Welcome, thank you for joining the ING third quarter 2018 results call. I'm happy to give the floor to the CEO of ING, Ralph Hamers. Go ahead, sir.
Thank you, operator. Warm welcome. Thank you for joining us. We'll give you an update of the developments, our financial results for the third quarter of 2018. With me are Koos Timmermans, our CFO, and Steven van Rijswijk, our CRO. As you all know, the third quarter for us was deeply marked by the settlement with the Dutch Public Prosecution Service. It's sincerely regrettable that serious shortcomings in the execution of policies to prevent financial economic crime were identified at ING in the Netherlands. We take this very seriously. We accept full responsibility for this. Not meeting standards for securing the integrity of the financial system is just unacceptable. We didn't wait for the fine to come out to start our enhancement process. We are enhancing our customer due diligence files where necessary. For the last year and a half already, the program is running.
We're also working on various structural improvements on our compliance policies in terms of the policies, the tooling, the monitoring, and the governance as well. Despite the serious setback in this quarter, I think on the other side, we can be proud of the hard work of our colleagues. Dealing with clients and on one side answering them, but on the other side, also dealing with clients that result in continuous commercial momentum, and that is what we have shown as well in the third quarter. We saw a growth in primary customers by 200,000 to 12.2 million. We saw a continuation of the growth on the lending side. Net core lending was well diversified and grew by EUR 6.8 billion. Customers kept their confidence in us and did deposit EUR 3.4 billion with us.
All of that leading to an underlying pretax result of EUR 2.1 billion for the quarter, which is a 6.5% improvement against a year ago. As I said, this result as a financial result reflects continued business growth and resilient margins. The margins are well managed. There's also a low risk cost environment and a strong expense control, you can actually see expenses going down versus the last quarter. The net result was, of course, impacted by the EUR 775 million settlement agreement that we have with the Dutch Public Prosecution Service, therefore came out at EUR 776 million. The underlying return on equity was 10.7%, which is actually up. The capital position remains strong, which is also very good at a level of 14%. On the line, financially and commercially, we see a very solid quarter. Regrettably, it is a quarter which has two different sides.
With that, as a very short introduction, we are happy to take your questions.
Ladies and gentlemen, we're 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 your questions or remarks. Go ahead, please. Our first question is from Mr. Ruben Eg, De Telegraaf. Go ahead, please. Your line is open.
Hello, good morning. Could you share some more light on the division financial markets, which is a bleeder at the moment? Could you tell what's happening there, and also a more forward-looking statement?
Yeah. The more forward-looking statement, we never do. Ruben, thanks very much for the question.
You can always try.
Yeah. Okay, let's look at financial markets. The business that we do in financial markets as ING is one that is concentrating in the foreign exchange area. How do you help your clients hedge foreign exchange exposure? How do you help your clients hedge interest rate exposure? We have a business in what we call GSF. There's more businesses, but these are the big contributors to the financial markets business. Within the financial markets business, we see already for quite some quarters that although there's a lot of volatility in the stock markets, and there's quite some foreign exchange volatility in some markets, overall, there's not a lot of volatility, specifically not in the rates market. Therefore, you don't see a lot of demand from customers for hedges.
That actually makes that the volume of business coming through the financial markets activities is far lower than it used to be one, two years ago. Two years ago, I think. That basically gives a result that is below our hurdles. If you look at financial markets and what they do beyond the way we qualify it and report it within wholesale banking. Also the activities that we do for mid corporates, in financial markets, the return of that franchise on an annualized basis between 3% and 4%, which still makes it a bleeder because it's not making the hurdle of 10%, but it's not like it is a loss-generating business. It is a profitable business. For the amount of capital that you need to hold for these activities, we're not making the right returns.
There's a couple ways to go about this. There's first one is you restructure, and that's what we did. We centralized most of our trading activities in London. As you know, from Amsterdam and Brussels into London. With that, you try to work on the cost side. You continue to work on the cost side by further standardizing the systems, which is what we have been doing over the last couple of years, and we will continue to do so as well. You can't solve this only on the cost side. You'll also have to look at the income side and at the return side. For that, either you stop real businesses or you wait for better times to come. Times in which the risk client demand for hedges, and they will come back. At this moment, you're right.
