Good morning. This is Maureen welcoming you to ING's first quarter 2016 conference call. Before handing this conference call over to Ralph Hamers, the 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 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 is posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of any offer to buy any securities. Good morning, Ralph.
Over to you.
Thank you. Welcome everyone to ING's first quarter 2016 results conference call. I will talk you through today's presentation, Wilfred Nagel and Patrick Flynn from the Executive Board are here also to answer questions thereafter. Let's turn to page two. If you look at the quarter, I think I can be pleased with the achievements in the first quarter, as we continue to deliver consistently on our Think Forward strategy. ING posted a first quarter 2016 underlying net result of EUR 842, performed very well. The net result was impacted by a dramatic increase in regulatory expenses this quarter. Our net interest result increased on volume growth and margin improvements, while the commission income remained stable. The quality of the loan book continues to improve as well as risk costs and the NPLs fall. Our capital position continued to strengthen.
The group fully loaded Core Equity Tier 1 was up to 12.9% or 13.2% pro forma for the full divestment of NN. If we turn to the strategy, in March 2014, we launched our Think Forward strategy, we continue to make progress on many fronts. I wanted to start today's presentation with a quick review of some of the highlights of our strategic development before we talk about our commercial development and before we talk about the final financial results. This quarter we're paying a little bit attention to both the Netherlands as well as innovations in fintech. If you turn to page four, you see technology, digital banking. As you know, are changing the way that our customers want to do their banking, and this requires us to be flexible, requires us to be agile.
In the Netherlands, we've introduced the omni-channel approach, which means that the information is captured only once, so the customer can seamlessly switch between channels without information being lost. Basically, we put the customer at the heart of the process and organize our channels around him or her. The second key change we have made to our organization in the Netherlands is the agile way of working, which we have now introduced. This means that we work with multidisciplinary teams, and they enable us to react faster and more effectively to the changing customer needs. To our knowledge, we're the only bank to have tried this approach, and we are now looking at launching this way of working in other countries as well.
On the innovation side, over the last couple of quarters, we have informed you about new introductions of innovations that we developed ourselves in the way we deal with our clients, new products, new apps. What we do with those is that each of them we are testing in a specific market, and once successful, we copy them quickly, and roll them out into new countries. If we then move to slide six, to the extent we don't have the innovation internally, we clearly also have to look externally at some of the developments that are happening there. I think it is important that sometimes you cut through the noise of the fintechs. Everybody talks about fintechs. There's a lot of fintechs, but the question is fintechs. I think that's where we are very clear. We have a strategy.
That strategy is aimed at differentiating the client experience. That strategy calls for a new approach on assets capabilities. We very much look at fintech initiatives in the areas that can improve our customer experience, and as well can deliver asset-generating skills, as you have learned over the last two quarters when we talked about Kabbage and WeLab. What is so attractive in working with fintechs is that they have an entrepreneurial spirit. They're agile. They have technology available, the newest technology available. What they find attractive to work with ING is the fact that we are agile, that we are what we call a fintech of all electric. With our ING Direct approach and our approach, we have a strong brand and marketing capabilities. We have capital, and we have access to the customers that they can use in order to try their initiatives on.
Working together, we feel that we bring new and better service to our customers at a much faster pace than we could do only looking at our own innovation. It's a combination of the two. Much aligned and consists with our strategy. We don't go after the next best idea if it doesn't fit the strategic direction, nor our culture. Results as well, all of this page seven. If you really focus on the customer, you see that the Net Promoter Score improves, and we are now ranked number 1 in seven out of the 13 countries. This recognition underscores that ING is delivering on the customer promise, and that's at the heart of our strategy. We're growing customer numbers.
Also this quarter, again, 250,000 new customers coming in, 100,000 new primary relationships coming in, we're growing on the back of that, our savings and lending franchise. That is then also reflected in the way our balance sheets develop. For example, also in this slide, you see that we have made steady progress on building more sustainable balance sheets in our challenges and growth markets, which has been part of our strategy. You've seen that there is less dependence on mortgages, and there is an increase of wholesale lending, as well as retail banking, non-mortgages in the balance sheets of the challenger and growth markets. It's a more diversified lending book, and that supports the NIM as well. We move to the results. Slide nine. We posted a solid set of first-quarter results despite significantly higher regulatory cost.
The regulatory cost increased by over EUR 300 million from the first quarter last year, we've also had much lower volatile items this quarter, that's what you see in the middle of this slide. If you adjust for those items, the regulatory cost and the volatile items, you look at the underlying trend, you can see that on slide nine, that the pre-tax result was roughly stable from the first quarter of 2015, slightly up from the fourth quarter. That reflects the positive momentum in the business, notwithstanding the difficult quarter for financial markets. Our net interest result was strong again, this increase was driven by good volume growth and slightly higher margins, reflecting reductions in our client savings rates. In the first quarter of 2016, we reduced savings rates in several countries to align with the record low interest rates.
These rate cuts, together with a slightly higher margin on lending activities, were the main driver behind the increase in NIM this quarter. Though it was also supported by some one-offs in bank treasury and the corporate line. If we then look at the core lending development slide that we use every quarter to show you the commercial progress as well. On slide 11, you see that we have continued to deliver on lending growth also this quarter. Our core lending business increased by EUR 7.1 billion from the fourth quarter of 2015, that's driven by healthy growth in both wholesale banking and retail banking outside of the Netherlands. Therefore, we remain comfortable with our lending growth target of 3%-4% per annum. On the commission income. Commission income has also remained relatively stable for us this quarter compared with the fourth quarter of 2015.
