State of the Banks

Banks prepare for the new reality

FY 2020 edition KPMG Netherlands kpmg.nl/financialservices Contents

Foreword 3

Income 4

Costs 7

Customer experience in the new reality 10

Asset Quality 13

Macro economic outlook 16

ING full year results 18

Rabobank full year results 20

ABN AMRO full year results 22

De Volksbank full year results 24

Selected thought leadership 26

It’s June 2021 and we are publishing the third release of the State of the Dutch bank analysis (FY20). Due to a very busy season a bit later than we had anticipated but we hope it still provides some good insights into the performance of the 4 large retail banks in the Netherlands.

Compared to our last publication date on the FY19 results which took place in the third week of social distancing, we are finally in a much better place as a society thanks to the constraints we have had in place for such an extended period of time. With vaccination now fully under way we can finally look forward to a return to (the new) normalcy post-summer.

Banks have operated under challenging circumstances during 2020. Not only as a result of the COVID-19 impact, which obviously had a profound impact, but also due to other structural aspects such as the continued low interest rate environment, pressure on margins, increasing compliance cost and changing client behavior.

Banks have played a pivotal role in providing access to government support measures for their clients and have been pro-active in mitigating direct adverse impact to their clients. Throughout the evolution of the crisis, banks have been able to continue to serve their clients without disruption. This is a tribute to the already advanced state of digitization in the Dutch banking landscape and will likely accelerate other developments like closing more branch locations and digital client interactions.

The uncertain situation resulting from COVID-19 translated in lower overall economic activity and this understandably has hit the top line of the Dutch banks with income being at the lowest level in five years. In addition, margins have declined and although we generally see more diversification into fee income generation, this does not significantly move the needle yet.

2020 was another year where significant steps have been taken by Banks to address the cost income ratio. For instance by re-assessing the strategy, and/or product-service portfolio, driving digital processes and last but not announcing a further reduction in FTE's. However next to the immediate impact of COVID-19 two aspects have negatively impacted this ratio. First of all the lower income base and the significant non-structural cost increases banks faced on the compliance agenda (e.g. resulting from KYC & AML requirements).

From an asset quality perspective things look quite positive. The housing market continues to be strong and the economic outlook is good with higher growth projected for the next two years. However as the government support measures have been made available widely to companies, for banks with SME exposure, it will remain a challenge to understand how and which sectors and companies will emerge successfully post-support measures. And although the banks are well-provisioned, this may affect the bottom line for banks in the next few years.

Ferdinand Veenman Head of Financial Services KPMG Nederland

Income is at its lowest level in five Figure 1 Total Operating Income (2016-2020) years EUR (x billion) EUR (x billion) The business model of Dutch banks – relying heavily on interest income – continues to 20 15 14 face pressure in the years ahead. Banks are ING ING 13 struggling to keep interest income at healthy 12 levels despite the challenging interest rate 15 11 environment and are looking to diversify 10 income streams, but this is not moving the 9 Rabo 8 Rabo needle yet. 10 7 Interest income and margins under ABN 6 ABN 5 pressure 5 4 Last year, net interest income of all four 3 major Dutch banks has decreased (average 2 decline in FY20: 4.7%) and is at its lowest Volksbank 1 Volksbank level in five years for three out of four banks. 0 0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Increasing income is a challenging task. The high degree of competition for mortgages also fueled by institutional investors through OTD mandates in the Dutch market pushes banks to keep their rates to a bare minimum Figure 2 Total Net Interest Income (2016-2020) to safeguard market share. In light of COVID- EUR (x billion) 19, banks were not able to grow lending EUR (x billion) 20 volumes, potentially due to the availability 15 of governmental supporting schemes, 14 ING diminished businesses’ demand for creditING 13 and competition from non-traditional lenders 12 15 in the SME/consumer market and working 11 capital financing. 10 9 Rabo 8 Rabo 10 Margins have declined for all banks to 143 7 bps and 144 bps respectively for ABN AMRO ABN 6 ABN and ING, and 130 bps for both Rabobank 5 5 and De Volksbank, the lowest level in post- 4 financial crisis years. 3 2 Volksbank 1 Volksbank 0 0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Last year, net interest income of all four Figure 3 Net Interest Margin (2016-2020) major Dutch banks has decreased (average decline in FY20: 4.7%) and is at its lowest NIM (bps) level in five years for three out of four banks. 170 Increasing income is a challenging task. The high degree of competition for mortgages 160 also fueled by institutional investors through 150 OTD mandates in the Dutch market pushes ING banks to keep their rates to a bare minimum 140 ABN to safeguard market share. In light of COVID- Rabo 19, banks were not able to grow lending 130 volumes, potentially due to the availability Volksbank of governmental supporting schemes, 120 diminished businesses’ demand for credit and competition from non-traditional lenders 110 in the SME/consumer market and working 100 capital financing. 2016 2017 2018 2019 2020

Margins have declined for all banks to 143 bps and 144 bps respectively for ABN AMRO and ING, and 130 bps for both Rabobank and De Volksbank, the lowest level in post- financial crisis years.

At the same time, Dutch banks continue to struggle finding substantial alternative sources to diversify their income. Circa 75% of income is derived from interest-bearing assets for ABN AMRO, ING and Rabobank. De Volksbank is almost fully reliant on interest income. Total operating income

Figure 4 Total Operating Income (2016-2020)

7,916 17,637 10,782 923 100.0% 2.9% 6.3% 5.8% 7.6% 5.0% 90.0% 19.7% 17.1% 16.5% 80.0% 70.0% 60.0% 50.0% 92.1% 40.0% 74.1% 77.1% 75.9% 30.0% Net Interest Income 20.0% Net Fee & Commission Income 10.0% Net Other Income 0.0% ABN AMRO ING Rabobank De Volksbank

© 2021 [legal member firm name], a [legal structure] and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 4 Banks are searching for alternative income Preparing for the future The low interest rate environment is expected to remain. Most challenges to maintain income levels have been Hence, the exploration of alternative income remains known by the sector for some time. COVID-19 has a top priority. Competition in this field is high and so accelerated the risk of further decline in interest income are the costs to tapping into substantial and innovative as the positive macro-economic outlook we started with income streams. The following trends are emerging: in 2020 has been substituted by uncertainty. Amidst these challenges, banks need to prepare their playbook — Exploring new PSD2 opportunities and platform for sustaining and developing (top) level (diversified) models income and a healthy margin. The full opportunities provided by the introduction of PSD2 in 2018 have not been captured yet and Strategic considerations for banks to prepare for the so far, new concepts have focused on personal new reality: budgeting capabilities. In the following years we expect more proof-of-concepts in other areas. In — Develop compelling customer value propositions on Belgium, KBC Bank is experimenting with integrating price, products, and services to engage the most public transportation and parking services in their attractive customers and drive profitable growth. app and – in line with digital frontrunners in the Determine pricing strategies across the bank and Asian market – providing non-banking services to prevent siloed approaches. non-customers. Dutch initiatives have been more — Build a customer-centric organization and culture conservative; Rabobank has enabled mobile phone that inspires people to deliver on the customer transfers via phone numbers, and all banks provide promise and drive up business performance. Adding basic integration of competitors’ bank accounts. additional value through advice and services can — Widening product and service offering increase fee and commission income. Increasing cross-sell amongst the existing client — Create intelligent and agile services, technologies, base has been a proven way of increasing income and platforms, enabling the customer agenda without incurring high acquisition costs. with solutions that are secure, scalable and cost- De Volksbank has announced a significant change effective. Incorporate non-banking services, and find of strategy by entering the business credit market opportunities. and offering insurance and private investment products. With a primary focus on cross-selling, De Volksbank expects fee and other income (now 7.9%) to double within a few years. ABN AMRO sees growth opportunities in the SME market through the introduction of differentiated digital payment packages and opportunities to earn fees by advising clients on their approach to sustainability. Moreover, Rabobank announced the start of a Carbon bank focused on buying and selling of CO2 credits as well as seeking additional fee income in the insurance brokerage market. KBC Bank is experimenting with integrating public transportation and parking services in their app

With income under pressure, attention is Despite these developments, ABN AMRO and needed for cost containment Rabobank managed to lower their operational expenses in FY20, albeit moderately. On the contrary, the With continuous pressure on income, Dutch banks have operating expenses of ING and De Volksbank have put in great efforts of reducing costs in recent years. increased in 2020, whereas the rise in costs of De However, these efforts have produced mixed results. Volksbank can be attributed to incidental costs due to its COVID-19 has resulted in a large increase of cost-to- reorganization. income ratios (C/I ratio). Although this is caused mainly due to a decline in income, containing costs remains The current developments are likely to be a constant difficult for the four Dutch banks. factor in the coming years putting more pressure on attaining efficient business operations and assessing The average C/I ratio of the four major Dutch banks cost-benefits per market and product offerings. has increased from 58.5% in 2015 to 62.5% in 2020. Unsurprisingly, the current ambitions on C/I ratios were Rising regulatory costs, costs relating to maintaining and not met by all the four banks in 2020. Rabobank already replacing legacy systems and processes, and continuous announced that it will push back its C/I ratio target by investments in the digital transformation of processes one to two years. Taking the rise in C/I ratios of the last all remain important factors in the struggle to lower years into account, one could argue that the C/I ratio operational expenses. In recent years, the increased Cost-to-income ratio targets of the Dutch banks are perhaps too ambitious effort in building effective AML/KYC capabilities has ranging from 50% to 58% in the long term. complicated cost containment further.

