ABN AMRO: A Sturdy 15% CET1 Ratio With Simply 4% Of Belongings In CRE (OTCMKTS:AAVMY)

Introduction

ABN AMRO (OTCPK:AAVMY) (OTCPK:ABNRY) is among the largest banks in Europe, and after a number of years of poor efficiency (together with the fallout of the COVID pandemic), the Dutch financial institution seems to be heading in the right direction once more and the share value has greater than doubled since I rated it a purchase in Might 2020. I offered my place earlier this 12 months on valuation issues however because the share value has decreased once more since March, I wished to have one other look to see if it is a good second to get again in.

ABN AMRO’s primary itemizing is on Euronext Amsterdam, the place it’s buying and selling with ABN as its ticker image. The common each day quantity within the Netherlands is roughly 2.9M shares for a complete financial worth of in extra of 40M EUR per day. I’ll use the Euro as base foreign money all through this text.

The growing internet curiosity revenue in Q1 bodes nicely

It shouldn’t come as a shock to see ABN AMRO’s internet curiosity revenue elevated within the first quarter of the 12 months. Whereas the whole curiosity bills 5 folded in comparison with the primary quarter of 2022, the whole curiosity revenue doubled as nicely and this was nonetheless ample to report a rise within the internet curiosity revenue by greater than 20% to 1.62B EUR. And though the curiosity bills elevated by a shocking 70% in comparison with the ultimate quarter of final 12 months, ABN AMRO was in a position to improve its curiosity revenue by just a bit bit extra which signifies that even on a QoQ foundation the web curiosity revenue elevated by slightly below 4%.

That’s most likely nearly as good because it will get as of late and within the subsequent few quarters will probably be attention-grabbing to keep watch over the web curiosity revenue growth. Bear in mind the ECB began to hike rates of interest later and at a slower tempo so you would argue the European banks nonetheless need to take care of the complete affect of the speed hike cycle.

Considered one of ABN’s benefits is its comparatively steady payment and fee revenue outcome, which historically is available in at round 400-500M EUR per quarter. That’s vital because it principally covers a considerable a part of the personnel bills. Within the first quarter of the present monetary 12 months, ABN AMRO reported a complete non-interest expense of 1.41B EUR whereas its whole quantity of non-interest revenue was roughly 470M EUR, leading to a internet non-interest expense of 940M EUR.

The entire pre-tax outcome was 722M EUR on which about 199M EUR in taxes had been due. This resulted in a internet revenue of 523M EUR or 60 cents per share primarily based on the present share rely of 866M shares.

One of many components I am keeping track of within the European banking sector is the capital ratio of a financial institution. As of the top of Q1, ABN AMRO’s CET1 ratio got here in at 15%, which is roughly 520 bp above the minim necessities for the financial institution.

As the whole quantity of risk-weighted belongings on the stability sheet is slightly below 132B EUR, a 520 bp in “extra” capital represents a capital surplus of roughly 6.85B EUR or 8 EUR per share. This clearly doesn’t imply ABN will distribute that “extra” capital to its shareholders however it does point out the financial institution has a strong buffer to take care of financial shocks.

Of the 404B EUR in belongings, about 250B EUR include loans.

And inside that 250B EUR mortgage ebook, about 60% consists of mortgages. And as you possibly can see beneath, in extra of 40% of the whole quantity of mortgages has an LTV ratio beneath 50% with the typical LTV ratio at 56%. Based on the financial institution, a 20% home value lower would end in about 12% of the mortgages being beneath water. And even when they’re beneath water that clearly nonetheless doesn’t imply the financial institution would notice a complete loss as the vast majority of the mortgage could possibly be recouped when an belongings will get foreclosed.

Additionally vital. The entire publicity to business actual property is simply 15B EUR, which is simply 6% of the mortgage ebook. And the LTV ratios are fairly low right here in addition to nearly 50% of the CRE loans has an LTV ratio of lower than 50%. And solely a small portion of the CRE loans is expounded to workplaces.

Funding thesis

I used to have an extended place in ABN AMRO after shopping for the inventory in 2020 when the COVID pandemic was inflicting volatility within the European banking sector. Because the ECB pressured the banks beneath their supervision to droop the dividend, ABN AMRO was hit fairly arduous. In my Might 2020 article I believed the inventory was too low-cost. Since that decision, the share value has greater than doubled and the whole return exceeded 150%.

I offered my place primarily based on the valuation of the financial institution, and though there nonetheless was room for progress, the potential returns had been decrease than what I’m often aiming for. Nonetheless, previously 4 months, the share value has misplaced about 15% and is at present buying and selling at simply over 14 EUR per share. The elevated volatility additionally made the choice premiums extra engaging and I just lately began to jot down out of the cash put choices once more.

Editor’s Notice: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.