Good morning. This is Priscilla welcoming you to ING's 4Q 2022 Conference Call. Please note today's conference is being recorded. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Group, 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 a 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 report on Form 20-F, filed with the United States Securities and Exchange Commission in our earnings press release as posted on our website today.
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 very much. Good morning and welcome to our full year 2022 results call. I hope you're all well. As usual, I'm joined by our CFO, Tanate Phutrakul , and our CRO, Ljiljana Čortan. I'm pleased to take you through today's presentation. After that, we will take your questions. After two years in which the pandemic dominated headlines, 2022 was another turbulent year. The war in Ukraine, an energy crisis, soaring inflation, for the first time in over eight years, central bank rates turned positive. In this exceptional year, we continued to deliver value. I'm proud of our ability to adapt and to manage the company through challenging times. To manage the impact of negative rates, we diversified our income.
To manage through the pandemic, we smoothly switched to working virtual, and most recently with the war in Ukraine, we helped to keep our employees in Ukraine safe and we de-risked our Russian book. Let me reiterate that we focus on being the best universal bank in Europe and that we focus on organic growth, which we again delivered in 2022 by adding 585,000 primary customers. Now, over 47% of active customers are primary customers and I'm pleased to see that our focus on offering a superior customer experience is paying off. This is supported by our digital-only mobile-first strategy in retail as visible in the growing share of mobile-only customers, while also a larger part of customer journeys in retail are now end-to-end digital as measured through our Digi Index.
Another achievement was the growing volume mobilized to help our Wholesale Banking clients transition to a more sustainable business model. In 2022, this volume was up by 15% exceeding EUR 100 billion. In our P&L, we saw the benefits of the rising rate environment with clean NII up by EUR 1.1 billion in 2022. This is on top of the structurally higher fee base resulting from our efforts to diversify income. We expect this strong performance on income to continue, reflected in an improved total income growth target, which we'll come to later and all of this has enabled us to return EUR 4.8 billion to our shareholders in 2022. Before we go into the financial results, I want to spend some time on the progress of our strategy and related targets.
To slide 3, showing our purpose, strategy, and priorities. One priority is to deliver a superior customer experience. As banking products are commoditized, the customer experience is a key differentiator for customer growth. This delivers value by increasing diversified income while serving a larger base will lower the cost to serve per customer. A superior customer experience means easy, relevant, personal, and instant across all channels, leading to a growing number of customers who promote ING. In retail, we have the highest Net Promoter Score in 6 out of 10 countries, which includes some of the biggest markets like the Netherlands and Germany. In markets where we are not there yet, we are working hard to improve. In Wholesale Banking, we are seeing NPS improving from 59 at year-end 2021 to 67 at the end of this year.
More promoters lead to more customers, more cross-sell and in the end, more primary customers. Growing our primary customers is a key target as the base for future value creation. With investment in our businesses and also with savings again becoming a profitable product, we will continue on our path to grow this base. Our other priority is sustainability, where an important aim is to support our clients in their transition to a sustainable business model. Our efforts to do so have paid off, reflected in a growing volume mobilized for our Wholesale Banking clients and we have momentum to reach EUR 125 billion per annum by 2025.
To support our efforts to steer our loan portfolio to net-zero, we have updated the intermediate 2030 targets for the sectors covered by our Terra approach, aligning with net-zero pathways. On to the strategy enablers on slide 4, as also shared during our investor update. A seamless digital experience, a scalable tech and operations foundation, a safe and secure bank, and of course our people. We continue to invest in these areas, and I would like to highlight the progress on some of these areas. We mentioned progress on the Digi I ndex on the first slide as a 2022 highlight, this index measures the average straight-through processing rate of 341 retail customer journeys and is a good proxy for how digital we are.
At year-end, the average SCP rate reached 64%, up from 60% at end 2021. Not reflected yet in this measurement is Wholesale Banking. However, we are working also to digitalize the processes in Wholesale Banking, and we'll take that into scope as well. We made good progress on centralizing services and capabilities in our hubs, which helps us to streamline processes and improve quality and productivity. For our people, we promote diversity at ING. It's essential for delivering on our strategy. We believe that diverse teams bring a healthy mix of contrasting perspectives and are more innovative, creative, and therefore bring better outcomes. When looking at diversity and inclusion, we apply the 70% principle, striving for teams to comprise no more than 70% of the same gender, nationality, or age group.
We have set a target to grow the representation of women in senior management, which is at 29% now and already very close to our 2025 target. Slide 5 shows the outcome of our strategy execution in 2022 and our financial targets for 2025. On fee growth in daily banking, we see further room to increase or introduce fees. In investment products, the continued growth of accounts is a strong base for fee growth when market confidence improves. This confidence will also support growth of lending fees. Higher fees will support total income growth. For 2023, the main driver will continue to be liability NII. While there are some uncertainties, such as further central bank rate increases, deposit tracking and customer behavior, the tailwind from liabilities will continue, and for 2023, we expect total income growth of over 10%.
