Morning. This is Patricia Kroes, welcoming you to ING's first 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. 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.
Thank you, operator. Good morning, everyone. Welcome to the first quarter 2018 results call. As always, I will take you through a couple of slides by way of introduction, and there is plenty of opportunity for Q&A. With me here are Koos Timmermans, our CFO, and Steven van Rijswijk, our CRO. Turning to the key points. ING Group posted a first quarter net profit of just over EUR 1.2 billion, which is a solid 7.2% increase on the same quarter last year. On the retail side, we recorded a net inflow of 170,000 primary customers. That makes a total of 11.2 million customers now. [Germany] retains very strong commercial momentum and contributed strongly to this quarterly growth. In the first quarter, we recorded very strong net core lending growth as well, EUR 12.3 billion to be exact, as well ahead of the 3%-4% loan growth guidance.
As we indicated last quarter, the Q4 costs were elevated mostly due to incidental items, I'm happy to report that costs came down again in the first quarter. That demonstrates the continuous focus on cost control while transforming risk costs below due to the positive macroeconomic outlook and credit environment. The four quarter rolling average basis return actually came out at 10.3% [by the EF]. Lastly, we have now completed our financial ambitions with a Basel IV CET1 ratio ambition of around 13.5% and an underlying return on equity ambition of 10%-12%. We will discuss these in more detail later on as well. I'll give you some more information even further in this presentation on this. Turning to slide three. This is the indication of our commercial momentum. We are retaining a solid commercial momentum, as you can conclude from this slide.
Primary customers up 170,000 at 11.2 million versus a 2020 target of 14 million. Total customers of 400,000. Again, this quarter, as mentioned already, EUR 12.3 billion of core lending growth. On the other side, we see the deposit growth at EUR 2.4 billion. That helps us in our efforts to optimize balance sheet usage and cushion the impact of the lower rates. As always, these results can't be achieved without a relentless focus on customer experience, as well as the further focus on digitalization across the markets where we operate. We have now included also an indication as to how the digital interactions that we have with our customers, how that is growing. You see that we have reached over 800 million in the quarter, and that is more than 20% increase year-on-year.
You see that the trend of customer behavior is there and that our strategy is perfectly matched with that trend. As for the first quarter, we ranked number 1 in 7 out of our 13 retail markets in terms of Net Promoter Score. While we are in the process of creating the go-to digital banking platform for all of our 38 million customers, we also keep developing new innovations ourselves and partner with FinTechs. In the end, if you want to build that platform, you need to look at what you can do yourself, but there's also good ideas outside. Currently, we have more than 150 partnerships with FinTechs. In March, we completed the earlier announced acquisition of the leading payment service provider, Payvision, and that will significantly enhance our payment offer for our SME and Wholesale Banking clients.
On robo-advice, the partnership that we have with Scalable, that continues to make good progress as well with our customers in Germany. We now have EUR 400 million of assets under management on the ING platform through Scalable. When it comes to instant lending, a story you know quite well, the collaboration that we have with Kabbage for instant lending to SMEs, we have expanded that to France and Italy after our initial rollout in Spain. Lastly, our in-house developed mobile aggregation and banking management platform, Yolt, which has been built for open banking in a PSD2 world. We now have more than 250,000 registered users in the U.K., and Yolt has also been awarded the best money app in the U.K. several times. We know what it takes to play in a digital area. Going to slide five.
At the end of last year, we strengthened and sharpened our approach to sustainability by introducing what we call a Responsible Finance portfolio. That portfolio replaces our sustainable transitions finance portfolio, as we reported earlier. This portfolio of Responsible Finance, we aim to double this by 2022. In order to achieve that ambition, we try to keep being instrumental in coming up with new industry standards. For instance, our team was instrumental in the development of the Green Loan Principles, which were published by the Loan Market Association in March. In Asia, we acted as sustainability coordinator on the first sustainability-linked syndicated loan of its kind, and that was to Olam. Olam is a company active in the global agri-business. Furthermore, we're building a reputation as a leading green bond house.
We were involved in as many as eight green bonds in the first quarter, including deals for the transactions for the Kingdom of Belgium and the SpareBank 1 in Norway. As indicated during the full-year results, I'm turning to page six now. The slide that shows the ING Groep financial ambitions. As we indicated in our full-year results, with the finishing Basel IV and knowing what kind of IFRS impact we had on our capital and our earnings, we've now also been able to complete our set of financial ambitions. We set a CET1 ratio ambition of around 13.5%, and that's on Basel IV terms, as you can see, and an underlying return equity ambition between 10%-12%. For our capital, we feel we have a very good starting point with the 14.3% CET1 ratio currently.
While at the same time, we will still need to grow capital until the 1st of January 2022, because by that date, the majority of the Basel IV and TRIM impact will have occurred. We will aim to keep delivering attractive returns to shareholders. As you can see, with an average return on equity of 10.3% over the last four quarters. We feel we're in a good place here on this one, while we can grow the franchise as well. As you are used to from us, we are a return equity-focused company. We will continue to maintain pricing discipline. We will look to grow profitably even further, with the higher capital requirements coming in. The discipline, in order to make this set of ambitions, needs to stay in place. As you have experience with us, we will continue to do so going forward.
Let's take a look at the first quarter results of this year. Now turning to slide eight. You see the development of our underlying pre-tax result that came out at nearly EUR 1.7 billion in the first quarter. That's due to continued loan growth, resilient margins, strong decrease in the risk cost helps as well. At the same time, we see regulatory expenses going up, these are, as you know, seasonally high in the first quarter. Net interest income was up 1.1% on prior year, that's due to this mentioned continued growth in customer lending. Also the overall net interest margin that is staying within our guidance of a high 140s to low 150s. This is all despite the foreign exchange headwinds that we saw on the U.S. dollar, as well as the continued pressure from the low rate environment.
In itself, that's a good result right there. As we didn't have any core savings adjustments in our main European retail markets during the quarter, the NII, compared to the fourth quarter, was down. That's also partially explained by the EUR 35 million lower NII due to the decision to end some of the hedge relationships back in the third quarter of 2017. You can see that in this bar chart as well as the -EUR 35 right there. Up 1.1% year-on-year, but down 1.2% quarter-on-quarter because of not adjusting core savings rates and this -EUR 35 right there. Our net interest margin continues to be at healthy levels. You see that it has been unchanged. If you take the four-quarter rolling average at 154 basis points, correct for incidental and quarterly effects. It's stable at 154 basis points.
If we look at the NIM in the first quarter, we see a reduction of 6 basis points. The NIM now coming out at 152 basis points, that's largely explained by some of the volatile positive impacts that we saw in the previous quarter, and they reversed largely. You see that on the financial markets side, although we actually saw a slight improvement in the financial markets total income compared to the weak fourth quarter. The NII component dropped quite substantially, that explains the 3 basis points in the reduction of the NIM. Another 2 basis points is due to the impact of ending some of the hedged relationships, which I already talked about.
You see the remaining decrease, which is a single basis point, and that's a result of slightly lower margins on non-mortgage and also the lending side, and a bit on the savings side as well. NIM on current accounts and mortgages remained stable in the quarter. Look at the core lending growth on slide 10. We see that we grew here with EUR 12.3 billion in core lending. That's 2.2% quarter-on-quarter. Comes with good returns, meets our risk appetite framework. While we keep facing tough competition across the board, that we have many growth engines within our bank. Retail grew EUR 5.2 billion, this is mostly in consumer and business lending. While Q4 in retail was more skewed towards mortgages. On Wholesale Banking, we saw net core lending growth at EUR 7.1 billion.