I mean, the division is not performing well enough in order to make the return hurdles on the capital that we have to allocate to that business.
Right.
Yeah, it is one that is in our focus to improve.
There are signals that the trading activities have to go back from the U.K. to the EU, which would mean more cost because all the investments you had to do to bring everything to London and then bringing it back would be wasted. Do you have any comments on that? Can you also shed some light in where you are in thinking what to do, to stop certain activities or just to sit back and wait it out?
Yeah. No, I can't allude as to what we're doing. We're looking at all different options. We're in the middle of that process to review, and you will hear the moment that has any kind of major impact. For sure, if that happens, you will hear so. Now, on the other discussion, which is basically the discussion that all banks have with the SSM as to the location of some of the risk-taking and risk management activities in financial markets. Ensuring that some of that, if it is related to the EU 27 business, that is located on the continent. That is certainly a discussion that we're having. It's something that we won't comment on because we never comment on discussions that we have with our regulator. This will not have a material impact on the business case that was underlying the centralization in London.
It's not going to really hamper that business case of centralization in London. I think we moved to London, the business case was [inaudible] is still valid.
Okay. You're staying in London. There's no question they would leave.
We have centralized in London, so the question is just, are there specific activities that you need to bring onto the continent? That will not influence the business case so much that you wouldn't want to be in London.
Right. Thanks so much.
The next question is from Mr. Koen Haegens of de Volkskrant. Go ahead, your line is open.
Good morning. I was wondering, because you're saying that expenses have been going down during the last three months. At the same time, I would expect that the cost of these measures because of the settlement, for example, the extra monitoring and the personnel expenses in Amsterdam, I would expect these costs to rise. Could you explain how it comes that the costs still are getting lower?
Well, the cost that we report on is a lump sum of cost of ING across the globe.
Yes.
We're active in 42 countries, as you know. If costs go up in one market, it doesn't mean that overall our costs go up. If costs go down in one market, our overall costs go down. That's one. Secondly, the improvement program, the enhancement program around KYC and monitoring, client activity monitoring, that's not something new. We didn't start at the moment that the settlement came out.
The shortcomings were very evident when we did the investigation together with the prosecutor. Therefore, we started that enhancement program already early 2017.
Clearly, we are investing in this area of compliance. We are increasing the number of people active in compliance. Just to give you an idea, in the Netherlands, we've increased that from 150 in 2010 to 450 as we speak, and globally from 600 in 2010 to now 1,800 globally. It's not that there's going to be a sudden cost peak or cost increase. Yes, compliance and making sure that we do play our role as a gatekeeper seriously and that we do play it well is costing. At the same time, as you know, we are transforming. We have heavy investments on the digital side, and that's also reducing costs. The sum of the two may still lead to an overall decrease, which is happening in this quarter.
Having said that, the actual penalty or the actual fine is taken out of the profit this quarter.
Yeah.
It is not reported on the cost line. It's reported as a special item, it hurts.
It's supposed to hurt.
Yeah. During the next quarters, we won't see extra continued costs rising.
Well, as I said, you will see some cost categories going down, and the cost of running a program like this.
You can certainly expect to be at a high level.
Sometimes increase, because this is an important role to fulfill, and it needs investment going forward as well.
Yeah. One final question on this. The earlier goal of the reorganization of decreasing 7,000 jobs worldwide and 2,300 in the Netherlands, has this changed because of these, for example, extra compliance personnel?
Well, first, I have to correct you. We never indicated that we were cutting 7,000 jobs because of the transformation. We said that 7,000 jobs were going to be affected by the transformation.
Okay. Yeah.
The reason why we said it that way is that, and you can check our FTE numbers, that overall, our FTE numbers are not really going down. This is ING as a total.
That's because we are creating a lot of jobs as well.
The jobs that we're creating are in different areas from not only different geographies, but also different areas.
Yeah.
Where we are saving jobs because of digitization. For example, digitization leads to a decrease of operational jobs, but we do need more data analytical skills.
Yeah
those people in that area. The 7,000 that we announced at that moment, that is what we are still performing on.
As to the jobs that will be affected. We are currently, in terms of the reduction, for example, then if it comes to those areas where this will lead to a reduction.
