Welcome, thank you for joining the ING second quarter 2020 media call. I'm happy to give the floor to the CEO of ING, Steven van Rijswijk. Please go ahead, sir.
Thank you very much, welcome, and thank you for joining us on the call today. On the call with me is Tanate Phutrakul, our CFO. We will give you an update of the developments and our results of the last quarter. The COVID-19 pandemic continued to strongly impact the economies where we operate and how we conducted our business. I'm very proud of the way our people are supporting our customers.
Throughout the last months, our colleagues continued to mostly work from home, and in those circumstances, we help customers in dealing with the disruptions from the crisis. For instance, by further enhancing our digital and mobile-first banking proposition, making banking both easier but also safer. Trends in customer behavior continued or became even stronger. We saw a sharp rise in digital payments in line with the general trend of people avoiding cash for hygiene reasons.
87% of the interactions of customers that they have with us are now done through mobile, and 41% of our customers only deal with us through their mobile. Another way of helping our customers is through the lending that we do. We have granted payment holidays to approximately 190,000 customers, leading to a total amount of EUR 18 billion in loans outstanding, [EUR 18] . On top of that, we granted almost EUR 250 million in loans with government guarantees, plus over EUR 5 billion in liquidity support for larger corporate clients.
Doing all of that, we continued our risk assessments, and we carefully monitor the situation of our clients through early warning systems and regular personal contact with the customers. In that situation, our core business remained resilient. We continue to see strong net interest income. For fee income, for instance, from broker services in Germany, they were higher.
Looking at wholesale banking as well, income was up due to increased client demand for financial market services. At the same point in time, we maintained good operational cost control. Our digital model also enabled us to continue our growth with primary customers, with an additional 156,000 primary customers this quarter, getting the number in total to 13.5 million, supporting a better cost infrastructure.
Net core lending declines by EUR 7 billion as a number of our business clients and corporate clients repaid the credit facilities that they used to protect themselves amid the economic uncertainty in March. The customer deposits grew by almost EUR 21 billion, and that was a reflection of the reduced spending that our customers have following the lockdown measures, as well as seasonal holiday allowances. All in all these elements led to a very resilient pre-provision result.
Of course, and you've seen that the impact of COVID-19 is most prominently reflected in the elevated risk provisioning and the goodwill impairments that we booked for this quarter. We recorded EUR 1.3 billion of net additions to loan losses provisions, which was sharply higher than the previous quarters. That number is a combination of several factors. We saw, on the one hand, collective provisioning that was a reflection of the worsened macroeconomic indicators due to the COVID-19 pandemic.
Those are not necessarily companies that are deteriorating, but we are taking additional risk costs based on the macroeconomic forecasts. Then you see a number of individual stage three provisions and negative rating migration. The stage three provisions were a number of large file additions for wholesale banking and mid-corporates, both from existing companies that are in difficulties as some new additions.
In terms of our expenses, there is a EUR 310 million goodwill impairment that we disclosed already last week. Overall, that brings our profits to EUR 542 million pre-tax or EUR 299 million net with a very strong capital position where our CET1 ratio increased from 14% flat in Q1 to 15% flat in Q2. With that, I am very happy, and Tanate as well of course, to take your questions.
Thank you. Ladies and gentlemen, we're starting the question- and- answer session now. If you have a question only now please press star one now on your telephone, star one for question only now. Go ahead please. Our first question is from Mr. Ruben Eijk from De Telegraaf. Go ahead, sir.
Hello, good morning. Steven, congratulations with the new position. Question about the loan provisions in the Netherlands and Belgium, EUR 120 million I read. Could you shed a bit some more light on where those provisions, in what sectors they are?
Sorry, Ruben, you're talking about Belgium, right?
This is the Netherlands.
This is the Netherlands. Yeah, those provisions are spread out in different sectors. Typically, you would say that vulnerable sectors have to do with hospitality, also non-food retail and travel. Now, these books are small, but that's typically where you see these provisions in the mid-corporate and SME spheres.
Any also consumer-based provisions, mortgages or so, or is that still stable?
Yeah, mortgages provisioning typically is very limited. That has been the case over many years, including the previous crisis. Part of the risk cost that you see also in the Netherlands has to do with the macroeconomic outlook and that you see because we take our provisions in three stages. Stage one is loans that are performing, but you do provide upfront already an amount, even with the inception of the loan. That we do as well here. There you see a big increase because the level of the provision is based on macroeconomic forecasts for the next 12 months.
As these are bad for the next 12 months, you see a steep increase in the provision levels in stage one, performing loans, but next 12 months, bad outlook. You go to stage two. That is a stage in which you say, well, for these companies with still a good performance, but a different status, you take lifelong provisions, so for the entire loan amount. There you again look at macroeconomic factors.