Figure 5 Cost-to-Income Ratio Development (2016-2020)

75%

70%

65%

C/I (%) C/I 60%

55%

50% 2016 2017 2018 2019 2020

Rabobank ING ABN AMRO Volksbank

© 2021 KPMG Advisory N.V. State of the Banks FY 2020 | 7 Efforts to lower costs — The acceleration of digital client interactions by Despite the increase of their C/I ratios, various measures COVID-19 has offered more opportunities of realizing have been undertaken in 2020: longterm cost reductions by closing branches. In the coming years, we expect further developments in — Banks are continuously assessing their strategy, the real estate strategy of banks (e.g. ABN AMRO is increasingly focusing on the profitability of selected relocating to their old HQ location). ABN AMRO, ING activities. Dutch banks are increasingly focusing and Rabobank already announced to significantly on core banking activities in the domestic market reduce the number of their physical branches in and, assessing the need for costly consumer the nearby future. De Volksbank is differentiating savings. Both ABN AMRO and ING decided to shut itself through its multi-brand strategy by focusing on down unprofitable business units. ABN AMRO offering local access to its branches. announced to sell its corporate and institutional — Reduction of staff has continued in 2020 and will banking non-core portfolio activities, whilst ING likely impact the banking workforce in the coming closed international offices in South America and years. ABN AMRO expects to further reduce its Asia. Rabobank announced to simplify its Wholesale workforce by 15% by 2024. De Volksbank recently organization to realize economies of scale and announced to lay off 400–500 employees in the announced to stop offering online saving accounts to following years. ING has announced closing of clients in Belgium. branches resulting in the layoff of 440 employees. — Banks aim to reduce product complexity and Finally, Rabobank announced a further reduction of streamline the product offering (across borders). the workforce by 1,000 FTEs a year for the next 5 For example, ABN AMRO strives to realize a 60% years. The outflow of personnel will occur in the next reduction in the complexity of their product portfolio. couple of years by a mix of regular outflow and the This move could hurt innovation capacity, but creates reduction of external FTEs. big opportunities of creating efficient business Developmentoperations. FTEs

Figure 6 FTE Development (2016-2020)

60.000 55,901 53,431 51,943 51,504 52,233

50.000 46,781 45,063 43,247 43,822 43,272

40.000

30.000 FTE’s

21,664 19,954 18,830 19,234 20.000 17,977

10.000 4,005 3,945 3,797 3,648 3,819

2016 2017 2018 2019 2020 ING Rabobank ABN AMRO Volksbank

© 2021 KPMG Advisory N.V. State of the Banks FY 2020 | 8 Preparing for the future Engineering: Operational efficiency is key when income is under — Digitize processes: Further focus on digital banking, pressure and investments in KYC/AML activities and channels and transactions, and digitization of work digital transformation are needed to stay relevant in the from front office to back office will create responsive market. Our recent survey of more than 200 executives operations, with maximum use of digital interaction. at some of the world’s largest banks confirms the Use tooling in supporting client contact and insights importance of further focus on cost containment. For and re-evaluate local physical presence in order to example, 61% acknowledges that cost reduction has improve operational efficiency. increased as a strategic priority and 83% is refocusing the cost optimization efforts. — Intelligent automation & technology transformation: High emphasis on robotic process, testing Strategic considerations to reduce costs and prepare for automation and cognitive- and call automation to the new reality, based on three macro cost levers: reduce transaction costs. Invest in digitally enabled technology such as cloud, infrastructure connectivity and application rationalization. Accelerate the Strategy: decommissioning of the obsolete applications and removal of data centers. — Geography and offering: Re-evaluate presence in low — Data, analytics & insights: Improving the use and performing customer segments and geographical quality of data and artificial intelligence will increase areas. insights in customer demand and contribute to — Operating model & balance sheet: Banks should salesforce effectiveness. Streamlining of the reduce the cost of funding by optimizing the balance product portfolio and reducing the presence in low sheet. performing customer segments and product areas based on data will result in the simplification of the needed operations of the banks. Simplicity: — Tax & legal optimization: Align the business model — Organization design & people: Drive the and operating model with the appropriate tax and simplification of the organizational design throughout legal structures. the bank, focus on span of control, organizational layers and realignment of pay and rewards. — Functional transformation & organizational model: By reducing organizational complexity, decision- making and governance structures, adopting an agile way of working, process re-engineering, QA/QC-risk convergence and the rationalization of procurement and vendor managements functional costs reduction can be realized.

COVID-19 impacted the Dutch banking sector banks introduced a wide range of solutions to guide In the first quarter of 2020, strategic priority of banks financially distressed business and consumers through rapidly shifted to support employees, customers the crisis: and society to deal with the impact of the COVID-19 — 172,000 businesses were supported with a total pandemic. Based on the experiences with the 2007- of EUR 33 bln in postponed repayments, loans and 2008 financial crisis, Dutch banks took an important additional credit lines social role and presented themselves as part of the — Approximately 37,000 consumers received payment solution by financially supporting businesses and breaks totaling EUR 88 mln consumers that were affected by the pandemic. In retrospect, two sector-wide trends can be observed As a result, consumers experienced that banks are also that were driven by COVID-19: there to support when times are tough. Consequently, 1. Banks were positioned as integrity champions in consumer confidence in the Dutch banking sector supporting government measures remained stable over the year 2020 according to a 2. Banks employed a variety of initiatives to accelerate survey conducted by the Nederlandse Vereniging van digitization of their services Banken (NVB).

Consumer trust remained stable during the For the year 2021, the risk exists that banks will find it crisis more difficult to keep on supporting a growing group The COVID-19 pandemic brought a lot of uncertainty to of financially troubled businesses and consumers. To society. Integrity – being trustworthy and engendering retain consumer trust banks have to be prudent in the Confidence of dutchcitizenspromises they makein towards the their clients.banking By setting sector trust – proves to be a fundamental driver of Customer Experience Excellence (CEE) in times of crisis and the right expectations in advance and being realistic to last year the financial services industry scored highest consumers when they can(not) assist, banks prevent on this CEE pillar surpassing other sectors. Based on that current levels of consumer confidence will diminish KPMG’s annual CEE research, it can be concluded that as the crisis evolves. Dutch banks worked hard to take on a societal role by presenting themselves as part of the solution. Dutch

Figure 7 Confidence of Dutch citizens in the banking sector

28% 28% 27% 28% 26% 26% 26% 27% 26% 24% 24% 24% 23% 23% 23% 24% 23% 22% 23% 23% 21% 21% 22% 22% 21% 22% 21% 22% 22% 21% 21% 21% 20% 20% 18% 20% 20% 19% 19%

Percentage of people of Percentage 17% 16% 16% 15% 15% 16% 13% 19 - Q3-15 Q3-16 Q3-17 Q3-18 Q3-29 Q3-20 Q3

