ABN AMRO: A Robust 15% CET1 Ratio With Just 4% Of Assets In CRE (OTCMKTS:AAVMY)

Introduction

ABN AMRO (OTCPK:AAVMY) (OTCPK:ABNRY) is likely one of 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 Could 2020. I offered my place earlier this yr on valuation issues however because the share value has decreased once more since March, I wished to have one other look to see if this can be a good second to get again in.

ABN AMRO’s predominant itemizing is on Euronext Amsterdam, the place it’s buying and selling with ABN as its ticker image. The typical 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 rising web curiosity earnings in Q1 bodes properly

It shouldn’t come as a shock to see ABN AMRO’s web curiosity earnings elevated within the first quarter of the yr. Whereas the full curiosity bills 5 folded in comparison with the primary quarter of 2022, the full curiosity earnings doubled as properly and this was nonetheless enough to report a rise within the web curiosity earnings 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 yr, ABN AMRO was capable of improve its curiosity earnings by just a bit bit extra which implies that even on a QoQ foundation the online curiosity earnings elevated by just below 4%.

That’s in all probability nearly as good because it will get as of late and within the subsequent few quarters it will likely be attention-grabbing to keep watch over the online curiosity earnings growth. Take into accout the ECB began to hike rates of interest later and at a slower tempo so you possibly can argue the European banks nonetheless should take care of the total influence of the speed hike cycle.

One in every of ABN’s benefits is its comparatively steady charge and fee earnings end result, which historically is available in at round 400-500M EUR per quarter. That’s essential because it principally covers a considerable a part of the personnel bills. Within the first quarter of the present monetary yr, ABN AMRO reported a complete non-interest expense of 1.41B EUR whereas its complete quantity of non-interest earnings was roughly 470M EUR, leading to a web non-interest expense of 940M EUR.

The whole pre-tax end result was 722M EUR on which about 199M EUR in taxes have been due. This resulted in a web earnings of 523M EUR or 60 cents per share based mostly on the present share rely of 866M shares.

One of many components I am maintaining a tally 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 full quantity of risk-weighted property on the stability sheet is just 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 nevertheless it does point out the financial institution has a strong buffer to take care of financial shocks.

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

And inside that 250B EUR mortgage guide, about 60% consists of mortgages. And as you may see beneath, in extra of 40% of the full quantity of mortgages has an LTV ratio beneath 50% with the common LTV ratio at 56%. In keeping with the financial institution, a 20% home value lower would end in about 12% of the mortgages being below water. And even when they’re below water that clearly nonetheless doesn’t imply the financial institution would notice a complete loss as the vast majority of the mortgage might be recouped when an property will get foreclosed.

Additionally essential. The whole publicity to industrial actual property is simply 15B EUR, which is simply 6% of the mortgage guide. And the LTV ratios are fairly low right here in addition to virtually 50% of the CRE loans has an LTV ratio of lower than 50%. And solely a small portion of the CRE loans is said 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 compelled the banks below their supervision to droop the dividend, ABN AMRO was hit fairly exhausting. In my Could 2020 article I assumed the inventory was too low cost. Since that decision, the share value has greater than doubled and the full return exceeded 150%.

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

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