Good morning. This is Anita [Krielen] welcoming you to ING's third quarter 2019 conference call. Before handing this conference call over to Ralph Hamers, 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 a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or solicitation of an offer to buy any securities.
Good morning, Ralph. Over to you.
Thank you very much. Good morning, everyone. Welcome to the third quarter 2019 results call. As always, I'll take you through the presentation. I'll give you some kind of highlights per slide. Tanate, our CFO, and Steven, our CRO, are here with me to answer some questions. Going through the key points. We posted a net profit of more than EUR 1.3 billion in the third quarter, leading to a four-quarter rolling underlying return on equity of 10.3%. The negative interest rate environment continues to be a challenge, but as in the previous quarter, we have been able to counter the resulting pressure on income. In Retail, we retained real good commercial momentum with further growth of our primary customer base by 165,000 and now exceeding 13 million.
It basically means that more than one-third of our clients see us as their main bank, as their primary bank, which for a digital bank is a real testimony to our strategy. We also achieved loan growth in the Retail businesses, specifically in mortgages, where we continued to improve margins in almost all of our countries. In the Wholesale Banking area, our lending business declined this quarter due to some external factors such as the oil price and some incidental large repayments. I'll discuss that with you later. Overall, between Wholesale and Retail, the customer lending went down by EUR 1 billion. The loan growth in Retail at the resilient margins, as indicated, combined with very good fee growth, countered the margin pressure on customer deposits, as well as the higher costs related to KYC.
On the expenses, besides the increase in regulatory costs, which is the real cash out, we saw an increase in the legal provisions. Also, the KYC enhancement program continues to weigh on cost. The CET1 ratio improved to 14.6%. We do expect to see effects on capital from banking regulation and reviews in the coming quarters. As our key priority, we keep taking steps to counter financial and economic crime. We have further strengthened our organization, as you can expect from us, as well as our governance related to KYC. We do see again the cost of KYC going up for this quarter. As you can expect from us, we are using innovation and technology to make the management of our non-financial risk more efficient and even more important, more effective. Turning to the commercial momentum slide. You see continued commercial momentum in the slide.
Primary customer base went up again to 13.1 million, specifically growth in Germany, Australia, Poland, Romania. That's where we saw the most growth in primary customers. In terms of Net Promoter Score, which you know is a very important component for us, we ranked number one in 6 out of the 13 retail markets. Back to the core lending growth. We saw growth in Retail amounting to EUR 3.6 billion, Wholesale EUR 4.6 billion negative. That negative, so the decline in Wholesale Banking was mainly driven by oil price developments. If you remember, we also saw that in one of the quarters last year. Furthermore, syndicated loan activity remained subdued given the favorable bond market, which also led to exceptionally high loan repayments in the third quarter in our book. We don't think this decline is setting a trend for the quarters to come.
We maintain our ambition of 3%-4% overall loan growth with a slightly lower loan growth on the Wholesale Banking to 3%. To remind you, last year we were the first to signal that due to market dynamics, loan growth in Wholesale Banking could slow down. It was exactly this quarter when I mentioned that first. We were putting caps already then at leveraged loans, as well as real estate finance. We also indicated to you that in view of some of the capital requirements, and our own ambitions around that, we would focus on repricing on the wholesale lending side. You see some of that coming through as well in this now. Customer deposits grew by EUR 4.4 billion. That's in line with the general market trend in the eurozone countries, where we do not see the effect of increased spending due to low interest rates.
We see rather the opposite. Not to repeat myself from last quarter, but balances on customer deposits are increasing as loan demand is and was already being met. Market uncertainties encourage savings rather than spending. What we also see is the underlying growth on customer deposits for us is also related to clearly getting more and more customers doing more with us on a current- account basis as well. Turning to slide four, as indicated in the key points, it's one of the key priorities, if not the key priority. We continue to take steps to counter financial and economic crime by improving our management of non-financial risk. We started the rollout of our global KYC enhancement program 2017. We're implementing that across all the different countries in which we are present.
As part of this program, we have both reinforced the way we governance this area, as well as the pure strengthening of the KYC organization in terms of the number as well as the quality of the people. As you can expect from us, we also keep applying technology and our innovation skills to develop tools which increase the accuracy and the efficiency of the management of our non-financial risk. Just to mention a couple of examples, and you see it here on the slide. In the Netherlands, a tool was created to improve the client enhancement process for SME customers, and that would support our KYC centers by digitalizing the data need and the feed we give the transaction analysis.
That is basically moving away from a cumbersome manual process to an automated one, saving time, like that, being more efficient, but also reducing the risk of error, so more effective as well. On to Italy. I'm sure you will want to have an update there. We continue to implement our program there. We are living up to the program that we presented on the improvements that were required by the Banca d'Italia. In the meantime, we will continue to refrain from onboarding new customers. We are fully servicing, and successfully servicing, I would say, the existing customer base. As I said before as well, banks can't do this alone. We need to work together with other banks, but we also need to work together with law enforcement, as well as regulators.
Together with four other banks in Holland, we will investigate the possibilities to cooperate on transaction monitoring, for example. We believe this represents an opportunity to bundle knowledge and resources on one side. On the other side, to really strengthen the collective role that we have as a gatekeeper to the financial system. Turning to the next page. As you know, every quarter we like to spend a few minutes highlighting one of our businesses. We've discussed Spain's success model before. Having built a full-fledged digital bank in Spain with close to 4 million customers now and growing fast. This quarter, I want to actually zoom in on Spain, and more specifically on how we have reviewed and redeveloped and recalibrated our approach to mortgages and the success that we see there. As you know, mortgage is generally an advisory product.
It's a challenge to successfully sell this product in a fully digital way. The new relationship model that we developed by ING Spain provides customers with a dedicated mortgage advisor. I think that is the key here, and that advisor supports the customer throughout the process from start to finish. At the same time, we have reviewed the process itself, and we've also improved our risk acceptance process as part of that. Not changing our risk appetite, but the way you accept the risk. That newly developed model with this dedicated mortgage advisor, with this review process, with this new risk acceptance process, we've been running that model next to the old model. Here you see a little bit the comparison.
When we compare the commercial results of the two models, and you see it on the right-hand side of the slide, we see that the new model is delivering really promising results, literally all over the different categories. The number of incoming calls is really lower than for the old model, which is a cost savings in itself, and it shows the improved efficiency of the model. Also working on the customer satisfaction side. You can actually get a higher customer satisfaction at a lower cost. You see that here as well, going up from 3.9-4.5 on a 5-point scale. Really, really good. The conversion in the whole process is almost twice as high, the effectiveness of the whole process and clearly supported by the personal approach of having this dedicated relationship manager throughout the process, leading to a much higher conversion.
All of that leading to a new production year-to-date that is 20% higher. With that, leading to a 1.5% market share increase. An additional market share of 1.5%. Maybe to round it off as a success story, the new production is also being produced at higher margins. Basically, whether it's from a cost perspective, an efficiency perspective, a customer satisfaction perspective, a conversion perspective, and effectiveness, sales effectiveness, as well as from a margin perspective and market share perspective, it's a real good example of how a continuous review even in a digital bank, you can have high market shares and good pricing at decreasing cost. A real success story. Turning to slide six. As you know, we have given you updates on this as well, over the last couple of quarters. We are committed to do our part to combat climate change.
