Earnings Call: Q2 2020

Aug 6, 2020

Earnings release

Welcome and thank you for joining the ING Second Quarter 2020 Media Call. I'm happy to give the floor to the CEO of ING, Stephen Van Rysweck. Please go ahead, sir. Thank you very much, and welcome and thank you for joining us on the call today. On the call with me is Tene Toutrecole, our CFO. And we will give you an update on the developments and our results of the last quarter. The COVID-nineteen pandemic continued to strongly impact the economies where we operate and how we conduct our business, And I'm very proud of the way our people are supporting our customers. Throughout the last months, our colleagues continue to mostly work from home and in those circumstances, we helped 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 €18,000,000,000 in loans outstanding, €18,000,000 On top of that, we granted almost €250,000,000 loans with government guarantees plus over €5,000,000,000 in liquidity support for larger corporate clients. And during all of that, we continued our risk assessments and we carefully monitored the situation of our clients through early warning systems and regular personal contact with the customers. And in that situation, our core business remains 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 €13,500,000 supporting a better cost infrastructure. Net core lending declined by €7,000,000,000 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 €21,000,000,000 and it was a reflection of the reduced spending that our customers have following the lockdown measures as well as seasonal holiday allowances. And all in all, all these elements led to a very resilient pre provision result. But of course, and you've seen that, the impact of COVID-nineteen is most prominently reflected in the elevated risk provisioning and the goodwill impairments that we booked for this quarter. We recorded €1,300,000,000 of net additions to loan losses provisions, which was sharply higher than the previous quarters. And 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-nineteen pandemic. So those are not necessarily companies that are deteriorating, but we are taking additional risk costs based on the macroeconomic forecasts. And then you see a number of individual Stage 3 provisions and negative rating migration. And so the Stage 3 provisions were a number of large file additions for Wholesale Banking and Midcorpus, both from existing companies that are in difficulties as some new additions. In terms of our expenses, in that expenses, there is a €310,000,000 goodwill impairment that we disclosed already last week. So overall, that brings our profits to €542,000,000 pretax or €299,000,000 net with a very strong capital position where our common equity Tier 1 ratio increased from 14 percent flat in Q1 to 15% flat in Q2. And with that, I'm very happy and to Nate as well of course to take your Our first question is from A question about the loan provisions in the Netherlands and Belgium, euros 120,000,000, I read. Could you share 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. Or is the Netherlands? Yes. I mean those provisions are spread out in different sectors. But typically you would say that vulnerable sectors have to do with hospitality, but 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. Okay. So any also consumer based provisions, mortgages or so? Or is that still stable? Yes. Mortgage provisioning typically is very limited. That has been the case over many years, including the previous crisis. But 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 3 stages. So stage 1 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, but there you see a big increase because that the level of the provision is based on macroeconomic forecasts for the next 12 months. And as these are bad for the next 12 months, you see a steep increase in the provision levels in Stage 1 performing loans, but next 12 months bad outlook. Then you go to Stage 2. Those are that is a stage in which you say well for these companies with a still a good performance, but a different status, you take lifelong provisions, so for the entire loan amount and there you again look at macroeconomic factors. So nothing to do with the company per se, but there you look at the lifelong provisions and therefore you get more provisions in the 1st year and better performance in the second and third year because you have to look 3 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. And then Stage 3 is the individual provisions. And if you look at that part, then on individuals, retail, mortgages, very, very limited, very small, a bit more in the mid corporate and SME sphere and a number of larger files in Wholesale Banking. And if I was looking at the risk costs 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? Yes. Belgium has a larger SME mid corporate book. I think that our SME mid corporate book in Belgium is approximately twice the size that in the Netherlands. And in the Netherlands, our mortgage book is a little bigger than in Belgium. So that's a reflection of the different types of books that we have. Okay. Is the €43,000,000 goodwill impairments in Belgium, is that for Record Bank? I will give the floor to Nathan this one. Yes. Yes. The EUR 43,000,000 is of an acquisition that actually Record Bank made several years ago. Okay. Thanks so much. Thank you. Our next question is from Mr. Cole Schwartz of Trau. 