Earnings Call: Q3 2013

Nov 6, 2013

Good morning. This is Yvonne welcoming you to ING's Q3 2013 Conference Call. Before handing this conference over to Ralph Hammers, 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 financial future financial performance and any statement not involving historical facts. Actual results may differ materially from those projected in our forward looking statements. A discussion of factors that may cause actual results to differ from those in any forward looking statement is contained in our public filings, including our most recent annual report on Form 20F filed 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 or a solicitation of an offer to buy any securities. Good morning, Ralf. Over to you. Welcome everyone to ING's Q3 2013 Results Conference Call. I'm Ralf Harmer, CEO of ING Group. I'll take you through today's presentation. And here with me are Patrick Flynn, our CFO and Wilfred Nagel, our CRO in the Executive Board. We also have Dafin Rada, the CFO of the insurance company and Doug Caldwell, the CRO of the insurance company to answer questions about the insurance side. Let's go to Page 2. We had a very strong Q3. I and T continued to make strong progress on the restructuring, advancing further into the end phase of our transformation. At the same time, what is good is that our businesses have delivered a good set of quarterly results. ING Group posted an underlying net profit of 891 €1,000,000 driven by another solid quarter on the bank side and improved operating performance on the insurance side. If we then go to slide 3, I'd like to start by giving you an update on the major events that have happened over the last few weeks on the restructuring side, because we have greatly advanced in our restructuring story. Mid October, we sold another 15% of ING U. S. And the remaining stake now is 57%. And with that, we're almost reaching the deadline of 2014 and the 2014 of reaching 50% stake in that. So we're close to that already whereas we have more than a year to go. As you also can see on the graph, the rigid or double leverage of the group remains effectively covered by the current value of the remaining stakes in both the U. S. As well as South America. Also last week, we announced the agreement with the Dutch state on unwinding the IABF. And today, we will pay another EUR 1,100,000,000 as part of the core Tier 1 secondurity support that we received in the past. And this means that we have only 2 more payments left under that state support program. Last but not least, we have taken another big step in the EC restructuring, reaching a new agreement with the European Commission as a result of which ING Life Japan will be divested as part of ING Insurance. I'll go a little bit more detail in all of these events. So first on the state support arrangements, Page 4. We have recently announced and achieved 2 major milestones with the Dutch state. Last week, we reached an agreement on the IABF, basically unwinding the transaction that we have established in 2009 reducing ING's risk on Alt A. The unwinding will free up €2,000,000,000 of risk weighted assets related to the counter guarantee that we currently have in place. And that will add that release of risk weighted assets will add another 10 basis points to ING Bank's core Tier 1 ratio. Following the repayment of the core Tier 1 Securities today including premium, We have paid more than €11,000,000,000 now to the Dutch state and the remaining €2,200,000,000 will be paid in 2 tranches. The first one scheduled in March 2014 and the final one in May 2015. So much on state support. Then we move over to the other milestone that we reached with the European Commission, basically including Japan as part of the IPO, the base case IPO of ING Insurance. Under that new agreement, the total restructuring of ING Group will now have to be completed 2 years earlier by the end of 2016. However, the agreement to divest more than 50% of ING insurance by end of 2015 remains unchanged. So we continue our preparations for base case IPO and those preparations are on track. With the sale of ING Life Korea as announced a couple of months ago, these changes mean that we have effectively completed all the restructuring requirements for our Asian insurance businesses. To go a little bit deeper into the Japan Life business, basically ING Life Japan has 2 businesses. I'm now on slide 6. One business is Japan Life and the other one is the Closed Block VA business. On Japan Life, that's a CODI business, a company owned life insurance business in which we are market leader with a 20% market share of the Japanese life markets. It's focused on it's a focused business model catering to SMEs and affluent customers through independent agencies and bank as well as partners. And as can be seen in this graph, the operating result of ING Life has continued to increase over the last couple of years. And this will be a very significant contributor to ING Insurance earnings and cash flows. So that is a very positive signal. Beyond that, you also see here that our Life Businesses Japan is well capitalized. If we then dive deeper into the closed block characteristics, That is the next slide. This closed block is expected to release significant amounts of capital over time. The vast majority of this portfolio consists of accumulation benefit products and they will run off quickly and free up capital over the next 4 years. The Japanese VA guarantees are already reinsured to ING Re internally and we manage them and hedge them on a market consistent basis. Then in order to further improve transparency around this VA portfolio in the new reporting segmentation as announced today Japan VA will be reported as a separate segment. And that will trigger a P and L charge of approximately 600,000,000 euros in Q4 of this year. And with that, we will restore the reserve adequacy in the Japanese VA business to the 50% confidence level and that will be reflected in full write down of the deck. In addition, ING Insurance is considering and studying a move towards fair value accounting on the reserves for the death benefits. This would be a further improvement in the alignment of the book value of the reserves with their market value and the accounting for the related hedges that we have in place. If this move towards fair value is implemented then this would result in a pretax charge through equity of approximately €400,000,000 to be taken in the Q1 next year. What is important to know is that these changes will not impact the regulatory capital of ING Life in Japan nor the economic capital of ING Re. If we then look at the pro form a debt on the insurance side, we see that if we adjust the pro form a balance sheet for the announced sales of China Merchants, the ING Bank of Beijing Life Business I'm in Korea and the sale of ING Life in Korea. You see this picture appearing. And this also reflects the negative €1,000,000,000 pretax impact of the Japanese VA measures as I just explained. So the pro form a IFRS equity on ING insurance will then be 13 €700,000,000 and the debt net of the cash will fall to €3,000,000,000 And as a result of all of this, the pro form a financial leverage ratio of ING Insurance is 22.5%. If we then take a closer look at the capital ratios, the solvency ratios on the insurance side, we see that they are impacted by several one offs. First on solvency. The solvency of NN Life is decreasing from 230% to 183% in the Q3. And this is mainly due to the move to the DNB swap curve, which we decided to following the downgrade of France by Fitch. And then Life solvency would have been stable in the Q3 of 2013 versus the Q2, if the Q2 of 2013 would also have been based on DNB swap. Then on the IGD ratio. The IGD ratio for ING Insurance is down versus last quarter and that reflects the impact on the NN Life solvency ratio as well as the recognized loss on the sale of ING Life Korea. The pro form a IGD ratio including the impact of the announced Insurance Asia sales and the €1,000,000,000 pre tax impact of the VA accounting measures for Japan would be 2 16%. And the final targets of