Good morning. Good morning. It's great to see you all here today. I hope you enjoyed your boat ride over here. Good morning also to those of you following on the webcast. My name is Malcolm Brown, Head of Investor Relations, and it is my great pleasure to welcome you all to the ING Investor Day 2014 here at the Kromhouthal in Amsterdam. In keeping with the theme of the event, Think Forward, we've gone paper-free this year. I hope you've all got your tablets with the Investor Day app ready, and that's where you'll find all the presentations and your personalized agenda for the day. For those of you following on the webcast, all the presentations are on the ING website. We've got a great program for you lined up today. I think you're going to find it very interesting.
We start this morning with a presentation from our CEO, Ralph Hamers, on the strategy of the bank. That'll be followed by Patrick Flynn, our CFO, talking about financial ambition 2017. We have plenty of time for questions before we take a break for coffee, and that's also the moment we say goodbye to our webcast. After the break, we're going to break you up into two groups. Half of you will come back in here, half of you will go down the corridor behind me to the next room to start the next session, and it's all on your investor app. For now, let's make a start. Ladies and gentlemen, the Chief Executive of ING, Ralph Hamers.
Thank you, Malcolm. Well, good morning to you all. Thanks for coming to Amsterdam. Thanks for traveling from different parts of the world and also from close by just to get an update on the ING strategy. I'm sure we're going to make it worth your while. We're going to have an exciting day, and I'll kick off with this presentation to give you an update. What are we going to discuss? First, I'm going to tell you that we are on track to become a pure bank. I'm going to show you that we have strong financials, a unique business model to take this forward, and a very attractive portfolio with a lot of opportunities to go from.
The conclusion there is that we are well-positioned to take advantage of the transformation in the banking landscape, whether it's coming from regulatory environment, whether it's coming from the technology side, or whether it's coming from the customer behavioral side. That makes us take action now in order to position ourselves as a European banking leader going forward. We'll end up with confirming on the targets and give you a peek at the financial outcomes of all of this. First, an update on the restructuring. Since our last call, because up to now, I've been meeting you in telephone calls on the back of the Q3 and the Q4 results. Since the last call, we made a further progress on restructuring. We sold another 14% of our insurance corporation in the U.S. We've now deconsolidated, and the remaining stake is 43%.
We've also sold another 11% of SulAmérica. All of that brought down the double leverage of the group from EUR 5 billion to EUR 3.9 billion. That EUR 3.9 billion is very well covered by the value of the remaining stakes in Voya, in SulAmérica, and in the European Insurance Company. We have one step to go in order to finish that part of restructuring, which is the IPO of NN Group. On the other side, today, this morning, we made our penultimate payment of EUR 1.2 billion as part of the Quarter One support that we received from the Dutch government. We only have one more payment to go in the amount of EUR 1 billion, which we will do according to program in May 2015. The restructuring is moving ahead. We're progressing well, and therefore, it's time to take a look closer at where we go as a bank.
If you look at our franchise today, this positions us very well to become a European banking leader. That is the core conclusion. We have a strong deposit-gathering capability across Europe. We have a leading direct first franchise in many of the European countries, and we have a client-focused franchise in the commercial bank, supported by a leading global franchise in industry lending. Over the last couple of years, we have shown to have discipline and execution, whether it was on restructuring the group, whether it was on restructuring some of our activities in the bank, whether it was in getting the balance sheet in shape, and whether it was on capital generation. We've proven on all of those. We have significant upside potential going forward. We have a mix of mature and growth businesses.
We have increasingly strong positions in countries that we now call challengers as of today, and we're very well-placed to benefit from the European Banking Union. If you look at the portfolio of our current activities, and I will get back to that later in the presentation, we'll basically see three categories: the market leaders, the challengers, and the growth markets. The commercial banks across all of these activities, supporting our clients with specialty products in more than 40 countries across the globe. Taking a closer look, we have the benefit of the activities in the market leaders as well as the challengers to feed each other in the development towards the digital age because we're moving towards the same model in all of the activities that we have. It's paying off.
In the mature markets, where we are market leader, we actually see an increase in number of clients as well because of leading in this model. We'll show you. We now have almost 11 million customers in the Benelux. On the challengers side, we see client growth even faster. We'll come back, and we're now at 14.4 million individual customers and leading Net Promoter Scores. We have merged the retail banks and the commercial banks there in order to have the balance sheet optimization. In the growth markets, these are our markets that grow by themselves. We can pull off growth whether it is in the mature markets, whether it is in the challengers markets, or whether it's in the growth markets. Only through relentless customer focus combined with a strong cost discipline. Our model is quite simple, actually.
We have a very strong deposit gathering capability on one side, we have a consistently strong-performing commercial bank on the other side. Even during the crisis, we saw customer deposits coming in, increasing by EUR 60 billion in the challengers markets from individual customers over three years. That's not because customers are depositing only more with us. That's also because we are getting in more and more customers. They like us. On the commercial banking side, you've been able to follow these performances over the last couple of years, during the crisis, we have been able to keep up a very solid performance of around EUR 2 billion-EUR 2.2 billion of underlying profit before tax, leading to a return on equity anywhere between 10%-13% on the commercial bank through the crisis.
If we go deeper into our balance sheet, you see that our balance sheet is supporting our client business more and more, both on the asset side where we see the percentage of client business growing from 56%-63%, as well as on the liability side, where we see the client business growing from 49%-60%. That is done through growth with clients. It's also done because of creating domestic banks and merging retail banks and commercial banks in the countries where we have the funding and where we have the assets in other places, integrating the balance sheet. Koos Timmermans will take you through more of the tactics and also the strategic opportunities that we see from a balance sheet perspective later today. On the other side, the capital generation from ING Bank has been very solid.
Over the last three years, we have been paying a total dividend of EUR 8.1 billion to the group in three years' time. The bank generates a lot of capital. This doesn't happen by itself. This happens because of a solid financial performance on one side, where we see the growth results increasing from EUR 5.5 billion-EUR 6.6 billion with some increased risk cost over the last couple of years. However, the decrease of risk cost in 2014 will directly flow into an improvement of the bottom line, leading to a solid result across the last three years and a better result to come with decreased risk cost in 2014. That performance was supported by a strong focus on cost.
Through our restructuring programs, we were able to compensate increased cost from regulatory side, from inflation and CLAs, pension cost, we have been able, over the last three years, while we were growing and while we were restructuring, we have been able to keep cost flat. For the coming years, we want to keep it flat as well. Patrick will go into that later as well. All is leading to a further improvement on the cost-income side from 70% in 2009 to 57% now and decreasing in the years ahead. Let me take a look at the future. If we look at the future, we have to take into account many different trends. Let's start with the customer. The customer is more demanding than ever before. The customer is willing to change institutions like this. If they don't like it, they go somewhere else.
The customer is more mobile, that's because of the technology that we apply. That technology, another trend, makes us interact with our customers in a completely different way. I'll take you through that. Technology also enables non-banks to come into our turf. Technology also helps us to improve our operational efficiency. On the society side, we see that we still have to work hard to further restore trust. We're confident that we can do so by a continuous focus on the client. On the regulatory side, you know regulations have become more and more onerous, leading to more cost, restricting our business, and therefore we have to rethink the business models so that we are sustainable in the future. Take a look at this one. The change in customer behavior in terms of the channels they use in banking.
2005, still 42% of all interactions with customers were through a branch. Now we see in 10 years' time, we see that decrease from 42% to 5%. That's not an evolution. That's a revolution. The good thing is that we see that the channels of preference are the digital channels and the mobile channels, increasing from 27% to 68%. That is exactly in the direction where we are good. We are good. We have been working on making banking digital and mobile and online for the last 15 years. We have been deploying direct banks and growing them from scratch for the last 15 years. We know where this is going, and we know how to address it. On the other side, the good thing about digital banking is that clients interact with us more frequently than ever before.
They come to the bank, although it is virtual, more often than ever before, which gets us to a better knowledge of our customers and therefore gets us to understand their needs much better. On one side, we lose the physical contact, but in the other side, we have the digital contact. That digital contact makes it possible for us to really understand them also in the future. If you look at where we are and if you look at where the client behavior is going, we see an increasing trend of self-directed customers across Europe. In every country where we are active, we see the share of self-directed customers growing very fast. We're there where it is happening. It's not only that.
