Good morning. This is Patricia Kruithof welcoming you to ING Groep's second quarter 2018 conference call. Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Groep, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving 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 statement is contained in our public filings, including our most recent annual report on Form 20-F, filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Ralph. Over to you.
Hi. Good morning, everyone. Welcome to the second quarter 2018 results call. As always, I take you through today's presentation. Our CFO, Koos Timmermans, and our COO, Steven van Rijswijk, are here with me. To go through the key points, I think we can be happy with the quarter. ING Groep's net profit was up 4.2% on the same quarter last year at EUR 1.4 billion. Just like in the first quarter, we recorded a strong core lending growth of just over EUR 14 billion. That's well-diversified, disciplined growth. Also, fee income was strong and risk cost remained low. On the retail side, primary customers increased by 400,000 to 12 million, and that's real good growth, and partly helped by the inclusion of Record Bank customers as per the second quarter. That's 80,000 out of those 400,000.
Second quarter was a very important one for our colleagues in Belgium, and they successfully completed the legal integration. They successfully migrated all of the Record Bank customers to ING, and I will provide you with some more details later in this presentation. Given our strong focus on transformation, the digital spend remained fairly high in the quarter. You will see that as well. The group CET1 ratio ended the quarter at 14.1%. That's mostly due to the strong lending growth and the fact that we keep setting aside profits for future dividend payments. Over the first half of 2018, we will again pay an interim cash dividend of EUR 0.24. Going to slide three. The slide illustrates that we're on the right track with regards to our Think Forward strategy. Total retail customers now exceed 38 million, while primary customers are up to 12 million.
As said, this now also includes Record Bank, and that's versus the target of EUR 14 million by the end of 2020. Again, this quarter, we saw net core lending growth outpacing the customer deposit growth. That helps us in this low rate environment to defend the NIM. Net core loan growth for the quarter stood at EUR 14 billion. That brings the balance to 4.6% growth since the start of the year. Net customer deposits inflow were EUR 5.8 billion for the quarter and over EUR 8 billion in the first half year. As per the second quarter, we ranked number 1 in six out of our 13 retail countries, in Net Promoter Score. Another four markets, we rank number 2.
Across ING, as you know, we're all focused on ensuring the success of our digital transformation, and delivering on our ambition to create a scalable banking platform across different retail markets, like we have basically done across all of the wholesale businesses as well. Given the importance of the Belgian and Dutch markets for ING, we'd like to give you a heads-up as to where we are in the future integration of these retail banking businesses. On this slide, you basically see the trajectory and the steps that we are making towards the full integration of the Belgium and the Netherlands platform. In the end of 2017, the beginning of 2018, we already put in place a cross-border delivery organization.
We rolled out the agile way of working in Belgium and made it consistent with the way we work in the Netherlands, and these are now cross-border integrated teams, the way we operate. I think that most important transformation milestone today has been reached in the second quarter of 2018, and that's a successful migration, all Record Bank customers to ING in Belgium. The 600,000 Record Bank customers now benefit from one consistent client service model that we deliver from an ING perspective. Basically, they are now catered for by the ING branch network. Making these milestones smoothly, doing this integration, doing this migration of clients smoothly, that is only because of the relentless efforts and focus of our colleagues in Belgium and the Netherlands.
At the same time that we're undergoing this major transformation, as you can see later in the presentation, have also managed to retain the strong commercial momentum and keep their focus on the customers. I have enormous respect for our colleagues in Belgium and the Netherlands as to what they're pulling off. It's really a job very well done up to now. Going to slide five, just to give you an insight as to how we are building the go-to platform for all financial needs. Also in the second quarter, we continued to build on this ambition, in order to ensure that we can actually cater for all the financial needs of our customers. As you know, we announced this quarter the partnership with AXA to create a fully digital insurance platform.
Our platform will be offering clear, easy, customizable protection products to the retail customers in six of our challenger markets. This is what we do. This is where we build a client base that is delivered and serves in a digital way. Once they are primary customers, we look as to what are the other needs they have and how can we fulfill these needs. In fulfilling those needs, we don't necessarily need to do that with our own products if our colleagues, like AXA, can help us delivering differentiating products in our differentiating experience. That's platform business. Therefore, I'm pretty excited about these partnerships because, for example, in this one, in the AXA case, it will offer 13 million existing ING customers and growing, as well as, of course, non-ING customers, the opportunity to get access to a new personalized and digital insurance offering.
We also do this on the SME side. For example, for SME customers in the Netherlands, we have partnered with Funding Options. That's a digital platform that will help Dutch SMEs to find the best funding solutions for their growth. Again, here offering next to our own solutions in terms of loans, to the extent that doesn't fit the need of the customer, they will have an option of third parties to help them. It's the same in Germany, by investing in FinCompare, that fintech empowers SMEs to easily compare financing alternatives as well. The comparison element of these services that helps building platforms. We also develop things in-house, as you know, basically I'm turning to Yolt. Yolt now has 400,000 registered users, is ready for the next step, in its early life, which basically means that we have decided to expand France and Italy with Yolt.
Turning to slide six. This is an update that you get every quarter as well, because sustainability is integrated throughout our business, and we are mindful of the important role that we can play in, amongst others, the energy transition. It's a crucial one in order to make sure that, as a whole, we fulfill our commitments to the COP21. In the second quarter, we continued to pioneer sustainability-linked financings. What we did is we offered loans that are linked to a company's own sustainability KPIs. Where in the past, the innovation was in making sustainability loans that were tied, of which the margin was tied towards the relative performance of externally rated sustainability indices. Basically we go one step further, and we look at what are the internal sustainability KPIs of a company, and can we actually connect margin to their progress on those sustainability KPIs.
We did so with DSM and Renewi here in the Netherlands. We also work with Gecina, which is what you see here on the slide as well. That's a real estate trust. Also there we did a sustainability-linked loan, and this was the first revolving credit facility of its kind here as well. For Dutch real estate customers, our energy robot was launched to help them detect how much energy is being wasted in buildings. Basically, what this robot does is it makes a scan, generating recommendations, reducing waste up to 15%. You know that basically energy-efficient buildings are the ones to have on your books, therefore we help our customers in making sure that they do have the right buildings, and they invest in this as well.
Last we mentioned here is that for Australian bank Macquarie, well known to you as well, we acted as green structuring advisor for a green loan. That was structured according to the green loan principles as published by the Loan Market Association, We as ING helped to co-develop that. As you're used from us, every quarter, we highlight a particular part of our business opportunity to talk about one of ING's platform businesses that we actually don't talk much about externally, and that's Interhyp. Interhyp is the largest mortgage broker in Germany. It's fully owned by ING. It's a true example of a fintech that revolutionized a market which was dominated by traditional players. It started as an online offering, and it built also a physical distribution, and the combination of it is what makes it so successful.
That online offering and the complete digitally enabled mortgage platform that they have built can now offer mortgages of well over 400 banks. If you combine that with independent advice and through more than 100 offices, you understand why they are ranked so high in terms of customer satisfaction and win the different awards over many years in a row already. This business is a fully income-driven business. It's got very strong profitability, focuses on Net Promoter Score, just like the rest of ING does as well. The volume share of banks on the Interhyp platform fluctuates because basically, they advise what is best for the customers. ING Germany is one of the banks offering their products through Interhyp. Through the combination of strong processes and attractive product features, we consistently rank amongst Interhyp's top three partners.
Again, they advise specifically clients, so they actively distribute third-party products here as well. What we also do, at least ING Germany does, we refer clients to ING that do not match our ING's in that credit criteria. Those clients who ask for personal face-to-face advice, we basically refer them to the Interhyp offices. It's a very good model, it's a very nice example of an open platform, and it also shows you how the two can go hand-in-hand and create a combined success. Now turning to the second quarter results. Slide nine. Look at the numbers here. The underlying pre-tax result was just over EUR 2 billion in the second quarter. It's the highest quarterly pre-tax result we have seen during the past years. The quarter's pre-tax profit is basically as a result of continued loan growth at resilient lending margins, combined with higher fee income.
