Good morning. This is Patricia [Klosauf] welcoming you to ING's First 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 an historical fact.
A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission, and our earnings press release, as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Ralph. Over to you.
Thank you, Patricia. Good morning, everyone. Welcome to the first quarter 2019 results call. As always, I'll take you through the presentation that you have been provided with. With me are CEO Steven van Rijswijk and our new CFO, Tanate Phutrakul. Welcome, Tanate. During Investor Day, at the end of March, we were already able to cover a wide range of topics.
It was really a pleasure to spend quite some time with many of you in Germany. You'll see that many of the things that we talked about there are covered and reflected in these first quarter results. Let's turn to the key points of this quarter's performance. ING Groep posted a net profit of EUR 1.1 billion in the first quarter. That's leading to a four-quarter rolling underlying return equity of 11% for the quarter. Strong performance there.
On the retail side, we recorded a net inflow of 150,000 primary customers to reach 12.6 million. Australia and Germany were the strongest contributors for this quarter's growth, but we see growth everywhere on primary clients. First quarter was another strong quarter for loan growth with net core lending up by EUR 8.7 billion. Again, well-diversified by the businesses and the geographies.
You'll see that later, and a net customer deposit inflow of around EUR 5 billion. Next to the loan growth at resilient margins, results were supported by solid fee income, despite challenging market conditions and the release of a currency translation reserve related to the sale of Kotak. The cost side, we maintained a good cost discipline. As we had expected, the retail balance cost continuing to trend down, showing the effect of the Transformation program.
The group CET1 ratio came in at a strong 14.7% from 14.5% at the end of the fourth quarter of 2018. That was among others, supported by the sale of our Kotak stake. As a key priority, you know this, we continue our work on the global KYC enhancement program, which is rolled out across the whole bank in all client segments, in all business units.
We have more than 2,500 FTEs working on KYC, of which around 500 FTEs are involved in file enhancement and therefore more on a project-related basis. On page three, basically, we come back to the key value accelerators that we presented to you in Frankfurt last month. It all begins with growing primary customers in both retail and wholesale. As you know, these are people and businesses who have a deeper relationship with ING. They're more loyal. They're more profitable.
They create what we call lifetime value. On the back of their loyalty, they do more business with us, whether or not with our own products, or third-party products and services. Next to that, we see the trend that customers, consumers, corporates alike, that they expect the same superior differentiating service and experience no matter where.
That provides us with a great opportunity to deliver cross-border scalable efficiency, through which we can adapt fast to the needs of our clients and the services that we can offer on a more scalable basis. Once you have that, you can increase the time to volume for new products and services. Very simple explanation. Rather than going country by country, you can reach many more customers and faster when launching a new service because basically you can launch it across different countries at once.
We will also continue to benefit from the attractive position as a retail-funded player and a net credit spread receiver going forward. As we have indicated, sustainability is something that is part of our purpose. At the same time, it's also a driver for growth and value that's integrated throughout all of the businesses. This quarter as well, you see some real proof points of this. Let's take a look at the commercial performance.
The first quarter 2019 shows that we kept good commercial growth momentum. I already mentioned the primary customer growth that's progressing well towards our new ambition. Around 1/3 of our total customer base is now primary. You see that has gone up over the last couple of years. These results can't be achieved without our dedication to our customer experience and digitization across the new markets where we operate.
You see that if you look at the logins, the digital interactions that we measure through logins to the mobile app, that we have increased these interactions dramatically. It's up by more than 25%, and we reached the one billionth digital interaction mark this quarter.
That is clearly showing that the strategy that we launched five, six years ago to really focus on digital banking, to really invest in technology and make sure that we create a differentiating experience, that is actually evidence here that we saw that right, and it really looks very promising for us going forward.
Furthermore, if you look at the underlying customers and the way they interact, 26% of our customers currently are mobile only. This percentage actually more than doubled in the past two years.
In the first quarter, we ranked number one in six out of our 13 retail markets in terms of net promoter scores. In another four markets, we ranked number two. Also there, we keep a close eye on the underlying improvements in client experience and how that affects the net promoter score, because this is not only our compass, it is certainly also a leading indicator of future growth and then success for us.
That's why we keep presenting it to you every quarter. For this quarter, this led to a further core lending growth of EUR 8.7 billion and a customer deposit growth of EUR 4.8 billion. Turning to slide five, showing that we continue to lead the way with innovations that improve the customer experience.
In the first quarter, we made it certainly easier for our customers to make payments in the Benelux by being part of the initial launch of instant payments in the Netherlands and Belgium. What this will do, this will allow customers to have their funds credited to the beneficiary account within five seconds, 24/7. This is really a breakthrough in banking .
This is literally real-time banking, seven days a week, 24 hours a day. This is a breakthrough in our view. Clearly, we will continue to expand this to other countries later this year. As you realize, we can't do this by ourselves because the other banks have to make these investments in their systems to have real-time clearing, more or less, as well.
Also in the first quarter, we took several steps with our blockchain and distributed ledger technology, helping to improve the offering to our clients, to decrease the cost for our clients, to improve the client experience. We have done so in a consortium with MineHub, as well as the first client transaction on the Komgo platform that we have reported to you earlier has now materialized. Promising steps into a direction where things will be cheaper, faster, and safer in an environment that is very important to us, which is trade and commodity businesses.
All of that and clearly also our own DLT work, this ledger technology work, is being noticed in a recent analysis, Forbes magazine. An analysis in Forbes magazine, investment strategy firm Reality Shares ranked ING the fifth among global listed companies for its blockchain-related potential.
Clearly, we are leading the way there and basically creating quite some opportunity for further efficiency and safety in banking. You are familiar with our strong commitment to sustainability. I am now on slide six for you. Our commitment is clearly to our own footprint and how we can further reduce that, but also the CO2 impact that our clients have and the support that we can give to reduce this.
In the first quarter alone, ING supported 12 sustainable bond transactions and 16 sustainable loan transactions, clearly giving us the lead in ESG issuance segments. Many of these deals were first as we empower our customers in transition to a low-carbon economy. Customers really trust us in kind of devising their own plan in order to ensure that they are able to issue green bonds, and we really know how that works for them.
We do more than just advising customers and doing these transactions. We're also advising governments in Austria, Poland, and Spain to achieve their sustainability goals. The transactions that we do with companies are basically everywhere in the world. During the quarter, we were recognized for our leadership by several independent institutions.
As you can see here, we were named for the fourth year in a row to CDP's A list of 126 companies that are leading the fight on climate change. We also remain a sustainability leader according to Sustainalytics, ranking as ninth out of 300 banks globally.
Turning to the results. I'm on page eight now. The underlying pre-tax result was nearly EUR 1.6 billion in the first quarter. As you can see, results were down 6% from a year ago. This is fully explained by higher, but still relatively low risk cost.
