Earnings Call: Q2 2015

Aug 5, 2015

Good morning. This is Cecilia welcoming you to ING's 2 Quarter 2015 Conference Call. Before handing this conference call over to Ralph Heymers, Chief Executive Officer of ING Group, let me first say that today's comments may include forward looking statements. Such statements regarding future development in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward looking statement. A discussion of factors that may cause actual results to differ from those in any forward looking statements is contained in our public filings, including our most recent annual report on Form 20F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Ralf. Over to you. Good morning. Thank you. Welcome everyone to ING's Q2 2015 results. I will take you through the presentation first. For questions, I have Patrick Flynn, our CFO and Vernagel, our CRO here with me from the Executive Board. Turning to the key points, slide 2. ING posted strong set results in the Q2 of 2015 supported by strong volume growth and lower risk cost. Our underlying return on equity rose to 11.8% in the first half of twenty fifteen and that's exactly in line with our ambition 2017 as you may recall. The bank capital generation remained also strong at 30 basis points, but that's offset by 40 basis points upstream to the group. The fully loaded group quarter 1 ratio increased 70 basis points to 12.3%, but that's principally on the back of the NN deconsolidation, which from a restructuring perspective is certainly another milestone. And I think specifically for our shareholders, pleased to announce an interim cash dividend of $0.24 per ordinary share, which is equivalent to €922,000,000 or as we had indicated before 40% of the underlying net profit for the first half of twenty fifteen. Now before we go into the quarterly figures, I just want to recap a picture on the first half of the year, starting with the progress we're making on strategic initiatives. In March 2014, we launched our Think Forward strategy with one clear purpose and that's to empower people to stay a step ahead in life and in business. Now the core of our strategy is to create a differentiating customer experience. It's truly all about customer. In the Q2 2015, we continued to expand our digital offerings for our customers and we also identified new ways to facilitate the financing needs of small companies. If you look at the progress we're making again in the first half year, I'm very happy to say that we welcomed another 600,000 new customers in the first half and established approximately 250,000 new primary banking relationships. And we see particularly strong growth in the challenges in growth countries in line with our strategy. Another part of the strategy that we had indicated is how can we build more sustainable balance sheets going forward. And the next slide, slide 4, you actually see that we have also made steady progress on building more sustainable balance sheets in our Challengers and Growth Markets. You remember that diversification of our assets across different segments was part in order to improve the concentration risk and but also in order to improve our return. And now you see that the lending book is more diversified with the proportion of mortgages declining and the proportion of commercial banking, consumer lending and SME and mid corporate lending increasing. And now moving to the P and L. We posted strong results in the first half of twenty fifteen. The underlying net result banking increased 31.4% from the first half in twenty fourteen and the return on equity was 11.8%. If we exclude CVA DVA, which was positive for the first half, the underlying result increased by 17% on a like for like basis due to continued volume growth and lower risk costs. And these results were supported by higher income, strong lending growth and improved costincome ratio and lower risk cost. Basically, we have the trend moving in the right direction in all of our key metrics. That's what you can see on slide 6. Now on top of a very strong profit contribution from the bank in the first half and the net gain resulting from the merger between Viesha and Kotak Bank. We've also booked contributions from both NN Group and Voya in the first half of this year, which have taken us to a net result of around €3,100,000,000 for the group. And with that, we're pleased to announce an interim cash dividend of €0.24 per ordinary share, which is equivalent to €922,000,000 or as indicated before 40% of the underlying net profit for the first half twenty fourteen. And we remain committed to returning value to shareholders and reiterate our intention to pay a full year dividend of at least 40% of ING Group's total net annual profits. And we will evaluate the potential for any supplement returns dependent on financial and strategic considerations and regulatory developments. If we then look at the capital position, slide 8. You see that the bank capital generation remains strong as said 30 basis points, but that was offset by 40 basis points capital upstream to the group. We're paying dividends from the bank to the group. And as we have indicated before, we decided to manage the surplus capital at ING Group and that's why we upstreamed the dividend. The core Tier 1 ratio of the bank with that is 11.3%, which is slightly down due to this upstream, but still comfortably above 11%. And the core Tier 1 ratio of the group increased 70 basis points to 12.3 percent and that's principally as a result of the deconsolidation of NN. I want to emphasize here that we have not included any of the 2nd quarter profits in capital. Reason for this is that this actually will give us increased flexibility to decide on our dividend payout ratios for 2015 without requiring regulatory approval. We believe this is more important than showing a slightly higher group core Tier 1 ratio for the quarter. The buffer surplus including the €2,100,000,000 not allocated to the group capital, the group now amounts to €7,900,000,000 at the end of the Q2 of 2015. Now if you then sum this up in a comparison between the ambitions that we had indicated 18 months ago when we launched the strategy and where we are right now. I'm now at slide 9 and you see that in the first half twenty fifteen, we already reached most of our ambitious 2017 targets. And I'm very pleased with the progress that we're making on all of these metrics. So far the basically the focus on the first half year and the strategic progress, let's now zoom into the 2nd quarter results. 9 gs 2nd quarter in line pretax result was strong at 1.6 €1,000,000,000 That was positively impacted by CVA DVA, which was partly offset by the negative impact from mortgage refinancings. Excluding the volatile items as shown in the table on in this graph, the pretax result increased by 19.2% from the Q2 of 2014. It was stable if you compare it to the Q1 of 2015 and that in itself reflects a positive momentum in our business. So if you correct for all the volatile items and then you look through what is really happening operationally, you see that we have real momentum in the business with an increased pretax result of 19.2%. I just mentioned that our results have been negatively impacted by mortgage refinancings. That's because our customers have moved to lock in low rates and I want to give you a little bit more information on this development. Slide 12, I'm now on. The prepayment risk and the subsequent impact in our results basically varies from one country to the other, because it's really linked to whether we can actually charge early repayment fees at the point of refinancings. With the increased rate of mortgage refinancings that we have experienced, we needed to take a closer look at our policies and our hedging models. And this has given rise to 2 changes that we have reported in this quarter. 