The second 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 performance, and any statement not involving an historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F, filed with the United States Securities and Exchange Commission, 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 securities. Good morning, Steven. Over to you.
Thank you very much. Good morning, everyone, and welcome to our second quarter 2020 results call. I hope you are healthy and well. I'm happy to take you through today's presentation in my new role as CEO. I'm joined by our CFO and our interim CRO, Tanate Phutrakul, as well as Karst Jan Wolters, currently responsible for the day-to-day risk activities. At the end of the presentation, we will as always have time to take your questions. With COVID-19 affecting many, also the second quarter was far from standard. We continued to support our customers, employees, and society during this time. At the same time, as countering financial and economic crime remains a priority, we continue our efforts to increase the effectiveness of our KYC activities.
However, the current operating environment reinforces our belief that we are on the right strategic path with our digital model being a clear strength in continuing operations and uninterrupted service. Pre-provision results prove resilient as we keep focused on pricing discipline. We also saw some of the negative valuation adjustments from last quarter reversing as financial markets somewhat normalized again. Combined with cost control, this largely countered the margin pressure on customer deposits and goodwill impairments. Over to risk costs. Under IFRS 9, we took substantial collective provisioning in Stage 1 and Stage 2 to reflect worsened macroeconomic indicators. When these remain unchanged, we believe that we have already taken the majority of provisioning for this year, and for the second half of 2020, we expect risk costs to be below the level recorded in the first half year. The CET ratio improved from 14% to 15%.
This ratio was supported by lower RWA due to several management actions and CRR amendments. Regulatory capital also increased. I'll come back to this later in the presentation. We are confident that we are well-positioned to face headwinds with a strong capital position, a strong funding base, and a low Stage 3 ratio. Also this quarter, we provided support to our employees, customers, and society. Currently, around 75% of our staff continues to work from home, and we have started with a phased return to office, ensuring that our people can work safely and in line with local requirements. We help both our private and business customers with payment holidays. So far, we have granted payment holidays on EUR 18 billion of credit outstandings, representing two and a half% of our loan book. This is mainly in mortgages and business lending.
Of this amount, the payment holidays on EUR 1.3 billion have already expired, and on these loans, we are not seeing a meaningful increase of risk costs. After initial peak in March and April, new requests have come down, and as we are already seeing payment holidays starting to expire, we wouldn't expect this amount to show a large increase going forward. We've also extended approximately EUR 250 million in loans to SMEs and with corporate customers under government guarantee schemes and provided EUR 5.4 billion of liquidity to larger corporate customers, with part of the liquidity drawings having reversed versus the peak at the end of March. We use different ways to monitor the credit risk profile of our clients.
Aside from individual credit assessments, we also use our early warning system to identify potential signs of an increased credit risk for an individual customer, and through personal contact, we stay updated on how our clients are doing, and if needed, we are involved early on. Now, moving to slide four. In the previous quarter, we saw very high loan growth, and that was mainly driven by protective drawings in wholesale banking. This quarter, part of these drawings have come back, while also investment plans are on hold, and that has reduced the demand. In retail, we saw continued demand for mortgages, while in consumer lending, demand was subdued. And also in business lending, there was less demand driven by liquidity provided through government support packages and less need for working capital or investment loans. That resulted in negative loan growth.
In fees, the strong trend of the last quarter continued in investment products. Daily banking fees were affected by the lockdowns, with lower payment fees reflecting lower commercial activity and limited travel. We managed to partially offset this effect with the increased payment package fees in the Benelux as well as in Germany. Our conservative approach to syndicated transactions, so in wholesale banking, resulted in lower lending fees over there and lower oil prices affected trade finance. Despite these COVID-19 effects, fee income over the first half year was almost 9% higher than the first half of 2019. We're on track with our fee growth ambitions. Loan loss provisioning, that was impacted by worsened macroeconomic indicators, and as a result, we saw an increase in Stage 1 and Stage 2 provisioning. I'll come back to that later. Let's look at slide five.
This slide shows that despite all the challenges posed by the current market environment, we keep on growing our primary customer base. As we also saw last quarter, especially Germany benefited from the digital experience we offer to our customers. Furthermore, we managed to grow our top-line income both year-over-year and quarter-over-quarter. While there is some positive impact from more volatile items, when you look at our NII, our net interest income, we managed to keep that stable as also guided, despite the negative interest rate environment in the Eurozone. Year-over-year, there is some support from tiering. Nevertheless, the pressure on liability income is still significant and even increased this quarter with core rate reductions in the non-Eurozone countries. Our discipline, and that's important with lending margins and charging negative rates, are examples of how we are managing the pressure.
It is also important to note that the benefit that we could get from TLTRO III will come as of the third quarter as our main participation in this scheme only came at the end of the second quarter. On to the next slide six. I want to underline the message that our digital and agile abilities are great assets under current circumstances. Digital banking is a safe choice for our customers while it ensured business continuity in a rapid changing world. Our digital mobile-first strategy, in my view, is the right strategy. Under my leadership, we will continue with this. As you can see in the top graphs on this page, we continue to help our customers making the shift from using assisted channels, being branches and call centers, to mobile banking at a very high pace.
With lockdown measures in place, our customers have quickly adopted remote channels for advisory products, such as video calls for mortgages or investment advice. This is visible in a further reduction of assisted channel usage and further acceleration of the share of the mobile-only customers, and that came in at 41%. If you take that further, the share of mobile interactions increased to 87%, with the number of interactions again increasing if you look at it on an annualized basis. Last but not least, on the right-hand bottom side, if you look at that graph, again on an annualized basis, it shows that we improved our conversion rate to sales since the end of 2019, with an increasing number of mobile sales per thousand customers.
Slide seven, w e continue to work to improve the digital experience for our customers, including further steps in Unite, as we are improving the digital experience also for our Belgian customers. This quarter, we took important steps in Belgium towards digital harmonization. We launched OneWeb, the new digital banking channel, and we started to welcome our private individual customers to OneApp, which is based on the app also available in Germany and the Netherlands. To remind you, many Unite milestones already have been realized. We implemented an agile service model, reduced the number of branches, migrated all Record Bank customers, and decommissioned systems. Centralization of the core banking systems, and we said that before, will not happen. With the technological changes and benefits that we currently have and that we initiated after we had started Unite in 2016, we will be able to harmonize our digital customer proposition much faster.
For example, through the use of APIs. Although the technical execution of Unite differs from what we planned back in 2016, we are certain that we can improve and further improve efficiency. With that, let me take you through the second quarter results starting on slide nine. In the second quarter, income increased both year-on-year and quarter-on-quarter. Compared to a year ago, we saw higher treasury income. We disciplined our lending margins combined with positive valuation adjustments. This offsets the continued pressure on the customer deposit margins and also the lower income from foreign currency ratio hedging, reflecting lower interest rate differentials as the core deposit rates, not only in Eurozone but also in non-Eurozone countries, were significantly reduced.
As a reminder, 2019 second quarter also included a EUR 79 million one-off gain. The overall income was EUR 6 million higher year-on-year, and without that one-off gain, even more. Sequentially, income improved by EUR 160 million. This mainly reflects the reversal of last quarter's negative valuation adjustments despite pressure on liability income and lower fees after an exceptionally high fee income in the first quarter of this year. Pre-provision results, and that excludes both volatile items and regulatory cost, was resilient. Income, excluding volatile items, was slightly lower. Pressure on liability income remained. First, our record high previous quarter fees were lower. Costs were lower year-on-year despite the CLA-related increases. The previous quarter benefited from a significantly higher VAT refund. If you exclude this item, the quarterly operating costs, excluding the volatile items and goodwill impairments, also went down.