Nothing to do with the company per se, but there you look at the lifelong provisions, therefore you get more provisions in the first year and better performance in the second and third year because you have to look three years ahead. But again, nothing to do with the companies per se, but only have to do with the macroeconomic forecast. That's the IFRS impact as you will. Then stage three is the individual provisions. If you look at that part, on individuals, retail mortgages, very limited, very small. A bit of it more in the mid-corporate and SME sphere and a number of larger files in wholesale banking.
Yeah. If I was looking at the risk cost in the basis points, I see that the Netherlands is half the size than in Belgium. Why is that? What's such a difference in those two countries?
Yeah. Belgium has a larger SME mid-corporate book. I think that our SME mid-corporate book in Belgium is approximately twice the size of that in the Netherlands. In the Netherlands, our mortgage book is a little bigger than in Belgium. That's a reflection of the different types of books that we have.
Okay. Is the EUR 43 million goodwill impairment in Belgium, is that for Record Bank?
I will give it forward to Tanate on this one.
Yes. Yes. The EUR 43 million is of an acquisition that actually Record Bank made several years ago.
Okay. Thanks so much.
Thank you.
Our next question is from Mr. Koos Schwartz of Trouw. Go ahead, please.
Yes. Good morning. I see you have almost 56,000 employees. That's a lot more than last year. Apart from the KYC, what's the reason?
Again, I will give it forward to Tanate.
Yes, indeed. Significant increase in those FTEs are related to KYC. Part of it is the strengthening of our risk and compliance function, and part of it is actually growth in terms of in our innovation area. These are the three big driver of FTE growth in our company the last 12 months.
Yeah. When was the last time that the amount of employees was rising?
Well, I think that, Koos, the employees have been rising over the last number of years. It also has to do in smaller increments. That has also to do, on the one hand, with an increasing focus on KYC, which we have had since the last number of years, where we are now more than 4,000 people working on combating financial economic crime, but also in the investments that we make in terms of further digitization of our service to our clients. That's both in Netherlands, Belgium, but also in other markets.
Okay, thank you.
Our next question is from Ms. Eva Rooijers at Het Financieele Dagblad. Go ahead, please.
Hello, everyone, and thank you for taking my question. Steven, I believe during the analyst call, you said something in the line of, you've had the worst for this year, especially in provisions. Can you explain it a little bit more or correct me if I misunderstood?
Thanks, Eva. Indeed, when we look at the risk costs itself, the provisions that we took, part have to do with the macroeconomic circumstances. I said the lion's share or most of what is in these stages one and two, because we split these provisions in three parts, the first two parts is about EUR 550 million of the EUR 1.3 billion, that has to do with the macroeconomic forecasts and the deterioration of that between end of Q1 and end of Q2. We just take the consensus of what is out there in the markets and the deterioration of what we saw end of Q1 versus end of Q2.
We thought that the economy in the Netherlands would still be flat to a - 1% or 2%. Now we talk about percentages of the Netherlands of - 8%. We look at unemployment levels, we look at house price levels. All those elements are then taken into account in our models, then you get a calculated risk cost. That risk cost is EUR 550 million if you look at these two stages. Only in stage three are actually the real clients that are in difficulties and that have proven not to be able to pay for at least 90 days.
That's the remaining part of the risk cost, at least the larger part of it. If the macroeconomic forecasts do not further deteriorate, the forecasts as they currently stand, Europe -8% this year, +4%- 5% next year, then back to, let's say, +2% in 2022. If those forecasts stay the same, we will not see these big provisions in stage one and stage two. In that sense, we have had the biggest part of the risk cost in 2020. We have had those in our debt assumption.
A follow-up question then. You don't expect stage three provisions to deeply arise in the coming quarters?
I think that we've seen a number of sectors already deteriorate quite quickly. We've seen it in oil and gas. If you look at our oil and gas sector, I expect the risk costs in those sectors to come down, basically because we have taken a lot of it already. The remaining uncertainty, of course, is with a number of the payment holidays. There we have given EUR 18 billion in payment holidays. We have received back a little bit over EUR 1 billion, in terms of the payment holidays expired. That basically means that now we can see with these clients whether they perform or not without these payment holidays.
Until now, we do not see with those clients a big change, but you can also assume that they only took payment holidays for a shorter period because they didn't need it. For the remaining part, we still need to see when these payment holidays expire, what it will mean, and undoubtedly on that part, it may well be that risk costs for those clients will increase. Like I just said, there are also some releases or decreases, and countering those effects leads to believe that our risk costs will go down in the second half.