(Very) low confidence (Very) high confidence

Source: Banking Confidence Monitor 2020, Nederlandse Vereniging van Banken

© 2021 KPMG Advisory N.V. State of the Banks FY 2020 | 10 COVID-19 measures led to an accelerated In the new reality, customer self service plays an adoption of digital and mobile services important role according to most banks. Therefore, banks are making investments to offer easy access to The virus also resulted in other means of interaction products, services and relevant information through their between customers and banks. As a result of social digital channels. For example: distancing, customers had to discover new channels to access products and services. Similarly, bank employees — ING introduced a new chatbot helping customers to had to get used to working from home and different find the right products of their needs, boosting digital ways to serve clients. To enable uninterrupted client sales. Furthermore, ING is migrating customers to interactions, banks rapidly set up virtual call centers and their new digital banking channel One App / One reallocated staff. Services that were traditionally offered Web to enhance the digital experience at bank branches, such as mortgage conversations, — ABN AMRO introduced video banking in the retail were quickly rescheduled to virtual appointments segments, resulting in a higher NPS. Furthermore, through video conferencing. the bank accelerated the digital delivery of new services, such as digital signatures in commercial As opening times of local branches had to be adjusted, banking banks reported a rapid adoption of digital and mobile — Across the board, we see that banks make strategic services amongst their clients. To explain all available investments in / partner up with technology start-ups services and actions they were taking in the context of that may improve the value proposition of their COVID-19, all Dutch banks set up online portals for their financial products clients: — All banks took additional measures to actively With no alternative available customers increasingly got support customers in making the move to digital used to digital and mobile banking during the past year. banking. This group involves elderly people forced Examples of ING and ABN AMRO show that banks took to make the shift to digital by lack of other means to an active role in helping customers to make the shift contact their bank towards digital and mobile. As a result, customers rely — De Volksbank publicly emphasized the importance to less on physical interactions. This development offers keep its local branches open, next to digitally serving some banks the opportunity to close local branches its clients. The bank has a relatively large network more quickly. However, assessing added value per of physical stores, and is in an earlier stage in the location can still benefit the brand experience. digital banking transformation compared to its larger competitors

Bank Use of digital and mobile channels Branch closure

ING — Mobile interactions increased to 87% — In 2020, ING announced to close a quarter of in 2020 (2019: 82%). 40% of retail its branches and recently announced to half the customers only interact with ING by remaining number mobile phone — ING plans to expand the number of in-store service points (e.g. at Primera, The Read Shop and Bruna) from 246 to 321 ABN AMRO — 80% of retail banking clients used the — The number of ABN AMRO branches declined mobile app in 2020 from more than 500 in 2010 to about 100 in 2020 Rabobank — 66% of private customers and 82% — The number of Rabobank branches is declining of corporate customers made use of from more than 900 in 2010 to about 100–150 online channels in 2020 in the nearby future De Volksbank — No data – De Volksbank recently — Contrary to most other banks, De Volksbank commenced its 2021-2025 strategy does not plan to reduce its number of stores with increased focus on digitization of (e.g. SNS stores and RegioBank offices) services (omnichannel)

Source: analyst presentations & integrated reports (use of digital and mobile channels) and Het Financieele Dagblad (branch closure)

© 2021 KPMG Advisory N.V. State of the Banks FY 2020 | 11 Branch closure is a sector-wide trend, but differentiation In light of the ongoing trends, we offer three strategic is present where either physical branches (SNS), considerations that Dutch banks can adopt from digital- franchisees (RegioBank) or service points (ING) are only challenger banks: offered to customers. Branch closure should not be a 1. Customers are different, and so are their needs: goal in itself and needs to be considered wisely. Banks Banks should not just sell financial products, should analyse where physical presence adds value and but offer tailored solutions instead to solve the where not. Different service models can be considered customer’s problems. For example, an online ‘Fit that offer customers an optimal blend of physical and Finder’ can be introduced to assist customers in online channels. making decisions that cater their financial needs best Strategic consideration for the new reality: 2. Use data to make the value offering As a result of the digital transformation, accelerated by individualized: COVID-19, customer interaction increasingly takes place Banks can leverage big data, internet of things and through online channels. In general, Dutch customers advanced analytics to get a better understanding of are satisfied with the online services offered by banks. the customer’s physical, rational and psychological However, Dutch customers also scored their banks needs. Examples to adapt the experience lower on the quality of contact they had according accordingly include digitally targeting the customer to a survey conducted by the NVB. Banks need to with personalized offers, or customer agents that invest in the quality of online customer interaction. To change their tone of voice to match the customer’s create a memorable online experience, empathy and language understanding can be embedded to improve the quality 3. Goalsetting is key: of online customer interaction by giving customers B anks should formulate KPIs focused on both the feeling that the bank understands their personal commercial performance as well as people situation and is ‘human’ in its treatment. performance. Parameters to measure performance should include employee sentiment, customers In the new reality, online customer interactions and sentiment and commercial success digital customer experiences will become even more relevant as we expect that competition between banks will increasingly take place in this area. Furthermore, banks should prepare for a growing group of young customers that grow up with a smartphone, become increasingly tech savvy and have different expectations that need to be fulfilled by their banks.

With no alternative available customers increasingly got used to digital and mobile banking during the past year.

Dutch banks typically show strong asset-quality in the lending portfolio – is evident. The declining measures relative to European peers; with a declining trend is primarily due to a large shift to Stage 2 ratios, trend in NPL-ratio from above 3% in 2015 to below 2% especially among Rabobank, ING and ABN AMRO – in 2019 – traditionally outperforming the EU average which reported an average increase of 3.1% on this of 3.4%. However, the impact of the pandemic on the metric, relative to 2019. ABN AMRO showed the largest ability of lenders to pay back loans – particularly in the increase, and the largest proportion of Stage 2 assets, SME and corporate lending market – starts to become at 10.2% - highlighting the need to make improvement visible in the FY20 financial performance of the Dutch of asset quality a priority to limit further deteriorations in banks. Especially with government support withdrawing 2021. as the pandemic crisis is coming to an end, this trend may only continue and spread to retail loans as well. In However, while most banks experienced short-term this section, we look at selected metrics of asset quality. delays and impairments, not all banks reported increases in Stage 3 ratios; which mainly indicates that direct Deteriorating portfolio quality exacerbated by government support to borrowers prevented borrowers COVID-19 from defaulting on their loans. In the last 3 years, Rabobank has been steadily reducing its non-performing For all Dutch banks in scope, the proportion of the loans while ING and De Volksbank were able to continue lending portfolio that was performing and deemed to to operate at low levels – in particular compared to be Stage 1 in line with the EBA guidelines, decreased European averages. In contrast, ABN AMRO incurred in 2020, relative to 2019, with ABN AMRO experiencing various incidents and has an increasing amount of the strongest decline of approximately 600bps, that non-performing loans. was unexpected by the market. In fact, the increased credit risk – especially among SMEs and corporates

Figure 8 Stage 1 Ratio (2018-2020)

100%

95% 100% 90% 95% 85% Stage Stage 1 Ratio (%) 90% 80% 85% ABN AMRO De Volksbank ING Rabobank Stage Stage 1 Ratio (%) 2018 2019 2020 80% ABN AMRO De Volksbank ING Rabobank 12% 2018 2019 2020 Figure 9 Stage 2 Ratio (2018-2020) 10% 8% 12% 6% 10% 4% 8% 2%

Stage Stage 2 Ratio (%) 6% 0% 4% ABN AMRO De Volksbank ING Rabobank 2% 2018 2019 2020 Stage Stage 2 Ratio (%) 0% ABN AMRO De Volksbank ING Rabobank

4% 2018 2019 2020

Sources:3% KPMG Analysis, Annual Reports, ECB Financial Stability Review 2%4%

1%3%

Stage Stage 3 Ratio (%) 0%2% © 2021 KPMG AdvisoryABN AMRON.V. De Volksbank ING State of theRabobank Banks FY 2020 | 13 1% 2018 2019 2020 Stage Stage 3 Ratio (%) 0% ABN AMRO De Volksbank ING Rabobank 40% 2018 2019 2020 30%

20%40%

10%30%

20%0%

Stage Stage 3 Coverage Ratio (%) ABN AMRO De Volksbank ING Rabobank 10% 2018 2019 2020 0%

Stage Stage 3 Coverage Ratio (%) ABN AMRO De Volksbank ING Rabobank 2018 2019 2020 100%

