Good morning. This is Emily welcoming you to ING's Quarter Two 2014 conference call. Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Groep, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F, filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today. Nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Ralph.
Over to you.
Thank you. Welcome, everyone, to ING's second quarter 2014 results conference call. You know the way we do this. We have Patrick Flynn here as the CFO and Wilfred Nagel as the CRO from the executive board. Just before I start, please note that there's also a separate analyst call today at noon hosted by NN Group. We would like to refer you to that call for specific questions on NN, because that team is not with us here, and they will have their own call with you. Assuming you have the presentation in front of you, we'll go to page two. Early July, we successfully listed NN Group at the Euronext stock exchange. For ING Group, it was a real pivotal moment, representing the final major transaction in our restructuring and repositioning of ING as a leading European bank.
It has also unlocked significant financial flexibility for the group because the combined values of the remaining stakes in Voya NN now comfortably exceed the double leverage on group level, and that results in a pro forma surplus of around EUR 5.7 billion. ING Group's second quarter financial performance was strong, with an underlying net result up 19% on last quarter at EUR 1,181 million. That is supported by improved results in both the bank and NN. Now turning to page three. As said, the IPO of NN basically is the official beginning of the company's standalone future. I would like to take this opportunity to once again congratulate Lard Friese and his management team on this success, and I wish them all the success in the future.
Following the IPO now, our stake in NN Group has reduced to 68.1%, and as you all know, that stake is subject to a six-month lockup. We also have our final payment to the Dutch state in May next year. Then it is due. However, as we have indicated earlier, we had two conditions to be fulfilled before we would review the timing of this payment and consider an early repayment. One was the IPO, and the other one was the outcome of the AQR exercise. And basically, one of those has now been fulfilled, so we will review the timing of the payment after the outcome of the AQR exercise. Turning to page four. Just to go in a little bit more detail what the impact of the IPO is on the double leverage. The core debt was EUR 4.6 billion at the end of the Q2.
Including the net proceeds of the IPO at EUR 2.1 billion, the double leverage is reduced to EUR 2.4 billion. If we then look at the market value at August 1st of the remaining 68.1% in NN and the 43.2% in Voya, we see that the market value stands at EUR 8.1 billion, and therefore, the surplus is the EUR 8.1 billion minus the EUR 2.4 billion, which is EUR 5.7 billion at group level. And that basically that excess value that has now become very apparent offers us the financial flexibility to finalize our restructuring going forward. Much on restructuring and double leverage. Let's turn to the Q2 results of the group at page six.
The group posted an underlying net result, as said, of EUR 1,181 million, and that is significantly up from the Q2 last year, as well as from the Q1 of this year, and that is driven by improved results on both the bank side and NN Group. Turning to the bank. Slide seven. We are actually pleased to report a strong underlying result before tax of the bank at EUR 1,278 million, and that is up 11.4% year-on-year and 8.7% quarter-on-quarter. If you look at what has caused the improvement with both prior quarters, that mainly reflects a further decline in risk cost and good lending growth, ensuring good income generation. And that is what we will show you later. As you also can see from the slide, both Retail Banking and Commercial Banking contributed positively to the improvement of this result.
Looking at slide eight, we turn to the return on equity. The strong performance has now resulted in an underlying return on IFRS-EU equity of 10.7% over the first half of 2014, and that is already in the range of our ambition. Now, clearly, this is on the back of a strong quarter and two strong quarters. It is good to be in the range already, so that is quite an achievement there. And if we then look at what are the units that are delivering this improved performance, then basically we see that all units in Retail Banking delivered on this improved performance. But specifically, Retail Banking International, their return improvement was particularly encouraging. If we then look at the income component of the result, I am now on slide eight, we saw a healthy development.
