Future Earnings Will Decline Due To Lower Interest Income And Rising Operational Costs

Key Takeaways

• Declining interest income and U.S. tariffs pose significant risks to earnings and revenue growth, impacting net margins.
  
• High operational costs from compliance and digital investments, coupled with litigation uncertainties, could constrain future earnings and profitability.
  
• Strategic acquisitions, sustainability initiatives, and strong mortgage growth enhance ABN AMRO's revenue and operational efficiency, while optimized capital management supports stability and potential capital returns.

Catalysts

Provides various banking products and financial services to retail, private, and business clients in the Netherlands and internationally.

• Investors may attribute perceived overvaluation to the decreasing net interest income (NII) forecasted, as interest rates are expected to decline during 2025, impacting earnings negatively.
  
• The potential impact of the anticipated U.S tariffs on Eurozone growth could hinder revenue growth for ABN AMRO, particularly affecting export-based sectors such as Germany and the Netherlands.
  
• Despite strong growth prospects in the mortgage market, a flattening of asset margins, particularly in mortgages, due to reduced risk premiums, could compress future net margins.
  
• The need to invest in regulatory compliance and digital transformation could keep operational expenses high, limiting the improvement in net margins and thus earnings growth.
  
• Potential headwinds from litigation costs and legal provisioning related to past activities may create uncertainty regarding future expenses, impacting net margins and earnings.

ABN AMRO Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ABN AMRO Bank's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.0% today to 22.2% in 3 years time.
• Analysts expect earnings to reach €2.0 billion (and earnings per share of €2.62) by about March 2028, down from €2.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 6.4x today. This future PE is greater than the current PE for the GB Banks industry at 8.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.02%, as per the Simply Wall St company report.

ABN AMRO Bank Future Earnings Per Share Growth

Risks

• ABN AMRO's acquisition of Hauck Aufhäuser Lampe is likely to strengthen its position as a leading private bank in Germany, potentially enhancing revenue and expanding its service offerings in the region.
  
• The bank's initiatives in sustainability and digital transformation, such as returning to the Dow Jones Sustainability Index and deploying AI solutions, are recognized for improving client engagement and operational efficiency, which could positively impact its net margins.
  
• Strong growth in the Dutch mortgage market, with continued high demand and rising house prices projected for 2025, could sustain or increase ABN AMRO's revenue from its mortgage division.
  
• The bank's strategic approach in capital optimization, like selling infrastructure loans to manage risk-weighted assets, helps sustain a strong CET1 capital ratio, which supports earnings stability and possible capital returns.
  
• ABN AMRO expects its cost of risk to remain below the through-the-cycle average in the coming year, indicating robust credit quality and advantageous impairment levels, which could positively influence its overall earnings.

Valuation

• The analysts have a consensus price target of €18.3 for ABN AMRO Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €23.0, and the most bearish reporting a price target of just €14.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €9.1 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of €18.92, the analyst price target of €18.3 is 3.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.