Both year-on-year and quarter-on-quarter. Going to page 10, onto NII. Net interest income, excluding financial markets, was slightly lower year-on-year, reflecting the effect of the negative rate environment on customer deposits as well as lower income on foreign currency ratio hedging. This quarter, we saw several core rate reductions in the non-Eurozone countries with a substantial inflow of deposits, especially in the Eurozone countries, reflecting reduced spending in these uncertain times and holiday allowances received. Versus the previous quarter, NII, excluding FM, was 1.8% lower. NII on mortgage improved, however, margin pressure on customer deposits did continue. Overall, we continue to see that effect of pricing discipline as we benefit from negative rates that we charge on deposits.
Versus the second quarter of last year, we benefit from deposit tiering, which came into effect at the end of 2019, and again, benefit that we get from TLTRO III will be pronounced as of the third quarter of this year as the main uptake of the TLTRO scheme was at the end of June of this year. Our net interest margin decreased by seven basis points this quarter to 144 basis points. That was mainly driven by a higher average balance sheet reflecting high deposit inflow, our TLTRO III participation, and the customer's elevated average drawing on revolving credit facilities in wholesale banking. As I told you, it came down towards the end of this quarter, but the first two months, April and May, the drawings in revolving credit facilities were still relatively high.
The generally low margin on these facilities did impact the margin on non-mortgage lending as well as income on liabilities. As mentioned before, while NIM is an important metric for the market, we know that NIM can be impacted by volatile items, as you can see this quarter. We believe it is also good to look at the overall net interest income development. If you look at page 11, slide 11, we turn to core lending developments. If you look at retail, starting with challenger and growth markets, we continue to grow there in mortgages, especially strong growth of mortgages in Germany with some lower demand for consumer lending products, kept overall net core lending flat for other challenges and growth markets. Retail Benelux, there you saw a small decline, mainly due to the lower demand in business lending.
That reflects a combination of liquidity provided through the government packages as well as the impact of lower commercial activity, and that in turn has an impact of reduced demand for working capital. In wholesale banking, there we saw a decrease of EUR 5.6 billion, driven mainly by repayments of the last quarter's increased utilization of the revolving credit facilities. That wasn't lending, that came down this quarter. Daily banking and trade finance, we did see a decline reflecting lower demand of receivables finance and working capital solutions, as well as, of course, the impact of the low oil prices in trade and commodity finance. In the second quarter, therefore, net core lending was down by EUR 7 billion, and on the other hand, net customer deposits increased by close to EUR 21 billion.
That was driven by retail banking, reflecting reduced spending due to the COVID-19 pandemic and the holiday allowances received. Now we go to fees on page 12. We managed to grow fee income by EUR 12 million year-on-year, and let's say 1.7% increase. In retail banking, that's especially good. Fees were 5% higher, driven by investment product fees, and those were up almost 28% year-on-year as we continue to see a high number of trades benefiting from market volatility. In daily banking, fees were lower, and that was due to fewer payment transactions. We already see an increasing of the payment transactions getting close to the pre-COVID levels following the relaxation of the lockdown measures. Lower fees in wholesale banking were mainly driven by our conservative approach towards the syndicated lending market.
For the quarter-on-quarter fees were down by 7.7% after very high fees in the first quarter, which was elevated also by the successful first quarter campaign in Belgium. Typically, the first quarter in Belgium is a very good fee quarter. In addition, lending fees in wholesale banking were lower quarter-on-quarter after a very strong start of the syndicated loan markets. We contracted our appetite, therefore it came down. The same was the case due to daily banking as therefore the activities in daily banking in the trade and commodity finance went down as well. To slide 13, results in financial markets is very strong for the quarter. Client income up EUR 64 million, mainly due to rates and global capital markets.
Sequentially, client income rose by EUR 73 million, reflecting good income in rates and credit trading, which in the first quarter experienced losses due to market volatility. Our valuation adjustments had a positive impact of EUR 87 million this quarter. This was driven by markets normalizing again after the volatility observed towards the end of the previous quarter, and this led to a reversal of the negative valuation adjustments. Both effects contributed to the good results for financial markets this quarter. We go to the cost side of things. Slide 14. Expenses excluding KYC and regulatory costs, as well as the EUR 310 million goodwill impairment that we announced last week, were down by EUR 44 million year-on-year. With a solid focus on cost control and lower performance-related expenses, we were able to absorb CLA-related salary increases.
Even when we exclude a provision that we took in the second quarter of 2019 for a restructuring in Germany, costs of this quarter were still lower than last year. KYC-related costs were comparable to the previous quarter. As we work on becoming more effective and make progress on our file enhancements, these costs are expected to plateau in 2020, with an expected run rate of around EUR 600 million for this year. Regulatory costs obviously were seasonally lower in the second quarter, up by EUR 40 million compared to last year, but that was due to a catch-up on contributions that we had to do for the Single Resolution Fund. As our income stays resilient, but demand is currently impacted, you can expect me and Tanate to take a real serious look at our cost base.
Some investments will continue. There is a need to have and nice to have, we will certainly look at these projects to see whether we need to impact these or not. We go to slide 15. That shows elevated provisions in all stages. Stage 1 may feel a bit counterintuitive. Here we go to the technical explanation of life. If you look at credit outstandings in Stage 1, that represents performing loans. On these loans, credit risk in and of itself has not increased. Yet, if you look at this quarter, under IFRS 9, our accounting regulation, we need to take a EUR 255 million provision for these loans. That effect is caused by the macroeconomic indicators, and that they deteriorated compared to the first quarter. For Stage 1, you therefore only look at macroeconomic indicators for 12 months.
In the 12 months, what we do see is a sharp downturn, but not so much an upturn. The recovery comes subdued, and recovery in the 12-period is more limited. As close to 90% of our exposures is Stage 1, therefore, this impact and effect applies to the majority of our book. You go to Stage 2 provisions, and these were higher as well. We have deteriorating circumstances in the second quarter, and therefore also there they reflect collective provisioning based on worsening macroeconomic indicators. A smaller part of the book, but a broader impact, because there you do not look at a one-year loss, but you look at the lifetime loss of the loan.
Because you also look at the lifetime macroeconomic forecast, therefore you see some recovery in years two and three, and that then positively impacts the risk costs and provisions. We also had some individual files in higher-risk sectors that we moved to the watch list, and we have applied some rating downgrades. Then Stage 3. You can expect that we saw that for already weakened companies, the COVID-19 pandemic is clearly not helping. We saw a deterioration of existing Stage 3 files on which we took additional provisions. Compared to previous quarters as well, we also moved a number of new, larger files to Stage 3, and this also included a sizable suspected external fraud case, in which there were quite some reports in the press over the past couple of weeks.
If we move to slide 16, that shows the total picture for risk costs, which in the second quarter of this year came in at EUR 1.33 billion or 85 basis points over average customer lending. As I explained to you on the previous slide, this was largely driven by elevated provisioning in Stage 1 and 2, including EUR 421 million collective provisioning allocated to the segments. Also in that number, we took a management provision for payment holidays. Aside from Stages 1 and 2, in Retail Benelux, there were higher risk costs, mainly driven by some larger additions for individual files in mid-corporates. Our Retail Challenger and Growth markets, higher risk costs predominantly came from collective Stage 3 provisioning that was mainly visible in Poland, Spain, and Turkey.
Wholesale Banking, Stage 3 risk costs remained elevated, reflecting additions for larger individual clients, both existing and new files, mainly in Germany, in the Americas, in Asia, and in the Netherlands. This also included this sizable provision I just mentioned on the expected or suspected fraud case. As we moved more exposures to the watch list, Stage 2 outstandings went up, mainly in Wholesale Banking, and that resulted in a higher Stage 2 ratio of 7.0%. To be clear, Stage 2 is not necessarily a waiting room for default. It implies at this point in time, risk cost is monitored more closely on individual files, but not necessarily that this exposure is expected to default. When the risk cost or the credit risk is no longer deemed increased, we move it back to Stage 1.
