Q2 2007 ABN Amro Holdings Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good afternoon, ladies and gentlemen. Welcome to the ABN Amro second quarter results 2007 presentation. (OPERATOR INSTRUCTION) I would now like to turn the call over to your host, Mr. Rijkman Groenink.

HUIBERT BOUMEESTER, CFO, ABN AMRO: That was good, thank you. What we've got to discuss with you of course is the first half '07 results. We'll be joined shortly by Rijkman Groenink. The response to the discussion perhaps is around the operating performance. We have a very select audience here at home. We are joined in the webcast but we still have -- it remains select. But I have to plead guilty, as well, this morning. So I think we'll just [go ahead].

The first thing that we would like to notice from the operating results in the first half '07 is that they do show a pretty strong performance in conditions of corporate uncertainty. We're going to first discuss those. Then I would like to take you through the year of delivery discussion and Rijkman will address the strategic options explored section. If you have any questions as we go along please do ask and I will try to answer.

The first half results of '07 show a strong performance and why do we say that? The reported revenue growth 12.6%. When adjusted, and of course we have adjusted for a number of items that you can see footnoted on the bottom of the page, is actually 14.3%, which has been driven by increase in operating income in all Bus. We have, of course, seen a strong underlying performance in the [new] global markets.

We had also seen, on a reported basis, expenses went up 14%, but when adjusted at 8.6%. Of course leading to well below cost growth relative to revenues, leading to a very significant increase in reported. Operating result is 9.1% but particularly up 29.1% in terms of the adjusted operating result. That again in turn then leads to a 3.6 percentage point improvement in the adjusted efficiency ratio to 68.5% for the first half.

That in turn, of course, leads to a reported profit which is marginally down at 1.4%, but on an adjusted basis is up by 13.4% to EUR2.39b. And that is despite higher taxes and loan loss impairments as a result obviously of some of the BUs I had already alluded to, but also Asia, Latin America and Europe. And we see indeed that the markets business unit has led the further driving of increased operating profit significantly.

That's where I would like to start and sort of finish the first summary of the results. Of course there is a comparison that we've made Q on Q but we remain, as we have said, well on track to beat the 2007 EPS target of EUR2.3 on an adjusted basis. We do that from a position of capital strength, 6.12 core Tier 1 and an 8.17 Tier 1 ratio and therefore, we feel that in the right combination of caution and of course reflecting the improved earnings that we're able to pay a dividend of EUR0.58, which is up 5.5%. So far the general sort of statement on the first half results.

The next slide shows that depicted and I'm happy to come back to this EPS discussion should you want to. But it's clear from these numbers that we are well positioned to deliver on an EPS basis.

If you look at the adjusted revenue growth by 14.3%, which has been driven by high revenues of BUs, of course you can see with the exclusion of course of our Group functions BU contributions from all BUs, albeit that some BUs have seen a marked improvement in terms of revenue growth. Notable, as I said earlier, are the business units Europe, Latin America and Asia. And if you look at the light yellow boxes you can see the contribution and growth in contribution from the Global Market set of products. It's quite significant, as well, supported by robust growth for global clients.

Are our costs under control? We would say yes because the adjusted expenses, excluding bonus accruals, are up by only 1.5% year on year. This, in our view, is a result of cost measures we've taken in 2006 and further savings from services. If you look at the adjusted operating result that flows through from all of this you can see that the picture is slightly more mixed but generally on the same trend line for the different BUs. Antonveneta has not quite been able to keep up its operating result, but all the other BUs have been able to barring Group functions.

The efficiency ratio improvement we would say is therefore rather dramatic with a 3.6 improvement in the efficiency ratio. A very solid result delivered, as I said earlier, based on our measures taken in 2006 and our efforts on the services side. If you translate that to the adjusted efficiency ratios by BU it translates therefore in improved efficiency ratios in almost all BUs, some by a significant margin as you can see in the business unit Europe and also in the business Europe -- business unit, excuse me, North America.

