Earnings Call: Q1 2019

May 2, 2019

Welcome and thank you for joining the ING First Quarter 2019 Results Call. I'm happy to give the floor to the CEO of ING, Ralph Hammers. Yes. Thank you, operator. A warm welcome to all of you and thank you for joining the call this morning. We'll give you an update on the developments of financial results. I'll give you an intro and then we'll have plenty of time for Q and A. With me are to date, Peter Kull, our CFO and Cesar Estrach, our CRO. So looking at the Q1 2019, it's proving that our strategy is delivering while we were hard on improving our processes. We continue to improve the way we manage non financial risk. An important element is that our global know your customer enhancements program is an important element of that in managing non financial risk. We currently have over 2,500 FTEs working on KYC across the bank in all client segments and all business units. We've rolled out an adverse media screening tool. We have begun assessing behavioral risk as well. And all these efforts are aimed to further embed non financial risk structurally throughout ING. Same time, we're able to continue and innovate to improve banking experience for our customers. Examples of that are the improvements in payments and mortgages we announced in the Netherlands, elsewhere in France, further groundbreaking developments in the use of distributed ledger technology, also for our wholesale banking businesses. We also cut our efforts to empower clients in transitioning to a low carbon society by taking part in 12 sustainable bond transactions and 16 sustainable loan transactions. So really playing an important role there. Commercially, we saw a positive start of the year as well. We saw good commercial momentum in the number of primary customers growing by 150,000 to reach 12,600,000. And for the first time, we had over 1,000,000,000 digital interactions with our customers in the quarter, so at more than 25%. On the back of the commercial developments, we saw net core lending increase by €8,700,000,000 in the 1st quarter and net customer deposits coming in at 4 point €8,000,000,000 And that resulted in a pretax result of over €1,600,000,000 and a net result a little over €1,100,000,000 So basically, you see the underlying continued business growth. You see resilient margins, solid fee income, and good cost control, putting that in the mix delivers these results. Compared to the Q1 last year, the ratio was affected by the higher risk cost, which were extremely low in 2018. And they're higher this quarter, but still low in view of the over the cycle average that one can expect in risk cost. The underlying return on equity was strong at 11% at a 4 quarter rolling average. And the CET1 ratio, so our capital ratio, has increased from 14.5 percent to 14.7%. So very, very robust there as well. So underlying, commercially and financially, a very solid quarter. And with that, happy to take questions. We have a question from Mr. Ruben Ek, the Thanks for returning my earphones the other week. Could you share some more light about the 1,000,000,000 Internet contacts we had? Could you shed some more light in where you see that growth? I mean, there are countries where you are only digital. Can you share something about the older countries? Yes, sure. So Reuben, there's a combination of 2 things here. So on one side, you see that the number of customers that bank with us mobile only is growing very fast. So 2 years ago, that was around 12% of our customers were mobile only customers. Now 4 years ago? 2 years ago. 2 years ago, yes. And now we are 26% of our customers are mobile only. At the same time, you see the assisted channels decreasing in number of contacts as well. So the assisted channels would be branches, call centers, etcetera. So you see a very rapid move towards mobile only and beyond that desktop banking, everything that digital, a rapid move, a rapid increase in percentage of the total interactions. And then clearly, you see because of that also as well, the number of interactions increasing because basically, the behavior of customers on the mobile is different from the on a desktop or the behavior of customers on the branch. I mean, checking in your current checking your current account, people now do, I don't know, once a day, for example. And on the desktop, they would do it once a week. And then the branch, they would never do it and just wait for the paper statement to arrive, right? So clearly, moving digital leads to more interactions itself and that is what you see here. But having much more interactions gives you quite some opportunity to get to know your customer better. And that's the line I can share. And could you also make there a connection in the growth of fee incomes? Or is that another reason? Well, so if you would take the number of interactions that we as a bank have as a starting point for a different business model being a digital player or platform. And clearly, just like people check-in on the news side a couple of times a day, you have an opportunity to engage with your customer, with the one who checks in. That's what we as a bank have as well. So in our moves towards becoming more and more a