Good morning. This is the operator to welcome you to ING's third quarter 2018 conference call. Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Group, 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 a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statements 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. 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.
Good morning. Thank you, operator. Welcome, everyone, to the third quarter 2018 results call. As always, I'll take you through today's presentation. Both our CFO, Koos Timmermans, and our CRO, Steven van Rijswijk, are here with me. The key points for today, our net profit was lower at EUR 776 million this quarter, that's because the EUR 775 million settlement agreement that we had with the Dutch authorities in early September. We clearly and sincerely regret that the outcome of the investigations identified serious shortcomings in the execution of our policies to prevent financial economic crime at ING in the Netherlands. We take this very seriously. We accept full responsibility for it. They will walk you through some of the initiatives that we have in place to strengthen the management of compliance risk as well. Commercially, things have actually progressed very well this quarter.
The underlying pre-tax result, which excludes the settlement impact, stood at just over EUR 2.1 billion. Primary customers continue to increase as well this quarter by 200,000 to 12.2 million. We have a number one Net Promoter Score position in seven out of 13 retail countries. The four-quarter rolling underlying return on equity improved to 10.7% in the third quarter, that's on the back of continued lending growth at resilient margins, continued strong fee income despite seasonality, and a focus on strict cost discipline across the bank. Group CET1 ratio ended the quarter at a solid 14%. Turning to slide two, I'd like to emphasize that we are committed to conducting our business with integrity. We want to conduct it in compliance with the applicable laws, regulations, and standards in each of the markets and jurisdictions in which we are active.
Already at the beginning of 2017, we initiated a bank-wide Know Your Customer program, supervised by the Dutch National Bank. The program includes activities to improve the accuracy of our client files, transaction monitoring in the Netherlands which includes redefining the drivers which trigger an event, and not capping the number of daily triggers, monitoring clients at customer level. We're also developing bank-wide processes and tooling to support improved client activity monitoring. The KYC program is just one of the many initiatives that we started within the bank. In addition, we have initiated to improve employee awareness around compliance, such as behavioral risk assessments, strengthen the internal compliance culture, strengthen the mindset. The risk management function is chairing a client integrity risk committee, which takes compliance-driven decisions on the client on and off-boarding.
With a further focus on the uniform execution of policies and procedures through more rigorous testing prior to implementation and also centralizing our operational KYC activities for ING in the Netherlands. We've also substantially increased the number of compliance-related staff for ING in the Netherlands from 150 early 2010 to 450 today. Lastly, we partnered with third parties to better combat money laundering. Many of these initiatives we already started some time ago. The cost of these as we run them currently, the cost of these are in the plans. Compliance regulation is, however, continuously evolving. We will, of course, invest when and where needed in order to ensure that compliance risk and non-financial risk in general becomes one of those categories of risk that bankers have to deal with, like market risk and credit risk. It's got to become part of our DNA.
Turning to slide four. This illustrates that we remain on track with regards to the execution of our Think Forward strategy. Primary customers went up 200,000 in the quarter to 12.2 million. That's versus the target of 14 million by the end of 2020. Basically, we are progressing nicely towards that 14 million. In the first nine months of the year, Basically, all of our countries contributing to the growth on the primary customer growth side. As you can see in the slide, Australia is doing really well, Germany is doing really well, but also countries like Romania and Poland and Spain are doing quite well. Again, this quarter, net core lending growth outpaced the net customer deposit growth, which helps us in this low rate environment, defending the NIM, the net interest margin.
For the year to date, we have already exceeded our 3%-4% loan growth ambition. However, particularly in wholesale banking, we see more stiff competition in certain regions, we have put in place stricter risk parameters in certain sectors, particularly in real estate finance and leverage finance. In the third quarter, as you can see also in this slide, we ranked number one in seven out of our 13 retail markets in terms of Net Promoter Score. You know that Net Promoter Score is a compass for us, and it's certainly a leading indicator of more primary customers and more customers to come. It's a real important indicator for us. In another three markets, we're actually number two. Going to the next slide, the integration of Belgium and the Netherlands.
Given the importance of these two retail markets to ING, I thought that it would be helpful to briefly recap why we're integrating these and what's the progress that we have made so far. The parts of the slide that you see here are actually a copy of what we presented during the Investor Day in 2016, where we presented the business case for embarking on this Unite transformation program. Well, clearly we have started it because we see that the mobile and digital banking trend in Belgium continues to accelerate. At the same time, our main IT components in Belgium are reaching end of life cycle, so we needed to invest. That is what we concluded at that moment.
Furthermore, there was scope to integrate our two brands in Belgium, Record Bank and ING brand, and optimize the combined branch footprint, which was successfully completed in the second quarter of this year, where we reached the most important milestone to date, basically the legal integration of the two banks, and with that, also the migration of almost 600,000 Record Bank customers to ING in Belgium. At the same time, we have been reducing the physical footprint in terms of the reduction of branches in one quarter from 1,250 to 650. Over the period that we have been working on this transformation program, so the last two years now, the number of internal FTEs in retail banking in Belgium have gone down by 1,150.
At the same time, we are preparing the target platform for the next step in migration of customers from Belgium onto this target platform, which we are running in the Netherlands. We are preparing this platform by introducing instant payments 365 days a year. That replaces the batch-based payments architecture with a real-time solution. Also, the app that we have in Holland is very highly rated. Basically, you can see why that is the target platform to move to, because it is really state-of-the-art. The major next step will be to prepare the omni-channel Dutch banking platform further, also from a language perspective, to agree on the standardization of basically customer propositions across the two countries to manage expectations, then we'll migrate these customers. We are convinced that we can deliver this large-scale transformation as we have extensive experience.
For example, by integrating Postb ank and ING Bank in the Netherlands. Now clearly also we are extending that experience into our Belgium labor force because they have done a major migration of the Record Bank clients onto their own systems as well. All of that looks to be going quite well. Turning to how we continue to innovate and improve the customer experience. As you know, at the core of our strategy is to deliver a differentiating customer experience. When customers get in touch with us, their experience should be simple, should be smooth, across different channels should be almost the same. To this end, ING has built a common contact center platform for use in retail countries, providing customers with access to the same services.
Basically, this means that if you are chatting with a customer online, you want to continue the same conversation over the phone, it's just one button to push so that you can actually continue the service across all the different channels. That's what we're building, and that's what we're introducing in 12 of the 13 retail countries. On top of that, we'll have to continue to be open to new ideas and collaboration. If we look at other initiatives, our investment in the international payments platform, TransferMate, is one of those examples that provides our customers and corporate clients with faster, cheaper, easier international payment solutions. It's a real good example of that. We've also extended our existing partnership with TradeIX. That's the world's first open platform for trade finance, and that's entirely based on blockchain. With Komgo, that's the other example that we have here.
We take the earlier pilots that we called Easy Trading Connect. Remember that I updated you on how we basically digitized the total trade flow, trade and commodity flow, with a couple of clients, traders, and as well as shipping companies. That is actually now growing into a company. Komgo is one of those companies. In this company, we are agreeing to this as the standard, while we partner with the industry players like Gunvor, like Mercuria, like Shell, but also with banks, because one bank can't set the standard, you have to agree on that standard. ABN AMRO, BNP, Citi, Soc Gen are also on this. Here you see actually a disruption in the making from a pilot into a business.
With that, I actually do think that the global trade flow in the end will be on DLT, distributed ledger technology, faster, safer, and more efficient as well. Going to slide seven. As a bank, ING makes the most climate impact through our financing, as you know. The direct footprint of banks is generally managed well. It's also not big, but we can actually make the biggest impact through the management of the indirect footprint, which is through our customers and the money that we lend to our customers. We have a loan book of EUR 600 billion across many sectors, and we will now be considering this towards meeting the Paris Agreement's two-degree goal. We're able to start doing this by creating an innovative, accurate way to measure the climate impact of our portfolio, and that we call Terra.
