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Edited Transcript of ABNd.AS earnings conference call or presentation 7-Aug-19 9:00am GMT

Q2 2019 ABN Amro Bank NV Earnings Call

AMSTERDAM Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of ABN Amro Bank NV earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Clifford J. Abrahams

ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO

* Kees C. van Dijkhuizen

ABN AMRO Bank N.V. - Chairman of Executive Board & CEO

* Tanja J. A. M. Cuppen

ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board

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Conference Call Participants

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* Albert Ploegh

ING Groep N.V., Research Division - Research Analyst

* Alicia Marianne Chung

Exane BNP Paribas, Research Division - Analyst on the Pan-European Banks Sector

* Bart Jooris

Banque Degroof Petercam S.A., Research Division - Analyst

* Benjamin Goy

Deutsche Bank AG, Research Division - Research Analyst

* Benoit Petrarque

Kepler Cheuvreux, Research Division - Head of Benelux Equity Research

* Farquhar Charles Murray

Autonomous Research LLP - Partner, Insurance and Banks

* Giulia Aurora Miotto

Morgan Stanley, Research Division - VP and Equity Analyst

* Jason Kalamboussis

KBC Securities NV, Research Division - Executive Director Research

* Jean-Pierre Lambert

Keefe, Bruyette & Woods Limited, Research Division - SVP and United Kingdom Analyst

* Johan Ekblom

UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks

* Kirishanthan Vijayarajah

HSBC, Research Division - Analyst

* Nick Davey

Redburn (Europe) Limited, Research Division - Research Analyst

* Omar Fall

Barclays Bank PLC, Research Division - Analyst

* Pawel Dziedzic

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Raul Sinha

JP Morgan Chase & Co, Research Division - Analyst

* Robin van den Broek

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Stefan Rosenov Nedialkov

Citigroup Inc, Research Division - Director

* Tarik EI Mejjad

BofA Merrill Lynch, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for holding. Welcome to this ABN AMRO Second Quarter 2019 Analyst and Investor Presentation. (Operator Instructions) I would now like to hand the call over to Mr. Kees van Dijkhuizen. Go ahead, please, Chairman.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [2]

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Thank you very much, operator. Good morning, everybody. Welcome to the investor and analyst call for ABN AMRO's Q2 results. I'm joined here by Clifford Abrahams, our CFO; and Tanja Cuppen, our CRO.

I will take you through Client Due Diligence and the progress we've made on the execution of our strategy, how we are managing the bank in a lower interest environment and update you also on our targets. Clifford will go through the details of our second quarter results and run through capital. Tanja will update you on developments in our loan portfolio as well as the regulatory focus items.

Turning now to Slide 2. I will run you through the highlights of the second quarter. I'm very pleased with our strong financial results and solid operational delivery during the quarter. Our NII is strong despite the low interest rate environment. And our impairments are, like last quarter, moderate and well below through-the-cycle cost of risk.

On Basel III capital position remains strong and we are well positioned to manage the transition through TRIM and Basel IV. We have declared an interim dividend of EUR 0.60 a share, 50% payout of half year in line with the payout of last year.

We are making good progress on our strategic execution, our cost savings programs and CIB refocus. We are taking the necessary actions to continue to deliver in this more challenging economic and regulatory environment going forward. We have further increased our focus on detecting financial crime. And this quarter, we recorded an additional cost provision for Client Due Diligence.

Let me take you through Slide 3 for more detail on this. I want to be clear that we are fully committed, of course, to complying with all anti-money laundering and terrorist financing legislation. We are pleased with the Dutch government's plan to jointly combat financial crime. We see this as an important initiative towards improving cooperation between government and banks and among banks and in an effort to make society even safer and to prevent financial crime.

Our Client Due Diligence foundation is in place and we are further strengthening and enhancing our activities in this area. The CDD workforce has tripled since 2013 to more than 1,000 people fully committed to detecting financial crime. And this number will increase substantially in the next few years.

The CDD review of the main CIB portfolios, Private Banking clients and high-risk retail clients has been undertaken. We are making progress on the acceleration of CDD remediation programs in Commercial Banking and ICS as announced in Q4 2018. Recently, the Dutch Central Bank determined that we are to review all our retail clients in the Netherlands. Consequently, we will undertake further measures and extend our CDD remediation program to which we have taken -- to which we have made an additional provision of EUR 140 million.

The program will ensure that all clients in the Netherlands have an appropriate risk and transaction profile. And this will enhance transaction monitoring and the filing of unusual transactions reports. Sanctions, such as an instruction, fines, may be imposed by the authorities. In general, across the bank, we will take all remedial actions necessary to ensure full compliance with legislation. Strict compliance is our license to operate, and we remain vigilant in detecting financial crime and we will continue to make the necessary investments.

I will now update you on the progress on our strategy -- of our strategy on Slide 4. Sustainability is a key pillar in our Banking for better strategy, and I'm very pleased that ABN AMRO was announced as Western Europe's Best Bank for Sustainable Finance by Euromoney this summer, a clear recognition that every part of the bank is looking to have an environmental or social purpose. We have received also the award for Netherlands' Best Investment Bank for local leadership, emphasizing our strong local market position and focus on sustainability in terms of profitability as well as impact on the environment.

During the quarter, we invested in 2 solar projects and enhanced our front-office tool, CASY, to accelerate sustainability shift for our clients. We want to reinvent the customer experience and continuously look for partnerships that can enhance the service to our clients. A good example is our recent partnership with Yes Corporate Finance to serve our SMEs with M&A advice.

On the next slide, I will update you on an example of customer experience and our IT transformation. We are a frontrunner in video banking, which is a key enabler in moving clients to digital channels, driving operational efficiencies while improving Net Promoter Scores. We are seeing high adoption by our retail clients. 2/3 of our mortgage meetings are done via video banking. With Private Banking clients, the first adoption is good for 20% and Commercial Banking has just started to roll out video banking. We aim to do the majority of clients via video banking by 2020.

We are steadily reducing IT spend to move to 12% to 13% IT cost/income ratio in coming years. We are increasing the use of cloud-based services and have started to further transforming I&T towards smaller teams, combining development and operations or DevOps. Further streamlining and automating the process of developing software will lead to significant efficiencies.

Now I would like to update you on the interest rate environment and the actions we are taking on Slide 6. You all know the interest rate environment sharply deteriorated. The 5-year swap rate at the end of June, for instance, decreased by 24 bps versus Q1 2019 and 56 bps since our Investor Day last November. This mainly impacts our deposit margins as there is limited scope to reduce deposit rates further and it's hard to pass on negative rates. In contrast, our asset margins have remained resilient across client lending and we remain focused on margins over volume.

I'm pleased with the development in our books. We saw strong performance in our mortgage book and our market share is now at 70% from 40% last quarter and the last quarter of last year. We expect it to further improve. We also saw some growth in our Commercial Banking loan book. Both reflect the healthy Dutch housing market and the broader economy. Nonetheless, assuming current interest rate expectations, we expect ongoing pressure on our NII going forward. Clifford will elaborate on this. We are working hard to mitigate the NII headwinds by developing more the fee business, by focusing on originate-to-distribute platforms, investment products, like Kendu, partnership initiatives and cross-sell.

This quarter, we started our originate-to-distribute platform for 30-year mortgages, delivering on existing cost programs and looking into further cost actions. Our cost/income ratio is under pressure due to both lower for longer as well as the increasing regulatory compliance cost despite our mitigations. Therefore, I regard our 56% to 58% target for next year as very challenging. We remain focused on our financial targets in this more challenging environment.

Now moving to capital on Slide 7. We are strongly capitalized in the Basel III and well positioned for Basel IV. Basel IV ratio is largely unchanged versus year-end 2018, excluding profit accrual. We see more regulatory focus on capital regulation. And that focus is much broader than Basel IV, maybe TRIM and model reviews, NPE and provision reviews as well as the effects of worsening economic outlook across Europe. We have already booked some additional RWAs reflecting TRIM and model reviews. And this quarter, we recorded a supervisory capital deduction of EUR 0.2 billion following an ECB review, including provisions. We expect further regulatory impact going forward.

