Good morning. This is Kirsten welcoming you to ING's Q3 2014 conference call. Before handing this conference call over to Ralph Hamers, 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.
Good morning. Welcome, everyone, to ING's third 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 A.M. today, there will be a separate analyst call for you hosted by NN Group. Any questions on NN specifically, we refer you to that call. Let's just go to the key points. ING posts an excellent set of quarterly results. The underlying net result banking was EUR 1,123 million. That was up 37% from the third quarter last year and 22% from the previous quarter. The results reflect a strong increase in interest result and a lower risk cost.
At the same time, we were able to support our customers with EUR 3.3 billion of net lending growth and funded by EUR 4.3 billion 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 7th. That's what we have announced today. This is a major milestone. The repayment brings us an important step closer to fully meeting the EC restructuring requirements. 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 its operations. That has led to a write-down for goodwill and other non-current assets of EUR 403 million.
Taking a look at the overall result of the bank, the strong underlying net result banking was on the back of a continued volume growth, combined with better margins and a lower risk cost. As you can see in the picture, this resulted in a return equity of 12.7% in the third quarter and 11.4% for the year-to-date return on equity. Turning to Slide four, excluding the negative CVA/DVA impacts and correcting for the deconsolidation of ING Vysya Bank, income rose by 8%, 8.1% to be exact, over the past year, supported by a strong increase in net interest income. 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 marginal 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. It has our special attention there in order to ensure that we manage the savings rate so that we keep a healthy margin. 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 third quarter, we have been able to extend EUR 3.3 billion in net lending, primarily in structured finance, in general lending, and residential mortgages. That was funded by EUR 4.3 billion of net inflows of funds entrusted, 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 EUR 1.4 billion out of the EUR 3.3 billion, and Commercial Banking up EUR 1.9 billion out of the EUR 3.3 billion. That's for the quarter. Now, if we take a look at the nine-month picture, which is on Slide seven, we take a look at the lending development across the nine months, we see that net lending increased by EUR 15.8 billion. If we recalculate that on an annualized basis, we get to a 4.3% annualized growth. That's driven by both Retail Banking and Commercial Banking.
Within the Commercial Banking, particularly in structured finance and transaction services. This net growth of EUR 15.8 billion includes the runoff of the WestlandUtrecht portfolio, the lease portfolio, part of the real estate finance portfolio, and also the reduction in our exposure on Russia. Basically, the annual growth rate or the annualized growth rate for the first nine 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. On the cost side, in the first nine 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. 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 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 EUR 955 million by 2017. Talking about these restructuring programs, and now on page nine. You know that much of our existing cost programs are focused on the optionality environment. We know that even on completion of these programs, particularly in Retail Benelux, we will not yet be best in class.
If you take a look at this chart, this is the chart that we also presented at our investment day, we basically see that because of the CB TOM implementation, the Commercial Banking will actually move into best-in-class territory in the IT environment if it comes to the combination of cost effectiveness and cost efficiency. The challenger and growth countries, which is called challenges here, they're already in that quartile. The Benelux programs will get us to the middle of the pack. 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. The other cost component, the risk cost component.
Risk cost decreased both in comparison to the third quarter of last year as well as the second quarter of this year. It decreased to EUR 322 million. If you calculate that 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. That is what we see in the third quarter. Risk costs in the Retail Banking were slightly up from the previous quarter. We expect them to remain at this elevated level in the coming quarters, specifically in the Retail Netherlands environment.
If you turn to the NPL ratio. NPL ratio decreased marginally to 2.8% in the third quarter due to a lower amount of non-performing loans. This was reflected across nearly all the reporting segments this quarter. 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 second quarter. They remain above normalized levels, we expect this to be for the foreseeable quarters. Risk costs are expected to remain elevated. Although we do see a gradually improving macro picture in the Netherlands. If we go back to the result and how it kind of divides between the performance of the Retail Banking and the Commercial Banking. I'm now on slide 13.
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 third quarter last year, that's on the back of better volumes and better margins. The Commercial Bank, the pretax result also increased substantially on both comparable quarters, but that's if we exclude the negative CVA/DVA results. This again, I think if you look at this picture, it again confirms the strength of our client focus model, both on the Retail side as well as the Commercial Banking side with the global reach. 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, slide 14.
You can see here that all Retail divisions have reported strong results this quarter. All year-on-year, you see the results All Retail areas going up. Particular attention requested for Retail Germany. Reporting another record high quality result, that's driven by both the volume and thus income growth, as well as lower risk costs in Germany. 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, as well as better results from our stake in Thai Military Bank, TMB, this quarter in Thailand. Moving over to the Commercial Bank, slide 15.
