Dutch Banking Landscape

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Assessing industry trends and key performance metrics of the four largest players

HY 2019 edition KPMG Netherlands

kpmg.nl/financialservices Contents

Foreword 3

Macro economy 4

Hot topic: Anti-Money Laundering 6

Financial Performance 9

Note: the analysis in this document is solely based on public available data and information reported by the institutions such as the company’s website, interim accounts, investor day presentations and press releases. Dutch Banking Landscape 3 HY 2019 Foreword The first half year of 2019 has again been a dynamic period for banks. In our last banking update just 6 months ago, the four Dutch banks that we analyze in our report, shared a common voice on PSD2 and Open Banking, innovative Revenue generation at customer-centric initiatives, sustainability and digitalization as key topics in their annual reports. the four banks relies heavily on income Progress on customer-centric initiatives is actually being made: After NIBC and generated by the Rabobank, now ABN AMRO has also implemented an originate-to-distribute model for mortgages in order to be able to provide their customers with mortgage portfolio but compelling rates (for mortgages with long-dated interest reset periods). This their margins are will help the banks on two sides: adding fee income to their revenues and maintaining their client base. This development is fundamentally changing the negatively affected by competitive landscape for mortgage origination. the consequences of the

Over the first half year, the attention in (investor) reporting has shifted from low interest rate these new commercial initiatives to the financial performance of ING, environment and Rabobank, ABN AMRO and Volksbank, and increased scrutiny on KYC and increased costs for AML programs. compliance programs. The effect of a continuing low interest environment on total income and net interest income is felt by most banks. The four banks rely heavily on income generated by the mortgage portfolio which has healthy margins. Simultaneously pressure is felt on decreasing their cost base in order to keep a healthy cost-to-income ratio. This last element is important when wanting to keep the rates on (retail) savings and payment accounts positive (whilst depositing money at the central bank occurs at a cost). However, this may prove challenging, additional to the needed investments in KYC programs and ongoing digitalization of the current and new business.

Continued investments in anti-money laundering and sanctions compliance are needed as well. The public and the regulator place increased responsibility at banks to take on the gatekeeper role of preserving the integrity of the financial system and preventing the increase of risks associated with fraud, terrorist financing and money laundering.

In the next half year we expect the banks will continue to deal with this cost-intensive gatekeeper role on the one side and their growth ambitions on the other side.

Ferdinand Veenman Head of Financial Services KPMGNederland

© 2019 KPMG Advisory N.V. 4 Dutch Banking Landscape HY 2019 Macro economy Global economic developments have dominated the news cycle of the last year. The looming Brexit, the US-China trade war, multiple European elections and (European) government crises, they all have an impact on the playing field of (Dutch) banks. While the Dutch economy may seem to continue growing, a closer look provides mixed signals1. Growth can be ascribed to an increased level of employment and an above average consumer consumption, but a weakness can be found in the Dutch manufacturing. European Central Bank possibilities in the future, resulting in and private consumption growth, DNB ‘ECB’: Dutch economic backlash in the media. expects that developments in the housing market will have a strong Favorable economic conditions by slowdown forecasted, impact on the economic prosperity. negative interest rates cost monetary stimulus: Interest rates will remain at their current, or even lower, As illustrated before, the Dutch banks money and monetary rates at least in the first half of 2020. economy is driven mainly by stimulus deemed necessary Despite the risk of recession in the consumption. The volatility of region being low, Mario Draghi consumption creates uncertainty and Economic slowdown: While the Dutch 3 explained how low interest rates are increases the impact on the economy economy has been outperforming itself still required for a healthy economic when consumption or housing prices consistently over the past years, the EU status of the Eurozone. Markets initially are affected. believes that a weaker external reacted to this news, with the euro environment leading to lowered hitting a two-year low, as did the Dutch LTV/LTI limits are high by incoming Foreign Direct Investment, a German 30-year bond. international standards: Low interest cramped labor market, and declining rates combined with relatively high exports due to weakness in global Shift in Dutch housing LTV/LTI limits in the Dutch market trade, will lead to a decrease in GDP market remains big risk for increase the indebtedness of Dutch growth, with 1.4% forecasted in 2020 Dutch economy4 homeowners. Currently, banks are versus 2.6%in 2018. Dutch consumers expanding their lending policies, mainly have indicated to be less optimistic De Nederlandsche Bank (the Dutch due to the higher margin on mortgage regarding the economic climate for the Central Bank, ‘DNB’) identifies multiple products. Banks could be hit on their next 12 months and the financial factors in the Dutch housing and balance sheet by the economic situation of the past half year2. commercial real estate market which downturn. A hit in prices impacts the influence the financial stability. A house level of provisioning under IFRS9 Negative interest rates costs price correction can have a significant needed by the banks. banks money: Since the ECB impact on both the economy and the implemented a -0.4% rate to place needed amount of capital for Dutch Implications of climate- deposits with the ECB, a total of banks. EUR 21 billion was transferred by change regulations for European banks to the ECB, with Rising housing prices: Real housing financial stability and Germany, France and The prices are already 17% above the institutions talking point of Netherlands accounting for 70% of previous peak due to a housing market this figure and increasing the banks in which, at the moment, the demand supervisory bodies capital costs. This is part of the outperforms the supply. Dutch housing The mass re-evaluation of assets ECB’s wish to pressure banks into prices are amongst others driven by the following the implementation of policies handing out more credit to low interest environment, mortgage such as environmental sustainable consumers, to in turn stimulate the interest tax relief and high LTV/LTI limits governance (ESG), can have significant economy. This phenomenon poses compared to other European countries. an issue on the liability side where implications for balance sheets of DNB expects housing prices to keep the cost for savings increase and financial institutions and, therefore, on rising albeit at a slower rate. makes banks question whether they wider financial stability. As shown in the Furthermore, the expected increase in 5 should in turn provide negative paper of NGFS report have been interest rates to consumers which, prices exceeds income growth, further published by national and international for now, is a highly unpopular tightening the market and making it groups urging a gradual and controlled opinion. At the publication of their difficult to find affordable housing. transition, to prevent unwanted half year results, ING has not denied Amplifying cyclical fluctuations: Due consequences. that the step to a negative interest to the relation between housing prices rate for consumers is one of the 1 First hairline cracks seem to be visible (Source: Rabobank) 2 Consument minder optimistisch (Source: CBS) 3 ECB rate decision (Source: CNBC) 4 OFS voorjaar 2019 (Source: DNB) 5 NGFS, Macroeconomics and Financial Stability: Implications of Climate Change (Source: NGFS) © 2019 KPMG Advisory N.V. Dutch Banking Landscape 5 HY 2019

