Good morning. This is Patricia speaking, welcoming you to ING's third quarter 2017 conference call. Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Groep, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F, filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Ralph. Over to you.
Good morning. Thank you, operator. Good morning, everyone. Welcome to the third quarter results conference call. As you are used to, I will walk you through today's presentation. With me are CFO Koos Timmermans and CRO Steven van Rijswijk. Let's turn to the key points of the presentation today. We posted a net profit of nearly EUR 1.4 billion for the quarter, which marks a 2% increase year-on-year. On the retail side, we reached 10.5 million primary customers, which shows that we're well on our way to achieve our Ambition 2020 level. As you know, we recorded lending growth of EUR 8 billion this quarter at resilient margins. Net deposit growth stood at just over EUR 4 billion, at EUR 4.2 billion. It kind of shows how well-diversified we are from a geographical and product perspective, that really provides for a strong foundation for this growth.
We continue to invest in our digital transformation. Underlying operating expenses remain under control. I'd like to highlight the success of earlier transformation programs in Retail Netherlands, where cost actually came down significantly. Furthermore, risk costs remain well below our through-the-cycle average, as you probably have seen already. We'll go into that later. And this all, the growth on one side, the stable cost, and the low risk cost contributed to a healthy four-quarter rolling average return on equity of 11%, while our CET1 capital position remained stable in the quarter at 14.5%. That's the short summary. Now the long summary. Moving to slide three. In the third quarter, clearly the Think Forward strategy is paving the way for a strong commercial performance. Given the pressure from the low rate environment on savings, I'm happy to see the lending growth is outpacing deposit growth yet again.
You see the mobile device becoming ever more important as a channel for our customers. We're heading in the right direction in terms of where we want to invest and how we want to improve our customer experience. This helps us not only to grow in the number of customers and primary relationships, but also in improving the cross-buy ratio for those primary customers in the markets in which we operate. That's what you see there as well. Every region, we see an improvement there. In the third quarter, we made significant progress in the intended digital transformation. In the Benelux, amongst other steps, decisions have been made on rationalizing and/or merging the local products into what we call a single shared future product catalog, which is a starting point in order to simplify everything that comes from there.
Overall, we also increased our digital investment spend in the third quarter. To accelerate the pace of innovation, we announced recently to increase our investment in fintechs to EUR 300 million. We launched a EUR 300 million investment fund, a venture fund, in order to support our strategy there in collaborating with fintechs. Over the next 4 years, the fund will focus on investments in both startups as well as companies that have gained already some market traction. The venture fund will build on the success that the current approach has brought us in the past 3 years. In fact, our current 115 strategic fintech partnerships, the investments in order to keep improving the customer experience. As one of those examples in our new partnerships, we have Scalable Capital, which is a partnership with a robo-advisor.
Since the start of the collaboration, we have onboarded more than 1,000 customers every week in this new approach. Part of helping the people in business to stay ahead is also to make sure that we prepare them for the world of tomorrow, and that is generally resembled in our efforts on the sustainability side of the business. I'm now on slide five. We have joined Madaster, and what Madaster does, they provide a so-called digital material passport for buildings, and that stimulates the construction with recyclable materials. It stimulates the reduction of waste. The investment in smart designs. In the quarter, we were also involved in some groundbreaking sustainable finance transactions, like, for example, the green bond that we did for the public utility Anglian Water in the U.K., as well as a project finance deal for one of the largest solar plants in Australia.
I'm particularly proud of our strong sustainability ratings. We, once again, are included in the Dow Jones Sustainability Index, both the world index as well as the European index for banks. CDP awarded ING a position in its CDP Climate A List again. We're proud progress are the transactions that we're doing, the collaboration that we're doing in this field in order to ensure that we truly prepare our customers for the world of tomorrow. Let me take you through some of the results, slide five. These are the year-to-date results, the first 9 months. Underlying net result was nearly at EUR 4 billion in the first 9 months of the year, which marks a 10% improvement over the same period of last year.
Even though the group Common Equity Tier 1 ratio has increased to 14.5%, we managed to achieve an attractive return on equity of 11% on a four-quarter rolling average. Higher capital ratios and higher return on equity. That's a healthy picture. That's a good picture. On the next slide, you can see some of the key drivers of these underlying results. Firstly, try to highlight the net interest income, which showed, if we exclude financial markets, an increase of 4% year-on-year, and that's despite the continued pressure from the low rate environment. This increase in NII is very much a result of the continued lending growth that we report to you on every quarter, and that is supported by relatively stable margins on the lending side.
That's what you see over the first nine months of growth and fee income of 12% year-on-year, was broad-based and reflects an improvement in almost all segments and products, with the relatively strongest increase in the Retail Challengers and Growth Markets. You will see that later on as well. On the expense side, again, the first nine months of the year picture, excluding regulatory costs, the underlying expense base increased only slightly as the ongoing cost savings initiatives largely offset our digital investments and higher marketing and staff expenses to support the business growth. Also very low risk cost. At this moment, we support the underlying result. Risk costs came in for the first nine months at 21 basis points over average risk-weighted assets.
If you combine all of this, the revenue picture, the cost picture, the cost-income ratio is established at 53.8% on a four-quarter rolling average basis, and that's an improvement as we move towards our 50% to 52% target range. Much for the first nine months. Let's dive into the quarter specifically. Slide 10. On slide 10, we see that the underlying pre-tax result was up 6.2% year-on-year to nearly 2 billion EUR on the back of a robust net interest income. Also a healthy commission income growth and the annual dividend from Bank of Beijing, and the low risk cost. Low if you compare to the through the cycle average. In the quarter, we continued to grow both our retail and wholesale loan books year-on-year. We do see some modest pressure on the lending margins in certain areas.
The pressure on the savings margins is alleviated somewhat by further cost, core savings rate adjustments that we did in the quarter or just before. Net interest income was partly distorted by our decision to end some hedge relationships. That's where you see the uptick on the net interest income of EUR 91 million there in the chart. It's a positive impact on NII, but this is fully offset by a similar decline in other income. The net effect of the ending of some of these hedge relationships is zero. Turning to slide 11 for you. Net interest margin was up six basis points for the quarter, to somewhere in 57. The quarter-on-quarter move is largely explained by the technicalities of the earlier mentioned decision to end some of the hedge relationships, and that is contributing four basis points to the NIM.
From a line-by-line perspective, that is offset in other income, but it distorts the NIM picture by four basis points. It's not structural. We can go into that later as well. Then we have the two basis points uptick from the higher interest result in financial markets that we show you every quarter as well, because that is somehow volatile as well. Overall, a good picture, stable NIM, if not increasing NIM. It's a good picture here. Corrected for the two items, as said, we would have come out at 151 basis points, and that's at the higher end of the range that we guide you for, which is the high 140s to the low 150s. Going into the core lending, slide 12. The third quarter, we grew core lending at EUR 8 billion.
This is actually above the 3%-4% loan growth guidance on an annual basis. As you are used to, this growth comes at good returns, meets our current risk appetite framework, while we face tough competition. We're not changing our risk appetite, we're not changing our return hurdles, but we do see that the broad footprint that we have from a product and geography perspective, it gives us ample opportunity to find the right commercial opportunities. This quarter, we saw the strongest contribution from the wholesale bank, again, particularly in general lending and working capital solutions. To a lesser extent, the Real Estate Finance business, but it's doing well as well. Growth of the wholesale bank underscores the strength of the franchise and the benefits of the diversification across the geographies, and specifically also in the wholesale bank, the diversification across the different industries and sectors.