95%

100%90%

85%95% Stage Stage 1 Ratio (%) 80%90% ABN AMRO De Volksbank ING Rabobank 85%

Stage Stage 1 Ratio (%) 2018 2019 2020 80% ABN AMRO De Volksbank ING Rabobank 12% 2018 2019 2020 10% 8% 12%6% 10%4% 2%8% Stage Stage 2 Ratio (%) 0%6% 4% ABN AMRO De Volksbank ING Rabobank 2% 2018 2019 2020 Stage Stage 2 Ratio (%) Figure0% 10 Stage 3 Ratio (2018-2020) ABN AMRO De Volksbank ING Rabobank 4% 2018 2019 2020

4%2%

3%1% Stage Stage 3 Ratio (%) 2%0% ABN AMRO De Volksbank ING Rabobank 1% 2018 2019 2020

Sources: Stage 3 Ratio (%) KPMG Analysis, Annual Reports, ECB Financial Stability Review, EBA/RTS/2020/07 0% ABN AMRO De Volksbank ING Rabobank 40% Figure 11 Stage 3 Coverage Ratio (2018-2020) 2018 2019 2020 30%

20%40%

10%30%

20%0%

Stage Stage 3 Coverage Ratio (%) ABN AMRO De Volksbank ING Rabobank 10% 2018 2019 2020 0%

Stage Stage 3 Coverage Ratio (%) ABN AMRO De Volksbank ING Rabobank 2018 2019 2020

Figure 12 CET1 Ratio (2018-2020)

40%

30%

20%

10% CET1 Ratio (%) 0% ABN AMRO De Volksbank ING Rabobank 2018 2019 2020

Sources: KPMG Analysis, Annual Reports

Ability to cover for defaults varies across banks Banks have strong capital buffers at the outset The variation in expectations of future economic activity, of the crisis to withstand new losses and the impact of this on the specific bank-portfolio While asset quality deteriorated, banks responded by explains the variation in provisions taken in FY20, and taking preventive measures such as not paying out thus also the Stage 3 Coverage ratios. In fact, ABN dividends. The EBA’s prudential treatment of software AMRO increased allowances significantly – relative assets also caused regulatory capital relief, which to the size of their portfolio - for (existing) Stage 3 recognizes software assets as CET1 capital instead clients to account for expected losses. Alternatively, de of pure intangible assets – providing a regulatory- Volksbank – whose portfolio is primarily composed of capital incentive to invest in software assets and thus retail loans and mortgages – decided to take relatively increasing CET1 capital. Looking at the Dutch banks, small provisions which, combined with an increase De Volksbank and ABN AMRO were the two banks that in Stage 3 loans, led to a decrease in coverage ratio. reported marginal decreases in CET1 ratio, while ING Obviously, strong collateral values (supported by ever and Rabobank showed slight increases. De Volksbank increasing house prices) explain low coverage ratios for has capital ratios that are significantly stronger than mortgage lending. Accurately being able to estimate the those of the other banks, due to its smaller size, and impact of economic activity on expected credit losses less complex offering of banking products and services. on a particular loan portfolio, and managing provisions While these CET1 ratios are strong, the question accordingly, is a key capability for banks to manage asset remains to what extent the CET1 ratios will be eroded quality and reserves well and efficiently, in FY21. in FY21 and/or will have to be additionally replenished in upcoming years.

© 2021 KPMG Advisory N.V. State of the Banks FY 2020 | 14 Considerations to manage asset quality Embrace higher standards: Hope for the best. Prepare for the worst. Embrace the higher standards applicable Adjust and manage NPL strategies: for high-NPL banks, which essentially require banks — Update strategies to reflect changes in the external to meet the expectations defined in the ECB’s NPL environment, thereby increasing capabilities to Guidance with respect to strategies, governance and analyse the dynamics of externalities and making operations (chapters 2 and 3). portfolios more flexible. — Review strategic mix of optimizing in-house workout Invest in understanding what ESG means for your capacity, outsourcing, joint ventures, structured portfolio: COVID-19 demonstrated the importance of credit and clean sales. defining a ‘new reality’ for investing, and highlighting the — Special consideration should be given to customer importance of delivering societal impact beyond financial experience and bank reputation, as the majority of returns. For a time, the immediate health and economic obligors in financial difficulties typically recover to crisis pushed the sustainability agenda to the back- become fully performing clients again. burner. However, our view suggests that — in the ‘new reality’ of the post-COVID world — environmental, social Accelerate credit programs: Start or prioritize and and governance (ESG) will increasingly become central accelerate programs that strengthen pro-active credit to the economic equation of asset-quality. management – improving capabilities to detect and act upon signals, giving banks client-level insight into the impact of actions on the bank’s overall capital and asset quality key indicators. And also enabling the bank to take preventive actions towards clients.

Hope for the best. Prepare for the worst.

GDP expected to recover in FY21 Consumer confidence linked to increased After suffering an unprecedented decline in GDP growth consumer savings – culminating with -9.2% quarterly decline in Q2 2020 Consumer confidence in the Netherlands hit an – the Netherlands began showing signs of recovery. all-time-low, leading to decreased customer-spending Among other things, the significant reduction in export too. This is also evidenced by the large growth in net of goods and services and decreased consumer customer-savings on Dutch bank accounts, of 5.5% in spending were the largest contributing factor for the FY20 relative to 2.5% in 2019. This additional liability for export-dependent Dutch economy. However, with banks places pressure on the leverage ratio, as banks key drivers of economic growth expected to recover, run the risk of attracting more deposits than they have the Dutch economy is expected to grow over FY21 – demand for loans. The recovery of consumer confidence positively impacting funding needs of the economy, and in FY21 will likely lead to a decreased savings-rate for therefore banks’ lending potential. customers, and banks are likely to notice this in their balance-sheet composition throughout FY21.

Figure 13 GDP expected to recover in FY21

8% -o- y) 4% 0% -4%

y) -8% - 8% o - -12%4% -16%0% -4% -8% Quarterly GDP Growth Quarterly GDP (%, y 1-1-2017 1-3-2017 1-5-2017 1-7-2017 1-9-2017 1-1-2018 1-3-2018 1-5-2018 1-7-2018 1-9-2018 1-1-2019 1-3-2019 1-5-2019 1-7-2019 1-9-2019 1-1-2020 1-3-2020 1-5-2020 1-7-2020 1-9-2020 1-1-2021 1-3-2021 -12% 1-11-2017 1-11-2018 1-11-2019 1-11-2020 -16% EU27 NL

Quarterly GDP Growth Quarterly GDP (%, y 30 1-1-2017 1-3-2017 1-5-2017 1-7-2017 1-9-2017 1-1-2018 1-3-2018 1-5-2018 1-7-2018 1-9-2018 1-1-2019 1-3-2019 1-5-2019 1-7-2019 1-9-2019 1-1-2020 1-3-2020 1-5-2020 1-7-2020 1-9-2020 1-1-2021 1-3-2021 1-11-2017 1-11-2018 1-11-2019 1-11-2020 20 Figure 14 Consumer confidence linked to increased consumerEU27 savings NL 10

0 30 -10 20 -20 10 -30 Consumer Confidence Index 0 -40 -10 1-1-2018 1-7-2018 1-1-2019 1-7-2019 1-1-2020 1-7-2020 1-1-2021 -20

-30 Consumer Confidence Index -40 3%1-1-2018 1-7-2018 1-1-2019 1-7-2019 1-1-2020 1-7-2020 1-1-2021 3% 2% 2% 3%1% 3%1% 2%

Annual Rate (%) 0% 3M Euribor NL Mortgage Rate NL Savings Rate -1% -1% 1-1-2017 1-7-2017 1-1-2018 1-7-2018 1-1-2019 1-7-2019 1-1-2020 1-7-2020 1-1-2021

3M Euribor NL Mortgage Rate NL Savings Rate y)

- 8% o - 4% 0% -4% -8% -12% -16% Quarterly GDP Growth Quarterly GDP (%, y 1-1-2017 1-3-2017 1-5-2017 1-7-2017 1-9-2017 1-1-2018 1-3-2018 1-5-2018 1-7-2018 1-9-2018 1-1-2019 1-3-2019 1-5-2019 1-7-2019 1-9-2019 1-1-2020 1-3-2020 1-5-2020 1-7-2020 1-9-2020 1-1-2021 1-3-2021 1-11-2017 1-11-2018 1-11-2019 1-11-2020

EU27 NL

-10

-20

-30 Consumer Confidence Index -40 1-1-2018 1-7-2018 1-1-2019 1-7-2019 1-1-2020 1-7-2020 1-1-2021

Figure 15 Low interest rates continue to place pressure on Interest Income

3% 3% 2% 2% 1% 1%

Annual Rate (%) 0% -1% -1% 1-1-2017 1-7-2017 1-1-2018 1-7-2018 1-1-2019 1-7-2019 1-1-2020 1-7-2020 1-1-2021

3M Euribor NL Mortgage Rate NL Savings Rate

Low interest rates continue to place pressure on Interest Income The squeeze on net interest margin is a trend that continued in FY20 and is expected to continue in FY21, due to expectations of continued low interest-rate environments, as evidenced by the market’s negative forward-rate for EONIA until 2026. The ECB reiterated the decision to keep ECB interest rates unchanged, in an effort to increase inflation to a healthy 2% target. Consequently, for banks, a movement to aim to source more non-interest-related income, is observable in the market. Offering improved customer experience, and aiming to enlarge fees and commission income, can help reduce dependence on the low interest rate environment.