The Commercial Bank delivered its improved results in the lending business, as you know, you can see that also on the lending growth and the transaction services area, specifically for this quarter, supported by lower risk cost. Cost income of the Commercial Bank, if you compare it to a year ago, same quarter last year, the cost income was like 45.2%. It's now down to 44.1%. You see the effect of an increased efficiency, both in terms of a larger lending book as well as a good focus on the cost side through the CB TOM. Particular attention for the structured finance development. 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 increasing as well.
Lending assets have grown by 22.3% from the third quarter last year 8.2% from the second quarter this year. In this picture, that is also partly due to positive foreign exchange effects. Correcting for it, there was still growth there as well. Regarding the net lending assets growth, if we correct for the foreign exchange, grew EUR 1.3 billion in the third quarter of 2014. That was particularly in the energy transport and infrastructure group. Those are longer-term assets. 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. That's 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 third quarter of 2014.
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 24.5% in the third quarter and 22.2% year to date. Good results there. Moving to our capital position. On the back of these results, ING Bank's pro forma Core Tier 1 ratio on a fully loaded basis increased to 11.1%, and that is set 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 Core Tier 1 ratio, as we now report that as well, was at 13.2%. We turn to slide 18.
If we look at the total position of the bank with a Core Tier 1 of 11.1%, then we look at the surplus position on group level, basically taking the market value of Voya and NN. Correcting that for the remaining group debt, we saw a surplus of EUR 6.4 billion. We felt comfortable to start a process to prepay the government. After we do the final payment to the Dutch state, the surplus on group level pro forma will be at EUR 5.4 billion. That is why we are 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 state aid forward. We will continue to look at the opportunities to further divest our remaining stakes in NN Group and Voya over time.
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. We are on track in terms of most of these elements. 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. The wrap-up. Well, we just went through everything. It is 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 went through the AQR and the stress test with quite a healthy picture. We have very strong results both in the bank and the insurance company.
Within the bank, we see an excellent contribution from all segments. A good picture. 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 yourselves to two questions only. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. There will be a short pause while participants register for a question. Thank you. Our first question comes from Anton Kryachok from UBS. Please go ahead.
Good morning. Congratulations on the good set of numbers, thank you very much for taking my questions. Just two questions from my side, please. One on dividends and one 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, now you have this ability on state aid repayment, and you're not using bank capital to repay the final tranche of state aid. 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? 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.
On slide 27, you have provided a very helpful picture on where you are in terms of deposit pricing. 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 basis points 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, I'll fill in if there's the need. Patrick.
In respect of the dividend payout ratio, as Ralph said, our intention is to pay a 40% plus or a minimum of 40% payout for next year. As you probably will have noted, the fact that we have repaid the state or will on Friday repay the state from ING 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 earned first before we decide how to distribute them. The commitment remains 40% plus in 2015, first and second half in cash. In terms of interest margin, you asked our ability to deflect.
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 two basis points. There's a drag maybe of low interest rates, about three or four basis points a quarter, and we think that we will be able to offset that with rate cuts.
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 cut. They may not be in perfect symmetry, over time, over the near term at least, we think we can offset the impact of low rates with further rate cuts on deposits.
Maybe to add also on the Netherlands specifically, we're showing here the Profijtrekening, which is one of the larger savings accounts that we have, and the price there, now we've moved it. There's many other savings books that we have or savings accounts that we have where we pay already lower than the 120. It's not necessarily a psychological hurdle that basically limits us to stay at this level. We're following the market. We're managing this as to the inflow, the acquisition of clients, and what it's worth paying for it. There is no specific hurdle there on the 120 basis points. Further questions.
Thank you. Our next question comes from Farq Murray from Autonomous. Please go ahead with your question.
Morning, gentlemen. 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? Just coming back with regards to the dividend discussion. There seems to be some slightly academic discussion about a dividend in 2014. I just wouldn't mind just clarifying your preference.
At a certain level, given the EUR 5.4 billion surplus in the holding, that discussion is slightly academic. 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 for flex there? Thanks.
Yeah. In respect to NN, as you know, we have a lockup to the 3rd of January next year. In this phase, we're polling 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. 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. That's the sort of thinking around how we exit. We have not decided what we do with the 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 lock-up period. 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.
For 2014, we'll revisit 2014 when we get the full year fourth quarter results, and we'll talk about that in February.
Thank you. Our next question comes from Ashik Musaddi 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. How should we expect the risk cost in Commercial Banking going forward, i.e. what is the one-off element here? How much is a run rate? What should be the level that we should forecast for 2015 and then 2016 as well? That's our 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?
It looks like if you do a 40% payout, you will add one percentage point capital every year, or say, 70 basis points. You will end up at 13% or 14% capital in three years' time, as compared to what you are forecasting or what you are targeting, 11%. How should we think about the missing link here? These would be my two questions. Thank you.
Risk cost?
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. If you look into the numbers as Ralph presented them on, I think, slide 10, what you will see is that the three main contributors of provisions, Benelux Retail International and Commercial Banking, you see two of the three 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.
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. What was predominantly an export-led recovery is now beginning to look a bit more like a domestic spending recovery as well.
We think there are going to be potentially some positive movements in the longer run on that side. 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.
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 three stakeholders here. The first one was the taxpayer that should never come into a situation
To build out the bank anymore, therefore we said, "Well, we want to grow our Core Tier 1." The second one is that we have a commitment to support the economies in which we're active, therefore we want to grow the business. For that, we need more capital as well. Then the third one, this is not in a particular priority. The third one was the shareholder who hadn't received a dividend for quite a long time. Therefore, we should go back. Now, basically, the way we worked it out is it's a 40% minimum dividend payout. Clearly, depending on how the growth develops and how the Core Tier 1 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 the regulatory area will develop in terms of further requirements. We know there is discussions going on TLAC and other concepts, we just don't know where that's going to end either. Having said that, the logic through which we manage is a minimum of 40% dividend, leaving room for growth and capital buildup. If it's not necessary for the other two, that's why we called it a minimum 40% dividend. Hope that helps.
That's very clear. Thanks so much.
Yeah. Thanks.
Thank you. Our next question comes from David Lock from Deutsche Bank. Please go ahead.
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, 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 chief operating officer in the last six 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 it's actually been quite stable in the third quarter, 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 kind of 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.
On Ukraine, obviously the business climate remains grim. You see it in many areas. All the international airlines have reduced their capacity into Ukraine. The local airline is struggling, rumored to be bankrupt. Car sales down by 80%. Banking system very weak. 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 agri-business, predominantly based in the western part of the country and actually doing quite well. Of course, a lot of the export companies in Ukraine have most of their cost in local currency and export in hard currency, so effectively they benefit from the current situation.
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. 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 to with the Russians. 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. Some marginally positive news, but it remains a fairly grim picture.
Coming back to the cost side, thanks for that question. I think the trends remain the same. People want to do, on the retail side specifically, to do their banking more and more themselves. They are very well informed. They are 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. Basically, that gives rise to new projects that we are thinking about in terms of making one channel for basically working through branches and call centers and mobile and internet and all of that. 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 is the real change, is that you cannot work front to back in separate programs. You need to work on one 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. We are making a lot of progress on it given the current programs. I do expect that more standardization across countries, but also more standardization within the countries and reducing of complexity will lead to further cost savings in those areas.
Thank you. Our next question comes from Andrew Coombs from Citigroup. Please go ahead with your question.
Good morning. My first question would just be a follow-up on NN. Perhaps you could just remind us of the pros and cons of a spin-off versus the sell-down, as you see them. I know you said you're polling opinions at the moment, but interested to know your thoughts there. Secondly, in terms of loan growth, if I look at slide seven, you provide the nine-month numbers there. Just backing out third quarter, 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 the Netherlands and Belgium on the retail side as well.
Perhaps you could elaborate there on the key movement. Thank you.
Patrick first?
In terms of sell down versus spin, as I mentioned, one of the things we need to do is make sure we maintain an orderly market, which suggests, given the relatively limited amount of liquidity in NN, that a sell down, an 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 and cash spin and then sell down a cash or variance along that. The spin would have to be the entire remainder. 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.
You also want to avoid a significant flow back. 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.
Dan, on your question as to loan growth. In the end, loan growth also has to do with GDP development. The good thing is that on the Commercial Banking side, we have a global reach. I would not read too much into the third quarter as a trend, if not for the fact that the longer-term industry lending activities, the project finance activities, they're actually coming on stream. We started hiring more people about a year ago, a year and a half ago. These bids for these projects went out nine months ago, and now basically you see this book being built. This takes time.