Also this quarter, we've taken several actions which reinforce this commitment. We're backing several initiatives on this one, both at a global level as well as in the Netherlands specifically, as long as they're really fighting climate change. We can't do this alone. We realize that. One bank can only do so much impact you get if you have a group of banks. Therefore, we're happy to see that many of the other banks are joining us in signing these initiatives.
These initiatives are the Principles for Responsible Banking that we signed in New York, with that also putting all of that in action by starting the Collective Commitment to Climate Action, which is basically a continuation of our commitment that we already launched more than a year ago in the market, that we would manage our lending portfolio in line with the Paris Accord on climate change. A year ago, we did launch our own Terra approach, that makes all of this measurable. You may remember we launched that together with the 2° Investing Initiative. Through that, we basically use a science-based scenario per sector to see how you can actually decrease your indirect footprint per sector.
How you can actually also get into a conversation with your customers in order to apply new technology in order for them to decrease their footprint, and with that, decrease our indirect footprint. With the commitment comes also taking the accountability. The accountability you can only show by publishing the results of what you have set out and what you've committed to. Therefore, this quarter, we released our first Terra progress report, and we're proud to be the first bank to publish such a report showing climate alignment. In addition, we've also signed an initiative together with the European Investment Bank, to support large business clients in the Benelux with sustainable projects, basically financing the transition to more sustainability. It also works on the commercial side. Clearly, our stance on this is combined with developing specific skills and capabilities.
We saw another strong quarter with 12 sustainable bonds, sustainability bonds, 11 sustainability improvement loans, five green loans completed. Again, including some firsts because we're really still developing these products as highlighted in this slide. To mention one of those transactions, Porsche is investing in its first battery electric vehicle and have tapped the green bond market, and we were a green adviser for a EUR 1 billion green Schuldschein. The first-ever Schuldschein for Porsche, and also a green one. Good commercial positioning right there. Turning to the results. Slide eight. The underlying pre-tax result, as you can see here, is just over EUR 1.9 billion in the third quarter. That's EUR 213 million below the same quarter of last year.
That's, as you can see, only slightly lower on income year-on-year, which is, I think, good news in all of this, but with higher expenses, specifically on the KYC side, and still relatively lower risk cost. Year-on-year underlying income as a component was EUR 20 million lower, reflecting the combination of higher margins on mortgages, higher fee income, and we'll certainly dive into that later. That's offset by lower Treasury-related income and the margin pressure we see on customer deposits due to the low- rate environment. Maybe a bit lower, but certainly of higher quality, and I think that's the good news in all of this. It shows only a tick lower but with good quality earnings here, income here. Sequentially, underlying income was down by EUR 40 million, and that was fully driven by lower Treasury-related income.
As you know, that can always be volatile. Turning to slide nine. If you exclude Financial Markets, NII was a bit lower, just 1% year-on-year. While we clearly would rather see a growing NII, and we continue to aim for that, I believe it's actually a good achievement that we managed to keep NII stable, especially since the market rates have gone negative. You see that our model proves resilience, and we're keeping the commercial momentum. We have been able to achieve this as we continue to improve our mortgage margins, increase mortgage volumes as well, and that partially counters the negative impact from margin pressure on customer deposits and the lower Treasury-related NII, as I mentioned earlier. Going forward, we'll continue to focus on margin improvements and loan growth. We further benefit from our activities in the non-euro retail countries, so that's also strong in our franchise.
Also negative rates that we can charge on our deposits for professional customers. Furthermore, the deposit tiering at the ECB, which was announced some time ago, is enacted these days. It will help, and it will largely cancel out the negative rates on deposits at the ECB. NIM, net interest margin specifically, that was slightly higher this quarter at 154 basis points. Get the numbers right. It's being driven by Financial Markets. Our NIM guidance, here we go again, end of the year on NIM is that we stay in the high 140s. We're aware that you and the market closely watches the NIM development. However, as we also see that some of the volatile items, such as Treasury, have an impact on NIM as well as the slice of the balance sheet impacts the NIM.
We believe it is better to look at the NII development. That is good. That shows real resilience. The NIM development over the last couple of quarters has shown resilience as well, by the way. Good. We turn to net core lending and just dive a bit deeper here. As I said, the net core lending decreased by EUR 1 billion, driven by a EUR 4.6 billion decline in core lending and Wholesale Banking, an increase of EUR 3.6 billion in growth in Retail. The decline in Wholesale Banking was predominantly driven by Daily Banking & Trade Finance, with oil price developments impacting the volumes in TCF. Core lending was also lower, as I mentioned, given the repayments of some of the larger loans. We continued to grow underlying as well. It's not like the machine has stopped.
On the contrary, the machine is in full production, but you have these two specific effects that doesn't show a net growth but a net decrease for the quarter. Retail Netherlands, so turning to retail, saw a modest growth both in mortgages as well as other lending. In Belgium, we see continued growth in the mortgage book. However, the overall core lending was EUR 0.2 billion lower, mainly related to a large institutional client that we have there. Retail Challengers & Growth Markets. The combination of Germany, but also all the other digital banks that we have and the ones that we have in the growth markets. We see that net core lending was up at EUR 2.7 billion. Also largely mortgages, but also a modest increase in non-mortgage lending. As I already mentioned, the commercial momentum is still there.
Volume is there, new clients is there, margins is there, that is a good combination. Turning to fees. Slide 11. If you adjust for a reclassification of Financial Markets-related fees in both quarters, net fee and commission income increased by EUR 40 million year-on-year, that's 5.8%, that's coming in then at a strong EUR 733 million of fee income. That fee income was fully driven by Retail Banking. If you would make the analysis, the Retail Banking year-on-year increase is 9.4%. That's in mortgages, that's in daily banking, it's in insurance products, it's across all of the different countries. This is really good quality commission income showing the strategy is working in launching new products and continuing to grow. It's a good sign.
If you zoom in even further, you see that Germany saw particularly strong growth in fee income, recording 21% higher fee income, mainly due to our mortgage program. Wholesale Banking fee income, adjusted for the aforementioned FM reclassification, was stable. Sequentially, fees in Retail also increased, while Wholesale Banking fees were lower, mainly due to lower lending-related fees as transaction volumes were impacted by, as earlier mentioned, oil price developments. Looking at Financial Markets, an okay quarter. Total income was EUR 19 million higher year-on-year. Income growth in several segments was more than offset by higher negative valuation adjustments. Sequentially, though, you see that the FM income improved by EUR 149 million, and that is because of a lower negative valuation adjustment. The underlying business there is constant, if not growing.
That's the good news than the valuation adjustments, which have been negative for the last couple of quarters. You see them having an effect on it. What we concentrate on is the real client-related business. That is solid, and that's a solid development. Turn to the expenses, slide 12. Excluding the regulatory cost, the expenses were down EUR 20 million. Moving down, if you compare it to the second quarter of 2019, and I think that's a good result. At the same time, if you compare it up to the same quarter last year, they were up EUR 118 million. An important factor driving these higher costs, specifically if you look at the year-on-year, are the KYC-related activities. Quarterly cost increasing by some EUR 50 million compared to last year. That's the enhancement program. It's a strengthening of our KYC activities across the board.