Risk cost remained relatively low. On a four-quarter rolling basis, the return on equity, the underlying return on equity, improved to 10.4%. In the quarter, the underlying return on equity was 12%, and that's because Q2 has lower regulatory costs. Basically, the regulatory costs are reasonable, and therefore, in the Q2, we show a higher number. Sequentially, underlying income was up about EUR 30 million, and that's largely due to the stronger income in the Wholesale Banking lending franchises. Year-on-year, underlying income was also supported by the strong underlying business in Retail and Wholesale, but was affected by a weaker performance in financial markets and foreign exchange impacts. If you compare year-on-year, in the second quarter of last year, we had this one-off gain on the sale of an equity stake. That basically contributed EUR 97 million to the result a year ago.
If you correct for that, you see that the underlying business is really developing very well and supporting the income going forward. The NII, excluding financial markets, and now I'm at slide 10, increased 2.1%, as you can see. That's mainly explained by higher interest result in the Retail Challengers and Growth Markets and Wholesale Banking. Customer deposit margins continue to be impacted by lower reinvestment yields. In the quarter, the savings margin was positively impacted by core savings rate reductions in Germany and Austria. We further decreased our savings rates there, we have been able to cushion, absorb some of the pressure there. Net interest income on customer lending improved year-on-year, as we continue to lend at higher overall lending margins. That, as you know, is partly the result of our changing asset mix.
Our NIM continues to be at healthy levels and in line with our high 140s to low 150s guidance that we have given you over the last couple of quarters. That looks like a good performance as well. If you look at, let's zoom into the core lending businesses and the growth of EUR 14.2 billion in the second quarter. I'm sure the questions are going to come, but this growth does meet our risk appetite framework. We do see a bit of increase in competition. In all of that, we remain return focused and do not compromise on structure. That's a core element of how we are basically how we do our business. Again, this quarter, nearly all lending franchises contributed to the net growth. You see a very well-diversified picture here from both a retail wholesale bank perspective, as well as a regional perspective.
Retail Netherlands saw modest growth in both mortgages and business lending. I think it's a positive sign. I think the Netherlands, from that perspective, has really cut the corner now, basically has come around, is doing quite well. Retail Belgium, as mentioned already, continue to have very strong commercial momentum, notwithstanding the transformation. Retail challenges in growth markets also continues on its growth trajectory. You see a well-balanced expansion into both mortgages and non-mortgage lending on slide 12. In the wholesale bank, the net core lending growth was EUR 6.1 billion. We saw much higher number of longer-dated deals, that supports a small increase in lending margins that I talked about earlier.
As I mentioned, slide 12, in terms of the diversification of the different sorts of lending that we do, you may remember that when we launched Think Forward in the beginning of 2014, we basically indicated that we should build different lending capabilities. I think that this slide shows you that we have become far less dependent on one asset class. Four or five years ago, we were very dependent on the asset class of mortgages. Basically, you now see that what we have looked at the growth in terms of other lending, that is actually happening. For example, in the retail bank, where you see other lending, which is higher yielding, non-mortgage lending, that is growing by EUR 4.5 billion in the quarter. In the wholesale bank, you see also basically different areas growing.
Again, to mention, I think it was important that the longer-dated project and asset-based finances, which has supported the NIM, but also the fee income. From this picture, you can actually see that we have well-diversified lending growth in product, sector, and geography. Turning to the fee income. Fee and commission income came in at a strong EUR 717 million. That was up EUR 56 million or 8.5% quarter-on-quarter. This was driven by the increase in most of the retail countries, despite an overall weaker activities in retail investment products. That basically put some pressure on the fee levels in countries like Belgium and Germany. Q2 also saw higher fee income in industry lending and general lending and transaction services. The latter is supported by the inclusion of Payvision now.
We're consolidating the results of Payvision, the commission income from Payvision is reported as part of transaction services. Fees in financial markets were down, that's as a result of lower deal activity in corporate finance and capital markets. We had a very good first quarter in that, the second quarter was okay. Financial markets, in general, had a difficult quarter. Client activity was lower. Revenues were furthermore impacted by the lower rates in Europe and the tight credit spreads, I'm sure you've heard that from some of our colleagues as well. Looking at cost, as you know, if you're going through a major transformation in which you have high investments, it is very important that you do make the right investments, that from that perspective, you do allow some cost growth, that cost growth should be under control and discipline.
If you look at the cost growth in the second quarter, you basically see that we were up EUR 56 million versus the first quarter, flattish year-on-year. Compared to the previous quarter, away from the release of a legal provision in the first quarter, there was an approximately EUR 30 million quarter-on-quarter increase in the digital investment spend. We also saw some higher headcount in industry lending support the growth in the wholesale bank. Also here, we had a bit of an effect of the inclusion of Payvision, as we are consolidating that in our numbers, where you see it on commission income, you see it on cost, the inclusion of Payvision. We are very strict about the management of cost. Those areas that can evidence profitable growth, we will allow cost growth.
If not, we take measures on a four-quarter rolling average basis to cost income ratio on the back of all of this, was up slightly at 56.1%. By including second quarter 2017 in this average, that was a quarter, as I earlier mentioned, that had this EUR 97 million one-off in other income. That's why you see a bit of an uptick, although the quarter cost-income ratio came out at 52.3%. On all of this, I can confirm that what I've said in previous quarters on cost, we remain committed to the 50%-52% cost-income ratio ambition range by 2020. 2018, as I have indicated earlier, is still expected to be an investment year, we do expect the benefits of the transformation to come through the years 2019 and 2020. Turning to risk cost. Q2 was another solid quarter for the risk cost.
Loan loss provisions were EUR 150 million versus EUR 85 million in the previous quarter. Basically, on the back of a continued positive macroeconomic outlook, and combined with the benign credit environment, most regions where we are active, you see that that delivers a low risk cost, relatively low risk cost. As you can see in the graph here on the left-hand side, retail Netherlands recorded a release of EUR 47 million. Also, banking risk costs were EUR 59 million compared to a net release in the first quarter, and the effect of IFRS 9 was visible here, as a number of performing files were classified as Stage 2 under IFRS 9 rules. That's an interesting concept now under IFRS, of performing files are attracting provisioning. I think we all have to look at that and then get used to that as well.
Non-performing loans for ING as measured by the Stage 3 ratio under IFRS 9 dropped from 1.7% to 1.6%. For the remainder of 2018, we would expect risk costs to stay well below our through-the-cycle average of 40 to 45 basis points over risk-weighted assets. On the capital side, CET1 ratio remains strong. End of the quarter at 14.1%, down 20 basis points quarter on quarter, but still well above our SREP requirement of 11.8%. Since we reserved last year's full dividend already in the first three quarters, as you are used to, so basically we keep it outside of the capital build. On one side, the profit, in order to ensure that the first three quarters we reserve for the full-year dividend.
On the other side, we grow, and therefore it's not surprising that the CET1 ratio moves down somewhat during the first quarters, especially since we do see the opportunities to properly deploy capital throughout the business, and that's what you see in improved lending margins. With that, we do expect NII and return on equity to be supported by this new loan growth. During the quarter, the CET1 ratio benefited from the inclusion of EUR 0.6 billion of interim profits. What we didn't reserve as a dividend is here, but it was on the other side impacted by risk-weighted assets growth because of the higher lending volumes, but also because of a macro-prudential add-on for the Belgian mortgages and some adverse currency impacts.
In line with the last couple of years, we will pay an interim cash dividend of EUR 0.24 later this month. With most of Basel IV impact coming in 2022, we remain well-placed to comply with future capital requirements. Finally, slide 17 now. If you look at all the different indicators and the ambitions that we have for 2020, you see that we perform well against all of these ambitions. Both the CET1 and leverage ratios remain well ahead of their minimum regulatory requirements. We reached some very important transformation milestones, like, as mentioned, the full integration of Record Bank in Belgium, which will help us to bring down our cost-income ratio to the target ratio of 50% to 52%.
