we will update you further on that later in the year.
The next question is from Mr. Stefan Nedialkov of Citi.
I got 3 questions, hopefully, quick ones. Number one on the leverage ratio benefit from the clearing redefinition. You've upped the guidance to 50 basis points to 60 basis points, or it's confirmed that this is already net off the off-balance sheet factors. And to get some color on what exactly early adoption means, are we talking 2018, 2019, et cetera? So that's question number one. Question number two, in terms of M&A, can you please refresh us on your M&A targets? What type of criteria does target need to meet in order to -- in order for you go ahead, especially with respect to cost of equity or ROI or [ ROEC ], et cetera, et cetera? And the last question, when you talk about M&A being funded out of earnings, just looking at consensus, consensus as you're basically making anywhere between EUR 2 billion to EUR 2.3 billion per year for 2020, you're paying 50% of that, so that leaves you EUR 1 billion or so for an acquisition. Applying all the -- assuming one times book value, RWA, additions, et cetera, that basically lets you by something for, I guess, EUR 20 billion, EUR 25 billion in assets. Does that make sense? Am I thinking about it the right way? And what sort of EUR 20 billion to EUR 25 billion worth of assets make sense to you from a strategic point of view domestically or outside of the Netherlands?
Leverage ratio?
Yes. I think on leverage ratio, I think we're calling out the impact as slightly larger reflecting growth in the business of clearing an [ auditable ] balance sheet dynamics. I think the confirmation you're looking for is, yes, in terms of your first question. In terms of timing, I think it reflects the implementation of CRD V/CRR II proposals. We don't expect that in the short term, in particular, not in the time scale that you talked about. I think what's on our minds is, we do see the likelihood of this benefit in the medium term and we want to reflect that in terms of how we manage it in the short term, which means we're more -- frankly, more comfortable being at around 4% knowing there is a prospect of a meaningful, call it, uplift in the medium term, and that's how we're thinking about it. So we don't expect a uplift short term, but it's giving us comfort that it's there in the medium term and we managed to -- and we think about this in terms of a glide path.
On M&A -- thanks, Clifford. M&A, I think we've communicated, I think it was around IPO, and actually our sponsors feel the same. If there would be the Private Banking in, say, Germany or France, it will be add-ons which would add scale but onshore impeccable positions and the like. So there are not so many opportunities around, but that's what we said. So that's small. And your third question about the EUR 20 billion, EUR 25 billion assets, that's all the kind of calculations we make right now.
Our following question is from Mr. Tarik El Mejjad of BAML.
[ Just to speak ], I have another angle to the capital question topic. So you guide for a review of your capital return once you are above or within the range. But if you look at your capital generation, given like a [indiscernible] in RWAs and so on and some growth, you won't be there between -- before 2020 or 2021. Is that a good thinking? And also the TRIM, I'm a bit surprised by your comments that you'll -- your term was front-run Basel IV, and my understanding is there is no really overlap between the 2. But maybe you can tell us why you come to this conclusion that's actually higher TRIM will mean lower -- sorry, higher Basel IV will mean lower TRIM. And on the asset-quality review, the idea -- I mean, last time in 2016, you didn't score very well, which draw down on the stress test was very high. What have you done since then to make sure your [ profits ] better because my understanding is that the [ P2G ] is probably highly impacted by that result and maybe you can actually disclose why the [ P2G ] as some of your colleagues did to give us more comfort that's actually your 13.5% includes some decent management buffer? And last point, which is not really a question, it's a comment. I mean, I understand the market wants to get some capital back, but it's clearly stated today that there is no excess capital or such in the medium term, and I think you should better keep any capital builds and try to find routes for growth rather than hoping for some special which at the end, I'm not sure that adds much true to shareholder, but that was my personal review.
I think to TRIM, Tanja, if you can...
Yes. Should I start with your question on TRIM? So as you are aware, we have quite low RWA levels for shares and asset classes, and if that was increased because of TRIM, it would still be between -- below the output source of Basel IV. So that's why it's -- will reduce the impact of Basel IV. On the EBA stress test, of course, we have known that a full exercise and lessons learned based on the last stress test in the past [ 3 ] years, a full [indiscernible] plan has been implemented to be well prepared for this year's exercise. And on the P2G, I cannot give any comments.
Right. It's included the P2G in the 1.5%, which then indeed includes the management buffer and the P2G. So you can call -- I think you can make more or less your own calculation. Then with respect to growth, I think what we're aiming for is of course growth if it's profitable, and that's our perspective. So it's not just growth by itself.
Our following question is from Mr. Matthew Clark of MainFirst.