The strength of our book is also exemplified by the Stage 3 ratio of our group. That's 1.6%. Of course, that ratio is always looked at by a nominator and a denominator. If you exclude TLTRO III from the credit outstandings, Stage 3 ratio is up slightly, although still low at 1.8%. I think that exemplifies the strength of our book. To continue on that book or risk management, slide 17 depicts our book. Again, and I've said and highlighted that also in the previous quarters, I feel very confident with our risk management framework and the quality of our book. We've taken lessons learned from the previous financial crisis, resulting in a very well-diversified loan book with caps on single exposures, caps on sectors, caps on countries.
We have a conservative risk appetite with a focus on senior structures, collateralized structures, our confidence is underscored by our strong track record through the cycle, with historical risk cost as a percentage of pre-provision profit well below that of our Eurozone peers. This slide provides this overview of our loan book and highlights some of the sectors in business lending and wholesale banking, which are most directly impacted by the pandemic. As you can see, again, I told you that also in May, the size of the individual books is limited and Stage 3 ratios are generally low. Let me now focus on a few of the sectors on which we typically receive questions. Oil and gas. EUR 4.5 billion directly exposed to oil price risk, covering reserve-based lending and offshore business.
Main focus here is on the 1.4 billion U.S. book in reserve-based lending, because it operates in a relatively high cost-based environment. This quarter, we also saw some deterioration in our offshore drilling portfolio, but that's small because that book is only EUR half a billion. Hospitality and leisure sectors, we've always had a restrictive portfolio, and we've been very selective. If you look at aviation, and I repeat myself from May, but the exposure is limited. Also here we've been selective and even under the current market circumstances, exposure in Stage 3 is basically non-existent. As you know, we feel we're ahead of the curve by capping certain businesses, as we did with, for example, our leveraged finance book. We closely monitor the development of this portfolio. We follow a strict policy, including only senior debts. We have a max leverage.
We have a max EUR 25 million take and hold. There are no single underwriting allowed. Overall, that of course, you have seen in the fees for wholesale banking, we are less active in the underwriting market as uncertainty remains high, and that's a conscious choice. Clearly, current market circumstances will have an impact on our customers, and we are closely monitoring how our book develops. With the risk framework in place, with the many experienced good risk colleagues, we remain confident on asset quality. On to our capital. Slide 18. Here you can see how our common equity 1 ratio developed, which was up by 1%, reaching a very healthy 15%. On the capital side, on the capital number, we had a EUR 1.4 billion positive impact.
In addition to adding our full net profit, capital was up by EUR 600 million, reflecting the adoption of the transitional IFRS 9 arrangement, where the shortfall became a surplus. The goodwill impairment we took had a positive impact on the capital because we took it away from our profit, our P&L, which we already had in regulatory capital, so we could take it out here of capital, so to avoid double counting. The Common Equity Tier 1 ratio was also supported by lower RWA, and we'll come back on that on the next slide to give you more detail on that. Now with this 15%, we are well above our current CET1 ambition of around 13.5%, increasing our buffer versus MDA level to 4.5%. As mentioned before, we will come with an update on our capital plan with the third quarter results.
As far as stance on dividends, we want to provide our shareholders with an attractive return. However, for now, we have delayed further dividend payments until after the 1st of January 2021, which is in line with the ECB's recommendation. The dividend reserve over 2019 does remain outside of regulatory capital. I realize some banks add it back to capital. If we would do that, but we do not intend to do that, but just for comparison purposes, if we would add this reserve back, our pro forma common equity 1 ratio would stand at 15.5%. Now, going to slide 19, some more details on the RWA developments. RWAs were lower by EUR 13 billion this quarter, mainly driven by approximately EUR 12 billion of lower credit risk-weighted assets.
That was mainly a result of management actions, including EUR 8 billion due to the adoption of the standardized approach for sovereign exposures away from AIRB, and EUR 3.5 billion from implementing a cash flow-based maturity approach rather than a legal maturity approach. Again, we become a bit technical here. We also benefited from several CRR, i.e., regulatory amendments, while lower lending volumes further reduced RWA. I point again at the EUR 7 billion lower core lending for the quarter. We did also record a EUR 6.6 billion RWA increase reflecting expected TRIM impact following an update at the end of July that the ECB made in which they intend to resume decisions on TRIM investigations.
Overall, with the Definition of Default impact absorbed, with the TRIM impact largely known and absorbed, we do feel very comfortable with our current capital position, including absorbing potential future RWA impacts. As you can see on slide 20, both the CET1 ratio and leverage ratio remain ahead of our ambitions. On ROE, it's clear it's below our ambition, but we very much intend to continue to provide an attractive total return to our shareholders. As mentioned also in previous quarters, our cost-income ratio was impacted by factors such as the negative rate environment and regulatory costs as this quarter's goodwill impairment affected that metric.
To reiterate what we said before, cost income is not how we run our business, but it remains an important input for ROE, hence we continue to have our ambition to reach a 50%-52% cost-income ratio as we further digitize. This quarter, most segments show a reduction of operating expenses. Costs will continue to have the focus of the organization and in particular of Tanate and myself. For our dividends, following the ECB recommendation, we have suspended dividend payments until at least the 1st of January 2021. The EUR 1.75 billion that we reserved last year for the final dividend payment over 2019 is kept outside of regulatory capital. We are keen to provide our shareholders with an attractive return. To wrap it up, we continue efforts to help our customers, our employees, and society to deal with the effects of COVID-19.
At the same time, countering financial, economic crime remains a priority as before. The current environment reinforces our belief that we are on the right strategic path with our digital model. We've seen it through the crisis with digital use uptick and uptake, and with our digital model enabling us to continue to grow primary customers and keeping NII stable. Loan demand was affected by COVID-19. Still strong in mortgages growth, however, reduced demand mainly from our business customers. Pre-provision results very resilient, supported by focus on pricing discipline, good fee income, and cost control. When the current macroeconomic indicators remain unchanged, we believe we have already taken the majority of provisioning for this year. For the second half of the year, we expect risk costs to be below the level recorded in January to June.
The CET ratio strong 15%. We will come therefore with an updated capital plan at our third-quarter results. We remain very confident we are well-positioned to face headwinds with a stable income base, with growing fee income, a strong capital position, a strong funding base, as well as a low Stage 3 ratio. Thank you very much. I will now open the call for questions.
Thank you, sir. We're starting the question and answer session now. If you have a question or remark, please press star one now on your telephone, s tar one for questions or remarks. In the interest of time, please, we kindly ask each analyst to limit yourself to two questions only. Our first question is from Mr. Stefan Nedialkov of Citi. Go ahead please, sir.
Good morning, guys. It's Stefan from Citi. Steven, welcome to your new role at ING. I have a couple of questions. The first one is on the outlook for pre-provision profits and post-provision profits. You seem to be guiding to stable NII for the rest of the year. There was a small miss in the quarter. How should we think about the evolution for the rest of the year, in terms of help from TLTRO and others? Fees obviously very strong, and costs are relatively under control. Does this mean we should be looking at an improving pre-provision profit into the second half of the year? On the post-provision profit basis, cost of risk, you guys seem to be guiding to second half being less than the first half. Back of the envelope calculations basically point to around EUR 3.4 billion, which is in line with consensus.
Would you agree or disagree with that? Thank you.
Thank you very much, Stefan. I will take the cost on the risk guidance, and then I will give the outlook for the pre-provision profits to Tanate, also in light of your question on TLTRO. If you look at the risk costs, there is a significant part of our risk cost that came from macroeconomic indicators. As we said in the first quarter of the year, we then took very much a process approach and said, okay, what is now the consensus that we have in the first quarter of what we use with Oxford Economics of the then outlook that we then had for the economies for the first year and also for the next three years?
That consensus still was quite benign because some reports already were negative, some reports were still flat, and hence on average, the impact, GDP impact or impact on house prices or unemployment was relatively limited. We took then EUR 200 million plus an additional EUR 40 million for one of the portfolios. What we now do is again, go back to the process and we look then at what are the macroeconomic indicators for the end of June. There you see a big deterioration. You see a forecast for the Eurozone -8%, for some countries, even -10% or -12%, with then a gradual recovery in 2021, 2022. We need to bridge that delta in our risk costs.