Yeah
in Belgium for the last two years, this has led to a real decrease of internal FTEs, as we would call that, of 1,150 people.
Yeah.
As an example of that 7,000 that are affected. Again, it's not like.
Yeah
jobs. Yep.
I understand. Thank you.
Any further questions?
Ladies and gentlemen, you can still press star one on your telephone if you have any further questions or remarks. Go ahead, please. Star one for questions or remarks. Go ahead. We have another question coming through from Mr. Ruben Eg, De Telegraaf. Go ahead, your line is open.
Could you take us with what has happened in the last quarter in the Dutch business? How did customers react on all the news which came out around ING? I see, for example, that EUR 2 million of the customer deposits have decreased. Could you tell us more about how this went?
Clearly, we have talked to customers, and we have also looked at social media, Ruben. Clients and people have indicated that they weren't happy with the situation at ING, and some have certainly also closed their accounts. Now, we have a pretty large market share, and we have more than 8 million customers, as we call them, in the Netherlands. The number of customers from quarter to quarter is pretty volatile in itself. If you look at the underlying development of the primary customers in the Netherlands, we actually see a continuation of an increase if you take it as a trend over the last three quarters. With primary customers, as you know.
Those are the customers that see us as their primary bank. In terms of the specificity of the savings going down in the third quarter, it's quite a normal seasonal pattern because the third quarter is the holiday quarter. People do use the money that they get in June, generally as a holiday payment, or May and June. They consume it in July and August. That you see some of this going down is more a seasonality effect than anything else.
One of the questions about the capital ratios.
Yeah.
You see that core Tier 1 is just a bit above your goals. The leverage ratio is a little bit above that. How come this is going down, and in what ways are you comfortable with how it's looking at the moment?
If you look at the core Tier 1 in this quarter, it went down by 0.1%. That is basically because we are accruing the remaining profit, which was somewhat lower, of course, after the settlement. We are accruing that for the dividends, so normally-
That is what we always do. We accrue for the dividend in the first three quarters of the year, and then the final quarter is more used for either balance sheet strengthening or for using extra money for dividends. This quarter, the profit is basically reserved for that. That doesn't add in the equity. On the other hand, what also happened is, if you look at foreign exchange and then you look at Turkey, but you can also look at the U.S., and if you look at equity stakes, so for instance, Bank of Beijing, those two led to a slightly more downward pressure on the total core Tier 1 ratio. Overall, we are still 0.5% above our ambition level, which is, I would say, it's a considerable amount. It's a billion and a half more than what you normally need, or EUR 1.6 even.
Now, the issue is, what we have said is we are looking at this capital more longer term, and we just have to make sure that we will continue at this post-Basel IV 13.5 level, and that is what we are doing, and that's what we are accumulating money for. If you look at the leverage ratio, then you see something else. In the leverage ratio, what plays a role, of course, is both your total amount of equity, but also your balance sheet size. For instance, if we have more pooled money with, for instance, BNG. That is our bank where we deliver cash pooling services for our clients.
If they have higher balances, then under the new rules, this is also part of the leverage ratio, and that plays a role, and that's why, for instance, per quarter, it might fluctuate because you have these amounts in there as well.
Yeah.
Just also on the capital ratio, Ruben. I mean, for the 13.5 is our ambition. We want to manage it around the 13.5. Doesn't mean that we wouldn't allow it to go below, because in the end, the regulatory minimum is 11.8. The regulatory minimum is 11.8. We basically want to steer away and stay away from that level. That's why we've said, well, we want to manage it around 13.5. We're well beyond the 13.5 as to where we want to be.
Okay. Yeah. Because the loan book is growing, and the risk for that makes your capital ratio go lower because you want to use the money, didn't pay out.
Exactly. Well, in the first three quarters, that's how we reserve our profits. In the fourth quarter, you will then see a surplus of profit then going to the capital, and then you see it going up again. Yes.
Yeah. All right. Okay. Thanks so much.
Next question is from Mr. Koen Haegens, de Volkskrant. Go ahead, sir. Your line is open.
Thank you. I have another question on Turkey. This summer, there was a lot of noise about the potential problems and losses over there. Now it seems, at least in your numbers, that this may have been a bit exaggerated. What do you think about it? Do you think that we have seen the main crisis over there already, or can it become worse?