As you may remember, and that included a positive one-time impact on the consumer loan origination in Germany. If you compare the underlying commission income was up due to higher fee income in Belgium on investment products and better revenue on current accounts in the Netherlands. Volatile items, which actually were quite significant in the first two quarters of last year. Lower income from financial markets reflecting the challenging market conditions. Turning now to expenses. Our expense base is more and more impacted by regulatory costs, you can see on slide 13, the difference it makes to our cost-income ratio this quarter. You see on the slide how the cost income has developed ex regulatory costs, that is really into the range that we had indicated earlier, but at the increase in regulatory cost is taking us off that path.
It's important for you to see that influence of the regulatory costs on the cost-income. Our latest estimate for regulatory costs for 2016 is EUR 960 million, which is an increase of EUR 340 million from 2015. There is another reason why it is so high in the first quarter. IFRIC 21 requires us to book a large portion of these costs in the first quarter of the year. It is disproportionately high in the first quarter as well. All of the annual increase, nearly all of the annual increase will be incurred in the first quarter with the booking of EUR 496 million. This makes the year-on-year comparison a little bit difficult. What you can also see in this slide is that excluding regulatory and redundancy costs, expenses have remained relatively flat on previous quarters.
The actual underlying cost, the cost that we manage in our organization, has been stable despite growing the franchise. That's a real good result. It shows that some of the restructuring programs that we launched, that they actually deliver the room to grow in other areas and keep costs stable at the same time. Moving to the quality of our loan book and the risk costs. The quality of the loan book continues to improve. As you can see, total risk costs were 33 basis points over average risk-weighted assets this quarter. Again, below our through-the-cycle average. The NPL ratio decreased to 2.3%, and that's an improvement for the fourth consecutive quarter. That's both in retail banking and wholesale banking. Dutch retail, you see also in the orange part of the stacked bars has also continued to improve also this quarter.
We have taken some risk costs in our oil and gas portfolio this quarter, and the NPLs for oil and gas have edged up 2%. Overall, the oil and gas portfolio continues to perform rather well, that reflects that on the higher risk segments of the lending, we are invariably a senior secured lending. We rank ahead of the bondholders and the equity in a downturn or default situation. We want to make that clear and can have a discussion later on it. That is the explanation of why risk costs are okay in the oil and gas portfolio. We turn to slide 15. Here you see how the regulatory costs have impacted the pre-tax results of the retail businesses in the different regions.
As you can see, excluding the regulatory costs, the underlying performance has been on the back of better Net Interest Income and commissions across. You see that the impact of regulatory costs on the Wholesale Bank was less significant than in the Retail Bank, still a drag on the results for the quarter. While our financial businesses suffered from the challenging market conditions, on one side, our lending business actually performed very well, they continue to perform very well. You see that in both industry lending as well as general lending and transaction services. Slide 17. Group Core Equity Tier 1 capital increased to 12.9%. That primarily reflects the positive impact from the reduction of our stake in NN Group.
The pro forma group Core Equity Tier 1 ratio at a full divestment of April 13, is 13.2% in the first quarter of 2016. I think it's also important to mention that similar to last year, ING has decided not to include the first quarter net results of EUR 1.3 billion in the group Core Equity Tier 1 capital. The net result of EUR 1.3 billion is not included in the group Core Equity Tier 1 capital. That profit that we don't include, includes two components. The first one is the net gain of EUR 0.4 billion on the sales of NN Group in January and April. That's equivalent to 14 basis points. That brings the pro forma level more or less in line with the 13.4% then, that we disclosed earlier this year in the previous quarter.
The second component is excluding the gain on the sales of NN, which is EUR 0.8 billion, and that's equivalent to another 24 basis points. That's what you see in slide 17. Slide 18. If you look at the Ambition 2017 targets, that basically we are delivering on almost all of the ambitions that we set out two and a half, three years ago when we launched our strategy. The cost-income ratio and the return on equity, however, are impacted by the dramatic increase in regulatory costs for this quarter. If you would equally distribute the regulatory cost over the four quarters of 2016, the first quarter 2016 return on equity would actually have been 10%. Then slide 19.
It's just an overview slide to show you how we have gone through restructuring and the separation of bank and insurance, and that restructuring is now fully done with the final divestment of the stake in NN Group. We're obviously delighted that we have completed the final divestment with the sale of 14% in NN Group in April. It's been a long journey since we started this process in 2009. We've done over 50 transactions, raising more than $40 billion in proceeds, often in raw consensus, but it has helped us through the crisis, and it has made us an even stronger bank going forward. If you look at ING at this moment, we have a strong portfolio of leading banking businesses. Our strategy is clear, and we are well placed to empower our customers and deliver sustainable results to our shareholders. To wrap up and transfer to the Q&A.
The quarter summarizes well on the volume growth, on the NIM improvements, on the stable commission income. Net interest income good, commission income good, financial markets The weakish in the first two months of the year, and that's what you've seen on the results. That's what you've seen on the results on the income side. On the cost side, the regulatory costs that are much higher in the first quarter, specifically. If you look through all of this, it's solid development and a good result. The underlying performance is strong, and that's important. I'd like to open the call to questions now.