1 affects the other income, specifically in Italy and Belgium and that's in the amount of a negative 127,000,000 euros of non recurring charges and that mainly has to do with the adjustment of the underlying hedges. The second impact is the one on net interest income. That's basically a change in the recognition of early prepayment fees in the Netherlands, which resulted in a €19,000,000 reversal of net interest income this quarter. But that actually will be spread out over the future. So that is a correction on income, but that is something we will then see coming in the future as part of our net interest income line. Looking at the net interest income line, turning to slide 13. The result rose 4% from the Q2 of 2014 was slightly down from the previous quarter, but it was principally due to a lower interest result from financial markets and the one off adjustment that I just mentioned in the booking of prepayment fees in the Netherlands. So if you correct for the 2, we actually see that the so if you correct for the financial markets and the impact from mortgage refinancings, we actually see that the net interest income has increased 5.8% from the Q2 of 2014 and was flat from the previous quarter with Retail Germany and Industry Lending particularly strong in this quarter. And zooming into the Financial Markets side maybe for a second. So the where we see a 2 basis points drop in NIM from Financial Markets or lower interest income on the Financial Markets side, we actually see still a good performance on the financial markets. It's just a difference in composition in income and a division between the other income within financial markets and the interest income. So income is good. Net interest income, if you correct it for both, it's even it's stable quarter on quarter and it's 5.8% up if you compare it to the same quarter last year. So good development. If we then zoom into the NIM. The NIM as said decreased by 4 basis points to 143 basis points. But as I indicated already, it's 2 basis points on the account of how we recognize income in Financial Markets. So there is a different division between other income and interest income. So the income line is still good, but a different position division between interest income and other income. And the other two basis points caused by the different recognition in prepayment fees of the Netherlands. So if you correct for those 2, which are not really negative, you actually see a stable NIM for the quarter. The underlying there what is causing this stable NIM for the quarter, we actually see that savings margins are a little bit up in the quarter and that's because of the adjustments on the savings rates to where the market is going. And the lending margins, if we correct for this impact in the Netherlands on prepayment fees were flat. And we expect that the commercial margins will be roughly stable. If we then look at the underlying growth of the core lending franchise, turning to slide 15, you can see that in this slide that our core lending business increased by €8,700,000,000 with a healthy growth across all different franchises in both retail and commercial banking. And that basically shows that we maintain the momentum that we have built across the network. Retail Banking increased €4,300,000,000 driven by growth in Belgium, Germany, the other challenges in growth markets. The Netherlands remains a bit weak on this. Commercial Banking rose €4,700,000,000 and that's driven by industry lending and in particular within industry lending structured finance loans with a longer tenor. So positive development there as well. And this basically shows you how you can reconcile it in the balance sheet as well. It's also notable that we're booking more and more of our commercial banking assets in the Challenger and Growth Markets, which is exactly in line with our strategy to develop sustainable balance sheets in each of these countries. Specifically also if you look at Germany, Germany has demonstrated strong growth in its lending capabilities with funded commercial banking assets hitting the €10,000,000,000 mark already. But also if you look at the underlying development of the consumer lending franchise in Germany, it continues to grow at more than 10% per annum and now exceeding the €5,000,000,000 threshold. So also a check mark on where we are in delivering on our strategy. Moving to expenses. Our expense base is more and more impacted by regulatory costs. We had already indicated that regulatory costs were going to increase. We see it happening every quarter. It is a very volatile component of the cost side because we book them at different moments in time. But if you correct for the regulatory cost and if you correct for the foreign exchange influence on our cost base with the weaker euro and the stronger dollar, then expenses increased by 3.6% from the Q2 of last year and 4% from the Q1. If you really dive into this, then you see that the expenses in Retail Netherlands and Retail Belgium, excluding the regulatory costs have remained flat, but that we continue to invest in business growth in Industry Lending and Retail Germany and other retail challenges and growth markets as we have indicated. And we don't mind that because if you now turn to slide 18, we show that in Retail Germany where we do see cost growth and in street lending where we see the cost growth that these are two examples of areas where basically we see the costincome ratio itself either already a best in class industry lending and further decreasing for example in Retail Germany. So cost growth in an area where income growth is higher and as a result you actually improve the costincome ratio and your efficiency or you actually continue at a best in class level in industry lending, I think that is nothing to worry about. Also as I indicated before, the customer base in Germany and the number of primary accounts is continuing to increase. We see the improvement of the costincome ratio. On the industry lending side, the cost increase is mainly driven by the number of FTEs that has increased 6% from a year ago. But that's because you need the professionals to actually work with your clients to do the business. The lending book is increasing quickly in that area without changing our risk appetite. So these are positive developments. And as said before, we don't mind seeing cost increases in these areas where we see either an improvement on efficiency, income growth or already franchises that are already at best in class in the market in terms of efficiency. Turning to risk costs. Risk costs were €353,000,000 in the 2nd quarter, down from the Q2 last year, down from the Q1 this year, reflecting lower risk costs in both Retail Banking and Commercial Banking. Total risk costs were 46 basis points of the average risk weighted assets. Most of the business are now close to the longer term average where we expect them to be across the cycle except for the Netherlands. If we take a close look at the Netherlands, which is then the final page for my introductory presentation before we get to the Q and A, We see that the risk costs in the Netherlands are decreasing, but still relatively high. On the mortgage side, we see it stabilizing from 1 quarter to the other quarter. On the business lending side, we see it decreasing. But specifically on the business lending side, we feel that this is still an elevated level. So that we and we expect this to continue around this elevated level for the foreseeable quarters. Clearly, risk costs in the Netherlands are still higher than we would like them to be, but we feel comfortable that the worst is behind us. We see that in economic growth in the Netherlands, the improvement in the on the mortgage side, in the housing market, the domestic demand. So the worst is behind us from that perspective. Risk costs overall will show downward trends, but they're still at an elevated level. Okay. To sum up, I think we have another quarter of strong results €1,100,000,000 for the bank, up 21.1 percent from the same quarter last year. Our strategy implementation is on track. We can see it in different areas. We can see it with different drivers. It's on track across the whole network. It's to the benefit of all of our customers with a customer growth of 600,000 this quarter this half year and 250,000 primary relationships is to the benefit of our shareholders for which we declare a interim