Morning, this is Mark, your operator. Welcoming you to ING's second quarter 2022 conference call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business expectations for our future financial performance and any statement not involving any historical fact.
Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual reports on the Form 20-F filed with the U.S. Securities and Exchange Commission and our own press release as posted on our website today.
Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you.
Thank you, operator. Good morning, and welcome to our second quarter 2020 results call. I hope you're all well, and I'm joined by CFO Tanate Phutrakul and CRO Ljiljana Čortan, and I'm pleased to take you through today's presentation. After that, we will take your questions.
During our recent investor update, the board and I showed you the value ING has delivered over the past years. We talked about our two strategic priorities, our customer experience and sustainability, and what we do to ensure we can keep delivering value. Today, I will discuss some of this quarter's achievements on these priorities and how we keep improving ourselves also in today's challenging environment. Challenging it is. We keep a close eye on what seems to be quite a storm. It's hard to predict how things will evolve.
However, even with reduced visibility, we're confident about the strengths of ING, and this confidence is based on several factors. First of all, on a strong commercial positioning. We see it reflected in almost a quarter of a million new primary customers added during the quarter. Second, our solid financial performance with strong pre-provision profit driven by increased NII, resilient fees, and well-contained costs.
Third, on the prudent way we manage risks, visible in our risk metrics and in the further reduction of our risk exposure. Though we can expect to see some impact of the current macroeconomic environment, we're well-prepared with healthy provisioning and a low Stage three ratio. Finally, on a strong capital position, which also leaves us with the opportunity to provide our shareholders with an attractive return.
Today, we announced an interim cash dividend of EUR 0.17 per share, bringing the yield of distribution so far in 2022 to 9.1%. Before we go into the quarterly affairs, I will spend some time on our strategic priorities and this quarter's pre-provision profit. Slide three shows some improvements we made on our customer experience.
We focus on the digital customer journey and especially on mobile solutions as mobile is the main banking channel with now 53% of our customers only interacting with us through the mobile. As Marnix van Stiphout explained to you during our investor update, expanding our mobile offering also reduces our cost to serve. In half of our retail countries, we have the highest net promoter score, meaning we have the highest share of customers recommending ING to others.
As Aris mentioned during the investor update, we want to be number one in MPS in all of our retail markets. This in turn supports growth of our primary customer base, and this grew by 228,000 this quarter, reaching 14.2 million primary customers or 46% of our private individual customer base. We will continue to grow these numbers by improving the customer experience through focus projects with high execution certainty.
Some examples this quarter show how we further digitalize mortgages, making the process more easy and instant in Romania and Belgium. In Spain, we added new features to our app using application developed in other countries based on our touch point components. These applications being round-up and open aggregation now have been reused to benefit our Spanish customers.
The next slide shows how we place sustainability at the heart of what we do. We joined forces in the sector of aluminum to develop a framework defining how lenders can support the decarbonization of this sector. This is key to realizing climate goals and follows earlier successful sectoral work groups on steel, aviation, and shipping.
At our investor update in June, we announced intermediate targets for three of the sectors in scope of Terra to align with our net zero by 2050 commitment. Since then, we've added intermediate targets for three more sectors, being cement, steel, and aviation. More details on these and our intermediate targets will be included in our next climate report. Our sustainability focus goes beyond the environment.
For example, at the end of June, we published our fourth human rights review, following up on our previous reports on extending the assessment of the most impactful human rights issues to our retail operations. Commercially, transition finance activity remained robust. The number of sustainability deals was slightly higher than in the first half of 2021, a year in which activity in this area made a big jump compared to previous years.
During our investor update, we introduced a volume target, which is to have an annual EUR 125 billion mobilized by 2025. Over the first half of 2022, that number reached EUR 40 billion. One example this quarter is in Singapore, where we had the lead role in the first social bond in healthcare. Slide five that shows our pre-provision profit up almost 20% year-on-year and 3% quarter-on-quarter.
I'm happy that we realized another very strong quarter despite market circumstances becoming increasingly challenging. In NII, we see the effects of an improving yield curve. As Nate showed during our investor update, we benefit from the shift to a positive environment, and the drag on liability margins from negative rates has disappeared. We also continue to benefit from higher rates in non-euro zone countries.
