Yes. Anita, shall we start?
Yes, sir. I was just waiting. She was supposed to let me know. Oh, yeah. Okay. Okay, sir, I'm going to start now. You know I have to read the safe harbor statement. Hold on, please. Good morning. This is Anita Krielen. Welcome you to ING's third quarter 2020 conference call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Groep, 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 differ from those in any forward-looking statements 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, and our earnings 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 security. Good morning, Steven. Over to you.
Thank you, Anita, and good morning, everyone, and welcome to our third quarter 2020 results call. I hope you're all recognizing Italy, as we can again welcome new customers. There are a couple of key points I want to make today. Our digital model continues to be a clear strength as we added another 213,000 primary customers, and the number of mobile interactions continued to grow. It's also supported us to deliver a strong performance this quarter with pricing discipline, solid fees, and cost control, resulting in a resilient pre-provision profit excluding volatile items. We are taking steps to maintain our strong performance. Our margin discipline and risk appetite remain unchanged while we take steps to focus our activities. At this point, we're announcing adjustments in two areas.
In Wholesale Banking, with a focus on our core clients and where we need to be to service them. Secondly, in the Challenger & Growth markets, we focus on how to best fulfill our ambition of scalability and being end-to-end digital with more certainty of execution. The CET1 ratio improved on resilient net profit. We have adjusted our long-term CET1 ambition from around 13.5% to around 12.5%, reflecting lower capital requirements and more visibility on regulatory RWA impact. This implies a management buffer of around 200 basis points. As long as high uncertainty due to COVID-19 pandemic remains, we will manage CET1 above the 12.5% and gradually will move it, since it's further increasing to an 87% in total interactions.
This underscores my belief that our digital mobile-first strategy is the right strategy, and our ambition to keep transforming into a data-driven digital bank remains firm. Having said that, with the current external environment, we do feel the need to refocus some of our activities. In Wholesale Banking, we increase the focus on core clients and simplify our network in Asia. Core clients will continue to be served from regional hubs in New York, Singapore, and Hong Kong. In our Challenger & Growth markets, the focus has resulted in a decision to significantly reduce the scope of our Maggie program, a program that was launched to provide a standardized customer experience and integrate the product offering in four of our challenger countries. Effectively, the reduced scope means we stop the complex and costly clear in 2021, for which a redundancy provision will be taken in the next quarter.
Going forward, we will continue to take a critical look at our activities and our cost base while we keep the focus on our strategic priorities. As you can clearly see, we do this bite-size because I want to have execution certainty. Onto the next slide. Data-driven digital leadership to offer our customers a differentiating experience remains a strategic priority. End-to-end digitalization on the other. We do this by a number of points. The first point, by rolling out a first-class customer engagement layer using and combining mobile app components. This results in a continued expansion of the customer base with access to our improved digital channels. All of our retail customers in the Netherlands and Germany are using the one app, one web channels, and in Belgium, almost all our private customers have been onboarded.
When this is completed, we will have achieved almost all milestones and 80% of the cost savings of our Unite program. Two, when you look at the middle layer of the slide, that's the purple layer, we will roll out global products and services in insurance, in investment products, and in consumer lending. On the right side of that middle layer, you see the local product and services, which we will continue to build in a modular way, and that's also end-to-end digitalization locally. The complex and costly cross-border integration of local systems and the third point is that our digitalization journey is enabled by the foundation that we've built over the years. You see that at the bottom part.
This foundation allows us to use and reuse building blocks throughout ING worldwide and can be applied in the development of local products and services as well as to the rollout of cross-border platform initiatives, such as the collaboration and cooperation with AXA on insurance products. As a digital leader, we continue to move towards an efficient, easy customer platform that caters for our own and third-party products and services. On slide five, you can see that over the years we have been able to grow our NII in a low rate environment. Please note, 2020 is annualized and is not guidance. As you know, we have five levers we applied to support and grow NII. One, loan growth. Two, margin discipline. Three, changing of the asset mix. On loan growth, I want to say that we are not willing to compromise on lending standards and on margins.
However, we benefit from a geographical diversification, and we see loan demand already improving in the U.S. and in Asia. In Europe, demands remain subdued. However, we continue to be committed to support our customers and the wider community. On deposits, we are increasing the charging of negative rates in the Eurozone, and in non-Eurozone countries, we have lower deposit rates to counter the effect of significant local central bank rate reduction. Higher margins also within risk appetite. As you can see, we are successful at growing our fee base by increasing daily banking fees and introducing behavior fees. As you will see later in this presentation, we have managed to keep the pressure on NII limited, while we have not yet included the conditional benefits from TLTRO III, and have absorbed significant negative FX impacts in the third quarter of 2020.
Please note, we remain confident that we will meet, which I said already in the previous quarter. Turning to slide six. As mentioned, we retain the same risk appetite and focus on a high-quality loan book, proven also by our strong track record, with low risk cost through the cycle compared to our Eurozone peers. Looking at the numbers for this quarter, these came in well below the second quarter, despite taking a EUR 552 million management overlay. This overlay reflects increasing uncertainty with the second wave of COVID-19 coming in, and a delay in potential credit losses as support from governments by reflecting the updated macroeconomic indicators in our models. Like I said last quarter, that would mean that a bad quarter will roll off and a good quarter will come on, but we've offset that impact.
The second part of the overlay was furthermore applied to increase provisions for loans that are still subject to a payment holiday. The total amount of loans on which payment holidays were granted remained limited to almost EUR 20 billion or around 2.6% of our loan book. With almost EUR 6 billion already expired, taking additional provisions, also reflecting business customers and sectors which we consider higher risk under COVID-19 and the uncertainty the second wave and stricter lockdown measures may bring. Slide seven provides an overview of what we've done to strengthen our management of compliance risk, which continues to be a top priority. We have taken steps to implement one global approach to how we manage our know your customer activities.