dividend and that basically sums up the presentation. I'd like to open the call for questions. Thank you. We will now take our first question. Andrew Coons from Citi. Your line is open. Please go ahead. Good morning. My first question would be on Slide 8 and the second question on Slide 14. First, with respect to Slide 8, you specified in your group core Tier 1 ratio, you've elected not to include retained earnings in order to maintain flexibility on the dividend payout ratio. Could you please just explain the rationale behind that? And secondly, could you confirm that the group core Tier 1 ratio would actually have been about 50 basis points higher, so I. E. 12.8% if you had included the retained earnings? I just wanted to check my understanding was right there. And then secondly, on Slide 14, I noticed that the interest margin in the Commercial Bank, excluding Financial Markets, has actually moved positively. That's quite surprising given the competitive pressures you flagged there previously. So perhaps you could elaborate on what's driving the NIM improvement within the commercial bank? Thank you. Yes. Good morning, Andrew. In respect of dividend and the reserving process, what we've seen is that the regulator allows you to pay a dividend out of your accounting profits without recourse to specific approval provided your fully loaded ratios are in the top book of this which they set out in the early January and where we are. Therefore, to avoid a scenario where we need to ask the regulator for regulatory approval, we need to reserve each quarter and that's the new bit. Initially, we thought this is over the full course of the year, but in discussions with the ECB, it seems to be a quarterly process. We need to reserve from our accounting power profits an estimate of what we want to pay out in or have available to pay out in dividends. If we were not to do this enough to reserve profits quarterly and not include them in capital, but to reserve them for dividends, because you can't basically do both. I think it's pretty logical. If they think you're going to pay down dividend, then you can't include it in your capital. Can't fault the logic in that. So to give us flexibility to pay out above 40%, we decided not to reserve profits in our accounting sorry in our capital, but keep them to one side and earmark them for potential dividends at the year end. And more than likely, we'll do something similar in subsequent quarters. This is designed to give us complete flexibility or as much flexibility as we can in terms of deciding how much dividend we want to pay and avoid any scenario where we would need to revert to the regulator for permission. And you're right that had we included those profits in our core Tier one ratio, we're actually close to 13%. All right. Thanks. We will now take our next question, David Lock from Deutsche Bank. Your line is open. Please go ahead. Hi, good morning, everyone. So I've got two questions. First one's on loan growth. It looks like you get a real strong performance really in your core lending businesses in the Q2. I just wondered if this is a trend that you're seeing going forward whether we should expect the 4% ambition to actually be a little bit higher over the rest of this year as some of your lending platforms come online? We've seen a kind of steady step up I think in a number of quarters over the last sort of 18 months. And then the second question is net interest margin. Just trying to understand the outlook really for the rest of this year in terms of what you're seeing around deposit repricing potential or loan pricing potential going forward? Do you think the margin can still expand over the course of this year from the new lower base? Or do you think it's really more of a stable outlook? Thank you. Thank you. I will take the first question on loan growth. Patrick will then come back to your NIM question, but also come back to the NIM question that Andrew asked. So loan growth, strong performance. Yes, clearly, as said, certainly in the Commercial Banking area, the loan growth is related also to the fact that you build up the number of professionals who know the business, who develop the relationships and get the business in. It's a good quarter. Also on the consumer lending side and the mortgage lending side and the SME lending side and some of the challenging growth markets, we see good loan growth. Clearly, some quarters were not on the 3% to 4% per annum. Some quarters were above like this one. I think if you look at the model that we're running, the way we reserve capital in order to support loan growth that works with the 4% ambition. So let's as we have indicated in previous quarters when we were a little bit short of it, we said, well, you have to look at it from a year on year basis. Also on this one, I think let's not draw a conclusion on the quarter. We see strong growth this quarter. We have the people. We have the capital. We have the capacity and the resources. We see the demand out there. We're gaining market share in all of these fields. So we're very positive on it, but we would like to stick around the 4% ambition for the moment. Then on NIM, I'll give the word to Patrick. Yes. Sorry, we cut Andrew off there a bit too quick. So the improvement in Commercial Banking is due to mix. So a lot of the Commercial Banking lending is in structured finance, which has got good margins as I said before. And that mix change from more structured finance as opposed to general lending is positive for the CB margin excluding FM. Now in terms of NIM, if you look at both NIM and interest income and I think Ralph's slide 13 pointed it out. Over the past 12 months, past year, we've increased interest income by nearly 6%, 5.8%. That's due to the mix change and growth lending growth, whereas the NIM in basis points has been flat. So we do have the negative impact of low rates, which we can mitigate by trimming deposit rates and also improving the asset mix. That's the strategy we've been following. It has been successful in that. We've had, as I say, increased interest income close to 6% just under, but held NIM stable. And kind of looking forward, I suspect something similar pattern provided we're able to continue the lending growth as Ralph just alluded to. I would likely see that pattern continue. Thank you. We will now take our next question Martin Redkopf from Goldman Sachs. Your line is open. Please go ahead. Yes, good morning. My first question is on risk costs and on your comments made earlier that risk costs have now approached the over the cycle average you have been guiding for some time. But I was just wondering whether you could provide us with some guidance. And obviously, your guidance is implying that risk costs are likely to overshoot undershoot over the next couple of years, given they have overshoted over the last couple of years. And I was just wondering if you can provide us any guidance what level of risk costs we should be looking at in terms of 2016 2017, if that is not too far out? And the second question is on excess capital. You state that the pro form a for NN Group, the number is now €7,900,000,000 and I was just wondering if you could give us an update on how you're thinking of potential regulatory headwinds, RWA inflation here? And also how you think with regards to potential acquisitions, whether you would use part of that capital for potential acquisitions and whether such acquisitions would be predominantly within the euro area or also could be elsewhere? Thank you. Okay. Risk costs. Wilfred? Thanks. Conceptually, of course, you're right. If we're now coming close to the average through the cycle risk cost then to maintain that average there will have to be a period where we're going to be below. The question is when will that happen? Our guidance for the remainder of the year is unchanged. We still think we're going to end up around the 2014 level. There's a bit of potential I think for coming in slightly below that. But what we're looking at right now is a slow gradual recovery in most of the core markets. We do see a general as you've also seen in this quarter a trend in quite a few of the markets for declining risk costs. The two things that I think for the remainder of this year will impact that positive trend negatively is first of all the fact that the Netherlands as Ralf already pointed out is still very sluggish in terms of recovery. And the second one is there are significant uncertainties out there which you're all aware of around Russia, Ukraine, China, a lot of macro developments that will have an impact. At the same time, we do see in a number of portfolios where we have taken significant provisions during and after the crisis, we're now seeing significant releases and that is obviously what's going to obviously what's going to be driving the further reduction in net risk costs that we indeed reasonably should expect going deeper into that part of the cycle. And that is hopefully going to materialize in 2016 2017. And then capital regulatory headwinds? Well, that is there's a number of developments on that front, right? I mean, the ones that probably everybody is aware of are the major ones. There are 4 from our perspective. 