Both in Stage 1 and in Stage 2, you see then a significant uptick in our risk costs with over EUR 400 million, and we include in that an additional management overlay for potential risk costs that we get in our payment holidays. What you see is actually migration of clients who, because of these macroeconomic indicators, get higher probability of default allocated and therefore get higher ratings. Again, therefore you see higher risk costs as well. It's an additional effect. The large lion's share of what you see in Stage 1 and Stage 2 are these macroeconomic impacts. You look almost already at about EUR 550 million. If these macroeconomic indicators stay as they are, then the next quarters, we will not see that anymore.
Therefore, we are quite confident that our risk costs will go down for the second half of the year. Now, I've given you now some pointers, obviously I cannot give forward-looking statements as to the provisions to make, I cannot comment on the consensus. I trust that with those pointers, I give you a good view of how we look at it. Now, Tanate, can you go to the pre-provision profit?
Sure. Stefan, as you know, we don't give forward guidance, but let me talk you through some of the components about our NII. If you look at our quarterly results this quarter, you see that we maintain pricing discipline in terms of our repricing of our loan book. We try to also continue with the geographical diversification of our loans to more the non-Eurozone. I think to maintain stable NII, we do count on improving macroeconomic situation, where that should come through with increased loan growth in Q3 and Q4. Having said that, we are also taking steps with respect to our liability costs. For example, in a number of our non-Eurozone markets, we are looking to take steps or have been taking steps on reducing the deposit rates offered to our customer.
As you know, we have already gone negative for large private banking customers in either the Netherlands or in Belgium in charging negative rates. Of course, as you mentioned, we have taken this TLTRO funding outstanding as of the end of Q2. We have taken approximately EUR 60 billion in TLTRO funding, which we benefit. If we can keep our loan growth stable or rising, we'll benefit from funding of approximately minus 1%.
Okay. Thank you, guys.
The next question is from Mr. Benoit Pétrarque of Kepler Cheuvreux. Go ahead, please.
Yes. Good morning, and welcome, Steven. Good to have you on board. Now, Steven, just as a first question, I know you are here just for a couple of weeks now, but do you expect to update us on the strategy? I would not expect major turnaround, but any thoughts on the direction you might want to give to the company? Linked to that, obviously a big thing is the cost focus. We've seen some banks actually lowering costs significantly in the second quarter, and the direction is quite clear there. Could you update us on the pipeline of the cost cuttings and also on the direction for the full year 2020? It was, I think, down 0.4% on the clean basis in Q2. It's good, but maybe more is needed in front of the pressure the top line is facing.
The second question is on the asset quality and risk. Obviously, you have quite a small amount of loan under moratoria. I think it's 2.5% of your book. It's EUR 18 billion. Do you have a bit more granularity on that figure, how much is retail and how much is wholesale? When do you expect those loans to be back to normal? Also, do you have an initial idea of how much could turn maybe problematic on the EUR 18 billion? Is that a small figure, or do you have a view on that? Thank you very much.
Yes. Thanks very much, Benoit. I try to dissect your two questions. I will answer on strategy and the cost of risk, then Tanate will look at the cost side of things. Let me start with saying on cost that it will be also an important focus of myself, especially in these times. Yeah, it has been a couple of weeks in the job. In this particular job, that did not being said that I have already been in the board for three years as a Chief Risk Officer, but part of a board management team. I was part of this strategy, and I will continue this strategy. Of course, we could make some amendments when we further develop, but I'm behind the strategy.
I also do think, and we've seen it in the crisis, that digital banking and mobile banking first and 24/7 banking is the way to go. The digital use of our customers went up again dramatically, with 87% of interactions being pure mobile, with 41% of our clients being only on the mobile. Now we slowly transform our clients from assisted channels such as chat or call center or even branches to digital banking or to mobile banking. We have been closing branches in the Netherlands. We continue to look at our branch footprints. In some of these branches, there's only two or three customers coming per hour. Yeah, what can you do? We cannot leave them open. The digital banking focus and the online banking focus really helped.
We've also seen it, for example, in the way in Germany, how they are increasing fees, in the brokerage fees that we do online. We do online brokerage. That helps really in our income and also on our cost side. That line I will continue, and I will try to accelerate and put additional focus on even accelerating digital banking going forward to make sure that we go into the direction that we believe sustainably will be the right path for banking.
Of course, there is a crisis to manage, and that's on the one hand helping clients and also discussing with clients to what extent we can help them with their loans, and also have a good management, a strict management on the risk side of things to be prudent when it comes to extending loans to our clients, to take appropriate provision levels and to make sure that we can dissect the winners from the losers. Thirdly, there will be increased cost scrutiny in these times. It's logical. Any CEO in this day and age would look much stricter at the cost, and so that's what I will do as well. Last but not least, but that remains important for the banking industry overall, for society overall, but also for ING. I will also continue to working on AML.
That's a key priority, was that for ING before the 1st of July. It will remain an important priority, but also note that we need to do this effectively and efficiently.
Benoit, just addressing a bit on your cost question. I think clearly if you look at our quarterly results in Q2, we have achieved absolute cost reduction, and this is also absorbing inflation increases as well as heightened increase in spending on compliance and KYC. If you look at what we have guided before with respect to costs, in market leaders, we have guided towards negative cost evolution. If you look in our Q2, that has been achieved. If you take out the goodwill impairment that has happened in Belgium, for example. In the Wholesale Bank, we have talked to you about the fact that we are flattening the cost growth in the Wholesale Bank, and that has been our guidance since Q4. Now you can see in Q2 with some positive evolution from that perspective, that cost in the Wholesale Bank has started to decline.
Within the C&G countries, again, we have said that selectively we would like to see cost growth as long as we see positive jaws. In light of the macroeconomic situation and slowing revenue prospects, we will also be taking actions with respect to cost in the C&G world in the coming quarters. I think overall, we just wanted to say that we will take a balanced view between looking for efficiencies at the current time and investing in our digital future that Steven is talking about. A number of our programs are under review in terms of looking for that cost efficiency.
I need to come back to the cost of risk and the payment holidays. If you look at the EUR 18 billion, approximately 40% is to households, so retail, 60% is to business clients. The lion's share of the payment holidays is to the Northwestern European countries. A bit over EUR 1 billion already expired, and there is no meaningful higher risk cost in these loans. We took some additional provisioning for payment holidays still outstanding. Other than that, we remain to watch it, but currently we have no deteriorating signals at this point.
Great. Thank you very much.
Our next question is from Giulia Aurora Miotto of Morgan Stanley. Go ahead, please.
Yes. Hi, good morning. Can you hear me?
Yes, very well.
Okay, fantastic. A couple of questions from my side as well. Fees, strong results there. Can you please run us through the main initiatives that make you confident that ING can deliver on the 5%-10% fee growth? Secondly, less related to results per se, but the ECB had an M&A consultation last week or very recently. Any thoughts on that? Could ING be perhaps involved in cross-border M&A, do you think, if there are some opportunities available? Thank you.
Thank you very much, Giulia. I think on fees, we have clearly strong results. We've seen that for the first half year compared to the past half year, we had an over 8% increase. Let me give you also more granularity here. We increased our brokerage fee business in various countries, but most notably Germany. There you see that our brokerage fee activity went up year-on-year with 28%. We increased our payment packages in various countries, amongst others, the Netherlands and Belgium. We only did that at the end of the first quarter so the impact is only greatly coming. Despite the fact that we had virtually no travel and a significant decrease in payments in this quarter, obviously, we could keep our fees up. The activity is now coming back again.
We had subdued syndicated market loan activities, and when that comes back, those fees will go up as well. We have various initiatives in the insurance space, for example, which are currently growing with our collaboration with AXA, and there the fees are growing as well. As you can see, historically, we consistently have delivered on our fee ambition of 5%-10%. In that sense, I'm confident. We see that delivering quarter by quarter. If you look at the consultation.