Figure 1: Consumer confidence Consumer confidence 35 Consumer confidence dropped further in the beginning 30 of 2019, even hitting a worrying negative confidence level from February until May. It is the first time since 25 February 2015 that the consumer confidence drops 20 below 0, however, it is still higher than the 20-year average of -3. 15 In June 2019, consumer confidence recovered due to 10 improved consumers’ outlook on the economic climate and a less negative consumer willingness to buy 5 thereby increasing consumer spending. Consumers’ 0 confidence in their future financial situation improved.

-5 The indicators show that consumers are becoming less Jun’15 Dec’15 Jun’16 Dec’16 Jun’17 Dec’17 Jun’18 Dec’18 Jun’19 negative but a lower level than the last years. Source: CBS

Figure 2: Property price index House prices 140 House prices continue to increase, resulting in an impressive price increase of 30.9% since 2015. 130 Although regional differences can be observed, all Dutch provinces show growth. 120 It is noteworthy that the average year-on-year price 110 increase decreased from 8.7% in December 2018 to 7.0% in June 2019. This may be a sign that housing 100 prices in the Netherlands have reached their top and will flatten accordingly, despite the low-interest environment. 90

80 Jun’15 Dec’15 Jun’16 Dec’16 Jun’17 Dec’17 Jun’18 Dec’18 Jun’19

Source: CBS

Figure 3: Consumer Price Index and Unemployment Inflation and Unemployment 12 As from September 2016, the Dutch Consumer Price Index, which may be seen as an important indicator of 10 inflation, continued to increase, hitting 2.8% in March 2019. This is the highest rate since 2013 and is 8 significantly higher than its European equivalent, the European Harmonized Consumer Price Index. Possible 6 explanations are the introduction of a higher VAT rate and a higher tax rate on energy in January 2019. 4 In May 2019, unemployment decreased to 4.1%, the lowest rate since 2008. Since then the Dutch 2 unemployment rate is steadily increasing, to a 4.3% in June 2019. It is uncertain how far unemployment can 0 Jun’15 Dec’15 Jun’16 Dec’16 Jun’17 Dec’17 Jun’18 Dec’18 Jun’19 continue the downward trend. Long term unemployment is decreasing. CPI Unemployment

Source: CBS

The need for effective anti-money laundering (AML) and sanctions compliance systems and controls is evident, as are the severe penalties for institutions failing to comply. Increased regulatory scrutiny and the extra-territoriality of US and UK laws are driving greater focus in this area, providing additional challenges for regulated firms. In addition to the challenge of managing the immediate interaction with the authorities, this scrutiny is also exposing weaknesses in these regulated institutions’ underlying infrastructure, data, documentation, systems & controls and resources. Leen Groen Partner Regulatory Compliance Utilizing a framework for Key elements in modern compliance KPMGAdvisory, the Netherlands compliance programs are the AML and Sanctions models used to improve risk Utilizing a framework for compliance management. These models consist of financial institutions should, as part of both the technical systems (e.g. a post- their compliance program, strategically transaction monitoring solution) as well invest in initiatives focused on the long as the elements interacting with the term, while concurrently prioritizing model like governance, policies and immediate program needs and resources. The use of such models effectiveness. To assist financial introduces model risk within institutions in maintaining and refining institutions. For this reason, KPMG has, Patrick Özer their compliance programs, KPMG has as part of the overall Financial Crimes Partner Forensic Technology developed a proprietary Financial Program framework, an underlying KPMGAdvisory, the Netherlands Crimes Program framework that AML and Sanctions model validation consists of eight components, with methodology. governance and culture at its core6. As financial institutions advance in their financial crimes compliance journey, their compliance activities shift from responding and remediating to more proactive prevention and detection. This allows for greater effectiveness, efficiency, sustainability, and agility. And it also helps institutions to think about compliance not just as a cost of doing business, but as a competitive advantage.

