Good morning. This is Kirsten welcoming you to ING's Q4 2014 conference call. Before handing this conference call over to Ralph Hamers, the Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F, filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today. Nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Ralph.
Over to you.
Thank you very much. Welcome everyone to ING's fourth quarter 2014 results conference call. I will take you through today's presentation. With me are Patrick Flynn and Wilfred Nagel from the Executive Board for the Q&A session. If we turn to page two of the presentation, the key points. 2014 was an important year, as we know, on the restructuring side, it was also a very successful year. We made significant progress on the restructuring. The Dutch state fully repaid ahead of schedule and listed successfully the Voya deconsolidation and a further sell-down to 19%. On the Think Forward strategy that we launched in 2014 and the embedding throughout the organization, we see already the success in the growth of the number of customers. We have welcomed more than 1 million individual customers and half a million of primary customers.
This all was translated into strong full-year results, reflecting higher interest results, strict expense controls, and lower risk cost. The fourth quarter itself was at EUR 783 million as a result before tax. That was impacted by negative CVA/DVA, the redundancy provisions, and the Dutch bank tax, and we will elaborate on that. I think we're all delighted that we can announce that we are reinstating dividend payments on ordinary shares with a proposed cash dividend of EUR 0.12 a share, which basically translates into a payout ratio of around 40% of the fourth quarter group net profit. Those are the key points of today's presentation. Turning to page three. In March 2014, you were there when we launched the Think Forward strategy with one clear purpose: empowering people to stay a step ahead in life and in business.
The core of our strategy was to create, and is still to create, a differentiating customer experience. It's really all about the customer. Following the launch of Think Forward strategy, we have introduced a steady stream of improvements in 2014. Most recent being the biometrics technology that we are using in Belgium, through which people can now actually access their mobile app using their fingerprints. We have introduced many more of these new technology-driven customer experience improvements. On the back of that, the constant focus on the improvement of the customer experience, we have welcomed more than 1 million new customers, and more importantly as well, half a million of primary bank relationships. With a particular strong growth in these challengers and growth countries, and fully in line with our strategy.
That translated then again into strong commercial growth, both on the deposit side as well as on the lending side. Turning to page four, the P&L. We posted strong results in 2014. The underlying net result in banking increased 8.5% from 2013, and it's up at EUR 3.4 billion now. Excluding CVA and DVA, which was negative throughout 2014, and excluding the redundancy provisions, the underlying result actually increased 22.6% on a like-for-like basis. That was on the back of continued volume growth, better margins, and lower risk cost. That result, if you would translate that result in the pro forma return on equity, the pro forma return on equity would be 11.3% in 2014. All of this, as indicated, was on the back of healthy income growth, a higher NIM, flat cost throughout the last couple of years, and lower risk cost.
Slide five shows you that we're basically moving into the right direction in all of our key metrics. Slide six shows you the expense developments. We promised to keep costs flat in 2014, and we did. That is despite higher regulatory cost, higher pension cost, and investments in future growth. Actually, if you really look through this, we were able to keep costs flat while growing and investing in the business because there are certain elements in the business that we are growing and investing, as you know. It's quite an accomplishment on this one. The pressure on cost will continue from a regulatory point of view. Regulatory cost in 2015 will increase further as the Dutch DGS and the contribution to the Single Resolution Fund are expected to be implemented in 2015. That's why we expect further pressure on costs from that perspective.
In addition to that, we will continue to selectively invest in the businesses for future growth. Given the fact that we can actually show that we're growing, and that we're showing that we're growing the business, we feel comfortable continuing to invest. However, we also see on the other side, further efficiency gains in the areas of IT procurement, so that we can reach our targeted cost-income ratio of 50%-53% 2017. Talking about IT investments. As you remember, in November, we announced further investments in the digitalization of our Dutch business. That would result in further improvement of the customer experience, but also, it would result in additional cost savings. We have also taken in the fourth quarter now, additional measures in the commercial bank. Those are measures that are related to the ongoing transformation program of the commercial bank, the so-called CB TOM.
We do foresee incremental savings there as well, as a consequence of which we have announced a pre-tax provision of EUR 39 million for the commercial bank in the fourth quarter. The incremental savings of all these programs are now amounting to EUR 300 million by 2018, and that's on top of the EUR 950 million that we announced earlier. To conclude, we posted strong results in 2014, and at the same time, we will continue to invest in our strategic priorities for future revenue growth while maintaining a competitive cost base. Let's dive into the fourth quarter results. I'm turning to page nine now. If we take a close look at the fourth quarter result, we posted a solid fourth-quarter result.
The underlying pre-tax result was impacted by a couple of one-offs and volatile items such as the CVA/DVA, the redundancy provisions, as earlier mentioned, the bank tax, as well as the consolidation of Vysya. If you would adjust these items, the pre-tax result would actually be up 20.5% from the fourth quarter of 2013. That's driven by higher net interest income and lower risk cost. Looking at the growth. The net interest result rose 10.9%, mainly due to higher results on customer lending. That's what page 10 shows you. Since the end of last year, net lending of our core lending businesses increased by EUR 18.5 billion, and that's 3.8%, driven by retail banking outside the Netherlands, the commercial bank, and structured finance and transaction services in particular.
This is a growth number that is consistent with the strategy as set out at the investor relations day that we had in March. We do see the growth in the right areas that we focus on, where we think we can make a difference. Turning to slide 11, the net interest result. We see a continued upward trend, increasing eight basis points from the fourth quarter last year and stable at 153 basis points from the previous quarter, despite lower net interest results in financial markets. Where do we see the margins increasing? We saw them increasing in comparison to the third quarter of 2014 in retail Benelux as well as structured finance. The average savings margin, although, declined slightly from the third quarter in 2014, we'll go into that now in the next slide.
In the fourth quarter, we did reduce our client savings rates in the Netherlands, Belgium, France, Poland, and Romania. Despite these reductions, we saw a slight margin decrease because the reinvestment yields are decreasing a little bit faster than first moving the savings rates down. We continue to move these savings rates down. In the first quarter, we already announced a further decrease in Spain, and we continue to review all our client rates in order to protect our NIM on this side of the balance sheet. Looking at the risk cost. Risk costs are down from the fourth quarter of 2013, they're up from the third quarter in 2014. That was because of the release that we had in the third quarter of 2014. The result, the actual risk cost in the fourth quarter were EUR 400 million.