We actively engage with the regulator and our prudent capital management reflects the current economic and regulatory outlook as well as our approach to sustainable dividends. Our interim dividend is set in a mechanical way, being 50% of our half year profit in line with last year's payout, resulting in EUR 0.60 a share. We are within our capital target range and expect to be well placed to consider additional distributions of about 50% payout at the full year results.

Now I would like to hand over to Clifford to take you through our second quarter results. Clifford?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [3]

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Thank you. Turning to Slide 8. As Kees mentioned, we are pleased with our strong second quarter results, a net profit of EUR 693 million, slightly higher than last year. This quarter, our operating income increased mainly due to strong NII despite the low interest rate environment. Operating expenses, excluding CDD provisions, continue to trend down, reflecting cost savings and lower FTEs. I'm pleased that impairments are moderate this quarter at 18 basis points. Tanja will give you more background on this.

I'll now guide you through the individual line items on the next slides. But first, our client lending on Slide 9. I'm pleased that our mortgage volumes are somewhat higher this quarter. New production increased by around 40% compared to Q1 while redemptions were stable. Our market share recovered to 17% this quarter and is rising from here into Q3. This reflects improved mortgage market conditions as we remain strictly focused on margin discipline.

We are delivering on our CIB refocus and improved discipline. As a consequence, our CIB client loans decreased further in the quarter, mainly in Trade & Commodity Finance, while SME lending saw some growth, reflecting the resilient Dutch economy which continue to outperform the Eurozone. We expect this growth to continue in line with Dutch GDP.

Turning now to NII on Slide 10. Q2 net interest income is strong this quarter. As you can see on the right, this reflects lower liquidity management costs and positive one-offs offset by low interest rates. We estimate the impact of lower for longer to be around EUR 13 million this quarter compared to EUR 10 million in Q1. Interest rates have declined further this quarter. Assuming current interest rate expectations, we expect around EUR 20 million sequential quarterly NII impact into 2020 mainly through lower deposit margins. The increase in NII in Q2 is largely driven by the normalization of liquidity management costs as our Q1 non-euro liquidity position was at a temporarily high level, reflecting Brexit readiness.

The risks of a no-deal Brexit in October remain and we have prepared for this. But as we have made changes to our liquidity management approach, we do not expect any large movements in NII in the future. The remainder of the increase in NII of EUR 62 million in the quarter is related to various small positive developments in Q2 of which EUR 45 million related to incidental. So I consider the normalized level of NII this quarter to be somewhat above EUR 1.6 billion. And for the remainder of this year, we expect NII to be around EUR 1.6 billion per quarter. Kees explained earlier that we're working hard to mitigate the impact of a low interest rate environment.

And now turning to fees and other income on Slide 11. Fees are higher compared to last quarter, excluding the effect of the sale of Stater since we lost 1-month contribution in June of around EUR 7 million. We expect total fees to remain stable at around EUR 400 million in the short term, growing modestly after that as the growth initiative mentioned by Kees start to kick in. Other operating income remained stable at around EUR 100 million in the quarter, excluding the gain on the sale of Stater, which was around EUR 130 million. For now, we feel comfortable with our guidance of EUR 125 million per quarter for other operating income.

Now moving to costs on the next slide. I'm pleased with our performance on costs, which continue to trend down. As you can see from the left-hand chart, personnel expenses continue to decline, reflecting lower FTE. Other expenses, excluding incidentals and levies, was slightly higher compared to Q2 last year as IT investments are higher this quarter. The CDD provisions in Q2 and Q4 relate to external resources only. In addition, these specific programs will require internal resources, which will be expensed when incurred. Alongside this, we see our running cost for compliance increasing further. So altogether, quite some cost headwinds from compliance building up.

In the right-hand chart, you see we have realized further cost savings of EUR 54 million versus Q2 last year, bringing total cost savings beginning since 2015 to a run rate of almost EUR 800 million. As you know, we target a total of EUR 1 billion cost savings and we're on track to reach a cost base of around EUR 5 billion by 2020. As Kees explained, we're working hard on further cost actions to mitigate general inflation and increasing regulatory and compliance costs.

I will now hand over to Tanja to pick up impairments on Slide 13.

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [4]

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Thank you, Clifford. Second quarter impairments are moderate like Q1 and amounted to EUR 129 million with a cost of risk of 18 basis points. In CIB, there were no material impairment charges for energy offshore and diamonds reflecting our exit derisking. The charges in CIB were spread over several smaller industry sectors.

For diamonds, we have further reduced our loan book by around 20% this year. CB impairments were low, reflecting the healthy Dutch economy. The lower coverage ratio for mortgages is a result of the refined default destination for regulatory purposes relating to unlikely-to-pay trigger. This led to higher stage 3 loans and, as a result, to a lower coverage ratio but did not affect the portfolio quality. We reconfirm our full year expectation of below the through-the-cycle cost of risk of 25 to 30 basis points.

I will now update you on regulatory focus items on Slide 14. Kees already mentioned the more demanding regulatory environment. And I will update you on 3 other specific focus areas of the regulator. So starting with nonperforming loan regulation, although we are a low NPE bank, we are impacted by the new rules. The Pillar 1 or prudential backstop regulation came into force in April of this year and prescribes minimum loss coverage for newly originated nonperforming loans as of April 2019.

The ECB also published some additional guidance, which applies to loans defaulted after April 2018. We expect the cost combined impact of prudential backstop and the ECB guidelines to have limited impact at first, readily building up in later years. However, the supervisor expects us to phase-in minimum coverage levels for the existing stock of NPEs during the period 2020 to '24.

Separately, and following an ECB review, we took a supervisory capital deduction of around EUR 0.2 billion this quarter, ahead of the phase-in of NPE minimum coverage. During the phase-in from 2020 to '24, we estimate the annual impact to be of a similar order of magnitude. There are some uncertainties here and we are working on mitigating impacts through restructuring, work-out and loan sales. So the NPE implementation will have a meaningful impact on capital generation but should not materially impact our current strong capital position. NPE and provision reviews impact capital and so are relevant for Basel III, Basel IV and leverage ratio.

Turning to TRIM. TRIM is a regulatory assessment to harmonize internal RWA models. So far, we have included the impact of mortgages and market risk models. Currently, our corporate lending and specialized lending portfolios are in progress. We have already included some add-ons in our RWAs, reflecting preliminary feedback. We expect TRIM to be finalized in the course of 2020 with further impact on Basel III RWAs. TRIM and model reviews are a clear focus for us, the regulator and our approach to capital management. However, they are not expected to materially impact Basel IV fully loaded RWAs, for which we are already well capitalized.

Earlier this week, the EBA presented its response on Basel IV implementation using the quantitative impact study of the European banks. The response remained close to a full and unconditional implementation of Basel IV. We remain comfortable with our Basel IV assumptions and approach.

I will now hand back to Clifford, who will take you through capital ratios on Slide 15.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [5]

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Thank you, Tanja. Our Basel III capital position in the quarter remained strong with a CET1 ratio of 18%, excluding half year profit, are well within our target range. If we had accrued half year profit in line with the payout ratio of last year of 62%, our CET1 ratio would have been 18.4%. Compared to last quarter, the CET1 ratio, excluding half year profit, remained stable, reflecting a decrease in RWA offset by the additional supervisory cap reduction.

It's good to see CIB now operating around its targeted RWAs, excluding TRIM and model-related add-ons, reflecting a refocus. The legal merger between group and bank have been finalized, benefiting the leverage ratio, which is partly offset by the additional supervisory cap reduction. As Kees said, we have a strong and stable Basel IV capital position at around 13.5%, again excluding half year profit and excluding client mitigating actions. So we are within our capital target range and expect to be well placed to consider distributions above the 50% payout sustainable profit at full year results.

I would now like to hand back to Kees to update on targets.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [6]

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Thank you, Clifford. Our financial results for year-to-date and Q2 are strong. Returns are good and our capital position is also strong. Our results reflect the benefit of our strict pricing discipline and our operational plans delivering. Going forward, our cost/income ratio is under pressure due to both lower for longer as well as increasing regulatory and compliance cost. Therefore, as said, I regard our 56%, 58% target for next year as very challenging.