It's a good question. Steven is going to answer that.
Yes. Thank you. From a macroeconomic point of view, Turkey is in a more difficult period, and that is not over yet. They are in the midst of it. Although I must say that the Turkish Central Bank has put the initial right steps in place to actually support the country. At the same point in time, we have already been managing our exposure and the way that we deal with individual clients for the last couple of years. For example, we've been very strict on focusing on foreign currency lending for clients locally. We only focus on the large clients which have foreign currency income, then give them also foreign currency lending. Otherwise, there's a mismatch.
Yes.
That's one. Two, we typically, if you look at retail, so mortgages, that's only a local currency. If you look at small businesses, that's only a local currency because they largely make also local currency income.
Yes.
The larger company, we focus on foreign currency lending. That's one. Two, we have been gradually decreasing our intercompany lending from Amsterdam to Turkey. At the end of last year, that was EUR 4.1 billion. That has gone down to EUR 3.4 billion, and we continue to bring that gradually down. We still would like to support our clients in Turkey, both foreign, so non-Turkish companies in Turkey doing business there, as well as Turkish companies doing business here in Europe. We need to do it in a balanced way, and we need to pay continuous attention. Other than that, we are focused on it continuously and have to pay a big compliment to the local team who have been managing that already very well for the past two years.
Yeah. One further question. Which of your other more important markets do you see potential problems on this thing? I read something about Romania. Maybe there is China.
I think, if we zoom out, clearly, you can have a long discussion about trade war and the effect it will have on global growth.
There is not a lot of markets apart from the couple of emerging markets that were already hit hard in the summer, Argentina, Brazil, Turkey, that were hit hard, that where you can expect further deterioration or so. In Turkey, as Steven has indicated, which is a large market for us, in comparison it is small for our total book. The local book seems to be holding up quite well, and that's because of all the things that Steven was indicating.
Europe in general, including Poland and Romania, if there is anything in Europe that can spoil the party is geopolitical risk either coming from Brexit.
Sure
A more hard Brexit in a way that we don't know how to manage, but honestly, we are prepared for that. Geopolitical risk coming from Italy, as we know.
which gives rise to and weakens the EUR a little bit. Immediate crisis, no.
Okay. Thank you.
Okay.
Next question is from Mr. Archie van Riemsdijk, ABM Financial News. Go ahead, please.
Yes. Good morning again. I would like to start with a question about the treasury-related income in the quarter, which according to some analysis is the main higher than expected result. Could you explain a little bit what that is?
Sure. It is not the main part, but indeed, there was a bit of headwind on the treasury side. What you are seeing is roughly speaking, we have derivatives which we use to hedge our currency. For instance, we take deposits in Czech koruna, and we convert them to EUR. For that, we use a swap, and that swap has a bit more value. Similarly, with USD, we do euro USD swaps to fund our USD business. Those swaps are mark to market. In general, that gives us a bit more money, and that was, in this case, it is around EUR 60 million, that you have derivatives not in hedge accounting, which are supporting the results. The other part in there is we have derivatives which we use for hedging, and we have hedged items.
The hedged items, that is, for instance, mortgages, derivative we use for hedging, are valued against a different curve, and that is technically called the OIS curve, and that gives also some results. The characterization of all of this is two things. One, this can a little bit go up and down, and secondly, over time, it always pulls to par. You have a quarter up, you have it a quarter down. In that sense, it's a bit unavoidable type of noise in your hedging activities. It's again, it is a relatively sizable number, but at the same time, I wouldn't say it is sort of the biggest contributor to the results.
All right. Thank you very much. Maybe I knew in advance I shouldn't have gone into that detail, but thank you.
It's okay.
I was just going to like it.
Don't worry about it. If you go through the results, so the income line is a bit of a beat, so basically, a bit better than expected on the back of the growth and good margins. The margins were kept up. The fee income is a bit better than the market expected, which shows that we're turning around the model from a savings bank to a full-fledged digital primary bank and are selling other products now as well, which generates some fees, and the fact that the cost decreased. Now on the treasury side, as Koos explained, yeah, it's certainly a quarter that looks positive, but some of these elements, as he says as well over time, are neutral. You will see them then also being a little bit more negative in some other quarters.
