Gentlemen, welcome to the ING Quarter 1 2018 Call. This moment all participants are in listen-only mode. Following the presentation, there will be a question-and-answer session. I'd like to hand the call over to Mr. Ralph Hamers, Chairman. Go ahead, please, sir.
Thank you, operator. A warm welcome. Thank you for joining us on this call. We'll discuss our strategic progress here, as well as the resulting financial achievements for the first quarter of 2018. With me are Koos Timmermans, our CFO, and Steven van Rijswijk, our CRO. If we look at the first quarter, we have been able to continue to speed up innovation, improving the experience of our customers. Evidence of that is in the U.K., our Yolt open bank platform is growing rapidly. We now offer the service to 250,000 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.
This is a really good offering for our SME and larger and wholesale banking clients in order to give a differentiating experience to their consumers, their customers as well, in both the online and offline world. The combination of the two really strengthen our footprint in online channel payment services, both on the business customers and the retail customers. 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, bringing our total to 37.8 million in 13 countries. We now serve 11.2 million primary customers.
That number is up 170,000 versus the last quarter, we're on our way to our ambition of 14 million primary customers in 2020. 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 first quarter in Australia. On the back of the growing number of customers, both on the retail side as on the wholesale banking side, we have been able to extend EUR 12.3 billion of additional lending. We have been able to attract EUR 2.4 billion of savings in the past quarter. If you focus on innovation and improving customer service, you will get more customers, you will be able to do more business, you will also have good financial results. That's what we see as well. Financial performance is good across all the geographies, all the different sectors.
That's partly helped by the economic upturn. We were able to maintain a robust interest margin, we have to remain vigilant here, because we know that the low interest rate environment is not the negative rate environment is demanding. The first quarter net result came out at just over EUR 1.2 billion, 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 cost-income ratio, that's a kind of a four-quarter average cost-income ratio, is stable-ish 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%.
It's well in excess of the objective to be around 13.5%, that's an ambition that we have now set, and that includes the effect of Basel IV. 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. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. Go ahead. If you have any questions or remarks, please press star one now on your telephone. Our first question is from Mr. Ivo Bökkerink of Financieele Dagblad. Go ahead, your line is open.
Good morning, gentlemen. I have two questions. The first one is about Financial Markets, which posted lower income. Maybe 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 customer deposits in the Netherlands and Germany. I saw there was a net outflow there. Is that a one-off, or is that a trend that's going on for longer? Has it anything to do with the frost that happened last quarter about remuneration? 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. What are the drivers that you see that might be able to up that return on equity in the future? Thanks.
Okay. Well, thanks, Ivo. Your first question on Financial Markets. Financial Markets had a better quarter than the fourth quarter, but if you compare it to the first quarter 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 first quarter, you have to take into account that meanwhile we have diminished, decreased, even sold our equity derivatives business. That's an explanation of a EUR 15 million revenue on a yearly basis. That's part of the restructuring of Financial Markets into a profitable franchise. What remains is our FICC franchise, which is 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.
There's not a lot of client demand to hedge that. If there is no clients wanting to hedge, then basically we don't do the business. Having said that, 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 the equity derivatives business that we have sold, 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 three 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.
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 and Germany, there is no particular explanation there. Clearly, on one side there is some players that pay better rates. 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 give, in the view of the customers, a better chance for return, equity products related. You see that happening there. That's the explanation there. We've actually seen the number of customers in the Netherlands grow in the first quarter, as we have seen in all the other quarters before that. That is not an explanation.
The turmoil around the salary discussion is not an explanation for that. On the return on equity, I give the word to Koos.
Overall, as we have said, we have a 10%-12% ambition. Currently we run at around 10.3%. You might say, "Is that low?" There are several factors which are causing that. 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, you have various factors which play a role. 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. Can you exactly pinpoint one number in terms of ROE? The answer is no.
Can you say with these factors playing around, both your investments a bit lower, risk cost will at a certain moment increase, interest rate will increase. Will that keep you somewhere between the 10% and 12%? The answer is probably yes. We don't feel concerned with the current number of around the 10.3%, and we don't intend to lower our investments on digitalization because of this.
Okay. Thanks very much.
Maybe, Ivo, also going back on your question as to customer deposits. The combination of savings and deposits is not really decreasing, by the way. I don't know where you have those numbers from.
