Earnings Call: Q3 2014

Nov 5, 2014

Good morning. This is Kirsten welcoming you to ING's Q3 2014 Conference Call. Before handing this conference call over to Ralph Harmes, 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 historical fact. Actual results may differ materially from those projected in any forward looking statements. A discussion of factors that may cause actual results to differ from those in any forward looking statement is contained in our public filings, including our most recent annual report on Form 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, Ralph. Over to you. Good morning, and welcome, everyone, to ING's 3rd Quarter 2014 Results Conference Call. As usual, I'll take you through today's presentation. Patrick Flynn, our CFO Wilfred Nagel, our CRO, are here with me from the Executive Board. Please note that at 10:30 today, there will be a separate analyst call for you hosted by NN Group. And so any questions on NN specifically, we refer you to that call. Then let's just go to the key points. ING post an excellent set of quarterly results. The underlying net result banking was €1,123,000,000 and that was up 37% from the Q3 last year and 22% from the previous quarter. The results reflect a strong increase in interest result and a lower risk cost. And at the same time, we were able to support our customers with €3,300,000,000 of net lending growth and funded by €4,300,000,000 of net funds and trusted. After comfortably passing the AQR and the stress test, as you have seen over the last couple of weeks, we have been able to bring forward our final payment to the state to coming Friday, November 7, and that's what we have announced today. And this is a major milestone. Repayment brings us an important step closer to fully meeting the EC restructuring requirements. And they also complete our strategic repositioning as a leading European bank. As a last point, NN Group has been reclassified as held for sale and discontinued operations and that has led to a write down for goodwill and other non current assets of €403,000,000 Taking a look at the overall result of the bank, the strong underlying net result banking was in the back of continued volume growth, combined with better margins and the lower risk cost, as you can see in the picture. This resulted in a return on equity of 12.7% in the 3rd quarter and 11.4% for the year to date return on equity. Turning to slide 4. Excluding the negative CVA DVA impacts and correcting for the deconsolidation of ING WeixaBank, income rose by 8%, 8.1% to be exact over the past year as supported by a strong increase in net interest income. And the net interest income growth was especially in Retail Germany, Retail Netherlands, Structured Finance and Financial Markets. If we then take a closer look at the net interest margin, net interest margin rose to 153 basis points. That was due to higher margins on savings and a stronger contribution from Financial Markets this quarter. The increase in savings margins reflect a reduction in client savings rates and that was more than offsetting at least for this quarter the low interest rate environment in which we have to operate. As we expect pressure on the savings margins to continue given the low interest rate environment, we constantly monitor clearly our deposit rates in all countries. For example, in October, we have also therefore already reduced our client savings rates further in the Netherlands and France. So it has our special attention there in order to ensure that we manage the savings rate so that we keep a healthy margin. Then looking at the development of the loan book and the funds entrusted, the strong interest result was underpinned by our commitment to serve our clients' financial needs. In the Q3, we have been able to extend €3,300,000,000 in net lending, primarily in structured finance, in general lending and residential mortgages. And that was funded by €4,300,000,000 of net inflows of funds and trusted and that was generated across the whole franchise. Now if we take a closer look at this, we see for the quarter retail banking up €1,400,000,000 out of the €3,300,000,000 and commercial banking up €1,900,000,000 out of the 3.3 percent. That's for the quarter. Now if we take a look at the 9 month picture, which is on slide 7 and we take a look at the lending development across the 9 months, we see that net lending increased by €15,800,000,000 And if we recalculate that on an annualized basis, we will get to a 4.3% annualized growth. And that's driven by both retail banking and commercial banking. And within the commercial banking, particularly in structured finance and transaction services. And this includes so this net growth of €15,800,000,000 includes the runoff of the Western Utech portfolio, the lease portfolio, part of the real estate finance portfolio and also the reduction in our exposure on Russia. So basically, the annual growth rate or the annualized growth rate for the 1st 9 months, even with running down some of the portfolios is at the 4.3% and that's consistent with the strategy that we set out at the IR Day in March. Then on the cost side, in the 1st 9 months, we have been able to keep the expenses at around last year's level. And we're confident that we can keep them roughly flat this year. Then if you take a close look at the quarterly cost income, we actually see that decreasing 55.5% in Q2 and decreasing to 54.1% for Q3. If we then look at basically how the cost will develop going forward, that's where the restructuring programs come in and the remainder of what we need to do there. We actually see that all of these programs are on track to reach the cost savings of €955,000,000 by 2017. Now talking about these restructuring programs and now on page 9, you know that much of our existing cost programs are focused on the option IT environment. And we know that even on completion of these programs, particularly in retail Benelux, we will not yet be best in class. So if you take a look at this chart and this is the chart that we also presented at our Investment Day, We basically see that because of the CB Tom implementation, the commercial bank will actually move into best in class territory in the IT environment, if it comes to the combination of cost effectiveness and cost efficiency. But the Challenger and Growth countries, which is called challenges here, they're already in that quartile. But the Bangladesh programs will get us to the middle of the pack. And we have indicated before that we want to finish these programs, but at the same time that we will continue to invest in IT to deliver much better services and harmonizing systems and processes in order to take further steps in the future. Now then the other cost component, the risk cost component. Risk cost decreased both in comparison to the Q3 of last year as well as the Q2 of this year. It decreased to 222,000,000 dollars And if you calculate that as a in