Good morning. This is Saskia welcoming you to ING's fourth quarter 2016 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.
It doesn't work either. I hope everybody hears me. We have some technical problems here, let's start nevertheless. Meanwhile, they're trying to get some more mics here around the table. Welcome to ING's fourth quarter 2016 results. This is the conference call. Thank you for joining us today. I'll talk you through today's presentation. Patrick Flynn is here, our CFO. Wilfred Nagel, our CRO, is here from the Executive Board in order to help me answer some questions as well that you may have later. Let's go through the presentation, slide two. ING Bank posted a record underlying net profit of nearly EUR 5 billion, which is an 18% increase on 2015. We have maintained very good momentum in primary customer growth, which continues to lead to a strong financial result, aided by continued decline in loan loss provisioning.
As announced during our recent Capital Markets Day, we have booked a EUR 1.1 billion restructuring charge in Q4 for the acceleration of Think Forward, that's taken below the line as a special item. Our Group CT1 capital position ended the year at a robust 14.2%. Even with our strengthened capital base, we delivered a return on equity above 10% at the group. We're proposing a full year cash dividend of EUR 0.66 in line with our progressive dividend policy. Those are the key points. Let's go into some of the details. Slide three. As you can see on this slide, we continue to attract many new clients. In 2016, we added another 1.4 million customers, a growing proportion of these customers are considered a primary client. We aim to continue this trend, as we are now targeting 14 million primary customers by 2020.
This year alone, we have extended an additional EUR 35 billion of loans and received EUR 28 billion of customer deposits, both increasing by roughly 6% year-over-year. As you know, our compass, the net promoter score, remains one of our most important KPIs in the business and a forward-looking KPI as to the continuance of our commercial growth. In the fourth quarter, we were once again ranked number one in seven out of the 13 retail markets in which we are active. All of these commercial results lead to a good and strong financial result, which you will see on slide four. The underlying net result for the bank was nearly EUR 5 billion, which represents a 16% compound annual increase since 2013, despite the headwinds we are facing from the low rate environment.
Even though the fully loaded bank CT1 ratio has increased by four percentage points this year, we further increased the bank's return on equity to 11.6%. The underlying income, excluding CVA/DVA, improved by 7.4% in 2016, on slide five now, with an increase visible in all income line items. With net core lending growth of nearly EUR 35 billion during the year, we've been able to grow net interest income by 5.2% compared to 2015. However, it's not just the NII that drives results. We also saw substantial progress in the fee and commission income line, particularly in our challenges and growth markets. On the expense side, as you can see, we've managed to keep the underlying expenses stable this year.
Existing cost savings programs have funded the growth initiatives that we have in both the challenges and growth markets, as well as in industry lending activities within the Wholesale Bank. In combination with a stronger income line, this has led to a 1.7 percentage point reduction of the cost-income ratio to 54.2%. Edging closer to our 50-52 target range for 2020. In addition to that, we had low risk costs supporting the underlying results. Risk costs came in at 31 basis points for 2016, and that's well below our through-the-cycle average of 40-45 basis points. Good development on all accounts there. Turning to capital. The Group CT1 ended up at 14.2%, which is up 70 basis points quarter-over-quarter, and up 150 basis points compared to the end of last year.
That's comfortably above the current 11.75% fully loaded requirement by 2019, excluding Pillar 2 guidance. For 2016, we propose a full-year cash dividend of EUR 0.66 per share. This means that we will have a EUR 0.42 final dividend, since we already paid a EUR 0.24 interim dividend in August 2016. The full-year dividend is payable in May 2017, after the AGM. After accounting for this dividend payment, there is a total of EUR 2.1 billion of interim profits flowing back to the Group capital, and that explains much of the quarter-over-quarter increase in the CT1 of the Group. In summary, if we compare all of this against the financial targets of 2020, the Group CT1 ratio of 14.2% and the leverage ratio of 4.8% are well ahead of regulatory requirements.
We made good progress on our cost efficiency this year, we're certainly confident that we can reach the 50%-52% target range by 2020. We've been saying over the past few months that given the regulatory uncertainty, that we think it's prudent to wait for further clarity before we announce a Group return on equity target. Given the fact that there is not more clarity yet on Basel, we will not be able to give more clarity around the Group return on equity targets for the moment. Nonetheless, we achieved a strong underlying Group return on equity of 10.1%, and we continue our progressive dividend policy. This actually sums up the full-year results. We have healthy growth, we have an improvement in capital, we have a healthy return on equity, and we have an attractive dividend. That's basically the summary.
Let's dive deeper now into how we're progressing for the future. I'm turning to the transformation programs now. Slide nine. You will recognize this picture. At the recent investor day, this is where we used this picture. We announced four different digital transformation programs. We've started to see the tangible successes of these programs, with the project team now being established for the model bank in Spain. Germany has introduced a multibank feature in its daily banking app, which is a very important step. You open up for third parties. It's part of our philosophy. We believe in that, creating open platforms. We remain confident about the execution of these transformation programs for sure, including the EUR 900 million of annual savings they will deliver by 2021. As we had indicated four months ago, we took a EUR 1.1 billion pre-tax restructuring charge in the fourth quarter.
That's booked as a special item below the line. You also know that innovation is very important for our future, which is the next page. Innovation, the way we can summarize it, is really about the three Cs. The C of customer experience, because that's what the real focus is about. That's what's causing the success, that's what's causing the growth of 1.4 million customers also last year. It's the culture that you need to be innovative, and it's the connection that you need with different ecosystems that you need in order to be innovative. That's what you see. In this spirit, we have developed innovations over the last year, such as Payconiq in Belgium, which is more or less becoming the standard now in Belgium. Instant lending in Romania.
Many of the examples that you see here you will recognize, because we have talked to you about these in the past. Now, as said, we can only innovate if we have the right culture. We build on our ING Direct heritage here. We have our own innovation program, PACE, as we call it, and we have an annual innovation boot camp. All of those in order to stimulate our employees to constantly think about creating a better product and a better service for our customers. Then the connection part, as I said, it's all about our own ecosystems. How do you make sure that you get the right people in to talk to each other? How do they open up? How do they connect? How do they basically motivate each other? These connections are not limited to what you do inside.
You have to open up in order to get also the good ideas from the outside. We don't have a monopoly on good ideas, therefore, we have partnerships with more than 70 fintechs now, aimed at improving the customer experience. The way we work with fintechs tends to be a little bit different from many of the other of our colleague banks. It is that we're not investing in them because of the upside in the fintech itself. We're investing in them because we believe they can truly improve what we're trying to do towards our clients. That's a different philosophy. Turning to sustainability. I'd like to remind you how important that is to ING, I think the annual results is a good moment to give you an update.
Fourth quarter, we've seen further growth of our financing of sustainable projects, as well as the social and environmental out-performers. That portfolio of Sustainable Transitions Finance, as we call it, the STF, has increased to EUR 34 billion now. In November, we launched the Sustainable Finance Collective, Asia, that's the first of its kind. It's a funding initiative in the region where we basically group different parties together, look at different business models, see how we, together, can support the development of new circular models, climate neutral models, help each other. At the same time, in our real estate finance Netherlands activity, we decided that we will only offer new financing to green office buildings going forward. As you've probably already read and seen in the different newspapers, we also get strong external recognition for our sustainability policies.