ING Insurance will have to be finalized and we aim to provide you with more clarity on these capital targets in the Q1 of 2014. So much on restructuring and all the progress we are making there. Let's take a look at the results. Our ING Group posted a net result of 891,000,000 that's up 5% to 6% year on year and slightly down on the Q1 or from the Q2 this year. The net profit came in lower at €100,000,000 €101,000,000 to be exact. And that's there as a result of the €950,000,000 loss taken on the sale of ING Life Korea. But the important thing is that the underlying net results are holding up and actually improving year on year. If we then take a look at the bank, the bank posted another solid quarter. The gross result of the bank was stable versus last year, but it's down from the last quarter and that is mainly caused by lower results on the bank treasury side and financial markets partly caused by the decline in CVA DVA impacts. Risk costs were down both year on year as well as from the Q2 this year, but they remained elevated amid the weak economic environment in Europe. Then looking at the net interest margin. The net interest result remained relatively stable despite lower lending volumes. The margin improved to 144 basis points, but that's mainly driven by a lower average balance sheet. The savings margins increased further in the Q3 of this year, reflecting the lowering of declined savings rates in several countries that we put. The lending margins, however, were also slightly down from last quarter and that is due to increased competition and actually low demand in the market. And the NIM is expected to remain at around these levels in the coming quarters. Then the lending assets, as mentioned already, they were significantly down in the Q3 and that is mainly due to the sales and the transfers of assets as well as some currency impacts. We have particularly reduced our Dutch mortgage exposure on the bank side, but that is mainly due to a transfer of a part of the portfolio of SEK 4,900,000,000 to an end bank, which we did as part also of the restructuring. But in addition to that, we placed an RMBS for €2,200,000,000 Also we reduced our real estate finance exposures through selling certain files in the U. S. And the U. K. I think what's important to note for you is that we saw an increase in lending assets in the areas where we can realize growth very much in very much so in Germany, the rest of the world and structured finance. Then going to the operating expenses, they were roughly stable year on year. And that basically shows you the impact of the cost savings initiatives, but also the partial transfer of the staff of Westland Utrecht, which we transferred to ING Insurance and to NN Bank as we call it and lower impairments on the real estate development So those were decreasing the cost. The increases in cost were very much related to higher pension cost and we took some additional restructuring costs above the line. This time we see in certain of these cost savings initiatives we see an acceleration and therefore we take some additional restructuring costs there, a bit above the line. Versus the second quarter of this year, expenses rose 1.4% and that is caused mainly by the restructuring costs that I just referred to in those cost savings initiatives. The status of these restructuring program in general are on track. Actually they're a little bit ahead of the plan And the cost savings reached so far are at €352,000,000 and the savings with the savings of €488,000,000 still to be achieved by 2015. I don't think it needs mentioning that we follow these programs closely because we ensure to deliver these results. They are important for a continuing efficient bank going forward. On the risk costs then, they decreased year on year as well as visavislastquarter. They decreased €64,000,000 to €552,000,000 These reductions are generally in general lending, retail international and real estate finance. I mentioned to you the files that we have sold in that portfolio and some of this was offset by higher additions in structured finance, basically one specific file. Then we go over to the NPL ratio. Also there we see a slight decrease to 2.7%, down from 2.8% last quarter, basically down to a lower number of non performing loans, decreasing by €500,000,000 in total, lower NPLs in real estate and lower NPLs in structured finance. If we then turn to the Netherlands and focus a little bit on the Netherlands, because I know you're interested in that as well. The risk costs in Retail Banking Netherlands were up year on year and slightly down from last quarter, but they remained at an elevated level and that basically reflects the weak economic environment that we still see in the Netherlands. The NPL ratio for business lending has increased from 6.4% to 7% in this quarter and that was primarily due to an increase in the sectors of transportation, business services and retail non food. On the other side, the NPL ratio for Dutch mortgages rose from 1.6% to 1.8%, but that was mainly due to a decrease in the mortgages outstanding as a result of the transfers I mentioned earlier. The portfolio that we moved from ING to NN Bank as well as the RMBS that we placed. Risk costs for business lending and mortgage portfolio are expected to remain elevated basically at this level, certainly not improved for the next couple of quarters given the continued weakness in the broader Dutch economy. Although we do see earlier signs of bottoming out in the housing market, we see some positive signals in consumer confidence, but we want to be very cautious on this one. Then on real estate finance specifically, the risk costs for real estate finance were €83,000,000 They were down both year on year and also on last quarter and that was driven by higher releases as a result of the asset sales that I already mentioned in the U. S. And the U. K. The additions, however, remained elevated and were concentrated in the Netherlands and Spain. The NPL ratio declined to 9.9% and the risk costs are also in this segment we expected to remain elevated. Now we take a look at capital position of the bank. I'm now on Slide 21. The bank's core Tier 1 ratio increased from 11.8% to 12.4 percent in the last quarter and that is driven by continued solid profitability and the decrease in risk weighted assets. If we correct for the payment of the Dutch state to the Dutch state today as well as the unwinding of the IBF and you see that the payment that we're making today will decrease the core Tier 1 by 0.4 percent. However, the unwinding will increase it by 0.1%. So the net effect is a decrease of 0.3 percent, but that will still get us to a pro form a healthy 12.1 percent core Tier 1 ratio to on a Basel 2.5 basis. Now if we then correct for the 1st tranche of the Phase in effect, then we would get to a pro form a CRD IV Core Tier 1 of 11%. If we would correct for the full Basel III on a fully loaded basis, the core Tier 1 would get to 10.4%, still higher than our ambition that we have communicated to you to remain at around and above 10%. So basically we see that the bank is already meeting the COD IV requirements and that we are delivering on the priorities that we have communicated to you at the Investor Day 2 years ago. We're accelerating transition to Basel III. We're limiting the balance sheet and risk weighted asset growth. And we are successfully executing the balance sheet optimization. We are simplifying our business portfolio and we take a very prudent approach to capital and funding given the unstable market conditions that we still see. Core Tier 1 asset stands at 10.4 percent fully loaded. LCR is above 100% And above the 3, leverage ratio is well above the 3% of the COD4 of the minimum which is the minimum COD4 target. Basically, the conclusion is ING is simpler, stronger and well positioned to service our customers and improve the business going forward. Then we move to the insurance side. The operating result improved strongly year on year supported by higher investment margins, tight cost control and improved non life results. The decrease versus last quarter