This approach is being co-created by the 2° Investing Initiative, and it's a leading global think tank. Terra looks at the technology shift that is needed across certain sectors to keep the risk of global temperatures to well below the two degrees Celsius. For example, in the automotive sector, it's not enough to lower the emissions by making fewer petrol-powered cars, but you really need to produce more electric cars, right? Terra then measures the need shifted in technology against the actual technology clients are using today and planning on using it in the future. That's where financing comes in, and that's where we can have a major impact by having that conversation with our clients. I think it works basically on two sides. On one side, clearly, we are then together working on how we will comply with the two degree ambition that we have.
From a risk management perspective, it gives you control over mitigating the risk of ending up with stranded assets. It works on both sides. It's an important thing to do, from both the bank's perspective as well as the society's perspective. We clearly realize that we can't do this alone. We've made this Terra approach now open source. Many banks have indicated their interest, and I hope they will join us on this one. If new technologies will come around or better methodologies are developed, we will move towards that as well. We didn't want to wait for a global standard and everybody to agree it because it took already too long. We launched our own in order to start really having an impact on climate with this. Let me turn over to the third quarter results now.
Slide nine. If you look at slide nine, you see the underlying pre-tax result, just over EUR 2.1 billion in the third quarter, which marks one of the highest quality pre-tax results we've seen in the history of the bank. Quarter's pre-tax profit is largely a reflection of the 5.4% improvement in the underlying income that you see on the right-hand side. That's as a result of the loan growth, the fact that we are doing this and continue to do this at resilient lending margins, but also higher bank treasury-related items, solid net fee and commission income, as you will see later, and the annual dividend from Bank of Beijing, that is always in the third quarter, but was also remarkably higher.
Furthermore, the third quarter strong result was supported by tight cost control and relatively low risk costs, up by eight risk costs versus both comparable quarters, as we will touch upon later in the presentation. Sequentially, the underlying result before tax rose 5%. If we zoom in to-Markets. I'm on slide 10 now, for the ones who are following me on the slide presentation. NII, excluding financial markets and the impact from ending some of the hedge relationships, increased 5.4% year-on-year. That's mainly explained by a higher interest result in the retail Challengers in growth markets, industry lending, and general lending and transaction services. Year-on-year, net interest income on customer lending improved as we continued to lend at slightly higher overall lending margins.
NII was further supported by a slight improvement in the interest result on savings due to the higher client balances and a broadly stable margin, whereas current accounts continued to be at drag. This was one of those quarters in which we were still able to manage some of the effect on the savings side, and that is what you see here. The mix of these two effects actually led to a one basis points improvement on our net interest margin to 152 basis points, which is nicely in line with the guidance that we have given before, that we expected this at the high 140s, low 150s guidance. Turning to lending growth in the third quarter. We recorded net core lending growth of EUR 6.8 billion, as you can see here. It is a more normalized pace when compared to the first half of 2018.
Retail banking growth outpaced wholesale banking this quarter. Retail Netherlands saw good growth in mortgages, even including the run-off book. Retail Belgium saw a drop. This is more the net effect because it is fully caused by a lower overdraft usage by a major client. If we exclude this impact, there was a growth in net core lending, almost fully in mortgages. Retail Challengers & Growth markets continues on a strong growth trajectory with a majority in mortgages this quarter. The wholesale bank net core lending growth was EUR 2.8 billion, predominantly recorded in general lending in the third quarter. Our focus on return appropriate risk may lead to lower growth going forward, given some increasing competition and also some looser credit standards in the market. We can also cover that during the Q&A. Turning to fees.
If we adjust for a rebooking of capital markets related fees from other income to fee income, which is the EUR 27 that you see there in the bar. Even if you correct that, net fee and commission income came in at a strong EUR 693 million, which is up 7.8% year-on-year. You see it is nicely and increasingly diversified across the different segments. The year-on-year fee improvement was driven by increases in most retail countries, but particularly in the Netherlands and Germany, despite seasonality in areas like investment products. The third quarter saw also higher fees in wholesale banking, and that's particularly due to an improvement in financial markets. Despite this, if you then look at the financial markets performance, financial markets had a more difficult quarter, impacted by the challenging market conditions, reduced client activity, and low interest rates in Europe.
We don't see on the rate side too much volatility as a consequence of which there is not a lot of hedging demand. If there's not a lot of hedging demand, you don't see that coming through on the rate side. If we look at the total financial markets result, and then we would include the business that we do for SME and big corporate customers, the return on equity on our financial markets business would actually improve meaningfully. Nevertheless, we are looking at how we can improve the performance of financial markets going forward. Turning to cost now. If you look at the expenses excluding regulatory costs, which are just like the second quarter, lower in the third quarter. Our expenses were down EUR 33 million or 1.5% versus the second quarter.
This reduction is mostly visible in Retail Belgium due to a continued reduction in FTEs, which I mentioned earlier already, but also visible in the wholesale banking side and the corporate line. On a four-quarter rolling average basis, the cost-to-income ratio improved to 55.5%. In the quarter itself, the cost-to-income ratio was actually 49.7%. You can conclude that we're committed to tight cost management here, where reductions in some areas are used to selectively invest in gross return areas. Combined, this is leading to a continued decrease of our cost-to-income ratio, and we remain committed to the 50-52 cost-to-income ratio ambition that we had given to be delivered by 2020. Turning to risk cost, that is slide 14. Risk cost in the third quarter came in at EUR 215 million.
That's 27 basis points over average risk-weighted assets, which is a more normalized level, especially when compared to the very low level of risk cost recorded in both comparable quarters. As you can see in the graph on the left-hand side, Retail Netherlands recorded another release of EUR 21 million, and that's particularly in the mortgages. Risk costs in Retail Belgium are mostly related to business lending, while in Retail Challengers in Growth markets, there's a combination of business and consumer lending. Banking risk costs were EUR 108 million in the quarter, and that's mainly caused by some larger Stage 3 files in the Americas and Belgium region. It's also across sectors, so there's no specific trend here to be detected. Non-performing loans for ING, as measured by Stage 3 ratio under IFRS 9, remained at 1.6%, as you can see on the right-hand side of this slide.
For the next quarter, we would expect risk costs to stay well below the through-the-cycle average of 40 to 45 basis points over risk-weighted assets. Zooming in on Turkey now. Given the macroeconomic events in Turkey in the third quarter, it's worthwhile that we spend some time here, and I'm sure some of you will have some questions around it anyway. We have composed this slide so that you have a good summary in front of you. Just to start, the Turkish loan book is just 2% of ING's total loan book and is still performing well. The NPL ratio is at 2.3%, as you can see in the third quarter. Overall, the portfolio remains in good shape, but clearly, we expect some of our clients to be affected by the macroeconomic situation.
We take comfort from the fact that all of our exposure to private individuals is in local currency, while we only provide foreign exchange loans to companies that have proven foreign exchange revenues. For larger corporates, we can make an exception if there is a parent guarantee or if there is an export credit agency insurance covering it. Furthermore, I think it's good to mention that our Turkish book has generally a short remaining maturity. You can see that in the slide as well. On the right-hand side, you see that our remaining maturity of the credit outstandings that we have in Turkish lira is just shorter than a year. Foreign currency is around two years, so short-term books.
What we basically are doing now, the folks in Turkey and our team that is working really hard on this, is to manage the risk in our portfolio by de-risking where possible, particularly by not rolling over foreign exchange loans. The aim is to reduce intragroup funding. Since the start of the year, we already reduced by EUR 700 million. As I said, I can only compliment the team on the ground in Turkey, which is doing an excellent job to control the risk and running the business during challenging times. Turning to the capital side, slide 16. CET1 ratio remains strong. End of the quarter is 14%, down 10 basis points quarter-over-quarter, but still well above the SREP requirement of 11.8%.