We expect to operate at the low end of our ROE target range of 10% to 13% while low rates persist. Our capital position and capital generation remains strong, and we are well positioned to manage the transition through TRIM and Basel IV. We recognize the importance of distributions to shareholders. We want our distributions also to be sustainable. We announced the interim dividend of EUR 0.60, a 50% payout in line with last year's interim and are well placed to consider additional distributions on top of the 50% payout at full year results. We are focused on our financial targets in this challenging environment.

So before we go on to Q&A, I would like to briefly recap the highlights on Slide 17. As said, I'm pleased with our strong financial results and solid operational delivery this quarter. We remain focused on our financial targets. At the same time, we see headwinds from the economic and regulatory environment and we are taking the necessary action by further strengthening and extending our CDD remediation programs.

Finally, this quarter, I announce that I will not serve a new term of office following the end of my current term, which will expire in April 2020. I remain, of course, fully committed to further accelerating the bank strategy and pursuing our purpose together with our employees and clients in the months ahead.

Now I would like to ask the operator to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mr. Robin van den Broek, Mediobanca.

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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Yes, logically, the first question is on NII. I think your EUR 20 million sequential drop per quarter implies roughly EUR 6.2 billion for 2020. I was just wondering if you could talk a bit about the assumptions that are underlying that guidance. And then maybe you can specify on loan growth, euro swaps curve and margin expansion. During the IR call this morning, you highlighted that it assumes basically 20 bps of ECB rate cuts going forward. But I was under the impression that your replicating portfolio of EUR 185 billion basically is invested between the 2- to 4-year euro swaps curve. And I was under the impression that, that gives most of the NII headwinds. So any confirmation there would be helpful.

Second question is on the AML KYC efforts you've done in the presentation. It seems that these are imposed by the Dutch Central Bank. You also make a comment of potential fines. I was just wondering, how comfortable are you on that specific case? And can you confirm or deny whether there's been any refuse into your operations over the last years, whether or not criminals have been able to abuse your system without your cooperation? Any comment there would be helpful.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [3]

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Would you start with the question?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [4]

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Yes. So on NII, we guided to EUR 20 million sequential reduction, as you say. The way we've done that is we've looked at our own views of future interest rates and we publish those as a bank, ABN AMRO. And we compare that to the current interest rate environment, the yield curve, the swap curve that Kees showed on his slide. And those are pretty much in line. We saw rates coming down further through July. And these views, as set out, reflect our views broadly at the end of July sort of now-ish. The ECB rate cuts that the market anticipates are reflected in our view of interest rates and also reflected in the yield curve going forward. And clearly, if that turned out differently, the yield curve will be different. But then we apply that yield curve to our replicating portfolio, as you indicated. And that results in a smooth impact on NII from declining rates.

So the headwind, the way we think about the headwind, is the current 5-year swap compared to the swap 5 years ago, divide that by 5 and that gives you an idea of the annual impact. And we've translated that into a quarterly net interest income figure to arrive at EUR 20 million per quarter. So I'd make the point that is an up-to-date figure. We talked about around EUR 10 million in May because interest rates were low then. They're just lower now. So we think it's helpful to update it. But frankly, it shouldn't come as new news. What we're doing is being transparent on the indication of the impact on NII. But we've assumed the flattish balance sheet for the rest of our loan book and asset margins broadly as now and no benefit from a possible tiering for the ECB. So things may turn out differently, but that should guide you to risk and opportunities of the NII figure I gave earlier.

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Robin van den Broek, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [5]

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So Clifford, maybe one follow-up on that. I think in your more mature deposit presentation last year, you were more referring to the 2- to 4-year euro swaps kind of investment arise and now you're applying 5 years?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [6]

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Yes, so I think -- yes, so the way we think about it to simplify things is a duration of around 3, so an average duration of 3. But each year, you have a maturing sort of 5-year swap from 5 years ago and then a new vintage that's struck today. So that should give you an idea of how that sort of pipeline works its way through and consistent with our presentation of last year.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [7]

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Thanks, Clifford. Robin, to your question around AML CDD, indeed Dutch Central Bank did the investigations like they do also with other banks and they did with us. And as I mentioned before in Private Banking, actually already before the Panama Papers a couple of years ago and also in international corporate banking, we did this AML CDD work already. At that moment in time, we have intensified, as you know, in Q4 our work with respect to the credit card business we have and also Dutch corporates. And the last portfolio is retail.

Of course, we have an approach there. But Dutch Central Bank -- and of course, there, all the clients are in the transaction monitoring systems. But Dutch Central Bank wants us to do that quicker and different here and there. And that's the reason why they have now told us to do that. We're discussing with them at the moment timeframes. We have taken in a provision of EUR 114 million. And also for transparency reasons, we've mentioned that the sanction like, for instance, instruction and/or fines may be imposed by authorities. And we have no indication about any fine at this moment in time and level, so we cannot say more about that.

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Operator [8]

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Our next question is from Mr. Farquhar Murray, Autonomous.

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Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [9]

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Just 2 questions from me, both actually related to the NPE coverage discussion outlined on Slide 14. The first question is, I mean, EUR 0.2 billion in 2Q '19 is clearly a capital deduction. But could you actually be clear whether the outstanding phased component over 2020 to '24 are also capital deductions or instead an increase in the capital required presumably under Pillar 2? And then the second question is could you give any color perhaps around which books are driving the impacts we're seeing? Is it coming from loan coverage, so perhaps the mortgages? Or is it coming from longer vintage NPLs, say, the diamond book?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [10]

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On your first question with respect to NPE and how that will be taken in the future, that is actually, well, still a topic of discussion. But I think there for now, the most conservative approach is to take it as a capital deduction. But this may change over time when discussions develop further. And then your second question was on -- can you repeat that because that went very fast on NPL?

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Farquhar Charles Murray, Autonomous Research LLP - Partner, Insurance and Banks [11]

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Just on the -- basically, I'm trying to understand which books in terms of loan books are actually triggering these impacts. Is it coming from low coverage books, such as the mortgage book? Or is it coming from longer vintage NPLs, for instance, perhaps the diamond book?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [12]

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Yes. So it's really across the board, I would say. And it's very much focused on our collateralized lending, where, well, we are well collateralized in that. Provisioning levels can be lower than in the end, well, the 100% after 7 years of prudential backstop curve that we need to take. But I would say it's more in the corporate space than in the mortgage space.

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Operator [13]

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Our next question is from Mr. Raul Sinha, JPMorgan.

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Raul Sinha, JP Morgan Chase & Co, Research Division - Analyst [14]

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Can I just go back to some of the issues that we've been discussing on the call? I guess, firstly, on the NII, can you talk a little bit about what management actions on mitigating impacts that could be this EUR 20 million replicating portfolio headwind? Is that my understanding it seems to be that, that is just a headwind that you're getting from the replicating portfolio and obviously against that, you've probably got some asset spread widening and higher mortgage market share? So could you help us think through how big the impact of those mitigating actions might be?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [15]

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Yes, I'll take that. So we wanted to be clear on the impact of deposit margins. And that reflects the EUR 200 billion or EUR 185 billion portfolio that we have in respect to deposits. So that's a big item. I think we -- the elements that can mitigate that impact are volumes. Kees talked a bit about the volumes that we're seeing. And we're encouraged by our performance in the mortgage market, had good margins. But that in order of magnitude is a smaller figure. I think we need to be realistic about that in terms of volume growth. And we're also cautious about accelerating growth on the asset side at this point of the cycle. I think around margins, it's an interesting development because it's clear that margins of mortgages are much stronger now than they were during the last cycle. And we are pricing through our returns and we'll only do mortgages if we see adequate returns.

But it's possible that the low interest rate environment and the challenge on deposit is feeding through to price discipline across the market on the mortgage side. And so we're currently seeing benefits from that. We've also indicated opportunities around fees. And so the figures we have given reflect our view of the current market. If the market changes as the overall competitive position responds to low deposits, clearly we expect to benefit from that. And then lastly, costs. We've been consistent, and I think our track record shows that we remain disciplined on costs and our guidance there maintained.

