Earnings Call: Q4 2013

Feb 12, 2014

Good morning. This is Mark welcoming you to ING's 4th Quarter 2013 Conference Call. Before handing this conference over to Ralf Harmers, 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 unhistorical facts. Actual results may differ materially from those projected in any forward looking statements. A discussion of factors that may cause actual results to differ from those in any forward looking statement is contained on our public filings, including our most recent annual report on Form 20 F filled with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell Autosolvers' station of an offer to buy any securities. Good morning, Ralf. Over to you. Thank you very much. Good morning. Welcome everyone to YNG's 4th quarter 2013 results conference call. I will take you through today's presentation. And then I have Patrick Flynn, our CFO and Wilfred Nagel, our CRO here with me from the Executive Board. We also have Dafin Rada and Doug Caldwell, CFO and CEO of ING Insurance here with us to answer any questions specifically on ING Insurance. In the Q4, 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 4 or €5,000,000 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 Q3 back in November, ING made further progress on the divestment of the insurance units. The divestment of Insurance Asia is now resolved and the sales of the 2 stakes in South America are closed as well. Our remaining stake in South America 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. And we have taken some major steps there that we will go through today. So let me go a little bit there with you in more detail on the capital improvement of ING Insurance. In the Q4, ING Group converted €1,000,000,000 of ING Insurance debt into equity, resulting into a reduction of the gross debt of ING Insurance to EUR 3,900,000,000 Furthermore, the cash proceeds from the sale of ING Insurance Asia have been used to recapitalize NN Life. First, by injecting capital of €600,000,000 into NN Life increasing its regulatory solvency ratio to 2 21% at the end of Q4 2013. And in the Q1 of this year, ING Insurance provided a subordinated loan of another €600,000,000 to NN Life. As a consequence, the pro form a regulatory solvency ratio of NN Life is now at 2 34%. 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 5, 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 €800,000,000 and as alluded to already a gross debt position of €3,900,000,000 So we feel both are adequate. However, on the fixed cost charge, we feel that we're not at the desired level yet. But all in all, our intention is to make sure that ING Insurance will be appropriately capitalized at the moment of IPO. Now turning to the double leverage on the group level. The core debt increased slightly to €5,000,000,000 in the Q4 and that is because the proceeds from the sales of ING U. S. Via basically and Sur America were offset by the conversion, the earlier mentioned conversion of the EUR 1,000,000,000 debt from ING Insurance into equity. The residual double leverage of the group now at €5,000,000,000 is covered by the market value of our remaining stake in ING U. S, the remaining stake in South America as well as by the value of the ING Insurance company. Now that is that we should be able to bring to the market later this year. So far the double leverage. Then on January 9 this year, we announced an agreement to make the Dutch defined benefit pension financially independent. And we are very pleased with this agreement as it means that ING Group will release from all financial obligations under the defined benefit pension plan, including indexation and funding and what was also very 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 core Tier 1 ratio and a 3% point decrease on the insurance IGD ratio, but it does take away volatility in both equity and P and L for which capital is normally intended to be the buffer. So we have exchanged a bit of buffer, but we've reduced the volatility as well. Now let's go into the results of ING Group. ING Group underlying net results showed a strong improvement in over 2013 compared to 2012 with the result a net result increasing 22 percent to 3.255 €1,000,000,000 For the Q4, the group posted a net underlying result of 405,000,000 and for the Q4 of 2012, but down from the Q3 of 2013. And that was mainly due to the previously announced one off charges in ING Insurance. If we then look to the bank specifically, the bank had a very solid 4th quarter underlying result and that was basically due to a further increase in the interest margin to 145 basis points despite some seasonal lower activity in financial markets. But also the result of the unwinding of the IVF supported the quarter results that came out at €99,000,000 but that was partially offset by the additional provision of €76,000,000 that we took to accelerate some of the cost savings in the Dutch bank. Risk costs for the 4th quarter were slightly up from the Q3 of 2013, but were down from the Q4 in 2012, but they remained at elevated level amid the weak economic environment. Then 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 result interest result has grown by 2.8% to €2,946,000,000 a year ago and that was really due to higher volumes and an improved margin on funds and trusted. The net interest margin increased to the 145 basis points and that includes a minus 5 basis points of cost in the bank treasury that is in that net interest margin. And that those negative five 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 that will be and this result we will isolate going forward and transfer to the corporate line as of the Q1 2014. And the negative interest on this book is already included in our overall interest results. So 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, because over the years the NIM has improved including