Welcome. Thank you for joining the ING first quarter 2019 results call. I'm happy to give the floor to the CEO of ING, Ralph Hamers.
Great. Thank you, operator. A warm welcome to all of you. Thank you for joining the call this morning. We'll give you an update on the developments of financial results. I will give you an intro. Then we'll have plenty of time for Q&A. With me are Tineke, our CFO, and Steven Rijswijk, our CRO. Looking at the first quarter 2019, it's proven that our strategy is delivering while we work 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. All these efforts are aimed to further embed non-financial risk treasury 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, France. Further groundbreaking developments in the use of distributed ledger technology, mostly for our Wholesale Banking businesses. We also kept 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. 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 private customers going by 150,000 to reach 12.6 million. For the first time, we had over 1 billion digital interactions with our customers in a quarter.
That's more than 25%. On the back of the commercial developments, we saw net core lending increase by EUR 8.7 billion in the first quarter and net customer deposits coming in at EUR 4.8 billion. That resulted in a pre-tax result of over EUR 1.6 billion and a net result a little over EUR 1.1 billion. 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 first quarter of last year, the result was affected by the higher risk costs, which were extremely low in 2018. Though they're higher this quarter, but still low in view of the over the cycle average that one can expect in risk costs.
The underlying return on equity was strong at 11% at a four-quarter rolling average, the CET1 ratio, so our capital ratio, has increased from 14.5% to 14.7%. Very robust there as well. Underlying commercially and financially, a very solid quarter. With that, happy to take questions.
Thank you, sir. Ladies and gentlemen, we are starting the question and answer session now. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. Go ahead, please. If you have a question or remark, please press star one now on your telephone. We have a question from Mr. Ruben Ach, De Telegraaf. Go ahead, please. Your line is open.
Hello, good morning. Thanks for returning my earphones the other week. Could you shed some more light about the 1 billion internet contacts you had? Could you shed some more light in where you see that growth? There are countries where you are only digital. Can you share something about the other countries?
Yeah, sure. Ruben, there is a combination of two things here. On one side, you see that the number of customers that bank with us mobile-only is growing very fast. Two years ago, that was around 12% of our customers were mobile-only customers.
Four years ago?
Two years ago.
Two years ago. Yeah.
Now we are at 26% of our customers are mobile-only. At the same time, you see the assisted channels decreasing in number of contacts as well. The assisted channels would be branches, call centers, et cetera. You see a rapid move towards mobile-only, and beyond that, desktop banking, everything that is digital. A rapid move, a rapid increase in percentage of the total interactions. 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 behavior of customers on a desktop or the behavior of customers on the branch.
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 in a branch, they would never do it and just wait for the paper statement to arrive, right? Clearly moving digital leads to more interactions itself. That is what you see here. Having much more interactions gives you quite some opportunity to get to know your customer better, and that's the line I can share.
Could you also, may there a connection in the growth of fee incomes or is that another reason?
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 site 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. 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 third-party products, peer products as well. It does play into our strategy to become the go-to platform for financial services. Absolutely.
Yeah. Is there, in the growth fee income, something you could say about what you have achieved via third parties, like AXA and NN Group or so?
Well, I don't have it at hand here, but clearly, the opportunity to offer third-party products by virtue of being the check-in app as we are, for example, in Holland, we're the number 10 app in terms of daily usage of the average search person, and the number 1 through 9 are either Facebook or Google products. After Google and Facebook products, there's ING. Once you have that and they check in with you, then basically, you can build a relationship on a more frequent basis. 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 to your own products and your own services, you don't develop a credible platform offering. You've got to be open.
Being open means that you do offer third-party services and products, and that does improve your fee income going forward.
Yeah. Okay. 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, could you share something about why that could help you in your loan book and how easy or difficult it is building a branch office next to your digital apps?
Yeah. If you look at where we are a challenger bank, right? Where we are predominantly a digital bank, then we have in Spain, we have 26 branches. 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 16 branches. In Germany, we don't have branches, but we have our own mortgage broker, Interhyp. Interhyp is growing very fast. They also sell products of our peers. They also sell Deutsche Bank mortgages or any other bank mortgages.
Yeah.
From that perspective, there's 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. That advice you can either through physical location, you can do it through a call center, you can do it through a web call. That's on one side where we see that with 26 branches in Spain, we cover 85% of the economy. We have in the Challengers & Growth markets, we also have activities in, for example, Poland and Romania and Turkey, where we have branches, hundreds of them, and where we are basically also changing the function of those branches. 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.
Therefore, you see the role of these branches changing as well. In Poland and Romania and in Turkey.
Why do they change that?
Basically, people, like in Holland, you see that people interact with their bank.
Okay. Yeah.
More digitally. Therefore, the function of the branch moves away from being a transactional channel to an advisory channel.
Yeah. All right.
Thanks so much.
Our next question is from Mr. Adam Clark, 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 and more generally? Secondly, prospective joint venture bank in China with the Bank of Beijing. I was wondering if you could talk a little bit about just what your financial targets are there and maybe the differences, where in Europe you're kind of a digital leader, but in China, you're up against these very big technology giants in Tencent and Alibaba. The difference is there. Thank you.