terms of risk weighted assets, we get to 44 basis points of risk weighted assets. These risk costs are a bit flattered this quarter as commercial banking benefited from a release on a larger file. As said before, the commercial banking risk costs will be volatile quarter on quarter. The trend is downward. However, this is one of those elements which makes it volatile if we have releases on larger files. And that is what we see in the Q3. Risk costs in the retail bank were slightly up from the previous quarter. We expect them to be remain at this elevated level in the coming quarters, specifically in the retail net loans environment. If we turn to the NPL ratio. NPL ratio decreased marginally to 2.8% in the 3rd quarter due to a lower amount of non performing loans. And this was reflected across nearly all the reporting segments this quarter. So no one particularly stood out either negatively or positively in terms of development. Taking a closer look at Retail Banking Netherlands, as indicated already, risk costs in the Retail Netherlands were down from last year, but stable in comparison to the Q2. They remain above normalized levels and we expect this to be for the foreseeable quarters. So risk costs are expected to remain elevated. Although we do see a gradually improving macro picture in the Netherlands. Then if we go back to the result and how it kind of divides between the performance of the retail bank and the commercial bank. I'm now on slide 13. So back to the overall results. Stronger results of ING Bank were driven by both sides. The pretax result of retail banking increased 27% from the Q3 last year and that's on the back of better volumes and better margins. And the Commercial Bank, the pretax result also increased substantially on both comparable quarters, but that's if we exclude the negative CVA DVA results. So this again, I think if you look at this picture, it again confirms the strength of our client focused model both on the retail side as well as in the commercial banking side with the global reach, well diversified, but also a good balance between the two because the retail banking franchise is important for the funding and the commercial banking franchise is also important for the lending and both perform quite well. Taking a closer look at retail banking then, Slide 14. You can see here that all retail divisions have reported strong results this quarter. So all year on year you see the results in all retail areas going up. Maybe particular attention requested for Retail Germany, basically reporting another record high quarterly results and that's driven by both the volume and thus income growth as well as lower risk costs in Germany. And the same we see in the rest of the world. It's noteworthy that behind this result we see improved contributions from Turkey and France and as well as better results from our stake in Thai military bank, TMB this quarter in Thailand. Then moving over to the Commercial Bank, slide 15. The Commercial Bank delivered its improved results in the lending business as you know and you can see that in the also in the lending on the lending growth and the transaction services area and specifically for this quarter supported by lower risk cost. Cost income of the commercial bank, if you compare it to a year ago, so same quarter last year, the cost income was 45.2%. It's now down to 44.1%. So you see the effect of an increased efficiency both in terms of larger lending book as well as a good focus on the cost side through the CB TAM. Then as particular attention for the Structured Finance development. So Structured Finance posted another excellent quarter supported by a strong volume growth. You see that both in the interest income as well as the non interest income where we see the arrangement fees then increasing as well. Lending assets have grown by 22.3% from the Q3 last year and 8.2% from the Q2 this year. In this picture that is also partly due to positive foreign exchange effect. Correcting for it there was the growth there was still growth there as well. The net lending assets growth, if we correct for the foreign exchange, grew €1,300,000,000 in the Q3 of 2014. And that was particularly in the energy trades energy transport and infrastructure group. And those are longer term assets. So they take longer to come on the book, but they will also stay longer. These are more project finance assets. The net lending assets in the trade and export finance, you see that going down. Let's see the light blue bar on the negative side in the chart on net lending growth. That's the more shorter term assets and they declined slightly in the Q3 of 2014. And here you basically see some of the effects of the efforts to reduce exposure to Russia. The return on equity of the structured finance rose to 24 point 5% in the 3rd quarter and 22.2% year to date. So good results there. Now moving to our capital position. On the back of these results, ING Bank's pro form a core Tier 1 ratio on a fully loaded basis increased to 11.1 percent and that's as said primarily and principally due to the retained earnings as well as higher revaluation reserves. The leverage ratio increased to 4%. And on group level, the group quarter 1 ratio as we now report that as well was at 13.2%. Then we turn to slide 18. If we look at the total position of the bank with a core Tier 1 of 11.1 percent and then we look at the surplus position on group level, basically taking the market value of Voya and NN and correcting that for the remaining group debt, we saw a surplus of €6,400,000,000 And therefore, we felt comfortable to start a process to prepay the government. And so therefore, after we do the final payment to the legislature, the surplus on group level, pro form a will be at €5,400,000,000 So that's why we're very pleased today that we were able to announce today that we have received the regulatory approval from the DNB and the ECB to bring this final payment of Stay Date forward. And we will continue to look at the opportunities to further divest our remaining stakes in NN Group and Voya over time. But we will do that maintaining an orderly market as well. Slide 19 gives you a summary of the ambitions that we indicated on our Strategy Day in March, ambition 2017. So we're on track in terms of most of these elements. And therefore, we remain with the policy to pay a minimum dividend of 40% of profits over the financial year 2015, comprising both an interim and a final dividend in cash. To wrap up, well, we just went through everything. It's a good summary slide. It was a really good quarter for the bank. Good quarter on the back of actually also this quarter, we did the IPO of NN. This quarter, we were we went through the AQR and stress test with quite a healthy picture. We have very strong results both on the bank and the insurance company. So and within the bank, we see an excellent contribution from all segments. So a good picture. And with that, I would like to close the introduction and open the call for questions. Thank you. In the interest of time, we kindly ask each analyst to limit yourself to 2 questions only. Thank you. Our first question comes from Anton Kreychok from UBS. Please go ahead. Good morning. Congratulations on the good set of numbers and thank you very much for taking my questions. Just two questions from my side please. 