Good morning. This is Mark welcoming you to ING's fourth quarter 2013 conference call. Before handing this conference over to Ralph Hamers, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance, and any statements not involving an 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 on our public filings, including our most recent annual report on Form 20-F, filed with the U.S. Securities and Exchange Commission and our earnings press release as posted on our website today. Nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Ralph, over to you.
Thank you very much. Good morning. Welcome, everyone, to ING's fourth quarter 2013 results conference call. I will take you through today's presentation. I have Patrick Flynn, our CFO, and Wilfred Nagel, our CRO here with me from the Executive Board. We also have Delfin Rueda and Doug Caldwell, CFO and CRO of ING Insurance here with us to answer any questions specifically on ING Insurance. In the fourth quarter, ING continued to make strong progress on the restructuring, advancing further into our end phase of our transformation. At the same time, we have been able to deliver a good set of quarterly results. ING Group posted an underlying net profit of EUR 405 million, driven by another solid quarter result from the ING Bank and an improving operating result of ING Insurance.
Since the last results call in the third quarter back in November, ING made further progress on the divestment of the insurance units. The divestment of Insurance Asia is now resolved. The sales of the two stakes in SulAmérica are closed as well. Our remaining stake in SulAmérica is now 10%. On the ING Insurance side for the European and the Japanese operations, we are on track in our preparations for the intended base case IPO in 2014. We have taken some major steps there that we will go through today. Let me go a little bit there with you in more detail on the capital improvement of ING Insurance. In the fourth quarter, ING Group converted EUR 1 billion of ING Insurance debt into equity, resulting into a reduction of the gross debt of ING Insurance to EUR 3.9 billion.
Furthermore, the cash proceeds from the sale of ING Insurance Asia have been used to recapitalize NN Life. First, by injecting a capital of EUR 600 million into NN Life, increasing its regulatory solvency ratio to 221% at the end of the fourth quarter 2013. In the first quarter of this year, ING Insurance provided a subordinated loan of another EUR 600 million to NN Life. As a consequence, the pro forma regulatory solvency ratio of NN Life is now at 234%. This, by the way, also includes the pension deal that we have announced earlier. Following the strong improvement of the solvency ratio of NN Life, and I'm now on slide five, we can say that currently all operating entities of the insurance company are adequately capitalized.
In addition, on the holding company level, we have a cash buffer now of EUR 0.8 billion and as alluded to already, a gross debt position of EUR 3.9 billion. We feel both are adequate. However, on the fixed cost charge, we feel that we're not at the desired level yet. All in all, our intention is to make sure that ING Insurance will be appropriately capitalized at the moment of IPO. Turning to the double leverage on the group level. The core debt increased slightly to EUR 5 billion in the fourth quarter. That is because the proceeds from the sales of ING U.S., Voya, basically, and SulAmérica were offset by the conversion, the already mentioned conversion of the EUR 1 billion debt from ING Insurance into equity.
The residual double leverage of the group now at EUR 5 billion, is covered by the market value of our remaining stake in ING U.S., the remaining stake in SulAmérica, as well as by the value of the ING Insurance company now that we should be able to bring to the market later this year. So far the double leverage. On January 9th of this year, we announced an agreement to make the Dutch defined benefit pension financially independent.
We're very pleased with this agreement as it means that ING Group will be released from all financial obligations under the defined benefit pension plan, including indexation and funding, and what was also really necessary in order to prepare the insurance for the IPO, to get rid of the cross guarantee between the bank and insurance. There is an upfront cost to this agreement, and the impact of that is 20 basis points on the bank's fully loaded Q1 ratio and a 3 percentage point decrease on the insurance ITB ratio. It does take away volatility in both equity and P&L, for which capital is normally intended to be the buffer. We have exchanged a bit of buffer, but we've reduced the volatility as well. Let's go into the results of ING Group.
ING Groep underlying net results showed a strong improvement over 2013 compared to 2012, with a net result increasing 22% to EUR 3.255 billion. For the fourth quarter, the group posted a net underlying result of EUR 405 million. That refers to the fourth quarter of 2012, but down from the third quarter of 2013, that was mainly due to the previously announced one-off charges in ING Insurance. We then look to the bank specifically, the bank had a very solid fourth quarter underlying result. That was basically due to a further increase in the interest margin to 145 basis points, despite some seasonal lower activity in financial markets.
Also, the result of the unwinding of the IABF supported the quarter result that came out at EUR 99 million, that was partially offset by the additional provision of EUR 76 million that we took to accelerate some of the cost savings in the Dutch bank. Risk costs for the fourth quarter were slightly up from the third quarter 2013, but were down from the fourth quarter in 2012. They remained at elevated level amidst the weak economic environment. We'll take a closer look at the development of the net interest margin. As said, the net interest margin has increased further to 145 basis points. The underlying interest result has grown by 2.8% to EUR 2,946,000,000 a year ago. That was really due to higher volumes and an improved margin on funds en trusted.
The net interest margin increased to 145 basis points, that includes a -5 basis points of cost in the bank treasury. That is in that net interest margin. Those negative 5 basis points in bank treasury have been built up over the last years by replacing the short-term funding with long-term funding for existing loans. This result, we will isolate going forward and transfer to the corporate line as of the first quarter 2014. The negative interest on this book is already included in our overall interest results. Basically, we have been able, during the years, to absorb those costs and put it in the pricing towards our clients, whether on the asset side or the liability side. Over the years, the NIM has improved, including this negative cost of improving our funding structure.