this negative cost of improving our funding structure. And then we expect going forward that the NIM will stay around 145 basis points for the next foreseeable quarters. If we then take a closer look at the development of the net lending assets, net lending increased in both retail and commercial banking. But in the Q4, they were down mainly due to sales and transfers of assets and currency impacts. But the underlying development in as mentioned in Retail and Commercial Banking is positive. The net lending in Retail Banking increased €1,600,000,000 on the back of a higher net lending in Belgium, Germany and the rest of the world. And that was offset by a lower net lending in the Netherlands. And on the Commercial Bank side, we see that the net lending has increased by €400,000,000 driven by higher net lending in Circuit Finance and Trade Finance Services. So 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. Let me take a closer look at the operating expenses. The underlying operating expenses have risen marginally year on year to EUR 2,351,000,000 and that was mainly due to a higher pension cost and additional restructuring cost. And that was offset by ongoing cost savings as well as the partial transfer of the Western Utrecht staff to ING Insurance and the lower annual charge for the Dutch bank tax. For the full year 2013, expenses have been remained more or less flat from 2011, despite the introduction of the bank tax already in 2011 and the higher pension cost. So basically you see that the transformation program that we have announced that that is really helping us to keep costs flat over those years with increased pension costs and increased bank taxes and increased regulatory costs. And therefore, it's important that we continue on this transformation program and keep following it. And therefore, we turn to slide 14. Those restructuring plans are on track. In the Q4, we took another €76,000,000 of additional restructuring costs for the Retail Netherlands. These additional restructuring costs relate to an extension of the previously announced cost savings programs already. So earlier on, we announced a first reduction of 2,700. Later on, we added another 1400 and now we're adding another 300 for the restructuring of the bank in the Netherlands. And this additional 300 FTEs will in the end save €30,000,000 of additional cost of 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 FT feet feet feet feet feet feet feet feet feet feet feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet Feet to reduce our expenses by €880,000,000 by 2015. And of this amount already €458,000,000 have been achieved. And 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. Then we take a closer look at risk costs. The risk costs in the bank side have increased slightly versus the 3rd quarter to €560,000,000 and that's mainly driven by Retail Belgium, general lending and business lending in the Netherlands. And that is offset by lower additions in structured finance and real estate finance. So Q3 to Q4, we see a slight increase Q4 2012 to Q4 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 Q4 of 2013, mainly due to a lower amount of credit outstanding. And the amount of NPLs has increased by 200 €1,000,000 mainly due to higher NPLs in Business Lending Netherlands, Dutch Mortgages and General Lending. Then if we look at the development of the provisions and the write offs, our 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. And therefore, basically the coverage ratio has further increased to 38 0.6% in the 4th quarter. If we then further focus and zoom on the risk cost development for retail banking in the Netherlands, These risk costs have remained at an elevated level and 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 Q4. And the risk weighted assets have increased as well in the Q4 and that is largely as a result of lower cure and recovery rates. And that's also reflecting the economic environment in which we are active in the Netherlands. The average risk rate 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, but this improvement is still fragile. And therefore, the risk costs are expected to remain at this elevated level in the coming quarters. Then if we take a closer look at the risk cost in the real estate finance area, the risk cost for real estate finance decreased further to €71,000,000 and the non performing loans have risen a little bit by €22,000,000 And I think for all of us here and on the other side, it's important to note that the risk in the Q4 include the results of the Dutch National Bank's the Dutch Central Bank's review on our commercial real estate portfolio. Then we take a closer look at the capital position of the bank. The capital position remains strong at a core Tier one ratio of 11 0.7%, despite the dividend upstream to facilitate the Dutch payment and despite the increased risk weighted assets. And basically, these 2 are compensated by solid profitability and the capital generating capability of the bank. The pro form a 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 offs 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 Q1 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. Then if we take an overall look as to the COD4 requirements, besides our strong capital position, we also meet the other CD4 requirements. The RCR ratio is above 100%, while free leverage ratio with a minimum of 3% is certainly met with 3.9% leverage ratio as by the end of December last year. Now so far the bank, let's turn to the insurance company then. The 4th quarter operating result for the ongoing business of insurance improved to €215,000,000 and that was up 20% from a year ago, excluding currency effects. And 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 4th quarter result before tax was a negative €428,000,000 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 