1 on dividends and 1 on net interest income. Starting with dividends perhaps, you have successfully passed the AQR. The capital build in this quarter has been stronger than expected. And now you have disability on stage A repayment and you're not using bank capital to repay the final charge of stage A. So I was wondering what are any other moving factors which you would take into account when making a decision where the actual payout ratio will be in 2015? And the second question please on net interest income and specifically on margin trends. I think on an underlying basis, your ability to reprice savings continues to be a very important driving factor for defending net interest margin. And on slide 27, you have provided a very helpful picture on where you are in terms of deposit pricing. And in the Netherlands, you have reached a level of 120 basis points, which some people think is important due to the Dutch wealth tax. I was just wondering whether you can give us your perspective on whether 120 bps Dutch deposit pricing is an absolute floor or over time you can go lower? Thank you. Thanks for those questions. I'll actually refer them to Patrick and I'll turn in if there's a need. Patrick? Yes. In respect of the dividend payout ratio, as Ralf said, our intention is to pay 40% plus or a minimum of 40% payout for next year. As you probably would have noted, the fact that we have repaid the stake or will on Friday repay the stake from group means that that dividend will be for both the first and second half, which is an acceleration of our commitment we gave at the Investor Day. We're going to stick to the 40% plus for now. Let's see how the results pan out in 2015 before we start making any broader commitments. I'd like to see the profits there in first before we decide how to distribute them. But the commitment remains 40% plus in 2015 first and second half in cash. Now in terms of interest margin, you asked our ability to deflect. Again, this reference point in the Netherlands, I think it's more an issue that in your side of the table than ours. No disrespect, but we don't see it. And when we're talking about it internally and our ability to manage interest margin, it's not something that features as a major barrier in our thinking. We have been able to reduce deposit rates as you note. We did that significantly in the beginning of this quarter. We flagged that with the results last, which means that deposit margins improved about 2 basis points. There's a drag maybe of low interest rates about 3, 4 basis points a quarter. And we think that we will be able to offset that with rate cuts. But the speed as I said before, the speed of those rate cuts can slow down and it may not necessarily be a perfect symmetry between the drag, which is a constant factor of low rates and our ability to cost. They may not be in perfect symmetry, but over time over the near term at least, we think we can offset the impact of low rates with further rate cuts on deposits. And maybe to add also on the Netherlands specifically, we're showing here the Perfheidriekenning, which is one of the larger savings accounts that we have and the price there, Now we've moved it. But there's many other savings books that we have or savings accounts that we have where we pay already lower than the 120. So it's not necessarily a psychological hurdle that stands that basically limits us to stay at this level. And we're following the market. We're managing this as to the inflow, the acquisition of clients and what is worth paying for it. So but there is no specific hurdle there on the 120 basis points. Further questions? Thank you. Our next question comes from Farquhar Mahri from Autonomous. Please go ahead with your Two questions, if I may. Firstly, with the state capital repayment now done and the CET1 ratio tripping over 11%, At what point do you think you'll be able to clarify the approach to making the final exit from NN Group? And what are the key considerations there? In particular, what do you mean or what are the restrictions related to exiting through an orderly market that you're discussing there? And then just coming back with regards to the dividend discussion. I mean, there seems to be some slightly academic discussion about a dividend in 2014. I just wouldn't mind just clarifying your preference. I mean, at a certain level, given the €5,400,000,000 surplus in the holding, that discussion is slightly academic. And I'm just trying to understand, would you prefer to do a distribution of the surplus first before coming around to the dividend or is there scope to flex there? Thanks. Yes. With respect to NN, as you know, we have a lockup to the second of the 3rd January of next year. In this phase, we're pulling opinions about what people want us to do with that, shareholders want us to do and other stakeholders as well. What we're trying to make clear here is that we are not going to be doing any radical large steps in part because we've got commitments in the IPO prospectus that we will exit NN in an orderly manner. The liquidity in NN is relatively limited. Therefore, it does mean that we need to take things in a steady manner. So what we won't be doing is one large massive sell down either in cash or spin. The steps we will take will be a progressive steady orderly progress, so that we do not disturb the market and we do things in an orderly manner, a bit like the way we've been dealing with Voya transacting in an orderly manner. So that's the sort of thinking around how we exit. We have not decided what we do with surplus whether we distribute it in cash or spin. That decision we have not made yet and don't have to make till we conclude or go through the lockup period. And in terms of 2014, we've achieved a lot this quarter as Ralph said, particularly with the state repayment and that clears the path for dividends next year. We got a brand new regulator yesterday. We need to get used to them a bit. So for 2014, we'll revisit 2014 when we get the full year Q4 results and we'll talk about that in February. Thank you. Our next question comes from Ashik Musaddis from JPMorgan. Please go ahead. Hi, good morning everyone. First of all, well done on the good set of numbers. I have two questions. First of all, would you give us some color on how should we think about risk cost going forward given that you have already met the 44 basis points today, obviously, including the big releases from corporate Commercial Banking. But how should we expect the risk cost in Commercial Banking going