Sorry, can I just follow up on the fee bit. This increase the payment packages, what impact do you expect from that?
I'll give that to Tanate.
Giulia, the fee packages that we announced in the Netherlands and Belgium, we announced a fee increase of approximately 10%-15% in these two markets. These packages normally are increased on an annual basis, so we take decisions if we would increase our fees somewhere around October, and it has an impact in the beginning of the subsequent year.
Thank you.
Okay. On the M&A consultation, our strategy has been clear, which is we first and foremost focus on organic growth. If we look at acquisitions, we focus on certain skill sets or certain products that we do not have that can broaden and deepen the service delivery to our clients. We would look at in-market consolidation, because basically that gives cost synergies. Clearly, the current landscape as we currently see it in Europe limits the ability for cross-border synergies on both capital and liquidity, given the compartmentalization of that in the various countries. Therefore, we find it difficult to see benefits for cross-border M&A at this point in time.
Thank you.
Next question is from Benjamin Goy, Deutsche Bank. Go ahead, please.
Yes. Hi, good morning. Two questions please from my side. I want to follow up on the fees and you also, I think, repriced in Germany, for example, your payment packages. Just wondered how the experience was and whether we can expect, so to say, more pricing power in your challenger markets as well, where you have historically been price leader. Secondly, I think there was a headline that you will review your dividend policy, which probably is no big surprise, but I was just wondering whether this is part of a broader review, and it might also include share buybacks considering you are trading well below book value. Thank you.
Yeah, let me do the question on dividends, and then Tanate will answer the question on fees. Based on the announcements by the ECB earlier this year, we basically delayed our dividend policy. Therefore, we said we need to resume a dividend policy later in the year. That's what we will do in the third quarter. We also said that already in the first quarter that we would resume our dividend policy in the third quarter or announce what our dividend policy would be going forward. How we will then do it, and also depending on what we are allowed to pay, we will come back with our dividend policy and the structure in which we would pay dividends.
One thing is clear, and it is that we want to pay dividends to our shareholders, and hence we also made a reservation for the second half of the year 2019 dividend that we could not pay. We will do that new dividend policy as part of the total capital planning review, including the management buffer that we currently have of 4.5% over our MDA level. Tanate?
Benjamin, just to reiterate the point on fee income, as Steven has mentioned, we do annual reviews on daily banking packages. We make sure that we try to take steps to sustain our investment product fees and third-party fees, as mentioned on our joint venture with AXA. To address your question specifically on a category of fees that we call behavior fees, whereby, for example, in Germany, we say that we would start charging payment package fees of approximately EUR 5 per month unless you actually bring your salary accounts to ING. In those instances, and this is just an example for Germany, probably about a third of our customers actually who were not primary customer decided to become primary customer, so start bringing regular income into their account. They go from non-primary to become primary.
A certain proportion of our client, about a third as well, decided not to be primary customer, but agreed to pay the EUR 5 per month in fees, and the remainder have decided to leave ING as a client. I think overall, we are quite happy with this evolution.
Thank you.
Following question is from Mr. Johan Ekblom of UBS. Go ahead, please.
Thank you. Just coming back to some comments you made in terms of growth ambitions. I guess, should we expect any change in terms of where you would like to focus on growth? You talked about the challenges in growth market, but if we look back over the last two years, you clearly put the brakes on a bit in wholesale, et cetera. Is it a continuation of that strategy? Is it an acceleration of that strategy, or how should we think about?
Yeah. Thanks, Johan. I presume that's the question that you have. We will have a continuation of that strategy. We already a couple of years ago said that we saw some risks creeping into the wholesale banking books. Structures were deteriorating, were becoming looser. The amounts were getting bigger. We saw in some sectors that the risk was not really priced in, and hence we started to put caps on books. We started to put caps on leverage book. We started to put caps on the real estate finance book. We started to run off some of the books to the extent we could in the oil and gas and drilling sectors. That we will continue. Obviously, and we've also seen it in the previous crisis, at some point in time, there was a reversal.
The structures become tighter again, then the pricing goes up again. We can again grow that. For now, we will keep quite strict in the wholesale banking side, especially when there's a lot of volatility, we need to be prudent there. That's what we will continue to do. At the same point in time, we've said we want to diversify our loan book. We want to diversify our business. Hence, we are doing that in different geographies, amongst others C&G, amongst others in consumer lending. That's what we have been doing over the past couple of years, and that's what we will continue. Now, I see while I'm talking that Johan's connection was lost. That's why he didn't hear it, but I hope all of you heard it.
I suggest we move to the next analyst, and when he returns, he may have a second question.
Thank you, sir. The next person is Tarik El Mejjad of Bank of America. Go ahead, please.
Hi. Good morning. A couple of quick questions, please. First on the NII, could you give us indication how been the behavior of retail and corporate customers in terms of deposits and how the EUR 21 billion significant increase in deposits in Q2 could reverse in the next month? Same question on capital. Thank you for giving us a breakdown already quite significant in terms of capital and RWA evolution, but my question is on the CRR 2.5, what did you take in there in terms of SME supporting factor, and the rest of the small component. On Basel IV, so is it fair to think that once you take the Definition of Default, the EUR 10 billion you booked in Q1 and then now the whole EUR 13 billion TRIM, that's like a majority, I guess, for RWA inflation related to Basel IV.
I think there's still only like a 20 or 30 basis points to go and you'll be fully loaded Basel IV. Is that correct? Thank you.
Let me take the questions on capital and RWA, and then we will also discuss the deposits. If you look at the capital benefit we had from the CRR 2.5 regulation, it was approximately 25 basis points benefit. The lion's share came from management actions, but 25 basis points came from the new regulation. If you look at RWA, I think you make a valid point. I think that DoD was a significant impact. We had with the large corporate model and the EUR 13 billion you mentioned, you remember that well because we reversed EUR 6.6 of that, but now we put it in again. Most of the TRIM missions we've had are letters, if you will. There are then one or two letters to come, but these are on relatively small books, so the impact there from an overall point of view will be benign.
The last step would be the Basel IV outcome, and whether it then comes 2022, 2023 or even later is unclear. We expect the impact of the eventual Basel IV to be limited. Hence, we are very confident with our current capital level, with the most and the large majority of the impact already having taken that. Tarik, on the customer deposits.
If I may, just on the capital.
Sorry.
Sorry, Tarik, did you say something?
Yeah. Sorry. Just on the CRR 2.5 before I move to deposits. The 25 basis points, that takes into account the software and the SME. IFRS 9 you took it, I saw that in the capital bit.
Yeah. It takes into account SME. The SME support factor, if you will. It does not take into account software.
Tarik, the software, the RTS is still being debated. We expect that to be issued during the course of Q3 and will be applicable in Q4, and we've given some estimate that we think will benefit anywhere from 10 to 12 to 15 basis points from the software.
Okay. Thank you.
Our next question is from Johan Ekblom, UBS. Go ahead please, sir.
Thank you, sir. I was cut off my line about before, but you don't need to repeat it. I think I got most of it. Just a second question in terms of the TLTRO impact. How should we expect that to be accounted for given the growth dynamics we're seeing? Will you book it on a recurring basis and then adjust at the end or will you wait until the end to book the benefit, et cetera?
Yeah. Thanks, Johan. By the way, say hi to Rolf for me when you speak to him. The first question we already answered, but on the second question on the TLTRO, I will give it to Tanate.
I think in the TLTRO, there's really three component parts that you need to think about. Clearly, first, the magnitude of the TLTRO we mentioned that we'd have taken approximately EUR 60 billion of that funding. The second is the confidence level that we have with respect to maintaining at least zero growth in the portfolio. Currently, we do expect that we can actually encourage loan growth to basically be more than zero. The third point is, of course, as long as we can deploy into the relevant amount, the margin will be attractive. If we can't deploy, we can still place the money, for example, with the ECB, and have a margin on this funding of approximately 50 basis points. That's how it would be done.