We expect going forward that the NIM will stay around the 145 basis points for the next foreseeable quarters. We then take a closer look at the development of the net lending assets. Net lending increased in both retail and commercial banking. In the fourth quarter, they were down, mainly due to sales and transfers of assets and currency impacts. The underlying development, as mentioned in retail and commercial banking, is positive. The net lending in retail banking increased EUR 1.6 billion on the back of a higher net lending in Belgium, Germany, and the rest of the world. That was offset by a lower net lending in the Netherlands. On the commercial bank side, we see that the net lending has increased by EUR 400 million, driven by higher net lending in structured finance and trade finance services.
The total lending book decreasing, but that is not necessarily caused by the underlying development, but very much by asset transfers and sales, as well as foreign exchange developments. We take a closer look at the operating expenses. The underlying operating expenses have risen marginally year-on-year to EUR 2.351 billion, and that was mainly due to a higher pension cost and additional restructuring costs. That was offset by ongoing cost savings, as well as the partial transfer of the WestlandUtrecht staff to ING Insurance and a lower annual charge for the Dutch bank tax. For the full year 2013, expenses have remained more or less flat from 2011, despite the introduction of the Dutch bank tax already in 2011 and the higher pension cost.
Basically, you see that the transformation program that we have announced, that is really helping us to keep costs flat over those years with increased pension costs and increased Dutch bank taxes and increased regulatory costs. Therefore, it's important that we continue on this transformation program and keep following it. Therefore, we turn to slide 14. Those restructuring plans are on track. In the fourth quarter, we took another EUR 76 million of additional restructuring costs for the retail Netherlands. These additional restructuring costs relate to an extension of the previously announced cost savings programs already. Earlier on, we announced a first reduction of 2,700. Later on, we added another 1,400, and now we're adding another 300 for the restructuring of the bank in the Netherlands. This additional 300 FTEs will, in the end, save EUR 30 million of additional cost by 2015.
Also in Belgium, we are looking at a further reduction of FTEs as part of the transformation program in Belgium by another 115 FTEs, and that will lead to a future saving of EUR 10 million. All these cost savings, in addition to the previously announced cost savings initiatives, are expected to reduce our expenses by EUR 880 million by 2015. Of this amount, already EUR 458 million have been achieved. I think it goes without saying that we will continue to focus on possibilities for further cost savings in order to become more efficient, improve our services, but also change with the rapid change in behavior of our customers. We take a closer look at risk costs. The risk costs on the bank side have increased slightly versus the third quarter to EUR 560 million, and that's mainly driven by Retail Belgium, general lending, and business lending in the Netherlands.
That is offset by lower additions in structured finance and real estate finance. Third quarter to fourth quarter, we see a slight increase. Fourth quarter 2012 to fourth quarter 2013, we see a slight decrease. Let's focus on some of these risk categories in more detail. We turn to slide 16 then for you. The NPL ratio has increased marginally to 2.8% in the fourth quarter of 2013, mainly due to a lower amount of credit outstandings. The amount of NPLs has increased by EUR 200 million, mainly due to higher NPLs in business lending in the Netherlands, Dutch mortgages, and general lending. If we look at the development of the provisions and the write-offs, we feel that our loan book remains well collateralized and provisions.
The net additions to loan provisions have structurally outweighed the write-offs, resulting in a higher stock of provisions. Therefore, basically, the coverage ratio has further increased to 38.6% in the fourth quarter. If we further focus and zoom on the risk cost development for retail banking in the Netherlands, these risk costs have remained at an elevated level. That is basically reflecting the weak economic environment that we see in the Netherlands. For the same reason, we also see that the NPL ratio for both business lending and the Dutch mortgages have increased further in the fourth quarter. The risk-weighted assets have increased as well in the fourth quarter. That is largely as a result of lower cure and recovery rates. That's also reflecting the economic environment in which we are active in the Netherlands.
The average risk weight for Dutch mortgages have increased from 15% to 19%. We do see signs of an improvement in the Dutch economy and also on the Dutch housing market. This improvement is still fragile. Therefore, the risk costs are expected to remain at this elevated level in the coming quarters. If we take a closer look at the risk costs in the real estate finance area, the risk costs for real estate finance decreased further to EUR 71 million. The non-performing loans have risen a little bit by EUR 22 million. I think for all of us here and on the other side, it's important to note that the risk cost in the fourth quarter includes the results of the Dutch Central Bank's review on our commercial real estate portfolio. We take a closer look at the capital position of the bank.
The capital position remains strong at a Core Tier 1 ratio of 11.7%, despite the dividend upstream to facilitate the Dutch payment, despite the increased risk-weighted assets. Basically, these two are compensated by solid profitability and the capital-generating capability of the bank. The pro forma Core Tier 1 ratio, if done on a fully loaded basis, is 10%. Our capital position clearly shows the strong capital-generating capabilities of the bank. Knowing that the repayments of the Dutch state are one-off and no structural issues for us, we feel that with the organic capital generation of roughly 30 basis points per quarter, we have a strong capital-generating bank in order to ensure our capital position.
Although our Core Tier 1 will be negatively impacted also in the first quarter by the result of the pension agreement and the next payment to the Dutch state, it's really those capital-generating capabilities that will support the capital development of ING Bank throughout 2014. If we take an overall look as to the CET1 requirements, besides our strong capital position, we also meet the other CET1 requirements. The LCR ratio is above 100%, while the three leverage ratio with a minimum of 3% is certainly met with 3.9% leverage ratio as by the end of December last year. So far the bank. Let's turn to the insurance company. The fourth quarter operating result for the ongoing business of insurance improved to EUR 215 million. That was up 20% from a year ago, excluding currency effects.
The improvement was mainly driven by a higher operating result in Netherlands Life because of higher investment results and costs that were well-maintained, as well as lower funding costs in total and corporate expenses that were lower. The fourth quarter result before tax was a negative EUR 428 million, and that's primarily reflecting the one-off accounting charges to restore the reserve adequacy of the Japan closed block VA to the 50% confidence level, as we already indicated to you in the Q3 call, and a change in the market interest rate assumption to further align the accounting and the hedging for the separate accounts pension business in Netherlands Life. The sales, this is a very good sign as well, the sales grew 10.6% at constant FX quarter-on-quarter.