forward, I. E. What is a one off element here? How much is the run rate? And what should be the level that we should forecast for 2015 and then 2016 as well? So that's first one. Secondly is given that your capital position fully loaded is already at 11.1% And you are kind of targeting 11% by the end of 2017. How should we think about that? Because it looks like if you do a 40% payout, you will generate you will add 1 percentage point capital every year or say 70 basis points. So you will end up at 13% or 14% capital in 3 years' time as compared to what you are forecasting or what you are targeting 11%. So how should we think about the missing link here? These would be my 2 questions. Thank you. Risk cost? Yes. On risk cost, as you indeed mentioned, we are now at 44 basis points, which is our through the cycle average and that would be something that you expect under normal circumstances. However, if you look at the outside world, the circumstances are far from normal. And if you look into the numbers as Rolf presented them on I think slide 10, what you will see is that the 3 main contributors of provisions Retail Benelux, Retail International and Commercial Banking, you see 2 of the 3 contributing pretty much the same number as last quarter and only Commercial Banking sharply lower, which is due to the fact that and this is something we flagged before that Commercial Banking provisioning is definitely lumpy in a quarter on quarter comparison. You can see quite meaningful swings without them necessarily indicating a trend. And I would certainly say that this level is not reflective of a long term trend that you should simply extrapolate. We've been saying that before. And certainly this quarter is a demonstration of that lumpiness. A while ago, we talked about when we expected to see the 44 basis points on a more structural basis and we said that would be well into 2015 most likely. If you look at the most recent projections of growth for the eurozone, which have come off quite a bit, There is a plus and a minus there. The minus is we are predominantly in Europe, so this will definitely affect the outlook also for provisions. The plus is that relatively speaking the Dutch economy is doing a little bit better. And what was predominantly an export led recovery is now beginning to look a bit more like a domestic spending recovery as well. So we think there are going to be potentially some positive movements in the longer run on that side. But I think for the next few quarters, I would expect the domestic markets, the big ones for us to be pretty much where they are and Commercial Banking to continue to be somewhat lumpy. And on your second question, I think when we presented our story in March, we indicated that the way we want to go about capital distribution, we had 3 stakeholders here. The first one was the taxpayer that should never come into a situation to bail out the bank anymore. And therefore, we said, well, we want to grow our core Tier 1. Second one is that we have a commitment to support economies in which we're active. And therefore, we want to grow the business. For that we need more capital as well. And then the third one and this is not in a particular area not in a particular priority. And the third one was a shareholder who hadn't received a dividend for quite a long time. So therefore we should go back. Now basically the way we worked it out is it's a 40% minimum dividend payout. And clearly depending on how the growth develops and how the core Tivan develops that's why we call it a minimum dividend payout. Having said that, we don't know how the growth will develop. We hope it's going to be good. We also don't know how regulatory how the regulatory area will develop in terms of further requirements. We know there is discussions going on, on TLAC and other concepts and we just don't know where that's going to end either. But having said that, the logic through which we manage is it's a minimum 40% dividend leaving room for growth and capital buildup. And if it's not necessary for the other 2, that's why we call it a minimum 40% dividend. Hope that helps. That's very clear. Thanks a lot, Peter. Peter. Thank you. Our next question comes from David Lock from Deutsche Bank. Please go ahead. Good morning, everyone. Thank you very much for a clear presentation. My two questions. The first one is on costs. I know Ralph in the past that you've spoken about declining branch footfall, change in the way that people are approaching banking. I just wondered if you could update us on kind of what you're seeing in terms of trends in your retail business in particular. I know you've appointed a new innovation officer and operating Chief Operating Officer in the last of 6 months. I just wondered if you could update in terms of the work they're doing and potentially if there's any upside to that kind of cost plan that you've already got in place. My second question is on Ukraine. I note that whereas in the second quarter we had a big jump in NPLs that's actually been quite stable in the Q3 and coverage has also been quite stable. I just wondered if you could give us any update on the outlook, particularly for Ukraine. If there's any color you could give on how you see that area going forward for your business? Thank you. I will give the second question to Wilfred first and then I'll come back on the cost side. Yes. So on Ukraine, obviously, the business climate remains grim. You see it in many areas. The all the international airlines have reduced their capacity lots of negative signals. However Lots of negative signals. However, if you look at what's happening in our portfolio, first of all, let me note that about a quarter of the book is subs of foreign companies fully guaranteed by their parents. Another third or so is agribusiness predominantly based in the western part of the country and actually doing quite well. Of course a lot of the export companies in the Ukraine have most of their costs in local currency and export in hard currency. So effectively, they benefit from the current situation. So there's quite a large part of the book that is not really that heavily affected by the situation. Now the other part is where you see the NPLs and the associated provisions. We use our tried trusted and relatively successful provisioning methodology on each of the situations that we get into the Ukraine in that sense is no exception. We obviously watch it very carefully. We make an assessment every quarter of what we believe the best estimate of the outlook is and that translates into the numbers that you're seeing. What we are seeing in the market over the past few weeks is that foreign currency supply is improving slightly and that the Central Bank is regularly and fairly predictably acting in terms of supplying liquidity where they can. Positive note also that the gas supply has now been agreed with the Russians, so that gives a bit of relief over potential