6 The KPMG framework integrates the U.S. Federal Sentencing Guidelines suggestions for compliance programs as a foundation and goes beyond those concepts to incorporate international regulatory AML, Sanctions and Anti-Bribery and Corruption (ABC) requirements, guidance, and leading initiatives by peers.

A proven model validation D. Performance and effectiveness – methodology Determine whether model limitations and assumptions are still appropriate. Model Validation: Our methodology is designed in line Key activities of this component will Being one step with AML/CTF and Sanctions include ongoing verification, ahead of the regulatory requirements and sensitivity testing, performance industry standards and has been tuning, and quantitative and qualitative regulator created based on our extensive benchmarking. For Sanctions experience in transaction transaction filtering as well as client monitoring validation engagements screening, both exact terms as well In August 2017, DNB issued its with a number of global financial as list name permutations are applied guidance on the ‘Post-event institutions, including (system) to the Sanction systems for transaction monitoring process for banks in the Netherlands. benchmarking purposes. banks’7. Additionally, DNB conducted a series of sanctions- Our methodology is based on five E. Outcomes analysis and reporting – related thematic examinations. key pillars: Evaluation of the alert investigation processes as well as a detailed review Recent signals from the market A. Governance – Review the bank’s show a trend, as the regulator is of the MI reporting, suspicious activity governance framework related to reporting and escalation processes. now taking the next step by transaction monitoring, transaction explicitly mentioning model filtering and client screening, validation in the updated guidance including policies and procedures, Technical testing activities on AML/CTF and Sanctions and roles and responsibilities, resources displaying its interest vis-à-vis and training, for comparison against Model Validations include highly banks to evaluate the performance existing authoritative standards for technical testing activities to and effectiveness of implemented compliance and controls programs. determine whether the model transaction monitoring, for anti- functions as designed. Examples are: B. Conceptual soundness – Assess money laundering and counter- the quality of the model design and Technical code review terrorist financing (AML/CTF) and construction, and validate that the Technical code is reviewed, based on sanctions client screening and documented judgments used in both the description as well as the transaction filtering systems. This model design follow sound regulatory implementation of the code in the trend continues to place the requirements and industry practice. system. Technical implementation financial industry under further Review the risk evaluation, needs to be a correct representation increased regulatory scrutiny. rules/settings assessment and the of the conceptual setup. assessment of developmental Different banks have been Control structure testing evidence (or supporting analysis) that approached by regulators to provide supports the model development. Designing and applying test cases to more insight into the maturity level exercise the different logical of the transaction monitoring, client C. Data, system and process conditions specific to the business screening and transaction filtering validation – Assess whether data rules and technical rules based on the systems in place. Performing a feeds and information from ancillary conceptual design, including boundary model validation of the compliance systems are appropriately integrated value analysis and replication of rules models will provide the bank with into the monitoring and filtering elements. systems. the confirmation it seeks and – if Sensitivity testing performed adequately – this will Test the systems to assess its core functionality is working as intended. System thresholds are increased/ also enhance performance and For example for a transaction decreased in discrete intervals and increase effectiveness of the monitoring system, rules may be alerts are compared to the baseline corresponding compliance (independently) replicated based on number of alerts. systems. documentation to determine if they Fuzz testing are implemented and working as Testing input data containing designed. potentially invalid or illogical variables, or input around the edges of equivalence classes to determine if the system can gracefully handle these cases. Rule replication A selection of scenarios and related technical rules will be independently replicated based solely on the documentation containing the 7 DNB, Post-event transaction monitoring process for banks (Source: DNB) scenario’s design, logic and parameters.

© 2019 KPMG Advisory N.V. Dutch Banking Landscape 9 HY 2019 Financial performance 10 Dutch Banking Landscape HY 2019 Interest margins remain positive for banks, costs and total income are more volatile

In the first half of 2019, the Dutch banks had difficulty maintaining their level of net income. ING and Volksbank have increased their income from non- interest earning activities, but Dutch banks remain reliant on interest bearing assets. Banks rely heavily on new mortgage production to increase margins and accompanying income, but the question is for how long this will be sustainable. If growing income may become more difficult in the future, increased focus will be needed on the costs involved in running the business. Up until now, half of the banks is close to their target ratio.