platform, meaning that we want to be more and more active in the total value chain of how a customer engages in specific products and specific services, it does lead to the opportunity to offer 3rd party products, peer products as well. So it does play into our strategy to become the go to platform for financial services, absolutely. Yes. Is there any growth fee income something you could say about what is what you have achieved via 3rd party parties like AXA and NN Insurance or so? Well, I don't have it hand here. But clearly, the opportunity to offer 3rd party products by virtue of being the check-in app as we are. For example, the Holland, we're the number 10 app in terms of daily usage of the average person. And the number 1 through 9 are either Facebook or Google products. So after Google or Facebook products is ING. So once you have that and they check-in with you, then basically you can build a relationship on a more frequent basis. And if you want to build a credible relationship as a platform, you've got to be open because if in that relationship, you only limit yourself through your own products and your own services, it is not very you don't develop a credible platform offering. So you got to be open. Being open means that you do offer 3rd party services and products, and that does improve your fee income going forward. One follow-up question, if I may. Could you share some more background about growth countries where you also have the need for offices. You see that in Spain and Germany. And could you share something about why that could help you in your loan book and how easy or difficult it is doing a branch office next to your digital? Or I need your apps? Yes. So, if you look at where we are at Challenger Bank, right, so where we are predominantly a digital bank, then we have in Spain, we have like 26 branches. And they look at situations where people need advice, for example, in mortgages. Although the percentage of mortgages that we actually sell digitally in Spain is rapidly growing even with those physical outlets. The same in Italy, we have like 16 branches. In Germany, we don't have branches, but we have our own mortgage broker, InterHeap. And Interheap is growing very fast. But they also sell products of our peers. They also sell Deutsche Bank mortgages or any other bank mortgages. So from that perspective, there is always a function that a branch will have also in a digital world because there is moment in life that either a consumer or a small company would need some kind of advice. And that advice, you can either through physical location, you can do it through a call center, you can do it through a web call. So that's on one side where we see with 26 branches in Spain, we cover like 85% of the economy. And we have in the CNG markets, we also have activities in, for example, Poland and Romania and Turkey where we have branches, 100 of them, and where we're basically also changing the function of those branches. Because honestly, I think even in these markets, the digital pickup is even more rapid than many other countries that we see on the Western European side. And therefore, you see the role of these branches changing as well, so in Poland and Romania and then Turkey. So why did they change that? Because basically people like in Holland, you see that people that interact with their bank are more digitally. So therefore, the function of the branch moves away from being a transactional channel to an advisory channel. Yes. All right. Thanks so much. Our next question is from Mr. Adam Clarke, Dow Jones. Go ahead please. Hi, good morning. Thanks for taking my questions. Just have a couple of questions. One, any comments about the prospects of consolidation among European banks? Obviously, you've been mentioned in reports about potential approaches for Commerzbank, and I wonder if you could talk about that more generally. And secondly, prospect for your joint venture bank in China with the Bank of Beijing. I wonder if you could talk a little bit about just what your financial targets are there and maybe the difference is where in Europe you're kind of a digital leader, but in China you're up against these very big technology giants, Tencent and Alibaba, so the difference is there? Thank you. Yes, thanks. Well, on European Banking consolidation, I think that as a pan European bank, probably the most pan European bank there is with quite some activities in different European markets, specifically also Eurozone markets, we are supportive of the banking union. And the banking union is basically a condition in order to build a more integrated Europe. And I think the first two steps to create a banking union have been taking, which is a single supervisory mechanism as well as a single resolution board supported with a single resolution fund. In order to finalize the banking union, you need to have somehow a European deposit guarantee system in order to make sure that besides the supervision and the resolution with the bail in concepts that depositors are made whole if banks fail. So that third step is basically blocking 2 out of the 3 benefits that one can have in European Banking Consolidation, that being capital efficiency as one benefit