Good morning. This is Kina. Welcome you to ING's third quarter 2016 conference call. Before handing this conference 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 financial performance, and any statement not involving historical facts. Actual results may differ materially from those projected in any forward-looking statements. 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.
Okay. Good morning. Welcome, everyone, to ING's third quarter 2016 results conference call. Thanks for joining us today. I talk you through today's presentation. Patrick Flynn, CFO, Wilfred, CRO, Wil van Aarten will be here with me in order to answer your questions. In front of you, let's go to slide two. ING Bank posted a strong net set of results again this quarter with a net profit of EUR 1.3 billion. We continue to grow primary customers, particularly in the challenges in growth markets, and this is driving the top-line revenues. Our capital position has further strengthened to 13.5%. Underlying bank return equity improved to 11.3%.
As we announced during our recent Investor Day, we intend to invest EUR 800 million over the next five years in our digital transformation, in order to converge towards a single scalable banking platform and deliver an even better customer experience. Turning to slide three. The underlying net result for the bank was nearly EUR 3.6 billion in the first nine months, which is up to 6% year-over-year. That's despite the almost EUR 300 million of higher regulatory cost. Even though the bank's common equity Tier 1 ratio has increased by around 100 basis points to 12.6%, which was also supported by lower risk-weighted assets, we achieved a return on equity of 11.3% for the first nine months of the year, as you can see.
The underlying income in the nine-month period improved by 6.7%, as you can see on slide four, with an increase visible in all the income line items. With core lending growth of EUR 25 billion year to date, we've been able to grow the NII by 5.1% over the same period last year. It's not just the NII that drives the result, as we also saw substantial progression in fee and commission income, which has grown even faster at 6.4%. Turning to five, performed well on expenses and risk costs as well this quarter, excluding restructuring the regulatory cost. As our cost containment programs are funding the investment in the growth businesses like Germany, the challenges in growth in general and industry lending.
Low risk costs supported the underlying result and came in at 35 basis points over average risk-weighted assets for the nine-month period. Combined, this leads to a cost income ratio of 54.2% year to date, which is an improvement, but still above our target range. Turning to slide six, this is a slide you probably recognize from our Investor Day presentation. On the left-hand side, you see the 2016-2020 roadmap. In that roadmap, our leaders, but making sure that we decrease our cost. In the challenges in growth, we expect income to grow, and therefore we would allow cost growth. In the Wholesale Bank, we expect some growth in income, and we want to manage our costs more or less flat.
If we compare that to our performance over the first nine months, we see rapid income progression at the challenges in growth markets as we continue to grow primary customers and gain market share. In the Wholesale Bank, we also see a steady growth. The top-line growth in the Benelux is proving more difficult. Particularly in Belgium, the low-rate environment is starting to impact our results there. That's why we have announced further investment in our digital transformation to enable us to increase the operating efficiencies across all of our businesses. At the same time, meet customer expectations now and in the future. It's really focused on improving the customer experience going forward as well. Turning to slide seven, that's another slide you will recall from our recent Investor Day.
This depicts our journey to converge and optimize banking markets in which we're active. Given the need to renew our IT platform in Belgium and the change in behavior as customers rapidly adopt mobile banking, we intend to move to an integrated banking platform for the Netherlands and Belgium. In the challenger markets, the Model Bank and Project Welcome will help us to position us to capture customer growth at lower cost going forward. We continue to improve our target operating model in the Wholesale Bank as well. Regrettably, our intended transformation would impact many of our colleagues. We will find new job opportunities. Slide eight provides the summary of the financial impact of the transformation programs that we talked about at our Investor Day.
The combined programs for Investor Day should deliver EUR 900 million of growth annual cost savings by the year 2021. That will help us to bring the cost income ratio down to our revised 50/55, 50/52% target from the current level of 54% over the first nine months of this year. These are major programs, which are very important to delivery of our strategy. Their execution will be years. Turning to slide nine, as you can see, we're convinced that our focus on growth of customers, and particularly the growth of the primary customers, is the right one. Our data show that primary customers generate 2.5 times more value, are eight times more loyal, and have twice the cross-buy. This year alone, we have added more than 400,000 primary customers.
We have updated our ambition to increase the number of primary customers to 14 million by 2020. At the same time, we've also developed a simple calculation of the economic value of the primary customer strategy. It's measured as the number of customers versus the share of primary versus the improvement in cross-buy in product value. You can work on these different levers to improve the economic and customer value. In one country, we would focus more on one, and in other countries, we would focus more on other elements of this formula. On slide 10, just to show you that we continue to innovate. These are some of the innovations that we launched and developed in the past quarter. Some of these have been developed completely in-house, while we also partner with more than 65 fintechs at this moment.
In the third quarter, we created and launched money management platform, Yolt, in the U.K. This gives customers insight in their account information from different banks in one easy overview. That helps customers to stay on top of their finances. The app is currently being tested in the U.K., and depending on the results, we will launch it for a broader public as well. In Spain, we have introduced Twyp Cash, which is an efficient way for customers using their smartphones at more than 3,500 retailer venues. Also in the Wholesale Bank, we developed a virtual cash management application, which gives corporate treasurers the opportunity to manage their cash across banks and borders anytime, anywhere. This is a multibank virtual cash management dashboard. On the sustainability side, I would like to remind you of how that sustainability is embedded throughout our organization. Slide 11.
Some of the main sustainability themes that we have within the firm are energy transition, the circular economy, and water. In the third quarter, we were involved in the proposed merger between the Shanks Group and Van Gansewinkel, which is a great example of our focus on supporting the circular economy. I'm particularly proud of our strong sustainability ratings. In August, leading agency Sustainalytics. We also have strong ratings from the other agencies, as you can see on this slide. It's truly an integral part of our strategy, and we're really proud of the progress that we're making on this front. Turning to the third quarter results. Let's focus on Q3 here. I'm turning to slide 13 now. Slide 13, we posted a strong set of third quarter results, with a 1.9 X result, which basically confirms our good business momentum.
The overall result is driven by net interest income, which is up again in the quarter as higher volumes and slightly improved margins are driving that growth. You can see that on the right-hand side of the slide. On the NIM, the net interest margin. Net interest margin was up five basis points quarter-on-quarter, increased to 155 basis points. We always isolate the financial markets impact on the margin, and this quarter, this was three basis points. It is better to think of this improvement as a two basis points increase. This is mostly because of the adjustments of our savings rates to the market rates in core markets like the Netherlands and Germany, and they are feeding through now. Though we also saw a very small increase in lending margins in the quarter.
While the amount of interest income in FM is up this quarter, the aggregate FM income excluding CVA/DVA is down versus the strong second quarter. If you look at the other quarters, not so much to the second quarter, you see it as broadly in line with the previous three quarters. If you don't look at the second quarter, but you look at all the quarters before, you see that the results are holding up at that level. Looking at our growth of core lending, slide 15. We continue to deliver lending growth, but at a more modest pace than in the first two quarters in 2016. That is largely because of seasonality when it comes to lending activity, and the third quarter is traditionally the slowest quarter in the year. ING's core lending business recorded a net growth of EUR 3.6 billion.