This also leads to an improvement of our target for the coming years, up from a 3% CAGR to a 4%-5% CAGR. This income growth will support an improvement of our cost-income ratio to 55%-56% in 2023. On the cost side, we expect to see some pressure from the full-year effect of inflation and we continue to invest in our business and to execute our strategy, which will bring benefits in the longer term. On the ratio, we intend to move to our targeted CET1 ratio of around 12.5% through our 50% payout of resilient net profit, combined with additional distributions in roughly equal steps. We will update the market on our distribution plans with the announcement of our 1st quarter 2023 results.
On return on equity with the targeted development of the cost-income ratio, our low through the cycle risk costs and the ratio target of around twelve and a half percent, we have confidence we will reach our target 12% ROE by 2025. Let me take you through our full-year results 2022, starting on slide 7. The return of positive interest rates in 2022 clearly demonstrated the benefit of our funding profile with a high share of retail deposits and limited dependence on more volatile Wholesale Banking funding. After years of being a drag on income, rate increases have turned our large retail deposit base back into a driver of income growth, and it is clearly visible in the improvement of our deposit margin over the past year.
At the same time, the quick pace of rate hikes impacted lending margins as client rates generally tracked a higher cost of funds with a delay. Combined with lower rates on mortgages, lending margins have come down over 2022, stabilizing at the end of the year. Lending demand was subdued, reflecting increased uncertainties and lower affordability in the case of mortgages due to high inflation rates and energy prices. These elements are visible when we look at total income. In 2022, liability NII was the clear driver of growth, while non-liability NII declined. Fees came in at a structurally higher level, reflecting our focus on income diversification. Taking this all together, total income except for net TLTRO impact and the Polish mortgage moratorium grew by EUR 1 billion in 2022. The next slide zooms in on total income.
As mentioned, liability NII was a clear growth driver, up 53% compared to 2021 due to the aforementioned reasons. Lending NII was subdued and came in 8% lower. Fees, fee income was resilient despite uncertainty that has affected the appetite for both investments and lending. The full-year increase was driven by impressive growth in daily banking, reflecting growth in primary customers, the increase in payment package fees, and new service fees. Expenses on slide 9. Regulatory costs were slightly lower, mainly reflecting a 50% add-on to the Dutch bank tax in 2021. Furthermore, 2022 expenses for the full year included EUR 325 million incidental items, mainly reflecting restructuring provisions.
Excluding these incident items, operating expenses were impacted by high inflation, and this was mainly visible in staff costs, where increases were largely driven by indexation. As an example, the legally required bimonthly indexation in Belgium drove up annual staff costs by 9%, and this impact could not entirely be offset by the benefits from management actions taken through a structured service model and change the footprint. Next to indexation, in several countries, we have provided voluntary compensation to help our people cope with the rising energy prices. As mentioned, we also continue to invest in our businesses, in digitalizing customer journeys and also in marketing campaigns to ensure we keep increasing the number of primary customers, thereby expanding the base for future growth.
Combining these investments with the full year impact of inflationary pressure, we expect to see some cost pressure in 2023. We'll continue to focus on cost control. Slide 10 shows you risk cost development with the full year 2022 risk cost coming in at EUR 1.86 billion. This was largely driven by actions taken related to our Russia book and the impact of deteriorated macroeconomic indicators. Management overlays for risks from second-order effects of the deteriorated environment were largely offset by releases of COVID-related overlays. The total amount of overlays remaining at year-end was EUR 453 million. Our Stage 3 ratio remained low at 1.4%. Although the current environment is not without challenges, we feel confident about the quality of our loan book, supported by the fact that we are well diversified and avoid concentration risk.
Our loan book is senior only and well collateralized. In Wholesale Banking, we mainly work with investment-grade companies. Finally, historically, our provisioning has been prudent and without surprises when we do move into the recovery phase. We move to return on equity on slide 11. The 2022 return on equity was affected by the higher level of risk costs as well as incidental costs and high capital levels. When adjusting for the incidental costs, our through-the-cycle risk costs and our target around 12.5% CET1 ratio, the ROE was 9.6%. Going forward, reaching our 12% ROE target will be supported by several factors, such as further growth of primary customers, our 4%-5% CAGR on total income, as well as higher fees combined with continued discipline.
The discipline is there on control of expenses and maintaining high asset quality. At the same time, we intend to reduce the equity level over time, and we take management actions to control risk-weighted assets and to improve capital allocation. I move to slide 12. Over the past years, we have built a strong track record of delivering an attractive return for our shareholders. ING continues to be a strong investment case as the best European universal bank with consistent strategy execution, income growth, well-contained expenses, and a strong asset quality. Combined with our strong capital position, we are in a good position to return capital to shareholders. The amount we distributed over 2022 represents an attractive shareholder return of 12.5%.
Now I move to the fourth quarter results on slide 14, and I will take you through those a bit more quickly as the trends are known, and we would like to have sufficient time for Q&A. The fourth quarter results of 2022 show the strong performance on our pre-provision profit. When excluding volatile items and regulatory costs, pre-provision profit was up almost 28% year-on-year and 4% higher quarter-on-quarter, and I will address the underlying P&L lines in the following slides. Slide 15 shows the strong development of NII, net interest income. This was driven by the liability NII reflecting rate increases, limited deposit tracking, and a continuous deposit inflow.
