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Strong operating performance driven by strict cost control

Strong operating performance driven by strict cost control. Second quarter results 2002. 8 August 2002. Table of content. Introduction 3 Operating performance 5 Update on WCS 13 Asset quality and Capital 19 Outlook 24 Appendices 26.

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Strong operating performance driven by strict cost control

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  1. Strong operating performance driven by strict cost control Second quarter results 2002 8 August 2002

  2. Table of content • Introduction 3 • Operating performance 5 • Update on WCS 13 • Asset quality and Capital 19 • Outlook 24 • Appendices 26

  3. Strong operating performance driven by strict cost control First half 2002 performance: • Revenues flat (+0.4%) • Operating expenses are trending down (-2.1%) • Operating result up (6.9%) • Provisioning was driven up by an unprecedented level of corporate defaults due to perceived fraudulent practices • Efficiency ratio improved by 1.8% to 71.0% • Tier 1 ratio up to 7.15%, a 0.6% increase compared to the first half 2001

  4. Operating performance

  5. Operating performance of the second quarter was good Revenues Q2 2002 • Revenues held up remarkably well despite the weak economy • Expenses have continued to come down, driven by WCS and BU US • Efficiency ratio has further improved

  6. Good performance in C&CC was driven by all franchises Operating result Q2 2002 • Revenues stable • Expenses higher due to incidentals in BU NL • Strong performance despite adverse currency movements

  7. BU NL restructuring is on track Revenues Q2 2002 • Revenues increased due to higher net interest revenue • Expenses up due to incidentals but staff costs trending down • Conversion of the branch network is on track. Target of EUR 400 mln annual cost savings as of 2004 is maintained

  8. BU US posted another quarter of growth and improved efficiency Revenues Q2 2002 • Revenues went up by 7.1% in local currency: mortgage origination stabilised, value of mortgage servicing rights increased • Expenses came down due to strict cost control and lower mortgage related expenses

  9. Strong performance in BU Brazil despite market volatility Revenues Q2 2002 • Revenues were up 1.4% in local currency • In local currency, expenses were up 10.1% driven by higher staff costs and automation costs related to the opening of new branches • Effective tax rate is an integral part of the BU operating efficiency. • Net profit increased by 68.2% to EUR 143 mln

  10. PC and AM were affected by difficult market conditions Revenues Q2 2002 • PC commissions and asset values were down, particularly in France and International Private Banking. Operating performance was affected by higher expenses, in part due to further investments in the Dutch franchise • Resilient AM revenues despite the significant reduction in the value of AuM and associated revenues, in line with market conditions. Costs were contained enabling AM to deliver a satisfactory operating performance

  11. WCS improved its operating performance despite weak markets Revenues Q2 2002 • Modest decline in revenues due in part to stable flow business • Expenses sharply down, driven by TOPS, strict cost control and the closure of US Equity & Corporate Finance domestic business • Operating result and efficiency ratio improved significantly

  12. Update on WCS

  13. Restructuring decisions have begun to pay off in first half of 2002 • Overall revenues down in the first half of 2002, with more stable flow revenues mitigating the downturn in volatile businesses • Cost base reflects the positive impact of the restructuring decisions, particularly TOPS and US domestic closures • Expenses have come down sharply and we expect it to fall by an additional 5% in the second half of 2002 • Aggressive capital management has remained a key theme. Target of RWA reduction of EUR 20 bn will be achieved by year end. A further EUR 10 bn reduction is targeted by 2004

  14. WCS will continue to sharpen its strategic focus • Client-led, integrated wholesale bank with a European focus • Focus on profitable Financial Institutions and Large Cap Clients • Grow our strong Global Financial Markets and Loan Product businesses through integrated delivery of value-added Debt and Treasury products • Position our strong Global Transaction Services franchise for growth through delivery of an integrated suite of Working Capital products • Reposition our Corporate Finance and Equities businesses to deliver positive operating results by focusing on our positions of strength