About one-third is accounted for by industry lending, and two-thirds in our retail franchises, as you can conclude from this slide. Geographically, the lending growth is coming from all regions, with the exception of the Netherlands, where we continue to see modest declines. As I said in the introduction, it is not only the net interest income that is increasing, it is also the commission income. You see that on slide 16. Crucial here is that we keep growing our primary customer base. On the back of that, we see further opportunity to grow fee income, particularly in the retail bank. Some of the initiatives that we are looking at are retail investment and insurance products, as well as the daily banking fees in selected markets. We also look at new sources for fee income, for example, by attracting third parties to our platforms.
Commission income was broadly flat on the second quarter, but up 16% on the third quarter last year, as we see some of our fee initiatives starting to pay off. Wholesale banking lending fees were down a little this quarter, but that is due to more modest activity in industry lending, which is more or less what I explained to you on the lending growth, the seasonality effect here, as well as a slower quarter for the capital markets in which we are active. You see that the fee income on the retail banking side continues to grow. Wholesale was a bit lower, and that is more seasonal than structural. Turning to the underlying operating expenses on slide 17. Very cost, but most of these costs are in fact skewed towards the first and the fourth quarter. In the third quarter, you don't see too much of those.
On a quarter-on-quarter basis, if you exclude your regulatory cost, our expenses remained flat. We're growing the business at flat cost and hence improving efficiency. For the full year 2016, we now expect regulatory cost to be around EUR 900 million, as we have been able to meet some of our contributions through irrevocable payment commitments. Less cash out and replaced by irrevocable payment commitments. Slide 18. The risk cost picture here. The underlying quality of our loan book continues to improve. The NPL ratio for the bank as a whole was down slightly to 2.2% EUR of risk cost for the quarter. There's retail still trending lower, specifically in mortgages. But also in Wholesale Bank, there is generally a benign trend visible here. We've taken some minor extra risk costs in our oil and gas book again.
The overall picture in the oil and gas portfolio is that it continues to perform rather well, actually. It's a reflection of the senior secured nature of our lending, as we have discussed with you over the last couple of quarters. Turning to the challenges in growth markets on slide 19. Challenges in growth markets delivered another strong quarterly result. We continue to grow primary customers throughout our geographies, while achieving further diversification in our product portfolio. This, combined with the balance sheet optimization, is driving improved margins and the increase in the interest result in these markets. In commission income, as you can see here as well. Risk costs are well controlled. Cost income ratio is below 50%. Again, this is a geographical picture. It's not only a retail picture for you, just for your information. The cost income ratio below 50% includes regulatory costs.
You see that we do really have a far more efficient model in the challenging growth markets, and that the digital model that we have there is the way forward and hence our announcement three, four weeks ago. Risk costs are well controlled. Another great example of our Think Forward strategy at work is Poland, and that you can see on slide 20. Poland has been a difficult market over the past year. Quite some changes there. The performance of our Polish business actually speaks for itself. We have a number 1 Net Promoter Score in the country. As you know, that's really our compass. We really focus on Net Promoter Score. That drives client satisfaction, client experience improvements. That drives the growth in number of clients, and you see all that here as well. Focusing on the Net Promoter Score, we're number 1 in Poland.
You see the same effect as we have seen in many other countries, that we see that this market is becoming increasingly digital and mobile. The launch of our Moje platform helps us to change that behavior but also grow the number of retail customers. The primary retail customers is growing fast. The number of retail, that we can also create a more sustainable balance sheet. The combination that we have in this market and the success that we have in this market on the Wholesale Banking side helps us to further optimize the balance sheet here with savings coming from the retail side and more Wholesale lending coming from the Wholesale Banking side. This all leads to higher lending volumes, an increased loan to deposit ratio as well, and we expect that to reach 90% by the end of 2017, versus only 70% in 2013.
Here you see both commercial growth and balance sheet optimization at work, and making our balance sheet much more efficient. Overall, the different income lines show good progress here, both over the last three years, but also if you compare nine months 2016 versus nine months 2015. Truly our strategy at work in a country like Poland here. To conclude, the capital position of ING. The Group CET1 ratio strengthened further. It is up 40 basis points to 13.5%, fully loaded, and that is principally on lower risk-weighted assets. Similar to previous quarters, we have not included interim profits in capital, which currently leaves us with EUR 3 billion of profits set aside for the 2016 dividend, or after the 2016 dividend payment, we have EUR 3 billion set aside. Our final dividend will be decided upon in February, as you know.
We expect that the rate of dividend progression will be slower than the growth in underlying earnings. Lastly, I am pleased to share that at least one of the regulatory uncertainties that we face is likely to be clarified soon. Subject to a confirmation by the Single Resolution Board, we have concluded that ING Group should be our designated resolution entity. It is the Holdco and not the Opco. Against the targets that we announced three, four weeks ago, we are already performing well against these comprehensive set of financial targets for 2020, with a Group CET1 ratio of 13.5% and a leverage ratio of 4.4%. We are well above fully loaded requirements on both. We slightly revised our cost-income ratio target to 50-52% and align our aim to remain a cost leader in the industry.
As we said during our Investor Day, given the regulatory uncertainty, we believe it is prudent to wait for further clarity until we announce a group return on equity target. Nine months of 2016, we achieved a group return on equity of 9.8%. Also, I would like to mention that our progressive dividend policy remains unchanged. To wrap up, before we turn to Q&A, as you have been able to see, we keep recording strong commercial growth in our retail and wholesale banking businesses. However, at the same time, we see a change in customer behavior. We see that the regulatory agenda is not finished. We see a low rate environment and all of those posing real challenges to us. In our Investor Day, we announced that we will accelerate the execution of our Think Forward strategy with a major investment in digital transformation in order to cope with these challenges.
I think that the performance of this quarter shows that we have the right model to deal with them. Our clear intention is to move towards one scalable banking platform, which will allow our customers and the bank itself to stay a step ahead. With that, I will open the call to questions.
Thank you. If you would like to ask a question at this time, please press the star or the asterisk key, followed by the digit one on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that 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. In the interest of time, we'd kindly ask each analyst to limit yourself. The first question from Anton Kraskoch from UBS. Please go ahead. Your line is open.
Thank you. Good morning. Thanks a lot for taking my questions. Just two questions, please. The first one is on capital. If I look at consensus DPS forecast for this year, and deducted from the EUR 3 billion capital buffer that you have accumulated, which is not included in the CET1 ratio, then your CET1 ratio will go up by about 40 basis points or so. Your Group CET1 is closer to 14% now. I was wondering whether this is a good indication of where you want to be in terms of the minimum capital requirements plus the management buffer in the longer term. Do you think you need to run with a temporary higher buffer before we get clarity on Basel IV. The second question is on net interest margin.
During the Investor Day, I think we've discussed that you expect margins to be broadly flat throughout 2017. We have a boost now, some of this is temporary, of course, driven by financial markets, but underlying, let's say, is slightly above 150, 152 basis points mark. Is this a good run rate for next year, or do you expect it to be a little bit lower and kind of flat versus a full year run rate, which will be closer to 149, 150? Thank you.
Thank you, Anton. I'll give the first question to Patrick.