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Raul Sinha, JP Morgan Chase & Co, Research Division - Analyst [16]

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That's really helpful, Clifford. Can I ask a second one, please, on customer due diligence? Are you willing to put any kind of scale on the FTEs that might need to be added? And obviously, you talked about the challenging cost/income ratio for next year. But you didn't talk about below 55% aspiration. I think you had 2022 there. Obviously, that would also be impacted, I would guess, to some extent. Or should we think of that still as very much a target?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [17]

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With respect to C/I, I think I would say that they are both still targets. Actually, we have not withdrawn from those targets. But of course, the 2020 is the most close by. And as we mentioned, due to the developments, we see this as becoming very challenging as said. The 2021, we mentioned on the Investor Day, November last year. We also mentioned at that moment in time that, that was based on that moment in time existing economic and also interest forecast. So those are, of course, quite different than today. So we have not updated that yet and it's still 3 years ahead, so who knows? But of course, the interest environment is completely different right now. What we have concentrated ourselves now in 2020. On CDD, your question, sorry, what was...

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Raul Sinha, JP Morgan Chase & Co, Research Division - Analyst [18]

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FTE.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [19]

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The FTE, sorry. Yes, we're working on that actually. It's not so much a constraint money-wise. It's more that we want to add those people in a way that it is efficient and that they can do a good job and not -- well, they're not there without being properly guided what to do. Well, I would say a couple of hundred at least in the coming years.

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Operator [20]

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Our next question is from Mr. Benoit Petrarque, Kepler Cheuvreux.

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Benoit Petrarque, Kepler Cheuvreux, Research Division - Head of Benelux Equity Research [21]

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So on your NII guidance, I would like to talk a bit more about mitigations, especially around the pricing of deposits. So obviously, we are in negative interest right around banks. What is your view around pricing of deposit maybe moving into negative territories on Private Banking money? We have seen many banks -- actually, a couple of banks at least moving into negative territories, also some very close competitors from ABN. So what is your view on that? Will you consider that? And I just wanted to make sure that is also not included in your assumptions.

And also what will be the impact of, say, 20 bps application of a tiering on new ECB money, please, on NII, that will be useful. And then the second one was on the NPE. So you were working around mitigations. I was wondering if you could talk a bit more about the potential impact of the mitigation actions. Are you planning more active or aggressive restructuring or even sales of exposure in the coming months? And then maybe finally just on the Basel IV, where are you on the 20% mitigation around Basel IV risk-weighted assets?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [22]

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Thank you, Benoit. I would like to make one preliminary remark and then please, Clifford or Tanja, you can if you want to answer the questions. We are cautious in communicating around rates because we once had a remark from competition authorities that they don't like financial institutions actually to guide too much around rates because, of course, your competitors also listen in, in these calls. So that's actually why we are cautious with respect to saying we go into negative territory, dah, dah, dah, because that also gives guidance. But having said that, perhaps, Clifford, can you talk a little more about it?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [23]

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I'll maybe pick up some of the other points. I think on our general savings account, we still pay 2 basis points to retail. So we lowered that from 3 to 2. And that 1 basis point is about EUR 10 million per annum. I think in the private bank for very large balances, it's common practice in the Netherlands to pass on negative rates. And if you have a look at websites it's clear. So that practice is already there. And for professional clients or corporate clients, they pay negative rates already, so -- in CIB or the commercial bank.

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Benoit Petrarque, Kepler Cheuvreux, Research Division - Head of Benelux Equity Research [24]

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But it seems like clients with balances up to EUR 5 million also get 2 bps at ABN. And I was wondering if this is correct.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [25]

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Yes. I'm not going to comment on particular thresholds. I think I made the point that the retail general savings is 2 basis points. I think I used the word very large clients. So I mean maybe we're thinking about different numbers there, Benoit. The -- so it's really -- it's an exception, I think, on the Private Banking side currently. The -- on tiering, I mean I would note that we have EUR 30 billion balances with central banks currently. I think you can do your own numbers. It's not clear on what rates would apply to what balances in particular, but...

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [26]

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If at all.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [27]

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If at all, indeed. But I think you'll work that out. The numbers are disclosed in our 2Q report. On Basel IV, our approach to mitigations, we indicated 20%, as you say. As and when they're delivered, we reflect them into our estimate of our current Basel IV number. And that number -- we haven't given the number actually at Q2. We said it was around the year-end at 13.5%. But our current figure includes, say, a small -- quite a small element of mitigations that's moved from a kind of an opportunity to a fact.

And in fact, our list of mitigations continues to build as we get more experience and time to study it so that's -- so I would say broadly speaking, that 20% remains intact. And the comment, I think, Kees mentioned this of our Basel IV being unchanged in the year, it's excluding retained earnings. And we gave that figure to be around 0.4% in respect to Basel III so that will be around that, a little bit lower for Basel IV. So you can see we're really quite comfortable under Basel IV currently.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [28]

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Tanja, anything else?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [29]

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Yes. On NPE, yes, I should say that we are working on mitigating actions. We are already working on the velocity in our NPE portfolio to normal workouts but also loan sales and portfolio sales. And you see that in the past already. So I don't expect any, well, extraordinary actions at this stage because, well, you need to remember we are a low NPE bank with 2.3% in stage 3. So well, these are low levels which we are comfortable with.

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Operator [30]

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Our next question is from Mr. Benjamin Goy, Deutsche Bank.

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Benjamin Goy, Deutsche Bank AG, Research Division - Research Analyst [31]

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Two questions, please, from my side. First, on impairments, would you call for the offshore energy and diamond book basically the worst is behind us and that we shouldn't expect any hiccups in H2? Also in light of that, I mean stage 3 loans are down on the corporate book, but stage 2 is up. So how is the outlook here for H2? And then secondly, on fees, you mentioned the EUR 400 million run rate in the near term. Just maybe you can remind us what are the key initiatives that we should expect to first pick up and drive fee income growth from this level?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [32]

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Thank you, Benjamin. Tanja, first, on diamond and Cliff on fees?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [33]

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Yes. On impairments, we have definitely derisked in the sectors that you mentioned, so offshore energy and diamonds. But we were -- we still focus on these sectors, these sectors are still under pressure. So don't say that we don't see anything anymore there. But further risk has definitely reduced. And then you asked a question about stage 2 and our corporate loans. Indeed, and I think I mentioned that last quarter, how we see a little bit that how the watch list is slightly increasing. We don't call that a trend. But you see some pressure, given also the slowdown that we see in the economy, but it's a slight increase.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [34]

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My comment on fees of around EUR 400 million. So I think I mentioned 1 month for Stater is EUR 7 million, so 3 months is around EUR 20 million. So we're seeing some rebasing of fees around the EUR 400 million. I'll just quickly run through fees across the businesses. I mean all of our businesses are focused on fees with different reasons, but to give some examples. So in the retail bank, we launched actually a week or so ago our originate-to-distribute proposition for 30-year mortgages. That's new to the bank. And we're optimistic about that making a meaningful contribution. I think in the private bank, we saw net flows -- positive net flows in Q4 and -- in Q2 and some recovery of the market.

We've obviously seen it set off back in July, but our fees are struck generally at quarter-end for the next quarter or 6 months. So that will help in the short term. And then we expect to see the contribution of our acquisition of SocGen Belgium business and further acquisitions, should we do those in retail -- in Private Banking going forward. I think on the commercial bank, take an example of the partnership that we're pursuing. Those are examples of fee-generating propositions. And the commercial bank has already commenced originate-to-distribute. So to give an example on the commercial real estate side, so where we see the market perhaps a bit at the end of the credit cycle and we're concerned about our own risk appetite, we take the opportunity to use our platform relationships to originate assets, earn fees in partnership with another financial institution.

And we're looking to do that in a more meaningful way in the corporate bank, where we've been building our capability over the last few quarters. And I think I'm quite pleased with that and see a considerable potential to do that over the next few years. That will come through slowly but build up over time over the next few years. That should give you a flavor of the sort of momentum that we have on fees, where there's a lot of work going on and that will come through over the next number of quarters.

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Benjamin Goy, Deutsche Bank AG, Research Division - Research Analyst [35]

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Okay. That's helpful. And just one follow-up, the stage 2 increase was rather broad based, there were no specific sector or anything?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [36]

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No, we don't see any trends in specific sectors, so no.