Return on Equity Return on Equity (RoE) has been a difficult KPI to perform well on for the last few years. For the Dutch banks, RoE is an interesting KPI to compare, Figure 4: Return on Equity (HY 2015 – HY 2019) due to their different nature of 17 Rabobank* ownership. ING 16 ING and ABN AMRO, the two listed ABN AMRO Dutch banks, have a RoE target of a Volksbank minimum of 10%. They outperform 15 compared to their target and also 14 outperform their peers (see figure 11 & 21, resp.) but have difficulty 13 improving their return in this challenging environment. Ralph 12 Hamers, CEO of ING Group, states that RoE is foremost improved by (%) 11 focusing on the return, and that the RoE Cost-to-Income (C/I) ratio is of less 10 concern. 9 Volksbank, on the other hand, has a more conservative RoE target of 8%. 8 The rationale behind this is the large capitalization, however, the RoE has 7 been declining for years. Volksbank’s targets have to be seen in conjunction 6 with their strategy and their owner: the Dutch state. In the second half of 5 2019 the state (by means of the NLFI) HY16 HY17 HY18 HY19 will give an update on the current Source: Half year reports affairs regarding *Rabobank does not publish RoE data for HY 2016 and HY 2017 Continues on the next page … © 2019 KPMG Advisory N.V. Dutch Banking Landscape 11 HY 2019

a possible IPO. Possible buyers will (e.g. OneApp for ING in Belgium), take the RoE into consideration. maintenance and downscaling of Figure 6: Total Net Income legacy systems, and digitalization of (EUR mln) Cost-to-Income ratio the inner and outer workings of the Total net income & Y-o-Y change bank. Getting a grip on the C/I ratio – the amount of euros spent for every euro Compared to the peer group, ING, of revenue – remains difficult in the ABN AMRO and Volksbank are industry. Historically, banks have had outperforming. Rabobank needs more difficulty getting the C/I ratio down to time lowering the C/I ratio but already their own set targets. Based on the came a long way since a few years + 3.1% current figures, all banks will likely ago. Total FTE has been declining have their 2020 objectives out of since a few years now, due to range due to multiple factors. Main reorganizations, but has somewhat factors that influence the C/I ratio are: stabilized in 2019. The extra manpower needed for AML, CDD, 9,241 - Regulatory costs: Increased Compliance and IT, will put regulatory costs (levies) and effort Rabobank’s target at risk in terms of needed to comply to reporting their C/I ratio. regulations and oversight. - 4.4% Based on the analyst presentations, - Compliance costs: Expected ING and ABN AMRO clearly see the increase in compliance costs 5,763 improvement of the C/I resulting from following fines in the recent years an increase in income. Rabobank and KYC programs where scaling focuses on costs, and incremental up on FTE is apparent. - 4.6% changes are noticed every year. - IT costs: Continuing investments Volksbank is very close to their target 4,403 in customer-centric environments of 50-52%.

471 - 1.9%

Figure 5: Cost-to-Income ratio (HY 2015 – HY 2019) ING Rabobank 78 ABN AMRO Volksbank Rabobank 76 ING Source: Half year reports 74 ABN AMRO Volksbank Interestingly, total net income is 72 down for three out of four banks. 70 The paradox is that banks name the low interest environment as the 68 main actor for this decrease but 66 also state that new production of mortgages may offset the 64 decrease. C/I (%) C/I

62 However, redemptions on mortgages have increased and 60 continuous competition from (non- bank) mortgage lenders creates a 58 difficult environment to increase 56 lending and offset the reduction of loan books. 54

0 HY16 HY17 HY18 HY19

Source: Half year reports

Net interest income vs. experimenting with offsetting the Although ABN AMRO is costs they have on deposits (due to outperforming its competitors in Other income the low interest rate environment) by terms of NIM, they have issued a Figure 7 shows the stark difference increasing (retail) banking fees. warning for the coming year. With the current interest rate environment between the three large Rabobank has seen a decline in other continuing, they expect net interest (international) banks and Volksbank in income due to the sale of FGH and income to decrease by EUR 20 mln terms of income. Volksbank has a BPD Marignan activities. Commission for every quarter, starting in 2020, sole focus on retail customers and on payment accounts increased reflecting lower deposit margins. therefore has less diversification in somewhat (2%), as seen at ING. terms of income streams separate On top of that, analysts indicate that from interest income. Net interest margin they are not sure if the continued The expectation is that with the The net interest margin (NIM) is an higher spreads on mortgages can introduction of PSD2 and competition important indicator, especially with persist for a long term if interest rates from Fintechs, banks should create the increased emphasis by bank remain this low. The Netherlands possibilities of gaining other fee, directors to put forth the low interest shows a higher mortgage spread than commission and other income (e.g. environment. Thus far the results surrounding countries, indicating that for services related to financial indicate that banks do well on it might not be possible to keep planning, financial resilience, transferring the costs of the low increasing NIM by new mortgage brokerage and other product advice). interest rate environment to the client production. ING and Volksbank have seen an (e.g. by not pegging the interest rates increase in other income (8.2% and on mortgages to the ECB rate). 16%, resp.). Volksbank attributes the Volksbank and Rabobank have trouble increase mainly to higher income maintaining NIM growth. Rabobank from payment transactions and higher marks that this is due to a low margin commissions earned from mortgage on savings and payment accounts. advice. ING attributes this to higher Volksbank argues that new mortgage retail fees, mainly because banks are lending causes lower net interest margin.