was mainly due to seasonally high dividend income in the Q2. We see that every Q2 we see an increased investment income there. IG Insurance is considering to refine the market interest rate assumption for the separate account pension business. If this would be implemented, this would result in a one off P and L charge of 160,000,000, 1.6 0 pretax in the Q4 of 2013. If we then look more specifically to income and costs on the insurance side, we see that the income was up year on year, slightly down from last quarter. But again, that was driven by the investment margin coming in a little bit lower given the high seasonal effect of the dividend income in the Q2, but you see income stabilizing there. Then on slide 26, you see that the administrative expenses are down. And I think this is an important one to note for all of you is that the impact of the transformation program as announced last year is really shown here. So we see the administrative expenses declining by 3.8% year on year. And this transformation program is eating up basically the cost increases from the transfer of people from Western Utrecht to NN Bank as well as also on the insurance side higher pension cost. Excluding the transfer from Western Utrecht to NN Bank and excluding some currency administrative expenses would be down 6.3% versus last year and 4% versus the Q2. And basically that's a clear evidence that the transformation plan is paying off. I come to basically a wrap up. I think around this table, we are all extremely proud of the financial and strategic progress that we are making and that we have achieved this quarter. We have delivered solid underlying results for both the bank and the insurance. And over the last 2, 3 weeks, we have been able to announce strong progress on our restructuring targets. And with that conclusion, I would like to open the call for questions. Thank you, sir. In the interest of time, we ask each analyst to limit your questions to The first question is from Andrew Crooms from Citi. Please go ahead. Good morning. I'll ask my two questions, please. One on Japan and then one on the loan loss provisions. Firstly, on Japan, looking at the €600,000,000 €400,000,000 charge, that's on an IFRS basis. I just wanted to double check what the change or would any impact, if any, would be on the local GAAP accounts? And if you could please provide an update on the latest equity figure under the local GAAP accounts for Japan. I think it was €500,000,000 as I recall last time I checked. Secondly, on the loan loss provisions, I'm just trying to reconcile the points you make on both Page 20 and Page 29. With regards to the NPLs, you've continued to see an increase, particularly in business lending in the Netherlands. But at the same time, if I look at your outlook commentary on loan loss provisions, you do talk about signs of stabilization and positive signals in terms of consumer confidence. So you talk about elevated provisions in the near term, but perhaps you could give us a bit more visibility on when you think loan loss provisions might start to recover in that segment? Thank you. Okay. I will give the question on Japan to Patrick Flynn, the CFO. Yes. The two adjustments are in IFRS only. They have no impact on regulatory capital locally or local GAAP results. And I don't have the local GAAP number to your hand, but we can get it for you later. Then we turn to Wilfred on the risk costs on the loan loss provisionings. Yes. I mean provisioning is always a bit of a lumpy business. If you look at the provisions in this quarter, they are down somewhat, but that is driven by a couple of relatively significant individual releases. Indeed, in terms of the guidance, what we have said for a while is we expect provisions to stay at these elevated levels. You do see a slight drop in NPLs across the global book, but there are individual portfolios including, for example, the one that you mentioned in the Netherlands where we're still seeing upticks. And we think that trend is not about to end. So in answer to your question on that particular book, when do we expect loan loss provisions to come down? Well, that's hard to predict, but I would say that won't be until well into 2014. Right. Thank you. Next question? The next question is from Francois Murray from Thomas Research. Please go ahead. Good morning, gentlemen. Just two questions, if I may. Firstly, on net interest income. I mean, the core retail businesses were actually very strong this quarter, but there will seem to be a step down quarter on quarter in retail rest of the world, which went to about €412,000,000 from memory versus a kind of €460,000,000 average over the previous quarters. I just wondered if you could give us some color on what happened there and how we should think about that going forward? And then secondly on ING Insurance, you provided the pro form a IGD ratio. I just wondered whether you'd come around to having a think about what the interest coverage is on that business as yet. Obviously, that partly depends on how you allocate debt, etcetera. But I just wondered if you might have that number now. Thanks. On the net interest margin piece, the piece of that is a number of pieces in there that are some of them non recurring. Part of it is due to the volatility we saw in the interest rates in Turkey. And another piece is FX as well. So there's a number difficult to isolate it to one individual point. In net, should we think that the interest rate move from Turkey was a negative and was probably predominant within that mix or on and as a one off? Should we think that the Turkish interest rate move was a negative and was probably the predominant there and probably is non recurring. Is that a fair way of looking at it or? I think the FX is probably the biggest single impact. Okay. Thanks so much. Dauphin Rueda is here with us. Yes. On the IGT, your question was about the interest cover. The interest cover is around 6 times at this point of time. And with the inclusion of ING Life Japan that will improve slightly. Okay. Thanks so much. Thank you. The next question is from David Andrade from Morgan Stanley. Please go ahead. Hi, good morning. Two quick questions on my side. First of all, I was just wondering in terms of the Benelux investment portfolio, if you've started to take any action in terms of rerisking it? And second on the non life insurance business, just wondering do we see this how do you think of the results this quarter? Do we see this kind of being a fairly stable result? Or is there room for kind of further improvement as further price increases come through on the individual disability side? Thanks. Okay. Delfin? So on the question on reinvestments, as we have indicated in the past, we are gradually, but very prudently analyzing the different possibilities of doing some rerisking. That is, of course, linked to our overall total target capital discussions. And as we have mentioned in the past, the effect of increased interest margin will only be perceived later on in 2014. Okay. Thank you. Thank you. The next question is from Kiri Vijayaraj from Barclays. Please go ahead. Good morning, guys. Just a couple of questions on slide 15. If I exclude the various sales and transfers, I wonder what's the underlying picture in terms of your market share development in the Netherlands? And I guess more importantly looking forward out to 2014, what's your appetite to start regrowing your loan book there please? Okay. I think the market share in the Netherlands is relatively stable overall. So on the mortgage side, we tend to be up from last year and growing into it stable at around 15%, 16% currently. On the company side, on the lending side for our 2 companies, it is around 23% in total, 23.5% up from 22% last year. And on the savings side, if we take the total both consumers as well as corporates, so basically on the funding side of things, we have a market share of around 28.6%. And appetite to grow into it, I think that clearly we have a we are a large bank in this country. We have to service our clients, but we will be very cautious as to the risk that we take on the