The increase in operating expenses year-on-year was more than offset by higher income. The higher income mainly reflects EUR 119 million gain on the release of a currency translation reserve related to the sale of our Kotak share. When this gain is excluded, year-on-year income was broadly unchanged. If you really look at the underlying, the business growth that we are able to generate was largely offset by lower treasury-related results and negative value adjustments in FM.
Sequentially, the lower pre-tax result is fully explained by seasonally higher regulatory costs in the first quarter, as you know, despite lower operational cost. We'll come back to that. First, turning to slide nine. If you look at the NII here, excluding financial markets, it increased 2.8% year-on-year.
That's driven by higher interest results on customer lending due to the volume growth that we have indicated, and better margins on mortgages. The interest margin on non-mortgage lending declined slightly as we generally notice increased competitive pressures in the market.
However, if you really dig deep, the commercial margins saw selective improvement as we increased internal funds transfer pricing pretty much across the board. Vis-à-vis our clients, we are selectively able to reprice. That's what we do see coming through. On mortgages, we see it in the margins directly, and in the other businesses, we see it beyond the increased internal funds transfer pricing. That is the all-in price for our customers.
Margins on customer deposits were slightly lower due to the replicating portfolio yields in our main markets, putting pressure on liability income, as we can no longer offset that by further reducing our core savings rates. The Group NIM was down only one basis point, 255 basis points in the first quarter, as you can see. That's explained by the lower, always volatile interest result in the financial markets environment.
While the negative impact of the deposit margins were offset by also the smaller balance sheet that we have and the way we calculate our NIM. On our four-quarter rolling average, which filters out the volatility quarter-by-quarter in the NIM, you actually see, and it's the blue line for the ones you have in color printed that the NIM was actually up one basis point at 154 basis points.
Overall, a good result on managing our margins here. Looking at where the lending comes from, the total EUR 8.7 billion further explained, you see that on slide 10. Again, well spread across the different businesses. Retail banking actually increased by EUR 4.8 billion, of which EUR 2.9 billion was in mortgages in almost all countries. EUR 2 billion was other lending growth, mostly in the form of business lending in Belgium and Netherlands, but also a bit across the board.
Wholesale banking reported an increase of EUR 3.9 billion, of which part is explained by volume growth in trade and commodity finance, and that's on the back of higher oil prices in the quarter. This was next to the growth in transport and logistics as well as energy, which explains most of the other lending growth in wholesale for the quarter.
Going back to the Investor Day, we already guided you that our focus on return and appropriate risk may lead to lower wholesale banking lending growth going forward. Particularly because of strong competition and looser credit standards in the market, we are cautious, and as you know, as a general principle, we are unwilling to compromise on structure or our prudent risk and return standards. Our focus is return equity, pricing and structure are key elements in the way we look at this business.
Turning to slide 11 on the fee income. Fee income has increased by 2.1% year-on-year. EUR 675 million now versus EUR 661 million in the same quarter last year. In retail banking, this was mainly visible in the Netherlands and Germany with increased fees. In Turkey and Belgium, fee income actually declined. In Turkey, this was largely due to less business activity.
In Belgium, it is mostly related to lower investment product balances during the first quarter due to the still volatile equity markets at the start of the year. Fees in Wholesale Banking were down compared to the first quarter of 2018. Sequentially, fees in Wholesale Banking were also down due to seasonally lower deal activity in our lending business in the first quarter.
Financial markets total income was down on the same quarter last year, up from the prior quarter. Development we've also seen with most of our peers. Actually, if you look at the underlying, the client business was actually rather strong in financial markets. The drop was mainly caused by negative evaluation adjustments. In rates and credit trading, we actually saw much better results in financial markets. That is also the sequential development there.
Turning to 12, we see and cover the expenses. If we look at the expenses, excluding regulatory costs, they went up 3.6% year-on-year, that's mainly in the Retail Challengers & Growth Markets to support the business growth that we have there. There is also a growth in the corporate line, that's due to higher shareholder and KYC-related expenses.
This is central KYC organization that we have there. Wholesale Banking expenses, excluding regulatory costs, were broadly flat when corrected for the release of a provisioning in Luxembourg, which you may well remember, in the first quarter of 2018. If you correct for that, if you correct for the inclusion of Payvision since the second quarter of 2018, we actually have flat costs in the Wholesale Bank. With that, proving the recipe that we again repeated at the Investor Day, I'll come back to that later as well.
Retail Benelux, we continue to see our Transformation efforts paying off with the underlying cost base dropping 4.1% year-on-year. Also proving the recipe that in that area where income will be under pressure, that costs really have to decrease, and the Transformation benefits are coming through if you look at the cost decrease in that area. Quarter-on-quarter, expenses excluding regulatory costs, were down as well.
If you compare it to the fourth quarter of 2018, that's a decrease of 1.3%, and that's due to lower staff and Transformation-related expenses as well as lower marketing costs, primarily in the Retail Benelux. That's just a quality effect. Regulatory costs, as you know, in our first quarter are seasonally high, and that's due to the booking of the Belgian bank tax and most of the resolution fund contributions that we book in the first quarter.
Year-on-year, they went up 4.5%, that's mirroring developments in our balance sheet, as well as some annual contributions in Poland that we now take in the first quarter. Bank taxes have become a meaningful part of our cost base, as you can see, are expected to grow a little bit further with the introduction of a Romanian bank tax, which we're currently estimating to be around EUR 11 million - EUR 12 million a year.
On a four-quarter rolling average basis, the cost-income ratio remained broadly unchanged at 55%. When taking out regulatory costs, one can already see that we are very efficient with a level just below the 50%. Looking at risk cost, slide 13. Here, you see an overview of the asset quality developments. Risk cost came in at EUR 207 million. That's 14 basis points of average customer lending.
Guiding risk cost in basis points over average customer lending is the new metric that we use since the first quarter to better align with some peer reporting. Under the old definition, Q1 risk costs were 26 basis points off average risk-weighted assets. This compares to the EUR 242 million in the fourth quarter, and a very low EUR 85 million in the same quarter last year.
Retail Netherlands recorded a low risk cost of EUR 11 million in the quarter. Retail Belgium was broadly stable at EUR 42 million, as you can see here, that's mostly in business lending. In Retail Challengers & Growth Markets, the risk costs were mainly recorded in Turkey, Spain and Poland. In Germany, risk costs were negligible for the quarter.
Turkey saw a substantial decrease in risk cost in the quarter if you compare it to the fourth quarter, because in the previous quarter, we saw a large Stage 2 migration under IFRS 9 as a result of the worsened macroeconomic outlook there. Which mostly affected business lending. The Stage 3 ratio in the country is still manageable at 3.1%, clearly we keep monitoring the situation there closely.
Wholesale banking risk costs were again low for the quarter, EUR 71 million. As always, a few individual Stage 3 files, this time in Belgium, the Americas, and Italy, no trends really detected there from an industry perspective or geographic perspective, just into specific individual files. Turning to capital. As you can see, we're making good progress in our CET1 ratio, which improved 26 basis points to 14.7% from 14.5% as per the end of 2018.