Provisioning, I think it's well within the expectations generally. Provisions growth has been there in the Netherlands as a result of some corporate provisions we've taken. Hardly any provisions in the portfolio of Europe. Some provisions in Antonveneta, and I'll come back to that as to what that means for the rest of the year. And basically we see all the significant growth for provisions in the business units that are subject and leaders of growth, namely, the business unit Latin America and the business unit Asia, both representing provisions that are accumulated as a result of very significant growth of the balance sheet.

And all of this means that on a temporary basis our Group ROE is below 20%. However, our return on assigned risk capital of all our operating BUs -- almost all, I should say, barring Antonveneta, is above 20%. By a significant margin in certain cases. Also our global clients unit has been able to achieve, for the first time, return on assigned risk capital which is above 20% at 22%.

We had shared with you our designs and deliverables for 2007 at the publication of the annual result for '06 and indicated how we were going to go about it even earlier. Very much based on improving our operating performance, increasing focus and capital risk level.

On the growth side I would like to share with you the some numbers on our total retail loans growth. You might note that there has been significant and continuous growth in that area since the early part of '04. The retail growth over the one year period is 31.2%. This is still done, I think, at very appropriate risk levels and risk costs. Expenses are up but by no means at the same level, which has led to an improvement in our efficiency ratio in Latin America, which is 95%. Brazil is, as I'm sure you're all aware, we are approaching the same performance as our peers.

In the BU Asia we've seen strong operating income increases by 38%. We have started to drive home our focus on selected markets, India, Greater China, UAE, Indonesia and Pakistan. You've seen us making some minor acquisitions in both Pakistan and Indonesia and those are in progress of being prepared for integration. In June we also received approval to go local and to build our bank further in China proper.

Antonveneta has been a cause of some disappointment to us, particularly the growth of operating income. As you can see at the level of 1.9% does not fully reflect both the conditions in the Italian market place and our aspirations for Antonveneta. We have made significant further investments in the client base and we have also taken other actions to attract new customers.

If you look at that we have to, of course, say that it is uncertain whether Antonveneta will continue to meet its EUR500m targeted profit for the period on a standalone basis but we certainly are confident that this will be higher than the profit for the period in '06, which was EUR413m. We have undertaken significant initiatives and therefore do expect that profit to pick up. But it hasn't picked up as quickly as we had hoped in Antonveneta.

On the efficiency side you can see the primary views where we were focusing on efficiency apart from the BU Europe, the BU NL and the BU North America. We've seen that the BU NL is on track to deliver improvement of the efficiency ratio in '07, seen a good improvement of operating income in the first half. Good volume growth in commercial loans, however, some lower margins and we've also seen good cost control and we've seen some benefits from the additional services savings leading to an efficiency ratio of 65.6% for the first half of '07. And that's quite a ways since where we were, of course, at the beginning of 2001.

If you look at the movement in efficiency ratio with LaSalle, there we also saw operating income up at constant FX rates. Of course the US dollar has gone down a bit. We saw the operating expenses up. Of course we have made some higher bonus accruals to pay for performance and costs up by 5.2%, which has allowed us to benefit some already from the successful execution of cost measures. And you might note that we have executed our 5% headcount reduction during the course of the first two quarters of this year.

Finally, as part of our plan we wanted to accelerate our steps to make sure that BU Europe reached profitability in 2007. We had taken and have taken certain actions to make sure that this would happen. Significant cost control, FTE reduction and service initiatives helped us. We also made sure that we pushed ahead on the shift in client mix with a further focus on financial institutions, which has led to a very significant increase in revenues for the BU Europe, which combined with the cost measures we've taken has now led to a profitable unit delivering for the period EUR243m.

We've also seen a similar, over the last three year, strong improvement in the efficiency ratio of the BU Global Markets. Global Markets were able to record revenues at levels which we had not seen before and driven really by momentum across the franchise. Growth has been and will continue to be supported by tight ongoing cost control and as a consequence of all of this, on a like for like basis, the profit for the period increased by 76.3% to EUR730m the first half of '07. A significant improvement both in profitability, efficiency ratio and capital returns.

Global clients, we had said that Global clients needed to transition itself to making better use of its capital, restricting its access to capital and seeing more fees and commissions as revenue base. Revenues did …