ING felt the impact of the COVID-19 pandemic, resulting in higher provisions, incidental impairments and lower income. Despite the economic circumstances, ING’s results remained resilient with EUR 2.5 bln net profit. In fact, ING reaped the benefits of their Mobile-First strategy resulting in onboarding retail clients and higher fee and commissions. In addition, excluding all incidental costs items from the equation, ING bettered their C/I ratio.

Income & interest margins lower net income and the impact of COVID-19 causing ING’s net income declined for the first time since 2012 by higher operating expenses (including incidental items) by EUR 669 mln to EUR 17.6 bln, mainly caused by a 3.4% EUR 743 mln, namely; higher regulatory costs, goodwill decrease in net interest income of EUR 474 mln and the impairments on CGUs Retail Belgium and Wholesale impairment on ING’s stake in TMB of EUR 230 mln. Fee Banking, and impairments for (in)tangible assets, e.g. and commission income has increased. Maggie Program. However, if these incidentals are excluded, ING’s cost/income ratio would be 52.2% (FY19: ING’s net interest income decreased due to several 56.6%), which is close to their ambition of 50-52%. reasons; 1) Continuing costly customer deposits, 2) ING approaches to their target on the condition that the ING’s core lending portfolio decreased by EUR 2.5 bln, 3) economy recovers and the impact of COVID-19 lessens to Reduced possibility to reprice loans due to high liquidity avoid future impairments. driven by TLTRO-III and government support, and 4) Negative interest on liabilities increased. Loan book Consequently, net interest margin decreased to 144 bps ING’s portfolio increased 3.93% to EUR 887.5 bln (FY19: 154 bps) to the lowest level in recent years. outstandings, mainly driven by Wholesale Banking in the Netherlands and Retail C&GM in Germany. The quality ING’s net profit was heavily impacted by the COVID-19 of ING’s loan book slightly increased despite the impact pandemic and decreased by 48.0% to EUR 2.5 bln, mainly of COVID-19. The NPL ratio slightly increased, however driven by loan loss provisions and operating expenses. was sufficiently offset by an increase in investment grade loans and a decrease in non-investment grade loans. ING’s C/I substandard grade loans remained stable. The quality of ING’s has the ambition to reach a 50-52% cost/income the loan book is strong with a Stage 3 ratio of 1.7% (FY19: ratio. ING realized a cost/income ratio of 63.2% due to 1.4%).

Figure 16 FTE Development (2016-2020) Figure 17 CET1 Ratio Development (2016-2020)

60.000 60.000 20% 20% 55,901 55,901 53,431 53,431 51,943 51,50451,943 52,23351,504 52,233 50.000 50.000 15,5% 15,5% 14,7% 14,5%14,7% 14,6%14,5% 14,6% 15% 14,2% 15% 14,2%

40.000 40.000

10% 10% 30.000 30.000 FTE’s FTE’s CET! Ration (%) Ration CET! CET! Ration (%) 20.000 20.000 5% 5%

10.000 10.000 0% 0% 2016 20172016 20182017 20192018 20202019 2020

2016 201720162018 20172019 20182020 2019 2020 ING Peer INGbanks Peer banks

17,491 17,77317,49118,08817,77318,30618,08817,63718,306 17,637 66% 66% 100% 100% 156 156 7,6% 7,6%7,6% 7,4%7,6% 5,8%7,4% 5,8% 10,4% 10,4% 64% 64% 90% 90%© 2021 KPMG Advisory N.V. 154 154 State of the Banks FY 2020 | 18 15,2% 15,5%15,2%15,7%15,5%17,1%15,7% 17,1% 80% 13,9% 13,9% 80% 152 152 62% 62% 70% 70% 150 150 60% 60% 60% 60% 148 148 58% 50% 50% 58% C/I (%) 146 146 C/I (%) 40% 75,7% 40%77,2%75,7%76,9%77,2%76,9%76,9%77,1%76,9% 77,1% 56% 56% 144 144

30% Net interest margin 30% Net interest margin 54% 142 54% 20% 20% 142 10% 10% 140 140 52% 52%

0% 0% 138 138 50% 50% 2016 20172016 20182017 20192018 20202019 2020 2016 20172016 20182017 20192018 20202019 2020 NII NII Net Fee and Comm.Net Fee and Comm. Net Other IncomeNet Other IncomeNet interest marginNet interest margin ING PeerING banks Peer banks 60.000 60.000 20% 20% 55,901 55,901 53,431 53,431 51,943 51,50451,94352,23351,504 52,233 50.000 50.000 15,5% 15,5% 14,7% 14,5%14,7%14,6%14,5% 14,6% 15% 14,2% 15% 14,2%

40.000 40.000

10% 10% 30.000 30.000 FTE’s FTE’s CET! Ration (%) CET! Ration (%) 20.000 20.000 5% 5%

10.000 10.000 0% 0% 2016 2017 2016 2018 2017 2019 2018 2020 2019 2020

2016 2017 2016 2018 2017 2019 2018 2020 2019 2020 ING Peer banksING Peer banks Figure 18 Income Distribution ING (2016-2020) Figure 19 Cost-to-Income Ratio Development (2016-2020)

17,491 17,773 17,49118,088 17,77318,306 18,08817,637 18,306 17,637 66% 66% 100% 100% 156 156 7,6% 7,6% 7,6%7,4% 7,6%5,8% 7,4% 5,8% 10,4% 10,4% 64% 64% 90% 90% 154 154 15,2% 15,5% 15,2%15,7% 15,5%17,1% 15,7% 17,1% 80% 13,9% 13,9% 80% 152 152 62% 62% 70% 70% 150 150 60% 60% 60% 60% 148 148 58% 50% 50% 58% C/I (%) C/I 146 146 C/I (%) 40% 75,7% 40%77,2% 75,7%76,9% 77,2%76,9% 76,9%77,1% 76,9% 77,1% 56% 56% 144 144

30% Net interest margin 30% margin interest Net 54% 142 54% 20% 20% 142 10% 10% 140 140 52% 52%

The loan loss provisions rose by EUR 1,555 mln to EUR ESG 2,675 mln caused by the economic impact of the COVID-19 ING’s business activities have significant influence on pandemic. Wholesale banking is responsible for half of communities and the environment. Their purpose is to help the net addition to the provisions, mainly driven by various society stay ahead of the challenges they are facing. individual Stage 3 provisions and high collective Stage 1 and Stage 2 provisions. Retail is responsible for the other half, ING leverages their Terra approach to tackle environmental largely due to provisions on Retail Belgium. issues. For the social domain, ING applies the UN Guiding Principles on Business and Human Rights to ensure active Digitalization and effective management of social risk and opportunities. ING’s mobile-first strategy gained momentum due to As for governance, ING’s strategy pursues strengthening the digitalization of the society driven by the COVID-19 their leadership in the fight against climate change. pandemic. Their digital capabilities provided ING with an Consequently, in 2020, ING was rated 1st in market cap by advantage in virtually servicing their clients to meet the Sustainalytics, rated AA by MSCI ESG and rated A list for growing demand for mobile banking adding over EUR 0.5 climate leadership. mln retail customers. ING expanded their digital capabilities to insurance and investments resulting in growth in fee income.