the 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 and this is a very good sign as well. The sales grew 10.6% at constant FX quarter on quarter, so Q3 2013 to Q4 2013 and that was reflecting higher sales in both Netherlands Life Insurance Europe and partially offset by your seasonally lower sales in Japan Life. Now if you focus then on Netherlands Life, specifically the results, the 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 from Netherlands Life, if we take a closer look at that has risen 23.2% from a year ago to €186,000,000 and that is as indicated mainly driven by higher investment income and lower administrative expenses. Now 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 Investment Management. Then if we take a closer look at the administrative expenses of the insurance company, the total 4th quarter administrative expenses for the ongoing business were €462,000,000 and that was down 0.6% from a year ago. And that may not be so that's only slightly down. However, this is despite higher pension costs and higher expenses at the Enen Bank. So basically, when you take the higher pension cost out and the higher NN Bank expense because of the transfer of West Hamtitrich, you see that the underlying administrative expenses that we manage as part of the transformation program that is really that we're really on track with that program. Maybe you if you look at the Q3 number there, you see a very low number, but that was caused by a VAT return and release of holiday provision. But 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 €138,000,000 savings so far. Then looking forward for the insurance. So 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 I 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 of 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. And the Japan closed block VA is expected to run off relatively quickly. You'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. And we are working on the final steps of our restructuring plan. And with that, I would like to kind of finalize the presentation and give the floor to you for questions. Thank The first two questions come from David Lock from Deutsche Bank. Please go ahead. Good morning, everyone. Couple of questions for me. The first one is on your risk weighted assets increase in the 4th quarter, which cost about 50 basis points on capital. I just wondered, is this a one time change that it's kind of come through this quarter? Or is this something that we should expect going forward as your models adjust to the economic environment? And then secondly, on asset balances, when I look at the balance sheet at the end of the quarter at 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? Or 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. Yes. So 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. And obviously with the economic trend out there, which Ralf also talked about, these models continue to show the deterioration in the economic environment and that is reflected in provisioning and risk weights. Now normally these updates are spread fairly evenly over the year and we had in Q4 a little bit of an unfortunate punching 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. Okay. And then on the assets, Chris? 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 whole day deals. So part of that reduction improves about €6,000,000,000 There's the Westland Utrecht transfer to insurance, which is €5,000,000 There's an RMBS as well. And FX makes up a component of it also. And I think Ralph also mentioned highlighted in a slide that there is commercial growth in lending. But yes, the primary thing we need to focus on in terms of NIM for the future. Yes. And 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. And the next two questions come from Ashik Musaddi from JPMorgan. Please go ahead. Thank you and good morning everyone. So first question is on your name basically. And you reported 145 basis points in 4th quarter and this is what you're guiding as well. But as I look at Slide number 11, it shows that there is a 2 percentage point 2 basis point negative impact from financial market, I. E. Your underlying NIM is a bit more better than 145. So it's around 147. So what is stopping you to give a higher guidance on 145 at the moment? Is it because you look at this from a long term perspective? So is that the reason? So that's the first question. And secondly, can you just give us some color on your cost? So the guidance you're giving now is $8,700,000,000 in 20.15 expected cost for bank. If I remember correctly earlier, you gave it around $8,800,000 $8,900,000 So this is some improvement. Is it mainly because of lower balance sheet and but still your cost to income still doesn't look like going towards 53%, which you are targeting. So 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. And so basically that's where we are focusing on. We see increased costs coming from bank taxes in several areas and regulatory cost. And we will continue to seek further compensating transformation programs and cost cuts in order to at least offset that or further improve. And we're in a constant process there. So we have these programs that you know, but 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. Because 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 cost, but we're also active in some more growth markets where some of the costs are growing and that total picture will lead to an expectation of cost to be flat for the next years. Then on the NIM, Patrick? Yes. On the NIM, 145 basis points up 1%. The interest was more importantly was up and that was in the back of our higher margin particularly on retail lending and savings, which more than offset the 2 bps fall in financial markets. Going forward, I think savings and margins in general are expected