In lending NII, we saw pressure on mortgage margins due to rising interest rates as client rates generally track higher funding costs with a delay, as well as declining income from prepayment penalties. Quarter-on-quarter, this effect stabilized. Excluding the net TLTRO impact and the Polish mortgage moratorium, our net interest margin for the fourth quarter increased to 148 basis points, mainly reflecting the higher NII on liabilities. Slide 16 shows net core lending growth. In retail, mortgages continued to grow, although at a lower pace, reflecting an overall slowdown of demand, driven by uncertainty and higher interest rates. Higher net core lending and business lending was mainly visible in Belgium. In Wholesale Banking, loan growth was mainly visible in lending and working capital solutions, which was partly offset by trade and commodity finance, reflecting lower commodity prices.
Going forward with still heightened macroeconomic uncertainty, we expect loan demand to remain subdued. Net customer deposit growth, that was EUR 7.2 billion, fully due to retail, mainly reflecting inflows in Germany, the Netherlands, and Spain. Wholesale Banking recorded a seasonal year-end outflow. We move on to fees on page 17, which showed resilience despite uncertainty affecting the appetite for both investments and lending. Year-on-year, fee income was down. Daily banking fees continued to grow this quarter by 11% compared to the same quarter last year. This reflected growth in primary customers, the increase in payments package fees, and new service fees. Lending fees were up year-on-year, thanks to strong fee income in Wholesale Banking. In investment products, we continue to see the effect of lower stock markets and less trading activity, although the opening of investment accounts continues.
Sequentially, fees were up, reflecting growth in both investment products and lending. Daily banking fees were lower due to seasonally lower travel-related fees in re-retail banking. We move to slide 18. Excluding regulatory costs and incidental items, operating expenses were well contained with growth well below inflation. As I explained, this is mainly the effect of high inflation rates coming in via salary indexation and CLA increases, while we also keep investing for future growth. Regulatory costs were down year-on-year as the fourth quarter in 2021 included a 50% add-on to the annual Dutch bank tax. Quarter-on-quarter, higher regulatory costs reflected the payment of the annual Dutch bank tax, which is always paid in the fourth quarter.
Incidental items this quarter included EUR 43 million of restructuring costs, EUR 30 million of allowances to employees to offer support for their increased energy costs, and EUR 9 million for hyperinflation accounting in Turkey. In light of the current operating environment, and especially when looking at the high inflation rates, I'm pleased with how well operating expenses were contained, especially in Belgium and the Netherlands. To risk costs on the next slide, that's slide 19, which were EUR 260 million this quarter, or 17 basis points over average customer lending. This included a further release of EUR 112 million in Stage 2 for Russian exposure and a EUR 46 million release of management overlays for the potential impact of secondary risks in the current macroeconomic environment.
In total, we have built up EUR 453 million in management overlays at the end of 2022. In Stage 3, we saw some collective provisioning in retail banking, mainly on consumer lending and business banking. In Wholesale Banking, we took Stage 3 provisions, mainly for some new files. The slight increase in the Stage 2 ratio was mainly driven by Wholesale Banking. Increase reflected lower total credit outstandings, partly due to a EUR 30 billion repayment of TLTRO funds, rather than a deterioration in the risk profile of our loan book, as Stage 2 outstandings actually went down. The Stage 3 ratio remained low at 1.4%.
Slide 20, that shows our CET1 ratio, which remains strong at 14.5% and was actually up compared to our 3rd quarter 2022 pro forma CET1 ratio of 14.3%, which included the buyback we announced with the previous quarter's results. This buyback was also the main driver for a EUR 2 billion reduction in CET1 capital, which also included FX impacts. Risk-weighted assets were EUR 7 billion lower, largely due to a -EUR 5.7 billion of FX impacts. Credit RWA were down when excluding these FX impacts, reflecting an improvement of the overall profile of our loan book and model updates. Higher operational RWA reflected the update of the AMA model. Finally, market RWA were marginally lower.
Concerning our distribution, we propose a final 2022 dividend of EUR 0.389 per share, subject to AGM approval on April 24th. Let me wrap up with the highlights. Overall, in a challenging environment, we have delivered strong results in 2022 and in the fourth quarter. Our people make an effort every day to build a superior experience for our customers and to support a transition to a more sustainable society. We see these efforts positively reflected in primary customer numbers, NPS, and volumes mobilized in transition finance. Our financial results show that accelerating NII momentum is a clear tailwind, while fee income has proven to be resilient. Expenses were well contained, despite the inflationary pressure of indexation in some markets and continued investments to realize our strategy.
Our capital position remains strong, and going forward, I'm confident that we will continue to deliver robust financial results and successfully execute our strategy. With that, I now go over to Q&A. Thank you.
