ABN AMRO: Best of (as well as for) both worlds

ABN AMRO announced last week the sale of a portfolio of energy loans to funds managed by Oaktree Capital Management and affiliates of Sixth Street Partners for a total amount of USD 1.5 billion. As a result, the bank completely exits the oil and gas market in the US. This follows the bank’s announcement in June last year to exit its Trade and Commodity Finance activities while restricting its Natural Resources and Global Transportation & Logistics lending activities to Europe. This was no surprise to us as the bank had indicated they were carefully reviewing these exposures during the engagement talk we had with the management in May regarding their exposures to carbon-intensive industries.

The benefits of this strategic reorientation are twofold. From a pure credit standpoint, this is positive as those activities are by nature cyclical and led to significant impairments in the past, which triggered last year’s decision to classify these activities as non-core and gradually wind them down. We expect a positive impact on the bank’s results, risk profile and capitalization. The last transaction alone will reduce Risk Weighted Assets by €2 billion and increase the pro-forma CET1 ratio by 30bps.

From an ESG perspective, this is also positive as the bank is reducing its footprint in sectors sensitive to transition and climate risks. Refocusing on its core markets in Northwestern Europe should also allow the bank to be more successful in its so-called engagement strategy with its customers. Instead of following an exclusion policy, the bank chose to accompany their clients in their transition to sustainability. Serving clients exclusively in markets where the bank has a strong historical presence will make it easier for the bank to implement this strategy.

We have some investments in ABN’s AT1 in the EUR fund, offering a 4.375% coupon with a call date in 2025, currently yielding 2.3% to call. This is quite interesting for an investment grade bond (rated BBB-) from a credit we like. In addition, given the high reset spread of 467bps extension risk is limited. As a comparison, the senior preferred bond (rated A-) from ABN maturing in 2025 currently offers a negative yield of -0.2%, justifying a move down the capital structure.

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