Most of that growth was recorded in industry lending, where we've seen a mix shift compared to last year. I'm mentioning that because it explains a couple of things that we'll discuss later. Partly due to the higher commodity prices, we saw the growth of shorter-dated TCF business contributing strongly to this growth, and we saw a reduction in the higher margin project and acquisition finance activity. That mix shift in itself had good returns, also explains some financial developments in the Wholesale Banking. Real estate finance continues to grow steadily. Talking about the mix shift and turning to slide 11 on the commission. Here you see that the Wholesale Banking fees were down year-on-year and quarter-on-quarter. That's because the fees on TCF deals, which grew in the mix, are usually lower than the longer dated industry lending business.
This is not a trend in itself, it's just what happens this quarter. Again, the TCF business is coming in at lower fees, but at good returns as well. If you look at the development of the Retail Benelux, we see year-on-year a decrease. Retail Belgium saw lower mutual fund entrance fees, and that's partly due to equity market volatility. While the first quarter, typically in Belgium, is traditionally strong in this regard. We've seen clients now wait for their investments given the volatility in the equity market. If you go to the net commission income in the Retail C&G countries, you see that growing rapidly. We're onboarding more primary customers there. We're enlarging our digital product offering. Quarter-on-quarter, you see the fees going down slightly.
That can be fully explained by the higher mortgage origination fees that we paid in Germany in order to continue and accelerate our mortgage growth. The underlying trend is actually very positive. The fees that we pay away are subtracted from the fees that are coming in. Financial markets, same slide here. Had a more difficult quarter. It's slightly up from the fourth quarter last year. Total revenues were up 13%. Client activity was, however, lower in the credit and rates business, in line with what we saw at some of our European peers. I think it's worth noting that we only have a small equity franchise compared to the U.S. banks. That's not where we had expected the uptick because we don't have the business. It's a credit and rates business, and the client activity has been low in that, and that explains this result.
Let me spend a few minutes on our challenges in growth markets, specifically the retail operations outside of our home markets in the Benelux and Germany. If you take the consolidated picture and you single out a couple of areas, you actually see much better how our strategy is successful. Here you see this Think Forward strategy at work, delivering very good results. Primary customers- Remaining flat despite commercial growth. Commercial growth being reflected in double-digit increases in NII, then fees, net core lending, more than EUR 9 billion in the past four quarters, and an underlying change in mix towards higher margin lending, such as consumer lending and business lending there. Customers seem to really appreciate our superior customer experience. They award us leading Net Promoter Score in five out of the eight markets.
This is where you see the Think Forward strategy fully at work with positive numbers, growth numbers, double-digit growth numbers, whereas number of FTEs being flattish. This is basically tech component of banking. We then focus even further and single out a specific country, let's take a look at Australia, and we want to highlight it because Australia had a very good first quarter. As you can see from the income graph here, 23% growth year-on-year on total income, and a cost income ratio of around 45%. Australia is a business that we built from scratch since 1999. Now services nearly 2 million customers, around 25% of this being primary customers. Due to our attractive pay and save proposition, two-thirds of our new customers directly turn into primary.
When we founded this business, it was a savings and mortgage business. Over the last couple of years, as with all of these digital franchises that we have, we've built it into a universal digital bank. Expanding the retail product range, fully distributed digitally and through mobile, adding insurance, adding regulated savings products. Also on the other side, diversifying the balance sheet, starting consumer lending, business lending, and growing our wholesale banking franchise there as well. A testament, I think, to our success to deliver a superior customer experience, we have a number one Net Promoter Score in Australia with a 22-point difference versus the best competitor. That's not because there is weak banks in Australia, they're actually strong banks. It kind of shows how well you can do as a digital bank only if you totally focus on client service and differentiating clients.
Turning to the operating expenses on slide 14. I think we demonstrated good cost control in the first quarter. Expenses, excluding the regulatory cost, which, as you know, are always high in the first quarter. Those expenses actually came down EUR 161 million versus the fourth quarter. Reduction in the number of non-recurring items, including a release of a legal provision in Luxembourg, lower marketing expenses, that is what explains half of the reduction. Our digital investments were also lower in the quarter at EUR 41 million. Combined with higher regulatory cost of EUR 493 million, as you can see in the bar chart, this led to a four-quarter rolling average cost income ratio of 55.7%, stable-ish on the back of high regulatory costs. Quite good, actually. Pleased with the progress on operating costs here that we can show you that this is under control while making progress on the transformation.
Similarly, also in Orange Business Services. We are going through the legal merger of Record Bank into ING Belgium. We have completed that now. We are now also running waves of migrations of clients. That's all going through as well. Overall, looking at the cost income ratio, we remain committed to the 50%-52% cost income ratio ambition by 2020. 2018 is still expected to be an investment year. We expect the full impact of transformation programs to come through in 2019 and 2020, as we had also indicated during our Investor Day 18 months ago. I can be short with respect to the risk cost. Turning to slide 15 here. Loans provisions were a very low EUR 85 million. The first quarter is the first quarter in which risk costs were reported under the IFRS 9 regime, for which more information is in the appendix.
See the more positive macroeconomic outlook coming through here. It impacts directly the provisioning, as well as the benign credit environment in most of the regions in which we are active, that results in low additions. Some larger releases, particularly in the wholesale bank. Underperforming loans for ING as measured by the Stage 3 ratio under IFRS 9, dropped to 1.7% from 1.8% in the beginning of the year. For 2018, we remain constructive and would expect risk costs to stay well below through the cycle average of 40-45 basis points. Lastly, on the anti-money laundering investigation by the Dutch prosecutor, we have nothing specifically to report. Expect to hear more in the near future. Slide 16 on capital here.
You can see that we incurred a minus 0.2% impact from the adoption of IFRS 9 on the 1st of January, as we already indicated in our previous call. That leads to a 14.5% CET1 at the start of the year. That initial impact of minus 0.2%, as we explained last quarter, is explained by the reclassification of part of the liquid investment portfolio to hold and collect. It goes to amortized cost then. During the quarter, the CET1 ratio declined by 20 basis points to 14.3%, and that is explained by higher Risk-Weighted Assets. The impact of the acquisition of Payvision versus the profit that we had, as you had the minus 20 basis points. In line with our progressive dividend policy, we continue to reserve one third of last year's full dividend in the first three quarters of the year.
We do that now as well. As you can also see from this slide, our CET1 ratio ambition of around 13.5% in the Basel IV fares well to our fully loaded SREP requirement and the MDA level of 11.8%. That implies a management buffer of 170 basis points. With Basel IV, IFRS impacts phasing in over time. We will have to retain some capital to be compliant on a fully loaded basis going forward. Still, a large part of our future capital generation capacity will be used to reward our shareholders via the existing progressive dividend policy, but also to support profitable growth if we can, with our stated ambition of growing the lending book of 3%-4% annually. To wrap it up.
You can see that we continue to grow our customer numbers, we continue to grow our primary relationships numbers, we continue to deliver profitable core lending. The NIM remains relatively resilient. Cost came down from a somewhat elevated level in the fourth quarter. We are in a strong position to expand our digital leadership, to continue to attract customers, who see us as the go-to bank, while delivering attractive returns to our shareholders. That is a nice summary to hand over to the operator for questions.
Thank you, sir. Ladies and gentlemen, we are 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. May I please remind you, in the interest of time, to limit yourself to two questions only. Star one for your questions or remarks. Our first question is from Mr. Benjamin Goy, Deutsche Bank. Go ahead, your line is open.
Hi, good morning. Two questions please from my side. One on capital, one on financial markets. Could you give some more color why you think 170 basis points is the right management buffer? Also to that related, your SREP is still based on Basel III, but your ambition is based on Basel IV. Do you think that changes over the next four years, the composition? Secondly, financial markets, since the capital markets data never made your company or the group ROE guidance and most quarters wasn't even close. Wondering what specific actions you think might improve the risk return profile of the segment. Thank you.