It is also that the ones who onboard digital banking and online banking before anyone are the more educated clients, and they interact with us continuously. In some cases, they actually advise us how we can further improve the services because we are in constant dialogue with our clients. On one side, we see this trend of self-directed clients. On the other side, we see that if you're very good at this model, that you can actually build scale with lower volumes. See the scale lines here in non-direct banks and direct banks, and between ING non-direct and ING Direct. Both on the non-direct side as well as on the direct side, you see that ING is more efficient and has a lower efficiency slope. That's because we know how to combine moving from a branch bank to direct as well as on the direct side.
Clearly, some of this advantage we give to our clients. It makes it attractive for clients to onboard. They also like our services very well. Across the countries in which we are active, whether in retail banking or commercial banking, we are the number one or number two in Net Promoter Score. Since clients are changing institutions more easily than ever before, if they change institutions, what institution will they go for? The one that is promoted. That's why it's important to be leading in Net Promoter Score. You've seen it through the crisis, through the last years, we have been able to continue to grow the number of clients, 8% across the total franchise, 13% across the countries in which we could now call challenger countries. 13% in three years.
The beauty of all of this is, as I already said, in our portfolio is that we have the leading market positions where we have branches often, and we have the challenger positions and the growth positions. All of these models are converging. We've shown it. In the leading market positions, you can expect that we are growing them more and more into direct first banks. Direct when possible, advice when needed. That's the way we go about this. In those areas, we have to focus on cost and operational efficiency. With that, further develop the clients from a relationship perspective. I will come back to that. On the challenger side, we have to grow into omni-channel experiences with our clients, expanding the product range in order to build even more sustainable franchises and be more successful in also developing the primary accounts.
I'll go back to that. Two proof points, and we have many more. Today, you will get presentations from Hans van der Noordaa on the Benelux and Roland Boekhout out in Germany, and they can give you more details on this. I'll give you two examples. In Belgium, ING was the first bank to really move to direct first. At first, clients needed to get used to it. We may have lost one or two clients there. Overall, since 2007, we have been able to customer base in Belgium, a mature market, by 25%. More clients, a more efficient model, leading to better revenues, leading to a lower cost income, and an improvement of return on equity. On the other side, Germany, over the last couple of years.
Efficient already from a cost income perspective, but broadening its product base, growing on the client side, improving its results. Throughout the crisis in Germany, we received 1.6 million of new clients. It's about 1,000 clients a day. 1,000 new clients a day in Germany alone. Leading to improved efficiency, a better return on equity. Again, you can get all the details in the sessions that we have later today. With this as our starting point and knowing the trends, what will we do going forward? We have interviewed more than 1,000 clients over the last six months, both commercial banking and retail banking clients. We have asked them their opinion on banking and on ING. One thing came out on ING, that wherever we are active, in whichever country, in whichever business line, we enable our clients to realize their projects, their plans, their future.
If you take that as a purpose that we've already proven in the past and we focus on this even more so going forward, that whatever we do in ING, we empower people to stay a step ahead in life and in business. If you're so customer-focused, you have to truly understand what clients want and deliver what they want. That's why we have the customer promise. This customer promise goes for all of our activities. The customer promise is around being clear and easy, enabling banking anytime, anywhere, empower our clients to take the decisions. One important promise as well, that every day, if you work for ING, you work in order to improve the service to our clients every day. This doesn't change and happen overnight, clearly, we have to make some changes as well in ING.
We have to further streamline our organization. We have to continue on the path of operational excellence. We have to further develop our performance culture. We have to broaden our lending capabilities. I will go in each of those during the presentation. Before I go there to the enablers, as we call them, about this customer promise. If we're talking clear and easy, it is about using language that everybody understands. It is about simple processes. We're relentless. We review all processes. I'll give you some examples later. If we promise anytime, anywhere, you go for mobile first, basically, clients should have the same experience throughout whichever channel they use.
If you talk about empowerment, it is about giving either clients the tool so that they get a good sense for what is important to them, to get a good sense for what decision they need to take to improve their position, or you give them the right advice at the right moment, rightly priced, tailored offers. All of that leads to one strategic direction, which is a differentiating of our customer experience through four priorities. If we're good at this, we will earn the primary relationship. We have to earn it. If you have the primary relationship and you really want to build on it, you have to invest in analytics in order to understand your customers better.
If you're true about improving the customer experience going forward, you have to step up the pace in innovation and apply technologies as soon as possible if you think that will improve the client experience going forward. With all these non-banks coming into our turf, trying to disrupt our market, we have to think beyond traditional banking, to develop new services and business models going forward. Today, you will have sessions to make you understand what we mean on many of these aspects. If I talk about the primary relationship, generally on the retail side, this is determined by having the salary account, the payment account. If you have the primary relationship, you see that the cross-buy goes up. I'm talking about cross-buy. You have to earn the primary relationship, and it's about the client to decide whether they want to do things.
It is about cross-buy, not cross-sell. We have enormous upside potential. Of the 32 million, almost 33 million clients that we have, only 7 million we call primary relationships, and we want to grow that to 10 million in the next couple of years. Enormous upside on this one. If we go to the commercial bank, the primary relationship is generally determined by having the anchor products of lending and payments. Why is that? If you truly want to understand your client, you have to be at the heart of the company's finances, where the supply chain is working, from suppliers into the company to off-takers, the payment stream, and the working capital facilities around it in order to optimize it. Only if you're there, you really understand your customer. Only if you're there, you can make relevant solutions for your customer.
That's what makes us the leading commercial bank in the Benelux. That's why we're going to export a lot of this into the rest of Europe in selected client areas. Bill Connelly in the commercial banking session later today will take you through that. It makes us invest in payments business. It makes us invest in working capital solutions as a product going forward. That's on primary relationship. On developing analytics and analytical skills. In a digital age, in order to be successful and truly understand your client, you have to work with the data that you have. You do that in order to improve the customer experience through an operational excellent perspective, through adjusting the channels to their liking automatically because of analyzing their behavior. You can counter fraud and cybercrime.
If a client makes a payment in a location where it is almost impossible for him to be from where he did his last payment, we will approach him and say, "Well, is this you?" You can do that. It also helps on the risk management side. If you go deeper into the data, you understand your client better, and you can have better underwriting. An offer at the right moment, rightly structured, rightly priced. With that, you create commercial banking opportunities, both on retail and commercial banking side. If we talk about innovation and how we interact with our clients, you will also have a session today to show you where we are in different countries. We have examples from Turkey and Spain and different countries to take you through as to how we think innovation helps us delivering a better service going forward.
Let's go to the enablers. All of this will not just happen like this. We have to do stuff at ING. One thing that is not going away, one thing that you know that is important for ING, is the focus on operational excellence. We have already informed you earlier that we have this long-term IT program to further reduce the number of applications in general and to further improve the percentages, the share of applications that we either share or replicate across the different countries. This shows you the progress that we're making, and there's more to come. On the other side, if you look at the effectiveness of IT, you see that in the challenges countries, basically the direct countries, we're best in class in terms of effectiveness of IT. Efficiency, effectiveness. We know how to do it. We have it in-house.
The current programs, the commercial banking transformation program that we're going through, will get us from average to best in class on the commercial bank, as you can see. The programs that we have in the market leaders area, basically the Benelux, the current programs, the Dutch Case for Change and the Belgian Transformation Program, will get us to the next stage there, but will not get us yet to best in class. There's more to come. There's upside here. Since these are long-term programs, we want to be sure that we finish a program and get the savings and the effectiveness improved before we deploy another program. You can be assured that we will go to best in class there as well.
Just to give you an example how this works and what this does, because this is the beauty of truly focusing on operational excellence. You can both decrease cost and improve service. Take the example here on the international credit transfer side. From a total number of 140 types, we're moving to 6. This is a lot of work. We go through 700 client processes. We move from more than 1,000 different systems to 100. It's a lot of work. It will lead to lower cost, a better client experience, and better client insight because we will have all the information, multi-country, multi-product, multi-device, ready for our commercial banking clients. Connie will take you through that. The other opportunity that we have for which we have to develop further is that we have to develop our asset-generating capabilities in order to match our funding-rich franchises.