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 key ICs. What's the reason? Again, I will give it forward to Denise. 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 innovation area. So these are the 3 big driver of FTE growth in our company the last 12 months. Yes. When was the last time that the amount of employees was rising? Well, I think that because the employees have been rising over the last number of years. So it also has to do in smaller increments, but 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. And that's both in Netherlands, Belgium but also in other markets. Okay. Thank you. Our next question is from Ms. Eva Royers, Headfin Achaladocsla. Go ahead please. Hello everyone and thank you for taking my question. Stephen, I believe during the analyst call you said something in the line of you've had to worst for this year, especially in position. Can you explain that a little bit more or correct me if I misunderstood? Thanks, Eeva. So indeed, when we look at the risk costs itself, so the provisions that we took, part has to do with the macroeconomic circumstances. I have said the lion's share on most of what is in these stages 12 because we split these provisions in 3 parts. And the first two parts is about €550,000,000 of the €1,300,000,000 and that has to do with the macroeconomic forecasts and the deterioration of that between end of Q1 and end of Q2, I would 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, then we thought that the economy in the Netherlands will still be flat to minus 1% or 2%. Now we talk about percentages of the Netherlands of minus 8%. We look at unemployment levels. We look at house price levels. All those elements are then taken into account in our models and then you get a calculated risk cost. And that risk cost is €550 million if you look at these two stages. Only in Stage 3 are actually the real clients that are in difficulties and have proven not to be able to pay for at least 90 days. So that's the remaining part of the risk cost, at least the larger part of it. Now if the macroeconomic forecasts do not further deteriorate, so the forecast as they currently stand, so Europe minus 8% this year, plus 4% to 5% next year and then back to, let's say, plus 2% in 2022, if those forecasts stay the same, we will not see these big provisions in Stage 1 and Stage 2. And in that sense, we have had the biggest part of the risk costs in 20 20. We have had those in our debt assumption. But a follow-up question then. So you don't expect Stage 3 provisions to quickly arrive in the coming quarters? I think that we've seen a number of sectors already deteriorate quite quickly. I mean, we've seen that in oil and gas. So 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 holidays. There we have given €18,000,000,000 in payment holidays. We have received back a little bit over €1,000,000,000 in terms of the payment holidays expired. So 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 void days for a shorter period because they didn't need it. So for the remaining part, we still need to see when these payment voids expire what it will mean. And undoubtedly, on that part, it may well be that risk costs for those clients will increase. But like I just said, there are also some releases or decreases. And countering those effects leads to beliefs that our risk costs will go down in the second half. And one more detailed question. So the €1,000,000,000, is that the amount of payment holidays that has expired and that started back paying again? Or is that the amount that has already paid back after 2018? No, it's expired. So now they need to start paying again in their normal course of business. And 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. Yes. Thank you very much. Thank you. And we have a question again from Mr. Ruben Egge, Telegraaf. Go ahead please. Thank you. On Page 7, you mentioned some various large addition to individual Stage 3 files, mainly Germany, the Americas, Asia and the Netherlands. And you point to one suspected external fraud case. Would that be the case of Wirecard? Yes, Arun, 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. So I think we reach the same newspapers as you do. So I will not deny or confirm, but you can make it out, I think. Okay. Yes. You or your predecessor said in Q1 that you 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. I mean currently the Q2 just expired. Some of the payment holidays, by the way, in a number of countries are 9 or 12 months. And what I'm very happy with is how many governments, let's say, paved 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. And 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? And that will only become more clear in the 3rd and the 4th quarter. Okay. And because we already are ongoing in Q3, can you see any developments in the release, which in what the lockdown release have brought us? Yes. I think a number of things. First of all, like I mentioned also to with regards to the question Eva said, the SEK 1,000,000,000 that is resuming under normal regime, we don't see any change compared to before the crisis. But again, these people will typically be people that have not needed longer terms and longer times, so therefore, it's maybe not the best signal as yet. What we do see on the payments, I mean, the