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Operator [37]

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Next question is from Mr. Stefan Nedialkov of Citi.

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Stefan Rosenov Nedialkov, Citigroup Inc, Research Division - Director [38]

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It's Stefan from Citi. Two questions on my side. Number one, starting with the NII, front book versus back book margins, if you can provide some color in terms of mortgage lending, corporate lending, what you're seeing in terms of the alternative mortgage providers. Are you more focused on the short term still? Are you seeing pricing discipline across the whole curve or only at certain points?

The second question is on the NPE capital deduction. In terms of the tools at your disposal, is it fair to think that you might be able to find some firepower in extra delevering in the CIB business beyond the EUR 5 billion of reduction that we have already seen, maybe some other businesses are still quite low-returning, especially in the current low rate environment? Could we see a bit of RWAs taken out of that to offset the NPE capital deduction over the next couple of years?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [39]

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All right. Clifford, on NII, please?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [40]

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So I think in terms of we're seeing -- we're pleased with our margins on the front book mortgages. So they have -- they picked up a little bit. And that has allowed us to improve our market share. So I wouldn't call out particular segments as we expect -- we price to deliver our hurdle rates with very little cross-subsidy. So we're seeing -- we can speculate on the reasons for that. But we're seeing good margins in that area. And the overall margin of the book is pretty constant quarter-on-quarter. And that's true on the corporate side.

So I think on CIB, we're seeing decent margins because we are refocusing. And on the SME side, I think we're just cautious about some of the end-of-cycle behavior. We're seeing some evidence of weakening terms, financial and nonfinancial. And we're staying disciplined. And our margins are, I would say, broadly consistent with the back book currently. I think on NPE, do you want to comment on that?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [41]

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Yes. Maybe a few comments on that. First, it's important to know that the current RWA reduction that we are doing, we use a risk perspective there as well. So we look at the higher risk segment in that RWA reduction exercise. And then secondly, it's important to consider as well in terms of impact of NPE that, well, this mainly impacts when NPEs get quite old so, say, over 7 years. And you see that happening more in the smaller end of the portfolio, so here think about CB as opposed to CIB, where we have more mitigating actions available. So that's something we take into consideration as well when looking at our portfolio.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [42]

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If I could comment on the RWA reduction in the corporate bank because I think, Stefan, you mentioned, is there scope to reduce it further? I think we're pleased with the actions of the corporate bank has taken to date. We've delivered on our target that we announced last year. We'd like to see that stabilize around that level. And you've seen already, I think, some benefits of that action already coming through in terms of the ROE, it's picking up. I think we're pleased with that. I don't expect or plan for further material reductions from here. We want to see the benefits of the refocus taking place, the cost reductions coming through as well as the improvements in the operating model that I alluded to earlier. And we're pleased with the progress, that business is taking currently.

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Operator [43]

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Our next question is from Mr. Nick Davey, Redburn.

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Nick Davey, Redburn (Europe) Limited, Research Division - Research Analyst [44]

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Three questions, please. The first one, there have been a couple of passing comments about looking again at costs or thinking a bit more about costs. And I appreciate you're sticking to the EUR 5 billion of cost guidance when compliant cost -- compliance costs are rising. But I just wondered if you had, in the calendar between now and the end of the year, a kind of more formal revisiting of the cost plan in light of this bearishness on revenue or if it was just a bit more of a sort of generic comment.

The second question, please, on market share trends in The Netherlands. I take your point that over time, you've been aiming to get back to a front book market share in line with a back book. But if we take as read your NII guidance, you're talking about 4% NII decline next year. So my question would be in that kind of a terrible margin environment, why care at all about market share? Why not do absolutely everything you can on price to protect the P&L and worry about market share later?

And then the third question would be just around the language on dividend, which in the outlook statement is retained and you still see yourselves as well positioned to consider payouts above the 50%. Obviously, there is now this comment about potential sanctions on the KYC element. So did you sort of review the dividend language into this quarter? I know it's early in the year to be thinking about this. Such as wondered a, how long this retail review might take, and b, what it would take for that dividend language to be changed if at all.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [45]

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Clifford, if you can do the cost, I can do the market share and sanctions.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [46]

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Okay. I think on costs, we -- I think we -- all I can say there is that we set out our cost plans at the November Investor Day, and there, our approach to cost management is a continual focus on consistent improvement, so I think don't expect big bang announcements yet in response to 1 quarter's reduction of interest rates. I mean we are focused on our financial targets, and Kees indicated there, were challenging. We also said that we are working hard on cost discipline. And I think that's the behavior you could expect going forward, which is a sustained approach to, I would say, optimizing costs, not big bangs.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [47]

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Yes. With respect to your remark about focus on decline NII and then market share discussion around mortgages, indeed, the decline around NII is, as Clifford explained driven by deposits and the replicating portfolio there. With respect to, I would say, the asset side, it's more that volumes -- that with respect to volumes and margins, we more or less expect a flattish in both ways, a flattish development. But our largest portfolio is mortgages. And mortgages in the second quarter, and Clifford mentioned it already, we were able to both -- because we're not predominantly market share driven, as you know, because we have had a market share more than a year ago, which was 20%, and we went down to 14% due to discipline. So we are -- our drive is do we make hurdle, can make hurdle, and we stay disciplined on that. What we've noticed now in Q2 which is we can both improve our margin, our margin on new production. And the mortgages in the second quarter was higher than the margin in the first quarter, while also increasing market share from 14% to 17%, while we expect that trend actually to continue in the third quarter.

So that shows you that we are able to both increase at this moment in time, of course, no guarantee in the future. But at this moment in time, we work from a disciplined approach, make good margins and then the market share is more or less a result. But of course, we are happy with an increase is because in the second quarter now, our mortgage book increased compared to a decline in the first quarter. I hope that gives an answer to your questions. Then with respect to dividends and then the language around being well positioned, that language has not changed yet due to the sanctions remark because we do not know anything about that at this moment in time.

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Nick Davey, Redburn (Europe) Limited, Research Division - Research Analyst [48]

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Any idea of timing of the retail review?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [49]

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No. Not really.

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Operator [50]

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Our next question is from Mr. Bart Jooris, Degroof Petercam.

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Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [51]

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Yes. A lot of my questions have been answered. Some follow-up here. Today it was announced that the DNB expect banks to look at also clients that have legal tax avoiding schemes in place. Does -- do you expect any further impact on that regarding your cash CDD costs? Also, could you give us a reason why the DNB asked you to speed that up? Is that company-specific? Is that sector specific?

And then on impairments, you made a lot of comments on the worsening outlook of the economy. Do you have any IFRS 9 impact already in your second quarter impairments? Or do you expect any in the remainder of the year?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [52]

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Thank you. Thank you very much. With respect to legal tax avoidance, are already, for some time, stated policy is that, of course, tax evasion is not allowed anyhow, but it also expect to legal tax avoidance as we are discussing with clients that we like them to have a tax treatment around the products they have from our bank, which is in line actually with that product. So put it differently, all kind of fancy structures around it, well, we're not so fond of, so we discussed that, and that's part our, actually, I would say, our tax policy as a bank. It's also, by the way, one of the metrics, which we take into account with KYC around clients' tax behaviors. With respect to this is a company of sector specific, yes, it's Dutch Central Bank. So Dutch Central Bank focuses on banks, of course, and insurance companies, so they do not make remarks about companies, but...

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Bart Jooris, Banque Degroof Petercam S.A., Research Division - Analyst [53]

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Yes. Sure. But the fact that you have been asked to speed up the review of your retail clients, is that something that is especially for you? Or does it also take place at ING ABN?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [54]

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Now we don't know because we have now been transparent about our case. And actually, we don't know about other banks.

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [55]

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Okay. And then your question on provisioning levels, and I think here you explicitly referred to IFRS 9 stage 2 provisioning. So as I mentioned, we see some slight increase into Phase II, but provisioning level there is with EUR 179 million. It's a limited amount there. Maybe it will increase somewhat based on more negative outlook, but I don't expect that will be significant in 2019.

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Operator [56]

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Our next question is from Mr. Jean-Pierre Lambert, KBW.