We see the retail risk cost trending down now as well overall. We go to page 14, the NPL. The NPL ratios increased to 3% in the fourth quarter, and that was mainly caused by higher NPL amounts in retail banking mortgage portfolios. That's following the implementation of the EBA forbearance definition, which requires a forborne loan to remain an NPL throughout a 12-month probation period. That is actually moving the NPL ratio up, specifically also on Dutch mortgages. The question is: Is this itself a worrying development? No, it's an adjustment of definitions. Go to page four of 15. We actually see that if we would look at the NPL ratio on Dutch mortgages in the third quarter, we would be at the same percentage. The impact of the forbearance definition on actual risk costs is very limited.
The risk costs were actually down in the Netherlands in comparison to last year, but also in comparison to the third quarter this year. In addition to that, the 90-plus days arrears decreased to 1.4% from 1.5% in the third quarter of 2014, and that actually reflects the improvement of the Dutch economy and the housing market there. Although the NPLs are going up because of a definition change, the underlying trend is actually positive. Slightly positive. Looking at the Dutch economy, we continue to see positive momentum in the Dutch economy as well as the housing market. We've seen home sales reach the highest level in the last six years. House prices continue to increase. House prices have actually moved up 5% since the third quarter of 2013, when basically we reached an all-time low. That's actually a good development there as well.
It shows the confidence, and we know that this is a prerequisite for further economic growth in the Dutch market itself. All that led to a further improvement of our capital position. Page 17. ING Bank's pro forma Core Tier 1 on a fully loaded basis now increased to 11.4%, and that's principally due to retained earnings as well as higher revaluation reserves. The group Core Tier 1 phased-in ratio increased to 13.5% from 13.2% in the third quarter of last year. That ratio is well in excess of the regulatory guidance of 10.5% for the group, despite the partial reductions of the carrying value of the insurance stakes. Following the divestments of the insurance stakes, the group Core Tier 1 ratio on a fully loaded basis will be 13.1%, and that will be well in excess of the bank's ratio and the regulatory guidance.
Taking a closer look at the results on group level, page 18. Strong capital position at the bank and the group level, as well as the strong results on group level, actually enable us to start returning capital to our shareholders ahead of schedule. Therefore, we're pleased that we can announce today the resumption of dividend payments with a 2014 dividend of EUR 0.12 a share. As you can see from the slide, the dividend was funded from the group rather than the bank, although we have not yet fully paid down the group debt. That's a clear signal of our willingness to distribute capital from our insurance disposals back to our shareholders. Going forward, it's our intention to pay a minimum of 40% of ING Group's annual net profits to the shareholders through dividends, with effect from 2015.
Furthermore, at the end of each financial year, the board will recommend whether to return additional capital to shareholders. That will be dependent on financial, strategic, and regulatory considerations at that time. Turning to slide 19. Where are we in terms of our Think Forward 2017 that we basically released and announced in March of 2014? Actually, we have already reached most of our goals, but not all of them. Sticking to some of these goals, it is quite a challenge going forward, and that is what we are managing. If you just go through the list, our capital position is strong with a Core Tier 1 ratio above 10%. Our leverage ratio is around the 4% target, based on IFRS. As far as the cost-income ratio is concerned, we are making the right progress, moving in the right direction. The cost-income improved further if you compare 2013.
As I said, there is some challenges ahead on regulatory cost that we will have to offset. We remain committed to our 50%-53% range as a target in 2017. The reported return on equity in 2014 was 9.9%, up from 2013. As I indicated earlier already, if we would exclude CVA, DVA, and the redundancy provisions for this year, for this quarter, the return on equity pro forma for the year would be 11.3%, and that is nicely within our target range. Finally, if we come to the dividend payout, that is what we have indicated also in March. We will already start paying a dividend in 2014. It will be a 40% dividend on the fourth quarter net profit for the group. As of 2015, we will pay a minimum 40% of annual net profit, starting with an interim dividend later this year.
To wrap up, I am sure you have quite some questions, whether you look at it from the restructuring perspective, whether you look at it from the commercial perspective, the underlying development with the number of customers or the underlying development if it comes to savings and lending growth. Whether you look at the results, both in terms of P&L as well as capital position, 2014 has been a successful year, and we are very pleased that we can actually start paying dividends again after six years of not having paid a dividend. With that, I would like to open the call for questions.
Thank you, sir. In the interest of time, we kindly ask that each analyst limit yourself to two questions only. If you would like to ask a question, please press the star followed by the 1 on your telephone. If you wish to cancel this request, please press the star followed by the 2. There will be a short pause whilst participants register for a question. Thank you. Our first question comes from Anton Kryachok from UBS. Please go ahead.
Good morning, thank you very much for taking my questions. Just two questions, please. One on net interest margin. Can you please comment on the sustainability of net interest margin that we saw in Q4? Financial markets was a negative drag on the group margin this quarter, and as that unwinds in Q1, Q2, would it be reasonable to expect even higher margins from this level? Should we keep in mind various other factors that might keep pressure on net interest margin at the group level? The second question please, on capital. In the slides you comment that your regulatory capital requirement might be around 10.5%. This is slightly higher than the 10% number that we heard from the Dutch regulator. Does it influence your own management core equity Tier 1 target of 11%? Is it 11.5% now?
Also, how should we think about excess capital that you will have over and above 11% or 11.5%? Would you look to distribute that as soon as the opportunity arise? Do you think we might see a gradual build up of capital requirements further down the road? Thank you.
Patrick will answer.
Good morning, Anton. On NIM, as we tried to guide on FM, it is inherently volatile. We're happy and pleased with the franchise and how it contributes in aggregate, but the distribution between FM NIM and trading income can be arbitrary, and it's not managed specifically to contribute on each individual line. We'd prefer to look at our NIM results, I think particularly in terms of guidance, excluding FM, notwithstanding it is a solid contributor to earnings. If we look at where we are on NIM, over the course of the year, we've improved NIM by about eight basis points to just over 150. It's within our guidance range. It did increase in Q4, and total interest earnings are also improved. This has come mainly from lending. It's come mainly from our strategical focus on structured finance.