If we exclude the negative CVA, DVA impact, we exclude the deconsolidation of ING Vysya, we see an income increase by 3.1% from the second quarter last year and of 0.9% from the first quarter of this year. That is supported by strong volume growth in both lending and funds entrusted. As you know, you know the character of our bank, ING Bank's total income is dominated by net interest result. That really reflects the relatively stable and predictable income stream. The underlying interest result, excluding the impact of the deconsolidation of Vysya, increased slightly versus the first quarter of 2014. That is despite lower interest results in financial markets and corporate line.
If we then look more specifically, we zoom in on the net interest margin development, we see that the net interest margin declined to 146 basis points. That's mainly due to the deconsolidation of ING Vysya and lower results in financial markets, which was already what we guided last quarter, that the NIM in financial markets was rather volatile. We see two basis points decrease from the financial markets component. The net interest margin on client balances actually remained stable as the lower savings margins that we see have been offset by higher lending margins. As we expect pressure from the savings margins to continue, given the low interest rate environment that we're in, we have already reduced client savings rates in July. That's after the quarter ending in Germany, the Netherlands and Belgium.
In September, we will further reduce our savings rates in Spain in order to manage the savings margins. Moving to slide 11. Basically, slide 11 shows you the early proof points of our strategic direction in wanting to grow in structured finance and in the challenger countries. We have seen a loan growth of EUR 7.4 billion during the quarter. That's funded by a similar amount of EUR 7.4 billion by customer deposits. Clearly, we are very happy and pleased that we already see some confirmation of the direction that we have communicated in March of this year. If we look even further, we zoom and we make a further analysis, we see that the deposits side of the bank is particularly strong in its development in the Netherlands, Belgium, Germany and Spain. Turning to where lending actually comes from, where the lending growth comes from.
The net lending in retail banking has increased by EUR 3.5 billion. That's predominantly in Belgium, Germany and the rest of the world. They all contributed to this growth. The net lending in commercial banking has increased by EUR 3.9 billion. That is driven by structured finance and general lending and transaction services. The strong increase in structured finance was across all products and geographies. That basically reflects the increased focus and resources that we have put in over the last 12 months in order to grow our activities in this core product. As I said, that is certainly a confirmation of the strategic direction, we're happy to see that. Looking at expenses, slide 13 now. On the cost side, we see that in the first half that we have been able to keep the expenses at around last year's level.
We're confident that we can keep them flat overall through 2015. Quarter-on-quarter, we will continue to see some volatility. We will remain vigilant on cost, and cost growth is only allowed if there's even higher income growth. That's what we've seen in businesses such as Retail Germany and in business lending. Where we see double-digit income growth, therefore we do allow for cost growth. These are investment areas. If the income growth is not there, we will not allow the cost growth. Looking at the risk cost component, we see that the risk costs are continuing their downward trend. Risk cost decreased from both the second quarter last year, as well as from the first quarter this year, and came out at EUR 405 million. That is basically driven by lower risk cost across the different countries and segments.
In the Commercial Bank, as we already guided, we see a continuing downward trend. We expect risk cost to decline further from here. However, we also know that this is a business with large files, so quarter-on-quarter comparison may still be volatile, but the trend we expect to be downwards. On the Retail Bank in Netherlands side, we see slightly lower risk costs in the first quarter, but we expect them to remain at this elevated level in the coming quarters. Looking at the non-performing loan ratios. The non-performing loan ratio overall increased marginally to 2.9%, just due to a higher amount in non-performing loans. The increase was caused by Commercial Banking and business lending in Netherlands. Business lending in Netherlands is part of the retail banking results for your information.
Taking a closer look at the risk cost, we see that ING Bank's loan book remains well collateralized and provisioned, because the net additions to the loan loss provisions have structurally outweighed write-offs, and resulting therefore in a higher stock of provisions. I think that's a clear signal of prudence is still around this subject. Turning to the Retail Banking results specifically, on slide 17, we see an underlying pre-tax result of Retail Banking at EUR 870 million. That's up 31% from the same quarter last year and about 13% versus the first quarter. Both comparisons show a real strong development of Retail Banking as part of our franchise.
