Thank you for joining the ING fourth quarter 2021 media call. I'm happy to give the floor to the CEO of ING, Steven van Rijswijk. Please go ahead, sir.
Thank you very much, operator. Welcome, and thank you for joining us on the call. On the call with me are Tanate Phutrakul, our CFO, and Ljiljana Čortan, our CRO. We will give you an update of developments and our results for the Q4 and full- year 2021. Overall, we are pleased with our performance. In 2021, our bank and our customers continued to face challenging conditions from the ongoing pandemic to supply chain pressures, rising energy prices, and increasing inflation. In the final quarter, we were encouraged by increasing lending volumes and strong fee income growth, which both signaled growing economic confidence as we all seek ways to live with the coronavirus.
Our customer growth continued in 2021, as we gained 481,000 primary customers, bringing the total to 14.3 million, 3.5% higher than in 2020. Last year, for the first time, over 50% of our customers banked with us through their mobile only, coming from 19% in 2017. I'm also particularly satisfied with the consistent diversification of our income. Fee income rose 17% in 2021 and now contributes 19% of the total. This was supported by our customers changing preferences in the low interest rate environment and by expanding our range of smart and easy digital investment products, which help us to establish and deepen primary relationships.
For instance, in Germany, thanks to products like digital advice, we now have more than 2 million investment accounts, an increase of 21% compared to last year. I'm also pleased to report the progress in our efforts to facilitate the transition to a low-carbon economy, aligning our loan book with a net zero future by 2050 or sooner. In 2021, we supported over 300 sustainability deals, more than double the number of a year earlier, helping our clients to become more sustainable. Now, what did that all mean for our financials? Our core lending portfolio grew by EUR 13.4 billion in the Q4 and by EUR 30.6 billion in the full- year. Deposits increased by EUR 10.3 billion over the year after a seasonal negative flow of EUR 2.1 billion in the last quarter.
Our total income rose almost by 11% in the quarter compared to last year and around 5% for the full- year as we saw resilient interest income aided by ECB measures. As I mentioned before, fee income was really strong, up 17% for the year and even 20% in the Q4 . Risk costs showed an uptick in the Q4 as we adjust for the changing economic circumstances. For the full- year, these additions to our loan loss provisions were down sharply compared to the exceptional 2020. At 8 basis points of our loan portfolio, the level was well under the average we normally see through the cycle.
All in all, this came down to a pre-tax profit of EUR 1.3 billion for the quarter and almost EUR 6.8 billion for the full- year, both much higher than 2020. For the net profit, the development was similar, with almost EUR 1 billion for the quarter and just under EUR 4.8 billion over the full- year. With our CET1 ratio strengthening to 15.9%, this gave us plenty of opportunity to propose a final dividend of EUR 0.41 per share. With that, we are happy to take your questions now.
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for the question and answer queue, please press star one for your questions. That's star one for your questions. Go ahead, please. The first question is from Mr. Rutger Betlem, Het Financieele Dagblad. Go ahead, please.
Good morning, all. I'm glad I for once have beaten Ruben Eg in the race for the first question. Several countries closed this year, France, Austria, some others. I was wondering what do you see as growth markets for the coming years?
Thank you very much, and congratulations with asking the first question. Ruben will be proud of you. Yeah, I mean, look, we do see continued growth across the board. If you look at our mortgage portfolio, that continued to grow well in the Q4 as did our wholesale banking portfolio, and we saw that actually in all countries that we are active. We do see especially good growth continuing in Germany. We have approximately 9 million clients in that market. We have seen significant mortgage growth in 2021. We continue to see that in 2022.
You also see good mortgage growth in countries like Spain, Australia, but also in emerging markets, which still have quite a low, I would say, loan to GDP levels in Poland and Romania. That's on the retail side. If you look at our small businesses, there we saw initial growth now coming back in our small businesses, so that also means that economic activity is resuming. We saw that in the Benelux, but we also see that in Poland and Romania. Therefore, the economic outlook, barring these uncertainties that we all know of supply chain disruptions and higher energy prices, that except for these elements, the continued economic growth will continue also to help loan growth in the small business area.