Leading sustainability and responsible investment magazine, Corporate Knights, ranked us as the fifth most sustainable company in the world even. We're pretty proud of that. Actually, we're also proud, specifically for all of our colleagues, we're very proud to have been recognized as the Global Bank of the Year 2016 by The Banker magazine. Let's look into more detail now, if it comes to the segments for 2016 as a whole. Turning to slide 13 for reference. This is a reminder of what we said during our investor day. At top left, you see the recipe that we repeated there. This is a recipe that has been around since we launched Think Forward three years ago, in which we expect the market leaders not to grow income, but to really become more and more efficient.
Challenges in growth markets to grow fast, grow income, then they will be allowed to grow on their cost side. For the Wholesale Bank, we do expect income growth. However, we do expect the Wholesale Bank to more or less manage on a flat cost base across the business. Now, on the right-hand side, you see the results. We continue to see rapid income growth in our challenges in growth markets, as we are becoming the primary bank for more and more customers. We grow fee income on the back of that. That's what you will see later today as well. We're improving the cross-buy. On the Wholesale Bank, we are continuing to grow our portfolio, particularly in industry lending, while we hold the costs flat, that through the implementation of our efficiency programs.
In the Benelux, you see that the top-line growth remains challenging, as the persistently lower rate environment is causing margin pressure. Therefore, in order to drive the result of the future, we have to ensure that we become more digital, have better client services, and with that, also become more efficient. Let's take a closer look at the challenge here in the Benelux. We see here over the years, a lack of that revenue growth. In the Netherlands, this is largely caused by lower volumes. In Belgium, although we see reasonable lending growth, there's a pressure on savings and current accounts, as we are at the legal floor in terms of our savings rates already. You see that in this picture. You see the difference here between the Netherlands and Belgium coming through on the margin pressure.
The volume increases in Belgium help us to offset some of the pressure in Holland. We are keeping the margin, being able to manage the margin, but we see a decrease in volume. Therefore, the focus across Benelux is mainly on cost efficiency. How do we adapt our model to a new, more digital way that our customers can do their banking? The program that we announced is intended to further align the Dutch and the Belgian platforms in order to deliver a much better customer experience in a much more efficient way. Unfortunately, this also involves the headcount reductions as announced, further rationalization of the Belgian branch network. At this moment, we continue to work constructively on these proposals with the relevant stakeholders. There's a good debate there, a constructive debate with the different stakeholders for these transformation programs.
Turning to the retail side of challenges and growth now. You see the strong business performance on slide 15. It's evident in all of these numbers. The NII for the segment has grown annually by 9% since 2013, versus the strong 8% growth for the fee income. We still expect the fee income will grow faster than NII in the coming years, as we offer more and more products through the increasingly mobile and digital platforms. At the same time, while we have selectively invested in business growth in countries like Germany, and had to absorb higher regulatory costs, we have managed to improve the cost-income ratio. It's a real good story. At the same time, our growth is with a proven risk approach, as you can see in the development of the risk cost.
Lending growth is not coming in by moving away from our risk acceptance criteria, we keep the same risk acceptance criteria, but we get the clients in on the back of the superior experience. That's how it works. If you look at ING in total. This is the picture Including Wholesale Banking, you can clearly result. We continue to invest in our digital investment advisory capabilities. For example, through the form of robo-advice building. Turning to Wholesale Banking, we benefited from a well-diversified business portfolio so that we can tap into profitable growth in different countries and industries. Underlying income growth is consistently higher than the operating expense growth, and that is resulting the positive jaws that we see in the Wholesale Bank. That therefore leads to a further improvement of the cost-income ratio to 45.3% in 2016.
That's well below the 50-52 target range for the group as a whole. As the macroeconomic environment continues to improve, we have seen a further reduction in risk cost, also in the Wholesale Banking side, with provisions being low at EUR 368 here as well. Third quarter. That's supporting the 6.5% increase year-on-year. Geographically, the lending growth comes from all regions, with the exception of the Netherlands, where we see a modest decline in volumes. This quarter, we saw the strongest contribution from industry lending and working capital solutions within the Wholesale Bank, as well as from the mortgage book and retail challenges in growth markets. I have to mention that the industry lending growth was flattered a little by higher order anyway. Improved steadily here. The NPL ratio for the bank as a whole came down slightly first quarter. It's now at 2.1%.
In absolute terms, risk costs were a modest EUR 138 million for the quarter. Only 18 basis points over our average risk-weighted assets. We take a closer look. In the fourth quarter, we benefited from a provision release on the German mortgage portfolio, and also some releases in the Wholesale Banking book in Ukraine and Spain. Retail, again, recorded lower risk costs as well as business lending is now starting to turn a quarter, and the strong housing market conditions lowered the NPL ratios of the mortgage book. To wrap it all up, I think we can all be proud of this underlying result for the bank, which is the evidence that we're on the right track and that the Think Forward strategy is effective.
That the decision to accelerate the Think Forward strategy, focusing on customer experiencing, and experience and through that, getting the growth in, that is the best recipe also to weather some of the headwinds that we're seeing. Same time, these headwinds will not go, we'll have to keep a close eye on it, whether it is on the low rates, whether it is on regulatory cost, whether it is on client change behavior. We do think that investing in digital capabilities, making sure that we create one scalable banking platform, that is the best way for the customers to stay a step ahead, but also for the banks to stay a step ahead. With that, I open the call to questions.
Thank you, sir. To ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question today. We take our first question today from Tarik El Mejjad from Bank of America. Please go ahead.
Hi, good morning, everyone. Just a couple of questions, please. On the dividend policy. Your proposed dividend of EUR 0.66 came slightly short from the EUR 0.67 consensus number. In slide seven, you said that this is reflecting regulatory certainty and growth opportunities. For regulatory certainty, we know Basel IV, we're waiting for that. Do you have any comments on that because it's getting a bit confusing, a few messages out there. What do you think will be the expected outcome? My main point is on the growth opportunities. Are you shifting here towards potentially higher volume growth than the 3%-4% that you've been guiding before, if you see an opportunity there? You're really straining to that, but just expecting RWA, basically less positive migration and RWA to start to grow perhaps faster than the 2016 level.
Actually, I will limit it to this question. Thank you.
Okay, I'll give an answer on the second part of your question, and I'll refer to Patrick for the first part. On the growth that we pursue. From the beginning, when we launched the strategy, we indicated we thought we could grow 3%-4%. For growth, you do need capital. We have a very good capital position, also from the beginning, we've said, well, we need capital and the capital generation of the bank from three sources. The first one is in order to make sure that we improve our capital buffers. The second one is in order to make sure that we can continue to grow. The third one is to make sure that we can pay a dividend over time. When we came out with the policy, we said it was going to be progressive dividend over time.
That means that if you see, for example, growth opportunities that fit your risk profile, you can pursue that. In some quarters, we grow a little bit faster than in other quarters, you need capital for that. What we will not pursue is growth opportunities that don't fit our risk profile. Do we expect to stay at this level of growth in our lending book? I don't know. It really depends on the opportunities and whether they fit our growth profile, our risk profile. That is the important. That's one component, growth and the capital that you need for that. You have the component of dividends and the capital that you need for that. Your last part is the capital that you need for improving your buffers. There's some uncertainty remaining there, and I'll give the word to Patrick for that.
Morning, Tariq. Yeah, in Basel IV, we're watching it as you are. We don't have that much more insight than anybody else. I think what you see is that the most recent or perhaps close to final proposals from the Basel Committee still would result in increases in capital requirements for most European banks above the threshold of 10%, above the no significant increase threshold. Hence, there was no agreement in early January. There are several authoritative voices across a number of countries who are saying that they will not accept increases in excess of that minimum threshold. It remains to be seen whether under the pressure, and I'm sure it's a very big pressure to reach an overall consensus agreement, that that line is held. We just don't know yet. We're waiting to see the outcome as you are.
Okay. Thank you very much.
Thank you. We now move on to our next question from Daniel Du Toit from J.P. Morgan. Please go ahead.
Hi. I've just got two questions. The first one is on net interest margin, second one on provisions. On the first one, the underlying NIM of 152 basis points this year, I guess that's developed something better than you had thought just a few months back at the Capital Markets Day, when I believe you guided for stable NIM, which at the time implied about 150 or so. Given these developments and also given the rise in bond yields that we've seen at the end of last year, is 150 basis points still the right level, or do you think you can deliver sort of in line with the second half of this year? Then secondly, on provisions, last quarter you guided for the full year to be down in 15.
You've now gotten to the sort of EUR 1 billion for the full year, 30 basis points of risk-weighted assets. Just wondering what your thoughts are going into next year and whether that kind of level at around EUR 1 billion is sustainable. Thank you.
Okay, in terms of NIM, I think the interest margin has sort of come out very much in line with how we thought it might and how we sort of tried to guide at the investor day. Nothing really changed there. If you exclude financial markets, which can be variable quarter-on-quarter, we said we think we can keep it in and around the 150 mark, maybe a little bit above 150, maybe a little bit below high 140s, low 150s, I think is what we said. That's what's happened. Again, we said that should pertain for most of 2017 because the actions have been taking, including the asset mix growing at healthy margins, which again, we continue to do in the fourth quarter. Also, there's still some scope to manage deposit rates in line with the low rate environment.
The combination of all those three things gives us the ability to manage NIM, hopefully at a stable level in and around the 150 mark. The best part of this year, that's what we said in October, it still remains the case, and I think Q4 is entirely consistent with what we guided on 3 October.
Yeah. On the provisions, traditionally at the beginning of the year, we do give some indication of what our thinking is. If we look at the environment today, the range of possible outcomes is probably widening somewhat because of all the uncertainties out there. We're sharing the thoughts because that is really what we do here. I'd also like to make clear that internally, we do not budget risk cost as such. Risk cost, in the end, is the product of economic events and our ability to mitigate the impact on ING. That mitigation comes from two things. One is the quality of the origination that we do, and second is our ability to deal with difficult situations and do work outs, et cetera.
If we were to budget for these numbers, then it would become a matter of managing to a number. That's exactly where we don't want to go. We do our best under the circumstances. We don't want to be influenced by some budget concept of risk cost. Having said all that, if we look at the trends, Ralph already in his presentation alluded to that, we still see in a large part of the book, potential for support of that migration. That will help us going into 2017. At the same time, that piece is simply don't have a big backlog of large restructuring spending anymore. If you look forward, we had a very significant cash recovery in Ukraine as an example. There will be some more, not to the extent that we saw it in 2016.
There are also some portfolios that we've discussed on these calls for a few quarters now that may create some additional risk costs. I just mentioned here shipping, the drilling side of our oil and gas book. Turkey is an uncertainty. On balance, based on the current trends, I think our current idea around risk cost for 2017 is somewhere around 16, potentially a little bit higher than that, also reflecting the growth that Ralph was talking about.
Okay. That's clear. Just on net interest income, on margins, does the rise in long-term rates not at all affect the way that you think about net interest margin beyond 2017? I know there's a lot of hedging.
Beyond 2017, we'll need to get there to understand what it would look like when we're there, first. Secondly, we do have seen an increase in the long end of the curve, albeit very modest, 50 odd basis points. Directionally, that's good. We would prefer a positive yield curve, significantly higher than it is today. That is directionally beneficial. We do not take outright interest rate risk in our business. Our loans and deposits are match funded into our treasury. Hence, that enables us in a falling interest rate scenario, which we've seen for several years, to manage our margins in a stable manner, hence the earlier question. We have been doing that.
Equally, on the upside, the positive impact of rising rates will take quite some time to manifest. They would need, I think, to be significantly higher than they currently are to be something meaningful.
Okay. Significantly higher than the 50 basis points or so that we've seen so far before we should expect any kind of change to your NIM guidance?
Yeah, sustained for a long time.
Okay.
Our deposits are tranched. They roll over every quarter. We spread these out over time, so the Treasury buys them in each quarter, replicates them as they're bought in, and each quarter loans are originated and bought in and the margin fixed over time. It's only when they come to renewal that the higher rate might be seen particularly on deposits. This would need to be a sustained increase in rates over a prolonged period for it to start to become manifest in the overall stocks.
Okay. The 50 odd basis points rate rise so far, if it is maintained, should not materially change your view on the interest margin?
No.
Okay. That is clear. Thank you.
Correct.
That is clear. Thank you.
Thank you. We now move on to our next question from Bruce Hamilton of Morgan Stanley. Please go ahead.
Yes, morning, guys. Thanks for the update so far. Just going back to the dividend question and the capital build. Clearly, the regulatory input is one of the key ones. There is still quite a lot of fog out there, but are you expecting that we will get clarity by, say, the end of March, or does that feel quite an aggressive timescale? Secondly, on a separate point, in terms of your robo-advice offering, is that in partnership with a fintech company, or is that your own product? Can you talk a little bit more about it? Is it sort of an algorithmic driven model, which depending on inputs people give on risk, will throw out what investments they should make, or how does that sort of offering work? Obviously, gross sale is kind of interesting.
The first one, well, we were, as you know, promised that there would be a definitive answer on this at the end of 2016. January came, we didn't get it. ING's a British bank, there wasn't an answer. We would hope that we will get clarity in March, nothing's any guarantee. We would like it, obviously. The sooner the better, again, it's something we cannot control. I just don't know when they're going to reach a conclusion.
Okay, on robo-advice. Actually, Bruce, it's both. We've launched different concepts to do investment management. For example, we launched in a couple of countries what we call My Money Coach, and that allows people to make a short-term and longer-term financial picture of their own situation, and generates advice as to how to invest across different categories on one side. The investment itself that's behind it is sometimes algorithmic driven, sometimes it's just a fund. We also give recommendations on what peers would have done in their situation. You can get some kind of an Amazon approach, like other people in your situation, with your financial situation, with your future plans, have selected this and this and this for this and this reason. That's one way we do it in our own in-house product called My Money Coach.
On the other side, robo-advice through algorithms. We are working with different fintechs there, just to get a sense for how some of these really work. Some are more successful than others, as you know. We're working very closely with one particular fintech on this one as well in Germany. That's really fully algorithmic driven. We're looking at this, taking a very overview as to all the investments and all the angles that you have to take. Also, by the way, from a duty of care perspective, which is something that you really have to keep in mind when it comes to investment advice on investments.
Thank you. That's helpful. Thank you.
Thank you. We move on to our next question from Benoit Petrarque of Kepler Cheuvreux. Please go ahead.