Few questions on net interest income and growth, so to think. Firstly, you gave a flattish net interest income outlook last quarter, and the yield curve is materially higher since then. And just still talking about the flattish net interest income outlook from here, has the higher yield curve really changed anything from you? And maybe if you could also just talk about mortgage spreads here, given the yield curve moved and mortgage rates seemed to have been still attractive for you to be writing new mortgages at the current level of spreads and that any commentary there would be appreciated. Second question is on CIB loan growth. Obviously, you're pretty strong. I think it's 11% or 12% in your slide. Are you happy with that kind of level of loan growth going forward from a risk perspective? Any comment there would be appreciated.
Tanja?
Yes. On the CIB loan growth, yes, of course, we carefully look at the economic cycle if it comes through loan growth that we've seen in our main factors. The ECT sector, we have seen considerable improvement in terms of credit quality and also the modest loan growth projected and we are comfortable with from a credit risk point of view.
Yes. I think on margins, we hedge our position with respect to interest rates. So we're not all that sensitive to interest rates, although we welcome a gently rising interest rate environment. I think you sort of answered your question in a way, which is, it takes time for the business to adapt to a different interest rate environment. I think it's possible the interest rates may well be higher this quarter than last, but I think we need to see that persisting and maturing before we call general change in trends in the business. So let's monitor it quarter-on-quarter and look forward to catching up later in the year.
Okay. Based on the forward curve as it is, do you still see a headwind from the kind of falling calculated asset yield 2018 investors 2017?
Yes. On the deposit side, we are looking to actively manage margins, and we're reaching towards the end of that. So we're kind of at an inflection point, which was behind my comments earlier on margins. So if it rates stayed lower, that will put pressure on margins. If rates are ticking up, that would relieve pressure on margins, but then we need to see where consumer rates move in that direction.
But you say if rates -- are you talking from the current level as of today or from a kind of 2017 average level or from a fourth quarter average level just because the yield curves moved so far year-to-date or since the fourth quarter average? Just trying to work on...
Yes. Look, I understand, and I can understand, we don't manage the business in that way and don't give guidance in that way. I think I gave the guidance earlier really [indiscernible] of Q4. I mean, we'll update that later in the year if there's structural change and clearly, week to week, month to month, you can take a real-time snapshot and frankly from your own views on the direction. We need to operate the business in a stable way, which I think reflects some of the stickiness in consumer rates that you referred to earlier.
And with respect to the -- I mentioned a 1.5 P2G. I mentioned buffer, but as mentioned on Slide 16, it's 1.7. Sorry for that.
Our next question is from Ms. Natacha Blackman, Societe Generale.
Sorry, I was facing some technical problems. And this is Natacha from the Credit Research team at SGM. My questions on are funding. First of all, do you have any subordinated debt funding to do this year? It looks like you're now full on the AT1 side. And second, would you be able to provide an update on timing of non-preferred senior issuance? And how much you're looking to do?
Yes. I mean, we don't comment on our issuance plans at that level of detail. And I think in non-preferred senior, we are looking to build our [indiscernible] over time and take advantage of new market opportunities, which we expect towards the end of this year, early next year.
Following question is from Kiri Vijayarajah of HSBC.
Just a couple of follow-up questions on your volume ambitions. Firstly, where do you expect your mortgage market share on new origination in the Netherlands to be this year? Do you expect it to be up or down on last year? And when I look across Slide 9 and the mix of growth in the different loan segments there, is there any rebalancing we need to think about back towards the Netherlands when we look at some of the macro indicators? Or is it more of just the same where actually international book continues to drive the growth for you guys?
I think with respect to the mortgage markets over the year, we had a 21 market share, fourth quarter 19. So that's a bit of the margin. We are, I think, largest bank in the Netherlands worth of 22 Rabo. So I think it's -- we like this market share, but it's definitely in the end related to making hurdles and making profit -- doing a profitable business. With respect to the growth, well, this means it's difficult to forecast the [ multi-book ]. We're out flattish or a small growth there. And with respect to the growth of the SME, we always guide Dutch share growth; and with international, we guide [indiscernible] and we still do.
Our following question is from Ms. Alicia Chung.
Just one question from me. The underlying cost for 2017 was around EUR 5.2 billion, including [ direct ] cost. If we look at 2018 specifically, what we expect in terms of investments and cost savings this year? And can you give any guidance around what kind of cost growth we can expect when you combine the 2 together? Then more broadly, is it possible that you -- given the way underlying cost is progressing, is it possible that you undershoot your EUR 5.2 billion target by 2020? Or is the intention to reinvest any cost savings or any of your undershooting back into the business?