Same time for 2018, as indicated, we do expect the cost-income ratio to remain at a more elevated level, since we are still investing digitally on the digital transformation for 2018, and the savings are expected later on in 2019 and 2020. Finally, as already mentioned on the four quarter rolling average, looking at this picture, the group return actually stood at a robust 10.4%, as we keep growing the franchise while facing continuous pressure from the low rate environment and foreign exchange impacts. To wrap it up, our second quarter performance confirms that we keep executing well on the Think Forward strategy, whether it's on customer numbers, primary customer numbers, lending numbers, savings numbers, whether it is on the milestones of the transformation, keeping our costs under control. You see that the bottom line benefits from all of that.
Looking ahead, we will continue to focus on managing expenses, optimizing our operational excellence, enhancing our compliance and non-financial risk practices, and executing our digital strategy. On a particular point, you are wondering about the criminal investigations. ING Bank has engaged into discussions with the relevant authorities on potential resolution of the issues, such discussions remain ongoing, and their outcome is uncertain. For the full status on this, I refer to the paragraph on page 20 of the press release. I think as a full summary, I'm confident that our efforts that we're putting together will further strengthen our company and enable sustainable success for the long term of all stakeholders. With that, I think the wrap-up is done, and we have some time 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 your questions or remarks. Go ahead, please. May I please remind everyone in the interest of time, we kindly ask each analyst to limit yourself to two questions only. Thank you. Our first question is from Mr. Benoit Petrarque, Kepler Cheuvreux. Go ahead, sir. Your line is open.
Yes. Good morning, everyone. Two questions on my side. The first one will be on the net interest income and NIM outlook for the rest of the year and next. If I look at your NI and strip out the two small one-offs on NI, I think you are growing it around 2% year-on-year ex functional markets. At the same time, you are growing the loan book, I think it's about 7% over the past quarters on average. I'm a bit surprised, actually, the difference between growth of loan book and clean NI. I was wondering there, what you can tell about the underlying commercial margins and also the underlying deposit margins. What is the outlook for those two components, and whether you think loan growth will translate into higher NI growth overall going forward? That would be the first question.
The second one was on the cost side. In the past, you updated us on where you were in terms of cost savings and achievement of the cost savings. Could you update us on the EUR 900 million, where you are in terms of achievement of this cost-cutting plan? I think you were planning to get to EUR 400 million cost cutting by end of 2018 originally. Now you've been getting that figure a bit down, but where are you now at the end of Q2 in terms of achievement of this cost-cutting plan? Thank you.
Thank you, Benoit. Koos will share the answers around the table here. Koos, if you could.
Maybe, Benoit, first, if I look at the net interest income, indeed you spotted well that you see a modest growth. We are growing by 2%, and this quarter what you see loan growth is outpacing debt. Overall, what you also see is our net interest income, it edged down from EUR 152 to EUR 151. Three factors play a role. First, loan growth is accretive, so in that sense, that helps on the margin side. On the other hand, what we still see is the reinvestment of our savings money is still costing some.
The third element, which plays a role, and that is also what you see particular this quarter, is we also took some actions in lengthening funding, particularly in USD, and that had to do with LCR requirements and with the fact that we took an LCR on a gross basis with regards to cash pool. Sometimes you take some repair actions on that side, and that is not helping on the margin side. Overall, I think these three factors are there. If you ask, what does it mean going forward? In general, on the lending side, things look quite good in terms of at least what you see in current production, in terms of margins, not real concerns.
If you look at the savings side, what we do see is that on the savings side, we still expect some margin erosion over the next quarters, again, still we feel we are confident with our overall guidance that we say the high 140s, low 150s, that is what we see for the second half of this year.
Maybe to complement that, in view of, I'm sure, follow-up questions that could come. If you look at the current market circumstances, I think the NIM will be managed as indicated by Koos. Basically, the big effect going forward will be to continue to change the asset mix towards higher lending margin. That helps. That's the way it works. We do see room for selective repricing. If you look at the second quarter in the major franchises in which we work, whether it is structured finance, real estate finance, and on lending, we see margins to be stable, if not improving a bit. In the transaction services, at least in the PCM area, the payments and cash management area, we see margins improving a little bit as well on the back of the US dollar business that we have there.
Look at the retail markets, see a bit of pressure. Well, pressure or stable margins and pressure maybe because of some marketing actions in the Netherlands. For example, in Belgium, we see margins stable, if not improving, and in Germany as well, stable, if not improving. We do feel that given that situation in the market, that we can do some selective repricing going forward, and that combined with the change in asset mix and how we manage the savings margin, that gives the guidance as indicated by Koos. Specifically on your cost question, the update on the ATF savings. Koos, if you could Yeah?
Yeah, sure. If you look at our transformation program, what you know is that indeed we are expecting EUR 900 million benefits over time to kick in. At the same time, the first thing what we got to do is invest EUR 800 million in terms of cost. That EUR 800 million is what we said we were going to invest over the next five years, and what you've seen is it was EUR 38 million in Q1, and it is EUR 70 million in Q2. We are still making those costs currently. That's also why we ended up giving a rolling cost guidance around the 55% for this year, which we expect that will start to decline over the next year for two reasons. One, investments will slightly go down. Secondly, benefits will start to kick in. That is how we see it overall. The savings, indeed, they are there.
The one thing what we are seeing is, there where we had savings in, for instance, Belgium right now in terms of merging operations, the temporary external staff hiring and IT support we need for that overshadowed that, but that is of a temporary nature.
Yeah. How much have you realized so far out of that EUR 900, roughly?
We don't want to measure it this way because it becomes very piecemeal and incremental because remember, we also had old programs like in the Netherlands, and there you see absolute cost going down, and at the same time, we are making cost currently, and we are realizing benefits. We'd like to express ourselves more in the overall cost-to-income ratio, how we see that progressing. There, again, for this year, we maintain that rolling forward four quarters, we want to keep it under the 55%.
Okay, great. Thank you very much for that.
Our next question is from Mr. Bart Joris, Degroof Petercam. Go ahead, your line is open.
Yes, good morning. Thank you for taking my questions. They're sort of a follow-up on Benoit's questions, actually. If I take out the Belgium mortgage effect and the effects on your RWA increase and normalize the dividend reservation, your CET1 ratio remains stable over the quarter. My question is, do you see short-term levers to increase that CET1 ratio? Also on the longer term, if you look at what you say on your cost income target, saying that if that goes to 52%, you would save around EUR 900 million there. You would gain that there. You could lose that also, if your risk costs would normalize again to 40, 45 basis points. Basically, if we look beyond 2018, what do you expect there in NIM? Because NIM will have to improve to improve your capitalization, I think.
Also, maybe could you give us an idea of how you see your commissions evolve too? That will also be needed to improve your capitalization. Thank you.
Well, that was a long question, Bart.
Sorry.
Let's try to decompose it in a couple of elements here. Your first question is on the CET1 ratio. I'll give that to Koos, and then we'll see how we fare with some of the other stuff.
Bart, on the core Tier 1, the good news is we are roughly making around north of 10% of ROE. What we've always said is our ROE is used for three things. It's used for facilitating growth, it's used for strengthening the capital, and it's for paying a good dividend. To be honest, in the longer term, we don't need to change something significantly on that because the composition is fine. If you look at it per quarter, this quarter we had a bit more growth. What we also do is we reserve full year last dividend in the first three quarters. That means we are a bit stringent in setting aside the dividend and not accumulating that in the capital.
That is what you can see then is that, a slight edging down of your capital over the first three quarters, and then it increases in Q4, and that might be a bit exacerbated if you have good loan growth. If you look at all things underlying, that looks actually rather fine. In that sense, we are not too concerned on the core Tier 1 ratio from that angle, as long as you make good margins on your loans and stay disciplined.
Yeah, on the other part of your question.