Good morning. Thanks for taking my questions. The first one will be on the dividend per share. One cent increase this year, clearly constrained by the Basel IV uncertainty. How do we have to think about DPS growth going forwards? I'm asking because consensus expects EUR 0.17 next year, in 2017. It's a EUR 0.04 increase versus just one cent increase we have seen now. Is there a kind of relationship ultimately with earnings growth, or do you see kind of one cent increase per year, kind of the normal run rate going forward? Could you just guide us a bit on DPS going forward? The second question will be on commercial margins. Clearly, the risk cost outlook has been improving substantially recently. Do you expect any type of margin pressure, or do you expect commercial margins in different segments to remain at current levels? Thank you.
Thank you very much. On the EPS growth, the policy that we released stands, which is saying that at the time when we launched this policy, we also indicated that we expected lower than the EPS growth. That's the relationship there. It's going to be slower. Whether it's going to be one cent now and it's going to be, again, one cent next year, really depends on the position at that moment in time. How do we look at surplus capital? Opportunities, because you don't want to run into a stop-and-go scenario for your own growth, either. You always have to make sure that your profits are level for growth going forward is to have some dividends to be paid and the progression. Now, if we would ever come in a situation of true surplus capital, you would rather think of one-time distribution of shares.
That's one time, then including this in some kind of a different trajectory at that point. On your commercial margins. We don't see the margin pressure coming in at this moment in time specifically in Wholesale Bank. Honestly, we've seen that in all of the different kind of activities. There's only a couple of banks that played it, that standard business. The parties that you deal with are very professional. They know they have to take the risk. That's where you generally see that margins are holding up. Even in the other commercial banking products at this moment in time, the margins are holding up. Across the board for mortgages, we see some pressure now coming through in Belgium on the mortgage business. In Belgium, we also see most of the pressure coming through on the savings side.
In Belgium, there's a particular amount of pressure on both sides of the balance sheet in terms of margin pressure. Margins on the savings side, generally in our activities, can still be managed, but we still have some room to go before we hit a commercial or legal floor in the countries in which we're active. Again, besides Belgium, where we've already reached the legal floor. That's a little bit the on margins.
Great. Thank you very much.
Thank you. Benjamin Goy from Deutsche Bank has our next question. Please go ahead.
Good morning, Benjamin Goy from Deutsche Bank. Two questions, please. First on loan growth, maybe to specify a bit how you think in the near term, so let's say 2017, about your through the cycle loan growth guidance, considering you actually have a good momentum, can say it's slightly improving even in European loan growth. Would be interested in your thoughts here. Secondly, on the costs. Regulatory costs were lower again in 2016. Is that a one-off, or could that help you also in the next years, say 2017 or maybe even longer than that?
Thank you, Benjamin. On loan growth, basically, what we have said, the 3%-4% is still where we kind of guide. This year was particularly interesting for loan growth because of the sectors in which we're active and the countries in which we're active. Clearly, in the back of commercial growth, the number of clients, we will continue to see loan growth. On the back of the investments that we do in the Wholesale Bank, we will continue to see some loan growth. There's two parts to this that you have to take into account. The first one is that we don't want to loosen our risk acceptance criteria in order to get more growth in. The second one is the loan growth has to make the returns on ever-increasing capital requirements. Those are two filters that we continue to use consistently.
By the way, you have seen that. You see that actually, we have been improving our return on equity. Higher buffers. We do see an improved return on equity, but it's discipline that we apply in pursuing loan growth that should protect us from future problems, and therefore, we're not going to go overboard if we see the opportunity. We will stick with return equity requirements and the acceptance criteria there. Now, again, the 3%-4% is not a target, it's a guidance. Some quarters it will be higher, some quarters it will be lower, but that's what we see. On regulatory costs, our regulatory costs have increased, but they're lower than what we had expected at the end of the year. They have increased by just over EUR 200 million to EUR 845 million for the year.
Short of the expectations, that is true, and that is because when we know and understand schemes, whether they are deposit guarantee systems or whether they're bank tax systems, the moment we understand better, we also know how to manage them better a little bit. Regards. As said, in some cases, we have been able to change a funded requirement into an unfunded given application. Where we can do so, we will continue to do so.
Okay. Thank you.
Thank you. We move on to our next question from Kiri Vijayarajah from Barclays. Please go ahead.
Yes. Good morning, gentlemen. Just a couple of questions on Belgium. You show on slide 14 the margin, the net interest margin in Belgium, underperforming, particularly the Netherlands. Really just what's your outlook there? Have we seen the worst of the Belgian margin pressure there? I wonder if you could comment on customer satisfaction or customer retention data that, how's Belgium, the customer base in Belgium, been fairing after the announcements you made at the investor day? Any comments you can make on how the franchise is fairing would be helpful. Thanks.
The underperforming then comparison between the Netherlands and Belgium, yeah, they're two different countries. If you look at the Belgium situation, we're not sure we've seen the worst of the margin pressure in Belgium. All banks have raised more or less the legal floor on the liability side. There's not a lot of room to manage your margin on the savings side. There's quite some competition in the market on the lending side, and with pressure on the margins there. Yeah, we're not sure whether we have seen the worst, honestly. Assuming we haven't, that's why we feel that we have to improve our efficiency. That goes directly to your second question, is, the announcements themselves don't change the customer satisfaction. If you look at the earlier reactions in the media, they were not pretty. We had expected that.
If you look at the underlying development, whether it is in the growth in number of customers, if you look at the lending book and the savings book, it's just growing as expected also since October 1st. In terms of the conversion performance, we don't see any effect there. Obviously it shouldn't because, although a sad message for many of our colleagues, what the consequences of the nature of the country, we are very committed to our clients in Belgium. That's why we're in Belgium, in order to make sure that we can continue to be committed. Basically, clients see that, and they stay with us.
Okay. Very clear. Thank you.
Thank you. We now move on to a question from Anke Reingen from RBC. Please go ahead.
Yeah, good morning. Just two follow-up questions. Firstly, on the provisions, I just wondered if you could be a bit more specific. Obviously, it's a very wide range of Q4, 18 basis points, be it 51, or should we mainly be looking more at the nine-month level for 2017 at 35 basis points, any more like, where you think you're relative to on these different ranges? Then just on your savings rates, I just wondered, obviously, that you continue to cut, in some countries in January, but is it like you think you've almost reached the floor or the potential for further cuts has come to an end, especially due to the change in interest rate environment? Thank you very much.
On the provisions, Anke, the crystal ball that you're looking for, we'd all love to have, but we don't. I think Q4 you should look at as extraordinarily low for a number of reasons. The better base to think about the projection is, as I said before, 2016 total, keeping in mind that there is quite a bit of uncertainty, both in the world political and economic environment. Also, of course, keeping in mind, as always, that provisioning is a lumpy business, particularly in wholesale. There can always be incidents, so it's quite difficult to repeat that. The underlying trend in the portfolio, we still believe, is generally one of positive liberation.
Couple of portfolios, oil and gas, particularly shipping, Turkey, potentially offshore services are books that we would see a bit more pressure in balance, don't think it would be a million miles away from what we saw in 2016. It could certainly be a bit different. Again, we also need to keep in mind when we look at the absolute number, that the loan book is growing and that will also impact the absolute number, even if the basis points stay the same. Loan return guidance remains at the 40%-45% range.
Thank you.
In terms of deposit rates, those modest cuts in smaller entities in Q4, for instance, Australia. The Netherlands in Q1, there's a small reduction of 5 basis points. Spain also. I think the point is that other than in Belgium, where we are at a floor, in other major markets, we still have the capacity to manage rates down if that's justified. That links into what I said earlier about being able to maintain a stable margin throughout 2017. There is room on the deposit side to act if, as I say, it's justified. No, we haven't hit a floor other than in Belgium.
Okay. Thank you.
Thank you. We now take our next question from Jean-Pierre Lambert of KBW. Please go ahead.
Yes, good morning to you. Two questions. The first one, thank you very much for the slide 30 with the breakdown by country. I have a question about France. As you know, Orange Bank is going to introduce banking services. They have 28 million mobile phone customers. They're targeting two million customers. You currently have one million. How do you see the impact of a new entrant from a mobile perspective on your business? Is that the read-across you have from other geographies where you face such a competition? Second question is about innovation. Something you've announced on 31st of January is blockchain experimentation, which you run in six business areas in wholesale. Currently you have a cost-to-income ratio, which is fairly low, 45. I know these are pilot experimentation, but what kind of impact could it have on the cost-to-income ratio in wholesale? Thank you.
Thank you, Jean-Pierre. Well, yeah, the Orange Bank that will start operating. There is more mobile operators around the world are initiating banks and banking activities, and we see that as well. It's good to have competition, that's what we can say about it. How will it impact our business specifically? I still think that we have more to gain than to lose, if you look at our market position in France. We're a challenger there. What we can do, which not a lot of parties can do, is that going forward with our model bank, we will have a broader centralized platform, as a consequence of which our cost-to-income ratio will be even lower to operate in our digital and mobile banking than we currently do already.
As you may remember from the strategy presentation, we think that we can further shift the efficiency curve lower from already what we do in the direct franchises, which is already lower in comparison to the branch banks in the markets in which we're active. We will push that cost-income ratio even lower with our model bank approach. Therefore, we'll be even more competitive. Yeah, if there is one or two more additional competitors, I think it will only help us in markets in which we are a challenger. It's good to see what's happening there. On the blockchain specifically, these are all pilots.
Some of the biggest impacts that we can envisage for blockchain is to make the service that we give to our clients faster, for sure, through blockchain, because then a lot of the paperwork that, for example, in a trade process is still needed, will become digital. Apart from it becoming faster, it will also be safer, because through a digital way, we think we can manage the fraud % down further. It can be cheaper, because if you digitize the manual processes that are still behind some of these activities in the Wholesale Bank, not only in ING, but as a market practice globally, that you can use for the all three. Faster, safer, and cheaper. How will that impact the Wholesale Bank cost-income ratio? It will just add to a further efficiency increase.
As we use most of the efficiency increase in the Wholesale Bank to also grow the front office in order to support the growth of the lending book, whether you're going to truly see it back in the cost-income ratio per se, I can't say yet. Let's first weigh the results of these pilots and see whether we can actually come to market standards, because there is absolutely no use to have a blockchain standard in a Wholesale Bank area if it's not open, if it's not open to third parties, if it doesn't become a market standard. Before it will really help your cost-income ratio, do a market standard, and then all banks will benefit from it, really.
Thank you very much.
Thank you. From ABN AMRO, we have Cor Kluis with our next question. Please go ahead.
Good morning, Cor Kluis, ABN AMRO. Got a few questions. First of all, about the Netherlands retail. We saw there the RWAs coming down by EUR 3.2 billion throughout the quarter. You mentioned it's due to risk migration in mortgages and business lending, it's quite a material decline also compared to previous quarters. Could you technically mention what happened especially this quarter? Also the RWA weightings for Dutch mortgages, Belgium mortgages, and the German mortgages. My second question is more related to the regulatory expenses, which were EUR 845 million. You had the release in Germany, of course, of around EUR 15 million. It's a future run rate around EUR 800 million. Should we think about 2017? That were my questions.
Cor, hi. In the Netherlands, you've got to remember we have and runoff, which is try to run off more to do it, and see each quarter. You are seeing house prices improving, so there's some impact as well, a positive inflation. It's small, but part of the overall trend. It's helped. I think the average waiting stayed the same at around 12 in the Netherlands. SME lending continued to decline for us. It's not something we particularly like or want, but we do see a number of portfolios with high NPL still, so trying to get the risk reward trade-off right. The SME is probably driven to by less than neutral.
Yeah, to add to that, Cor, the risk weights on Dutch, Belgian, and German are 12, 18, and 22. The average weight is 16. Following on from Patrick's comment on the business lending book in the Netherlands, the absolute level of NPLs and risk costs is still not quite the trend is positive. That also contributes to the change in risk weight.
Cor, on regulatory cost. While you never know what new incoming governments may pursue. If what we currently know stays, the run rate will not be around EUR 800 million, but will actually increase with the volume increase of our activities, really. Because some of these or most of these are related either to balance sheet size or liability size or the size of the savings portfolio. One way or the other, they are volume driven. That's a good assumption, assuming that the programs that are currently running on the regulatory side will stay as they are.
Okay. Thank you very much.
Thank you. We now move on to a question from Pavel Zwiedzik from Goldman Sachs. Please go ahead.
Good morning, and thank you for the presentation. One question on financial markets, and then one follow-up on regulatory cost. On financial markets, it looks like it was a decent quarter, but over the years, your adjusted and underlying pretax profit has eroded. When you look forward to 2017, are you more hopeful that the unit can see some earnings recovery going forward? On the bank taxes that you just mentioned, you said that politics remain one big uncertainty as to the level they're going to be going forward. Could you perhaps comment on that a little bit more? Do you see risk only to the downside of higher bank taxes as it was the case in the past, or perhaps you hope that the levy can be lowered in the future?
We've now seen a few examples of European countries where authorities managed to strike a deal with banks of lowering bank taxes. It also seems that bank profitability is much higher on macro-political agenda, which would support such move. Thank you.
Yeah, Pavel. On financial markets, we're very happy with the performance of financial markets in the fourth quarter. We're specifically happy with the performance of financial markets, given the fact that over the last couple of years, it has been transformed really towards a business that is very much focused on client activity and supporting our clients. That's what we've seen in the fourth quarter on the rates business, on the FX business, on the equity business. Good performances there. On a return basis and a return on equity basis, we still do see room for improvement in our financial markets franchise, and our team is working on improving such.
What we can see is that with improved client focus, with a further alignment between the different activities that we have in the Wholesale Bank, we actually think we can move the business forward, and improve the profits going over time and returns over time. That's what the transformation of the financial markets business is, and that plan is really aimed at. On bank levies, honestly, I think it's a mixed picture. We've seen Poland actually coming in with higher bank levies. We've seen Belgium coming in last year with higher bank levies. We see markets like Germany and other markets with decreased bank taxes. It's truly a mixed picture. I don't think you can talk of a trend yet.
Are you right in terms of saying that there's sufficient new laws and new safety valves in order to make sure that banks don't need to be bailed out, but they can be bailed in, and therefore they are less and less reliant on
Are being saved by governments. I fully agree with you. Therefore, the real reason to have bank levy specifically in the form of bank taxes, that argument has gone. It doesn't mean that the bank tax itself will go just because the argument for levying them has gone.
Thank you. That's very useful. Can I have just one follow-up on your comments on transformation of financial market units. Should we expect a further risk-weighted asset decline going forward? Could the magnitude be similar of the level of decline of risk-weighted assets that was recorded in 2016 or perhaps at the run rate that we've seen in the fourth quarter? Thank you.