On lending NII, the picture was a bit different as client rates generally track higher funding rates with some delay and prepayment penalty income continued to level off to more normal levels. For the second half of 2022, several factors play a role in how NII will develop. The yield curve development is supportive, while benefits from negative interest rate charging and tiering will disappear. We expect that higher funding costs will be passed on to the market.
Loan demand could weaken in the current environment, although for transition finance, we saw during the pandemic that demand continued also in more difficult times. Overall, we maintain our expectation that NII will be up in 2022. Looking at other P&L items, there were some more impacts from the macro environment.
The main impact came from hyperinflation accounting we had to apply to Turkey. Combined with the goodwill impairments, the impact on our net result was -EUR 277 million, mainly in other income, and this amount was added back when determining resilient net profit for distribution. On fees, growing uncertainty resulted in lower stock markets and less trading activity, leading to lower fees on investment products.
Although visibility going forward is reduced, with 6.5% growth realized year- to- date, we continue to target an average 5%-10% growth rate. Operating expenses reflected inflationary pressure, mainly in staff costs. Overall, with measures taken to control costs, we contained the upward pressure and kept cost growth well below inflation rates.
Although higher inflation seems to continue, we maintain our commitment to keep underlying costs flat this year and to keep cost growth beyond 2022 below inflation. Now let me take you through our second quarter results starting on slide seven. Year-on-year, NII was up 3.7%, benefiting from a further recovery of liability margins, reflecting increasing interest rates as well as higher results in treasury.
We continued to see some pressure on lending margins in the second quarter, reflecting lower prepayment levels on mortgages and a delay in tracking higher funding rates. We expected the higher current rates now have been incorporated in market rates. NII went up 1.5% quarter-on-quarter, again supported by improved liability margins and also slightly higher volumes, offsetting the pressure on mortgage margins due to the reasons I just mentioned.
Our net interest margin for the quarter was slightly lower at 136 basis points, as higher NII was offset by a higher average balance sheet. Slide eight shows net core lending growth. In retail, mortgages were again the largest driver of growth, especially in Germany, Netherlands, and Australia. Also in business lending, we saw good demand, mainly driven by working capital.
In wholesale banking, loan growth was mainly visible in term loans and lending and in working capital facilities. Going forward with increased macroeconomic uncertainty, visibility is reduced on how loan demand will develop in the second half of the year. Net customer deposit growth was EUR 8.1 billion, fully driven by retail, which included the seasonal effects of holiday pay allowances in the Netherlands.
In Germany, we saw a reversal of outflows following the announcement of an increase of the threshold above which negative interest rates are charged. Wholesale banking recorded a small outflow following the high level of deposits at the end of the first quarter. Now turning to fees on page nine. Year-on-year, fee income grew by 4%, driven by 10% higher fees in retail, where daily banking fees increased with an impressive 34%.
It reflected growth in primary customers, the increase in payment package fees, and new service fees. Lending fees were also higher, while investment product fees were down, although still at a consistent high level as increased uncertainty resulted in lower stock markets and less trading activity. In wholesale banking, fees were 7% lower as generally subdued capital market activity led to lower deal flow in capital markets and corporate finance after a very high activity in the first quarter of this year.
Sequentially, fees were stable in retail with growth in daily banking and lending, while investment products were lower, affected by growing uncertainty. In wholesale banking, this uncertainty was visible in the deal flow in syndicated loans and capital markets, while lending fees were elevated in the first quarter, driven by a high number of syndicated transactions.
On to expenses on slide 10, including incidentals and regulatory costs. Operating expenses were slightly higher on both comparable quarters. This may be the effect of inflation coming in, which is leading to higher salary costs driven by CLA increases and indexation. In many countries in which we're active, inflation rates are now in double digits, and we keep investing in the customer experience and in areas where we can get the best returns.
In this context, with a 1.4% decrease year-on-year and 3% increase quarter-on-quarter, our costs are under control and we still guide for flat costs over 2022. Regulatory costs were up on both periods. Year-on-year, this was mainly reflected in a one-off contribution in Poland to a new institutional protection scheme.
Quarter- on- quarter, the reduction is explained by the full payment of the annual contributions to the European SRF and Belgian DGS in the first quarter of this year, and this also applies to the annual Belgian bank tax. Incident cost items this quarter included restructuring costs in Belgium, where we are adjusting our network, and also for Philippines, where we have decided to discontinue our retail activities as we don't believe the required scale can be reached in an acceptable timeframe.