Well, let me see. In the quarterly results, there's a mention of a net outflow in Germany and in the Netherlands. An overall inflow and an outflow in the Netherlands and Germany. Let me see if I can find really quickly where that was mentioned.
While you look for that, let's have the next one.
Sure.
Yes. Okay, thanks.
Next question is from Mr. Ruben Eg, De Telegraaf. Go ahead, your line is open.
Good morning. Could you shed some more light how the transition of the technical systems in the Netherlands and Belgium are going? 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 than you would have hoped? What can be expected from the cost-income ratio while this one system is being implemented? Can you shed some more light on the fee incomes? I believe they have to grow from 15%-20% of the incomes. On what level is that now? At the shareholders' meeting, Ralph, 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? How do I say the correct word there? How do you see what the damage on that image is?
Thanks, Ruben. On the first one on Belgium. What we're doing between the Netherlands 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, English language. We have to make it, for example, also available in French and German language, as those are legal languages in Belgium. 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. On the other side, we are in Belgium doing the first step, which means that we are integrating the two banks that we have in Belgium, which is Record Bank and ING Bank.
For that integration, we have received the approval from the National Bank of Belgium. We now have the legal integration of Record Bank into ING Bank Belgium. As we speak, we are migrating clients from the Record Bank onto the ING Bank systems in Belgium. First it is Record Bank clients to ING Bank Belgium, 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 1st. All of the tribes, the way we run tribes on mortgages, on payment services, et cetera. There is one person responsible for two 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 two years already.
That's also been done. On the cost side, there is a bit of a peak there. 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 up some of the packages that we are offering. You can't perfectly match when they leave versus when that part of the operation is digitalized or transferred or a system is decommissioned. That's where we see that we have to backfill some of the people that leave early with externals, and that takes a bit of an increased cost.
Overall, in the grand scheme of things, that is just part of implementing such a grand plan. That's question number one. Question number two on your fee income. When we did our investor day 18 months ago, we indicated that on the back of turning our digital franchises from savings mortgage franchises into digital universal banks, we would focus on developing new products into developing primary relationships. 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 other business with us as well. For that, you develop also other products or offer third-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.
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.
We're currently at 15%.
Okay. When do you hope that will most grow to achieve that ambition?
2021.
Yeah.
2020, 2021.
Good.
Yeah.
Yeah.
On your last question, what I had indicated there and basically holds to be true is that 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. 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. 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. What still is then left over is maybe a dent in your reputation. We measure reputation in many different ways.
The first one clearly is also the reputation effect that you may see in what we call the Net Promoter Score, because that's the direct effect in terms of customer service. That Net Promoter Score, actually, we've seen going a bit down first, but it is back up at the normal levels. You see that's kind of good, that by focusing on our client relations, and I think my colleagues do a really good job there, that is not a structural issue. 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.
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 upstanding, that is actually evidenced by entering the top 10 in the Netherlands of most reputable firms. It helps you getting through some of this commotion as well.
Yeah. How do you look back on all this? Of course, you said you would have done it or the company would have done it differently. What are the first results in internal looking back on how this all went?
Well, things are being evaluated as we speak. I think 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 your service to your clients, improving the services to your clients, investing in that you can weather quite some commotion. That's what we have shown, and we've seen the number of clients increasing in the first quarter also in the Netherlands.
Yeah. Thanks.
We have Mr. Ivo Bökkerink, Het Financieele Dagblad with you. Go ahead, please, your line is open.
Thank you. Yeah, just getting back on the net outflow, a quick follow-up question. It's on page six at the top. Growth in Belgium and other challenging and growth markets outpaced declines in the Netherlands and Germany. I was wondering, can you tell me how many clients ING added in the Netherlands this quarter? How many of those 400,000 were Dutch?
Yeah, we don't go through growth per country per se. I think the good thing is that it has been growing every quarter over the last couple of years. The growth that we see in this quarter is not slower than all the quarters before it.
Okay. That's helpful. Thanks.
Ladies and gentlemen, if there are any further questions or remarks, please press star one now on your telephone. Go ahead, please. We have a question coming through from Mr. Ruben Eg, De Telegraaf. Go ahead, please. Your line is open.
Thank you. Well, it has been over more than six months, very quiet on the saving interest. Is this the bottom line which has been reached? Because last year you saw steps going every six months. There were two steps in May and October, and ever since this is what it is in the Netherlands.
Well, as you know, we can't.
I have to keep on trying.