  15. We will build on our strength in Treasury and Debt products and ... • Enhance our ability to meet key clients’ needs by providing an integrated offer to include capital raising, capital management and risk advisory • Achieve this objective by combining our structuring and origination capabilities in Loan Products with our distribution capabilities in Global Financial Markets • Build upon and profitably grow our strong positions in primary markets • Eurobonds (No. 7) • Euro denominated DCM(No. 3) • European Asset Backed Securitisation (No. 2) • Global Loan syndication (top 10 rankings in Healthcare, Utilities, Telecom, Oil & Gas) • EMEA Project Finance (No. 9) Source: Euromoney, IFR, Project Finance magazine, Loanware

  16. … our strength in Working Capital products • Expand the scope of GTS to deliver an integrated and tailored approach to the working capital needs of our clients • Provide corporate treasurers with range of working capital products designed to reduce working capital cycle and enhance overall returns • Leverage our advantage product range and network reach to grow our market-leading positions • Global Cash & Payments (No. 4) • Global Foreign Exchange position (No. 8) • Global Custody (No. 6 in w/ Mellon) Source: Euromoney, IFR, Project Finance magazine, Loanware

  17. Focus Equities and Corporate Finance on positions of strength • Cost base of Corporate Finance and Equities has been reduced by over 30% since Q2 2001 • Further reductions coming in the second half of 2002 from both our US restructuring and actions announced today • A 400 to 500 headcount reduction will be implemented without additional restructuring charge • Equities and Corporate Finance will focus on existing positions of strength • Committed to profitability in 2003 without relying on market recovery

  18. Asset Quality and Capital

  19. Unprecedented level of corporate failures drove provisioning up • Provisioning rose sharply due to an unprecedented level of corporate failures triggered by perceived fraudulent practices • Decrease expected in HY02, barring any force majeure • Slightly higher level for the year assumed due to Q2 levels • Quality of the portfolio remains satisfactory (%) Annualised provisions / RWA

  20. Tier 1 has improved despite Brazil % change 30 06 02/ 31 12 01 30 06 02/ 30 06 01 (EUR bn) 30 06 02 31 12 01 607.5 11.02 31.3 250.5 7.15% 10.80% 597.4 11.79 34.0 273.4 7.03% 10.91% 1.7 (6.5) (7.9) (8.4) (1.2) (4.5) (9.8) (12.4) Total assets Shareholders’ equity Group capital Risk-weighted assets Tier 1 ratio Total capital ratio • Adverse currency movements have impacted Tier 1 solvency • The impact of Brazil was 19 basis points in the second quarter • The capital release from RWA reduction in WCS has improved Tier 1 ratio

  21. Optimal Tier 1 & 2 ratios are a function of several factors • Optimal capital structure is a function of cash-flows and asset quality • Sustainability of the income stream • Asset quality and levels of provisioning • Effective tax rate • Pay out ratio (policy is 45 to 50%) • Proportion of cash dividend (approx. 40%)

  22. ABN AMRO has high coverage ratios • Operations are cash generative • Cash-flow is sustainable • Historically, pay out ratio and cash proportion of dividend have led to a retention of at least 70% • Coverage ratios are high at half year 2002 • Operating income / Provisioning : 2.8x • Net attrib. Profit / Cash dividend: 3.2x • PBT / [taxes, extraordinaries, cash dividend]:1.8x

  23. Outlook

  24. Outlook unchanged • Given the level of corporate failures in the second quarter, we have assumed a slightly higher level of provisioning for the year • We expect net profit, excluding extraordinary items, to be in line with 2001 • Interim dividend stable at EUR 0.45 per ordinary share

  25. Appendices Second quarter 2002 results

  26. Appendices: table of content • Pensions 27 • Currency variations and hedging 29 • Brazil: cross border and sovereign risk 34 • Asset quality and provisioning 37

  27. Pensions • Accounting policy migrated to US GAAP on 1 January 2002. US GAAP allows the spreading of potential increases of the annual pension costs • Accrued benefit cost is fully accounted for in the liabilities under provisions • Annual pension costs would have to increase as and when unrecognised net actuarial gains / (losses) are greater than 10% of the Projected Benefit Obligation • Any increase would be spread over the average remaining service term - 11 years at present