Figure 7: Net Interest Income vs. Other income Figure 8: Net Interest Margin (HY 2016 - HY 2019) 100% 170 6%

90% 165 25% 27% 26% 80% 160 70% 155 60% 150 50% 94% NIM (bps) NIM 40% 145 75% 73% 74% 30% 140

20% 135

10% 130 0% 0 ING Rabobank ABN AMRO Volksbank HY16 HY17 HY18 HY19 Other income NII Rabobank ABN AMRO Source: Half year reports Source: Half year reports ING Volksbank

© 2019 KPMG Advisory N.V. A closer look at individual performance 14 Dutch Banking Landscape HY 2019 ING half year results ING showed decent results for HY 2019. Continued business growth, higher treasury-related revenues and a single receivable of EUR 79 mln related to the insolvency of a financial institution drove higher net income. However, this was offset by an increase in operating expenses, resulting in a slightly lower net profit of EUR 2,556 mln, down 3.7% from HY 2018.

Net interest income and net Return on Equity Cost-to-Income ratio interest margin Net income of ING increased from ING’s HY 2019 net operating Net interest income (NII) increased by EUR 8,940 mln in HY 2018 to expenses increased by 4.1%, 0.8% to EUR 6,953 mln, which was EUR 9,241 mln HY 2019, which compared to HY 2018, to EUR 5,238 mainly driven by higher interest reflects a 3.4% increase. ING’s mln. This is mainly due to an increase results on customer lending due to underlying RoE remained stable at of EUR 105 mln in expenses excl. volume growth and improvement of 10.8%, which is up from 10.4% Q2 regulatory expenses, which was residential mortgages’ interest 2018 and slightly higher than the partially driven by higher KYC-related margin. This reflects the Dutch trend average RoE of its peers of 10.5%. costs (global increase to >3,000 of banks putting more focus on This is still in line with its financial employees) and a restructuring mortgage production as a ambition to realize an RoE of 10-12%. provision related to agile consequence of higher margins. transformation in Germany. This also affects the net interest CET1 ratio Regulatory expenses remain stable margin (NIM). Volatile results in Due to revisions of internal models with a decline of EUR 1 mln YoY. Financial Markets and lower interest following Basel IV regulation, The Cost-to-Income ratio remained margins on non-mortgage lending and Operational RWA went up by EUR 6.4 fairly stable at 56.7% for HY 2019 customer deposits were offset by bln quarter-on-quarter, resulting in a compared to 56.3% for HY 2018. This improved interest results on HY 2019 CET1 ratio of 14.5%, is considerably lower than its peers residential mortgages and a lower compared with 14.1% HY 2018. This and reflects ING’s ambition to have a average balance sheet. As such, the is above the SREP requirement of stable C/I ratio of 50-52% in 2020. NIM increased from 151 bps in 11.81%, but still lower than the peer This target is still very ambitious. HY 2018 to 154 bps in HY 2019. average of 21.4%. KYC Deep dive ING’s leverage ratio of 4.3% is exactly Business innovation Initially launched in 2017, the KYC the same as on 30 June 2018 and well program will run until the end of 2020. ING’s innovation activities focus on above ING’s goal of 4.0%. enhancing the customer experience. Managing non-financial risks has the In the first half of 2019, ING With the first stage of Basel IV coming highest priority within ING. As introduced several innovations, i.e.: into effect on 1 January 2022, ING mentioned above, in the first half of - personal money management strives to meet a CET1 ratio ambition 2019, ING increased the number of features in Germany & Poland; of 13.5%. With the HY 2019 results, FTE working globally on KYC-related - Apple Pay functionality in the ING has a strong capital base and is activities to >3,000. Netherlands, Romania and Spain; well positioned to meet this ambition, The global KYC enhancement - integration of voice-activated although management actions are program includes, e.g.: Google Assistant in Belgium and deemed necessary to continue in - internal assessments; Poland. 2020. - streamlining of KYC operations; - cooperation with authorities, other Furthermore, the UK-based Yolt app banks, law enforcement and surpassed 900,000 users and regulators to increase and improve expanded to France and Italy. ‘know your customer’-related activities; - development of (AI-based) tools. KYC remains a politically relevant subject where problems from the past need to be resolved in order to be compliant.

Figure 9: Net interest margin development (in bps)

155

150

145

140 HY 2016 HY 2017 HY 2018 HY 2019

ING Peer banks

Source: Half year reports

Figure 10: Cost-to-Income ratio development 70

40 HY 2016 HY 2017 HY 2018 HY 2019

ING Peer banks

Source: Half year reports

Figure 11: RoE development8 Figure 12: CET1 ratio development Figure 13: FTE development9 18 22 60,000 53,525 16 20 51,833 51,342 52,189 18 50,000 14 16 14.5 14.5 12 14.2 40,000 14 13.1 10 12 30,000 8 10 8 6 20,000 6 4 4 10,000 2 2 0 0 0 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19

ING Peer banks ING Peer banks ING

Source: Half year reports Source: Half year reports Source: Half year reports

8 For HY 2017 and HY 2018, the results of only four out of five peer banks are available and therefore included in this peer bank average. 9 Due to the unavailability of HY results of the majority of the peers, peer banks are not included.

