Earnings Call: Q3 2018

Nov 1, 2018

And thank you for joining the ING Third Quarter 2018 Results Call. I'm happy to give the floor to the CEO of ING, Ralf Hammers. Go ahead, sir. Thank you, operator. Well, warm welcome. Thank you for joining us. We'll give you an update of the developments of our financial results for the Q3 of 2018. With me are Coe Semmelas, our CFO and Svein Hsieh, our CRO. As you all know, the Q3 for us was deeply marked by the settlement with the Dutch Justice Department. It's sincerely regrettable that serious shortcomings in the execution of policies to prevent financial economic crime were identified at ING in the Netherlands. Yes, 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 fight to come out to start our enhancement process. We are enhancing our customer due diligence files where necessary in 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, monitoring and the governance as well. Despite this serious setback in this quarter, on the other side, we can be proud of the hard work of our colleagues dealing with clients, on one side, answering them. But on the other side, also, dealing with clients that result in continued commercial momentum, and that is what we have shown as well in the Q3. We saw a growth in primary customers by €200,000 to €12,200,000 We saw a continuation of the growth on the lending side. Net core lending was well diversified and grew by €6,800,000,000 Customers kept their confidence in us and did deposit €3,400,000,000 with us. All of that leading to an underlying pretax result of €2,100,000,000 for the quarter, which is a 6.5% improvement against a year ago. Now as I said, this result, as a financial result, reflects continued business growth and resilient margins. Margins are well managed. There's also a low risk cost environment and a strong expense control. And you can actually see expenses going down 1st to last quarter. The net result was, of course, impacted by the CHF 775,000,000 settlement agreement that we have with the Dutch authorities and therefore came out at €776,000,000 The underlying return on equity was 10.7%, which is actually up. And the capital position remains strong, which is also very good at a level of 14%. So in line, financially and then commercially, we see a very solid quarter. But regrettably, it is a quarter which has 2 different sites. With that, as a very short introduction, we are happy to take your questions. Our first question is from Mr. Ruben Eef, The Telegraph. Could you share some more light on the division Financial Markets, which is a believer at the moment? Could you tell what's happening there? And also a more forward looking statement? Yes. So the more forward looking statements we never do. Lupe, thanks very much for the question. Well, you can always try. Yes, yes, yes, yes. Okay. So let's look at Financial Markets. So the business that we do in Financial Markets as ING is one that is concentrating in the foreign exchange area. How do you kind of help your clients hedge foreign exchange exposure? How do you help your clients hedge interest rate exposure, and then we have a business in what we call GSF. I mean, those are kind of the big I mean, there's more businesses, but these are the big contributors to the Financial Markets business. Now within the Financial Markets business, we see already for quite some quarters that given the although there's a lot of kind 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 race market. And therefore, you don't see a lot of demand from customers for our hedges. And that actually makes that the volumes of business the volume of business coming through the financial market activities is far lower than it used to be 1, 2 years ago, at least 2 years ago, I think. And that basically gives a result that is below our hurdles. Now if you look at Financial Markets and what they do, beyond the way we qualify it and report it within Wholesale Banking, but also the activities that we do for midcorpets in Financial Markets. The return of the franchise on an annualized basis is between 3% 4%, which still makes it a bleeder because it's not making a hurdle of 10%. But it's not like it is a loss generating business. It is a profitable business. But for the amount of capital that you need to hold for these activities, we're not making the right returns. So there's a couple of ways to go about this. The first one is you restructure, and that's what we did. So we centralized most of our trading activities in London, as you know, from Amsterdam and Brussels into London. And 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. But you can't solve this only on the cost side. So you'll also have to look at the income side and at the return side. And for that, either you stop real businesses or you wait for better times to come, times in which the risk line demand for hedges, and they will come back. But 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. So yes, it is one we that is in our focus to improve. Yes. There are signals that the trading activities have to go back from the U. K. To 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 would be wasted. Do you have any comments on that? And 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? Yes. No. So I can't allude as to what we're doing. Clearly, we're looking at all different options. We're in the middle of that process to review. And you will hear at the moment that has any kind of major impact. For sure, we will then if that happens if that happens, we will 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 the risk management activities in Financial Markets and ensuring that some of that, if it is related to the EU27 business, that is located on the continent, That is certainly a discussion that we're having. It's something that we don't comment on because we never comment on discussion that we have with our regulator. But the this will not kind of have a material impact on the business case that was underlying the