ABN AMRO : Operational and financial performance continues to be sound ; recommendations maintained

Since we initiated coverage on ABN AMRO ahead of its IPO (November 2015), ABN AMRO has continued to gradually strengthen its fundamentals through the execution of a relevant strategy, supported by a favourable macroeconomic environment in the Netherlands. In the absence of major external shock, growth in the domestic economy is expected to continue and support the bank’s performance in the coming years. - ABN AMRO is one of best capitalised entities among large European banks in risk weighted measures (CET1 fully-loaded by 17% at end-2016). According to our calculations, this ratio would enable ABN AMRO to absorb a 26% increase in RWA from the revisions of the Basel rules (from 2021?) before reaching the target CET1 ratio of 13.5% envisaged by the management, excluding any earnings retention. In our view, 13.5% is an adequate ratio when compared with the bank's good asset quality and regulatory requirements (SREP 2017 of 11.75% by 2019). - The bank's strong credit profile translates into high ratings, and corresponding returns. We keep our 'Neutral' recommendations on senior and Tier 2 debt but change our recommendation to 'Neutral' from ‘Buy’ on Tier 2 6.375% 04/2021 and 7.125% 07/2022. ABN AMRO is expected to issue 'senior non-preferred' (SNP) securities (for a total volume in the range of EUR5-10bn in the medium/long-term) in order to meet MREL requirements. Therefore, the risk of excess supply on Tier 2 appears small. We also keep our ‘Buy’ recommendation on senior 'retail' issues that offer an attractive pick-up compared to benchmarks. - In absolute terms, we like ABN AMRO’s AT1 instrument, strongly anchored in the 'BB' category and which carries limited risks in our view. However, its cash price is high (106.4% on 02/05/2017) and yield (3.7% on 02/05/2017) only moderate in the universe AT1. In relative terms, we favour risks/returns ratio on the AT1 issued by large European peripheral banks. We stay ‘Neutral’ on ABN AMRO’s AT1. - >Support factors - - ABN AMRO has demonstrated the resilience of its business model in the recessing years (2012 and 2013), supported by recurring revenues and a moderate risk appetite.- Capital ratios are very robust, and should enable it possible to smoothly absorb the potentially significant impacts of expected regulatory developments.Points to watch - - Still on-going discussions on the revision of the Basel rules and the potentially substantial RWA which could result from them (and therefore the decline in its capital ratios) create some regulatory uncertainty on the bank’s capital. However, the minimum targeted CET1 ratio of 13.5% does not appear to challenged.- The leverage ratio (3.9% at end-2016) remains below the target of 4% targeted for 2018 by the bank; Internal generation of capital and the issuance of AT1 instruments should be amply sufficient to fill the gap.