Thank you. If you would like to ask a teleconference question at this time, please. If you wish to cancel this request, please press the star followed by the two. There will be a short pause while participants register for a question. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. We will now take our first question from David Lock, Deutsche Bank.
Morning, everyone. First one for me, please, on the credit quality. I just wanted to ask if you could give any comment on or color around the shipping book. We've seen a couple of other banks that have taken additional charges here. Just wondered if you could update us on the size of that business for you. The second question is on regulatory costs. I think we've seen over the last couple of years an ever-increasing regulatory cost bill. Just how confident you are that this really is the kind of total that we will have for regulatory costs now, or do you think there is potential for further rises in regulatory costs going forward? I guess if you could update us on how you're trying to offset some of that inflation elsewhere in the group.
I know you've got flat costs despite loan balances up, but if you could just update us on the kind of initiatives and how those are going, that'd be great. Thank you.
I'll give the first question to Wilfred, and Patrick and I will share the second one.
Good morning, David. On shipping, we have a book that consists of both the pure shipping, i.e., shipping companies, major lines, as well as container leasing, shipbuilding, ports, and other services. The total amount is around EUR 12 billion, and I'll give you a bit of a breakdown of that. The large shipping companies lines, of which you would recognize pretty much all the names, I'm sure. That's slightly over EUR 7 billion with NPLs of 1.5%. There is the inland shipping and coastal shipping book of EUR 1.3 billion. That is more problematic. I'll come back to that in a minute. There is a container lease business of about EUR 2 billion with 0% NPLs. Shipbuilding and repair, EUR 1 billion with 0.8% NPLs. Ports, EUR half a billion with 1.4% NPLs. And shipping related services of EUR half a billion with 1.6% NPL.
As you see, the vast majority of this book is relatively unproblematic, with NPLs well below the global average for ING's book. Turning back to inland coastal shipping, that has NPLs in the 20s, which I think shouldn't be a surprise because a large part of this sits actually in the business lending books in the Netherlands that we have been showing pretty poor performance on for a number. It's now improving. A lot of the pain that we have taken on inland and coastal shipping has been taken, and has been taken through that business lending book in the Netherlands. I think it's important to make sure everybody understands the overlap there. The provisions that we took on this whole book in Q1 were not material. They were well below 10% of our total provisions. Maybe a general comment.
There is a lot of talk in the market about shipping at the moment. What we see in terms of problems in that market tends to be related to non-recourse financings to partnerships. These have been heavily used in Germany, also here in the Netherlands, as investment vehicles for private individuals, helped by accelerated depreciation schemes that made it quite an interesting tax shelter. The issue working out these loans is obviously that you're dealing with a number of investors there that are not interested really in injecting more capital or taking an active management role, and therefore you simply end up typically liquidating the collateral. As I said, in our case, that part of the book is relatively small, and most of the issues have gone through the P&L over the past few years in the business lending in the Netherlands.
Okay. Patrick, on regulatory costs.
On regulatory costs, there are three key buckets for regulatory costs, I think all of which are now in situ, which should mean that we should not see a significant of this level of increase year-on-year. The three buckets are deposit guarantee schemes, and there, the Dutch introduced one which come into effect in 2016 we didn't have before, which is EUR 130 odd million, which is the reason for the bulk of the increase. We can get growth in that, but that would come from growing our franchise, but that should be relatively modest, but in line with growth of our client franchise and growth of deposits. Bank levies, bank taxes. There's been an increase there, primarily due to the Poles introducing a significant bank tax. We have bank taxes from the Dutch, the Belgians, the Poles.
To our knowledge, there are no other major countries where we're in there introducing new bank taxes. The Single Resolution Fund, euro resolution funds are in situ as well. The structural part is in place. Any further growth, as I say, should really come from growing the franchise, unless some other country we're not aware of introduces a new bank tax. As I say, I don't expect this quantum of increase to recur again.
Maybe on the accounting, why some of this is fully taken in the first quarter?
Yeah. I'm talking about full year impact, and there is a timing impact which requires you to upfront some of this into Q1, the numbers I was talking about are year-on-year increases. If you want me to go through the why it's Q1 versus later on, I can do that as well.
How are we looking at offsetting those? Clearly, this is such a big amount that you can't absorb those in a quarter, not even in a year. Generally, we talk about different kinds of headwinds in low growth, low interest rate, as well as high regulatory cost environment. We do see also there to be tailwinds, at least for a franchise like ING, and I think the whole digitalization is a tailwind for ING. If any bank understands how to use digitalization in order to improve customer experience, and with that make the company even more efficient, it is ING. Clearly, the offset in the end should come from how can we use digitalization for improving the efficiency. That customer behavior is only changing faster, so we can also improve and accelerate some of our strategy, and that's what we're looking at right now. Thanks very much.
We will now take our next question from Andrew Coombs, Citi. Please go ahead.