This is despite the fact that we had to add the full net profit of the quarter to the dividend reserve following the impact of settlement agreement. CET1 capital was further impacted by foreign exchange, lower EC securities reserve, which were only partly offset by lower risk-weighted assets there. We remain confident that we will meet future capital requirements, including the potential impact from Basel and TRIM. We have a large set of potential management actions at our disposal to mitigate these inflationary risk-weighted assets impacts. That includes asset distribution, data enrichment to avoid punitive risk weights, lending mix optimization going forward as well. Maybe as an example of one of the management actions that we have taken in the third quarter to test the readiness of the market as well as the organization here, is we successfully closed a synthetic capital relief transaction on German mortgages.
There are things that one can do. Finally, looking at the slide which show our ambitions both the CET1 and leverage ratios remain ahead of minimum regulatory requirements. We continue to be broadly on schedule with our large digital transformation programs, which help us to bring down the cost-income ratio to our target range of 50%-52% by 2020. Compared to the previous four-quarter rolling average, we have already improved our cost-income ratio now by EUR 0.60 in the third quarter. Finally, on a four-quarter rolling basis, the underlying group return on equity increased to 10.7%. As we keep growing the franchise, are able to command higher margins in most segments, actually. We focus on cost control across the different businesses and still have relatively low risk cost, while at the same time facing continuous pressure from the low rate environment.
Maybe to wrap it up. The third quarter in ING and reputation-wise was overshadowed by the settlement that we agreed on the back of serious shortcomings on the compliance side. Therefore, I can assure you that enhancing our compliance and non-financial risk practices will have the highest priorities within this firm. But if you look at the underlying performance, you can actually also conclude that in the third quarter that we keep executing well on our Think Forward strategy, whether it's on primary customers, whether it's on Net Promoter Score, whether it's on lending or fee growth. And that, combined with our focus on managing cost, optimizing operational excellence, and executing our digital strategy, makes us confident that we will continue to improve on the financials side.
Lastly, I'm pleased to announce that we will hold an Investor Day on the 25th of March in 2019, and that we can actually take more time to take you through some of the examples, some of the milestones, give you more updates as to where we are in the transformation. But clearly also on compliance. But the day will focus on giving you deeper insights in our capabilities and digital leadership. With that long introduction, I give the floor and open it for questions.
Thank you, sir. 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 questions or remarks. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. That's two questions per analyst. Our first question is from Mr. Robin van den Broek, Mediobanca. Go ahead, your line is open.
Yes, sir. Good morning, gentlemen. My first question is on cost of risk. If you take your guidance of 40-45 basis points on RWA and you translate that to the loan book, on a loan book basis, you're between 20-25 basis points. Some could argue that that is a fair level for a mortgage bank-driven focus. I was just wondering, your other retail lending exposures between EUR 100 billion-EUR 150 billion at the moment, I was wondering if you could give a little bit more color on what underlying cost of risk you assume for that book and what level of collateral is in place for that part of the book. Secondly, your U.S. dollar lending exposure is roughly at somewhere towards EUR 100 billion, I think.
I was just wondering to what extent are you reliant on commercial paper and the swapping of EUR deposits to U.S. dollars in order to fund that U.S. dollar lending book? Also, if you could describe the dynamics you see at the moment versus your back book, whether there are negatives coming through or positives. Those are my questions. Thank you.
Thanks, Robin. This is Steven. Regarding the cost of risk, yes, the cost of risk for the last four quarters on average was 18 basis points. This quarter is a bit higher at 27 basis points. There are a number of files in wholesale banking amongst us in Belgium and the U.S. that have caused that. Those are individual files. They do not bear a particular relationship. If you look at the bank as a whole, we have approximately EUR 600 billion in lending. Approximately half of that comes from mortgages. That makes, we're not only a mortgage bank, but yes, we're significant and large in mortgages. There is a relationship between RWA and risk costs. On average, we see that over a longer period of 40-45 basis points. What you actually currently see is that risk costs are relatively low across the board.
Also in retail and in wholesale banking. Yeah, the risks in, if you look at tenors and coverage in mid-corps, as we in wholesale banking typically are a bit higher than in retail. It also causes higher RWA. Across the board, the risk costs as a % of RWA are currently low.
I appreciate that answer. My question is more a little bit about the other retail lending, because if I look at the guidance of other banks on a loan book basis, I can basically make a fair estimate for mortgages and for your wholesale banking exposure. For other retail lending, which is still a sizable part of the book, it's a little bit more difficult. Could you perhaps give a little bit more color on what your assumption is on that part of the book? Thank you.
Yes. We do not disclose particular risk costs on particular segments of the book. I can tell you that also for those segments, the risk costs are relatively benign.
Robin, it's Koos. On the dollar book, you're right that we have a dollar book, and that is in total, we have roughly $40 billion shorter term and $70 billion longer term. What we normally do is the shorter term is funded with CP issuance, and the longer term is funded by a number of sources, which is equity, AT1-denominated long-term debt, and also part of the MREL. Long-term assets are funded long term. If you then particularly ask about back book costs, and then I think you have the cost on is now rolling over CP more expensive over the Ultimo to fund the short-term assets. We had seen that last year as well. The Ultimo, that was already completely covered, that is not an issue.
Okay. That's very clear. Perhaps, I presume you match maturities in your funding, so there's no immediate impact if spreads moves, for example, on that perspective.
That's correct.
Thank you.
Next question.
Our next question is from Mr. Nick Davey, Redburn. Go ahead, your line is open.
Yes. Good morning, everyone. I'll stick to two questions then, please. The first one, on costs. It's obviously been a volatile year on the cost line. You've settled in now in the last couple of quarters towards about 1% growth, excluding regulatory expense. Is that a fair run rate from here? I feel like we've had a year of kind of confusion in understanding this interplay between expenses and underlying savings. Do you think this kind of underlying run rate of 1% cost growth is representative? Second question, I'll go with then wholesale growth. It does seem like there's a slight change in language here today. You talked about bringing closer controls, I think you said, on real estate finance. Could you just talk about, is this a shift in strategy? Is this based on risk that you're seeing? Is it based on competition?
I think you mentioned not getting adequate returns. Is it driven by a desire to build a bit more capital? Could you just talk a little bit around if I'm right in picking up a change in language, and if there is, what's driving it? Thank you.
Okay. Thank you, Nick. On cost. Well, on cost, the run rate. We haven't guided on run rate. We have guided on cost income. I think that's also the way we run it, actually, in ING. When we launched the strategy, we had three recipes for three different activities. The market leaders activity, is expected to really decrease its cost base, like really decrease its cost base. These are mature markets. We're investing heavily in digital, and efficiency is leading there, and that's where you can expect the cost to go down.
In the C&G, the challenges in growth markets, if we see there is profitable growth and we can keep the commercial momentum by running these digital banks, we don't mind to invest selectively and therefore even have a cost growth that is higher than the 1% that you're mentioning, because it is the cost income ratio that we look at that. On the wholesale banking side, from the beginning, we've said that within the sphere of wholesale, we feel that over a period of time, that efficiency gains can be used to the extent there is opportunity to grow the front office in order to produce to be more commercially active. That's a little bit how we run it.
On any given quarter, this may be a little bit up or a little bit down because, you see that sometimes we invest a little bit more in ATF in a given quarter, and then some of the savings come through a little bit faster, like we see this quarter. Another quarter may be a little bit the other way around. Certainly, in 2017 and 2018, we have indicated that those are two years of real investment in the Accelerate Think Forward, so that more towards next year, towards the end of next year, you should really see the effects. We see some of the effects already, which is what we're very happy with. It doesn't give us room now to suddenly start growing the cost or the investment. That's not how we run it.