  28. Currency variations and hedging

  29. Impact of currency variations on Group performance Reported change (%) Currency impact (Eur mln) Organic growth (%) Q2 02 / Q1 02 Revenues Expenses Operating result Pre-tax profit (241) (136) (105) (75) 4.7 2.1 11.2 (12.8) (0.4) (1.9) 3.4 (20.6)

  30. Impact of currency variations on BU US performance Reported change (%) Currency impact (Eur mln) Organic growth (%) Q2 02 / Q1 02 Revenues Expenses Operating result Pre-tax profit (100) (49) (51) (40) 7.1 (1.1) 16.4 16.4 (1.4) (8.9) 7.2 (7.2)

  31. Impact of currency variations on BU Brazil performance Reported change (%) Currency impact (Eur mln) Organic growth (%) Q2 02 / Q1 02 Revenues Expenses Operating result Pre-tax profit (88) (62) (26) (15) 3.7 10.7 (10.1) (22.2) (12.7) (6.8) (24.3) (34.4)

  32. Overview of the currency hedging policy

  33. Brazil: cross border and sovereign risk

  34. Brazilian cross border risk is largely mitigated • Brazil, Mexico and Chile are the largest contributors • Extensive use of risk mitigants is sought and achieved when dealing with Brazilian counterparts • Mitigated exposure includes trade deals, transactions covered by credit default swaps and political risk insurance

  35. Overview of the portfolio of government securities of BU Brazil Portfolio breakdown • Portfolio is locally funded and invested in Brazilian real denominated notes NB: currency linked notes are notes denominated in Brazilian real

  36. Asset quality and provisioning

  37. The composition of the consolidated portfolio is stable June 2001 December 2001 June 2002 Private loans (EUR bn - by outstanding)

  38. Overview of total loan loss provisioning per SBU Loan loss provisioning per SBU Annualised provisioning / RWA 2Q02 loan loss provisioning

  39. Wholesale client base is predominantly OECD - (by limits, June 2002) Eastern Europe 0.3% North America 27.0% Europe 52.9% Asia 7.2% Middle East 1.0% Asia Pacific Advanced 7.1% Latin America 4.0% Africa 0.6% Geographic exposure calculated based on the country lending office of each counterparty

  40. Breakdown of Wholesale portfolio per client sector - (by limits, June 2002) Wholesale - Total portfolio Wholesale - Corporate portfolio

  41. Wholesale corporate portfolio is well diversified - (by limits, June 2002) As a % of total limits of Wholesale Corporate portfolio which excludes FIPS

  42. Wholesale corporate exposure is gradually coming down across sectors Sector breakdown of wholesale portfolio - Total limits, June 2002

  43. Breakdown of WCS risk-weighted assets RWA per product - Ytd 01 RWA per product - Ytd 02

  44. Average UCR of wholesale client sectors since June 2001 - (by limits) Average UCR Average UCR - historical performance

  45. Average UCR of wholesale client sectors - (by limits, June 2002) ACD Wholesale corporate portfolio ECH (27.1% of WCS corp. portfolio) (53.4% of WCS corp. portfolio) TMT (19.5% of WCS corp. portfolio)

  46. Overview of the C&CC consumer and commercial franchise C&CC total private loans (Eur bn)

  47. C&CC NL total portfolio Overview of the commercial portfolio of BU NL - (by outstanding, June 2002) C&CC NL commercial portfolio by product C&CC NL commercial portfolio by UCR

  48. Asset quality Overview of the portfolio of BU US - (byoutstanding, June 2002) Overview by legal entity Business mix

  49. Overview of the portfolio of BU Brazil (June 2002) C&CC portfolio performance - Total outstanding Business mix UCR breakdown

  50. Overview of C&CC consumer credit (by outstanding, June 2002) By Geography By Product

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