No, not necessarily. When I'm talking about the transformation, clearly it is a further focus on specific products, it's also about centralizing some of the trading activities in one location rather than three, taking out the cost and systems and support functions, a further focus and a further alignment in client focus. It's all of that in order to actually stir up the results, not necessarily to further or decrease the risk-weighted assets. If there's more business to be done, we will do more business at the right return.
That's very helpful. Thank you.
Thank you. We take our next question now from Alicia Chung from Exane. Please go ahead.
Morning, everyone. Just a couple of quick questions from me. First of all, on the subject of rising rates, could you just give a sense of what the impact would be on NII if the ECB were to increase their deposit rates from the current minus 40 basis points to, say, 0. Also on the same vein, more generally, what would you see as the sensitivity of cap to rising rates? If I could just have one more. Some banks have started to talk about the TRIM process. Have you started this process, and can you give any color as to what this will entail for ING and a little bit about timing and process? Thanks a lot.
Okay. On NII, like I said earlier, small reductions or increases in rates are to be welcomed, and it's fine. I would hope that the economies would form better and the level of stimulus needed is lowered. I can only repeat that, certainly for 2017, a small increase is unlikely to be that visible in our results. We take a long-term view in behavioralizing our savings. They are invested over multiple years. That's crunched. Lending is much funded at initiation, so they're directionally positive. We don't see 40 odd basis points. That's your example. Having a number impacted NII that you could pick out now. In terms of capital, we disclose in the press release, disclose every quarter, mark to market of the debt securities and equities.
The mark to market of debt securities at EUR 1 billion odd, EUR 1.2 billion, and that would be impacted by rising rates were it to happen this year. Next year, you have IFRS 9. The accounting may well change. It may virtually disappear. We publish the number. Yeah, within our capital at the moment is EUR 1.2 billion of the mark to market on bonds, which obviously subject would be influenced by rising rates.
Trim. For us, that will start in April, it will start on the retail side of our business and our models. It's obviously very hard to predict what the outcome or implications of TRIM are going to be even prior to the process starting. If you're thinking in terms of operational costs, we tend to do most of these things with in-house people. It's unlikely that you'll see a spike in cost because of this exercise, but it does, of course, mean workloads and shifting of priorities from other things to this. Particularly as operational implications, I don't think you're going to see much in the numbers. Like I said, it's very early to talk about the impact. The only impact I would make on that is the actual net impact of whatever changes we make in the models.
It's also because we have influence what Basel IV actually does, but the floors under the are going to be calibrated. It may well be that the outcome of this exercise is going to be blunted quite a bit by what comes out of Basel IV. Again, we don't know where either is going to land, so it's just speculation to say anything more.
Thank you very much. Just on that last part, do you have a sense of when the TRIM process will be finished as well, or is this sort of just an ongoing thing?
No, we don't exactly. We do know that the initial assumption has been that this was going to be a one-and-a-half to two-year exercise.
Okay. Thank you.
Thank you. We now move on to Nick Davey from Redburn for our next question. Please go ahead.
Yes, good morning, everyone. Two questions, please. The first one on volume growth. Interesting to hear you mention having an ROE hurdle rate when you conduct new business. Could you let us know a bit more about that, what ROE hurdle rate you actually target? Maybe just if you could make a couple of other comments around the same theme. If I look at ECB data about where new loan rates are in most of your core markets, particularly on corporate loans now, between 1.3%-1.5%
It's quite difficult, I think, without starting loan rates, as I think about your funding costs, cost-income ratio, and your through-the-cycle cost of risk guidance to get to a bottom-line margin, which gives you a very sensible ROE. It'd just be interesting to hear whether or not that's the right way of thinking about these available loan rates that we can see. The second question, sorry to come back to this net interest margin question, and particularly around interest rate sensitivity, but you can tell there's a bit of confusion on this side. One really helpful theme, if you'd be happy to elaborate on, would be this structural hedge on the deposit side.
I realize you're not too willing to give us NIM guidance beyond 2017, but the big variable for us really is to understand quite how big a contribution to net interest income this structural hedge makes, and therefore, if we can get an idea of the duration or the size of it, we could probably begin to understand better where long bond yields need to be, for us to expect NIM compression or expansion. Any more guidance on that would be much appreciated. Thanks.
For quite some time, ING has operated on pricing for cost of capital. No surprise that we're delivering 11.6% return on equity, which is progressively increasing, as the slide shows. The pudding is in the eating. I don't know why you have a question about it, we're delivering it. I would also point out the group as well is at 10%. Not only is the bank delivering the return on equity because it's managed to do so, the group is also delivering it. The mechanics of that, we disclose in the press release, the ROEs by segment. For those with subsidiaries, we measure it on what they have in equity. For those branches we measure to be imputed from RWAs. Typically, we use 12%, on which you have to make a minimum 10% return.
The combination of business from the lending and fees and ancillary services delivers more than 10, as you can see in the results. I think you're confused. I don't know where you get this point about structural hedge. We don't have structural hedges. I think that may be some feature of U.K. banks. We've never talked about that. We don't have it. We simply replicate our deposits to the behavioral maturity. Bulk of our deposits are sticky, long-term. Whilst they may be available on demand, they stay with us. We do statistical measures, linear regression to measure their stickiness through time, and then invest those at the behavioral maturity, which is typically three to four years. Very simple. Tranche of deposits comes in, it's sold to Treasury at the behavioral rate that's back-tested and validated.
Treasury will place that into the market, typically with interest rate swaps. Lending as well, if it's a three or four-year loan, you get the three or four-year interest rate and credit margin on top. The business has to make the margin over the cost of funds that the Treasury provides it. It's pretty simple, basic ALM process, and there's no fancy structural hedge on top of it.
No, that's really helpful. Thank you. I suppose the interesting part from our side is that three to four-year interest rate swap, because presumably as that rolls off and a new interest rate swap is taken up, that there is a bit of lost income on that process.
It's a constant process that happens every quarter across multiple geographies. It's broken up, it's not in lump sums. That's why we are able to address and mitigate low rates, because it's a slow process that takes many years to flow through. There's no one-time lump sum cliff effect.
Understood.
We've been dealing with low rates for the past two and a half years, this is how we've been managing it.
That's really helpful.
As rates come down, we've been able to trim deposit rates and hold deposit margins broadly stable. We would continue to be able to do that through 2017.
Understood. Thank you.
Thank you. From Citigroup, we have Stefan Nedialkov with our next question. Please go ahead.
Hi, guys. Good morning. It's Stefan from Citi. Two questions on my side. In terms of the savings rate in Germany, is there a reason why you're sort of 20 basis points, 25 basis points, even 30 basis points above competition? Is there a strategic reason for that or a competitive reason that you can share with us? My second question is on risk-weighted assets. Again, just following up on the better-than-expected capital in Q4. In the footnote to the presentation on Slide 28, you mentioned that 18 basis points positive was driven by regulatory items and CVA RWA, and negative 14 basis points was driven by model updates. These, on their own, are quite large swings, to my mind.
Obviously, they do offset each other somewhat, but if you can just give us some color on the 18 basis points regulatory item RWA movement and on the 14 basis points model updates, that would be really good. Thank you.
Stefan, it's Ralph. On your first question. Well, the way we look at savings rates, particularly in a challenging market, we certainly look at competition. We look at the competition that may also be challenging the incumbents. We look at our own position challenging the incumbents.
