ABN AMRO Q2 Profit Beats Forecast, Announces Changes in CIB

Dutch bank ABN AMRO managed to surpassed analysts’ profit expectations on Wednesday, but announced several changes in its corporate banking division as part of its efforts to improve the profitability of that business.

Despite a 28 percent contraction on its profits last year, ABN AMRO’s second-quarter profit of €688 million ($799.5 million) still ended higher than the forecast of about €552.5 million ($642 million).

The Amsterdam-based firm argued that while impairments were 36 percent lower than in the first quarter, they were still high as challenges remain in certain sectors, such as energy and healthcare.

ABN AMRO Chief Financial Officer Clifford Abrahams stated that the health care in the Netherlands and global offshore energy sectors were the areas contributing to higher impairments.

Impairment charges on financial instruments in the second quarter were at €134 million ($155.74 million), and the company expects impairments for the full year to stay below their through-the-cycle average of 25 to 30 basis points.

Operating income fell 8 percent from the prior year to €2.29 billion ($2.66 billion) in the quarter, while operating expenses also declined 8 percent to €1.26 billion ($1.46 billion).

ABN AMRO fully-loaded CET1 capital ratio, which acts as an indicator of financial stability, rose to 18.3 percent in the second quarter from 17.6 percent a year earlier, appearing particularly higher than other European banks.

Abrahams said it is a protective measure against the approaching banking regulations, as they see ABN AMRO being quite significantly impacted by the Basel IV reforms.

They project an impact of 4 to 5 percent on their capital ratios as a result of the policy so at 18.3 percent, they are well-situated within their current target range, according to Abrahams.

ABN AMRO Chief Executive Kees van Dijkhuizen stated that they expect capital generation to continue, improving their position to distribute capital in addition to the target dividend payout of 50 percent of sustainable profit.

The Basel IV, proposed by the Basel Committee on Banking Supervision (BCBS), is an international banking policy that calls for banks to have stronger capital positions so they can better prepare for possible financial troubles.

The new regulations however, will hurt profitability by requiring banks to hold more capital for assets with a relatively high risk.

ABN AMRO Makes Changes in Corporate Banking

Along with its second-quarter earnings release, ABN AMRO also announced a number of changes in its Corporate and Institutional Banking (CIB) unit in an attempt to boost returns on that area.

CIB is facing both cyclical and long-term challenges, according to van Dijkhuizen and the return on equity of the division, according to as a whole does not meet the group return on equity target, as income growth in certain activities has not offset risk-weighted assets growth, impairment, and costs.

Its return on equity was at 12.5 percent in the first six months, ending lower than the 16.7 percent reported in the same period last year.

The bank stated that it would focus its CIB to higher-yielding activities, such as lending to Dutch companies, clearing, and private equity.

As part of its plans to increase profitability, ABN AMRO intends to lower the capital allocated to global sectors, mainly in trade and commodity finance, which means the risk-weighted assets will be reduced by €5 billion ($5.81 billion) by the end of 2020 to €34 billion.

Staff will be trimmed down by 250 jobs as well. CIB had about 2,600 employees at the end of June or less than one in seven of the total employees. Corporate banking is the smallest of the firm’s four units. It contributed 11 percent of the company’s total net profit in the second quarter.

The reductions are the outcome of an assessment that had been flagged by van Dijkhuizen three months ago, when he said CIB is experiencing cyclical and structural challenges.

The move also comes at a time of turmoil at the top of ABN AMRO, after a cut in senior management last year and the exit of Chairwoman Olga Zoutendijk.

In addition, the cuts follow a similar assessment of the company’s private banking division last year, which likewise sought to further shift its focus on a smaller number of markets closer to its Dutch home.

The firm will take a restructuring charge of €50 million ($58 million) as a result of the changes.

Abrahams stated that the corporate bank has a strong client franchise in the Netherlands, but their results have been unsatisfactory over the last few years, and with Basel IV approaching, capital requirements will increase therefore their decision to update their response to that.

CIB only had a modest role at ABN AMRO since the Dutch government rescued it nine years ago. While the unit added almost a quarter of the company’s revenue in the first quarter of 2018, it brought in only 12 percent of underlying profit.

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