Okay.
Over time, they have a zero result because they are there to hedge some of our books, and in some quarters, they give a positive result, and in other quarters, they may give a less positive or even a negative result.
Okay. Clear.
Yeah.
If I could, maybe a totally different type of question. There has been some critique, maybe that recent problems, including the compliance issue, but also in the IT transformation in Belgium and maybe also more general that it seems that ING is maybe focusing too much on IT integration and too little on banking. Do you recognize this criticism, and are you maybe changing course as a result?
I don't think that banks have a choice, because I do think that banking is digital and the future of banking is digital, and therefore, IT as a technology is a crucial component going forward, even on those elements that you mentioned. Now, the part that you mentioned in terms of the IT risk that was reported on in one of the newspapers, that was completely taken out of context.
The way we do manage these transformation programs is that we already, before we start these programs, we make our own summary of where we expect some of the risks to be because you're going through a major transformation. We do report it to our people that with the programs that they run and the projects that they deliver on and the money they have to invest, that that should really go at those areas where we expect some of these increased risks while going through a transformation. That's exactly what they are doing. For example, if you allude to the compliance issues, I think a large part of compliance issues can only be resolved as to where a society expects for them to be resolved through technology.
If you have to, and I'm just taking the Netherlands, if you have to analyze 4 billion payments per annum, and you have to analyze those payments against the activity of a client, then there's no other way than using technology to help you get to interpretation of some of this. On the back of that, generate your alerts to the FIUs. Even in those areas, yes, it is people, it is skilled people, it is culture and mindset. There's also quite some technology investment that you need to do in order to get it to that level where I think, we need to get it as a gatekeeper and play our gatekeeper role sufficiently serious.
Okay. Thank you. Finally, if I can, could you give some update on the state of play, where it comes to the expected competition from big tech companies? Do you still have the same opinion on where banking is going and on the role that ING can play there?
Yeah, banks in general, ING specifically, for sure. If you look at the trends in terms of customer behavior, you see that customers deal with us increasingly digital. Just to give you a couple of numbers, we have 3 billion moments of contact a year with our customers, as ING only. 3 billion interactions with our customers. More than 99% of those interactions are through mobile, whether it's your iPad or your phone, your smartphone. More than 99%. Another number to give you is that out of the 38 million customers that we have, more than 20% have never interacted with us other than through a tablet or a smartphone. Kind of shows that banking, and generally banking, is done through tablets and iPhones going forward.
Now, all these people expect from a bank a service level that they are used to also from the global techs, which is a service level that is personal, that is instant, and that's why we are happy to deliver these instant payments in the Netherlands going forward, relevant, and seamless. That is the experience they expect from banks digitally. You have two kind of source of competition for banks other than banks themselves, which is the fintechs, which we see more like players in the market that can help us to build our own experience towards our clients. You have the big techs, the Googles, the Amazons, Facebooks of this world, who are in daily touch with our clients already and can easily extend their services to include banking. We see that. We see that Amazon is active in banking.
We see that Apple Pay is increasingly accepted, although they don't have a banking license. Amazon does have and is looking at payments licenses as well. Alibaba has full-fledged money market management activity, WeChat as well. For them, it's very easy to include banking service in their offering, and therefore, they are a major competitor in vis-a-vis our clients. Now, what we argue is that we are happy with competition, any kind of competition, that it should also be on a level playing field. Some of the regulations that are coming through, like PSD2, don't create a level playing field. They're very one-sided regulations, where basically we are put at a disadvantage vis-a-vis these large players.
Is there any development there, or will that remain for the foreseeable future?
I think that we have brought some of this under the attention of the respective politicians, they do see it now. They see the ultimate kind of power of the platforms and the sheer size they have, but also the sheer influence they have over consumers. That is something that, one way or the other, needs to be regulated, if that's what you want to call it. I do think there is an increasing awareness there's a need for that. Having said that, it's not in the works. They see it, but for the moment, we'll have to work on open banking and PSD2, and that's for as a reality that we'll have to work with.
Okay. Many thanks.
We have a follow-up question from Mr. Ruben Eg, Telegraaf. Go ahead, please.