Thank you, Steven. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. Thank you. We will take our first question from Benoît Pétrarque from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, good morning. Benoît Pétrarque from Kepler Cheuvreux. So two questions. One on on the 10% plus income growth and the second one on the cost income. First on the 10% plus income growth, could you maybe be a bit more specific in terms of what you expect potentially? Because, you know, that implies a quite large potential range. What could be kind of the upper end of this guidance in a favorable scenario around pass-through and markets? And just to make sure, do you still have in mind in that guidance the 30% pass-through rate for 2023? Or, you know, based on the current market development, things probably change and you have a different assumption.
Could you maybe a bit specify that? What is your thoughts on, around pass-through as well, and pass-through rate embedded in this guidance? The second one is on cost. I think you said in the past that you wanted to maintain cost below inflation. I think the 55%-56% implies potentially 6%-7% cost growth for 2023, which will put you know, slightly above the inflation headline. Just wanted to check with you if that's the current... if it's a proper way of thinking about cost growth. Also maybe on the 55-56, can we assume it's going to be more than 56% on the 10% income growth and potentially 55% on a, you know, 12%-13% income growth scenario?
Just wanted to clarify that. Thank you.
Right. Thank you very much, Benoît. I think the questions are linked to some extent, so I'll hand over to Tanate.
Thanks, Benoît. I think in terms of context of how we come up with the guidance, I think we want to remind you that we are operating with an environment of significant uncertainty and quite bearishness in terms of macroeconomic outlook, right? We are prudent in terms of our financial planning in that context. In terms of the income growth of more than 10%, what's driving that is really a few items, whether it's on the high or on the low side, as you mention it. One is really loan growth. You see that loan growth in Q4 has been slowing, that would be one determinant, a lending margin. The second is the tracking speed, right?
We have given you at the Q3 results a certain simulation about tracking speeds, and we had assumed, if I can refresh your memory, around 30%, 40%, and 50%. The tracking speed that we see so far in Q4 has been more like 15%, which in our opinion is on the low side. From that perspective, I think, we see that the catch up in terms of deposit tracking should be more prevalent in 2023 compared to Q4 2022. Okay? In terms of linkages, yes, indeed, that if we are operating at over 10%, then you would imagine the cost income ratio to be on the high end of our guidance. If we go higher, obviously it comes to the low end or beyond. Thanks.
Maybe just on 2023 cost growth, implicitly based on your cost income, is that in a range of, you know, 6%, 7%? It's slightly higher than the headline, say Eurozone inflation for 2023. Is that correct or?
Well, that's why we give you guidance with respect to to cost income ratio, to give you variability in terms of income and cost trajectory. I think we have clearly more pressure in terms of salaries from the high inflation you see in the back end of 2022. We also have also targeted certain investments we will make in terms of, for example, client acquisition. It's one of our primary targets for next year, to increase primary customer growth. Within that context, we do expect to operate at between 55% to 56% cost income ratio.
Great. Thank you very much.
Thank you. We'll now move on to our next participant, Raul Sinha from JP Morgan. Please go ahead, sir. Your line is open.
Hi. Good morning. Thanks very much for taking my questions. A couple of questions from my side. The first one, really just for Steven, what gives you the confidence to reiterate the 50%-52% long-term cost-income ratio guidance given, you know, obviously the inflationary pressure that you're seeing in 2023? Could you talk to us about how you're able to manage the efficiency view or back to what you were thinking about at the Investor Day, given the environment for costs has changed quite dramatically since then? What gives you the confidence that you can hit 50%-52%? Also related to that, I guess, you know, your income guidance is higher than expected. Cost-income ratio is same, but the ROT has not gone up in terms of what you think you can make.
Is there some new negatives related to what you thought in Investor Day, or you're just being conservative? The second question is around the buyback phasing for 2023. Could you remind us, please, of the withholding tax threshold for this year? I'm surprised that there is some surprise in the market that there was no buyback today. I just think it would be helpful for us to get a little bit more clear message in terms of the timing of any potential buyback savings here. Thank you.
Okay. I'll leave the question on the tax and the buybacks to Tanate, I'll focus on the guidance that we have for 2025. Clearly, also compared to the rates that we saw during the Investor Day, the rates went further up. That both goes for income, and it also goes for inflation. In that setting, what you continue to see is that First of all, we have been able to grow our interest income on the back of higher interest rates and that was 17% compared to the same quarter last year.
We have been able to actually still grow our fee income. Yeah, only this year we're at 2%, but it was on the back of, let's say, more stability, more annuity in our payment business, while in our investment business was going down based on the fact that stock markets were lower and also to some extent, a bit subdued lending activity. We start therefore from a better structural base of fee income than we did last year. We have grown our primary customers, with 600,000. We are confident to continue to be able to do it. These customers are people that we can do more with. We continue to be confident to grow our fee base with 5%-10% per annum.