If you look at wholesale banking, we had a phenomenal growth level in the Q4 . I would not extrapolate that as such for 2022. Still our pipelines are good, economic activity is resuming, and of course, when we talk about transition of economies to a more environmentally friendly environment, that also will require significant investments on a global basis. Also as a bank, we will benefit from that. That's what we see actually on the lending growth. A second lever of growth is on commissions. I mean, we are continuing to grow our primary customers, and that's always important because if we grow the customers that are primary for us, which actually means that we do more business with them, they will continue to spur growth also on the fee side.
Two, we have continued to grow our daily banking packages and our fee income on daily banking and payments. Thirdly, when you look at investments, the investment accounts actually continue to increase. Take Germany as an example, the number of new investment accounts that we grew with in 2020 were 326,000, and in 2021, the number of new investment accounts opened were 390,000. Also in terms of the investment accounts that we have with our customers, as many of them still don't have an investment account with ING, also there we see growth in actually all of the markets that we are active in.
Okay, good. Thank you. I won't ask questions about the markets because my colleague, Eva, said that she would do that. I have one more question about what I heard in the analyst call, and I heard some annoyance with DNB and the systemic risk buffer. How are those talks progressing and do you think that they are willing to like adjust that system a bit?
I mean, I'm not sure that I mean, you can hear whatever you like to hear, but I'm typically not that quickly annoyed. Look, I mean, the systemic risk buffer in the Netherlands is higher than in any other market in Europe. I applaud the prudence, obviously, also of the supervisors, which they have to be. By the way, we want to be prudent as well. If you look at a systemic risk buffer, though, it's higher than in any of the other eurozone markets.
Since we're working in a European setting, when the ECB came on board in 2014, the idea of Europe was, not only of the ECB, but of Europe and European Parliament was, that we would gradually create a banking union, and that is based on three pillars. First of all, that is a European oversight of our activities. Now, that's being done by the ECB. Secondly, by having a Single Resolution Board, that we have as well, that sits in Brussels. Thirdly, with having a European Deposit Guarantee Scheme, and that is what we are currently filling up. That then poses the question, should we then also not harmonize the capital levels that you require across Europe? That's what I alluded to.
That has been a long-standing discussion, for banks like ING, and that's something that we will continue to monitor. In the end, it's in the eyes of the DNB to the extent they want to do to act on that or not.
Okay. Understood. Thank you.
Thank you.
The next question is from Mr. Ruben Eg, Telegraaf. Go ahead, please, sir.
Good morning. I'm not sure if I'm able to follow- up on this amazing first question, which was asked, but I'll do what I can. I was actually wondering, you saw that half of the net core lending growth in 2021 was in residential mortgages. I was wondering in how far the inflation, which you see in the Netherlands and in Europe, has an impact on your the credit losses you have to assume in advance. How do you look at the way this is going, because in January the inflation was, of course, much worse than in Q4 last year.
Thanks, Ruben. That's actually a fantastic question, so you can applaud yourself. It's so good that I will give the floor to Ljiljana.
Yeah, of course. You have to give it to a professional.
Yeah.
Thank you very much for the question. Yes, it's a very good one, and we are looking into it. I can confirm that we haven't witnessed the deterioration of the quality of our residential mortgage book in 2021. Asset quality ratios are all very positive.
However, we also look at the signals from the environment, and we have seen the signals that we haven't observed in the, I would say, last 20 years with respect to the inflation coming in. We all know that inflation is good for certain parts of the P&L and less good for the other parts of the P&L, and we wanted to remain prudent in the Q4 and take into account that this potential risk, coupled with the rising, potentially rising interest rates, might have some negative impacts on the most vulnerable parts of the portfolio, and this is why we have taken this action. Again, it was a management overlay, very specifically triggered to the weaker part of the portfolio, so the portfolio that is already in a significant increase of credit risk, and this is why we have done it. I hope I've answered your question.