Although all Retail units have improved over the quarters vis-à-vis last year, as well as vis-à-vis last quarter, I would like to emphasize the developments in Retail Germany, where we reported a record high quarterly result, and are driven by both higher volumes and income growth and lower risk cost. We see an increase of 26% year-on-year for the quarters, we see a 23% increase sequentially on this one. Germany Retail is still going strong. Turning to the Commercial Bank. The Commercial Bank also had a solid second quarter, that as indicated on the back of particularly strong performance from structured finance, an important part of our strategy.
As we have discussed with some of you in more detail and also with some of our shareholders, we have recruited people in this area in order to grow this business. You see that is already paying off. Income was up 9.6% from the second quarter last year and 19.5% from the first quarter this year. That's supported by both strong volume growth and improved margins. If you then look at the financial markets component of the commercial banking result, we see that financial markets has also performed very well this quarter. We've seen that in this quarter, the client business has held up quite well in a generally difficult market. We're quite pleased to see the quarter at this level. How does this translate into our Core Tier 1 ratio?
On a fully loaded basis, we see that the pro forma Core Tier 1 ratio has increased to 10.5%. That's mainly due to returned earnings, strong returned earnings. It doesn't have the same effect on the leverage ratio because that remains stable. That's because the retained earnings were offset by the negative impact of calling the 8% perpetual hybrid in April. That basically neutralized it. Therefore, we don't see the further improvement of the leverage ratio from this perspective. Improvement on Core Tier 1 and a stable leverage ratio. We are growing the business by EUR 7.4 billion. Just a small peek at NN Group's results. Page 21 now. You see that NN delivered a much improved result before tax this quarter.
As I mentioned at the outset, NN's management will have a separate call with the analyst community. Therefore, I propose not to comment on this. If you have questions, you probably have a different call. To wrap up before we go to Q&A. I think we're all relatively proud of the progress we have made since our last results. On the restructuring side, we have reached a very significant milestone, with the last milestone to reach, which was the IPO of NN. The IPO itself was successful. The company is now increasingly independent. It has a good performance. We're very happy with that. On the ING Bank side, we see strong quarterly results. We see already signals confirming the progress in our strategy, both in customer growth, because we have welcomed half a million new customers over the last six months.
We see the lending growth coming in. We see the savings growth coming in. Basically, a solid commercial performance there in line with strategy. Clearly, we're looking forward now to getting through the comprehensive assessment, the combination of the AQR and stress test, because that will enable us to move forward with our plans, including a decision on the state aid repayment. With this, I would like to open the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touch tone telephone. If you wish to cancel this request, please press the star followed by the two. If you're using speaker equipment, please lift the handset before making your selection. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. Our first question comes from Francesca Tondi of Morgan Stanley. Please go ahead.
Good morning, Hamers. Hello, very two simple questions from my side. On the margin side, you still feel very confident, although in a challenging environment, about progression of your margins, including you have upward targets. Other banks in the same regions that you are in, KBC in Belgium, others, are pointing to more margin compression, also because of the impact of the reinvestment yield. Can you please again elaborate a little bit more where you see this margin improvement, how much scope you really think you have on the deposit side, why you have it compared to some of the other domestics, so that we get more calm from there. The second question is on your clearly open to capital repayment and an eventual dividend.
Do you think this is something that we're assuming that the AQR and stress test go well and gives you a clean bill of health? Is it something that we could even consider at the end of the year, or do we have to wait for next year? Is paying the state and dividend and announcing some dividend, something that could even be at the same time? Is that conceivable? Thank you.
Okay, I will take the first question. I will give the second question to Patrick. The margin development, as we have indicated when we launched our strategy, we expected margin stability and improvements to come from a couple of things. The first one was certainly that the mix of our asset base was going to change. Basically, we wanted to grow more towards structured finance and SME and consumer lending. Clearly we see the growth in the structured finance area already, but on consumer lending and SME, that is more back-ended in our strategy because we basically have to still build some of these engines. That is why we are confident about the structural improvement of the margin from where we go. Clearly, in the lower interest rate environment, there is pressure on savings margins.