and liquidity efficiency as the second benefit. So remains, at this moment in time, the benefit of cost efficiencies. Now those cost efficiencies you can reap if you are able to build cross border banks or if you're not, that is limited to local cost synergies. So given where we are, most of the bank consolidation EBIT will happen, will be concentrated on taking cost out of the system per country. So that's the way we think about European Banking consolidation. So if the banking union is not finalized and not a lot of like big cross border mergers will happen, unless there is interesting cost benefits to be reaped in the different markets in which people in which these banks are active. Now in China, we are on the back of the experience that we have in the Philippines. We're looking at how we can build a regulated digital bank. So a couple of years ago, the Chinese banking regulator came to us with a request to look at how would we be able to build a digital bank in a Chinese context because most of the players, the ones that you mentioned at that moment, were offering a lot of financial services outside the regulated sphere. And since then, we have been working with them and with our principal strategic partner in China being Bank of Virginia in which we hold 13% as a shareholder. We have been looking at how we could build a venture like that, if at all. And we're currently in the process of looking at how we can do that. And then can you talk about I mean, I was on the impression that a certain amount of the investment size had already been decided. So if you could talk about how many customers, etcetera, you could imagine having for a purely digital bank, etcetera? And what kind of profits you can make compared to European Digital Banking? We that is not there yet honestly. So what we're looking at here is, for example, we what we're really testing here is whether you can set up a digital bank rapidly using whatever we have as a leading digital bank as ING already. So refer to what we're doing in the Philippines. Basically, in the Philippines, we have looked at what different digital components do we have in order to set up a mobile bank only. And we were able within 10 months to launch a mobile bank in the Philippines using the codes that we have in different places in ING. So basically, what we're testing here is can you replicate on the back of what you already have or can you just use simply use code that you developed in one country easily in another country? And that is what we do through what we call touchpoint architecture, which means that if we develop, for example, an account opening process for our bank in Spain or the MonoBank and how do we make that code reusable anywhere else. And that is what we're testing in some markets just to see how quickly we can do that. And at the moment, that looks to be really successful. That itself shows you that you can build cross border scalability in banking without any kind of further structuring. Sure. And just on the consolidation point, can you talk at all about whether you did approach Commerzbank or how you see Commerzbank? We don't comment on market rumors there. Okay. Thank you very much. Our next question is from Mr. Ruben Munsterman, Bloomberg News. Go ahead please. Good morning again. I would like to gauge a bit how important the digital strategy is for ING. So, so far, the digital strategy is quite successful in getting new customers and growing. But I wonder, is it not the whole world is digital yet, so there are some markets where people still go to branches and all of that. Is it possible that in the meantime, ING would open branches to get some customers which aren't digital yet? Clearly, we are known for our digital approach. Our digital approach delivers 2 different things. So one thing it delivers in a market like in the Netherlands, where we are or Belgium, it delivers the opportunity to improve customer experience at lower cost. It's just better customer experience and you increase your efficiency. And that's what you see happening in the Netherlands and Belgium. On the back of the investments that we've made. We actually see the cost going down. That's what digital does on top of indeed in markets like Netherlands and Belgium where we also have physical presence. Now in many other markets, we're a digital player and we're growing on the back of our success of being a digital player. And that is not just because you are digital. It is also because if you want to be successful digitally, you need to have the discipline of keeping your products very simple and keeping the number of products very limited as well. And so just being digital because of the technology that you use is not a successful business model. So it has to come with a culture of keeping things simple and limited in what you offer. And in these markets, often, this is what we offer and this is what we stand for. And we're certainly not then interested in increasing further complexity from that perspective just to get the additional customer. Now clearly, in building up a primary relationship and being able to deliver cross buy that even a market like in Spain, we are predominantly digital and we have 3,500,000 