Also, we've seen good growth in margins from mortgages and other parts of retail. The low rate environment and the drop in rates in the quarter has put further pressure on. That's something we will try to counteract, but it is an increasing negative headwind. Thus far, we have been able, with progressive rate cuts, to hold margins on savings stable, albeit they slightly declined in the quarter. We still have more ammunition in the locker to offset the fall of rates going forward. On the asset side, we keep good discipline in terms of lending. As I said already, that helped us in terms of margins of structured finance and mortgages in particular. Again, as I mentioned on previous quarters, we are seeing pressure in other categories, short-term lending products like trade finance, also general lending is under margin pressure.
What does it all mean net-net? I think what it says is that with the ability to curtail pressure on deposit margins, we think we can keep our net interest margin broadly at the level of where we are for the full year, around the 150 mark, which is solidly within our target range for the next couple of quarters. Thereafter, it's a bit hard to call, given the relatively uncertain environment at the moment. On to capital ratios. The 10.5 is for the group level. That arises from a review based on 2013, which is the last time we formally had a review. It reflects risks pertaining at that point, which include some significant risks when you look back in hindsight, that we have subsequently dealt with, i.e., the NN IPO, which was not concluded at that point. That has subsequently been done.
An add-on for that, I think we would reasonably expect to be eliminated going forward. I think we can manage that, the piece that leads to the slightly higher group requirement above that of the bank, which is unchanged going forward. However, it remains to be seen how the regulatory environment changes in the future. For now, the bank target was to be above 10, as we said previously. That's unaltered. We're at 11.4
Slightly above where we guided to be. It's probably at the top end of where we need to be. We're going to look very carefully at managing the bank capital ratio, consistent with the previous and continuing guidance to be around 11.
That's very clear. Thank you.
Thank you. Our next question comes from Andrew Coombs from Citi. Please go ahead.
Good morning. One question on just interpreting the commentary on your dividend policy, and the second question on loan growth. First, if I look at slide 25, during your appendix, the presentation provide a useful illustration of the capital of the group, pro forma for full divestment of the insurance stakes. You talk about a EUR 5.3 billion buffer relative to the bank Core Tier 1 ratio. What I just wanted to clarify is, given the commentary that you've made about recommending to return additional capital to shareholders at the end of each year, should we assume that that EUR 5.3 billion buffer is essentially likely to be returned to shareholders, either if NN was to be spun off in that means, or by means of a special dividend if you're to proceed with a sell-down going forward? That's my first question.
Second question, just with regards to loan growth, a somewhat simpler question, but given the headwinds you have of mortgage prepayments in the Netherlands, Russia de-risking, lower trade finance volumes, how feasible do you still think it is to grow the loan book by 4% in 2015? Thank you.
Yeah. Patrick will take the first question on dividend policy. Yeah, I'll take the second one.
Okay, yeah. The EUR 5.3 essentially reflects the surplus value of NN and Voya, which is sort of where we've disclosed the floor, possibly in a slightly different format, but it's essentially the same number. As we've articulated in the bottom of the press releases, as you'll see, we are willing to review our surplus capital at the end of the year with a view to seeing whether we can dividend more than the 40%. In undertaking that review, we will look at our profits, obviously. We'll look at the regulatory environment. We'll look at growth opportunities. We're going to take a holistic view at the end of the year to see whether conditions are supportive of uplifting our dividend payout ratio above 40%, and potentially distributing some of the surplus.
I would also point out to you that the dividend we've just announced for the fourth quarter is from the group, and it is paying out part of that surplus. If you look to the left on the same slide, the EUR 0.5 is coming effectively from the group, and therefore is a payout of part of the surplus. That's done already.
Yeah. On the lending growth, clearly, there is some areas where basically we see some headwinds. Russia, as you have indicated, we have indicated a bit of de-risking there. Mortgage prepayments in the Netherlands, although they are also more than normal given the fact that we had a special situation with this tax holiday on gifts in order to prepay mortgages. There's a special situation that is falling away, or has fallen away as of the first January of this year. Trade finance in the fourth quarter, that's particularly also because of the lower oil price. The volume is going through. Same thing, but the value of the volumes are going down. To come back to your real question, will we be able to keep the 4% loan growth target?
If you look at where we are growing, we have grown our structured finance portfolio by around $7 billion in this year, which is 16% over the year. We've grown Retail Banking International. In Retail Banking International, specifically, the non-mortgage lending, we have been able to grow it by $3.5 billion, which is 17% in 2014. That's exactly where we focus for our strategy. Clearly, as indicated, we see some influence on Russia and lower oil prices, and we may see a bit of lower growth in this quarter or maybe next quarter. Also, if you look at a more broader perspective, and you look at where we can actually, and where we are actually getting the growth from, which is on the commercial bank, through the fact that we work in 40 countries across the globe.
We're not overly dependent on the Eurozone from that perspective. Even within the Eurozone, we expect things to pick up with a weaker euro and lower interest rates. Even there, we expect further improvements. Then on the retail banking side, we have large activities in Poland and Turkey, which are also growing faster than market. It may not be a smooth development of each quarter adding the growth that is exactly in line with the 4%. Overall, we feel that our franchise and our focus will deliver the 4% growth during the next years.
Thank you.
Thank you. Our next question comes from David Lock from Deutsche Bank. Please go ahead.
Morning, everyone. Two from me. First one's on non-interest income. I think this was probably one of the areas of disappointment in the results. Even if I add back the CVA charge, it was still a miss to where certainly I was and consensus was. I just wondered if you could call out any other kind of one-off or quantify any other one-offs in that. Just to help us in terms of how we should think about that line going forward, because it was clearly quite a weak quarter. I just wonder if it's just a one-off, and we should perhaps expect it to move more back towards the EUR 800 level that we'd seen previously. The other question is just on costs. Thank you for the update.
Just wanted to confirm that the DGS and SRF costs, are those coming in in line with what you're expecting, and are those definitely within the 50%-53% guidance going forward? I note that there was a DGS release in the quarter. I find that odd that there was a release given we know that cost should be going up in the coming years. If you could just comment on that'd be helpful. Thank you.
Sure. [inaudible], take these questions.
Yeah, other income. Indeed. It did come down in the quarter, and I'm afraid there was a number of sort of one-off type things that happened there. If you look at it, the change you're talking about, if I look at retail, I see approximately 20% of the fall is in retail, and that's primarily or mainly attributable to what we call hedge ineffectiveness, where you have to mark to market hedge swaps when they're ineffective from an IFRS 39 hedging basis. Most of this actually just increases the carrying value of the derivatives, and you get it back later through time. FM is seasonally low in fourth quarter. I should point out there's a big CVA element of that was EUR 72 million within that, but that's seasonally low FM results.
Another part, FM is about a third of it, another part, about 40%, comes from bank treasury, where we had lower gains in the fourth quarter. There was more in the third quarter. There was also some real estate impairments as well, some tidy-up impairments in there. They're the main components of the other income line, and they're broadly in the category, as you pointed out, of other income. The second question was on DGS. Good question, actually. What we're seeing on costs, we have a commitment to flat costs, and as Ralph pointed out, we have delivered on that consistently over the past couple of years. Going forward, regulatory costs, in total, are likely to go up, I think, next year.
This year, 2015, in the region of EUR 240 million, which is a combination of the Single Resolution Mechanism at EUR 120 Dutch DGS. I'm afraid every other area is topping up as well on the pieces they've had. It is increasingly challenging to deliver flat cost with an ever-increasing regulatory cost burden. In aggregate, that's going to be around EUR 650 in total regulatory costs in 2015. Ultimately, we will swallow it comes challenging to mitigate it perfectly every year because we are going to invest in the franchise where we have growth opportunities, and we're not going to damage a franchise that is growing simply to hold costs flat.
Yes, within the 50/53, if this is what the world is, we will have to deliver it, and we will have to absorb those costs through a combination of income or cost efficiency. Going back to DGS, there are multiple components in this. Some of them go back in time, and through an awful lot of hard work and perseverance, we managed to recover one, albeit I think our scope for recovering the ones that are coming is highly limited.
Thank you.
Thank you. Our next question comes from Ashik Musaddi from JPMorgan. Please go ahead.
Hi. Good morning, everyone. Thanks for the dividend. That's nice. Just a couple of questions. One is basically on the deposit reduction. You mentioned that you have further cut the deposit rates in fourth quarter and in first quarter in Spain as well. How much of this is a lag effect that will come in next quarter's coming result? You mentioned you're happy with the 150 basis point NIM for next couple of quarters. What are we missing? Because this quarter you delivered 153 without financial market benefit. What are we missing on that? That's the first question. Second thing is on the risk cost. Can you give a bit more color on what's going on in Dutch retail and international retail? Because it looks like the risk cost is coming down, but how sharply can it come down in coming quarters?
Can it really come down in like what happened in structured finance? This is more of a gradual decline as we have seen in over past five quarters, on risk cost in the retail side. Thank you.
Okay. Thanks. The deposit rate reduction. Clearly, from the savings side, on the savings side, we try to manage a stable margin there. We have a replicating portfolio there, so the reinvestment yields, they go down every year given the lower interest rates. We manage this on a month-by-month, quarter-by-quarter basis and trying to keep the margin flat. You're not missing too much from that perspective, but it's all a matter of timing, when is the right time from a customer's perspective and from a competition perspective to decrease rates, and that's what we take into account as well. That's basically the thing on the NIM from the savings side. The risk cost, I would like to give that one to Wilfred.
Yeah. What we see is that the international businesses generally are at or around their long-term average in terms of risk cost. The outlier a little bit, and it has been for the past few quarters, is the Netherlands, where the recovery is very sluggish, and we continue to see higher risk cost. The other units are at or around the long-term average, given the economic environment, which is obviously not average and has a lot of uncertainty, we don't really expect for that to come down by much at this point. Neither do we really expect a major drop in the Netherlands. We are seeing, as Ralph said in his presentation, a gradual improvement also in the Dutch environment, but it is slow, and we know that the recovery on NPLs and risk cost tends to lag that by several quarters.
That's been the case for a while now. All in all, our outlook for the coming quarters is generally for risk cost to be at around the levels that we're seeing currently.
Thanks. Just to follow up on that. Given that you have changed your NPL definition because of the new forbearance concept, will that put any sort of pressure on the stock of provision that you have, or both are totally unrelated?
No, it won't because the ones where we had to change their classification were loans that had been properly provisioned according to the actual risk profile and that hasn't changed. There's no direct link between the two.
Okay. Thanks a lot. That's very clear.
Thank you. Our next question comes from Martin Leitgeb from Goldman Sachs. Please go ahead.
Yes, good morning. Two questions from my side as well. One is a follow-up on your earlier comments on deposit pricing and here the opportunity to cut rates further. I'm just wondering what you think your opportunities there in countries where you're mainly represented via online banks, for example, in Germany. Do you also see there the opportunity to cut rates more? I think if I look at the latest flow data, this has been a significant source of increased deposit funding for the group, and I'm just wondering whether you can keep growing the deposit base there whilst at the same time cutting rates, given that you own only an online bank there. The second question is just in reference also to your loan growth comments made earlier. If I recall right, I think your acquisition ban is going to end later this November.
I was just wondering, given the capital position where you are now and where you're progressing to in the potential that would be subdued growth on the back of a more lackluster performance of the European economy, would you also consider potential focused acquisitions or is that something which is further out of perspective at this time? Thank you.
Well, thanks very much for these questions. On deposit pricing, just to go back, I think part of the success of our direct franchise is the fact that the client experience is much better than the client experience they have at our competitors. There is no country in which we have a competitive deposit rate. We're not allowed to have a competitive deposit rate in any of the countries, given the fact that we still have a pricing ban. The fact that we still grow in number of customers and still grow in funds and trusted on the savings side is truly because of a strong brand and a truly differentiating client experience. That actually gives us room to further decrease the rates if and when we think this can be done.
If you take a look at the same slide, that in countries like Germany and other countries, we are still paying around 80 basis points. There is scope for further reduction without necessarily influencing growth on one side and new customers coming in on the other side because we're focusing on the experience. They're somewhat related but not fully related. We have shown that over the last couple years because we can't price competitively to begin with. On the growth side, as we have been able to show the growth this year, starting the strategy, we know what's in the pipeline. We feel comfortable with the focus areas in which we're growing. We're actually investing in these areas also this year. We're hiring more people in these areas.
We do comfortable that the organic growth strategy that we launched a year ago, that we can fulfill that one. From that perspective, to conclude that we can't get to that growth, we don't see those signals yet. That's one. Secondly, we're also subject to a acquisition ban and therefore from any perspective concluding on the grounding growth, but also from a ban perspective, it's premature to talk about any other strategy than the organic growth strategy.