Except for the Netherlands, there was also strong growth in all of our retail segments. You see Retail Belgium growing, you see Retail Germany growing, you see the other C&GM markets growing as well. If you dive a bit deeper, this is more skewed towards mortgages on the retail side. Just like in the second quarter, it's important to point that there was again, quite a meaningful foreign exchange effect, which we exclude from the core lending numbers to show you what is really happening. From a balance sheet effect perspective, though, you have to correct it for the FX effect, which is clearly a USD weakening against the EUR in which we report, and that has a negative EUR 3.8 billion effect you see in the chart as well. Another way to look at our commercial growth is to compare the customer lending and the customer deposit growth.
It also tells you something about how effective we are in further optimizing our balance sheet. We see it in two charts on slide 13. One of the main levers, as you know, to offset pressures from the low rate environment, is to make our country balance sheets more efficient by originating lending to partly replace low-yielding liquid investments. In our Challengers & Growth Markets, it's the picture you see on the right-hand side. You see that that is really happening, where the gray bar, to the extent you have a color copy, but at least the top bar, the 33%, you see it going down to 22%. That is the investment portfolio. We are basically using those balance sheets more and more for lending, which helps us in optimizing the balance sheet.
On top of that, in our Challengers and Growth Markets, that's the left-hand side of the slide, we see that the customer lending is significantly outpacing customer deposits the last two quarters. That is positive as well, because it shows that on one side, we are able to stem deposit inflow in order to ensure that we don't attract savings that may be loss-generating on one side. On the other side, we see that the commercial momentum in terms of attracting new customers is not dependent on savings anymore, because the commercial momentum on customer growth is continuous, both in number of customers as well as primary relationships. It shows that we really have turned the savings franchises over the last four, five years into digital universal banks, and that's what you see here.
From a commercial momentum, we're not dependent on it, and from a balance sheet management perspective, we're not dependent on investment portfolio. Increasingly, we have the right assets in the places where we have the funding. All of that helps, clearly, to protect the NIM. We move to slide 14, which goes a little bit deeper into the commission income. The commission income rose 6.3% year-on-year, to EUR 643 million. Again, that shows that our bank-wide focus on primary relationships through which the cross-buy increases, leads to fee income growing faster than NII. The increase in commission income was visible in all segments and nearly all products, with relatively strongest growth in Retail Challengers and Growth Markets and Retail Netherlands. In Challengers and Growth Markets, the commission growth is driven by the increase in the number of primary relationships, as I said. They buy more products.
We are increasing the Diversified from a product range that we offer through our digital channels, that really helps. The Netherlands is mostly attributable to the higher fee income on current accounts. Quarter-on-quarter, the fees are down. Wholesale banking fees in the second quarter benefited from larger deals and increased M&A activity, which partly explains the drop here as well as there is a modest impact from foreign exchange to explain the drop. Retail Belgium also had an exceptional strong second quarter mutual fund inflow, which was not repeated in the third quarter. If you remember correctly, when answering your questions last quarter on which % of the fees was structural and increase, we already indicated some of this.
We do see a structural increase year-on-year on the back of the change in our model to an increasing primary client-focused bank, which presents cross-buy opportunities through digital offering, and with that, an opportunity to further increase the commission income. That's what you see as an underlying picture here, that's the good movement. Turning to the underlying expenses in slide 15, showed a good improvement quarter-on-quarter, as particularly the ongoing cost savings initiatives in the Netherlands are offsetting digital investments as well as higher costs to support the business growth. You see a more or less flat picture here from a quarter basis on the underlying operating expenses. Regulatory costs ticked up a little, if you compare it to last year, the previous year quarter, you may remember that, it included a lower DGS contribution in Germany.
That's what distorts this picture from a year-on-year basis for this third quarter. As our expense base remains impacted by regulatory costs, we prefer to look at the four-quarter rolling average cost-income ratio. The regulatory costs are just too volatile to have any meaningful cost-income picture derived from it on a quarterly basis. That's why we have gone to a four-quarter rolling average. That is a slight uptick here at 53.8%. Benefits from the digital transformation programs will be back end loaded. We stay committed, though, to our ambition to have the cost-income ratio be between 50%-52% by 2020. Going to risk cost. The risk environment remains benign, very benign, with the overall NPL ratio for the bank at a very low at 2%.
Clearly, that is because of effective risk management on one side, but on the other side, we just see that the economic circumstances help us as well. This is why they are much lower than the through-the-cycle average of 40-45 basis points. In fact, risk costs in the Netherlands were negative this quarter, as you can see, due to a release on the back of further improving macroeconomic and housing market conditions in the country. Similar pattern is visible in the wholesale bank, where risk cost came in at EUR 46 million, or only 12 basis points over risk-weighted assets. That's also supported by net releases for larger clients in Asia and the U.K., combined with some limited new additions during the quarter. Yes, it's a healthy picture. It shows as a good picture.
It is far lower than the through-the-cycle average of 40-45 basis points. This is cyclical, so let's not fool ourselves. We turn to ING's capital position. CET1 capital ratio was stable at 14.5%. The capital position benefited on one side from the inclusion of the EUR 500 million of net profits for the quarter and positive risk migration. On the other side, this was offset by a modest increase in risk-weighted assets due to the lending growth, as well as higher operational risk-weighted assets. Again, we decided to reserve an amount equal to one-third of the 2016 total dividend in the quarter, which leads to a total dividend reserve after paying the interim dividend of EUR 0.24 in August of EUR 1.6 billion.
Just to remind you, last year we decided that every quarter we would reserve the dividend from our profit at the first three quarters of one-third of the previous year dividend in order to ensure that we would have built a reserve to meet the same dividend payment. Then in the last quarter, depending on how the development is, we will decide on the progressiveness of the dividend. If you look at the total capital stack, this is a strong position at 19.8%, supplemented by more than EUR 5 billion of group senior debt issuance during 2017. That laid the foundation for rating uplifts at bank level for both S&P, as well as Moody's, just this quarter. Finally, looking at where we are versus our 2020 financial targets. First of all, CET1 leverage ratio well ahead of minimum regulatory requirements. Happy with the progress on cost efficiency.
We'll keep doing more in order to reach our cost income range, to make our cost income target to meet the range in 2020. We have again reached important milestones with respect to the transformation programs, which will help us in that regard. Finally, on a four-quarter rolling average basis, the group return on equity improved to an attractive 11%, while we keep growing the lending book and face pressure from a low-rate environment. With that, I would want to open the floor to questions, but not unless I have actually expressed my gratitude for our staff. The reason for that being is that we see a consistent focus on the implementation of the strategy. We see recognition in the market for this.
We see recognition like being awarded best bank in the world, and we can't do this without all of the 52,000 staff working for ING being committed to delivering on the strategy every day. With that, I turn to the questions.
Thank you, sir. We're starting the question and answer session now. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. In the interest of time, we would kindly ask each analyst to limit the number of questions to two. Our first question is from Mr. Tarik El Mejjad from Bank of America Merrill Lynch. Go ahead, sir. Your line is open.