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Jean-Pierre Lambert, Keefe, Bruyette & Woods Limited, Research Division - SVP and United Kingdom Analyst [57]

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Three questions, please. The first one is on the actions you can take on the deposit front. You sold some Moneyou activities in Belgium. Can you sell in other countries? Is that under consideration? What is the sensitivity of those sales in terms of NII impact? Then the negative rates, what are the pockets where you don't apply yet negative rates to your clients? Is it in clearing? Or is it in other areas?

The second question is to come back on the cost actions. You referred in the past to standardization, which is a slow process, standardization of products. Can you accelerate that or undertake new action?

And the third one is more general on Brexit. You say you're ready. But what do you mean by that? What could be the impact on your loan portfolio according to your simulation?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [58]

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Thank you very much, Jean-Pierre. Well, questions for you, Clifford. And perhaps the Brexit one as well as a U.K citizen.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [59]

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I'm ready for Brexit. I got my passport. On the actions on deposits, yes, you're right, to focus on the Moneyou Belgium. And that was a strategic decision but also a financial one. That's basically deposit franchise. And in Moneyou, we pay deposit rate, not just in Belgium but elsewhere, Germany, The Netherlands because that's the nature of that particular business. And if we no longer have those deposits, then we look at the opportunity, where would we get that funding elsewhere? In wholesale, is short-term is negative, as we've discussed. So there is a P&L benefit from that. And we'll disclose more about that in Q3 when we expect that to close. It is quite small, but it demonstrates some of the things we've been thinking about. I think on terms -- we still pay deposit rates on Moneyou, and that's our online bank, and it's quite sensitive, so when rates come down, and we have pulled the rates down quite recently, you tend to see outflows. At least from a financial point of view, that's a win-win. We need to have regard for the franchise there, but we have been pulling that particular lever and see further scope to do that.

I think on negative rates, as of today, as I mentioned earlier, we pass on negative rates in our corporate bank, in the commercial bank, not all kinds but certainly the very large ones, more on wholesale-related clients. And in the private bank, I would call it, on an exceptional basis, so for very -- for really very large balances. So it's not something that you can do generally, and it's not something, I think, that's generally applicable currently in The Netherlands.

I think on Brexit, actually, I might ask Tanja to comment on Brexit and answer that. I think you would -- yes. I think the question is on readiness. I've said I'm ready.

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [60]

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Yes. Good. I think that the bank is well prepared at all. In terms of our activities in the U.K., perhaps have the right licenses to continue. So we are prepared for that. And then the question is, of course, what does it means for the overall activities in The Netherlands. So we expect that it will mainly be a second-order effect. We have carefully worked with our clients that have direct exposure to the U.K. to see whether they are well prepared, and if we have concerns, we put them on the watchlist in the meantime. But I'm most concerned about the second-order effects in terms of slowdown of economic growth throughout Europe and also in The Netherlands. And of course, we are always prepared for that. We have, for the most vulnerable sectors to a downturn, we have limits in place, so, yes, you need to think of leverage lending, for example, commercial real estate where we always focus at as well making sure that we can deal with the downturn as well.

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Jean-Pierre Lambert, Keefe, Bruyette & Woods Limited, Research Division - SVP and United Kingdom Analyst [61]

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And on the cost actions perhaps as well. I was asking about the standardization, which is ongoing. It's a slow process, but can you accelerate or involve more segments into that process?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [62]

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Yes. I think it's -- call it slow. It's a steady process. We've made progress, and we expect to make further progress over the next few quarters. And that underpins our approach to cost management, and that is behind -- it was factors such as that, which was behind our guidance regarding costs. So we continue to make progress in that area. I think I gave an example of KYC, which we're doing across the bank in 1 centralized unit to get the benefits of consistency and effectiveness that we see plenty of scope to do that across the bank. And you'll see that, that's steady work that will take a number of quarters to come through.

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Operator [63]

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On our next questions are from Albert Ploegh, ING Bank.

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Albert Ploegh, ING Groep N.V., Research Division - Research Analyst [64]

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Yes. Two questions from my end left. First of all, sorry to come back to the -- to remarks on KYC and the potential for fines and sanctions. I know this is a sensitive and difficult topic maybe to comment -- to give comments on, but should I see the comments on fines in the context of what you already know and expect today potentially? Or is this more a general risk statement ahead of the actual retail clients review in the Dutch portfolio? That's my first general comment on that -- question on that.

The second one is on capital management and the language around dividends, which was also earlier asked but maybe from a bit different angle. I mean it's clear that the banks like yourself is a strongly capitalized or preferred by the regulator to take as much as possible of any frontloading of any changes in capital regulation. We also hear what you say today on the near-term outlook for earnings, which, yes, if everything is -- stayed the way it is, it's a likely lower earnings next year than this year. So how should I read your comment on being in a position to pay more than 50% payout and the remark on sustainable distribution? So should I see that more in a context like that you were aiming for something like in a kind of stable absolute level dividend of EUR 1.45 compared to the last 2 years, which already requires you to pay more than 50%? So any comments on that? And again, that's already a very attractive yield level compared to where your stock is trading today.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [65]

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Thank you very much, Albert. Now with respect to your first question, we just don't know about fines. So that's the reason why we cannot say anything more about that, if there will be a fine, and if so, the amount. We just don't know, so we cannot say anything about that. With respect to capital management, indeed, as we also mentioned in our press release, that on the one hand, the message is clear that we are well placed within our capital range and expect to be where we are within our capital range or -- and expect to be well placed to consider distributions above the 50%. But on the other hand, we also mentioned, indeed, the interest of the regulator in this area. And of course, already, a lot have been mentioned around TRIM, NPEs, a lot was mentioned. So it's the TRIM, it's the the Basel IV, its models always will be related to TRIM but also NPEs. So there's a lot around and regulator is also very much interested in that. And, of course, also when there's a low for longer environment, they also take that into account. And, of course, we also take that into account. So our policy is actually this 50% at the end of the year.

Do you want to do more? As mentioned, we think we can do more. Last year, indeed, it was worth EUR 1.45, which was the same as the year before. But yes, of course, we don't -- I will mention the word sustainable dividends. But actually, that is something of course. When profits go up and down really seriously, then, of course, that is something you have to reflect in your dividend. And it's last year, we decided, indeed, to do the 62% and EUR 1.45, but, yes, we cannot give guidance at this moment in time for this year. We will take everything into account, our forecast around earnings. We engage with the regulator about capital and, of course, the NPE calculations we have right now and take it all into account and then decide on the dividends.

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Operator [66]

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Our next question is from Johan Ekblom of UBS.

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Johan Ekblom, UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks [67]

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Just 2 questions remaining from me. First, coming back to the mortgage market. So when we think about the new originated distribute 30-year mortgage product, should we view that as kind of incremental business that wasn't open to you before? Or would you expect it to be cannibalization on your existing business from that? So should we expect that to have an impact on the balance sheet mortgage volumes?

And then the second question is just quickly on the retail banking fees has had quite a strong pick up in the quarter. Anything in particular driving that? Is that temporary effects? Or is this kind of new fees introduced to counteract the negative margin headwinds?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [68]

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Okay. Thank you, Johan. With respect to the originated distribute mortgages, I would say, it's on top because 30 years we have very -- well, we don't do actually a lot business there, almost nothing. So this will be on top. It will not be on our balance sheet because we will offload the fee in the originated distribute, so it just generates fees. And of course, we get -- we're getting clients, so that's good. The retail banking fees, we increased payments for accounts. So that's structural increase, I would say, on the retail side.

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Johan Ekblom, UBS Investment Bank, Research Division - Equity Research Analyst of Benelux and Nordic Banks [69]

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Just a follow up on the 30-year mortgage product. When we think about the revenue stream from that, is that a one-off upfront fee that you will book? Or is that something that you will amortize over the life of the mortgage, so it will be very small volumes to -- impact to begin with?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [70]

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Okay. Clifford?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [71]

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Yes. If there's a cost, I mean it's market practice to charge origination fee and then a servicing fee. So there'll be some booked upfront like a general facility and then ongoing fees. It will take time. If you work through the numbers, I'm not going to disclose our pricing. It will take time to build up. So it's more of an annuity income in the 30-year, given you expect the loan to be in place so many times. So the idea would be -- would build up over time. So I think it's a pretty modest contribution to 2019 in terms of fees, but then build up over time as the vintages of loans build up.