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 the longer-term side of the book. 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. 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. On the more domestic side of things, we see the Netherlands. We see actually the mortgage production coming up.
At net net, as you know, we transfer mortgages out of our book to NN Bank to build up that bank. We have the WestlandUtrecht book in runoff. 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 third quarter a little bit lower than the second quarter. 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 be requested. 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. It's one client that is in these numbers, and it's a big one. Depending on how much they draw by the end of the quarter, you see these numbers going down or up. The trend is still a growth trend in Belgium. In Germany, we're still growing on the consumer finance side and the mortgages. Generally internationally, whether it's Poland, Romania, or Turkey, we see rapid growth in the portfolio. I hope that kind of gives a picture as to how we expect the lending portfolio to grow. In the end, as said, it's all GDP driven. Within most of the countries, certainly the challenger countries as well as the growth countries, we are taking market share.
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%-13% is now very old. Given that you are already at 13% this quarter, and there are further P&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, 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, then Patrick will follow with the answer to the first question. On the second question. 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 SME clients. If it concerns investment loans, we will actually give the discount to our clients. 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 three mortgage providers in the Netherlands, with a minimum market share of around 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 residential book and we transfer mortgages to NN Bank, which is an EC requirement. 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. You also know that a lot of people do prepay their mortgages these days, given the fact that the interest on the savings are not as interesting anymore, versus the after-tax cost on the mortgages.
You see some prepayments there as well. Both sides, we feel that we're committed to the economy. If we come to actual production amounts, the domestic bank in the Netherlands produces around EUR 6 billion of new mortgages per annum. With that, I'd like to give the floor to Patrick.
Yeah, kind of interesting you talking about the ROE target being so old. On one hand, I'd agree with you. We only set 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 about consistent delivery here. Very pleased with the 12.5% in the quarter, but it's 11.4% year-to-date. We've 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 fourth quarter is typically a lower one in financial markets, and we have that bank tax, the EUR 140 million bank tax that has to be paid every year comes in Q4.
It's typically a little bit lower than the other 3. This is about consistent delivery of ROE targets year-on-year. Only 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 two questions related to dividends. Now that you have 11%, is there a thought that the supervisor authorities may push you to a higher Core Tier 1? Do you have initial conversations with your new supervisor on this topic? The second point related to dividend, would you consider increasing the leverage to pay a dividend for 2014? Is that totally excluded? Thank you.
Yeah. 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. 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 tests were all about a leveling. We're assuming that whatever they do, it will be a consistent application. As of today, I don't have any insight or expectation that Core Tier 1 targets are being put higher by the ECB. As Ralph mentioned, what is potentially on the radar screen in terms of capital is the GLAC/TLAC debate, which the whole industry will get some clarity on. That's I think the major area in that space.
Obviously, 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. If it does, I think we will be in a much better place if the economy's growing strongly enough for that to happen. A long-winded answer, but at this moment, I do not see direct pressure on higher Core Tier 1 from the ECB, partly because they started just yesterday. On 14, 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'll reevaluate the position when we have the fourth 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'd have thought there'd be a slightly lighter headwind stretched over time. 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 try to give you an average. 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. We are giving you an estimate of that drag effect, which is in the 3 to 4 basis points 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. We look at the setting deposit rates in the context of the commercial proposition, what competition are doing in the various geographies. When we've considered those conditions justified, we then do reduce rates.
It's not about trying to seamlessly offset or perfectly offset 3 to 4 basis points of negative headwind every quarter.
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.
Thanks, Ryan. A question comes from Kirishanthan Vijayarajah from Barclays. Please go ahead.
Yeah. Good morning, guys. Just 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? Could you just comment on how your pipeline is looking, say, right now versus, say, a quarter ago? Secondly, still on structured finance, but looking further out, how vulnerable do you think that kind of 20%+ 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 structured finance is that what we see is that the longer-term side of structured 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 Banking, which is a little bit more volatile and depends on how you price yourself in the market. We can move that. Now it happens that in the third quarter, we see a decrease on that because of the mitigation of the risk on Russia. The longer-term side is actually taking off, or we're 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. What we tend to see then is that the sponsors of these projects, they really prefer the more professional banks who understand the underlying business. Because this business, 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 is happening underlying. 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
Basically, the sponsors are surprised by the reaction. What we see therefore is that this is next to an expertise business, it's also a relationship business. Sponsors keep coming back to the top banks. We have been able to keep our position in the top five to top 10 for the last couple of years, even during the crisis. That basically, we think that this business will continue, but it will also continue on these returns. In some presentations over the last couple of months, we have shown actually that the returns in this area have been rather resilient, even over the last five years. It's a good return business. It's a long-term business. It's a combination of relationship and expertise business.