This list is obviously not complete but shows some major areas, such as machine learning to detect when transactions are being broken up in small parts in an attempt to avoid raising alerts. We call that smurfing. Last but not least, and I'm actually proud of that, we also were the first in the sector to put a team in place with people with a psychology degree that are purely focusing on ensuring the most effective behavior and getting groups to work well together with learnings from these assessments, the behavioral risk assessments, then to be applied across the entire organization for more effective as a society. We are pleased to see an increasing awareness on this topic with action plans presented by the Dutch Government and by the European Commission.
We are part of initiatives to collaborate with other banks on transaction monitoring in the Netherlands and Belgium. Although these are complex matters, which will take time to realize, things are moving in the right direction. Let me take you to the third quarter results, starting on slide nine. In the third quarter of this year, income was lower both year-over-year, income compared to the previous year was mainly driven by pressure on liability margins and lower results on foreign currency ratio hedging, reflecting lower interest rate differentials as local central bank rates in non-Eurozone countries were significantly reduced. Actually that is the largest part of the decrease comes from these foreign currency ratio hedging differentials. Sequentially, excluding the impairment in TMB, income was EUR 155 million lower.
This reflects the lower client activity in financial markets compared to the previous quarter and lower income in the corporate line, again, including the lower results on foreign exchange ratio hedging, partially compensated by the annual dividend received from Bank of Beijing. Pre-provision results, excluding both volatile items and regulatory costs, was resilient. Next to the revenue differences I just talked about, the change compared to the third quarter of last year came from a VAT refund we received in that quarter, as well as CLA increases that came in in this quarter, in loan costs. Compared to the previous quarter, the result next to the revenues was also impacted by slightly higher costs driven by redundancy and legal provisions. If you would take those legal provisions and redundancy costs out, the operational costs this quarter were lower than last quarter. On to NII on slide 10.
As mentioned earlier in the presentation, we are seeing some pressure on NII from the current market conditions, which affected the levers we generally use to counter the impact from the low rate environment. NII, excluding financial markets, was lower year-over-year, reflecting the continued pressure on liability margins, while deposit inflows this year were substantial. We kept lending margins stable. Lending volumes declined, reflecting the currently lower demand, especially in Wholesale Banking. The impact from FX was significant this quarter. Interest results on foreign currency ratio hedging was significantly lower, driven by local central bank rate reductions in non-Eurozone countries, while also the devaluation of some foreign currencies had a substantial negative impact. Compared to the previous quarter, NII, excluding financial markets, was 2.9% lower. Overall, lending margins improved. Pressure came in from the aforementioned reasons.
To emphasize, we continue to focus on pricing discipline, which will benefit us in the future, and we may increase the benefits from negative rates charged on deposits. In addition, we did not book the conditional benefits from TLTRO3 yet. However, we remain confident we will meet the threshold. Our net interest margin decreased by 6 basis points this quarter to 138 basis points. This was mainly driven by a higher average balance sheet reflecting our TLTRO3 participation, and that was partly offset by lower average customer lending. The overall lending margin improved. However, pressure on liability margins continued. NII in the corporate line was lower. As stated previously, while NIM is an important metric for the market, we note that NIM can be impacted by volatile items as we've seen this quarter, so we believe it is better to look at overall NII development and guidance.
Turning to net core lending. As mentioned, loan demand dropped this quarter, especially in the corporate segment. In the current environment, we're observing that companies delay investments and need less working capital, while also demand has been met through direct governmental support schemes. We do see some divergence in circumstances between Northern Europe and Southern Europe. In Northern Europe, governments have provided more direct support through tax deferrals and wage support, also reflected in generally low additional uptake of government-guaranteed bank loans. Meanwhile, in Southern Europe, bank lending is the main support channel for companies. Specifically for the Netherlands, our largest market, companies were able to adjust their cost base by reducing the number of temporary workers, especially in sectors such as hospitality and tourism. In this context, overall for the third quarter, net core lending was down by EUR 6.9 billion.
In retail, net core lending grew by EUR 1.1 billion, driven by mortgages, with growth driven by further repayments of the COVID-related increased utilization of revolving credit facilities and lending, i.e., the emergency lending that people took, as well as some repayments on term loans. In daily banking and trade, the decline mainly reflects the impact of low oil prices in trade and commodity finance and FX. Net customer deposits increased by EUR 3.4 billion. This level is comparable to previous years. However, in the third quarter, this was composed of higher savings in retail, reflecting continued uncertainty. In Wholesale Banking, we saw a net outflow, also reflecting repayments of protected drawings in the first quarter, which had been placed as deposits. As mentioned, the negative net loan growth is a shift in demand, which we don't consider structural, and we expect loan growth to return when uncertainty subsides.
With our geographical diversification, we will be able to benefit as demand picks up with the first positive signs visible in Asia and the U.S. Now on to fees. Year-over-year income fee income was higher when adjusted for the reclassification of financial markets last year, with impact from COVID-19 visible in how different product categories developed. If you look at retail banking, fees were 5.5% higher, again, driven by investment product fees with a continued higher number of trades to benefit from market volatility. In daily banking, fees were lower year-on-year, although payment transactions increased following the relaxation of lockdown measures, but these have not yet returned to normal levels yet.
The increase of Daily Banking packages in the first quarter of this year has absorbed part of this impact, the full benefit of the action that we took should become visible when transaction levels return to normal. Lower fees in Wholesale Banking were mainly driven by lower demand, lower TCF volumes with trading commodity finance volumes, less activity in Financial Markets. Sequentially, fees were 1.5% higher. Retail grew by 4.1% as some recovery in the number of domestic payment transactions was visible in Daily Banking. Fees on investment products were at a slightly lower but still high level. In Wholesale Banking, lending fees were higher due to the closing of several syndicated deals for the quarter. Overall fees in Wholesale Banking were down, reflecting less activity in Financial Markets. Year to date, fees grew by 5%, this meets our ambition level.