One more detailed question. The EUR 1 billion, is that the amount of payment holidays that has expired and that started back paying again? Or is that the amount that is already paid back after updating?
No, it's expired. Now they need to start paying again in their normal course of business. Until now, we do not see yet the deterioration in that group of clients that has resumed normal activity also in repaying their banks.
Okay. Yeah. Okay. Thank you very much.
Thank you.
We have a question again from Mr. Ruben Eijk, De Telegraaf. Go ahead, please.
Thank you. On page seven, you mentioned some various large addition to individual stage three files, mainly Germany, the Americas, Asia and the Netherlands. You point to one suspected external fraud case. Would that be the case of Wirecard?
Yeah, Ruben, we never disclose individual names, but it is true that we've taken a significant provision on a sizable client on which we expect fraud. I think we read the same newspapers as you do, I will not deny nor confirm, but you can make it out, I think.
Okay. Your predecessor said in Q1 that you will have to see in Q3 if we should expand the holiday and payments. Is that something what you are looking now at the moment?
It's still a bit early to call. Currently the second quarter just expired. Some of the payment holidays, by the way, in a number of countries are nine or 12 months. What I'm very happy with is how many governments, let's say, pave the floor under the economy to keep the liquidity going for a number of these companies. Banks are a part of some of those schemes.
What I'm also very happy with is that supervisors gave significant liquidity relief to the banks to be able to provide liquidity. Now the question comes in the second half of the year, should that floor continue or not in a balanced way, or can it stop? That will only become more clear in the third and the fourth quarter.
Okay. Because we already are ongoing in Q3, can you see any developments in what the lockdown release have brought us?
I think a number of things. First of all, like I mentioned also with regards to the question Eva asked, that the EUR 1 billion that is resuming in a normal regime, we don't see any change compared to before the crisis. Again, these people will typically be people that have not needed longer terms and longer times. Therefore, it's maybe not the best signal as yet. What we do see on the payments, the payment levels were significantly down in April and May. At the end of June, they were only a few percentage points lower than the payment traffic that we had seen pre-COVID.
The same goes for the points of sale. The machines that you see in the different stores that you use. Also, that traffic has come back closely to the levels that we saw pre-COVID. The only area where we haven't seen that as yet, or maybe two areas, that is actually international payments, because people travel a lot less and still continue to travel a lot less. Two is ATM drawdowns. There you typically see is that people do not use cash that much anymore. That's a trend we, by the way, also expect to continue. You also have seen that it has accelerated during the crisis.
Okay. Last question. There's a mention of a special COVID-19 task force to monitor transactions to protect customers from fraud. Is that the fraud you see on WhatsApp, et c? Should I think about that?
Exactly.
Do you have any results from that new task force?
Basically, when all of our employees started to work from home, or most of them, also many people from other companies started to work from home. That basically means that you sit a little bit in isolation. It also meant that we had to train our staff, but also give information and training and awareness campaigns to our clients, to make sure that there is extra awareness and precaution with regards to phishing. Our employees get emails that they should pay an invoice. We typically call that a CEO or CFO fraud.
The CEO wants you to pay an invoice. Okay, let me do that. Also, clients receive emails if they want to give their account number because it is needed to do some changes to the systems. Therefore, we've reinvigorated campaigns to inform our clients, and that was what the task force was meant to do. The number of incidents in that regard until now has been small. I think that people are also maturing. Incidents will continue to happen, and we need to continue to inform our clients to make sure it happens as least as possible.
Okay. Thank you.
We have another question from Eva Rooijers, this is from Het Financieele Dagblad. Go ahead, please.
Yes. I have two more questions on dividends. First of all, what is the reason you haven't added dividend to capital? Is that because you're hoping you can pay dividends as soon as January? Secondly, some CEOs have criticized the latest decision of the ECB to extend the period that banks should not pay dividends because it's a general measure, while there are big differences between banks. Some are very healthy still and should be allowed to pay dividends to shareholders. It's one of the arguments. I was wondering what your stance is in that discussion.
Yeah. You're damned if you do, you're damned if you don't. What do I mean with that on the dividend, is that if you are a stronger bank, you wish to be able to pay dividends because shareholders are also an important stakeholder. By the way, there are also a number of smaller pensioners in that, and we've seen that last year when we had to curtail dividends that therefore are dependent also on receiving that dividend amount. Now, the second element, of course, is that for an ECB to actually make a distinction between what they then would call stronger banks and weaker banks would give a wrong signaling effect.