Over the last couple of years, we have been focusing on a balance sheet optimization, which was driven by asset transfers as well as by legal integration in those countries where we had assets on the commercial banking side and funding on the retail banking side. Have been very successful at that. We have been integrating the balance sheet up to an amount of EUR 48 billion. Koos Timmermans will give you an update there, but he will also take you forward on this one. It leaves still an open opportunity, a big opportunity. Because you see from this picture that we still have a funding surplus of around EUR 48 in countries like Germany, Spain, and Italy and Belgium, and we still have a funding shortage in the NV, in what we call the Netherlands. There's two things we do.
We're not going to wait for the European Banking Union to happen. If it happens, it gives real upside. Meanwhile, we're going to develop our industry lending to match with these activities. We're going to develop capabilities in SME and consumer finance. Not losing the upside of the European Banking Union to come. Because if one institution is well-placed to benefit from it is ING. What will we do? On the asset side, we will focus on some growth on the corporate side, because as I said, the successful commercial banking model that we have in the Benelux and across, we will further deploy in the countries where we are challenger. We will really grow further on the industry lending side. We'll have growth in the SME side and the consumer lending side.
We'll get more diversification, and it will be NIM accretive. The NIM will go up. That's where we expect the NIM increase to come from. Better risk diversified and better NIM. We can do it because we know how industry lending works. We have a track record. Just like we built the ING Direct franchise from scratch organically with ING people recruited in all the countries where we're active, painting them orange, we have done so on the industry lending side as well. This is not a franchise that we just have. This is built over a 20-year period across the globe with a beautiful track record, specializing in oil and gas, metals and mining, power and infra, transportation, commodities, telecom and media, coupled with strong risk management, and you can see that.
It generates high return on equity across the cycle, higher than 18%, anywhere between 18% and 23%, with risk cost over the cycle right where our appetite is, 40 to 45 basis points. It fits us very well. Already we are building competence centers and expertise centers in, for example, Germany and Belgium. We will do more in order to get assets to where the funding riches is. This is a real strong franchise. How will we go about further developing our consumer lending business and SME lending business? On the consumer lending business, we have particular expertise in Belgium, in Turkey, and in Germany, and Roland will continue with you on that one. We know how to do it in a challenging country.
We have this expertise, we are going to develop a model that really works also in the mobile era. On SME, we have the expertise in Poland, in the Netherlands, in Belgium, if it comes to how do you do scoring for SMEs. We also now have the expertise in Spain, how you move from individual banking to what we call retail plus and start banking small companies and giving them loans in a direct way. That's where data analytics comes in as well. Do we know the client well, and can we underwrite? We have the background, we have the experience, and we'll take it step by step. The story I'm telling you is going to yield a benefit strategically on a longer-term horizon.
What you can expect from us is a mix of activities and actions in the Think Forward, Act Now program that will both yield improvements on the short term as well as making us ready for the future and have the growth there as well. For example, you can expect us to be concentrated on finalizing the restructuring of ING. You can expect us to be concentrated and give emphasis on finishing the restructuring programs in the Netherlands, Belgium, and the commercial bank. At the same time, we will continue with a relentless customer focus supported by our purpose and the Orange Promise. We will invest in expanding our lending capabilities later on, reduce bureaucracy. To support the operational excellence, we will appoint a chief operating officer. In order to support innovation, we will appoint a chief innovation officer.
In the phase 3, 2016 and onwards, some of the longer-term actions will then yield benefit, and we can leverage our European franchise if the European Banking Union is in place. Across these phases, you can expect our cost-income ratio to go down and our return equity to go up. I've told you about why we are so passionate in ING about the customer, which is the purpose. I've told you what is that we want to do. We want to continue to create a differentiating client experience for clients to want to work with us. I've taken you how we want to do it, by focusing on operational excellence and broadening our lending capabilities. I know in your minds, the question mark is where are you going to play?
For that, in order to know where we should put our emphasis and how we should put our priorities, we have developed a strategic framework. Which is what you see here. All of our activities, whether in the country or whether in the business line, we are continuously taking through the strategic framework. We check them on market attractiveness, on strategic fit, as well as connectivity into the rest of the business. We have developed a concept of sustainable share because we don't think that economies of scale is the only way to survive. We think that a combination of operational efficiency, which we have proven to be able to reach at a smaller scale, combined with agility and flexibility are the ones that will make you survive.
Therefore, the concept of sustainable share is introduced as one where we combine factors that show us how relevant we are to the customer, how relevant we are to the market, how sustainable our balance sheet is, and whether the activity makes the financial hurdle. Through that, we have different action plans for different activities. Don't expect today announcements on disposals or what have you, but expect going forward that the combination of the strategic priorities as indicated, a differentiating client experience, the improvement levers combined with the strategic framework, will make us change the business plans and the action plans all the time in order to ensure that all of our activities are constantly matching and adding value to ING as a total.
If you take this and the strategic priorities, you come automatically to the 3 categories that I've shown you in the beginning of the presentation. The market leaders category, the challengers category, and the growth market category. With the commercial bank across all these categories and doing more with their specific capabilities. The combination of strategic priorities and these categories lead to a recipe for improvement which is different per category. In the areas where we are market leader, the emphasis will be on continuing to differentiate in client experience by improving our operational excellence, by improving and streamlining our organization even further. We don't need to develop our lending capabilities.
If we go to the category of challengers, we already have a differentiating client experience, so we'll have to continue in it, but with less emphasis than, for example, in the areas where we are market leader, but we have to focus on developing our asset capabilities. There will be much more emphasis there. In the growth markets, there is an emphasis across all the different dimensions. That's why there's a different recipe per category of activities. This is how it works out financially. It basically means that in the areas where we are market leaders, we expect revenue to increase, but cost to decrease. You can expect from us the same attitude towards cost that we have shown in the past. The recipe here will lead to an improvement of cost-income and an improvement of return on equity.
These activities will basically generate a dividend to, on one side, distribute, and on the other side, invest some in the areas of challengers and growth markets. In the category of challenges, we expect revenue to increase rapidly, but only if revenue is increasing rapidly we will allow for cost growth. Also there, we expect cost-income to go down and return on equity then to go up. The same goes for the growth markets. We expect revenues to grow rapidly and only if it is there, we will allow for cost to go up. Improvement of cost-income, improvement of return on equity. This basically is supported by having the balance sheet grow, or through this, we think we can grow the balance sheet by about 4%, well, the lending assets by 4% and the balance sheet by 3%.
All of the activities, each and every one, will have to contribute to an improvement of cost-income and return on equity. How do we see the return on equity improving? If you take the whole story, you see that the diversification of the asset mix will lead to a better NIM. We expect the risk cost to go down because we think we have stopped it. We expect through this plan for operational efficiencies to further improve. Either through real cost decrease, as I said, in the mature markets, or through improving and continuing on the efficiency curve that I've shown you. These three elements will ensure that our return equity will increase. That brings me to the ambition slide.
We will manage Core Tier 1 above 10%, an increasing and comfortable cushion over the years in order to support potential volatility on the risk-weight asset side from model updates or regulatory updates. Also a cushion in order to ensure that we have a consistent dividend payment going forward. The leverage we will manage around 4%. The cost-income is expected to go down into the range of 50%-53% and clearly further in the future, closer to the 50%. The return on equity, 10%-13% return on IFRS-EU equity, by the way, this is. We expect to pay a dividend after the Dutch state has been repaid over the financial year 2015. To sum it up, and before I give the floor to Patrick to go even deeper into the financials, we're on track to become a pure bank.
We have strong financials, a strong track record to deliver what we promise, and an attractive portfolio and a unique business model ready to face and benefit from the trends in customer behavior and regulatory changes. We're well-positioned to take advantage of these transformations, and we are now taking the actions in order to position ourselves as a European banking leader. Thank you, and Patrick, you can take it from here.