Yeah. Well, I was mostly wondering, because you see a lot of consumers who of course see now higher bills they have to pay for fuel in the supermarkets and in all the credit risks you do with having a mortgage. This sort of inflation isn't in it. I was actually wondering, do you also look at the way customers could repay their loans because of all the higher prices?
Absolutely. This is one of the major criteria in underwriting or originating any of the loan. We always primarily look at the customer's household's income and ability to repay. Collateral comes only as a secondary part of this equation. Yes, this is true. With increasing inflation and increasing, I would say, or decreasing purchasing power potentially in the future, that might be a risk. That's why, as I said, exactly looking at these lower parts of the portfolio, we have taken some additional one-off measure. It remains to be seen whether inflation really is going to stay higher for longer and what is going to be the monetary response to it.
Well, what would actually for ING be one of the, or maybe the best message the ECB could bring this afternoon, except that the interest rate goes to 5% or so? Or what would, in the range of expectations, be good for you?
Yeah. Look, in the end, what is good for people is good for the economy, and what is good for the economy is good for us. We are only, let's say, a secondary beneficiary of what will be happening. In the end, we are helped, like all of us, but especially banks are helped by a thriving economy. Now, what is positive is that the outlook on the economies is positive. We had, for the Netherlands, for example, a GDP increase in 2021 of 4.3%, and also the GDP outlook for the Netherlands is positive for 2022 and 2023, with around 3.3% in 2022 and then slightly lower in 2023. That's all helpful.
At the same time, there are disruptions in supply chains and there are disruptions in oil and gas prices, so energy prices. On the supply side, and that both are elements on the supply side, that is driving prices up and that is also driving inflation up. That's where we need to be mindful. In the end, you want to curtail that inflation, because in the end, if inflation then also spills over to the demand side of things, then that could have a negative impact on demand. Now, we currently do not see that. As I've said, the economies are thriving quite well and we see an uptick in economies continuing because the demand is increasing. We also see increasing demand for all the transition that companies need to do with regards to the environment.
That is actually pushing the demand up. In that whole setting, what will then be helpful is a gradual increase of interest rates. Slow moves, because if you hike too quickly, you cause quick disruptions in the economy, and that in and of itself will then create a freeze, and that is not good for economy. That's not good for people and also not good for us. What will be beneficial for us, to put a long story short, is gradual increases in rates. Now, whether that will come-
Okay
At least in the Eurozone, is still to be seen, since the ECB also has these buyback programs on obligations and debentures in Europe. Now, as long as they do not curtail that, then increasing interest rates will probably be counterintuitive if you still continue with these programs. On the one hand, they will need to look at tapering a number of these programs, and then subsequently, that may also lead to hikes in inflation, but that's for Mrs. Lagarde to comment on.
Okay. Is there any way, I mean, if you look at your customers, the fee income are rising because the prices of products are going up. Savings interest is at zero in the Netherlands. In any way, for your customers, they feel this pain also?
Yeah. Well, first of all, the fees are rising because we do more business with more customers. Part of it sits in payment packages, but it also sits, first and foremost, in the increase in the number of primary clients that we have, so we have more clients that we do business with, and in the growth of investment products that we have as well, and the number of assets under management. That is driving our fee growth. More generally, if I take one step back, a negative interest rate environment is an aberrant environment. In the end, it is better for economies if we have a positive rate environment with a positive upward sloping yield curve, which means shorter interest is lower than longer-term interest.
That helps the pension indices, and that's what you currently already see. That's helping normalize behavior in terms of what people invest in and whatnot, and also helps people to make the right credit decisions and not being lured into financings which they could do simply because of negative interest rates. Therefore, from an economic point of view, in general, it's good for people if the interest rates are turning to more positive territory that we have seen until 2012. Okay. Thanks so much. Thank you.
The next question is from Miss Eva Rooijers, FD. Go ahead, please.
