AAVMY - ABN AMRO: Encouraging Net Interest Income Growth

2023-04-14 18:52:24 ET

Summary

• ABN AMRO Bank N.V. has seen encouraging growth in residential mortgage demand and net interest income in spite of inflationary pressures.
• Additionally, return on equity has also seen growth.
• I take a bullish view on ABN AMRO.

Investment Thesis: I take a bullish view on ABN AMRO based on continued growth in net interest income and return on equity.

In a previous article back in September, I made the argument that ABN AMRO Bank N.V. ( AAVMY ) could likely trade stationary over the following quarter due to uncertainty over residential mortgage demand - owing to higher interest rates and other inflationary pressures.

In spite of this, ABN AMRO Bank N.V. stock is up sharply since my last article:

The purpose of this article is to assess whether the strong upside that we have been seeing in the stock can continue given recent performance.

Performance

When looking at data from 2020 to the present, it is clear that the value of Residential Mortgage saw particular growth in the latter quarters of 2022:

ABN AMRO reports that in spite of inflationary pressures and higher interest rates - demand for residential mortgages has continued to remain strong, following several quarters of decreases for loans that had been granted a payment deferral following COVID-19.

In this regard, the capacity of customers to absorb the higher cost of residential mortgages seems to be strong and demand remains steady in spite of this.

Moreover, DutchNews.nl reported in January that house prices in the Netherlands dropped by 6% year-on-year, marking the first time in nine years that house prices saw a drop on an annual basis.

With lower prices helping to offset higher mortgage rates - demand appears to remain strong. However, there is concern that potentially lower supply could affect demand going forward - with new build sales down by 46% as compared to last year, owing to apprehension on the part of current homeowners to sell in a falling market.

However, this concern has not particularly affected growth in residential mortgages as we have seen. Additionally, net interest income in 2022 was up by over 4% on that of last year, with significant growth of 22% from Q3 to Q4 2022.

From this standpoint, my prior concern that rising interest rates could dampen mortgage demand has not materialized. Instead, demand continues to remain vibrant and net interest income continues to grow.

Moreover, we can see that corporate loans to clients grew by 1.4% from December 2021 to December 2022 - with core Corporate Banking up by 4% over this period.

In this regard, ABN AMRO has not only shown signs of growth across its largest segment of Residential mortgages - but the corporate side has also remained strong - resulting in an increase of 2.1% for total client loans over the year.

Risks and Looking Forward

Going forward, I take the view that the main consideration for ABN AMRO is whether continued upward pressure on rates and broader macroeconomic conditions will place pressure on residential mortgage demand and corporate loans going forward.

Based on recent results, there is no evidence that this has been the case to date.

While the stock has seen strong upside since September, we can see that ABN AMRO is now trading at the upper end of its price to book value as seen over the past three years:

That said, the bank's return on equity of above 8% is higher than that seen over the previous three years:

In this regard, while the stock is more expensive on a price to book basis than that of six months ago - return on equity remains higher than that of last year and growth in net interest income continues to remain strong.

In my view, the main risk for ABN AMRO at this point is that the stock could become overvalued if price continues to rise without corresponding growth in return on equity or net interest income. However, the latter two continue to see strong growth. As such, I take a bullish view on ABN AMRO.

Conclusion

To conclude, ABN AMRO Bank N.V. has seen strong growth in residential mortgage demand and return on equity in spite of inflationary pressures. In spite of macroeconomic risks, I am cautiously optimistic that the bank can continue to thrive under the current environment. As such, I take a bullish view on ABN AMRO Bank N.V.

For further details see: