Earnings Call: Q1 2018

May 9, 2018

Gentlemen, welcome to the ING Quarter 1 2018 Media Call. At this moment, all participants are in a listen only mode. Following the presentation, there will be a question and answer session. I'd now like to hand the call over to Mr. Ralph Harmert, Chairman. Go ahead please, sir. Thank you, operator. Well, welcome. Thank you for joining us on this call. We will discuss our strategic progress here as well as the resulting financial achievements for the Q1 of 2018. With me are Koos Timmerond, our CFO and Stephen Van Hensweig, our CRO. If we look at the Q1, we have been able to continue to speed up innovation, improving the experience of our customers. Evidence of that is the in the UK, our Yield Open Bank platform is growing rapidly. We now offer the service to 250 1,000 registered users. It's a service that has received many awards already in the U. K. We completed the acquisition of Payvision. Payvision is a service that connects merchants and payment providers offering more than 80 payment methods in 150 currencies. So this is a real good offering for our SME and larger and wholesale banking clients in order to give different experience to their consumers, their customers as well in both the online and offline world. The combination of the 2 really strengthened our footprint in only channel payment services, both on the business customers and the retail customers. And on top of that, we're developing more and more partnerships with fintechs. We now have more than 150 fintechs that we partner with. These investments in new ways to service our customers in further improving our own services, on the back of that, we realized a very good business result in the quarter. We welcomed another 400,000 new retail customers and bringing our total to $37,800,000 in 13 countries. We now serve 11,200,000 primary customers. That number is up 170,000 versus the last quarter. And we're on our way to our ambition of 14,000,000 primary customers in 2020. And if you look at where the growth is coming from, that's very well spread across all the different countries. That's especially strong in the Q1 in Australia. On the back of the growing number of customers, both on the retail side and on the Wholesale Banking side, we have been able to extend $12,300,000,000 of additional lending. We have been able to attract $2,400,000,000 of savings in the past quarter. Now if you focus on innovation and improving customer service, then you will get more customers. You will be able to do more business and then you will also have good financial results, and that's what we see as well. Financial performance is good across all the geographies, all the different sectors. The risk costs are dropping, and that's partly helped by the economic upturn. We were able to maintain a robust interest margin, but we have to remain vigilant here because we know that the low interest rate environment, if not the negative rate environment, is demanding. The Q1 net result came out at the just over $1,200,000,000 and that's a 7.2% increase from a year ago. That itself resulted in an underlying return actually of 10.3%. If you look at the expenses, they came really down from last quarter and it demonstrates a good cost control. The costincome ratio, that's kind of a 4 quarter average. Costincome ratio is stableish at 55.7%. On the capital side, we saw the introduction of IFRS 9 combined with the acquisition of Payvision and the business growth resulting in a bit of a lower capital ratio at 14.3%. But it's well in excess of the objective to be around 13.5%, and that's an ambition that we have now set. And that includes the effect of Basel IV. So this is a high level summary, and I'm sure by now you have been able to read some of the material that we have released. With that, I'm happy to take your questions. Thank you, sir. Ladies and gentlemen, we're starting the question and answer session now. Our first question is from Mr. Ivo Buchholink of Financial Aid Aclat. I have two questions. The first one is about financial markets, which posted lower income. And then you can paint a picture more broadly what's going on there and if you're happy with what's going on there. Second question is about the pressure on deposits. In the Netherlands and Germany, So there was a net outflow there. Is that a one off? Or is that a trend that's going on for normal? And has it anything to do with the fuss that happened last quarter about remuneration? And thirdly, that's also a bit of a broad question. It's about the return on equity, which is on the low end of the ambition that you have for 2020. And I think it has been for some quarters now. So what are the drivers that you see that might be able to up that return on equity in future? Okay. Well, thanks, Yves. So your first question on Financial Markets. Well, Financial Markets had a better quarter than the Q4. But if you compare it to the Q1 of last year, it was weaker. There's a couple of explanations for that. The first one is that in comparison to last year's Q1, you have to take into account that meanwhile, we have diminished, decreased, even sold our equity derivatives business. That's an explanation of $50,000,000 revenue on a yearly basis. And that's part of the restructuring of FlashMaster into a profitable franchise. Then what remains is our FICC franchise, which is the so the franchise that is focusing on clients in the rates business and the credit business. That has been a particularly slow quarter because of the fact that there was not a lot of movements in that market. So there's not a lot of client demand to hedge that. And if there's no clients wanting to hedge, then basically, we don't do the business. Having said that, so financial markets had a weak quarter. You know that we have a transformation program in place also for Financial Markets business to first take out the businesses that we don't have scale in, and that's what is the that's the equity derivatives business that we have sold and then grow the business that we do have scale in and that is fully aligned with our Wholesale Banking strategy. That's the credit and rates business. Meanwhile, looking at the cost component of financial markets by combining the 3 platforms that we had in Amsterdam, Brussels and London. We're still in the process of doing so, but that should take further cost out. So with all these measures, further alignment with the Wholesale Banking strategy, further efficiency increases by taking out cost, That should help the financial markets business to improve their return. On the customer deposits in the Netherlands in Germany, there's no particular explanation there. Clearly, there is on one side, there is some players that have that pay better rates. Then you have customers that are looking for alternatives to invest and that's what you see. Also in Germany, you see quite some money going into products that are that give in the view of the customers a better chance for return, equity products related. So you see that happening there. So that's the explanation there. We've actually seen the customers, the number of customers in the Netherlands grow in the Q1 as we have seen in all the other quarters before that. So that is not an explanation. So the kind of the turmoil around the salary discussion is not an explanation for that. Then on the return on equity, I give the word to Koos. Yes. Overall, as we have said, like we have a 10% to 12% ambition. Currently, we run at around 10.3%. You might say, is that low? There are several factors which are causing that. I mean, we could make that 10.3 higher as of immediately by, for instance, stopping investing in digitalization in the future, which we don't. At the same time, so you have various factors which play a role. So one is indeed your investments, which lead to a little bit higher cost right now that will at a certain moment be lower. On the other hand, having said that, you right now have very low risk cost and there will come a time that this will normalize. So can you exactly pinpoint one number in terms of ROE? The answer is no. But can you sort of say like with these factors playing around, both your investments a bit lower risk cost will, at a certain moment, increase interest rate will increase. Can you will that keep you somewhere between the 10% and 12% the answer is probably yes. But we don't feel concerned with the current number of around 10.3%, and we don't intend to lower our investments on digitalization because of this. Then maybe Ivo, also going back on your question regards to customer deposits. So the combination of savings and deposits is not really decreasing, by the way. So I don't know where you have those numbers from. Well, in the let me see, in the quarterly results, there is a mention of a net outflow in Germany and in the Netherlands. So an overall inflow and an outflow in the Netherlands and Germany. Let me see if I can find the really quickly. Where that was mentioned. Next question is from Mr. Ruben Ek, Telegraph. Could you shed some more light how the transition of the technical systems in the Netherlands and Belgium are growing? I understand that Belgium is a bit too successful, that there are more people have left the back office. It hasn't been fully automated. So you had to hire some externals for that. Is that something you have to keep on for a longer period? Then you can have hope. And what can be expected from the costincome ratio while this one system is being implemented? Can you shed some more light on the fee incomes? I believe they have to go from 15% to 20% of the incomes. On what level is that now. And at the shareholders meeting, you Rolf, you said that there was no financial damage of the salary discussion, but more like an image damage. Could you tell us some more about that? Is that something you can in any way measure or so? I'm going to say the correct word. How do you see what the damage on that image is? Is? Thanks, Ruben. So on the first one on Belgium. So what we're doing between Milan and Belgium for the moment, the stage where we are, is that we are investing in the Dutch platform to prepare it for migration of Belgian clients, which means that, for example, our Dutch platform needs to be able to cope with more than just the Dutch and English language. And we have to make it, for example, also available in the French and German language. Those are legal languages in Belgium. So you see that at this moment, we are preparing the Dutch platform for that. That will take a while. We're investing heavily in that. But then on the other side, we are in Belgium doing the first step, which means that we are integrating the 2 banks that we have in Belgium, which is Record Bank and ING Bank. And for the for that integration, we have received the approval from the 2nd Central Bank, and we now have the legal integration of Record Bank into ING Bank Belgium. And as we speak, we are migrating clients from the Rekord Bank onto the ING Bank systems in Belgium. So first, it is Record Bank clients to ING Bank Belgium and then it's all ING Bank Belgium clients to the ING systems in the Netherlands. In order to encompass all of that, we have started with a full cross border organization as of January 1. So all of the tribes, the way we run tribes on mortgages, on payment services, etcetera, etcetera, etcetera, there is one person responsible for 2 countries that has been appointed. All of those teams are being integrated as we speak. Belgium has started to work agile the way we have worked agile in the Netherlands for 2 years already. So that's also been done. And on the cost side, there is a bit of a peak there. So while you're doing all of this transformation and knowing that in the end, you will need less people or also different people in order to run the bank going forward. You can't perfectly time the departure of your people because clearly, they are looking for other alternatives outside of the bank. They are taking off some of the packages that we are offering. And you can't perfectly match when they leave versus when that part of the operation is digitalized or transferred or a system is decommissioned. And that's where we see that we have to backfill some of the people that leave early with externals and that gives a bit of an increased cost. But overall, in the grand scheme of things, that is just part of implementing such a grand plan. So that's question number 1. Question number 2, on your fee income. When we did our Investor Day 18 months ago, we indicated that on the back of turning our digital franchises into from savings mortgage franchises into digital universal banks, we would focus on developing new products into developing primary relationships and on the back of developing primary relationships and that basically means clients that regard ING as their primary bank, then they will be more open to order business with us as well. For that, you develop also other products or offer 3rd party products like, for example, the robo advice business that we have launched in Germany. On the back of that, you make fees as income as well. And therefore, on the back of that, we have indicated that we wanted to increase the percentage of our income coming from fees and commissions versus interest income. That ambition stands at 20% of total income and we're currently at 15%. 2021? Yes. And then on your last question, what I had indicated there and basically holds to be true is that it's clearly, we regret the whole situation and the turmoil that has been around the salary proposals and the effect it has had on our clients and our colleagues. But what we did is we focused on our clients as we do every time. We focused on servicing them as good as possible and improving that service as well. And then you see that also in a phase like that, you can continue to grow. And on the back of that, you do have also good financial results. So what still is then left over is maybe a dent in your reputation. So we measure reputation in many different ways. But the first one clearly is also the reputation effect that may that you may see in what we call the Nakamoto score because that's the direct effect in terms of customer service. And that Net Promoter Score, actually we've seen going a bit down first, but it's back up at the normal levels. So we see that that's kind of good. By focusing on our client ratio, And I think my colleagues do a really good job there that, that is not a structural issue. And then I'm actually quite happy to say that ING has entered the top 10 in terms of most reputable firms in the Netherlands as well over 2017. And that is something that we have worked on for a long time, making sure that in terms of how we deal with clients, what we do in society, how we go about sustainability, that the overall reputation of the firm is outstanding and that is actually evidenced by entering the top 10 in the Netherlands of most reputable firms. How are you getting through some of these commotion as well? How do you look back on all this? Would you questions that you would have done or the company would have done it differently? How are the first results in internal looking back on how this all went? Well, things are being evaluated as we speak. I think what you what is good to see is that with the discussions going on out there, that if you truly focus on where your passion is, which is servicing your clients, improving the services to your clients, investing in that, that you can weather quite some commotion. And that's what we have shown. And we've seen the number of clients increasing in the Q1 also in the Netherlands. We have Mr. Ivo Buchlink, Financial Edaplat for you. Go ahead, please. Your line is open. Thank you. Yes, just getting back on the net outflow and a quick follow-up question. It's on Page 6 at the top. So growth in Belgium and other challenging and growth markets outpaced declines in the Netherlands and Germany. So there's that. But I was wondering, can you tell me how many clients ING added in the Netherlands in the quarter? So how many of the 400,000 were Luedash? Yes, we don't go to growth per country per se. I think the good thing is that it has been growing every quarter over the last couple of years. And the growth that we see in this quarter is not slower than all the quarters before it. It is in gentlemen, if there are any further questions or remarks, please press star 1 now on your telephone. We have a question coming through from Mr. Reuben at Telegraph. Go ahead please. Your line is open. Thank you. Well, it has been over more than 6 months very, very quiet on the saving interest. Is based on bottom line, which has been leased. Because last year, you saw like steps going every 6 months. There were 2 steps in May October. And since this is what it is, is that should. I keep on trying. Yes, I know. But we can't give any guidance on pricing. It's subject to anti competitive market behavior, so we can't give any guidance on pricing there looking forward. So it's I won't do it this time around. Okay. Well, let me rephrase the question. Is this the environment which ING is able to, while survive is maybe a bigger work, but to shed out the storm? So I'll answer the question in a different way. So if you look at how we manage our net income margin, You see that as part of that net income margin with a low, if not negative rate environment, the margin that we make on savings is decreasing with time. So there's margin pressure in the net income margin or from the savings side. The way we compensate for that on the NIM side is that we look for business and we have done so for the last 5 years that makes higher margins. So you see that the composition of our balance sheet in terms of asset mix, you've seen that from a percentage perspective that we have moved away from mortgages. We kind of going down the mortgages. We're growing the management. But as a percentage of our growth, we're growing faster in also banking, for example, in industry lending, where the margins are a bit higher. And that compensates for some of the pressure that we have to weather on the savings side. So that's the income component of it. And then clearly, if this continues, there's another component to work on, which is the component of making sure that your balance sheet is more and more in sync with regards to the fact that the savings that you have should be really used to fund your business because we know that surplus liquidity itself is a loss generating business for us because we get a minus 40 basis points on that. And that's where you see that if you have a quarter like this, a last quarter where your lending book is growing faster than your savings book, then you're optimizing your balance sheet as well. So you have less savings generating a negative return in the way you including it with the Central Bank. So you're optimizing your balance sheet. So on one side, you're doing more higher margin business in the wholesale bank. On the other side, you further optimize the way your balance sheet looks like. And that in total kind of helps you to weather the pressure from the savings margin. You're actually saying that the ACP policy is actually making your business more and more healthier because this is like traditional banking, right, collecting savings money and lending it to companies. Yes. But 1 on 1, honestly, I mean, I can't use a series money to fund my mortgage book because the tenors of the 2 don't match. So I have to look at replicating portfolio for that savings money for, say, anywhere between 2 3 years. And in some cases, then the returns are still negative. So it's not healthy for banks. One more element I would like to ask. Yes, could you is there any way I mean, when I saw the quarterly, so there are also the economic environments which are made. And if you look at the economic circle, you would actually say we're more or less come to the top of the circle when we are going down. Is there any way on forecast in how the situation would look like indeed we are coming at the end of a circle and the economy is slowing down? Yes. So there's 2 ways to answer this question. First is what is our economic outlook? And the second one is how do we think that the new way of accounting, IFRS 9, will how that will influence provisioning and risk cost. So on your first question, you see trading wars, at least the ruling of trade wars, I'm sure that could hold a bit. The Chinese economy, it could hold a bit, maybe the U. S. Economy, although we don't see that. We have actually more job openings in the U. S. Recently reported. And maybe the upbeat confidence that we had in Europe. This maybe is a bit down. But having said that, we still expect solid economic growth in the months for as well with consumer confidence there, unemployment going down as a consequence of which all of the sectors are growing and we see all of the sectors growing. We see the business lending book and the numbers growing for the first time in many quarters as well, which means that the new production that we have is actually bigger than the repayment in that book, which is a very positive signal. So obviously, short end economic outlook, yes, maybe it's not as positive as a quarter ago, but it's still quite positive. Now in terms of how we at the peak of our cycle here, I give and I now will that filter through in terms of risk cost and the way we deal with IFRS. I give the work to Stephen. Yes. Thanks, It's always hard to exactly see where we're actually on the top of the or the peak of the economic cycle. But if you look at I9, it at least gives some indication. So what you currently still see is that our risk is low for the quarter, dollars 11 basis points, dollars 85,000,000 which is very low and it's the lowest in a large number of quarters. At the same point in time, we have in IFRS nine, 3 stages. Stage 1 is a 1 year projection based on expected loss And Stage 2, which are lifetime losses, not because clients are in default, but because of economic scenarios and larger probability of default rates and therefore certain provisions that you take now. And then Stage 3, which is clients actually in default. And if you look at Stage 2, it's actually it's a bit lower than last quarter. But if you look at the press release, it's about only CHF 20,000,000 dollars lower in terms of the total stock of provisions. So it's actually fairly stable. What you would expect if you have a big improvement in your economic cycle, it would actually mean that Phase 2 will go down because then lifetime losses and companies that are not default will be going down because GDP forecasts get better and employment scales get better. Now that is what we do not see in our economic scenarios. And vice versa, is the economic scenario will be trending down tremendously. That would lead to a dramatic increase in your Stage 2 provisioning, which is also not the case. And that would give you an indication that we are at or close to the top of the cycle. Moreover, that's the second indication. If you look at model releases, which basically means lower PED levels in general on our models, which you typically see in Stage 1 because the provisions are made up of risk costs, but on the other hand, of releases, so negative risk costs basically based on improvement in models. And we can basically see that this quarter, the other releases were relatively limited to a number of previous quarters, which also gives you an indication of the top of the cycle. So those are indicators, I would say. Our next question is from Mr. Ivo Bokhering, Finageliadblad. Go ahead please, sir. Thanks. Yes, I've got a question for Stefan Hazlett. It's about the other matters paragraph in the results, specifically about the investigation by the budget policies. And there's a little addendum added. But as management has concluded under IFRS that it is more likely than not that a present obligation exists, there's an outflow of resources, probable, etcetera. So I was wondering, has it been added because it was necessary because of the IFRS? Or are there other developments that made that necessary to add? And what are those? Yes. So this was a disclosure that we already made in the annual report 2017. So in that sense, that disclosure has not changed. So we are under investigation and leading to an outflow and as of further closing. And what we have said is that we expect more information in the first half of twenty 18, and that's what we still expect. So we haven't changed the wording or disclosed in that regard. Okay. And the second question is for Ralf, and it's about €12,300,000,000 extra lending in the quarter. That's quite a lot. Is that like a record amount in the quarter? Or has this been done before in the past, let's say, 5 years? I'm not sure it's regulatory high. 8% growth. Yes. It's annualized. It's 8% growth. I'm not sure it's a record. I mean, we don't have Tardis to Lens, right? So it's not like we want to move faster. What we have indicated when we launched the strategy 5 years ago was that we feel that given our footprint, which is a global footprint and given our sector expertise, which has been in existence for 5 years and built up over 25, 30 years, that we feel that on average, we could grow the lending business by 3% to 4% a year. And that's a guidance. It's not a target. You don't want to have lending targets as a bank. I mean, then you run into problems. So with guidance, that's first. Then if in a specific quarter, you will see quite some volatility between quarters, There's a couple of components that influence that growth as well. So sometimes markets are a little bit more attractive in terms of the returns and the pricing that you can have in some of the markets