Thank you, Ben. I will take the second question, and Koos will take the first question. On financial markets. As I already indicated, the FIC results, and this is the business that we play in, they're not that positive for the market as a whole. Therefore, you see that reflected in our own performance as well in the first quarter. The transformation plan that we have for financial markets is to address a couple of things. First, you know that if you compare year-over-year, you should also correct for the equity derivatives businesses that we are shrinking and actually selling. That's an annual revenue impact of EUR 15 million right there. We continue to further improve our efficiency by combining the three trading locations to one, consolidating the trading activities. That should help on the cost side as well.
Isabel launched a further sharpened also banking strategy, in which financial market sales plays an important business, and will be more and more aligned with the client base that we have across the different sectors, where we know we have strong client relationships, where there is quite some demand for our support, from a financial markets perspective as well. Therefore, with these actions, we still expect that the streamlining of our financial markets operations and a further alignment towards our client business, that we can improve the return on equity until 2020.
Maybe, it goes on the 170 basis points. Is that the right buffer? Two conditions we set ourselves. First, we want to serve our customers, so have the normal loan growth. Second is we want to be able to pay you a dividend with a reasonable amount of certainty. That is the two preconditions we say. The question is, how much of a buffer do you need above your minimum SREP requirement? We said, if we pick 170 basis point, that will allow you above a normal cycle with its peaks and its downs to continue your underlying business with the two conditions set. You can still normally pay a dividend, and you can still normally facilitate your clients and grow. That is the basis of the 170.
What is in there, basically the 170 basis points caters for both credit risk migration, it caters for the new provisioning according to IFRS 9, although we have little experience with it. It also caters for things like your revaluation reserve changing, switches in the currencies. All of this is basically the components which constitute this 170 basis points.
Okay. Thank you very much. Sorry to follow up on the part, SREP Basel III versus your Basel IV ambition. Any thought on that over the next two to three years?
Sure. I think, overall, where we have said the ambition is 13.5%. In fact, we are currently at 14.3% under Basel III. What we indicated the previous time is that probably Basel IV, it might cost you 2%, if you keep the same portfolio and the same economy and you don't do anything to repair it. If the current ratio is 14.3%, that would be under a Basel IV lens, a 12.3% and 13.5% is our target. That means we will still accumulate a little bit of capital over the next few years, but it can be managed in such a pace that you can still continue your dividend and grow your business.
Okay. Thank you.
Our next question is from Mr. Benoît Pétrarque on Kepler Cheuvreux. Go ahead please, your line is open.
Yes. Good morning, gentlemen. Yes, to come back on the CET1 ambition of 13.5%. Could you be a bit more specific on the timing, in order to get to this level? Is that situation, it will take you a couple of years to gather, and you have no rush to get to this level. Also, could you talk about the dividend trajectory, so long you are below the 13.5%? I think you said already that you want to have a progressive DPS. How progressive will that be, let's say, in the period you are below the 13.5%? The second question will be on the TCF growth. I was wondering if it's purely linked to the commodity price or you see a more fundamental shift here, because it suggests that we'll see probably a bit less growth in the fee and commissions line.
Also, on the returns on the TCF business, what type of investment margin are you making on this business? Thank you very much.
Most of the first one. Yes, Benoît, if you look at the ambition there and the timing of it, in the end, what we see is the biggest part of the Basel component will have to be realized around 2022, and that is the adaptations to the internal models. It could be a bit speeded up because of TRIM, but that is something which we don't know precisely, but we see it as follows. If Basel currently would cost us around 2%, then already 0.8% is what is in our current buffer, the 14.3%, so that means we are already 40% underway. That means the other part, we will accumulate over time. Do we want to do that as of next year? No, the answer is, we want to do that over that period of time. We will use that to grow into that number.
The only other point is on the dividend part. We will continue with our dividend policy as is.
Okay. On your question on TCF growth, yes, it's linked to the commodity price. We also take business when we can price it at good returns. Sometimes that's not the case. Therefore, on the TCF exposure, this is subject to commodity prices, often the USD rate as well as our appetite to price, given the fact that we have our pricing discipline there. This is not a fundamental shift. This is that, on a quarter or even on a month basis, changes because of the factors that I just mentioned. The NIM in the business. It's a little bit lower. It's lower margin business. Return on equity of the business, although, is good. Otherwise, we wouldn't write the business. On the other side, the TCF business itself brings along lower commissions and the longer-term project finance business and some of the acquisition finance business.
Even there, we don't see a fundamental shift. We just saw more deals coming in, specifically in previous quarters. We expect that business, and we're looking at the pipeline to continue as we have seen in the past, just that this quarter, it's a bit lower.
Great. Thank you very much.
Our next question is from Stefan Nedialkov on Citigroup. Go ahead, your line is open.
Yeah. Hi, guys. Good morning. It's Stefan. I've got two questions. One is on fees, and the other one is on savings from your investment plan. On fees, the three interesting areas from 1Q results to me personally are Germany industry lending, excluding the TCF business, and other challenging growth markets. I would love to get some color on the dynamics that you expect for the rest of the year. In Germany, for example, do you think you will continue to be paying higher fees to brokers going forward? In industry lending ex TCF, what were the dynamics in 1Q? Were fees still resilient even when you exclude the TCF business? In C & GM, you did show some good results. I was just trying to get a feel for the proportion of primary customers going forward. Do you expect this to increase?
What's the outlook for cross-buy, et cetera? Consensus right now doesn't really seem to believe your fee story, just trying to get some more color on it. The second question is on your saves from the investment program. You have been pretty good in terms of updating us on the investment spend. How about the investment savings or, sorry, the gross savings that you have been guiding us on an annual basis. Are you meeting those expectations that you have set yourselves? Are you behind? Are you catching up later this year? Just to give us some color on that would be great. Thank you.
Stefan, this is a very elaborate question.
Sorry about that.
I think you're coming to two points that are of interest and of importance also to give you some more color on. If it comes to the commission side, if you look at Germany, overall with the growth of customers and the growth of primary customers, fees are to increase over time. The year-on-year, the fee level for the first quarter this year is the same as last year. If there is a moment in which we produce a bit more mortgages, it is also because we feel that we can produce it at the right returns. As you know, we're very disciplined there. It's good production that comes in, and then we pay away some fees. In the end, you should realize that the money largely stays in the company because we produce through Interhyp there as well. That is more Germany.
On the industry lending side, we don't see a change in level of fees if it comes to the longer data industry lending business. It is just that we didn't close as many deals this quarter as in previous quarters, and therefore it's lower from that perspective. There is no trend that we see there is a pressure on fees in the industry lending business. For the C&G markets, we grow in customers, we grow in primary customers, and we improve in cross-buy across the franchise. We follow this closely, but you should realize that cross-buy only can grow on the back of more primary customers and the introduction of new products. It's the introduction of new products that we are working on that will lead to further fee increases.
Although I can't disclose how we will use our platform to accelerate fee revenues, we are working on a couple of things that you will hear from us later this year that will certainly further use our primary relationships to introduce new products, and with that, generate more fees. On the cost-saving side, the update there, we're continuing with our investments. The investment plan is on plan. The transformation itself is on plan. If it comes to growth savings, we have indicated how we expect growth savings to come in. At this moment, we see savings coming in from previous programs like the Wholesale Banking TOM, like Power IT, like some of the programs that we had in the Netherlands. You see those savings coming in. You see actually the cost going down, for example, in the Netherlands. You see there are the savings coming in.
For the Accelerated Think Forward, those savings are coming in, but at the same time, we're still year of high investment level, therefore you don't see them and you don't recognize them exactly. The way we expect this all to play out is that our cost-income ratio is to decrease. For coming year, we don't expect the cost-income ratio to decrease too much. We expect the cost-income ratio to be around 55.5% for the year. You can expect cost income go down when the net between the savings and the extra investments is becoming a positive, so it's a real savings, coming towards the end of 2019 and in full 2020. Our cost-income ratio, you can expect to go down in 2019 and 2020.
