ABN Amro group jumps as profit beats estimates

Bloomberg

ABN Amro Group NV jumped the most in almost six months after second-quarter profit beat estimates and Chief Executive Officer Gerrit Zalm announced plans to cut costs by about 200 million euros ($225 million).
Underlying net income climbed 10 percent to 662 million euros from a year earlier, the Amsterdam-based bank said in a statement on Wednesday. That beat the market consensus of 592 million euros, according to a note by ING Groep NV. The company took a legal provision of 271 million euros in the period.
Europe’s largest banks have reported a drop in second-quarter earnings, hurt by volatile markets, surging legal costs and record-low interest rates. While Zalm said on Wednesday that the lender is “well on track” to reaching financial targets including a dividend increase for 2017, it’s looking to cut costs by about 25 percent through measures including job cuts, with most coming next year.
“One has to think about finance, risk and human resources,” the CEO said at a press conference when asked about where job cuts may fall. “There’s little room to reduce compliance, because of regulatory demands.”
ABN Amro rose as much as 6.2 percent, the biggest intraday increase since Feb. 10, and was up 4.6 percent at 17.87 euros as of 11:13 a.m. The shares have dropped about 14 percent this year, partly hurt by a wider selloff after the U.K.’s decision to leave the European Union.
Net interest income, the bank’s main source of revenue rose 5 percent to 1.58 billion euros. Loan impairments charges increased to 54 million euros from 34 million euros a year earlier.
“Net interest income and risk costs surprised positively,” Albert Ploegh, an analyst at ING Groep NV, wrote in a note to clients.
ING, the Dutch lender investing in financial technology to reduce personnel expenses and branch costs, said earlier this month that second-quarter profit more than tripled to 1.3 billion euros, boosted by lending income and lower provisions for loan losses.
While other lenders have scrapped their financial targets, ABN Amro plans to reach a return on equity of 10 percent to 13 percent over the coming years and is targeting a common equity Tier 1 ratio, a measure of financial strength, of 11.5 percent to 13.5 percent. Zalm also reiterated plans to increase the dividend payout ratio to 50 percent in 2017.

Cost Control
Operating expenses were little changed at 1.3 billion euros in the second quarter, with the underlying cost to income ratio, a measure of profitability, at 57.2 percent. The bank will pay an interim dividend of 40 pence per share.
“Capital generation is ahead of expectations thanks to a reduction in risk weighted assets and higher-than-expected profit accumulation,” said Matthias de Wit, an analyst at KBC Securities in Brussels, who has a buy recommendation on the shares.
ABN Amro made provisions in the quarter to compensate clients over interest-rate swaps that backfired. Six lenders sold almost 18,000 swaps to small- and medium-sized Dutch businesses between 2005 and 2010. The derivatives, designed to protect against interest-rate increases, caused financial hardship for many when the economic climate changed in the financial crisis.
European lenders have been under pressure to raise their capital buffers as regulators toughened scrutiny of riskier assets to avoid a repeat of the global financial crisis that sparked a series of bailouts. Once one of the world’s largest banks, ABN Amro was transformed under state ownership into a consumer lender focused on the Netherlands. The state sold 23 percent of the bank in an initial public offering in late November.
The company will publish new financial targets once regulators “give more clarity” on so-called Basel IV rules, according to Zalm. The CEO referred to a set of regulatory requirements from the Basel Committee on Banking Supervision, some of which have already been decided on while others are set to be announced later this year.