Hi, good morning, Ralph. Thank you for the presentation. Just one question, actually, on your dividend policy, because, as you highlighted within nine months 2017, you've accrued your pay dividend 2016. If you look at on-consensus numbers, you have to accrue less than 10% of your Q4 numbers to deliver the consensus dividend per share. What's your thinking about that? Are you looking to the go-to CET1 ratio to decide on the distribution of capital, or you stick with your EPS growth kind of dividend per share growth? What's your updated thinking on that, and how do you square that with the regulation and Basel? Thank you.
I'll start answering the question. Koos will fill me in for sure. For the moment, we want to be cautious on this. We want to continue with our guidance that over time we will pay a progressive dividend. We see a good operating environment for the moment. We see that our strategy is working, that the capital is being generated. In the end, what we decide to do with the capital, we can use it for three courses. The first one is, how can we build capital in the future? Second one is, how can we support growth in the future? The third one is, how do we pay a dividend? At this moment, going by current regulatory environment, we are well capitalized. As you know, there's discussions around changing that capital requirements, and we don't know exactly where this is going.
I'm sure there's going to be follow-up questions on that as well. Therefore, we want to be careful in view of that. That is our way of thinking around how we will deal with the dividend. Maybe Koos, you can fill in.
Maybe. Tarik, one other specific point to add. The way of accruing distinct it from a policy. What we do is the way of accruing by accruing already the last year in the next three quarters. That is basically to make sure that we allocate some to our accrual reserve, but also add something to our equity. Our policy is basically something different. That is just we have a careful progressive policy, and that hasn't changed. That means, in Q4, we make up our mind, but don't expect major surprises, because otherwise we would have announced a different policy.
Okay. Thank you. If you just can follow up on that. On the level of capital, will you be comfortable? I know that you can't discuss that yet because you don't know the rules yet. It seems that for the last two quarters, you favored growing your balance sheet and capture profitable volume growth rather than trying to build capital ahead of any announcement. Would that fair to think that a level around 14 and a half, 14.8% is a level where you would feel comfortable this level? There's no need to rush and build capital ahead.
I think overall, you have it exactly right that if we can grow whilst maintaining an ROE north of 10%, that is something which we clearly like, and that is what we are doing. What we find difficult, however, right now is to say whether 14.5 is the good number because we don't know the rules of the game going forward with Basel. The first initial reaction internally is always whatever new capital system we get, can we price new loans with an ROE of 10% against new rules? And that's the first thing we have to answer. But before doing that, we need to know the rules.
Then, thank you very much for clarification.
Our following question is for Mr. Benoit Pétrarque from Kepler Cheuvreux. Go ahead, sir, your line is open.
Good morning, Benoit Pétrarque from Kepler Cheuvreux. First question will be on the cost. Q3 shows that you get some impact from the transformation programs on the cost base. It will be clearly increasingly important going forward. We are one year from your update, November 2016. You have been guided at that time, EUR 200 million of benefits in 2017 and EUR 250 for next year. So I would like to understand where you are now, how much has been realized, and whether you are still comfortable on realizing actually an increase of the cost-cutting next year. And also on the digitalization costs, I think you are on track to post a EUR 170 million investment in digitalization this year. I think you were going for a slight decrease next year to EUR 120.
Now, given all what happened on the digitalization side, are you still comfortable that your investment in IT will actually decrease in absolute term, in 2018 versus 2017? That's the first question. Second question will be on, in fact, quite some undisclosed one-off items which make the analysis per division quite difficult, especially on the Retail Netherlands. If I see the quarter-over-quarter development of the NII, I see an increase of EUR 35 million. I was wondering how much is the underlying development, if you strip out the one-offs there. I think you had a one-off on the [savings with replicates] again. Especially considering savings rates are now 0% in the Netherlands. I like to understand what the quarter-over-quarter trend is and what your outlook is for next year, in the current interest rate environment.
Maybe final question will be also on the cost side in the Netherlands, down EUR 75 million. Actually links a bit to the first question I had. Cost reduction program is clearly visible there, how much is coming from the one-off provision release? I'd like to clarify that. Thank you.
Benoit. Yeah. From a cost perspective. The transformation program, as announced a year ago, from an investment perspective, we're probably a bit behind in terms of the money that we are investing. That is because of the different programs that we have launched. We have to make sure that they all land, that they're all aligned, and that it's happening on one side and the other side. In some scenarios, we need regulatory approval, which sometimes leads to a bit of a delay as well. In terms of the cash spent in this transformation as well as for building the digital bank, probably in the 2017 investment, a little bit behind. That's one.
Secondly, we do feel very comfortable that will not lead to further delays in terms of the savings to be reaped, because the total period in which we are to generate the savings is the 2020-2021, as we have indicated to you. The savings from that transformation itself, that we're going through the next couple of years, will be a little bit more back-ended. That's for that program.
What we see specifically coming in as savings for this quarter and also for the year, and why quarter-on-quarter and year-on-year, you see that our operational costs are more or less flat, is that the savings from previously started programs, specifically in the Netherlands, but also some in the Wholesale Bank, but specifically in the Netherlands, on the IT side and the actual decrease on the IT spend in the Netherlands, that's what we actually see coming in through the P&L. That's why overall you see a flattish picture from an operational expense perspective, more or less. That is what is happening there. Specifically on your next question on the NII, I'll give the floor to Koos.
I think overall, if you look at the NII and you refer to the Netherlands, there is some higher income related to mortgages, and indeed, it's a transfer to the value hub on which we make a one-off profit. If you look at the normal volumes and the normal lending, since their volumes are not growing, that is where you don't get the higher NII from. We also had one other thing, and that was related to a company called Payconiq, where we made more incidental profit. Overall, I would say a part of the increase in NII was attributable to more one-off items. Underlying what was more or less stable. That is in essence what you've seen on that side. You also mentioned the Netherlands on the cost side. Indeed, we have a significant improvement there.
Part of it is indeed what Ralph alluded to. It's just the programs which we have run in the past, and they lead to lower expenses now, and they lead to lower third-party staff right now, and you don't need to take more provisions because of new programs announced. That is a big part of it.
Of course the other part was what was mentioned, the CLA provision, and that contributed to it as well.
Great. Thank you much.
The following question is from Mr. Bruce Hamilton of Morgan Stanley. Go ahead, sir. Your line is open.
Thanks. Firstly, just details on picking up on the last question. Is it possible to actually size the benefit of the mortgage book disposal in the top line in Netherlands, and also the cost benefit from the provision release? Secondly, I guess looking at the Belgian business, clearly, I understand there's seasonality in fees, but the NII dynamics down 5% Q-on-Q look particularly tough. Is that simply a function of no room to move on deposits and competitive dynamics on new business, or is there something else going on there? Just finally on IFRS 9, obviously you've given us a narrower guidance range for the first time impacts.
If I could maybe ask how you're thinking about the cross cycle impacts on your management buffer, given the procyclicality of the new rules and whether that would be an addition to the management buffer you've historically run with. Thank you.
Thank you, Bruce. I will take your question on Belgium, and then Koos will fill you in on IFRS 9. Regarding Belgium, you do see here the impact on one side from the lower rate environment, the replicating portfolio that is producing lower returns versus a savings rate that you cannot decrease further in order to offset pressure coming from a low rate environment. That is one thing. The other side, we are growing in Belgium. We have commercial momentum in Belgium. On the lending side, whether it is in mortgages, whether it is in SMEs, or whether it is in mid corporates, we actually see the book continuing to grow at stable margins. The margins quarter-on-quarter are rather stable. The combined effect of that leads to the pressure that you see on the NII at this moment in Belgium. There is no specific effects beyond that. It is business.