Third quarter 2013 to fourth quarter 2013, that was reflecting higher sales in both Netherlands Life, Insurance Europe, and partially offset by a seasonally lower sales in Japan Life. If you focus then on Netherlands Life, specifically the results, you know that we have changed the insurance segmentation, and it's much more aligned with the operational business units, and therefore, we now also see that the operating result is much more reflecting the ongoing businesses. The operating result for Netherlands Life, if we take a closer look at that, has risen 23.2% from a year ago to EUR 186 million. That is, as indicated, mainly driven by higher investment income and lower administrative expenses. The operating result for the other segments was impacted by seasonality, specifically in property casualty in the business in the Netherlands with the heavy storms in October.
That result has gone down and some one-off items like restructuring costs in Europe and Spain and Hungary, and IT project costs in asset management. If we take a closer look at the administrative expenses of the insurance company, the total fourth quarter administrative expenses for the ongoing business were EUR 462 million, and that was down 0.6% from a year ago. That's only slightly down. However, this is despite higher pension costs and higher expenses at the NN Bank. Basically, when you take the higher pension costs out and the higher NN Bank expenses because of the transfer of WestlandUtrecht, you see that the underlying administrative expenses that we've managed as part of the transformation program, that we're really on track with that program.
Maybe if you look at the Q3 number there, you see a very low number, but that was caused by a VAT return and a release of holiday provision. I think it's important to notice in this picture that the underlying administrative expenses are really going down, and that is because of the successful implementation of the restructuring program now reaching EUR 138 million savings so far. Looking forward for the insurance. The ING Insurance continues to focus on improving its capital generation, and also the earnings throughout the different business segments. In the Netherlands, the focus continues to be on cost reductions, and as said, we are on track with the transformation program. I think that's a very important element there.
In the non-life business in the Netherlands, management actions are being taken to improve profitability, and we have been able to demonstrate that by the improved performance on the disability and the accident side of the business in 2013. For Insurance Europe, Japan Life Investment Management, basically the focus is to produce earnings, and we see them as cash generators going forward as well. The Japan closed block VA is expected to run off relatively quickly. We've shown that in the Q3 call, releasing capital over time in the foreseeable couple of years. In order to wrap it up so that we can start to answer some of the questions that may still be out there. We're proud of the financial and the strategic progress that we have achieved this quarter.
I think it's clear that we have delivered solid underlying results this quarter, both on the bank side as well as in the insurance side. We are working on the final steps of our restructure plan. With that, I would like to finalize the presentation and give the floor to you for questions.
Thank you. If any of the audio participants would like to ask a question, you may now press star 1 on your telephone. If you wish to cancel the request, please press star 2. In the interest of time, we kindly ask every analyst to limit your number of questions to two. The first two questions come from David Lock from Deutsche Bank. Please go ahead.
Morning, everyone. Couple of questions from me. The first one is on your risk-weighted assets increase in the fourth quarter, which cost about 50 basis points on capital. I just wondered, is this a one-time change that has come through this quarter, or is this something that we should expect going forward as your models adjust to the economic environment? Secondly, on asset balances, when I look at the balance sheet at the end of the quarter at EUR 788, that's obviously a lot lower than the average, no doubt reflecting some of the transfers that occurred at the end of the quarter. I just wondered, when we're thinking about NIM guidance going forward for the coming quarters being flat and clearly the balance sheet being a lot lower, how should we think about NII as a result going forward?
Is this just a blip, and should we see asset balances increase? Thank you.
I think for the risk-weighted assets question, we turn to Wilfred.
The question on what happened in Q4 and should we expect more of this, we, of course, have a regular process of updating our models. Obviously with the economic trend out there, which Ralph also talked about, these models continue to show the deterioration in the economic environment, and that is reflected in provisioning and risk weights. Normally, these updates are spread fairly evenly over the year, and we had in Q4 a little bit of an unfortunate bunching up of a number of these, which led to a bigger change than we would normally see. One time or more to come, well, it's never a one-off in the sense that this is a continuous process, but what happened in Q4 is certainly not an indication of what we expect for the next few quarters.
On the assets, yes. If you look at the balance sheet, there is indeed a big decrease in the balance sheet. However, it's not all in customer lending. In fact, there's a number of these items that are not. Within the total, there is partial good news in that we concluded the exit of the IABF, the Fubon deal. Part of that reduction accrues to that, EUR 6 billion. There's the WestlandUtrecht Bank transfer to insurance, which is EUR 5 billion. There's an RMBS as well, and FX makes up a component of it also. I think Ralph also mentioned, highlighted in a slide, that there is commercial growth in lending.
Yes.
Which is the primary thing we need to focus on in terms of NIM for the future. You should also realize that we actively reduced the portfolio both in real estate finance and lease, so that you can expect a further decrease there when we get to the targeted levels.
Thank you.
Thank you. The next two questions come from Ashik Musaddi from JP Morgan. Please go ahead.
Thank you, good morning, everyone. First question is on your NIM, basically. You reported 145 basis points in fourth quarter, this is what you're guiding as well. As I look at the slide number 11, it shows that there is a two basis point in negative impact from financial market, i.e., your underlying NIM is a bit more better than 145. It's around 147. What is stopping you to give a higher guidance than 145 at the moment? Is it because you look at this from a long-term perspective? Is that the reason? That's the first question. Secondly, can you just give us some color on your cost? The guidance you're giving now is EUR 8.7 billion in 2015 expected cost for bank.