books visavis the current economic situation and as well as the outlook there. We do see positive signs of consumer confidence. We see the house prices basically bottoming. We see more volume coming back into that market, but we will we don't expect a we expect basically a modest recovery. And so we will play along with that modesty and see where we can initiate and support further growth, but cautiously. Okay. Thanks very much. Understood. Thank you. The next question is from Ashik Musaddi from JPMorgan. Please go ahead. Yes. Thanks a lot. A couple of questions. One on your cost savings for the banking. Can you give us some color around how much will be the cost saving on a look through basis, e. Net of pensions and restructuring cost? And is this restructuring cost just a one off? Or are there more restructuring costs to come in the underlying numbers in the future? That's the first one. 2nd, there's a lot of things going on, on real estate finance and structured finance portfolio on loan loss provisions. Can you give us some color on what's one off and what's recurring? I. E, it looks like on real estate finance, the one off is some releases whereas on structured finance is one off additions. So can you give us some color on that would be great? Thanks. Maybe first move to Patrick. Yes. In terms of costs, the approach is very similar to what we've had in the past. What we're aiming to do is make structural reductions in our cost base. But unfortunately, there are additional regulatory costs that are coming at us. So we're trying to make sure that at a minimum we keep our cost base flat, so absorbing these regulatory changes. What you see is that we have programs announced. And like we said before, we will do more. There is more we can do. And there is an additional charge of €56,000,000 that's shown in the slides for improvements that are above or at least half of which are above and beyond the programs we currently announced. So we are looking to do more than the programs we previously announced. Then on the loan loss provision in your recent state finance Wilfred? Yeah. You're right. There is lumpiness both in the releases that we're seeing in REF as well as in what we see in additions in structured finance. So comparing to earlier quarters, there always have been releases on the REV portfolio as well as growth additions. Difference is that this quarter we have probably around €30,000,000 more in terms of release than normally. And if you look at structured finance then I'd say we've got between 50,000,000 and 60 additional provision that is slightly more than we would normally expect. So if you correct for that lumpiness you get an idea of where this is and you'll see that we're roughly trending at the same levels as in the past quarters. Hello. Thanks. Thank you. The next question is from William Hawkins from ZBW. Please go ahead. Hello. It's William Hawkins still at KBW. Two questions please. The insurance investment margin the €175,000,000 that seems quite resilient on a quarterly sequential basis because you were about €190,000,000 in the second quarter and that included well over €50,000,000 of dividends. I appreciate there's the benefit from West Angie Tract Bank. But to the extent that sequentially that's still a good €20,000,000 or €30,000,000 increase on the second quarter. Is all of this just quarterly noise? Or is it the benefits of rising rates? Or to what extent should I say it's something sustainable rather than something just kind of volatile? And then secondly, I'm just interested to understand a little bit on your understanding of the outlook for the operating profits for the Japanese VA business after you've made these VA changes and also the emergence of capital? Any kind of guidance you can give on that? I appreciate the announcement today has only just come, but presumably you've already done a lot of work in the background on that. Thank you. Okay. Dauphin? Yes. Thank you, William. Two questions on the insurance investment margin. Indeed, there is the impact of the increased interest margin coming from the net interest margin coming from M and M Bank. Following today's announcement when we present the new segmentation for the next quarter that's going to be taking out. In addition to that, there is in comparison to the previous quarter of last year, there was a lower allocation to profit sharing with our policyholders. And in addition to that, of course, there is a gradual small improvement in terms of the amount of investment rebates to our customers as the guarantees in our pension funds gradually or slowly decrease. So that are the 3 elements that are impacting the interest margin this quarter. In relationship to your second question on operating profit, the outlook, I will not provide any view in terms of the outlook at this point, but I think that the slide in the presentation show that Japan Life business is providing a good sustainable and a strong operating result. And in addition to that, for the closed book VA, This is something that obviously as the book runs off will generate some capital releases. Okay. Thanks. Thank you. The next question is from Omar Fall from Jefferies. Please go ahead. Hi, good morning. You're remaining very cautious on the outlook for Dutch loan losses, which is certainly understandable. However, again, the macro trends in the last 2 months have shown a fairly sharp improvement across a pretty broad range of measures like the PMI increasing at a record, lower bankruptcies, more stable house prices, etcetera. So you're saying that despite that, you haven't seen any of that reflected in the rate of NPL adds or any other asset quality metrics since the end of Q3? That's the first question. Secondly, just a small one on the net interest margin please. What is the contribution of Financial Markets to the NIM? And would it be possible in the future just to get that number a bit more consistently as you used to do in the past? Thanks a lot. Okay. For the first question, we turn to Wilfred. Yes. So on economic developments in the Netherlands, it is indeed and Ralf has also highlighted that the case that we are seeing some early signs of a coming recovery. But if PMI index improvement doesn't directly translate into GDP, What we are seeing at this point is more a slowing down of the deterioration than a real improvement. So that's one observation. It's good news, but it doesn't translate at all into the NPL rates at this point. That's also because typically these movements come later in the cycle and certainly some of the bigger asset classes are late cycle anyway. So as we said before, we do note these potential improvements and we do expect them to gradually trickle through into the numbers. But again not until we're well into 2014. Understood. I guess I would have just been surprised not to see some improvement on the SME lending side given that that is a shorter duration book and much more geared to the immediate economic cycle. But I understand your caution. Yes. Well, maybe to specifically comment on that, what we are seeing is that at least in the SME books in the Netherlands, the NPL rates don't go up anymore, at least they didn't in this particular quarter, which may again be just quarterly noise if you like. Where we do see an uptick still in NPLs is in the mid corporate segment that is also part of business lending. And if you combine the 2, then we're still seeing an increase in both NPLs and risk cost. Understood. On the NIM, the impact of FM was 0. That's why we didn't give it, but we can look to include it going forward. Thank you. The next question is from Francesca Tondi from Morgan Stanley. Thanks very much for the presentation details so far. I'm following up on a couple of points. Looking at the net interest margin, if you could tell us a little bit more on the one hand, how do you see commercial margin trending especially in Benelux? But also how are you looking at your still large liquidity buffers? Are you looking at taking them down especially if you're looking at potentially other another rate cat or rates going into negative territory. If you could