1 is the revised standardized approach plus floors. Then there is the interest rate risk in the banking books. There is the revised SREP methodology and there is TLAC. Now on all of those, we have a rough idea of what the framework is, what the methodology is, but we don't really have the actual numbers. So if you take the revised standardized approach, it really depends in terms of its impact on where the floors are going to come in and we don't know that yet. If you look at interest rate risk in the banking book, we have an idea of the scenarios that are going to be applied, but we don't know exactly what the actual numbers are going to be in those scenarios. It's quite hard to quantify that. Same with the SREP methodology. I mean, we know roughly what the new components But again, we don't know exactly where they're going to land. And on TLAC, partly because TLAC itself is still a discussion, partly because the level is to some extent dependent on core Tier 1, which again we don't know exactly what it's going to be. It's hard to quantify. Clearly, individually, each of them could have a significant impact and collectively they certainly could. All we can say at this point is we participate in all the QIS and consultation processes. We're in constant dialogue with the regulators. It's clear that all European banks will be impacted. Depending on which floors and which methodologies land where. It could be some more than others. We've talked in the previous quarterly call a bit about the Dutch mortgage book that might in some scenarios be impacted more than others. But equally there are scenarios in which portfolios that do not directly affect us so much would be more impacted. And then there is last but not least, all of this analysis would be based on as is balance sheet. Obviously, we have various management actions available to us to mitigate the impact of each of these. And that means that some of this might translate not into capital but into P and L impact and some of it would simply be capital. But again, too early to tell. Then the second part to that second question on acquisitions. Just go back to the Think Forward strategy. You know that our strategy is based on organic growth. The organic growth is actually happening. We see it in a number of clients. We have real momentum in gaining new clients. We have real momentum in the businesses that we had indicated in which we wanted to grow. So from that perspective growth really needs to come from an organic way. And that's why we're principally not really looking at acquisitions from that perspective. So if we were to think about acquisitions as I indicated before, we're going to we'll have to be very disciplined around it, but it will be kind of if it is like a team or skill set or assets for balance sheet management or skills, that's those are things that may be interesting. But again, we feel that that we can do also from the bank's capital generation. Thank you very much. We will now take our next question, Benoit Petrie from Kepler. Please go ahead, sir. Yes. Good morning. Benoit Petrie from Kepler Cheuvreux. Yes, two questions from my side. The first one will be on the mortgage refinancing trend, which seems to accelerate. So could you tell us a bit what do you see in your book? So what type of actual refinancing trend you see? And usually there's also some so next to non recurring impact, it could be some kind of more recurring negative on NII. I mean, we've seen one peer in Belgium, which have been mentioning negative impact on recurring NII. So do you expect some negatives on NII going forward and maybe net interest margin as well? Second question will be on the cost side. I think if you look at H1 less regulatory costs you probably are around 4 point €2,000,000,000 You mentioned €640,000,000 of regulatory costs in H2. So it looks like you are adding for a €9,000,000,000 plus on the cost side for full year 2015. Is that something you have also in mind? Or you still think you will be lower than that? Just maybe last one, could you update us on your oil and gascommodity exposure going into Q3? See prices are going down there. So are you more worried on that? Is that part of your more cautious guidance on risk cost? Could you explain a bit there what you see? Thanks. Patrick? Okay. So your question was specifically on the trend I think on refinancing. Where it is refinancing I think as Ralph mentioned happens most where the charges are the lowest which is in Belgium and to a lesser extent Italy. Italy is a very small book, so it's not that relevant particularly if you have a second part of your question in terms of NIM impact in terms of the group is just too small. In terms of Belgium, we watch this very closely and we've seen a significant trail off of mortgage refinancings. It's dropping and has been most quarters now for some time. So it's clearly trailing off close to half the book has refinanced. So it's largely done I think. Not everybody will be able to refinance. So as I say it's trailing off significantly. In terms of NIM impact, the non recurring charges are into other income. The NIM impacts that could be prospective and continue, well, we do include as you see in the slide €20,000,000 €25,000,000 of the charges that we can charge in Belgium that will drop off obviously. But you can see it's a relatively small number. There is maybe a little bit lower margin as compared to the hedges on the new refinanced mortgages, That's a small number. I mean that's less than 1 basis point impact for the overall group. So the impact on NIM going forward is a little bit as you can see, but it's not something that would derail us or not derail our views in terms of growing interest income or maintaining them. It's like some of these headwinds you just get and we have to compensate for. And we have the Belgian team have looked at this and working hard to mitigate it and we also cut deposit rates. So this year, we don't expect to see any net impact at all by virtue of cutting deposit rates in Belgium to offset it. And on costs, yes, we had an ambition to try and keep costs flat. It's increasingly difficult with €230,000,000 €40,000,000 of regulatory costs. We also FX is going to hit us for maybe another €100,000,000 That said, that's positive given the for the costincome ratio, given a lot of this comes in markets like structured finance where we have excellent costincome ratio. So you get benefit of that in the overall costincome ratio. And also there's €100,000,000 adverse from the costs we announced with respect to the Dutch Ford and L project omnichannel project last quarter. But we're working very hard to mitigate these cost increases. And we're also trying to keep a very strong eye on the cost income, which you see is at the 53% level. Oil and Gas, Wilfred? Yes. I would refer to Page 32 of Ross' presentation where we showed a breakdown of our oil and gas related exposure as we did last quarter. It hasn't changed. The exposure is about flat at SEK 30,000,000,000. A couple of