Great, many thanks.
Okay.
Thank you. Our next question comes from Omar Fall from Jefferies. Please go ahead.
Hi there. Good morning. When you think of capital return to the group, particularly when you think of returning the excess that you mentioned above the 40% payout on awards, how do you think about revaluation reserves through shareholders' equity, please? They're now pretty sizable at EUR 3.6 billion, if I take debt and equity. Would you be stripping out a chunk of that when you think of returnable capital? Second question, on Bank of Beijing, what is the point of maintaining this stake, please? I think it's worth about EUR 2 billion. It doesn't make much sense strategically, but would be a nice capital gain for you, especially with the prospect of an Asian macro slowdown. Finally, just on your slide 25. You'll just have to excuse my math or being able to rebuild this.
How does the pay down of the group debt fit into this waterfall chart? Would it essentially be once the holding company is collapsed in, the EUR 1.5 billion would come out of the surplus or buffer? Thanks a lot.
Okay, thanks. I will take the question on Bank of Beijing, and the other two questions will be taken by Patrick. On Bank of Beijing. As we have indicated when we launched the strategy, we treat all of our activities, including a participation in Bank of Beijing, in exactly the same way. If we see scope to make a difference, if we feel that the customer position and the market position is right, if our activities generate the right investments and finance themselves in a balanced way, then we support those, or we have an improvement plan. That's what we've done for all business lines in every country. Bank of Beijing is not different from that. We treated it like that as well. We will continue to see how our cooperation with Bank of Beijing develops.
We have indicated already, we have signed a memo of understanding to develop internet banking in China, which is something we are working on with them at this moment. On one side, we have the stake, on the other side, we have a strategic cooperation agreement, which is exactly going in the direction where we can actually add a lot of value. From that perspective, we feel comfortable with what we're doing there. With that, I would like to give Patrick. Yeah.
Yeah, I think what we're saying is we're pointing out that the improvement in the Core Tier 1 ratio in the quarter, about two-thirds of that is due to the appreciation of interest rates and Bank of Beijing and the remainder, the EUR 500 million profit. The way we look at it is more in our sensitivity of that Core Tier 1 ratio to movements in interest rates. That's roughly limited. We look at that more on a sensitivity basis in terms of the absolute amount. The computation includes debt reval reserves for us as it does for everybody else. On how does the pay down of group debt fit in. The pay down of group debt is a regulatory requirement, with the EC, which we do have to deliver on, we will deliver on. That happens by virtue of the monetization.
The way we presented the slide is slightly different than in the past because we don't spike it out, in part because it doesn't actually fit into the computation of regulatory capital, but it is a requirement, we haven't forgotten it. As we monetize the surpluses in NN and Voya or release those, either monetize or spin, we will then pay it down the double leverage. The total quantum available to shareholders is the sum of the residual value in Voya and NN, minus the double leverage.
Great. Thank you.
Thank you. Our next question comes from Guillaume Tiberghien from Exane. Please go ahead.
Yes. Hi. I've got two questions, both of them on RWA. The first question relates to regulatory RWA inflation. Can you give us maybe a feel as to where we should expect RWA to be after regulation is changed or improved this year on computation of RWA for operational risk, credit risk, et cetera? The second question relates to Belgium. There seems to have been a strong increase in RWA during the quarter, and I was wondering whether there was any change in models or whether it was only due to the volumes. Thank you.
Wilfred will take both questions.
On regulatory developments, obviously this is early days. There is a lot of discussion in Europe, and there has been for the past two years about harmonization of risk weights. There is definitely going to be a development there, but we can't quite see where that is going to land. I think we have, in the past, provided you a bit of a feel for the sensitivities that we have regarding a floor in mortgages. We, for example, looked at the Dutch book, and if you were to introduce the Swedish style floor of 25% risk weights, that would, in our case, lead to additional risk-weighted assets of about EUR 9 billion. It would be given the fact that the risk weights, of course, differ through Europe. Also, in our own portfolios, it would have different impacts on different portfolios.
The other big one that we have, apart from Belgium, is Germany. There, the impact would be a lot less because the risk weights are already higher. We're awaiting the developments there, but it's hard to predict. I don't think we're overly sensitive, but clearly as a bank that has a lot of its portfolio on advanced models and a relatively low risk profile, this is something that we're watching very closely. On Belgium, I'm aware of some model updates that have impacted risk-weighted assets modestly. I don't think it was that sharp an increase.
Thank you. Our next question comes from Kiri Vijayarajah from Barclays. Please go ahead.
Yes. Good morning, guys. Just a couple of questions. Firstly, going back to the dividend, you said you'd look at the 40% payout ratio when you get to the end of the year, depending on the surplus. I wonder if you'd consider paying some of that out in an interim dividend in the summer, because I remember if you go back pre-crisis, you guys did use to pay interim dividends partway through the year. Second question, just quickly on the commercial bank, you've announced some extra redundancies there, and I wonder if you could tell us which products, which geographies you're downsizing there in the commercial bank. Thanks.
Take the commercial bank, Patrick will come back on the dividend. On the commercial bank, the actual redundancies. As you know, we have been transforming the commercial bank, according to the CB TOM, which is a transformation program. What you normally see in these transformation programs is you see while you are transforming, you see more and more opportunities, and we see that here as well. Basically what you see in terms of the net redundancies is that, the gross redundancies are a little bit higher because we see scope for a reduction on the operational side and on the technology side, given the fact that we further standardize our processes and our technology. However, at the same time, we're also hiring people, and that's more in the commercial areas. It's a net number.
Basically, it is just, we see the opportunity to generate more savings on the back of actually an improving client experience, going to standard products and standard technology across all the geographies in which we're active.
On dividends, maybe I haven't been clear enough, the policy is for an interim and a final, so two dividends. What we will do is pay the 40% in the interim, at the final, we'll take a look at the holistic picture, as I said already, around growth opportunities, level of profitability, regulatory environments, the general lay of the land. It's at that point, at the end of the year, also by that point, we'll have a better view of where we are in terms of realizing value, crystallizing value in terms of BOI and NN. We know how much we physically have available to potentially distribute. We'll take a holistic view at the end of the year, it's only at the end of the year we will form a view whether paying above the 40% is the right thing to do.
Okay. Understood.