KYC/AML developments KYC remains a high priority for all banks. In 2020 ING continued to execute and update policies and procedures; 1: ING introduced three KYC pillars that oversee customer due diligence, transaction monitoring and screening. 2: ING set up a special taskforce to monitor transactions for crime related to COVID-19. 3: ING improved KYC training by partnering up with ACAMS. 4: ING integrated their global pre-transaction screening tool to all countries in scope and joined four Dutch banks to collectively monitor transactions.

Banca d’Italia lifted its ban on ING’s client onboarding that was imposed due to poor KYC processes and compliance. ING France was also under regulatory inspection in this regard.

Despite worse forecasts earlier in the year, Rabobank achieved a net profit of EUR 1.1 billion. However, the negative consequences of the COVID-19 pandemic were clearly felt by the bank. Impairment charges increased significantly and the bank’s interest income declined due to the insecure economic environment. Apart from these extraordinary events, Rabobank continued to executed its strategy which is focused on making the organization more future proof and contributing to society.

Income & interest margins better performance of the Dutch economy than expected, Rabobank realized a net profit of EUR 1.1 billion in extensive governmental support and the composition of 2020, a decrease of 50% (FY19 EUR 2.2. billion). This Rabobank’s loan book. Vulnerable sectors in the private decline can mainly be attributed to significantly higher loan portfolio were Food service and Retail (automotive and impairment charges resulting from the COVID-19 pandemic. fashion). Furthermore, the low interest environment Rabobank is facing, is continuously pressuring the profitability of the Rabobank supported its clients in order to prevent financial bank. This is also reflected in a 9 bps drop in net interest difficulties and as a result reduced the inflow of stage 1 & margin to 130 bps. 75.9% of Rabobank’s income in 2020 2 clients. Approximately 18,000 clients received payment resulted from interest income (FY19; 71.9%). This increase holidays. Despite this support, the bank expects a further is due to a drop in other income (43%), caused by the inflow to FR&R in FY21. Around EUR 950 million of loans absence of positive revaluations due to the COVID-19 are in stage 3, of which the majority are in Wholesale & pandemic which resulted in lower income from the bank’s Rural due to a small number of larger defaults, whereas Corporate Investment division. Like most banks Rabobank only a relatively small part of stage 3 consist of the Dutch aims to further balance its income sources by improving net retail clients alleviated by governmental support. fee and commission income. The ultimate impact of COVID-19 on the non-performing Asset Quality loans of Rabobank is not yet visible. From 2018 onwards NPLs have decreased from 3.8% to 2.5% by 2020. 2020 was an extraordinary year following the major The relatively limited impact of COVID-19 so far can be increase in impairment charges (approx. EUR 1 billion) attributed to the support measures of the government and due to COVID-19 and affecting net profit. However, FY20 payment holidays. impairment charges were lower than expected due to a

Figure 20 FTE Development (2016-2020) Figure 21 CET1 Ratio Development (2016-2020)

50.000 46,78150.000 46,781 20% 20% 45,063 45,063 43,247 43,822 43,27243,822 43,247 43,272 16,8% 16,8% 16,0% 16,3%16,0% 16,3% 15,5% 15,5% 40.000 40.000 15% 13,5% 15% 13,5%

30.000 30.000 10% 10% FTE’s FTE’s CET1 ratio (%) ratio CET1 20.000 20.000 CET1(%) ratio

5% 5%

10.000 10.000

0% 0% 2016 20172016 20182017 20192018 20202019 2020 2016 201720162018 20172019 20182020 2019 2020 Rabobank RabobankPeer banks Peer banks

12,805 12,00112,80512,02012,00111,9112,0205 10,78211,915 10,782 75% 75% 100% 100% 142 142 10,4% 7,6% 7,6% 16,7% 12,9%10,4%12,1%12,9% 12,1% 90% ©90% 2021 KPMG16,7% Advisory N.V. 140 140 State of the Banks FY 2020 | 20 16,0% 16,5% 16,5% 70% 70% 80% 80% 16,1%16,0%16,7%16,1% 16,7% 14,3% 14,3% 138 138 70% 70% 136 136 60% 60% margin 65%

margin 65% 134 134 50% 50% 132 132 C/I (%) C/I 40% 40% (%) C/I 73,7% 75,9% 75,9% 60% 69,0% 69,0%71,2%73,7%71,2%71,2% 71,2%130 60% 30% 130 30% Net interest Net interest 128 20% 20% 128 55% 55% 10% 10% 126 126 0% 0% 124 124 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 50% 50% NII NII Net Fee and Comm.Net Fee and Comm. 2016 20172016 20182017 20192018 20202019 2020 Net Other IncomeNet Other IncomeNet interest marginNet interest margin Rabobank Rabobank Peer banks Peer banks 50.000 46,781 20% 50.000 45,063 46,781 43,822 20% 45,063 43,247 43,272 16,8% 43,247 43,822 43,272 16,0% 16,3% 15,5% 16,8% 16,0% 16,3% 40.000 15,5% 40.000 15% 13,5% 15% 13,5%

30.000 30.000 10% 10% FTE’s FTE’s 20.000 CET1(%) ratio

20.000 CET1(%) ratio 5% 5% 10.000 10.000 0% 0% 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Rabobank Peer banks 2016Figure 222017 Income Distribution2018 2019 Rabobank2020 (2016-2020) Figure 23 Cost-to-IncomeRabobank Ratio DevelopmentPeer banks (2016-2020)

12,805 12,001 12,020 11,915 10,782 75% 12,805 100%12,001 12,020 11,915 10,782 142 75% 10,4% 7,6% 100% 16,7% 12,9% 12,1%142 90%10,4% 7,6% 140 16,7% 12,9% 12,1% 90% 140 16,5% 70% 80% 16,0% 16,1% 16,7% 14,3% 16,5% 138 70% 80% 16,0% 16,1% 16,7% 14,3% 70% 138 136 70% 60% 136

margin 65% 60% 134

margin 65% 50% 134 50% 132 C/I (%) C/I 40% 132 73,7% 75,9% (%) C/I 60% 40% 69,0% 71,2% 71,2% 130 30%73,7% 75,9% 60% 69,0% 71,2% 71,2% 130 Net interest 30% 20% Net interest 128 20% 128 126 55% 10% 55% 10% 126 0% 124 0% 124 2016 2017 2018 2019 2020 50% 2016 2017 2018 2019 2020 NII Net Fee and Comm. 50% 2016 2017 2018 2019 2020 NII Net Fee and Comm. 2016 2017 2018 2019 2020 Net Other Income Net interest margin Rabobank Peer banks Net Other Income Net interest margin Rabobank Peer banks

C/I Digitization & Branch network Rabobank realized a reduction of 2.3% in underlying The COVID-19 pandemic has accelerated the adoption of operational expenses compared to last year. This decrease digital banking services. Employees and customers were in costs was mainly attributable to a workforce reduction forced to work from home which led to an increase in of 550 FTE and a decrease in travel and event related digital customer interactions. An indirect result of this was expenses. the acceleration of the closure of local branches. In the following years, Rabobank aims to further reduce of its local Despite this reduction in costs, Rabobank’s C/I ratio has offices network from 300 to 150 offices. risen from 63.0% in FY19 to 64.5% in FY20 as the decline in costs was lower than the decline in income. In order ESG to lower costs, Rabobank announced a further reduction Rabobank positions itself as the sustainable and of the workforce by 1,000 FTE a year for the next 5 years cooperative bank at heart due to its deep roots in food and Additionally, cost reduction needs to be achieved by the agri. The bank’s social character is reflected in its mission acceleration of digital services and further simplification of ‘Growing a better world together’ and its strategic goals to Rabobank’s governance model by concentrating all banking be a meaning full cooperative. and cooperative activities in 14 regions for the Dutch retail business. In 2020, Rabobank was rated 1st out of 390 banks in the Sustainalytics ESG Risk rating category diversified banks KYC/AML developments for a third year in a row. This recognition confirms the For some years now, KYC and AML are focus activities sustainable performance of Rabobank. of Rabobank. In 2020 alone, 800 new employees were welcomed in this compliance domain resulting in Additionally, the bank initiated and supported multiple 4,000 employees worldwide. Next to the inflow of new activities to realize a meaningful contribution to society. For employees in this domain, Rabobank invested approx. EUR example, by accelerating the build of affordable housing in 400 mln. in dedicated resources and further automation The Netherlands by teaming up with the bank’s subsidiary of processes. The bank reorganized its CDD operational BPD (Area developer). Furthermore, Rabobank renewed its structure by centralizing specialists into 8 regional centers partnership with Word Wide Fund for Nature (WWF). alleviating resourcing needed at local banks.