The largest contribution this quarter was the sale of our stake in Kotak Mahindra Bank, which led to a meaningful reduction of risk-weighted assets. We also added back EUR 238 million of net profits to capital, which further helped the CET1 ratio. The remaining move in risk-weighted assets is largely explained by the positive impact from risk migration and lower market risk-weighted assets, which were partly offset by volume growth and model updates, including a modest impact of IFRS 16.
That's the operational leasing accounting treatment in effect since January 1st, 2019. Actually, and we can discuss it later, slide 22 shows you more detail on the underlying risk-weighted assets movements. As you can see, we're well-positioned to achieve a Basel IV fully loaded CET1 ratio of around 13.5%. As you know, that's the ambition that we have to manage around the 13.5% level.
We're certainly remaining well ahead of our current trap requirement of 11.81%. As Tanate has also indicated to you during the Investor Day, our CET1 ratio could develop in a more volatile way during the year due to potential TRIM impacts and model updates coming through, which may lead to the risk-weighted assets variability in the quarters to come.
However, as you know, the overall impact is more or less determined by what we expect from Basel on our portfolio, and that has not really changed. Therefore, we feel comfortable with this picture. As I already alluded to earlier in the presentation, and I've shown you during the Investor Day, this slide. I'm now on slide 15.
We have been repeating this for the last five years as to how to look at the total set of results as per the recipe that we have for the different areas in which we're active. This slide summarizes exactly that. Therefore, you have to look at the results more in this way rather than in a consolidated way and come to a conclusion.
It's important that in a retail Benelux environment, that the costs actually really go down, whereas in the retail challenge in the growth markets, we don't mind costs going up, if it supports profitable growth and you see income increasing. Then the Wholesale Bank, clearly, depending on how we fare with the development of our lending book and repricing, if income continues to increase, then we can manage a flat cost base.
Clearly, if there's more pressure on income, then we'll have to look at the cost picture. In the end, what we look at is at cross-border scalability and efficiency operating leverage, which we explained to you during the Investor Day. That's really important to us. The cost-income ratio is not necessarily how we run our business on a day-to-day basis.
It's one of the input factors, but the underlying operational efficiency, basically the volumes over operating expenses, that's what we look at to see whether our digitalization efforts and our Transformation towards a digital bank, a digital dynamic player, a platform, if you will, whether that is really delivering the results. That's an important one to know.
As said, if we see pressure on the top line because of lower growth, or if we see higher costs coming through regulatory or KYC expenses, then from a return on equity perspective, we'll have to look for further cost control, which can't always be compensated in the actual quarter, but over time, we will continue to look at the cost-income ratio to go down.
Again, we don't manage that on a day-to-day basis. Getting more efficient is what we are champions at. We've proven it before, I think what you see in this quarter in Market Leaders, it's really delivering results on the back of the Transformation that we started a couple of years ago. Summarizing from a financial and business perspective, I'm now on slide 16.
We continue to perform well against nearly all of these financial ambitions. CET1 up, therefore, a comfortable cushion towards the 13.5% after Basel IV. Leverage ratio well above the 4% ambition that we have right there. Despite higher capital requirements coming through, we continue to produce a very attractive underlying return on equity, which on a four-quarter rolling basis stood at 11%. Mid-range there.
As I reiterated in the previous slide, on the cost-income ratio, it's not how we run our business, it does remain an input factor for our return on equity, we remain committed over time to get to the 50/52. It's operating leverage that we really are after. As for 2019, our policy is to pay a progressive dividend like we did in the past years.
Wrapping it up. Q1 performance confirms we're still on the right track with the execution of Think Forward. We see the organic growth coming through, number of customers in the lending book, in the savings book. Overall, we retain a good commercial momentum, keep being disciplined on cost, continuing to improve the way we manage our non-financial risk within the company as well.
Another step, I think, closer to being a real dynamic digital player and making sure that we empower our customers to stay a step ahead in life and in business. With that, we have plenty of time for questions. Let's start that session.
Thank you,sir. Our first question is from Mr. Stefan Nedialkov, Citi. Go ahead, your line is open.
Yeah. Hi, guys. Good morning. A couple of questions from me. On the fee side of things, could you please update us in terms of your partnerships? For example, Scalable Capital was supposed to be rolled out to other countries. I believe it's still only in Germany. How much of the sort of weakness versus consensus that we're seeing today, would you say is seasonal versus more structural?
Obviously, you're paying more fees to external brokers in Germany. At the same time, fees in Belgium seem to be quite resilient, et cetera. Just trying to understand the seasonality versus structural trends here in terms of fees. The second question is in terms of your German strategy. Obviously, there's been quite a few headlines. I'm not going to be mentioning specific names, but if you could just tell us in what kind of context would having more branches make sense for you in Germany? Thank you.
Thanks, Stefan, for the questions. Looking at fees, as we had indicated on the Investor Day, every day, we're getting closer to being a dynamic digital player, a platform, if you will. Every day, we're adding more primary customers. Every day, the opportunity for us to kind of also offer third-party products or even peer products to our customer base, we're getting closer to that.
The opportunity for us to increase our fee income is there. That's why we're very confident that the fee income over the next couple of years will increase by 5%-10% per annum. However, if you now look at this quarter results specifically, we paid away a little bit more fees on the mortgage origination in different countries, although in Germany, we had a bit less origination there. Therefore, you see the fees going up on mortgages.
We see behavioral fees coming through in Germany as well. We see fees in the Netherlands coming up as well. Where you see a bit of a dampening effect on the fee income growth, it is on paying a little bit more fees away for mortgage origination.
In Belgium specifically, if it is related to the assets under management, as I indicated already in my introduction, it's on the back of the more volatile equity markets in the fourth quarter that came off at a lower and/or , a weaker start, and that's where we see lower fees coming in.
Our partnerships, like the AXA one, like the Transformation one, like the Payvision one as well, they will generate more fee income and more partners to be sought after and looking at how we can roll out new services and products to the 12,600,000 primary customers that we have.
In Germany, specifically, we don't comment on market rumors. You know our strategy. It is organic, and it is successful as an organic player. We're growing very fast in Germany, as you know, and we have close to 9,000,000 customers now. It's the biggest franchise from a number of customers perspectives that we have. It's a dominant part of what we do. If it comes to inorganic elements to our strategy, we've always indicated that that would come through a couple of dimensions.
The first one, if we see an opportunity to buy lending capability skills with a portfolio or without a portfolio, we would certainly look at that, and that's what we have been doing in the past here and there. If we see potential in acquiring companies that provide us with new technology through which we can either get closer to our clients in the value chain, like through the acquisition of Payvision, or an acquisition that provides us with technology that helps us to improve the customer experience, we do that.