It is pressure on return on the savings business versus a continuous growth of the lending book at stable margins. Koos?
Bruce, sizing benefits and costs. Overall, on the benefit, if you look at the sale of the mortgages, that is a low double-digit number which we had. On that part, we give you that benefit. The one-off on the cost side, we rather do not give it on the CLA. We always have ongoing dialogues with our unions and everything, sometimes you gain some, sometimes you lose some. We rather say there is something incidental in there, but we do not tell a lot about that further. If we talk about the procyclicality of the new rules under IFRS 9, clearly you know now that the start of IFRS 9 is giving us basically an impact in quarter one terms of 10 to 30 basis points. The procyclicality on how that will develop over time. If you have quarterly changes, we do not have that yet.
We have early indications, but we find that too early to already test with you. We are working on a way right now to create structural scenarios because you do not provision on a base case, but also on a worst case and a good case, and we are still in a testing phase of this. No doubt we will come back on that in the next quarter. Maybe one thing on the IFRS 9. If you look at the impact of the 10 to 30 basis points, in fact, it is not because of higher provisioning, it is because we are reclassifying part of the investment portfolio. In that process of reclassification, that is where you will find the impact. It will lead to a more stable reval reserve, but you take a certain upfront capital hit.
Thanks, that's helpful.
Following question is from Mr. Alex Colaguinne from Nexis. Go ahead, your line is open.
Yes, hi. This is Alex from Nexis. Question for Myself as well. Was just wondering on IFRS 9, just to come back on that. Thank you very much for the update. What does that mean for your cost of risk going forward? Should we expect the cost of risk to go up like in 2018 due to the implementation of that? I don't know how we can read on the implementation of that above the first time application. Second question is more on the contribution of loans to your balance sheet. I think that on your slide 13, we see that mortgage represent 45% of the balance sheet. Is that the number that you're pleased with? Are you looking for this contribution to decrease going forward? What is optimal in terms of breakdown of the contribution of each type of loan to your balance sheet? Thank you.
On the IFRS side, the question is, are cost of risk going up? First of all, we still make the same loans. Is the loan losing or not losing money? That is the ultimate part. In that sense, I would say that is not changing. The question is, are we now provisioning more and therefore releasing more in the end, or are we provisioning earlier and then releasing that later? That is the real question around there. I think the way how we look at it is that probably due to what is called stage 2 migration, when you enter into a negative scenario, you start to take your provisions somewhat earlier, that will lead to reductions later on. You get a slight shift in a cycle, and that is all what we see there.
We don't necessarily see more provisioning because at a certain moment, the loan is still the loan.
Okay.
Okay, to your question on the percentage of the loan book that is made of mortgages. Alex, when we launched the Think Forward strategy four and a half years ago, we put up a picture in which we indicated that 54% of our balance sheet was made of mortgages. We indicated at that moment that, one of the things that we have learned from the crisis is that you can have good assets, but if you have a concentration risk in good assets, it can still be seen as something bad by the market. We wanted to move away from concentration risk in asset categories. Over the last four years, we have moved from the 54% to almost 50%. I'm talking ING overall. The picture that you are referring to on slide 13 is the C&G numbers.
The overall picture for ING is a move from 54% to 50% in 2016. In our ambition 2020, we moved the percentage mortgages down to 48% of our balance sheet. That is the way we think things will go. That is the way we're managing the composition of our balance sheet, on one side, from a concentration risk perspective, on the other side, from the perspective that, as indicated, we're seeking for higher NIM loans as part of our balance sheet. In order to ensure that we can do so, you reduce a little bit on the lower NIM percentage-wise, which is generally mortgages.
Okay. Thank you very much. If I can add one last question. On Basel IV, I know that there is nothing set yet at this point of time. I'm just wondering if you have any comment made on all the rumor or statement that was on the market lately, around the 72.5% output flow. What does that mean for you in terms of implication and so on? Thank you.
Yeah. It's a good question. My first line generally is that predicting Basel has become an art. Clearly, at this moment, what we hear back is that there is momentum to do a deal. I don't think we're creating a level playing field. I've mentioned that before. What we should be trying to do is creating a level playing field, ensuring that the same risk should be treated in the same way, rather than the same assets, as they are called, are treated in the same way. Mortgages in one country are completely different from mortgages in another country. Bankruptcy laws are different. The roles that banks play on the continent versus the U.S. are completely different.
Despite all these arguments, one way or the other, there seems to be momentum to do a deal if and when both sides of the ocean agree on credit risk approach, the operational risk approach, but also the fundamental review of the trading book approach. That's basically where there is not an agreement yet. That is what makes that Basel has not come to an agreement yet. That is one thing. The second thing is that, indeed, what we hear back is that there is some discussion around settling on, from a credit risk rated perspective, a 72.5% floor of standard. We know, and all of the European banks know, that for every bank leads to an outlier situation from the statement that this should not lead to a more than significant increase in capital.
We haven't seen any bank where it would not lead to a more than significant from that perspective. We go back to the ECB and the SSM leaders indicating that they would not allow the Basel to lead to a more than significant capital increase for European banks because they are convinced that European banks are sufficiently well capitalized. You can also refer to the statement of the EC Commissioner Dombrovskis, who has said, "Well, we don't need higher capital for our banks in Europe, and therefore we will not support that." You should realize that everything that people agree in Basel is just an agreement in Basel. It is not law. It has then to go into European law.
That's where the next discussion will happen then. Before all of this will become something clear, it may still take some time, and that's where we currently are.
Thank you. Very clear. Appreciate it.
Ladies and gentlemen, please may I remind you to kindly limit your questions to two. Our following question is from Mr. Pawel Zytnik from Goldman Sachs. Go ahead, sir, your line is open.
Good morning. Thank you for the presentation. Can I just start with following on your Basel IV remarks? Obviously you said there is a lot of uncertainty as to how the rules will be implemented and so on. Most of the assessment studies that have been done, have been done based on the consultation papers published by Basel back in, I think, 2015 and 2016. I was wondering, as you look at the proposals or maybe the sensitivities of new rules that are being discussed, have you seen any changes in the underlying framework when it comes to credit risk, operational risk, eligibility of IRB models and so on, that would make the potential impact much softer than implied by, let's say, over 70% output floor?
I think this is something that very recently was published by one of the Eurozone central banks that actually a lot of changes have been done in the background. The second follow-up on Basel IV is following. The new Dutch government, it seems, lifted 4% leverage requirement. I understand that this is not a constraint for ING, but do you view it as perhaps a welcome signal that should the Basel IV be very harsh for yourself? The new government and new policymakers in the Netherlands are much more willing to work and potentially lower your O-SII domestic buffer to account for that. Thank you.
On the Basel IV assessments, output floors have there been a sort of tooling around with that? The answer is yes, particularly on the mortgages side. Over time, what you have seen is that the standardized approach has been changed somewhat. In a sense, there is a form of a slotting approach on mortgages. In other words, you have different buckets for LTVs, and that gives somewhat a relief on the output floor. That is what we have seen as a big picture over the last half year. That is some relief. Nevertheless, there are many open questions still around it, as Ralph was saying. I wouldn't know, for instance, if American banks are having a standardized approach included op risk in there or not. There are still quite some things where as banks, we are a bit puzzled around.