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Operator [72]

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Our next question is from Ms. Giulia Miotto, Morgan Stanley.

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Giulia Aurora Miotto, Morgan Stanley, Research Division - VP and Equity Analyst [73]

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I have 2 questions on 2 hot topics. So I want to go back on the replicating portfolio, please. If I understood you correctly, the way you came to this EUR 20 million quarterly impact is by looking at 5-year swaps 5 years ago and 5-year swaps today, the difference and then the impact on about EUR 180 billion of replicating portfolio notion on. Now if I look at this -- however, I had much higher impact because the 5 year swaps if a year ago was 1 percentage points higher. So can you help us -- can you help me clarify that? That's my first question.

And then the second question, on Page 30 of your report, and this is related to NPE, I read that during the phasing period, so 2020 to 2024, you estimate the annual impact to be of a similar order of magnitude. So now, in this quarter, we saw a 20 basis points impact. My question is does this mean that you expect 20 basis points impact per year going forward related to this? Or what does this mean exactly?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [74]

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Okay. I'll pick up those 2. I think on -- so the way we derive the EUR 20 million guidance was actually based on a full analysis of our -- of the yield curve of the dynamics of our portfolio, and that's how we derive the EUR 20 million per quarter. I think the example I gave as the 5-year was a simple way of understanding it that makes a number of assumptions. However -- and I think we're happy to take this off-line, but your figure of 100 basis points is about right. But given it's a 5-year replicating curve, that only has -- that will have a 20 basis points impact, and then you've got to work through the quarter impact because all the numbers we've been talking about are per quarter and sequential. So if you work that through based on the numbers, actually, that you've indicated, you get to about EUR 20 million. And we're happy to pick that up off-line. I think in -- just the short answer to your NPE question is yes, but we haven't given numbers going forward. We said around that order of magnitude, but the EUR 0.2 billion is a little under 20 basis points for 2019.

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Giulia Aurora Miotto, Morgan Stanley, Research Division - VP and Equity Analyst [75]

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Right. Okay. So on the second question, you expect an incremental 20 bps negative impact on capital from NPE per year over the next 4 years. And this is both Basel III and Basel IV?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [76]

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Well, yes and no. We haven't said -- I think we said a similar magnitude, but we don't want to give...

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Giulia Aurora Miotto, Morgan Stanley, Research Division - VP and Equity Analyst [77]

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Yes. Okay. I don't hold you to 20 bps exactly just the order decline...

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [78]

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We said we weren't going to mitigate. And Tanja gave a guidance on -- the rules are being -- we expect some further clarification in the rules here. But we're giving you order of magnitude, capital impact, and I think we'll leave it at that.

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Operator [79]

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Our next question is Mr. Kiri Vijayarajah, HSBC.

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Kirishanthan Vijayarajah, HSBC, Research Division - Analyst [80]

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Yes. A couple of questions on the capital, really. So if you seem to be generous with the dividend, do you worry that you could potentially get hit with a heavier fine? I know you can't give much visibility on that. But is that something we should worry about? Or in your mind, are those 2 very separate issues?

And then just wondering on the leverage ratio, you're showing a pro forma of nearly 5% leverage ratio. So I wonder, does that alter the way you steer your balance sheet, maybe go after some of the more leverage hungry business lines within CIB?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [81]

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Thank you. Now with respect to dividend, we guide given the knowledge we have around the fine, which is actually not much. So the moment we know more about that, we would, of course, also look into our dividend in the end of the year, so with this year. Dividend fine will be this year. If there will be a fine and it will be this year, then will take it into account, of course and if we have new notion about it. So this moment in time, we have not taken it, actually, into account.

With respect to leverage ratio. Now this 4.9 is actually a 2022, I think, or 2021.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [82]

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'21. Yes.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [83]

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2021 figure, so that is a pro forma figure. Regulators doesn't work with that at this moment in time, so we just show you that we're well placed going forward. But as of this moment in time, we cannot use that figure with respect to regulatory approach.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [84]

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So just -- I mean building on that, it will cause the benefit of the legal merger.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [85]

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Yes.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [86]

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And you see that we haven't just added it straight on because we've reduce some of the constraints on our -- on those businesses that are good ROE but a little bit more leverage-hungry, as you say. And so I think one of the challenges of excluding interim profits is that it's depressed the leverage ratio through this year. But we expect it to pick up next year as retained profits really strengthen that ratio. And that will free us up a little bit to think about some of those opportunities that you just mentioned.

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Operator [87]

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Our next question is from Mr. Tarik EI Mejjad, Bank of America Merrill Lynch.

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Tarik EI Mejjad, BofA Merrill Lynch, Research Division - Equity Analyst [88]

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Just a couple of questions, please. First one on cost. So the EUR 5 billion target, I really struggled to understand you keeping this target to be our guidance. I mean you indicated that the challenging cost income was driven by obviously pressure on revenues but also higher regulatory -- not as for but higher compliance costs and IT in this quarter. So how you manage to offset these? Because I think someone asked the question but I it wasn't clear about the answer really. And so don't you think the EUR 5 billion is at risk? And I think Clifford said you don't expect anything big to be announced, but shouldn't you announce something because really you need to maybe do some more efforts to offset this pressure that you expected a few quarters ago.

And second question is on capital. So the 20 -- EUR 200 million capital reduction or 20 bps, that's for seasonal ratio but also for leverage ratio. So is that correct to think that on a pro forma basis for leverage ratio, you would be at 4.1% today if we assume around 20 bps impact. And is the topic of leverage ratio being low is not kind of back again?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [89]

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Clifford?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [90]

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Yes. So -- well, we're very careful about what we say publicly about targets and guidance, as you'd expect. So we've indicated, or Kees indicated, that the cost/income ratio is challenged. And it's primarily challenge because of income, not costs. The cost guidance of EUR 5 billion is on track that we said. We announced that, well, through last year, we're on track for that. And while we see incremental cost inflation coming through, we are confident enough in our cost actions to indicate that in the round, we're on track with EUR 5 billion. I mean I think the fact -- we've been clear that we provided for the client CDD costs. There will be some further interim cost. But clearly, we booked those costs. We booked a chunk of it in Q2 and Q4 last year. So you don't need to book it again next year.

So we're comfortable with our EUR 5 billion guidance. We're comfortable retaining our targets, recognizing that the cost/income ratio target is challenging. I think on leverage ratio, the 4.2 already reflects the capital reduction that we discussed earlier for 2019. So it's already in the 4.2.

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Tarik EI Mejjad, BofA Merrill Lynch, Research Division - Equity Analyst [91]

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Yes. I understand that but for the 2020 to '24 period, since you basically give us a pro forma, including all the CRR and all the positives, so is it fair to put also the negatives, which is potentially 80 bps or...

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [92]

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Yes. I mean -- yes. But we also don't include future retained profit, so I think we've been transparent in our disclosure. And you can draw your own conclusion.

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Operator [93]

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Our next question is from Ms. Alicia Chung, Exane BNP Paribas.

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Alicia Marianne Chung, Exane BNP Paribas, Research Division - Analyst on the Pan-European Banks Sector [94]

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Just a couple of quick questions from me. Firstly, just going back on the capital, taking up a little bit of level, is it fair to say now that you have pretty much guided to, and to some extent or another, quantified all the key regulatory headwinds going forward that are known so far, and so we can, in essence, feel comfortable and draw a line under that? Or are there any other capital headwinds that you see on the horizon, even if it's difficult to quantify right now? And I suppose -- I'm specifically thinking about the ECB guidelines on the definition of default and what the implications could be for ABN or indeed anything else.