Good morning. First a question on NII and then one on financial markets income. On NII, there's obviously a number of moving parts within the NIM calculation in particular. You talk about lower client savings rates, growth in higher margin lending, a bit on the client savings rates, growth in higher margin lending, a bit on the treasury profit line, which sounds like it's more one-off in nature. Then you talk about the offset in the reinvestment yields. Would it be possible just to break down between those factors, one, two, and Q? Second question on financial markets. If we look at the income ex CVA, DVA down 33% year-on-year. You draw out lower income in rates, and equity in particular. I'm slightly surprised that your result is weaker than peers, particularly given your macro bias.
Perhaps you could explain what's causing the sharp year-on-year decline there, and why you've underperformed the broader industry. Thank you.
On interest margin, as you see, the aggregate increase is four basis points, which comes from a combination of factors. Some of them are interrelated, so it's not always that easy to pull them apart, but I'll try and help. There's three things we've been doing. Again, these are the three levers we've been talking about consistently over the last year. Improving the asset mix on our balance sheet, moving away from pure mortgage growth to higher margin assets. We see success particularly in challenging growth markets with increasing non-mortgage SME and also commercial banking, wholesale banking assets in those markets, which was a nice driver of NIM increase in that segment. Optimizing the balance sheet as well, which again means as we grow our client franchise, bring in more deposits, we deploy those increasingly into own originated assets and less so in bonds.
That's another lever that's been working well. Then we cut deposit rates, trim deposit rates, which gives a benefit as you do it, but it's against the backdrop of a persistent low rate environment. That's something you have to keep up to offset that negative headwind. There were a couple of things in bank treasury corporate line, as you rightly point out, are likely not structural, like day count benefits you get in the first quarter. We're 151 for now. What we're trying to achieve, again, we're trying to keep our commercial margin stable-ish, done previously. How will that translate? Probably, in the high 140 is where we will try to be throughout the course of this year. Maybe one or two of the increases is one-off related.
On your financial markets side, I can't compare to peers. I think it's for you to do. I can only talk about ING. If you look at our financial markets franchise, then in the area of the foreign exchange business, the global security finance business, as well as the money markets business, those results have held up. In the global capital markets business, results were even further up. And some of the interest rate for us in this quarter.
If I could just come back on the interest margin. If savings rates were to be unchanged in the quarter, hypothetically, what would be the drag from the lower reinvestment yields on the current account balance?
I know you want more granularity in numbers that forecast the future, which we're reticent to do. The best I can give you is that what we've done so far, and we can continue to do for the rest of this year at least, is that we can manage deposit margins such that we can defer or defray the impact of low rates by managing deposit rates. We still have the ability to do that. Hence, with improving the balance sheet, optimizing the mix, the commercial margin, in aggregate, we think we can hold stable for the rest of the year.
Okay, thank you.
We will now take our next question from Anton Kryachok from UBS.
Good morning. Thank you for taking my questions. Two questions, please. Firstly, continuing on the theme of margins. I've noticed that you've been active at repricing your deposit base in the Netherlands and Belgium, but the savings rates in Germany have been sticky for the last couple of quarters, at around 50 basis points. Does this mean that you think we've reached a trough in deposit pricing in Germany, or do you think there is more to be done there? The second question please, on capital and dividends. You've set aside 100% of this quarter's profit for dividends. That is, I think, roughly equivalent to half of all the annual dividends you've paid last year. If you continue the current pace, you'll quickly provide more than the last year's worth of dividends. How shall we think about capital accretion going forward?
Are you planning to set aside 100% of next quarter's profit as well until you reach a certain point? Then on dividend accretion would be very helpful. Thank you.
Okay. Well, thanks, Anton, for the questions. On margins, we did move the rates in Germany in December. Clearly the way we move rates on the savings side, it really depends on a little bit the market, the customer behavior, the funding that we need to fund also the lending side in general. It's a combination of factors that makes us move rates on the savings side. The only thing I can say is that over the next couple of quarters, as Patrick was already saying, whether we're talking Germany or the Netherlands or wherever, that generally it's a management of your savings rates on one side, weaning the book away from mortgages towards higher yielding assets that will kind of create a mix of keeping an overall NIM that is high 140s. Sometimes we can change and we can decrease our savings rates.
Where we feel we can, together with keeping the interest of our clients into account as well, we will certainly do so and there is room then. On the capital dividend front, last year already we showed you that we kind of wanted to have a practice in place if we don't have to reserve our profit and put it into capital. We want to keep it separate in order to build a reserve so that we have flexibility to determine our dividend going forward, to determine the dividend both interim as well as final. You can't read anything into this as to whether we're going to pay this out in full or not and what our payout ratio will be. It's just that we look at two factors.
One is how can we make sure that we have a reserve to pay out a dividend on one side, and how do we make sure that we will stay into category 1 as determined by the ECB, i.e., how do we make sure that we comply with a fully loaded Core Equity or Tier 1 of 12.5% for us, that we are at liberty to pay a dividend without approval, that we have the flexibility to pay dividends. Honestly, I think the whole thing is a good problem to have. On the dividend side itself, as you said, we have indicated when we launched our dividend policy that that will be a dividend that will grow over time progressively. Also this year, given the fact that we do see some regulatory changes in coming to a final conclusion on it.
Thank you. That's very clear.
We will now take our next question from Pawel Dziedzic from Goldman Sachs.