Under the current external circumstances, I find this a great achievement as it shows how well we adapted and have been able to diversify our income streams. Moving to the next slide. Expenses this quarter include a EUR 140 million impairment on capitalized software driven by the changed scope of our Maggie program. Excluding KYC and regulatory costs as well as this impairment, expenses were up by EUR 25 million year-on-year, or 1.1% as this quarter includes CLA increases, while the third quarter last year included a significant VAT refund. Quarter-on-quarter, most segments reported lower operating expenses. Overall expenses, excluding KYC regulatory costs and impairments, were EUR 20 million higher, but this includes EUR 37 million in provisions. KYC-related costs were comparable to the previous quarter.
As we work to become more effective and make progress on our file enhancement, these costs are expected to plateau in 2020, we said it before, but now somewhat below the initially expected run rate of EUR 600 million for the year. Regulatory costs were slightly up year-on-year and lower sequentially, which included a catch-up on contributions to the Single Resolution Fund. As stated earlier in the presentation, with a challenging external environment, we've taken steps to refocus our activities with adjustments in Wholesale Banking and to the Maggie program, reflecting a reduction of around 1,000 FTEs by the end of 2021. Going forward, we will continue to monitor developments, and I will continue to critically review our activity and expenses and act anywhere needed while making sure that we're able to execute.
Slide 16 shows the risk cost split per business line, which in the third quarter came in at EUR 469 million or 30 basis points on average customer lending and is well below the elevated level of the previous quarter. As explained on slide six, this includes a EUR 552 million management overlay, primarily in Stage 1 and Stage 2, consisting of two parts. This was applied to compensate for a EUR 380 million release driven by updated macroeconomic indicators, and the second part, an increase in provisioning for payment holidays. The resulting EUR 172 million impact on risk costs, i.e., -EUR 380 million, +EUR 552 million, was allocated to the segments with EUR 105 million in Retail Benelux, EUR 53 million in Retail C&G, and EUR 40 million in Wholesale Banking.
Aside from the allocation of the managed markets, risk costs predominantly reflected higher collective Stage 3 provisioning, mainly visible in Australia, Romania, Germany, and Poland.
In Wholesale Banking, Stage 3 risk costs were significantly lower than the previous quarter, with some additions to existing Stage 3 files while new inflow of new clients was limited. The Stage 2 ratio was slightly higher at 7.6% as we conservatively moved more exposure to watchlist. To reiterate, Stage 2 is not a waiting room for default. It implies that credit risk on an individual exposure is monitored more closely, reaching a very healthy 15.3%. CET1 capital was EUR 0.4 billion lower, mainly driven by negative FX impact from the devaluation of the U.S. dollar and the Turkish lira, while net profit for the quarter was not added to capital as it was fully reserved for future distribution.
The CET1 ratio was further supported by EUR 9.9 billion lower RWAs, mainly driven by EUR 10.5 billion of lower credit RWA, primarily due to a lower coverage ratio, resulting in a lower level of required RWA. Market RWA was down, mainly due to lower exposures as markets normalized, while operational RWA increased due to technical updates to the AMA model. Turning to our capital update on slide 16. During 2020, we have seen several developments which have contributed to the decision to lower our long-term CET1 ratio ambition from currently around 13.5% to around 12.5% going forward. This adjustment is mainly driven by a reduction of capital requirements in the course of 2020. This was partly driven by the COVID-19 pandemic. Here we can expect buffers to come back. Part is also structural, such as under Article 104a under CRD V, which was pulled forward.
For the CRD V lovers amongst you, Article 104a. Also, during 2020, we've taken the RWA impact of the Definition of Default, as well as the majority of the TRIM approximately 200 basis points on our current SREP requirements, higher than our previous management buffer of 170 basis points, reflecting uncertainty on that part of the capital buffers that may come back. Given the current uncertainty caused by COVID-19, we'll manage the short-term CET1 ratio above 12.5% until there's more clarity, and then we will move to the 12.5%. On to slide 17, which shows our distribution policy. As we've always said, we aim to offer our shareholders a sustainable and attractive return and did not accrue for dividend in the first half of 2020, while we kept the EUR 1.8 billion dividend reserve for 2019.
Our previous progressive dividend policy did not fit with the procyclical impact of IFRS 9 and the related volatility. We now announce our new distribution policy, which consists of a payout ratio of 50% of resilient net profits to be paid out in cash or a combination of cash and share repurchases, with the majority in cash. We have reserved this quarter's full net profit for dividend while at businesses through the cycle. We believe our businesses should aim to cover at least our cost of capital. As mentioned in the previous quarters, our cost-income ratio was impacted by factors such as the negative rate environment and regulatory costs. This quarter, also impairments affected this metric in both income and costs, but corrected the Q3 2020 cost-income ratio was 57.7% on a four-quarter rolling basis, and for the quarter it was 54.8%.
To reiterate, cost income is not how we run our business. COVID-19 at the same time, countering financial and economic crime remains a priority. The current environment reinforces our belief that we are on the right strategic path with our digital model enabling us to continue to grow primary customers and mobile interactions. Loan demand was affected by COVID-19, but still strong in mortgages. However, we saw reduced demand mainly from our business customers, compared to when the lending went up at the end of the first quarter with the emergency drawings. Pre-provisional, risk cost sharply decreased, especially in Stage 3, while we further increased collective provisioning in Stage 1 and Stage 2 to reflect the remaining uncertainty and the delay in potential credit losses.