We also look at the client relationship. Savings is not necessarily a product per se. It's also a starting point of a relationship that will evolve into a primary relationship and therefore will create value over time. That's why we launched in our strategy presentation four months ago, this formula, so that you understand a little bit how we go about growing the number of customers, getting them into primary relationships, see what the cross-buy opportunities are, and manage the product value. It has more aspects than just to compare it to the competition and whether we should match it or be a little bit above. Having said all of this, even with paying a little bit more than the competition there and rewarding our customers a little bit better, we are more efficient. We have a lower cost-income ratio by far. Ours is around 40%.
The next best competitor is around 70%. The returns are beyond 20%. Return equity in the German business is 25, 26%. We seem to be able to run a very efficient shop with very strong, sticky client relationships, and not only producing P&L for today but also for tomorrow. That's the way to build the franchise. For the risk-weighted assets question, I'll turn to Wilfred.
Maybe Stefan, rather than going into this one item regulatory or not, let me just give you a quick breakdown of the deltas in Q4. That might be the easiest way to look at this. Net-net, RWAs were up by EUR 1.6 billion. In that is a currency effect of a plus of about EUR 3 billion. If you take that out, then you end up with a minus roughly one and a half. The composition of that, at least the major components are positive migration, minus two and a bit. It is the sale of our Kotak shares, minus one. There is one that probably falls in the category that you were referring to, that is the risk weighting due to the CVA, which goes down by EUR 0.6 in terms of risk-weighted assets.
There was a reduction in operational risk capital by EUR 0.7, an update of the external ORIC database that banks used. Model updates. The other one that you're referring to, a total of EUR 3.1 net. That consists mainly of some adjustments to some of our old default portfolios, where, for example, project finance, we increased our downside LGD. On Spanish mortgages, where we have hardly any defaults, we increased somewhat. There was a reduction in there on some of the modeled RWAs for derivatives. Net-net, that comes down to the EUR 1.6 that you see. I hope this helps you understand these swings.
Yes, absolutely. Thank you.
Thank you. We move on to Anton Kryachok of UBS for our next question. Please go ahead.
Thank you. Good morning. Thank you for the presentation. Just two questions, please. The first one on the Dutch mortgage market. Lending from banks to Dutch households has been on a declining trend for about four or five years now. Do you think 2017 will be an inflection year from the volume growth point of view, or do you think that that market will keep shrinking this year? The second question, please, and sorry again to come back to the topic of the interest rate sensitivity. Just to summarize, Patrick, the points that you've made around deposit margins. Your back book is hedged. The front book is influenced by three to four-year swap rates. If those improve, it takes on average three to four years for that to fully price into the deposit spread on the back book.
Is that broadly a message on deposit pricing? Thank you.
On the Dutch lending to households, will it keep shrinking? If you're looking at our portfolio, it is shrinking. That's a combination of a couple of things. The first one is that our book is shrinking because we are transferring an old portfolio to an end on an annual basis, as has been in place for quite some time. That will continue until that portfolio has been completely transferred. That's one explanation why our portfolio is shrinking in terms of lending to households in Holland. The second one is that our new production currently is lower than average, given the fact that we are a little bit more cautious with pricing the long end of the market. The part of the market that goes beyond 10 years.
We're a little bit more cautious than some of our competitors, and therefore, our new production is a bit lower than the repayment of our portfolio. Having said that, I do think that the total housing market and the trend there are still subject to a drive towards a lower LTV. That drive will have an effect on the market that this will not be a super growth market, at least not in our portfolio. That's just to explain how our portfolio is developing there.
Thank you. That is very, Patrick, clear.
Okay. Our approach to asset liability management is pretty standard. I have seen it. When I came across it was 25 years ago. This is nothing super sexy here or really sophisticated. It is really basic standard ALM. Perhaps if you want to go through it in more detail, maybe it might be better to do so with IR after the call.
Okay, thank you. Just maybe I shorten my question to just one simple sentence. Are we right to assume that it takes 3 to 4 years for your savings deposit margins to improve when interest rates rise?
Adam, the way it works is that this is a continuous process. It is a combination of new money coming in and the way you price new money coming in, the book that you already have, how you price that versus the replicating yield for the matched kind of behavioral tenor for that piece of the business. This is a continuous process, through which we adapt the replicating rate to the portfolio. The difference between the replicating rate, which is subject to change on a continuous basis, and the difference between that and the rates that we pay outside, both for new money and the existing money, that is what determines the margin. It is a continuous process.
If you see a steeper yield curve, not so much a higher rate altogether, but if you see a steeper yield curve, you can expect to see that coming back into our margins, if that will not translate into a higher rate that we pay to the customers. We'll manage more or less at stable margins as we have done so over the last couple of years, going down in terms of rates. You can expect so also from a competition perspective, that some of that we would need to pay that also to our customers. Honestly, they should benefit from some of that as well.
Got it. It's the relationship between deposit pricing and the reference interest rate.
Exactly. Yep.
Thank you so much.
Thank you. We now move on to Alex Koagne from Natixis for our next question. Please go ahead.
Yes. Hi, everybody. Just two follow-up question from my side. On Basel IV, assuming there is no agreement because, I guess today there is just too much difference between what should be the flow, the thing that we can have an agreement. What does that mean for European banks, or what does that mean for you in term of RWA? Can we assume that the ECB could just implement some of the Basel IV proposal or not? This is question number 1. Question number 2 is on the banking union. I guess that's one of your Italian person that they were able to transfer capital from Italy. I was just wondering if you can assume that you can now move capital freely and what does that mean for you in term of managing your business and your margin and so on. Thank you.
Well, in terms of Basel IV, typically the way it works is the EC have to try these things in legislation. There's no agreement, there's nothing to put on the table for new legislation that would be hard to envisage how that could be put into place. We're speculating here. We'll have to see what comes out of this, whether there's an agreement or a proposal or not, and whether the EC will endorse it or not. We'll just have to see what happens.
In terms of capital, I think the ECB, who make fungibility of liquidity of capital some of their core objectives, they have made progress on this, I think, in terms of we see that they are trying certainly to harmonize capital requirements across the various Euroland entities in which we operate, so that we do see more consistency between the requirements country on country. I think that's a helpful outcome. It will be a task that will take some time to fully get there. There are still some national legislative barriers and some national discretions that inhibit them in this. We're pleased with the direction the ECB is taking and actually that they are making progress here. Still a long way to go.
If I just can ask a follow-up question. Can you today move some capital from, let's say, Germany to Belgium or to Netherlands?
We can get dividends up, we can inject them down if needs be.
Okay. Thank you.
Thank you. Robin van den Broek from Mediobanca has our next question. Please go ahead.
Yes. Good morning. Thank you for taking my question. Most of them have been answered, I'll take the liberty to put in a more detailed question. Towards the Netherlands, the residential book is down 2%, other lending is down 3% Q on Q. Still NII is up, I was wondering if you could elaborate a little bit more on the Dutch margin in Q4 specifically. I saw that the margin for the year is flat, maybe there's some one-off in there or that the margin just improved in the fourth quarter. Maybe a similar question to Belgium, where you basically see reverse trends with the book being up and NII being down quite substantially during the quarter. I was wondering if you could comment a little bit on the prepayment penalties that the movement there, Q on Q.
Are you seeing now that rates are going up, do you see that basically the last part of the clients that can still refinance at more attractive rates are jumping in, or are you seeing basically that prepayment levels are dropping off compared to Q3? Thank you.