I know, but we can't give any guidance on pricing. It's simply too anti-competitive markets behavior. We can't give any guidance on pricing looking forward. I won't do it this time around.
All right. Well, let me rephrase the question. Is this the environment which ING is able to, well, survive is maybe a bigger word, but to sit out the storm?
I'll answer the question in a different way. 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. There's margin pressure in the net income margin 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 five years, that makes higher margins. 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, really kind of pulling down the mortgages. We're growing the mortgage book, but as a percentage of our growth, we're growing faster in wholesale banking, for example, in industry lending, where the margins are a bit higher. That compensates for some of the pressure that we have to weather on the savings side. That's the income component of it.
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. We know that surplus liquidity itself is a loss-generating business for us because we get a -40 basis points on that. That's where you see that if you have a quarter like this, a last quarter, where your lending business is growing faster than your savings book, then you're optimizing your balance sheet as well. You have less savings generating a negative return in the way you have, including it with the central bank. You're optimizing your balance sheet. 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. That in total kind of helps you to weather the pressure from the savings margins.
You're actually saying that the ECB policy is actually making your business more and more healthier? This is like traditional banking, right? Collect the savings money and lending it to companies.
One-on-one, honestly, I can't use a savings money to fund my mortgage book. The tenors of the two don't match. I have to look at a replicating portfolio for my savings money for, say, anywhere between two and three years. In some cases, then the returns are still negative. It's not healthy for banks.
Okay. Yeah. One more element I would like to ask. Oh, yeah. When I saw the quarter results, there are also the economic environments which are made. If you look at the economic circle, you would actually say we're more or less coming to the top of the circle when we are going down. Is there any way on forecast in how the situation would look like, if indeed we are coming at the end of a circle and the economy is slowing down?
Yeah. There are two ways to answer this question. First is what is our economic outlook. The second one is how do we think that the new way of accounting, IFRS 9, how that will influence provisioning and risk cost.
Exactly.
On your first question, you see trade wars. At least the looming of trade wars, I'm sure that cools a bit the Chinese economy. It cools a bit maybe the U.S. economy, although we don't see that there. We have actually more job openings in the U.S., recently reported. Maybe the upbeat confidence that we had in Europe is maybe is a bit down. Having said that, we still expect solid economic growth in the Netherlands 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 in the Netherlands 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.
Honestly, short and economic outlook, yeah, maybe it's not as positive as a quarter ago. It's still quite positive. Now, in terms of are we at the peak of our cycle here, how will that filter through in terms of risk cost and the way we deal with IFRS, I give the work to Steven.
Yeah. Thanks, Ralph. It's always hard to exactly see whether we're actually on the top of the or the peak of the economic cycle. If you look at IFRS 9, it at least gives some indication. What you currently still see is that our risk cost is very low for the quarter, 11 basis points, EUR 85 million, 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 9 three stages. Stage 1 is a one-year projection based on expected loss. 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. Stage 3, which is clients actually in default.
If you look at stage 2, it's a bit lower than last quarter, but if you look at the press release, it's about only EUR 20 million lower in terms of the total stock of provisions. It's actually fairly stable. What you would expect if you have a big improvement in your economic cycle actually mean that phase 2 will go down. Lifetime losses from companies that are not in default will be going down, because GDP forecasts get better and employment figures get better. That is what we do not see in our economic scenarios and vice versa. If 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. That would give you an indication that we are as close to the top of the cycle.
Moreover, that's the second indication. If you look at model releases, which basically means lower PD 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 what you basically see that this quarter, the model releases were relatively limited to a number of previous quarters, which also gives you an indication of the top of the cycle. Those are indicators, I would say.
Yeah.
Okay. Thanks very much.
Our next question is from Mr. Ivo Bökkerink, Het Financieele Dagblad. Go ahead, please, sir.
Thanks. I've got a question for Steven in that side. It's about the other matters paragraph in the results, specifically about the investigation by the Dutch authorities. There was a little addendum added, which says, "Management has concluded under IFRS that it is more likely than not that a present obligation exists and an outflow of resources probable," et cetera. I was wondering, has that been added because it was necessary because of the IFRS, or are there other developments that made that necessary to add? What are those?
This was a disclosure that we already made in the annual report of 2017. In that sense, that disclosure has not changed. We are under an investigation that may lead to an outflow, and that's what we're disclosing. What we have said is that we expect more information in the first half of 2018, and that's what we still expect.
We haven't changed the wording.
We haven't changed the wording or disclosure in that regard.