Thank you, Ralph. Good morning, everybody. I hope you found that inspiring. I did, and it's not the first time I've heard it. What I want to do is I want to build on this strategic plan and articulate a little further in terms of what it means as a financial ambition. Before we go forward, I want to take a step back. Clicker working? Nope. There we go. It's in gear. If you remember, many of you, I see a lot of familiar faces here, as I say. If you go back five years, ING has gone through a significant period of change, a significant period of altering our profile from a banking insurance conglomerate to a standalone pure-play bank. That process has required a significant degree of managerial focus and execution.
I think it's fair to say that we have demonstrated managerial focus and execution in delivering that. We are on the verge now of being a pure-play standalone bank. In that process, we've also got the bank ready for Basel III, and we've changed the capital profile to be ready for the future. We're now closer to the end, and with the upcoming IPO of insurance and the final state repayment, we will be there. We can then direct 100% of our energy and our focus on delivering on this plan for the bank. Many of you have been with us throughout this process. You've been through some of the more difficult times earlier on. I see familiar faces here. I see Jeff, I see Nick. The people who've come from the West Coast, Justin, to be here.
I am very pleased to be able to articulate a financial plan just for you. What are the key messages here? We're going to grow our income through asset growth and NIM expansion. Cost discipline will be maintained. I think Ralph has articulated that several times. We will use this as a defining advantage, and we will get the cost-income ratio to the 50%-53% range. Loan loss provisions are likely to decline from here. The combination of a strong capital base and a strong capital generation capability means we can resume dividend payments. First dividend over 2015 and growing thereafter into a 40%+ dividend payout ratio. As I said, we've transitioned the bank to be compliant with CRD IV. Fully loaded cost income ratio is at 10%. We meet today regulation requirements in terms of capital.
We are in line with 10% fully loaded with our listed European peers. Leverage, loan deposit ratio, LCR ratio are all comfortable. That creates potential for significant dividend upstream. You see we've done that up to now. This bank is capital generative. How have we done that? Well, we did it in the context of a balance sheet that reduced nearly 20%. We increased income by focusing on NIM improvement, repricing assets, reducing costs on deposits, and we kept costs flat. As you can see, NIM is up four basis points, and the cost-income ratio down 4%. Track record, as I mentioned, strong track record of profit generation, and a strong track record of dividend and capital creation. Thinking forward, what do we do from here? Well, we need to grow.
We need to get the ROE above cost of capital, so we can pay a proper dividend to shareholders, and we will execute on that. Growth, what does it mean? Balance sheet, growth around 3% with lending growing 4%. This is lending from existing franchises, probably in our challenger markets and NIM accretive. This growth will be funded by customer deposits. Ralph has articulated the power we have in terms of generating customer deposits. Koos will, in one of the breakout sessions, take you through our funding strategy beyond this. The lending mix will change somewhat with a lower proportion of mortgages and a higher preponderance of higher margin products such as consumer finance. As I said, it will be funded by customer deposits.
This growth will predominantly be outside the Benelux, more than likely in countries where we have services and funding, places like Germany, Spain, Poland. Again, in the breakout sessions, you'll get further insight on how that growth can be made happen. What this means is that our net interest margin will increase to the 150-150 basis point range. Already funding from customer deposits with the potential to grow, and we also have the potential to improve margin here as well. In fact, we reduced margin in the Benelux 10 basis points this quarter. Costs. We have, via our efficiency programs, absorbed significant cost pressure over the previous years, be that from pensions, from regulatory changes, from inflation. We've kept costs flat up to 2013, and we will keep costs flat for a further two years to 2015, at EUR 8.7 billion. Our cost efficiency programs are on track.
You've seen them announced in previous results updates. We are on track to deliver EUR 500 million of additional cost savings. That will happen. In fact, we're going to raise the target of aggregate cost savings to EUR 955 from EUR 880. With, as you can see on the slide, EUR 75 coming after 2015. There are further cost pressures coming. We know we're going to have the Dutch DGS scheme. We know that the Single Resolution Mechanism is going to cost money. There will be further regulatory costs. We will focus on efficiency. IT is an area where we have more opportunity. There will be more cost efficiency programs coming down the track. We do need to grow. We need to invest to grow our franchises. We need to invest to leverage and exploit the opportunities we have.
I don't need to re-emphasize it will be done in a disciplined way, in a way where we invest to be accretive to a cost-income ratio target of 50%-53%. Indeed, it's likely, and I hope to see that towards the end of our period, the 4 years, we will gravitate towards the lower end of this range. However, given the lower balance sheet, the lower starting point I mentioned earlier, it may well be that we don't get into this 50%-53% to 2016. Summarizing that, what does it mean? It means through lending growth and NIM expansion the top line will increase. We will keep costs under control, so pre-provision profits should improve. Looking at our profile, we have a very well geographically diversified asset book, as you can see in the middle.
Because of the collateralized nature of much of our lending, our loan loss provisions have been lower than our peer group. We're beginning to see improvement in customer confidence, economic confidence, signs of GDP growth. What does that mean? I think it means that it looks like 2013 was the peak for loan loss provisions, and we should see them declining from here. You saw last quarter that commercial banking was showing visible signs of improvement. We expect that to continue. The improvement in the Benelux may take a little further time, as it's a little slower emerging from the economic downturn. Loan loss provisions to reduce from here. Finally, to the key topics, dividend and ROE. Let me just take a little bit of step on capital. As I mentioned, we're well capitalized. We meet regulatory requirements today.
We do see the potential for an increasing capital requirement through the introduction of a systemic or domestic buffer, which means that we think the 10%, which is our target, will become a minimum over time. We intend, as Ralph said, to run with a buffer above that. A buffer to ensure, assure we have capacity for dividends, ensure that we can absorb the occasions like we saw in Q4, where we may have some RWA model volatility. We'll run with a buffer above 10%. Comfortable buffer. When you put all that together, what does it mean in terms of ROE? Well, I think it should be pretty clear that we can get into the 10%-13% range. We start at nine.
With the business growth, the NIM improvement, and the normalization of risk costs should be more than sufficient to cover the additional capital buffer we'll need on top of Core Tier 1. That will get us comfortably into the 10%-13% range. In summary, we have a business model that's capital generative. We will have some business growth, may require some additional capital. We're going to grow a buffer on Core Tier 1, will require a little bit of capital, but it leaves significant room for dividends. We aim to pay our first dividend in respect of the financial year 2015, and thereafter grow as rapidly as possible to a 40%+ dividend payout ratio.
Rounding it off, Ralph has shown you this already, but just summarizing again, our key financial ambitions and targets are: Core Tier 1 ratio with a buffer above 10, leverage around four, cost-income ratio 50% to 53%, an ROE of 10% to 13%, and a dividend payout ratio of 40% plus. I think this makes a compelling financial case for ING, I hope you do, too. Thank you. I'll ask my colleagues, Ralph and Wilfred, to join me on stage, We are happy to take your questions. Want some water? No, I'm fine. You want one? Thanks. Okay. Question time. We have a lot of time. We have time this morning, we have time during the day. Let me just see. I'll start up front, Then I'll just work through the room. Go ahead.
Good morning. Jean Pierre Lambert from KBW. I had two questions. The first one is on the capital buffer. If you could explain a little bit what kind of amount you're thinking about, or percentage, What would drive this up or down to give you confidence on not to keep a large or smaller buffer. The second question is about the customer experience. How do you rank yourself compared to other digital banks? I'm thinking about HSBC, I'm thinking about the Nordic banks. How do you see yourself, Where do you see the gap you have to catch up? Thank you.
Okay. You take the buffer? Yeah. In terms of the buffer, I think what the buffer will mean is that 10% will become the minimum rather than the target. The buffer will make that the minimum. That's coming from the regulatory changes we think are going to happen. Then the discretionary piece on top of that is what we choose to put so to ensure that we don't breach that, We maintain a comfortable cushion above there to ensure we can pay dividends and absorb any volatility that may arise. What does that mean? We've got a four-year trajectory here. I think what it means is that between now and the end, you'll probably see us going closer towards 11, towards the end of 2017. It'll be a gradual path. Okay. On the customer experience, I can be clear.