Sorry. If you have wrapped
the cost income ratio. We've gone through this before, and just to give you kind of the basic recipe as to how we manage. We do expect costs to really come down in the Benelux area. That has been the recipe since 2014, and the transformation is really focused on getting the cost really down in the market leaders area. That's an important element. In the Wholesale Bank, we have indicated that as long as we feel we can grow profitably, so business that we make the right returns. If we need people on the front office side in order to support that growth, we will allow cost growth on the front office side. That to be funded by savings in the further digitization of the machinery, if you will, of the Wholesale Bank.
A flattish, if not a bit of an improving cost income ratio for the Wholesale Bank over time is what we are working on. We would allow costs to increase if overall we feel that the cost income ratio can go down in the Wholesale Bank. In the challenging growth markets, clearly, we have commercial momentum. We are the leading digital bank in many of these. We have a differentiating client experience. We continue to grow in number of clients. We continue to improve our offering in order to ensure that we build a client franchise rather than a product franchise. For that, we don't mind some cost increases as long as over time, again here, we do expect income increases, and with that, the cost income ratio also to decrease.
You can't compare us to some of the incumbents that are just doing the transformation and seeing no growth, because then you only expect costs to go down, and you should. We are an incumbent and a new bank at the same time. In the more incumbent areas, you should expect from us to get the costs really down. In those areas where we are much more a technology company and in which we are much more a fintech, if you will, or a platform, and we're growing so fast that we don't mind cost increase if over time from a customer relationship perspective, we do expect the income to increase as well. Specifically then, if I then go into, for example, the NIM development for the year, we expect this still to be at the high 140s.
The fees, as we have indicated before, coming from a base of EUR 650, EUR 660 a quarter, we expect fees on the back of how we develop our franchise, specifically in the Wholesale Bank and in the challenging growth markets. We expect fees actually to grow faster than the other income components, by 5%-10% per annum. As a consequence of that, the fee component of income to increase, and getting closer to the 19% or 20% of the total income. I just tried to decompose your question into a couple of areas, and I think these are the areas that you need to know more about in order to help you there. Thank you.
Well, I was more looking about your NIM after this year, because probably your reinvestment yields on your deposits going down will bottom out somewhere there, you could maybe profit from some loan margin expansion. That was more my question about the NIM.
No, honestly, I think as we were indicating, we don't see too much pricing pressure at this moment in time. We will look for selective repricing, not only because it needs to be done in order to get the right margin, but also in order to ensure that the increased capital requirements, that will come in over time in Basel, that we do some repricing in order to continue to have profitable growth. That will influence the NIM, and therefore it will, in our view, be stable over time, if not, maybe improving a little bit.
Okay. Thank you. Okay. Thank you.
Our next question is from Mr. Robin van den Broek of Mediobanca. Go ahead, your line is open.
Yes. Good morning, gentlemen. Sorry to come back on the margin again, I think over the last quarter, you've given a little bit of detail on the replicating liability portfolio, where you allocate EUR 300 billion on the Euroswaps 5-year point and another EUR 120 billion spread over the Euroswaps 7-10 years point. If I look at that, I can still see some residual pressure come through also next year, which you cannot offset by deposit rate cuts anymore. I was just wondering, if I look at your narrative so far on margin, it seems that repricing could be a new element. Could I basically assume that you're going to be able to offset that residual pressure on the replicating liability portfolio by this repricing? Then the other elements within NIM still remain in place? That is the first question.
The second one, unfortunately, is also on costs. On your investments compared to your capital markets day plan, I think so far this year, you've done roughly EUR 110 million. The budget for the year is EUR 170 million. Contrary to last year where you were back end loaded on these investments, it seems now you're more front end loaded. You've also indicated that the Record Bank integration on the Belgium platform is now fully over. I was wondering if there are any cost reductions coming through from that in H2 already, besides the lower investment spend in H2? Thank you.
Okay. It's Koo s maybe on the NIM, the following point. What you have seen in the past in Belgium, where we hit the low of 11 basis points, by that time it started to have influence on your NIM. Also realize that that was already more than a year ago, by that time, the portfolio yields were still a lot higher than how the money was reinvested when it matured.
What you see right now, we are in a slightly different situation because we are approaching zero in the other countries, but average portfolio yields have already dropped and reinvestment rates are actually a little bit higher. The consequence of not being able to lower your savings rate is less than what we faced in Belgium in the past. That is also the reason, can we then say it's completely not there? The answer is no, but that is why we say it's one or two basis points of effects which you could expect over the year, but not a lot more than that if we take the current forward rate as something which is about to materialize. In that sense, we are not too much under pressure there. The question is, can you really compensate that with loan growth and additional loan margins?
That is what we have been doing over the past, but at the same time, loan demand, it needs to meet our capital hurdles as well. As long as it does, we will do so. If it doesn't meet the capital requirements, loan growth will be a bit less and it won't compensate. That's the way how we work as a team.
Can I maybe close to one question on that. I think the current five-year EUR swap is 35 basis points, the one year forward is at 65 basis points. It is an important assumption that that forward rate will materialize, basically. If we stick at 35 basis points, there will be more residual pressure on this replicating portfolio, presumably, right?
If you have the current yield curve not moving an inch and just staying as is over the next one or two years, that has implications for your income. You're right.
Okay. Thank you.
Robin, we don't manage these projects quarter-by-quarter from a cost perspective. These are major transformations that often are seeking for the same IT specialist. Therefore, sometimes we prioritize one versus the other, and that's how we manage them. In the end, given the fact that this is such a major transformation at ING from so many different perspectives, whether it is more from a country perspective or more from a functional perspective as to what we do in risk and finance and what we do in the foundation in order to move to the cloud or building a data pool, all that has to do with IT, all that comes, in the end, often to a couple of specialists. With that, we prioritize over time. We don't manage specifically on a quarter-by-quarter basis, but we are managing this project and getting it done.
That is, I think, the important message here is that we are, on all projects, making progress. Sometimes we accelerate some of these elements, and sometimes in some projects, we delay some because of what I just mentioned. With that, the cost could come sometimes a little bit early or come a little bit late, like last year. This year, specifically in Belgium, we saw a peak, and that is on one side because of the extra digital investments that we needed to make as part of the plan, but it's also because we had to backfill on some of the people that left ING early. In order to make sure that clients, and specifically the new clients that are coming over from Record, get onboarded in the right way and get their questions answered quickly through all the channels.
We have hired some additional people in order to ensure that they do benefit from that service. We do expect that to fade away for the total organization and to absorb that extra volume. The cost there, you should expect to decrease, but more in the first couple of months of 2019, not so much in the second half of 2018, in Belgium specifically.
Okay.
As I said, we will invest as needed to complete this transformation, and we will get these benefits.
Related to the platform of Record Bank, is there anything to say there that effectively you could switch it off, I guess? There's no potential cost saving connected to that?
There will be. You will see that coming through at a certain moment in time. The whole idea is that we will move from three platforms, and now I'm talking about internal platforms and not about external client platforms, but internal IT platforms and core banking platforms. In the Benelux and market leaders, we will move from three, basically Record Bank, ING Bank Belgium, and ING Bank N.V.. We will, in the end, in this program, move to one, being the revamped platform that we have in the Netherlands. As we speak, we are preparing that platform in order to be able to migrate the ING Belgium clients onto that. Then, at the end, and therefore some of these savings, specifically, if it is all about decommissioning, the biggest savings in this program are a little bit back-ended.
If we're talking about decommissioning savings, they will be back-ended because you can't switch the system until the final client has left the system. That is an important thing to notice. Therefore, we do expect cost to go down. We do expect cost income to go down still, and you will see that next year already and then 2021 as well. We're confident about reaching that cost-income ratio. At this moment, for 2018, we are in an investment year.
Thank you very much, guys. Very helpful.
Our next question is from Mr. Bruce Hamilton, Morgan Stanley. Go ahead, please. Your line is open.