If I remember correctly, earlier you gave it around 8.8.9, this is some improvement. Is it mainly because of lower balance sheet? Still, your cost to income still doesn't look like going towards 53%, which you're targeting. How should we think about your cost to income? That would be great. Thank you.
Okay. On the cost guidance, I think we've always said that we will keep costs flat until 2015. Basically, that's where we are focusing on. We see increased costs coming from bank taxes in several areas and regulatory costs. We will continue to seek further compensating transformation programs and cost cuts in order to at least offset that or further improve. We're in a constant process there. We have these programs that you know, beyond those programs, we are constantly in a very cost-aware, if not cost-cutting mode, in order to ensure that they keep under control and at least stay flat for the foreseeable future.
You should realize that in total, because this is more on the bank, that we have some areas where we are in very mature markets, where we're actually actively reducing costs, but we're also active in some more growth markets, where some of the costs are growing, that the total picture will lead to an expectation of cost to be flat for the next years. On the NIM, Patrick?
Yeah. On the NIM, 145 basis points up. The interest, more importantly, was up, that was on the back of our higher margin, particularly on retail lending and savings, which more than offset the 2-pip fall in financial markets. Going forward, I think savings margins in general are expected to be resilient. In the Netherlands, we reduced client rates another 10 basis points in January 2014, the impact of the Belgian 10-pip cut in the Q4 still to come through fully. Specifically, your point about financial markets. It can be volatile. Overall, there's a solid earnings profile, but the composition between what's mark-to-market and what's interest can vary quarter and quarter. We prefer to focus on the more predictable commercial banking piece. There, as I say, we do see the potential for a slight uptick in that as we go forward.
Okay. Thank you. Thanks a lot. That's clear.
Thank you. In the interest of time, we kindly ask the analysts to ask no more than two questions. The next two questions come from David Anchor from Morgan Stanley. Please go ahead.
Hi. Good morning. Thank you for taking my questions. Just a follow-up question on the increase in the RWAs. I was wondering, we shouldn't interpret this as any kind of signal in terms of change in market conditions or higher capital requirements coming from the DNB or anything like that. I just wanted to follow up on that. Second one, in terms of the retail Belgian business, I saw a larger quarter-over-quarter increase in loan loss provisions, and I was just wondering if you could just give a bit more color behind that. Thank you.
David, I ask Wilfred to answer you.
Yeah. On the RWA, as we said, this is a continuous process. It just so happened that we had a couple of things bunch up in Q4. If you were to include, for example, what happened in Q3, you'd see a much smaller change in RWA, because over the second half in total, it was only about EUR 4 billion. Should you read anything particular in this? I don't think so. It is a reflection of a trend economically that was still deteriorating in 2013. By definition, these numbers always lag by one or more quarters, depending on the frequency with which we update. You shouldn't be reading anything into that looking forward. As Ralph was saying, we do see signs of the economy bottoming out, at least in parts of Europe.
Unfortunately, that's not quite the case in Holland yet, but in some of the other markets it is. Personally, I would say that the next updates are going to be at least a lot less impactful than this particular one. On Belgium, actually both the trend in risk weights as well as in provisioning there is driven by exactly the same thing, which is the same model update. If you look at the underlying there, and the comparison, I realize is not fully valid, but I think it's an interesting indicator. If you look at the actual write-offs in Belgium against that same portfolio, they've been very stable at about EUR 10 million, EUR 11 million a quarter for the past six or seven quarters. It's not as if we're seeing an underlying trend there either.
Okay, great. Thank you very much.
Thank you. The next question comes from Marco Stevic from Nomura. Please go ahead.
Good morning. I have two questions. My first question is on asset quality. Can you give a bit more color on the AQR carried out by the Dutch regulator? As in what do they focus on, and what type of definitions did they use as part of their review? The second question is on asset lending. We've seen some increase in retail, particularly in Belgium and rest of the world, and some in structured finance and transaction services. Can you give again here some color over the nature of these increases and your growth strategies in these segments going forward? Thank you.
Wilfred is going to answer the AQR question.
To start with, what definitions have DNB used that simply follow the IFRS definitions. What the initial process was that they looked at about EUR 40 billion in assets in total income producing real estate. Based on their quick scan of that, they zoomed in on about EUR 24 billion in more detail, that was a very thorough review, assisted by a number of outside experts in the real estate sphere, which led to an assessment down to individual files for a number of these portfolios. Of course, in that process, you would find that the judgment on individual files here and there differed from ours, both positively as well as negatively. On the whole, you see the impact, as Ralph already indicated, of our interaction with DNB reflected in the numbers completely in Q4.
On the asset lending in general. I think you know our strategy, where we are active as a domestic bank, basically wherever there is demand on the retail side, SME side, mid-corporate side. With the prudence that we take, we support those clients and those economies. Those economies are growing, then you will see that our assets will also further grow, and in some cases maybe a little bit faster as well, where we have a possibility to grow market share. On top of that, we do see much more demand coming in different areas as well, which is a sign of the economy picking up, producers being confident, more investment loans being requested, and particularly also in the areas of trade and structured finance, we see that coming in. We do expect some further asset growth in the coming quarters.
Although we also see that in some areas, like in the Netherlands, we see the portfolio going down because of prepayments and repayments of mortgages.
Okay, thank you.
Thank you. The next question comes from Anton Pil from the company UBS. Please go ahead.
Thank you very much for taking the questions. I have two questions, please, on the revenue line. Firstly, just trying to understand your guidance on NIM a little bit better. During the call, you have talked about the potential to increase lending margins in the commercial banking. You have also outlined some depository pricing work that you have done recently, and of course there is two basis points negative effect on net interest margin from the financial markets. I was wondering why your outlook on NIM is basically for flat 145 basis points going forward, given that you have a number of tailwinds behind you. The second question please, on funding and NII.