Yes. I think from a -- I agree with your calculations in terms of costs, excluding incidentals the last year. We are focused on driving down cost sustainably over time and in particular, to meet our cost-income ratio target for 2020. There will be some movement. I think we want to -- we do want to invest in the business, and we expect to see that happening further both technology and client developments, but also investments in, call it, further cost reduction. So we want to see that happening in 2018 and '19. We're very committed to our cost-income ratio targets in 2020. Hopefully, that gives you the guidance. I mean, it's possible that the cost levels drift up, reflecting those investments, but we don't want that to drift up too much quite frankly, because it's important that the whole business manages cost in a disciplined way and hits that cost-income ratio target in a way this is sustainable going forward.
Our following question is from Mr. Maxence Le Gouvello of Jefferies.
I have no question on capital, just focusing on business. The first one is on Retail and Private Banking. Can you give us how many -- how much assets have been moved over 2017 from Retail Banking to Private Banking and which kind of ability you're going to have to improve the profitability budget [ consort ] on those assets? The second question is a follow-up on the Corporate and Institutional Banking comment from Tanja. On the offshore segment in your interim report, you are saying that we reached a bottom. The comment is meaning that you're feeling more comfortable in terms of managing your cost of risk, or you're going have the ability to accelerate the loan growth.
Yes. I think on net flows, we saw EUR 1.7 billion net flows into Private Banking and about half that represents a transfer. That's the Q4.
Okay. And on full year?
Yes, it's a similar sort of trend, I would say.
Okay. And by how much are you able to increase the profitability because I believe you are going to be able to offer to those clients moving to the Private Banking more adequate products? How long will it take to improve?
Well, I'd say that business is EUR 2 billion private client assets, so we are working hard to deliver value to all our clients. And I think we'd like to see improved growth and financial performance across that business. So I wouldn't call out that specific chunk of assets, in particular. We think those businesses are those kinds that are best managed within the Private Bank.
Okay. And then with respect to your question on C&IB, you mentioned specifically offshore. With respect to offshore, we will continue to be cautious and want to see more fundamental improvements as well. My comment was more broadly as well on the ECT sector.
Next question is from Mr. Marcell Houben from Credit Suisse.
I have 2 left. The first one, just to come back on your interest rate hedging. Could you disclose what's the interest rate sensitivity in year 3 or post year 3? I think you have disclosed it in year 1, but I just would like to know year 3 and if you just adjust your hedging program as some of your peers have done. The second question is on again Basel IV capital. Am I just right to assume that the 35% risk weight probably by inflation, just assuming no watering down of [indiscernible], so it seems ultraconservative to me. And would that, in turn, also mean that if there is watering down, your target would decline by that?
Yes. Just on picking up these questions on Basel IV, the rules are just out. We think the most transparent way is to provide an estimate on the rules that's published in line with our best judgment. I'm not completely clear what others have done, but I think we've been quite transparent on that. As the rules emerge, we will reflect on our estimates and reflect on our capital range. As we stated earlier, we need to prudently manage the transition, not snap back with some forwards as the latest sort of speculation regarding rules. So I think that's on the first question.
Yes. The question related to Basel IV, 35% being too prudent because not [ worrying down ] of output floor included. That's correct. That's not included. To be honest, I don't know what the effect there will be in Europe because the output floor is, of course, quite a -- is a real Basel outcome. So to change that, I don't know if that's possible, let's see, or that in Brussels, also discussions will concentrate, for instance, on mortgages and the likes or growth in Europe SME, I don't know. So we don't know yet, but it's too early to tell that it is too prudent.
Yes. Just picking up your first question, we hedge our interest rate. We match that. We are exposed to rising rates. We'll disclose that in our annual report when it's out in a few weeks. In terms of our overall position, we have shown no equity duration towards the end of last year. I don't think it's -- I don't regard -- it's usually material because our overall interest rate position is fairly modest. In hindsight so far, that looks smart, frankly, but we need to see how rates develop going forward. And you'll see a few more details in our annual report when that comes out in March.
Okay. Just a follow-up, if I may, on the cost programs. I was just wondering because now on the line for 2017 is like roughly EUR 5.2 billion in line with your target for 2020. How much more cost savings would you need to keep this nominal level of EUR 5.2 billion sort of flat for '18 and '19? How many cost savings programs additionally or commensurately should we expect to keep it flat?
Well, I think we're working on our existing programs at the moment, and we think that we can manage the needed cost development in line with the 56%, 58%.
Our next question is from Mr. Nick Davey of Redburn.