payments levels were significantly down in April 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 point of sale, so the machines that you see in the different stores that you use. Also that traffic has come back closely to levels that we saw pre COVID. The only thing the only area where we haven't seen that as yet or maybe 2 areas, that is actually international payments because people travel a lot less and still continue to travel a lot less. And 2, is ATM drawdowns held out of Materne. There you typically see that people do not use cash that much anymore. And that's a trend we, by the way, also expect to continue, but you also have seen that it has accelerated during the crisis. Yes. Last question, there's a mention of a special COVID-nineteen task force to monitor transactions that protect customers from fraud. Is that the fraud you see on WhatsApp, etcetera? Should I think about that? Exactly. Do you see any do you have any results from that new task force? Yes. So well, I mean, basically, when all of our employees start to work from home, or most of them, also many people from other companies start to work from home. And that basically means that you sit a little bit in isolation. And 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. So our employees get emails that they should pay an invoice. We typically call that the CEO or CFO forte. The CEO wants you to pay an invoice. Okay, let me do that. But also, clients receive e mails if they want to give their account number because it is needed to do some changes to the systems. And 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 at least as possible. Okay. Thank you. And we have another question from Eva Royers. It's from Financially Doppler. Go ahead please. Yes. I have two more questions on dividend. 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? And 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 is one of the arguments. So I was wondering what your stance is on that in that discussion. You're damned if you do, you're damned if you don't. And 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. And 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 dividend 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 dividend and other banks not, yes, that could bring that that could have an unintended secondary order consequence of people believing that those banks are not good or weak. So 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. And then and what is then the reason that you because some banks didn't put the dividends in capital. Yes, yes, yes, yes. So 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 for to pay at a later point in time or not and then to actually start to make reservations in 2020 for paying dividend at some point in time. So what some banks have done, they have put a 2019 part in their capital, but they have started to make reservations also in the first half of twenty twenty. They cannot pay with a reserve. And what we have done, especially because also 2019, the second half of the dividend is a relatively larger part. So therefore, you say yes, it would be a bit unfair if we would certainly take that reservation away. And we said, now 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. But assuming that we then have strong enough capital, then we will reserve that to pay it out whenever we can after the ECB measure are finalized. And that's the way we approached it. And then 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. And 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. Yes. Okay. Thanks very much. Next question is from Mr. Marcel De Boer, Head Ciner, Kepler. Go ahead, sir. Yes. Hello. Good morning. I have a question on the ECB. How much money did you collect at the Telstra facility? And could you please tell me to what extent do you benefit from that money? I'll give this forward to Teneys. So we disclosed this morning that we subscribed to approximately €60,000,000,000 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 minus 1%. So that is the terms of the TTRO funding. And how much money will that give you in 1,000,000? Well, that really depends on where we deploy the funds. So if we deploy the funds to our SME midcorp customers, then you make a margin on that. But at minimum, we would make somewhere around 50 basis points on that funding if we are able to achieve positive lending growth. Yes, 50 basis points. Yes. Okay. Thank you. Next question is from Mr. Cole Swarttrail. Go ahead please. Yes. You just said that people save a lot more money than in the pre corona times. I think it was €21,000,000,000 in Q2. Could you give the figure for the Netherlands? I see now people are frantically looking at their papers, and I will do the same. So customer deposits, I only can see in the Netherlands, the customer deposits were €196,000,000,000 I will have to look it up what they were in the Q1, but we can give you that figure. No problem. Yes. Okay. But you can assume that I can imagine it's So they grew as well? No doubt they grew as well. Yes, yes, I guess. Could it be something like onethree or maybe a bit more because Yes. Why don't we move on to our questions? It's like a trade for trial. There are about 3 people now looking at all kinds of sheets to look at this. And when they know, they ring the bell and they give me the answer. So if we continue with