Allocation of capital (growth vs dividend)

Sustainable profit generated can be deployed in three ways. We can distribute to shareholders, grow the capital on our balance sheet, or acquire another business. There are several reasons to increase capital. Firstly, growing our business increases RWAs and additional capital is required to maintain capital ratios.

We focus on profitable business growth and estimate that our balance sheet will grow in the low single digit. Secondly, regulatory requirements change over time. We now need to hold significantly more capital for the same business than in the past. And finally, the credit cycle requires additional capital at certain points in the cycle. We do not save up capital for acquisitions, these should be funded from earnings.

Capital management is tantamount to balancing these requirements. We use multi-year forecasts to get a good sense of future capital requirements so that we can react in a timely manner. For example, several years ago we started to build capital for a possibly significant impact of Basel IV. As it turned out, the final proposal in December 2017 showed us to be in a good position, even though capital requirements will indeed increase significantly. 

Although capital planning deals with many uncertainties, we nevertheless want to give shareholders a good sense of what they can expect in terms of shareholder distributions. Therefore, we have set a dividend pay-out target of 50% of sustainable profit from 2018 onwards. We believe this is a sustainable level that we can uphold. On top of this, additional dividends and/or share buy-backs (subject to regulatory approval) will be considered when our capital position is within or above the target range (17.5-18.5% for 2018). 

The combined distribution will be at least 50% of sustainable profit.