We feel comfortable reiterating our ambition on the cost-income ratio of 50%-52% towards the end of 2020 and 2021.
Okay. Thank you, Ralph.
Our next question is from Sophie Peterson, JPMorgan. Go ahead, your line is open.
Yeah. Hi, here is Sophie Peterson from JPMorgan. I was wondering if you could talk a little bit about your net interest income, especially in the retail division. If I look at the Netherlands and Germany, it was very weak, down 4% quarter-on-quarter and 5% quarter-on-quarter respectively. Could you just give a little bit more detail on what's going on and how you think about net interest income growth in these divisions going forward? Also, in the other challenger and growth markets, NII was up 8% quarter-on-quarter. Could you just give a little bit more detail what drove this? My second question is around your 10%-12% ROE target. What does the 10%-12% range include? Does it take into consideration any rate hikes, or anything else that we should be careful aware of?
Is it already for 2018, or what's the timeframe for this? Thank you.
Sophie, on your first one, the NII retail, in the Netherlands and Germany. In the Netherlands, you see that our mortgage book is decreasing, has been decreasing over many quarters. That in itself is a reason for lower NII. That compared to the fact that we haven't moved on our savings rates, it means that there is a little bit more pressure coming in on NII from the savings side. The same effect, the savings effect, is what explains the NII development in Germany as well. We didn't move our savings rates in the first quarter. We have moved our savings rates in the second quarter though already, so you can expect some positive developments from that in Germany. That explains the NII retail development in the Netherlands and Germany.
In the C&G, basically what you see there is that the NII is up because of the growth of the book. There's a continuous growth of the book, that's one. Secondly, C&G is a mix of eurozone activities and non-eurozone activities, where you see that margin pressure is more in eurozone activities and on the savings side, and less on the non-eurozone activities. With the growth in clients and primary clients, as I have reported on, that's why you see the NII going up in C&G. Return on equity, I give the word to Koos.
Yeah. On the return on equity, we have that ambition, an ambition is based on a plan. In a plan, you have a few components which are of importance. The one is, and that's a positive one, is that we think we can continue our loan growth. Also, a positive one is that although we don't see interest rates increasing according to a forward curve, it's slightly less than that. On the other hand, the negative one is that credit growth, of course, over time will normalize. All these factors, they play in a role in your plan. Again, that plan then is the basis for an ambition, but that ambition is what we still need to execute.
Thank you. Just actually a quick question. The 10%-12% ROE ambition, that's for already 2018 or is it more 2020?
Actually, it's now because we have already made that. I think where it changes it a little bit is that with Basel IV, we will accumulate more capital. You might not see it in a ratio, but we accumulate more capital, that is where we base our ambition on. It doesn't mean that we can sit still. In fact, making 10.3% now is not the same as making 10.3% a year from now because you accumulate a little bit more capital and divide it by more RWAs.
Okay. Thank you.
Next question is from Mr. Farquhar Murray at Autonomous. Go ahead, your line is open.
Morning, gentlemen. Just 2 questions from me. Firstly, on NIM, you mentioned the 1 basis point quarter-over-quarter impact from margin compression. Should we look at that as possibly a trend over the remainder of the year? Would you now expect to hold kind of low 150s, high 140s level to the end of 2019, 2018? It would be interesting to understand how NIM develops in the plan you alluded to there in answer to Sophie's question.
Secondly, on digital investment costs, those were EUR 41 million in the quarter and are down materially quarter-over-quarter. Could you explain what's happening there and perhaps outline your expectations for the digital investment costs for the full year 2018? Thanks.
Thank you. On the NIM, the 1 basis point margin compression. Is that a trend? Yes, it is, and it isn't. Honestly, we gave guidance last year already that in the first 2 quarters, we expected to be able to manage a NIM on the high 140s and low 150s, and we're coming out of 150. Actually that's a positive from that perspective. We expect this also for the second quarter. Towards the end of the year, we would expect the NIM to be around the high 140s. That's how we feel the NIM can develop. On the digital investment, the quarter-over-quarter development, it's not something that we manage down per se. We match the request for investments versus the demand versus supply on a quarterly basis. We have our total transformation plan.
Sometimes you have conflicting requests, therefore you have to give priority to one versus the other. That influences the overall investments on a quarter-by-quarter basis. The digital investments, as we had planned for 2018, are at a level of EUR 117 million, and that's what we certainly also want to invest this year in order to ensure that we stay on plan on the investments and the transformation itself.
Right. Thanks.
Next question is from Mr. Pawel Zytnik on Goldman Sachs. Go ahead, your line is open.
Good morning. Just two questions from my side. First one is a follow-up on your cost guidance. You reiterated that you're aiming for around 55%, 55.5% cost income ratio this year. If we look at the underlying cost growth for 1Q, it stands at around 3%. Obviously there is some more volatility on the back of release of legal provisions. To what extent, this low single-digit growth rate, two, three, 4% is reflective of what is happening to your business growth that you're seeing and so on? The second question is on capital and follow-up. You mentioned that it will take time when it comes to phasing in Basel IV, which obviously creates some buffer for your dividend payments. You also in your presentation, you mentioned that you'll prepare for TRIM.
I wonder if there is any update as to what the impact of TRIM might be. Thank you.
Thank you, Pawel. The second question will be taken by Steven. On the cost guidance, it is a mixed bag, Pawel, on this one. It really depends on how you can manage the transformation itself. As you know, in the market leaders area with our Orange Bridge project, we are actually aiming to reduce cost, literally reduce cost. We have seen that, for example, in Belgium for this quarter, that the costs are a bit up, and that is not because of the unsuccessful transformation. It is actually because it is a little bit too successful, where people are taking up some of the redundancy packages, whereas the operations are not digitalized yet. We are backfilling a little bit with externals, which cause us to make a little bit more cost, for example.
In the end, this is a plan that makes market leaders much more efficient, build one platform, and with that, actually get costs literally down and improve the cost income further in the market leader area. In the wholesale banking area, in supporting the growth of the lending book, over the last couple of years, we have been growing what we call the front office people and the front office costs. At the same time, the wholesale banking team is geared towards a further efficiency and a further decrease of FTEs on what we would call more the operational side of the activities, because it becomes more and more digitized. That effect you cannot manage on a quarter-to-quarter basis either, overall, maybe a slight cost increase on the wholesale banking side, the cost income ratio is what counts in order to support a growing franchise there.
In C&G, as you have seen, the way we report C&G, this is basically an area where we do not mind cost to grow. That is a fast-growing franchise in terms of clients, in terms of activities, in terms of operations, in terms of lending, a bit of cost increase, managing a healthy cost income ratio, broadening the franchise from a savings mortgage franchise to a universal digital bank, that is the aim there. We would not mind a bit of cost growth, allow cost growth there, as long as we see that commercial development coming through. That is what we see. That is the explanation on the first one. For the second one, the TRIM impact, I give the word to Steven.
Thanks. Hi, Pawel. On TRIM, with regards to the mortgages in the Netherlands and Belgium, as well as the SME book in the Netherlands and all of our trading models, the TRIM review is done, we're in the process of exchanging feedback
The regulator in that regard, that we do not expect to be able to give any further guidance on that before the second half of this year. The second part of TRIM are the low default portfolios in Wholesale Banking, that review will only start as of the second half of this year and will be finalized in 2019. I would anticipate on the first part to get some feedback in the course of 2018. On the second part of TRIM, it will be in 2019.
Thank you. That's very clear. Can I just come back to the cost growth question, thank you for the explanation. I think going forward, those growth rates make tons of sense. I was wondering if you're seeing maybe perhaps currently in the second half of the year, slightly higher run rate of cost. You mentioned Belgium as one place where perhaps it exceeded your expectations. Is that fair or perhaps I'm misunderstanding this?