We clearly look at the countries where we play. That's where you have to be differentiating. That's why we measure the Net Promoter Score all the time, to get a sense for whether we are ahead of the competition. Clearly, if you have a true differentiating experience, the difference between you and the competition should grow in Net Promoter Score. That's what we're moving towards. On the other side, if you looked at the ambition to step up in pace and innovation, Then basically some comparison to competitors come in as well, we think we can step up, We will step up. That's why we are appointing a chief innovation officer. However, we continuously check the rating of our clients on, for example, the apps that we have, the banking apps.
In all the countries, we have the apps with the best ratings. We continuously look at competition as well. In the end, it is not so much the means through which you reach your customer, it is the experience that the customer has through that mean. If you really go down into the core elements of the success of ING in a direct way, it is about the experience behind the online banking, and it's not so much that we have deployed online banking, but it's truly easy. It's very clear. It is the way clients can actually understand it. That is difficult, honestly. Some of the banking products are rather complicated, but we have to make them easy, and we have to give it to them in an easy process. Just having online or just having mobile is not how you differentiate yourself.
It is the experience behind the online and the mobile, the easiness, whether it's a corporation or whether it is a consumer client that makes a difference. That's, I think, what we're good at. Yep. Go ahead.
Good morning. Thank you very much for the presentation. I'm Anton Krejcik from UBS. I have two questions, please-
Okay
on the bank P&L. One is on net interest income. I was just wondering, in your net interest margin guidance of 150 to 155 basis points, do you give yourself any benefit from lower funding costs, wholesale funding costs? I remember during Q4, we talked about potential five basis points coming from expensive funding winding down from 2015 onwards. The second question, please, on costs. You've mentioned that you're looking for broadly flat costs in the next couple of years. I was wondering whether in your outlook, you capture all the new regulatory costs that might come in, especially from the single supervisor in Europe. Thank you.
Okay. Patrick?
In terms of the interest cost, we are isolating, as we mentioned the last call, part of the cost that helped us create our strong liquidity profile into our corporate line. That's about 5 basis points. It will run off slowly, but the real decrease will only be 2020.
Back end.
It's back ended. Yes, in terms of costs, we intend to keep costs flat. Ralph mentioned we will see absolute cost reduction in the Benelux, we'll be selective in where we invest. We have factored in that there will be costs coming in respect of the DGS scheme and as best we can guesstimate it, the European Single Resolution Mechanism. They're factored in.
These are indeed guesstimates, right? This is what we think will come. If that surprises us on the high side, then we'll have to see how we can cover it. Go ahead.
Yes, good morning. It's Matin Latif here from Goldman Sachs. I have two questions, please. The first one is in relation to slide 28 of Ralph. Here you speak about the funding surplus and the funding shortfall of roughly EUR 47 billion, EUR 48 billion. I was just trying to understand what the potential earnings impact might be if you would be able to match those two. If you might be able to close the funding shortfall in Netherlands with the surplus you have mainly in Germany, how much would that impact earnings and how quickly could you close that? Would that be almost immediate if the new supervisor would allow you to shift the money? Or could that take maybe 6, 12 months until you close the wholesale funding?
The second question also with regards to that topic is, I understand that this is not part of your current guidance. The 10%-13% return on equity and also the growth in loans of about 4%, they do not include the assumption that the single supervisor would lead to free fundability of deposits. Would it be right to assume if free fundability were to come, that you would grow your German deposit base more, and you would basically have actually a higher growth then as a consequence?
Okay. I think you all can make the math, because you have your models as well. If you take EUR 48 billion, either surplus or gap, and you can match them, you correct for a liquidity buffer that you will always have, depending on whatever the legal structure is and whatever a local regulator may want you to keep in the country from a liquidity perspective. Take 15% there. You reduce the 48 by 15%, and then you take a margin 1%. You get an indication. Now, how quickly will we get there? We don't know. Clearly, the discussions the way they're happening right now, is that most likely we will get there gradually and not necessarily rapidly. That's why we have a strategy that basically also uses those funding surplus in being able to grow in those countries with different assets.
We're not waiting for it to happen, but if it happens, it will give the upside. Your second question as to whether if all this happens, whether we can grow faster, I think we can turn it the other way around. Currently, our ambition to grow and support the economies in which we're active, because that's basically what this truly is. We see it as rather reasonable to assume across the whole portfolio, a growth of 3% in balance sheet and 4% in lending. Depending on how capital requirements at a certain moment look, and if then lending and the lending opportunity would be much bigger and we could grow faster and support the economies, we can also put some more pace in the savings machine. At this moment in time, we are trying to balance the savings machine with the asset machine.
If the asset machine would generate and be a little bit more successful, we think that we've proven over the past that we can also then accelerate the savings machine. We'll go with at that moment, provided there is the capital and provided the capital kind of requirements that we are currently assuming will stay. Yeah, go ahead. I'll come to that part of the room as well, don't worry.
Benoit Petrarque. The first question is on growth, on loan growth to be more precise. Could you give us the figure, the 4% split down per region? I think you have identified three big regions. Would be interested to get the details there. Will that growth be back-loaded?
Can you mention the challenges?
Will that growth be back-loaded or are you expecting 4% growth as of 2014? On M&A ambition, where are you there? Is that too early? Do you prefer to be first at 11% Core Tier 1 ratio before thinking about anything? If any M&A, where are you kind of thinking-
Okay
to go?
Good.
Sorry to come back on regulatory cost.
Don't worry.
How much additional regulatory cost are you expecting from DGS and a resolution fund?
Okay.
In euros, please. Thank you.
Wilfred takes the first question, I take the second one, and Patrick takes the third one. I think that's a very democratic kind of balance here.
Okay, on loan growth, as Ralph was saying in his presentation and Patrick also alluded to that, the big opportunity for us is clearly in those countries where we already have the funding base and are still catching up on the origination side of loans. Clearly the challenger countries, and to a slightly lesser extent, the growth countries as we have identified them in the presentations, are the one where you can expect to see most of the loan growth.
On M&A, I can be very clear. We still have an acquisition ban, a merger ban, until we have repaid the state in full, as well as the moment at which we have deconsolidated the insurance company. Only then the ban is lifted. Any area of where we see acquisitions coming into our plan, it's rather speculative because our plan doesn't foresee those acquisitions. What you can expect is that the strategy that we have just presented, including the strategic framework, that if and when we would get into an area of acquisitions, it would be completely consistent with that. For the moment, we're not thinking about it. The ban is there, the plan that we presented is organic growth.
On the costs, Dutch DGS probably starts not this year, probably next. We've got the SNS levy this year of EUR 300 million, which is EUR 100 million a quarter. Somewhere around EUR 150 million is an estimate, not fully clear. The Single Resolution Mechanism is even less clear what that will be, but we've sort of penciled in around EUR 100 million for that. That is, as Ralph said, a bit of an estimate at this stage.
Okay, go ahead.
Good morning. It's David Locke from Deutsche Bank. Just two questions, please. First one's on non-interest income. It hasn't really been mentioned very much today. I just wondered if you could give us your thoughts on how that's going to grow going forward, given all the analytics that you talked about. Then secondly, on impairments, I know that your guidance hasn't changed from 2012, yet your asset mix is changing. I just wondered if you could give us a kind of feel for why that confidence around impairments is coming through despite the emphasis on consumer lending. Thank you.
Okay. On the non-interest income, our model indeed is a model that works on the interest income more than on the fee income. That comes with the model. That's why it is successful. If we have a promise to our clients that we are transparent and our products and processes are clear and simple, then I think that in itself it is a consequence of that model that there is no fees that you can't really explain. It doesn't mean that we don't see an upside on the fee side. We will develop products and services that are more fee generative. Going forward, our model will still be much more dependent on interest income than on fee income. Both on the commercial banking side we see that, as well as on the consumer banking side. We have a rather stable interest income there as well.
That's the model. It comes with a promise to the client that you have lower fees, basically.
Sorry, what was the follow-up?
The impairment with consumer finance.
