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Rumored CEO change welcome as ABN AMRO faces capital, mortgage risk-weight challenges

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Rumored CEO change welcome as ABN AMRO faces capital, mortgage risk-weight challenges

Newleadership and a fresh strategy could help ABN AMRO Group NV restore balance amid worries about itscapital and mortgage risk-weightings.

Thebank's upcoming CEOchange might happen earlier than previously thought, with GerritZalm expected to name his successor before the end of 2016 and leave the postat the beginning of 2017, Reuters reported, citing Dutch newspaper Financieele Dagblad. Zalmwas appointed CEO after the bank's nationalization during the global financialcrisis and his contract expires in 2018.

Themost likely internal CEO replacement is Chris Vogelzang, who leads the retailand private banking division, according to the report.

"Thebank needs a fresh pair of eyes," said Vardhman Jain, a bank equityanalyst at Macquarie in London. "The retail banking head would be a goodcandidate."

Hesaid the bank needs to find a way to offset declining interest margins in itsmortgage business, its most lucrative activity.

"Thebank struggles to meet its targets … It hasn't performed that well," hesaid in an interview. "It needs a new strategy."

IPO

InNovember 2015, when the Dutch government sold part of ABN AMRO on the stock market, the bank'sshare price reached €18.35 at the end of the first trading day. It has fallensince then, closing at €16.41 on July 21.

Untilit finds new revenue streams to attract investors, the bank's share price islikely to stay "way below" the IPO price, Jain said, which means thegovernment won't offload more of its stake.

"It'san overhang," he said.

MarcellHouben, an analyst at NIBC Markets in Amsterdam, said in an interview thatZalm's tenure was fruitful as far as it went, but added that the bank isentering a new phase that requires different leadership.

"[Zalm's]job was integration [with Fortis], restructuring and the IPO," saidHouben. "It was successful. Now it's time for a new CEO."

Houbensaid challenges lie ahead in the retail division. The digital offering, despitebeing ABN AMRO's most important section, has been falling behind that ofING Groep NV, hesaid. The new CEO will have to remedy that.

"There'sa lot of work to be done on digitization and reducing operating expenses,"he said. "ING is much better at it."

Capital, RWAs

Meanwhile, regulatory capitallevels present their own set of uncertainties, Houben said.

Thebank's leverage ratiohas been a point of contention for some time, hovering around the lowest levelsseen in Europe. At the end of 2015 it stood at 3.80%, and by the end of thefirst quarter of 2016 it had declined to 3.70%. ING's stood at 4.30% at the endof the first quarter, and most other large European banks are above this level.

Asof 2018, the minimum leverage ratio level imposed by Dutch regulation will be4%. If ABN does not gradually reach that point it might find itself unable todistribute capital to shareholders, which may further depress its share price,Houben said.

"Theleverage ratio could be a constraint for dividends," he said. "It'sdefinitely a risk."

Theanalyst said another "huge risk" was posed by for mortgages,which may have a detrimental effect on the bank's common equity Tier1 ratio.

"Ifa floor is implemented ABN gets hit harder than ING," Houben said.

Henoted that the Dutch regulator was lobbying for that not to happen after theBasel Committee caused anxiety in the country earlier in 2016 when it publisheda policy proposal that would force the country's banks to consider mortgages tobe much riskier than they currently do. This in turn would affect theirrisk-weighted asset levels, which are a key component of the capitalrequirement. ABN AMRO's end-March CET1 ratio stood at 15.8%.

Jainsaid ABN AMRO had some of the lowest risk-weights for mortgages on the market.However, he added that, should new standards be imposed as part of theso-called Basel IV wave of bank rules, the bank would be able to cope withouthaving to raise additional funding.

"Therewould be an impact on capital but [ABN AMRO] should be able to absorb it,"he said.