Still to be answered further. More going back to the question on the Dutch government. Indeed, what they have said is we want to move more towards European standards with regards to the leverage ratio. On the one hand, you can say that's a pretty gratuitous thing in a sense that capital standards are going up potentially with Basel anyway. If a leverage ratio standard goes down, that doesn't mean a lot. You can also interpret it slightly different, and that is that Netherlands might be converging somewhat more towards European standards. Obviously we are also looking at our OSII buffer and see whether there is room for lowering that somewhat over time and moving more towards a level playing field on that element. There's two ways how to interpret it.
We tend to always look at it from the bright side of life, we hope that we are moving slightly more towards European standards.
Thank you very much. Can I just maybe ask the second question, and it will be just on your results and a very quick one clarification. Obviously, your impairments have come below half a billion EUR for nine months so far, and your previous guidance on the last call was for EUR 1 billion for the full year. Can you give us some clarification as to what to expect in the fourth quarter? I understand there might be some pickup, but perhaps quite modest.
Yes. Thanks, Pawel. Clearly, risk costs in the first nine months have been relatively benign. Basically, you see that on all areas, both in the wholesale bank as in the retail bank. Of course, we remain careful with industries such as oil and gas and real estate and acquisition finance, and we carefully watch markets such as Turkey. At the same point in time, we see generally across the board, the risk of being benign on all fronts. In that sense, we expect the risk costs to end up well below what we have seen in 2016.
Thank you.
Our following question is from Mr. J.P. Lambert of KBW. Go ahead. Your line is open.
Yes, good morning. Two questions. The first one is on the ending of the hedge relationship. We have a shift up of EUR 91 million. For this quarter, how should we look at this going forward? Is this EUR 91 going to remain stable, or is that going to taper off, or is it a one-off? Second question is regarding your fintech portfolio. Can you explain a little bit how you look at this and how you select the priorities? Is it based on return on investment? Is it based on the acceleration of transformation, the impact on the customer journey? You have a large portfolio. I wonder how you cluster and organize these investments. Thank you very much.
Okay, Koos, you will take the first one?
Sure.
Okay.
On the hedges, indeed, what we do is we have quite a lot of derivatives for hedging purposes. We do that for mortgages, we do that for savings. From time to time, we do two things. One is end hedge relationships, and that is particularly when you have short-dated swaps, and the other is we try to, from time to time, reduce the amount of hedges as well. That gives us room to clean up the portfolio. In this case, what happened is this quarter is indeed that we de-designated some hedges, and that means you have a result of EUR 91 million, and we expect that also in the next quarters to be there, and that will only slowly start to taper off. What we will do is each quarter just tell you what the effect is so that you can calculate your normal NIM.
We talk about normal NIM, and you always have this number in there in case it is there, but expect it to be there for the coming quarter.
Thank you.
Jean-Pierre, on your question as to how do we deal with the different investment opportunities that we have and how do we prioritize. The highest priority is always everything that has to do with compliance. We don't need business cases for that. You need your license to operate. Everything that has to do with compliance always has the priority. All the other categories, whether it is from a foundational perspective, if you take our strategy presentation, or from a support function perspective, a new business perspective, an improvement in client experience perspective, all of those need to have business cases. Business case in terms of improving the net promoter score, a business case in terms of increasing revenue, or a business case in terms of decreasing cost. All of those are subject to the same principles of business cases, apart from the compliance one.
That's the way we do that. We have a very strict governance around this in terms of you can't start a project without an approval from a central committee that reviews all of this. It has the same standards on every project that compare these projects, that also checks the progress of these projects. In the board, we review this every month. That is on the change investments that we have. On the investments that we do with fintechs, which is related to the EUR 300 million investment fund, the way we look at that is that everything that we do there and every collaboration that we enter into needs to be aligned with our strategy. We are not a venture capital fund, and I will repeat that, and I think the story from our perspective is clear.
We're not here in order to look for and find the best investment opportunity that makes the best return that has nothing to do with our strategy. We're looking at those fintechs that can help us improving the customer experience, that can help us launching a new product like robo-advice or the collaboration with Kabbage in entering into the SME markets in Spain and Italy and France in a completely different way, in a challenger way. That is what we're looking at. If, in those cases, it is better to take also an equity participation or some kind of a risk participation in order to solidify that partnership, then we do that through this fund. That is how we work.
Great. Thank you. On Germany, the expansion of the SME program, do you have an idea of a potential timing? Because this would be a very attractive market, the automated lending.
The expansion of what? Of the-
The SME lending.
Okay. In terms of going into the SME markets, we started to do that in the challenger markets in Spain first, collaborating with Kabbage. We have been working with them now for two years. On the back of the experience, getting the algorithm right, getting the customer experience right, we have now chosen that as a platform to also go into Italy and France. We first want to see how it works there before we decide on other countries.
Great. Thank you very much.
In Germany, for example, we launched robo-advice, and depending on the success that we have with that, we will then also go into different countries. In every country, we take a different initiative, and depending on the success, that will then become the standard for other countries to follow.
Thank you very much.
Yep. Thanks.
Our following question is from Miss Alicia Cheung of Exane. Go ahead, your line is open.
Morning. Just a couple of questions from me. Firstly, going back on the costs. I noticed that in the Challengers & Growth Markets, it looks like costs have moved up quite markedly in the last quarter. Just wondering, is this the new run rate there given there is higher investment spend there and also higher growth, or are there also some one-offs in there that we should take into account that maintenance maybe going forward is a little bit lower? Secondly, is it possible to give us an update on where we now stand with various litigation and investigation issues such as the Uzbekistan case, the EC investigations into anti-competitive behavior across the Dutch banks? Can you quantify what the Spanish litigation provision is? Thank you.
Okay. Alicia, thanks for the question. On the cost itself, the cost will grow in C&G. We have always indicated that we have different recipes for different areas. In market leaders, we don't expect revenues to go up. We expect cost to go down and hence improve return and improve cost income. In C&G, we have always said if there is growth and there is growth of revenue, we don't mind the cost to go up. We are investing in C&G to grow, to reach more customers, launch new products and through that improve revenue both on the lending side, on the interest-related side as well as on the commission side. The fact that you see in some parts of C&G the costs go up, that is what it is.
Clearly, we see for this quarter, we see in C&G a cost inflation coming from the provisioning in Spain that we have indicated and Turkish foreign exchange rate. Those are 2 one-offs from that perspective. The trend in cost in C&G can be up as long as the revenues are up as well. If the revenues are not going up and the strategy is not working, we will also have to be much more stringent with cost growth in C&G. On the litigation, I give that to Koos.
Thank you. I think if you look at the litigation, we have the AML part, the anti-money laundering. That investigation is about the onboarding of clients and the money laundering. On that one, we have not taken a provision yet because we cannot decide at the moment on both the timing as well as the size of what a provision would be. Since this investigation is ongoing, we cannot comment further on how this is progressing. If you look at the other part, the anti-competition investigation which happened, or whether it's an investigation, I don't know, the raid which happened with our Nederlandse Vereniging van Banken offices, as this is happening there, we cannot comment on what is happening on that part because that is not necessarily in our institution. We don't know what the consequences of that will be.
Thank you.
If we look at the Spanish mortgages, maybe on the Spanish mortgages, a couple of comments. This is about origination costs. With regards to the provision, we cannot disclose what we provide because we are appealing in some cases as well. In that sense, otherwise, we are undermining our own position, and we just have to await jurisdictional clarity going forward. In a sense, we think we are provided adequately for what we know at this moment, but we have to await further how that goes.
