Hello, and welcome to the ING Media Call, Second Quarter 2022. Throughout the call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Steven van Rijswijk. Please begin the meeting.
Thank you very much, operator. Welcome, and thank you for joining us on the call. With me are Tanate Phutrakul, our CFO, and Ljiljana Čortan, our CRO. We will give you an update of developments and results for the second quarter of 2022, which in short showed solid results in the context of ongoing economic and geopolitical challenges. In line with our three-year priorities, also this quarter we continued our efforts to offer a superior customer experience with a focus on the digital customer journey and to contribute to a sustainable future. We managed to further grow our primary customer base by 228,000 to 14.2 million. We service these clients with a digital and increasingly mobile experience.
Around 53% of our customers now interact with us through their mobile device only, up from 52% a quarter ago and 37% in 2019, which illustrates how the pandemic has been a catalyst for the adoption of mobile banking. This is also true for digital commerce and mobile payments. In the past quarter, we registered 348 million mobile payment transactions. This is 29% more than in the first quarter, 66% more than the second quarter of last year, and even 3x as much as in the second quarter of 2020. In terms of sustainability, we have the ambition to be a banking leader in the fight against climate change.
In the past quarter, we supported 128 sustainable deals, which puts the total number of deals in the first half at 205, which is three more than in 2021. In the past months, we also sharpened our targets and ambitions to reduce our carbon footprint, finance more green and renewable energy projects, and to support our wholesale banking clients to future-proof their business models and operations. As said, our results were robust, despite the continuing geopolitical uncertainty and pressure on the global economy, which led to increasingly challenging operating conditions. Our pre-provision profit remained strong. This was supported by higher interest income, with the pressure on liability income turning into a tailwind, resilient fees, and expenses under control. We saw our core lending portfolio grow by just over EUR 10 billion.
EUR 7 billion of that was in retail, driven by mortgages in Germany, the Netherlands, and Australia, as well as in business lending. Loan growth in wholesale banking was EUR 3 billion. Our deposits grew by EUR 8.1 billion, mainly due to holiday allowances in the Netherlands and the increase of the threshold in Germany for negative rates. Fee income increased by almost 4% compared to last year, mainly coming from daily banking and retail. Fees on investment products reflected a lower activity in stock markets and trading as uncertainty increased. This was also visible in a lower deal flow in wholesale banking. Expenses were well contained despite inflationary pressure and continued investments in our customer experience.
Risk costs were EUR 202 million, which included an overlay reflecting increased macroeconomic uncertainties, as well as releases of overlays we previously booked related to the pandemic and our Russian exposure. All in all, our net result came out as just under EUR 1.2 billion, significantly up from the first quarter, but lower than 2021. Our CET1 capital ratio stood at 14.7%, and we will pay an interim dividend of EUR 0.17 per share over the first half of this year. With that, we're happy to take your questions now.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There'll just be a brief pause while any questions are being registered. Our first question comes from the line of Rutger Betlem from Het Financieele Dagblad. Please go ahead.
Good morning, all, and thank you for taking my question. First question is about the interest rates. As always with earnings windfall in the form of higher interest is being threatened by a looming recession. Still, you remain positive on the NII. What factors help your confidence in that?
Okay. Thank you very much, Rutger. Well, I mean, look, clearly there are economic headwinds, and, of course, we've seen good lending growth in the first half of the year in mortgages, in business banking, and in wholesale banking. In mortgages, that is because there are still shortage of housing in many of the markets in which we operate, so a clear desire for growth in ownership of homes.
Mm-hmm.
In business banking and wholesale banking, you do see that most of the growth in the facilities are mostly short-term. The bigger, larger deals were not really there in the second quarter of this year. With further assumed contraction, we say that we expect a mild recession in the Netherlands, for example, we do expect that lending growth will be fairly limited. At the same time, it's not only about lending growth, we do have a stock of lending and therefore that makes up a large amount of our revenues. The question is, of course, okay, are you either growing your loans?
We need to remain cautious and we need to look at what the demand is, and that demand we expect to go down also because we expect, for example, the number of home sales in the Netherlands to come down this year with 15% compared to the last year. Last year it was 218,000. This year, we forecast 190,000 homes sold. That's an indicator. If you look at the liability margins, i.e. the interest rates, those are increasing, or have been increasing both on the short end but especially also on the longer end.
Therefore on balance, the potential decrease in loan volumes will be offset more than that by the growth in our liability income, because those interest rates are rising pretty swiftly and that gives us confidence to book a higher net interest income in the second half of this year.