Thank you. Our next question comes from Jean-Pierre Lambert from KBW. Please go ahead.
Yes, good morning to you. The first question is related to acquisitions. If I look at Belgium, where there's some concern about potential acquisition in this because there's a bank on the block, at some point, it doesn't make sense really because you are in the process of making IT simplification. To add another bank would create quite a complex situation again. In fact, you've been reducing branches, so why add branches? To me, in a stable market such as Belgium, it doesn't make sense. What is your point of view outside of a core market? What would be of interest to you, in theory, in terms of gain of clients or branch network, just to understand the logic. The second question is oil and gas. No negative developments in the short term. What would be a trigger for additional provisions, in your view?
What event could be triggering additional provisions? Thank you.
On acquisitions, as I said earlier, our strategy is one for calling for organic growth and improving efficiency around that. We don't necessarily talk about core markets either from that perspective. We are active in what we call the market leaders area, which is the Benelux, the challenges and growth countries. We basically see, even in Belgium, we see customer growth actually quite rapidly by taking the challenger attitude. Also in all the other challenger countries, we see customers coming on board, volumes growth coming through, and we see the same in the growth markets. In the growth markets like in Poland, Romania, and Turkey, we actually are growing faster than the market, and the market is growing fast itself. In all of these markets, our strategy is an organic growth strategy.
As you know, I can continue to repeat that we're not considering specific acquisitions to add to this strategy. If at all, it would be completely in line with the strategy. It's premature to talk about it, given the fact that we are showing the organic growth and the fact that there is an acquisition ban anyway. On oil and gas, I'll give the floor to Wilfred.
Thanks.
Yeah. On oil and gas, if you look at page 33 of the presentation, you see a bit of a breakdown of the portfolio and the types of exposures that we have there. What you will note is about 12% of the portfolio is more directly exposed to oil prices. The rest is only indirectly. Obviously, where the sensitivity would be in that part of the portfolio would be low oil prices for much longer. We've looked at that. We have stress tested, particularly that part of the book at oil prices well below where we are today, and also with them staying low for longer. We don't see for the next
Two and a half years. Any major issues in that book, if it were to last a lot longer than that, then obviously pressure would increase, and that would indirectly also affect some of the other exposures. This would be particularly the case if some of the oil majors would become under pressure, because that's where directly or indirectly a lot of the rest of the exposure is. The short-term effects, we're not too concerned. I would also argue that if oil stays low for much longer, that would have a beneficial effect on other parts of our portfolio. Whether it would really impact the overall risk cost in our total book remains to be seen.
Thank you.
Thank you. Our next question comes from Benoît Pétrarque from Kepler. Please go ahead.
Yes, good morning. Thanks for taking my questions. First one will be on the financial market division again. It looks like the beat on the net interest income comes from the financial market. Could you just explain us a little bit what is going on in the other income line? The other income line is down EUR 600 million year-over-year in 2014. I know there's a drag from CVA of EUR 200 million, have you changed anything on the kind of income allocation between other income and net interest income, which will actually explain the beat this quarter? The loan growth. Very strong in Belgium. If you strip that out, we have actually negative loan growth in the quarter.
I know we cannot look only at one quarter, what do you expect in the coming quarters in terms of loan growth, especially on the oil and gas sector? Do you see a significant lower exposure coming in 2015? Do you see also a pickup in credit demand in the Benelux, especially on the SME side? I was wondering why you paid the dividend from the group and not the bank. Is that a timing issue or is there other reasons for that? Thanks.
Okay, I'll take the one on loan growth. On the quarter, I think that what you're indicating is right. For the quarter specifically, we saw two developments. In Belgium, we see continued growth. Actually, everywhere we see continued growth. However, we also saw an overall negative growth because of subdued demand in the Netherlands in business lending. The increasing prepayments of mortgages in the Netherlands on the back of, as I said already, the final kind of month in which people could actually use this tax holiday to take a €100,000 kind of gift tax-free in order to prepay mortgages. We saw an acceleration there. We saw clearly a decrease in exposure on Russia, which we're managing down as we had indicated to you. We see lower value volumes on the trade finance side, on the TCF side, because of the lower oil price.
We see this more like this is the result of one quarter. For us, it's important to look at the underlying engines in the direction of our strategy, which I've indicated. We see real loan growth in the structured finance area across. We see real loan growth in both mortgages outside of the Benelux, as well as non-mortgages outside the Benelux. Specifically to the Benelux, in Belgium, we see demand and growth as normal. Economy is developing average. In the Netherlands, we actually hope that the economic growth that has to come back this year, that that will actually support a bit of loan growth on the SME side as well. As you know, the Dutch economy is an open economy, the lower EUR should help most of the exporters to see some volume growth.
The lower interest rates and the lower oil price should also help consumer spending as well. As most of the real structural reforms that any country needed to be done have been done in the Netherlands, we expect that also on the back of that, the economic growth will be back in the Netherlands and therefore will be a support for the SME business and thus also for increase in demand. The other two questions, I'll ask Patrick to comment on.
Yeah, other income. I think the moving factors in Q4 are broadly the same for the course of the year. The other thing you need to remember then, there was a big release in the last year, which changed the delta in respect of the IIBF. Remember when we exited that, there was a benefit, that's non-recurring. That's another factor. In terms of the moving pieces within the other income, it's the same. It's the hedge ineffectiveness piece. It's lower financial markets, which is lower year-on-year. There's some volatility in bank treasury, as I mentioned.
On the dividends?
Why we pay them for the group. Well, ultimately, the bank will become the group. Once we execute on our sell down, our spin of NN and Voya, that's what it will be. Also, what we pay dividends is from the group physically, and also the regulators starting to look more at the group. For all those reasons, I think it makes sense to focus on the group.
Thank you. Our next question comes from Stephen Hayward from HSBC. Please go ahead.
Hi, good morning. You've previously commented that a 60% payout ratio is too high. On your normal dividend and excluding any additional capital returns, is this comment still true to form? Also, if you could give us clarification on when the close period ends for the sell-down of stakes in NN and Voya, please. Thank you.
Okay. I don't remember ever saying anything was too high or too low. We're saying minimum 40%. We will look to assess whether at the end of the year, whether it's appropriate to pay more given the conditions I mentioned before. I'm sorry, if it was me, I must have had a mental block when I said 60%, but I don't remember ever saying that. You have to point me to where I said that if I did. In terms of NN and Voya, they both have results this week, and after that, we're free to act.