just discuss a little bit around that would be very helpful. And the second question is on asset quality. You've really given us a lot of details. So just a very a couple of points quickly. Do you see potential for further sales, especially real estate finance? I know you've done U. K. And U. S, still large portfolio. What about elsewhere in Europe? Do you feel comfortable with the valuation? And also looking at the AQR, how comfortable you are that the details we have so far, for example, on NPLs definition, how close are they to what you have in your NPLs? Thank you very much. Okay. Let me take the first question on the commercial margins. Well, basically in the part of Europe where we are active, there is clearly, we have sufficient liquidity buffers and we're ready to lend, but we don't see a lot of demand. On the corporate side, we see corporates moving into markets directly often through bond issues where we can support them we will do so. But given the fact that there is not a lot of demand and there is sufficient liquidity in the market, we you can expect a bit of pressure on margins from that perspective. Having said that, we have always managed our pricing in a very strict way. So we have our specific hurdles on the basis of which we price. And therefore, for the coming quarters, we expect the total net interest margin to stay around this level. Thank you. And then you still have relatively large liquidity buffers at the treasury level. You've taken somewhat them down. Do you have a further reduction to do? Or you are where you are hoping you were hoping to be? Maybe in terms of impact on interest margins, yes, we have a comfortable liquidity position. Yes, we're meeting the CRD requirements. Obviously, we look to try and optimize in that space as well. I mean, in terms of interest margin in the Benelux, it did improve notwithstanding the fact that we moved mortgages across to the NN as we were required to do, which obviously is a drag because you take the NN out. That was sort of compensated a bit by further reduction in interest the saving accounts in the Netherlands and Holland of 20 basis points. So in terms of margin, we managed to compensate in the Netherlands from the negative effect of the asset transfer and the weakish loan demand by reducing deposit levels. And yes, we'll try and we are looking to optimize in terms of our financing costs. We have a very strong loan deposit ratio. We've seen good inflow of retail funding, which puts us in a stronger position in terms of the outlook for future long term debt issuance needs. Yes. And then on that, how would you look at the federal reduction in interest rates by the ECB even just taking the ECB the rates into negative territorial rates what would you think of that? Obviously, we look at this in the round. We look at our position relative to our peers. We look at our position with respect to our customers. And you take a blended and rounded view of how the market is developing. I think one of the positive points is our deposit rates on average in Holland are still healthy. They're 150 basis points, 1.5%. So there's plenty of room there. Let's move to the questions on NPL. Eva? I think we're now at question number 7. I have noted 3 things that you wanted to talk about NPL definition AQR and valuations and real estate finance sales. Let me take it in that order. The NPL definition that's come out from EBA, obviously, we have noted. We struggle a bit with the fact that it doesn't completely gel with the Basel definitions, which doesn't make it easier. But in any case, this definition is substantially less conservative than our own. I can give you two examples. One is in our situation, we do not only take everything that is more than 90 days overdue, but also everything that has been over 90 days is on the way back to normal or even is normal. We don't take those out of the NPL bucket until they're 6 months performing. And secondly, the EBA definition in a situation where we lend to a group states that we need to take the whole group into NPL once we cross 20% of the total exposure being in default, whereas under our own metrics that is at the 1st euro of default of anything outstanding to the group. And just to give you an indication of what the differences roughly are, if you take our own NPL definition on the Dutch mortgages, we look at 1.8%. If you were to take the EBA definition, that would be more like 1.1%. Then you asked about valuations in AQR. There's obviously a number of things going on. There is a DNB AQR on commercial real estate here in the Netherlands. There's also the ECB AQR coming later in the year and into next year. Our view is that with regard in particular to commercial real estate finance, which I guess is the background to your question, What we have done over the past few years is 1st of all manage the book down substantially by about €10,000,000,000 from €36,000,000,000 to about €26,000,000,000 at the moment. Secondly, we have increased our risk weights quite substantially over that period from about 20% to currently about 53%. And against that smaller book, the stock of provisions has also gone up over that period. So on the whole, we feel fairly comfortable with the buffer of capital and provisions that we hold against this book and we don't expect any major issues there. And then on real estate finance sales, there's obviously a lot more activity in the markets in general than there was a year ago. We have taken advantage of that in the U. S. And in the U. K. To some extent. There's also a bit more activity in the markets closer to home, not yet at price levels that we and our clients find exciting. I would point out that we're not holding large portfolios of distressed real estate as owners here. Most of our clients are still performing. Most of the assets that we hold are still producing income. In fact, all of them are. So it's not something that we do without the consent of our clients and usually the initiative of our clients. But again, where we see opportunities and our clients want to benefit from those, we support them. Thank you, sir. The next question is from Michael Van Vagen from Bank of America Merrill Lynch. Please go ahead. Yeah. Hi, good morning. It's Mike Vagen, Bank of America Merrill Lynch. Two things. First of all, on your net interest income, can you indicate for the treasury unit, you saw a big negative impact in Q3. To what extent that recovers when you start to essentially use the funding that we've seen strong growth in Q3? And to what extent does the liability management give you a benefit going forward as well in your NII by having lower funding costs? So that's question number 1. Question number 2 is on the European or Euro Asia IPO. Now that you've announced that Japan will be part of this entity, I guess you've taken a big hurdle and the consultation on Solvency 1.5 is also out there. That to me suggests that you by now should probably have a fairly good idea of what this business will look like and where you want to get it to. So when can we expect an update on targets in terms of solvency, leverage ratios and I guess returns? Thank you. In terms of the outlook for treasury, a couple of answers to this one. And first is, this is something we probably do owe you an update on and for more granular analysis. And we're looking at it in the context of our current planning process. And we're aiming to give a more fuller analysis of this after we've completed that. So you're going to have to bear with us a bit. I think the full story in this we will or the projections of the future at least we will give you next quarter when we've completed our MTP process. In terms of your specific question, yes, the liability management exercise particularly the hybrid, the 8.5 percent to $1,000,000,000 hybrid coal is positive, although that's a relatively small part of the overall total. The deterioration quarter on quarter is more to do with one off effects. The treasury yields where we have or hold the cost of the Tier 2 debt that we've sorry the long term debt that we've issued as well. But the deterioration is more to