In that setting, we on the one hand benefit from higher interest income, but also tonnages alluded to, with the tracking of the interest rates currently still lower than we have seen than the 30% that we gave as an example in the presentation that we also showed you in November. Of course, pressure on inflation that we are seeing in salaries in different countries that we need to continue to manage with digitalization through our scalable tech and ops foundation, as well as our seamless digital services that we do on a continuous basis. We're very strict on cost management, and that gives me the confidence that we'll move to these returns that we talked about, the 12% and the 50%-52% in 2025.
Raul, just to answer your question on the level of cash distribution to make the hurdle for a share buyback in 2023, it's approximately EUR 2.8 billion. As mentioned, we are gonna give you an update on in terms of our capital management at the end of the Q1 results.
Thank you.
Thank you. We'll now move on to our next question from Flora Bocahut from Jefferies. Please go ahead. Your line is open.
Yes, thank you. Good morning. The first question I had is regarding the provisions. Obviously, you didn't provide any guidance for 2023 for that P&L line. You've been making, you know, positive comments regarding the strength of your loan book in the slide pack. Could you maybe, you know, elaborate a bit on the trends that you're seeing there, whether you are seeing first signs of a degradation in the asset quality, and therefore what we should expect maybe for the 2023 provision outlook compared to the through the cycle guidance? The second question is just coming back to the, sorry, the 10% income growth. I just wanted to check to what number that applies.
Is that to the reported, 22 number, or is that to the adjusted 22 income for, you know, the Polish one-off and the TLTRO impact? Thank you.
Yeah, I will answer that on the, on income growth and Ljiljana will answer on provisions. The larger than 10% forecast is based compared to the reported 2002 income level. Sorry, 2022. Did I say 2020? 2022 income level. Ljiljana.
Good morning. With respect to provisions, as you recall, we usually do not guide. However, if you remember what we talked about in June, we feel quite confident with the portfolio structure and quality as it is, and as well with the risk management framework around it, which will, we are confident, ensure that in the next few years, we remain within our through the cycle average. Additional to that, I would say the recent results of the fourth quarter gives us additional confidence that we are doing the right thing. That means that we do not see in our portfolios any first increase of the NPs. It is very limited in the fourth quarter. It's seasonal, and it's aligned with expectations.
Secondly, we do not see any structural delinquencies either on payments or on the, I would say, deterioration of quality in any of the asset classes. Let me also remind you on the structure of our portfolio, which is very much collateralized, very much in residential real estate with low LTVs and quite, I would say, substitute part of the consumer lending and business lending, which are usually the first deterioration parts of the portfolio. Having said that, having seen the good development in 2022, specifically also fourth quarter, having seen the structure of our portfolio going forward and having the risk management techniques in place that we do have, we feel confident to remain in that range.
Thank you.
Thank you. We'll now move on to our next question from Farquhar Murray from Autonomous. Please go ahead, sir. Your line is open.
Morning, all. I think if you just kinda come back to slide 7, where you're showing the liability margin. I think at the last call, you kind of indicated there was scope for that to maybe go over 100 basis points. I just wondered if you could give us a sense, particularly looking forward through to 2025, full year 2025, what kind of liability margin you're kind of expecting to kind of normalize back to there. Just coming to the cost side of things, if I look at the 50%-52% for full year 2025, it seems to be almost suggesting costs at a headline level are basically flat between full year 2023 and 2025.
I just wondered if you could give us a bit of a sense of the bridging elements within that, 'cause I think regulatory costs are expected to come down. I kinda now wonder if investment costs also come down. Presumably there's some degree of background cost drift, within that kind of assumption as well. Just rounding, if we have some detail around that's possible. Thanks.
Okay. Tanate?
Yes. The first one is that on deposit margin. As I mentioned before, the tracking speed has been slow given the sharp rise in the ECB rates that we see now. What we're seeing historically in more normal times is that deposit margin seems to range around 1%, right? We are at around 94 basis points as of the end of Q4. There is a bit more room in normal situation for that. I have to remind you that the U curve is having this massively sharp rise and then plateaus after a while. You have to take that into account. In terms of cost target for 2025, I think you have to think about two things that we expect to moderate.
Number one, clearly is regulatory expenses, DGS contribution, bank taxes. We expect that to decline, particularly starting in 2024. We expect to normalize as inflation come down, the salary increases. We expect that to normalize as well, while continuing to maintain our efficiency programs to mitigate much of the cost increase, which we have done historically.
Just to follow up on that, I mean, should we expect an overshoot versus the 100 e-early in this year in terms of liability margin?
Well, it just depends on the competitive situation. When we do our planning, we had some observations whether deposit system, deposit level would decline or not. As you franchise, deposit actually grew by EUR 10 billion. There is continued build up of deposit, which bodes well for deposit margin.
Okay. Thanks a lot.
Thank you. We'll now move on to our next question from Kiri Vijayarajah from HSBC. Please go ahead, sir. Your line is open.
Good morning, everyone. I've got a couple of questions on the fee side. Firstly on the retail side, you know, when interest rates were negative and you were actually pretty successful in pushing through some quite meaningful fee increases. I think it's more kind of to 2021 rather than last year. My question is more as interest rates normalize and the deposit margin also normalizes, do you think it gets progressively harder to push through kind of that next leg of retail fee increases that you're kind of assuming in your 23 and 25 targets? Secondly, still on fees, but more on the Wholesale Banking side, you know, the fees there always sort of jump around a little bit quarter to quarter.