Good morning. Thank you for the presentation. Two question from my side. The first one is follow up on the regulatory cost. You mentioned that you would not expect similar volatility in regulatory cost going forward. When you look at your regulatory charge for this year, EUR 960 million, you booked right now around 50% or slightly over 50% of that. Can you confirm that you have full clarity of the charge? In other words, are there any assumptions that you still have to take over the scope of the regulatory charges in the remaining nine months of the year? I have a follow-up on asset quality. You mentioned that NPLs and impairments slightly increased in your oil-related portfolio. Could you comment if this is above or below expectations?
How should we think about losses related to reserve-based lending, given the oil prices are now above 30% level that you indicated in the past? Would you still expect those charges to increase in the second half of the year? Thank you.
Yeah, on regulatory costs, we do have a reasonably good view based on the correspondence we've seen from regulators and interpreting the rules that have, in some cases, just recently been published on how these regulatory costs are computed. Ralph has referred to his homework on IFRS and understanding of IFRIC, which I'm very impressed about. He embarrasses me by his technical knowledge. We do have a reasonably good insight on that, and I think we tried to put it in the slide on page 13. An IFRIC-proof distribution of regulatory costs is laid out for you there.
Yeah, on oil and gas. You have 34, both our usual disclosure as well as a little bit more detail. I'd recommend you have a look at that. Regarding your question on how do we see the deterioration given current oil prices, well, obviously, a higher oil price helps. We should keep in mind, though, that what protected us partly in the times that oil prices were even lower was hedging. That, of course, works the other way around now a little bit because we won't see the full benefit of the oil price increase on some of these credits because of the hedging either. Having said that, the book is behaving pretty much as expected. Talking about reserve-based lending, in particular, just anecdotally, we've seen over the past four or five weeks the odd bankruptcies in the reserve-based lending business in the U.S.
Three of those were ING clients. One ended with no loss and has been finalized. One, just interesting anecdote I think, started with about EUR 110 million of exposure. We're now down to EUR 10 million, and we expect to come out of that also with no loss. The third one had a small single-digit loss on several tens of millions of initial exposure. Although it is anecdotal, it underlines Ralph's point about these loans being senior secured and not at all comparable to high-yield bonds or second lien or mezzanine tranches. It really depends on where you are in the capital structure, what the impact is. Having said that, yes, we will continue to see some pressure on the oil and gas-related book.
Reserve-based lending, where we do expect to have some losses, but certainly at this point, we don't expect any dramatic deterioration compared to what we have been saying earlier. There is also the offshore drilling and services part of the business. That depends, on one hand, on the continuation of a number of big producing wells. That's in the areas where we do business which we've mentioned before, is very high CapEx but relatively low OpEx, lower marginal lifting costs than the current prices. Most of these fields simply continue to produce and therefore continue to consume services. However, what we are seeing, of course, is slowly growing impact of the cutback on investments in new projects, and that over the next few years will obviously bring some more pressure on the offshore drilling and services book.
I don't think we need to make any changes to our guidance. We gave you the results of our internal stress test last quarter. We said that EUR 30 for a long period, we would see the risk cost between 14 and 15. If it were to stay at EUR 20 for a long time, we would expect to go back to the 14 levels for 2016. I think at the levels where we are currently, we're still looking at risk cost guidance around last year for the total of 2016.
That's very clear. Thank you very much.
We will now take our next question from Bruce Hamilton, Morgan Stanley.
Thank you. Morning, guys. If I could just come back on costs. Obviously, you've given us good color on the regulatory degree of confidence that hopefully the EUR 960 million is the right number. On the underlying cost there, if I look versus Q1 last year, cost growth grew at about 3.5%. Obviously, you're much more stable on the subsequent quarters. How should we think about the underlying cost base for this year? Is it better to look at it, at least a small single-digit percentage growth, or does the move in towards digital and what you're doing with your business mean that you think you can get things much nearer to flat? Secondly, just on the RWAs in the group. Obviously, they drifted lower by a couple of percent in the quarter.
Just to understand how you were able to manage that down, whether that was largely FX driven or other drivers in terms of the RWA modest decline. Thank you.
Yes. On the cost side, basically the underlying cost we expect going forward in the next quarters to be flattish. It's a mixed bag, really. We see that the restructuring programs that we
Belgium and the commercial bank and the wholesale bank. Those are delivering, we see costs going down in some areas of the bank. We don't mind cost increases if it leads to further income increases. Over the last couple of quarters, you have seen that costs in the industry lending business, the franchise, we have hired people there. In Germany, we have shown that last quarter as well, that we didn't mind costs going up in Germany because income was going up even more rapidly. What we do generally is that where we save money, we can actually invest in franchises where we do expect growth, and for the foreseeable quarters is exactly what we want to do. Flat-ish costs hovering around this level is what you can expect.
Yeah. The main components of the changes in risk-weighted assets are, on one hand, lending volume, which created an increase of about EUR 4.5 billion, partly mitigated by FX changes, which created a drop by about EUR 3 billion. There was credit migration for about minus EUR 1 billion. The biggest drop in risk-weighted assets came from the operational risk side, where we had a model update that both reflected industry data, which led to a slight uptick. Our own internal scenario analysis and projections led to a slight decrease, and some incremental diversification benefit as well. Market risk was up slightly, but that hovers around EUR 10 billion for a long period already. Those are the main changes.