From an accounting treatment, I guess it really depends on the level of confidence that we would have with respect to loan growth, and we'll inform you in subsequent quarters on that.
Thank you.
Our next question is from Mr. Kiri Vijayarajah of HSBC. Go ahead, please.
Yes. Good morning, everyone. You alluded a couple of times to pricing discipline, and you talked about fee packages, deposit repricing. I'm curious to what extent you've been repricing on the loan side. Is it more than just saying no to loans from just a risk perspective in the wholesale bank? Just some color on where you've demonstrated pricing discipline, if you like, on the lending side. Just a quick follow-up on the capital management actions you've done this quarter on the RWAs. Just to what extent does that flow through onto the Basel IV ratio, or were those levers more skewed towards really improving the Basel III ratio, the EUR 11.5 billion of RWA mitigation you've done this quarter? Thank you.
Yeah. Thank you very much, Kiri. First on the repricing on the loan side. On the one hand, it's just a matter of discipline to not price loans whereby there is too much pricing pressure to make an adequate return. For example, you see that in countries like Belgium, whereby if there are sometimes pricing pressure on the mortgage book, then we will not go along, and the mortgage book decrease a little bit. We will stick to pricing discipline to go for return, not for size. Now, if you now look overall on the book, you see that on mortgages, our lending margins on the overall book went up. On business lending, so mid-corporate and SME, it went down a little bit. Wholesale banking, it stayed approximately flat.
Why it doesn't stay flat, because on the one hand, we increase our discipline in pricing for these project loans. What you do see is that there are less projects and less project loans and less trade finance. There is a heightened demand in our recurring credit facilities and our corporate facilities, and these typically go at lower rates. On average, therefore, the wholesale banking margin stays flat. It's a move from one sub-book to the other. To the management actions on RWA. To what extent does it front load the Basel IV implications? It does in that sense, since we are, if you look at the Basel IV regulation, largely hit, if you will, by the input factors and less by the output factors.
That's why we have said that the lion's share of what Basel IV will do, and the TRIM missions are actually a prelude to, in that sense, Basel IV. Because of our dependency on the input factors rather than the output factors, the lion's share over 80%, and I think now it's more than 90% at this point in time, of Basel impact will come as a result of TRIM missions and remodeling and DoD. In that sense, the answer is yes.
Great. Thanks.
Our next question is from Anke Reingen on RBC. Go ahead, please.
Yeah. Thank you for taking my question. The first one is on loan growth. A number of banks have talked about the recovery in demand in June, and some also mentioned July. I just wonder what you have seen in terms of demand coming back. Secondly, on your update on capital with Q3 results, I'm a bit confused as in what you can actually say, given the ECB is unlikely to have commented by that point. Is it about potentially reallocating capital within the group, capital return? Should we also expect this to be part of a broader review of your targets, having taken over your role now? Thank you very much.
Thank you very much. On loan demand coming back. Yes, it's early days, but we see it coming back a little bit. The same goes for payments. Payments were quite down in April and May. Points of sales were down in April and May. ATM withdrawals were down in April and May. ATM withdrawals are still a bit down, as we increasingly see we go to a less cash society. Not necessarily a cashless society, but less cash society. The payments we see coming back, and if you see payments coming back, you can also expect loan growth to come back. By the way, there is good demand in the mortgage market. That has continued. It's a matter of pricing, whether we will take it or not. When the economic activity recovers, we expect that working capital levels will increase.
In that extent, the loan demand is expected to come back a little bit. It's early days, and it also depends, of course, on how the lockdown will progress. In terms of capital plan, the ECB has given advice not to pay dividends in 2020, but it does not preclude us to have a dividend policy. We adjourned our dividend policy until the third quarter of this year. We are going to come back to you with our new capital plan, and in that new capital plan, we also will state to you our dividend policy going forward, whether changing or not. Of course, in that, we also will say something about buybacks because we do not exclude buybacks to some extent. Again, that's just a general statement. It's not illogical to look at buybacks at a below book valuation.
Thank you. Would you also review your ROE targets at that point, or is that for a later point?
We have, at this point in time, no intention to change our ROE target.
Okay. Thank you very much.
Our next question is from Daphne Tsang, Redburn Europe Limited. Go ahead, please. Ms. Tsang , please unmute your line. Ms. Daphne Tsang , can you hear us? We'll go further to the next question. Ms. Daphne Tsang , can you hear us?
Hi. Welcome to the call. I've got two questions, if I may. Hi, can you hear me?
Yes, we can hear you.
Hello.
Yes. Hi, Daphne.
Hi. Welcome to the call. I've got a couple, if I may. First, on NII. You stick to your flat NII guidance, which is pretty flat-ish in the current environment. That sort of implies that you need higher NII in H2 versus H1, if I'm correct.
Sorry, Daphne. You seem to be very far from the microphone, so we have trouble hearing you. Can you get a bit closer to the mic, please?
Yes, sure. Hi, is it now better?
It's much better. Thank you.
Okay. Thank you. I'll repeat my question. First one on NII. To meet your flat NII target for your year, it cannot imply that you will need a higher NII in H2 versus H1. You mentioned earlier that you expect loans to improve in the second half, but I'm just wondering, how about your margin? I appreciate you have already given some comment earlier. You mentioned pricing discipline and TLTRO, which offset your liability drag. Is it fair to say that the H2 NIM should improve from the current low level of 144 basis points? You previously guided 140 basis points for H1 and high 140 basis points in H1, and you're just below. What's the outlook on H2, please, on NIM and on TLTRO III, how much more room you could increase from the current EUR 60 billion level taken in June? My second question on cost.
Where do you see cost going in H2 and beyond? Your previous remark about taking a serious look into the cost is very encouraging. Are you looking to achieving net cost reduction in 2020 or from 2021 onwards, given that the growth opportunity in near term is quite limited? Thank you.
Thank you very much, Daphne. These are all good questions on the P&L side. I will give the floor to Tanate. It's the NIM, it's TLTRO, it's cost. Go ahead, Tanate.
Daphne, I think if you look at our NIM evolution during the course of Q2, you can see that it is declining from 151 to 144, but that's really driven by the balance sheet extension that you have seen in Q2. Partly because of the revolving credit facility that were taken by our wholesale bank, which comes with a margin which is approximately 50% less than a normal blended portfolio of loans we extend in the wholesale bank, and also the extension of our balance sheet by increased funding to the central bank because of the taking up the TLTRO III. If you adjust for that on a pro forma basis, our net interest margin is approximately 148. We do see a drop, but not as dramatic as perhaps the number would indicate.
I think looking forward about how we would expect things to evolve, again, I reiterate, it's really depending on, to a degree, our maintaining, and we will, maintaining price discipline. We will take actions also with respect to lowering deposit rates in our non-Eurozone markets. Already announced plans to charge negative rates to, for example, private banking type customers in Netherlands and mid caps in Belgium. I think with those actions, together with TLTRO, we hope that we can maintain that stable NII going over the next few quarters. Having said that, you asked about TLTRO plans of EUR 60 billion. Currently, we are happy with our liquidity position, and we don't have any current plans to increase that for the time being. Respect to costs. We are taking steps with respect to cost.
You can see that our cost evolution is good in the second quarter of the year, with absolute cost declines in all of our major divisions. We will continue to look at that, whether it's in our channels, branches, other types of channels, given the digitization that we have seen. Again, we will balance that with investment in our digital future. It will be a balance between the two.
Thank you. Our next question is from Mr. Omar Fall, Barclays. Go ahead, sir.
Hi. Good morning, all. Thanks for taking my questions. Just to both on costs. On the EUR 44 million decline in underlying costs, ex the restructuring charge, can you just give us a sense of the scale of the three elements you mentioned, the cost savings versus bonuses versus CLA increases? I just don't really understand why you haven't seen the very sizable COVID-19-related savings that your peers are all seeing in areas like travel, marketing, et cetera. Many of your peers are down almost double digits year-on-year in their retail businesses, which is very far from you. Similarly, if you could just update us on the Unite plan and where all that stands. Is it effectively on hold for the foreseeable future as we go through the crisis?