Yeah. Thank you, Anton. Capital. Really the position hasn't really changed since the Investor Day. Yes, we're very pleased with the strong profitability and the improvement in the Core Tier 1 ratio. We haven't defined a capital target other than being above prevailing regulatory requirements.
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A bit of provisioning again in Q3. The overall impact on the total amount of provisions is still minor there. At this point, the outlook around that hasn't really changed. On shipping, you see actually that the NPLs there are up a little bit. This is mainly in the short sea, and it duplicates, as we said before, with business lending in the Netherlands, where that book for a large part resides. If you strip that out, then you take the core shipping book, deep sea, the NPL is more or less stable at 1.4%, and again, they're really minor. If the current cycle persists and the upturn
That at some point will come, is going to be pushed out further in the future. I think we can't rule out a bit more pressure on the book, also on the deep book, also on the deep sea side. At this point, we're not concretely seeing that yet.
Yeah, Benjamin, on your second question. Well, you know the story around India. We follow the sustainable share aspects of our activities in every activity that we have, whether you look at it from a geographic perspective or more business line perspective. That sustainable share analysis gave us an improvement plan for ING Vysya which we were following and implementing. At the moment we ran into this opportunity to conclude a merger with Kotak Bank, versus the way we would otherwise have achieved the value creation if we would do it organically and ourselves. That's why we decided for that merger with Kotak. It's been a very successful merger. Now we see that also the corporation and collaboration on the Wholesale Bank side is solidified. Then we just see and take a look at how we can further decrease our share, as and when.
That's a little bit how we work. To the extent, so this is a general answer to how we deal with That we have, whether it's a fully owned activity or not. All of the activities have to live up to our expectations. All of them need to have a plan to improve sustainable share. If there is ways to accelerate that value creation, we will certainly do so. Thanks.
Great. Thank you.
Our next question comes from Tarik El Mejjad from Bank of America. Please go ahead. Your line is open.
Hi, good morning, everyone. Just a question again on capital, especially on Pillar 2 requirement. I understand that most of the large European banks already get their ratio, in some cases not final, but it's a good idea already. Is there any reason why you don't want to disclose it or you didn't receive it yet? Again, because I'm still not get used to the idea of this 3%. How now the local regulator reacts because we have more visibility on Basel. The SREP now is more precise because of the Pillar 2R and G is only a buffer, it's not binding. Our regulator is now, I think, is in a weaker position to basically force this extra DC on you. What's the thinking around that? Thank you.
Patrick. Tarik, Patrick will take this question.
Yeah. Well, I totally agree with you. We don't understand the DC either. The fact of the matter is there. We believe as well that the introduction of TLAC and MREL and all the buffers we need to have that there's good arguments why this is no longer needed. I thoroughly agree with you on that point. Yes, we've got our initial letter from the ECB, the SREP letter. It is draft, to be finalized later in the year. There's a Pillar 2G and a Pillar 2R element to it. We've decided not to disclose it just yet until it's final. That's, to some extent, respecting the wishes of the regulator. There's no big secret in it. It's just simply, well, sometimes when the regulator asks you to do something and you can do it, we'll do it fast.
I'm afraid you're just going to have to bide your time a little bit on this.
The Pillar 2, so you'll be disclosing the Pillar 2R and the Pillar 2G as well, or just the R?
We'll disclose the elements that we need to disclose that are price sensitive.
Okay. Thank you.
Our next question comes from Alicia Chung from Exane. Please go ahead, your line-
Hi, everyone. Just a couple of quick questions from me. Firstly, at your Investor Day, you obviously gave a number of details around the restructuring charge and cost savings we can expect in the future. Discussions were still ongoing with the Works Council. Can you just give us a bit of an update of where we are on that? Secondly, obviously IFRS 9 will be coming in next year. Just wondering whether you can give us a bit more color on what you expect the impact will be for ING. Thank you very much.
Thank you, Alicia. On the restructuring, where are we on that? You know that the restructuring basically touches upon about 7,000 jobs around the globe. It's not necessarily limited to the Netherlands and Belgium, although a large part of the intended restructuring will touch the Netherlands and Belgium. Where are we? We're three, four weeks after the Investor Day announcement. In Holland, we have a constructive dialogue with our social partners. In Belgium, we have a constructive dialogue as well. We have to follow a strict order of how we do so, given the fact that we are working on intentions and we go by a specific law. That makes that at this moment we are in a phase of giving information to our social partners, and that's where we are. On IFRS 9, I'd like to give the word to Patrick.
On IFRS 9, I'd like to give the word to Patrick.
Yeah. IFRS 9, we're working through the models to nail them down as to what the impact will be. There's quite a bit of work involved in that. It's quite a complex process. The Investor Day. There's two elements to this in terms of the loan loss provision. You've got to remember there's the existing expected loss element that's in capital of EUR 1.1 billion that will be reversed. The key question is, at the point at which IFRS 9 is implemented, because that's relevant for determining the impact of equity, as we talked about earlier, that loan loss numbers are somewhat benign. The trend is benign. You have to determine at that point what the extra amount will be and then compare it. Yeah, we're working through that.
We can't give you a number just yet, it's important to remember the two points at play. The other bit to remember is that for classification and measurement, we currently have, and most people currently have, bonds at AFS. I think the majority of people would like to, us included, to have those in the equivalent to accrual accounting. We don't have variability. The current mark to market on that we disclose is EUR 1.3 billion. Some element of that may be lost at the point of transition. That's a public number. I don't think it'll be the full amount, some element of that would go at transition as you restate those bonds to the initial cost. That mark to market is currently in people's capital ratios. That's the position.
With a very strong 13.5%, as one of the earlier commentators has mentioned, capital ratio plus some extra as well in the doing of this.
Okay. Thank you very much.
Our next question comes from Daniel Bootboy from JPMorgan. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking my questions. I have got two, one on provisions and the other one on capital. Just on provisions, I guess more broadly given the decline in provisions in the quarter, how are you thinking about your previous messaging for flattish provisions in 2016 versus 2015? Also given slightly more constructive messaging, I think, on the oil and gas portfolio, would it be fair to expect that going forward at slightly below normalized levels, I guess similar to what we have observed so far this year? Secondly, on capital, our weighted assets were down about EUR 6 billion in the quarter. From what I can see, about EUR 2 billion of that is due to lower market risk and sort of FM driven. Should we expect that to reverse in the fourth quarter?
Are there perhaps any other elements of seasonality or temporary factors that help depress RWAs in Q3? Thank you.
Thank you. Okay. Thanks, Daniel. I am asking Wilfred to answer both.
On provisioning, going into the year, our guidance was for something around the 2015 level with two opposing forces. One was the expected continued improvement of the book, positive risk migration, and on the other hand, of course, the potential impact of, at that point in particular, the low oil price that everybody was very worried about. Clearly, three quarters into the year, we can see which of those two forces has been on the winning side. The oil and gas impact is fairly benign, and on the other hand, the book has. Looking at the expectation for the overall number for this year, I think it is safe to assume that Q4 will bring something not dissimilar to what we have seen in the first three quarters and will therefore end up below the 2015 number. On the RWA, that is indeed a relevant question.
First of all, let me say that you shouldn't be assuming that we continue to grow the loan book without at some point incurring more RWAs. What you saw in this quarter, and I can give you the mechanical answer, is that we have a combination. Credit growth in the core business. The core lending, as Ralph pointed out, has been growing. That effect has been largely offset by runoff in the non-core books. Secondly, we had quite a significant reduction from the positive migration. That was about EUR 3.4 billion or so. We had two opposing and canceling forces, a bit of an update due to model updates on one hand, and a FOREX effect that pushed it back down again.
Of course, there was the sale of part of our stake in Kotak that also contributed to a drop on the RWAs. We also saw a drop in market risk-weighted assets
On lower volatility, in particular in the market, and a slight uptick in operational risk RWAs. On the whole, I don't think you should see a trend here.
Okay. It's a reasonable base to be working off from.
Well, as a starting point, it is what it is, but the trend, I think generally, we don't see too many capital requirements that come down.
Okay. Understood. Thank you.
Our next question comes from Cor Kloos from ABN. Please go ahead. Your line is open.
Good morning, Cor Kloos, ABN AMRO. I got a few questions. First of all, about the RWA bond debt, and that's probably most of the EUR 3.4 billion credit migration effect, I would estimate around 12%, but that's the first question. Second question is about savings rates. You're around 0.3% in most countries outside of Belgium, which you pay retail clients at this moment. Are there any legal minimums outside of Belgium to which you can reduce that? Could you at least legally reduce that to 0% everywhere? And also on the corporate side, what kind of savings yields are you currently paying, or what are clients paying?
Thank you, Cor. Wilfred will answer the first one, I will take the second one.
Yeah. On the risk weights, the answer, Cor, is very short. You're right. It's 12% for the Dutch mortgages, down from 14% a quarter ago.
Okay, thanks.
On the savings rates, yeah, Cor, clearly in Belgium, there's a legal minimum. Whether there's a legal minimum or not in other countries, I think you have to be careful as to moving rates in line with market rates, because you have to make sure that it's in line with market rates, because you have to make sure that in the end, you're managing the client relationship there as well. It depends on how the market itself in which you operate develops as well. It depends a little bit on the psychology of that that we take into account as to how to manage the combination of wanting to grow savings on one side and paying a decent rate to our clients. That's on the consumer end of things.
On the corporate end of things, clearly for the more professional corporates, the one that play in the market just like we do, we charge them the way we are charged as well. We do charge negative.
Okay. For the mid-corporates, the SMEs mid-corporates?
For the SME mid-corporates, that's not the case.
Okay. Thanks.
Our next question comes from Pawel Zywicz from Goldman Sachs. Please go ahead. Your line is open.
My side, the first one is a follow-up on capital. You mentioned that you await regulatory clarity, which was promised for later this year. I was hoping if you could update us where the discussion currently stands. Do you have any better visibility as to potential impact of Basel IV? Do you in fact expect that you will know more by the end of this year, or perhaps that the process will be pushed into 2017? The second question is on your loan growth. I appreciate you mentioned that the pace of growth, in particular in the Wholesale Bank, is lower because of seasonality. I was hoping if you can comment if there is anything more to read into that.
This quarter is essentially first one after the British referendum. I wonder if you noticed any changes in lending demand from a large corporate on the back of higher uncertainty. Thank you.
Thank you, Pawel. On the loan growth, to start with the second question. It's really more a seasonal effect on the Wholesale Bank side than anything else. As you know, on the Wholesale Bank, we have our teams globally active in different sectors within the industry lending. We have corporate clients across the globe as well. We're not necessarily either the Eurozone or Europe, but really the GDP growth of the whole world. We're gaining market share as well. It's a combination of a GDP in a world that's still growing. We're active in sectors in which there is still investments going in markets and in countries which are still going through a transformation for which infrastructure, media, telecom is all important.
We don't see any reason why we should diverge from the plan that we think we can grow by 3%-4% over the different quarters in a year. In our view, this is just the seasonality effect in the third quarter on the Wholesale Bank side. On Basel, I'll give you a bit of information and Patrick will follow on. The discussions are happening right now. That's Basel. In the next two months, yes, we do expect to know more, but the question is what it is that we will know. Patrick?
Indeed, we will know more because there are formal meetings scheduled in November and January. Whether they're conclusive or not remains to be seen. What I can tell you is that the industry is working in a coordinated manner and is proactively measuring the impact of four different iterations of Basel proposals and reporting those back to the relevant authorities, being the ECB, the PRA. What I can tell you is that all four of those, albeit the last, most recent is slightly lower, but all four of those have impacts which are significantly higher than the no significant impact amount, approximately 10%, which the ECB and others have said is the only acceptable outcome. In terms of getting to a point where the Basel proposals meet the threshold of no significant impact.
I think it's significant that you saw the BaFin come out yesterday, quite forcefully, and say it's unacceptable. We are expecting that the regulatory bodies, ECB, PRA, will stand by their commitment to ensure there's no significant impact. Because we're not there yet, that's why I think, as Ralph says, we will have some. As a result of the, let's say, proposals being not in line with no significant impact, is there a risk that those negotiations will continue for longer? Can't rule that out. All right. That's very clear and helpful. Thank you.
Our next question comes from Kiri Basalak from Barclays. Please go ahead. Your line is open.
Yes. Good morning, guys. It is Kiri Basalak, Barclays. Just getting back to shipping and just trying to understand what you said earlier, that if there is going to be an uptick in risk costs on shipping, it is actually going to come through in retail Netherlands rather than the Wholesale Bank. Is that because it is not to do with the high-profile issues in dry bulk and containers, and it is really your inland or some sort of local shipping exposures? Just on the numbers, could you just give us the coverage ratio on those shipping NPLs?
Kiri, Wilfred will answer that question.
On shipping, what I was trying to get across is the message that we have a bit of an uptick in NPLs this quarter, from 4.4%-4.9%, and that uptick is completely due to files in the mid-corporate book in the Netherlands, short sea shipping type 2 business. That has been the case for a while. We have had between our total shipping exposure and what we do in business lending in the Netherlands. The remaining business, i.e., if you take out the short sea, which is booked in the Netherlands from the total shipping portfolio, then NPLs on the deep sea shipping book are still at 1.4%. The impact of the total provisioning, including what I mentioned for business lending in the Netherlands on the quarter, has been minor.
If this cycle lasts for much longer, then we do expect to see a bit more pressure also on the deep sea book. We have seen one major container line that got into trouble and filed for bankruptcy, as you are all aware. That might happen in the near future, one or more times as well with other companies. In other words, at this point, what we are seeing is mainly related to short sea and inland, but we cannot rule out a bit more pressure if this cycle continues. On the coverage ratio, that is around 47% at this point. That is for the whole shipping book.
Great. That's helpful. Thank you.
Our next question comes from Anke Reingen, from Royal Bank of Canada. Please go ahead. Your line is open.
Yeah, good morning. Two questions, please. Firstly, on your normalized loan loss ratio of 40 to 45 basis points. I was just wondering how quickly you think you will get to that level, or do you think it's reasonable to assume that 2017 will remain below that level? Secondly, on the point that you decided that ING Groep should be your resolution entity. I'm not quite sure. Should this have any implications on funding costs, and does this also mean in future, we no longer look at the bank capital ratio and return? Thank you.
On the longer-term guidance on provisions, obviously, this is always a difficult subject in the sense that predicting these things is difficult. If you step back, we do believe the 45 basis points longer-term is the right through-the-cycle average. Logically speaking, having been above that level for a number of years, it is expected that we should be below for a while to continue to maintain that long-term average. That's logic. Is there anything at this point in what we know that leads me to believe that 2017 would be a massive deviation from that trend? No, but it can always happen.
Patrick. Anke, for resolution entity, for bail-in purposes, bail-in debt issuance purposes, be that MREL or TLAC, we simply issue senior debt out of the holdco as opposed to the op co, which has been the case in the past. Tier 1 was issued out of the holdco, that's today out of the holdco. That doesn't change. Also Tier 2, which in the past was issued out of the opco, will come out of the holdco. There may be some pricing differential for senior out of the holdco because it will be structurally subordinated. As to how much that in the ING represents, I would expect that to be not significant. I'm looking at my head of capital management, squarely capital management, squarely in the eyes on this one.
Yes, there will be some increase in the cost, but not significant and nothing we can't absorb and haven't factored into the plans we announced in our Investor Day a month ago.
Okay. Thank you.
It doesn't mean anything from a capital perspective, from the bank to the group in terms of capital ratios, simply about debt issuance.
Yeah, thank you.
Our next question comes from Stefan Nedialkov from Citi. Please go ahead. Your line is open.
Hi, guys. Good morning. It's Stefan Nedialkov from Citigroup. Two quick questions. Margins. I would love to get some color from you on the lending margins by product in Belgium, Netherlands, and Germany. As a second question, in terms of just overall volume issuance of AT1, as much as you can share with us in terms of any immediate plans over the next few quarters to issue AT1 instruments. Thank you.
On the lending margins, Patrick?
I mean, I can talk around it, I know you'd love to get it, but we're not going to give you the detail. I can talk a bit around it, but we're not going to disclose precise numbers. I think as Ralph mentioned, the NIM was up two basis points. There was a bit of that due to repricing and deposit was also helpful, that there was some firming of margins on lending. Some of that in the mortgage space in the Netherlands. As mentioned earlier, in Belgium we have seen prepayments. They're easing off as compared to the past, which means better margin mortgages are dropping off the book and they're being replaced. At returns which deliver the required return on capital, but lower. That is a bit of a margin erosion piece, which Ralph alluded to.
In the lending structured finance, which is a big chunk of our lending, the margins are holding up reasonably well. We're growing that book, so that's the positive point, and it's a point that we've had for several quarters, is that we're growing and maintaining margins. Obviously, in terms of deposit margins, we're seeing a bit more money moving from savings accounts to current accounts, which is margin negative because you don't pay anything in those, and low rates steadily ease into that. On deposit margins, Netherlands, Germany, they blipped up in the quarter because of the rate trimming that was done because the negative rate environment persists and continues to erode there. It sort of steps up a bit and then progressively steps down. That's sort of a talk around it, per se, and hopefully that's helpful. On AT1, we don't have fixed issuance plans.
We certainly don't announce them in advance. I mean, a sort of gap look that is there, and we would typically like to fill that. As to timing of when and where, I mean, you'll only see a press release when you see a press release saying we're doing it.
Okay. Thank you.
Our next question comes from Patrick Lee from Santander. Please go ahead. Your line is open.
Hi. Good morning. I just have one quick question on what you mentioned earlier on anyway. I noticed that you saw a deposit outflow in the retail Netherlands business and retail Belgium business. How much of this outflow is a Q3 seasonality thing, or was it a response to your recent rate cuts, or whether you're seeing market share loss to other competitors? I guess the interesting thing is whether this would change your thinking on further deposit rate cuts in the Dutch saving rates in the coming quarters.
Thank you, Patrick. Well, what you're seeing is certainly seasonality. That's one, specifically on deposits. The other thing that you see is that given the fact that the rates are pretty low, that customers don't mind keeping their money on current accounts either, because it's certainly also more in the SME side and the mid-corporate side, you see that current account balances are increasing. Specifically on deposits, you see a seasonality effect there. As to the cuts that we have done, we did one just before the quarter in the Netherlands. That's why you see a bit of a improvement in the margin, as Patrick has alluded to. In Belgium, we have reached the legal floor. It's 11 basis points. Nothing to be expected in Belgium.
In the Netherlands, as I have indicated before It's a combination of how the funding develops, how your client growth develops, how your relationship with the client develops, the psychology of going lower, and what it will do to your funding base. I can't really indicate to you whether or when there's going to be cuts.
Perfect. Thanks a lot.
Our next question comes from Natasha Blackman from Citigroup. Natasha Blackman, please go ahead. Your line is open.
Good morning. Hi. I have two questions related to your choice of resolution entity. The first one, I know that you made a comment earlier about issuing CoCo senior. Should we expect that on your senior funding strategy, that you'll only be doing HoldCo in the near term, or would you be doing both OpCo and HoldCo, as some other banks are doing? Separately, ING Bank issued [inaudible ] the 3%, and that bond could be exchanged into HoldCo at ING's option. Could you confirm that this is an action ING is looking to take? Thank you.
I'm sure, Natasha, you'd love me to answer all of that and give you precise timings and dates, which I'm also pretty sure you know I'm not going to do. We have the optionality, yes, on the Tier 2. We'll look at whether it makes sense to do that within the period of time we have that option, which is still some time in the future. That depends on getting confirmation that the resolution entity will be confirmed. It's our election to do so, but the SRB has to confirm that. In terms of senior, certainly we will be issuing some out of the HoldCo to meet TLAC and MREL requirements. I think that's fully clear that we will be doing that. Whether we will issue out of the OpCo or not, I will reserve judgment at this point.
Okay, thank you.
Our next question comes from Farquhar Murray.
Morning, gentlemen. Just one question from me. Obviously, a relatively favorable quarter in terms of RWA development. I just wondered if you could just outline how much of that might be sustainable, and particularly in terms of the market risk reduction that you saw in the quarter. Also in terms of outlook, could you just outline what you're thinking in terms of credit migration and model developments from here? Thanks. Model developments from here. Thanks.
Okay, Farquhar, thanks for the question. Wilfred will give an answer.
Yeah. On market risk, obviously for us, that is not a very big part of the RWA to begin with. The drop that you saw was partly due to lower positions. It was also due to lower volatility and the combination, relatively speaking, quite a large drop. That could easily migrate in a different direction as circumstances change. I wouldn't see that as permanent or a trend. As for the impact of potential model updates, like I said earlier, the general trend in capital requirements tends to be up. I think a lot of the model redevelopment work that is going on is going to lead to some increases, but it's too early to say by how much and also by when, because the throughput time of this process, including the assessment by the ECB as well as our own, is relatively long.
There's nothing immediately or big on the horizon, but there will be a steady-
On credit migration from here?
Well, we're still seeing a positive trend there. The production of new lending at the moment tends to be still a bit better than the quality of the stock, and the stock itself is also showing positive migration. I think it is absent any other changes on the model side. If you freeze all of that, I think it is a fair assumption that a bit of positive RWA development from that front is still to be expected.