© 2019 KPMG Advisory N.V. 16 Dutch Banking Landscape HY 2019 Rabobank half year results Rabobank’s net profit has decreased to EUR 1.2 bln in HY 2019. Increased (provisions for) credit losses, the absence of non-strategic income from FGH and BPD Marignan, together with the low interest environment, explain the decrease in net profit. Continued attention to costs provide a lower C/I ratio, which is still higher than its Dutch counterparts. Net interest income and Net KYC Deep dive Fundr: Fundr is the direct lending interest margin venture of Rabobank that has been Similarly to other banks, Rabobank is established this year. It is expected Interest income has increased, mainly also increasing its efforts in the KYC that thus far the loan origination is due to loans and advances to programs. Increased scrutiny from marginal, but Rabobank has not customers (2.2%). However, the government and regulatory started marketing this venture much Rabobank’s costs on cash deposits bodies, including fines (e.g. yet. Loans up to EUR 250,000 can be from customers have increased Rabobank’s EUR 1 mln fine in requested online and within (10.5%), due to a higher inflow of February 2019), have made this a top 15 minutes a pre-approval is shared. deposits (and a higher average priority. Compared to competitors (i.e. balance sheet total) and the fact that Rabobank indicates that higher New10, Funding Circle), Fundr is late the ECB rate is below zero but Dutch investments for Compliance/CDD are to the market but has high potential banks still pay a positive savings rate expected (e.g. for smart software – due to the large SME customer base to its retail customers (0.03% p.a.). robotics) as well as further of Rabobank. Margins on new lending are stable, enlargement of the group by 1,600 Rabo&Co: In the previous update, we leading to a compensation for the CDD specialists worldwide. This year stated that increasing non-interest costs spent on savings and current it has already influenced the income is of the outmost importance accounts. administrative expenses. to banks, due to the dependency on the large mortgage book and the This resulted in a decrease by 1% of Introduction of Vista, Fundr influence of the low interest rate NII to EUR 4,212 mln in the first half and Rabo&Co environment. With Rabo&Co, year of 2019, with a slightly lower Rabobank initiates a platform where NIM of 140 bps (HY 2018: 141 bps). New initiatives were introduced to the market aimed at widening the product entrepreneurs can connect to private Cost-to-Income ratio offering of Rabobank. individuals for financing needs. These loans are offered together with As shown in our previous updates, Vista Hypotheken: Vista has been Rabobank themselves. Rabobank puts great focus on cost introduced in April this year next to reduction but shows fluctuating the existing offering of mortgages CET1 ratio results. The first half year of 2019 was under the Rabobank and Obvion label. positive in that regard; C/I ratio is Interestingly, Vista is not available at The CET1 ratio decreased by 0.2% to 62.3% compared to 62.9% last year the regional offices but can only be 15.8%, which is still well above the due to lower staff costs (-2%) whilst found at the intermediary offices 14% target. The decrease is mainly total staff increased by 65 FTE throughout the Netherlands. The due to an increase in RWA. compared to year-end 2018, which is target group is first-home buyers and will be financed by external funders. still lower than one full year ago. Noteworthy, ABP has pledged an Administrative expenses (accounting investment of EUR 800 mln (of which for 37% of total operating expenses) 500 mln is directed to sustainable have dropped by 10%. The main mortgages) through APG. reason for the decrease lies in Leasing and Real Estate. This is due to the phasing out of non-strategic operations and integration of certain business activities.

Figure 14: Net interest margin development (in bps)

155

150

145

140

135

130

125 HY 2016 HY 2017 HY 2018 HY 2019 Rabobank Peer banks

Source: Half year reports

Figure 15: Cost-to-Income ratio development

80 75 70 65 60 55 50 45 40 HY 2016 HY 2017 HY 2018 HY 2019 Rabobank Peer banks

Source: Half year reports

Figure 16: RoE development10 Figure 17: CET1 ratio development Figure 18: FTE development11 18 22 60,000 20 16 50,103 18 50,000 14 44,698 43,623 15.8 15.8 41,926 16 14.7 12 40,000 14 12.4 10 12 30,000 8 10 8 6 20,000 6 4 4 10,000 2 2 0 0 0 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19

Rabobank Peer banks Rabobank Peer banks Rabobank

Source: Half year reports Source: Half year reports Source: Half year reports

10 For HY 2017 and HY 2018, the results of only four out of five peer banks are available and therefore included in this peer bank average. Rabobank does not publish RoE data for HY 2016 and HY 2017 11 Due to the unavailability of HY results of the majority of Rabobank’s peers, peer banks are not included.