We do that on a regular basis. If in markets in which we're active and we're a large player, if consolidation is happening in those markets, we have a duty to look at what's happening there and how that could affect our position. That's what we've done in India when consolidation was forced by the regulator.
We took a position there as to what we wanted to do. You know that in Thailand, we are also in preliminary discussions there as to how we can counter the effect or how we can actually consolidate in that market. That's it. Thank you.
All right. Thank you.
Next question is from Mr. Benoît Pétrarque, Kepler Cheuvreux. Go ahead, please.
Yes. Good morning, guys. Three questions, two on NII. First one is around the replication drag, especially in the Netherlands Q on Q. I would assume this drag to continue in the year, can the Q on Q trend be replicated for the rest of the year, or do you assume a bit lower pressure going forward?
Also, broadly speaking on replication drag, do you think you can push client rate further down on maybe SME mid-corporate segment or take other actions like maybe on the investment side to offset clearly low interest rates, which is likely to continue? That's the first question. The second one is on the wholesale banking. NII down 6% Q on Q. Surely, day count has been a drag there. Do you see commercial margin pressure?
I'm a bit confused with Ralph's statement that you have the ability to reprice, to pass on this transfer pricing to clients. Are we going to see more pressure on the commercial side in the wholesale banking, or is that a temporary issue in the first quarter? The last one is on the cost, up 2% clean year-on-year. Is the 2% run rate for 2019, or do you think cost savings will materialize in the summer, especially around the restructuring, and we could end up definitely below that level on a clean basis towards year-end? Thank you very much.
Hi, Benoît. This is Tanate. I just give you a bit of a comment on the saving replication question that you had. I think it would not be fair to look at the NII reduction in the Netherlands and do a extrapolation on that, it's a combination of two factors. I think within those numbers, you see some volatility from bank treasury results in there, as well as the actual replication in itself.
Indeed, we do see compression in terms of savings margin that is happening in the Netherlands, given the fact that we are now at a very low level in terms of our deposit rates in that market. To address that question, how you should look at it, I think our replication is anywhere between the three, the five, and the seven-year part of the curve.
You can work it out depending on how those curve moves, how difficult or how good it would be in terms of replication. Having said that, I think we are taking steps whereby, as we mentioned in the previous quarterly call, that we are increasing the fund transfer pricing to the front office in terms of lending origination, and that is happening across the whole of ING, which means that the origination margin that you see going forward is actually quite robust.
As Ralph mentioned just now, in retail banking, particularly in mortgages, which is a major part of the Netherlands, you see margin improvement across the whole of our ING mortgage book in all of our geographies. That is part of the mitigation that we are taking to make those steps.
In terms of wholesale banking NII, I think it's again a combination of things, because within that NII, it reflects not only the underlying margin for the lending business, but it's also in terms of the impact in financial markets where the results for Q1, while I think reasonable in the context of what's happening in that particular part of our business, but it still has a negative impact on our net interest margin as well.
The last point, I think, on wholesale banking is there's a shift in terms of our mix, at least in Q1, whereby we are doing somewhat less in terms of industry lending, a bit more in terms of trade finance, and that comes with somewhat lower margins than what you normally see from us on wholesale.
In terms of cost guidance, I think, again, if you look at our cost discipline, we're still there. We still have the three-prong approach, which basically mean that we do expect cost reductions and cost efficiency to go forward in market leaders. You see that visible in the first quarter there.
We do allow cost growth in Challengers & Growth, where you see robust growth continuing to be there in Australia, in Poland, in for example, places like Romania. That's actually helping us in terms of revenue growth and margin growth. Of course, in wholesale banking, we're taking steps to look at cost reductions where we need to and cost growth if required, for example, on KYC program.
I think when you study our results in detail, you can see a fairly substantial cost reduction in our financial markets where we're matching revenue pressure with cost decline during that period. Okay, thanks.
Okay. Thank you very much.
Our next question is from Mr. Adrian Cighi, RBC Capital Markets. Go ahead, please.
Thank you very much. Two questions from my side, please. Just one follow-up on the potential banking consolidation theme. Very helpful color on the criteria for potential acquisitions. Can you maybe talk about any specific return hurdles and over what period you would hope to achieve these? Should you pursue any acquisitions that maybe don't fit the capability or the skills criteria you outlined? On the capital progress this quarter. You've showed a positive risk migration of 28 basis points. Can you maybe help us understand how much of this would impact the Basel IV guidance that you've provided or not? Thank you.
On the first one, Adrian. In an organic growth, as we were indicating in terms of seeking additional lending capabilities, that's been there over the last couple of years as a focus point, where basically we indicated in the beginning of the Think Forward strategy that we felt that we had a too high concentration risk in our balance sheet if it came to mortgage exposure.
We wanted to diversify our balance sheet, our asset mix, into more consumer lending, SME lending, mid-corporate lending, and wholesale banking lending. For a lot of wholesale banking activities, we had our own specialists already, and we grew our sector units there. On mid-corporates and SMEs and consumer lending, we've always been looking at new technology being applied in those areas with instant scoring and instant lending, but also to the extent available, specific portfolios.
From a return on equity criteria, our return on equity, the ambition is what it is. We would always look at the same kind of criteria on the basis of which we run our own business. That's how we would look at that. On CET1, I will give that to Steven.
Yes. Thank you. Thanks, Adrian. If you look at the risk migration, that is largely due to a number of impacts. We are doing some better collateral and data quality management. There were some write-offs that were going through the books, as a result of which it is taken out of RWA. Sort of collateral releases. There were some price increases in both the housing prices in retail as well as in our real estate in wholesale banking. These are temporary blips up, but these blips could also go down to the other side.
In that sense, we do not change our guidance on Basel IV, which again is 15%-18% based on our RWA balance sheet at that point in time, with about one-third that we can achieve lower as a result of management actions and 80% of that increase will come due by the year 2022 because Basel IV mostly depends with us on input factors. Thank you.
Thank you very much.
Our next question is from Mr. Farquhar Murray, Autonomous. Go ahead, please.
Morning, gentlemen. Just two questions, if I may. Firstly, on the NIM outlook, the performance for 1Q19 is quite solid, and you refer to favorable moves on commercial margins with mortgages. Could you now extend the kind of guidance for high 140s, low 150s NIM to the end of this year on the back of that?
Secondly, just on the new risk cost guidance of 25 basis points on average customer lending, how does that compare when you look at your internal analysis versus the kind of previous guidance? Would you actually be able to give us some indication about what that means at a segmental business level, so to say, down to wholesale banking? Thanks.
Thank you. On the NIM outlook, indeed, looking at how we've been able to manage it over the first quarter, where basically you have the pressure more on the savings side and how you can manage that pressure on the savings side, at least from an interest income perspective. Maybe on the asset side, repricing is an important driver there.