Thank you very much.
Our following question is for Mr. Stefan Nedialkov of Citi. Go ahead, sir, your line is open.
Hi, guys. Good morning. It's Stefan from Citi. Two questions. First one is on fees and your strategy in that area. The second one, unsurprisingly, on Basel IV. On fees, I was looking at the slide in your presentation where you talk about initiatives to drive fee income growth, and something stood out. You say that you're selectively increasing the lending and payment fees to corporate clients, and also you're reviewing the daily banking fees across your different markets. Obviously, your model, when you attract deposit relationships, has usually been a very low-cost one. I was just wondering how increasing fees effectively without really adding value to the customer, as has been your philosophy, how that is likely to affect your brand in, say, Spain, France, Italy, et cetera, or are we basically talking about just a small catch up with the competition?
On the fee side of things, could you just give us some color on the proportion of fees that are derived from third parties in the various segments? So Belgium, Netherlands, and also C&GM. On Basel IV, I had a question on how the various buffers are likely to interact. Is it your understanding that the P2R and the P2G buffers already include components for risk weights, so that if Basel IV comes in, the ECB can effectively automatically reduce those buffers down? Or is it unclear whether risk weights are basically unaccounted for in those pillars? On the P2G versus the management buffer, what is your thinking if Basel IV comes on?
Would you be willing to reduce your Buffer and make it coincide more or less with the P2G requirement, or would you still be stacking a pretty significant management buffer on top of the P2G? Thank you very much.
Thank you, Stefan. I will answer the question on your fees, and I think Koos will go into the buffer four questions. Specifically on fees, let it be clear, we are here to truly empower our customers. We feel that investing in digital is the way to go in order to ensure that we do deliver a differentiating client experience. At the same time, we have said that while we're doing this, we have to develop a primary relationship. Because we feel that the primary relations, at least we know from research, they're eight times more loyal and four times more valuable than product relationships, regardless of the product. Hence, we are trying to develop relationships across the board, both on the wholesale banking side as well as on the retail banking side.
If you develop these relationships across the board and you want to improve your cross-buy, you need new products. Many of the new products come with fees rather than with interest income. We do expect fee income to increase over time. Whether this is fee income that we charge directly to our clients or whether it is fee income that we get from third parties on the back of that, it really depends on the offering, on the product. It also sometimes depends on the local regulatory environment from that perspective. That's on one side. Your specific question on the introduction of daily banking fees, I think it's a good question. It's one of the discussions that we have had. ING stands for an empowering brand, it stands for an efficient bank, it stands for a digital bank.
You have to make sure that if you do charge fees and clients are to paying fees, that there is a reason for that, there is a value added for that. Before we introduce fees also on daily banking, it really comes with a package that we then offer to our clients through which they can see the added value. If we don't see the added value, it's going to be difficult to charge fees for it. We're very careful to do so because indeed it may impact on our brand and we have to be very careful with that. With that, I'll give the floor to Koos.
On the interaction of buffers and buffers on buffers, because we normally, we have a 4.5 minimum buffer, we have a 2.5 capital conservation buffer. On top of that, we need a buffer which is then called our systemic risk buffer. That brings us already at 10, and then we have our P2R, that is a stress test buffer on top of that buffer that brings us with countercyclical around to the 11.8, and currently we are at 14.5. You might say there is a buffer between all the add up of these requirements. Will that be reduced if Basel IV happens? You hold a buffer because of uncertainty, and if Basel IV is clear, we start to determine what the buffer will be north of the P2R requirement.
We will determine a management buffer, that management buffer will include the P2G. The size of it will be determined by a few things. Number 1, volatility, that could be IFRS 9. Number 2, volatility because that could be based on our revaluation reserve or our FX swap sensitivity. The third element is our RWA migration, which you might get because, as you see, we are living right now in a pretty benign environment. At a certain moment, if a market turns, you have both IFRS 9 against you, as well as that you have negative credit migration. For these kind of things, you want to hold a buffer as compared to your P2R. Let's first await what the Basel requirement will be, we will say, "Hey, what will be our buffer at that time?
Maybe to add, clearly we, as Koos is indicating, we are making this case that if regulators think that we are sufficiently capitalized as we speak with a CET1 of EUR 45 billion, because discussing buffers and percentages, this is all very interesting. But in the end, do EUR 45 billion of CET1 capital, is that sufficient for a bank with the risk that we have in our balance sheet? Yes or no? At this moment, they are saying, "Yes, it is." Whichever way you want to calculate things through Basel changes, whichever buffer you want to call or whichever percentage you want to determine because of whatever formula you think of, is EUR 45 billion enough, yes or not?
At this moment, they are saying, "Yes, it is enough." If we go north from the EUR 45 for whatever reason, the question can certainly be, do you need all those other buffers, whatever you call them, and all those percentages in order to improve? That is the only way to have this discussion, because otherwise we continue to trick ourselves into percentages that represent completely different numbers of the underlying risk. That is the only way to have a clear discussion around all these subjects. We confuse ourselves to death as to how we want to calculate things and what kind of buffers and percentages we want to put on ourselves through. But in the end, for a bank like ING, is EUR 45 billion CET1 enough, yes or no? That is the question.
Yeah. Ralph, just to follow up on your observations. Completely agree with you. Basel IV is effectively a change in regulatory accounting at the end of the day. But some of these comments are coming from central banks is that capital requirements were not set in absolute EUR amounts. They were set in basically percentages. In order for the ECB to offset this regulatory inflation, basically, which is not necessarily based on any economic reality, you might have to basically bring your P2R and a lot of the P2Gs down to zero. At the end of the day, in Europe, you might have to have just a 4.5 plus 2.5 as an overall capital requirement at the CET1 level. That just looks bad from the point of view of the ECB.
We as analysts, and everybody, I guess, trying to square these two things off with each other.
The same goes for us.
All right. Thank you.
Yeah. Okay, thanks.
Our following question is from Mr. Bart Jooris of Degroof Petercam. Go ahead, your line is open.
Yes, good morning. Thank you for taking my questions. Two questions on the results. What do you see on potential for further provision releases in the future? I understand that maybe in Retail Netherlands, they may be more limited than wholesale banking. Could you give us some flavor on that? Second, could you give us some more insight on your RWA growth? Could you elaborate on what caused the market RWA decrease and how that could evolve in the future, and what will the effects affect on the RWA?
Okay, thank you, Bart. With regard to future provisions, basically, at least in the short term, what we see for this year is that we believe that the risk costs will become well below what it was last year. That's only a couple of months. Clearly, there are always volatile portfolios, and especially in wholesale banking, provisions can be relatively lumpy. If you look further ahead, it becomes a bit more difficult to predict. In the end, and I think also Ralph said it at the beginning, through the cycle, we look at a risk cost level of 40 to 45 basis points across a cycle. Also in this cycle, we do not see that to be different. At least for now, we do not see an immediate change in the economic environment.
For the short term, we continue to expect risk costs to be benign. Again, there are volatile sectors, and there is lumpiness in the wholesale banking books, we need to be careful there. When it comes to risk-weighted assets, basically, this quarter, there was an increase of EUR 0.7 billion, which was comprised of volume elements, which is a growth in lending, which caused an increase of EUR 3.3 billion. There was an operational risk increase of about EUR 2.7 billion. There were some risk migration in the models, an improvement of the macroeconomic environment, and there were decreases due to FX, as well as a decrease in our market risk. That combination made up the RWA or the relatively limited RWA increase of EUR 0.7 billion.