to be resilient. In the Netherlands, we reduced client rates another 10 basis points in January, 14%. And the impact of the Belgium 10 bps cut in the 4th quarter still come through fully. Specific to 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 is can vary quarter on quarter. So we prefer to focus on the more predictable Commercial Banking piece. And 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 Anders 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 just wondering, so we shouldn't interpret this as any kind of signal in terms of change in market conditions or kind of higher capital requirements coming from the DNB or anything like that? I just wanted just to follow-up on that. And then second one in terms of the Retail Belgium business, I saw 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 Guilford to answer you. Yes. So on the RWA, as we said, I mean, 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 €4,000,000,000 So 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 1 or more quarters depending on the frequency which we update. But you shouldn't be reading anything into that looking forward. As Ralf was saying, we do see signs of the economy bottoming out at least in parts of Europe. Unfortunately, that's quite the case in Holland yet, but in some of the other markets it is. So personally, I would say that the next updates are going to be at least a lot less impactful than this particular one. And then on Belgium, provisioning there is driven by exactly the same thing, which is the same model update. And 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 €10,000,000 €11,000,000 a quarter for the past 6 or 7 quarters. So it's not as if we're seeing an underlying trend there either. Okay, great. Thank you very much. Thank you. And the next question comes from Mario Josephic from Nomura. Please go ahead. Good morning. I have two questions. My first question is on asset quality. Can you give us a bit more color on the HR carried out by the Dutch regulator? I think what do they focus on? And what type of definitions did they use as part of their review? And the second question is on asset lending. We've seen some increase in British, particularly in Belgium and rest of the world some infrastructure finance and transaction services. Can you give again here some color over the nature of these increases and your strategies growth strategies in this segment going forward? Thank you. Alfred is going to answer the AQR question. So 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 40,000,000,000 in assets in total, income producing real estate. Based on their quick scan of that, they zoomed in on about €24,000,000,000 in more detail. And that was 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. And of course, in that process, you would find that the judgment on individual files here and there are different from ours both positively as well as negatively. But on the whole you see the impact, as Ralf already indicated, of our interaction with DNB reflected in the numbers completely in Q4. Okay. And then on the asset lending in general, well, 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 fluency that we take, we support those clients and those economies. So if 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. So 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. And the next question comes from Anton Kreyosok 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 deposit repricing work that you have done recently. And of course, there is 2 basis points negative effect on net interest margin from the financial markets. So 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? And 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 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 a 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. Yes, so 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 the deposit prices. And we have decreased those also in the Q4 and some of that effect is not fully in the results. But overall, we feel that the NIM will stay around the current level and maybe a little bit increasing from this level. Then I'll turn it to Patrick for the funding profile. Yes. In terms of the funding profile and the cost of debt, we've mentioned before that included within our strong interest margin, EUR 145,000,000 we've incorporated and had the cost of the debt issuance to which you refer. Partly to help almost exclusively to help transparency, we're going to isolate that and put it in the corporate line. So the debt we issued in the crisis to extend the profile of our funding to accelerate, which we did ourselves towards being compliant with poultry emerging regulatory requirements was expensive. That cost, which is about 5 bps in total, is 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 runoff is gradual and then thereafter, it starts to run down quickly. So I don't see immediately a big pickup or benefit from lower funding costs. Our funding profile is very good now. Our loan deposits 104. The acceleration in senior debt funding, which we undertook is done. We don't need to grow that. So yes, the treasury book will take a little bit of time to run off. Thank you very much. That's very clear. Thank you. And 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, Kalda, 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? And then 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? So 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. Yes. In terms of the fixed charge coverage ratio, a little bit more work to do there. The number was about 4 at the end of the quarter. That's excluding the impact to Japan VA special license and divestments. The outlook for that will be influenced by obviously earnings, which are focusing very hard to improve and the final debt structure, including the €1,000,000,000 