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, and specifically also eurozone markets, we are a supporter of the banking union. The banking union is basically a condition in order to build a more integrated Europe. I think the first two steps to create a banking union have been taken, 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 Scheme in order to make sure that, besides the supervision and the resolution, with the bail-in concept, that depositors are made whole if banks fail.
That third step is basically blocking two out of the three benefits that one can have in European bank consolidation. That being capital efficiency as one benefit and liquidity efficiency as the second benefit. 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. Given where we are, most of the bank consolidation, if it will happen, will be concentrated on taking cost out of the system per country. That's the way we think about European banking consolidation. If the banking union is not finalized and not a lot of big cross-border mergers will happen, unless there is interesting cost benefits to be reaped in the different markets in which these banks are active.
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. 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. Since then, we have been working with them and with our principal strategic partner in China, being Bank of Beijing, in which we hold 13% as a shareholder. We have been looking at how we could build a venture like that, if at all. We're currently in the process of looking at how we can do that.
Can you talk about I was under the impression that a certain amount of the investment size had already been decided. Can you talk about how many customers, etc., you could imagine having for a purely digital bank, etc., and what kind of profits you can make compared to European digital banking?
That is not there yet, honestly.
What we're looking at here is, for example, 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. This will 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. We were able, within 10 months, to launch a mobile bank in the Philippines using the code that we have in different places in ING. Basically what we're testing here is, can you replicate on the back of what you already have, or can you just simply use code that you developed in one country, easily in another country?
That is what we do through what we call touch point architecture, which means that if we develop, for example, an account opening process for our bank in Spain or the model bank, then how do we make that code reusable anywhere else? That is what we're testing in some markets, just to see how quickly we can do that. For 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. 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 far, the digital strategy is quite successful in getting new customers and growing. I wonder, 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, and our digital approach delivers two different things. One thing it delivers in a market like in the Netherlands or Belgium, it delivers the opportunity to improve customer experience at lower cost. It's just better customer experience, and you increase your efficiency. 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. In many other markets, we're a digital player, and we're growing on the back of our success of being a digital player. 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 with keeping your products very simple and keeping the number of products very limited as well. Just being digital because of the technology that you use is not a successful business model. It has to come with a culture of keeping things simple and limited in what you offer. In these markets, often, this is what we offer, and this is what we stand for. We're certainly not then interested in increasing further complexity from that perspective, just to get the additional customer. Clearly, in building up a primary relationship and being able to deliver cross-buy, that if in a market like in Spain, we are predominantly digital, and we have three and a half million customers.
If offering mortgages needs to be accompanied with having 26 locations where we have our advisors, we don't mind having those 26 locations.
That's clear. Thank you. 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? Would you rule that out?
Well, we have indicated where we look at non-organic growth before. Our Think4 strategy that we launched five, six 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. If it comes to M&A, we are looking at a couple of situations. The first one being that in building our bank, we've 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. 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 consider M&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 Makelaarsland 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 the principal needs, the primary needs of our customers, rather than the secondary needs that we as a bank fulfill. These are elementary steps in building a platform. Yes, we do M&A there.
The third area is an area where basically if, while we're growing and while we're successful, if in markets in which we're active, consolidation happens, we'll have to take a look at how a consolidation like that would affect our own prospects. We have engaged in an M&A in India on the back of that, with our merger of ING with Kotak Mahindra Bank, when 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.
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.
It's our policy to not comment on market rumors.
Why is that policy?
Markets can spread any rumor, we don't want to comment on things that we don't want to comment on.
All right. 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 continent or not?
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 costs. That's the important signal right there. Two years ago, when we basically decided that we wanted to move to one location to base our trading activities, our financial markets activities, we had three locations right at that moment, Amsterdam, Brussels and London.
We basically picked London because of the talent pool. Now, clearly, now you're referring to Brexit and the potential consequences for having specific activities situated physically in London. Yeah, we are in discussions with our prime supervisor, being the SSM, as to which activities that they would want to see in a Brexit scenario, more located on the continent rather than in the city. That will not have a major effect on the number of people that we have based in London.
Okay. Thank you very much.
Ladies and gentlemen, if there are any further questions or remarks, you can press star one at any time on your telephone. Star one for questions or remarks. Go ahead, please. We have a question from Mr. Marcel de Boer, Het Financieele Dagblad. Go ahead, your line is open.
Yes. Hello, good morning. I have two questions. Could you please elaborate a little bit more on the loan loss provisions? They rose to EUR 207 million. Can you tell me why and in what sectors? 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?
Marcel, I will start with your second question, and then Steven will come back to you on the first one.
Okay.
The AFM framework that you're referring to, which the banks agreed to adhere to in terms of timing and milestones to be reached to reach out to your 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.
Yes.
With regards to risk costs. Indeed, they are higher than they were in the first quarter of last year, albeit they were lower than the fourth quarter of last year, when the risk costs were EUR 242 million. In this quarter, EUR 207 million. The reason for the difference compared with the first quarter of last year is that last year we had releases in two portfolios, mainly. One is in the Netherlands based on risk migration in the models. When house prices rise, that has an impact on loan loss provisioning. Basically, because if house prices rise, the loan-to-value of your mortgages goes down, and then the risk costs that you take up front on a portfolio basis go down. That leads to releases.