Because if you allow a couple of banks to pay dividends and other banks not, that could have an unintended secondary order consequence of people believing that those banks are not good or weak. I do understand the position of the ECB, that they say, well, it's a one-size-fits-all approach. Personally, from our banking point of view, because you have seen our capital, we are, as far as I'm concerned, in a strong banking bucket, and therefore I would have liked to have a bit more flexibility, but I do understand their approach.
Yeah. What is then the reason because some banks didn't put the dividends in capital.
Yeah. At the time, you were given the opportunity to either look at reserving your dividends for 2019 or the remainder of it, to actually keep that as a reserve to pay at a later point in time or not. Then to actually start to make reservations in 2020 for paying dividend at some point in time. What some banks have done, they have put the 2019 part in their capital, but they have started to make reservations also in the first half of 2020. They cannot pay, but they just reserve. What we have done, especially because also 2019, the second half of the dividend is a relatively larger part.
Therefore you say it would be a bit unfair if we would suddenly take that reservation away. We said, no, we keep that reserved until the time that we can pay, barring, of course, whether we have sufficient capital. Because the first thing that we do with our capital is that we need and we want to use it to support customers if they need lending.
Assuming that we then have strong enough capital, then we will reserve that to pay it out whenever we can after the ECB measures are finalized. That's the way we approached it. I don't want to be too long, but then we said, okay, we suspended therefore our dividend policy, so no reservation in the first half. In the second half, we said after all the measures are clear, then we're going to come back to look at what is our capital level now and what will our dividend policy be going forward.
Yeah. Okay. Thanks very much.
Next question is from Mr. Marcel de Boer at Het Financieele Dagblad. Go ahead, sir.
Yes. Hello, good morning. I have a question on the ECB. How much money did you collect at the TLTRO facility? Could you please tell me to what extent do you benefit from that money?
I give it forward to Tanate.
We disclosed this morning that we subscribed to approximately EUR 60 billion from the ECB, and there are certain conditions attached to that funding that we have to basically distribute those funds to help the economy, and that as long as we achieve positive loan growth over the coming 12 months, we will benefit from funding at -1%. That is the terms of the TLTRO funding.
How much money will that give you in millions?
That really depends on where we deploy the funds. If we deploy the funds to our SME mid-core customers, then you make a margin on that. At minimum, we would make somewhere around 50 basis points on that funding if we are able to achieve positive lending growth.
Yeah, 50 basis points.
Yes.
Okay. Thank you.
Next question is from Mr. Koos Schwartz . Go ahead, please.
Yeah. You just said that people save a lot more money than in the pre-corona times. I think it was EUR 21 billion in Q2. Could you give that figure for the Netherlands?
I see now people frantically looking at their papers, and I will do the same. Customer deposits. Yeah, I only can see in the Netherlands the customer deposits were EUR 196 billion. I will have to look it up what they were in the first quarter, but we can give you that figure. No problem.
Yeah. Okay.
You can assume that.
I can imagine it.
They grew as well. No doubt they grew as well.
Yeah. I guess. Could it be something like 1/3 or maybe a bit more?
Yeah, why don't we move on to other questions in there? It's like [Non-English content] There are about three people now looking at all kinds of sheets to look at this, and when they know it, they ring the bell, and they give me the answer. If we continue with questions, I'll come back to you later in this call, hopefully, and if not, we'll do it separately. Is that okay?
Okay. Yeah, that's okay. Thank you.
Thank you.
Next question is from Eva Rooijers, Het Financieele Dagblad . Go ahead, please.
Hi. Here I am again. This time with question on mortgages. Yesterday or actually this morning, a data company published the latest data on the Dutch mortgage market. Those numbers show that ING was two quarters in a row the lender that lost the biggest market share in the Dutch mortgage market. Do you have an explanation for that?
I think that the first quarter is basically typically a quarter whereby the insurance community is investing a lot in new mortgage production. Basically, they also focus on the longer-dated mortgages, so 20 years plus. That is typically a part of the market in which ING is smaller, and we do that from a risk point of view.
Other than that, we stay quite disciplined on the way that we are pricing our mortgages, and we are not wanting to buy market share. We will not continue to do that. We want to make sure that from a sustainable point of view, we can grow our mortgage book, avoid getting to a sugar rush to pump up the book. We will do that discipline both from a pricing and a risk cost point of view.
Okay. Thanks. Another question. You mentioned during the analyst call a couple of times that you are going to look at cost savings. Can you already say something, where do you see the most or the biggest opportunities to cut costs in the coming years?