Perhaps a bit of a strange question, how is the board doing? You've been in the center of the storm from the beginning of this year. Koos is stepping down. The whole company is looking at you. How's it going?
Well, Ruben, if you go through this experience, you have to come out with the result of an investigation and a settlement like this, it's painful. It's painful for our clients, it's painful for our colleagues, it's painful for us as leaders as well. Clearly, in one side, makes you extra motivated to ensure that going forward, you do it well. On the other side, it's something that you have to cope with for some time as well. Honestly, this is what we're going through. The whole company is going through it. We use it for the better. We use it as a motivator to take on compliance as one of those categories that really have to become part of our DNA. Like bankers have grown up to become good credit decision-makers or how we manage market risk.
We really have to get the whole area of knowing your client thoroughly, knowing the activities of your clients thoroughly, it has to become part of the DNA of a banker, that is crucial. That will take some time, for that, we do have the programs, we'll go through that.
Yeah. I'm also asking because a lot of analysts had expected you would do less this quarter than you have done. Was it easy or in what way was it difficult to keep your focus also on the business while there are the other stuff, as I would call it?
Well, I think, Ruben, it's a combination of two things. First, you do see that the transformation that we've started already five years ago and that we accelerated two years ago, that is bearing fruit. It's bearing fruit in terms of how we deal with our clients, the experience that we offer, the Net Promoter Scores in which we're number one in seven out of 13 countries. These are leading indicators for our continuous growth on one side. The other side, as I also said, is that focus on compliance, the improvement of the files, the investment in activity monitoring is not something that just started because of the settlement itself. It's already started more than 18 months ago. Also there, the modus operandi within the organization, we include those activities, and clearly they will be stressed even more as we go and with new technologies coming in.
That was already there, and that will continue so as well. It's not like from an operational perspective, this is now a sudden shock. I said more than 18 months ago, we already started in many areas to improve what we were doing.
How is actually the search for a new CFO going?
That process has started, and we're in the middle of that process, so we can't comment on that any further than that.
Okay. All right. One last thing. I understood next year you're organizing a new capital markets day.
Yep.
What's on the program?
Yeah. What's on the program? This is in March. We thought it would be good to give an update to our investors, and I'm sure you will be invited as well.
Oh, wonderful.
We launched the acceleration of our Think Forward strategy at the end of 2016. This is a program that runs into 2020, 2021 on some elements, and we think that giving a heads-up to our analysts in early 2019 is a good moment because we're just in the middle of the program then, and we can actually show some of the results of that transformation coming through if it comes to digitalization, new initiatives that we have taken across with fintechs and on the wholesale banking side, as well as on the retail banking side, how the experience is digital in different apps. We'll have a couple of deep dives into programs and a couple of showcases as well for analysts.
You need to have a regular update with your analysts and through them with your shareholders anyway on what your plans are.
Yeah. Are there also on that day updates to be expected about, for example, capital markets, sort of wholesale banking, which are, of course, elements which are under stress at the moment?
Yeah. There will be an update on all of our businesses at that moment. Including that. The things that do well and the things that need improvement, that will certainly all be addressed there.
Okay. Thanks so much.
Okay.
Ladies and gentlemen, if there are any further questions or remarks, you can still press star one on your telephone. Star one for questions or remarks. Go ahead, please. There are no further questions coming through, sir. Please continue.
Okay. Thanks. Well, then, I'd just like to thank you once again for showing your interest in ING and being with us today to go through our third quarter results. As I said in the beginning, clearly, this quarter has two sides. Clearly the quarter itself is overshadowed by, deeply marked by the settlement that we have made with the Dutch Public Prosecution Service. The consequence, the number one priority was already and will continue to be the enhancement of our customer due diligence files, where necessary, working on structural improvements, whether it's on policies and tooling and things I've mentioned before. That's really crucial. On the other side, it's good to see that the commercial momentum keeps being there, that the transformation program is bearing fruit. We see continued growth in primary customers in many different countries across the globe, continuous growth in lending and deposits.
That combined with good expense controls, and that to a good result and a continuous strong capital. Thanks a lot, if there's any further questions during the day, you know that our media team is always available. Thank you.