In the end, that's what you also see when you look at the composition of our RWA, which is largely credit, to some extent, market and operational risk. In the end, the largest driver, all things being equal, will be the increase in our loan book.
Yeah, do you see more room for a market risk decrease of RWA?
Excuse me, can you repeat the question?
Do you see more room for further market risk decrease of the RWA?
Well, no. Basically, that depends on our activities. As you can see, our CVA is relatively limited. We always link our market activities to our client activities. When volatilities are low, the risk rates in that regard are a bit lower. In the future, of course, and Ralph also talked about that, FRTB will be coming, and that in a couple of years' time, could have an increase in RWA as an effect.
Okay. Thank you very much.
Our following question is from Mr. Kiri Vijayarajah of HSBC. Go ahead, your line is open.
Yes. Good morning, gents. It's Kiri Vijayarajah here from HSBC. I just wonder if you could share your thoughts on the impact of potential Dutch tax reforms, not just for your blended corporate tax rate, but also what it might mean for the Dutch mortgage market. If there are potential changes to mortgage interest deductibility, and if there's a risk, you could see an acceleration in mortgage redemptions. Just your thoughts on that would be helpful. Thanks.
The proposals of tax reforms are on different fronts. On the income tax, it goes hand in hand, indeed, with a proposal to further decrease the mortgage tax deductibility over time. It may mean that over time, you would see a further prepayment of Dutch mortgages, if that is the case. We should all realize that these changes are happening over a period of 20 years. It is something that goes gradually over time, and therefore, it will probably not necessarily disrupt the markets themselves. Also certainly not the way we deal with our clients and the income profile of our business. It will just be a lengthy process. That's the one on tax reforms on the income tax and the tax deductibility of mortgages.
On the corporate tax, there's going to be a decrease, at least at the proposal of corporate tax on one side. On the other side, there's this discussion about tax deductibility of leverage. On the other side, we don't know the specific wording there. We'll have to wait until we see whether that's going to affect us or not. Yes, I think, which is the news for investors is that there's a proposal to abolish dividend tax altogether, which should, I guess, be a positive.
Thank you. That's very clear.
Yep.
Our following question is from Mr. Benjamin Goy of Deutsche Bank. Go ahead, your line is open.
Yes. Hi, good morning. Two questions on your loan growth, please. First, on the Netherlands, feels like your net production is getting incrementally less negative, wondering when we see a turnaround here and return to positive growth. Secondly, on the wholesale bank, feels like over the last three quarters, you are moving away a bit from U.S. dollar lending and doing more in the Eurozone and general lending in particular. Wondering about the rationale here. Are you a bit more worried about, let's say, U.S. dollar exposed credit cycle, or do you just see more opportunities in the Eurozone? Some more color will be appreciated. Thank you.
Thank you, Ben. Specifically on the Netherlands. We're increasing our market share in mortgages, for example. It has to do with the fact that we have a little bit more appetite on the long run of the market on the back of the clarity that the mortgage credit directive gave us, from a prepayment cost perspective. Also there, as you are used to, we do price longer tenor assets, both on the retail side as well as the wholesale bank side in a different way from shorter, in order to not to have a legacy book or whatever proposals come from Basel. We do see that we're picking up on market share there, which is offsetting the automatic repayment that is under the portfolio, as well as the WestlandUtrecht transfer that we do. That's on the mortgage side.
On the SME side, we see demand picking up, which is almost equal to the current level of repayments on that book. We see the market turning there, and that's the positive effect there. On the wholesale banking side, Steven will fill me in. It is not so much a worry. We see a lot of market activity in the U.S. taking out bank loans, reprice at levels, which are not sufficiently attractive for us. As you know, we're very disciplined in the way we price our lending. We see actually more activity also in the general lending in the Eurozone. Therefore, we can shift our activities there and grow there. As said, we benefit from a diversification in product and geography. We keep the same pricing hurdles irrespective of the activities also on the wholesale bank side. Steven?
If you look, Ben, over the past 3 quarters, you see every quarter in the wholesale bank it is something else. The 1st quarter was an increase in structured finance, there was an increase in REF and working capital solutions. The 3rd quarter, there was an increase in general lending and working capital solutions. There is not a particular concern about the U.S. versus Europe in that regard. You see still growth continuing on both sides of the ocean. We have a well spread portfolio, the reason why we grew faster this quarter in general lending and working capital solutions was on the one hand, there were a number of larger corporate activities, including M&A, which then calls in terms big underwritings and loans, corporate underwriting and loans that has increased general lending. Moreover, we're growing our working capital solutions business.
That is our trade finance business, if you will, whereby on the one hand, from supply chain finance, we focus on the higher rated corporates for the unsecured loans and for the trade receivable portfolios, which is the secured receivables we grow across the board. When the trading activity is picking up in Europe, i.e., in the Eurozone, that book is growing.
Great. Thank you.
Our next question is from Mr. Matthew Clark of MainFirst. Go ahead, your line is open.
Good morning, everyone. Two questions on net interest income, please. Firstly, on the hedge treatment change and the accounting distortion. Would you expect the impact to be at a similar level in incoming quarters, or is it a completely random, kind of could be positive, could be negative, depending on market moves and how that affects the fair values, et cetera? If it's going to be persistent, obviously it will distort the segmental revenue trend as well. Would it be possible to get the full breakdown of the segmental impact? I think you've only given the impact in Retail Netherlands and the Corporate Center rather than, but presumably there's a residue that's also affecting the other divisions. Then, second question also on net interest income.
Should we be worried that the kind of pressure we're seeing in Belgium this year, we're going to see in Germany and the Netherlands next year, the year after, as you run out of scope to cut deposit rates? Maybe if you could just give us some guidance on the medium term outlook for the savings margin there. Thank you.
On the NII versus NIM, because I think the last question is more on NIM versus NII. Yes, you can expect that from a NIM perspective, that the income on the savings side of the business is under pressure. The margin is under pressure. The replicating portfolios in the end, get reinvested at lower rates, and therefore, margins that we make, that we normally offset with decreasing savings rates. At a certain moment, you have reached the bottom. We're not there quite yet. There is margin pressure on that side. From a NIM perspective, there is a couple of things we can do in order to still manage our NIM, which we have indicated already in the presentation. One is further balance sheet optimization.
Second one is to change the composition of the asset side of the balance sheet by gradually, prudently, but increasingly improving or changing the percentage, increasing the percentage of higher NIM assets. Those are 2 things that we do in order to offset the pressure that we see on the savings rate. That's the NIM. Over time, given the fact that we are growing our book, the NII should increase. That's a different factor. We're growing the book, the NII will increase. The NIM, we feel we can, for the foreseeable quarters, manage at the high 140s, low 150s. Specifically on the effect of the hedge relationship, I'll give the floor to Koos as well.
On that hedge relationship. Again, maybe to reiterate, we have EUR 91 million, which is basically now part of interest result and not part of other. Overall, in the whole company, it's a wash. We expect that to be there the next quarter as well. Later on, we will guide for how long or when that will taper off, but expect it to be there next quarter. If you ask a breakdown, it's EUR 38 in the Netherlands, EUR 23 in Wholesale Bank, EUR 27 in the corporate line, and EUR 3 in Belgium. Again, please remind that overall it's just a different categorization. In that sense, it's not a profit or a loss.