conversion. I think it's important to note that the debt to date has been a floating rate and going forward it's more likely to be fixed. So 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. Okay. Then for the risk weighted assets, we turn to Rufe. Yes. The question was why wouldn't it go to 25% or more? Well, would it move again? It would if the market really continues to deteriorate. That's not as Rolf was indicating earlier really what we're seeing. And we do expect a slight further decline of house prices into 2014, but very likely bottoming out. So looking at the outside world, it's not so likely that we'll see something dramatic happen to this risk weight. And 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 trends 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 4.20 or so per quarter like a straight line. So we're not seeing anything in the economic reality around this book that causes us great concerns here. And 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. And the next question comes from Benoit Petrog from the company Kepler. Please go ahead. Yes. Good morning. It's Bernard Petraque from Kepler Cheuvreux. Yes, two questions on my side. First one is on the capital, 10% core Tier one ratio fully loaded. If I strip out the remaining state support and the pension, it's 9%. Well, obviously, you will build up capital in 2014 about 120 bps. You might also have some risk weighted assets growth. But let's say you might end up at 10% in 2014, will that be a good level for you? I. E. Do you want to build buffer on the top of that? And do you consider to use some of the cash proceeds from the IPO to recapitalize the bank after the IPO? That's the first question. And number 2 is also on capital. You have about 60 bps of positive revaluation reserves taken in the 10%. Are you considering to change methodology there? I think the Belgium regulator has been commenting on that negatively. So 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 Q1 at the end of the year is 10%. I think that's a solid number. And if you look at where it has come from, that's on the back of a bank which has paid out nearly 100% of its €3,000,000,000 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. Yes, we have state repayments to pay at the end of the quarter, which is about 40 bps in the 20 bps for the pension deal. But if thinking about capital, what's important is think about whether any of the perceived drop is due to a structural or temporary events. If we're structured, we start to be taking mitigating measures. It's temporary. We have a take a different view. So the bank has demonstrated a consistent pattern of strong capital generation in the past. I think that's likely to continue. So I am confident with this capital generation capability that during 2014, we'll have the core Tier one ratio above 10%. Now in terms of the this debate around excluding mark to markets, yes, we're aware that there's some discussion around that. There is some discussion on a number of other pieces on within VAL3. We'll just we'll watch how that emerges. Thanks. Thank you. And the next question comes from Francois Beosin from the company Exane. Please go ahead. Yes, Good morning, everyone. Just two questions on the insurance, please. First one is, can you give a bit more details on the amount of capital backing the Japanese closed clock VA and at which pace 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 rerisking or is this from lower crediting rates or a combination of both? Thank you. Alfven? Okay. In terms of the amount of regulatory capital back in the Jaffa MPA, maybe just to remind everyone that we are doing the calculations for the capital required based on economic capital and that is approximately EUR 900,000,000. 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 in the one hand, when we are gradually converting into some higher rating assets. We have done that over the last quarter by increasing approximately, I mean, EUR 2,900,000,000 of mortgages that has been invested. So that will enhance the yield going forward. When you compare the investment margin with the 4th quarter, you have to be careful. As in the Q4 of last year, there was a release of an extraordinary provision of €51,000,000 and that basically distorted the comparison. Thank you. Just a follow-up on the capital backing, the VA blocks. So you mentioned €900,000,000 economic capital. What would be the pace of release of that capital if everything goes according to your plan? We have I mean, the how the capital will come basically in the short term might depend on the reality of the hedgehog hedging, but we have to take into account that over the next 5 years, the majority more than 90 percent of the book will mature. So what will be the capital release quarter per quarter is uncertain, But over the next 5 years, it will be the majority of it. Thank you very much. Thank you. And the next question comes from Matthijs Debit from the company KBC. Please go ahead. Yes, good morning. Two questions, please, from my side. First on the solvency 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 impacts? And how should we think about the capital generation of NN Life going forward? And then 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 Q4? Thanks. Okay. Matthias, I'll ask Delfin to go into those. So two questions, Matthias. The first one is about the increase in solvency during the quarter. I mean, no doubt that NN Life has improved very significantly by approximately 50 percentage points on a pro form a basis. So at the end of 2013, the Solvency II ratio was 221% from 183% at the end of September. The main drivers for this increase are obviously the EUR 600,000,000 capital injection that was performed in the quarter and also favorable market developments as well as some internally generated capital. Yes. The latter