Thank you. Second question. If, for instance, the interest rates rise by one basis point, what would that mean for your earnings? Is there a forecast that can be made or?
Well, I mean, this becomes quite complicated quite quickly.
Of course.
It's a bit more difficult than that because then it also depends on where that basis point increase comes from. Is it a shorter end? Is it a longer end? Is it across the curve? What we have said is because that really depends on how we do finance ourselves in the different markets in which we are active. There's a compilation of all kinds of balance sheets within the balance sheet of ING, depending on the market in which we operate. You can imagine that a number of countries have their own balance sheets. What we did, and I would like to point you to the investor update that we gave in the middle of June to give some indication. That has to do with the replication.
Because a bank earns its income from, I simplify the matter, by getting paid for the risk we take on lending and by the reinvestment that we have on the deposits that we receive. We are investing those deposits for a longer timeframe. In general, a positive interest rate and upward sloping curve are beneficial. The question is, how long do we reinvest? Because you also want to do that. You want to match your assets and liabilities. We say we reinvest 40% less than one year and 60% more than one year. That basically gives some indication. You have to look at the graph what that could mean when we would in terms of the interest rates staying at a certain level and tracking certain interest rates more or less.
Now, the one basis point is too simple, too difficult to certainly answer because then we need to discuss tons and tons of assumptions, what you exactly mean. In general-
Mm-hmm.
You could say because quite a big part of our replication portfolio that was invested at lower rates a year ago is running off because that was less than one year and is now being reinvested. Yet on that part, if you put it very simply, that if that then increases with one basis point, we will then make one more basis point on that part of the portfolio. Then you have to do that for each tenor of the replication. Because the interest curve across the board, both short-term and long-term, is increasing, it's almost like a parallel shift, if we call it. The whole curve goes up. We do see across the board an increase in our replication income.
Thank you. Clear.
The next question comes from the line of Jorg Leijten from NRC. Please go ahead.
Yes, thank you. Hello, Mr. van Rijswijk. I got a question with regards to the depreciation on the Turkish activities. In your update, you were saying this is something that we have to do on paper due to internal accounting rules, international accounting rules. We all know there is a hyperinflation. Turkey is struggling with hyperinflation at the moment. But is that something with the level of inflation in the Netherlands we could expect in the near future as well on some of your Dutch activities? Or is our level of inflation on such a low point compared with Turkey that it's not realistic that something like that happens in the Netherlands as well?
No, indeed, these are accounting rules, and what it means is that under international accounting standards, if the aggregate, so the total inflation over a period of three years is together higher than 100%, then you need to revalue your assets and your liabilities. What that means is that our equity that on the one hand means that our equity goes up, so that would almost seem that we make more because our equity is higher. To correct for that, you correct for that in your profit and loss statement by showing a loss there because that loss then filters back into your equity and therefore the two elements are offsetting each other. It's nothing else than by and large an accounting treatment, not so much what the real underlying operations do.
If you now look at the Netherlands, yes, we have high inflation. Let me look at the numbers. Inflation for 2022, according to our macroeconomists, is forecasted at 9.8%. For 2023, still elevated at 3.9%. You already see if you add those up, that is not getting anywhere close to 100%. That situation happening here, as far as we can see is very unlikely.
Okay. That's clear. Thank you. I got one other question. It has to do with the reservations you make for default clients. I don't know if that's the right word in English, but with the mild recession you're predicting coming up in the Netherlands and also elsewhere in Europe, do you expect to make more reservations the coming quarters with regards to default clients due to the recession? Do you expect more clients not being able to pay back on their lending?
I'll give that question to our CRO, Ljiljana.
Hello. Thank you for the question. Yes, definitely we do see ahead of us a certain clouds that Steven mentioned with respect to the, I would say, affordability of the loans on the consumer side, but as well in the real sector, in economy or the corporate side. However, I would like to remind you that we do have the portfolio that has a very low starting point in terms of the cost of risk, meaning a very good asset quality. We have already in the second half, but also before in this year, taken significant forward-looking provisions in order to manage for this eventual uncertainty. Our second quarter cost of risk actually reflect exactly these macro uncertainties, and actually they increase because of these macro uncertainties by EUR 181 million.
On top of that, we have replaced so far risk costs for the COVID-related overlays to the new so-called macroeconomic headwinds, including inflation and energy prices. We do believe at this point of time we are well prepared to navigate through the eventual storm in the second half of this year.
Okay. Thank you very much.
The next question comes from the line of Adrian Muresanu from Muresanu. Please go ahead.