Furthermore, specifically in this quarter, we took several legal provisions in the Challengers & Growth Markets amounting to EUR 40 million. That's across several countries, various underlying reasons. We also had to absorb CLA-related salary increases across the markets, where we also see the effect of generally tight labor markets. We also had a VAT refund, so that helped us a little bit. You can expect from us to have a continuous cost focus. We do realize that KYC costs are increasing. We can't absorb those increases by the negative cost developments on the back of the earlier transformation programs, you can expect from us that over time, we will continue to look for further efficiencies and further digitalization of our operations so that over time, these costs will be absorbed. On the quarter-on-quarter picture, results were lower, driven by the combination of the already mentioned VAT.
Also, last quarter, we had a provision in Germany, which you may remember, and this quarter, we had these higher KYC expenses and legal provisions. In the third quarter, the cash-out regulatory cost, which is the right-hand side of the picture. The cash-out regulatory costs in the third quarter are not the highest. We do see an increase here, and that increase is mainly due to an additional DGS contribution and higher costs in Poland. On a four-quarter rolling average basis, the cost-income ratio was 55.8%, which is more or less the same as last year in the same quarter. It was 55.5%. You see that over time, even with increasing costs, that we are able, from a C/I perspective, to either work on the income side or continue to work on the cost side over time.
We will continue to focus on that. Turning to the risk cost, slide 13. The third quarter, we saw the risk cost coming in at EUR 276 million. That's 18 basis points of average customer lending. That's up from EUR 209 million in the last quarter and EUR 215 million in the same quarter a year ago. It's driven by some things in Retail and Wholesale Banking as well. Compared to the second quarter in the Netherlands, the main driver was a change in the house price index for mortgages, which mechanically increases the LTVs, and that then leads to an addition to the general loan loss provision. Retail Belgium risk costs were back to a more normalized level after a very low second quarter. You can see that in the chart. In Germany, we saw actually a EUR 7 million net release versus a EUR 25 million release last quarter.
That all has to do with model updates on mortgages, the EUR 7 million. Other Challengers & Growth Markets reported lower risk costs, mainly driven by Turkey and Poland, if you compare quarter-on-quarter. Wholesale Banking risk costs were higher this quarter at EUR 160 million, with a few non-correlated individual Stage 3 files in the Americas, Belgium, Poland. We don't see a trend here. We can go into that in the Q&A as well with Steven there. Overall non-performing loans for ING, as measured by the Stage 3 ratio under IFRS 9, were slightly higher at 1.6%. Still low. For the remainder of 2019, we continue to expect risk costs to stay well below through the cycle average of around 25 basis points of average customer lending. Turn to capital, slide 14. We're almost at the end. Hold your questions. CET1 increasing to 14.6%.
Basically, we benefit from an inclusion of the EUR 500 million of interim profits. Just to remind you that we reserved last year's full dividend already now in the first three quarters, limiting the profit added in this quarter, but therefore in the fourth quarter, a large part of profit contributes to capital. Risk-weighted assets increased by EUR 1.4 billion, mainly caused by model impacts as we absorb the impact related to the ECB's TRIM review of Dutch SMEs. Also, the impact of a mortgage model update in Australia. Currency impacts, higher market risk-weighted assets further contributed to an overall risk-weighted assets growth. That was partly, again, offset by positive risk migration and a lower operational risk-weighted assets. Now, with the 14.6%, we are still well-positioned to achieve our CET1 ratio of around 13.5%.
We may see risk-weighted asset inflation in the coming quarters, coming from other regulatory developments such as the finalization of the TRIM exercise on some of the corporate portfolios, as well as the implementation of the new definition of default. That could impact CET1 levels in the coming quarters, as said, though the magnitude and the exact timing of these risk-weighted assets inflations remain uncertain. As you can see on slide 15, we continue to perform very well against nearly all of our financial ambitions. Both CET1 and leverage ratio remain well ahead of the minimum regulatory requirements. Despite the higher regulatory requirements, we continue to produce a very attractive return on equity of 10.3% for the quarter. That's the four-quarter rolling average.
To reiterate, cost- income is not how we run the business, but it certainly remains a very important input factor for our own analysis as to where we have to improve. It is certainly also an important input factor to calculate your return on equity. We still have the ambition to, over time, to reach the 50%-52%. Our policy for 2019 on a dividend is to pay progressive dividends like we did in the past years. Good. Now to summarize. Honestly, I think in view of the macro environment, the negative rate environment, we show good results. Very good results, maybe even on the NII in the third quarter, and that leads to a net profit of EUR 1,344,000,000.
We continue to see the pressure on the interest rate environment, but we are able to offset it with continued strong commercial momentum on the Retail side for the volumes and margins. We see continued commercial momentum on the increase of primary customers with 165,000. We also see an increase in cost, as said, besides the regulatory costs, the KYC cost and the CLA cost, that clearly we'll have to absorb over time and make sure that we continue to run an efficient franchise. All of that in order to deliver a handsome return of 10.3% for the quarter, and that is fit in the ambition range of 10%-12%. CET1 ratio improved to 14.6%, well above regulatory minimums. I said, and I will repeat it, we do expect to see some effects on capital from banking regulation reviews in the coming quarter.
With that, let me open the line for questions.
Ladies and gentlemen, we will start the question- and- answer session now. To be registered for the question and answer queue, please press star one. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. If you have a question, please press star one. The first question is from Mr. Stefan Nedialkov, Citi. Go ahead, please.
Yeah. Hi, guys. Good morning. It's Stefan from Citi. Two questions on my end. Number one, are you ready to give guidance for the net interest margin for 2020? Secondly, some press reports show that some of your shareholders are angling for M&A in Spain, specifically with much more of a traditional bank. If you just comment, what are the attractions and challenges of such an initiative and whether this is something that you could consider?
Hi, Stefan. It's Ralph. I'll give the NIM question to Tanate. I'll pick up the second question now. As you know, we don't go into any of these comments of press and rumors around M&A, and don't expect us to do that in the future either, to comment to that. Our strategy, and as you see it again this quarter, is a organic growth strategy, very much focused on delivering a differentiating client experience, and with the innovation and with the new products, and even with KYC, knowing our customers even better. We can make that as much as an approval for our role as the gatekeeper, also a commercial tool. That's what you can expect from us, focused on organic growth.
We have said before that on M&A, we would be looking, if any, for teams that have specific skills in some of the more lending products that we may not have our own skills in, and then see how we can develop that, or for specific technology players that can help us to deliver that differentiating customer experience. I will repeat that one in a market in which we are active as a large bank, if consolidation is happening, we'll analyze whatever is happening. This is it. Nothing more, nothing less. On NIM, Tanate?
Yes. Hi, Stefan. On NIM, I think we give our guidance pretty much looking forward for the next six months, where we guide towards the 140s in terms of net interest margin. The high 140s. I think in terms of looking at the rate, I think it can be quite volatile. I think if you look at the August curve, it was really quite bearish, where we see strong recovery in September and October. That's why I think we are more comfortable guiding the net interest margin over the next six months.
Okay. It's basically high 140s through the end of the first quarter of 2020.
Yes.
Okay, thank you.