Those of you who've been with us for a longer time will remember that this guidance of 40-45 basis points through the cycle on risk-weighted assets has been there for a long time. Now, if you look back four or five years and you compare the portfolio then with now, on the existing book, we have significantly de-risked it. Better diversification, generally a lower risk profile. We've built in a bit of a buffer, if you like there, for incremental risk that would come in from the consumer lending business. The second observation is, of course, this guidance is on risk-weighted assets. Don't forget that consumer lending brings significant increases in risk-weighted assets if it ramps up. Not necessarily does it change, in fact, the percentages that we're looking at.
Taking these two factors, I'm quite comfortable that that guidance is correct, if not conservative at this point.
We'll go to one of the two gentlemen there.
Yeah.
Then if you could pass a mic after-
Yeah
to the person behind you.
Will do. It's Andrew Coombs from Citigroup. If I could just ask a couple of questions on the dividend, just points of clarity, a follow-up to the previous question and one on strategy as well. First into the dividends, just to clarify a couple of points. When you talk about a 40% dividend payout ratio in 2015, is that on group or bank earnings, or are you hoping they'll be the same thing by that point? Also, if I look at your previous dividend payment, going back some time now, but you used to do a 50/50 split between accrual in the first and second half. Should we assume something paid out in August of 2015, or are we waiting till early 2016?
Follow-up to the previous question, you just talked about RWA growth obviously being a bit higher given the focus on SME and consumer lending. If you're talking about 4% loan growth, what should we be penciling in in terms of RWA growth? My final question on strategy. Slide 17 of Mr. Hamers' presentation. You looked at basically the relationship between cross-buy and between the direct network. There does seem to be a bit of an inverse relationship, and that the advantage of having a branch platform as cross-sell, cross-buy, is that much higher. How do you go about rectifying that on the direct platform?
Okay, good. I think we start with Patrick. We go to Wilfred, and I'll take the strategic one. Patrick.
Dividend. Just to be clear, it is likely possible that the first full 40% dividend rate payout will only come in respect to 2016, and that can be interim and final, as you suggested. We haven't decided on the exact split or percentage, but interim and final in cash. 2015, before we pay any dividend, we have to repay the state, and the final state repayment is scheduled for May 2015. That is EUR 1 billion. That'll take a chunk out of the dividend capacity for 2015. Second half of 2015, there's a potential for a dividend payment from the second half, although payment of that may not be till, in terms of cash received, till the following year.
It may be that the second half of 2015 dividend paid in 2016, and then the full year, 40% plus dividend payout ratio for 2016, interim and final in cash, part 2016, part final the following year.
The policy going forward, interim versus final.
Interim versus final. We will try and replicate what we've done in the past with an interim and a final, cash. Bank versus group. Ideally. We want to fast-forward as quickly as we can the end state of insurance. You've seen us doing it with Voya. We will sell that down as well when markets and lock-up period ends. We need to get the insurance business IPO'd. After, we will follow a strategy of selling that down as we are obliged to. Will that be all completed by 2015? Maybe not. In terms of dividend, what we're talking about dividend payout, we're looking at the bank profits as the percentage to determine the dividend on, and that will flow through the group straight through to shareholders.
Okay.
Risk-weighted assets.
On the risk weights. Generally, if you dig into the numbers, what you'll see is that we expect them to rise in line more or less with the balance sheet projections that Ralph has given you. Why is that? For a couple of reasons. One is, keep in mind that we're almost exclusively on advanced internal ratings-based models, which means the models and the risk weights really reflect what's happening out there on the macroeconomic level and also with the risk profile of our own portfolio. As we're going into recovery, we do expect a lot of these risk weights to gradually come down somewhat, giving us a bit of room to build up some higher risk, or at least higher risk-weighted assets. Secondly, if you look what we're specifically managing actively down, both in terms of risk profile, in terms of volume.
One good example of that is commercial real estate lending, which obviously is still dropping in total portfolio. Certainly, the more risky parts are coming down, which gives us disproportionate drops in risk-weighted assets. Another example would be the business lending portfolio in the Netherlands that we're working very hard on to get the risk profile down, and that will reflect also through our models in the risk weights. That whole combination gives you the outcome that you pointed at and that we're comfortable with.
On the strategy of cross-buy, just to finalize, to finish with your third question here. The question is whether there's a relationship. There's certainly a correlation between cross-buy and having a branch network. The question is there is a causality. Yeah. There is one as well. It is not because you have a branch network. It is because you have a primary relationship. That's why the next step for our direct model is to build on primary relationships. We will increase the number of clients for which we do salary payments or have a payment account that they frequently use. Based on that, improve our knowledge of these customers, and then also develop some more products.
If you truly compare to the areas where we have a full bank, where clearly we have a full product offering, already by having the product offering, you have a higher chance of cross-buying. The full banks have more primary relationship. Given the fact that you have the primary relationship, the client considers you more as their lead bank, and therefore are considering you to buy different products for different needs. It's really that angle. Having said that, you see that, for example, in Spain, where we are a little bit ahead in the next stage in terms of developing primary relationships, that we do have branches. We don't want to go to 1,000 branches.
We have branches in the big cities, I think we can do so, because we really want to concentrate the branches to focus on value-added services rather than on transaction-oriented services. That is basically how we can complement the branch knowledge on one side with the direct experience, and keep on the efficiency curve, where you get more quickly into scale benefits than with a full branch network where more of our competitors are. The beauty is, we don't have to close branches. Also from that perspective, clients are not unhappy with us because we will open some maybe, rather than close them. We don't have a legacy there. Again, on the cross-buy, the first step is primary relationships, and broadening the product base there. I think that will already get us up in cross-buy, before we get into needing a lot of branches.
Yeah.
Yeah.
Go ahead, yeah.
Thank you. Ashok Musaddi from JPMorgan. Couple of questions. First on dividend. Your target looks a bit broad-based, greater than 40%. I'm just trying to assess, can it go to 60% or 65%? If my math is right, you're targeting 11% Core Tier 1, for example, let's say. That's a 10% increase or EUR 3 billion over the next 4 years. At the same point, you're targeting 3% growth, say 12% over the next 4 years, 12%, 13%, again, EUR 4 billion. That means you're targeting EUR 7 billion of capital increase. Average it out, EUR 1.7 billion kind of a capital increase you're looking at on an annual basis. If you meet the targets, basically, you can make bank earnings of north of EUR 4 billion. That means you can practically pay out EUR 2.3 billion of dividend in the long term. That's 60%.
What am I missing on this one based on your targets? That's the first thing. Second thing on risk cost. There's a slide that shows that you have had a risk cost of three basis points in the past. What can drive that? What are the areas at the moment which can release so much of provisioning? One you have mentioned is industrial lending. What are the other areas? Is it SME or some color on that? Thank you.
Okay. Dividend capacity.
Yeah. In terms of dividends, we will need some capital for the higher capital buffer, as I mentioned. We also will need some capital to invest in growth, and some of this will be higher risk weighting, such as SME and consumer finance. I think the combination of those plus the profit means that a 40% is a good number. I think 60% is too toppy.
Okay. Thank you.
Okay.
Risk cost.
Yeah. On the risk cost, if you followed us for a while, you will have noticed that we tend to be relatively conservative on provisioning. Typically, the provision levels run 20%-30% ahead of the actual write-offs. Now, the longer the cycle of the asset that you're providing for, the more difficult it is to compare these annual numbers point in time because, of course, provisions basically are looking forward and your write-offs are looking backwards. Still, if you do this over a longer period, you'll see the same thing, which also leads after every crisis to releases of provisions. It's a bit difficult to say where that would happen. If you were to think about which are the areas where we have quite heavily provisioned and really not seen the big write-offs, one would be the Dutch mortgages, for example.
There is, I think, potential for releases also in commercial real estate. That may sound a bit controversial, but we're actually seeing it in some cases as we speak. Generally, I think also in the industry lending books, there are definitely going to be releases at some point. This is going to be fairly broad-based, consistent with the fact that we tend to conservatively provision. I think the AQR that DNB did here in the Netherlands on the commercial real estate portfolio, by the way, that included some international books as well, did show indeed that we are conservative in an asset class that people had worried about quite a bit.