Hello. Thank you for the invitation. I have two questions about Romanian market. My first one is, I have seen last year that Romanian retail market has delivered probably the biggest, the highest return on equity in the ING Groep, somewhere between 30%-40%, if I remember well. Also I've noticed that ING had registered an impressive organic growth in the market. From this, my question is, which is the strategic, how should I say, target for ING Romania? To increase the profitability or to increase the scale, the market share?
Yeah. Thank you very much, Adrian. Clearly, what we have said, and Romania is what we call a universal bank. In Romania you have both retail activities, that is private individuals, and business banking. Small and mid-sized companies, as well as wholesale banking. The two business models work slightly differently. If you look at the retail side, so that is private individuals and the business banking customers, it is important to have sufficient local scale. Why is that? Because the largest part of the cost infrastructure due to compartmentalization of capital, liquidity, data, systems and products, therefore also sits in the particular countries, in Romania, in Germany, in Spain, in the Netherlands.
Sufficient local scale helps to be able to offer a good customer proposition. It helps to attract the right talent in the market, 'cause there's always this fight for talent going on, especially now, and to reach a good through the cycle profitability. Now, in Romania, we are a top three bank. We also offer very good digital propositions. This quarter we're the first bank to offer a fully online digital pre-approval process for mortgages. We are the first bank to do so. We are very pleased with our performance in Romania, pleased with the way we interact with our customers, and we will continue to invest in that local scale, but especially also in the superior customer experience. Because we believe that the difference we can make is in providing a better experience.
That in the end leads to better, more personal, more easy, more instant interactions. That in the end then also drives our profit and loss statement. Now, skill is important to be able to offer the right components to our clients in the market. In the end, we will then look whether we can realize the right profitability, and that for sure is also the case for Romania.
Thank you. I had another question about the corporate banking market. Here I've just observed that other banks also reported here in Romania a very big growth rate on the corporate loans portfolio. I was how should I say, wondering how do you expect to evolve here the corporate banking market? Because on the one side, there is an increase, a new demand for working capital, and on the other side, there are some adjustments, of course, of investment projects in these challenging conditions.
Yes. Thank you.
Thank you.
Yeah. Thank you. I mean, here we have to differentiate between the short term and the long term. In the short term, indeed, to your point, we have seen an increase in working capital facilities, but those are relatively short term. Although we have good growth in wholesale banking across the board, so in different countries, for wholesale banking, given the current economic circumstances, it may well be that loan growth in the second half of the year is more subdued than we have seen in the first half of this year. That's a logical consequence of the economy. We also need to be mindful of that, we do not over-credit, and we stay very much focused on the strength of our loan book in Romania and also elsewhere. The other point is more long-term.
Thank you very much.
I mean, Romania, the second point is that Romania in the long term is growing. I mean, if you look at the development of Romania, it's growing quicker in GDP than many other European markets. It has a very good, I would say, a well-educated employee base with a lot of technical capabilities. That's also why we are putting some of our central hubs in Romania for the strong technical engineering capabilities that you have in Romania. Therefore, long-term, we do expect further growth when the countries are developing. Because in wholesale banking, we have a network of banks, i.e., we focus on international companies, Romanian companies doing business in Romania and outside, and foreign companies doing business outside and in Romania, that we, on the long term, expect further growth also coming from wholesale banking in Romania.
Many thanks.
We have just one follow-up from Rutger Betlem. Please go ahead.
Yes. Thank you. I have a follow-up question on the question that Jorg Leijten asked earlier, and that's the impact of provisions and bankruptcies. How is your forecast on that?
I'll give this again to Ljiljana.
Well, as you know, we do have, and we have proven through our track record, that we have a strong risk management framework in place which makes sure that our asset quality remains of a good one. This is clearly seen from the number of the indicators I've just mentioned, for example, an NPL ratio.
Yeah
that remains stable. Actually our Stage 2 ratio, which is the ratio that shows increased risk in the portfolio but still performing, even decreased this quarter. We do believe with our policies in place, with our prudent also provisioning process that we have applied at this point of time, there is no need to change our guidance through the credit cycle, and we remain with that.
Thank you. Second question, if I look at the exposure in Russia, it's still quite a large sum. When do you expect to make sort of progress in lowering the amount?
Sorry, I missed that question. What is a big sum?
Uh
Exposure in Russia. Okay.
It's about the exposure in Russia. It was, I don't know, it was about EUR 6 billion, I think. It's now EUR 4 billion, I think. It's still quite a large sum, and I was wondering when you expect to make further progress on lowering that amount.
All right. I give that question again to Ljiljana.