We have a program to invest, and we look at its effectiveness. Overall, we look at the development of the cost income ratio. On wholesale banking growth, is there a change of language? There is areas where we see a little bit more competition, but specifically more on the U.S. side. We see a little bit more competition, at least, we see pricing, that in our strict pricing, doesn't help us to do more business there. There is many sectors where there is quite some business that does well. That's how we look at things. If you look at how we price our business, we keep the same discipline. Also, in this quarter, we saw the margins on the front book in industry lending being in some areas, a little bit under pressure, but overall stable-ish.
Credit quality was actually better in the front book. We have become a little bit more selective if it comes to, for example, the domain of real estate finance, which we have capped, and leveraged finance, where we actually see structures coming through, and leverage ratios coming through, that we don't feel good with. As you know, we will never compromise on structure. That's a golden rule here. On the general lending side, also in wholesale, we see actually margins coming up a little bit. We have different areas, different sectors, different geographies, but we keep our pricing discipline, and sometimes we grow a little bit faster than others. From a risk perspective, the two areas, as indicated, real estate finance, capped, and leveraged finance, capped as well.
Thank you. Can I ask just a couple of follow-ups on the cost? Just ask to focus on a couple of units. You mentioned about really trying to get absolute costs down, particularly the Benelux retail. This quarter, we're now at declining costs year-over-year in Belgium. Do you think we've got past the worst there? Do you think we're into a period now where we can start to see those savings materializing? Is this a kind of tipping point quarter? Sorry to ask the inevitable, the financial markets business, which is now loss-making, and I know it's a quiet quarter, but this does tend to happen in the second halves of the year. Have you done enough on costs there? I understand your point about efficiencies and playing them into the front office, but it just doesn't seem to be bearing fruit.
Is it acceptable to you to be losing money in financial markets business in a quiet quarter? Thanks.
Good questions, Nick. On Market Leaders, this is an area of major transformation, where still some investments are being made. I wouldn't call it the worst is behind us. It's not the terminology that we use, and we're investing in order to improve our client experience, in order to continue to deliver to our clients in an efficient way. Over time, you have to expect those costs to come down. Absolutely. That's the recipe. Whether quarter by quarter, you can actually now start predicting the cost to come down, I can tell you that there's investments going on there as well. On financial markets, I can see your question. As you know, we just finished a major transformation in financial markets also to decrease the cost further, by centralizing our activities from three locations, Belgium, Netherlands, and London, on to the London platform.
We are reducing the cost there by these kind of movements. Clearly, the current situation is not something that is sustainable, and we will continue to look at how we can improve either on the revenue of volume side or on the cost side. Absolutely.
Okay, thank you.
Next question is from Mr. Farquhar Murray, Autonomous. Go ahead, sir. Your line is open.
Morning, gentlemen. Just two questions, if I may. Firstly, on the slower growth in wholesale banking, how will that impact on the group growth aspiration? Should we think of it as part of a trade-off within the kind of 3%-4% growth aspiration for the group? Is that aspiration actually potentially coming down a little bit? Secondly, just coming back a little on the money laundering issue. The DNB has made clear that in future it intends to publish all sanction decisions barring exceptional circumstances. Could you give us a sense of how often we might have historically seen those kind of sanction decisions against ING? Would it have been one a year, two a year? Just to get a bit of a sense of frequency. How do you see that kind of publication system developing? Thanks.
With regards to the loan growth in wholesale banking, first of all, we're not solely dependent on wholesale banking to grow. What Ralph said is correct. Sometimes we grow a bit faster in wholesale banking, and we're in wholesale banking in sometimes more in structured finance and sometimes in general lending. We grow more in mid-corporate, and then we grow more in mortgages. Second of all, the loan ambition is 3%-4%, but it's an ambition, not a target. In the end, we want to make our returns, we have clear return hurdles in our company. We have clear risk structures that we adhere to.
If we cannot make the returns on the capital that we provide to our clients, we will not lend, we will keep it to either grow our capital or pay it in dividends, and that is the way that we manage that set of capital on the balance sheet. Regarding the sanction disclosures, there are, in the past, what DNB would do, they could give directives or instructions to banks, and those are published in a local state prize newspaper, if you will, the Dutch Staatscourant, that is called. That has happened to a number of banks, including ING. I do not know the number by heart, but I think those directions or instructions have been given a couple of times over the past 5 to 10 years.
Okay. Just a follow-up question. Given the current pricing environment, would you see any difficulties and the opportunities you see across the business? Would there be any issues trying to meet the 3%-4% ambition?
Well, honestly, if you look at the current quarter, where we actually see margins across the board a little bit higher. This is Ralph. Whether it is in retail Netherlands on the mortgages, we see a bit higher margins. Belgium mortgages, a bit higher margins. Germany mortgages, a bit higher margins. On the business lending side, the Netherlands and Belgium, we see stable margins. In general, lending and transaction service, we see improved margins in C&G, Challengers & Growth, except for Germany, we see also improved margins. We see margins okay with that. Therefore, with our strict pricing policy, we can still get the volumes in. This quarter, at 6.8%, it's just over 1% for the quarter. Which is more than the 4% if annualized even.
Even this quarter, it's lower than last quarter, it is still annualized more than 4% this quarter. Honestly, on the other side, with our selective pricing, and as you know, given the fact that we will have to hold more and more capital because of Basel
The returns and the way we price will give higher NIMs as well going forward. If that kind of decreases the volume growth, but you do it at good margins, we're also okay. Because in the end, again, here, it is a cost income play.
Perfect. Thanks much.
Next question is from Mr. Stefan Nedialkov, Citi. Go ahead, your line is open.
Hi, guys. Good morning. Stefan from Citi. A couple of questions from my end as well. On Turkey, could you elaborate a bit more on your funding strategy there? Are you basically trying to pay down the entire intragroup funding over time and delever as much as possible, or is the strategy more in terms of replacing the intragroup funding with syndicated lending down the line, given the successful syndicated rollovers we've seen from some of the Turkish banks recently? If you could give us the delta in the number of compliance officers since the end of 2016 to today. I think you were saying 300 people delta from 2010. I was just wondering what that number is from year-end 2016.
Related to that, whether you have had any communication from the regulator that the 450 FTE number needs to go up and by how much. Lastly, if I may, on loan growth, from what I remember at the Investor Day back in 2016, your ambition was to grow by around 5% in wholesale. Is that still the ambition given the current trade outlook through 2020? Thank you.
Okay. Steven, we'll take Turkey, and also compliance staff. Yep.
Yes. I'll take the first four questions. With regards to Turkey, you have seen that our intercompany funding has come down from EUR 4.1 billion by the end of last year to EUR 3.4 billion as per the third quarter. We have a balanced strategy here. Gradually, we want to decrease the intercompany funding from ING to ING in Turkey. If there is excess funding or excess capital from Turkey, then we will ask that to be repaid. Again, we do that in a balanced way. We have a franchise in Turkey, also with international companies being in Turkey and Turkish companies working across my network. Again, with due care for our foreign currency structures, we gradually will bring that funding down.
It also means that we increasingly get more local funding tools, including securitization or syndicated loans or deposits, or other public means of funding. That we will then balance with intercompany funding. That on Turkey. The delta in compliance staff. Yeah. Maybe I could rephrase it, that it is not only the compliance staff, but also people who work to make ING and keep ING compliant from an AML, an anti-money laundering perspective and the legislation that we have in that regard. Indeed, in the Netherlands, the number of people working on that increased from 150 to 450. If you look at this on a global basis, the staff working on these parts of the bank grew from 600 to 1,800 over the past six or seven years. Basically, that is ongoing.