centralization in London. So it's not going to really hamper that business case of centralization in London. I think we move to London from business case with Factis is still valid. Okay. So you're staying in London. There's no question that you would leave? We have centralized London. So I mean the question is just, is there specific activities that you need to bring on to the continent? But that will not hamper that will not kind of influence the business case so much that you wouldn't want to be in London. The next question is from Mr. Koen Hagens, the Volokgrant. Good morning. I was wondering, because you're saying that expenses have been going down during the last 3 months. But at the same time, I would expect that the cost of these measures against to because of the settlement, for example, the extra monitoring and personnel expenses in Amsterdam, I would expect these costs to rise. How can you could you explain how it comes that the costs still are getting lower? Well, I mean, there is on the cost that we report on is a lump sum of cost of ING across the globe. And we're active in 42 countries, as you know. So if costs go up in one market, it doesn't mean that overall our costs go up. Or if costs go down in one market, our overall costs go down. So that's one. Secondly, the improvement program, the enhancement program around KYC and monitoring, client activity monitoring, that's not something new. I mean, we didn't start at the moment the settlement came out. I mean, the shortcomings were very evident when we did the investigation together with the prosecutor. And therefore, we started that enhancement program already early 20 17. So clearly, we are investing in this area of compliance. We are increasing the number of people active in compliance. And 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 €600,000,000 in 20.10 to now €1800,000,000 globally. So it's not kind of there is that there is going to be a sudden cost peak, a cost increase. But yes, compliance and making sure that we do play our role as a gatekeeper seriously and that we do play it well is costing. But at the same time, as you know, we are transforming. We have heavy investments on the digital side, and that's also reducing costs. So the sum of the 2 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. I mean, it is reported on the cost line. It's reported as a special item, But it is it hurts, and it's supposed to hurt. Yes, yes. But 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 and sometimes increase because this is an important role to fulfill and it needs investment going forward as well. Yes. Yes. One final question on this. Is 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? 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. And 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. And this is IG as a total. That's because we are creating a lot of jobs as well. And the jobs that we're creating are in different areas from where, basically, not only different geographies, but also different areas 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 and people in that area. Now so 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. In Belgium, for the last 2 years, this has led to a real decrease of internal FTEs, as we would call that, of 11.50 people. And as an example of that 7,000 that are affected, but again, it's not like Yes, yes. Jobs. Yes, I understand. Thank you. We have another question coming through from Mr. Ruben Eyck with Tellegraf. 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 IMG? I see, for example, that €2,000,000 of the customer deposits have decreased. Could you tell us more about how this went? So clearly, we have talked to customers and we have also looked at social media, Ruben and 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 8,000,000 customers, as we call them, in the Netherlands. The number of customers from a quarter to quarter is pretty volatile in itself. But 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. And 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 Q3, it's quite a normal seasonal pattern because the Q3 is the holiday quarter. So people do use the money that they get in June generally as a holiday payment or May June. They consume it in July August. So as you see some of this going down is more a seasonality effect than anything else. One other question is about the capital ratios. You do see that core Tier 1 is just a bit above your goals. Also the leverage ratio There's 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? Yes. If you look at the core Tier 1 in this quarter, it went down by 0.1%. And that is basically because we are accruing the remaining profit, which was somewhat lower, of course, after the settlement, but we are accruing that for the dividends. So normally and that is what we always do, we accrue for the dividend in the 1st 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. So this quarter, the profit is basically reserved for debt. So 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. So overall, we are still 0.5% above our ambition level, which is, I would say, it's a considerable amount. It's EUR 1,500,000,000 more than what you normally need or EUR 1,600,000,000 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. And for instance, if we have more old money with, for instance, BMG, so 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 these days, yes, you have these amounts in there as well. This also on the capital ratio, Ruben. I mean, for the 13.5% is our ambition. We manage we want to manage it around 13.5%. Percent. Doesn't mean that we would kind of that we wouldn't allow it to go below because in the end, the regulatory minimum is 11.8 percent, right? So the regulatory minimum is 11.8%. We basically want to stay away and stay away from that level. That's why we have said, well, we want to manage it around 13.5%. So we're well beyond the 13.5% as to where we want to be. Okay. Yes. And because the loan book is growing and the risk for that makes your capital ratio go lower because you want to use the money, it didn't pay out. Yes. Well, in the first three quarters, that's how we reserve our profits. In the Q4, you will then see a surplus of profit then going to the capital and then you see it going up again, yes. Yes. All right. Okay. Thanks so much. Next question is from Mr. Koen Hagen, the Volokstrand. 