We don't see that. It's not the way we manage at this moment. Again, on a year-to-year basis, we have our investment program clearly in the transformation plan, sometimes are ahead of plan. Some things are a little bit delayed. The investments are a little bit early the savings are a little bit late or the other way around. It's not like we're managing towards a higher cost base towards the second quarter. On a quarter-over-quarter, we really track the transformation plans the costs come out as they come out. We don't expect that we'll have a peak in cost later on. Again, what we do really, really track is the cost-income ratio, because we do feel that our investments should lead to further efficiency, to more business, with that, also more income. That's what we really, really focus on.
That's very clear. Thank you.
The next question is from Alicia Chung, Exane. Go ahead, your line is open.
Morning, everyone. Just one quick question from me. On Basel IV, after a long period of uncertainty, it now looks like we have a much better view of the new regulatory world, and you've clearly already estimated the impact of Basel IV and TRIM at around 200 basis points. Have you also started to review how capital is allocated around the different businesses and whether capital allocation is still optimized in this new world? Are there any particular areas where you're changing your view and where it would make sense to invest more now or which are too capital intensive and could be downsized to release capital for more profitable, less capital-intensive businesses? That's one question. Also, just going back to your lending growth, obviously it's been relatively strong in the wholesale bank versus retail, and it's been historically slightly stronger there as well.
It also has lower return on risk-weighted assets. Do you expect that the wholesale bank will be a core driver of the lending growth going forward? Thanks.
Okay. I think these are two questions for our CFO.
I think overall, if you look at the capital allocation, let me first take the first part, and that is that, in fact, the increase in RWAs can come from two factors. The one is an increase in your models, or the other is an increase in the output floor. The overall composition of the two businesses and the output floor that is more related to mortgages, which are a driver, and the internal model is more related to other factors on the wholesale bank. Overall, the composition is important. What you find is that actually both the output floor as well as the internal models, they contribute to our increase, and that's not on top of each other but next to each other.
Let me say that the big macro picture is that in capital allocation, you got to watch a bit how much is your mortgage business and how much is your non-mortgage business, and that is what we do. From then on, we are going to fine-tune a little bit further, and that is then if you go, for instance, in the wholesale bank, what constitutes now the big increases in the internal models, that has to do partially with the industry lending business, and that has to do with recognition of the loss given defaults on certain collateral, but it also has to do with large corporates and banks. What we are doing there is before taking an allocation decision, the first thing you think about is, can you reprice this business? Who are our competitors? Are they in the same boat as we are?
Therefore, can you increase your prices or not? That is the phase and the dialogue we are going through right now. You could say that overall, the macro picture in terms of mortgages, non-mortgages is quite good, but further fine-tuning still has to happen. And you are very right to say so because what we have currently is, we have stated the Basel IV requirements, and that is like a 2% decrease of your capital, but that is all if you leave it unmitigated. We take our time to make the dialogue. First of all, if you can reprice it, you're already a long way down.
If you look at the loan growth, wholesale versus retail, first of all, we always say we are pretty lucky that we have a bit of loan growth, and if you follow the last eight quarters, then you find it each time comes from something different. It's not that we are actively steering it. You also got to have a front office which is able and agile to get there. If you had last quarter, you had both a bit of a stronger U.S. dollar as well as a bit of a stronger oil price. That's all great, but then you still got to make a loan to finance the inventory, and we have a bit of the agility to be there where the loan demand is. We cannot drive that precisely ourselves.
At the same time, what we do do is, in our lending, we just have criteria that we say, "Hey, what is our cost of funding?" We have our Greenlight committees where we say: Okay, what is it that we need for expected losses and unexpected losses? We need to compensate for the capital cost. That is the way how we do it. We are not sitting at a board level, say, like this quarter, let's make it a retail quarter or let's make it a wholesale quarter. It's a bit more driven by what the clients tell us, but keeping acceptance standards.
Thank you very much. Next question is for Mr. Bruce Hamilton, Morgan Stanley. Go ahead, your line is open.
Thanks. Morning, guys. Thanks for taking my questions. Firstly, just on any implication from the move out into the U.S. funding markets in LIBOR. It sounds like the mix change in the industrial lending business was more to do with just what opportunities were there, and you expect that to normalize. I just wanted to check whether there was anything in your current planning that was being impacted by U.S. funding markets and any implications there. Secondly, just come back on the guidance around capital dividends and growth. Would I be right in thinking that you would prioritize aggressive dividend over growth if push came to shove? Obviously you're building capital, but given the growth in the business, you're not building huge amounts. You either have a lot of excess if you're going to reach that Basel requirement.
I just wanted to check the priorities. Thank you.
Maybe on your second one, because we have a progressive dividend policy, and we can pay a dividend, that will certainly be something that we are very wary of in order to ensure that the shareholders get their return. That should answer your second one. On the first one, I'll give the floor to Koos.
LIBOR versus OIS. Maybe first and foremost, we are a bit more a LIBOR-based bank, but that counts both on the way how we fund ourselves, but also in the way how we make our loans. If LIBOR widens, then you benefit on the asset side, you bleed a bit on the liability side. Do you bleed? Is your cost of funding going up? It's a bit of a mixed bag. I think in general, what we experience over the quarter is that your funding prices go up a little bit if you go for straight funding. At the same time, if I look at the basis swap, you create your U.S. dollar synthetically, then it goes down. In that sense, no, there's not a real concern on our side.
Okay. Helpful. Thank you.
Next question is from Robin van den Broek, Mediobanca. Go ahead, your line is open.
Yes. Good morning, everybody. Two questions from my side as well. The first one is a bit more specific on Basel IV and TRIM. I think you indicated with your full year 2017 release that roughly two-thirds of Basel IV would become visible immediately at the Basel IV adoption in 2022, driven by the internal models. In relation to, I think the question of Benoît, the dividend progressiveness. In the last few years, we saw EUR 0.01 per year improvement. I think also at your capital markets day, you said that DPS is probably going to grow slower than EPS. Is that still how we should look at the dividend progression, or can we expect dividends to grow faster and maybe more in line with EPS? That's the first question. The second one is on customer risk guidance.
I appreciate the comment made that for this year, you expect it to be well below the through-the-cycle level. Maybe you can make a reflection to the EUR 700 million you printed in 2017. I was also wondering if you could disclose any numbers on how IFRS 9 behaved in the current quarter versus the previous setup. Thank you.
Thank you, Robin. The first one goes to Koos and the second one to Steven.
I think if you look at Basel IV TRIM, is it two-third on the 1st of January 2020? Actually, the input floor part is a little bit more, so it's around 80%. Indeed, we will get it done by 1st of January 2022, but then it means 80% is done and there's not a lot more to go. That is a bit the part where we are. Again, it all depends. Think about it as follows and not too absolute. The 2% which we always mention on Basel is based on the existing portfolio, the existing economy without mitigating measures. Things will change, and the two we mention right now might be a little bit less or different if you talk about it half a year from now. We are counting on 80% of it needs to be fixed by 2022.
What does that mean in terms of dividend progression? For us, it's always a simple thing. Overall, what we have is we distribute dividend. At the same time, we grow and we accumulate a bit of capital. Now, the question is: Will anything change in that relationship? Overall, we still want to continue to pay the dividend because we have not changed anything on the progressive dividend story. As long as we can still grow our business and we make more than a 10% return on it, we like that as well. Only in case there is no profitable growth, then you can say, "Hey, I start to distribute a bit more dividend per share." Right now, we have no reason to do so because the client growth is there.