I wondered what your pipeline on the larger deals looks like in the wholesale bank. I know, I guess for the industry as a whole, that's getting less weakening at the moment. On the fee side, on the, on the flow businesses, you know, trading commodity finance, does that also look like it's going to be subdued in the short term, you know, for the first quarter, first half of this year? Really just some color on the wholesale fee outlook, please. Thank you.
Yeah.
Yeah. Thank you very much. Clearly, yeah, we are entering a different environment than we did before. At the same time, we, like we said before, there are a number of levers that we can pull to grow our fee business. First of all, it's growing our primary customer base, very simply put. We, that's why we grew with 600,000 this year, with over 200,000 this quarter. We work on growing that base. That's also why we continue to work on improving our experience and put marketing to work, because when we have these primary customers, they do more with us. That's maybe step one. Step two is we continue to focus on e-extending our services to more customers.
Also in the fourth quarter, even though the stock market levels are still subdued, for example, in Germany, again, the number of new customers coming on, the net new number of customers coming on to the investment app was around 50,000. We continue to grow the number of people that work with us on our fee business products. Thirdly, we extend the number of services. What we have done in Germany, we also, with investment, we also extend to other markets or we introduce new payment products. Fourthly, that's the topic that you mentioned, we also reprice there where we can, when we, when we provide the adequate service.
What we do, for example, this year, we already announced that as per the first quarter of this year, we will increase our payment packages in the Netherlands for retail customers, and we will increase the payment packages for business customers in Belgium. We also continue to do that, and all those elements give us confidence that we will continue to on average, make 5%-10% growth in fee business over the next coming years.
When it comes to Wholesale Banking, yes, the pipelines are good. We saw in the fourth quarter that when there was of course, a lot of uncertainty in the first part of the year. Of course, there are still uncertainty. At some point, companies do need to invest. That's where you see a number of the larger syndicated loan deals coming back. That's what we've also seen in the third quarter, but also in the fourth quarter of this year.
On the flip side, we saw the lower energy prices that have an impact on the trade and the commodity finance, so the trade financing. That's quite dependent on price. Therefore also the fees on that part are coming in a bit. So that latter part is more volatile because it really depends on the pricing of, let's say, the barges of oil and gas. In terms of the deal volume in the Wholesale Banking, we're cautiously optimistic that that will also continue in 2023, given the fact that inflation numbers are coming down a bit, that GDP levels for Europe are a bit above 0, that the activity in China is resuming after the lockdown has expired.
The decrease in political tension between China and the U.S., yeah, with, of course, a big overhang being the war in Ukraine. Cautiously optimistic also in that sense on fees for 2023.
Great. Thank you.
Thank you. We'll now move on to our next participant, Benjamin Goy from Deutsche Bank. Please go ahead, sir. Your line is open.
Yes. Hi, good morning. Just two questions, and maybe in light of some news, maybe surprising news last month, maybe you could update us on your capital allocation policy, dividend share buyback, organic growth, but also M&A. Secondly, obviously there's also focus on primary customers, but I was wondering whether you have somewhat more appetite for also growing customers at large, given they are much more profitable these days in this interest rate environment. I think you're using some teaser rates in some markets. Just pretty interested in your thoughts here. Thank you.
Well, okay, thank you very much. I will answer the question on customers and for Tanate on capital allocation. With regards to customers, we continue on the one hand to focus on growing our primary customers. Those are customers that have part of their salary account with us, plus one additional product. We do that by providing them with an easy, instant, personal and relevant experience. That's why we're also focusing so much on end-to-end digitalization of the journeys that I talked about, so the Digi Index, which we also improved, because that gives us the ability to grow. Yeah, let's take, I mean, if you look at most of the markets, if not all the markets in the fourth quarter, we again were able to grow that number.
We are able to do that because our experience generally is being perceived as better than that of our customer than that of our peers. If you look at the Net Promoter Score, in 6 out of the 10 retail markets, we came in at number 1, including large markets such as the Netherlands and Germany. That's what we want to do on that end. We know that primary customers do a multiple more of what non-primary customers will do with us. That's why in that target we have for 2025, we are focusing on the continuing growth of that number, and it's in the KPIs of all of the country hats in all of the markets.
When we look at generically customers' growth, if you look at, let's say, the still uncertain outlook that we have on the economic environment, yes, cautiously optimistic, like I just said, but still a little bit uncertain. When we talk about the larger mid-corporate Wholesale Banking clients, we largely focus on existing clients and try to help them, try to focus also on their transition finance. Like I said, the transition finance mobilized the last year increased with around 15% from EUR 88 billion to EUR 101 billion. We want to be there for our existing clients, and we're prudent with regards to onboarding new clients also given the fact that currently the environment is still relatively uncertain. That's the way that we want to grow our client base. Nate?