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? And do you think that we have seen the main crisis over there already? Or can it become worse? It's a good question. Stephen is going to answer that. Yes. Thank you. So 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. So 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. That's 1. 2, we typically for 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. Also, the larger company, companies we focus on on currency lending. That's 1. 2, we have been regularly decreasing our intercompany lending from Amsterdam to Turkey. At the end of last year, it was €4,100,000,000 and that has gone down to €3,400,000,000 and we continue to bring that gradually down. But we still would like to support our clients in Turkey, both foreign or non Turkish companies in Turkey doing business there as well as Turkish companies doing business here in Europe. So we need to do it in a balanced way and we need to pay continuous attention. But 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 2 years. Yes, yes, yes. One further question, which of your other more important markets do you see potential problems thing? I read something about Romania. Maybe there is China. No. So I think if we take kind of the if we zoom out, clearly, you know, we're going to have a long discussion about trade war and the effect it will have on the on global growth. But there is not a lot of markets apart from the couple of emerging markets that were already hit hard in the summer, further deterioration or so. In Turkey, as Steve has indicated, this is a large market for us. But then in comparison, it is small for our total book. The book seems to be the local book seems to be holding up quite well, and that's because of all these things that David was indicating. Europe in general, including Poland and Romania, if there's anything in Europe that would spoil the party, is geopolitical risk either coming from Brexit and then more a hard Brexit in a way that we don't know how to manage, but honestly, we are prepared for that. And geopolitical risk coming from Italy, as we know, which gives rise to and weakens the euro a little bit. But immediate crisis, no. Next question is from Mr. Archie from Riemensdijk, ABN 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 analysts is the main like higher than expected results. 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. And what you have seen 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 euros. For that, we use a swap and that swap has a bit more value. Similarly with dollars, we do euro dollar swaps to fund our dollar business. Those swaps are mark to market. And in general, that gives us a bit more money. And that was in this case, it is around €60,000,000 that you have derivatives not in hedge accounting, which are supporting the results. And the other part in there is we have derivatives, which we use for hedging, and we have hedged items. Now the hedged items, that is, for instance, mortgages, the 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 2 things. 1, this can a little bit go up and down. And secondly, over time, it always pulls to par. So you have a quarter up, you have it a quarter down. And so in that sense, it's a bit, yes, unavoidable type of noise in your hedging activities. But 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. Don't know if you're going to like it. Don't worry. Don't worry about it. I think 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. So 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 Carlos explained, yes, it's certainly a quarter that looks positive. But some of these elements, as he says as well over time, are neutral. So 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. In other quarters, they may give a less positive or even a negative result. Okay. Clear. If I could, maybe a totally different type of question. There has been some critique maybe that well, that recent problems, including the compliance issue, but also in the IT transformers in Belgium And maybe also more general that yes, it seems that ING is maybe focusing too much on IT integration and too little on banking. Do you recognize this criticism? And do you maybe are you maybe changing course as a result? I don't think that clients have a choice because I do think that banking is digital and the future of banking is digital and therefore IT is 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 was completely taken out of context. And the way we do manage these transformation programs is that we already before we start these programs, we make our own kind of summary of where we expect some of the risk to be because you're going through a major transformation. And we do report that 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. And that's exactly what they're doing. But for example, if you allude to the compliance issues, I think a large part of the compliance issues can only be resolved as to where a society expects us to be for them to be resolved through technology. Because if you have to and I'm just taking them the Netherlands, if you have to analyze €4,000,000,000 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. And on the back of that, generate your alerts to the FIUs. So even in those areas, yes, I mean, it is people, it is skilled people, it is culture and mindset. There's also quite some technology investments 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 as sufficiently serious. Okay. Thank you. Maybe finally, if I can, could you give some maybe some update