Hi. Morning, guys. Thanks for taking my questions. Firstly, just on the industrial lending book, obviously there was a pickup in the longer-dated lending, which helped fees and NII in the quarter. Should we normalize that? How do you balance growth there against the risk that we're getting to later in the cycle, and any segments that you're actively looking to avoid? Secondly, linked to that, how meaningful were the benefits from restructuring files in Q2 from the industrial lending and the general lending books, just to get a sense. They seem quite small, but just wanted to check. Thank you.
I will give the word, the floor, to Steven. Certainly on the second part, maybe also on the first part, I will come back on the first part as well. Go ahead, Steven.
Yes. Thank you, Bruce. With regards to lending, if you look at, and we've shown it also over the past number of quarters, that typically one quarter you'll grow in longer-dated lending. Another quarter, we grow more in working capital solutions. If you look at the growth that we see in the past quarter, that was specifically focused on shorter-dated lending in trade and commodity finance based on a higher dollar and higher oil price. In that sense, you could see more of that quarter as an anomaly and typical growth in structured finance overall, where we grow our projects and our project finance business all across the world. With regards to the link to the risk costs, we stay, and Ralph already said that, within our risk appetite. We typically focus also in our project finance lending on first-quartile cost producers. Often our loans are secured.
Often with regards to shorter-term funding, they are self-liquidating, so there is no move and no desire to move in our risk appetite because we know what we know. We are not going to divert from that, especially not in this part of the cycle. I think your other question was with regards to the height of the risk cost or what that does in terms of restructuring files and how you should potentially break down, I guess, the risk cost within wholesale banking. If you look also in the press release, on the one hand, we had a benefit of one of the restructuring files coming back to performing, and that had an influence on the performance of industry lending.
On the other hand, and that's what you see actually in the total risk cost, the last quarter, we had a number of releases on Stage 3 of files that were in restructuring that came back to normal performance. This quarter, we had less of those releases. What we did have was a number of files that are actually performing but that moved to Stage 2, for example, because of sanctions. When you move from Stage 1 to Stage 2, you go from one-year losses to lifetime losses over the term of your loans. That has an impact on the total risk cost that you provide for in your P&L. That has impacted the risk cost in the second quarter of this year, wholesale banking.
Just to follow up, I guess my question is more, I thought you'd had a benefit through NII in Q2 from those restructurings, and I was just trying to size how big an impact that was.
Indeed. That's what is also in the press release, but that's a small benefit of the total.
Thank you.
Maybe, Bruce, on your first part of your question, as indicated by Steven, from a lending growth perspective in euros, you see a bit of an inflated number on the back of the dollar and the commodity prices, specifically in the TCF. If you look at the longer-dated business, the number of deals that we did in the second quarter is the normal number of deals. It's just that in the first quarter, it was a bit low on the number of deals. If you just move away from the euro number that we're showing, and you correct for the dollar effect and the oil price and commodity price effect, that is always part of our numbers there, and you look at number of deals on the long-term side, the second quarter is a normal number of deals.
That's helpful. Thank you.
Next question is from Mr. Benjamin Goy, Deutsche Bank. Go ahead, your line is open.
Yes. Hi, good morning. I want to follow up on fee income. You mentioned your targeted growth in industry or in wholesale banking, sorry, and the challenges. Also in the Benelux, you did very well in the quarter. Just wondering what was the driver here in a not-so-easy quarter. More generally, deposits are still flooding in particular in the Netherlands. Is it more potential to convert savers into asset management products or anything else? Yeah. Thank you.
Well, I think the fee income in the Benelux is, if that's a specific question, it's a little bit across the board. There is some conversion happening from savers into investment products. Actually, that's not where we see the most of the activities, honestly. Basically, the fee income in the Benelux is really a little bit across the board. It's in payments areas. It is on closing more mortgages and therefore, specifically in the Netherlands, there's fee income related to that as well. It's a little bit of everything from that perspective.
Thank you.
Our following question is from Mr. Stefan Nedialkov, Citigroup. Go ahead, your line is open.
Hi, guys. Good morning. It's Stefan from Citi. Two questions. The first one on costs and the second one on your fintech partnerships and the AXA partnership. In terms of the costs, specifically in Belgium, could you please give us an update on how many branches have been closed at this point following the legal merger between ING Bank Belgium and Record Bank? What's the timeline over the next two years? Similarly for employees, I think the initial plans were to basically lay off 3,500 employees. Where are we now in terms of that number? Over what timeframe are we going to get to 0 from the 3,500? A related question to that, just looking at your costs disclosure, external employees and external consultants account for around 10% of your overall cost base.
What would you expect that percentage to be halfway through the digital transformation that is end of 2019 and at the end of the digital transformation at the end of 2021, that is. Sorry, that might have been a little bit of a longer question. The second one is much shorter. Can you give us an update on the AXA partnership? Where are you in terms of designing the modular products? Can you give us some more disclosure on your expectations for fee generation from 2019 onwards? Thank you.
Thank you, Stefan. On the cost, in Belgium, if it comes to branch closures, we have now integrated the Record Bank into ING Bank. Of all the Record Bank agents, I think just short of 70 are becoming ING agents. That is then, again, from that perspective, optimized into a total branch network, a distribution network of 665 branches or distribution points or franchisees, however you want to call them. That has basically been done now. Then your question is going to be, what about my cost? The Record Bank used to work through agents, therefore the cost savings in terms of costs that are in running a branch and having a branch and all that, were always with the agents.
Where you could see in the future, a bit of a difference is more on the commissions you pay agents as to how to manage your client base. There is no direct benefit, well, not a big one from those branch closures if it comes to the Record Bank agents being closed. On the FTE development, without going into specific details as to which number will exactly be reached by when in the Unite migration, but from a Belgium number perspective, towards and including 2021, you can expect that effect on FTEs to be more or less evenly spread across the different years. That's on the FTEs in Belgium now. On external FTEs in the Netherlands, I think that was your question there. Externals in the Netherlands have a lot to do also with the digital investment program because many of these are IT people.
As long as we continue to invest and as long as we need it, we will have externals there. These are not externals that backfill, like we have a bit in Belgium, but these are externals that we work through on a contract basis and have worked through for many years because it has always been a pretty high number, and they work as part of our IT workforce. It is not that they will be decreasing. Well, they will be decreasing if we decrease our investments in the end. What they will deliver, though, is a much more efficient process, and therefore the savings that you can expect in the Netherlands and in Belgium is much more on the operational side and the operational cost base in the Netherlands.
I wouldn't focus too much on internal, external FTEs because they do support the franchise and the investment program from a Dutch perspective. On AXA, we're only starting as we speak, with AXA. We concluded that deal. We're now setting up the team. Clearly, this is going to be a team that needs to come up with a different approach to insurance, because otherwise we would not be delivering a differentiating client experience. This is about decomposing insurance needs, looking at the insurances that some of our clients may already have, and then ensure that they are not over-insured on one side or don't have a lack of insurance on the other side, by decomposing the product and making it very simple, very clear and very transparent. That's how we want to go about this.
The first products you can expect to come into the market in 2019, and I think the first products will probably be on the credit link side. Basically, products that one way or the other are cross-bought by our customers, for example, as part of a mortgage. That's where the first steps will be made, and then on top of that, we will further develop new products. We're not giving any indication as to what we expect from a revenue perspective on that.
Okay, thank you.
Our next question is from Mr. Farquhar Murray, Autonomous. Go ahead, please. Your line is open.
Morning, gentlemen. Just two questions, if I may, I'll try and keep them brief. Firstly, the EUR 6.3 billion of wholesale industry lending in the quarter seems very strong. You say it's consistent with your risk appetite, but I just wondered maybe could you give us some kind of quantitative comfort that you're not sacrificing structural terms and pricing to get that on the book? Secondly, just a follow-up on the answer to Robin's question, where you indicated one to two basis points on NIM, I think. Can I just clarify that is one to two basis points negative on NIM year-over-year, probably from the high of 140 basis points guidance for the second half? Is that with the yield curve as it is, with no deposit rate cuts going forward? Just so I understand what's implicit to that number. Thanks.