A lot of terming out work that you have done on your funding profile was carried out during 2011 and 2012, when the cost of funding was much higher than we are seeing right now in the market. Do you see any potential tailwinds from refinancing of those expensive funding sources at the cheaper price now? Thank you.
Okay. Anton, on the NIM, I will give you some more details. On the funding profile, Patrick will talk about that. Over the last couple of quarters, we have seen a potential to increase the lending margin in CB. However, we feel that we're quite there. I don't think there is a lot of possibility to further reprice on that side. We, however, see that over the last couple of quarters, the NIM has improved more so on the deposit repricing, basically decreasing deposit prices. We have decreased those also in the fourth quarter, and some of that effect is not fully in the results. Overall, we feel that the NIM will stay around the current level, and maybe a little bit increasing from this level. I'll turn it to Patrick for the funding profile.
Yeah. In terms of the funding profile and cost of debt, we've mentioned before that included within our strong interest margin of 145, we've incorporated and had the cost of the debt issuance to which you refer. Almost exclusively to have transparency, we're going to isolate that and put it in the corporate line. The debt we issued in the crisis to extend the profile of our funding to accelerate, which we did ourselves towards being compliant with Basel III emerging regulatory requirements, was expensive. That cost, which is about 5 basis points in total, we're going to isolate, put into the corporate line. In terms of the impact going forward, it will take some time to run off. I think it may increase very slightly in 2014 before it starts to run off. Initially, the run-off is gradual, thereafter it starts to run down quickly.
I don't see immediately a big pickup or benefit from lower funding costs. Our funding profile is very good now. Our loan deposit's 104. The acceleration in senior debt funding, which we undertook, is done. We don't need to grow that. The treasury book will take a little bit of time to run off.
Thank you very much. That's very clear.
Thank you. The next question comes from William Hawkins from the company KBW. Please go ahead.
Hello. Thank you very much. My first question on the fixed charge cover for insurance. You flagged that that was an issue that may still need addressing. Can you tell us what the fixed charge cover was and what you'd like it to be, and what actions you may be able to take to improve that? Or is it just an issue of trying to get the earnings to improve? Secondly, I'm sorry, just back on the risk-weighted assets in the Netherlands in particular. What kind of scenarios can you imagine that would lead to a further increase in the required risk weighting? If we're at 19% now, why shouldn't it go to 25%? Or is that an unimaginable scenario? Thank you.
William, I think for the first question, we turn to Patrick.
In terms of the fixed charge coverage ratio, a little bit more work to do there. The number was about four at the end of the quarter. That's excluding the impact of Van Ameyde special license and divestments. The outlook for that will be influenced by, obviously, earnings, which we're focusing very hard to improve, and the final debt structure, including the EUR 1 billion conversion. I think it's important to note that the debt structure to date has been a floating rate, and going forward is more likely to be fixed. Some work to do to improve the fixed charge coverage ratio. Something we're going to focus on between now and the IPO, and we will update you at the point of the IPO on how we see this.
For the risk-weighted assets, we turn to Wilfred.
The question was, why wouldn't it go to 25% or more? Would it move again? It would if the market really continues to deteriorate. That's not, as Ralph was indicating earlier, really what we're seeing, and we do expect a slight further decline of house prices into 2014, but very likely a bottoming out. Looking at the outside world, it's not so likely that we'll see something dramatic happen to this risk weight. The second point I'd make is that if you look at the history of our risk cost versus write-offs on this book, we're still showing the same trend where the net stock of provisions keeps going up. In other words, we keep adding more than we're actually using. The third observation is that's also reflected in the fact that we're not seeing extra losses per file that we liquidate.
In fact, those losses are very stable, as is the number of foreclosures, which keeps running at about 420 or so per quarter, like a straight line. We're not seeing anything in the economic reality around this book that causes us great concerns here. One more point, this whole debate about risk weights is very exciting. The reality of the book has been throughout this crisis that the risk cost has been well within the operational profitability on the book itself, and that ratio is actually improving as we speak because the profitability is going up, and we don't really see the risk cost going anywhere from here.
Thank you.
Thank you. The next question comes from Benoit Pétrarque from the company Kepler. Please go ahead.
Yes, good morning. It is Benoit Pétrarque from Kepler Cheuvreux. Yeah, two questions on my side. First one is on the capital, 10% Core Tier 1 ratio fully loaded. Now, if I strip out the remaining state support and the pension, it is 9%. Well, obviously, you will build up capital in 2014, about 120 basis points. You may also have some risk with assets growth. But let's say you might end up at 10% in 2014. Will that be a good level for you? Do you want to build a buffer on the top of that? Do you consider to use some of the cash proceeds from the IPO to actually recapitalize the bank after the IPO? That is the first question, number two is also on capital. You have about 60 basis points of positive revaluation reserves taken in the 10%. Are you considering to change methodology there?
I think the Belgian regulator has been commenting on that negatively. What is your view on the stock of revaluation reserves, including in your ratio? Thanks.
Benoit. I don't recognize your number of 9%. The fully loaded Core Tier 1 at the end of the year is 10%. I think that's a solid number. If you look at where it's come from, that's on the back of a bank which has paid out nearly 100% of its EUR 3 billion profits in the course of the previous year, which is 1%, and still ends up at the end of the year at 10% fully loaded. We have state repayments to pay at the end of the quarter, which is about 40 basis points and the 20 basis points for the pension deal. Thinking about capital, what's important is to think about whether any of the perceived drop is due to a structural or temporary event. If it were structural, we'd certainly be taking mitigating measures. If it's temporary, we take a different view.
The bank has demonstrated a consistent pattern of strong capital generation in the past, and I think that's likely to continue. I am confident with this capital generation capability that during 2014 we'll have the Core Tier 1 ratio above 10%. In terms of this debate around excluding mark to markets. We're aware that there's some discussion around that. There is some discussion around a number of other pieces within Basel III, and we'll watch how that emerges.