Good morning, everybody. I have a follow-up question on inflation and mortgages. The overlay, does it also apply for the Dutch mortgage book or is it mainly other countries? How big are provisions on mortgages in total? Because I want to get a feel for how big the provision issue took this quarter compared to the total amount of provision.
Thanks, Eva. Let me give this question to Ljiljana.
Thank you very much for the question. What I can say on the overall provisions, they are approximately at EUR 5 billion on the portfolio level. Coming back to the inflation and the topics that we have discussed, it is not specific for the Netherlands. It's very much to the global mortgage book. In our markets where we are mostly present, it's not Netherlands specific. Because we do see these inflationary trends globally and not just in the Netherlands.
Okay. Can you maybe also say a little bit more about the positive impact of rising inflation and interest rates on your business?
Yeah, look, in the end, so if you have a mildly positive inflation level, that inflation level will then help to continue to grow spending. It will help actually the demand rather than a negative environment. That is positive. If you think about a positive yield curve, in the end, that will have a positive impact on our interest margins. In that sense, it's positive.
Yeah.
Again, it all comes down to slow moves. If you look at 2012, that's when the interest rates became zero. In 2014, when the ECB came on board, that's when the interest rates became negative in Europe, and that gradually decreased. It's this slow moving that is important to avoid big shocks to the economy and big shocks for our consumers. Yes, we're an advocate of higher interest rates also because it creates the right behavior and the right incentives for everybody to be mindful of risks that people take. Secondly, slow moves in that will be helpful because then it will limit disruptions in the economy.
A question about your exposure in Russia. How are you managing the risk there given the geopolitical situation right now? Is this a country where you want to stay active?
Sorry, is this a country where what? Sorry.
Russia, where you want to stay active?
Oh, yeah.
present.
I mean, look, we are present in 40 countries in the world, at least physically present. We actually do have clients in many more countries, but we're not necessarily physically present in all of those markets. If you're present and do business with clients in so many markets, you're bound to always be in a situation where there is either economic or social or geopolitical tension. Now, we have seen that in many of the markets which we operate, and currently, we do see tensions in Ukraine and Russia. To give you an idea, we have approximately EUR 5 billion in lending outstanding in those two markets combined, and that's from a total of over EUR 600 billion of our lending books. That's less than 1%.
If you look at the number of people that work in those two markets, that is 400 on a total of 57,000. Again, that's less than 1%. Thirdly, if you look at where we do actually have these exposures on these two countries, approximately 70% of what we book on Russia and Ukraine is not booked in those countries, but is booked elsewhere in Europe predominantly. Because these companies also do have many activities in other markets than only their own markets. The same as with Dutch companies, they also operate abroad, and it also goes for these Russian and Ukrainian companies.
Now, that means that these activities elsewhere are helpful because it mitigates the risk that many of the income streams that we receive are in dollars or in euros. Nevertheless, I mean, there are, of course, concerns with regards to what is happening in that area. I mean, that's concerning for all of us in general. What is most important is that we stay close to our clients. You should not forget that in Russia, sanctions were already levied since 2014.
Mm-hmm.
We also had to make significant adjustments to our loan book at that point in time. The most important thing you then need to do is to stay close to your client, keep in conversation to see how you can best deal with the situation that at such a point in time will emerge. We will not do that differently this time.
Okay. Because that was mainly my question about sanctions. Because if sanctions get stricter, do you expect now another adjustment of the loan book, and that will have significant impact?
That depends on the nature of those sanctions.
Yeah.
Currently we have already a lot of trade sanctions were levied since 2014. We made significant adjustments. You do that within the ramification of what the sanctions are stipulating. If new sanctions were to come on board, we would need to study those sanctions, what they exactly entail, and then we would act accordingly.
Okay. My final question is about capital distribution. Did I understand correctly that it is your ambition to give back more to shareholders, but that you are waiting for approval of the ECB? How much room is there for capital distribution?
I will give that question to Tanate Phutrakul.
Capital question. Yeah.