Okay, Steven, for the first question, I'll give the second question to Koos. Yeah? Okay.
Thank you, Farquhar. Well, with regards to the first question, we continue to have a diversified book in wholesale banking, including industry lending. We are continuing to focus typically on first cost quartile producers, with secure structures, where we typically are senior secured or super senior. There is no deviation whatsoever from the current structures that we have. Like I also said in the past, with regards to certain sectors such as acquisition finance or real estate finance, we put caps in place to make sure that we do not focus on cyclical sectors or that we stay within the risk appetite that we have. At this point in time, we feel comfortable to continue to work in that way.
Going back, by the way, on a question that Bruce asked a couple of minutes ago regarding the releases of a few of those files and getting them back into performing, both of those files have a release in terms of single digit in terms of NII, it is a release of accrued interest.
On the question of the NIM, could you say had the one to two basis point negative year-over-year, is there no deposit cut forecasted? Well, maybe a little bit, because we don't give indications on when we could, but we are not completely flat at zero at all countries, there is maybe a little bit of room to do something. In that case, that is included. At the same time, is it based on the current yield curve? Yeah, that was the current yield curve as about 2 weeks ago. At the same time, we also see that reinvestment yields are now five basis point higher than it was 2 weeks ago. At the same time, that is what we didn't factor in. Overall, what is it that we do?
We say, well, reinvestments will still be at a slightly lower rate than current portfolio yield. That has a one to two basis points drag, including that we say, well, we might drop deposit rates where there is something possible in the future. Again, we never give indications when that is that we do that or if we're going to do it at all, because you also look at the competitive situation.
Okay, thanks very much.
Our next question is from Mr. Marcel Hoeben, Credit Suisse. Go ahead, your line is open.
Good morning. Thank you for the presentation. Thank you for my questions. I have two left. Koos, on the Basel IV mitigation, I think you stated earlier that you can mitigate roughly one-third of it. Can you say anything regarding the timing? I know it's top-down and early stage still, but can you split that one-third into, for example, synthetic securitization deals? That was the first one. The second one is, Ralph, on the cost-to-income ratio guidance. That obviously also implies a revenue growth assumption. If I assume roughly 7.5% fee growth, 2% NII growth, you're looking at roughly 3% revenue growth per year. Is that good thinking there? Thank you.
Koos?
Yeah.
Maybe the first one on the Basel. Indeed, we think there is ways how the impact of Basel can be mitigated. If I give you a few examples. If I look at high-end corporates and if I look at rating all your corporates, well, there is a few unrated corporates around, and if we do apply a rating to them, that has an impact of EUR 2 billion on your RWAs. Well, EUR 2 billion is not the same as a 15% increase of your RWAs, which is EUR 45 billion, but at the same time it helps. These kind of actions will work. Originate to distribute. Yes, that was something which will start to give some RWA releases as well. I think the most important part is actually just allocating more smartly.
If there is business where either we say, "Well, there, a bank is not the best provider given Basel, that should be other institutions," then you can say, "Hey, let's refocus on some other activities." That is something which will happen over time. Do we have it detailed out already in a work plan where we say, "This is the allocation of savings per work stream?" There, the answer is not yet. At the same time, you also realize we have till the end of 2022 to basically cover most. We do feel comfortable that around a third of the 15%-18% increase, what we see is what we can mitigate. Also because that was basically, at that 15%-18%, what we indicated earlier, that was replicating the same portfolio exactly in the future, and you would normally never do that.
That is basically the actions we have. OTD, rating the unrated, come to a different allocation and maybe look at other structures, so you can say, "Is our collateral well-divided over the facilities, and can you do that smarter with clients?" All these actions, they will help, and all of them, we will set them in motion. Over time, we will come with a more detailed timeline on that.
Yeah, Marcel, on your cost income side, as you know, we don't necessarily guide on NII. We do guide on how we grow the loan book in a profitable way. Basically, if we can grow our loan book profitably with the right returns versus the capital that we need to reserve for these loans, that's how we grow the NII also in the next foreseeable future. The fee income on the back of having more primary customers, as well as the strategic review that we did in the wholesale bank in order to ensure that these client relationships that we do more business with also outside of lending, that the fee income is expected to grow faster than the NII. Overall, we don't give guidance on it, and there is a reason for that.
It's not that we don't want to give it's just that we run a prudent shop, which basically means that if the revenue is not there, we will deliver it on cost. Therefore, clearly, we have our dynamic plan, and we're agile in the way we plan. As long as we see the revenues coming in, we don't mind investing and growing. The moment we feel that the revenues are not going to come in on the back of what we're delivering, then it will have to be delivered on the cost side, also across those franchises that in principle need to grow. Therefore, we have guided on cost income, and I think that should give you much more certainty than specifically an income one. Thank you.
Okay. Thank you.
Next question is from Alicia Chung. Go ahead, your line is open.
Morning, everyone. Just a couple of questions from me. First of all, just looking at the corporate center, the run rate of net profit over the last couple of quarters has been quite good, mainly on revenues. Just wondering why that is. Is this just volatility, or is it something a bit more sustainable? Secondly, just looking at the cost income ratio in the financial markets business. We see it's been quite structurally high for a while. When can we expect to see the benefits of the consolidation of the trading floor, trading activities coming in? Is there also other further opportunities beyond that for the cost to move lower, given that revenues may well stay cyclically low for a while? Thanks.
Okay. On the corporate line, I give the floor to Koos.
Alicia. On the corporate line, in general, what we have there is a few things. One, we have some capital-related activities, and that has to do with the investment of the capital, the FX hedging of the capital. The investment of the capital is gradually giving you a lower rate because we reinvest there, that is not so good. On the other hand, the foreign exchange is always choppy, at the same time, what you see there is that overall, it's a good result right now. I think if you ask what is now structural is that in the past, when we started to extend our funding, this goes back into 2012, we said, "Hey, if we have to lengthen our funding and implement LCR and everything," we didn't want to retroactively price that to all our commercial units.
We took a negative hit at our corporate line. That one, that was running with a run rate of around EUR 80 or so, EUR 80 a quarter. That one is going to disappear gradually, by 2020, 2021, that one is gone. That is, I think, the most important part where we do see over time, that is particularly beyond 2020, that this element will disappear out of the corporate line. Barring that, would be quite positive on it. On the cost income ratio for FM, I think it's a good question, it's about cost income ratio. Actually, the guys have done a really good job merging the different trading floors across Amsterdam, Brussels, and London. That has happened. That's done from that perspective.
The cost will come out, specifically the direct cost will come out because of decommissioning some of the stuff, also saving on basically coordination costs and what have you. That restructuring is done. The next step is also to ensure that indirect costs, through the whole value chain, you know that benchmark has quite an integral value chain into the risk systems and into the finance systems, that will be further rationalized as well. On the cost from that perspective, they will continue to manage that. The integration of the trading force has been done completely. Also, as part of that plan was the managing capital much more efficiently and basically what you've seen also this quarter is that there was some release on risk-related assets from the financial markets practice there as well.
Having said all of that, while costs are under control and actually cost savings are being realized, we see that the markets are not helping the financial market franchise on the income side. Cost income has two sides. The question is, how far can you go in trimming down your franchise on one side in order to reap the benefits when the markets come back? That's basically where we're at right now. If you look at the income side in the financial markets, we've actually seen on a year-on-year basis that the FX business is actually generating more income. The rates business is under pressure, as you know, you know the reasons why. The equity products business, part of that is sold and transferred. The income is decreasing there as well.
On the debt capital markets and corporate finance business, this quarter was just a lower quarter than same quarter last year, that can be picked up anytime as well. On one side, yes, the team is doing quite well actually on restructuring and on integrating and have finished the transfer onto one hub. Costs are being managed further down. On the income side, the market is not helping except for the foreign exchange side of the market. Thank you.
Thank you. Our next question is from Mr. Kiri Vijayarajah of HSBC. Go ahead, your line is open.