I see Belgium seems to be down just 3% in terms of costs on an underlying basis. I know that affects both Belgium and Netherlands. An update on that would be helpful. Thank you.
Thanks very much, Omar. I'll take the update on Unite. Nate will give you an answer on the costs. I think on Unite, there we have already done the majority of what we need to do under that program. We integrated Record Bank in our bank in Belgium. We decreased the number of branches in Belgium by half. We have put all of our active retail customers on the one web environment from Belgium to the same one web environment as the Netherlands. We're currently in the process of putting all the retail clients on the OneApp environment in Belgium, to date, that's approximately 170,000. That will continue. By the end of the year or early next year, we will have migrated all those clients.
We will then continue also to put our business clients on the one web environment, we started with that as well. Then what we can then do is that we then will put new offerings. For example, what we're currently doing is an insurance offering that we then can put on that same OneApp and one web environment for both countries in one go. Therefore, we do not only have a larger number of clients on one IT system and one customer integration layer and one customer experience layer, but we give them a better digital experience by offering solutions on that one platform. That we will continue going forward, and that will continue beyond the Unite program. The lion's share of the Unite program, we will taper off in 2020 and 2021.
The benefit from it, both from a digital experience, a revenue, and cost point of view, will then continue to come.
Sorry, Omar, to address your questions on cost evolution, I think the collective labor agreement or wage inflation varies from market to market, but on a blended basis for ING is anywhere between two and a half and 3%. I think that's addressing part of your question. The second one, we do recognize that some of our peers have been reducing variable compensation, which has resulted in maybe a sharp reduction in their expense line. I think ING, as you know, are not really big on variable compensation, so that hasn't been a major factor in terms of our cost decline in the second half of the year.
The third thing, which I want to remind you, is that we're still in the path of taking steps to improve our KYC environment within ING, and that if you look year-on-year, the KYC expenses actually went from EUR 98 million to EUR 134 million. To remind you, we've given guidance that during the course of 2020, we expect the total expenses that we will take on KYC to be approximately EUR 600 million. Again, within that EUR 600 million, approximately half we currently pay either to external consultants or management consultants. We would expect that going forward, we would make efficiencies there as well.
Thank you. Sorry, Steven, on Unite, your predecessor used to tell us that there'd be a kind of hockey stick effect with the sizable savings to come, kind of 2021, 2022, as the systems were decommissioned following all the elements of implementation that you've just highlighted. Are you basically saying that that process is still ongoing and that decommissioning process in 2021, 2022 will lead to those sizable savings? You're basically saying that everything's kind of in the base of costs from here, and any potential savings from the plan are going to be marginal.
Thanks, Omar. I think that what my predecessor said, that in the beginning of the process, when we started in 2016, we would look at centralization of our core banking systems. After some time in 2018, 2019, we said, well, basically, on the one hand, it is very difficult to centralize those systems. On the other hand, we also can now make use of APIs to actually draw data and products from our core banking systems into our customer integration and experience layer to, in an easier way, realize a one platform environment in the Benelux. We will continue to decommission systems. Not all systems can be decommissioned, but for some products it is easier to decommission than not. It is increasingly focused on harmonization, standardization, delivering a better digital experience on the front layer.
That will deliver savings, not necessarily by a big bang in decommissioning the core banking systems.
Got it. Thanks a lot.
Our next question is from Mr. Rahul Sinha of JP Morgan. Go ahead, please.
Good morning, gentlemen. Thank you for taking my questions. If I could just follow up on a couple of points, please. The first one slightly detailed on the oil and gas book. Stage 3 ratio seems to have picked up materially in the second quarter, now 7.8%, even if I adjust for the trade finance book in Q1. Steven, I was wondering if you could discuss what you're seeing here, given the recovery in oil prices and how you might be looking to proactively manage the risks in this book. Related point on frauds. I think we had the discussion in the last quarter as well, where there was a big fraud in Asia, now you have a big fraud in Europe. I was just wondering what lessons the group is taking away from what we are seeing in terms of fraud.
Just very quickly, just to follow up on the dividend discussion. I'm not sure if I missed this. I'm gathering that the progressive dividend payout policy of the old obviously is behind us now. This review that you're flagging at Q3 is to set a new policy. In that context, do you think that there are merits in a U.S. model where bank dividend payout ratios are low, but then they have the flexibility to use buybacks? Is that the sort of direction you should think the sector should be heading towards, given what we've seen in the pandemic? Just some thoughts would be really useful. Thank you.
Yeah. Thanks, Rahul. If you look at oil and gas, indeed, taking out, if you look at the Stage 3 ratio, that's 7.8%. That is for the bigger oil and gas portfolio. If we then take out, let's say, the trading part of it or the non-directly oil price related part of it, largely this 7.8% relates to that EUR 4.5 billion. If you then do the math, you basically do see, and I refer to what I said in the first quarter, then I said that we moved the entire U.S. oil and gas book to Stage 2. That book is around EUR 1.5 billion. Now, if you look at that 7.8% and you do the math, it pretty well resembles that book. What do you take from that?
Yes, that book is a difficult part of the book. Again, and that comes in line with what we said in the previous quarter, it is therefore also that book and not something else. If you look at the broader oil and gas portfolio that we highlight on that page, there we don't see that many issues. It is really focused on that EUR four and a half billion, and that's where we see the provision taking. Now, if you look at one of the later pages in the deck, you see in one of the bar charts that we took provisions in the natural resources space. That is largely that oil and gas part, including offshore and drilling. That relates to the 7.8% amount.
With a number of the names in Stage 2 and some of the names in Stage 3 continuing to move and taking higher provisions, we do expect that the provisions on oil and gas in the next half year will go down. On fraud or the fraud case. My first comment is people should stop defrauding other people. That's step one, of course. If you look at in the ING book, the previous frauds we have seen were focused on the trade and commodity finance book. There was one each, one quarter one, one in the fourth quarter last year. What we have done there is that increasingly we look at transactionally secured exposure.
We're looking at our policies because we do have, I would say, control teams that do checks on the traffic that goes on, the bills of lading that we have, the documentation that there is. There is auditing going on to look at the lineage, if you will, the end-to-end transactional dealings going on trade commodity finance parts. Over the course of the years, you see that the structures have been weakening to some extent, and we're reintroducing the strict structures, and we call that TCF 1.0. We go back to where the market went to, back to TCF 1.0. At the same point in time, in that business, we are also experimenting with blockchain, because blockchain is, in terms of an end-to-end payment system, especially for trade, much safer than all the paper floating around on a global basis.
The ability to be fraud is much lower when we can use the blockchain technology and with some of the players in the TCF space, we are currently experimenting with that. The fraud in TCF was therefore, we have seen a few of these cases. What we now see in the fraud that we have for this quarter is a complete one-off scenario. Many institutions, many organizations, many accountants, many regulators are hurt by that. It's just a matter of, in that sense, knowing business models. In terms of that sector, we have very little auto exposure in the other business, in that business sector, and actually we decrease it to almost a negligible amount. On dividends, I think we have just delayed our dividend policy in light of the measures that were taken by the ECB and the advice that they have given us.
We will resume with the dividend policy in the third quarter of the year. It could go several directions, of course, I noted also the U.S. banks with the lower dividend policy and the share buybacks. All options are on the table, we come back to that in the third quarter.
Great. Thank you very much.
Next question is from Mr. Farquhar Murray, Autonomous. Go ahead please, sir.
Morning, gentlemen. Just two questions, if I may, actually I'll apologize. The first is a little bit of an echo of Rahul's question there on the dividend. My question there is, can you just outline what the key considerations are going to be that will feed into that kind of dividend policy revisit? Perhaps maybe just detail from your perspective what the pros and cons of the previous approach are, just so we get a bit of a sense of what you might regard as things that are worth changing. Then secondly, apologies if I missed it, but what is the current fully loaded Basel IV position? Are you suggesting that as of today, basically Basel III and Basel IV are now essentially the same? Thanks.
