ABN Amro Jumps as Profit Beats Estimates; CEO Eyes Cost Cuts

  • Bank plans to slash expenses by 25%, partly by shedding jobs
  • Dutch company has already surpassed some of its targets

ABN Amro Group NV rose the most in six months after second-quarter profit beat estimates and Chief Executive Officer Gerrit Zalm announced a plan to cut costs by about 200 million euros ($225 million).

Underlying net income climbed 10 percent to 662 million euros from a year earlier, the Amsterdam-based bank said in a statement on Wednesday. That beat the market consensus of 592 million euros, according to a note by ING Groep NV. The company took a legal provision of 271 million euros in the period.

While some of Europe’s largest banks have scrapped their financial targets and reported a drop in earnings, ABN Amro has already surpassed some of its goals. Zalm on Wednesday said that the lender will seek to cut costs by 25 percent through measures such as job cuts and reiterated a plan to increase the dividend payout ratio to 50 percent in 2017.

“One has to think about finance, risk and human resources,” the CEO said at a press conference when asked about where job cuts may fall. “There’s little room to reduce compliance, because of regulatory demands.”

ABN Amro rose as much as 6.2 percent, the biggest intraday increase since Feb. 10, and was up 3.8 percent at 17.73 euros as of 1:08 p.m. The shares have dropped about 14 percent this year, partly hurt by a wider selloff after the U.K.’s decision to leave the European Union.

Net interest income, the bank’s main source of revenue, rose 5 percent to 1.58 billion euros. Loan-impairment charges increased to 54 million euros from 34 million euros a year earlier.

“Net interest income and risk costs surprised positively,” Albert Ploegh, an analyst at ING Groep NV, wrote in a note to clients.

ING, the Dutch lender investing in financial technology to reduce personnel expenses and branch costs, said earlier this month that second-quarter profit more than tripled to 1.3 billion euros, boosted by lending income and lower provisions for loan losses.

Cost Control

ABN Amro’s operating expenses were little changed at 1.3 billion euros in the second quarter, with the underlying cost to income ratio, a measure of profitability, at 57.2 percent. The bank will pay an interim dividend of 40 cents per share.

The results were lifted by “low impairment charges and an improving net interest margin, which is rare in the current low-yield environment,” NIBC Markets analyst Marcell Houben said in a note on Wednesday. He has a neutral rating on the bank.

ABN Amro reported a return on equity of 15.1 percent and a common equity Tier 1 ratio, a measure of financial strength, of 16.2 percent, 2 percentage points above the current target for next year.

The lender made provisions in the quarter to compensate clients for interest-rate swaps that backfired. Six banks sold almost 18,000 swaps to small- and medium-sized Dutch businesses between 2005 and 2010. The derivatives, designed to protect against interest-rate increases, caused financial hardship for many when the economic climate changed in the financial crisis.

Capital Buffers

European lenders have been under pressure to raise their capital buffers as regulators toughened scrutiny of riskier assets to avoid a repeat of the global financial crisis that sparked a series of bailouts. Once one of the world’s largest banks, ABN Amro was transformed under state ownership into a consumer lender focused on the Netherlands. The state sold 23 percent of the bank in an initial public offering in November.

The company will publish new financial targets once regulators “give more clarity” on so-called Basel IV rules, according to Zalm. The CEO referred to a set of regulatory requirements from the Basel Committee on Banking Supervision, some of which have already been decided on. Others are set to be announced later this year.

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