We feel confident that these return equity, whether it is 20% or whether it's 19%, we have seen it ranging between 19%-24% over the last couple of years.
Okay, great. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press the star followed by the one on your telephone. To cancel your request, please press the star followed by the two. Our next question comes from Maxence Le Gouvello from Credit Suisse. Please go ahead.
Good morning, gentlemen. I would have two question. 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? 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 EUR 7.8 billion that you released at that time. Thanks.
Okay. We'll start with the second question for Wilfred. I'll take the first one.
Yeah. On the exposure reduction Russia, understandable question. We had given some indications of our ambition there. 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. 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 U.S. dollars. I'm sure you've noticed the U.S. dollar has strengthened against the EUR. That has had an impact of about EUR 400 million on the reported exposures.
The pre-settlement exposures have been influenced by the fact that ruble, of course, has continued to decline, and that has added about EUR 300 million-EUR 350 million to the pre-settlement exposure. 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. There is no issue with clients defaulting or not paying for other reasons. The effect of that is masked by the things I 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 EUR will be.
On your second question. 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 Benelux and Germany. What we see there in the third quarter, we see a growth in net lending of EUR 1.9 billion. That's actually the areas that grow the fastest. What is the underlying? The underlying is mortgages as well as SME and mid-corps, as we would call them. You should realize that in countries like Poland, Romania, and Turkey, where we have large domestic banks, that these GDPs are growing fast, even in some of these. We are taking market share. We're growing generally twice as fast as the market in some of these countries.
That's where some of this lending growth is coming from. It looks good for the third quarter.
Very clear.
Thanks. 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 is 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 third quarter. Linked to that, is that fair to assume that your higher margin on higher loan-to-value are sustainable because simply there is limited competition on that segment? Second question will be on Germany. For first time for some quarters, we have seen some small net outflows of savings. Nothing huge, but we were used of nice positive there. Is that the effect of low savings rates? What you've seen in the fourth quarter, are you comfortable you can lower savings rate further down in the coming quarters there?
Just a remark on the 3 to 4 basis points impact on NIM. It put it at 12 to 16 basis points 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 rate. Basically, the 3 to 4 basis points we already discussed, I think Patrick already kind of elaborated on that. In the fourth quarter, 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. What we see actually is that, over the last couple of quarters, we have been able to reduce the savings rates. 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. As we have already announced in October, which is the fourth quarter, we did reduce savings rates in the Netherlands and France.
If we feel there's an opportunity or a need, we can reduce savings rates also in other countries, including Germany. That's that one. On the Dutch mortgages, maybe Patrick.
We are producing, but we have a limited appetite for mortgages given the concentration risk. New production margins are healthy, that does contribute to the overall margin. The nature of the market has changed with LTV levels by virtue of government regulation coming down. The production is as healthy or better loan-to-value levels than in the past. Also, the tax incentive has now pushed people towards amortizing, you see very little of interest only. Quality is better and margins are pretty good as well. In terms of the headwinds, the three to four basis points, I think we're looking forward for maybe the next 12 months, reassess what the position is. It's difficult to predict six months ahead, never mind 12. I'll reserve judgment on what will happen beyond 12 months.
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? 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.
On the exposure to the energy and commodity sector, 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, and that could be an early indicator of larger problems. 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 long 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. At this point, no particular worries, but it is a space we're watching closely.
In terms of Commercial Banking interest margin, in the quarter, there were lower margins in both the 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 margin's relatively stable in current quarter. The quarterly decline is more of a mechanical effect, reflecting how we accounted for things last quarter. The outlook for structured finance, broadly stable margins, which is our growth focus area, whereas the pressure is more in general lending, which is not the focus of our growth ambitions.
Just to follow up, the weakness in the energy and commodity sector, 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. Obviously, the economics of a lot of projects will look different under the current oil price scenario than they would have a while ago. That may lead to reduced demand. In that sense, I think you may see a bit of an impact on the growth going forward. That is not directly related to our appetite. 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. Will it have an impact? Yes. Is that due to reduced appetite on our side? No, not necessarily.
Okay. Very clear. Thanks.
Thank you.
I take it this was the last question. Well, gentlemen and ladies, thanks very much for joining us today on 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 plowing through our numbers, as 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 EUR 1.123 million 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. You may disconnect.