© 2019 KPMG Advisory N.V. 18 Dutch Banking Landscape HY 2019 ABN AMRO half year results ABN AMRO reported EUR 1,171 mln in net profits over the first half year of 2019, with Q2 2019 profits largely exceeding the expectations of analysts. These higher profits were the result of increased interest income, one-off receivables (one of which was the sale of mortgage administrator Stater) and moderate level credit provisions. However, ABN AMRO’s half year results mainly dominated headlines because of a EUR 114 mln provision the bank was forced to recognize in order to re-evaluate the CDD status of its retail clients. Net interest margin Return on Equity KYC Deep dive Despite challenging interest rates, Net income of ABN AMRO increased Similar to its peers in the Netherlands, Q2 2019 net interest income by 1% year-on-year (YoY) to ABN AMRO has increased its CDD increased by 2% to EUR 1,681 mln, EUR 2,321 mln in Q2 2019. The operations. Since 2013, CDD reflecting lower liquidity management underlying return on equity slightly headcount has tripled, currently costs and various other incidental decreased to 11.4% from 12.5% over employing over 1,000 FTE. Its effects. NII is largely Dutch based, HY 2018. Interim dividends are set at operations focus on four main topics: with 84% being generated in the EUR 0.60 per share, totaling 50% of - Client identification and Netherlands, 9% in the rest of Europe the bank’s profit over the first half verification; and the remaining 7% in the rest of year. - Know Your Client; the world. However, NII for HY 2019 - Risk Assessment; has decreased by 2.2%. With an Cost-to-Income ratio - Transaction Monitoring. accompanying decline in net other Over the first half year of 2019, ABN ABN AMRO has reviewed the CDD income (-10.9%), total net income AMRO improved its C/I ratio. The status of its main Corporate and decreased by 4.6%. bank started the year with a ratio of Institutional Banking, Private Banking The net interest margin 4Q rolling 63.8% (or 60.2% if regulatory levies and high-risk retail clients. DNB has average slightly increased to 164 bps would have been equally divided over now determined that the bank has to in HY 2019, from 162 bps in HY 2018. the year), but managed to decrease review all Dutch retail clients. that number to 56.4%. That is still Consequently, ABN AMRO was CET1 ratio higher than its Q2 2018 figure of bound to make an additional provision. 52.9%. The average C/I ratio over the ABN AMRO’s capital position Upon non-compliancy, sanctions such first half year was 59.9%, which is remains relatively strong, with a CET1 as instructions or fines may be still higher than – but on track for – its ratio of 18.0%; the CET1 ratio imposed by authorities. ambition of 56% to 58% for 2020, showed a slight decrease from reflecting a cost base of EUR 5,000 ‘Banking for better’ 18.3% for Q2 18. The Basel IV CET1 mln. Personnel expenses continue to ratio remained largely unchanged ABN AMRO’s strategy – Banking for trend down, reflecting lower FTE versus year-end 2018 (13.5%), better – focuses on three main pillars: levels. IT expenditure will be lowered excluding profit over the first half Sustainability, Customer experience until an IT C/I ratio of 12% to 13% is year. ABN AMRO has set its internal and Future-proof bank. As a result, achieved. ABN AMRO will continue CET1 ratio target at 17.5% to 18.5%, ABN AMRO has, among other its cost savings programs and but will adjust its ambition depending initiatives, introduced a front-office remains focused on its financial on possible new requirements from tool to improve sustainability targets in a more challenging regulators. dialogues with its clients, improved environment, dominated by NPS by further increasing its exposure The leverage ratio remained stable at historically low interest rates, a in video banking for all segments, and 4.2%. volatile global economy and increased progressed in centralizing, regulatory and compliance costs. standardizing and automating its mid- ABN AMRO recognized an additional and back-offices. Current CEO Kees provision of EUR 114 million, which van Dijkhuizen will step down at the reflects the bank’s commitment to end of his period in 2020. The strengthen KYC/AML capabilities Supervisory Board is currently in the across all its businesses and Retail in process to recommend his successor particular. to the General Meeting of Shareholders.

Figure 19: Net interest margin development (in bps)

165

160

155

150

145

140 HY 2016 HY 2017 HY 2018 HY 2019 ABN AMRO Peer banks

Source: Half year reports

Figure 20: Cost-to-Income ratio development

40 HY 2016 HY 2017 HY 2018 HY 2019 ABN AMRO Peer banks

Source: Half year reports

Figure 21: RoE development12 Figure 22: CET1 ratio development Figure 23: FTE development13 18 22 30,000

16 20 16.2 18.3 18.0 18 17.6 14 21,939 16 20,756 12 20,000 19,215 14 17,952 10 12

8 10 8 6 10,000 6 4 4 2 2 0 0 0 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19

ABN AMRO Peer banks ABN AMRO Peer banks ABN AMRO

Source: Half year reports Source: Half year reports Source: Half year reports

12 For HY 2017 and HY 2018, the results of only four out of five peer banks are available and therefore included in this peer bank average. 13 Due to the unavailability of HY results of the majority of ABN AMRO’s peers, peer banks are not included.