In 2020, ABN AMRO had a change in leadership and is preparing the organization for the new reality. The first net loss since 2010 was recorded due to an increase in impairment charges. ABN AMRO is experiencing the impact of COVID-19 on their loan book and is taking steps to improve their KYC/CDD activities. COVID-19 has also accelerated plans for further digitalization and the strengthening of the bank’s sustainable propositions to become a future-proof bank.

Income & interest margins EUR 1.21 billion in operating expenses due to one-offs for ABN AMRO’s in total income decreased by 8% to EUR 7.92 the partial phase of CIB non-core of which 64% was for billion. The combination of increased impairment charges personnel expenses. related to COVID-19, a sharp decline and subsequent rebound in oil price, and individual client cases resulted in a ABN AMRO expects to achieve a cost saving of EUR 100 net loss of EUR 45 million. COVID-19 is expected to impact million in 2021 and EUR 700 million in total savings towards the bank’s results in FY21 as well. 2024.

Net interest income has declined with 9.4% in FY20 due Asset quality to the low interest rate environment, partial phase-out of Even though the EUR 2.3 billion impairment significantly the CIB portfolio and decline in appetite for credit of retail impacted the ABN AMRO’s net profits, the charges customers. Margins are under pressure and declined to 143 were lower than expected. Moreover, ABN AMRO’s also bps. benefitted from the resilience of the Dutch economy as well as the extensive government measures. Net fee & commission income (NFCI), declined with 4.5% to EUR 1.56 billion. ICS credit card usage declined and CIB The impairment charges come from CIB which increased activities have been partially phased out. with over 400% to EUR 1.66 billion and Commercial Banking (CB) which increased with almost 300% to EUR C/I 542 million. CIB noted three exceptional client cases and C/I Ratio is with 66.4% at the highest point in 5 years due individual stage 3 impairments in the oil & gas and energy to lower income. sector, while CB noted individual stage 3 impairments for the food, shipping, and industrial goods & services sectors. Retail Banking (RB) recorded a decrease of 3% to EUR The collective impairments in stage 1, 2, and 3 are mainly 2.02 billion in operating expenses due to lower provisioning due to corporate loans and consumer loans. for AML programme. CIB recorded an increase of 10% to

Figure 24 FTE Development (2016-2020) Figure 25 CET1 Ratio Development (2016-2020)

25.000 20% 20% 25.000 18,4% 18,1%18,4% 17,7% 17,7% 17,7%18,1% 17,7% 21,664 21,664 17,0% 17,0% 19,954 19,954 13,234 20.000 20.000 18,830 18,830 13,234 17,977 17,977 15% 15%

15.000 15.000 10% 10% FTE’s FTE’s CET1 ratio (%) ratio CET1 CET1 (%) ratio 10.000 10.000 5% 5%

5.000 5.000

0% 0% 2016 20172016 20182017 20192018 2020 2019 2020

2016 2017 2016 2018 2017 2019 2018 2020 2019 2020 ABN AMRO ABN AMROPeer banks Peer banks

8,588 9,290 8,5889,093 9,2908,605 9,0937,916 8,605 7,916 68% 68% 100% 100% 170 170 6,6% 5,9% 6,3% 5,9% 6,3% 11,7% 6,6%8,8%11,7% 8,8% 66% 66% 90% © 2021 KPMG Advisory N.V. State of the Banks FY 2020 | 22 90% 165 165 19,0% 19,7%19,0% 20,3% 20,3%18,7% 18,7% 19,7% 64% 64% 80% 80%18,8% 18,8% 160 160 70% 70% 62% 62% 60% 155 155 60% 60% 60% 50% 50% 150 150 58% 58% 40% 40% C/I (%) C/I 73,1% 73,1%72,5% 75,2%72,5%74,1%75,2%145 74,1% 145 (%) C/I 69,5% 69,5% 56% 56%

30% Net interest margin

30% Net interest margin 140 140 20% 20% 54% 54% 135 135 10% 10% 52% 52% 0% 0% 130 130 50% 50% 2016 2017 2016 2018 2017 2019 2018 2020 2019 2020 2016 20172016 20182017 20192018 20202019 2020 NII NII Net Fee and Comm.Net Fee and Comm. ABN AMRO Peer banks Net Other IncomeNet Other IncomeNet interest marginNet interest margin ABN AMRO Peer banks 20% 25.000 18,4% 20% 18,1% 25.000 18,4%17,7% 17,7% 21,664 17,7%17,0% 18,1% 17,7% 17,0% 21,664 19,954 13,234 20.00019,954 18,830 15% 20.000 18,830 13,234 17,977 17,977 15%

15.000 15.000 10% 10% FTE’s CET1 (%) ratio FTE’s

10.000 CET1 (%) ratio 10.000 5% 5% 5.000 5.000 0% 0% 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 ABN AMRO Peer banks Figure2016 262017 Income Distribution2018 2019 ABN AMRO2020 (2016-2020) Figure 27 Cost-to-IncomeABN AMRO Ratio DevelopmentPeer banks(2016-2020)

8,588 9,290 9,093 8,605 7,916 68% 8,588 100%9,290 9,093 8,605 7,916 170 68% 5,9% 6,3% 100% 6,6% 11,7% 8,8% 170 66% 6,6% 5,9% 6,3% 90%11,7% 8,8% 165 66% 19,0% 90% 20,3% 18,7% 165 19,7% 64% 80% 18,8%19,0% 20,3% 18,7% 19,7% 64% 80% 18,8% 160 70% 160 62% 70% 155 62% 60% 60% 60% 155 50% 150 60% 50% 150 58% 40% 58% 73,1% 72,5% 75,2% 74,1% 145 (%) C/I 40% 69,5% 56% 73,1% 75,2% 74,1% 145 (%) C/I 30%69,5% 72,5% Net interest margin 140 56%

30% Net interest margin 20% 140 54% 20% 54% 10% 135 135 52% 10% 52% 0% 130 50% 0% 2016 2017 2018 2019130 2020 50% 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 NII Net Fee and Comm. 2016 2017 2018 2019 2020 NII Net Other NetIncome Fee and Comm.Net interest margin ABN AMRO Peer banks Net Other Income Net interest margin ABN AMRO Peer banks

Despite the fact that the impairment charges were ESG significant on the non-performing loans, ABN AMRO saw In 2020, ABN AMRO ranked in the top 10 percent of sector moderation in the second half of FY20 by the large-scale banks on the Dow Jones Sustainability Index (DJSI). government support, the wind-down of CIB non-core ABN AMRO has set operational sustainability targets for portfolio and the increase in oil price which is a positive sustainable client loans and investments and expects to development for stage 3. reach the top 5% of the banking sector in 2021 on the DJSI. And markets itself as the advisor to accelerate the KYC/AML developments ‘sustainability shift’. The Detecting Financial Crime unit has grown from ca. 2,000 FTE’s in 2019 to ca. to 3,800 FTE’s in 2020. The bank ABN AMRO aims to have all its offices energy label A expects its AML costs to peak in 2021 thereby increasing classified. By 2024, the banks aim to derive 30% of its its personnel base further to 4200 FTE’s. assets from sustainable investments and financing.

The AML-related personnel expenses increased by EUR 40 million of which about 25% was allocated to salaries. Total AML costs were about EUR 400 million and is expected to peak to EUR 425 million in 2021.

The Public Prosecutor’s investigation is expected to be finalized in HY 2021.

Digitization & branch network ABN AMRO has almost fully transitioned to videobanking. COVID-19 has further accelerated this customer channel. The bank conducted 86% of all its advisory consultations through videobanking reaching as much as 90% for its mortgage advisory.

ABN AMRO will aims to centralize its operations to advance its efficiency. By the end of 2024, the bank aims to have 90% of all high-volume processes end-to-end digitized.

In 2020, ABN AMRO reduced its number of retail branches by 17 to 103 locations. The bank expects to close 20 retail branches per year going below 100 branches by year-end of 2021.