The next question is from Mr. Pawel Dziedzic, Goldman Sachs. Go ahead, please.
Good morning. Two questions from me as well. The first one is on risk-weighted inflation related to regulation and macro-prudential policies and so on that you highlighted. I completely understand that details and magnitude and timing, this is all uncertain at this point. Can you help us understand to what extent this inflation comes on top of the 15%-18% risk-weighted assets inflation guidance that you gave in relation to Basel IV? In other words, are goalposts for ING capital goalposts still moving up, or this is more a timing issue? The second question is somewhat related to that, and it is on your dividend policy. I think you reiterated it. We witnessed over the last two weeks the first major buyback in the eurozone. Of course that captures our imagination.
Given all the uncertainty on, let's say, regulations at this point, would you be in a position to review your capital policy over the next one, two years, you think? Would buybacks could potentially feature into those, given the flexibility they could give you over the, let's say, progressive dividend growth policy and obviously at your current valuations? Thank you.
Thank you, Pawel. The risk of inflation will be taken by Steven. On the dividend policy, we launched a policy a couple of years ago. It's a progressive policy. We feel comfortable with it as we speak. We keep generating capital every quarter, and we continuously look at how we manage that capital. Do we manage it to support growth? Do we manage it in order to support our capital buffers, or do we manage it in order to pay dividends? That is how we play this. Over time, we'll have to see, and that's what Steven will certainly fill in as to what the risk-related inflation will bring. If we would come into a situation where we feel as comfortable, we will always look at distributing capital to the shareholders. Again, it's the three purposes that we want to fulfill with capital generation.
It is buffers or tackling risk-weighted asset inflation. It is growth, and it is capital return, and we're not ruling out any additional return above the policy. Given what we're looking at for the next couple of quarters, I'll give the floor to Steven.
Yes. Thank you. Indeed, we may expect some impact on the finalization of the TRIM exercises and the definition of default inclusion under the new standards of the models that we need to apply on the ECB to an extent that is a prelude to Basel IV. The extent to which we will only know in more detail once we have received the final letters. At this point in time, we remain comfortable, also given the current capital ratio that we are at with 14.6% Common Equity Tier 1 to maintain our ambition of 13.5%.
Thank you very much. I think 13.5% is clear, but is 15%-18% risk-weighted asset inflation still an accurate guidance over the next years?
On Basel IV it is.
No, I think on all initiatives, right?
We'll need to see what the impact is on the TRIM and the definition of default. On Basel IV, we're still comfortable with that number.
Overall, you believe that this could be higher given the new initiatives? Apologies for drilling into this.
I repeat myself in saying that we need to wait for the final letters to see the total and final impact.
Okay. Very clear. Thank you.
The next question is from Mr. Robin van den Broek, Mediobanca . Go ahead please, sir.
Yes, sir. Good morning, everybody. Thank you for taking my questions. My first question is a bit digging into the margin dynamics. You mentioned during the pre-earnings call that you expect to see some pressure on general lending on the back of TLTRO III, having better conditions, more liquidity coming to the market, while demand, according to ECB data, seems to be dropping off a bit. I presume that pressure has not really hit your book yet and is more likely to come early stage next year. How is that factored into your guidance? Is that basically fully offset by euro swaps bounce we've seen over the last quarter? That's the first question. The second question is a bit on costs.
I appreciate you've said your cost savings from the restructuring plan are more back-end loaded than initially foreseen, but could you give us an update on where we stand? According to the program, you would reach accumulated savings of EUR 550 million by the end of 2019, going to EUR 700 million by the end of 2020. Could you give an update on where we stand on that, please? Thank you.
Yes. Robin, on basically the dynamics in loan growth, whether that's more the market dynamic, where the ECB is hinting at, or our own dynamic. Whatever the ECB is hinting at, we don't see that necessarily. I can't really come to that conclusion from how the lending develops in our own loan book, because it's really a combination of our own strict repricing as we have announced in the beginning of the year. Specifically, in the wholesale area, we felt that given where capital levels are going, we have to make our returns. Therefore, we have our return on equity hurdles that we apply there, and that leads to some fewer deals on one side. At the same time, it doesn't mean there is less demand. Same with the repayments that we've seen this specific quarter.
The fact that some clients tap the bond markets rather than the banking markets doesn't mean there is no demand. That's another dynamic there as well. I wouldn't jump to the conclusion, honestly. I would turn it around more from our perspective. We don't see a trend yet, if there is one coming, that there is going to be lower demand. You know that we have exposure across the whole globe, and across the whole globe, we are still growing also on the Wholesale Banking side. Even with this quarter, we're just short of the 2% growth on an annualized basis. We continue to guide that. Although Wholesale Banking will not grow as much as Retail Banking, we do expect it to grow 2%-3% continuing. It's not a target because I don't like targets on the lending side.
It's certainly an ambition, but at the right price. That's more or less on that side. The cost savings. Actually, the transformation programs are delivering the cost savings. Actually, we had a review of those yesterday once again. Some of these transformation programs deliver these cost savings as specifically the Netherlands and Belgium program, maybe a little bit later. On the other side, we also see some of these transformation programs will deliver more savings. All in all, we're not that much behind on delivering on the savings as we speak.
We have specifically for the Netherlands and Belgium, for the Unite program, we have announced a change in tactics as per our Investor Relations Day, in which we basically said that given where technology is going and given the opportunity that the technology is providing us, where the front end of the business can be connected to the mid-end, if you want to call it like that, where the product sits and where your accounting sits or your account management sits through APIs, that we felt it was better to disconnect and decouple the migration of clients in one go. Belgian clients all to the digital systems in one go with products and accounts and everything in order to benefit from these digital channels. Connect the Retail Banking clients in Belgium directly onto these channels. We're in the midst of that.
With that, we feel we can have better commercial momentum. We are currently running a pilot with around 1,000 retail clients in Belgium as we speak, where they experience the digital channels. Generally, where we introduce these digital channels, we see the app rating going up from just below 3 to more than 4, 4.5. These are real good experiences that we're providing. We want the Belgian clients to benefit from that. We do expect that all clients will be migrating towards that front end by the end of 2020. That will continue with that commercial momentum that we currently see in Belgium. If you look at the Belgian numbers, although there's a bit of an uptick on cost, the income component is pretty impressive given where we are on the rate environment. That's a little bit what I can say from you.
Overall, as I've said before, even in markets where we are lower cost ratio, like in Germany, if we do see pockets where we can improve from an efficiency perspective at putting digitalization in, we will do so. You can expect that from us as a digital player.
Maybe one follow-up. Your underlying cost base, is it fair to assume that your restructuring program, you basically said that KYC is not going to be fully captured, but at least the other factors of CLA increases and stuff like that, is that basically captured by the program?
Absolutely.
Okay.
Over time, even the KYC costs will be captured. Like we have been able to capture the EUR 1 billion of cash out regulatory costs over the last five years. You can't take EUR 1 billion on the chin and compensate for it in one quarter. We do this over time, continuously reviewing what can we do better, looking at new technology, as I said, which does make us change tactics in some of these transformation programs because new technology is available, and we'll certainly apply that where we feel that it can improve both our customer experience as well as in efficiency.
Thank you very much. It's very helpful.