© 2019 KPMG Advisory N.V. 20 Dutch Banking Landscape HY 2019 Volksbank half year results True to the intentions of the current Dutch cabinet, state-owned Volksbank is exhibiting a conservative performance, improving its cost/income ratio and exceeding the internal and external capital ratios targets by far. Interest income has decreased by 3% but non- interest income has grown. Volksbank has a high reliance on retail activities and may therefore be hit even harder if retail deposit rates will drop below zero, or if mortgage rates will eventually follow the steep decline of interbank/market rates. Only time will tell. Income and reliance on Cost-to-Income ratio KYC Deep dive mortgages In the last update, Volksbank had an Volksbank is the only of the four Volksbank is the only of the four increase in the C/I ratio to 58.7% for banks with little to no news around banks where net interest income has the full year. In the first half year 2019 KYC and/or compliance issues. not increased compared to HY 2018. it declined to 54.3%, which is getting Volksbank has a very small portfolio A decrease of 3% (EUR -13 mln) is closer to their 50% to 52% target of credit granted to SMEs (EUR 3 bln) mainly due to the lower margin on range. It should, however, be noted but still has 1.53 mln retail new mortgage production compared that Volksbank tends to have a customers. Volksbank states that the to the existing book, as well as significantly higher C/I ratio in the ongoing changes in new laws and increased (early) renewals. This also second half year (approx. 3% to 4% regulations urges them to review influences the net interest margin higher). their compliance function in the coming period. (NIM), which drops from 147 bps to In terms of cost control, Volksbank 140 bps over the last year. Six seems to be on the right path. The Shift in focus months ago, Volksbank had a YoY number of external employees has decrease of 2% in net interest decreased by 16% to 678 FTE and Interestingly, Volksbank put a lot of income (NII). overall personnel and marketing costs focus on the financial resilience and have decreased too. Volksbank earns most of its interest innovation in their FY 2018 update, but this is hard to find in their 2019 income from its mortgage book, CET1 ratio and Return on whereas other banks have more interim report. In the current resilience due to their wholesale Equity communications, climate-related lending activities. subjects are important. Volksbank has Volksbank has a very high CET1 ratio published a ‘Green bond framework’ Even though the redemptions are (37.1%), mainly due to the significant which is the groundwork for the higher than expected, Volksbank still capital position that was initially launch of such a bond. They have a managed to expand its mortgage funded by the state. Volksbank has 41% climate neutral balance sheet portfolio, but lost market share due to restated its CET1 target at 19% in and ASN is targeting a positive the fierce competition that is going on order to comply with the new impact in terms of biodiversity in in the current Dutch housing market. Basel IV regulation. 2030. Unlike Rabobank, Volksbank has not This gives room for a possible seen an increase in impairments on Sl!m, Volksbank’s financial resilience dividend payout to the state and the mortgage portfolio and the app, is still in its Beta version and reducing the CET1 ratio. average LtV of mortgages declined other innovative projects are still in again to 68% (FY 2018: 70%) which is Furthermore, the Return on Equity the startup phase, and will focus on probably attributable to rising housing (RoE) of 8.6% is fairly low. However, the mortgage chain and digital prices. with a smaller Tier1 capital position, identity. It will be difficult for this KPI will automatically rise. Volksbank to distinguish themselves from the competition in this regard.

Figure 24: Net interest margin development (in bps)

155

150

145

140 HY 2016 HY 2017 HY 2018 HY 2019 Volksbank Peer banks

Source: Half year reports

Figure 25: Cost-to-Income ratio development 70

40 HY 2016 HY 2017 HY 2018 HY 2019

Volksbank Peer banks

Source: Half year reports

Figure 26: RoE development14 Figure 27: CET1 ratio development Figure 28: FTE development15 18 40 5,000 37.1 16 35 34.1 34.3 4,188 3,961 3,926 14 4,000 3,693 30 29.2 12 25 3,000 10 20 8 2,000 15 6 10 4 1,000 2 5

0 0 0 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19 HY16 HY17 HY18 HY19

Volksbank Peer banks Volksbank Peer banks Volksbank

Source: Half year reports Source: Half year reports Source: Half year reports

14 For HY 2017 and HY 2018, the results of only four out of five peer banks are available and therefore included in this peer bank average. 15 Due to the unavailability of HY results of the majority of Volksbank’s peers, peer banks are not included.

KPMG Peer Bank has been built using data starting in 2013 from European Banking Authority (EBA) stress tests and transparency exercises, which provide detailed bank-by-bank data on capital positions, risk exposure amounts and asset quality on over 130 banks from 24 countries of the European Economic Area, yielding over 150,000 different data points. KPMG Peer Bank offers a number of distinguishing features: - Basel IV Calculator - Flexible Peer Grouping - Ratios and indicators benchmarking - Data export and delivery Contact KPMG’s Banking Update team for more information

Ferdinand Veenman Lennart de Vries Joost Lensen Head of Financial Services Strategy & Operations FS Financial Risk Management Partner, KPMG Nederland Director, KPMG Nederland Senior Manager, KPMG Nederland Tel: +31 (0)20 656 8586 Tel: +31 (0)20 656 2930 Tel: +31 (0)20 656 8455 Mob: +31 (0)6 2254 7497 Mob: +31 (0)6 1187 8596 Mob: +31 (0)6 2128 4207 E-mail: [email protected] E- mail: [email protected] E-mail: [email protected]

Jelle Dijkers Maarten den Dunnen Nick Reijnen Strategy & Operations FS Strategy & Operations FS Strategy & Operations FS Senior Consultant, KPMG Nederland Senior Consultant, KPMG Nederland Consultant, KPMG Nederland Tel: +31 (0)20 656 7620 Tel: +31 (0)20 656 7109 Tel: +31 (0)20 656 8608 Mob: +31 (0)6 1064 3981 Mob: +31 (0)6 8260 7135 Mob: +31 (0)6 2228 2796 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

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