ABN AMRO Bank NV is well positioned to absorb 480 million euros anti-money laundering regulation, but is expected to struggle against profitability in 2021 amid restructuring and the impact of COVID-19, analysts say.
The Netherlands’ third-largest bank said on April 19 that it had accepted the Dutch prosecution’s offer to settle a long-standing investigation that revealed shortcomings in its compliance with anti-money laundering rules. silver between 2014 and 2020. The additional cost will result in a “modest” loss in the first quarter, as reversals and write-downs will partially offset the impact, the bank said.
Although the settlement will be have a significant impact on ABN Amro’s earnings per share in 2021, there are some bright spots for the bank’s earnings outlook, Paul van der Westhuizen, senior analyst at Rabobank Research, told S&P Global Market Intelligence. Revenues from the sale and leaseback of ABN Amro’s head office, the large provision of loan loss provisions, and the progress made in the course of non-core corporate and institutional banking activities could all boost returns. 2021 results, he said in an email. “A lot will also depend on what the yield curve does as ABN Amro is particularly sensitive to steepening and flattening due to its heavy reliance on net interest income.”an der Westhuizen said.
Pressure on profits
With “large loan loss provisions to be released and over € 2 billion in capital exceeding regulatory requirements”, ABN Amro can “easily absorb” the cost of settlement, Rabobank Research analysts said in a note.
While it is able to bear the one-time cost of settlement, ABN Amro also faces the expense of an ongoing remediation program to address its anti-money laundering shortcomings, or AML, S&P Global Ratings said in a newsletter. These costs “arise in still difficult macroeconomic conditions and the bank’s strategic refocusing, and will further weigh on its ability to generate profits in 2021-2022,” said Mr. Ratings.
Regardless of its current capital reserve of 800 basis points, other challenges remain for ABN Amro related to revenue growth and pressures on profitability, said Suvi Platerink Kosonen, senior finance strategist at ING, in a note. UBS analysts say they have reduced their 2021 forecast for ABN Amro’s annual profit and annual profit attributable to shareholders by 32.4% to 250 million euros and 42.5% to 162 million euros , respectively.
Taking into account the adjustments made following the AML settlement of ABN Amro, the average consensus forecasts for the bank’s net income and turnover in 2021 amount respectively to 466 million euros and 7.41 billion euros. euros, according to data from S&P Global Market Intelligence.
“AML investments have notably inflated ABN Amro’s spending in recent years. The bank expects them to peak in 2021 at 425 million euros, mainly due to the additional staff,” he said. Fitch Ratings said in a note. ABN Amro’s anti-money laundering workforce is also expected to peak at 4,200 in 2021 from 2,000 at the end of 2019, according to Fitch Ratings.
After several AML remediation programs executed in various departments over the previous years, ABN Amro launched a new Financial Crime Detection Unit, or DFC, in 2019 with the aim of centralizing remediation processes. The aim of the DFC unit is “to remedy the daily processes of assessing new and existing customers and to detect and combat criminal money flows,” the bank said. DFC remediation programs, which are closely monitored by the Dutch central bank, will continue until the end of 2022, the bank said.
Since the launch of the DFC unit, ABN Amro “has demonstrated progress in addressing weaknesses in KYC processes, “said Fitch, noting that the recent investigation” found no evidence that the bank was routinely involved in suspicious transactions or pursuing high-risk customers . ABN Amro’s ratings are unaffected by the recent AML settlement, Fitch said.
Dutch prosecutors opened the AML investigation against ABN Amro in September 2019, a year after the Netherlands’ largest bank, ING Groep NV, paid 775 million euros to settle a similar AML case with the authorities national.
‘Take a step in the right direction’
Despite the additional costs, there are some positive factors that may boost the bank’s underlying earnings in 2021 and, as a result, the overall forecast has been increased by 65% from a low base, UBS analysts said. The increase was made taking into account “the most recent improvement in swap rates and ABN Amro’s recent announcement that it would lower the deposit threshold to charge negative rates to 150,000 euros.” The decline in credit losses in 2021 also contributed to the increase in estimates for 2021, UBS analysts said.
UBS analysts cut their 2021 net interest income forecast for ABN Amro by 0.2% to 5.48 billion euros. “While we believe the restructuring of ABN is a step in the right direction, the benefits remain unresolved and we reiterate our neutral rating,” analysts said.
As part of its 2024 strategy announced at the end of 2020, ABN Amro aims to reduce its cost base from 700 million euros to a maximum of 4.7 billion euros by 2024, and increase its return on equity to around 8 % for the same year. The CEO of the bank, Robert Swaak, said in February that around 100 million euros of the 700 million euros in cost savings are expected to be generated in 2021 but noted that the bank is planning investments of the same amount for this year. Most of the 15% workforce reduction planned as part of the 2024 strategy is also expected to start from 2022.
ABN Amro will release its first quarter results on May 12.