Eva, just to reiterate, yes, we already announced plan to pay more dividend to our shareholders, €0.41 per share. Indeed, given the CET1 level of capital that we have, 15.9%, with a target capital of 12.5%, it is our intention to gradually reduce that level from 15.9% to 12.5%, and that we are in conversation and constructive dialogue with the ECB about that very topic right now. We said we will give clarity to the market before the end of the Q1 results.
Before end of Q1?
Yeah. Announcements. Yeah.
Yeah. Okay. Thank you.
Thank you.
The next question is from Mr. Ruben Eg, Telegraaf. Go ahead, please.
Thank you. Two more follow-up questions. Coming back on Russia, earlier there have been concerns about AML risks in that country. I understand what you said about the situation you operate there. On the other hand, we have seen over the years banking operating in certain countries and markets, and citing this reason that they stay, but in the end they leave anyway. Is there a way you can say, "No, we do business in Russia and we'll continue to do that" or could the situation change for financial risks but also inventory-wise for ING to leave there?
Yeah, I mean, look, we are, as you might imagine, pretty much focused on dealing with AML risks and we continue to improve and grow our practices over there in terms of AML. By the way, yeah, Russia has heightened AML risks, but there are also other parts of the book or trade or international payments that are prone to heightened AML risks. It's important therefore, especially because of the international nature of these AML risks, that we continue to work well together with other banks, but also with government agencies such as the FIU to actually fight financial economic crime. We play our part.
Again, I said it before, I mean, it's more effective and most effective if we work on this together because criminals work across borders. In that sense to fight it, so should we. When it comes to activities that are in more difficult circumstances, I mean, looking at Russia, we've been active in that market since the early nineties after the breakdown of the Iron Curtain. We've gone since then through three crises in Russia. So, we avoid to panic. If you panic is the first one. We have no intention at this point to leave our Russian franchise.
Okay. Second question. I've heard this morning a lot about capital returns. On the other hand, I was wondering, you could also use capital for consolidation in Europe, where you also mentioned the banking union. There has been talks for a long time. Could I say that ING is not going on the consolidation market because you want to return capital?
Well, Ruben, you could say whatever you like. You're a journalist.
Yes, I will.
I would say no, you cannot say that. I think that what we see is we have very good organic growth. You see good organic growth in the number of primary customers. Plus close to 500,000 this year again. Good lending growth, +EUR 30 billion. Good fee growth, we broke the EUR 900 million per quarter barrier. That all speaks for us. That's good. At the same time, if you want to improve your digital experience, we will be continuously on the lookout for technological skills that we do not have that can improve the digital customer experience, and some fintechs may have that. We will be on the lookout for, let's say, product skills, so we can broaden and deepen the offering that we can provide for our clients.
For example, we developed a good app for people to invest with, and that we developed ourselves. But there may also be products that we see that we don't develop ourselves and we then would buy. Last but not least, when you talk about consolidation, if you look, for example, at the transfer of France, in the end, that's also a contribution to consolidation, but then for other players, and that's in market consolidation, and that we will look at as well. What you see is the banking union is not there. That means there's a limitation of moving capital and liquidity around. In fact, capital and liquidity in that sense is trapped in different markets.
That also means that local skill is important, and that means that there are benefits in terms of local skill, in terms of offering, in terms of creating one technology platform in that country. If local consolidation were to happen in some of these markets in which we're active, we for sure will take a look at that.
Okay. Last question. Like, any other bank in the Netherlands, you have made reservations for compensation to Dutch customers on consumer credit products. I was actually wondering, of course, this is something from the past, but every new situation, it is said this is something from the past. How, as a CEO, could you look into that? At this moment, there are new problems being created in products ING offers?
This is the best question so far.
Thank you. I save this for last.
Of you at least. Otherwise, I would not.
Of course.
try to belittle other questions.
Oh, good. Yeah, it's the best question.