characteristics beyond what you see here on the page. 3 quarters of this book is very short. It's shorter than a year. So we can manage this quite easily if and when required in terms of overall quantum. Secondly, what I would point out before diving in a little bit deeper is that so we've got as you see on this chart about SEK 5,000,000,000 of exposure and that would be negatively impacted by a further decline or prolonged low oil prices. Against that, we have about €550,000,000,000 in lending that benefits from low oil prices. And indeed, part of what we see in terms of economic recovery and write backs of provisions is indirectly related to that. So I wouldn't necessarily call it all bad news that oil prices are low. What are we seeing in this portfolio? The watch list is up a bit. Obviously, we have a number of names that we're watching more closely than we were doing a while ago. NPLs are stable though. We're not seeing an increase in defaults or anything near that. Obviously, you can't rule out that that would start happening at some point. The question is what is the longer term oil price scenario? And obviously, a lot of people have views on that. Our house view is that at the moment the actually quite strong underlying demand for oil is overshadowed by quite a significant oversupply. We've seen a pretty strong cutback in investments in the oil industry over the past well, particularly the past 9 to 12 months. It started a bit earlier than that. And that will at some point impact the supply and cut back on the oversupply. Currently, our view is that we expect a stabilization towards the first half of next year and probably a gradual increase in oil prices later next year, which would mitigate some of the things that we're looking at, at the moment. So obviously, we're watching this space very closely. But given the type of portfolio we have, the tenants in there and the overall macro impact of lower oil prices, we're not quite as concerned as you might think. Thank you. We will now take our next question, Ashik Musaddi from JPMorgan. Your line is open. Hi, good morning. Just a couple of First of all, just to get it correct, can you give us some thoughts on what are the hurdles for any M and A that you are planning in terms of ROE or any other sort of metrics that you're looking for any M and A? Secondly is with respect to your NIM guidance. I mean, I remember if your NIM guidance is around 150 basis points to 150 basis points for 2017. So are you still sticking with that? Do you still see possibility of reaching towards those sort of guidance, especially in the mid range and not at the bottom end of the range? And just like 3rd question is just a clarification on your previous point on the why are you retaining the 2nd quarter profits and not putting in the group capital. So are you assuming 100% dividend payout ratio at the end of the year and that's why you're retaining the entire thing? Or is it just like creating buffers at the moment? Thank you. Okay. Thanks for the questions. Well, on M and A and hurdles, as I said already, we're not planning on M and A like in the sense that you probably would think about M and A. The Think Forward strategy is organic growth strategy. We have gone through what we call a sustainable share framework. We have organic improvement plans for each and every franchise. Clearly, if there were kind of what I indicated before asset books or skills or if technology was available in the market, That sort of M and A is something that we would be looking at. Yes, in a market in which we are active, in market in country consolidation is happening. We'll have to take a look as to how that will influence our own position and how we feel it will affect our own strategy. But that would be then more reactive because there's something happening in that market. Certainly, we would not be thinking about new geographies from that perspective. So that's what I can say about that. On the NIM guidance, so we have seen flat NIM over the last couple of quarters. But if you go back to when we started the strategy, the NIM was around 135 ish, mid-130s. And we have improved that to where we are right now the $147,000,000 ish. If you correct it for the two factors that I indicated, So there is an improvement there. That improvement is on the back of a change in composition on the asset side. And what we've indicated that it's 1st, it's a 2017 kind of indication as to where we want to be in order to improve returns. It's not a target in itself. It's a means to see how we manage returns. We see that the actual asset diversification into areas in which we have higher NIMs is actually happening. It is not 2017 yet. So basically, we feel still comfortable with the EUR 100 and 50 1,000,000 EUR 100 and 55,000,000 by 2017. Capital clarification, I'll give to Patrick. Thank you for the question on the reserving. I should have mentioned it when it was asked initially. When you given that we reserve 40% in the Q1 and if we were to do 100% for the subsequent quarters, we'd come out probably somewhere near 80%, so less than 100%. And I think the 80% will give us ample flexibility in terms of what we're thinking of now. That said, any final dividend payout ratio is something we will determine at the year end. And I repeat again. The way we're looking at it, we look at the profits we've made, what we think we'll make in the future and also where the regulatory world is looking like as well. Yes, that's very clear. Thanks a lot for this. We will now take our next question from Guillaume Trevant from Exane. Please go ahead. Good morning. I've got two questions. The first one is on the cost base. I think someone asked earlier whether you think you can reach a target of €9,000,000,000 for this year or whether you will go above that level? And the second question is again on the dividend. Obviously payout by consensus has now I think increased to about 80%, which is well above your minimum guidance. Presumably, regulatory constraints won't be known fully as we enter 2016. So is there a possibility that you might change the guidance to a more realistic level even if regulatory uncertainties are not fully clarified so that consensus can have a better feel as to where your dividend are going? Thank you. Well, in terms of costs, as I said already, we're going to work very hard to try and mitigate the impact. They are very big, the 3 things I mentioned, euros 400,000,000 in aggregate. That said, there's some uncertainty around them. So we haven't we never give up on this. This is something we will strive to achieve. But as I said, it's not easy. But We'll see at the end of the year where we end up on costs. Plenty of work to do in the interim. On dividend, we'll have to read your question again to make sure I hear it. It. In terms of guidance, yes, we're reserving what we're doing now necessity to refer to the regulator of in a region of somewhere around 80% mechanically. That doesn't mean imply that that's the payout ratio we're intending. It simply provides us flexibility up to that level without recourse to the regulator. And not at this juncture disposed to want to go to the regulator. And we have assessed what the appropriate number is. The minimum is 40%. So it's somewhere above that provided we are comfortable with the how the market how our profits are have developed and how we see them developing and the regulatory environment. I'm afraid that's not something that we will decide on or give a more precise view on probably until the Q4. Okay. We will now take our next question, Bruce Hamilton from Morgan Stanley. Please go ahead. Thanks. Thanks. Yeah, morning, guys. Just a couple of follow-up questions. Firstly, again, sort of looking at NIM and your ability to further manage down the sort of the deposit side of the equation. How much room do you have there? And which markets in particular do you have the biggest gap relative to peers? Just to give us a sense. And then secondly, just on the regulatory front, clearly depending on outcome mitigating action will be taken. But can you can we explore that a little bit? So I mean if