The next question is from Mr. Johan Ekblom, UBS. Go ahead, please.
Thank you very much. Just one question from me, please. Could you talk a little bit about the development of mortgage margins? I think you mentioned that mortgage margins are up in most markets, I guess the biggest driver of that has been the falling long bond yields, which as you also mentioned, have rebounded somewhat. If I look at pricing in the Dutch market, for example, we can see pricing coming down, still with the biggest spread to long bond yields than what we saw six months ago. The direction is clearly less positive than what we saw in Q3. How should we think about the potential impact of improved Retail margins at the group level for the next couple of quarters?
Tanate?
Okay. Thank you very much, Johan. I think overall, we look at basically product margin, and we split that through basically use of the FTP, right? With the negative interest rate that we have seen from the ECB, basically, the funding cost for our lending business has dropped quite dramatically because of that. Having said that, I think if we look through pretty much all of our geographies, we do not pass on that benefit to our customers, right? Which means our product margin, particularly on the front book, you see improvements in margin. Specifically, what you talked about in the Netherlands, for example, indeed, we see some pricing competition coming in in September, where actually absolute pricing is under pressure. I think overall, the evolution over the months has been actually quite positive.
We do see absolute price improvement in Belgium coming in in July and August, moderating in September. In one of the more competitive market like Germany, we also see product margin improvement there as well.
Maybe just follow up on that. Could you comment how big is the difference kind of front versus back now versus when we spoke after Q2? I guess at that point it would've been at kind of the biggest differential given where rates were.
I don't think we basically give that information, I think typically mortgage pipeline from origination to actually being booked is depending on markets, anywhere from three to six months. It's hard to say on such a quarter-by-quarter basis. I think we do measure monthly our new origination margins, and so far, a little bit of pressure in September, that has been accretive over time.
Thank you.
The next question is from Mr. Tarik El Mejjad, Bank of America. Go ahead, please.
Hi, good morning, everybody. Thank you for taking my questions. Two questions. First, on the costs. Clearly, the compliance costs you mentioned a few times that are quite sticky and becoming a bit structural to your cost base. You just mentioned in the question before that it will be solved within the current plan. Did I understand that well, or do you need to put in place a new savings plan with new investments to deliver the savings to absorb these over time? The second question is on capital and dividend.
I understand that it's still not clear about the impacts of TRIM and so on. If all these things are actually front-loaded, the TRIM, the definition of default, and also the DNB decision to put forward the floors in terms of mortgages and so on, would you be comfortable to keep still this progressive dividend policy despite seeing your CET1 actually falling quite sharply? I know it's just a timing difference, but you'd still be in a position where your CET1 and buffers will be lower than what you usually had. Thank you.
Thank you, Tarik. In terms of your first question, clearly, if we feel that current programs can be accelerated or can have a bigger impact, we will do so, even if we've, in reviewing all of the programs that are going on, all the initiatives that on a quarterly basis are coming to our table because we run this on a quarterly basis. The investment programs that we have in order to deliver, for example, improvement of KYC, but also the investment programs that deliver on a better experience or further efficiency, we continuously rank them as to impact. Therefore, it is maybe a mix of the current programs and more effective implementation of current programs.
Could be also new programs. As the one that I was alluding to that we did in Germany just last quarter, and you can see the results already on the cost side this quarter. If there is better programs than the current programs, we will certainly switch over to the ones that are better. In the end, you have to make sure that you don't run into programs that you don't finish, because in the end, it's also important to finish programs. Clearly, on a quarterly basis, we review all the programs that we have. We review all the investment, the discretionary investment money that we have in all of that. To the effectiveness on compliance, customer experience, as well as efficiency. That's how we take our decisions. On the second one, I will give the word to you, Tanate.
I think it's really reiterating what Steven has done. We have, in this quarter, continued to accrete capital at a good rate at 14.6%. I think we are fairly confident of our guidance on Basel IV at 15%-18%. I think for these new regulations on capital and the results of DoD and TRIM, we simply need to wait for those things to come along in the next quarters. Nothing more to add beyond that. I recognize this request for clarity, but I think we just need to wait for that to come.
I understand the maths and clearly that you are comfortable in terms of buffer in a sort of full picture, it's just more the timing and how from management perspective, you feel, you can see through a bit of a blip in terms of lower capital because it's just timing difference or you can't actually take that more than you have to basically keep that buffer reasonable levels. It's more like a strategic view than the maths. I agree that on the maths, we need to wait for clarity.
I think if you look, we have a comfortable buffer, right? Our current MDA buffer requirement is 11.8%, maybe rising a little bit to 11.9% because of the countercyclical buffer requirement. I think you stand several basis points above that number. Given time, we believe we can adapt ourselves and our strategy to come back to that 13.5% or around 13.5% post- Basel IV target.
Okay, thank you. Can I just follow up very quickly on the cost line? The legal provisions, is that related to compliance issues you had in different jurisdictions, or Because I think, Ralph, you mentioned that that's in many countries?
Yeah. This is related to several cases in several countries and are not necessarily compliance or AML issues altogether, no. It's a mix.
Okay. Thank you very much.
Maybe coming back on the CET1 ratio.
Yeah.
The capital factor. Just to reiterate, we have the 14.6% where we are. We have a minimum of 11.93%, whatever we need to have with counter cyclical. It's quite a buffer. Tarik, on your question as to strategically, every quarter we generate capital. This machine is really working very well, more than 10% return on equity. We do feel comfortable to absorb that. Again, timing-wise, it could be one quarter a little bit more than the other, and we'll have to see how we manage that. Yeah. No specific worries on that side.
That's very helpful. Thank you.
The next question is from Mr. Adrian Cighi, RBC Capital Markets. Go ahead, please.
Hi there. Two questions from my side. One question on cost of risk and one follow-up on costs, please. On the cost of risk, I understand that a large part of your cost of risk in Netherlands will be the change in methodology in terms of the house price index. What would it have been under the old methodology? Would you have seen a big increase as well? Would it have been differently? Maybe a follow-up on that, have you seen any IFRS 9 impact in the cost of risk increase? On the cost side, the KYC investments, the EUR 50 million this quarter, how much more do you expect to have to take in the coming quarters as part of this remediation program? Is this sort of something you have visibility into? Many thanks.
Yeah. I'll take the cost and then Steven will take the one on the mortgages and the IFRS. The KYC cost, clearly, we're running up these costs. That's a combination of what we agreed, which is do lookbacks. That is almost done. It's about file enhancements, which we're really on track, and it's about structured solutions. Lookbacks as well as file enhancements, that in itself will at a certain moment stop. You could see the next quarters to kind of see the growth of cost stop there and maybe even decrease there. From a structured solution perspective, that is something that we have to look at on a quarter-by-quarter basis as to how we can improve the effectiveness but also the efficiency of that. I can't really give you anything there.
Clearly, the enhancement and the lookback aspect of it is something that is temporary. Having said that, we will have to do continued review of our clients. Some of that capacity will stay with us.
Adrian, on your first question regarding the price index from Dutch houses. If we would have been using the old index or the NVM index, the cost of risk would have been lower in the Netherlands. This is a, I would say, a more less volatile, a more stable but also a more conservative index that we're currently using. With regards to IFRS 9, the impact is limited. It depends on the market. We are seeing some better macroeconomic circumstances in Turkey compared to, for example, a number of quarters ago. If you look at the overall scheme of things in risk costs, that has had limited impact.