also the production shortfalls that would occur on the industrial side that at least will now not be triggered by a lack of energy supply. So some marginally positive news, but it remains a fairly grim picture. Then coming back to the cost side, thanks for that question. Think the trends are remain the same. People want to do on the retail side specifically to do their banking more and more themselves. They're very well informed. They're self directed. What does it mean? It really means that the requirements that they have in terms of banking is that they want to be able to do it everywhere and in any way. And basically that gives rise to new projects that we're thinking about in terms of making one channel for basically working through branches and call centers and mobile and Internet and all of that. So the COO and the Innovation Officer are both looking at these kind of ideas, how we can work on that. While at the same time, because that's the real change is that you can't work front to back in separate programs. So you need to work on 1 and the same programs to be able to improve the client experience on one side, whereas you do reduce the complexity of your IT and you reduce the number of applications as we are showing and we have shown in the strategy day. So we're making a lot of progress on it given the current programs. But I do expect that more standardization across countries, but also more standardization within the countries and reducing of complexity Thank you. Our next question comes from Andrew Coombs from Citigroup. Please go ahead with your question. Good morning. My first question would be a follow-up on NN. Perhaps you could just remind us of the pros and cons of a spin off versus sell down as you see them? I know you said you're polling opinions at the moment, but interested to know your thoughts there. And secondly, in terms of loan growth, if I look at Slide 7, you provided the 9 month numbers there. Just backing out Q3, it does look like you've seen a slowdown in loan growth relative to both Q1 and Q2 in both the retail bank and in the commercial bank. I assume the commercial bank is due to the real estate runoff and reduction in Russia that you allude to. It also looks like you're seeing a contraction in lending in both Netherlands and Belgium on the retail side as well. So perhaps you could elaborate there on the key movements? Thank you. Patrick, first. Yes. In terms of sell down versus spin, as I mentioned, one of the things we to do is make sure we maintain an orderly market, which suggests given the relatively limited amount of liquidity in NN the sell down and exit process would benefit from building liquidity first. We think although we haven't finalized the work on this that if we do a spin, it has to be the end piece of the puzzle. I don't think you can do a sell down in cash spin and then sell down in cash or variance along that. The spin would have to be the entire remainder. And given that we would want to build liquidity that would suggest that if we were to do a spin it would be more to the back end of an orderly process rather than the beginning. We also want to avoid significant flowback. So spin to the extent we would use it would be more towards the back end of an execution process seeking to build liquidity and build flow in the stock beforehand. I hope that helps you clarify some of the mechanical thinking around this. This is about how you do it. It doesn't say what you do with the proceeds, because we haven't decided about that yet. Then on your question as to loan growth. Clearly, in the end loan growth also has to do with GDP development. But the good thing is that on the commercial banking side, we have a global reach. And I would not read too much into the Q3 as a trend, if not for the fact that the longer term industry lending activities, the project finance activities that are actually coming on stream. We started hiring more people about a year ago, year and a half ago. These bids for these projects went out 9 months ago. And now basically you see this book being built. This takes time. And I actually think that if anything because this is a business in which we play in a global scale, we're number 8, 7 on the global level and we're number 1 or 2 in Europe on this one that we actually see that that book is growing and it's a longer term side of the book. So if anything, I think that's a good development, although maybe at lower amounts for the quarter, this will basically structurally build up the loan book. That's on the commercial banking side. And then in the basically the trade the transaction services, it's a matter of pricing yourself into more volume or not. And clearly, we always make very clear decisions there as to keeping the pricing discipline as well. Now on the more domestic side of things, we see the Netherlands. We see actually the mortgage production coming up. However, net net as you know we transfer mortgages out of our book to NN Bank to build up that bank. And we have the Western Utrecht book in runoff. But we do see actually a good and healthy mortgage production in the Netherlands, but that book will decrease over time because of the transfers of business. On the SME side in the Netherlands, we actually see demand in the Q3 a little bit lower than the Q2. But we do expect given the fact as indicated by Wilfred already that we see the Dutch economy being also more driven now by domestic demand rather than just export oriented growth that more working capital will be needed if this continues and more investment loans will regress it. So we do expect an upturn there, but it's not there yet. We don't see it. If we go to Belgium, we actually see continuous growth. There is just one file that is a little bit more volatile. There's one client that is in these numbers and depending it's a big one. And depending on where how much they draw by the end of the quarter, you see these numbers going down or up, but the trend is still a growth trend in Belgium. And then in Germany, we're still growing on the consumer finance side and the mortgages. Generally internationally, whether it's Poland, Romania, Turkey, we see rapid growth in the portfolio. So I hope that kind of gives a picture as to how we expect the lending portfolio to grow. But in the end, I said, it's all GDP driven. But within most of the countries, certainly the Challenger countries as well as the Growth countries, we are taking market share. So it's not only dependent on the GDP. Very helpful. Thank you. Thank you. Our next question comes from Omar Fall from Jefferies. Please go ahead with your question. Hi. Good morning. Just two questions please. Firstly, your ROE target of 10% to 13% is now very old. Given that you are already at 13% this quarter and there are further P and L improvements to come and you're already above your capital target. Can you give us a sense of how internally you're thinking about where that number could really get to? Secondly, what do you view as the risk of some form of political backlash from the fact that you're so explicitly choosing not to grow the Dutch mortgage book for the foreseeable future? Of course, demand is currently low, but it's surprising that for a housing market that's only just recovering, politicians would have nothing to say about a bank that's been under state aid for so many years, reining back lending to such a crucial part of the economy? Thanks. Okay. I'll give the answer to the second question and then Patrick will follow with the answer to the first question. So on the second question, so basically it's not so much that we're not in the market in terms of mortgages and in terms of SME lending. We're open for business. Even today, we announced that we want to extend the TLTRO support to our resume clients. If it concerns investment loans, we will actually give the discount to our clients. So we're very much aware of our role also in the Dutch economy, if it comes to supporting the SME as well as supporting the housing market. Now if we come to the picture of our mortgage book, we are open and we are producing mortgages. Actually we price always to ensure that we are one of the top 3 mortgage providers in the Netherlands with a minimum market share of 15% in order to support our clients, our natural market share and also to get some new clients in. It just happens to be that at the same time we have decided to run down the Western Utrecht book and we transfer mortgages to NN Bank, which is an easy requirement. So if you take the total development from an ING perspective as if we were still one full company including the insurance company, you would probably see that the mortgage book would be stable, because you also know that a lot of people do prepay their mortgages these days, given the fact that the interest on the savings is not as interesting anymore versus the tax the after tax cost on the mortgages. So you see some prepayments there as well. So both sides, we feel that we're committed to the economy. If we come to like actual production amounts, the domestic bank in the Netherlands produces around €6,000,000,000 of new mortgages per annum. And with that, I'd like to give the floor to Patrick. Yes. Kind of interesting you're talking about the ROE target being so old. On one hand, I'd agree with you. We only said it 6 months ago, but it does feel that 6 months has encompassed a hell of a lot given we've done an IPO and repaid the state in that period. I think it's a this is about consistent delivery here. Very, very pleased with the 12.5% in the quarter, but it's 11 0.4% year to date. So we've had a 4 year plan. We've very ambitious targets in there about loan growth. We want to be delivering consistently on these metrics and we're not claiming victory on 1 quarter. I also have to remind you that the 4th quarter is typically a lower one in financial markets and we have that bank tax, the 140 odd 1000000 bank tax that has to be paid every year comes in Q4. So it's typically a little bit lower than the other 3. So this is about consistent delivery of ROE targets year on year. And only when we're if we're consistently outperforming we'll think of a change in the ROE target and we're not there yet. Okay. Thank you. Thank you. Our next question comes from Jean Pierre Lambert from KBW. Please go ahead. Yes. Hello. Good morning. I would like to ask 2 questions related to dividends. Now that you have 11%, is there a thought that the supervisory authorities may push you to a higher core equity Tier 1? And do you have initial conversations with your new supervisor on this topic? And the second point related to dividends, would you consider increased leverage to pay a dividend for 2014? Or is that totally excluded? Thank you. Yeah. I mean the regulator on Core Tier 1, well, they only really kicked in yesterday, so we haven't really had an opportunity to talk to them about that. I mean, our listening to what they said beforehand, they talk about level playing fields in Europe as they talk about common standards. The AQR and the stress test were all about leveling. So we're assuming that whatever they do it will be a consistent application. But as of today, I don't have any insight and or expectation that core Tier 1 targets are being put higher by the ECB. As Ralph mentioned, what is on the potential of the radar screen in terms of capital is the black TLAC debate, which we will get the whole industry will get some clarity on. That's I think the major area in that space. Obviously, the if the markets do rebound strongly, which we're not seeing yet, the countercyclical buffer is part of the overall Basel III framework. However, I think at this point it's somewhat remote to be thinking that that will kick in. And if it does, I think we will be in a much better place if the economy is growing strongly enough for that to happen. So a long winded answer, but at this moment, we do not see pressure on higher core Tier 1 from ECB and partly because they started just yesterday. On 2014 dividends for 2014, Q4, we just completed Q3. Let's see how Q4 pans out. Of course, we evaluate all our options and we will think about this. And I'm sure you will be asking questions about it, but we will reevaluate the position when we have the 4th quarter results. Thank you. Our next question comes from Matthew Clark from Nomura. Please go ahead. Good morning. Question on the deposit rates. A bit curious on your comment that there's a 3 to 4 basis points headwind every quarter that you need to offset. Just so that I understand, I thought that you invested your deposits at around a 3 year duration and looking at lagged roll down of that kind of duration asset portfolio. I just thought there'd be a slightly lighter headwind stretched over time. So maybe just could you clarify whether you see these cuts to the savings deposits as defensive or offensive and whether they're still invested at a 3 year duration because if you're cutting the rates in July and again in October that would suggest maybe that they're being invested at a shorter duration? Thanks. Yeah. Obviously, we're in multiple countries with different dynamics. And we're trying to give you an average. And so 3 odd years for replication of deposits is a good estimate of the overall position. The low rate environment does have a drag. It is relatively constant. Rates have come down lower. So we are giving you an estimate of that drag effect, which is in the 3 to 4 basis point range. The setting of deposit rates is also primarily, I would say, probably driven by commercial considerations, customer considerations, not exclusively based on offsetting 3 to 4 basis points negative headwind. So it's we look at the setting deposit rates in the context of the commercial proposition, what competition are doing in the various geographies. And when we consider those conditions justified, we then do reduce