Thanks.
Thank you. The next question comes from Francois-Xavier Bouvignies from the company Exane. Please go ahead.
Good morning, everyone. Just two questions on the insurance, please. The first one is, can you give a bit more details on the amount of capital backing the Japanese closed block VA, and at which phase this capital should be released? That's the first question. The second question is, you mentioned higher investment income in Q4, especially in the Dutch Life business. Can you give a bit more clarity on where this stems from? Is this from re-risking, or is this from lower crediting rates or a combination of both? Thank you.
Delfin?
Okay. In terms of the amount of regulatory capital backing the Japan VA, maybe just to remind everyone that we are doing the calculations for the capital required based on economic capital. That is approximately EUR 900 million. The other question was about the investment income in the Netherlands. The question was in terms of what is occurring in the Netherlands Life is, on the one hand, when we are gradually converting into some higher rating assets. We have done that over the last quarter by increasing approximately EUR 2.9 billion of mortgages that has been invested. That will enhance the yield going forward. When you compare the investment margin with the fourth quarter, you have to be careful, as in the fourth quarter of last year, there was a release of an extraordinary provision of EUR 51 million, and that basically distort the comparison.
Thank you. Just to follow up on the capital backing the VA block. You mentioned EUR 900 million economic capital. What would be the pace of release of that capital if everything goes according to your plan?
How the capital will come, basically in the short term, might depend on the reality of the effects on hedging. We have to take into account that over the next five years, the majority, more than 90% of the book will mature. What will be the capital release quarter per quarter is uncertain, but over the next five years, it will be the majority of it.
Thank you very much.
Thank you. The next question comes from Matthias De Wit from the company KBC. Please go ahead.
Yes, good morning. Two questions, please, from my side. First, on the solvency of NN Life, can you provide a bit more color on the 15 percentage points sequential increase in IGD? What part is retained earnings and what part is market impact, and how should we think about the capital generation of NN Life going forward? Secondly, also on the insurance business on the Dutch non-life, the combined ratio is ahead of the 100% level. But what would be a normalized level going forward if we would exclude the disability issues and the exceptionally bad weather we've seen in the fourth quarter? Thanks.
Okay, Matthias, I'll ask Delphine to go into those.
Two questions, Matthias. The first one is about the increase in solvency during the quarter. No doubt that NN Life has improved very significantly by approximately 50 percentage points on a pro forma basis. At the end of 2013, the Solvency I ratio was 221 from 183% at the end of September. The main drivers for this increase are obviously the EUR 600 million capital injection that was performed in the quarter, and also favorable market developments, as well as some internally generated capital.
Yeah, the latter part, how big is it in the 15 percentage point, please?
It will be around EUR 90 million or so of operational generated capital.
Okay, thanks.
In terms of the combined ratio, certainly the fourth quarter has been influenced as it is disclosed in the quarterly report by some increases related to storms, very significant storms in the quarter, and also some large claims for fire. In terms of normalized level, obviously, the intention is to bring the combined ratio below 100% in the short term, and that is being driven by the actions taken. During the last quarters, we have seen the significant improvement on the group disability business. Unfortunately, in the quarter, there was deterioration in property and casualty, driven by fire, some deterioration in motor, and also some deterioration in the individual disability book.
Okay, thanks.
Thank you. The next question comes from Francesca Tondi from the company Morgan Stanley. Please go ahead.
Good morning, all, thanks very much for all your explanations so far. Two questions from my side as well. Just going back for a moment to the question of increasing risk weight and the impact of capital. Just to clarify, it's just some economic deterioration. To what extent there's any impact from the review of the DNB, if you could comment on that just specifically. If it's just economic inflation, the 50 basis points capital erosion from the increased risk weighting, why do you feel so confident that in Q1 it will be lower than that? Was there any reason why, effectively, there was more of a peak in Q4? Just want to be comfortable that we're not going to see a similar impact and that the capital may drop marginally again in Q1. The second point on Net Interest Income, helpful comments on the margin.
If I'm looking at your assets being lower, it's still not entirely clear to me. Is Net Interest Income in the bank, is this one level in Q4 a level from which you can build in the course of 2014, I can actually hope for some growth in the assets driving some growth in NII? Could you actually make a comment on that? Thank you very much.
Okay. Francesca, for the first question, we turn to Wilfred.
Thank you.
Yeah. If I understand your question well, there are two parts to it. One is what was the impact of the DNB AQR, and the second is, are we confident that we won't see a similar drop in Q1, right?
Correct.
Okay. On DNB AQR, as we mentioned, the results of that review are in the results as you're looking at. Actually, if you look at risk-weighted assets purely for the commercial real estate book, they went down slightly. I think that answers your question on that topic. As for Q1, obviously there will be a number of moving parts in Q1, not just around model updates, but also, for example, the impact of Basel III, because parts of the phased-in impact there will show up in Q1.
If the question is particularly with regard to model updates, as I mentioned earlier, it was a bit of an unfortunate bunch-up in Q4 that led to this increase in RWA, and we currently don't expect something like that for Q1.
Okay. That's very clear. The Central Bank has only focused on commercial real estate.
Yes, they did.
Okay. Is there more focus elsewhere to come in Q1, or pretty much is done at this stage?
With regard to DNB, it's done. With regard to ECB, obviously, there is a new process which is kicking off as we speak.
Great. Thank you. On the NII, yeah.