Secondly, just going back to the fine -- the fines regarding the customer due diligence processes. Can you just give a little bit of context around firstly, has it -- around what was driving this? So is it the case that the authorities have actually uncovered specific -- suspicious transactions? Or are they just a little bit unhappy with the processes, but they haven't uncovered anything specific? And if they have uncovered any suspicious transactions, can you quantify how many? Can you also give a sense of which authorities are investigating it? Is it that just the DNB or any other authorities? And is it fair to rule out a criminal investigation at this stage?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [95]

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Cliff, can you start with capital?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [96]

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Yes. So maybe I will take that one given that it's related to definition of default. And maybe first to stress that asset, a new definition of default does not change our risk profile or are expected loss. So it will have some impact on the numbers. But we will have to review our models to calculate RWAs. And that's something we plan for and that will be included. At this stage, I don't expect that that this review and recalibration of models will have an impact beyond what we see as the impact for Basel IV. So here to your question, do you see any other headwinds coming on capital? Not at this stage.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [97]

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Thank you. With respect to the fines, your questions about that and about transactions and the likes. It has been an investigation, as said, around our operating of, especially client, how we have our client files in place, that we, for instance, understand how an account is being used mainly retail or also business transactions. That's one part of the investigation. Yes, I cannot -- do not want to -- well, actually come to that investigation with respect to all the report we got. It's just that just they have now told us to remediate files, as I already mentioned, in the transaction monitoring. We have all the retail clients at this moment in time in -- well, they are there, of course, but files should be done in a different way to get a better feeling also around, well, around the client and their risk profile actually.

The authorities, to your question, it's Dutch Central Bank, and the prosecutor for both authorities are possible here. We are, well, to the best of our knowledge, not part of a criminal investigation, as such, we are not talking -- we have not spoken with the prosecutors something like that.

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Alicia Marianne Chung, Exane BNP Paribas, Research Division - Analyst on the Pan-European Banks Sector [98]

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And if you don't mind, just one more question. Just going back to your NII guidance and just trying to understand a little bit around the flex around that. Obviously, you've got -- you've given some helpful views as to the potential mitigating impact. One other question. If rates stay the same past 2020, so we see no change from here, can we expect to have a pressure on NII for a while afterwards? Or should we expect to see stabilization in 2021?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [99]

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Cliff?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [100]

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Yes. I think we had guided for the next few quarters. I think best way of doing it is to look at the 5-year swap rates over the last 5 years. And you can see the movements 5 years ago, and that will give you a guide. So we see some flattening at that point. But I don't want to sort of speculate further about when or if rates might pick up.

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Operator [101]

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Our next question is from Mr. Omar Fall, Barclays.

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Omar Fall, Barclays Bank PLC, Research Division - Analyst [102]

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Three questions. At the time of the Investor Day last year, you said that the vast majority of the CIB loans that have come matured by end of 2022 or 2022, I believe. So could you square that with the fact that you expect such a long-dated phase in of the NPE review to 2024 or when this is presumably mainly coming from the CIB bit? Were you excluding the NPE specifically in that comment at the time? Or is it just the longer duration, the bias is more to CB assets to commercial banking?

And then secondly, could you just tell us what the stock sum of deposits is at the ECB today? And then lastly, sorry to come back to the question on CDD, but I don't think it was answered. Very simply, have you or the regulator actually found any evidence with historical wrongdoing through the networks by certain actors in any of the business lines?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [103]

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Tanja will you -- yes.

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [104]

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Yes. So first, the question on NPE. So the -- yes, the phasing period is based on when assets hit its, well, 7-year point being longer as an NPE, and this is indeed a mix of, well, mainly CB and C&IB, and to a much lesser extent, as I mentioned, from indeed the retail portfolio. And yes, so some assets in CIB are longer dated, so we'll be later in this phase and others will be earlier. But it's indeed a mix of CB and C&IB. So I don't see an inconsistency with the guidance on it at Investor Day.

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [105]

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Just on the cash balance, I think, it's in the quarterly report, is around EUR 30 billion with the Central Bank. Now it may be -- tiering may or may not apply on all of that. I mean you'll have to draw your own conclusions regarding certain tiers.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [106]

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And with respect to the last question, what the instruction of the Dutch Central Bank with respect to our bank presumably will become because, as said, we don't have it yet, but we expect it to come. It's concentrated on having files of our -- all our retail clients are better in place then we have them right now. So that's concentrated on the files, know your customer, understand what they're doing with the accounts and have the profile in place so that you can also do better transaction monitoring on top of that.

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Omar Fall, Barclays Bank PLC, Research Division - Analyst [107]

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Understood. So the answer is there is no historical wrongdoing. It is a process issue.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [108]

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If we can say something about wrongdoings and the regulator coming to the final decision on that, we will, of course, communicate about that.

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Operator [109]

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Our next question is from Mr. Jason Kalamboussis, KBC Securities.

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Jason Kalamboussis, KBC Securities NV, Research Division - Executive Director Research [110]

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Yes. Just a very quick questions. Is it fair to say that with what -- with all these process with the regulator, does it mean that you know any, even bolt-on M&A, should be off the table for now? That would be my conclusion. But if you could confirm.

The second thing for the diamonds, Tanja you mentioned minus 20% in your exposure. Is it fair to say that the exposure should be around EUR 600 million?

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [111]

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Thank you for the 2 questions. I'll start with the first one. We have mentioned bolt-on M&A. So it's not off the table. But of course, when we do a thing like that we, of course, have to look into that carefully, execution-wise and the likes, where in the bank it's happening, and so on. And secondly, Tanja?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [112]

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Yes. On the diamonds, it's, indeed, reduced by 20%. But had the total exposure is somewhat higher than what you mentioned. So I think you probably have in mind, well, a different number. Sorry, I don't recognize the EUR 600 million actually.

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Jason Kalamboussis, KBC Securities NV, Research Division - Executive Director Research [113]

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So could you give us an idea where it is?

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Tanja J. A. M. Cuppen, ABN AMRO Bank N.V. - Chief Risk Officer & Member of the Executive Board [114]

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Well, I think we don't disclose the exact number. So that's not something I have at hand at this point.

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Operator [115]

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Our next question is from Mr. Pawel Dziedzic, Goldman Sachs.

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Pawel Dziedzic, Goldman Sachs Group Inc., Research Division - Equity Analyst [116]

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Two clarifications, if I may. First, do you see a scope for costs to drop below EUR 5 billion in 2021? I wonder given all your comments as to where the cost base will go. And related to that, if we take again on board all your remarks today on NII headwind run rates for fees, et cetera, do you see yourself being in a position to improve operating efficiency beyond, let's say, 2020? Or we should expect cost income to be broadly flattish in the lower for longer rate environment?

And then a clarification on the provisions that you took on KYC this quarter. Can you give us a sense exactly what they relate to? Are those only external cost related to the incremental review or anything else is within that? And does it capture in any way the costs of this CDD ramp up, the several hundred of employees that you plan to hire over next years? That would be my questions.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [117]

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Yes. Thank you. Second question, the answer is yes. Its external cost, includes the couple of hundred increase. Although the couple of hundred increase, by the way, is internal and external. But it's external costs, and it's only related to this retail operation. Now with respect to costs, Cliff?

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Clifford J. Abrahams, ABN AMRO Bank N.V. - Vice-Chairman of Executive Board & CFO [118]

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Yes. I think -- I don't want to give fixed guidance regarding cost, but I think what I can say is that we're working hard on costs. The -- I think the KYC investment is going to be there for, I would say, a few years but not in the long-term at this sort of level. And we see plenty of scope for further cost efficiency, and I think I'd highlight our presentation in November and our recent IT event for the sell side where we talked about hitting the sweet spot of 12% to 13% IT costs and so on.

So we feel positive about further scope and cost reduction over time, but we need to recognize there's some near-term headwinds that we're having to deal with. And that is in the interest of safeguarding the bank and managing extensively in a tough regulatory environment but also, I'd say, a volatile economic environment. We don't want to whipsaw the business because rates went down in a month. What we want to do is manage the bank in a sensible way over time to safeguard the client side and deliver on profitability targets that we've indicated.

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Kees C. van Dijkhuizen, ABN AMRO Bank N.V. - Chairman of Executive Board & CEO [119]

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Thank you very much, Clifford.

I think we're ready, and I think there are no further questions, I understand, operator. So it's also 12:30. So I would say -- I would like to thank you all very much for all your questions, and conclude actually in our Q2 results update. And thank you, again, and goodbye.