Thank you very much.
The next question is from Mr. Raul Sinha, JPM. Go ahead, please.
Good morning. Hi. Thanks for taking my questions. Maybe on the [inaudible] portfolio to start with. Could you give us some more color on what you're doing here and how sensitive you are to the 30 basis points or so increase in the five-year swap rate that we have seen since the lows in August? Should we start to think about that drag maybe potentially ameliorating a little bit?
Thank you very much for that. I think our critical point is really the three-year, the five and the 10, right, in terms of our replication. I think if you look at perhaps the situation back in August, I think the picture looks a bit bleak, given where the curve was at that particular point in time. Since then, as you know, we've seen really quite an improvement coming into September and now into October. I think the picture varies, but I think it's improving given where the curve is today. Of course, we take various different hedging strategy in terms of hedging when we feel it's appropriate, and that also has a positive impact on margin, as you can see in Q3 as well.
Thank you. Could I request for more disclosure on this, please, going forward? It would be really helpful, I think, from a market perspective, to get a little bit more information around how it could impact your NII, because I think obviously it has become quite key to the outlook into next year.
Okay. We'll have our Investor Relations be in touch with you there.
Thank you. If I can just follow up on NII then, excluding the Financial Markets line, and I think, Ralph, you talked about the performance in this quarter has been down 1%. It's obviously quite good in the challenging environment. Your volume growth is obviously being offset by a lot of the pressure you are seeing. Do you think this down 1% sort of performance is the best you can hope to achieve going forward? Is there something you could do from a management perspective that could improve this NII growth, excluding the Financial Markets? Thank you.
Yeah. Raul, basically the way we look at this is that, given the commercial momentum that we have and the continuous growth of new customers that we get, and with that, not just the factor that the market is growing, but also that we are continuing to grow market share and improve margins. We think that over the next couple of quarters that we can offset the pressure on NII coming from more the saving side of it, with growing in our lending, improving our margins, growing in non-euro areas. From an NII perspective, we expect to see a flattish picture. Clearly, if the yield curve improves, it may help us a little bit upward on that.
Thank you.
Next question is from Mr. Omar Fall, Barclays. Go ahead, please.
Hi. Good morning. Just a couple of things for me. Firstly, could you just quantify the amount of RWA relief from positive risk migration this quarter? Where is that coming from, given all the metrics you've discussed on credit and the worsening macro and more broadly? Secondly, can you just give more color on the impressive performance on commissions, even if it's just a split in performance between account-related fees and more market-sensitive fees, please? Just how much of that performance is related to the AXA partnership, for instance? Thank you.
Okay. On the fee side, I'll take that, and then people will come back on the risk-weighted assets relief. On the fee side, I'll give you a bit more insight there. As I said, year-on-year, it's a 9.4%. On the Retail side, it's 5.8% including Wholesale. I think what you should kind of realize now is that the one-time effect of the change of the composition of owned branches versus agent branches in Belgium and the fee mix of that is now neutralized because that all happened in the third quarter last year. That is now here as well. This is a real good comparison now, and therefore the 9.4% on the Retail side is a real 9.4% on the Retail side.
If you go deeper into that, you see that this is high-quality improvements across the board, because in Holland we see an increase of just short of 5%. In Belgium, we see an increase of just short of 8%. In Germany, I already mentioned it specifically given the superb performance of Interhyp there as a mortgage broker at over 21%. Other C&GM, so these are all the other growth, but also the digital banks with new products or new fees being introduced, and including the AXA program. It's over 11% fee growth. It's proving that focusing on this primary business, this primary relationship in a digital way, and looking at how you can offer simple, transparent products to your customers digitally, that is really working. On your question specifically as to AXA, I think it's too early to give you insight there.
We're in the first quarter now of this JV initiating new products. We launched seven products across four different markets. That's really too early to tell you or give you insight as to how much fees we're making there. Basically it is really early days, so the impressive performance of fees is not because of this. This was just launched, and it's not like this is now in place. It's really because of other products as well. AXA and the growth and the success of the joint venture with AXA will help us going forward even more.
Just as a quick follow-up on that, in terms of that split between account-related fees and then more market-sensitive fees that are within Retail, can you give us insight to that?
I don't have that here with me. If you want to get a bit more insight, we'll see whether the Investor Relations guys can give you. I just don't have it here with me as we speak. Omar, if you could call the lady and gentleman of Investor Relations, that would be helpful.
Great. That would be great. It's just the growth is so much higher than the pace of loan growth, so I just wanted to get a sense of that. Thanks.
Yeah, it's not like we didn't indicate our comfort that we would be increasing our fees between 5%-10%. We have been guiding that for the last couple of quarters, and so we're realizing it.
Absolutely.
Okay. Thank you, Omar. Then Steven.
Yes, thanks, Ralph. Omar, on your question on risk migration. For the quarter, that was a positive impact on CET1 of 19 basis points, that's over EUR 4 billion in RWA. It's actually realized across the board. In Wholesale Banking C&GM Netherlands, mainly on the back of increasing prices in their retail franchises and also banking driven by some LGD improvements in [structured] finance.
Got it. 19. Thank you.
The next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead, please.
Yes. Hi. Just a follow-up question from our side. Could you give us a more quantified idea about how TLTRO III and deposit tiering can help your NII?
I think, Bart, on the deposit tiering, which has now come into effect, roughly we have EUR 50 billion in deposits with central banks. We will benefit from the tiering on that amount. Roughly, it will make it neutral. You can count on average that we get - 50 basis points until the tiering scheme has come into place. From a TLTRO III, I think we still look at it on an opportunistic basis. We are actually quite well funded for the year and going forward, we may or may not participate on the TLTRO III. We just look at it on a pricing perspective going forward.
The deposit tiering effect is not already included in your NII outlook to stakeholders?
It's part of the outlook indeed. Yeah.
Okay. Thank you very much.
The next question is from Kiri Vijayarajah, HSBC. Go ahead, please.
Yes. Just firstly, a follow-up on that tiering question. Does all of the benefit get booked in the Treasury unit that sits within the Wholesale Bank, or does it feed through into some of the other divisions through the internal transfer price? Secondly, can you comment on the volume decline in Belgium? I can understand about the repricing and trying to get a wider margin there. I wonder, is there any kind of change in risk appetite in Belgian mortgages? Are there any underlying worries about the Belgian housing market? Looking forward into next year, should we expect your market share in Belgian mortgages to maybe bounce back, or do you think it is all going to stay at a more subdued level or at least grow slower than the rest of the market? Thank you.
Thank you, Kiri. I'll take the second one. Tanate does the first one. On Belgium, the fact that you see a bit of a decrease there, that is not because of the development in the mortgage book. It is a particular client that has a bit of a swing in terms of outstandings drawdowns. On the underlying development on the mortgage book, we are increasing our mortgage book in Belgium because the market as a whole is growing. Our market share may be a bit down because, as I said, we are very disciplined in pricing.
We play a return game and not a volume game on this one. With that, the mortgage book is increasing, albeit maybe at a bit lower market share, but the market as a whole is increasing. Thank you.