part, how big is it in the 15 percentage point, please? It will be around €90,000,000 or so of operational generated capital. Okay. Thanks. In terms of the combined ratio, certainly, the 4th 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 quarter, 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. And the next question comes from Francesca Tondi from the company Morgan Stanley. Please go ahead. Good morning all and 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 delight comment on that just specifically? And just if it's just economic deflation, the 50 bps capital erosion from the increased risk weighting, And 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? So 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. And the second point on net interest income, helpful comments on the margin. But if I'm looking at your assets being lower, still not entirely clear to me. Is net interest income in the bank, is this one level in Q4 level from which you can build in the course of 2014. And so I can actually hope for some growth in the asset driving some growth in NII. Could you actually make a comment on that? Thank you very much. Francesca for the first question, we turn to Rafael. Thank you. Yes. So if I understand your question well, there are 2 parts to it. One is what was the impact of the DMBS, the quality review? And the second is are we confident that we won't see a similar drop in Q1, right? Correct. Okay. On DMP, that's a quality review. As we mentioned, the results of that review are in the results that you're looking at. And actually, if you look at risk weighted assets purely for the commercial real estate book, they went down slightly. So I think that answers your question on that topic. And as for Q1, I mean, obviously, there will be a number of moving parts in Q1, not just our own non LAP Edge, but also for example the impact of Basel III because parts of the phased in impact there will show up in Q1. But if 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. And the Central Bank has only focused on commercial real estate? Yes, they did. Okay. And is there more focus elsewhere to come in Q1 or pretty much it's 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. And on the NII, yes? Yes. So on the NII, Francesca, yes. So 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 IVF, some of the trading assets, a big impact on the foreign exchange valuation and lower placements on central banks. And basically, we see the growth on the client assets now picking up again. So 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. So should we expect NII then up from this level? As I've indicated earlier, it's the €145,000,000 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 4th quarter and the full effect will be in this year. Thank you. Thank you. And the next question comes from Kiri Vijayarajah from Barclays. Please go ahead. Yes, good morning guys. Just a follow-up on that question there on the shrinkage in the asset base. Have you actually been taking your liquidity buffers down? Because I think did you not say balances with central banks I think went down in the quarter? And then just also going back to the DNV's review, how confident are you that the process there is going to be aligned to the ECB's AQR? Because I think you said the DNB was using IFRS definitions rather than EBA for things like NPL. So 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. So the first one, Patrick will take and the second one, Wilfred will take. Yes. Balance sheet management is a complex animal. And one of the complexities of optimized. Then for the AQR? Yes. So 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 in 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 and that are going to be looked at. The official confirmation of that is going to come a bit later this week. And 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. So 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. Now given the workload on ECB that may not quite be the case how in case of the ECB review. But again, we don't know yet until we have the final details of what we're going to be looking at. Okay. It's brilliant. Thanks guys. Thank you. And the next question comes from Anke Reingen from the company RBC. Please go ahead. Yes. Good morning. It's Anke Reingen from RBC. I have two questions, please. Firstly, just sorry, coming back on this risk weighted asset increase. I just wanted to clarify how much of this is a reflection of a worse economic environment and how much of this is like potential plateau requirement? So would the Dutch mortgages ever come down from the 19% risk rating if the economic environment improves? So is this like a standard right now? And then secondly, on the loan loss charges in Q4. To be honest, I expect that it's a bit higher given seasonality. And I just wondered, given the only moderate increase what your outlook is for 2014? Thank you. You're welcome. So 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. So by definition they're driven by what the economic environment is showing. And that is not going to change, which 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. So are they going to move as quickly up as they move down? Probably not. But the concept is that they move with the economic environment and the quality of the book. And then your question on the loan loss charges, if I understood it correctly, is what is the outlook for 2014? Was that what you asked? Yes, yes, yes. Thank you. Okay. 