Yes. Good morning, guys. I've got a couple of questions on the wholesale bank. In terms of you lengthening out the US dollar funding, I was wondering, do you push the cost of that down to the wholesale banks, kind of individual desks that actually use the US dollars, or do you keep it in central treasury? In terms of kind of better understanding the LCR issue itself, is it because so much of the volume growth you're generating at the moment is really skewed towards US dollars and, of course, all the deposit inflows are kind of all predominantly going to be in euros, in which case, is this kind of potentially an ongoing issue for your currency LCR? Thank you.
Thanks. Well, maybe on the first question, lengthening the dollar funding profile. What happened is the following. Indeed, we have seen over the first two quarters also a significant amount of growth in our trade and commodity finance. That needs to be funded because, I mean, dollar got stronger, trade commodity finance, underlying commodities got higher. That got funded, and that means we normally use also short-term debt to fund short-term assets. If you ask how do we price things, normally what happens is, in case we need liquidity, for instance, if it's for backstop facilities or anything, all of this is transferred through to the business. Contingent liquidity and all these things, that's charged to the business so that there is not a form of free arbitrage around it. What happened as well, and that is second, and that is a bit irrespective of this.
If I look at LCR, what happened is we do businesses with clients, cash pooling, and that can be EUR only or that can be multi-currency. In cash pooling, the fact that balance sheet needed to be grossed up also meant that you need to hold liquidity for this type of thing. That gross element, that is where we needed to cater for and lengthen a bit of funding and make investment in securities. That is the part what I earlier mentioned in the call. I think you see two effects. Yes, on your first question, is anything what we do on liquidity side or on funding side repriced to clients? The answer is yes. Secondly, the LCR repair which we did, that had to do with grossing of net balances, and that is done.
To be honest, also these kind of things get priced through to the end customers because, in the end, you want fair pricing.
Great. Thank you.
Next question is from Mr. Nick Davey at Berenberg. Go ahead, your line is open.
Yeah. Good morning, everyone. Two questions, please. The first one's a bit of a follow-up actually on that dollar funding question. I seem to remember in the past you've talked about possibly having a sort of risk limit on the balance sheet in terms of how much dollar-denominated assets you're willing to have. My question is, are you anywhere near that limit? Do you think you're anywhere near sort of peak dollarization of the ING balance sheet? The second question, I may be pushing my luck, but on the cost of risk, you've obviously been quite a few quarters now, miles away from the 40-45 basis points through the cycle target. I suppose I would humbly suggest that having a through-the-cycle guidance is just not that useful for us, given that you'll run for many years below it and then for some years above it.
My question would be, could you sort of dissect the 40-45 basis points through the cycle average into what you would expect it to be in a good year and what it might be in a bad one? Thank you.
Maybe on the dollar part, are we reaching a limit? The answer is, it's not one number, but what you see is we are still replacing debt, and that means we are recycling debt, and we can do that partially where we, in the past, issued more EUR-based MTNs. We do it a bit now more in USD. Is there still room because, in the past, we were a more frequent EUR issuer, and now we are a little bit more a USD issuer. There is still some room there left. Can you infinitely continue to grow with 4% or 5% on the also by the side in USD assets only? The answer is no. We have not bumped up against a hard stop right now. We want, over time, a moderation of this. Yeah. Yeah. Thanks, Nick.
Regarding risk cost, clearly, as you look at the cycle now, people have been asking me, are we at the top of the cycle? Well, that's always difficult to exactly pinpoint. If you look at the growth of GDP and the deferred growth forecast, you see some of these forecasts being flat or some of them tapering off. We see consumer confidence and macroeconomic confidence in industries being at a high level as well. You also see at this point in time that the risk costs indeed, as you well point out, are very low. I think that risk cost in this quarter is one of the lowest quarter we've had for many quarters. If you also look at what you see in stage 2, the total risk book actually goes down a bit.
If you look at stage 2, it goes up a bit. There you see indeed, based on sanctions or other elements, then suddenly you see some risk costs appearing in the stage 2 element. Those are all indicators, if you will, that we are at the top of the cycle. If you go back for the past 10-20 years, you see that the risk cost as a percentage of risk-weighted assets are between 4-45 basis points. Now they are, at this point in time, between 10-20 basis points, and they were a bit higher than the 40-45 basis points at the top of the cycle. At that point in time where we hit higher risk costs, which was, I believe, in 2011 or 2012, it still included a book called Real Estate Development.
At that point in time, we built off that book and have, by and large, limited our real estate development that we did in the past, and focus only on real estate finance. The difference between what we see now with stages 1 through to 3 compared to what we had under the previous IFRS 9 or IAS 39 is that we have stage 2. It also means that in cases of economic downturn with the macroeconomic scenarios that come in on GDP or loan-to-value, for example, in mortgages, it has an impact on the loan losses. It may therefore well be that the risk cost as a percentage of risk-weighted assets will be a bit more procyclical, if you will, than we've seen in the past.
For now, we stay confident that at least for now, we stay well below our risk cost average of 4-45 basis points.
Okay, thank you.
Next question is from Mr. Tarik El Mejjad, Bank of America, Merrill Lynch. Go ahead, your line is open.
Yes, hi. Thank you for taking my questions. Just two quick questions. First of all, on the fintech initiatives you have. I understand this is all small businesses and contribution to revenues taken individually must be small. If you add them all together, can you give us a sense on how much that will boost your revenues? Is that significant, or we should just ignore it? Maybe linked to that, if it's small number and you don't communicate on it, is it just these initiatives to basically offset what would be loss of revenues, or is it really incremental? My second question is on costs. I really hear you about the back-end-loaded nature of the savings versus investments.
I want to know what you're thinking here in terms of the need to invest more in the next two years, because I don't think the investments on digital are finished yet, and you probably need to keep investing to keep pace with all the new banks and fintechs and improve the systems. Thank you.
Okay, thank you. I think most of the fintechs that we are after are really services. Otherwise, we would lose either clients through or revenue through. Basically what they are doing is they focus on how to improve the client experience. As you know, that part of the Think Forward strategy is exactly that. That's the focus. Ensuring that if you focus on the client experience, to a certain extent, you can develop that yourself, that unique client experience.
To a certain extent, you have to get it from the outside, and that's what you do. These FinTechs help you on one side to make sure that you continue to deliver on that, and with that you continue to deliver on your Net Promoter Score, and with that you continue to deliver on your client growth, and that's what you see. It's included in the overall way of managing our franchise and growing our franchise, and it doesn't add on top of it from that perspective. Some of them, though if it comes, for example, to our acquisition of Payvision, it will automatically deliver additional clients and additional income.
Some of those who are not really FinTech anymore but already scale ups and have a client base with an offering that is almost unique, which is beyond delivering a better client experience, there you can expect that there will be income growth from. On the overall ING income, it will help, but these are not the numbers that will make our P&L. It is crucial in terms of building our platform for the future. Now on your cost side, do we need to invest more in digital, up and above the ATF investments? Well, currently, our progress is so comprehensive, and we're in the middle of it, that before we think about do we need more, I think let's just make sure that we focus on executing what we got your mandate for, because that's the way I think we work.
We presented you a plan, you supported that plan, and we have to deliver within that mandate, and that's what is important to us. Will there be more investments needed on the back of that? Yes. I can already paint you a picture that on the back of this transformation plan, we will have a platform in the Benelux, and we will have a platform in Model Bank across five different digital banks. From that moment onwards, we will take the next step and see how you can deliver truly one platform across all of these countries. Yes, there will be more investments needed at that moment in time.
Having said that, every incremental investment in order to support each country's business will be much lower than if you still would have a country-by-country business, whether it is on commercial opportunities, in terms of delivering a better customer experience, introducing a new product or service like Scalable, which, if you develop it for one and you connect it to one app, you can actually develop it to all of the other apps in those countries as well. There's where you benefit by scaling very quickly on these investments. You also benefit, honestly, if it comes to, for example, operational costs as well as, for example, compliance costs.