do with one off effects lower mark to market gains and a lower positive and effectiveness result. But like I said, I think we will aim to give more color on this once we completed our planning ground. Thank you. And on the EuroAsia IPO sort of targets? Yes, Mikael. I think you're absolutely right. We have now clarity about the scope of the entity to be listed. We have clarity about the earnings potential and the actions that we're taking in order to manage expenses and manage the company going forward. Solvency 1.5 is more clear now. There is a proposal with that has been put forward in order for consultation. But we know what impact that will have. And as already mentioned by Ralf before, we will provide more clarity with the year end results or in Q1 next year. Thank you. Thank you. The next question is from Martin Liegeb from Goldman Sachs. Please go ahead. Yes, good morning. My two questions are as follows. The first one is, I realized you guys had a quite a significant step up in mortgage production in Retail Germany coming after 2 quarters of relatively slow production. I was just wondering whether you could provide a bit of color to that. How did you grow achieve this growth? And what kind of figure or size do we need to think as a run rate going forward? This is particularly in context that previously had very strong deposit growth in Germany, which was not matched by a strong pickup on the mortgage growth there. And so I'm just trying to see where that is going forward. And the second question is really just to confirm for the European Commission restructuring. Does the announcement today with regards to Chetan, does that change anything with regards to the time line on price leadership plan, on acquisition ban and on with regards to calling hybrids? Or do the deadlines there on November 14 November 15, respectively, remain in place as they are? Thank you. Yes. On the German mortgages, yes, we did see a bit of an uptick this quarter I think by about €1,000,000,000 or so. At the moment, the demand in Germany is frankly more driving our production than anything else. The capacity to do more is there. But obviously, we want to grow this book in a sensible and very risk aware way. If you look at our plans longer term for the book then what is very important to us is that we build a balance sheet that is in more than one respect balanced and that we differentiate also into more asset categories than just mortgages. So we are looking at a more broader based franchise in Germany over the long run. Therefore, mortgage production will continue to be important, but it's not going to be the only driver of balance sheet growth. The deal that we have now on basically moving the deadline from 2018 to 2016 does not change anything on the other aspects as you mentioned if it comes to M and A ban and price leadership ban. Okay. Thank you very much. Thank you. The next question is from Anton Kreychok from UBS. Please go ahead. Good morning. Thank you for taking the questions. Two questions on bank balance sheet, please. Firstly, on capital. You had a very nice capital build in this quarter, up 60 basis points. In that context, I was wondering whether you have heard from your local regulator on the targeted Basel III fully loaded core Tier 1 ratios that you will be required to have going forward? And if this strong capital generation continues, would you look at an earlier repayment of state aid? And the second question is on the balance sheet size of ING Bank. Obviously, apart from meeting the demand from your key markets in terms of lending, What else can you do to actually start growing the total size of the balance sheet of NG Bank to support the NII? Thank you. Yeah. In terms of the ratio we've said for some time that our target is 10%. The regulator is not going to I think publish his views. I think you can see from what we've done in terms of paying dividends. We paid dividends beginning of the year. We just paid 1 now. And obviously that requires regulatory approval. So I think there's an implicit message in there on how the regulator views us. So we stick to our stance that we as Ralph mentioned in the presentation that we're looking to be at around 10% all 3 fully loaded. We meet that today. In terms of balance sheet size and growth, yes, we did give a target for 2015, which would imply a significantly higher balance sheet than we currently have today. But that's remember that was in the context of leading to achieving an ROE of 10% to 13%. We're currently just below 10%. I think one thing was certain that certainly in my mind that A, we would reach it, but B, it would not be the way we originally planned 2 years ago. So we'll have to compensate. We're currently seeing limited loan demand. There's excess cash in the market at the moment. So we do have some growth, but it's moderate and a pickup in the global growth would help. But we're still delivering just under 10% notwithstanding that tough environment and with loan losses significantly elevated. So we're going to focus on NIM and a very stringent focus on costs and we will aim to achieve our target ROE. Thank you. Sorry, just as a follow-up on capital. If the capital generation in the next few quarters surprises positively on the back of RWA contraction, let's say. Would you look at accelerating the repayments to the Dutch state? Or is it something that you haven't thought about yet? Yes. We have 2 more payments to make. There's a schedule which we set out because the cash flow is fixed. We don't get a discount for paying early. So we have to balance acceleration costs more. And we're looking at obviously, we want to get the state out repaid as quickly as possible, but we have to balance the accelerated costs with that. And we have to balance the potential uncertainties that are coming next year with the AQR for example and seeing how the economy evolves. I'd like to look at it after we repay the next tranche and see what the world is like. We have an ambition to exit state aid as fast as is possible, but we will only do that in the context of maintaining strong capital ratios. Understood. Thank you. Thank you. The next question is from Benoit Petrarque from Kepler. Please go ahead. Hi, yes. Good morning all. Couple of questions. First of all, on the Benelux Insurance operating earnings, just to come back on the question of the kind of why not just to check the improvement year on year. As you've mentioned lower profit sharing assumptions and lower interest rate rebates. Could you quantify that please for the Q3? And linked to that, could you also update us on the kind of operating cash flows you've generated from your Eurasia businesses and the split per subsidiaries will be useful obviously? Obviously, this is a key question and you're not talking about cash here. Just wondering if you could clarify that. Then could you talk a bit on solvency for national Netherlands? It's 183%. First of all, could you give us the sensitivity to higher or lower interest rates given it has been moving again this quarter? And also could you update us on Solvency 1 point 5? What is the kind of likely outcome for the Dutch Life business there? And just quickly on Japan operating earnings, what will that be for the closed block roughly? Thanks. Dolphin? Okay. A lot of questions. I'm going to ask Doug to help me with the impact on interest rates and I will try to cover all the remaining. So starting with the operating cash flows generated by the different business, I'll start with this one because it's the shortest answer that we'll start providing some information about this once we start reporting with our new segmentation. I think that during the quarter, the main impact on our cash flows understood as cash capital have been mainly the change in the discount rate in for our business in NN Life to the move to swap. And that has been the main drag in terms of capital that compensate some of the generation of capital coming from the different units, investment management, Europe and certainly Japan. If we look at the impact on the Benelux for the operating results in terms of the profit