With the increasing uncertainty, we keep focus on margins and asset quality. We also take a critical look at our activities, leading to some adjustments in the organization. The CET1 ratio was strong at 15.3%. We announced our capital update with a reduced CET1 ratio ambition of 12.5%. Given the current uncertainty, we will manage our CET1 ratio, currently above.
Mark, please press star one now on your telephone. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. Star one for questions or remarks. Go ahead, please. Our first question is from Mr. Benoit Pétrarque, Kepler Cheuvreux. Go ahead, please. Your line is open, sir.
Yes, good morning, all. It's Benoit Pétrarque from Kepler Cheuvreux. The first question is on capital. Well, thanks for all the details you provided today. I was wondering whether that will be once a year or do you plan to execute this periodic review? Also on capital, you want to maintain a buffer during the pandemic, also reflecting uncertainties. What is this buffer right now? Could you a bit help us to quantify how much you need as we speak, looking around, looking at this, well, second lockdown, second wave. Could help us to quantify that? I want to understand, assuming ECB will, whether you are able to pay shareholders next year a bit of the excess capital sitting in the company, or that will be a bit of a late decision. That's the first question. The second question is on cost.
Also in combination with the, let's say the NII outlook, because it's quite a tough outlook, obviously. How do you see costs moving? I get to a clean cost at minus one to certain Q3 year-on-year. That's good. What trend do you see for 2021 on cost?
Clear actions in Wholesale Banking and with Maggie. The provisions in that regard will be taken in the fourth quarter. That's just how we need to do it from an accounting point of view. Like I said, the previous quarter, the needs on the cost level need to come down. Cost need to move down from here.
On Maggie, how much cost cutting will that bring, roughly? Could you quantify that?
We will only take a provision, 1,000 FTE. That is both internal and external FTE. We need to go to our provision committees to finalize that. That will come in the fourth quarter. Yes, you have mentioned that indeed it is a tough environment on NII. Of course, that is the case. At the same point in time, we see a growth picking up in the U.S. and Asia. Yes, it is a temporarily tough environment, but that is where our diversification in the countries will help because in some.
Looking to, over time, get to that 12.5% or around 12.5% target. We do review our capital structures almost every quarter, of course, looking at the prospects for the future and where we stand. I guess, the question is how fast and at what pace you need to get to that 12.5%. We just need to make sure that as we glide to that 12.5% target, we must have a sustainable structural reduction in the capital needs of the company. That's what we will do over time.
This additional buffer you are planning.
Buffer is almost 500 basis points, as you can see, and that we think that over the cycle, we can comfortably accommodate a 200 basis points buffer.
Okay. Thank you very much for that.
Next question is from Mr. Stefan Nedialkov, Citi. Go ahead please, sir.
Hi, good morning. Thank you for taking my questions, Steven, and colleagues. I have one figure how the efforts trajectory develops from here, but more of a one-off than a recurring. Secondly, the TLTRO accrual decision, is that something that your auditors need to approve potentially in 4Q or the beginning of next year, or is it much more of a management decision? Thirdly, on the pricing of your lending products, are you already incorporating a full Basel IV impact on capital?
Negative rates in Belgium to corporates and SMEs, the 11 basis points goes for current accounts for retail customers. Like we have already been doing in other markets for corporates and for SMEs, we'll also now start to charge negative rates above certain amounts for these corporates. We apply also schemes in Germany, for example, whereby if people open a savings account only, then we charge negative rates...
When we would book the potential gains, that's really a management judgment when we are virtually certain that such income will come. It's our decision, but of course, we do that in consultation with our auditors, and we will take that decision when we have reasonable confidence.
Thank you very much, guys.
Our next question is from Mr. Omar Fall, Barclays. Go ahead, please sir.
Hi there. Just firstly, how much of the decline in core lending?
Engagement layers and product elements is proving to be difficult. We have been learning, and we've always talked about getting from an intermediate state to an end state, if you will. Now we are in the lucky circumstance that we have built a number of our modular blocks. We've built our software blocks in terms of TPA, we've built our cloud, we've built our data lakes, we've built our global product propositions, including the insurance proposition that we have with AXA. We have already built an app environment. In the next quarter, the provisions will be taken for cost savings. If you look at the 1,000 FTE, approximately 600 relate to Wholesale Banking and approximately 400 relate to Maggie.
Got it. Sorry, just a cheeky follow-up on the TLTRO. How the balances spread or the allocation across the divisions, just so we can get a sense of, for our modeling, the impact on NII and NIM.
See how we are doing. It's really trying to look on a geographical basis for loan growth within the Eurozone. That would be the case for you to follow up in subsequent quarters.
Thank you very much.
Next question is from Mr. Benjamin Goy of Deutsche Bank. Go ahead, please sir.
Good morning. I hear your comments on the regulatory inflation. You talked a lot already. Just wondering, on the Basel IV ratio, where you're currently standing, also, I guess, 12.5%. Secondly, on your fee income, I guess this will gain in importance going forward. The EUR 200 million of fees from investment product this quarter, very nice growth rate. Just wondering how much is driven out of Benelux and Germany probably next. Any other countries where this is already a significant contribution? Any color would be appreciated. Thank you.
Thank you, Benjamin. On RWA TRIM, changing models, Basel IV, have for us been largely taken into account, except for the final Basel IV output factor. Other than that, the impact for us is from now on almost benign. We have been able to take the CET1 level down to 12.5%. Assuming that Basel IV would be fully implemented in 2023, and then leading gradually up to 2027, that total impact would be around 50- 60 basis points over the years. For us, that is a readily minor part of all the impact. With TRIM and DoD, we've basically had it, if you will. That's good. On the fees, typically, we come from an environment as a digital bank with our direct banks in different countries, whereby we had a very, very low fee share.