Now, other noise, whether IFRS 9 will cause more procyclicality than what we have envisaged in our buffer, which I managed at the beginning of the call, we had to take a look at it, but we don't know now, but we have made as best as possible the calculations which we make, and we think, well, that buffer will serve a bit for, call it noise reduction on either the client side or the dividend side. On the cost of risk. If you look at the first quarter, there was of course a change because we had IFRS 9, and what you then look at is, in this case, Stage 2. Is there a significant change in the stock that we have in Stage 2 provisions compared to the 1st January 2018? And the answer is no.
Basically, a reflection of where we currently are, which is we are in a good economic state. It also means that we have not yet seen the volatility that could come in, then the procyclicality that also [Koos] alluded to in terms of what could happen if there are significantly changing economic scenarios or GDP forecasts. As you can see from the IFRS 9 presentation, our provisions in that sense, compared to IAS 39, are much more linked to our economic scenarios, which include GDP forecasts or house prices, for example. That we need to factor in. That makes it, in that sense, a bit more uncertain. On the other hand, we have seen in the first quarter, no big files in Wholesale Banking. That was a positive for Wholesale Banking.
As a matter of fact, there was a release on a couple of files in the Netherlands and the U.K. That is good. Still, in wholesale banking, the provisions are kind of lumpy. More lumpy than is on the retail side. On the retail side, risk cost stayed benign. At the same point in time, model releases also were a bit limited compared to previous quarters, and that would give an indication that we're at a high point of the economic cycle. I'm still comfortable with the risk cost of being well below the 4-45 basis on RWA, and we need to see what more volatility could bring in the Stage 2 economic scenarios change.
Okay. Thank you for that, Koos.
Next question is from Mr. Tarik El Mejjad BAML Go ahead. Your line is open.
Hi. Morning, everybody. I just have two quick questions, please. First of all, I'll come back on the fees and commissions. Thanks, Ralph, for your explanations about the dynamics there in terms of Belgium, Germany, wholesale, and so on. My question is, do you reiterate the 5%-10% year-on-year growth for the EUR 650 million quarter basis that you've been guiding for in the previous quarter? The second question is on the litigation. Can you just explain us where you are now in this topic, and maybe just clarify what are different stakeholders there, and risks? Thank you.
Thank you, Tarik. On the first one, yes, we can reiterate. From the basis of EUR 650 million on a quarterly basis for the next couple of years, with building going from single product banks to client banks to primary relationship banks in a digital way. We see scope for introduction of additional products in better relationships, increasing the cross-buy, and then that also distribute more third-party products or products that generate fees. I have no problem with reiterating that guidance on fee development there. On litigation, I give the word to Steven.
Yes. I think we reiterated the message that we also gave previously in the disclosure 2017, again, in the press release this time around, we remain under the investigations or the criminal investigations by the Dutch authorities. That is linked to money laundering and onboarding of clients. That investigation is ongoing. As we said previously, we expect to have more information by the end of the first half of 2018. We still expect that to be the case. That's all we can say for it at the moment.
Okay. Thank you.
Next question is from Nick Davey, Redburn. Go ahead, your line is open.
Morning, everyone. Just a few follow-ups, really. Sorry, it's well-trodden ground. The first one is on cost, just back to this guidance of cost-income ratio that could be broadly stable year-on-year. I've taken your points made so far that there's lots of comings and goings on the investment plan. If you could just wrap it all together, and my memory from the Investor Day is that this year was already meant to be a year where you were getting net savings from the plan. Could you wrap up altogether the progress on all of these plans and the fact that the cost-income ratio may not fall? Is it something not going to plan on the income side, something a bit behind plan on the cost side, or have I misunderstood the guidance? Second one, back to this impairment. We're at 11 basis points.
Consensus expects you back up to 40 soon enough. Could you just talk specifically to IFRS 9 and your macro parameters? What's the sensitivity here if your GDP numbers are wrong in either direction, or unemployment, what we should be looking at from a macro forecasting perspective that will move the dial on this very low level of bad debt? The third question, sorry, it's almost a complete reiteration of Bruce's question, just back to this sort of allocation of a 10% ROE, seemingly trying to build 25 basis points of capital. You're running at 4%-5% loan growth and people expect a 55% dividend. That equation just seems a bit tough. It's doable if risk of asset growth is below loan growth, but that seems hard with the wholesale bank growing quicker than the retail bank.
Can you just talk to that equation, perhaps maybe focus on the RWA growth aspect of it, just to maybe add some new light as to what's already been said? Thanks.
Thank you, Nick. On the cost-income ratio. I wish I could just manage this according to the way I plan everything. It's not like things have really changed in the plans. Broadly, the plans are on track, as I indicated already, is that we have a bit of a setback from a cost perspective, not from a transformation perspective, but from a cost perspective. In Belgium, in this quarter, where we see that we had to backfill some of the activities with externals because of the reduction in internal FTEs, and they come in at a bit of a higher cost. That's what you see here and there. On the other side, we also see that we're a little bit more successful in growing our C&G franchise, so we allow it to grow a little bit more on the cost side as well.
I don't manage it per se as a fixed plan, I only do what I see in a fixed plan. If we see the opportunities in C&G to grow faster and give a bit of leeway on cost in order to reap that benefit because of the success and the high Net Promoter Score and more clients coming in, then we do allow so, therefore, managing on the cost-income ratio is what is really important for us, and not so much on net savings or the real cost component of things. On the LLP, I'm looking at Steven. Other allocation I'll give to Koos.
On the loan loss provision, basically what we now do, you see that in the presentation, we have a couple of scenarios with some baseline figures and an up and down scenario with regards to GDP and unemployment. There are many more factors in there, but those are two important factors that determine the total bucket of loan loss provision and loan loss stock. In certain scenarios, we could do a couple of things. We can change the parameters of these scenarios based on what we see. We can also change the weight of a number of these scenarios. There are various impacts based on these various scenarios that could happen, therefore, it is not black and white what the exact scenario will be because there could be many scenarios.
To give you an indication, if most of the parameters that are important for our IFRS 9 loan loss provision would go to the median of the cycle or the middle of the cycle or through the cycle average on GDP and unemployment, that would have an impact on our loan loss provision of approximately EUR 600 million.
On the capital allocation, indeed, we are fortunate enough to have a 14.3 core Tier 1 ratio as compared to a 13.5, what you see as a long-term average, you have a bit of a buffer. That buffer under normal circumstances is indeed needed because we pay out a decent amount of dividend. Over half of our 10% ROE is parked in dividend. Then you facilitate your 3%-4% loan growth. That means the other piece, you really need to accumulate a bit of the capital. Having said that, what we have not taken into consideration is two elements. One is, can we allocate the balance sheet a bit differently or dynamically? As you know, we always make adjustments. The second part is, we will also reprice.
Those elements, they need to be taken into consideration, and that is also why I said, don't take the 2% exactly as a hard given. It is more a ballpark where we need to work to, but for surely, we will try internally to make the effects a little bit less. That is what we will do.
Okay. Thank you.
Next question is from Jean-Pierre Lambert, KBW. Go ahead, your line is open.
Yes, good morning. Two questions. First, the buffer of 170 basis points. Could you give an indication of a breakdown between the components like IFRS 9 in broad sense? The second question is just a simple calculation. If you take your ROE of 10.3% for the quarter and you assume a 2% impact of Basel IV, your ROE is 8.9% or thereabout 9%. There's a bit of an effort to do to reach your ROE targets. Any comment on that? Thank you.
On the second one, I will give the answer, and Koos on the first one. I think your calculation is right, but we manage from there. How do we manage? First, in order to limit the impact of Basel, you can look at how do products look like, how are products structured. We structure them in a different way, so that you can actually dampen the effect of Basel and manage your risk-weighted assets through that. Secondly, I said, on the one side, we want to cater for our clients. On the other side, it is also about dynamic balance sheet management. Where we are basically putting people to that effort as well in order to manage our balance sheet there as well.