Repricing we do in two ways. It is by shifting the FTP with the internal fund pricing, transfer fund pricing. The other one is the commercial margins on top of that. Both we're doing, vis-à-vis the client, being able to charge a bit more helps you offsetting the pressure that we have on the savings side.
On the back of that for the next two quarters, we can guide as you are used to, that we can manage the NIM around the high 140s and low 150s. As to the cost of risk guidance, I'll give it to Steven, where we move from a guidance of risk cost over risk-weighted assets to lending assets.
Yes. Thanks. Basically, the 25 basis points is a translation or an exact translation where we were with the 40 - 45 basis points guidance over RWA. Please note that that is a through-the-cycle RWA, as a result of which you cannot compare directly to what it is today based on the current RWA of EUR 310 billion.
We look at it through the cycle RWA to come back to a translation to 25 basis points. In that sense, there is no shift in our risk appetite, in our policies, and the legal and obligor levels that we have. That has remained the same as before.
We give that guidance on a bank basis only. This is a broader risk appetite, we of course steer our risk appetite much further into detail into countries, products, sectors, legal and obligors, and the way that we deal with our security and our, I would say, restructuring units. That's the way that we manage the risks and the risk costs, it is a guidance to basically translate it into a figure for the market. No change there.
Just one quick follow-on, if I may. Obviously, if I did a match of the static RWA and lending numbers, I'll get a slight difference. From the sound of it, you're saying that reflects over the cycle RWA view. Can I just ask how much of that over the cycle increase in RWAs from where we are now would not come through in Basel IV? How much is Basel III only?
The provision profit in both challenger segments was flat year-on-year only. Wondering whether Q1 cost inflation was a bit on the high side should come down throughout the year, you are quite happy with the progress these guys are making and happy to invest into growth here. Thank you.
Thanks. On Basel IV, the way we look at our growth, it is clearly one of the components, whether we have capital to grow, the other one is whether what we can do fits our return and risk criteria. If we would have more capital to grow, we would not necessarily translate that into higher growth, because we stay very disciplined and strict in terms of the return criteria and the risk appetite that we have there.
If the opportunities are presenting are in the market, and this is in the business that we know, we could grow a bit faster than that. Again, it is not like if we have surplus capital, let's grow faster. It really has to show the right return and risk appetite criteria. On the cost in C&G, actually, we are happy with the performance in C&G.
If you look at the commercial performance but also the financial performance. Looking specifically at the quarter, we see a bit higher cost in the first quarter in Germany. That has to do with client acquisition cost. That is something that is not necessarily one that's a level that we would expect going forward for the year.
Thank you.
Our next question is from Mr. Pawel Dziedzic of Goldman Sachs. Go ahead, please.
Good morning. Thank you for the presentation. Two follow-up question. First one may be on cost. You mentioned that you have a good performance overall. There's some seasonality in 1Q. If we look at your four-quarter rolling average, your cost to income is at 55%.
I know this is now not a primary target, but to what extent do you expect to make some progress towards lower level this year? Would we see more one-off cost related to client acquisition perhaps, or rollout of project investments, KYC later this year as well? To what extent you have a capacity to go below this 55%? That's the first question. The second question is also a follow-up, and it's on cost of risk, your guidance, 25 basis points. I wanted to ask it a little bit differently.
It is, in what operating environment, what would need to happen for you to actually be at a basis points? Should we expect to see current low levels to continue in the foreseeable future? Thank you.
Thank you, Pawel. I will take the one on cost, and then Steven will come back on the risk cost question. Looking at cost here. Clearly, there's a lot of seasonality built in from a regulatory cost perspective. That's why we calculated the four-quarter rolling average. If you look at the coming year, we're still in a major Transformation in Unite, where you could expect further cost decreases to come in.
As we have briefed you on in Frankfurt in the investor day, we do expect FTE decreases over time. At the same time, where we are in the Unite Transformation program. We have made almost all strategic milestones, but at the same time we decided that going forward, we want to speed up the client migration from Belgium to the omni-channel digital interaction layer. Basically, for them to benefit from all the digital interactions with the bank.
We are actually moving that forward, and moving the migration of products a little bit later, as a consequence of which some of the cost benefits will also come a bit later. If you then look specifically for the year, really, we managed to further decrease cost in the Market Leader environment. In C&G, we'll always play it by ear if we see the opportunities, and we would allow some cost growth.
For the year, we're cautious there as well and the wholesale banking as well, because we really want to see how we go through this year. I can't really guide you on cost income on this one. You can expect from us to be really focused on the cost developments vis-a-vis the transition that we're going through. On cost of risk, Steven?
Yes. I think, Pawel, in general, a significant worsening of macroeconomic circumstances obviously has impact on risk cost. 25 basis points is the average over a longer period. It's hard to directly pinpoint exactly what the exact circumstances are, because there are many factors impacting that.
I also said during the investor day presentation, I'm also here to manage the tops down, if you will, or the peaks. We do that amongst others by compartmentalization and a good risk awareness, both in the first and second line and personal accountability. If you look at this year, the current circumstances as we've seen in previous years, we would expect these risk costs to remain below the long-term average.
Thank you. That's very clear.
Next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, please.
Yes. My first question is on NIM. The ability to put in higher costs in the internal fund pricing model. In Q4, credit spreads widened materially, which probably gave you the rationale to do that in Q1. In Q1, though, credit spreads tightened significantly. I was just wondering if that offset is structural in your view, or that we could see that to dissipate going forward, leading to some more NIM pressure on the longer term.
That's the first question. The second one, I think your answer on cost of risk, the change in guidance seems to imply that your RWAs are somewhat under-stated from a point in the cycle perspective. I was just wondering how that would feed into your fully loaded Basel IV target level of 13.5%. Should we either assume that you want to be above that level given where we are in the cycle?
Should we start to factor in more DPS progression than EUR 0.01 a year, given the fact that you basically are where you want to be on a headline level today? Thank you.
Okay. Thank you, Robin. On the internal FTP and the credit spreads tightening, specifically, we don't manage it necessarily on a quarter-by-quarter basis. We do look at where the margins are in terms of new production as well. That's where we see that over a higher FTP, the margins, specifically on the wholesale banking side, have been flattish to maybe even a little bit improving.
A higher pricing altogether there, in the new production for the first quarter. In terms of the other businesses, we see and we've seen in the first quarter, the mortgage margin in the Netherlands improving, in Belgium improving, and the business lending margins over this higher internal FTP to be flattish. I'm talking new production here. I'm talking what happened in the first quarter of 2019. That's what I can give you on that one.
On the cost of risk, I'll give it to you, Steven.
Yes. Thanks, Robin. Clearly, we are at a, from an economic point of view, at sort of a high point of the cycle, it seems, and also therefore a lower point of the cycle in terms of RWA. If you look at the past five to six years, we have seen a risk migration coming in on a quarterly or yearly basis.