Okay.
Yeah. Hi.
Oh, you're passing the mic automatically. That's good. Just do it.
Yeah. Hi. Sophie Petkoff from JP Morgan. In terms of the leverage ratio, you're targeting a 4% leverage ratio. EU is more talking about a 3% leverage ratio. How confident are you that Netherlands will push for a 4%? In case EU goes for a 3% leverage ratio, could we potentially see a leverage target from you? Thank you.
Yeah. This has been quite a discussion in the Dutch newspapers and in the Dutch market for a while now. Clearly, I think that ministers and regulators are all looking at ways how we can ensure that going forward, a crisis like in the past will not happen again. There's different ways to get there. Also they want to have simple ways to make sure that a crisis doesn't happen again, and therefore they look at simple ways to determine what buffers should be. The leverage ratio helps you if it comes to having a simple way to look at a clear and a simple way to look at where you are in terms of your buffers. That's why it is certainly a ratio that a lot of people like.
I can't look into the future, but for us, as a European bank, we clearly continuously focus our efforts in our discussions that whatever changes they want to make in terms of changing buffers, or increasing buffers from that perspective, whether it is leverage or any other buffer, that we want those to be aligned on a European level so that we continue to have a European level playing field since we're a European bank. Having said that, since we are close to the 4% and it doesn't really, at this moment, limit us to do the business that we think we should do from here on, it's also okay for us to manage around the 4%, whether it will become an obligation or not. That's why it's up there at 4%. It fits our business model from that perspective anyway.
Clearly, any requirements and mandatory ratios, we rather have them on a European level since we're a European bank. These are the factors that we work with. Yeah. Okay. Yeah, go ahead.
I think I have it here.
Okay. You have the mic.
Sorry.
We'll follow the mic. Good. Good.
Hi.
We have plenty of time. Don't worry. Go ahead.
We're going to the ladies now, yeah.
No, you are.
Francesca Tondi, Morgan Stanley. On the capital point, I take the point that actually you're happy to keep a little buffer above 10%. Given other banks have a higher capital here, given the still not entirely clarity, if the requirement were to be 12%, do you think you have enough room in these numbers to be there, or would you consider, for example, filling that additional buffer with AT1? How would you look at that? One clarification on your potentially first dividend payment, you say would be on the H2 2015 earnings, but surely the Dutch state repayment in May 2015 can be done with the earnings the bank has accumulated in 2014, and therefore you should be happy to have more than one half of the year 2015. I can see Patrick already laughing at that. I was going to push on it.
Strategically, how are you looking at your lending capacity, especially when looking at SME? Germany is a very tight market. Can you expand a little bit more on how you're looking at pushing lending there? Italy and Spain, I know it's cyclical, but are markets where SME are really suffering right now. A lot of local banks feel the risk is too high to even get there. I know you're looking at 2017, but how confident you are that actually your risk management will allow you to take not too much risk, effectively.
Yep. Good point, Patrick.
Yeah. Dividend. Well, just look at where we are at the moment. We paid a dividend today, 40% of last year's profits. Last quarter, we paid EUR 1 billion dividends. We've been paying quite significant dividends. Our capital ratio at the end of the year is 10% fully loaded, as I indicated, we need to grow that. There's a balance here. There's a balance between wanting to grow buffers to assure we have dividend payment capacity. When we start, we want to start on a robust way, no false starts. We're going to do this in a prudent way. Build a buffer, ensure then the state is repaid, that when we start, we start on a solid basis. That's base case. In terms of capital, you mentioned AT1. That more accounts for Tier 1. That's helpful potentially for leverage.
We're not using it at the moment because we need a change in the tax ruling that allows it to be tax-deductible, which we think is coming. AT1, helpful for total capital structure and leverage. 12%, if there was a move towards a 12% capital ratio, it's really about timing there. We're sort of trending up towards the 11 mark, provided if this were to happen, this is purely speculative, obviously. If it were to happen, what more matters is the timing and speed, because we're growing our potential to be capable of absorbing that if that happens.
Okay. Wilfred?
Right. Since you were so worried about what risk management would think of SME lending, Ralph asked me to answer that one.
Thanks for the question.
A couple of things about that. One is, it is a segment that we know as a bank very well. Those of you who know ING really well know that one of our original predecessor banks was called NMB, and that is translated, the Dutch bank for SME companies. That's our roots, if you like. We know the segment well. We do it in a number of countries, not just the home markets, but also a few others. What we've learned from that is a few things. One is, you don't start it too aggressively. You really use the early origination to hone your models, hone your underwriting standards, really understand what you're doing, get comfortable, and then begin to press the accelerator. That applies to consumer lending. It also applies to SME lending. It's not new.
I think ING has a history, and let me take one example of that, of being able to go into a relatively bad market as a challenger, which is important because you start then typically with a relatively small market share. Even to create a relatively large growth, you don't need to steal the bad stuff from the others. You can afford to cherry-pick. We have a history of that, for example, with mortgages in Spain, arguably not a category of loans that a lot of people would be excited about. We have one of our best mortgage books in the whole of ING sitting in Spain, and our NPL levels there are not even a fifth of what the market does. We have demonstrated we're able to do this sort of thing.
Even as a risk manager, I'm very comfortable with what we're putting on the table here.
Thank you.
Okay. Yep. This gentleman in the back.
Hi there. Omar Fall from Jefferies. Three questions, please. Firstly, looking at the bank P&L targets, including the strong NIM and cost-income ratios, I really struggle not to get to more like at least 13% in terms of ROE. Can you just help us square the circle by highlighting what movements in capital you've got within that, whether it's dividend upstreams or anything else? Secondly, on Patrick Flynn's presentation slide 17, if you could elaborate on the use of the term modestly for 2014 decline in risk costs. If I look at bankruptcies across Holland, they're very much under control. I know the mortgage book will take time, but at the very least on the SME side, we should be seeing some meaningful improvements, particularly given the year-on-year basis is pretty helpful. Finally, just a broader follow-up question to the last persons.
You could argue ING took state aid due to funding rich ING Direct investing in countries and asset classes where it had no expertise and no franchise. Given how much of the growth and NIM uplift is biased to consumer credit and SMEs, which really are quite new to you in the areas you're targeting, why should we be comfortable that the mistakes of the past won't be repeated? Thanks.
Okay. In terms of the ROE, as Ralph mentioned, some of the things we're doing, we're investing now for the future. Some of the development will take time to come through, but we need to invest now for that to happen. That starts to kick in maybe some of that towards the back end of the period. We want to hit this range, firmly hit the range, and I'm not going to commit as to exactly where in that range it will be, but clearly it's a range. Yeah, it would be great to get the top end of it, but let's work through and see how far we get. Okay. Sorry, what's the next question? The next one is on the modest improvement of risk cost as expected in 2014. Okay. Yeah. On that, it's a bit of a mix.
On one hand, we do see an improvement already happening, even in 2013, over 2012 when it comes to the international commercial banking activities. Specific examples within that portfolio are, for example, acquisition finance, which did still create some risk costs in 2012, but no longer in 2013, or at least not significant. Commercial real estate internationally, we think is clearly turning the corner now and has peaked. There are indeed a number of portfolios where we do expect significant improvements. At the same time, the whole markets, and in particular the Netherlands, see a very sluggish recovery, macro, and we also see that back in our own NPL and provisioning levels. Business lending in the Netherlands, but also the mortgage book, will continue to create significant risk costs, I expect, in 2014.
If you mix the two, we do indeed expect an improvement, but one that is, as was mentioned in the presentation, modest. I'd add to that predicting risk cost, particularly quarter by quarter, is a very tricky business because it is a lumpy activity. One or two big files could create both big releases as well as relatively big new provisions. I find it difficult and maybe also not wise to try and predict this quarter by quarter. I think the statement made in the presentation is correct. A modest decrease in 2014 is our best guidance here. Maybe on the last question, Wilfred can fill me in on this one as well, which is basically, are we going to make the same mistake that we made in the past in doing things in the direct environment, which apparently we don't have experience in now?