The third thing is that, as mentioned already by Koos, is that, yes, if we come out with a guidance to you in terms of return on equity, it will lead to a further discipline in pricing as to how we do our business, and that should also have a positive effect then on that. Last but not least, if you just look at our plans in which we expect the cost-income ratio to go down towards the end of 2020, and certainly the beginning of 2021, to 50/52, that in itself will also have a positive effect on your return on equity. Those are all the different elements in our recipe that we will now put at work in order to work towards the 10%-12% return equity ambition that we have given today.
Thank you.
Yeah. On the buffer component, the 170 basis points. Why 170, and what is causing it? As mentioned, what is causing it is we have IFRS 9, you will probably get a little bit more pro-cyclicality there. We have the RWA migration in times when the credit environment deteriorates. We have some foreign exchange, and we also have the interest rate revaluation reserve. Those are a few of the factors. Now, the point is, they are not additive. One of the things is you go to a better or to a more negative credit environment, probably interest rates are dropping. The two of them, you cannot just exactly add it up. I always do think that one of the main components we always have to work with is the RWA migration. This is the only thing, or the only good news about Basel IV.
You will have a little bit less migration because things get more fixed. Overall, mentioning particular components you cannot do because they don't add up. It's negative of they are basically either zero correlated or differently.
Great. Thank you very much.
Our next question is from Mr. Matthew Clark, MainFirst. Go ahead, please. Your line is open.
Good morning. A couple of questions. Firstly, was there any impact on net interest income in the first quarter from the lower number of days in the quarter? If so, could you quantify that? Second question, just what would need to happen for you to get to the upper end of your 10%-12% ROE target? Is that something that you could do with, say, the current macro backdrop and rate outlook? Do you need to see external changes in order to get to that upper end? Is that, do you think, within your own powers over time as the cost saves, et cetera, come through? Thanks.
Thank you, Matt. On the NII impact, yeah, in comparison to the fourth quarter, certainly there was a day count impact. It was some tens of millions there. If you look quarter-on-quarter, it's part of the explanation. If you look year-on-year, it's not. On the 12%, that happened in the current rate environment. Clearly, if the yield curve steepens a lot and all that, it will all help. Can it happen in the current rate environment? It really depends on the discipline of the market and the other parties in that market as well if it comes to, for example, pricing, the capital allocation. That remains to be seen, as you can expect from us, that we will continue with our discipline, and we'll see how things develop from there.
We will certainly always try to reach the upper end of our ambition. As I just laid out, there's a recipe with four or five factors there in terms of changing some of the product features, changing the balance sheet management aspects of things, repricing, working on your cost side as well, and the further efficiencies. What does need to happen is be very disciplined in what you need to do, and hoping that the market has the same discipline. If on top of that, the rate environment changes as well, it's a plus. I can't change the rate environment. Let's just rely on things we can do ourselves. Thank you.
What kind of horizon do you expect to be able to reprice business on?
Well, for the longer-dated part, if you now book longer-dated stuff, you should reprice as of today, because it will sit on your balance sheet beyond 2022, and the biggest effect is already there. With TRIM coming in as we speak, in the next couple of years, now repricing on the longer-dated stuff should happen as we speak, and that is what we're working on. As said and explained by Koos, the way we work, specifically on the Wholesale Banking side, there is no deal that escapes Greenlight process actual return as well as relationship return. That's where we have these discussions as to how to really service our clients on one side and do a really good job there and grow our franchise, versus making sure that there's discipline and return on the capital that is employed.
Yeah. Do you think mortgage margins are as good as they get then, if they're already being priced off Basel IV, are they?
Well, that's the question, whether that is happening in every market. I know there is also competitors that are pricing with some hope for rate development. We're not. We price for return. We are match funded in most of the business that we do, if not all. Therefore, we price at the match funded rate as well as the capital allocated in the foreseeable future. In a mortgage market, it also depends on the experience in terms of the prepayment effects in the mortgage. If we feel it goes beyond a specific year, and certainly with the 2022 date being pretty soon, I think a large part of the mortgage production you should expect to move in terms of pricing as well, to the extent they're not making the hurdle. In many cases, the mortgage business makes the hurdle.
Right. Thank you.
Next question is from Mr. Anke Reingen, RBC Capital Markets. Go ahead, your line is open.
Hi there. Good morning. Just a few follow-ups left, please. One on capital and one on cost of risk. On the capital side, we talked a lot about the various components of the 170 basis points buffer. Can I confirm that you're looking at the buffer as a binding constraint, or are you looking at 13.5 CET1 as a binding constraint? Just one clarification on the cost of risk, please. You mentioned that if the parameters go through to the cycle figures, your cost of risk increases to EUR 600 million, which translates into 20 basis points. Can you please clarify or have I misunderstood that? Thank you.
On risk, I'll give to Steven.
What I just gave was an example of if the most important parameters of our IFRS 9 models in the scenario analysis went back to through-the-cycle averages, the risk cost would increase as a result of IFRS 9 model with EUR 600 million.
Okay. Thank you.
Maybe on the first question, as it goes here, the buffer, is that binding constraint? That sounds all a bit harsh. The first thing is we have said, like, the 13.5 is our ambition, so we want to be around that level rather than that it's a hard constraint. Now, we have set a buffer of 170, and indeed, that was needed because of volatility, so it must be on top of something. There we have looked at the SREP requirement, which is fully loaded, probably around 11.8, so that brings you to the 13.5. Then indirectly, your question might be, what happens now if the Dutch SRB buffer goes down by 1%, then 11.8 becomes 10.8. Does then your 13.5 become 12.5? There, the question is, we look at two things.
We look at the components which build it up, but at the same time, we also look at the average of what the banking sector will do. That means if the central bank drops it by 1%, for sure we have more room in our MDA, but then we also look a bit at the averages of the sector. Don't make it too mathematical from that perspective.
Yes, sir. Thank you.
Our next question is from Mr. Alexia Haviaras on the Natixis. Go ahead, your line is open.
Yes. Hi, everybody. Just one follow-up question for me. If we look back to the last four quarters, we have your underlying revenue growing at a lower pace than your cost. The question is basically, should we expect you to deliver positive operating leverage this year? What about 2019, or this is something that should happen only in 2020? I do understand your comment on the cost line, but still, I'm not sure that the revenue line will grow enough for you to be able to deliver positive operating leverage. Thank you.
Thank you, Alexia. Basically, we expect operating leverage to be the same this year and to improve towards the end of 2019 and certainly 2020. You should see some positive operating leverage certainly in the second half of 2019.
2018?
19.
Second half?
Second half of 2019.
Okay, thank you.
Our next question is from Mr. Maxence Le Gouvello of Jefferies International. Go ahead, your line is open.
Yeah, good afternoon. Just one question. You mentioned that your TCF business was working quite well on the back of the rebound of the commodity since March. The oil price had been rising by close to 10%. Can we expect that in Q2 we should have all the same trends into the
Well, it also depends on how the oil price develops from here and the dollar develops from here, right?
Well, the dollar is stabilizing and the oil price is rebounding seriously.
No, clearly, if oil price increases and the dollar strengthens versus the euro, that has a positive impact from that perspective on the size of the TCF business, whether we write additional business or not. That's always a positive from that perspective. Again, we price every business, also the TCF business, on the back of whether we can make the returns vis-à-vis both the client relationship and the underlying transaction hurdle. If that is attractive, we will certainly continue to do so, from a return perspective.
Thank you.
Next question is from Baudoin Joris, Degroof Petercam. Go ahead, your line is open.
Yes, good morning. Thank you for taking my questions. Most of the major issues have been addressed. If I could get an update on Belgium, first of all, on the risk costs. You mentioned that risk costs are high because of some mid-corporate files. Could we consider that as a one-off and seeing it coming back to, let's say, also less than through-the-cycle averages in the coming quarters? Then you also mentioned that you are busy with integrating the Record Bank activities. Could you give us an update if you see some clients going away from there because of this migration?