we think about the flaws being introduced and impacts on mortgage books, is it what mitigating action outside of simply deleveraging the balance sheet or changing your growth dynamics? I mean, how should we think about what's within your control to manage for those potential regulatory changes? Well, I will take the question on the repricing for liabilities. I refer to slide 28, where you basically see where we are on our savings rates in the different markets in which we're active. Clearly, there's difference per market, per client category. And in the end, if it is about savings rate just like mortgage rates, it's a combination of where the market is and how you run your relationship with your client and the client interest here as well that you have to take into account. But this gives you a little bit of an idea where we are in the different markets. Our position towards peers in comparison to peers is if we get €9,000,000,000 of savings in the quarter, actually it's probably interesting and competitive in itself. So I think at this rate, we're quite happy on one side to get the funding in, build the number of clients. If you gain 600,000 clients in a half year, you must be doing something well and building client relationships going forward. Then on the regulatory impact, I will give that to Wilfred. Yes. In terms of mitigating actions, it really, of course, depends on the product and the client group. Your question, I think, was targeting Dutch mortgages. A number of things to be said there. First of all, again, it really depends on where these floors lands and whether or not the ultimate capital impact really makes the product unattractive from an ROE perspective. It's a bit early to tell. But just hypothetically, obviously, the treatment of that particular product in the balance sheet of various financial institutions and in particular insurance companies and non regulated investors is obviously very different from what it is for Dutch market. And I think for mortgages also in the Dutch market. And I think potentially one of the mitigating actions could be that strengthen the ties that we already have with a number of these investors on that particular product in order to move more to an originate to distribute model for this particular product. But again, it's quite early to speculate. Okay. Thanks. We will now take our next question Anton Piecyk from UBS. Your line is open. Please go ahead. Good morning. Thank you very much for taking my questions. Just two follow ups please. Firstly, on net interest margin, early in the call you have mentioned that you expect net interest margin to sort of stay at similar levels for the rest of the year. I just wanted to make sure which level were you referring to? Is it 143 basis points that you have reported on stated basis? Or should we look at the underlying picture, which is closer to 147 bps? And then the second question, please, on Dutch asset quality. The improvement in the NPL ratio in the quarter was quite strong. I think you've reported a fall in NPLs to 3.4%. Can you please give us a little bit more color on whether such a strong improvement in the underlying asset quality can actually warrant some write backs of your existing provisions? Or is it just you working through the files and taking down the provisions accumulated and writing down exposures which were impaired? Thank you. Okay. Thanks. Patrick will give an answer on the NIM and Wilfred on the NPLs. I think it's very important again to go back to slide 13 that shows the €5,800,000,000 growth. This isolates the movement in financial markets and it's really important to understand that. If you go back to say is it Q2, Q3 last quarter where we were in the $150,000,000 range, we had a very strong contribution from Financial Markets. It has dropped significantly the contribution from Financial Markets this year. And but Financial Markets revenues have increased. Both Q1 and Q2 are sequentially higher. So we're very happy with the contribution of Financial Markets in total. But the elements of the proportion of Financial Markets revenues that are attributable to NII or other income is arbitrary. So if you isolate the Financial Markets impact, we're broadly at the same level. Income is up. Commercial results excluding Financial Markets NIM is holding up well and is comparable to the same quarter of last year. Also we've had a little bit of negative headwind from the increase in the balance sheet with low rates. It inflates the derivative holdings that we have to gross up in both sides of the balance sheet. And if interest rates increase that could also come down. We would hope that will happen before 2017. So if you take into account what's happened in the financial markets, there's not that significant change in NIM. And hence, we believe that continuing to pursue our strategy of changing the mix means and with some help from interest rates by 2017, you could well see us in the target range or ambition range again. Lofot? A bit more color on the Dutch NPL situation. If we look at overall lending for the whole of the country, all the business lines NPLs were down to 3.6% from 4.1%. The 3.4% that you were mentioning is on the retail banking side, all the lending there, so mortgages business lending. The only area where we see a slight uptick is in business lending in the Netherlands from 8.1% to 8.3%. But I would point out that that is not because the NPL stock is rising, but rather because the total book there is dropping faster than the NPL stock. And that is a trend that I don't think will continue for long. We do see demand now beginning to pick up in the Netherlands. Also loan demand is beginning to stabilize. So I wouldn't expect this to be a permanent feature and we will see the NPLs also on that book coming down. By extension then what's going to happen in the next 2 or 3 years in all likelihood is that we will begin to see some write backs of earlier provisions in that book as well leading to the below the average of the cycle numbers that we were talking about earlier on. But I would reiterate, if you look at the book overall in the Netherlands, the NPLs are down across the board and that does reflect a real underlying trend because also when we look at the shorter rears before NPL, those numbers are also coming down in all segments. That's very clear. Thank you very much. Thank you. We will now take our next question, Kiri Vijayash from Barclays. Please go ahead. Yes, good morning guys. A couple of questions. 1 on costs, 1 on the leverage ratio. Your regulatory cost slide, euros 640,000,000 for this year. Do you think of that as kind of steady state and a sensible number to think about for 2016, 2017? Or is there potentially a bit more inflation to come there? And on your leverage ratio, you show 3 point 8% and a target of 4%, but we're also seeing other euros owned banks now targeting 4% to 4.5%. So how are you thinking about leverage ratio right now? Is it becoming maybe a bit more of a constraint? And I guess related to that, are there any kind of easier levers you can pull to maybe improve that ratio closer to the 4% in the shorter term? Thanks. In terms of leverage ratio, we set the target when we did it was based on IFRS and we're comfortably above the 4% on the IFRS basis. The delegated act approach is still being finalized. There's quite a bit of detail in how it's computed that it's important to work our way through. And I think I said in the last call, I believe we'll be able to whichever the metric is, I think the IFRS number is a good estimation of where we'll end up. So we have end up, where we'll end up, whatever the base of the computation is. What was the other question? Yes, regulatory costs. I hate to say it hard to say that I wish €650,000,000 was the max because it's a very big number. But we think it actually could be closer a little bit over €700,000,000 in the following year. That's due to the full impact of the Dutch GGS coming in because as of we expect it to be enacted in July. It hasn't yet been, but it could well be done enacted in legislation retrospectively. So our RS duet of 