on the state of play where it comes to the competition 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? Yes. Banks in general, ING specifically, for sure. If you look at the trends in terms of customer behavior, then you see that customers deal with us increasingly digital. And just to give you a couple of numbers, we have 3,000,000,000 moments of contact a year with our customers as ING only, 3,000,000,000 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 38,000,000 customers that we have, more than 20% have never interacted with us other than through a tablet or smartphone. It 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 tax, 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. So that is the experience they expect from banks digitally. Then you have 2 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. We have the big techs, the Googles, the Amazons, Facebooks of these worlds, 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 payment licenses as well. Alibaba has full fledged money market management activity, WeChat as well. So 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, but that should also be on a level playing field. And 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. And is there any development there? Or will that remain for sure in the future? Well, I think that we have brought some of this under the attention of the respective politicians, and they do see it now. But they see the ultimate kind of power of the platforms and kind of the sheer size they have, but also the sheer influence they have over consumers. But that is something that one way or the other needs to be regulated, if that's what you want to call it. And I do think there is an increasing awareness. There's a need for that. Having said that, it's not in the works. So it's you see it. But for the moment, we'll have to work on Open Banking and PhD II. And that's far as the reality that we'll have to work with. Okay. Thanks. We have a follow-up question from Mr. Ruben Ek, Telegraaf. Go ahead please. Perhaps a bit of a strange question, but how is the Board doing? I mean there's you've been in the center of the storm from the beginning of this year. Koos is stepping down. All companies looking at you. How is it going? Well, Arun, if you go through this experience and you have to kind of come out with a the result of colleagues. It's painful for us as leaders as well. And clearly, it's in one side kind of 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. And honestly, this is what we're going through, but the whole company is going through it. And but we use it for the better. We use it as a motivator to take on compliance as one of those categories that really have 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 and knowing the activities of the clients thoroughly has to become part of the DNA of a banker. And that is crucial. And that will take some time. But for that, we do have the programs, and we'll go through that. Yes. I'm also asking because a lot of analysts had expected you would do less this quarter than you have done. So 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 2 things. 1st, you do see that the transformation that we have started already 5 years ago and that we accelerated 2 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 that are in which we're number 1 in 7 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 and activity monitoring is not something that just started because of settlement itself. It's already started more than 18 months ago. So also there, the modus operandum within the organization, we include those activities. And clearly, there will be strategy for more as we go and with new technologies coming in. But that's that was already there, and that will continue so as well. So it's not like from an operational perspective, this is now a certain shock. I mean, as I said, 18 months ago, more than 18 months ago, we already started in many areas to improve what we were doing. Yes. How is actually the search for a new CFO going? Yes. So that process has started, and we're in the middle of the process. So it's we can't comment on that any further than that. Okay. One last thing. I understood next year, you're organizing a new Capital Markets Day. What's on the program? Yes. What's on the program? So this is in March. We thought it was it would be good to give an update to our investors, and I'm sure you will be invited as well. Yes, wonderful. The program, because we always have a media part of that as well. So we launched the acceleration of our Think Forward strategy at the end of 2016. This is a program that runs into 20 20, 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 kind of just in the middle of the program then, and we can actually show some of the results of the 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 we deal with our how the experience is digital in different apps. So 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. Yes. And also on that day, updates be expected about, for example, capital markets, sort of wholesale banking, which are, of course, elements which are under the stress at the moment? Yes. So there will be an update on all of our businesses at that moment. So including that, the things that do well and the things that need improvement will certainly all be addressed there. Okay. Thanks so much. 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 Q3 results. As I said in the beginning, clearly, this quarter has two sides. And clearly, the quarter itself is overshadowed by keeping marked by the settlement that we have made with the Dutch Justice Department. 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 is 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, good that combined with good expense controls and led to a good result and a continuous strong capital. Thanks a lot. And if there is any further questions during the day, you know that our media team is always available. Thank you.