Investment products, in that sense, were actually not very well developed. Hence, we are now starting to do that, and you see now the first growth of that in Germany. We're also rolling out investment proposition in other countries. You should be able to see that space grow. If you see that compared to the number of clients that we have compared to our peers, we're still at a very low level. In that sense, there is lots of upside potential in that investment product fee business.
Understood. Thank you very much.
Next question is from Mr. Kiri Vijayarajah of HSBC. Go ahead, please sir.
Yes. Thank you. Good morning, everyone. Just a couple of questions. Firstly, coming back to the pullback in the Wholesale Banking from Asia, LatAm. Can you just give us a feel for what kind of volume RWAs or revenue impact we should be thinking about? Timing-wise, when does this shrinkage get underway? Is it also fair to assume a lot of it's going to overlap with your oil and gas, commodities, shipping book? The second question's on capital, really just a technical point, because I think at the first half stage, you were letting your profits flow into CET1 capital. I see at the third quarter stage, you're not letting the profits flow into CET1 capital. Sorry if I missed it, what's the thinking there? Has the regulator said something there?
Just some color on that moving parts on your CET1 capital, please. Thank you.
Thank you, Kiri. Wholesale Banking, it's not so much a matter of shrinking volume in RWA, because we will continue to service a number of those clients from regional hubs in New York and Singapore and Hong Kong. It's basically an efficiency measure, if you will, to service those clients from hubs rather than from all kinds of different offices. In South America and four smaller offices in Asia, but these are small offices. We have Mongolia, and we have Thailand, and we have Kazakhstan, and we have Malaysia. In Latin America, it's Brazil, Argentina, and Colombia. If you look at the total in Wholesale Banking, the number of people involved is still relatively small. We are actually able, across the Wholesale Bank, to actually serve our clients with less people.
This also does not have an impact on the oil and gas book or shipping, if you will. We already said that we have put part of those books in rundown, but this measure has not an effect on that. If you look at the backgrounds on why we did not add net profits of the previous quarters to CET1, it's basically because at that point in time, we did not have a dividend policy because we aborted or delayed our dividend policy as of the first quarter. Since we now resumed in the third quarter, we added the entire profit of the third quarter in it as sort of a catch-up.
Right. Got it. Okay. Yeah, that makes sense. Thank you.
Next question is from Miss Giulia Aurora Miotto of Morgan Stanley. Go ahead, please. Your line is open.
Yes. Hi, good morning. A couple of questions from me. First, from a strategic point of view, you made some clear announcement on capital and some announcement on costs. I was wondering, should we expect an investor day with, for example, more clarity on cost direction or revenue initiatives? Really, you have taken a look and these are the only initiatives that you plan to announce over the next 12 months? This will be my first question. The second question, just going back to the 50- 60 basis points that you mentioned for Basel IV. How are you thinking about the mortgage overlay from the DNB? I know that this has been postponed, but in theory, it's still in the cards at some point. Is that included in these 50, 60 basis points, or would that be on top?
If I can just ask a follow-up on the IT slide number four. The product platforms, so insurance, investment, consumer lending, does this mean that now finally, whenever you launch a current product, that will be launched across the board to all your markets? We should see a faster ramp-up in fees. Thank you.
Thank you very much, Giulia. Starting top to bottom with your questions. Like I said also previous quarter, I'm reviewing all business lines and all business that we have in ING. If there are measures to be taken, we will take them, and I mentioned in my presentation execution certainty, because I want to avoid announcing big megalomanic plans for long-term that are not executable. When we see things happening, we take action, and we make sure we get to execution of what is coming. If there are new things to be done, then I will announce them at that point in time. We will take it from there. In that sense, there is not a current plan for an investor day with additional direction. I'm sure that the IR team will discuss this further with you. They're already looking very happy.
With regards to the Basel IV impact and the mortgage overlay of DNB, the DNB overlay did not come because the further growth in mortgages did not come, and there was also not a big increase in lending elsewhere. It was a protective measure that the DNB would put in place, but in the current circumstances, that was not deemed necessary anymore. If it would still come, it would be a front-running of Basel IV, and hence it is included in that 50-60 basis points. In retail, yes, we have, of course, in the past, we have developed products locally, and there are still local products. Some products are local, for example, in Italy, such as loans related to people working in certain companies that do not exist elsewhere. There are also products that can be applied more globally.
We will next to the local products that we have, we'll also start to roll out these global products so we can easily make them scalable across more markets, which is from both a revenue and cost point of view, more effective and efficient.
Perfect. Thanks.
Our next question is from Mr. Thomas Dewasmes on Goldman Sachs. Go ahead, please, sir.
Yes, good morning. Thank you. I had two questions, please. One, on capital targets. Am I correct in understanding that your current 12.5% target and 200 basis points MDA buffer already includes the planned increase in countercyclical buffer down the line? The second question is on fee income, please. Mr. Enria said recently that banks should consider growing those banks, possibly incorporate asset managers in their whole business plan. You often talk about AXA and your initiative there. Could you talk a little bit about what you're doing in the Netherlands in asset management and insurance to improve that link, please? Thank you very much.
Thank you, Thomas. On the first question, the answer is yes. The 12.5% already includes potential increase in countercyclical buffers at some point in time. That's where I said some parts of the decrease will be structural, some parts will be temporarily, but in our buffer from an article that he wrote was mentioned in a different way, and that meant that he stated in the article that Europe would benefit from the setup of an asset management company for loans that were not performing to then deal with those loans and, i.e., function, if you will, as sort of a bad bank. That was something to further support the European economy. I don't think that is needed for ING, but I think that was the reason why he wrote that article. That was the context in which he wrote it.