Yes. To answer your question, Benjamin, on capital allocation, we always look dynamically at our capital allocation, and that's why we decided to exit from subscale businesses like Czech, Austria and France, and that we deploy our capital to businesses that makes the hurdle. That's one part of our strategy which continues. At the same time, for 2023, you would see that our capital deployment in terms of lending will be less, right? Given the fact that lending is slowing and that allocation of capital to that aspects of our business will be more modest compared to previous year. At the same time, we see more profitability coming from deposit gathering, and that attracts relatively limited levels of capital required to increase that business.
overall, I think we can take whatever we need to do in terms of capital allocation, but stick with our ambition in terms of capital distribution to get to, in roughly equal step, to 12.5% by 2025.
Thank you. You didn't mention M&A at all. I assume this is very low priority for you?
M&A. So, okay, so you allude to M&A. Well, look, I mean, our first focus is on organic growth. We have been able again to grow with 600,000 customers. We're again able to grow our loan book with EUR 18 billion, which is a bit lower than the previous years because of the economic situation. We were able to grow last year our deposits franchise with EUR 25 billion. We were able to diversify our income further. We are being seen in a number of the markets as the best player. That also means that we're able to continue to grow our customer base there. Now, in case in some of these markets, local costs, that's the first focus area that we have.
In case in some of these markets, as said, we want to reiterate our position as a European universal banking leader, so that in some of these markets, there would be an opportunity for in-market consolidation under the right conditions, i.e., no big restructurings, a good digital platform. Clients that we can put on our platform, broadening of the revenue base, ability to realize cost benefits, and then we will look at it. If you ask me, do you focus on large scale European consolidation moves, the answer is no. I think that is very difficult.
Not only in the light of the integration, different integration we would have to do there, but also because the benefits of cross-border mergers in banking are just limited given the compartmentalization that we see in liquidity, capital, data, systems, product requirements, that makes it hard, and I'm not a firm believer in that at this point in time.
Thank you very much.
Thank you. We'll now move on to Andrea Scherl from Goldman Sachs. Please go ahead. Your line is open.
Good morning. Thank you for taking my questions. Can I come back to slide 7, please, and follow up on Farquhar's question? If we're looking forward, the deposit margin will likely expand meaningfully again next quarter. What is your degree of confidence in sustaining the higher deposit margins that we will be seeing in the first and potentially second quarter? What do you foresee for the development of asset margins from here? In the fourth quarter, as you show on the slide, or also in 2017, that was around 160 basis points versus 127 basis points in the fourth quarter. Should that pick up from here as repricing lags fade or stay around this level as this is a more structural issue in a higher rate environment?
Then, the second one would be on deposit trends, if you could just speak to what you're seeing there, disability and mix within it, and how this compares to your expectations. Perhaps one specific question if I can add. You've previously talked about migration from current into savings accounts. What is your expectation with regards to migration into time deposits? Thank you very much.
Thank you very much. When we talk about deposit margins, I'll leave that to Tanate, I will give you some answer on the lending margin and deposit trends. I mean, on lending, on the lending margin as such, what we have seen, especially in retail banking, that lending margins have contracted over the last year. The main reason for that was that on the one hand, the prepayment penalty fees came down, and that was because less people started to prepay their mortgages because the interest rates were higher, and most of our mortgages are fixed rate mortgages, therefore, they don't feel a need to prepay so quickly. Those levels came over. That was included in that lending margin.
Secondly, you will see that the increase in the market rates always grows quicker than that you can reprice to clients. That has led to a contracting margin on the lending side, not so much in Wholesale Banking, where the margin remained pretty stable over the year, but largely in retail banking. In the fourth quarter, we now see that leveling off. Leveling off on the downside, I mean, which is, we now see a sort of a stable level of prepayments. We now see that gradually we're able to price in the higher market rates into the mortgages, and therefore, we would expect that to also stabilize going forward and potentially, depending on demand to that, have, to have some, you know, risk on the upside, I would say. There's maybe some benefit on the upside.
In Wholesale Banking, it largely depends, the margin will largely depend on the amount of liquidity that is coming onto the market. Clearly, there is now some monetary complexion by the ECB that in itself could help in terms of getting that margins at higher level. Whatever it will be, and we will need to remain prudent in that regard, we'll price all those deals to the applicable return. If the price is not making that return hurdle, that in the end leads us to the ROE levels that we also indicated in our investor update, then we will just not do the deal. We need to stay prudent and very disciplined in that matter.
When it comes to savings and let's say the behavior of people, we've also seen that in the fourth quarter again, although we thought in Europe we would enter into a technical recession, that's still a question, and all the central statistic bureaus are still calculating whether this is really the case or not, because the consumer spending actually in December and November went up quite a bit. That remains a question. I think more in general, one can say that the outlook seems to be a bit more positive than we thought, let's say, a quarter ago. It also shows, by the way, when we saw that a quarter ago, how volatile this outlook is. In that setting, we do still see cautious behavior of customers.