When the cycle changes, one would expect some impact of that risk migration going back. In that sense, it doesn't change our guidance. That's why we said if you look at the average cost of risk through the cycle with ups and downs, we go to a 40 - 45 basis points, translated now into 25 basis points on lending assets through the cycle, and that's what we will remain at. In terms of capital return, I don't think that you should read anything into this.
At this point in time, also with what we have in the quarter, there are some blips up. That means positive risk migration that is relatively benign, that doesn't change our overall guidance on dividend policy.
Okay. Ralph, just to come back on the margins. I think you're saying that commercial rates are basically higher, the margin is sort of stable on the back of the higher FTP. Again, if credit spreads tighten this significantly, isn't that an issue?
I can talk about what we saw in the first quarter. Specifically on the credit spreads. We look at it specifically in the wholesale market, it is really on a client-by-client basis. It's a sector-by-sector basis. That's how we manage that. Whatever happens in the capital market specifically, does not necessarily influence the client rates directly.
Okay, thank you.
Next question is from Mr. Nick Davey, Redburn. Go ahead, please.
Yeah, good morning, everyone. Two quick questions, please. The first one on KYC costs. Could I just ask for a bit more detail about the charges that have appeared in Q1 and the outlook there? Was there any sort of temporary one-off costs in there that would mean corporate line costs could fall from here?
Conversely, is this, as you've outlined at the investor day, a bit of a project for the year? Any expectations we should have for higher costs from that source, either in wholesale bank or corporate line? Second question, just coming back on the challenger in growth markets. I think the question was already asked about stable pre-provision income and the pace of cost growth.
The only question I would have is if you could just provide the impact of FX in the challenger and growth markets in general, just so we can get a feel in constant currency terms about how revenue and cost growth is progressing. I don't know if you have that at hand or if it's the kind of thing you'd be able to provide in the future. Thank you.
Yeah, Nick, I'll give the second one to Tanate to follow up on either now in the call or maybe later. On KYC, as we've indicated, there's two components to the program that we're running. One is the structural improvements. For the structural improvements, we're beefing up the organization, we're hiring more people, and we're investing in systems and processes. That basically we do by clearly increasing the investments in that area.
There's only so much you can do. We are reprioritizing some of the investments that we had envisaged to do in other areas towards this area. Although we're investing more in that area, it doesn't necessarily lead to a big cost increase from that perspective. That's the more structural improvements for which we really have to reprioritize some of the investments that we are making on the IT, et cetera.
In the total KYC organization, as we were indicating, we have some 2,500 full-time employees now working on it, and it is growing. Around 500 are working on the non-structural business, which is more the project-related part of this program, which is the file enhancement.
When we are through the file enhancement, it goes to what we would call business as usual in terms of your KYC element of this. Then basically, the cost on the FTE side will go down. At this moment, it is 2,500 for the total. We envision some increases there. The underlying actual investments are being reprioritized from other areas into this. That is the picture I can give to you.
The one to hold on to maybe for you is then the 500, that once the file enhancements are done, that is something that you can expect as a cost going down. Having said that, the structural improvements going through in this area will continue for a while and will be reprioritized from other areas. Tanate?
Just to address your question, Nick, on the cost evolution in C&G, as Ralph mentioned, 1/2 of that is in Germany, the other half is in the other challenger and growth countries. Your question on foreign exchange is predominantly driven by Turkish lira against the euro, the positive impact of that in Q1 is approximately EUR 10 million-EUR 15 million.
Thank you very much.
Yeah.
Thank you. Just following up on the KYC. Ralph, am I then okay to assume that plausibly these KYC charges could drift up through the course of this year whilst you're making some of these permanent investments and running the 500 staff on top, and then the reductions may come in 2020? Is that fair?
Yeah. On the enhancement file side, you should expect during 2020 that that will actually come off. On the structural improvements, that will stay also during 2020. Yeah.
Okay. Thank you both.
Next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead, please.
Yes. Hi. First question, the negative valuation adjustments in wholesale banking financial markets were rather big, if I look at slide 21 with the negative EUR 58 million. Could you give some more color on that? Is that MVA, CVA, DVA? Why is this figure so large compared to the previous quarters? A little bit on the timing update. I heard some comments that you're already on your Basel IV. That depends on the actions to reduce the impact. How is that, the timing update? Could you give some more color on where you are, what measures you are still planning to take?
Thank you, Bart. The first one I'll give to Tanate. The second one is for Steven.
Hi, Bart. Yes, indeed, the value adjustment in financial market in Q1 was more pronounced than previous quarters. I think it's driven by two impacts. I think the first one is really in terms of our position in terms of bonds against which we do credit default swaps to hedge. In this particular quarter, in terms of the funding value adjustment, it was more than normal, let's put it that way, because of lower liquidity in the market.
The second impact is really from our credit trading desk, where we do macro fair value hedges on them. There are certain movements between long-dated credit positions against short-dated credit positions, where again, we have negative value adjustments. Both of these, on a like-for-like basis, should pull back to par over time.
Yes. Thanks, Bart. On Basel IV management actions, on one hand, we are still in the years to come to Basel IV. First, we have, of course, the outcome of TRIM that still needs to come on a number of the portfolios, which is a preluder to Basel. It start with TRIM that is then partially offset in Basel. That is still to come.
In terms of management actions, we have, of course, you can see it in the press release, in the segment financials, we also show the results based on our 13.5% CET1 RWA results for different segments. We also steer on that in terms of pricing, which basically means that we need to price up to be able to meet the return hurdles that we have. We have been talking about it during this call.
Secondly, we continue to work on improving our covers on our loans. You've seen a bit of that creep through in the risk migration that you saw in the first quarter. We continue to work on, let's say, external ratings for corporates as a result of which that will limit the rating in that regard, and that will help us also in terms of our RWA requirements.
We continue to see if there are portfolios which consistently have a lower risk cost over a longer period of time, because if that is the case, you can become eligible for lower risk weights. Then also in the last place, we continue to work on the originated distribution, whereby portfolios that would become more hurt by Basel IV, that are less favorable from a return point of view, that we see how we can shift the mix in our activities to cater for this. That's ongoing.
Could you give a timing on how we can see that evolving in this year, next year?
All elements will continue to go on continuously to be able to mitigate the effect of Basel IV of 15%-18% with 1/3, that is something that will come through over the next couple of years on an ongoing basis. That's not something that is being done in one quarter or something like that. That will be ongoing.
Okay. Thank you very much.
Next question is from Mr. Bruce Hamilton, Morgan Stanley. Go ahead, sir.
Hi there. Morning, guys. Thanks for taking my question. Most of the question's been asked, maybe just following up on consolidation, and Ralph, you've given some very useful color there. When you talk about not wanting to dilute the return targets of the bank, obviously it's good news, but do you give a sort of timeline for any, say, larger deal that you would hope to get up to that sort of double-digit ROE?