As we have indicated, we see still scope to further reduce our savings rates and bring a more balance vis-à-vis the reinvestment on the other side. It's a combination of being able to manage the savings margin vis-à-vis reinvestment, and slowly but surely building up a different asset mix going forward. That's on the margin. On capital repayment, Patrick.
Yeah. Thank you. In respect of capital repayment, we have a long-standing and oft-repeated commitment, a desire to repay the state early. We can't pay dividends until that is done. We reiterate that today. We set two conditions for that some time ago. First being the IPO of NN, which has been very successful and gives us EUR 5 billion of excess value above double leverage. The money is there, as it were. The second condition was the AQR, which we set some time ago. We're going to wait the outcome of that. When that is done, we will revisit the timing of the repayment for the state. Our commitment on dividends, which we outlined in the strategy, is that the bank will pay 40% plus dividend in 2015. That remains unaltered.
The positive news would be to the extent that we were able to repay the state early, out of, say, the funds we've generated from the IPO, then that 40% would be fully available to shareholders. The base case had been that half of that would have gone from the bank from the repayment of the state, and the remaining half would have been available for shareholders. There's a potential, if we're able to repay the state early, that 2015 could see the full 40% dividend payout to shareholders. I think you touched also on a dividend in terms of 2014. I think that's too early to talk about 2014. Let's get the AQR out of the way, and let's conclude on the state repayment piece first.
Thank you. If the bank, because obviously your ambition is to keep capital above 10% and pay state, but you have a lot of cash in the group. If that would make the bank a little tight, could you just still pay the cash for the state out of the group cash pockets and therefore effectively being able to anticipate all of that way?
The bank has got a good capital ratio, 10.5% fully loaded, up 40 basis points in one quarter. I think that's clearly positive. We've talked about the capital generation of the bank in the past, and here's a further example of that coming through. We have resources of the group as well. Both parties look healthy in that respect.
Thank you.
Our next question from Martin Leitgeb of Goldman Sachs. Please go ahead.
Yes. Good morning. I have two questions, please, both on deposits. The first question is, you mentioned that you have cut deposit rates in a number of countries towards end of June, I think July, into September. I was just wondering if you could provide a bit of detail or color in terms of by how much you cut in your main markets, so Germany and Netherlands, and what proportion of deposits would be affected there. I think in particular in Germany, you historically paid, I think, around 1% there, by how much that would go down. In that regard, you had very strong inflows of EUR 2.2 billion in Germany in terms of deposits. Do you see this affecting your inflows, or do you see just the market in general coming down?
The second question is probably a bit more about strategy and about the banking union going forward. With the regulator or ECB taking over as the regulator later this year, would you expect to be relatively shortly in a position to apply to transfer some of the excess deposits you might have in Germany and some other jurisdiction into countries such as Netherlands, where you had a shortfall or to optimize your funding structure? Is this more a longer term issue here? Thank you.
In terms of the rate evolution, there were a number of rate reductions, as Ralph indicated. We brought down in July rates in the Netherlands by 10 basis points, Germany 20 basis points. That brings it 80, answering your question, Spain 30, and Belgium as well will gradually come through in a 30 basis point reduction. That should give a boost in the second half to the margin on deposits.
That's the development in the main markets as to the reduction. What are the consequences? One of the remaining parts of that question was, do we see outflows in Germany? No, we see a continuous strong inflow overall in Germany. It's still a good functioning machine, and I think the whole market is moving with lower rates. Your second question, basically on how regulators will react going forward as to whether they will be more lenient to the transfer of liquidity or funds. It remains to be seen, to be quite honest. Clearly, we are happy for European supervision to take over. I think it kind of will enforce a level playing field across the whole banking system in Europe and the Eurozone.