This decision does not affect our wholesale banking activities, nor the shared service center we have in Manila, which as a hub, plays a central role in our scalable operations, also explained during Investor Day. Overall, in light of the current operating environment, and especially when looking at the high inflation rates, I'm pleased with the cost development.
On to risk costs on slide 11, which were EUR 202 million or 13 basis points over average customer lending. We booked EUR 481 million reflecting updated macroeconomic indicators and recorded a net addition of EUR 160 million for sector overlays. This reflected a EUR 268 million addition for potential impact of secondary risk of the current macroeconomic environment, minus a release of EUR 152 million taken in previous quarters, mainly for vulnerable sectors during the pandemic.
In total, we have built up EUR 492 million in management overlays. Risk costs further include a release of EUR 117 million for our Russia exposure. This reflected a further reduction of our Russia exposure, while we also partly replaced the management overlay taken the last quarter with provisions based on individual client assessments.
Inflow in stage three for Russia exposure was limited at EUR 58 million, as the book generally remained performing. Including some regular stage migration, we saw a net release in stage two and a reduction of the stage two ratio. The stage three ratio was stable at a low 1.4%. Slide 12 that provides some detail of our Russia exposure as of the 3rd of June.
Since the end of February, we reduced that exposure by EUR 2.1 billion, and we will continue our efforts to derisk. Of the amount remaining, EUR 900 million was onshore, with EUR 200 million covered by European parent guarantees and part of the remaining exposure is central bank deposits. Our local capital at risk was EUR 200 million. EUR 3.6 billion was offshore, with EUR 1 billion covered by ECA and CPRI, which is the outstanding amount covered.
We now have EUR 700 million in loan loss provisions for Russia, which reflects capital impact from expected losses, while RWA impact reflects unexpected losses. RWA on our Russia exposure decreased to EUR 9.4 billion, consistent with our reduced exposure. At 12.5%, this is an equivalent of a EUR 1.2 billion CET1 capital impact, so a combined EUR 1.9 billion of potential impact already included in CET1 capital.
Our focus remains on further reducing our Russia-related exposure, although you should not expect our portfolio to run off at the same pace as it did in the past four months. The next slide shows our CET1, which came in at 14.7%.
CET1 capital was half a billion lower, mainly due to the EUR 1.25 billion additional distribution, which was partly offset by the inclusion of half a billion of net profit for the quarter. RWA were up by EUR 1 billion, including EUR 4.5 billion of VaR impacts. Credit RWA were down, mainly due to the reduction in our Russia exposure.
Market RWA were higher, reflecting the implementation of EBA guidelines on the treatment of structural VaR positions. Furthermore, lower operational RWA reflected the update of the AMA model. Considering our distribution plans, we will be paying an interim cash dividend of EUR 0.17 per share over the first half of 2022. For additional distributions, you know it is our intention to optimize our capital structure and bring our CET1 capital to around 12.5% in equal steps over the next few years.
We have already distributed an extra EUR 1.25 billion this year, and we are in a good position to do more. This, however, requires approvals and we are in a constructive dialogue on this and we will update you when possible. Slide 14 shows our targets as we present them to you during our investor update, and the CET1 ratio remains well ahead of our target of around 12.5%. On ROE, we saw some impact from hyperinflation accounting this quarter.
With continued growth of customers, loans, and fees, as well as the focus on cost and capital optimization, we maintain our ambition to provide an attractive total return. Cost income remains an important input for our ROE, and we continue to work on our ambition of 50%-52%, which is not only about growing our income, but also about cost control. I would like to wrap up with the highlights of the quarter.
In the second quarter, we made additional progress on our strategic priorities with new digital capabilities added to improve our customer experience and new initiatives in sustainability, including further efforts to support the transition to net zero by 2050. Pre-provision profit was strong, driven by increased NII, resilient fees, and well-contained costs. We have a high-quality loan book with solid risk metrics, and we further reduced our Russia exposure.