and some of the businesses. And then particularly in this quarter, we can explain a part because of the higher commodity prices. So since we are a large player, a Tel III player in trading commodity finance globally, the commodity prices go up, then finance the same volume of commodities will lead to higher lending. So you see that, that part of the business is dependent on commodity prices as well as the dollar development because most of the commodities are priced in dollars and therefore our book is influenced by dollars, weakness of strength and commodity prices up or down. Now oil price has increased over time. We are a large trading commodity finance house, both in soft commodities as well as hard commodities. And then you see these fluctuations coming through. So we're happy with it, but it kind of shows that we are that we have good franchises. We don't do this business if it doesn't make the returns. It shows the strength of the continuation of our relationships. So yes, it happens to be 12.3%. And yes, we're happy while we have it. But next quarter could be higher, could be lower. Okay. Is it possible to strip that influence out of the higher commodity prices? Or give a few about how that annualized 8% compares to other quarters? So is that like more or less because of the higher prices? Or is this because you've done a lot more business? Yes. But if you look at the last 2 years where we also had a guidance of 3% to 4%, Over on average, we've probably produced around 5% annually for the last 2 years. And so this quarter, the dollar will be up. So it will be there is an increasing influence because of the dollar for the 2nd quarter because we know the quarter the dollar is already stronger and maybe other parts will be weaker. That's why we guide over a year because there's probably quite some fluctuation and it's dependent on all of this. And again, we have no target, and that's the most important thing for running a prudent business. Okay. Okay. That's fair to hear. One more thing just to be really clear on that as well. That's about the question I asked about the investigation. I looked at it again just now, how it was phrased at Q4 results, and there was nothing about the probability of a fine or other outflow. But the phrasing is different compared to Q4, but maybe it was already in the annual report and I haven't seen that. It was in the annual report. Okay. Yes. Okay. Thanks. Okay. We have another question coming through from Mr. Reuben Egg, Telegraph. Yes. One more thing about Ivo's question on the outflow. Is it still already clear? I mean, I'm looking on Page 6. Yes. We thought we'd do it online, but let's now do it online since you're online. So if you look at Page 6, you see in the total in the Netherlands and Germany, there was an outflow. And if you look a few lines above, you see that also in total, there was an inflow, partly offset by bank treasury outflow. If you then dive into the detail of the Netherlands, what you see in the Q1 on Page 9, there are customer deposits of RMB42.7. And if you look at the previous press release of the 4th quarter, it is RMB139.3 So on customer deposits, actually there's an inflow of RMB3.4 billion. And therefore, the net result is that the outflow that is in the Netherlands comes from bank treasury, which are deposits that we do not want to have a bank treasury because they do not yield that much, so we invest them in longer term. So that's more professional money, right? So you're asking about customer. So the customer inflow is certainly there and it's more the professional money that We chose to invest otherwise. Exactly, that we yes, where the RPA is. One question. Can you do the next quarterly results on Sashan Armstrong? That's for me, like, meet in a minute? Could you repeat that? It could be the next quarter results at Sachin Armstrong? If I may, we meet in a minute. We have no further questions. Sir, please continue. Okay. Thanks. Okay, Jeff, thanks for calling in. Thanks for showing the interest in ING and our development. I think in the Q1, again, by focusing on innovation, improving your customer service, you see that we're growing the number of customers across all geographies, including the Netherlands. I think that's a worthy point to be made that on the back of the growth on customers, you do more commercial business. And if you do that well, you also make a bit more money and healthy returns. And so from that perspective, the growth of customers by another $400,000 to $37,800,000 is good news. The development of Yold as an open banking platform and the acquisition of Payvision is a very strategic acquisition. We're very happy with our new colleagues there. And all of that leads to good results. Thanks for your attention. And if there's any further questions that you may have, analyzing the information that we stand out this morning And on the back of the Q and A today, you know that our media guys are always available to serve you well. So please raise them. Thanks very much, and talk to you next time. This concludes this conference. On behalf of ING, thank you for attending. You can disconnect your line now.