Also, in Wholesale Banking, we had releases on a number of individual files in the first quarter of last year, hence the risk costs in Wholesale Banking last year for the first quarter 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 cycle average. There is nothing particular to mention in that regards. 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. Wholesale Banking, the risk costs were largely what we call Stage 3 risk costs. Individual provisioning on a number of clients in various countries.
Okay. Yeah. There is no sector where there's
There is no particular sector even going on that has resulted in these risk costs.
Yeah. Okay.
It's a trend that we see.
Okay. To come back to the swaps. How much were the costs for ING? I understand you paid EUR 181 million in compensation. There is, of course, the execution costs. How high is the total bill?
Well, the 181 is what we have as a number.
Okay. That's the only number you have.
Yep.
Okay. Thank you.
You have a follow-up question from Mr. Adam Clark, Dow Jones. Go ahead, please.
Hi. 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? Will it be an elevated cost drag going forward? What do those costs look like?
Yeah, good question. 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 get further into our structural enhancement program. On the final enhancement program, basically the program has two 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, et cetera. There's 500 people working on that as we speak. That may need a little bit more people, but that's also more a project cost. The certain moment you're through final enhancement, you go back to what we would call from that perspective, business as usual.
The business as usual will be more a stable cost from there. 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 media tools in order to do adverse media checking. We'll have to invest in systems to be connected around data and data quality, et cetera. A lot of those investments, we actually do as part of our normal annual investment budget. It will come from areas where we would want to have invested, but we will now be prioritizing in order to make sure that we have these investments now.
They may not lead to an increase in 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 gatekeeper to the financial system. One element, the 500 FTEs, and maybe growing there on final enhancement. That is one that will be temporary. The rest will be there for a while until we have a real good system there as well.
Okay. Thank you very much.
A follow-up question for Mr. Ruben Ach, De Telegraaf. Go ahead, your line is open.
Two more questions. Could you tell me more about the Wholesale Banking? Do you have more updates about financial markets and treasury? The last time she talked that you are looking into that because they were not profitable, due to the circumstances. The other question is about last week's 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 elements.
Perfect. Thanks. Around financial markets. Well, if you look at the financial markets results that we published today, you can separate two components. One component is what are we doing in the client area. If you look at 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. 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 first quarter. The underlying client business that we are growing on the back of our Wholesale Banking strategy, that's actually working out quite well.
Having said that, this is an area that all banks continue to look at given the fact that financial markets don't really support a good return in that business as we speak, 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. We will certainly not cry victory over the improved client-related results that we have in the financial markets area as we speak. 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, Haley, you know we are in touch with our shareholders on a very regular basis, and we're going on roadshows after these results as well. We'll be certainly talking to the larger shareholders again.
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 nano 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.
Yeah. It stands still that they were clearly disappointed in the settlement you have over a longer period, also named in your results, that there would be a significant impact in what was going on. Significant it was, one could say. Where does the disappointment came from, what you hear back from your larger shareholders?
Clearly that, we were confronted with these 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. How it will be going forward? You said you're going roadshow again. Is that just normal, regular, or you have one meeting or
Yeah. On the quarter, we had our investor day six weeks ago, I think. Seven weeks ago.
Okay.
Just before we entered the close period. Now, during the close period, we're very reluctant to talk to shareholders on the results of that specific running quarter. On the back of each quarterly result, we always go on roadshow to the largest shareholders. That means we go to London, then we go to New York.
Okay. Do you also have plans maybe to invite them to see what you're doing on KYC improvements, et cetera, or isn't that not really standard?
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. They get to talk to many of our leaders there as well. Yeah, we're very open around that. Also on our roadshow, when the questions are asked, we will just take them through the different pieces of our Enhancement Program.
Okay. All right.
No?
No. One final question. I probably know the answer, but I would ask. Is there any update about the news which came out of Italy?
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. We will just continue there. We are reporting to the supervisor, that's where we are.
Okay. Do you have any news back on when you could onboard customers again? There was a message in Italian news that also the Public Prosecutor would sue or start an investigation. Have you heard anything from this person?
No, we have not been approached by them on that. No.
Okay. All right. The onboarding, is there any date when you could start again?
No, we have a very close reporting line with the supervisors. We keep them up to date as to how we progress, and we'll see how that pans out.
Okay. Thanks so much.
Welcome.
We've no further questions, sir.
Okay. Thank you. Well, thanks everyone who to joined us on this call. Just to summarize, I think the quarter, it's a solid quarter. A solid quarter with underlying commercial, continuing commercial growth. 760,000 primary customer relationships coming through. Good lending results, good service results, all basically delivering good financial results as well. We continue to work hard to improve our processes and the management of non-financial risk, 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 two 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 for it.
Clearly here for while you're going through the results, you know our media team very well, and they are more than happy to help you. Thanks a lot. Bye-bye.