Your question on the impact of the tiering. As you know, we run a centralized Treasury function, but these impacts we will distribute into the business unit, depending on the level of liquidity each unit has. A lot of the impact will be in the Retail Bank.
Good. Thanks, guys.
Next question is for Mr. Benjamin Goy, Deutsche Bank. Go ahead, please.
Yes. Hi, good morning. Two questions from my side. First on negative rates and some competitors or in some markets, increasingly discussions around passing that on to retail clients as well. How do you see that influencing the competition and also deposit flows? Do you still see it as an opportunity to gain customers, or is there increasingly a cost associated with that? Secondly, you state Stage 3 loans went up a bit, in particular driven by daily banking. Just wondering what was driving the increase? Thank you.
Benjamin, the first one. We do charge rates to the larger professional clients and the clients that have really large deposits with us. We certainly also do so in different currencies. That's basically where I think where I can give any indication on that one. We are certainly looking at compensating the pressure on the savings side, more in terms of looking for growth in non-euro environments, in growth in the lending book, the change in the asset mix, the repricing on the asset side.
Sorry, that was in particular on retail clients. I know you don't charge it, but some others do. Just wondering how you see that going forward, significant deposit inflows, and then a second question, what you do with it in case this materializes.
Yeah, well, we don't see that, so I'll not speculate on things that may happen.
Okay. Understood.
Yes. Regarding the NPL increases, there is indeed a benign overall NPL increase back to 1.6%, which is the same levels where we were in the third quarter of 2018. You also see that a few of the portfolios have a slight increase, and that tips the balance over from a 1.5%-1.6%. It's not particular to daily banking. These are very small portfolios that have a slightly increased NPL level, as a result of which the move up is with 10 basis points.
Thank you.
The next question is from Miss Alicia Chung, Exane BNP Paribas. Go ahead, please.
Morning, everyone. Just one question from me, and it's really on the provision outlook for next year. I'd love to get your thoughts on that. I suppose what I'm wondering is, do you think it will start moving closer to your through the cycle cost of risk? I guess there are a few moving parts to how we should think about provisions next year. Obviously, we're starting to see a little bit of an uptick in terms of provision normalization in Wholesale Banking, where provisions have deteriorated a little bit across a number of sectors. Secondly, I see that NPLs have obviously crept up, but also the coverage ratio has now fallen to a new low of 29%. I'm just wondering if you see 29% as a sustainable coverage ratio going forward, and is a higher coverage ratio more prudent?
Appreciate there is an asset mix within that, but you do have a decent weight of that within Wholesale Banking. Finally, I imagine you will want to start looking ahead to implementing ECB guidelines on calendar provisioning and definition of default, which certainly for some of the banks which have started implementing the definition of default so far, are taking it through higher P&Ls. Taking into account the underlying provision normalization, your current view, very low coverage ratio and the upcoming regulatory guidelines on provisioning, how should we think about cost of risk next year? Thanks.
Wow, Alicia. Thanks very much. On the cost of risk, yes, there has been an increase in risk cost in this quarter, partially due to a changing benchmark in the mortgages in the Netherlands, whereby, let's say a year ago, we saw a release based on model [updates]. There were a couple of files in Wholesale Banking that led to some higher risk costs. There is indeed an uptick in NPL, that's a limited extent. We see here and there the watchlist creeping up, that's based on a couple of files. I think it's too early to call to change the risk outlook for what has had before. The risk costs are still, if you look at over a nine- to 10-year cycle, at the low end of the spectrum. We see an uptick here and there.
We see a slowdown of GDP forecast and confluence here and there. I think it's too early to call that this is a real change. In that sense, I would not change the outlook that I've given before, which is that for this year, we will be well below the year through the cycle average in risk costs. For next year, I do not see at this point in time, a change in that outlook. If you look at NPLs and the coverage ratio, the coverage ratio in the end is an outcome of the way that we provision. Indeed, as you rightfully pointed out, the business mix that we have, we have a large mortgage book. In the end, the coverage ratios there are always relatively benign. The mix, what you see there, is what we end up with.
In that sense, there is not a change expected in that sense. If you look at the definition of default, indeed, that will likely come in the next coming quarters. We do not see an impact in that regard in cost of risk moving into our books.
Thank you. Very clear. If you don't mind, I wouldn't mind just one other question. Just going back in terms of capital and headwinds from here, is it fair to say that between now and 2021, the known headwinds, as far as you all are aware, is the TRIM, the definition of default and the macro-prudential RWA add-ons, and I guess I'm going to add to that calendar provisioning, or is there anything else that you see in the pipeline?
I thought it was enough, Alicia.
Just to draw a line under these things.
TRIM, DoD, and the macro-prudential impact on mortgages in the Netherlands is currently what we have on stock. If there's something new, then I will report on that.
Okay. TRIM is just the capital portfolio?
Yes, TRIM. Basically, TRIM. DoD, Dutch mortgages.
Okay. Thank you.
Thank you.
The next question is from Mr. Jason Kalamboussis, KBC. Go ahead, please.
Yes. Hi there. Good morning. A couple of things. The first one is on fees and commission. If we agree that for those that want to hear you, Ralph, you were saying that the second half we could see an uptick in fees and commission. I just wanted to look, when I am looking at consensus this year, this line specifically has come down by 5%. Effectively, the 5%-10% growth target that you have was eaten up already in a certain way. When I look at also consensus, if I look at CAGR 2017 to 2021, it is probably at 3% or roughly about there. How should we see the outcome in fees and commissions in the short or longer term? Do you stick to the 5%-10%, or is it more likely to be a 5%?
At the end of the day, even going forward, we are below that. The second thing is on cost. Just a small clarification. The EUR 118 million differential, let's say EUR 50 million was for KYC. We had the legal provision, so 40%, but that was more than offsetting that. If anything, there is probably about the difference of EUR 118 million minus EUR 50 million would give you EUR 70 million. Also benefited with that, it was EUR 100 million. Is there any chance we could get more granularity? Is it full CLA, so that we have an idea? For the KYC, the EUR 50 million, is it fair from your previous comments to assume that this is the kind of thing that we could expect year-on-year for at least the next one or two quarters until we get more clarification? Thank you.
Okay. Thank you, Jason. Well, the fees, I'm not sure exactly what kind of numbers you're looking at, but don't forget that the fees are a net number, which basically means it's fees that we get paid minus the fees that we pay. You were going through a couple of numbers pretty quickly, but one point and one part that is really distorting the fee growth picture historically is the real switch in Belgium, which we made from owned branches to agent branches when we merged the two branch networks of Record and ING. Basically, we have opened much more agent branches and closed more owned branches, which means that our costs go down on one side, but we pay out more fees. That payout of fees affects the net fee growth picture. That's distorting the historical analysis.
I think this is the first quarter in which you see that now we have been able to neutralize that effect year-on-year. This quarter, last year versus this quarter, this year, but basically you see that is more or less the same, the underlying fees paid out to the agents in Belgium. Now you can see the real growth. Based on that, and based on the growth of our primary customer base, based on the introduction of new products, the behavioral fees that we're introducing, some of the digital banks, some of the good mortgage production for which we get paid fees here and there as well, we do feel comfortable with continuing the guidance going forward of fee growth between 5%-10%. That's one. The second question on the cost.
