Company Reports

Narrow-moat ABN Amro reported roughly stable year-over-year and quarter-over-quarter earnings for the second quarter, comfortably ahead of the company-compiled consensus. Releases from loan-loss provisions were the main driver of the earnings beat, which we don’t think the company can maintain. ABN raised its net interest income guidance for fiscal 2024 slightly to EUR 6.4 billion from EUR 6.3 billion, with its cost guidance unchanged at EUR 5.3 billion. ABN remains one of the European banks with the greatest gearing to the interest-rate cycle. Still, fee income has steadily grown, and recent acquisitions support further revenue diversification, placing it in a better position for future lower interest rates. Although CEO Robert Swaak's recently announced departure was unexpected, we do not expect a change in strategy. We updated our model to incorporate new NII guidance, labor agreement changes, and restructuring provisions. Still, the net impact was negligible, and we kept our fair value estimate unchanged at EUR 21/share.

After emerging from outright government ownership, ABN Amro is one of the simplest banks in Europe. It is essentially a retail and commercial bank with limited capital markets activities. Its strong retail deposit base supported above-average profitability until negative interest rates started to bite. Having a lending book dominated by fixed-rate mortgages does not help either. The long-duration lending book forces ABN Amro to use more expensive long-term funding in order to manage liquidity risk, which then compounds margin pressure in a declining interest-rate environment.

Narrow-moat ABN Amro announced the purchase of German private bank Hauck Aufhäuser Lampe on May 28. The purchase will strengthen ABN Amro's existing presence in the German wealth management market. We estimate the deal will add around 5% to ABN Amro's earnings, including synergies. We tend to view wealth management as a moaty business and HAL's mid-double-digit historical returns on equity suggest a competitive advantage. ABN Amro's revenue mix is heavily skewed to net interest income, which can be volatile and capital-intensive. The deal will lead to a modest increase in the contribution of stable, low-capital-intensity fee income to ABN Amro's revenue mix. ABN Amro will use some of its excess capital to fund the cash purchase price of EUR 672 million. The purchase price is roughly equal to HAL's tangible book value and around 10 times its presynergy earnings. If ABN Amro can deliver its targeted EUR 60 million of synergies, it would imply a 5 times price/earnings multiple. We think these are modest multiples for an acquisition that will immediately enhance profitability and is an excellent strategic fit.

Narrow-moat ABN Amro posted strong results for the first quarter of 2024, beating company-compiled consensus on almost every line item. Net profit reached EUR 674 million, 29% above the comparable period a year earlier and 29% above the consensus estimate. Net interest margin has been a focus area for investors and ABN Amro delivered a 162-basis-point NIM. Stronger-than-expected loan volume growth drove net interest income higher than expected. Good cost discipline led to a 57% cost/income ratio, below the bank’s 2026 target of 60%. Credit quality remains sound with stable nonperforming loans reported. The only blemish in the results was an unexpected 50-basis-point decline in the common equity Tier 1 Basel III ratio to 13.8% due to model changes. We still model a 14.6% fully loaded CET 1 for 2024 after considering a EUR 500 million buyback and 50% dividend payout. Despite a solid start to the year, ABN Amro did not increase its guidance for the full year, which shows us that the second half of the year could be more challenging. We maintain our fair value estimate of EUR 21 per share and believe ABN Amro is undervalued.

After emerging from outright government ownership, ABN Amro is one of the simplest banks in Europe. It is essentially a retail and commercial bank with limited capital markets activities. Its strong retail deposit base supported above-average profitability until negative interest rates started to bite. Having a lending book dominated by fixed-rate mortgages does not help either. The long-duration lending book forces ABN Amro to use more expensive long-term funding in order to manage liquidity risk, which then compounds margin pressure in a declining interest-rate environment.