We have a strong capital position, and this provides the opportunity to continue delivering an attractive return to our shareholders. Today, we have announced an interim cash dividend of EUR 0.17 per share. Overall, although forward-looking visibility is reduced and we can expect to see some impact of the current macroeconomic environment on our business, we are well-positioned and confident about our ability to navigate these challenges and continue to deliver value. That brings me to the Q&A. Operator?
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find your question has been answered before it's your turn to speak, you can dial zero two to cancel.
Once again, that's zero one to ask a question and zero two if you need to cancel. Also, in the interest of time, we kindly ask each analyst to limit themselves to two questions only. Our first person is Giulia Aurora Miotto of Morgan Stanley. Please go ahead. Your line is open.
Yes, hi. Good morning. Two questions. The first one will be on cost of risk. It was very low in the quarter, but some banks are, you know, disclosing to the market what they think the impact could be in the case of a Russian gas cut off. I'm not talking about the direct Russian exposure necessarily, I'm just talking about the broader corporate loan book.
Has ING run that sensitivity, h ow much do you think that could add to your cost of risk? That's my first question. The second question on NII. Some progress in the quarter, but I was just wondering whether you have some, I don't know, guidance perhaps for the second half of the year. How do you think this could evolve given what you are seeing on the deposit side, on the mortgage market and in terms of loan growth demand? Thank you.
Thank you very much, Giulia, and I will focus on the first question on NII, and then Ljiljana will then do the question on risk cost. On the NII, I mean, if you look at this quarter, the increase was supported by higher liability margins, both in the Eurozone but also outside of it.
We are, as we also showed during our investor update, well-positioned to benefit from a rising interest rate environment, with of course, the current positive trend of the liability margin improvements, and also because of the fact that the ECB has now decided to increase the interest rates as per the end of July from -50 - 0. Now, clearly we have already seen the benefits.
In the third and fourth quarter, of course, we will also see that we need to absorb the loss of the negative carry that we will lose and also of the tiering benefits. On a net basis, then still we will have a positive benefit from liabilities in 2022. The flip side also is that rising interest rates have caused prepayment behavior of mortgages to change.
There sort of are less prepayments, and the funding rates we have not been able yet to fully integrate into our mortgage loans. Growth in lending was of course relatively high in this quarter with around EUR 10 billion. We see in some of the markets the home prices gradually not rising anymore, so flatlining. We see the number of properties sold going down.
For example, the growth in properties sold in this market will go down with approximately 15% compared to last year. That's what we expect. It also means that may also impact on the loan growth. Despite that, we do see growth in NII in the second half of the year as a result of increasing liability margins.
Good morning, Giulia. On the risk cost, yes, the risk costs this quarter were modest and were primarily reflecting few of the moves that we have taken consciously within the portfolio. The largest impact was clearly coming from a less favorable macroeconomic indicators going forward, and the impact of risk cost was EUR 181 million there.
Clearly, within this macroeconomic indicators, you already do have encompassed certain assumptions, macro related to the energy prices and gas. More specifically, as we've said, this quarter, we have replaced majority of our COVID-related portfolio with the so-called new second order impact portfolio. It's not related directly to the Russian exposure, it's related to the major macroeconomic indicators that we see, which is clearly the gas, potential to be cut off in sense of also rising energy prices.
Furthermore, I would say dislocated supply chains, and definitely, inflation. Having in mind these changes in releasing the COVID overlay and also building a new overlay, we are currently having approximately EUR 492 million of the overlay, out of which, it is related to the wholesale banking, EUR 228 million.
We do believe with that amount, we have tackled, properly the impacts of the eventual, gas, cut in Germany, but as well in Europe itself. Already for the retail part, clearly, we have taken, some, sensitivity analysis and also the impact of increasing energy prices on the household's cost and ability to repay.
You'll remember already in the fourth quarter, we took some stage two provisions related to the energy, but as well on the retail side to the potential impact on the housing price market. I do believe we are forward-looking, taking sufficient cautious, but we remain clearly with other tools like watch listing, very much present and observing the situation.
Thank you. Can I just follow up to make sure I understood it correctly? The Russian gas cut-off scenario is already factored in in your provisions or would require a further top-up?
Well, we do the assumptions based on the current macroeconomic environment. The assumptions that we have taken is actually line by line for all energy-intensive customers, having looked at several scenarios. We do see in the meantime that some of the countries like Germany, for example, is thinking of so-called gas auction model that would definitely give some subvention to the clients that would not be able to replace Russian gas with the other ones.