Okay. Just following up from a comment you made at the investor day last year, so quite a while ago, on the dividend 50%.
I know where that comes from. Basically, on the strategy day, we indicated that if the strategy works out the way we want it to go, that at the end of the year, and this is pure from the bank and the organic growth in the bank, and this is not looking at the surplus of the group at that moment in time. We indicated that basically, if you look at the capital generation that the bank has, that at the end of the year, basically, we would look at 30% of the group profit to support improved capital of the bank profit to support better capital ratios in the bank, 30% to support the growth in the bank, and the 40% to be paid as a dividend at a minimum. That's what we indicated, at a minimum.
Paying much more than that would either infringe on organic growth or capital build-up. Now, that was a year ago. That was completely unrelated to a surplus on the group level. At that moment, we had basically some execution risk still ahead of us. We hadn't fully repaid the state at that moment in time. We hadn't IPO'd the NN Group. We didn't know the value there exactly and how the group structure and the group surplus would look like, and whether there would be a surplus at all on group level. Therefore, at that moment, we were cautious on our statements there. Now clearly, where we continue now is, first we say, well, it's a 40% payout out of distributable profit, bank group, where we moved it to the group because the regulator is looking a little bit more at group now.
At the end of the year, based on the financial results, based on the strategic developments, and based on regulatory considerations, we see whether we can pay more out of the surplus on group level if monetized there as well.
Okay. Thank you very much.
Yep.
Thank you. Our next question comes from Max Le Gouvello from Citi. Please go ahead.
Good morning, everyone. Sorry, Credit Suisse. I've not yet moved. Two question. The first one is regarding structured finance. In the Q3 presentation, you provided us a very interesting slide giving us the lending growth by segment. Would we be able to have the same data, please? The second question would be regarding a follow-up of Guillaume Tiberghien question regarding RWA inflation. As you mentioned that most of your activities are under advanced methodology, which mean more exposed to rating changes. If we have some downgrade due to the oil crisis, how long it will take to reflect into your RWA inflation? Thank you very much.
In terms of just providing data, I prefer if IR help you out on that, If we can focus now on more strategic stuff.
Your question was how oil prices translate into RWA, is that correct?
Well, the drop of the oil price will have some impact on some of your corporates in terms of ratings. As you told us that most of your divisions are under advanced methodology, it means that potentially those ratings are going to be at risk, so potentially at the end, increasing RWAs. With your experience, how long does it take when you start to have the beginning of the crisis to see the inflation of the RWAs?
Well, we typically update models twice a year.
That means there's always one or two quarters lag. Frankly, I think we shouldn't read too much into this potential effect because there will be some impact on the ratings and the collateral values of some of the credits. At the same time, I don't expect in the typical rating area where we are with these clients, a one notch difference either way. It doesn't have a massive impact on risk weights. Secondly, we shouldn't forget the secondary effect of lower oil prices on the rest of the book. Frankly, if I had to guess, I'd say the chances of risk weights purely based on this coming down are probably higher than them going up.
Okay. Thank you very much.
Thank you. Our next question comes from Tarik El Mejjad from Bank of America Merrill Lynch. Please go ahead.
Hi, good morning, everyone. Thank you for the call. Two questions, one on loan growth and one on capital. First on loan growth, if I look at the slide 29, clearly, your core lending business for the quarter was nil. If I focus on the structured finance, it was EUR 800 million. That's still positive, but much, much lower than the quick start you've done in the first half of last year. I know that there was all these headwinds about Russia, oil and gas, and so on. What are the new sectors or segment that you would be targeting to offset this lower activity from these segments? Because I think it's there to stay. Secondly, how are you confident that actually you will still be able to grow faster your commercial banking than your retail banking?
Because I guess you still have in mind all this strategy of shifting to higher yielding assets to boost your margins. My second question is on capital. I think Omar asked a question about the revaluation reserves that are quite high. How do you think about capital distribution? Do you, in your mind, net of that, or do you keep that I'm sorry if you answered the question, but I didn't feel you did. On capital AT1s, are you planning to go to the market soon? What will be the timeframe to issue, I think EUR four billion or EUR five billion AT1s, you have to. Thank you very much.
Okay. Yeah. Thanks for the question. I think you're right in coming to the conclusion that the growth in C&IB for the quarter, in C&IB structured finance at EUR 800 million is lower because we are also de-risking on the Russia side. That's one. We do see growth in all segments, in structured finance, also in things related to oil even. We don't see that we really have to focus on other activities in other segments. All segments are growing. We feel that we can grow faster in C&IB by just adding to some of the franchises that we have and even diversifying a little bit more geographically, which is exactly what we're doing.
We're building up teams in the Americas as well as in Asia, in order to support the growth of that franchise on the back of 25 years of knowledge in all of these sub-segments. We feel comfortable that we can grow faster there by adding some more people. You should realize that although we're a large player, in the end, we have a 3% market share. It shows that we still have room to grow there. On the reval reserves and the alternative capital issues, I give the word to Pat.
You can see in our press release, we give it every quarter. There is the breakdown of the capital position. You can see there the quantum of the reval reserve, both for equity and for debt, EUR 2 billion in equity and EUR 1.6 billion for interest rate. I think we're relatively insensitive to falls in interest rates, which means I'm not so worried about that from a dividend perspective. Also relative to the size of the surplus we have at the group, potentially as the slide shows, the residual surplus, it was EUR 5.8 billion approximately. It comes down because we're going to pay some of that out by EUR 500 million. It's still substantially higher than that.
In terms of a strategy of looking at the distribution of surplus capital to the extent it's there every year, I think the bigger number is the surplus at the group and the ongoing bank capital ability to generate capital. There are two more important factors, I think, in my thinking than a concern around the interest rate, which I think is a relatively modest sensitivity to us. Hopefully that is a better answer. If you want to pursue it more, happy to do so. In terms of AT1 issuance, AT1 is a core part of our capital stack. We have not been able to issue it up till now because of the tax deductibility issue, which has been resolved. We are now in a process of looking at how we would structure it, what we would do, we will put structure type, whatever to take.
When we're ready to come back with more specifics, we will do so.
Okay. Just quick follow-up on loan growth, please. On the margin thing, how are you confident to still grow in this year commercial banking with higher asset yield faster than, for instance, retail Belgium or even Germany?