Yeah. On the NII, Francesca. Yeah, basically what you've seen in terms of the reduction on the balance sheet on the asset side in Q4, as Patrick has explained, a lot of that was related to non-client assets, like the return of the IABF, some of the trading assets, a big impact on the foreign exchange valuation, and lower placements on central banks. Basically, we see the growth on the client assets now picking up again. Basically, we expect that where the assets will start growing now again, it will actually be remunerating assets and therefore, that will have an effect on interest income.
Great. We should expect NII then up from this level.
As I've indicated earlier, it's the 145 where we feel comfortable but we do expect a slight increase from both the asset side, but also because of some of the effects on lower savings rates that we have introduced in the fourth quarter, and the full effect will be in this year.
Thank you.
Okay.
Thank you. The next question comes from Kirishanthan Vijayarajah from Barclays. Please go ahead.
Yes, good morning, guys. Just to follow up on that question there on the shrinkage in the asset base. Have you actually been taking your liquidity buffers down? I think, did you not say balances with central banks, I think went down in the quarter. Just also going back to the DNB's review, how confident are you that the process there is going to be aligned to the ECB's AQR? I think you said the DNB was using IFRS definitions rather than EBA for things like NPL. I wondered how confident you are that that DNB process is going to be closely aligned to what's going to follow on later this year. Thanks.
Okay. The first one, Patrick will take, and the second one, Wilfred will take.
Yeah. Balance sheet management is a complex animal. One of the complexities of it is that at the end of the year, it's reviewed for the purposes of bank tax. We carefully manage our position there to ensure it's optimized. Okay. For the AQR.
Yeah. The ECB AQR is also principally going to be based on IFRS definition, so we don't see a massive difference between that and what's happening, or what was happening in the DNB asset quality review. What we know of the ECB AQR is that there's going to be somewhere around 16 portfolios or so in ING that are going to be looked at. The official confirmation of that is going to come a bit later this week. Big difference that we see so far is that DNB asked for a lot more data per asset than ECB. There's almost a factor of 10 between the number that one asked and the other is going to ask. In terms of operational pressure, it's going to be a different exercise.
What DNB did with regard to commercial real estate was they actually, and that was done by BlackRock, re-underwrote a very large number of loans, and that included the full review of around 45,000 properties. Given the workload on ECB, that may not quite be the case in case of the ECB review, but again, we don't know yet until we have the final details of what they're going to be looking at.
Okay, brilliant. Thanks, guys.
Thank you. The next question comes from Anke Reingen from the company RBC. Please go ahead.
Yeah. Good morning. It's Anke Reingen from RBC. I have two questions, please. Firstly, just sorry, coming back on this risk-weighted assets increase. I just wanted to clarify how much of this is a reflection of a worse economic environment and how much of this is potential pillar 2 requirement. Would the Dutch mortgages ever come down from the 19% risk weighting if the economic environment improves, or is this like a standard rate now? Secondly, on the loan loss charges in Q4, to be honest, I expected it to be a bit higher given seasonality. I just wondered given the only moderate increase, what your outlook is for 2014. Thank you.
Yeah, Wilfred.
On the RWA increases, these are all by definition updates that look back at the most recently available economic data as well as data on the performance of our book. By definition, they're driven by what the economic environment is showing. That is not going to change. Also means that as and when the economic environment improves, we would expect these risk weights to change with that. Having said that, if you look at what happened in Q4 on a few of these portfolios, we readjusted our downturn LGDs, and those downturn LGDs in principle will stay there for a longer period because by definition, they reflect the worst situation that we could envisage. Are they going to move as quickly up as they move down? Probably not. The concept is that they move with the economic environment and the quality of the book.
Your question on the loan loss charges, if I understood it correctly, is what is the outlook for 2014? Was that what you asked?
Yeah. Thank you.
That is as always, a bit of a science, but more an art. What we're seeing on one hand is there are a number of indicators that the economic environment in most of the countries that we operate in is improving. That would, at least with a reasonable degree of confidence, lead us to say in those areas, we would expect a decline at some point. We've indicated in the past that there's always a time lag between an economic development and what shows up in our loan losses. That was the case going into the crisis. It will be the case coming out of the crisis. I don't expect this to take off rapidly, but we do think that on a number, particularly of the international activities, i.e. those outside the Netherlands, we will see an improvement.
On the other hand, as Ralph Hamers has also indicated, we're not so optimistic in the short run about the recovery in the Netherlands, therefore we expect to continue to see pressure, particularly on the business lending books here and potentially also in real estate finance. Although I would say that overall globally for real estate finance, we do expect risk cost also to improve. The only reason I'm a bit cautious on the Netherlands is I think we're over the hump with offices. I mean that market has continued to deteriorate, but at a much lower pace. We're seeing more interest also from international investors now.
On the other hand, I think there is some more pressure going to come on the retail side of the book, and that is also driven by what we see happening in our regular credit activities, where there's a lot of retail in the watchlist and in the restructuring books. If you combine all of that, our view at this point is that it is more likely than not that we'll see a slight decline in risk cost in 2014. I wouldn't expect that to start very rapidly. We'll see most of that probably in the second half of the year.
Okay. Thank you very much.
Thank you. The next question comes from Marcus Vivaldi from the company Morgan Stanley. Please go ahead.
Good morning. Two questions, please. Firstly, the debt for equity swap with regards to the insurance business. Should we assume that marked the end now of the restructuring of the capital structure of the insurance business for the IPO, or is there more to come there? Secondly, obviously you've still got a chunk of internally issued group hybrids. Could you talk a little bit please about what you plan to do with that in terms of timing maybe pre-IPO, and whether you'd be looking to effectively, if you were to externalize them, swap them into qualifying regulatory capital. Thank you.