customers, if offering mortgages needs to be accompanied with having 26 locations where we have our advisers, we don't mind having those 26 locations. That's clear. And is it possible that you would take over a large rival in order to get more market share even though that large rival has physical branches? Or would you rule that out? Well, we have indicated where we look at non organic growth before. So our Think Forward strategy that we launched 5, 6 years ago is a predominant organic growth strategy. And every quarter, every year, we're showing that we've got something going here. We've got something special here. And if it comes to M and A, we are looking at a couple of situations. The first one being that in building our bank, have always indicated that if you want to build a diverse asset side of the balance sheet, we need to grow in our capabilities if it comes to consumer lending, SME lending. And for that, if that would need to be accompanied with buying a small portfolio or a team that has the right skills to do that for us, we would be open to do so. The second area we would be open to do to consider M and A, which is actually an area in which we're very active, is everything that has to do with technology that we can use in order to improve our services, technology that we can use in order to offer different services to our customers like our acquisition of Payvision or Makarasland that we did in Holland, where we are not only offering digital services there, but also getting a little bit further away from principal banking and being closer to principal needs, the primary needs of our customers rather than the secondary needs that we as a bank fulfill. And then these are elementary these are steps in building a platform. So yes, we do M and A there. The 3rd area is an area where basically if while we're growing and while we're successful, given markets in which we're active consolidation happens, we'll have to kind of take a look at how the consolidation like that would affect our own prospects. And we have engaged in M and A in India on the back of that with our merger of ING with Kotak Mahindra Bank when the consolidation started to happen in Indian Banking landscape. We're currently looking at a team up with another bank in Thailand for that purpose as well. And is there a reason why ING doesn't comment on market rumors? Is there a legal reason? Or how should I view that? There's always a reason for doing something. Yes. It's our policy to not comment on market rumors. So And why is that policy? Because no, markets can spread any rumor, and we don't want to comment on things that we don't want to comment on. All right. And one other topic, what's the latest status on ING's Financial Markets office in London? Is there any more clarity on that if ING needs to relocate any of that staff back to the Continental or not? So actually what you see in our financial results specifically also in this quarter is that because of moving to London and centralizing our trading activities in London, we have been able to decrease our cost. That's the important signal right there. So 2 years ago, when we basically decided that we wanted to move to one location to base our trading activities, our financial markets activities. And we had 3 locations right at that moment, Amsterdam, Brussels and London. You basically picked London because of the talent pool. Now clearly, and now you refer to Brexit and the potential consequences for having specific activities situated physically in London, yes, we are in discussions with our prime supervisor, being the SSM, as to which activities. But they would want to see in a bracket scenario more on located on the continent rather than in the city. But that will not have a major effect on the number of people that we have based in London. Okay. Thank you very much. We have a question from Mr. Marcel De Beurre in Ancillary Docklands. I have two questions. Could you please elaborate a little bit more on the loan in most positions? They rose to €207,000,000 Can you tell me why and in what sectors? And the second question is about the interest rate swap issue. Did you completely finalize that issue? And could you tell me how high the costs were for you? And so Marcel, I will kind of start with your second question and then Stephen will come back to you on the first one. Okay. So the AFM framework that you're referring to, which banks agreed to adhere to in terms of timing and milestones to be reached to reach out to clients and offer reimbursement of these costs to our clients. We have fully adhered to those timelines of the AFM and all of our clients have received that offer by the end of 2018. So then with regards to risk costs, I mean, indeed, they are higher than they were in the Q1 of last year, albeit they were lower than the Q4 of last year when the risk costs were 2 $42,000,000 and this quarter $207,000,000 The biggest the reason for the difference compared to the Q1 of last year is that last year, we had releases in 2 portfolios mainly. 