If I answer you, and that's the second part, more directly, if you look at our insurance businesses or the sale of insurance and the fee that we make on that, again, since we came from an environment with our direct banks, which actually had no fees whatsoever. In the past, these banks were saving banks, were actually punching well below our weight in developing our fee business, also in insurance and also in brokerage. Hence you now see, since we are stepping up to plate, for example, in Germany, that has given us a big boost. That is exactly the area that we need to increase in as we came from these small amounts in the past.
Thank you.
Next question is from Mr. Guillaume Tiberghien of Exane BNP Paribas. Go ahead, please, sir.
Yes, good morning. My first question relates to the net interest income. If I look at consensus for next year, the consensus is around EUR 3.47 billion per quarter. You're running at EUR 3.3 billion. Obviously, there's EUR 140 million mix, and a big chunk of that is due to the FX ratio hedging. I wanted to know whether we simply need to take the current run rate and back the FX ratio hedging, and then slip from that given the pressure on deposit margin, or can we stay stable from that level? The second question relates to the Wholesale Banking, and you explained that given the lower Equity Tier 1 target, you can price, I guess, at a lower price given that you got less of a capital requirement.
Don't you think that prior to the reduction in the Equity Tier 1 target, you actually had to increase your price in order to meet satisfactory return on the previous target? I'm a bit confused whether you intend to price at lower rates or still improve the discipline in Wholesale.
Yeah. That's a good question. Let me say up front, we're part of the market, and therefore, we are not setting the price of the market. We price what is the market price. If we could direct the price of every market, I'm sure that we would be talking to some regulatory authorities. It's just a market price that we take or not take. In that, we will see whether it makes a return. Clearly, if it doesn't make a return, we will need to price up. Hence, it may also mean that if we price up and others don't, that we actually may not get the deal or the transaction. Now, the fact that we go to a lower capital target gives us more room to still win the transaction and still make the adequate return.
First and foremost, we price at market. We want to make a sustainable return through the cycle with our clients. In bad times, sometimes you see the returns becoming a bit lower, but through a cycle, you have seen that we've made an adequate return. That's how we deal with that. On NII, I give the floor to Tanate.
Yes. Just to explain a little bit about our view on NII. Clearly, there are three components to why the NII is compressing that you see in Q3. Part of it is to do with the FX impact that we discussed on the corporate line, and that we don't see that going forward as being a bigger challenge given the fact that the rates are normalizing in our books already. That's one. The second, I think, in the Wholesale Banking, as you mentioned, that it really depends on the prospects for loan growth in the future. We also see that we are not seeing further decline, for example, in the trade and commodity finance activity that is plateauing. Again, depending on the future, we don't see too much further compression because of that and potentially growth as economies return to more normal levels.
The last piece is really the negative rate compression that you see, particularly in the retail bank. As Steven mentioned, we have already taken actions with respect to negative rate charging in the Netherlands, in Belgium, and yesterday you see the announcement of charging for negative rates in Germany that has been executed as well.
Thank you.
Next question is from Mr. Raul Sinha, JP Morgan. Go ahead please, sir.
Good morning, Steven. Good morning, Tanate. Can I have two please as well? The first one is just on dividends. If ECB were to allow dividend payments next year, are you intending to pay the 2019 reserved dividend to the EUR 1.8 billion roughly, as well as 50% for 2020? Otherwise, I'm struggling to understand why you're accruing the EUR 88 million that you have taken in the third quarter. That clearly implies you intend to pay both the 2019 as well as 50% payout for 2020. If you confirm that would be helpful. The second one is a broader question on the return on tangible equity target that you're reiterating the ambition of 10%-12%. I'm really struggling with that, I have to say. You're at 5.1% this quarter. The cost of risk is not that far away through the cycle normalized level.
In terms of your cost messaging put against the NII pressures, it doesn't look to me like that it's going to be a very significant step down in the cost-income ratio. Even if I right size your capital base, which I suspect will take you many, many years to do, what am I missing that would double your returns from the current level? Thank you.
Thank you. If you look at our ambition, if you look at the past five years, we have largely met that ambition, only this year we are significantly below the ambition. We continue to look at costs and diversifying our vision to fee business to get back to that 10% level. There we are helped by a lower return hurdle of 12.5% compared to 13.5%. Please note that also if you look at this year, it's being modeled by many provisions that are currently being taken. I know that the risk costs that we had in this quarter were around EUR 470 million. If you look at the previous years, those risk costs were a lot lower still at between EUR 600 million and EUR 1 billion. Those are different elements. You clearly see that in that sense also IFRS pulls forward risk costs.
If there are no changes in macroeconomic circumstances, you would see those risk costs from IFRS coming down. Hence we're still focused on that ROE ambition of 10% to 12%. With regards to the dividends, yes, we have reserved EUR 1.8 billion. We have reserved the amount in 2020, if we would be allowed to pay it, we will pay it out.
Thank you. That's really helpful. If I can just follow up on the ROTE point. I suspect the cost-income ratio is obviously going to be a key driver of the improvement going forward, and I think you referred to how low rates have impacted structurally your cost-income ratio. Should we think about the ROTE ambition as something which also considers a normalized rate environment?
Of course, a normalized rate environment will help, but that's not what we're currently in. We are currently dealing with what is the current rate environment, and we will, in this environment that we currently see, take steps to get to the right level of return. As we said before, if we cannot price to the right return, we will not grow our business and give capital back to shareholders. We're very much focused on, again, making that return. It needs to bring us back in a normalized risk environment, I would say. Other than that, we take the current forecasts as they are in our medium-term plans.
Got it. Thank you very much.
Next question is from Mr. Tarik El Mejjad of Bank of America. Go ahead please, sir.
Hi. Good morning, Steven. Just a quick question on cost, please. As just Raul said, to bridge the gap with your 10%-12%, clearly cost is a key component. I guess CET1 ratio on capital as well is another one as the denominator will come down. On the capital first, I understand you want to take your time and have visibility on how the pandemic will evolve, I guess you're taking that action through your provisioning Stage 1 and Stage 2, so on. Why this extra level to give us a sense of how much savings you could generate from the projects you've announced today? Should we have to wait for Q4 to get these savings numbers? Thank you.