It is not the case that we have received a message from the regulator that the number has to be a certain number or whether it has to be more or not. That is not the case.
Good. Stefan, on your 5% loan growth ambition in Wholesale Banking, I don't remember that we had a specific Wholesale Banking loan growth ambition. The 3%-4% was the ambition. At the same time, we had the ambition, and we still have the ambition to change the asset composition of our balance sheet away from mortgages and towards higher margin lending, which is also Wholesale Banking. There is a consequence, maybe that is where you derived from. The only 5% number I remember is the one that the fees should grow with a minimum of 5%, and we're beating that.
Okay. Thank you, Ralph. Just to follow up on the compliance question. What was the number at the end of 2016 in terms of AML compliance or global compliance?
We do not disclose that publicly, but you can safely assume that we have been gradually moving those numbers up over the past number of years.
Okay, thank you.
Our next question is from Mr. Maxence Le Gouvello du Timat from Jefferies International. Go ahead, your line is open.
Good morning. Two questions. The first one would be on deposit. We saw an inflection point in Q3. Is it a seasonal impact, or is it a change of policy on your side? The second would be on Germany. You launched a lot of investment, and you moved to Agile banking. What is the dynamic we should expect in the coming quarter? Thank you very much.
Maybe Maxence, the reference you make on its course here on deposit inflection point, what is it precisely that you're referring to?
lower growth. You mentioned also some outflows in France and Spain.
Okay. I think what you see is the following. Overall, we are more approaching an inflection point, one of the things what you see is growth on the lending side that enhances your margin more than attracting additional savings. At the same time, are we at the point that that is changing? Well, that has all to do with the whole interest rate policy going forward. Overall, we are quite happy that, yes, we do attract a fair bit of the deposits. If you look at the deposits overall this quarter, there you talk more about seasonality because normally what you find is, the quarters, quarter 2 particularly, people they cash in their holiday allowances, so they get rich and they spend it in their holidays in Q3 and they have a little bit less money.
Okay. Thank you.
Maxence, this is Ralph here. Could you repeat your second question, please?
Yes. On Germany, you made some lots of investment, and you made the announcement that they moved to Agile banking on this quarter. Should we see an acceleration of the top line in terms of fee generation? Because I believe you're going to be more active on that part. Is it going to take a little bit more time? Is it a story of one or two quarter, or is it more for next year?
The additional investments are happening as you indicate. The Agile way of working is currently being introduced. What it will bring along is more efficiency, for sure. A platform in Germany that is more scalable than it currently is. It will help over time the cost-income ratio. I don't think it will be an accelerated effect that you can expect from that perspective. On the income side, clearly this is still a business that is dependent on interest income. However, we are introducing several fees by moving towards a primary digital universal bank. In Germany, we get more and more primary customers as you have seen in my report. With that, some more fees come along, like behavioral fees that you introduce in order to ensure that clients are incentivized to behave if they withdraw money, or how often they call, and stuff like that.
You will see some of that happening. This is not going to be a very one, two quarter acceleration, and that is the next level. Over time, you can expect a more diverse income picture in Germany as well with the introduction of more and more new products, which also generate fees.
Thank you. Have a good day.
Our next question is from Mr. Benoît Pétrarque from Kepler Cheuvreux. Go ahead, your line is open.
Yes. Good morning, everybody. Two questions on my side. First one was on the cost. Could you update us on the timing of the cost cutting for the EUR 900 million cost cutting expected? I think you were expecting originally EUR 300 million by end of 2018 and EUR 550 million by end of 2019. I'm just wondering here where you are and what you expect for next year. The second question was just on the mortgages in the Netherlands. I think you have been gaining market share, could you recall us what your market share is currently? I have the impression that your front book margin is maybe slightly below your back book margin on the mortgages in the Netherlands. Just wanted to confirm that statement. Thanks.
Thank you, Benoit. On cost, the timing. You will not see those costs necessarily to go really down there from an ING overall perspective, because as I said, we don't mind to selectively invest in initiatives if that, in C&G for example, enhances the franchise and supports the growth. We do measure internally the effect of the transformation and the investments in the transformation. We have a very rigid process around approving business cases as well as benefit management. We do make sure that the investments make their return. You can't necessarily rely on seeing that in cost numbers going down overall in ING because that's not how we work, as I just explained. On mortgages, Steven will work on that.
Yes. Thank you. On mortgages, our market share in the Netherlands is approximately 15%. If you look at the margin, the front book is actually better than the back book, that has gone up mostly in the quarter, but it also includes an impact of a combination of, on the one hand, refinancing of bullets, the other hand, new to bank production, which is more annuity than in the past, therefore there is a composition of the front book. If you look at it for products, the front book is better than the back book.
Thanks. Can we assume that by the end of 2018, you will realize your EUR 300 million level of cost cutting out of the EUR 900 million? One third, is that achieved so far, or are you
No, I think what we do is the following. We have overall this year indicated that we will work within cost income at around the 55%, that might be slightly below, and we are on our path of doing that. I find it very difficult to do that precisely because part of the work, look at this quarter, Benoit, that we've seen that we have spent money on Accelerate Think Forward, that differs by EUR 20 million, EUR 30 million per quarter. That is just a kind of non-standard activity which is happening. That is why this exact guidance is difficult. At the same time, what you do see is that overall, we expect for this year to have the cost within that guidance of what we have given. Overall, for 2019 onwards, we will make the next steps towards the 50/50 too.
Great. Thank you very much.
Next question is from Mr. Bruce Hamilton, Morgan Stanley. Go ahead, your line is open.
Hi. Morning, guys. Thank you for taking my questions. Most of them have been asked already. I guess a couple on capital. In terms of the cost of the AML case, we'll see that's absorbed in the quarter. Am I right to understand that the operational risk charge is probably still to come, and do you expect that to be Q4 or later? Secondly, on the capital optimization, obviously, you talked about the originate to distribute model. Do you think that using that to drive some capital relief will be the majority of your mitigation efforts, or do you also see the need to reconsider some of the global footprint? Are there any areas that you're thinking that might not be non-core or thinking disposals or really you think you can mitigate just through the areas you discussed on slide 16? Thank you.
Thanks, Bruce. With regards to the operational risk-weighted assets, the capital, the fine we've taken as a cost in the third quarter, the impact on capital on our operational risk-weighted assets will likely come when we update the model next year. That will be a limited effect.
Thank you.
Yes.
Our next question is from Mr. Pawel Dziedzic .
Oh, sorry. We just have one more answer to give.
Oh, excuse me
on the capital part.
I'm sorry. Just one moment.
If you look at the capital optimization, there is more things what we do. We don't only rely on the originate to distribute. Things we can still do and have to work on is if you take our lending to specific corporates or conglomerates to optimize the covers which you have will help because that gives you different capital numbers. The other things what we will do is we will work on the data to make sure that unrated corporates get a rating, so that will give you capital relief. The other thing, and that's maybe the most important, is to make sure that what we started in 2013 onwards or so, is to look at the pricing. Just to make sure that you adapt your pricing regime to the new reality.
I think those things, if you take that together, that will help you to optimize on the capital side.
Great. Thank you.
Following question is from Mr. Pawel Dziedzic of Goldman Sachs. Go ahead, your line is open.
Good morning. I will start up with a follow-up on your answer right now on management actions on risk-weighted asset mitigation. Can you give us a sense what is the timing of those measures? I think you say that 80% of them could be implemented ahead of 2022, should we see any impact in, let's say, next one or two years? That would be useful. The second is just also a follow-up on the cost remarks that you made about your market leaders, especially in Belgium. You mentioned that you expect cost decline, obviously you cannot guide quarter to quarter. It can be volatile. Can you walk us through what are the next stage of intending of timing migrations, what we expect to see operationally in 2019, and should we see a cost reduction parallel to that? Thank you.
