ABN AMRO Bank NV is well positioned to absorb a €480 million anti-money laundering settlement but is likely to struggle with profitability in 2021 amid a restructuring and the impact of COVID-19, according to analysts.

The third-largest bank in the Netherlands said April 19 it had accepted the Dutch Public Prosecution Service's offer to settle a long-running probe that found shortcomings in its compliance with anti-money laundering rules in the period 2014 to 2020. The additional cost will result in a "modest" first-quarter loss as write-backs and impairment releases will partly offset the impact, the bank said.

Although the settlement will have a significant impact on ABN Amro's earnings per share in 2021, there are a few positives for the bank's earnings outlook, Paul van der Westhuizen, senior analyst at Rabobank Research told S&P Global Market Intelligence. The income from the sale and leaseback of ABN Amro's head office, large loan loss provision releases and the progress being made with unwinding noncore corporate and institutional banking activities could all boost 2021 earnings, he said in an email. "A lot will also depend on what the yield curve does as ABN Amro is particularly sensitive to steepening and flattening due to its large dependence on net interest income," van der Westhuizen said.

Earnings pressure

With "large loan-loss provisions slated for release and more than €2 billion of capital in excess of regulatory requirements" ABN Amro can "easily absorb" the cost of the settlement, analysts at Rabobank Research said in a note.

Despite being able to bear the one-off cost of the settlement, ABN Amro must also cope with expenses related to an ongoing remediation program aimed at addressing its anti-money laundering, or AML, shortcomings, S&P Global Ratings said in a bulletin. Those costs "come amid still-challenging macroeconomic conditions and the bank's strategic refocusing, and will weigh further on its earnings generation capacity in 2021-2022," Ratings said.

Regardless of its current 800-basis-point capital buffer, other challenges remain for ABN Amro related to revenue growth and profitability pressures, ING senior financials strategist Suvi Platerink Kosonen said in a note. UBS analysts said they have cut their 2021 forecasts for ABN Amro's annual profit and annual profit attributable to shareholders by 32.4% to €250 million and by 42.5% to €162 million, respectively.

Including adjustments made following ABN Amro's AML settlement, the mean consensus forecasts for the bank's net income and revenue in 2021 stand at €466 million and €7.41 billion, respectively, S&P Global Market Intelligence data shows.

AML costs

"AML investments notably inflated ABN Amro's expenses in recent years. The bank expects them to peak in 2021 at €425 million, mainly due to additional headcount," Fitch Ratings said in a note. ABN Amro's AML-related headcount is also expected to peak at 4,200 in 2021 compared with 2,000 at the end of 2019, according to Fitch Ratings.

After several AML remediation programs run across various departments in previous years, ABN Amro launched a new detecting financial crime, or DFC, unit in 2019 with the aim of centralizing the remediation processes. The DFC unit's goal is to "remedy daily processes for assessing new and existing clients and to detect and combat criminal money flows," the bank said. The DFC remediation programs, which are closely monitored by the Dutch central bank, will run until the end of 2022, the bank said.

Since the launch of the DFC unit, ABN Amro "has demonstrated progress in addressing weaknesses in know-your-customer processes," Fitch said, noting that the recent investigation "did not find evidence that the bank was systematically involved in suspicious transactions or pursued high-risk customers." The ratings of ABN Amro are unaffected by the recent AML settlement, Fitch said.

Dutch prosecutors launched the AML investigation at ABN Amro in September 2019, a year after the Netherlands' largest bank, ING Groep NV, paid €775 million to settle a similar AML case with national authorities.

'Step in the right direction'

Despite the added costs, there are some positive factors that can drive the bank's underlying earnings in 2021 and therefore the overall forecasts were increased 65% from a low base, UBS analysts said. The increase was made taking into account "the most recent improvement in swap rates and ABN Amro's recent announcement that it will lower the deposit threshold for charging negative rates to €150,000. The bank's improved fee income from market activity and higher AUM as well as expected lower credit losses in 2021 also contributed to the 2021 estimates' increase, the UBS analysts said.

UBS analysts cut their 2021 net interest income forecast for ABN Amro by 0.2% to €5.48 billion. "While we think the restructuring ABN is undergoing is a step in the right direction, the benefits remain back-end loaded and we reiterate our Neutral rating," the analysts said.

Under its 2024 strategy announced in late 2020, ABN Amro wants to cut its cost base by €700 million to no more than €4.7 billion by 2024, and to boost its return on equity to about 8% for the same year. The bank's CEO, Robert Swaak, said in February that roughly €100 million out of the €700 million in cost savings should be generated in 2021 but noted the bank plans investments of the same amount for this year. Most of the 15% headcount reduction planned under the 2024 strategy is also expected to start from 2022.

ABN Amro will publish its first-quarter earnings May 12.