Yeah. On capital, the reason why we have done this is that we are in a second wave of uncertainty with, the name says it, the second wave of COVID-19. If we would not have taken a management overlay, that would have, excluding the Stage 3, probably looks three years ahead. Every quarter, that means that the last quarter of economic development falls off. Then the new quarter in 2022 comes on. It gradually means that in your models, you get a positive and the negative ones fall off. That's what we see because we had a very negative quarter in the second quarter that is then taken out, then you then add a quarter in 2022. Now, we've not done that as we are in a set of defaults, but we don't see that many defaults.
In a normal crisis, you would see those, but we don't see them yet, and that may have to do with the measures that are being taken left, right, and center by governments and the ECB and the Fed and what have you. Secondly, we have a number of clients in payment holidays. Also there, we don't see that much. As I said, of the EUR 20 billion, EUR 6 billion, it has already resumed a normal payment schedule. There is no increase in terms of payment defaults compared to what we normally see.
We would likely announce some kind of a redundancy provision at that point in time. To address your question about how much the cost reduction would be, I think you can assume a certain FTE cost and then make your calculations from there, but these roll-off will happen starting probably the beginning of next year. We'll give more clarity in Q4, but I think you can do your own internal calculation based on this information.
To follow up.
Next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, Peter.
Yes, sir. Good morning, everybody. Thank you for taking my questions. My first one is around NII. I'm a little bit confused still on TLTRO because I think you indicated you're confident of getting the benchmark, and yet, it's a management decision, and you haven't put it in NII for Q4.
Yes. I think different banks take different treatment with respect to the threshold that you need to meet with respect to accruing the impact of the TLTRO3. Our internal view is that, the date for the measurement, it's a one-off measurement in the end of March 2021, and we want to be virtually certain of hitting it before we book that particular income. I don't want to comment on how other banks do it, but that's one. The second one, I think, is on your question on negative interest rate. With that in mind, the impact of the announced plans, whether in the Netherlands, Belgium or Germany, we expect to have an annualized impact of approximately EUR 140 million on an annualized basis. That will come through. The last question is whether we would accrue the net profit of Q4 into dividend.
Yes, indeed, we are planning to do that.
Okay, thanks.
Of course, we will try to land on what ultimately gets us to the 50% over resilient profit. That's what we'll do in Q4.
Thanks.
Following question is from Mr. Farquhar Murray, Autonomous. Go ahead, please sir. Your line is open.
Morning, gentlemen. Just two questions from me. The first is just on the deposits, which is actually a bit of a follow-up to Robin's question there on the mitigations. Can you give us the numbers around how much deposits fall into negative rates in the fourth quarter and the first quarter, which I presume is behind the EUR 140 million you just gave. Then secondly, just on capital management, can you give us a little bit of an outline of how you're going to think about the split potentially between cash dividend and share buybacks, when you reach those decisions? When you talk about predominantly, what's the maximum amount of share buyback you'd expect to do within the total capital return in a given year? Thanks.
On deposits, I'll give the floor to Tanate.
In terms of deposits, Farquhar, we don't disclose that information, but you can see that over the course of the last 12-18 months, the level of threshold is declining deeply, right? We started with the Netherlands at EUR 1 million, then EUR 500,000, and now EUR 250,000. In Belgium, from not charging at all, now we go to EUR 1 million threshold. We start introducing it in Germany for accounts opened with us above EUR 100,000. You can imagine that the threshold gets lower and lower over time. Okay. On the stock buyback to you.
Yeah. What you can expect, Farquhar, is that we will pay out the majority in cash. We do not comment at this point in time how much we would think about doing in terms of buybacks or stock distribution or buybacks, I mean. That depends on the price at the prevailing time to the intrinsic value. That's how I look at it. As soon as we start to make distributions, we will announce it as well.
Okay. It's very clear that price clearly will matter. Presumably, do you think your stock's cheap currently?
We have no comment on our own share price.
Okay.
I can only say we're trading below book.
Okay. That's helpful. Thanks.
Next question is from Mr. Jason Kalamboussis, KBC Securities. Go ahead, please sir.
Yes. Good morning, gentlemen. A couple of things. The first one is on AXA. It's often mentioned, but the contribution to results is still insignificant. Do you expect this to start being more significant? Do you expect to have more such deals now that you showed how you are structuring, if you want, the products? The second question is on cost. With this change in the Model Bank, basically what we're missing is that before we would have had a number of IT systems being decommissioned. That was a bit of a long-term plan. It's still something that is not going to take place. Are there therefore other structural areas where you can see potential for cost efficiencies? Finally, just to, again, on costs. You are reducing now by 1,000 FTEs, but your FTEs basically are standing at around 56,500. In 2019, there were 54,500.
It looks like you have, over the last three years, you have had a significant increase between 2% and 4% of your FTEs. Could you give us a bit your thoughts on this and how you position this reduction of 1,000 versus the larger increases we have seen over the last three years? Thank you.
Yeah. Thanks, Jason. Indeed, we have a partnership with AXA. We have been rolling out a number of products in five countries. We keep rolling them out as we speak, also in more countries. That contribution will grow over time. We also have a collaboration with Amazon, for example, in Germany, where we are on their SME seller platform, so that we can sell loans to SMEs. We will continue to develop these partnerships either with others or do them ourselves, but actually provide then a differentiating experience, i.e., insurance or travel insurance only when you need it, that you can gain through your app rather than having an annual insurance that you pay for each and every month.