On cost, I'll take the one on cost. Cost will come back on the management actions regarding capital. The market leaders business, as I updated you during the presentation, I think a lot of the groundwork and preparation is being done as we speak. More investment needs to be made on the target platform in order to receive those Belgian customers, that will continue for some more quarters. Although on one side, you can expect that the further FTE reduction, just by virtue of efficiencies that are already being realized, that you can see some of that, we will still need to continue to invest at least the first couple of quarters of 2019. Because the planning of the migration of the first batch of clients is probably towards the end of 2019.
Only when all clients have been migrated onto the target platform, we can really start to switch off systems, decommission stuff as well. The real cost decrease
Is always going to be backended in the whole program. What you're going to expect in 2019, though, already as a cost decrease in Belgium, is the decommissioning of the Record Bank systems. That is for sure. They have now migrated, slowly but surely, we will be able to decommission and switch legacy systems off there.
Maybe on the capital side, the management actions we stated. If I go through them, rating unrated corporate is something which we will do as soon as we have the data, and that will be quick. At the same time, it's not easy to see because we will get our frequent model updates and TRIMs, but for sure, this is one part we will do as quick as we can. If you look at cover reallocation, it's a similar point on that. If you look at the originate to distribute, that will be a bit more feasible because over the next three years, yes, we like to do that. The expectation to do EUR 500 million or EUR 1 billion trades in a quarter on this type of activity, if markets allows, that would be something which would be interesting for us.
At the same time, there's various things which play a role in making that happen. If you look at the pricing side, indeed, where we were already looking at longer dated pricing against a higher Core Tier 1 ratio, we will right now start to focus also on the shorter term rating, because as you know, 80% of the increase of the Basel requirement is caused by the input floors, and they have an earlier date. That means that is the ones where we have to make sure that we focus a bit more on the short-term lending repricing, that is something which will happen very soon.
That's very helpful. May I just ask one follow-up? You mentioned TRIM. Do you have any more insight into what the impact could be as of now, or it's still unclear?
Yes. Regarding mortgages Netherlands, the impact is final. We got the final letter. Because initially, you get an investigation, and then there are initial findings, and then there is a discussion about it, and then you can respond to those findings, and that leads to a final letter, and then that also includes the impact on your model. On Dutch mortgages, that is finalized, and that impact was almost negligent. The next letters or finalization that we are going to have are on mortgages Belgium, on SME Netherlands, and on the trading books that I expect either to come in the fourth quarter or the first quarter. The TRIM exercise on the low default portfolios in wholesale banking only recently started, and that will only be in the course of next year that we see any outcome in that regard.
The only outcome we've received so far, the final outcome, was on Dutch mortgages, and that was negligent.
Thank you very much.
Our next question is from Mr. Alex Koenne on Oddo BHF. Go ahead, please. Your line is open.
Yes. This is Alex Koenne from Oddo BHF. Two questions from my side as well. The first question is on the operational leverage. I think that if we look back to the last six quarter, this is the first time you're able to generate a positive operational leverage. I'm just wondering whether you are more confident on being able to do so in the next quarter. The last time I raised the question, you said that you were expecting that to happen basically on H2 2019. How comfortable are you on your revenue growth? The second question is on the capital. Excuse me to ask the question, I should know, the 200 basis point impact from Basel IV, was that a gross or a net number from mitigation?
Also on the capital, the 13.5% target you're looking under Basel IV, was that for 2020 or more in 2022? How do you feel regarding your dividend policy? Are you still looking to grow your dividend, or are you looking, going forward, to move more to a, let's say, payout ratio and a progressive dividend? Thank you very much.
On the operating leverage side, I think we have achieved more quarters, but this is certainly a quarter in which it is showing. We're very happy with that. Whether this is going to happen every quarter going forward from now, I can't guarantee you, as I've indicated. We are managing on a cost income ratio that gradually, but surely, will go down over time. The cost income ratio is distorted because of regulatory costs anyway, in some cases. The underlying, if that is what you want to track, then you should, over time, certainly see that going down and see that trend picking up as from mid 2019, for sure. On capital, the 200 basis points, then I'll give the floor to Koos as well. It's an all-in impact. Basically, the idea is that it's a 200 basis points impact.
One third of that is to be managed. That's your mitigation side. Two thirds is left over then, so it's like 140 basis points, more or less, is left to be managed in a different way, of which 80% is what you need to solve, or what we would need to solve by 2022, because that's the input floor side of things. That 80%, that 140 will then go down to 110, which is 35 basis points per annum, because that's the remaining period to get there. That's how it works, and that's also why we feel comfortable to be able to make that with a 13.5% CET1 ambition. We have indicated that we want to manage capital around that number. There may be quarters that we're going to be below that ambition. There may be quarters that we're going to be a little bit above.
That also has to do with our dividend reserving policy, because as you know, we want to reserve as much of the dividend in the first three quarters, and keep it outside of capital. What is remaining in the fourth quarter, that will actually always up the CET1 number. That's why we have indicated to manage it around that number. On dividend, Koos?
Yeah. Overall, if you look at this, Alex, we are happy with the level of dividend we are paying. In that sense, I would see not a reason to change. What we always take into consideration is that in the future, Basel will make risk-weighted assets a little bit more stable. However, IFRS, with Stage 2 migration, might make things more volatile. We always look at should we adapt also our capital strategy to that, and no, we haven't concluded, but please be aware that the level of what we are paying, no matter what formula you're looking, we're quite comfortable with.
Thank you very much.
Next question is from Mr. José Coll at Santander. Go ahead, your line is open.
Thank you. To follow up questions, please, on Turkey. You guys had a strong quarter in Challenger and Growth markets and industry lending. I wonder if you could give us some detail regarding what was the contribution of Turkey, including cross-border lending to this strong performance. My second question is, I appreciate the progress that you have made in reducing exposure to Turkey. I wonder if we have already seen the lion's share of the reduction, or should we expect much more wind down progress going forward? I'm also wondering if you're currently allowed to pay dividends from Turkey to the parent company. Thank you.
On Turkey, the contribution of Turkey to the third quarter result. It was a good contribution, but it's a combination of the fact that on one side, clearly in that there is quite a repricing happening in that market as we speak. On the other side, there is also devaluation on the profit that we make. I think the overall contribution is what is normal. It's not something that is extraordinary and therefore has caused the C&G result to go up or down. That's not a conclusion you can derive. It's really the combination of improved margin, but given the devaluation in EUR terms, it's kind of stable-ish. In terms of the reduction having taken place in Turkey, we have started this program quite some time already if it comes to the decrease of intercompany funding. We will continue to do so.
This is clearly the hard currency part of the funding, as we are working on changing some of our foreign exchange exposure to our clients into local lira exposure. With that, you do free foreign exchange capacity, and with that, you can expect us to continue to decrease the intercompany funding. That will certainly continue. Again, we are a player in Turkey. We're committed to Turkey as a market, and we'll have to do this in close collaboration with our customers as well. For the upstream of dividends from Turkey at this moment, it's not something we're currently discussing, but is there a specific idea behind your question there?
Yeah. The idea is whether, if things turn even more sour in Turkey, that you guys can leave CET ratios to the bare bone and start trying to pull money back to the parent company. That's the idea.
Yeah, sure.
Worse comes to worse, what can you do about it? If you can anticipate some of it and start winding down loans, but also getting money back from your subsidiary.
Yeah. First of all, our capital there is relatively limited. You see basically that we're getting repaid from our loans. That is basically the way that we're reducing the exposure from ING Group to Turkey, but there are no capital controls in this regard, so we can freely distribute in terms of what we think we should distribute.