Narrow-moat ABN Amro reported a 58% year-on-year increase in net profit for fourth-quarter 2023. Reported net profit for the quarter came in substantially ahead of our expectations, but the outperformance was largely due to an unexpected loan-loss provision release. Provision releases are naturally not a maintainable source of profit growth. We welcome the greater clarity around ABN Amro’s capital targets. We believe ABN Amro will increase its share buybacks from 2024 above the new EUR 500 million buyback program announced on Feb. 14. Given the pressure that some European banks expect on the NII line in the face of lower interest rates, we view the guidance of flat NII for 2024 as positive. Cost guidance is less bullish than before. We maintain our fair value estimate of EUR 21 per share and narrow moat rating, but will update our model shortly to incorporate the new guidance from ABN Amro.

Narrow-moat ABN Amro reported earnings/share of EUR 0.85 for the third quarter of 2023, slightly ahead of the EUR 0.80/share recorded a year earlier and materially ahead of the company-compiled consensus estimate at EUR 0.66/share. However, net interest income came in below expectations, disappointing the market, and the ABN Amro share price declined by 9% on Nov. 8. We are puzzled by this reaction. We already highlighted our view that NIM expansion peaked in our comment on the previous quarter's results. As expected, there were no further details on the return of excess capital. ABN Amro previously indicated that they will only update the market about their capital strategy at the beginning of next year.

The lower house of the Dutch parliament approved proposals for higher bank taxes and measures to eliminate the difference between withholding taxes on dividends and share buybacks. We estimate that the increase in Dutch bank taxes implies a 2% hit to our 2023 earnings estimates for ABN Amro and ING. The tax treatment of withholding taxes differs according to investors' residency and tax status and should not directly influence our valuation for ABN Amro and ING. However, we are concerned that continued European regulatory and government intervention will lead to higher risk premiums and lower valuations for banks. We recently had the opportunity to speak to several U.S. institutional investors and the risk of increased government/regulatory intervention in European banks was a topic that came up in all our discussions. The Dutch proposals follow windfall taxes on Italian and Spanish banks and the pandemic-related dividend distribution ban.

We have updated our earnings estimates for ABN Amro. We now expect the bank will book earnings of EUR 2.48 per share for fiscal 2023, 27% ahead of its 2022 earnings. We now forecast cumulative share buybacks of EUR 1.5 billion over the next three years. We therefore increase our fair value estimate by 24% to EUR 21 per share. The tailwind from higher interest rates is likely to subside. However, we highlight that ABN Amro's long-duration lending book and its hedging policy shield it from the prospect of lower future interest rates to a greater extent than most of its European peers. We are more bullish than the company-compiled consensus for 2023 earnings, as we expect lower loan-loss provisions than consensus. We are broadly in line with consensus earnings expectations for the following periods. ABN Amro trades at a 36% discount to our fair value estimate. At its 0.6 times current price/tangible book value ratio, it is at a 30% discount to its 10-year average multiple and a 25% discount to the average multiple of the European banks we cover. Previously we favoured the firm adopting an aggressive return of capital strategy to narrow the discount rating to peers. We are now becoming more receptive to an ABN Amro acquisition in the wealth-management space to diversify its revenue base, as it is one of the banks we cover with the most significant reliance on cyclical net interest income. An increased presence in wealth management would increase ABN Amro's fee income and bring much-needed revenue diversification.

After emerging from outright government ownership, ABN Amro is one of the simpler banks in Europe. It is essentially a retail and commercial bank with limited capital markets activities. Its strong retail deposit base supported above-average profitability until negative interest rates started to bite. Having a lending book dominated by fixed-rate mortgages does not help either. The long-duration lending book forces ABN Amro to use more expensive long-term funding in order to manage liquidity risk, which then compounds margin pressure in a declining interest-rate environment.

Narrow moat ABN Amro reported earnings per share of EUR 0.98 for the first quarter of 2023, double the EUR 0.50 per share recorded a year earlier and materially ahead of the EUR 0.63 per share company-compiled consensus estimate. Higher fair value adjustments on the other income line and the release of some unused COVID-19 loan loss provisions were the main drivers of earnings coming in ahead of consensus expectations; some investors will view this as a low-quality earnings beat. Expanding net interest margins continued to be the primary driver of year-on-year growth, but quarter-on-quarter net interest income was stable, confirming that margin expansion has peaked. The third quarter will be the last quarter that ABN Amro will benefit from a softer base due to depressed net interest margins. The path for revenue growth is less evident from the fourth quarter onward. Credit quality remains sound with stable nonperforming loans. Dutch housing prices are holding up, while Dutch bankruptcies stay well below historical levels. Inflationary cost pressure is starting to bite, and ABN Amro no longer expects to meet its EUR 4.7 billion 2024 operating expense target. ABN Amro indicated that it will update the market on future share buybacks at the fourth-quarter results presentation early next year. We believe ABN Amro has significant excess capital, and it is disappointing that it will take so long to update the market. Our fair value estimate is EUR 19 per share.