Several scenarios have been taken into account. In case there is increased severity going forward, we will adjust our scenarios, but we do believe that with the provisions we have taken currently, we are more than well-provisioned.
Okay. Thank you.
Thank you. Our next question comes from the line of Farquhar Murray at Autonomous Research. Please go ahead. Your line is open.
Morning, all. Just two questions if I may. Firstly, just on lending demand. I mean, quite a strong second quarter, but you are flagging weakening loan demand in the second half, and obviously visibility is reduced. I just wondered if you could elaborate on where you are seeing weaker demand. In particular, is that mainly coming from just reduced refinancing on mortgages, or is it a more insidious cooling of corporate demand?
Secondly, and perhaps a little bit more Dutch specific, we are seeing a combination of pressures on Dutch agriculture and horticultural sectors. I just wondered if you could elaborate on your exposure there. In particular, is that part of when you think of that EUR 492 million that you've put aside, could you elaborate on which sectors those are probably most specifically focused upon? Thanks.
Okay. Lending demands. Thank you, Farquhar. If you look at the growth that we have seen in this quarter next to mortgages, if you look at both business banking and wholesale banking, where the growth was largely in short-term facilities. You've also seen that in terms of the fees on the big syndicated loans, one of the reasons why in wholesale banking the fees came down was because of less activity in the large mega deals, if you will.
That also shows that demand is relatively soft, except for working capital. We do expect demand for new mortgages to be softer as a result of less house sales and also by a result of higher interest rates, therefore lower prepayments. We do expect that to soften as well.
It's a bit too early to say, but if you currently look at the house price development forecast for the third and fourth quarter for the Netherlands, Belgium, and Germany, and where last year for the Netherlands, it was in the double digits.
You see that the first half still continued growth in all of these three countries where we have approximately 80% of our mortgages, but that's tapering off to, let's say, zero-ish level. Also due, of course, to the inflation, but also due to lower demands. Like I said, we see lower number of dwellings being sold. That's what we see on the lending side. If you look at Dutch agri, our exposure is low. We have, if you look at the total Dutch exposure, approximately 4% of exposure that Dutch banks have on agri. That gives you an indication how limited it is.
Okay, perfect.
Thank you. Our next question comes from the line of Benoît Pétrarque at Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, good morning. First question is actually on NII again. Just to come back on your NII sensitivity provided in June. I think at that time you provided a kind of impact of EUR 200 million for 2020 to EUR 800 million for 2023, and that was the kind of Eurozone effect net of exiting the negative carry.
Could you confirm? I think you confirmed that the NII will be up in the second part of the year, but is the EUR 0.2 billion still a figure you have in mind and also for next year, the EUR 0.8 billion? Do you expect also maybe some positive effect on the non-Eurozone countries still in the second part of the year?
Just to come back on this NII sensitivity, I wanted to confirm with you your deposit beta of 50% in your sensitivity. It seems to be quite high looking at your mix, retail wholesale. Do you still have a 50% deposit beta in mind o r do you see probably different developments in the market currently? That's the first question.
Second one is actually on your capital plan. You kind of reconfirm that you wanted to distribute your excess capital in equal steps and you're actually in constant dialogue with the regulator. What can we expect in terms of timing in light of the current uncertainties?
Is that something you still expect for you know in H2 or will that be slightly postponed given the developments, I mean the macro developments you flagged? Just wanted to check that. Also, the equal steps have 50 basis points. Is that still 50 basis points for each year, so 50 basis points potentially for 2022, 2023 up to 2025 o r will that be slightly different based on the current macro? Thank you.
The good thing is about this, about these questions is that I now realize that you have looked very well at the slides that we presented during our first day, and I'm very happy with it. There's one caveat to make about these slides, which is that we gave, let's say, the tracking rate and, therefore the growth in our liability income.
We based that on either 100% tracking or 0% tracking and said, well, and what if it is 50% tracking and maybe somewhere in between 0% and 100%. The 50% was an example. Not what it really is. Therefore, we don't really comment exactly on that figure still.