Okay. In respect of the capital structure for insurance and what we need to do, or may need to do further, there are three factors we look at in determining the right level of capital for the insurance. There's the solvency at the operating level. Most significant, which is NN, which has strongly improved. There's a cash buffer for the whole co, which is now at EUR 800 million. There's leverage. I think we're in the right spot or in the right range now in the first two, namely the NN solvency and the cash buffer. In terms of leverage, as I mentioned earlier, and respect to the fixed charge coverage ratio, there's still some work to do. I mean, the target range for that should be for a single A rated four to eight. As I mentioned earlier, we're at the bottom of that four.
We have some work to do to improve our fixed charge coverage ratio between now and the point of the IPO. As I said before, we will update you. Now, again, there's two ways of doing that. Obviously, it's a ratio. You can improve earnings, or you can reduce the interest cost. We're going to work on preferably organic capital generation to deal with this. We will assess where we are before the IPO and make a final call on what, if anything further needs to be done with the capital structure towards the IPO.
Okay. Thank you.
Yeah. Over time, the debt structure will change such that it will be external hybrids, but via a steady process.
Okay. Thank you very much.
Thank you. The next question comes from Omar Fall from the company Jefferies. Please go ahead.
Good morning. Two small questions, please. Firstly, just coming back to the drag on NIM from higher treasury funding costs, question from earlier. I didn't really understand the answer. Are you saying that eventually that five basis point drag that you reported will go from negative to flat over time? If so, what period? More generally, why are you still lengthening your maturity so much when your funding profile is already very strong? Second question. Sorry to come back to the high risk weighting on Dutch mortgages. With everyone having been critical in the past of the low weighting there, it's maybe harsh to overly penalize you when it gets to a level that's more in line with European peers. Anyway, my question is related to the weighting on corporate loans, which is still quite low.
I'm surprised that given the ongoing higher NPL build in business lending NL, for example, that those haven't moved, unless they have, and I've missed it. Thanks a lot.
Okay. For the question on the NIM bank treasury, Omar, Patrick will give you the answer.
We are not extending the profile. That work is done, so it's finished. Part of it was a small piece that was in the back end of 2013, so there's a slight annualization you need to see in the overall 5 basis points. It's a small increase in 2014, purely because of the get an annualized effect in 2013. The debt profile is where we want it to be. We do not need to extend that debt profile. A lot of it was senior debt, so it's long dated, so it will take some time for it to run off. We see a small increase in 2014, and then a gradual runoff, which after about five to six years, starts to accelerate. By the early 2020s, it becomes significantly lower. This job is done. It's finished.
Got it.
Okay, on the risk weights for business lending, actually, the weights have moved quite significantly, and the last quarter alone is a good example of that. In the Netherlands, risk weight moved from 56% to 71%, and in Belgium it moved from 26% to 33%. I think the models are doing exactly what they're supposed to be doing. They're pushing up these risk weights as the environment deteriorates. Frankly, we think that if you look at those weights, they fairly represent the risk. Again, also on these books, our provisioning is well ahead of the actual losses continuously. Again, the operational profitability is again ahead of that. It is, of course, something that we need to do carefully and do in a prudent way, but it's not as if any of this is eating into our capital to begin with.
Understood. Thank you very much.
Thank you. The next question comes from Farquhar Murray from the company Autonomous Research. Please go ahead.
Morning, gentlemen. Just one question, if I may. Really just a follow-up on Marcus' question. On the fixed charge covering ING Insurance and how you improve it, would you consider doing any further debt conversions to improve coverage there, probably nearer the IPO? Should we really regard that EUR 1 billion as that and complete it on that front? When you talk of changing the debt structure, presumably the shift from floating to fixed would actually further reduce the fixed charge. Do you actually see benefits on that? Cheers.
Well, I think moving to fixed from floating obviously adds more cost. As I said, we will make a final determination of what we need to do to get the fixed charge coverage rate into the target range just before IPO. We keep our options open in that regard. Is it organic capital improvement or is it debt conversion? Options are open, and we'll make that final assessment just before the IPO.
Okay. Thanks very much indeed.
Thank you. The final question comes from Steven Haywood from HSBC. Please go ahead.
Hi. Good morning. You've previously mentioned that you had a normalized through the cycle risk cost of about 40 to 45 basis points. I'm wondering if you could tell us what the normalized risk cost would be under a fully loaded Basel III regime here. Your combined ratio in NN excludes broker business. Can you tell us why you exclude the broker business here? Calculating it including broker business, you get to 109% combined ratio. Thanks.
Okay. For the normalized cycle risk cost, 40 to 45 basis points. Go for it.
It would be the same as what we have always been guiding. There's no big difference in terms of what the Basel III regulations do here.
Sorry, can I just follow up on that? If your risk-weighted assets go up from EUR 280 billion to EUR 300 billion, but you still guide, so that means your provisions will go up as well for 40 to 45 basis points of that.
That's correct.
Okay, thanks.
Yeah. Steven, on your question on why we exclude [Mandate Managed SIC our brokers] from the calculation of the combined ratio and the rest, it's just because they are completely different business. This is a broker that generates a margin and receives service fees, so it has no claims. Basically, it's presenting the combined ratio of the insurance business only. However, as the numbers are for the full segment, Netherlands Non-Life, they are included, but the combined ratio needs to be calculated only on the insurance business.
Okay. Thank you.
Thank you. There seem to be no further questions. Please go ahead with any concluding remarks.
Okay. Well, thank you very much for joining us this morning and asking these questions and showing interest in our results. Just to round off, to summarize, we feel that the results, both financially and strategically, are rather strong. We have made a lot of progress on the restructuring over 2013 and even more so in the end of 2013. Ready to go into the final stage of restructuring for ING Groep. With the base case IPO for the insurance company fully on track. With the capital plan being put in place. We're confident as to the performance in the next couple of quarters. Thanks very much and have a nice day.
Thank you, ladies and gentlemen. That does conclude the conference call for today. Thank you for your participation and you may now disconnect your lines.