Hopefully, we will all build up quite quickly a credibility across the borders so that local regulators will be more open to transfer of liquidity. It's certainly something we hope for, as we have indicated in our strategy launch, that our plan does not depend on that, because our plan basically shows the direction where we use the excess liabilities as much as possible in these countries. However, clearly, the moment there would be an open transfer, we could actually accelerate some of the savings machines that we have. For the moment, our strategy is not taking that benefit into account, but if it comes around, it will provide for quite some upside for sure.
Thank you very much. This is very clear. Thank you.
Our next question comes from Ashik Musfi from JPMorgan. Please go ahead.
Hi. Good morning. A couple of questions. First, on your loan loss provision, clearly the commercial space is improving significantly. Can you give us some clarity on what's going on in the Dutch SME and residential mortgage market, and what would trigger an improve in the risk cost in these two places? Also in terms of Germany, can you give us what's going on in the background? What is driving it? Is it just the volume and the margins, which are both going up together, which is making a big increase in German profits year-on-year? Sorry if this was asked in the previous questions. I joined it later on. Thank you.
Wilfred, the first question.
Yeah. Maybe, I am sure there are going to be more questions about loan book and NPL. Let me give you a quick rundown of what's going on. As Ralph mentioned, total risk cost for the bank as a whole down from EUR 468 to EUR 405. Retail banking down from EUR 296 to EUR 263, and commercial banking down from EUR 172 to EUR 142. Overall positive development, and it won't be surprising that we still expect the risk cost in 2014 to be lower than 2013. If you dig a little bit more and look under the hood, we do see the watchlist also down globally, though, and this goes to your question about the Netherlands, it's more or less flat in the Netherlands. If you look at provisions on a geographic basis, actually the provisions, as well as the NPLs in the Netherlands are up compared to last quarter.
Our total view of where we are in the economic cycle is a very mixed bag between, on one hand, the Netherlands remaining very slow in terms of recovery. We expect business lending as well as mortgages in the Netherlands to stay elevated in terms of provisions. There is definitely, and we've said this before, a delay between all the macroeconomic signs becoming slightly more positive, and that translating into lower NPLs and provisions for us in the Netherlands. We're seeing that delay factor at work here quite clearly. On the positive side, we do see internationally, generally, in the commercial banking business, a reduction in provisions and in quite a few of the retail books as well. Most notably the commercial real estate book, where provisions this quarter are close to zero, based partly on some significant releases.
It's, I think, also encouraging that some of the more problematic markets, like Spain in particular, on that front are now showing an improvement. If you look at the real estate market in general, what we're seeing for the first time this quarter is vacancy rates across the portfolio are either flat or down, which is a decent indicator of where the NPL levels might go. I'm sure you've also noticed that the sales of commercial real estate in Europe are up sharply. Q2, there was about EUR 51 billion in total transactions in the European markets, which is up more than 20% from the same quarter last year.
Overall, though, we're still looking at NPLs in the total portfolio slightly up, and that's why I think that you shouldn't read a very good estimate of the actual trend of the reduction of risk cost going forward in what you saw between Q1 and Q2. As I said, we do expect 2014 to be better than 2013. I don't think you should extrapolate the drop that we saw between Q1 and Q2.
Yes. That's very clear. Thank you.
Germany is just a success story. This is ING delivering on the model. What we're seeing and have shown is that if you go back, say, to 2012, with the deposits of under EUR 90 billion, there are over EUR 110 billion. At the same time, we've had rate reductions from about 150, I think at the time, down to 80 in July. We have a cost-income ratio that's come down from 50% to 47%. Negligible risk costs. Yeah, that's the essence of it. By the way, it's not optimized yet.
Yeah, just to follow up on that. You mentioned negligible risk cost. Is this a kind of a trend at the moment, or is there some one-off in the risk cost, some releases, or is it just a trend that you're seeing, underlying trend of improvement in Germany?
Look at the last five quarters. I don't see risk costs over EUR 27 million. They were EUR 10 million. They're just structurally low.