The curve now has become more positive for us and with the fact that 40% of our replicating portfolio lapses within one year, that brings us good benefit. It also means that despite the fact that we have a weakening loan environment that we just discussed, and the fact, of course, that we will not benefit anymore from the negative interest rate charging and tiering, we do still expect to have positive impact on NII in the second half of the year compared to the first half. The answer is yes. Tanate, capital planning.
Benoît, we are engaging with our regulators on capital planning and cash distribution. We have been engaging with them about where our target capital ratio will be and the path at which we get to that capital ratio.
This interaction with our regulators are ongoing, including you know if we were to do additional cash distribution, how that would look like. We're constructively engaging with them and that we consider ourselves to be in a strong capital position despite what's happening in the macro economic situation. We'll let you know when we get approval for any further cash distribution. So far, the discussion with the regulator has been constructive.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Tarik El Mejjad of Bank of America. Please go ahead. Your line is open.
Hi. Good morning. Just one quick question left. Can you please give more details on the restructuring costs in retail Belgium that you booked in Q2, what it's consisting of, and if should we expect more restructuring in the coming quarters on retail side? Thank you.
Yeah. Thanks, Tarik. I mean, this restructuring cost in Belgium had to do with how we deal with our network and our independent agents. There we came to a new type of contract, which led to us taking provisions in this quarter on how we work with them going forward. There's nothing else to be expected on that particular front. We continue to further optimize when we develop our digital services, our branch network, but that's something separate. This has to do with how we work with our independent agents.
Okay. Thank you. If I can add a question on costs. I think you had salary negotiations or discussions with unions in June in Netherlands. Is that correct? What’s been the outcome of this in terms of impact on costs? I know you reiterated your full year guidance of flat costs, but how, I mean, how should we think about next year? Thanks.
Yeah. I mean, if you look at the CLA impacts, that they are different in each country. Some countries have automatic indexation. In other countries, it depends on the month or the quarter, where we then index not per year, but per quarter. In some countries, it is based on discussions with unions, which is also the case in the Netherlands.
We have a current running agreement on CLA in the Netherlands that is running until the end of this year. Discussions will resume. I will make the bridge to costs. What we have said indeed is that we are targeting flat operating costs for 2022 compared to 2021. Clearly, we see big impact from inflation.
At the same time, we continue to work on our digitalization strategy, our end-to-end digitalization in the different propositions in retail and in business banking and wholesale banking. Of course, we've taken a number of decisions on stopping or closing some of our business activities in some of the countries which benefits have not completely come through.
With that, with those benefits coming through, that gives us the focus on keeping costs flat target for 2022. Thereafter, we have said because of our continuation of our digital improvements, we want to be able and should be able, by the way, to keep our cost increases below the level of inflation.
Thank you.
Thank you. Our next question comes from the line of Kiri Vijayarajah of HSBC. Please go ahead. Your line is open.
Yes. Good morning, everyone. A couple of questions from my side. Firstly, sticking with expenses, I wonder if you could just give us your quick view on the risk of windfall bank taxes in the various geographies in which you operate. Obviously, quite topical at the moment. Then secondly, just on this issue of the lag in terms of repricing on mortgages, are you able to quantify exactly what the negative impact was in 2Q?
I guess more importantly, does that recur whenever you have another quarter of sharp upward moves in funding costs that you can't reprice the mortgages swiftly enough? You know, we could see further quarters of that kind of repricing lag impacting your net interest margin. Thank you.
Okay. Let me first start off the lack of repricing in mortgages. Yeah, I mean, clearly, that actually always happens when interest rates increase, then also, typically then the market rates are an input factor for our funding rates, obviously, but will also be then an input factor for mortgages, obviously.
Typically, the rate of repricing of mortgages or loans in general when rates go up is slower than the funding rate going up. There will always be a lag between repricing to the markets and the funding rates that are higher. That will also continue when interest rates would go further up in mortgages as well. On the windfall on costs.
Kiri, on regulatory expenses as opposed to operating expenses, we have a bucket of just a little over EUR 1 billion in these types of charges, consisting of Single Resolution Fund contribution, Deposit Guarantee contribution, and bank taxes. Our guidance has been, and it continues to be, that both the SRF contribution and DGS should come to its targeted amount by the middle of 2024.
We do expect a fairly sharp reduction in those buckets at that time. In terms of bank taxes, we don't really count on windfalls, right? If anything, governments around where we operate are looking for additional revenue to help to support the economy and support people. We don't expect any further reductions in terms of bank taxes, and we're not counting on much increases either. We're neutral on bank taxes.