Thanks very much indeed.
Our next question comes from Benoit Petrarque from Kepler Cheuvreux. Please go ahead. Your line is open.
Good morning. It's Benoit Petrarque from Kepler Cheuvreux. Two questions on my side. The first one will be on the dividends. I think you are guiding of your DPS from the EUR 0.65. How should I reconcile this to the relatively strong performance of your kind of EPS growth expected in 2016? It looks like EPS will grow faster than the expectation of DPS growth. Is the regulatory uncertainty holding you back on a more kind of bullish outlook for DPS growth? That's the first question. The second question will be on the small steepening of yield curve, which is an interesting trend we see now in the third quarter. I'm sure you will like to see more, but how positive could that be for ING? How is your ALM position for yield curve opening, and how fast could that feed into your NI, potentially? Thank you.
Benoit. I'll do the last one first because I think it's the shortest. A small increase can be temporary. We are predicting and planning for a prolonged low-rate environment. That being the case, and the commercial momentum we have and
The measures we've announced in investing in future digitalization mean that we believe even with the low rate environment, even if we get to the point where deposit margins start to tip lower, we will continue applying earnings and we'll deliver EPS growth in a low rate environment. We're not counting on a minor uptick in the curve. In fact, I don't think it's that significant. We're expecting it to be tough for long, and we're set to navigate through that. That's point one. On dividends, maybe it's useful to just recap what the thinking was on the dividend and why we are where we are, why we're couching dividend in the way we are. When we set the dividend policy, we spent some time talking to a number of investors to figure out what the right approach was.
We had committed that we would return the surplus from insurance to shareholders. The best way to do that was to do it with a sustainable elevated dividend rather than having a one-off for specials. Hence, we set the dividend at a relatively high elevated level of EUR 0.65. It's incorporating the paying out of the insurance bonus, as it were, and it would be progressive from that point. Capital has three purposes for us. One is to build buffers to meet regulatory requirements, and second, and importantly, it's to support profitable loans to shareholders. As Wilfred has mentioned, the current benign environment where RWAs drop and loans go up is not a trend we can rely on. In fact, it could well flip in the opposite direction. We need capital for lending, and you could have quarters where other model events push it the opposite direction.
I'll just be honest with you, in our projections, where we see us growing throughout 2020, we see that we'll be using the capital for those three elements. Yes, the dividend progressive. We also have to remember that there is still regulatory uncertainty. We aim to use the capital for those three levers. Adding all that up, we think that the progression is going to be slower than the earnings per share growth.
Great. Thank you very much.
Our next question comes from Bruce Hamilton from Morgan Stanley. Please go ahead. Your line is open.
Thanks, gents. Morning. Two from me. On the sort of initiatives to grow fee income from here, there are quite a lot of areas you're looking to grow, but what are the sort of two or three that would move the needle most, and how big a revenue opportunity do you see from robo-advice specifically? Secondly, just looking at the Belgian unit, obviously revenues were a bit weaker both year-over-year and Q on Q. To check, were there any sort of one-off impacts in the quarter? Was there any substantial change in competitive dynamics? How to think about the outlook? Obviously, you're limited on what you can do on deposit repricing, but what are the levers from here, and how do you think about the top line?
On fee income, I don't think there is a golden bullet on this one. The fee income should not be a golden bullet in the first place. This is about strategy. Our strategy is very much to focus on growth in number of customers, the improvement of the number of primary relationships within that, develop products that clients would want. This is really about longer-term value creation, making sure that we turn the franchise from a product-by-product franchise to a client-focused franchise with a primary relationship strategy. That's what we see on the retail side. That's what we see on the wholesale banking side. If you have that primary relationship, you will know the customer better, and if you know the customer better, you will be able to be more relevant, more instant, and more personal in your service.
On the back of that, the customer will be more interested to buy different products from you. That's why we need more products. That's why we're looking at how can we distribute insurance products on the retail side. How can we use robo-advice on the retail side with the growing number of customers on the saving side that we have. Robo-advice could come in particularly handy as well. It's on the retail side, it's truly across the board. On the wholesale banking side, same thing there. We're improving our customer relationships. We are very relevant to the top customers that we have, who are absolute top player in all the industry lending aspects there as well. The cross-buy needs to come from financial markets business there, transaction services business there as well, as well as that capital markets business there.
It's not a golden bullet here. It's all about the philosophy as to how you build a client business rather than a product-by-product basis. You will find that we will improve that value over time by rapidly increasing the number of clients and improving the percentage of primary relationships as part of that. On Belgium I will give a bit of information there. What we've seen in Belgium here is that given the lower interest rate environment and the fact that on the savings side, which the savings are basically is our predominant funding base that we have in our Belgian franchise, that we've reached the legal bottom there in terms of repricing on the funding side. That's one thing. On the other side, we do see continued growth on the lending side. It's a good franchise. We have commercial momentum there.
That's why we want to invest and intend to invest in the Belgian franchise, and further improve it. Good franchise, good commercial momentum. From a funding perspective, given the fact that the savings are the biggest funding source, we have reached the legal bottom in terms of managing our margin on that side. Patrick, anything to add?
Just to say that, if you're looking at the fall sequentially in Belgium of 50%, that is not representative of the underlying. There were, to your point, a number of one-offs, not in Q3 so much, but more in Q2, the big Visa gain and the accrued saving. I think, if you look at the revenue decline year-over-year, it's closer to the 10%. I think that's more representative of the issue we're talking about.
Got it.
Our next question comes from Robin Down from HSBC. Please go ahead. Your line is open.
Good morning. Can I just quickly come back on Belgium and the cost of risk? I think it's the second quarter where we've seen a slightly elevated charge there, and described as coming from a small select group of customers. Just wonder if you can give us a bit more color, and whether you expect that to persist. Then secondly, can I just come back to the positive credit RWA migration. It kind of looks like, and this isn't the first, it looks like you're running more of a point-in-time model. In which case, I would kind of expect to see further improvements coming through from this over the next few quarters. Are you under some sort of regulatory pressure, perhaps to change that model towards more of a sort of through the cycle type sort of approach?
Just any color you can give on that would be appreciated. Thanks.
Yeah. On the risk cost in Belgium, I think it is worth pointing out that the absolute level at which we have those risk costs is relatively low and has traditionally been low in Belgium. We're seeing a bit of movement where retail is coming down a little bit on the whole, but within that, you see business lending in particular going up a bit. There is, apart from underlying addition to provisions for specific files, also a bit of model updating going on. There is no particular big trend there at this point need to address.
Sorry, can I just quickly come back on that?
Sure.
It wasn't so much a worrying trend. I'm just more interested in whether or not we're going to suddenly see a sort of step down as the sort of things like that model update and the addition of specific cases drops away.
That is why I pointed out the levels that we're at.
Okay.
I don't think there is a lot of room for improvement there. There's just a bit of noise around the average that we're looking at at this point. On risk-weighted asset migration, and the question, is there a point-in-time model. For provisioning, one tends to use point-in-time LGDs. For capital, it is all through the cycle. When you talk about risk-weighted assets, that is not a point in time, that is through the cycle that we use. Of course, it does get adjusted pretty much every year by adding more and more recent data. There's always going to be some movement, and there's always going to be a reflection of recent trends. It doesn't mean point in time. It's not. Does that answer the question?