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. So that would at least with a reasonable degree of confidence leaders 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. So I don't expect this to take off rapidly, but we do think that on the number particularly of the international activities I. E. Those outside the Netherlands we will see an improvement. On the other hand, as Ralf has also indicated, we're not so optimistic in the short run about the recovery in the Netherlands. And 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. And 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. But 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 watch list 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. So we'll see most of that probably in the second half of the year. Okay. Thank you very much. Thank you. And the next question comes from Marcus Rivealdi 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 that marks the end now of the restructuring of the capital structure of the insurance business for the IPO? Or is there more to come there? And then secondly, obviously, you've still got a chunk of internally issued group hybrids. Can 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 to 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 €800,000,000 and 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. But in terms of leverage, as I mentioned earlier, and with respect to 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 4 to 8. As I mentioned earlier, we're at the bottom of that 4. So we do need to we have some work to do to improve our fixed charge coverage ratio between now and the point of the IPO. And as I said before, we will update you. Again, there are 2 ways of doing that. Obviously, it's a ratio. You can improve earnings or you can reduce the interest cost. So we're going to work on preferably organic capital generation to do with this, but we will assess where we are before the IPO will make the final call on what anything if anything further needs to be done with the capital structure that follows the IPO. Okay. Thank you. Yes. I mean, over time, the debt structure will change such that it will be external hybrids, but be a steady process. Okay. Thank you very much. Thank you. And 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 5 basis point drag that you reported go from negative to flat over time? And if so, what period? And more generally, why are you still lengthening your maturity so much when your funding profile is already very strong? And 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. But anyway, my question relates 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 have missed it. Thanks a lot. Thanks 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 small piece was in the back end of 2013. So there's a slight annualization you need to see in the overall 5 bps. So it's a small increase in 2014, purely because of the get an annualized effect in 2013. But the debt profile is where we want it to be. We do not need to extend that debt profile. This was a lot of those senior debt is long dated, so it will take some time for it to run off. So we see a small increase in 2014 and then a gradual runoff, which after about 5 to 6 years starts to accelerate. By the early 2020s, it becomes significantly lower. So 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 loan is a good example of that. In the Netherlands, Bridgequade moved from 56% to 71%. And in Belgium, it moved from 26% to 33%. So 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. And 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. And again, the operational profitability is again ahead of that. So 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. And the next question comes from Farquhar Marai from the company Autonomous Research. Please go ahead. Good 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 near the IPO? Or should we really regard that EUR 1,000,000,000 as that and completely it on that front? And then when you talk of changing the debt structure, presumably the shift from floating to fixed would actually further reduce fixed charge? Or do you actually see benefits on that shift? Well, I think the moving to fixed and floating is obviously adds more cost. As I said, we would make a final determination of what we need to do to get the fixed charge coverage rating into the target range just before IPO. So we keep our options open in that regard. Is it organic capital improvement or is it net conversion? Options are open and we have made that final assessment just for the upward IPO. Okay. Thanks very much indeed. Thank you. And the final question comes from Stephen 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 costs would be under a fully loaded Basel III regime here? Also your combined ratio in NN excludes broker business. Can you tell us why you exclude the broker business here because calculating it including broker business you get to 109% combined ratio? Thanks. Okay. For the normalized cycle risk costs 40% to 45% basis points. Wofe? 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. Can I just follow-up on that? So if your risk weighted assets go up from €280,000,000,000 to €300,000,000,000 but you still guide, so that means your loan distributions will go up as well, the 40 to 45 basis points, is that? That's correct. Okay. Thanks. Yes. Stephen, on your question on why we exclude man demand seek our brokers from the calculation of the combined ratio and the rest is just because they are completely different business. Also, this is a broker that generate margin and receive service fees. So it has no claims. So basically, it is 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 seems to be no further questions. Please go ahead with any concluding answers. Okay. Well, thank you very much for joining us morning and asking these questions and showing the interest in our result. 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 Group with the base case IPO for the insurance company fully on track with the capital plan being put in place. And 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. 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