Okay.
Reflects the quality of the book.
Yeah. Okay. That's very clear. Thank you.
Our next question comes from David Lock from Deutsche Bank. Please go ahead.
Good morning, everyone. Thank you for the presentation. Two from me. First one on asset pricing. I just wondered if you could give us a little bit of an update of what you're seeing in terms of asset pricing across your core markets. Clearly you're flagging deposit rates coming down a little bit in September in Spain and in July. Just wondered if you could give us a bit of color on what you're seeing on your new flow asset margins. Secondly, kind of connected with that, on the loan growth, EUR 7.4 billion in the quarter, that's running about 6% annualized. That's ahead of where I was expecting, and it's particularly driven by your structured finance business, which you're also flagging as being a higher margin business, of course. I just wondered how sustainable you felt that that was in the coming quarters.
It is a particularly strong quarter, would you expect that to continue through the course of this year and beyond? Thank you.
Well, on asset pricing, what do we see in the core markets? Clearly with rates going down, the way we manage in the bank, we set what we call the funds transfer price. Sometimes it works better for asset margins, and sometimes it works better for savings margins. From the way we manage it in the core countries, we see a slight improvement on the lending side. We see the savings margins going down a little in the core markets. Basically, clearly you would expect, and we do expect some more pressure on the asset side in the market as a whole, given the surplus of liquidity. I guess that's also the purpose of the tactics of the ECB. Within our core markets, the way we manage our balance sheet, we don't see the decrease in margin yet.
Actually, we see it a little bit increased over the last quarter, and not so much decreased. Now, that also overall comes from the fact that we are growing in higher margin areas like structured finance, as you have indicated. It is strategic, if you look at the underlying business that we do in structured finance, some of this is the short-term, others is a little bit more long-term. Will this be the level of production going forward? I can't tell you. That it is a strategic area where we want to grow, I can tell you, and we see the first signs here. Will it stay at this level? It's really difficult to say now.
Thank you.
Our next question comes from Anton Kryachok of UBS. Please go ahead.
Good morning. Thank you very much for taking my questions. Just a couple of questions, please, on the restructuring efforts of the group. Firstly, on State Aid, previously you have used the balance sheet of ING Bank to essentially repay the tranches of State Aid. Is it reasonable for us to expect that you will do the same for the final tranche, or do you think you might actually use the proceeds from the insurance disposals to do this? The second question, please, on timing of the remaining insurance divestments. How do you think about exiting your current stake in NN? I would be particularly interested in your thoughts around different options that you might have, including the spin-off versus the direct sale into the market. Thank you.
In terms of repaying the state, yes, we'd signaled to us that we would use the bank, and that's what we had done before. That was before we've done the IPO, and it's before the point where we have resolved the double leverage, which is now in a EUR 5 billion positive scenario. The fact of the matter is we simply haven't sat down and decided, because it isn't really a constraining decision. We've got resources on both sides of the table to repay the state. Good surplus at the group as well. Mostly this will come from the group, so it's a question, do we want to push dividend for the bank to do it or not? Maybe not. It's a luxurious position. In terms of NN, we of course locked up, as is common practice, following an IPO for 6 months to the 2nd of January.
In terms of options to do with the surplus value, we have the option to spin. It's a real option in that we've got, as you'll recall at the AGM, shareholder approval to do that. That's in the bag, as it were. What we're going to do now for the next 6 months in this locked up period is evaluate our options, and listen to shareholders and think about what those options might be and how best to proceed.
Thank you.
Our next question comes from Matthew Clark from Nomura . Please go ahead.
Good morning. I was just hoping to follow up on the margin, in particular, the impact of lower interest rates on your investment portfolio. I think last quarter or the quarter before, you mentioned that deposits were invested at 3 years and own equity was invested at 7+ years. That implies pretty hefty headwind to come through, in particular if you compare long end rates currently with a lagged portfolio. I was just wondering if I'm missing anything on how you've invested your liabilities and own equity that might limit that impact, because otherwise it'll take more than 10 basis points per annum deposit rate cuts to it to offset that headwind of lower rates if yields stay where they are. Thank you.