It's just kind of interesting when you read the commentary, though, within the Pillar 3, how quickly things seem to be adjusted for that recent data. I'm slightly surprised you're saying that you're running on a through the cycle model, given that situation. Yes. Thanks for the answer.
All right. If you have any more detailed questions on that, we'll be happy to take them through investor relations, and we'll get you the explanation.
Great. Thank you.
Our next question comes from J.P. Lambert from KBW. Please go ahead. Your line is open.
Yes, good morning. I have a question regarding the development of the client base. You focus on primary core. Effectively, you have four segments. You have primary, non-primary, digital, non-digital. The traditional segmentation would include income, wealth factors. I was wondering, are these factors no longer relevant in the digital world, or you have sub-segments within primary relationships which include then sub-segments dealing with income or wealth? Thank you very much.
Well, we certainly don't have the segmentation the way you are depicting. Basically, we have customers. They could come in from different sides of the balance sheet. Some need a mortgage. Therefore, they're probably not as wealthy. They come in from different sides. Whether they're digital or whether they are a client of a branch bank, we don't differentiate there either. We do segment in terms of consumers, private banking, SMEs, mid corporates, and corporates. That's the way we segment our business and generally also segment our business models and our value propositions. Going deeper into that, across all of the segments, we approach our customers as much as possible as primary relationships. We're in this business in order to build a longer-term relationship and not do the occasional opportunistic transaction. Clearly, an opportunistic transaction can certainly do so.
On one side, we want to grow the number of customers. The other side, we want to improve as part of the number of customers, that part of the customer base that we have a primary relationship with. That is generally defined as a client that sees us as their primary bank. In a branch bank environment or in more relationship bank environment, that was the model of the past. We do think that even in a digital environment, you can create primary relationships. You can create such a digital experience that clients actually regard you as their primary bank. Clearly, a current account business, a payment account business, a cards business as well, as much as you need a savings and a mortgage business. That's what we're trying to do here. Do we segment our customers by wealth? Yes.
If it comes to consumer as a segment and private banking as a segment, yes, we do. Do we segment them by size on the corporate side? Yes, we do, because size generally, not specifically, but generally our customers have. We very much look at the needs that our customers have in the way we segment.
Thank you very much.
Our next question comes from Marcel Hooven from Credit Suisse. Please go ahead. Your line is open.
Good morning. Thank you. Taking my questions. I have two, if I may. The first one, loan growth, especially retail Belgium has been a main growth driver as well as for the mortgages. How do you see that going forward? Will it be in the same rate? This also applies to retail Germany. The second one is on fees. Most regions or some of the regions, southern regions, you don't charge fees for current accounts. Would it be in your strategy to start charging these? If so, what is your strategy? What are your comments on the other customers might leave ING? Thank you.
Thank you, Marcel. Well, Belgium has always been and is an important market to ING. We see that generally, the economy in Belgium has held up quite well, even during the crisis. The economy has held up quite well, therefore, we have been able to grow in Belgium throughout the crisis, and you see that that momentum is continuing. We see our growth in Belgium across all the different segments, whether you're talking about the consumer and the things or private banking, SMEs or mid corporates or corporates. We see growth all around. Also on the loan growth, we see in the mid corporate segment, we see loan growth. We see on the mortgage side, we see loan growth. That's just because the underlying economy has been rather stable in its growth pattern. It's a good market.
In Germany, we see a combination of a good underlying market, a good economy, and therefore loan growth coming from that. At the same time, it is really gaining market share. The loan growth in Germany is just underlying growth plus the fact that we are a challenger in that market. Because we are a challenger and we have access to the market as a whole, we see growth both on the loan growth, both on the consumer side of things, in consumer lending, in mortgages, as well as on the Wholesale Bank side of things. Over the last two, three years, we have really grown the Wholesale Bank team in our German operation and have started to grow our in Germany on the back of the relationships that we generally already have with those clients across the globe.
We never had them really in Germany because we were never a big Wholesale Bank in Germany. That's a change of strategy. It's a change of strategy that we announced three years ago. It's a change of strategy that we feel also helps us to grow sustainably in Germany and also further optimize our balance sheet use in Germany. That's the combination there. On your second question, in terms of current account fees and the challenges and the impact on customers. Let's take a step back here. In the challenger markets, we generally have a digital model, which means that we almost have no branches. In a digital model, we have a particular positioning of our brand, and that brand says we give simple, transparent services and an experience that is very easy and that empowers you to do your banking with us.
In all of that, we have always looked at how do you price your services. During the crisis, as you may recollect, we were not allowed to compete on prices in some of these markets, and yet the growth continued. That is because the experience is so much better than of our competitors. When you then start to think about is there an opportunity to charge fees, you really have to wonder, okay, what would I be able to charge fees for? The client needs to see the added value of your service before the client will accept the fact that you charge a fee. That's one. The other side, to which extent does charging fees limit the growth opportunity?
If I then go back to the formula that I kind of repeated in this presentation today, in that formula, you see four drivers: the growth of customers, the improvement of the percentage of primary relationships, the improvement of the cross-buy, and the product value. Just working on product value through increasing fees may limit your growth on the customer side. Per market, you will have to see how you manage this formula. In some markets, we will basically see, well, we have real good momentum. Let's just continue the growth of customers before we look at introducing fees on specific products. In other markets, we may look at and think we should charge fees for services that we can charge fees for because of the value added that we provide. It's really a market-by-market approach that we have here.
For you to kind of get our logic, I think the formula is important for you to get a sense for how we manage the different elements in that.
Okay. Thank you.
Our next question comes from Farquhar Murray from Autonomous. Please go ahead. Your line is open.
Hi, gentlemen. Just a quick follow-up on the kind of dividend and the kind of progressive outlook there versus earnings. When you do say DPS growth will lag EPS growth, should we read that as saying that kind of over the time period outlined at the Investor Day, the structural growth of dividends will be lower than the structural growth in earnings? Is it a slightly more pragmatic issue in the sense that near term, EPS is probably going to be slightly faster than your view on structural growth, and thus, the payout ratio is likely to moderate that way? Just I'm trying to get a sense of what the kind of guidance that is there, really. Thanks.
Yeah. Thanks, Farquhar. I think the structural growth in dividend is to be expected lower than the earnings per share or the earnings growth that we have indicated over the next couple of years. That goes back to basically the three uses of capital that we already touched upon. Patrick touched upon it during today's call. We made it very clear when we launched the strategy two and a half, three years ago, that we will always look at three uses of capital. The first one is, let's make sure that we are sufficiently capitalized. We never want to be in a position again, in which we would have to go to the taxpayer to help us. Capital is an important element here.
The second part is, as a bank that has a pretty simple business model, taking savings from a market, we also feel the responsibility to give loans into that market. If you grow your loan business on the back of your savings business, you need more capital. The first source is make sure you have good capital buffers. So the first use is improve your capital buffers. The second use is make sure that you have capital to grow your business and play your role in society. The third use is, and this is not in any order of priority, by the way, is make sure that your shareholders who share in the risk get a decent return.