Sorry, Farquhar, can you repeat the second question, please?
Yeah, sorry. Basically, the second question is on Basel IV. I'm just wanting an update on the current fully loaded Basel IV position, and essentially whether you're saying that Basel III reported and Basel IV are now essentially the same.
On Basel IV, let me put it this way. If the TRIM missions are behind us, and of course, we've now taken an additional step on one of the main TRIM missions by taking an additional EUR 6.6 billion. Once we are done with the TRIM missions, we get two more letters from smaller portfolios, the impact on that will be limited. 90% of the total Basel IV impact we will have had. On the Basel IV impact, I just lumped them together. It's a bit apples and oranges, if you look at DoD TRIM remaining Basel IV, all of that, 90% is already behind us. On the key considerations. Sorry, maybe I should add, that's why I'm hesitating. Basel IV end part of it, the remaining 10% is not certain yet.
We have taken all the input factors, Basel IV is still under discussion. It was first in 2022, then it would be 2023, and currently still under discussion when it will be implemented, so we do not know. We know the rules, that if they were implemented, what the impact would be, and in that sense, the 90% stands. Key considerations that will feed into our new policy are no different than what I answered to Rahul. Maybe one thing to add there. We're looking into to what extent the new MDA level has structural elements in them, given the new regulations and the relief that has been given by the ECB. To that extent, that could have an impact on our dividend policy as well, and to our capital levels.
All right. Thanks very much.
The next question is from Robin van den Broek, Mediobanca. Go ahead, sir.
Yes. Good morning, everybody. Thank you for taking my questions. First one is on. I noticed on press that you are putting some pressure on your external FTE providers to take lower wages. I was wondering, given you have a pretty sizable external FTE base, whether that could have an impact in Q3 already. Maybe a bit more specifically on the TLTRO III take up. I think the implied benefit could be EUR 150 million per quarter. Is that what we should expect in Q3 to come through, and then that benefit to dissipate a little bit longer term on the back of continued margin pressure? I was just thinking about the shorter term dynamics there. On Project Unite.
I think in the past you always had the longer term view to integrate even more countries on the same platforms. Though it's being a little bit different than you anticipated at the first hand for Belgium and the Netherlands, this is still going ahead. Are you expecting to still add more countries on that same platform longer term? Are the country differences too big, basically, to make that happen? Thank you.
Thanks, Robin. On Unite or on C&G, let's say that's the challenger and growth countries. We increasingly focused on building a customer integration layer, a front-end integration. We've always called it an intermediate step. We will continue with harmonization and digitization to offer a better digital experience, new propositions can be put on that OneApp or one web environment immediately across a number of countries. That does not necessarily mean centralization. You do not need to centralize all your systems to create the same experience for your clients and put new propositions in one go on an integrated app or web environment. On TLTRO and lower wages, I'll give it to Tanate.
Yeah. Just maybe to address your question on external staff. First of all, our external staff community is significant, and we always treat them with a lot of respect and very similar to our employees. Having said that, we are asking them indeed for temporary cut in tariffs, given the COVID-19 situation and slowing down of a number of projects. It's a combination of tariff cuts and a reduction in absolute number of external staff that we deal with. In addition, we're looking, of course, at changing mix. How many of these external staff do we deploy in our home markets in the Netherlands, Belgium and Germany, and where we deploy them in other lower cost markets, for example, in Poland or in Manila. It's a combination of factors, but indeed it is part of the plans to actually get better efficiencies there.
In terms of your question on TLTRO benefits, as I mentioned before, we have taken roughly EUR 60 billion. If we can maintain zero loan growth or better, we benefit at least 50 basis points. Of course, if we can deploy those funds lending to our customer, then the benefit would be larger.
I think in the past on TLTRO, you were able to book the full rate basically immediately on the back of your growth history. Does that apply now as well, or is it a more conservative approach this time?
I think those conversations are ongoing. The threshold, given that the TLTRO III is coming with a deeper discount from a funding perspective, I think we would like to give you an update in Q3 based on what we see other institutions doing in discussion with our accountants.
Okay. I guess on the external FTE base, there's no quantification behind what we could expect there?
No, we don't disclose external FTEs externally. Rest assured, we're asking in many of our home markets for these types of arrangement with our external suppliers.
Okay. Cheers, guys. Thanks.
We have another question from Stefan at Citi. Go ahead, sir.
Yeah. Hi, guys. It's me again. Just wanted to follow up on the digital proposition here. Obviously, over the years, you have been mentioning and emphasizing some partnerships, like the Scalable Capital one in Germany, which I believe is now being extended. You have AXA, you guided to around EUR 1 billion of fees over 10 years. Now you are announcing the Amazon partnership in Germany for small businesses. Are you ready to give us more color in terms of the % of fees that are derived from these digital partnerships and the outlook for next year and beyond?
I think that what we can disclose about is that one thing is clear, is that these digital partnerships and the broadening of our services to our clients becomes more important. We are diversifying away from net interest income, and in that sense, we either do that by developing new services ourselves such as a brokerage channel, by setting up fintech ventures ourselves, such as Yolt, or by collaborating with external partners. We have close to 200 of these fintech partners. We're very pleased in this case, as with Amazon, we have an exclusive partnership for their seller portal, to provide loans to the sellers that come onto their platform. It's again, a sign of strength and the way that ING is perceived also by the strong fintechs in the world as a strong digital player.
In the past, people ask us, "Oh, don't you see the fintechs as a threat?" Yeah, on the one hand, they can be a threat. On the other hand, they're also good in terms of collaborating to further develop businesses. In that sense, it also helps us in our ambition of the 5% to 10% fee growth per annum. It is only a testament to that ambition going forward.
Steven, are you able to put a number around that? Are we talking about 5% of total fees right now coming from these partnerships, or 10%, more than that?
It will be a ramp-up. With AXA, we started last year. With Scalable, we started two years ago. With Amazon, we started the 1st of July, the first loans are in, and this will be a ramp-up and will become a more important part going forward.
Okay. Thank you.
We've no further questions, sir. Please continue.
Okay. Thank you very much. With that, I would do a wrap-up. One second, please. Thanks very much for the questions. To summarize, we continue our efforts to help our customers, employees, and society to deal with the effects of COVID-19. At the same time, we continue to work on countering financial and economic crime as it remains a priority, not only in my previous role, but also in this role. The current environment reinforces our belief that we're on the right strategic path. We've seen that now also in the COVID-19 crisis, with our digital model enabling us to continue to grow primary customers and keep NII stable. Loan demand was affected by COVID-19. Stronger mortgages still, however, reduced demand mainly coming from business customers. Pre-provision result was very resilient, supported by our focus on pricing discipline, good fee income, and cost control.
Risk costs were impacted by substantial collective provisioning in Stage 1 and Stage 2 to reflect worsened macroeconomic indicators. As I said, the lion's share of that had to do with these indicators. As a result, risk cost came in well above the through-the-cycle average. When these current macroeconomic indicators remain unchanged, we believe that we have taken the majority and the bulk of the provisioning for this year. For the second half of 2020, we expect risk costs to go down compared to the level in the first half. The Common Equity Tier 1 ratio was strong at 15%.
If we compare that to banks that have included the dividend for the second half of 2019 in their capital, our pro forma capital would stand at 15.5%. We do not intend to include that in capital, but we intend to pay it out as a dividend. We will come up with an updated capital plan and dividend policy in the third quarter results. We remain very confident that we are well-positioned to face headwinds. We have a very stable income base with growing fee income, strong capital position, solid funding base, as well as a low Stage 3 ratio. With that, I thank you very much for your attention, for your good questions, for the interaction, and I wish you a very good day. Thank you.
Ladies and gentlemen, this concludes the second quarter 2020 ING analyst call. Thank you for attending. You may now disconnect your line.