Well, you're correct. Our exposure has come down by EUR 2.1 billion since the beginning of the crisis, which represents 33% of the overall stock. We do believe this is a very good result in a very difficult environment, and this is the result of a hard work of a central team, but as well our local teams and cooperation with the clients in order to de-risk where possible. Therefore, we have as well had the decrease of the risk cost in the second quarter based on this good deleveraging capacity. Going forward, we will continue doing so, even though we have to know that our portfolio in Russia is a combination of the short-term loans and long-term loans. Clearly, long-term loans are always better collateralized. That's why we also have a lot of ECA covered.
It means a structured sovereign support to some of the facilities as well as private insurances. These are clearly remaining on the book for the longer time. Short-term loans, we have decreased as much as we could, and we will continue doing that, clearly at a lower pace than what we've seen in the first and second quarter, having in mind that the majority of the opportunities has been already used.
Do you expect to take a bigger provision on that or?
As you know, we have currently approximately EUR 700 million of provisions for our Russian exposure, together with almost EUR 1.2 billion of capital that is reserved for the unexpected loss. Looking at our exposure in Russia, we do believe that we are sufficiently currently provisioned and for the worst case scenario, we would be well off. At this point of time, there is no need to take anything additional.
If there are no further questions, I would like to ask a last one. Is that okay?
That's okay, of course.
Okay, good. If you look at the current situation at the markets and the geopolitical tensions, the supply chain disruption, inflation, et cetera, what is the factor that worries you the most for the coming half of the year?
Yeah, famous last words. Of course, the energy supply in Europe is of course of a big concern. Europe is dependent on gas deliveries from Russia to the tune of 45%. We do believe that Europe is able to curtail that with about 60% in a year's time frame, but that still means that on the remaining 40% of that, 40%-45%, you're at risk. Now, countries are doing their best to curtail that. We also see that demand has come down already in the past quarters based on measures that have been taken.
If Russia would completely stop gas provision to Europe, that then can have an add-on impact on GDP, and we expect that add-on negative impact on GDP to be 1%-3%, so -1% to -3%, at least in the short term. That's currently a big short-term concern.
All right. Thank you so much.
Thank you.
Just as a final reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. We have a follow-up from Adrian Muresanu. Please go ahead.
Thank you. I have one more question about the ING strategy to limit exposure to finance oil and gas sector, for example, in the upcoming year period, because I know they are mostly focused on green finance and green loans. On the other hand, for example, in Romania, there is a lot of discussion about financing a very important project, Neptun Deep, in the Black Sea. I don't know if you know the project. Also in the gas infrastructure. What I'm asking, in fact, is ING will not finance these kinds of projects in Romania or, how should I say, it will be its position in this financing goals. Thank you very much.
Yeah. Yes, thank you. Look, for us, sustainability in the heart of what we do is one of our two strategic pillars next to providing superior customer experience. We really want to make the difference for people and for planet. It also means that we have committed ourselves to a net zero emission level by 2050, i.e. the 1.5 degree path. That's a long way away, 2050. That's why we said we also need to set intermediate targets because 2050, you know, I'm sure I'm then not working for ING anymore and neither are probably my colleagues here around the room. We need to make sure we also set intermediate targets, and we are driving that as well.
In doing that means that if you follow that 1.5 degree glide path, that means that the world needs to decrease global emissions by 45% by 2030. We are currently aligning our entire lending portfolio sector by sector on that -45% decrease by 2030, and even intermediate targets for that in 2025. In doing that, we follow the guidance of the International Energy Agency, that means that you can also follow the roadmaps and glide paths of that International Energy Agency per sector. For oil and gas, it means that we have decided not to finance new oil and gas fields.
We will continue to finance existing oil and gas fields and projects, but when it pertains to new oil and gas fields, then we will not partake in new financing. In the end, although I fully understand the dilemmas that we face in the world, especially in this day and age, I think what we now need to do as societies, both the public and the private sector, is really make sure that we can transition ourselves to a greener world. That also sometimes means that we need to make tough choices. We will always do that inclusive of our clients, so in dialogue with our clients, but we have decided not to finance new oil and gas fields, and we stand by that.
Thank you.
As there are no further questions, I'll hand it back to the speakers for closing remarks.
Thank you very much, operator. To wrap up the call, in the second quarter, we saw continued growth in our primary customers and the adoption of our digital and mobile offerings. This led to robust results despite the continuing geopolitical uncertainty and pressure on the global economy, which led to increasingly challenging operating conditions. 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 for your attention, and hopefully we will speak to you again next quarter. For the ones of you who go on holiday, I wish you a great holiday as well. Thank you.
This concludes our conference call. Thank you all for attending. You may now disconnect your lines.