In the fourth quarter, that meant that only for us already, our savings increased in retail with EUR 10 billion, which is quite significant. We would expect that to continue also in 2023 because spending levels, given the current macroeconomic environments, are a bit lower. When they're moving from current accounts to savings accounts, we haven't really seen a massive shift in that regard, so that remains to be seen. Most of the money that people use, they use for daily usage. In the past, by the way, when we talk about pre-financial crisis or during a financial crisis, in many countries, we had only savings accounts, because we started as a direct bank there.
We brought our portfolios to current accounts, and we haven't really seen in the last number of months a shift in that mix because people typically use their money on a daily basis.
To address your question on deposit margin, just giving you, our kind of views of where first ECB rates are to go, is we do expect that a decision today would be for another rate hike and another 2 rate hikes into the month of May. With rising ECB rates, then the tracking speed in Q1 and Q2 is likely to lag those ECB rate hikes. That from that perspective, that would point to higher deposit margin. We do expect that tracking will increase and that margin would normalize over time to that kind of 90 to 100 basis points level on deposits. That's, kind of our view at the current time. The last really on tracking speed, it really depends on loan growth, right?
The lower the loan growth, the less demand we have for additional funds. That would mean that pressure on increasing deposit rates would be less.
Very clear. Thank you very much, both of you.
Thank you, Andrea. We'll now move on to Sam from Barclays. Please go ahead, sir. Your line is open.
Hi. Good morning. 2 questions, please. The Dutch unions say that collective labor agreement negotiations have hit deadlock. Could you perhaps update us on the status there from your point of view? Perhaps you could give us a rough guide on how much salary inflation in the Netherlands is baked into your FY 2023 cost income guidance. Secondly, on that cost income guidance of 55%-56%, and also on the 10% top line growth guidance, could you give us some clarity on which of those are adjusted for the FY 2022 exceptionals, namely TLTRO and the Polish mortgage moratoriums? Thanks very much.
Tanate will answer the second question. I will do the first one on CLA. Yes, we've been in conversations again with unions in the past number of weeks. Those conversations in this country came to a halt. We believe that we offer a fair package for 2023 and 2024. That package was made public. That is a CLA increase for this year of 3%, the next year of 4%. That is not the total sum because there's also some in-skill increases. Obviously, we have taken those all into our cost projections for 2023. It remains to be seen what the unions will come back with.
We are convinced that we have offered something which is completely fair, reasonable, and we would expect the unions to come back, and then we'll take it from there.
Sam, to answer your question, the 10% or greater guidance that we give on revenue is based on our reported numbers, so unadjusted.
Brilliant. Thank you.
Thank you. We'll now move on to our next question from Tarik El Mejjad from Bank of America. Please go ahead. Your line is open.
Hi. Good morning. You sound today a bit cautiously optimistic, I would even say conservative, in a number of P&L lines. Should we be concerned about you being conservative as well on the capital return announcement in Q1? I mean, the end goal is still 12.5%. You repeated that it could be done in equal steps. If you are consistent with your cautious view on the environment in the short term, would that impact as well the phasing of the convergence towards 12.5?
Why would you not just instead of saying three steps, say we would like to pay EUR two and a half billion to EUR 3 billion excess capital. The space between buyback and some cash to avoid paying tax on buyback would be much clearer message and give confidence on your strategy on that front. Secondly, on M&A, I'll be slightly more explicit maybe in my question. There were some headlines that you'll be bidding for an Indian bank. Could you deny that or is this something that you would consider? In your earlier answer, you focused on Europe. Is anything outside Europe would be, could be on the table? Thank you.
Okay. Thank you, Tarik. Look, I think we have been quite clear and also consistent, and also reliable on what we have said on our capital distribution and our ability to execute. We stick to that guidance. We have said we will and want to move down in roughly equal steps to 2025. There is nothing in our guidance that would sway from that. As a matter of fact, we just upped our guidance on revenue quite significantly. We are in constructive dialogue with the ECB. We've said that every time we take a step, we say that we're in constructive dialogue. We also now said that we will let you know the outcome of that constructive dialogue by the first quarter of 2023.
If I do the math, I know quite well that we need to pay out more than 100% of profit in the next coming years to get to that level, given where we currently are. I have not forgotten that. That's what we will focus on. The same level maybe of preciseness on India, we have been saying a number of times that we focus to reiterate our universal banking leading position in Europe. I don't, without being pedantic about it, the last time I looked, India is not in Europe. I'm actually a bit surprised that one article in an Indian newspaper on an Indian company in a country which we exited about 6 years ago, would then serve as again as something that we would focus on.
I will not go any further because otherwise I have to give comments on each of the 225 countries in the world. I think that it is quite clear.
Okay. Thank you very much.
Thank you.
Thank you. It appears there is no further questions at this time. I'd like to turn the conference back to you, Mr. Steven, for any additional or closing remarks. Thank you.
Great. Thank you very much. Great to talk to you again at the, well, not quite the start, but at least hope started well. I hope to talk to you again in the near future. Thank you very much. Have a great day.
Thank you everyone for joining today's call. You may now disconnect.