Very helpful. Thank you.
We will now take our next question from Kirishanthan Vijayarajah from Barclays.
Yes. Good morning, guys. Going back to financial markets, it does seem to get allocated with a lot of the regulatory costs in the wholesale bank. I know you front-loaded some of the regulatory costs into 1 Q, but is your expectation that moves back above break even for the rest of the year? More generally, given those regulatory costs aren't going to disappear anytime soon, do you think you might need to do more shrinkage or rationalization within financial markets? Because on the basis of what we're seeing at the moment, the ROEs in the commercial bank. Thanks.
Yeah. The EUR 50 million of the regulatory cost goes to financial markets at 12, the same quarter of last year. Those are the regulatory cost numbers. That's not the real driver. The revenue fall is more to do with the pretty in January and February. Clients simply weren't active. That is not likely to stay forever. I think March was a little better, and we'll see how sentiment improves. It's more about dealing with client flow. As that picks up, we would hope to see improvements. All of the revenue lines within financial markets were positive, so it's not about losing money and taking positions. It's more the volume of client activity was very low, which is a common phenomenon, I think, across the market.
Yeah, of course, we always look to optimize and improve our business and respond to whatever structural changes we may foresee coming in all of our business lines.
Okay, thank you.
We will now take our next question from Ashik Musaddi, J.P. Morgan.
Yeah, hi. Good morning, everyone. Just one question on your loan book growth. You achieved a loan book core lending growth of around EUR 7.1 billion. Still coming from the wholesale banking. Can we get a bit more color about what is it? What book is it? Because it mentioned industry lending and general lending, et cetera. Just related to that is what sort of margin uplift are you getting because of this shift away from retail into wholesale banking? Any color again on the margins you're getting on this new book?
In the wholesale bank, it's a mix between industry lending as well as general lending, as you saw. In the industry lending side, it's a bit across the different franchises that we have. There's no particular franchise that grows faster than the others. You see here the growth in EUR. It's a dollar business, so in EUR it has been stable, in USD it has been growing. On the general lending side, we see quite some growth coming through there as well, which is related to normal client franchises and as well as the transaction services business that we are growing in. It's truly across the board. It's across the whole franchise. That's basically the healthy aspect of this. Yeah, go ahead.
On the margins, obviously wholesale banking margins are higher than mortgage margins because they're priced that way and not because you've much lower loan losses expectation on mortgages retail than you have wholesale banking. They are higher, and that's to pay for the inherent risk that we run in them.
Yeah. One thing I wanted to check is there any sign of margin compression in the retail banking as well? One thing I'm struggling is, if I look at your pre-tax results in Germany, it's more or less flat for five, six quarters. Whereas, I presume your book has still grown in that business. What is driving that? Is it margin pressure you're seeing on that business, on the asset side? Sorry, liability side.
I think that's a big success that we can grow.
Yeah
bring in new clients, bring in new deposits, which we have to pay 60 basis points on, keep the margin slowly increasing. It goes to the whole point around the strategy on optimizing the balance sheet mix, is that we can grow that franchise, bring in new clients, and put that money to work. Again, if we can continue to do that and hold the margin stable, we're more than happy. Growing a franchise is my humble opinion.
Okay. That's wonderful. Thank you.
We will now take our next question from Saku Harjumaa from Autonomous. Please go ahead.
Morning, gentlemen. Just two questions, if I may. Just starting with the financial markets business. This did come in weaker than expected. I think you hinted towards this in the last question, but could you just give a sense of how activity in 2Q is panning out as compared to the experience in 1Q? Namely, particularly how April compares to earlier in the year, particularly on the rates and equity derivatives businesses. Then just on the retail Netherlands, expenses excluding regulatory costs came in at EUR 601 million for the quarter. Could you just identify how much restructuring provisions are actually in that figure? You seem to reference some in the text, but I wouldn't mind a sense of the magnitude.
Markets side. Well, what you've seen in the financial markets side is that given the fact that our financial markets business is increasingly so a real client business, that in the first two months of this year that clients were really waiting for developments to stabilize, the markets to stabilize before they would take out their hedges that they would normally do in the first two months. Some of that business we've seen coming back in March, we also see it coming back in April. March and April look much better than January, February on that side. The restructuring expenses in the Netherlands.
Yeah. The big ones we tell you about and some of the more regular, because we're constantly trying to optimize and improve. Ralph talked earlier about what we're trying to do to improve efficiency and effectiveness. There are nearly every quarter, some degree of restructuring provisions we take. We don't give a number on them every quarter, but sort of low mid-teens is in the order of magnitude.
Okay, thanks.
We will now take our next question from J.P. Lambert, Keefe, Bruyette & Woods.
Yes, good morning. Two areas of question, if possible. The first one is the latest proposals on the Basel III, Basel IV area, the switch to standardized approach for large corporates and project financing. I was wondering if you have some views on the likelihood of this being implemented and the process of developing that area. The second point is the outlook for volume growth going forward. You benefited from wholesale banking growth this quarter and over the previous ones. Going forward, you've always indicated that you expect a growth coming from other areas such as SME lending and consumer finance. However, you're still at the pilot base, and I was wondering if the quantum development required will help you to sustain the growth rate you have in mind. Thank you.