Obviously the margin is a function of the numerator and denominator. Decline in the lending, which as I said already, particularly in SME, is not something we overtly want, per se. Doesn't necessarily lead to a decline. The Dutch overall book has been fairly stable. We're looking at it in front of me here, it's maybe moved one basis point over the five quarters, it is pretty stable. As Ralph mentioned earlier, when he did his geographic tour de force, in the retail space, there has been a marginal improvement in mortgage margins in a number of geographies, Germany and the Netherlands being one. As I mentioned earlier, deposits still are something that are pressurized by virtue of the low rate environment. Again, as I mentioned before, this is a slow bleed through. You asked about prepayments.
The market where that principally happens is in Belgium, is a little bit in Germany, the bulk of what we saw, I think it was around EUR 3.5 billion or EUR 3.7 billion year to date, or sorry, 2016 in Belgium. That spiked in the middle of the year, it seems to be trailing back off now. In our interest result, we need to have the prepayment fee, that's included in the margin. Obviously when that terminates throughout the short period, it will erode the margin further. Hence, why we're so cautious and flagged the margin pressure in Belgium because it's the market with the highest payment amongst our family. It's in the order of magnitude of EUR 13 million, sorry, in terms of interest income effect.
I'm sorry, can you repeat that last part?
EUR 13 million in the interest income in Belgium that will not recur because of prepayments.
That's for the full year.
Before.
That's very helpful. Thank you.
Thank you. From Santander, we move on to Patrick Leaf with our next question. Please go ahead.
Hi, good morning, everyone. I just have a follow-up question on your robo-advice initiative that you mentioned earlier and generally your think about fee income. Do you primarily see this robo-advice as a cross-sell opportunity to your existing primary customer base, or do you see this as a tool to attract a new segment of customer that you are not attracting currently, or maybe it's a mixture of both? I think related to that, in terms of the financials, if I look at your fee income as a percentage of total, mine usually is relatively low, like 14%, 15% of your revenues from connections. Your commission income growth was usually broadly in line with NII or volume, and I think that's what more or less what consensus has for you for the next few years.
Given these initiatives in robo-advice and other fee income initiatives, do you have any longer-term aspiration in terms of what is the right mix of interest income versus non-interest income for you? Or can you see fee income growing faster than volume or NII growth because of these initiatives in the next few years? Thanks.
Patrick, on robo-advice. Clearly it's a cross-sell opportunity on one side. On the other side, if you have the right product, every product can generate new customers as well. Whether it's savings, whether it's mortgages, whether it's a robo-advice here or any other brokerage service that we also do in a direct way. New clients come in through different products, and once they're in, we try to make them primary customers because that means that they see us as their primary bank, and hence that normally means they want to do more business with you. We do see that given our substantial savings base in most of our challenger markets, but also outside, that robo-advice could be a real good addition to the product portfolio, and therefore it will primarily be cross-sell.
Again, we will be happy if new clients come in through it as well. In terms of the fees as proportion of total income, we actually expect that going forward. As we launched the acceleration of our strategy 4 months ago, we showed you a formula, we also showed you some other numbers as well as to where we expect it to go. In the formula, we indicated that many, a large part of our clients currently generate interest income for us, whether on the savings side or mortgage side. That's where a bulk of our income is coming from as we speak.
Fee income is low for a couple of reasons. First, the first reason is we don't believe in charging fees for the sake of charging fees. I think the success of ING as a challenger in most markets is because we want to be very transparent. If there is a fee to be charged, it is because we deliver an added value. Now, that added value we can deliver by offering different products going forward. When we launched the acceleration of the strategy, we indicated that, we want to grow on, for example, the robo-advice side. We want to grow on, for example, the insurance product side in some of the challenger markets as well. Hence, we do think that as a proportion of total income, the fees will increase going forward.
Perfect sense.
Thank you. We now move on to a question from Bart Horsten from Kempen. Please go ahead.
Yes. Good morning. Thank you for taking my questions. First, on a follow-up question on core lending growth in the Netherlands, especially on business lending. Looking at the economic developments in the Netherlands, they are very positive. I was wondering whether you don't see any pickup in business lending at all, or going forward, maybe in 2017, you may see some of that. The next question relates to the settlement on the interest rate derivatives. We've seen some of your peers in the Netherlands raising the number of clients which they will offer a settlement or raising the expectation for implementation costs. What's your expectation on that area? There were some press reports on potentially broadening the claim settlement to semi-government institutions, which would also be regarded as non-professional investors. I was wondering whether you see that risk as well. Thank you.
Bart, on the core lending growth, I'll start and maybe Wilfred will fill in from this side here. We do see business lending proposals coming in, and that is increasing. They are approved with the same acceptance criteria. It's the same numbers, still around 80% of the requests are approved. From that perspective, yes, we see the demand, and it comes in. From a portfolio perspective, though, we do see companies still repaying their outstandings. We have write-offs. Just for you to remember that the NPLs in our core lending book in the Netherlands are still close to 7.5%. It's not the best book. The core lending book in the business in the Netherlands is one of the worst books, actually, globally.
It takes some time there before you can really see an improvement, both in making sure that risk standards are accepted, but also the growth, because the NPLs cause caution and also cause continuous write-offs there. That before you see an uptick in the portfolio perspective, it may take some time. Clearly, we hope so because more demand should cover that, and more demand means there is true economic growth, and we're happy to support some. Wilfred, you want to add there?
Ralph, I think, has summed it up. The one bit of color that I would add to it is we shouldn't forget when looking at these numbers that they do include the short sea shipping book to a very large extent sits in this business lending environment, and that does have quite a big negative impact on the overall number. The underlying trend for the non-shipping part of this book clearly is more positive than what you see in the overall number.
Okay, thanks.
On the IR derivative settlement. As you know, in comparison to some of our colleagues, we have a modest portfolio of issues here. That doesn't mean that every issue should be taken seriously. We do take every issue with a client seriously, so we're taking care of that. But the issue is just not as big for us as it is for some of our colleagues. On the expectations of provisioning, I think Patrick has an update there.
Yeah. We took provisions in the course of the last year, early on in the year, which were a bit more than sufficient. The framework was finalized at the end of the year. What we've done is consistent with that framework, and provisions were added, but not complicated.
Maybe a short remark on the semi-government. There were some articles in the press about that. The situation there is that pretty much all of those clients have been classified as professionals. That is the approach that we will take in that discussion if it arises.
I think we do have one or two more questions. The questions are not coming through at the moment, bear with us for a second. Okay, either we don't get the questions or there are not any questions. For the ones who still have questions and we have not been able to answer them at this moment in time, our apologies. Clearly, our IR team is available to you also for more detailed questions. Please take that opportunity. Just to wrap it up, 2016 has been a real good year. Customer growth, 1.4 million customers. Lending growth, EUR 35 billion. Savings growth, EUR 29 billion, leading to an underlying result of almost EUR 5 billion. You see healthy growth coming through. You see an improvement in capital at 14.2% CT1 for the group. You see a healthy return on equity, 11.6% for the bank and 10.2% for the group.
You see an attractive dividend. I think we're delivering on our targets and ambitions on all accounts. Thanks very much for your attention and taking the time to go through these results with us. Again, if you have more questions, please raise them with IR. Thanks a lot. Have a nice day.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.