rates. So it's not about trying to seamlessly offset perfectly offset 3 to 4 basis points of negative headwind every quarter. So that 3 to 4 basis points that's the impact on your group interest margin? Or is that the headwind on the balance of deposits? Margin. Okay. Thank you. Thank you. Our next question comes from Kiri Vijayarajah from Barclays. Please go ahead. Yeah. Good morning, guys. Just some questions a couple of questions on structured finance. Firstly, just to clarify what you said earlier about the slower new lending numbers in structured finance. Were you deliberately taking your foot off the pedal there given that you probably overshot your target in the first half? Or is it just that there's just fewer opportunities out there given what we're seeing in terms of the macro? And could you just comment on how your pipeline is looking say right now versus say a quarter ago? And then secondly still on structured finance but looking further out, how vulnerable do you think that kind of 20% plus kind of ROE is in that business? Because it does look like quite a crowded space in terms of the number of banks globally that are targeting that area. Thank you. Not so much. I don't think that I indicated that it was slowing. What I indicated on Circuit Finance is that what we see is that the longer term side of circuit finance actually is coming on stream now because it takes a little bit more time before you get these assets on the books and they will also stay longer on the books. At the same time, we have the TCF and transaction services element within the commercial bank, which is a little bit more volatile and depends on how you price yourself in the market. And we can basically we can move that. Now it happens that in the Q3, we see a decrease on that because of the mitigation of the risk on Russia. But the longer term side is actually taking off or we're not taking off not taking the foot off the pedal there. In terms of the return on equity in that environment in structured finance, what we have seen in the past is that there's always been moments where banks have come into this business either more regionally or more globally And they often come then with a lower price for a while. But what we tend to see then is that the sponsors of these projects they really prefer more professional banks who understand the underlying business because this is business that certainly the longer term side of this business is a business that you really need to understand because in these projects you sometimes have to restructure the loan structure and all that. And then you have to understand what's happening underlying. And if you're then engaging with a bank that is not as experienced as we are and we have been building this business for the last 25 years, then basically the sponsors are surprised by the reaction. Now what we see therefore is that this is more it's next to an expertise business, it's also relationship business. So sponsors keep coming back to the top banks. And we have been able to keep our position in the top 5 to top 10 for the last couple of years even during the crisis. So that basically we think that this business will continue, but it will also continue on these returns. Now in some presentations over the last couple of months, we have shown actually that the returns in this area have been rather resilient even across even over the last 5 years. So it's a good return business. It's a long term business. It's a combination of relationship and expertise business. So we feel confident that these return on equity whether it is 2020 or whether it's 2019, we have seen it ranging between 2019 24 over the last couple of years. Okay, great. Thank you. Thank you. Our next question comes from Maxence Lovullo from Credit Suisse. Please go ahead. Good morning, gentlemen. I will have 2 questions. Can you give a little bit more color regarding the good growth that we're able to see on the loan side in the rest of the world? Which country is really pulling this good performance? And my second question is regarding the exposure to Russia. Listening to your conference call on Q2, I was expecting a larger significant decrease of the €7,800,000,000 that you release at that time. Thanks. Okay. We'll start with the second question for Wilfred. I'll take the first one. Yes. On the exposure reduction Russia, understandable question. We had given some indications of our ambition there. And I can imagine if you look at the numbers Q3, you may wonder whether we're going to get there. There's a couple of things at play here. One is the repayments that we were expecting and the ones that we were stimulating, we knew were a bit back ended into Q4. In other words, we were expecting less of a drop in Q3 than in Q4. So in that sense, we're not entirely surprised. Secondly, what is at play quite substantially here is currency movements. Most of the business we do with our Russian clients is in dollars. I'm sure you've noticed that dollar has strengthened against the euro and that has had an impact of about €400,000,000 on the reported exposures. Also the pre settlement exposures have been influenced by the fact that ruble of course has continued to decline and that has added about €300,000,000 to €350,000,000 to the pre settlement exposure. So if you strip out those effects, the scheduled repayments and the ones that we thought we were going to be able to get, we have indeed obtained. So there is no issue with clients defaulting or not paying for other reasons. But it's the effect of that is masked by the things I've just described to you. We're still expecting a further reduction in Q4, which in notional terms will be bigger than the one in Q3. Given the uncertainty around currency rates, we can't quite predict what the impact measured in euros will be. Okay. Then on your second question or on your first question actually the growth in the rest of the world. The rest of the world basically means the countries in which we're active from a domestic perspective outside the Panalux and Germany. Basically what we see there in the Q3, we see a growth in net lending of €1,900,000,000 So that's actually the areas that grow the fastest. Now what is the underlying? The underlying is mortgages as well as SME and mid corps as we would call them. And you should basically realize that in countries like Poland, Romania and Turkey where we have large domestic banks that these GDPs are growing, growing fast even in some of these. And we are taking market share. So we're growing generally twice as fast as the market in some of these countries. So that's where some of this lending growth is coming from. And it looks good for the Q3. It's very clear. Thank you. Our next question comes from Benoit Petrarque from Kepler. Please go ahead. Yes. Good morning all. Two questions on my side. The first one will be on the Dutch mortgage margins. There's clearly an ongoing repricing going on this book. Where do you think margin will trend in the coming quarters? It seems that there have been a bit of margin expansion still in the Q3. And linked to that, is that fair to assume that your kind of the higher margin on high loan to value are kind of sustainable because simply there's limited competition on that segment? 