sharing and rebates together will be approximately €16,000,000 If looking at the update on Solvency 1.5, as I mentioned before, there is a proposal that has been put forward for consultation. Still the intention is to have it implemented as of 1st January 2014. Just to make clear, the Solvency 1.5 does not change the base of our Solvency capital, the so called Solvency 1. It just established another threshold for the Dutch regulator to determine or have more limitation on the possibility of distributing dividends. At this stage and subject to the results, I can basically tell you that the impact of this Solvency 1.5 is not limiting our capacity to distribute dividends. In relationship to Japan earnings for the VA. I'll try to find an answer for that, while I allow my colleague, Doug, to reply on the interest sensitive to interest rates. Sure. On the in Life, we effectively try to match fairly closely on an economic basis. As you know, there's a UFR in the Dutch curve requirements, this ultimate forward rate. What that basically means is that we're modestly impacted by rising rates. So in a rising rate environment, we lose a little bit of solvency. In a falling rate environment, we gain a little bit, but it's fairly modest. And on an economic basis, we stay quite reasonably protected for up or down rates. In respect of Japan, the effects of what we're doing in moving to mark to market can be summarized in 3 main things. 1, currently 75% of the book is mark to market and the quarter of it isn't it follows SOP-three. So you can get counterintuitive results because we do hedge on a full economic capital basis and you get catch up P and L effects from the SOP-three reserves movement. We're going to take that out because we're going to move the full P and L to mark to market. So that should make the results more intuitive. Also there is DAC hung up on that balance sheet that at some point would have to be written off and amortized. We're taking that upfront. So that will be gone. So that overhang will not be there anymore. Also we will move the reserve adequacy to a very comfortable position, so there will be no more questions regarding reserve adequacy. But it takes out 3 of the factors that can lead to volatility but it takes out 3 of the factors that can lead to volatility in results. It will also mean that and I really want to emphasize this that our Japan VA business, I think, almost uniquely is managed on an economic capital basis, on a market consistent economic capital basis. It's hedged on the same. It's capitalized on that basis. We have €900,000,000 of capital there which is comfortably in excess of the economic capital requirement. And we will in addition then move the accounting to full mark to market. And more transparent than that I don't think you can get. Thank you. Thank you. The next question is from David Lock from Deutsche Bank. Please go ahead. Hi, everyone. I'll be well behaved and just ask 2. First one on cost reductions, just circling back on an earlier question. I wonder if you could give a little bit more color on how costs future cost reductions could come through. Ralph, I know in the past you've mentioned that branch footfall has fallen significantly. Just wondered how long we could expect perhaps some of the fixed costs of the branch businesses in Europe to come out? And on the second question is more around capital again. I mean how do you expect your regulator I mean, I know there's been a question previously on how the regulatory level will kind of turn out. But if we compare where we are today versus where you were when you set that 10% level, it's clear that the European environment is a lot harsher in terms of capital requirements. How do you expect that to evolve over the next year please if you could give any color? Okay. I'll take the first one because this is specifically related then to one of the business models that we have, which is the branch model. Clearly, we see that customer trends are to do more and more direct and more and more themselves. We're a leader in Internet Banking. We're a leader in mobile banking. And therefore, you see that a lot of the actual transactions being done, they move to the portal environment and they move outside of the branch. And that is basically what decreases the traffic to branches in general. Clearly, and that has been the underlying factor for some of the restructuring programs that we have. As a consequence of that, we do decrease the number of branches. But we have to do that in those areas in a very well planned way because we also still have a lot of customers who like that. So basically you do that in a phased approach and you adapt towards the basically the adaptation rate of the consumers taking more products and doing more transactions through mobile and Internet. But advice will still be an important role will still be important in our model going forward. So basically, what you can expect is that the plans that are out there right now, we continue to implement them as we speak. Clearly, if there is signals that the adoption of direct channels is even further accelerating and as a consequence of which the footprint of branches could decrease. And now I'm talking about the Benelux more than anywhere else. Clearly, we would. On the other side, we also see countries and more emerging countries where in order to make a to complete our business model going forward, We would even consider opening some branches, for example, in Turkey. So but the one that you asked for is we will play it by ear. We will we check on customer behavior and clearly we move in line with that. On the second one, I'll give the word to Patrick. Yes. And in terms of capital, I think we think that 10% is a good number, particularly 10% fully loaded. I think we look well relative to peers in that outlook. The other thing you need to realize is that we operate a Baldrige advanced model. So the ground on which that is based is moving. And in a downturn environment, a weak economic environment, RWAs are going up. So as we constantly update our models for the current economic data, it generally leads to increasing RWA requirements. So we're maintaining a 10% RWA target on the back of a stronger RWA. Our mortgage RWAs have gone up. Our real estate finance RWAs have gone up significantly as they should do and as the Basel III models would expect you to do. So in that context, I think it's 1% still a good number. Just to be clear, is the model change that you referenced there on terms of Basel III, is that completely separate from the other model refinement that you referenced on page 22 of your quarterly report? Well, I wouldn't call it model changes. This is regular model updates. We do this all the time. That's what Bald 3 requires. And we regularly update the models for around economic data. And that has led to significant increase in RWA requirements for real estate finance over the years and modest increases for mortgages as well. This is just normal practice. BAL3 is operating as it should. Thank you. Thank you. The next is from Anke Rejian from Royal Bank of Canada. Please go ahead. Yeah. Thank you very much. Two questions, please. The first is on net interest income and the absolute level. Should we consider Q3 as sort of a trough? Or would you believe that the absolute level would continue to come down as you continue to deleverage despite a relatively good net interest margins? And the second is on costs. You mentioned before that best case costs would stay flat. Is that post the additional steps you mentioned for which you took the €59,000,000 restructuring charge? And also does the restructuring charge mean that your cost savings target of €840,000,000 effectively has gone up? Thank you very much. On cost savings, the €40,000,000 target remains. The additional provision of €56,000,000 approximately half of that will give incremental additional savings about €15,000,000 So it's not huge. But the point is we are aiming to do more and this isn't the end of it. And remind me what was your first question? It was just the absolute level of net interest income. Yes. We have a