Okay. That's very clear. Thank you.
Thank you. Our next question comes from the line of Benjamin Goy at Deutsche Bank. Please go ahead. Your line is open.
Yes. Hi, good morning. Two questions, please. Maybe one on NII on the details in the quarter. Looking at your three largest retail markets, they were down to flat, so not driving the overall group results. Maybe you can talk a bit about what was going on there, in particular Netherlands.
Secondly, on the Philippines, you decided to exit that. Can you speak a bit more generally about the framework, how you look at these type of ventures? What's the time frame? What is the break even periods you grant generally then, b ecause correct me if I'm wrong, I think it was first mentioned in 2019 that you're going into the Philippines? Thank you very much.
I will take the question, Benjamin, on the ventures or markets. Then Tanate will talk about retail margins. As I have said before, from a strategic point of view, in retail, local scale is important. Why is local scale important? That is because, from a regulatory point of view, there is compartmentalization.
Not only in capital and liquidity, but also in terms of data, systems, and product requirements, and because these are therefore so vastly different in each of the markets in which we operate, also the bulk of the cost base will sit locally.
That does not mean that we do not want to have global components as much as we can to get benefits of scale, which we do through our scalable technology and operations, including our internal private cloud and our touchpoint architecture and our global operations in various countries.
If you look at retail, that still means that in spite of all of that, it means that you need to have a sufficient local scale. Sufficient local scale to attract the right talent, sufficient local scale to build the right customer propositions, and sufficient local scale to get to an attractive return through the cycle for our shareholders.
That means that we have looked and are always looking at where can we invest optimally our capital and our costs and our effort in markets where we can do that and improve that, and in markets where we believe we are unable to do that in the medium to long term, we then stop that activity to reinvest that capital and those costs elsewhere. That has therefore also been the case in the Philippines.
Benjamin, just giving you a bit more highlights on the NII. We reiterate the point that we are geared to rising interest rates, so you will see that come through in the coming period. We already see that coming through in the other C&G segment when you look at our results in more detail, that in markets like in Poland, Australia and Romania, you see the benefits of that liability replication in our results already. Where you will see kind of later in the quarters to come is more in the Eurozone, where the discount rate, of course, has just been moved in July.
If you look at particularly the Netherlands and the Belux region, why you see negative impact in terms of NII for this quarter, it's really to do with the mortgage NII and the prepayment fees or prepayment income, which is reducing in this quarter that Steven has talked about.
We do expect, by the way, that in the Netherlands, that the impact of prepayments on the Netherlands book, where it's going through a transition, should play itself out over the course of the next 3-4 months.
Understood. Thank you.
Thank you. Our next question comes from the line of Anke Reingen of RBC. Please go ahead. Your line is open.
Hi. Thank you very much for taking my question. The first just on the capital. Just to clarify, when you said the unconstructive dialogue, you just seem to be talking about cash distribution, but just to make sure that buybacks could be part of the distribution in potential additional distribution in 2022 as well.
Then on the your target of 12.5%, just confirming that this wouldn't move in the case of further increases in the capital requirements, as seen in Q2, with countercyclical buffers coming in. So that would already incorporate the potential additional increases in capital requirements.
Then just the second, these are a different question, about the your sustainability ambitions. I just wonder how much you're willing to compromise in the near term, your energy transition versus energy security, what your view there is. Thank you very much.
Thanks, Anke, and let me start with the sustainability and then Tanate can continue on the capital and the targets. Looking at sustainability, we believe that this is the biggest existential long-term threat for the planet and the people that live on it. It also means that. Of course, we do see the challenges in the short term, which is a dilemma.
At the same time, we need to make sure that we play our role in protecting the planet. It also means that we sometimes will need to take decisions on not doing things anymore and get short-term pain to get longer-term gain, but always on an inclusive way with our customers.
Now, by the way, I see enormous amount of interest, focus, investment, dedication of the private sector and also the public sector in really trying to make sure that we get to net zero as quickly as we can with commitments all over the place to net zero by 2050 at 1.5 degrees Celsius. I am not intending to let that go.