2nd question will be on Germany. Actually for the first time for some quarters we have seen some small net outflows of savings. I mean nothing huge, but we were used of kind of nice positive there. Is that the effect of lower rates, savings rates? And what you've seen in the Q4, I mean, are you comfortable you can It puts it at 12 to 16 bps on an annualized basis. It puts it at 12 to 16 bps on an annualized basis. Is that the kind of headwind you are expecting in the coming years? Thank you. On the second question about the savings rates. So basically, the 3 to 4 basis points we already discussed. I think Patrick already kind of elaborated on that. In the Q4, whether we can reduce savings rates even further, All of this is a combination of what's happening in the market, how can we grow our client business and what is the funding that we need. And what we see actually is that over the last couple of quarters, we have been able to reduce the savings rates. And we see that the development in the market is that savings rates are going down everywhere. So we can either lead that reduction or follow that reduction. So as we already announced in October, which is the 4th quarter, we did reduce savings rates in the Netherlands and France. And if we feel there is an opportunity or a need, we can reduce savings rates also in other countries, including Germany. So that's that one. And then on the Dutch mortgages, maybe Patrick? Yes. We have a we are producing, but we have a limited appetite for mortgages given the concentration risk. New production margins are healthy and that does contribute to the overall margin. We the nature of the market has changed with LTV levels by virtue of government regulation coming down. So the production is as healthier or better loan to value levels than in the past. And also the tax incentives now push people towards amortizing. So there's no you see very little of interest only. So quality is better and margins are pretty good as well. Yes, in terms of the headwinds, the 3 to 4 basis points, I think we're looking forward for maybe the next 12 months reassess what we what the position is. It's difficult to predict 6 months ahead, never mind 12. So I'll reserve judgment on what will happen beyond 12 months. Okay. Thank you. Thank you. Our final question today comes from Jan Willem Knoll from ABN AMRO. Please go ahead. Yes. Good morning all and thanks for taking my question. I have a question on your exposure to the energy and commodity sector. We've seen fundamentals in the sector weakening rapidly of late. How is your loan book holding up in this segment? And what are your expectations for the coming quarters in terms of loan loss provisions, risk migrations, but also let's say appetite to grow the book? And secondly on lending margins also in Commercial Banking, you mentioned in the presentation that front book lending margins are down in the quarter. Can you explain in which segment specifically you see the weakness? And how should we be thinking about lending margins going forward? I. E. Do you expect the pricing pressure to continue? Thanks. Yes. So on the exposure to the energy and commodity sector, I mean, a couple of things are happening there. Obviously, the low oil prices and the shifting dynamics globally are having an impact. So far, we're not seeing any direct impact in terms of risk migration, quality deterioration of the book. We're obviously watching this closely. What you do see is here and there, but more anecdotally than structurally at this point is some stickiness in terms of redeploying rigs and FPSOs. That could be an early indicator of larger problems, but we're not seeing any strong indications. Obviously, we stress test our books with some regularity for lower oil prices and particularly low prices for loan is what you would want to worry about a bit more. At the current levels, we're not extremely concerned. And indeed, even if they come a bit lower, it wouldn't have a massive enormous impact. So at this point, no particular worries, but it is a space we're watching closely. And in terms of commercial margin Commercial Banking interest margin, in the quarter, there were lower margins in both structured finance and in general lending. There is more overt margin pressure in general lending. However, I think the decline in structured finance is more mechanical. I think we're seeing that margins relatively stable in current quarters. So the quarterly decline is more of a mechanical effect reflecting how we accounted for things last quarter. So the outlook for Structured Finance broadly stable margins, so the which is our growth focus area, whereas the pressure is more in general engine, which is not the focus of our growth ambitions. And just to follow-up, the weakness in the energy and quantity sector any does it have any impact on your ability to grow or your risk appetite in terms of willingness to grow? No. I think our long term strategy in the energy sector is unchanged. Then Obviously, the economics of a lot of projects will look different under the current oil price scenario than they would have a while ago. So that may lead to reduced demand. In that sense, I think you may see a bit of an impact on the growth going forward, but that is not directly related to our appetite. Also with lower oil prices very simply, for example, in the TCF space, you will see a reduction in the monetary value of a regular shipment and we're already seeing that in terms of the volumes. So will it have an impact? Yes. But is that due to reduced appetite on our side? No, not necessarily. Okay. Very clear. Thanks. Thank you. I think it is for this was the last question. This was the last question. Well, gentlemen and ladies, thanks very much for joining us today in this call. Our teams on the Investor Relations side are of course available for further questions and more detailed questions as they may come when you start flowing through our numbers. So we're very happy to take you through some of the more details. Thanks for being here. Just to sum up, we had a very good quarter for the bank at 1.1 $123,000,000 net profit underlying net profit for the bank. We had an announcement today that after a good outcome of the AQR and the stress test that we have been able to bring forward the prepayment of the repayment of the state. So good news from all different sides in results in commercial performance and as well as on the restructuring side. Thanks very much and talk to you next time. Thanks. Thank you, ladies and gentlemen. That concludes today's ING's Q3 2014 conference call. Thanks for your participation.