ABN AMRO Bank NV's new 2024 strategy was met with a cool reception by the market when it was announced, a reaction shared by analysts who question the bank's ability to boost growth and meet its profitability target.
The Dutch group said Nov. 30 that it aims to achieve return on equity of 8% in 2024 as the negative interest rate environment is expected to weigh on performance over the next few years. The target was pared down from 10%, which the bank still says is achievable when rates normalize.
"Modest" growth opportunities in key client groups in Northwest Europe underpinned by a gradual economic recovery and management action to mitigate the impact of negative rates, along with cost reductions through "simplification and centralization" gives ABN Amro confidence it can get to 8%, a spokesperson told S&P Global Market Intelligence.
ABN Amro wants to focus on core markets in the Netherlands and Northwest Europe and select segments it can "maintain and grow scale." This focus combined with €700 million in cost savings and reduced cost of risk that makes the ROE target "deliverable" in four years, CFO Clifford Abrahams said.
After booking ROE of 10% in 2019 and 11.4% in 2018, ABN Amro reported negative ROE of 1.3% in the first nine months of 2020 as negative COVID-19 effects and oil and gas losses inflated impairments and drove the bank to a loss in the second quarter. The bank is expected to book a negative ROE of 2% for full-year 2020, according to analysts' consensus.
Some analysts wondered why the bank is so cautious given the long time frame of its plan. Given the 2019 ROE level, the 2024 target is "relatively modest" and implies a more cautious revenue outlook, Credit Suisse equity analyst Jon Peace, said in a written comment.
ABN Amro's update was disappointing because it did not provide near-term revenue guidance, while the near-term cost outlook was higher than expected, Deutsche Bank equity analyst Benjamin Goy said in a note.
"Typically, only in major restructuring cases have we seen companies under our coverage provide a ROE target four years down the line that requires significant improvements from the status quo, and in our view, ABN's lack of interim targets instills no additional confidence in the 2024 target," Goy said.
CFO Abrahams attributed the expected uptick to €5.3 billion of costs in 2021 from an estimated €5.1 billion in 2020 to investments and additional expenses for anti-money-laundering efforts and regulatory levies. Costs should start falling from 2022 as more of the measures, including a planned reduction of 15% of staff, or more than 2,800 employees, take effect.
The target of 8% is achievable but ABN Amro may have to step up its cost-cutting efforts as revenue prospects look weak, Paul van der Westhuizen, a credit analyst from Rabobank Research said in a written comment. "Visibility is poor at the moment and much will depend on the development of the macroeconomic environment and the slope of the yield curve with regards to banks meeting their ROE goals," Van der Westhuizen said.
Current consensus forecasts reported by ABN Amro reach 2022, when the mean projection is for ROE of 6.2%, up from a projected 3.9% ROE in 2021.
There is also skepticism in the market as to whether ABN Amro can deliver volume growth in the segments it has decided to focus on "or at what cost they can deliver that," UBS equity analyst Johan Ekblom said in an interview.
According to ABN Amro's plan, the "heavy lifting" of the restructuring of the CIB and investments in digitalization should happen in the next three years with €400 million, or a little over half of the planned cost savings, being achieved by the end of 2023, Ekblom said. This means a big part of the cost benefit will come in the last year, implying a sharp increase in profitability in 2024, he said. Therefore ABN Amro is "asking people to put a lot of faith in a future that is still quite uncertain," Ekblom said.
The bank plans to raise market share to 20% in 2024 in both Dutch mortgages and SME corporate lending, from 18% currently in both segments. Growth should be achieved by exploring niches where the bank is underrepresented, expanding into new client groups and offering competitive pricing on select products, CEO Robert Swaak said. The market share increase in focus segments could reach up to 5%, according to the bank's guidance.
Growth in lending to small and medium-sized enterprises and wealthy private individuals "faces competitive challenges in the mature markets of the Netherlands and Northwestern Europe," Moody's credit analysts said in a December note. Furthermore, ABN Amro's lending volume should remain "broadly flat" until 2024 as the "progressive" runoff of the CIB noncore loan book will offset growth elsewhere, the analysts said.
Before the new strategy update, ABN Amro announced a plan to wind down a portfolio of noncore CIB loans, accounting for roughly 45% of total CIB loans and advances, and 35% of the unit's total risk-weighted assets, at its second-quarter earnings presentation in August. The total volume of noncore CIB assets had been reduced to €13.8 billion in the third quarter from €17.5 billion in the second quarter, bank figures show.