6.40 includes a half year for the Dutch GGS and the full year next year, hence the increase. Okay, great. Thank you. We will now take We will now take our next question, Anke Regan from Royal Bank of Canada. Your line is open. Yes, good morning. I just had two follow-up questions, please. Firstly, on the dividend, I was just wondering if you accrued at an underlying level or at the first half and then you're talking about as a percentage of stated profit. Is and how far is dividend growth in payout ratio? But obviously, there will be different results depending on underlying or stated profit. And then secondly just on potential regulatory changes, are you aware of any change in how AFS gains are treated in your capital ratio? Thank you. Okay. In terms of dividend, I mean, our ambition is maybe just to clarify, with the half year, we said it's and what we're paying is 40% of the underlying letter of the bank, but the dividend for the full year will be based on the net profits. That's what the regulatory which include in your profit. It's net net net. And after NN being deconsolidated Voya gone the Wix is one time, we would expect the underlying and the net to be very, very close. Hence, it is on net. In terms of dividend, the minimum is 40%. And as I said already, we have to see at the year end how much more if we can pay more than 40%. And as I said already, we've evaluated full year results and look at economic, commercial and regulatory developments. In terms of AFS, it's included in the numbers. It's come down a little bit. We don't think it's particularly worried about it in terms of a number given the strength of our capital ratio. Half it's attributed to the Bank of Beijing where you have a mitigating effect because it's an equity and then you have to hold an RWA against it. And is also you're not concerned that there might be a change in regulation under which you can't include all the unrealized gains? Yes. We can add that to the list of the regulatory things. But frankly, it's probably one of the smaller ones. Okay. We will now take our next question, Matthew Clark from Nomura. Your line is open. Please go ahead. Good morning. Two questions. 1 on the cost side. Are there any positive items we should think of going into the second half that might offset the negative regulatory costs and seasonality, etcetera, that would present a headwind. So any reason why we shouldn't expect the second half costs to be higher than the first half? And then second question is on the dividend accrual and the decision not to recognize the Q2 profits. Was that a management decision? Or is that a Board decision? Thank you. I think the latter is 1 and the same, because we're sitting the Board. And so that was our decision. I proposed it and the members agreed with me. So it's simply to create flexibility. These rules on what you include in regulatory capital, what you intend or payout or what you want to keep as a flexibility to payout of pie to ING and apply to all other European bases and ECB framework and it's been evolved over the second half and that they want to apply it on a quarterly basis. So we propose this. The ECB don't enforce it. They ask you they tell you, okay, if you want to include regulatory profits in your regulatory capital, you have to jump through a whole lot of hoops and fill a whole lot of forms and lots of people sign bits of paper. So it's quite burdensome and they have to approve that. And if you choose not to then the administrative purpose is a lot easier. Their only challenge to this is guys we hear you talking externally about paying more than 40%. Please be realistic on what the amount you want to include in profits sorry in capital. So we've decided to ourselves to reserve that profit earmarked for dividends to give us flexibility at the year end to meet what we said is an ambition, which is to pay more than And I repeat again, that ambition we will have to evaluate in the context of the environment that pertains at year end including regulatory developments. But we are doing our bit. We don't control those regulatory developments. We don't have a land out, but we're doing our bit and putting the profit aside so that we have the flexibility to pay more than 40%. Yes. On the cost side, clearly, as we've indicated, the regulatory costs are coming in the 2.40 in the second half. The Dutch DGS will come in at a certain moment in time. That is part of that €240,000,000 It's €100,000,000 that was kind of coming in as part of the Dutch restructuring program. The extra investment in the omnichannel, but that's basically spread out over the year as well. And then depending on where the euro goes, some of the cost increases that we see are basically as a consequence of the weaker euro. It's good for our costincome ratio on the dollar side of the business, but it's bad for the cost line itself. So for us on the cost side, clearly it's important to manage our costs. We are very disciplined about it, but we're investing in franchises that are actually growing. So the costincome is a much better indication for us. Now in the second half specifically, we will see more benefits of the restructuring programs that we're working on in the Netherlands and Belgium and the Commercial Bank still coming in. So that will continue as well. So as Patrick has said, will the second half be higher or lower? We're working very hard on it, very disciplined. We will only allow cost growth where we feel it in the end will improve the cost income. And that's basically the way we go about it. Okay. Thank you. We will now take our next question, Farquhar Murray from Autonomous. Please go ahead. Your line is open. Good morning, gentlemen. Just one question, if I may. Really just coming back on the comment you made on China and the potential possibly for loan losses coming through from there at all. Can you just recap the exposure to China that you have? I think it's in the region of about 15 billion. And within this, I presume you have very limited direct exposure to the recent turbulence that we've seen. So I presume what you're thinking about is more Out of that €2,700,000,000 is the Bank of Beijing stake and around €10,000,000 is lending plus there is obviously a little bit of pre settlement exposure. Out of 10, 5 is short term trade finance and the rest is multinationals, major state owned companies and some banks. We don't do mid market or retail lending in China. If you look at the tenors, then 70% of this book is shorter than 1 year. Currently the NPLs and they have been doing that for a number of years stand at 0%. Doesn't mean we're not watching this. What we've seen is the state taking a number of measures to stabilize the equity markets blocking shareholders with more than 5% of any company from selling at all. Interestingly also telling margin finance houses not to liquidate anything before the index hits 4,500 in Shanghai. A lot of stocks were suspended. We've seen the PBOC pumping a lot of funding into brokers to buy shares. And of course, out there, there is still 3,700,000,000,000 in ForEx reserves that the government has at its disposal to do things. So we're watching this. I'm sure we're going to see volatility. I'm sure we're going to see some pain at some point. We're not given the quality and the type of our portfolio overly concerned at this point. We don't think that this is something that will lead to a full blown crisis. But clearly, you'll see contagion and we're already seeing that from a macro perspective, particularly in the rest of Asia and Australia, but potentially also in the rest of the world and the commodity markets are a clear indicator of that. And just as a follow on, I mean, where then do you think you might get the knock on through? Is it just literally just general economic conditions? Or is there any kind of marginal exposure to the margin houses that you mentioned? Sorry, I didn't quite understand your question. Could you repeat it? I think the question in brief is just No. I mean, we don't have any margin financing based on assets that are directly related to this. I think what we're going to see is