Sure. Just coming back to the NIM for a minute. You've had flat net interest margin for a couple of years broadly. All the factors that you've mentioned, the balance sheet optimization, the mix shift away from mortgages, have been present there and necessary to keep it flat. I'm just wondering, if we look beyond the next quarter or 2 to the next year or 2, when you don't have that additional lever of falling savings deposit rates, can you still maintain that high 140s, low 150s margin outlook? Or should we be more thinking mid to high 140s and waving goodbye to the great low 150s result we've seen this year when you still had that scope to cut savings deposit rates?
I can see that you spent considerable time on analyzing this like we do. In essence, what you see is that overall for the next half year, the high EUR 140s, low EUR 150s we can guide. Also remind that we have kept our NIM flat despite the fact that in some of the countries, say Belgium, we already have encountered that we hit a bottom in terms of what we can do with savings rate. That means it's not a matter of everything completely starts to change as of a certain date. This is already the case there. You're right that in both Netherlands as well as Germany, you start to, at a certain moment, hit a bottom in terms of how low can you go lower with your rates. We still have the other levers.
We can still be smarter about the mix, we can still grow, and we can still make sure that we reduce our investment portfolio some further. There is room to do that. That gives us some comfort over the next half year how this goes. If you talk about 2 years out, please also note there that if you look at the forward curve, you see interest rates at a certain moment increasing as well. If then your reinvestment starts to be somewhat higher and you don't change your savings rate, then you might get an uptick. All in all, I would say for next half year guidance, it's still around similar. The high EUR 140s, low EUR 150s, and that is where we see it.
Again, we're also looking forward to Mr. Draghi at a certain moment taking some actions, we haven't seen that yet. A forward curve points to some alleviation there at a certain moment after 1 year.
Thanks very much.
Our following question is from Miss Sofie Peterzens of J.P. Morgan. Go ahead, your line is open.
Hi, here is Sofie Peterzens from J.P. Morgan. I want to talk about your loan growth in the Retail Other, and your loan growth in Challenger and Growth Markets. It was EUR 2 billion this quarter. Could you just give a little bit more details in which countries that you're seeing the highest loan growth? My second question is on TRIM. Do you have any update on TRIM? What have your discussions with the ECB been so far, and when do you think you can give further details on TRIM? Thank you.
Steven will answer the question on TRIM, I'll come back on the loan growth thereafter.
Yes. Thank you, Sofie. Until now, we've told that before, in September, the on-site from TRIM started. The initial focus is on the mortgage books in the Netherlands and Belgium, then on the SME book in the Netherlands, on all the trading models. In 2018, the focus will be on the low default portfolios, which are the wholesale banking books. Until now, the initial focus has been on mortgages. I think the on-site in the Netherlands is largely done, in Belgium is still ongoing. As of early 2018, the SME portfolio in the Netherlands will be reviewed. Those are the next steps. We've answered many questions. We've had lots of discussions.
Official feedback from the ECB, re: an outcome, if that is what you are asking me, that will only come somewhere early 2018, at least on the initial part of the TRIM exercise.
Sofie, to come back on your loan growth, which countries contribute. First of all, they all contribute. Specifically for the quarter, we've seen a better performance in Poland, in Australia and Spain, and Romania. We see growth across the different segments, across different asset categories. It is mortgages, and specifically in countries like Romania and in Poland, it is also SMEs and mid corporates.
Thank you. That's very clear.
Our following question is from Mr. Brajesh Kumar of Société Générale. Go ahead please, your line is open.
Thank you, good morning, all. Brajesh Kumar from Societe Generale Cross Asset Research. Can you please talk about your 2018 issuance plan? You have a little over EUR 8 billion opco senior maturing in 2018. Is it fair to assume you would like to replace those with holdco senior? What about holdco sub-debt? Any plans out there? Thank you.
Thanks for that question. If you look at issuance, broadly speaking, what we are doing, as we don't need any money, is making sure that when senior debt matures, we replace it with opco senior, then we can fulfill our TLAC/MREL requirements. That is broadly speaking, how 2018 would look like. More specific plans on that side, we don't want to give. If you look at the Tier 2 part, there what you've seen is we are well and comfortable within our Tier 2 jacket at this moment. Next year, you will have some grandfathering, and to be honest, so we already anticipated that. That is, roughly speaking, how our plan looks like. Lower on that part, a bit higher on the senior, but that is a recycling strategy.
Okay. I guess you are done with your 2017 plans, or is there some room out there?
We don't comment on exact issuance now, we are always looking at markets.
All right. Very clear. Thank you.
Our final question is from Mr. Marcell Houben of Credit Suisse. Go ahead, your line is open.
Good morning. Thank you for taking my questions. I have two left. The first one is on the hedging strategy. There was a change, the EUR 91 million in the NII. Can you just explain to me a little carefully what exactly means the end relationship? What were you hedged against? Does that not increase your risk profile to the entire bank or volatility? Just trying to explain what happened there. What was the reason for the ending of the relationship? The second one is on Belgium. Obviously, we've seen in Netherlands quite a good performance on costs. I was just wondering, when can we expect something similar for the Belgium market? Thank you.
Yeah, maybe. On the hedge relationship. First and foremost, it doesn't increase the real economic risk of a company if you relabel it from an accounting perspective. A hedge is still there. It's only in another category. What we do, again, what I said is from time to time, you want to re-look at your hedges, and you say, "Hey, can I do with a bit less, and can I use hedge accounting a bit less?" There, what you can do is, say, particularly short-dated hedges, which have low basis point values anyway, you move them a bit out of your hedge relationship. That's exactly what we've done.
Please note it's more an accounting reclassification, what you do then to say that you lift the hedge or eliminate it.
Excellent. Thank you.
Marcell, on your last question, specifically on Belgium. We had a long negotiation with the unions. We changed some of the plans in the way they work out, softening or reducing the impact on our employees. From a business case perspective, it doesn't really change. We are currently going through, or we just finished the process, the wave 1 in the redeployment process, which means that people working in specific areas have to reapply for their jobs. There's less jobs, we realize that, but they reapply. The first wave we have completed from that perspective. There is 2,000 roles impacted in that first wave, and people on the other side are picking up the packages, the redundancy packages that we are offering. Wave 2 of the redeployment is ongoing as we speak. It has to do more with the branches and the client services.
There will be 2,500 roles impacted in that, and that is ongoing as we speak. In terms of when you can actually see it in the cost numbers, maybe Q4, but certainly Q1, Q2 next year, you should see some of the effect going through the cost line.
Excellent. Many thanks, Ralph.
I think those were all the questions. I'd like to thank you first for calling in again and going with us through the quarter. As always, your questions, your preparations, the way you follow us truly help us to steer this company as effectively and efficiently as possible. Again, my gratitude also to you that you keep calling in, that you keep asking the questions and keep us sharp in the execution of what is seen as a successful strategy. We retain strong commercial momentum in both retail and wholesale. As reflected in the growth of our customer numbers, core lending numbers. The risk costs are low. It reflects the current benign operating conditions that we see. We're happy with the quarter. We're working on a successful strategy, growing our customers and growing our customer experience. Thanks for now.
For further and more detailed questions, you know that our team for investor relations is always happy to take your calls. Thanks a lot. Bye.
Ladies and gentlemen, this concludes this conference call. On behalf of ING, thank you for attending. You may disconnect your line now.