Three questions, please. The first one, just sort of high-level question really, thinking ahead to the next 3 quarters. If I sort of sum total, a lot of the areas of guidance, you've talked about flattish NII. I think you've talked also about some pushes and pulls on fees, which alludes to flattish. You're talking about costs with some pushes and pulls maybe flattish, and you postponed the dividend debate for another year. So when we tune in over next 3 quarters, what are sort of benchmarks of success? What do you hope to be sort of showing us between now and this time next year by way of progress, just some tangible things for us to look for, please? Second question, back to the sort of revenue and cost dynamic. You're sticking to the 56% to 58% cost income. But again, the revenue momentum at the moment is not as you've planned. At what point would you revisit the shape of revenue and cost aspirations to give us a clearer path to the 56% to 58% if the revenue [ momentum ] is tough? And then the third question, sorry, is another sort of interest rate and yield curve one, but I just wonder if there is any other help you can give us really on the deposit hedge of replication portfolio, how it's constructed, so we can understand or make our own estimates from the outside in and where the yield curve would need to get to for you not to be worried about this deposit hedge reinvestment. I think ING were talking about savings account for the 5-year duration, current account for the 7. Does that resonate at all?
Thanks for your question. Let me take the first one. I think when you have a high-income level and a low-cost level, I think indeed in some circumstances, some -- keeping some NII, to give an example, flattish and so on is something we also think it's -- would be a good result. We already mentioned, I think, the mortgage -- the pressure on the mortgage book as a result of redemptions. So we have to work hard there. And I think you should also take into account the levels of ROEs we have right now. So I think that should also be taken in consideration, I think, with respect to this question. But we'll work hard, of course, to grow and to diminish costs and the likes, so no worries about that, but you have to take in the context of the figures.
Yes. I think on replicating portfolio, I've actually read the transcript. I think those orders of, call it duration, I'm not unfamiliar, we're operating in the same market following the similar sort of analytical process. I don't think giving specific guides around that is all that helpful. What we've done is called out some of the pluses and minuses. We've reduced our deposit rates, including bonus rates, so we're able to manage at least so far the consumer rates. I think I've called out the challenges if low rates continue in the medium term. That would pressure margins in the medium term. And we need to -- we're frankly managing margins across the business, including the asset side and on the funding side, and that's what's driving our guidance around NII. So we don't plan to give specific sort of yield curve guidance on specific products. But based on what you've said, that sounds broadly familiar.
And sorry, if I could just ask the follow-up on the shape of the plan to get to 56% to 58%. So at what point is the revenue environment still tough? Would you update us on maybe a more punchy cost aspiration?
Yes. I think we committed to the 56% to 58% cost-income ratio target because we think that reflects an efficient business in this market rather than a specific number that's triangulated to the EUR 5.2 billion. I think we're broadly on track with those numbers, and we'll continue to update you. I think [ we are going to stay conscious ] on some of the comments earlier around growth and the need to invest in growth, and I think it's our -- our challenge is to ensure we do both, which is invest selectively in profitable growth areas, but also continue to bear down on costs and digitize processes so that we are serving our customers cost effectively. I think Kees updated briefly on that at the start of his presentation, and we look to do that on an ongoing basis each quarter.
We have another question from Mr. Stefan Nedialkov, Citi.
It's me back again. Hopefully, a very quick one. In terms of costs, could you update us on the overhaul of your core banking systems, the simplification process that you started several years ago? Where are we? And should we expect in 2018 more of a cost pressure coming from that? And then secondly, in terms of the ATM, the consolidation with all of the other Dutch banks, can you just give us again some color on how that is likely to impact the ongoing costs in 2018 plus?
Thank you. I think that the ATM is actually too early to write labeling over that to. I've not seen the figures yet in that respect. I think it's on the EUR 5.2 billion, it'll not be very big, I presume.
That's exactly the sort of thing you'd expect us to be doing. It's not hugely material for the EUR 5.2 billion, but it's sensible cost management on the part of the industry. So I think in terms of -- I'm not sure frankly, we've got much further to add regarding costs. I mean the -- we've discussed it in detail. I think what we call our TOPS 2020 program is proceeding well. We gave an update on the migration of the systems to cloud at the last quarter. I wouldn't necessarily call an overhaul of our core banking system. I think it's more in terms of a simplification and modernization of IT. It remains on track and that underpins our update and our confidence regarding our long-term cost-income ratio target.
I think it's 12:30. So I think that we, more or less, need to finish this one. So if there's still an urgent question then, but if not, then I would like to end the call. Operator, are there still questions?
Sir, we have no further questions. Please continue.
Okay.
Okay. That's great. Well, then I would like to thank you all very much for attendance of this call and hope to speak to you later. Thank you very much. Operator, thank you as well.
Thank you very much, sir. Ladies and gentlemen, this concludes this conference. On behalf of ABN AMRO, thank you for attending. You can disconnect your line now.