As indicated, we are investing in this area. We're adding even more people. We started to add people about a year and a half ago in these areas. We see this production going through. We are very disciplined in pricing no matter what, whether it's in the C&IB area or in the retail area. The strategy is to focus on higher margin segments, both in the C&IB area as well as in the retail area. That's exactly where we see the growth. As indicated, we see a 17% growth in structured finance over the year. We see a 14% growth in non-mortgage growth in Retail Banking International over the year as well. Both are in higher margin areas. For example, in Germany, we're growing fast on the consumer finance side in our model.
This shows also a growth in the higher margin end of the business.
Thank you.
We see healthy margins also on the mortgage side, by the way.
Thank you. Our next question comes from Matthew Clark of Nomura. Please go ahead.
Good morning. Two questions. First is on the strategy for the Asian banking stakes, the TMB Bank of Beijing. Could you just update us on your thinking there? Why is that a good use of shareholders' capital to keep those stakes? Second question is on the negative derivative revaluation impact in the commercial bank. Could you just give a bit more light on what that was? What were the external movements that drove that, and why we should be comfortable that that's not going to be a recurring feature? Thank you.
Okay, thanks. As I've elaborated upon, coming to our Asian stakes, we don't treat them any different from any other activity that we have. We have this, what we call, a sustainable share framework. All of our activities, business lines or geographic focus, we have taken through that framework. We basically look at the customer positioning. We take a look at the market positioning of our activities. We take a look at the returns, the returns on equity as well of these activities, as well as whether they have a sustainable balance sheet development, so both assets and liabilities. Regardless of where the activity is, whether it's Europe or Asia, or whether we are 100% owner or a smaller owner, if it fulfills this and we see an improvement plan that is promising and a good use of shareholder's value, we will do so.
If we can actually accelerate the return on shareholder value and improve our franchise, we would do so as well. It's what we did in India. For example, for Vysya, we had our own plans, strong organic improvement plans. We also saw the opportunity to engage into a merger discussion with Kotak Mahindra, as a consequence of which we could accelerate some of the improvements in the Vysya area. You've seen that that has been a good decision from a shareholder's perspective in terms of the share price going up. A very good merger partner for us. Also, with the capabilities on both sides, getting a better scale in the country, focusing on digital banking, which will come from our perspective, having a better offer for our international clients in India as well.
This is, for example, one of those decisions that we took that we could actually improve beyond from where we were, and then we do it. You can expect that from us in every activity, and that is not necessarily only for the Asian activity. We will do the same for any other activity. If we think we can do it better in a different way, we will do so. If we feel we're doing well this way and we can improve ourselves, we will do so as well. We have taken tough decisions on selling ING Direct in Canada, where we basically felt that the next stage of development for ING Direct was better when it would be in the hands of another bank. We did, and that was a tough decision. In India, we took a different decision as well.
That's the way we go about it.
Thanks.
Thank you. Our next question.
Sorry, I think there was one question on negative derivatives impact.
Yeah.
On negative derivative impact. It is irritating, the accounting noise we get from hedge ineffectiveness. It's something we're looking to try and dampen because it does create some noise. Economically, the vast bulk of this is simply accounting noise. We have solid economic hedges. Some of the detailed prescriptive and technical parts of IAS 39 require you to test for hedge ineffectiveness. Where we have hedge ineffectiveness, you simply have to write up the carrying value of the derivative, and you get that back over time. Economically, hedge ineffectiveness per se is not an economic concern. It is from an accounting reporting perspective. I appreciate that. You should be aware that we've had it all year, and notwithstanding that, which has been negative, we've still delivered very good results, including the fact that we've effectively squirreled away some money for the future.
That said, we are looking to try and dampen this to the extent we can, and perhaps in Q1, we can give you some further updates. We are looking to try and see if we can make this a little bit quieter, shall we say.
Is this hedging of the mortgage portfolio, and if so, should we be thinking of it's a pretty long time to unwind, 5-10 years rather than it'll unwind over a period of quarters?
It's partially that, but it's a bit more complicated. It includes netting against [in bank treasury] against deposits as well.
Okay. Thank you.
Thank you. Our next question comes fro Geoffroy de Pellegars from BNP Paribas. Please go ahead.
Good morning. Thanks for the call. I have two questions. The first one was on AT1, but you already answered it. The second one was on TLAC, and if you have any specific comment to make on this topic. Also in the context of TLAC, are you considering using your holding company to issue debt instrument? Thanks.
TLAC, I think there are proposals there. They're asking banks to react on those proposals. It's not completely clear as to where we're going on this one. There are a couple of facts and parts of TLAC that we don't necessarily support. For example, we're supporting statutory bail-in over contractual bail-in in our strategy. The pre-positioning in TLAC, although an understandable concept, doesn't make sense within the SSM. Otherwise, there is no SSM necessary anymore because it will just not give any added value. As a bank that is to benefit from a European banking union, a TLAC, and specifically the pre-positioning part of it, would not be very good. As you have already indicated, we do have a bank holding the group.
Although when we started the restructuring of the group, we indicated that in the end, probably the group and the bank could merge. Clearly, we now have an option open that depending on where TLAC goes, we also have the option to use the group as a holding and see whether a different structure works better for us going from there. I said, TLAC discussions are moving in different directions. These are three points that are specifically concerning our position. Which is, we support statutory bail-in over contractual bail-in. We don't like the pre-positioning element, specifically not within the SSM, because it basically defies the whole purpose of the SSM. The third one, if it happens, then at least we do have an option to work through a holding company.
Thank you. Great.
With that, we have come to the moment to close this call. Thanks for all your questions. As you may still have more questions reading through the material that we have released, you know that our investor relations team is happy to take you through more details and give you more comments. For now, I'm very happy that you participated in the call and asked all these questions. 2014 was an important year for us, and it has been a very successful year for us on the restructuring end of things, preparing the state early, coming out with a dividend at the end of the year. On the commercial side of things, the strategy is working. We see that in the growth of customers, welcoming more than 1 million customers. We see it in the growth on the saving side as well as the lending side.
With that, we're quite happy with the results so far. Thanks for your interest, and I wish you a good day. Thank you.
Thank you, ladies and gentlemen. That concludes today's ING Q4 2014 conference call. Thank you for your participation.