1 is in the Netherlands based on risk migration in the models. So when house prices rise, that has an impact on loan loss provisioning. Basically, because of house prices rise, loan to value of your mortgages goes down and then the risk cost that you take upfront on a portfolio basis go down. And so that leads to releases. Also in Wholesale Banking, we had releases on a number of individual files in the Q1 of last year. Hence, the risk costs in Wholesale Banking last year for the Q1 were negative. If you look at this quarter, still we see a relatively benign risk cost environment. We also see that our risk costs are below the through the cycle average. There is nothing particular to mention in that regard. I mean, the risk costs in Belgium were in line with all the previous quarters. In the Netherlands, they're still very low. Indeed, they are in line with previous quarters, actually a bit lower than the last quarter. The risk costs this quarter mainly coming from Turkey, Spain and Poland. And in Wholesale Banking, the risk costs were largely what we call Stage 3 risk costs, so individual provisioning on a number of clients in various countries. Okay. Yes. So there's another sector that is There is not a particular sector event going on that has revealed in this fiscal year. Yes. Okay. It's a trend that we see. Okay. And then to come back to the slips, how much were the costs for ING? I understand you had you paid €181,000,000 in compensation. Then there is, of course, the execution costs. So how high is the total bill? Well, the €181,000,000 is what we have as a number there. Okay. That's the only number you have? Yes. Okay. Thank you. You have a follow-up question from Mr. Adam Clarke, Dow Jones. Sorry to come back with just one more quick question, but it was about the increase in employees working on KYC and on anti money laundering efforts. I was wondering that 2,500, do you see that as a peak of employees? Do you hope that over time you're going to be able to automate some of those processes and begin bringing those numbers down? And will it be an elevated cost drag going forward? And what do those costs look like? Yes, good question. So the 2,500 FTEs that we currently have working on it, We do see some growth coming there as well in number of FTEs that will be working on this as we kind of get further into our structural enhancement program. On the file enhancement program, so basically the program has 2 elements. One is file enhancements, which is how do we make sure that with each and every customer, we have the right information centrally located that we have readily access to, so we can do a risk assessment on, etcetera, etcetera, etcetera, etcetera. So there's like 500 people working on that as we speak. That may need a little bit more people, but that's also more kind of a project cost, right? So at the sort of moment, you go through File Enhancement and then you go back to what we would call from that perspective business as usual. And the business as usual will be more kind of a stable cost from there. So the project element of the current 2,500 is 500 FTEs. Now clearly, in the structural enhancement program itself, we have people working on it, but we're also investing in systems like we indicated that we're connecting to adverse to media tools in order to do adverse media checking. We'll have to invest in systems to be connected around data and data quality, etcetera, etcetera, etcetera. A lot of those investments, we actually do as part of our normal kind of annual investment budget. So it will come from areas where we would kind of want to have invested, which we will now be prioritizing in order to make sure that we have these investments now. So that may not lead to an increasing cost per se, but they do crowd out other investments because we are prioritizing to invest in the structural enhancement program around KYC and AML in order to ensure that we are a good Cape K Pertuz finance system. So one element to 500 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es and maybe growing there on file enhancements, that is one that will be temporary. The rest will be there for a while until kind of the we have this kind of a real good system there as well. Okay. Thanks very much. Yes. A follow-up question from Mr. Ruben Aerg, The Telegraph. Go ahead. Your line is open. Two more questions. Could you tell a bit more about the wholesale bank? Do you have more update about financial markets and treasury. The last time, as you thought, that you are looking into that because they were not profitable due to the circumstances? And the other question is about Lost Week Shareholders Meeting, how you have experienced that day and how you look into the follow-up due to the concerns there obviously are between shareholders about the steps you're taking in, well, most likely the KYC and other risk categories. Perfect. And so around financial markets, well, if you look at the financial markets results that we published today, you can separate 2 components. One component is what are we doing in the client area. So if you look at the client rates business, the fixed business and specifically also the credit trading business, that's actually doing very well and it's one of the stronger quarters over the last couple of quarters. So from that perspective, the Financial Markets business is doing well. Although if you