simply the macro fallout in terms of weaker demand for a lot of services and goods going into China. We are seeing currency volatility in Asia stemming from this. It is more that macro pattern than anything specific to our portfolio that we worry about. Okay. Great. Thanks so much. We will now take our next question, Tariq Ahmadjad from Bank of America. Your line is open. Hi, good morning, everyone. I'll just come back on the NIMs, please. You reiterated your guidance of 150 basis points to 155 basis points. But the volume the asset size sorry, the balance sheet growth has been higher than what you targeted in your Investor Day. So does that mean you are scanning bulk of balance sheet in the next few years? Or you're expecting better shift in your business mix towards higher margin products? And my second question is on your loan growth and industry lending. Can you please give us more detail on what sectors are working well and how you manage still to grow, although oil and gas is not doing well? I know that you are diversified, but you can explain us what the other sectors are. And last question very quickly on Russia. I mean, it looks like it's not a concern anymore, but what's your strategy in there? Are you keen to start to grow your balance sheet again there? Or you are leaving it under control at this level? Thank you very much. Okay. On NIM, no, whenever the asset the lending growth comes in, the lending growth comes in. For us it is I mean lending growth the way it happens here is that we are very prudent. I mean we're not changing our risk appetite to get lending growth and that's not the way we work. We have the same risk appetite. The machine is running. We go after the categories that we like and the clients that we understand and the business that we understand. So there is no change there. And when the growth comes in, the growth comes in. And we're not necessarily working on scaling it back from that perspective. Clearly, as we have indicated in the launch of the strategy, a move from the 1 the mid-130s to the 150s in NIM was generally because of a change in asset composition. That's what we exactly see happening at this moment in time. We have seen the NIM increase on that back. It may increase further. So it's but in the end, we're managing client relationships. And when we can do deals, we will do so. On the Structured Finance side and more in particular, we actually see growth across the board in all the different industries and different sectors. So it's basically it's a global business for us. We work from Latin America all the way to Asia in it because these are sector specialists that we work with and where we can support the business we can our clients we do so. So it's really across the board geographically and it's across the board Page 30 of Ross' presentation, you'll see the current breakdown of the Russia exposure and also the delta compared to last quarter, which shows you that we're again down a few €100,000,000 in total exposure. The strategy is unchanged. What we did in 2014 was focus on the quantum, the total outstandings. And we did that by taking out all the exposures that were not core to our core clients and taking out all the clients that were not core to our franchise. Once we had that done, as we said before, we started focusing on the quality of the exposure and managing the event risk that really Russia represents. And what we're doing there is shifting as much as we can to ECA business, to pre export facilities, to offshore collateralized business, shorter tenors where we can funding for our clients where that works for them, their non Russian activities and also shifting as much onshore entity and funding it locally as much as we can which we've been quite successful at. Are we growing the balance sheet? No, that is not the plan. We think that the current exposure levels represent the core of our franchise and what our clients need from us to support them. And we intend barring any unforeseen new developments to keep it roughly where it is. Thank you. We will now take our final question from JP Lambert from KBW. Please go ahead. Yes. Good morning to you. I would like to come back, it's a single question, but various elements on the calculations of the buffer you will build up at the end of the year. The first question is, are you going to take into account the profit generation you may have next year? 2nd question is, I would like to understand a bit better the mechanics, how you will build up a buffer and how you will calculate it? If we take a practical example, you have specialized lending, which are €81,000,000,000 It's currently risk weighted at 37%. The proposal under BIS is 120%. So you have a gap. How you will consider this in practice to build up your buffer? This is a simple example, but can be expanded to the various business lines. Thank you. Sorry, which portfolio are you referring to? I'm referring to the portfolio of specialized lending, which is well structured finance and others, which are going to be weighted based on the proposal at 120%. And my impression from disclosure on the EBA is risk weighted I think at 37% in your book. Well, maybe I'll start and Rufe. If you think if you're talking about how much profit we will earmark that was available for potential dividend, that's simply the accounting results we have each quarter. If you're asking prospective regulatory changes, well, for we have to assess at that at the end of the year what they actually are. Wilfred alluded to that there's quite a lot of uncertainty. It makes it very difficult to compute precisely what the impact may arise from them. We hope at the year end we will have more clarity on that, so we can actually compute what you're asking. Maybe to come back. So going back to how we generally go about capital distribution between 3 components. So we have indicated that 30% of the capital generation of the bank is there to support growth, 30% is there to support improvement in core Tier 1 or any other risk weighted changes that you may see. And it was the minimum 40% that was earmarked to be paid out as a dividend. Now in the end, it's about managing that. So if regulatory changes come towards us and whether it is this one in structured finance or whether it is floors or whether it is anything else that comes from regulators. In the end, from a bank's perspective, this is the way we manage it. And if we have to dedicate more to capital, it may impact growth. So that's the way we will go about it. Clearly, we have a surplus group as well. And that's why we've indicated that if we go about thinking about paying more than 40% that in the end that is dependent on strategic considerations, financial considerations and also regulatory changes that at that moment we expect or not. And that's the way we'll go about managing it going forward. To come back maybe to understand, but I assume that you need above 100 at the end of the year 100 whatever unit and you have a net profit generation of X next year. Will you deduct some of the buffer you build up taking the net profit generation of next year into account? And the second point is, when you look at the regulatory environment, will you take a conservative view or you will take a view on the trajectory of the regulation? I'm happy to go into more details on this in a separate call, but not for this call. Thanks very much. Okay. Thank you. Operator, I thought this was the final question. So with that, I'm very grateful that you took the time to call in and discuss the results with us. Just recapping, 2nd quarter strong results. The bank net underlying at €1,100,000,000 up 21% from the same quarter last year. Underlying developments, strong lending growth, strong savings growth over the last half year 600,000 new clients coming in. So basically we see that if you look at the strategy and the way we are implementing it, you see that on all accounts we are progressing and doing well. The result is good. The results are good. So basically, we're rounding off a good quarter. Thanks very much and stay in touch. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.