I think there's a real difference here between, in some cases, what we did in the past and what we're planning to do here. First is that we are integrating these units legally and operationally into full banks. That's one. Through which we do a lot of balance sheet optimization already towards assets that we already had and that we know very well to generate, like industry lending. We have a real track record there. The second thing there is that the difference between what we did in the past and what we are going to increasingly continue to do in the future is that these will be own originated assets rather than buying them from competitors who have originated them in packages. That's a big difference as well.
The third one there, why you can feel comfortable, apart from already what Wilfred said, that we do have the experience in-house, is that we will clearly do this in small steps. We will continuously test underwriting standards with the experience, and then
We will not just go in big time. Specifically for the countries like Spain and Germany, we'll have some sessions later today as well, so you can also discuss with Brunon Bartkiewicz and Roland Boekhout, if you want to get some more information on that.
Maybe to add one remark to that. What we did in the past also led to some fairly large concentrations on our books. That in itself is always an issue, even if the underlying quality, and that is what we saw in the old day book in the U.S., in the end, doesn't turn out all that bad, and it didn't. Still, if the market believes you have a problem and the number is big, you have a problem. The difference is also that what we're talking about here is launching a number of initiatives, a number of asset classes across a number of countries, each individually not being very large, and the correlations between them also being quite limited due to our overall diversification in geographies and currency zones. Also from that perspective, I think this is a much safer proposal.
Okay. Good. Yep, go ahead.
Thank you. It's Antje Klein from ABN AMRO. I have some follow-up questions first, please. First on revenue growth, on total income. Should we be looking at about 6% growth per annum, or what have you been building, and how quickly is this coming? Because, in 2014, it's unlikely to see a quite sharp increase in revenues. When you talk about the cost of risk across the cycle, 40 to 45 basis points, is that already reasonable for 2016 or is this more like the 2017 run rate? More generally, I thought your argument about moving more customers from become a primary customer is quite convincing. I just wonder, how do you achieve this? Is this a question of price leadership or is it a product offering, or what are the key levers? Thank you.
Okay. Good. Revenue growth. Patrick.
Yeah. We see the potential to grow assets 4% per annum through the cycle or through our investment horizon. That's to be in products that are in Accreta, so that should help grow revenue. We are seeing some improvement in consumer confidence. We are seeing some improvements in GDP. That will help fuel this. It will take a period of time to build up.
Okay.
Yeah. On risk costs, as we said just now, predicting risk cost is more art than science. If you look at the macro developments, as I just said, I'm still a bit concerned about the slow growth in the whole markets. It is picking up, but I wouldn't really be able to precisely pin the 45 basis points in either 2016 or 2017. My best guess is we may reach it somewhere in the second half of 2016, so you will only see it as overall average for 2017. This is really crystal ball gazing.
Okay. Yeah, on your last question, the strategy of primary relationships. This is specifically for the retail bank, because in the commercial bank, we're doing this, and that works. In the retail bank, and certainly in the challenger countries, we're doing it as well already. We're doing it in Germany, we're doing it in Spain, and how do we do it? Just like any other product. We really want to be the bank to go to for the experience. I think the secret there is can you make banking products, can you really make it transparent and easy? That's certainly the first element of success on how we're doing it and will be doing it. Then clearly, it will also be a matter of pricing.
It's a good experience and a good price, because as we've shown, the fact that we have a model that has an efficiency curve, which is a lot lower than the normal branch banking model, we clearly do give some of that benefit to our clients. It's a combination of a true different experience and a better value for money. It's the two, and that's how we will continue to go about it. Yeah.
Okay.
Yeah.
So.
Hi, Justin Baintendi from Artisan Partners. Two questions. First, you guys are so close to repaying all the state aid. I was just wondering what the appetite is for repaying that before the deadline next year. Under what scenario could we imagine you paying that earlier? The second question is around the stakes you have in the businesses in Asia. Why did these businesses survive what was a pretty brutal restructuring that you guys did, and how do they fit with the rest of the group? Perhaps I do not know them well enough. They just seem a little non-core to me.
That is probably it.
That is probably it.
No. State aid, an early repayment of state aid. For us, it is very important to stick to a plan, and that helps also to guide our units as to what is expected from them and what is not. Up to now, we have been able to work on this plan also in terms of when do we have sufficient capital to repay the state. That is on one side. If you then at this moment look at when the next payment is, May 2015, and whether we could or we would want to accelerate. We would always want to accelerate in itself. However, there is a couple of uncertainties that we want to manage through as well. As I said, there was a final step in the restructuring to go, which is the base case IPO of our insurance company. That is one uncertainty.
The other uncertainty is that clearly, we're going on the bank side through an AQR process with the European Central Bank. We want to be cautious from the respect of these two uncertainties as to accelerating. Clearly, if we're going through this and a couple of things clear up, we could be in a position to accelerate, but the base case is we pay in 2015. Your second question on the Asian stakes. What is strategic then from that perspective? I think in Asia we have a couple of stakes. I'm not going to go into them each individually, but if you look at our activities in Australia, we own 100%. It's a very attractive market. We do a very good job. It fits very well in terms of the ING culture. There's a lot of connectivity. We take a lot of IT experience from there.
The strategic fit is as big as the German business. It is a bit on the other side of the world, but the strategic fit is clearly there. Also, the other assets that we have, if they continue to provide added value to the total, we will do so. As I said, the strategic framework that we have developed from a strategic fit and connectivity perspective or from a sustainable share perspective, if units or activities within that framework don't generate what it is that we want them to do, we will come to the conclusions. We have done this before, so we do dare to take tough decisions, as we have done with selling ING Direct in Canada and in the U.K. as well, with running off some of our lease businesses as well on the banking side.
It's not that we don't dare to take decisions. It is just that if we feel they're strategic and if they do fit and make the returns and add value, we find them strategic. Yeah. One minute? We have one minute. This is the final question before we go to the break.
Hi, it's Steven Hay from HSBC. Just on the Dutch regulator, it's been very influential in terms of financials companies paying dividends. If you could tell us how influential Dutch regulator was in your 40% payout ratio target and whether you've had any sort of discussions with them with regards to this payout ratio target, please.
Okay. Clearly, the Dutch regulator is influential. We are incorporated here. They are our lead supervisor. They have to give approvals for also repaying state out of the capital that we generate. I think they take a prudent approach there and have supported the ING restructuring all the way through. That's what they will do in the future as well. Clearly, the way they look at things is that as a regulator, they want to be very prudent, as we do as well. Honestly, we have discussed the plan with them in terms of how do we go about allocating the capital generation of the bank in the future. I think the story is clear from our perspective, and it is, in the end, we have to serve from that perspective, from the capital generating perspective, we want to serve three stakeholders here.
We want to serve the taxpayer that never, ever wants to bail out any bank anymore. Therefore, we feel that we have to manage our Core Tier 1 above 10% with a growing and comfortable cushion. That's the first stakeholder. Second stakeholder is that the economies in which we're active, once they take off and show sign of recovery, we should be able to support them. The capital that we generate should also be allocated to an improvement or an increase of capital in order to be able to increase lending. That's the second stakeholder. The third stakeholder, and this is not in order of priority, but these are just the three stakeholders. The third stakeholder for us is clearly the shareholder who has stood by ING through the whole crisis. Lost money on ING during the crisis, depending on when you stepped in.
If you were there at the beginning of the crisis, you still haven't recovered your value. We want to recover that as much as possible. We have not been able to pay a dividend for quite some while. I think by the moment we start paying a dividend, if we get there in 2015 or on the back of 2015, it will have been six years. I think we have to also contribute our thanks to the shareholder who has stood by us. This is a story that we took the regulator through, and they support it as a balanced story. Now, we can't look into the future as to whether new requirements coming at us will influence this balanced way of going about it, but this is the way we have developed our story. Yeah. Thank you.
This was the final question for now, and there is plenty of time to ask more questions during the break, during some of the other sessions. We'll have speed dating as well. Don't worry. Let's first go and grab some coffee and be back for the next sessions in, I think half an hour, if I'm correct. Yeah? Okay. Thank you very much.