look at the results today, there is also a negative valuation adjustment coming through with that business, which basically makes it a loss generating picture for the Q1. But the underlying client business that we are growing on the back of our Wholesale Banking strategy has actually working out quite well. Having said that, this is an area that all banks continue to look at given the fact that markets won't really support a good return in that business as we speak. And therefore, it will continue to be under our attention to further improvements both on the cost side as well as on what we do there. So we will certainly not cry victory over the improved client related results that we have in the financial markets area as we speak. And therefore, we're also quite happy to see that the earlier move to centralize these activities is actually showing further cost decrease, which is exactly why we did it. Around the shareholders' meeting, clearly, we are in touch with our shareholders on a very regular basis, and we're going on roadshows after these results as well. So we'll be certainly talking to the larger shareholders again. And the feedback that we get is, yes, clearly, they are disappointed on one side given the settlement that we had to enter into in the Netherlands over our role as a gatekeeper to the financial system. On the other side, they are very supportive of the strategy that we started many years ago and motivate us to continue with that while improving the environment of around KYC and AML. Yes. That is still that they were clearly disappointed in the settlement You have over a longer period also named in your results that there will be a significant impact in what was going on. So significant is wash, one could say. And where does the disappointment came from? What you hear back from your larger shareholders? Clearly, that's we were confronted with the serious shortcomings in our processes if it comes to making sure that we are effectively operating in the area of fighting financial economic crime. Okay. So how it will be going forward? You said you'll go on roadshow again. Is that just normal, regular or you had one meeting or Yes. So on the quarter, we had our Investor Day 6 weeks ago, I think, 7 weeks ago, just before we kind of ended the close period. Now during the close period, we're very reluctant to talk to shareholders on the results of that specific running quarter. And then on the back of each quarterly results, we always go on roadshow to the largest shareholders. So basically, that means we go to London, then we go to New York. Okay. You also have plans maybe to invite them to see what you're doing on KYC improvements, etcetera? Or isn't that not really standard? I mean, we take them through the programs that we run. We had our Investor Day as well where a couple were present where we have taken them through in more detail as to some of the stuff that we're doing and they get to talk to many of our leaders there as well. So yes, we're very open around that. So also in our roadshows, so when the questions are asked, we will just take them through the different pieces of our Enhancement program. Okay. All right. Yes. One final question. Is there I probably know the answer, but I would ask, is there any update about the news which came out of Italy? So no specific update there. You're referring to the outcome of the inspection of the supervisor there around the same processes in order to ensure that we are an effective gatekeeper to the financial system. Findings are all covered by the Global Enhancement Program that we were in the midst of implementation also in Italy. So we will just continue there. We are reporting to the supervisor, and that's where we are. Okay. Any news back on when you could onboard customers again? And there was a message in Italian news that also the public defender would sue or start an investigation. Have you heard anything from this person? No, we have not been approached by them on that. Okay. And the onboarding, is there any date when you could start? No, we're working we have a very close reporting line with the supervisors, with people up to date as to how we progress, and we'll see how that pans out. Okay. Thanks so much. Welcome. There's no further questions, sir. Okay. Thank you. Well, thanks everyone to join us on this call. Just to summarize, I think the quarter, it's a solid quarter. It's a solid quarter with underlying commercial continuing commercial growth, 160,000 primary customer relationships coming through, good lending results, good savings results, all basically delivering good financial results as well. We continue to work hard to improve our processes and the management of non financial risks, while we keep concentrating on delivering a differentiating experience to our customers and making sure that they become more and more sustainable. So those are really the 2 things innovation, sustainability on top of KYC that will be top of mind for us to make sure that we continue to be successful. Thanks, Fred. Clearly, for while you're going through the results, you have more questions. You know our media team very well and they are more than happy to help you. Thanks a lot. Bye bye.