ABN Edges Toward Higher Payout After Pruning Investment Bank

(Bloomberg) -- Dutch state-controlled bank ABN Amro Group NV is edging toward raising its payout to shareholders after a strong second quarter and cuts to its underperforming investment bank.

ABN Edges Toward Higher Payout After Pruning Investment Bank

“Yes, we feel more confident there after this quarter,” Chief Executive Officer Kees van Dijkhuizen said at a press conference when asked about a dividend increase. The higher payout could take the form of either a higher dividend or share buybacks, he said, adding that the bank would take a decision “later in the year.”

Since ABN’s rescue by the Dutch state in 2009, the bank has been shrinking to focus on lending to homeowners and businesses closer to its home market in the Netherlands. Under state control, the management has run its mortgage-heavy balance sheet conservatively, keeping its capital levels at a high level, relative to its European peers. The core tier 1 capital ratio rose to 18.3 percent as of the end of June, near the top of the 17.5 to 18.5 percent range that the bank targets.

ABN’s shares rose sharply early on Wednesday after it said it will cut around 250 corporate and investment bank jobs, scaling back its trade and commodity finance and other volatile businesses. ABN also reported better-than-expected developments at its core lending operation, with net income beating the highest analyst estimate.

Restructuring Charge

The planned cuts to the corporate bank unit will further strengthen the balance sheet, reducing risk-weighted assets by 5 billion euros ($5.8 billion). They will lower annual running costs by 80 million euros, and the bank will take a charge of 50 million euros to cover the restructuring.

“We like the quarter, the CIB plan and the prospect of additional returns,” RBC analysts led by Adrian Cighi said in a note to clients. RBC rates the shares at outperform.

The shares pared initial gains of over 4 percent and were up 3.2 percent at 24.08 euros at 11.20 a.m. in Amsterdam.

ABN Edges Toward Higher Payout After Pruning Investment Bank

Mediobanca analyst Robin van den Broek said that while the bottom line was bolstered by one-time factors in the second quarter, underlying profit was still ahead of expectations. He said the drop in provisioning was welcome.

The corporate bank cuts follow a similar pruning of the private bank last year. The new job reductions account for around one in 10 jobs at a unit that employs barely a tenth of ABN’s overall headcount. They’re dwarfed by ABN’s ongoing retrenchment in its retail business: the bank has closed over a quarter of its branches in the last three years, and it cut another 401 jobs in that network in the quarter.

Domestic Strength

“The business is core and the bulk of it is operating satisfactorily,” Chief Financial Officer Clifford Abrahams said of the corporate unit in a Bloomberg Television interview. The bank’s main operations continued to be underpinned by strong economic growth in the Netherlands, he said.

“We’ve seen growth of 3 percent in GDP, and we’d expect that to continue,” he said. He acknowledged the risk to the business from rising tension around global trade issues, but said its impact so far has been “muted.”

The improved performance may help to improve spirits at the bank whose upper echelons have been in turmoil recently, after a cull of senior management last year and the departure in February of its chairwoman, Olga Zoutendijk. Rumblings of discontent have continued since then, with some employees appealing to the bank’s state owners to step in and give firmer leadership.

Van Dijkhuizen told the press conference that “the atmosphere is good in the board room” and said he was looking forward to “better times in banking.” He said that the unhappiness had been partly due to uncertainty over the future of the corporate bank.

Highlights from the 2Q earnings release:

  •  Net income EU688m vs EU960m in 2Q 2017
  • Net interest income EU1.66b vs EU1.60b in 2Q 2017
  • Risk provisions: EU134m from EUR208m in 1Q
  • Underlying cost-to-income ratio 55.1 percent from 57.9 percent in 1Q 
  • Fully-loaded CET1 ratio 18.3 percent from 17.5 percent in 1Q 2018
  • ©2018 Bloomberg L.P.