Narrow-moat ABN Amro reported EPS of EUR 0.56 for the first quarter of 2023, nearly double what it recorded a year earlier and 52% higher than the final quarter of 2022. Higher net interest margins were the main driver. The base for the rest of the year is more challenging, but we still expect robust growth. However, NIM expansion will slow as competitive pressures on deposit and lending margins intensify. The future drivers of top-line growth for ABN Amro are less evident. That said, it mystifies us that shares continues to trade nearly 20% below their peak in March. The ongoing turmoil in the U.S. regional banking sector has not hit ABN Amro's operations, with very sound liquidity and no sign of asset-quality issues. We expect to increase our fair value estimate of EUR 17 by around 10%.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

We base our investment case for narrow-moat ABN Amro on the group's gearing to higher interest rates and potential to return excess capital to shareholders. Fourth-quarter earnings supported our view. ABN Amro announced a EUR 500 million share buyback, and net interest income for the final quarter was 11% ahead of consensus expectations. However, we baked this into our valuation and do not expect to make material changes to our EUR 17 fair value estimate. After a 43% share price rally over the last three months, the investment case is less compelling for ABN Amro, which is trading at 0.9 times our fair value estimate.

Our investment case for narrow-moat ABN Amro relies on our belief that it stands to gain a lot from higher interest rates and that it has significant excess capital. While the third-quarter 2022 results validated our view around rate sensitivity, the position around excess capital is less clear-cut. ABN Amro increased its guidance for fiscal 2022 net interest income slightly to EUR 5.3 billion from EUR 5.2 billion. It confirmed that net interest margins have bottomed and are seeing deposit margins improving, which supports our investment case. ABN Amro reported a 15.2% common equity Tier 1 ratio at the end of September after setting aside EUR 250 million for a potential share buyback that it announced previously. It theoretically has a 13% common equity Tier 1 ratio target. Still, in practice, we do not believe ABN Amro's ultimate owner—the Dutch government or its regulators—will support a material return of capital in the near term. The Dutch central bank recently cautioned banks under its supervision to remain cautious around capitalization.

After emerging from outright government ownership ABN Amro is one of the simpler banks in Europe. It is essentially a retail and commercial bank with limited capital markets activities. Its strong retail deposit base supported above-average profitability until negative interest rates started to bite. Having a lending book dominated by fixed-rate mortgages does not help either. The long-duration lending book forces ABN Amro to use more expensive long-term funding in order to manage liquidity risk, which then compounds margin pressure in a declining interest-rate environment.

Narrow-moat ABN Amro reported good results this second quarter with EUR 475 million in net profits, a 21% increase compared with the same period last year. Other operating income was the main contributor to the profit expansion with EUR 163 million compared with EUR 27 million last year. The bank also saw a 12% increase in net fee and commission income. Net interest income slightly declined by 3% while rising operating expenses had a negative impact, largely due to contributions to the single resolution fund. However, it was more than offset by impairment releases and lower taxes. We maintain our fair value estimate at EUR 15.50 per share.

Narrow-moat ABN Amro reported a net attributable profit of EUR 295 million for first-quarter 2022 compared with the EUR 54 million loss it reported for the same quarter last year. The reported profit also comfortably exceeded the EUR 236 million profit that the consensus of analysts collected by ABN Amro itself expected for the quarter. Mainly, the difference was a result of loan-loss provisions coming in 50% lower than expected. We don’t anticipate making any immediate changes to our forecasts on the back of this update and maintain our EUR 15.50 fair value estimate per share.