Yeah. Yeah. The reason why it's such a good question because you actually asked me about the unknown unknowns, huh. Companies are quite good, and ING, for sure is one of them as well, to point at issues that appeared in the past that we now solved, and we then will make sure that they will not happen again because we will strengthen procedures, we will reflect on it, and we will see how we can improve our procedures and work practices. What is much harder is to look ahead what is societal expectation on a number of these elements, huh. When societal expectation changes, then regulation changes, and then at some point, you will be caught up by what the reality is of what the society feels about what you should do.
Now, one element which is important, I think that these consumer loans were an example of that, is what you increasingly see is the attention for consumer appropriateness and suitability when providing certain products to customers. You see an increase in regulation and societal attention for treating customers fairly and providing them with the right product. Well, questions come up, for example, do you offer Bitcoin or not? Or how volatile can an investment product be that you offer, and how do you make sure that you provide it to the right customer who could understand such a product?
That's an area that we're very focused on to make sure that we are able to explain products to customers as good as we can, so to avoid that customers are getting into difficulties, and that will, I would say, impact their financial health. I think that's a key focus area for the future. How do you best preserve or maintain financial health for your customers?
How do you do that? Because ING is, of course, a large company. You can't sit at the desk of any other local CEO, of course, in what products they are offering.
Well, that's what a local CEO may say. In the end, we have very strict governance and procedures that are driven from the top. That means for the bank overall, and it also means that these global guidelines are being issued for the local franchises as well. In some occasions that really depends on the activities and the laws and regulations of that particular country. That means that on top of it, you may also get additional requirements that we will put in locally. First and foremost, we are driving all countries to adhere to the same global guidelines and that we manage on a weekly and monthly basis.
Okay. Thanks so much.
Thank you.
The next question is from Mr. Paul le Clercq, RTL Z. Go ahead, please.
Good morning. Can you elaborate on the expected negative impact on property valuations that you mentioned due to the higher inflation and rising interest rates?
Yes. That's for Ljiljana, I think.
Thank you. Well, that's a very difficult one because we obviously don't have the crystal ball, and as we know, the valuations are functions of diverse macro impacts. First of all, demand and supply is extremely important in order to assess the value of any asset class as well as a property in residential real estate. Secondly, the level of the interest rate is definitely something that is impacting the valuations. Thirdly, also the interconnections of all of these macroeconomic variables, specifically what we mentioned before, inflation and impact on purchasing parity is something that is adding on. We, at this point of time, do not have the specific worries because this would have been then seen obviously in our asset quality, which is further improving. What we are looking at is forward-looking. That's why we call this a prudent approach in the Q4 .
As to understand how could eventually increasing interest rates environment have the impact on property valuations coupled with different, as I say, impacts from the payment or purchasing power side of the households. So far, we feel comfortable with it, and that's why we have taken this overlay on the part of the portfolio, which is more vulnerable, so of a lower- quality, not on the total portfolio.
Mm-hmm. This EUR 124 million that you put aside, how is it, which part is for the impact on the valuation of property? And which part is the customer's ability to pay back their mortgages?
Well, we do not do this differentiation. It's clearly a simulation with respect to the forward-looking indicators. It's clearly the number that we do not split on a specific part of these macro indicators. As you might as well understand, it's very difficult to predict those. This is the best estimate from what we see in the forward-looking macroeconomic data.
Okay. Thank you.
This was the last question.
Last question. It was the last one. Very good. To wrap up this call, we're pleased with our performance over the past year. Our results were strong, supported by continued strong fee income, which increased 17% compared to 2020. Lending and deposit volumes were up for the year, signaling the growing economic confidence. Expenses were under control and risk costs were sharply lower for the whole year, adjusting to changing economic circumstances in the last quarter. All in all, this led to a net result of almost EUR 4.8 billion for the year and just under EUR 1 billion for the quarter, with our CET1 ratio increasing to 15.9%. With that, we leave you for now. If you have any further questions, you know how to contact our media team.
Thank you very much, and we'll surely speak again the next quarter. Bye-bye.