Baudoin, I'll give the first question to Steven. I'll come back on the second one.
On Belgium, indeed, there are two effects. One is, in the fourth quarter, there was still a model improvement in the retail mortgage side that was not the case anymore in the first quarter of 2018. Two, indeed, there were a number of mid-corporate files that led to Stage 3 provisioning. Because these are separate client files which are unrelated to each other, basically it can be considered a one-off. I do not have a crystal ball to see what's there in the future, but as currently, I cannot foresee that basically based on these files, it would lead to a similar amount of files next quarter, but that we need to see the next quarter.
On your Record Bank integration, I can only look at consolidated numbers here for Belgium. First, the integration itself is according to plan. As you know, the legal integration has happened. The migration of clients is happening as we speak. I'm sure clients take that as a moment of consideration of the relationship. Some clients actually have a relationship with Record and ING, they might cancel one of the two accounts. If you look at the development of the number of clients in Belgium, that has been positive. We have grown in the number of clients in the first quarter in Belgium. If you look at the underlying business in Belgium, in the mortgage production, the business lending production, the savings development, all of that is positive. It shows that we have commercial momentum.
There is no signs there that there is a negative effect on the commercial development or on the number of clients for the ING Belgium franchise as a whole. That actually is quite worth a compliment that our colleagues there are so client-focused that they've taken through all of these changes. I'm very proud of that.
All right. Thank you.
Next question is from Kirishanthan Vijayarajah of HSBC. Go ahead, your line is open.
Yes. Good morning. A couple of questions on Germany, if I may. Firstly, going back to the higher commissions you paid out on the mortgage originations, does that imply that more of the growth is coming from outside brokers rather than your Interhyp platform? Is there a mix shift going on driving the fee leakage there? And importantly, does that continue for the foreseeable future? Then on robo-advisory and the spike in volatility we had during the quarter, it seems to have had an impact in Belgium, but I'm more curious how the robo-advisory performed when markets got choppy. Do the clients feel they were well served by the product? Any customer feedback you can share with us will be appreciated. Thank you.
Thank you, Kiri. On the first one, it's a bit of both. Clearly, if we grow in mortgages, we grow through our own broker, Interhyp, and also through some of the external brokers. Some of that will be real leakage. Some of that will actually paying fees to Interhyp, which stays in the house, but that will then lead to a mix shift within the Interhyp production away from some of the other banks, possibly. Again, it's a higher commission paid if you look at the fourth quarter of last year. If you look year-on-year, it's okay-ish. The total commission income in Germany is flat. It's a bit of an explanation. Honestly, we think this is a positive development, because we know that the competition in the German mortgage market was very heated.
If we feel there is actually room for us to also produce, it shows that are healthy. That's a good sign in itself. On the robo-advice, honestly, I can't say that yet. It's too early to see how a robo-advisor, and how the service is regarded by customers of a robo-advisor in choppy markets. The history is too short, because what you see is that the introduction of the product itself is very successful. The net development is a very positive one. Whereas what you would want to see is if this were a stable environment, whether it would have a detrimental effect as you were indicating, that we saw in Belgium in the first quarter.
I can't conclude at this moment in time, given the fact that the Scalable service is seen as very attractive, and we're onboarding more than 1,000 clients a week onto that platform.
Great. Thank you.
Next question is from Mr. Marcelo Huen, Credit Suisse. Go ahead, your line is open.
Good morning. Thank you for taking my questions. I have two left. First is on the fee guidance. To my understanding, you have changed the fee guidance in the last quarter from 3%-4% to 5%-10%. I'm just wondering what triggered this change in guidance, and what makes you say 5%-10%? Second one is on the NII from the C&G retail in the first quarter here. It's almost a EUR 50 million increase quarter-over-quarter. I see a similar trend in the first quarter of 2017 and 2016, quarter-over-quarter changes. Can you explain some of the seasonality or what is going on there on the line? Thank you.
Marcelo. On the fee growth, I'm not sure that we have changed our guidance there. We've always guided that we expected fee growth to be higher than NII growth. That's because we are broadening our franchise. We're becoming more and more a universal digital bank with primary relationships. On the back of that, selling more and more different products, or offering them and for the clients to cross-buy them. There is no real change there in the guidance, as far as I know. In the end, it has to happen, so let's make sure it happens, and the franchises are developing digitally in a way that we want them to develop. On the NII C&G increase, I give the word to Koos.
I think overall, if you look at the net interest income, there is some, and then that is more related to bank treasury. What you see is we have some realized gains, and that has nothing to do with any particular timing of recognizing income. What we see is, to be honest, sometimes it just makes sense to sell some assets, some government bonds, and to put your money at the ECB. Overall, what you find is our central bank has gone up and our bond portfolio go down simply because it's the best bid in town. We look a bit at it on an assets whole basis, and sometimes we realize some and some not.
You overall look at the NII C&G, it is pretty robust, particularly if you look at the growth countries, because there you see growth in volumes and at constant margins.
Thank you. Just to follow up on the fee, Ralph. What makes you say between 5% and 10%? Because that is the guidance or the ambition at least that I hear so far. Just on NII, Koos, can you disclose what the NII quarter-over-quarter growth driven NII was please?
Maybe we have to take this later on with the investor relations guy, if you do not mind. Because I think to go into a detail, I do not quite understand your question. Maybe repeat your question and see whether we can answer it now. Otherwise, I would like to refer this to the investor relations guys later today.
Just on the fee, I think the people from IR guided, or at least all the ambition from ING to increase their fee income by between 5% and 10% per year. Why would you say between 5% and 10% regarding, for example, between 12% and 15%?
If it's solely the fees itself, we have indicated that we have an overall ambition that the component of our income of fees increases from 15%-20% of total. That is a financial evidence of our franchise becoming more and more a full-fledged client franchise, in which we also offer digitally third-party products. That was the more financial component of that. If you would then work your way back financially from a EUR 650 million base, and you want to get to the 20%, and you get to these growth numbers financially. A lot of work needs to be done for that. You need to grow your clients, you need to grow your primary clients, you need to grow your product offering, you have to invest in digital, you have to make it attractive. That's all what we're doing.
The financial component of it, as I explained, it's the ambition to move from a 15% total income with a 20% fee of total income over time, and that's where the financial ambition comes from.
That's very clear. Thank you.
Thank you.
I can give an indication on the growth in C&G. Basically, if you look at the presentation, you see a growth of EUR 2.7 billion in core lending. You apply an applicable NIM to that, it gives you an indication of what the growth in revenue is in C&G countries.
Excellent. Thank you.
Gentlemen, we have no further questions. Please continue.
Okay, thanks for these questions. If you look at this quarter, I think it has been another solid quarter for ING. The quarter in which we show that the commercial momentum is there. You can see it in the growth in the number of customers, the development of the primary relationships, the development of the lending business, the savings business. Also, we've seen that the cost peak in Q4 was a hiccup of incidentals. We've shown that as well. I think that's an important sign as well for you, that we are managing the cost while transforming this company to a digital company. All of those indicators are going in the right direction. This leads to a solid profit net result of EUR 1.2 billion, which is 7% up year-on-year, and a return on equity of 10.3%.
We've come out with new guidance around our ambitions on capital level 13.5 of the four, which is an ambition of around the 13.5%, as well as the return on equity of 10%-12%. We know there is a lot of work ahead of us in order to make sure that those plans come around. As you have seen in the past, we work hard in order to service our clients, and if you do that very well and you have that good relationships, then the financial results in the end will follow through as well. Thanks very much for all your questions. Thanks for your attention. If there's more questions, our team is ready to answer those as well. I wish you great day today, and talk to you next time. Thank you.
Ladies and gentlemen, this concludes this conference. On behalf of ING, thank you for attending. You can disconnect your line now.