I cannot give you more granularity at this moment in time than what we have already given, which is the combination of the KYC increase of EUR 50 million. Yes, that is what we think you can expect the coming quarters, and there will be a bigger effect then of KYC costs going down because of the enhancement part being finished. Some of the structural parts being fully on stream then. We don't know exactly how that mix is going to look like. Then, yes, we do have a pretty big impact on CLA increases across the globe. We see that as well.
Thank you very much. To be clear on the fees, good to know that you reiterate strongly the 5% outlook. On costs, just the Record Bank decommissioning and seeing you have said, I think, Q2, that it was not necessarily going to come in second half. Is it just an item that we should be keeping in mind for first quarter of next year?
Yeah, in the scheme of things, that is below EUR 10 million, and it will be Q4.
Okay. Thank you very much.
The next question is from Mr. Jean-Pierre Lambert. KBW, go ahead, please.
Hello, good morning. Two points, if possible. The first one is KYC. I look at the staffing in the Netherlands. It has been growing since the second quarter last year by 635 people, staff. Is that KYC or is that related to the Orange Bridge? Is KYC concentrated mostly in the Netherlands, the KYC costs? Second question is on your budget process, which you are probably undergoing for the moment. How do you look at the cost base and how is that related to the pile of projects you have with decommissioning returns? Do you feel that next year you need to accelerate and add more projects to absorb the KYC, or you feel things are safe as they are for the moment, and you don't see the need to accelerate initiatives? Thank you.
Thank you, Jean-Pierre. Well, on the cost or the FTE growth in the Netherlands, it's basically three components. The first one is that with the Unite program for the Netherlands and Belgium, we guided in the past already that you should look more and more at the combination of the cost factors and therefore also the FTE factors between the Netherlands and Belgium. If it comes from the perspective of the domestic banking business. We are preparing the Dutch systems and the Dutch channels for migration of the Belgium clients, and therefore we are less investing in some of the systems in Belgium and more in the Netherlands, and hence you would expect to see some FTE and cost growth in the Netherlands in order to prepare for that. That's one effect of what you see happening in the Netherlands in terms of FTEs.
The second one is certainly also KYC, both for the domestic bank in terms of the file enhancement, the look backs, and all the stuff that we need to do, but also the central KYC cost. We have set up, as we launch these programs as a global program, we set up a central team, developing central tooling, which is partially in the Netherlands and partially in different other countries, working on that, and that also has a specific effect on the FTEs in the Netherlands. Thirdly, with a lot of the work coming from a more regulatory perspective, we do see also a further increase in people working on the risk side. If it comes to, for example, the modeling aspects of risk management, the data knowledge, and the data scientists that we have to hire.
We hire them all over the place, but specifically also in the Netherlands. You can't just point at one factor that explains the increase in staff in the Netherlands. It's a combination of all these three things. The cost base and the budgeting process. I think the only thing I can say there, because we don't give cost guidance per se. You go back to the recipe that we have been using for the last couple of years, six years even, as to what you can expect from us. Over time, you should expect the cost in market leaders to go down because we do expect the income line to be flattish, if not negative.
Therefore, the cost should go down faster, and that's what we're working on, programs to support further efficiency gains between the market leaders' activities, improving customer experiences, and with that a more digital experience, and with that, also lower cost. That is what's happening. Expect costs to decrease there. On the C&G side, honestly, we have good momentum. We're offering a good service. More and more customers choose for ING as their primary bank. We don't mind costs to grow there as long as we also see that it comes along with more business and good price business, so also better income. As I said already, a large part of the fee growth comes from these digital franchises and the growth franchises that we have in C&G. Costs could increase.
It could lead to increase in the C&G environment, but we will certainly also look at the top line, because if there is no top line but only an increasing cost line, we will not accept that. The third area that we look specifically at is the Wholesale Bank, in which we have a continuous program for efficiency running. Depending on the pockets that need improvements, you could expect if the Wholesale Bank does not deliver on income growth. That cost will be stable, if not decrease. For example, if you just take a look at the Financial Markets franchise, you know that we have had a real transformation program in that area for the last two years, centralizing a lot of the trading, canceling some of the product capabilities.
Over time, the top line has been stable, if not increasing, and now I'm not counting the value attachments, the client business. Just look at this quarter, costs vis-a-vis last year have gone down by 6% in Financial Markets. It is very much specific programs in order to improve specific performances in areas in order to make sure that if an area is not performing according to our wishes or not making their hurdles, we will have to improve either on the income side, but also on the cost side.
Great. Thank you very much, Ralph.
The next question is from Mr. Jose Coll. Santander, go ahead, please.
Hi. Thank you for taking my questions. The first one is on OpEx, more specifically on group salary costs. When I look at the number of FTEs, it grows 2.8% versus third quarter last year. Your salary costs, they grow 2.1% in the first nine months of this year versus the first nine months of last year. My question is whether this FTE growth is driven by compliance staff, which should be non-revenue generating staff, and if so, whether they're making the same salary as your average base. The second question is, well, I suppose it's too early to talk about dividend guidance, but this may be a silly but honest question on the dividend policy. When you say you have a progressive dividend policy, does this mean that the amount that you pay in dividends should grow, or is it the payout ratio that should grow?
If you could please clarify. Thank you.
Well, Jose, on the first one. I don't know the specifics here. We should maybe come back to that question on your salary costs versus the increase in FTEs. It is clear that we are getting more and more people in on compliance and KYC, but it is something we need to do. This is what it is. At the same time, also in that area, we see innovation coming through, new technology coming through that both improves on the efficiency as well as the effectiveness side. We will continue to work on that. We also see temporary staff in that area in order to do file enhancement. That's also a picture that you see coming through right there. You see here that if you have the external staff, some of these are also more expensive than internal staff, but they're also temporary.
It's a mixed bag, really. It is really difficult to draw conclusions there. On the dividend policy that we have had over the last couple of years is a progressive one. It's progressive in terms of that amount grows. Thank you.
Thank you.
I think those were the questions then. Okay. I'd like to thank you. Thank you for being here with us this morning and going through the quarterly numbers. I'm sure during the day, you may have more questions. You know the IR staff is there in order to answer more questions and more detailed questions as well. For now, just to summarize the quarter, I think that the top line shows resilience in a time of real challenge, a negative rate environment challenge, and that resilience comes from the fact that we do have a franchise that grows. We do have capabilities to improve margins and combine volume growth. That's helpful. At the same time, we see the fee guidance that we've given now actually coming through because we have a clear picture now year-on-year.
You see that these franchises, the digital franchises, if you make them primary client-driven, that you see more cross-buy coming through, and with that, also more fees coming through. That's the resilience on the income side. On the cost side, two specific remarks to be made. One is the KYC and the other one the overall cost, CLA-driven costs. There's some one-offs as a mix overall leading to a good picture of EUR 1.3 billion bottom line. As said, focusing on the client is important, and with that, KYC and understanding truly your client is important as well. Thanks very much, and I wish you a good day.
Ladies and gentlemen, this concludes the ING third quarter 2019 conference call. Thank you for attending. You may now disconnect your line. Have a nice day.