When we set our dividend a year ago, we basically had a discussion with many of our shareholders to get a sense for how they would want us to pursue a different policy. In volatility, do you want to have a dividend that increases and is progressive over time? Most of our shareholders basically chose for the latter. That's why at that moment in time, we set a dividend level from which we think we can grow progressively. That dividend level that we set at that moment in time was already including a bit of a surplus there that we generated on the back of the sale of the insurance stakes. Therefore, A attractive dividend level. Certainly, if you do calculate it from a percentage, it is already an attractive dividend. We will manage this dividend over time progressively that it stays attractive.
Again, we will have to balance that also with the other two uses of capital generation. Make sure that we are adequately capitalized, make sure that we have capital to grow the loan book and play our role in society, clearly, profitably, with the right returns. Thirdly, make sure that our shareholders get an attractive return. That's the philosophy.
Okay. Thanks very much indeed.
Our next question comes from Jackie Ineke from Morgan Stanley. Please go ahead. Your line is open.
Morning, everyone. I've got two questions linked again back to the resolution entity being the holdco. First of all, I was just wondering if there's any pressure or you expect any pressure from the resolution authority to move any of your subordinated opco debt up to the holdco, or if you're more thinking this will be a slow process over four to five years. The second question is about this decision, and I appreciate it's not finally confirmed yet, but the resolution entity being the holdco, is that more of a Dutch general approach, and we could really expect that as approach for other banks in the Netherlands, or is it a tailor-made single approach for ING? Thank you.
Yeah. Well, I can only speak for ING. We have a holdco, therefore we can use it, and this is good to have it. Some of you were asking why we weren't getting rid of it in the past, and we pointed out this was going to be one of the uses. I can only speak for ING in that regard. In terms of issuance, clearly in terms of meeting an MREL or a TLAC requirement, bail-in of all senior will be part of that. If you're talking about TLAC at the minimum, the 23% level, given our 18% total capital ratio, you're talking maybe EUR 16 billion of issuance at a minimum. That would go needless to say. Yes, we will be issuing senior from, again, subject to confirmation by the SRB. We will be issuing senior from the holdco to meet that.
There's no pressure to move the opco TLAC, the subordinated debt, the opco up to the holdco?
Well, we have a requirement to meet TLAC at a date in the future. We can do that by virtue of issuing senior out of the holdco. I think that's what we intend to do.
Okay, thank you.
Our next question comes from Bart Joris from Degroof Petercam. Please go ahead. Your line is open.
Yes, good morning. Most of my questions have been answered. One left, looking at the regulatory cost in Germany this quarter, where you said that some contributions were met by irrevocable payment commitments. Is that something that is set now for the coming years, too, is it something that could be repeated in the coming quarters, bringing your regulatory costs down somewhat further from what you guided?
Bart, basically, this is something that is possible in Germany, and that's why we've elected it for the moment. 30% of the DGS in Germany can be guaranteed rather than funded, and that's what we have elected. I don't know whether it's going to happen anywhere else, but this is the way it works in Germany, and that's what we have elected to do.
Okay, thank you.
Our final question comes from Robin Van Den Broek from Mediobanca. Please go ahead. Your line is open. Please go ahead, Robin, your line is open.
Oh, sorry, I was on mute. Thank you for taking my question. Two questions left. First one on Basel IV. Patrick, you said there are four calibrations going around. I was just wondering if you can share some thoughts about which books would be most in focus in those calibration. Is it output floors on mortgages? Is it industry lending? Is it large corporate exposure being more standardized? Maybe you can give some more commentary around that. The second one is fairly simple. I appreciate all the moving parts you discussed at the capital markets day related to your cost base. The EUR 2.15 billion of underlying costs you've been reporting for, I think, six quarters now. How should we look at that going forward?
Do you think you can manage that cost base flat for much longer, or should we assume 1% inflation on that going forward? Any guidance there would be very helpful. Thank you.
Thank you, Robin. I will take the second question, and Patrick will take the first one. On the cost base. As you have seen over the last couple of quarters and over the last two, three years. We're very much focused on managing an efficient franchise. That efficient franchise, an improvement in efficiencies, you can do by making sure that the cost per transaction, the cost for volumes that you get through your business, that is either stable in a growing environment or goes down in a stable environment. In a market leaders environment, we see that volumes and income is not going to grow too much, and therefore, you should expect costs to go down in a market leaders environment.
In the challenges and growth environment, as we have indicated and modeled there, we are pretty successful, and therefore the volumes are growing to an extent, and the number of clients are growing to an extent, that it is pretty unlikely for us to keep the cost flat in that environment. Actually, we don't mind the cost to grow, if the income grows faster, and as a consequence of that, the cost-income ratio goes down. In the wholesale banking environment, as indicated, we do expect income to increase. If, at the same time, we can keep the cost flattish, not per se on a quarter-by-quarter basis, but over the period of which our plan is, then we expect the cost income to improve.
Given the fact that there are three completely different businesses that we're managing, we don't want to come out and saying, well, on a quarter. Clearly, even in challenges in growth markets, the income will not grow as fast, or the volumes will not grow as fast. The cost growth will not be as fast either. It's really something that we look at how the franchise develops. Overall, therefore we keep managing on a cost-income ratio from a cost-income ratio perspective. Overall, we have guided that we do think we can further improve efficiency by building a Model Bank, basically a bank that is scalable across different countries. We think the most efficient model that we have, the digital model, and as a consequence of all of the intended actions that we have, we will move the cost-income ratio down to the 50%-52% area.
We're not going to manage specifically on a flat cost base on a quarterly basis, because I don't think that's wise in building a strategy. In building a strategy, certainly given the fact that we have a disruptor model, that we have a challenge, I think you should allow growth to be there as well. Clearly, in relation to your cost growth, and you have to manage that. On Basel IV, I give the word to Patrick.
I think the only people who come out of the current proposals looking favorably are those small banks that are on standardized, because standardized, they're the only ones who would not have a material impact. There has to have been four iterations. I think the Basel group has been struggling to try and find how to reintroduce a standard model, essentially, or floors, with an impact that's not material, and so far, they have not succeeded, as I said earlier. It remains to be seen how they square this circle. Right now, they're struggling.
There's nothing you can say on which books, is it mortgages, is it industry lending or large corporate loans, where the main issue is, or is it across those books?
There's nothing I'm going to say, no.
Okay. Thank you.
As there are no further questions, I'll now turn the call back to your host for any additional or closing remarks.
Okay, thanks. Thank you for joining us on this call. I think we had a good discussion. Good questions. Thanks for that. The way you prepare for these sessions and the questions you raise makes it all the more interesting for us as well, because it's with people like yourself that we improve our franchise going forward. That improvement has shown this quarter as well, with a profit of EUR 1.3 billion for the quarter. We are showing that the Think Forward strategy is working. We're growing our number of customers. We're growing our number of primary customers again this year, with having more than 400,000 new customers year to date. We're growing our loan book and savings book as well. At the same time, we are improving our capital position.
This quarter again showed that the strategy is a good recipe to make sure that we improve on all accounts. Thanks very much, and talk to you later. Bye.
That will conclude today. Thank you for your participation, ladies and gentlemen. You may now disconnect.