questions, I'll come back to you later in this call hopefully. And if not, we do it separately. Is that okay? Okay. Yes, that's okay. Thank you. Thank you. Next question is from Eva Reuter, Head Finianci with Autoclave. Go ahead please. Hi, here I am again. This time, with a question on mortgages. Yesterday or actually, this morning, a data company published the latest data on the Dutch mortgage market. And those numbers show that ING was 2 quarters in a row, the lender that lost the biggest market share in the Dutch market. Do you have an explanation for that? Yes. I think that's the Q1 is basically typically a quarter whereby the insurance community is investing a lot in new mortgage production and basically they also focus on the longer dated mortgages, so 20 years plus and that is typically a part of the market in which RNG 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 but avoids getting to a sugar rush to pump up the book. And we will do that discipline both from a pricing and a risk cost point of view. Okay. Okay. Thanks. And 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 sort of biggest opportunities to cut costs in the coming years? Yes. But before I do so, I have an answer for Koos. So that's €8,000,000,000 increase in customer deposits in the Netherlands. Q1, 1, 88,000,000 Q2, 196,000,000 In terms of costs, I mean, we are continuing to look at our operations and adjust it to the environment. As you can see, we are increasingly digitizing our operations also because our clients increasingly use our digital channels. 41 of our clients percent of our clients only use the mobile. And with that, I mean not a mobile or an iPad or a tablet, but only the mobile phone. And 87% of the transactions 87% of our clients uses mobile as one of the form of digital payments. So 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. So on some of these branches, there are 2 to 3 people coming in per hour. Yes, that's just not sustainable to keep them open. So it's also based on the customer behavior that we deal with. So that's one element. 2, 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 we have on private banking, we have been announcing also because of digitization a number of layoffs there. And we will continue to calibrate our footprint and our operations and in that sense our costs in case these will occur. Okay. Thanks. 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. And European banks have been scaling down Investment Banking and Financial Markets divisions. Does the corona crisis make you rethink the Financial Markets Division that it might be good to grow it again? Or yes, what's your view on the financial markets division at the moment? Yes. I mean, let's be clear, and it's also in our purpose. We want to empower our people to stay a step ahead of life in the business. But what we also mean with that is that we are a very client focused bank. And that sounds like a tagline, but it also means that your financial markets activities are very much focused on what our clients need. And 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, whether 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 contact with investors that are on the other side of your clients. And therefore, when one is a buyer, the other one is a seller. But 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. And are you considering any other big strategic changes? You've only been now 1 month in the job, but maybe you already, yes, have spotted some things where you think of, I can improve this or make a change there or sell this or that. Yes. I mean, as you say, look, I'm 1 month in a job. On the other hand, I was in the board for 3 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. So there is a big focus currently on managing the crisis, having helping our clients, further digitizing our offering, so improving the offering for clients. So that's 1. Secondly, I will, of course, continue to focus on generally digitization of services in the bank. So we have been doing that and I will continue to do that. And 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. So that's 2. 3, of course, I will look to calibrate and continue to calibrate our operations to what the economic environment is. So we also need to be able to manage costs well. And last but not least, we 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 our banks and the financial 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 1 on your telephone at any time. Star 1 if you have a question or remark. Go ahead please. We have another question from Mr. Ruben Ek from The Telegraph. Go ahead, sir. Yes. Last one. Is there any views on the new CEO? Big shoes to fill, I understand, but Yes, well. They said the same as the CEO, I guess. So No, that's an easy task. No, but look, Arun, I mean, of course, I'm we're going through a process. We're looking at candidates. And 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. And I would like to wrap up the call. In the second quarter, the COVID-nineteen 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. But the impact of COVID-nineteen was also visible. It was visible in our elevated risk costs and goodwill impairments, a large part of that due to macroeconomic overlays. And overall, we booked a net profit of just below €300,000,000 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.