De Volksbank experienced a tempestuous year, in which it realized a net profit of EUR 174 mln (FY19: EUR 275 mln). Additional to challenges posed by COVID-19, the bank regularly made the news because of its boardroom dynamics which resulted in the departure of the CFO and COO. Last year, a new CEO was welcomed who will be responsible to commence the bank’s strategy 2021-2025 that focuses on digitization, cost control and diversified income sources. In KPMG’s 2020 CEE research, de Volksbank’s brands scored high on Customer Experience Excellence. Of the 215 cross-sector brands that were evaluated, ASN Bank was being ranked first and SNS was being ranked 31st (second bank in the rankings).

Income & interest margins Most of the impairment charges resulted from residential De Volksbank’s total income decreased by EUR 6 mln to mortgages (EUR 29 mln) and SME loans (EUR 8 mln) EUR 923 mln in 2020 fueled mainly by lower income in related to businesses that were impacted by the lockdown. mortgage production and a further drop in market rates. Only a minor amount resulted from consumer loans (EUR 1 Consequently, net interest margin decreased to 130 bps mln), as de Volksbank only holds a relatively small portfolio. (FY19: 137 bps) to the lowest level in recent years. The overall impact of COVID-19 on the non performing Fee income represented about 5% of total income in 2020, loans of de Volksbank is not yet visible in the financial and decreased by 10% compared to the previous year. This results of FY20. The stage 3 ratio (stage 3 loans expressed was mainly due to a changed classification of distribution as percentage of total loans and advances) only showed a fees paid by RegioBank to its franchisees. Regular fees slight deterioration from 1.3% in 2019 to 1.4% in 2020. on mortgage and insurance advice have risen. As part of its new strategy 2021-2025, de Volksbank aims to enlarge C/I the share of fee and commission income by broadening its De Volksbank’s operating expenses rose by 14% in 2020. range of products and services. Six percentage point of the increase can be related to a higher contribution to the deposit guarantee scheme and Asset Quality increased staff & consultancy costs. The remaining increase As a result of COVID-19, de Volksbank had to make a can be contributed to a EUR 45 mln restructuring provision As a result of COVID-19, de Volksbank had to make a for the bank’s new strategy 2021-2025. Consequently the considerable addition to its credit loss facilities. Impairment cost/income ratio, adjusted for incidental items, increased charges were EUR 38 mln in 2020, compared to a EUR 7 to 60.3% (FY19: 57.3%). mln reversal in 2019.

Figure 28 FTE Development (2016-2020) Figure 29 CET1 Ratio Development (2016-2020)

5.000 5.000 40% 40% 35,5% 35,5% 34,3% 34,3% 35% 35% 32,6% 32,6% 4,005 3,9454,005 3,945 31,2% 31,2% 4.000 4.000 3,797 3,797 3,819 3,819 29,6% 29,6% 3,648 3,648 30% 30%

25% 25% 3.000 3.000 20% 20% FTE’s FTE’s CET1 ratio (%) ratio CET1 2.000 2.000 15% CET1(%) ratio 15%

10% 10%

1.000 1.000 5% 5%

0% 0% 2016 20172016 20182017 20192018 2020 2019 2020 2016 201720162018 20172019 20182020 2019 2020 Volksbank VolksbankPeer banks Peer banks

148 150 148 147 150 137 147 130 137 130 66% 66% 100% 100% 155 155 3,8% 5,4% 3,8%4,6%0,6%5,4%5,5%0,3%4,6%0,6%2,9%5,5%0,3% 2,9% 5,5% 4,8% 5,5% 5,0% 5,0% 90% ©90% 2021 KPMG Advisory4,8% N.V. 64% 64% State of the Banks FY 2020 | 24 150 150 80% 80% 62% 62% 70% 70% 145 145 60% 60% 60% 60% 140 140 50% 50% 94,8% 58% 58% 90,7% 89,9%90,7% 94,2%94,8%92,1%94,2% 92,1% 89,9% (%) C/I 135 135 (%) C/I 40% 40% 56% 56% 30% 30% 130 130 54% 54% Net interestmargin 20% 20% Net interestmargin 125 125 10% 10% 52% 52% 0% 0% 120 120 50% 2016 2017 20162018 20172019 20182020 2019 2020 50% 2016 20172016 20182017 20192018 20202019 2020 NII NII Net Fee and Comm.Net Fee and Comm. Net Other IncomeNet Other IncomeNet interest marginNet interest margin Volksbank Volksbank Peer banks Peer banks 5.000 40% 5.000 40% 35,5% 35,5%34,3% 35%34,3% 32,6% 4,005 3,945 35% 32,6% 31,2% 4,005 4.000 3,797 3,819 29,6% 3,945 3,648 31,2% 4.000 3,797 3,819 29,6% 30% 3,648 30% 25% 3.000 25% 3.000 20% 20% FTE’s CET1(%) ratio FTE’s 2.000 15% 2.000 CET1(%) ratio 15% 10% 10% 1.000 5% 1.000 5% 0% 0% 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018Volksbank2019 2020 Peer banks 2016Figure 302017 Income 2018Distribution2019 De Volksbank2020 (2016-2020) Figure 31 Cost-to-IncomeVolksbank Ratio DevelopmentPeer banks (2016-2020)

148 150 147 137 130 66% 100% 155 148 150 3,8%147 5,4%137 4,6%1300,6% 5,5%0,3% 2,9% 66% 100% 5,5% 155 5,0% 3,8% 90%5,4% 4,6%0,6%4,8%5,5%0,3% 2,9% 64% 5,5% 5,0% 90% 4,8% 150 64% 80% 150 80% 62% 70% 145 62% 70% 145 60% 60% 140 60% 60% 50% 140 58% 90,7% 89,9% 94,8% 94,2% 92,1% 50% 135 58% (%) C/I 90,7% 40%89,9% 94,8% 94,2% 92,1% 135 (%) C/I 40% 56% 30% 130 56% 30% 130 54% 20% Net interestmargin 54% 20% Net interestmargin 125 10% 125 52% 10% 0% 120 52% 0% 2016 2017 2018 2019120 2020 50% 2016 2017 2018 2019 2020 50% 2016 2017 2018 2019 2020 NII Net Fee and Comm. 2016 2017 2018 2019 2020 NII Net Other IncomeNet Fee and Comm.Net interest margin Volksbank Peer banks Net Other Income Net interest margin Volksbank Peer banks

The restructuring provision will be used to transition the Several CSR related initiatives have been employed in 2020. organization to a more agile way of working, resulting For instance, de Volksbank adopted ASN Bank’s objective in a flatter organization that works more efficiently. This of having a net positive impact on biodiversity in 2030. transition will lead to a reduction of about 400-500 FTE in Furthermore, the bank was the first in Europe to issue a the period 2021-2023. In FY20, de Volksbank employed a EUR 500 mln subordinated green Tier 2 bond. total of 3800 FTE. KYC/AML developments Digitization & Branch network KYC and AML is a hot topic for all Dutch banks, including The new 2021-2025 strategy focusses on digitization of de Volksbank. In July 2020, Transaction Monitoring services, cost control and diversification of the bank’s Netherlands (TMNL) was established with four other income sources. Spearheads are delivering a strong social banks in the fight against money laundering and terrorist impact, building a strong customer relationship and at the financing. According to de Volksbank, TMNL is an important same time achieve strong financial results. addition to its own transaction monitoring activities. On De Voilksbank continues to operate four brands to target a daily basis, its ‘Competence Center Client Integrity’ different customer segments. employs about 130 people. In terms of brand development, we expect that the biggest Related to de Volksbank’s compliance function, its change can be expected at SNS (more focus on young traditional focus on non-prudential laws and regulations is people, enlarging fee income by offering a broader range of currently being broadened to include prudential. Compliance products and services). Additionally, all brands will increase employed ca. 50 people in 2020, and is substantially focus on serving SME’s. expanding as a consequence of the abovementioned reason. In addition, further investments in tooling and ESG process optimization will be made. De Volksbank strives to be a social bank that contributes to ‘more financial confidence in the Netherlands’ and aspires to be ‘a leader in sustainability by thoughts and actions’. All brands, being SNS (financial resilience), ASN Bank (sustainability), RegioBank (quality of life in local communities) and BLG Wonen (home ownership for everyone), contribute to this image.

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