If you are fully standardized across a couple of countries, then the incremental investment in order to improve specific processes or procedures or improve your IT risk and defend against cybersecurity, all of that will be incrementally lower in a platform approach than a country-by-country approach. The benefits will be because of the scale across border at that moment in time. The picture is that after this transformation program, and if it does work out that you can deliver also in banking, a standardized service from one platform to clients in different countries, then there can only be one plan thereafter, which is you do it for all.
At that moment, we will also then be benefiting from the fact that we have already done a major transformation in the Benelux, in the market leaders, and a major transformation in some of our digital franchises at that moment in time.
Okay. Thank you.
Next question is from Mr. Maxence Le Gouvello du Timat from Jefferies International. Go ahead, your line is open.
Good morning. Maxence Le Gouvello du Timat, Jefferies. Two questions on my side. The first one, can we come back on the growth markets on the cost expansion? How are you surprised about the speed of the acceleration, is it driven by the success of ING offer, and how long do you believe it's going to last? The second question will be about Turkey. We have not spoke about it. Can you let us know what are you doing over there in light of the recent political element? Thank you.
Steven will answer the question on Turkey, I'll come back on the growth of costs in the challenger growth markets. Thank you.
On Turkey, we are watching the developments in Turkey carefully. We have a loan book of about EUR 15 billion, which we by and large have kept flat. It has decreased a bit quarter-on-quarter based on a change in our vac rates. Our total loan book there as a part of the total loan book for ING is about 2.3%. The stage 3 provisioning is of a similar level, 2%-2.5%, so that's actually very low. If you then look in the composition of that loan book, we have a mortgage book of a bit below a billion. We keep that limited and relatively short-dated. On SME and mid-corporates, what we have done is we are working also with the state in terms of the guarantee that they give for lending, which currently is about EUR 1.5 billion.
We want to limit that to some extent because you want to be careful not to overextend your loans, which are supported by that guarantee, because that guarantee is also subject to a certain level of NPL levels, and we want to stay within that. When it comes to foreign exchange loans, which are largely in wholesale banking, there we want to make sure that to the extent that we give loans to these companies in EUR or in USD, that they also have EUR or USD revenues to deal with that. That's what you see in mid-corporate, but also with the corporates in the way that they publish their results, compared to some other countries, there is good information available to actually see that they make USD or EUR income.
In that regard, we are trying to match the funding that we give in foreign currencies to the revenues and the income that they make. In that sense, we keep a keen eye on the developments over there. Until now, based on what we're doing, the size of it and the resources that we make, it's well under control.
Thank you.
Also on your other question. In honor of C&GM, because this is basically ex market leaders and ex Germany and then retail, there's a lot going on. What is going on there, we have a Model Bank plan, which is basically investing in order to create a platform of standardized banking platform across five countries. We are working on introducing new products, for example, the Scalable Capital we have there, and we want to connect this into the service in other countries as well. We have the AXA initiative that will also have some cost increases in order to ensure that in the end, the move towards primary customers and the move towards a full-fledged universal digital bank, that you also have the product offering there. There is a lot going on there. At the same time, these franchises are growing very fast.
If you look at the growth of the primary customers, the 400,000 for the quarter, apart from the 80,000 that come from Record Bank, out of the 320, most of the 320 is coming from countries like Spain, Poland, Australia, Romania. We're growing very fast in all of these markets. We're not completely digital yet. That means that growing customers, growing lending, also means sometimes growing FTEs. We have some improvement programs if it comes to ensuring some of the systems that we have, if it comes to improving the customer onboarding processes that we have, and that's costing as well. The point here to mention is that we continuously look at whether these cost increases that we allow will deliver revenue increases and whether they will and do support growth. Because if not, the cost increases will not create value.
We're very disciplined in that. If we have the feeling that it's not happening, we'll just not do it. The timing of the cost increase versus the revenue increase, and with that, the timing of an improvement in cost-income ratio, also for these customers, it's not always they don't run parallel. It's not one euro for one euro or one euro for two euros in the same quarter. It's over time, and with that, it's important to look at number of customers and specifically number of primary relationships. We are building value for the future. That's important.
Okay. Have a good break.
Next question is from Mr. Jean-Pierre Lambert, KBW. Go ahead, your line is open.
Yes, good morning. Just one question. When you look at financial markets, could you apply the same principles as you do in retail banking and envisage a platform where services will be provided rather than internally generated in order to reduce your cost? Thank you very much.
Hey, Jean-Pierre, I think you hit the nail on the head here. I think that's one of the things that we are looking at, that some of our peers are also looking at and seeing at first as to can you more or less reinvent the way you do the business in a fully digital way. That's the first step. The second step is, can you with that improve the total value chain and the cost of the value chain, even using blockchain. Those are the things that we're looking at. Just like we have announced a couple of these successful initiatives on the trade side of the business, we think we can replicate some of that success on the financial market side.
As the next step, or as the third step, first is reinvent, second, use blockchain to really digitize the total value chain. Third, is there a way that you can actually platform your business and then be open for third parties to offer products to your clients? Those are the three elements, exact three elements that we're looking at for financial markets.
Great. Thank you very much.
Our next question is from Mr. Brajesh Kumar, Société Générale. Go ahead, your line is open.
Hi, good morning, all. Brajesh from Societe Generale. Just two questions for me, please, both related to funding. In terms of TLAC plans, in your recent fixed income presentation, you mentioned that ING has a good and quite manageable in-state TLAC portfolio. Do you have any internal percentage target for your in-state thickness for your HoldCo senior tranche? And number two, more specifically for 2018, so far we've seen that you've done just one benchmark HoldCo senior compared to EUR 8 billion-EUR 9 billion OpCo maturing in 2018. Can we expect you to be more active in HoldCo senior space in the next five months, maybe? And what about HoldCo subdebt? Any plans there? More so in AT1, given you just have a 0.9% in CRD compliant form. Thank you.
Okay, thanks for the question. If you look at the TLAC plans, what you see is we are currently already at where we should be in 2019. We are at 21.5%, I believe. We're north of that. In that sense, terribly in a hurry, we are not. At the same time, what you've seen over this year is we have done some issuance, we've done some covered bonds, EUR 1.75 billion, we've done some floating rate notes, EUR 0.4 billion, we have done some other covered bonds in Belgium. We have given a sort of a recycling strategy where we say, usually our senior OpCo will be replaced by senior HoldCo. We will do that, and that is basically the structural path we are on. From time to time, we escape into more opportunistic things as well.
The normal expectation would be that we do more HoldCo also for this year because that is our structural approach. We never comment on what's the next issuance plan for the next quarter.
Sure, fair enough. What about subdebt? What are you thinking out there? AT1, you have quite a bit to do yet.
Tier 1, we are actually at the moment also above our self-proclaimed target. We are north of the minimum. We are, I believe, at 1.6, and 1.5 is where the minimum is, and 1.7 is what our target is. Yeah, not in a terrible hurry. If I look at tier 2, actually, we are way north of the 2% we need to have. Can you say big plans? The answer is no.
Okay. Very clear. Thank you.
Chairman, there are no further questions. Please continue.
Okay. Thanks, everyone, for joining us this morning and looking at our second quarter results. I think wrapping it up, another strong quarter from a commercial momentum perspective, both in terms of the growth in primary customers. The lending franchise is very well diversified across products, geographies, and sectors at the funding side as well as the business. We made progress in delivering a better client experience if it comes to our own improvements, if it comes to teaming up with fintechs. I think we have reached a really important milestone in one of the bigger parts of the transformation program, the Unite program, where we basically successfully migrated 600,000 Record Bank clients onto the ING Belgium systems. That went rather smoothly. I think that sums the whole thing up, delivering a net profit of EUR 1.4 billion for the quarter.
I think it's been a real good quarter. Thanks a lot.
This concludes this conference. On behalf of ING, thank you for attending. You may disconnect your line now.
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