How appealing is the thought of re-domiciling, to get any benefits in terms of reduced domestic SIFI buffer? Then finally, just on cross-border deals generally, do you think the sector as a whole is close? How do you think about the timeframe and likelihood of deals happening from here?
Again, I won't comment to the specific rumors that are going around. I can talk in general about what I expect in the European banking landscape to happen. We are a supporter of the banking union, as the most pan-European bank, I guess, around, with so many local activities in several European countries and Eurozone countries. For the banks as a whole, including ours, to benefit from that banking union, we need to finalize the banking union.
From a regulatory perspective or supervisory perspective, it is being done. We have the SSM, the Single Supervisory Mechanism, that works. Works quite well, actually. We have the Single Resolution Board as well, in order to make sure that if banks fail, that there's a recipe through which we manage these failures. Then the fund to support the resolution of banks is also being filled as we speak.
That's done as well and will be done over time. There's a third part, which is how to protect depositors in bank failures as well, for which we have to come to some kind of a common deposit guarantee system, which basically needs to be finalized before banks can actually benefit on an additional two out of three benefits that consolidation can bring.
There's three benefits that consolidation can bring, which is the cost benefit that is always there, which is generally if you can't do cross-border scalability the way we can, it will be limited to what you can do in a country. The second one is liquidity optimization, and the third one is capital optimization. The second and the third one will not be there, not to a large extent, in my view, if we don't finalize the banking union in full.
Basically what banks need to focus on then is to which extent you can actually have cost synergies. Therefore, I think for most banks, this will limit the opportunity to local M&A for the moment. That's it. That's the color I can give. Thank you.
Thank you.
The next question is from Mr. Jean-Pierre Lambert of KBW. Go ahead, please.
Hello. Most questions have been answered. Just a follow-up on the digital indication of activity, which was up quite a lot, I think 25% or 26% year-on-year. This is maybe inflated by people just checking their accounts on a more regular basis on their mobile. Can you distinguish between the fundamental transactions and the basically review of outstanding or situation of accounts?
No, Jean-Pierre, I think you're completely right from the perspective that an element of the number of interactions is inflated by the change in behavior of customers that while they do their banking on the mobile, they just check in more often on something that they wouldn't check in as frequently in a desktop environment, or let alone going to the branch 5x a day to check your balance.
Having said that, though, you have to look at it from the different perspective that if you build a platform in which you have a daily interaction, it's like people checking the news 5x a day on news sites, that basically this provides banks with a great opportunity to build a broader relationship with those customers who maybe indeed only check in to check their account a couple of times a day, but nevertheless, you are in touch with them.
Yes, if you would only look at what that provides for an opportunity as a bank only, then yeah, there will be a further upside because you have more interaction and you will get to know your customer a little bit better in terms of his behavior, and the whole digitization will be able to generate more intelligence around the client.
If you look a little bit beyond that and you have that traffic, and you think of yourself as a platform a little bit more than a bank, then the opportunities are much broader. That's why, on the Investor Day, when we alluded to the fact that, for example, in Holland, we are the number 10 app in daily usage for the average Dutch person, whereas the number 1 through 9 are all Facebook and Google apps.
That is what shows the opportunity that you have. You have to think beyond your role as a bank and start thinking platform. Then these digital interactions do matter. Clearly, there's certainly some inflation there.
Great. Thank you very much.
Our next question is from Mr. Marcell Houben, Credit Suisse. Go ahead, please.
Good morning. Thank you for taking my questions. First one is on the fee side here. Ralph, can you give a little bit of color on the fee growth within the retail division? I mean, the drivers, the key drivers. I know and understand the ambition of 5%-10% growth, but there's an assets under management and investment product line in there. It just seems there was a lot of volatility seen the past couple of quarters within Retail Germany and Belgium, Netherlands, as well as the other Challengers & Growth.
Can you just give us a little bit of key drivers here to give a better accurate model capabilities for us as analysts? That was my first one. Second one is on the wholesale lending or lending growth. This quarter, we see some nice lending growth of close to 6% annualized.
Large part of it is driven by wholesale lending, which, if I remember correctly, you wanted to slim down the exposure a little bit. How should we read into this lending growth in this quarter of the wholesale bank?
Then if I could just put through a third quick one on the cost of income ratio target. I know it's not a key focus anymore, the 50%-52%, but you dropped away the timing of by 2020. In your base case scenario, when would you expect to reach this level? Is it past 2022 or is it a little bit earlier than that, for example? Thank you.
Thank you. On the fee growth. There's different dimensions in which you can grow fees. We use all dimension here. The first one is for the services that you already offer, depending on how the cost, the underlying cost develop, you increase your fees.
For example, in daily banking activities, for the use of your current account, your card, the additional services that you offer around salary accounts, you can increase fees, just because the services are increasing and the cost may be going up as well. There is an element in that same area, which is what we would call behavioral fees. Basically, how do you make sure that people who interact with us, either by withdrawing cash from an ATM or making calls into our call centers, how do you make sure that people really do that if they need it?
How do you make sure that people don't go to your ATM 5x a week for EUR 25, but they go 1x a week for EUR 125? There's aspects like that specifically in the challenger markets, is important for us, because we don't have our largest ATM networks there, but we pay fees to other banks on the back of the behavior of our own customers.
Clearly, the third element, if it comes to fees is, the more primary customers you have and the better you know these customers, and the more services that you either develop yourself or offer from third parties, whether this is investment products or whether this is insurance or whether this is non-banking in the future, that's the real upside because you should realize that the success of our model has always been that we don't charge fees for things that we feel don't add value.
We're not in the business like many others maybe are, to charge fees just because we can charge fees. That's not what we're going to do. It doesn't fit us. It doesn't fit what the clients expect from us. If we charge fees, it is because they do see it as a value added. That's the one on fees.
On cost income guidance. It's great that you asked, but as we have said, the real important element for us to see whether the Transformation is delivering the efficiencies is the operating leverage component, which is the volumes over operating cost. Clearly, some volumes, with margin pressure make less income than others, and some costs could just increase just because government's introducing new bank tax.
We want to eliminate from that, which doesn't mean that we don't want to compensate for those increase in costs or income pressures, but these are blurring our way to measure whether the digitalization itself is having effect. That's why we separate the two. In the cost income, clearly, there is the component of margin pressure or repricing, and there is the element of regulatory cost. Therefore, we do keep it as an input. We will manage it down.
You can expect us to manage it down towards the 50/52. You will see steps into that direction, we're not giving a specific date by which we will have achieved that. Maybe on the banking loan growth, I'm actually going to give it to Steven.
Thank you. Thanks, Marcell Houben. Regarding the loan growth, if you look at the total loan growth of EUR 8.7 billion this quarter, approximately EUR 4 billion comes from Wholesale Banking. Within that, approximately half of that within Wholesale Banking comes from trade commodity finance on the back of higher oil prices. We've seen it also in previous quarters, in previous years.