Yeah, on the regulatory cost, what we see when you hear is that the eminent individuals within the ECB environment, and I think also the U.K. for that matter, are saying that the quantum of capital in the system is adequate, and they believe in advanced models. What we see coming out of the Basel Committee is not consistent with that, and it hasn't been for some time. The positive thing is that there's increasing regulatory recognition that these things are not distinct, and we as an industry are working together with our colleagues in the banks to keep updating the QISs for the three different Basel three, four, whatever you want to call it, iterations, and present the impacts back to the regulator.
We're working very hard on the regulatory and lobbying front to make sure that there is a very clear awareness within the powers that be of what Basel is saying and that it is not consistent with the expressed wish of the leaders of the ECB.
Now on loan growth, I think you're right in terms of when will you see the quantum. We see high growth rates, actually, but they start from a low base, if not a base that is not even there, right? In some of the countries in which we are piloting. In the more growth markets we do. What is important to us is that we see the growth and that we see the growth happening at high percentage levels. From a quantum perspective, it will not be as visible yet as you see some of the success that we have in the Wholesale Bank.
In the end, what is important is, and that is what you see in slide seven of the deck, is that you do see the asset mix changing over time, and that in the SME and consumer finance area, which is the gray part of this stack chart. We're seeing that it's growing from 27 to 34. It has the higher growth rate, higher than mortgages. It's not as high as the commercial bank in those markets, but it is growing with 11.5% just over a two-year period. It's not bad. You see it there, and it's happening. These are important engines for us. It's also important that we show our commitment to the economies in which we get our savings there as well.
The momentum is there, but before you see it back in billions and billions and billions, you see it takes a little bit longer, but it's happening and it's happening at double-digit growth.
Thank you very much.
Our next question comes from Paul Fenner from Societe Generale. Please go ahead.
Hi, morning. Thanks for taking my call. I've got a couple of questions. The first is, in terms of your resolution strategy, given that you've now sold down NN, have you decided what strategy you're going to use in terms of holding company, operating bank? Can you just give us a bit of color as to what the issues are and what it is that you're waiting for? The second question is, in terms of bond issuance, you've done one Tier 2 issue this year, but you haven't done any AT1 for over a year now. I just wanted to get a sense of what your near-term plans for subordinated debt issuance were. Thank you.
We have to find out from the Dutch authorities what the resolution entity will be. That was promised clarity on that, but it seems to be slipping back and probably towards the end of the year. We're in a strong position. We have a holding company, we can use that. We have the operating company as well. It's really up to them to decide which one they want us to use. Until we know that, it's difficult to change your issuance strategy. What we were-
Do you know what it is that they're waiting for?
We're waiting for the regulator to-
Yes
indicate to us which entity should be a resolution entity.
Right.
Once you understand that is the entity from which you would want to do your issuance.
Right.
That's either a holding company or op company. The point is we have both. We have optionality on that. The first two quarters were horrible for the markets, particularly for Tier 1 issuance, pretty wide spreads out there. Given our strong capital position, we didn't have to move there, so we didn't. But what we did do is a bit of an innovative Tier 2 issuance where we issued it out of the bank with an option that within two years we can move it up to the group. We priced that optionality into the structure.
Plans over the next couple of quarters?
Yeah, we don't comment in advance. We have a strong capital position. We have a lot of flexibility given the long date grandfathering of our hybrid. We take our time and pick our moments.
Okay, many thanks.
Our next question comes from Alex Koagne from Natixis. Please go ahead.
Yes, hi there. Just one or two follow-up question from my side. The first one is on the NIM guidance. I think that you are guiding for a kind of stable net interest income in 2016 compared to 2015. Is that something that you can confirm today given the good Q1 and also the low margin and the low interest rate environment? I mean, just trying to understand what is your view, best income. Then on commission, I was just wondering whether you expect your commission to grow in 2016 compared to 2015. Thank you.
On NIM guidance, Alex, yes, you're right. What you see this quarter, that the NIM is actually up a little bit. We can actually confirm that we can manage the 2016 NIM stable versus 2015, as that it's a mix of things we use. It's the funding side, the savings, it's the lending side and moving towards higher yielding assets as well. It's a mix of the three. For 2016, we're quite comfortable on managing it at the higher 140s level, so it's at stable versus 2015. On the commission side. Clearly on the commission side, if you look at our income picture, you see that we're, in comparison to others, a little bit low on commission. Our commission income has been stable. We actually feel that there is opportunity on the commission side in our model.
We do expect an even more so going forward. That's basically the core of our strategy, not so much the commissions, but the core of our strategy is the primary relationship in a digital market through which you understand your client much better and through which the client really looks at you as their main bank, then you do get the cross-buy, and linked to that cross-buy will be higher commission income. That's the whole strategy. True. Thank you.
We will now take our next question from Anke Reingen from Royal Bank of Canada.
Good morning. I just wanted to follow up on net interest income. Firstly, on your guidance or your commentary about the net interest margin. I thought early on you said, you can hold it at the Q1 level around stable for the rest of the year, and I guess that would refer to the 151 minus, let's say, the 2 basis points. That would be more like 100 points. That would be more like 149, while you were just saying, you expect it to be stable versus 2015, which would be the 146. If you can maybe just clarify, for the net interest margin was very strong in the wholesale bank in Q1. Do you see the level as sustainable given the investments you made or is it part of the nature of the business that's quite lumpy on the quarters as well? Thank you very much.