Okay. Nor that probability.
No.
Okay. Good to know. Okay, the second question is for Ralph, it's about the EUR 12.3 billion extra lending in the quarter. That's quite a lot. Is that a record amount in a quarter, or has this been done before in the past, let's say, five years?
I'm not sure it's a record. It's really high. Sorry?
It's 8%.
Yeah. It's annualized, it's 8% growth. I'm not sure it's a record. We don't have targets to lend. It's not like we want to go faster. What we have indicated when we launched the strategy five years ago is that we feel that given our footprint, which is a global footprint, and given our sector expertise, which has been in existence for 25 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. That's a guidance. It's not a target. You don't want to have lending targets as a bank. You run into problems. It's guidance. That's first. If in a specific quarter, and you will see quite some volatility between quarters, there's a couple of components that influence that growth as well.
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. Particularly in this quarter, we can explain a part because of the higher commodity prices. Since we are a large player, a top three player in trade and commodity finance globally, that if commodity prices go up, then finance the same volume of commodities will lead to higher lending. You see that that part of the business is dependent on commodity prices as well as the USD development, because most of the commodities are priced in USD, and therefore our book is influenced by USD, weakness or strength, and commodity prices up or down. Now, oil price has increased over time.
We are a large trade and commodity finance house, both in soft commodities as well as hard commodities. You see these fluctuations coming through. We're happy with it because it shows 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. Yeah, it happens to be 12.3, and yeah, we're happy while we have it. 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 feel about how that annualized 8% compares to other quarters? Is it more or less because of the higher prices or is this because you've done a lot more business?
Yeah, if you look at the last two years, where we also had a guidance of 3.6%-4%, on average, we've probably produced around 5% annually for the last two years. This quarter, the U.S. dollar will be up, so there is an increasing influence because of the U.S. dollar for the second quarter. Because we know the U.S. dollar is already stronger, maybe other parts will be weaker. That's why we guide over a year, because there is quarterly quite some fluctuation, and it is dependent on all of this. Again, we have no target, and that's the most important thing for running a prudent business.
Okay. That's very clear. 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 the Q4 results, and there was nothing about the probability of a fine or other outflow. The phrasing is different compared to Q4, but maybe it was already in the annual report and I haven't seen that.
Exactly. It was in the annual report.
Okay. Yeah. Okay. Thanks.
Okay. Welcome. Any further questions?
Ladies and gentlemen, if there are any further questions or remarks, please press star one now on your telephone. Go ahead, please. We have another question coming through from Mr. Ruben Eg, De Telegraaf. Go ahead, your line is open.
Yeah. One more thing about Ivo's question on the outflow. Is that still already clear? I'm looking on page six.
We thought we'd do it offline, but let's now do it online since you're all online. If you look at page six, you see in the total in the Netherlands and Germany, there was an outflow. If you look a few lines above, you see that also in total there was an inflow, partially offset by bank treasury outflow. If you dive into the detail of the Netherlands, what you see in the first quarter on page nine, there are customer deposits of more than EUR 42.7. If you look at the previous press release of the fourth quarter, it is more than EUR 39.3. On customer deposits, actually, there is an inflow of EUR 3.4 billion.
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 in bank treasury because they do not yield that much, so we invest them in longer term.
That's more professional money, right? You're asking about customer. The customer inflow is certainly there, and it's more the professional money that
We chose to invest otherwise.
Exactly. Where the outflow is.
Okay. Last question.
Could we do the next quarter results with CC Amstel? If only, like, meet in the middle?
Sorry, could you repeat that?
If we do the next quarter results at CC Amstel? Ivo and me, we meet in the middle?
Okay.
I'm just thinking out loud with you. Okay, thanks so much.
Yeah. Much appreciated, Ruben.
All right, thanks.
Thank you.
We have no further questions, sir. Please continue.
Okay, thanks. Okay, gents, thanks for calling in. Thanks for showing the interest in ING and our development. I think in the first quarter, 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. If you do that well, you also make a bit more money and healthy returns. From that perspective, the growth of customers by another 400,000 to 37.8 million is good news. The development of Yolt as an open banking platform and the acquisition of Payvision is a very strategic acquisition. We're very happy with our new colleagues there. All of that leads to good results. Thanks for your attention.
If there's any further questions that you may have analyzing the information that we sent out this morning and on the back of the Q&A today, you know that our media guys are always available to serve you well. 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.