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ABN Amro shares plummet on vague capital management update, high impairments

Shares in ABN Amro Group NV dropped May 14 after the Dutch group reported an 8% year-over-year decline in net profit on the back of unexpectedly higher impairments.

At 1.24 p.m. in Amsterdam, the stock was down 5.39% on the prior-day close, to €24.93. The Dutch benchmark AEX index was almost unchanged from the previous day, trading down 0.02% around the same time.

The impairments were not related to the new International Financial Reporting Standard, IFRS 9, but to "several clients facing difficulties" during the quarter, Chief Risk Officer Tanja Cuppen told an earnings call.

Defaulted positions primarily in the shipping, healthcare and diamonds and jewelry sectors led to a rise in impairments to €208 million in the first quarter from €63 million in the year-ago period, Cuppen said, adding: "The challenging market conditions in the sectors I mentioned will likely require some additional impairments in the coming quarters."

As the timing of the impairments was largely coincidental, ABN Amro expects their level for the full year to remain below the cost-of-risk target range of 25 basis points to 30 basis points, Cuppen told analysts.

No update on capital

ABN Amro needs more time to assess the impact of the final Basel III capital requirements, dubbed Basel IV, CFO Clifford Abrahams said during the call. The group is waiting on important regulatory decisions still to come before the start of the implementation of Basel IV in 2022, he added.

"In the meantime, we are working through the consequences and are looking where we need to update our business," Abrahams told analysts.

Pricing, as well as changes to the product and business model mix of the group, are being considered as measures to mitigate the impact of Basel IV and other regulatory changes such as the ECB's targeted review of banks' internal models, known as TRIM.

"In any quarter, [risk-weighted assets] may be affected by regulatory changes and other factors," Abrahams said.

He reiterated the earlier guidance for an expected 35% rise in RWAs as ABN Amro adjusts its loan book to the Basel IV rules. These include a 72.5% output floor, which indicates the percentage to which a bank's internal risk modeling should match the regulatory standard. The adjustment typically results in an increase in RWAs, which are used to calculate the common equity Tier 1 ratio, the main gauge for a bank's capital strength.

ABN Amro plans to review its current CET1 ratio target range of 17.5% to 18.5% on a fully loaded basis at the end of 2018. The end of the year will also be "a natural time" to update on additional capital distribution, Abrahams said.

The lender aims for a dividend payout ratio of 50% of the sustainable profit from 2018 onward and has previously said additional distribution will be reviewed only in case its capital is within or above the target range.

As of March 31, the fully loaded CET1 ratio stood at 17.5%, compared to 17.7% at 2017-end. The group reported first-quarter consolidated profit attributable to owners of the parent company of €555 million, lower than the prior-year figure of €601 million.