A restructuring of ABN Amro Group NV's corporate and institutional bank over the next three years is aimed at preparing the Dutch lender for the implementation of the latest Basel III capital requirements, CEO Kees van Dijkhuizen and CFO Clifford Abrahams said Aug. 8.
Although ABN Amro is looking to bring return on equity in the CIB unit in line with the group level of over 10%, compared to 5.8% in the first half, a key driver of the revamp is reducing the capital consumed by the business. The restructuring will help reduce risk-weighted assets and increase the bank's common equity Tier 1 ratio, the main gauge for capital strength under the Basel III framework.
ABN Amro wants to be ready to face higher capital requirements by maintaining a CET1 ratio within the range of 17.5% to 18.5%, the executives said in a presentation of second-quarter earnings.
Large Dutch banks such as ABN Amro will be affected more than other European peers by the final Basel III requirements, which introduce a standardized model for assessing credit risk and assigning so-called risk weights. Dutch lenders have historically provided a lower risk cover for their mortgage-dominated loan books, and therefore face a more significant capital adjustment than most lenders elsewhere in Europe to comply with the new rules, which are commonly dubbed Basel IV because of their impact.
As a result, all big Dutch banks have over the past few years focused on raising their CET1 ratios and managing inflation of risk-weighted assets — the denominator of the ratio.
ABN Amro aims to reduce CIB risk-weighted assets by €5 billion by the end of 2020, relative to the end of the first quarter, which would correspond to an increase of 90 basis points in its CET1 ratio. CIB risk-weighted assets were roughly €39 billion as of the first quarter, and ABN Amro said it knocked €1.25 billion from the figure within the second quarter.
The group's second-quarter CET1 ratio stood at 18.3% on a fully loaded basis, compared to 17.5% at March-end and 17.7% at the end of 2017. If the ratio is within the target range, ABN Amro will consider raising dividends, the executives said. The group will pay an interim dividend of 65 cents per share for the first half, and will review additional distribution toward year-end, van Dijkhuizen said.
To achieve the risk-weighted asset reduction in CIB, ABN Amro will lower the capital allocation to predominantly global and highly cyclical areas of operation, van Dijkhuizen said. Most of the cuts will be made in the trade and commodity finance division, with a reduction of activities in global transportation and logistics and in natural resources, along with a de-risking of the diamond portfolio.
The global markets unit will also be shrunk, with ABN Amro looking to focus "on a limited product offering, tailored to our core domestic clients," van Dijkhuizen said.
The cost and risk-weighted asset reduction will be concentrated on the trade and commodity finance and global markets operations because they are the only two generating sub-10% returns on equity in the CIB division, the CEO said. In addition to an estimated €100 million revenue hit, ABN Amro expects around €50 million of restructuring costs, and will therefore seek to step up expense-trimming efforts by cutting around 250 full-time equivalent employees and generating other savings from IT rationalization and resizing geographic exposure.
ABN Amro's CIB will focus in future on three core areas — corporate client business in the Netherlands with further expansion possible across Northwestern Europe, its clearing business and private equity operations, van Dijkhuizen said. He noted that the envisioned measures will help achieve the medium-term ROE target for the CIB division, but that more will have to be done.
"Reducing RWAs and cost are important, but we also need to transform the business model to stay competitive as we transition to Basel IV," he said. "We will further optimize capital usage, putting more emphasis on distribution. Our focus will be on core clients, spanning multiple products."
Abrahams added that the revamp would not drastically improve the CIB cost-to-income ratio, saying: "This is really about a refocus and redeployment of capital rather than transformation of the cost-to-income ratio. I think it reflects a realistic plan, a one that's focused on de-risking, right-sizing and positioning the business in Basel IV rather than a step change in earnings."
ABN Amro reported second-quarter profit attributable to owners of the parent company of €664 million, down from €938 million in the prior-year period, mainly reflecting one-off factors in 2017. Shares in the bank were up more than 4% toward the end of the trading day in Amsterdam.