With regards to the cost and the structural areas for cost efficiency, all the elements that I mentioned, so both the foundational building blocks, including our modular software, which we call TPA, including the use of our cloud and including the use of our data lakes, are meant to be consumed by each and every entity as to avoid that we need to develop things two, three or, if you look at all the retail activities, 13 times. The same goes for all the app components, the same also goes for the global product solutions as we roll out in different countries. That is meant to actually avoid double cost, and we should see the benefit of that coming in. With regards to the FTEs that you see, it's a good point. Those are actually the internal FTE that we have.
Next to that, we also work with work packages and external FTEs. What you have seen over the past year or so is actually a shift from more expensive external FTE to less expensive internal FTE. Hence, that figure does not give you the complete picture, as you need to look at it from an overall point of view.
Thank you very much. If I may just follow up on the last question, is there a lot more to be done on that front?
Yeah. I realize that some of you are asking the same question in a different way. As I've said before, I will be focused on costs, and the nose of the plane with the cost needs to come down. It has been going up for the past five or six years or so, and the nose of the cost will come down. That's what I work on, and as soon as I have something to announce with projects with execution certainty, I will announce it.
Very good. Thanks very much.
Next question is from Miss Anke Reingen of RBC. Go ahead, please, your line is open.
Yeah, actually, I wanted to ask the same question on a different way. It's like on the cost. Is flat cost, is that realistic or does nose down even mean you could bring them down under a sort of normalized environment? Just lastly, a small clarification. When you talk about the NII pressure, is that including the benefits from the TLTRO or excluding? Thank you very much.
Yeah. Yes. Thanks, Anke, for at least it's good that you say that you're going to ask the question a different way. I said down. I didn't say flat, I said down. The nose needs to come down, and it will come down. NII, currently it is excluding TLTRO. The benefit of that, when we take it, because that's towards the end, and that's also what it says, you need to meet it at the end, and the end lies in 2021, so in March. If we book it will be then.
Is it fair to assume the TLTRO might offset the structural pressure on NII?
Well, it does not offset at all, but it gives a benefit given the amount that we got from TLTRO, and that's a significant amount.
Mm-hmm. Okay. All right. Thank you.
I think, Anke, we disclosed already earlier the amount of that benefit will be EUR 300 million.
Okay. Thank you.
Sorry about that. Next question is from Daphne Tsang , Redburn Europe Limited. Go ahead please. Your line is open.
Hi. Thank you for taking my question too, if I may. First on NII. Can you give us some color on where you think NIM will go from here? I mean, quarter-on-quarter is pretty weak, the denominator effect from taking the sizable TLTRO III is certainly a big factor there. Just thinking about now that you have lower capital ambition and it means that you have higher competitiveness, does it mean that you're happy for NIM to come down going forward to stay competitive, assuming the profitability angle still fits your criteria? Also, as part of my NII question, if I can say that, what is the additional or incremental negative charge coming next year versus this year? Some of the lower threshold and the new charge on more customers are actually effective from January next year.
Regarding the EUR 140 million that you mentioned earlier, is it the annualized amount next year or this year? Just trying to think if there is any tailwind. Secondly, on cost. I totally get what you're saying about taking a look at the cost base and see where you can see more initiative with high execution uncertainty there, at which point you will announce. Actually, taking a look at Q3, what have you done in Q3 to lower costs? Quarter-over-quarter, even adjusted for the impairment, you are kind of flat. Year-over-year, you're up. Assuming KYC cost is there, but surely you have taken some underlying costs out. Can you give more color on what actually happened in Q3 on your costs?
Yeah, thank you very much. I think that's on cost. Please note that you need to continuously look at where you cut since in those CLAs, costs will increase every year. To maintain flat, you need to cut. As you may have seen in the quarter, and hence you see the cost being largely flat, but that includes also a provision for branch closures. With regards to NIM and the EUR 140 million annualized negative charging, I'll give it to Tanate .
Thanks, Daphne. I think if you let me break it down with respect to the 6 basis points reduction that you see in our NIM this quarter. I think about 2 basis points is the impact of the arbitrage between FX, the interest rate arbitrage, U.S. dollar are already in our numbers as of Q3. About 2 basis points is related to the balance sheet extension because of TLTRO. Of course, we don't book the income there, so that represents another 2 basis point of reduction. The third is a combination of the negative rates margin compression in our deposits and somewhat lower volume. You can see that is the three legs of why our net interest margin is down by roughly 6 basis points. We, of course, over time, would expect to try to increase our net interest margin through various.
It's over Q4 into next year. Yeah.
Got it. Thank you.
We have a follow-up question from Benoit Pétrarque, Kepler Cheuvreux. Go ahead, please.
Yes, thanks for taking my question. On the collective labor agreement for the Netherlands for 2021, what can we expect? That's been pretty negative in 2019 and 2020 in terms of salary inflation. What is your pitch to unions going forward?
Deals with, let's say, we would call it a tail risk. In case the banking system, for whatever reason, would stop functioning, how can people still get money? That is the background of the digital currency initiative. It, of course, also has its backdrops, because does it also mean that central banks need to retain certain levels of capital? To what extent do you give access to consumers and to what extent not? I think that we're- Planning on having a sort of investor day/capital market day in the next two quarters. Yeah. Well, the question was asked before, not exactly in the same way. We have currently not necessarily intend to do so to have that investor day.
I already said to one of the previous people who asked the question, I will defer this to Mark Milders, the Head of Investor Relations, to actually contact you to see when and if that would be appropriate.
All right. Thank you.
We have no further questions, sir. Please continue.
Yes, thank you very much. I will wrap up. Summarizing again, we continue to help our clients. We had good underlying results. We have announced a new CET1 level and a dividend. I would thank you for all your questions today. We'll speak to each other next quarter. Thank you.
This concludes the quarter three 2020 analyst call. Thank you for your attention. You may now disconnect your line.