Sometimes the price goes up and goes down, immediately with the same lending volume, the value goes up because of that higher oil price. When we look at the remaining growth in Wholesale Banking, quite a significant part of that is by further drawdowns on revolving credit facilities. Again, that is relatively cyclical. We still stick to the 3%-4% loan growth over the year. You will see some quarters which are impacted by these type of events.
Thank you. That's very helpful. Can I just follow up on the fee side? Can you disclose the estimate management per retail division?
We can, but we don't.
All right. Fair enough. Thank you.
Cheers.
Our next question is from Mr. Kirishanthan Vijayarajah, of HSBC. Go ahead, please.
Yes. Good morning, everyone. Can I just come back to the weaker fee result in the Wholesale Bank and linking that to your lower risk appetite there. Just wondering if that lower 1Q fee number in the Wholesale Bank is a good level going forward, or could it compress a bit further as those self-imposed exposure caps start to bite a bit more, as the year progresses, you do less of the leverage loan, and so less fees from that.
Then secondly, just very quickly, could you give us an update on Italy? Any impact that the ban on onboarding new customers, has that had any impact on the underlying franchise at all? Any visibility on how long that ban will stay in force? Thank you.
Okay. Thank you, Kiri. Well, on Wholesale Banking fees, clearly, if we have restricted risk appetite and we're cautious to enter into deals that don't fulfill our requirements from risk appetite perspective or from a structure perspective, that does limit our ability to do large deals, and with that, it will and may have an effect on our fee income.
Having said that, I'm willing to take that because in the end, it will never pay. Clearly in the leverage finance business, we do see that there is a risk appetite in the market that doesn't match ours, and that does have a dampening effect on fees in the Wholesale Banking side. In addition to that, in the 1st quarter, from a markets perspective, whether it is more debt capital markets or equity capital markets, it wasn't a very strong fee quarter either.
At a certain moment in time, you would expect that to come back. Over time, in the sectors that we know very well, we do expect that business will just continue, whether it is in the transportation business, in the oil and gas business, the sectors that we really know.
We don't think that there's going to be strange players coming through, so we'll be able to do our deals, we will be able to charge arrangement fees and distribution fees there. Also on the DCM side, we do expect that market to be back, and on the back of that, be able to increase our fee income there as well. Turning to Italy. Clearly, the customer ban is not good news for the franchise itself in terms of how do you motivate your people, right?
Having said that, what we need to do there is important, which is having to ensure that we do play our role as a gatekeeper the way the regulator expects from us. That's what we're doing. The enhancement plan that we rolled out globally is clearly also being implemented in Italy and was already in the process of being implemented in Italy.
We will continue with that. As to how that influences the timing of the customer ban itself, I don't know. We will have to work with the regulator to get a feel, or the supervisors, to get a feel as to when that can be lifted. We don't have that as we speak.
Okay, that's very clear. Thank you.
Our next question is from Mr. Maxence Le Gouvello du Timat of Jefferies International. Go ahead, please.
Yeah. Good morning, everyone. Most of my questions have been answered. Just the last one regarding the appointment of Mike Rees at the supervisory board. It's quite a surprise considering Mike's profile on the wholesale and Asian exposure, we're just wondering how it fit with your strategy on digital retail banking, or will his focus would be only on the wholesale? Thank you.
Thanks for the question. Mike comes with a whole set of experiences, including the Asia experience, where we are active. As a wholesale bank, we're also active as a digital bank. As you know, we are testing, for example, the Philippines market. His Asian experience comes in. His wholesale banking experience comes in as a welcome experience as well, as he's also a formidable banker. In the end, the core of what we do is still banking, so it's good to have good bankers on board.
Okay. Thank you.
Next question is from Mr. José Coll, Santander. Go ahead, please. You can open.
Hello. Thank you. two questions, please. The first one would be According to the press about two weeks ago, they claimed that you are in the process of closing down your SME business in Spain, which arguably was small, but I thought this was a segment in which you wanted to expand. I guess this fits with your previous comment on mining the operating leverage, but could you comment further on this move?
Is this something that we can expect could happen in other C&G units? My second question is on Turkey. I see that total lending net of FX decreased about four percentage points in the quarter, which considering that the Stage 3 ratio is quickly rolling from 2.8% - 3.1%, might not be too impressive.
I wonder if you could give us some guidance in terms of lending reduction for the rest of the year, and what is your target or guidance for intragroup lending by the end of the year? Thank you.
Yeah. Thanks, José. On the first one, I'll give the answer, and the second one, Steven will take that. On the how do we go about SME business. In Spain, we started the SME business, and we also work with Kabbage on that one. As you know, the way we do these kind of things, we look at whether they develop well, whether they, in the end, we feel they can become profitable.
If not, and this is the way we go over these things as an innovator, is that in innovation, you also have to dare to pull the plug if things don't look to become successful in the way you have approached them. That is what we've seen there. That doesn't mean that this is also for the rest of C&G. We have to look at it country by country.
The SME business that we do and many other C&G businesses, specifically in Poland and Romania, we're very committed to that, and this is doing quite well. On Turkey Stage 3, I'll give the word to Steven.
Yes, thanks, José. In Turkey, the book went down with about EUR 1 billion in the first quarter of this year. Part of it is the currency difference, but the largest part is just a rolling off of loans as well as clients deleveraging. We're still, in that sense, conservative and focused on de-risking.
Balance sheet or intragroup funding that came down in the first quarter with an additional EUR 300 million. We had EUR 3 billion by the end of the year, coming down to EUR 2.7 billion now. You said the Stage 3 ratio went up a bit from 2.8%-3.1%. In that sense, we keep a keen eye on making sure that we remain also within risk appetite in that country.
A large part of the book is wholesale banking. We stay close to our clients, but clearly, especially on fixed loans, we are very strict in that we also need to see revenues in foreign currency before we actually grant also loans in that currency.
Thank you, sir. Maybe just a follow-up on Turkey. Is it fair to assume that the roll-off of the first quarter is sort of the run rate for the rest of the year in terms of both the lending book and the intragroup funding? Thank you.
No, that would be a bit too straightforward to assume that. Clearly we manage the risks in Turkey on a daily basis. Part of the loan decrease also came from clients not rolling over their loans, because also clients are deleveraging in that respect, but we remain conservative.
Thank you very much.
We've no further questions, sir, please continue.
Okay. Thank you very much. Well, thanks for giving us all these questions. It's good that you raised them. I'm sure that after going through the material, you may have some more. You know that our team is always ready to take you through and give you some more insights where we are able to.
Just to summarize the first quarter, underlying you see a continuing good commercial momentum, which we're very happy to see. We're keeping discipline on the cost side, although you have to differentiate between the different areas that we manage. Market leaders versus C&G versus wholesale banking. We continue to improve the way we manage non-financial risk. From that perspective, we're satisfied with the performance, also financially, and thanks for your interest and support. That's it. Thank you.