strong capital ratio. We're open for business. We have capacity to lend. We're looking to grow as Wilfred said in selected areas. And continuing to grow at the healthy margins we currently have gives us capacity to grow absolute level of interest margin. So Q3 could be a trough level in absolute terms? Well, if you look at the overall net interest margin Q3 versus Q2, I think there it's the same number effectively. Okay. Thanks. Thank you. The next question comes from Francois Boussaint from BNP Paribas. Please go ahead. Yes. Good morning. Actually, my question relates to Japan. I just wondered if you could give a bit more detail about how or let's say why a separate sale was not the business in the coming quarters? Or do you plan to manage this in runoff? And in particular, I'd like to understand what the risks are to the emergence of capital going forward within the back book? I mean is this equity risk how is this managed? And in what scenario would capital emergence be significantly different to what you expect? Thank you. First of all, I have to say I'm very pleased that we have included Japan, COLI and VA in the European IPO. I think this is an excellent outcome for shareholders. Why? Because it brings 2 businesses with combined capital of over €2,000,000,000 post the accounting changes into the IPO. It brings a COLI business with over €200,000,000 of operating profit and extremely well capitalized as you can see in the deck into the IPO. And it also brings a VA block, which is very conservatively managed. As I mentioned earlier, it's hedged and managed from a capital perspective on a market consistent basis, I think again almost uniquely. So with a surplus of capital over the required economic capital today. We hedge all the main risks interest rate equity and FX. We also have some Vega and gamma hedging, but a moderate amount. The customer behavior has been very stable. We have updated that 3 years ago and have not needed to make any material changes to that. Significantly, the block 80% of the block runs off its accumulation benefit will run off. There's no extension risk. It simply runs off. That happens by about 2019. It's gone. The remaining part which is death benefit has limited the risks in terms of customer extension, but we think quite small in terms of the capital impact. So €900,000,000 capital should emerge over time. The risks primarily are to gamma. If you have major shocks as we saw a bit in Q2 you can get some dislocation. I think that's the major outstanding risk. The other ones are pretty well hedged. Okay. And it sounds like it's a nice asset. So any why couldn't you find any buyer for that? I mean the issue there a bit was we had buyers with 2 different parts. We have a COLI business and a VA business in the same legal entity and part of it reinsured to another legal entity. So the complexity of the legal entity structure inhibited the conclusion of the sale. Thank you very much. Thank you. The next question is from David Andrick from Morgan Stanley. Please go ahead. Hi, good morning. Sorry, I just really didn't have my second question answered. So I just wanted to follow-up on it. In terms of the Non Life business in the Benelux region, particularly in the Netherlands, I'm just wondering if we should think of this result this quarter as kind of a fairly stable result or if we could expect further improvement coming through from price increases and underwriting, particularly on the individual disability side? And just a quick question on the kind of the capital restructuring. What's the can you quantify kind of what the potential improvements is in terms of cost of capital coming from that? Thank you. Okay. Dolphin, non life, gentlemen? Yes. On non life in the 3rd quarter, the operating result was €24,000,000 That was €18,000,000 better than in the same quarter last year. And this was mainly due to the improvement in the disability and accident business. Also, business. Also the Property and Casualty business compared with the same period of last year, it stayed more or less flat. So this the improvement in the results are due to the recovery plan that was already discussed and commented upon in the last quarter on the group income protection. There were many management actions taken there. There was also more favorable claims experience in the illness protection business and better results also for individual disability and that was offset partially by lower results from personal accident and travel. So overall, I think your question is in terms of the if the improvements in non life are sustainable and we do believe so. Of course, maybe for this the Q4, there's been some strong storms in the Netherlands and that might have an impact, as you know, seasonally on the quarter. But overall, the improvements, particularly in D and A, are going through. And sorry, just to follow-up on that, but the rate increases are still coming through. I think there's probably still an ongoing process there. Yes. There has been a repricing in D and A and that has been done. And normally the majority of our business has a 1 year duration. We tend to wait for renewals in order to do these price increases and this has already been happening as we move along. So part of the significant part of the recovery in the claims ratio is both in improvements in claims handling, but also in pricing increases. Okay. Thank you. Thank you. And the final question today is from Jan Willem Noll from ABN AMRO. Please go ahead. Yes. Good morning, gentlemen. One last question from my side. It seems that your tone on lending margins has changed a bit vis a vis previous quarters and a bit to the negative side I would say. Can you shed a bit more light on where you expect where you see currently most pressure on lending margins? And what is the outlook there? Thank you. I don't think we intended to give it a change in tone on lending margins. We maintain pricing discipline on lending. That's been a constant theme and remains so. I think what we're saying is that with a lot of liquidity in the market that the ability to grow significantly is being constrained. So it's more about the ability to grow volume whilst maintaining these margins is where the headwind is a bit. Fair enough. I refer to slide 14 where you say lending margin was slightly down due to low demand and for credit and increased competition. And low demand for credit point taken. The thing is I would I'm interested in the increased competition. I mean, why do you see increased competition in which segments in which business lines? That would be helpful. Thanks. I think this is and we're trying to read too much into very small changes. Our lending margin is up significantly in the previous year and down slightly in the previous quarter. So the message is we continue to believe or look to sustain healthy margins consistent with generating a 10% return on equity on new business. And the headwind a bit is more is in volume. Okay. So lending margins are expected to remain stable going forward? Overall interest margin we are aiming to keep it stable going forward. Okay. Thank you. Okay. I think that with that as the last question, we can round off this call. Thank you for the interest that you take in having this session with us and all the questions that you have raised. Clearly, if there's more questions, our team is available the whole day in the coming period as well to further explain. I think to summarize today and the announcements today, the first one, we've made a lot of progress in such a way with getting the IABF out of the way as well as getting a clear decision on Japan. Basically, we know the future restructuring is still to be done. And there's much more clarity there and we have made a lot of progress there. So that's good. And then the second core message here is that we have strong underlying businesses both on the bank and the insurance both doing very well underlying performance and both being well capitalized. So with that, thanks very much. I wish you a good day. Thank you, sir. Thank you, ladies and gentlemen. This does conclude today's presentation. Thank you for