Yeah, we have flagged before that there is a headwind from lower rates. If you look at the document, you'll see that the margin and deposits came down somewhat in the second quarter because we had marginal or little by way of deposit rate cuts, and you see there the impact of reinvestment rates biting a bit. It is an impact. It's been flagged before. You're broadly right, and that's what we've given in terms of average duration of reinvestment of deposits and capital. That said, that is not a threat to our target for 150, 155. As Ralph said, we aim to get there by deploying deposits and surplus deposits in higher yielding assets, hence the growth in the lending is important. Expect that the ability to do that will compensate for the lower rate environment.
Would I be right to think, for example, that in terms of purely thinking of the deposits in isolation, you can offset lower rates as that roll forward by cutting the deposit rates, and then to think of the own equity that's going to have to come from the asset spread mix. Is that the right way to think about it?
I don't think we break it up like that. We have cut rates. There's fairly chunky rate cuts in July announced already. There is still some further capacity in terms of rate cuts going forward. I think that what I've said before still stands in that as we get down to one-ish, 1%, where we are in some books, others we're above that, the speed of rate cuts or the frequency may well reduce, but there's still further capacity to cut rates and deposits to offset the low rate going reinvestment rate piece. That avenue is not fully exploited yet. As I said, repeating, the strategic intent is to drive the margin up from the asset side. We believe we can, and I think we're showing the first signs of delivering on that.
Okay, thank you.
Our next question comes from Omar Fall of Jefferies. Please go ahead.
Hi there. Three questions, please. Firstly, just a clarification on a one-off. The negative EUR 51 million of amortization of capitalized fees in the corporate line, is that going through net interest income and therefore needs to be added back to NII to get to a clean number? I only ask as otherwise it's hard to make sense of the very strong volume growth number against the final NII number compared to expectations. Secondly, I still don't understand, and I think I asked this last quarter, why we can't see any improvements in NPL trends in business lending NL when bankruptcies have been collapsing for over six months now. Is there something about your particular exposure or footprint that means you're not seeing the improvement that's pretty clear at system level?
Finally, coming back to structured finance, your volume margin and indeed revenue growth numbers are far in excess of what we're seeing anywhere else in the industry. I don't believe that you have much emerging markets exposure. What do you think you're doing to differentiate yourself at the moment? Thanks.
In respect to your first question, you're right. The EUR 51 million fee amortization did go through NII, and it is non-recurring. Yes, if you add that back, you would've seen a growth in top-line income. Now that's probably the right way to look at it.
As we've mentioned before, the recovery in the Netherlands is slow. You're right that bankruptcies are coming down, but bankruptcies of course, are the tail end of a lot of misery, not necessarily reflecting the actual situation of our existing loan book. What we see is we were slow in the Netherlands going into this recession. The initial impact came a lot later than in many other countries. We're also traditionally somewhat slow coming out. Secondly, of course, if you look at NPL percentages, you also have to keep in mind that the outstandings of this book in total are going down, as you can see from our quarterly reporting. With a stable level of NPLs in the absolute terms, you'll see an increase in percentages simply because the book is going down.
On your question on structured finance, as we have indicated, this is a strategic area for us to invest in. We've been in this business and building it up slowly but surely in the last 20, 25 years. We've recruited across. For us, structured finance is a global franchise. Basically, we're really active across all the different continents, we're not necessarily dependent on the European market to develop or a specific region to develop. We can opportunistically grow on one side. On the other side, we have the knowledge, we have the relationship, and we can price competitively. It's a combination of the fact that we can source the business across the globe, and we have the right people, and we have a very long experience in this, and long-term relationships, and we're gaining market share. That's how it works.
Okay, great. Thank you.
Our next question comes from Jackie Ineke of Morgan Stanley. Please go ahead.