Before I do so, I have an answer for Koos. That's EUR 8 billion increase in customer deposits in the Netherlands. Q1, EUR 188. Q2, EUR 196. In terms of costs, we are continuing to look at our operations and adjust it to the environments. As you can see, we are increasingly digitizing our operations also because our clients increasingly use our digital channels. 41% of our clients only use the mobile. With that, I mean not a mobile or an iPad or a tablet, but only the mobile phone. 87% of our clients uses mobile as one of the form of digital payments.
In that sense, you have seen that we have been announcing to close a number of the branches, but those are branches where we have very little traffic. On some of these branches, there are two to three people coming in per hour. That's just not sustainable to keep them open. It's also based on the customer behavior that we deal with that.
That's one element. Two, we have been looking at our externals and the number of billable hours they can have at our firm, that we actually do in many countries. A third element is, on private banking, we have been announcing, also because of digitization, a number of layoffs there. We will continue to calibrate our footprint and our operations, in that sense, our costs in case these will occur.
Okay, thanks. That's very insightful. Next question is from Mr. Ruben Munsterman, Bloomberg News. Go ahead, please.
Good morning. In the U.S., banks could offset bad loans quite a lot because they have big revenues at their trading units. European banks have been scaling down investment banking and financial markets divisions. Does the COVID-19 crisis make you rethink the financial markets division that it might be good to grow it again? What's your view on the financial markets division at the moment?
Yeah. Let's be clear, it's also in our purpose. We want to empower our people to stay a step ahead alive in the business. What we also mean with that is that we are a very client-focused bank. That sounds like a tagline, but it also means that your financial markets activities are very much focused on what our clients need. Hence, we do not have big trading activities because the trading part is not necessarily what our clients need.
That is what banks do to make a profit based on their own views on what the markets will do, where they will go down and where they will go up. Now, I'm simplifying the point because some trading is also required to have good contacts with investors that are on the other side of your clients. Therefore, when one is a buyer, then another one is a seller. Because of that client centricity, we do not need big trading operations, and I'm also not intending to open big trading operations.
Okay. Thank you. Are you considering any other big strategic changes? You've only been now one month in the job, but maybe you already have spotted some things where you think of, "Hmm, I can improve this or make a change there, or sell this or that.
As you say, look, I'm one month in the job. On the other hand, I was in the board for three years, so there are many areas which I'm very familiar with. Clearly, this is a very, I'll say, a strange period for all of us, and not only for me, but also for all of our clients, for you, and also for our customers. There is a big focus currently on managing the crisis, helping our clients, further digitizing our offerings, so improving the offering for our clients. That's one. Secondly, I will, of course, continue to focus on generally digitalization services in the bank.
We have been doing that, and I will continue to do that. I think this crisis has shown that that strategy is the right one because the need and the desire of our clients to work in a digital environment has only been increasing and will only further increase. That's two. Three, of course, I will look to calibrate and continue to calibrate our operations to what the economic environment is. We also need to be able to manage costs well.
Last but not least, would have said that when I was announced, AML remains a key focal area for me. I think we came a long way from where we were a couple of years ago, but we need to continue to learn, and we need to continue to collaborate with other banks and the official sector in the market, and those will be my focus areas that I will continue with.
Okay. Thank you very much.
Ladies and gentlemen, if there are any further questions or remarks, you can still press star one on your telephone at any time. Star one if you have a question or remark. Go ahead, please. We have another question from Mr. Ruben Eijk from De Telegraaf. Go ahead, sir.
Yeah. Last one. Is there any views on a new CRO? Big shoes to fill, I understand, but.
Well, they said the same as the CEO, I guess.
No, that's an easy task. Anyone can do that.
No, look, Ruben, of course, we're going through a process. We're looking at candidates, as soon as there is a candidate that we have selected and that is then ECB approved, we will announce it. That's just a normal causal process.
Okay.
We have no further questions, sir. Please continue.
Okay. Thank you very much. I would like to wrap up the call. In the second quarter, the COVID-19 pandemic continued to strongly impact the economies in which we operate, but also how we conducted our business. We were able to help many customers with our digital offerings, but also with payment holidays or government-guaranteed loans. The pre-provisioning income was resilient, supported by strong interest income, by rising fee income, but also by good operational cost control.
The impact of COVID-19 was also visible, and it was visible in our elevated risk costs and goodwill impairments, a large part of that due to macroeconomic overlays. Overall, we booked a net profit of just below EUR 300 million, and we remain strongly capitalized with a CET1 ratio that increased from 14% flat to 15% flat. With that, I would like to leave you for now. Thank you for your attention, for your questions, for our discussions. If you have any further questions, please contact our media team, and we will be speaking soon. Thanks very much. Bye-bye.
This concludes the ING second quarter 2020 media call. Thank you for your attention. You may now disconnect your lines.