All right. Thank you.
Next question is from Miss Alicia Chung, Exane. Go ahead, your line is open.
Morning, everyone. Just a couple of questions from me. First of all, back on the capital. It looked like for Q3, but also for the last three quarters or four quarters, that there has been quite a powerful tailwind for capital from positive credit risk migration. It's added about 10 to 15 basis points of capital per quarter over the last year. That's obviously quite significant given that this broadly offsets the 15 basis point negative impact from loan growth over the last quarter, for example. I guess my question is, how long do you expect to benefit from this positive tailwind from positive credit risk migration? What is driving it in particular this quarter, given that we are starting to see provisions creeping up? That's my first question. My second question is just on the financial markets business.
You had flagged today that you are doing a review into the business and into the structural profitability of the business. Just wanted to get a sense for do you have any kind of update already this quarter around what kind of actions you would consider taking? You mentioned that you needed to do more on revenues and costs, but also is there more that you can do on RWAs? Over the last couple of years, we've seen RWAs and financial markets falling about EUR 6 billion, but that seems to have slowed now. Is there more you can do to optimize this? How should we see that trajectory? Thank you.
Thanks, Alicia. Regarding positive risk migration, yes, indeed, we have tailwind, but we still see that coming through. The NPLs are going down, our forbearance are going down, the watchlist books are going down. That all also impacts, let's say, the capital. We therefore see that across the board, that if you look at the last five to eight years in that regard, which make up the larger composition of the calculation for our models, that still has an impact on our models. Therefore you see capital coming down. How long will this last is, I think, the whole million-dollar question. Until now, we still see credit migration in a number of these books. Risk costs are also low. Yes, they are a bit higher than they were over the past couple of quarters.
Again, that came from a number of wholesale banking files, which are largely unrelated. At the same point in time, we do see that the macroeconomic cycle has been positive for a number of years. That's why we also are more careful to some of the books which are more cyclical in nature, including real estate finance, including large leverage levels in the leverage finance or acquisition finance space. Sometimes in longer-dated infra construction projects, there we become a bit more careful to at least cater for a change in the cycle, if and when that occurs. Okay. On the financial markets business, just to be sure, the way we report financial markets is from a wholesale bank perspective. If you look at financial markets, including SMEs and mid-corporate business, they're not making the 10% hurdle, but they're making 3%-4% of the different quarters.
The profitability is, and the whole structure is under review. Basically, you can think of any action from that perspective. Because I think if you really want a structural review, you should consider everything imaginable from that perspective. Having said that, we do have a decent business across the different countries and across the different clientele. It's just that at this moment, specifically also in the rates business, it's a very slow business, as you know from also the other banks, as there is a low volatility on the rates. As a consequence, there is not a lot of demand for hedging on the client side. We have a client-oriented business, not so much a very big trading business. That's also why you have seen our risk-weighted assets going down. Also on the operational side with the further centralization and the cleanup of systems.
Also from that perspective, the operational risk-weighted assets have also gone down. I don't think there is a lot of scope to decrease that further per se. On expenses, I think that also there, if you look at what are our new business models in financial markets, also from an innovation and digitalization perspective, there may still be scope there to reduce expenses, either within the activity itself or you basically start something next to your activity. With that, you build a new activity which has a completely different kind of expense composition. As I said, then you can already hear from my elaborate answer on this one, we are reviewing it as we speak. The moment that plan is ready, you will probably see some of that coming through.
Great. Thank you very much. Maybe just one final question. You obviously flagged the Investor Day in March. Do you have any initial views as to what are some of the things that you would like to address?
Well, I think there's a couple of things that we certainly would like to address. We are at that moment in the middle of the transformation that we announced late 2016. We want to give you a real thorough update as to where we stand in terms of the major transformation programs like Unite and Model Bank to give you a feel for what we have delivered, where the milestones are, what you can expect. That's one side. On the other side, we also want you to experience some of the digital initiatives that we have taken, how some of these businesses are growing.
Why we feel that there is still scope for further digitization and business growth on that side. That's on one side. On the other side, also take you through some of the things we're doing on the wholesale banking side. This a little bit the program. We've announced it now. Clearly, in the next four or five months, we're going to work on it and see what are the deep dives that would be really interesting for you to take you through.
Great. Thank you very much.
The next question is from Mr. Kirishanthan Vijayarajah of HSBC. Go ahead, please.
Yes. Good morning, gents. First question, just really trying to understand the decline in shareholders' equity in the quarter. Obviously paying the dividend, the interim dividend, is the biggest item. I just wondered how much of an impact Turkey, and the devaluation of the lira had there through the FX line, in shareholders' equity. Actually, has any of that then reversed, maybe recovered a bit post quarter end? Then just going back to the wholesale bank and your self-imposed cap on leverage finance and the real estate books. Just really, is there a case to be a bit more proactive and actually maybe manage down your exposures on those books if you're really turning a bit more cautious on those, maybe be a bit ahead of the curve, rather than, instead of a cap, actually manage down the riskier bits of the portfolio. Thank you.
Yeah, you're right. On the shareholders' equity, that has come down. There are a few reasons. First of all, we accrue or we reserve all the profits, that is clearly one thing. The two things which play the role is the FX side. On the FX, indeed, you've seen that the Turkish lira, for instance, that was at September the 30th at a weaker rate around 7, I believe, than where it is right now, because right now it's around 6.32. FX played a bit of a role there as well. Dollar plays a bit of a role as well. The final one is the equity. The valuation of the stakes played a role. Those are the negatives on the absolute amount of equity.
Yeah. Regarding the self-imposed caps, the caps are only one element of how we manage these books. In leverage finance, if you look at the final take that we take, those were not bigger than EUR 35 million per entity. These are all, by the way, in unrelated sectors. There is no correlation risk. In terms of governance, we look to certain structures that we want to abide by, otherwise we do not take part. In real estate finance, something similar. We only look at certain durations, we only look at certain cash flow and loan-to-value ratios. Beyond that levels, we do not take part. The caps are one thing indeed. There are more ways that we are steering our portfolios within the risk appetite that we have.
Understood. Thanks, guys.
Next question is from Mr. Bart Jooris, Degroof Petercam. Go ahead, please.
Yes. Hi. Two questions from my side. First of all, near the end of September, there was an article in Het Financieele Dagblad stating that you will have to roll back part of the move to London of your dealers. Can you give some information on this, on where you are in the talks with the ECB and which effect this could have on your cost saving? A second more short question. Last two quarters, you had loan loss provision releases in the Netherlands in mortgages. Do you still see room for more of those in the coming quarters?
Yeah, thanks, Bart. On the first one, while we never comment on discussions that we have with regulators, I can just assure you that clearly there's a discussion around how do you organize for your EU 27 business going forward, how do you make sure that you can cater for your clients on the continent. We think we can do so, the discussions that we're having will not materially change the business case of having everything centralized in London. That's what I can tell you. Apart from that, we never comment on the discussions that we have with regulators, it will not materially impact the business case. On loan loss for provision releases, I'll give the word to Steven.
Yes. Thanks, Bart. The most important factor or an important factor in the driver for loan loss provisions and a decrease in that regard is also the loan-to-value levels that we have, especially on mortgages. You see prices in this country going up. Every quarter they have gone up quite steeply, that in the end also has an impact on our models and also on the stages in which our loan losses go to from stage 2 to stage 1, for example, that means releases. As long as these prices go up, that actually means further decreases in loan losses or releases.
Okay. Thank you very much.
Our next question is from Mr. Marcell Huben, Credit Suisse. Go ahead, please.