On the NIM, we can just reiterate what I've said and what Patrick has said, is that we think we can manage it at the higher 140s level. It could be 146, it could be 149 in a given quarter, depending on how financial markets turns out. It could be a bit higher, it could be a bit lower, but the high 140s and therefore stable versus 2015 is where we see it, being able to manage it, going forward. On the volume growth. Yes, we do think that the growth is sustainable. Whether it's front-loaded in the year or not. We always indicated that we expect a 3%-4% lending growth per annum.
Sometimes it's more in the first quarter in one part of the business, and sometimes it's more in another quarter in the other part of the business. It's the 3%-4% lending growth that we feel comfortable with over the year. If it is a little bit lumpy over the quarters, it is. It could be. There's a franchise that is a global franchise. It's an industry lending franchise on the lending side and a general lending franchise. We're not necessarily dependent on how the developments are in the Eurozone. It's truly global in different industries. Yes, we feel quite comfortable that we can continue the growth, as indicated, 3%-4% over the year. Thanks.
Thank you very much.
We will now take our next question from Robin van den Broek from Mediobanca. Please go ahead.
Yes, good morning. Thank you for taking my questions. Coming back to NIM, looking forward a bit further to 2017. If I understand you correctly, you're basically saying a high 140s for 2016. Probably, you will need to use some of your deposit rate cuts to keep it at that level. How should we look at 2017 given that we're at an interest rates clearly lower for longer? Do you still feel comfortable with the 150 to 155 targets you've put in place or should we hope that we can keep it in the high 140s? Second question relates to the DC fee. I think on previous Q4 earnings call, you indicated that if there's more regulatory clarity, you would see a chance that the regulator might reduce the DC fee.
In a recent financial stability report of the Dutch Central Bank, they seem to make a connection of the DC fee with the relatively sizable banking landscape in the Netherlands to GDP and the fact that the DGS is not funded yet. That will take up until 2024. It seems that that financial stability report could imply that the DC fee is going to stay at that level for at least a lot longer than the end of this decade. Happy to hear your thoughts on that.
Thanks, Robin. In 2017, lots of going on. I think it's too soon to say. Things are developing so quickly these days. Things are changing. It's really difficult. In terms of the guidance, the ambition that we have indicated when we launched the strategy, the 150, 155. That was a mix of improvement of margins, moving to higher yielding assets as well. Clearly when we launched the strategy, we hadn't foreseen a lower interest rate environment, at least not to this level. Depending on where we are, I think it's too soon to tell on that one. On the DC fee. It's there, and we'll have to manage with it. That's on one side. Whatever the reason is why we have it's not so important to us.
What we always basically use as arguments is that, we do believe in a European banking union, and therefore we do be one of the larger European banks, if not the most Eurozone bank, on the saving side. Therefore we do plea for a level playing field. In that case, the DC fee is not helping us. That's certainly our plea. A level playing field.
Yeah. Thank you.
Okay.
We will now take our final question from Alicia Chung, Exane. Alicia Chung, please go ahead.
Hi there. Just one final question from me, really. Provisions clearly came in below even your base case if you annualize that quarter for the full year. Can you give a little bit more guidance from here? Would you expect that this would improve your base case outlook now?
Well, you need to keep in mind that quarter on quarter, in particular, the wholesale provisions can be quite lumpy. You see in one quarter, sometimes a big release, another quarter is a bigger file coming in with new provisions, really helpful to look at it that way. We have indicated that we believe the overall 2016 number is going to be around 2015 under the current macro circumstances, and that guidance remains.
Sorry, just one last question. I know we talked a little bit about where the net interest margin might land over in 2016 and then further out. Could you give a bit of a view of where you expect deposit rates might floor? Just because obviously that's one of the key levers that you will pull from here, and we're already at relatively low levels, but perhaps there's further to go.
Well, if I had a crystal ball, I wouldn't probably be doing this job, actually, because then I would know everything for certain. Where would the deposit rates floor? We're looking at a situation in Belgium where the floor is actually set by the legal environment. We have an 11 basis points floor there. That's the floor legally. It's different per country. I think what's important is that we feel that the coming quarters, we have enough room to manage between lending margins, the composition of the asset base, and also savings to make sure that overall we have a growing franchise and that we serve our clients very well. Where deposit rates may actually floor, I can't really indicate.
The direction is down, but it's as much as I can see because you see the interest rates going down and therefore, there will be more pressure on deposit rates going forward.
Okay. Thank you.
Thank you. Thank you all. I'd like to wrap up this call. If you look at the quarter, the underlying development, the business development's been really good. 250,000 new clients, 100,000 new primary relationships, EUR 9 billion of new savings, core lending ups, and with that, the net interest result up, the commission result stable. The other income, specifically in the financial market side, we've seen a weaker quarter, and we have explained that as well. On the cost side, stable cost, lower risk cost, but a higher regulatory cost. That's disproportionate for the quarter. Overall, we feel quite well with the performance, but we do see challenges ahead. This is exactly the right strategy going forward in a world where customer experience is what counts and how we can grow. Thanks very much, and talk to you later. Bye.
This concludes the conference call. Thank you for participating.