Good morning. I just had a question from the credit side here. Could you comment on when you think the new additional Tier 1 instruments in Holland will get the final sign-off on tax deductibility? Linked to that, what are your plans for issuance of these new instruments? Thank you.
Yeah. We're getting good signals that the tax deductibility issue will be resolved in the second half. Clearly, hybrid instruments are a core feature of how you look at managing your Tier 1 and leverage ratio. We haven't issued up to now because of this tax problem. Probably would be looking very carefully at doing so when the tax position is clear.
Okay. Most of your peers are kind of looking at a 1.5% of risk-weighted assets to 2% in terms of issuance over the next two years. Would you say that's in line with what you're thinking?
I think there are minimum requirements in each category, which you need to have. We would have to respect that at a minimum.
Okay, thank you.
The next question comes from Lemer Salah of SNS Securities. Please go ahead.
Good morning, gentlemen. Three questions from my side. Well, given your European footprint, I was just wondering what your desire is with respect to the Targeted Longer-Term Refinancing Operations, and whether you want to share any possible benefits with the customers. Second question with respect to the cost level. I see that your cost-income ratio or target is lagging at the moment, which is one of the few targets. When do you see the cost-cutting benefits coming through for the bank? The third question is with respect to the AQR. It seems from my perspective that it's going to be a non-issue for you. Do you expect any negative surprises there? Thank you.
Okay. Thanks for these questions. We'll take the first one, Patrick, the second one, and Wilfred the third one. On TLTRO. It's not that we need it, but you know our strategy. In our strategy, we have indicated that we want to grow in the European economies. We'll be supporting the core economies in consumer finance and SMEs and business lending. Therefore, the TLTRO basically supports those plans. It's not that we specifically need it, but it is a very attractive way of funding. In itself, I think that given the fact that banks will participate, and we are considering so as well, we do think that that will have an effect on interest rates across the board anyway. Yeah, I think whether you can specifically relate to it or not, that it will have an effect on margins going forward as well.
It is in line with our strategic plans. It could support us. It is not that we need it, but it's a very attractive instrument. We're considering it, and I do think that one way or the other, some of the benefit will certainly also be lower interest rates for the businesses themselves. Last one, TLTRO, on cost, Patrick.
Yeah. On expenses, we have a target to get to 50/53. As we said in the Investor Day, it may be that the achievement of that will be a year late than the original 2015. That was the date by which we planned in our original strategy to achieve that. We revised that on the Investor Day, saying probably more likely 2016 before we hit that. We also have a commitment to keep costs flat for the next two years. We remain committed to that, and we're on line to achieve that.
Yeah. On the question whether we expect negative surprises. Surprises by definition are not expected, so the answer is no. What we can say about the AQR is that it's been a very intense process in terms of delivering data. We're at the end of that. We're now at the stage where DNB, the other local regulators, and the ECB are going through what we have submitted, asking questions, getting clarifications. Frankly, our biggest worry going into this process was the operational handling of it, and we're quite happy with the way that has gone. There is official clarity on communication on this, which is that it will take place in October. That is when we will learn what the outcomes are going to be, and that's when you will find out as well.
What obviously may have some influence on the outcomes is some political elements, differences between the various parts of Europe in terms of how we handle risk measurement, and it's kind of hard to predict exactly where this is going to land.
Okay. Thank you. Wonderful.
That was our last question. Thank you.
Okay. Thanks very much for all your questions and the time that you've taken to analyze the results up to now. Clearly, you will have more time now to go through the financials together with the input that we've given. Our team in Investor Relations is happy to answer further questions later today and during the next weeks. Thanks again. It's a good quarter. We're happy that we see confirmation on restructuring going forward, confirmation on the strategy going forward. I wish you a good day. Thanks a lot. Bye.
Ladies and gentlemen, this concludes the ING Analyst Quarter Two Results 2014 conference call. Thank you for participating. You may now disconnect.