I think that despite the fact that we are in these macroeconomic and geopolitical uncertainties, it is also an extra stimulus for, I would say, let's say, the world and the different societies to either even reinforce the efforts to decrease dependency on fossil fuels. That's what we currently stand by, and that's what we will be going for.
Anke, on capital, we find the current share price of ING to be an attractive level for a share buyback. To confirm, when we look at cash returns to our shareholders or cash distribution, we also focus with our priority on share buyback. That's just to confirm that question for you.
In terms of capital ratio, what we look at when we talk about the 12.5% or around 12.5, that is our long-term ambition, and we always review those ambitions with respect to what are changing in terms of counter cyclical buffers, which what you refer to. We know there's an upcoming European Commission review of buffer generally in Q1 and Q2 next year.
With that in mind, we always review, and we always see if there's any changes that may or may not need to be made. For now, we stick with our guidance of around 12.5% core Tier 1.
Thank you very much.
Thank you. Our next question comes from the line of Andreas Scheriau of Goldman Sachs. Please go ahead. Your line is open.
Hello. Thank you very much for taking my questions. So the first question following up from Benoît's question, if you could just confirm that the 60% deposit beta in your slides from the investor day refers to the savings accounts only and not to the transaction accounts, implying that the actual pass-through on retail accounts, so also including the transaction accounts, is actually lower than the 60% in those slides.
Secondly, on deposit betas, I was interested in your thoughts around pass-through on corporate deposits, any links to Euribor, for instance, any replication portfolios in place and how we should think about this. Thank you very much.
Okay. Yes, the example, but again, I want to stress it was an example, but the example given in the slide deck on investor update that indeed refer to savings account only. That's correct. If you look in general at replication in corporate deposits, typically that is lower than on retail, because the behavior of large treasurers in large organizations is that they will look at their deposits and the composition of banks and their risk management more often, actually on a daily basis.
Therefore, typically, they will move money around more, and it also means that the replication on our part is lower than is the case with retail. That's correct.
Thank you very much. Perhaps just to go back to that point, is there any gauge as to how big sort of or what variation in deposit betas we could expect on these balances?
Yeah, I like the interest, by the way, and the personal interest in it, but that's something that we do not disclose, and that we're really looking at our models to see how do we do that in different markets and different type of customers. I think that we've given quite good guidance on, you know, 40% in a year, 60% thereafter, what is a low and a high level, which yield curves have used.
Now, indeed, on deposit betas, there you have to make your own assumptions what that would mean. But we've also now given you guidance on not only on income level that we gave in investor update, approximately 3% increase in income, but also that NII for the second half will be up. I think within the guidance, I think that should well work for you.
Thank you very much. Very helpful.
Thank you. We currently have one further question in the queue at this time. That's a follow-up from Benoît Pétrarque at Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Thank you. Just follow-up questions on the prepayment in the Netherlands. Could you just disclose the amount of prepayment in the second quarter? I think you've done that in the third quarter last year. It would be very useful to kind of get a sense on the downside potential from current levels.
Just to come back on the NII. So your guidance basically that the H2 NII will be higher than the H1 NII. I think that's what I understand from the call. Could you also clarify your position on TLTRO, what you will do with that? Thank you.
Thank you. On prepayments, what I can say, Benoît, is that currently we do see more normalized levels before all the low interest levels came in. We do not expect that prepayment level will go down significantly further or that there will be significant further impact from lower prepayments, repayments penalties. To confirm, will NII be higher than the first half in the second half? Answer, yes. That's our what we are forecasting. What is our view on TLTRO, Tanate.
Yes. We have not prepaid the TLTRO funding as of the end of June, so we have decided to keep it for the time being.
Which type of benefits do you expect in the coming quarters? I think you have EUR 76 million in this quarter.
We expect, similar to somewhat higher benefits from TLTRO, based on the fact that we did not repay and based on the prevailing interest rate. Yeah.
Okay. Thank you very much for that. Thank you.
Thank you. As we currently have no further questions at this time, I'll hand the floor back to our speakers for the closing comments.
Good. Thank you very much, operator, and thank you very much for listening and asking your questions. It was relatively short after the investor update in the middle of June, but it was good to see each other again, and I hope to speak to you in the near future as well. Have a great Thursday. If you're still going holiday, have a great holiday. Thank you very much.
This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.