Good morning, thank you for the presentation. Questions. I have two left, please. On the Net Interest Margin first. That's been holding up pretty well. I'm just looking at the 2019, 2020 level. Is it just a replicating portfolio that is pressing down the margins? Because also on the lending side, on the asset side, you've been saying margins have been keeping up very well, including Belgium and Germany, which to me are a little bit competitive markets. Is it just can you keep margins stable for 2019, 2020, or is it other than the replicating portfolio pressing those down. That's my first one, and the second one is on capital. The language on capital seems to be a little bit more bullish, more upside there. At what level would you consider having excess capital? Is it above the 13.5% or is it above the requirement?
Would you consider paying out extra dividends on top of the progressive at the end of the year if you're below the 13.5%? Thank you.
On the NIM side. Clearly you've seen that on the NIM side, we have been able to manage the pressure on the savings side very much by managing the savings rates up to now. On the other side, we have also managed the NIM by making sure that we have disciplined pricing, and actually that disciplined pricing, we have changed the composition of our balance sheet on the asset side of the balance sheet towards higher margin business. That has always been part of the strategy even when we announced it five years ago, that we wanted to be less dependent on the lower margin mortgages from a risk perspective. That does support the continuation of a higher NIM, which is what you have seen. Now going forward, depending on how the replicating develops itself, and that is all related to how the yield curve develops.
Basically, we'll have to manage it with strict and disciplined pricing, which in the end will have to go up because you will have to keep more capital for it, if you adjust towards Basel, and also the continuation of the change of the composition of your asset side of your balance sheet. Those are two levers through which you can still manage your NIM. We don't give guidance all the way to 2020, but certainly for the next couple of quarters, we expect to continue to manage the NIM in the high 140s in the next couple of quarters to low 150s. Yep. On capital, Koos?
Yeah. On capital, as we have stated previously, we have an ambition to keep it at 13.5. That's an ambition, what does an ambition mean? It means basically that if we are at 13.2, we're not falling off a chair, but it also means at 13.8 that we don't immediately say, like, "Now it needs to be redistributed." You look at a number of factors. The factors you look at is there anything pro-cyclical like IFRS 9, which warrants that you need to keep it? The other thing you look at is, are there any interesting lending opportunities, and do they give you a return which satisfies for you?
If the answer is no, nothing pro-cyclical is happening, and no, there's no interesting opportunities, you consider should you give it back because then the money has no employee in the company. Before we dare, we at [inaudible] first have we see it as for the next two years to make sure that we accumulate over the next three years towards that Basel standard, we will cross that bridge when we get there.
All right, thank you. Just to follow up, Ralph, on your end on the net interest margin, could you disclose the pressure from the replicating portfolio in the first nine months of this year, please?
Clearly what you see is the following. On the short term, so if you roll over your short-term reinvestments, we start actually to make a little bit of money. Why is that? Right now, the three-year swap rate actually is higher than what the moving average was over the last three years. On the five years, it's break-even because that's where it is. Where you find that you're still leaking in reinvestment is on the seven and on the 10-year, because if you look at the 10 years over the last 10 years, the average was higher than where you currently reinvested. One tenth of your portfolio is still rolled over at a lower rate.
You find a bit of a drag, therefore, more on the current account because that's invested longer than that you see that on the savings because that's invested shorter.
Thank you, Koos.
Next question is from Mr. Jason Kalamboussis of KBC. Go ahead, please.
Yes, good morning. Some follow-up questions, if I may. The first one is, coming back to the compliance, the number of compliance people that you have since 2010. Look at it in a different way. Can you just confirm that there was no hike in 2016, and we have just a linear progression of the compliance people you have since 2010? The second thing is on Belgium. A quick one just on costs. You elaborated on 2019 and 2020 and how a lot of things are back-ended. Am I right to understand that fourth quarter, we should still see a drop, notably due to the fact that you had a lot of people, consultants, et cetera, that will be leaving? On Belgium, on the impairment side, you gave a reason for the higher retail number in wholesale. I think you say they are unrelated files.
Should we see them more as one-off or do you see more pressure in general in the Belgian market? Finally, just a clarification. You did say that you see better margins in mortgages in Belgium. Is that correct?
Thank you. Jason, I will cover question number two and question number four. Steven will come back on question number one and question number three. On the cost side, as I said, the program is back-ended. There is a continuing reduction of FTEs on one side, and the other side, as we said, there is also some backfilling going on in order to ensure that we can continue to service our customers. How that actually plays out in the fourth quarter, I am not going to guide on that. That structurally over time, the cost will go down. That is the reason why we did the transformation. It is a combination of improving the customer experience and also become more and more efficient.
On the Belgium mortgage margins, indeed, over the last quarter, we have seen that we have at least been able to produce against a margin in which the new production, the front book, is a little bit better than the back book. Yes, absolutely. Steven. With regards to compliance staff, we have been building up over the years. We hope that the increase, also on the back of more legislation and more stringent legislation over the latter years, has caused the increase to be higher in the years 2014, 2015, 2016 than before. Still, we have been building that up, not only in the Netherlands but on a global basis. On a global basis, we went up from 600 to 1,800 this year. When you look at Belgium, the cost of risk. Yes, there are a couple of files in Belgium.
In wholesale banking, there were a number of files in business lending. If you look at the risk cost of Belgium over the past number of quarters, over the past number of years, this is nothing out of the ordinary. Again, with wholesale banking, one quarter you see popping up a few files in one country. The next quarter, it is in another country. This is not particularly a Belgium issue or something like that. Great. Thank you.
The next question is from Mr. Adrian Cighi, RBC Capital Markets. Go ahead, your line is open.
Hi there. Thank you very much. This is Adrian cighi from RBC. Just one question on fee income and one follow-up on Turkey, please. On fee income, are you growing at an adjusted rate of 7.7% year-on-year? This growth rate includes Payvision contribution. Can you maybe help us quantify the underlying like-for-like growth and whether you still see the underlying growth picking up towards the 5%-7% range, or does the 5%-7% ambition include the contribution? One follow-up on Turkey. Do you have any contributions this quarter that you would define as one-off, either from hedging or from CPI linkers? Thank you.
On Turkey, no. There is no specific CPI links or hedging that has influenced the result in Turkey. We stay with our clients where we can. We also try to reduce the foreign currency book and only focus on foreign currency lending to clients that also have foreign currency income. Except when we have clients, for example, foreign clients who give guarantees to their Turkish subsidiaries, we will step away from it. There are no particular one-offs in the country that are worth mentioning here. On your fee question, Adrian, I think it's a good question to get that clear. Yes, Payvision is included. If you correct for Payvision, it's a very small number. Payvision is growing very fast. If you look at the fee number, it's a small number. It doesn't lead to a different conclusion.
You can expect higher fees to come from that in the future, for sure. To correct it for this number now, you wouldn't come to a different conclusion.
Perfect. Very helpful. Thank you very much.
Yeah. Okay.
There are no further questions, sir. Please continue.
Okay. Thanks for being with us this morning. Thanks for attending this elaborate call. Just to summarize, clearly, the third quarter has been overshadowed by the fine and the settlement that ING had with the prosecutor in the Netherlands on the back of the investigations that identified serious shortcomings in the execution of our policies to prevent financial economic crime. I want to repeat that we regret this, that we take this very seriously, and we take full responsibility for it, and that we have already been working on this announcement program for the last 18 months, and we will continue to do so in order to make sure that we do play our role as a gatekeeper thoroughly going forward.
On the other side, we see a quarter with a continued primary customer growth, 200,000 increase in the third quarter, continued net core lending growth at EUR 6.8 billion, a continued fee income growth at almost 8% from a year ago, and we see a strict cost discipline coming through. On all levels, in terms of what is important to show that our strategy is working from that perspective, I think this is a good quarter. Again, it's all overshadowed also by the settlement itself. Thank you very much. If you have further questions, you know to reach our investor relations guys. Thank you.