Earnings Call: Q2 2013

Aug 7, 2013

Good morning. This is Yvonne welcoming you to ING's Q2 2013 Conference Call. Before handing this conference call over to Jan Holmen, 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 of our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in our forward looking statement. A discussion of factors that may cause actual results to differ from those in the 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, Yan. Over to you. Okay. Good morning, everyone, and welcome to the ING conference call for the Q2. With me here, Patrick Flynn, our CFO and Wilfred Nagel, our Chief Risk Officer Also here, Delfin Rueda and Caldwell from our insurance activities, Delfin, the CFO, Doug, the CRO, in case there are some specific questions. Let me quickly go to the presentation and go to Slide number 2. You see that we have made steady progress on our restructuring. U. S. IPO successfully launched double leverage reduced significantly to SEK4.4 billion and the relevant parts of the National Dutreib Bank we have transferred to National Nederlander and that way making them ready when the IPO for Europe is done to be divested. ING Group, underlying net profit of 942,000,000 dollars driven by good performance in all three segments. The bank reported another strong quarter pre tax result of 1,000,000,000 euros 47,000,000 supported by an improvement in our net income or net interest margin 242 basis points and good cost control. Operating results in Insurance Eurasia, substantial improvement supported by expense reductions that you can see here that the transformation process that we have announced last year is really beginning to bear fruit. Also our Non Life business had good results. Insurance U. S, solid performance, again, driven by higher fees and premium based revenues and reflecting the inflow from retirement and the I'm business. Slide number 3, you see that reflected one more time. On the left side, you see the restructuring activities that we completed. And on the right side, you see the program that we have to pay back the Dutch state and another payment coming due in November and then quickly thereafter 1 on March. And we are still very active in making sure that our IPO for Europe can be done next year together with the sale process of ING Life Korea and Japan. Slide number 4, you see the group double leverage has been reduced to 4,400,000,000. Dollars We if you take our stake in the U. S. And you take our stake in South America, they're basically a market value sufficient to cover the outstanding double leverage. And that gives us flexibility to deal with the IPO for the European unit, should we have in mind different type of alternatives. Slide number 5, you see here that the we have decided to transfer ING U. S. Out of ING Insurance. It will go to the group, the group holding company. And that's why we clear the way to use ING Insurance as the IPO vehicle for the Eurasian Insurance business and also allowing for a very clean and easy separation between bank and insurance company. The transfer of the U. S. Will be done as a dividend upstream to the group and we plan to do that before the end of this year. It will not have an impact on ING Group Capital and future proceeds from the sale of our remaining stakes in ING U. S. And SoulAmerica will be used to redeem the double leverage at the ING Group. We are planning to provide an update on the preparation for the IPO of the Insurance Eurasia activities on September 19. We probably will hold that in London. It's a way to introduce our management team and to show what the plans are at a fairly high level. So you probably will get an invitation from our IR organization for that meeting. Slide number 6, insurance debt is further reduced. You see the pro form a consolidated balance sheet of ING Insurance without the U. S. And then you see that ING Insurance has a debt of $4,700,000,000 at the end of Q2. That will be reduced to $4,300,000,000 when we use the proceeds of activities that are on sales, China Merchant Funds, ING Bank of Beijing Life Business, the Korean Investment Management Business and also the full redemption of intercompany debt from the U. S. And then the sale process for ING Life Korea, Japan and the rest of ING Management in Asia are ongoing and also the proceeds here can be used to further reduce the debt. Target capital and leverage ratios for the to be IPO ed company are under discussion and will be announced in due course when we have more visibility, in particular on the capital regime that will be available here in Europe. Slide 7, you see here that we have transferred the completed the merger of the commercial operations of Westland Peteribank with National Nederlanden that was done on July 1 and that will pave the way to divest these operations as part of the insurance European IPO. We transferred SEK3.9 billion of mortgages, SEK3.7 billion of retail savings to National Debt on the Bank. And in addition, the group provided the capital injection of $300,000,000 for which the bank has made a dividend to the group. On Slide 8, you see the strong capital position that the bank has despite the dividends that we paid to the group. The ratio declined from $12,300,000,000 at the core Tier 1 to $11,800,000,000 following the $1,800,000,000 dividend to the group. €1,500,000,000 was used to reduce the double leverage and €0,300,000,000 was used to provide capital to National Debt on the Bank on July 1. The pro form a COD4 core T1 ratio at implementation date is 10.7. And if we look at it on a fully loaded basis, it is 10.2, still exceeding the ambition we have for 2015 of at least to have 10% core Tier 1 ratio. Well, let's look at the ambition we had for 2015, Slide number 9. We basically have achieved most of what we said to be done, certainly on the balance sheet. We have increased the leverage ratio, strengthened the funding profile and we are meeting our Basel III targets at this point. The costincome ratio in the first half was 54.7 percent and we're moving towards the target of 50% to 53% in the quarter we had 54.3 percent. So based on ongoing cost saving programs that are on track to reduce the annual expense by about $800,000,000 by 2015, ING Bank will further optimize its cost structure and therefore additional cost savings are being investigated. Slide 10, you see that we are on track to reach our 10 to 13% ROE target for 2015. That's the ambition. The ROE in the first half was 9.3 percent and the absence of CVADVA and a normalization of risk cost would lift the ROE above the 10%. And then of course we have further repricing and we have the ability to grow our balance sheet a little bit more. We have room for that. So that the range of 10% to 13% is comfortably, I would say, with Envision. Now looking at the results of Q2, I go rather quick. You see the group result, net result underlying at $942,000,000 and good performance by all contributing units, both the bank, the Insurance U. S. And Insurance Europe. The bank on Slide 13, another strong quarter, supported by an increase in the net interest margin, 242 basis points and also again cost savings are bearing fruit here as well. Risk costs remain elevated and that is reflecting the weak economic environment we see continue to see in Europe. Net interest margin improved 1.42 driven mainly by higher results, while the average balance sheet remained more or less stable for the Q2. Savings margins were better and that offsets the low interest environment that we have seen some time. Lending margins were up from Q2 2012 and that reflects the repricing and the very, very diligent pricing that I think we have always tried to do and the margin was stable compared to Q1. We expect that the NIM will continue to remain around these levels in the coming quarters. Cost reductions, Slide number 15. We have, I think, reduced our cost significantly despite the fact that we had higher pension expense. You may remember that we had an increase a lowering of the discount rate that had an impact on our pension expense, but we have fully offset that by the cost savings we have initiated. Expenses were down compared to Q1. Cost income ratio at 54.3 percent and I think our employment was down by about 4%. As I said, cost savings are on track. You see here our plans for the bank, both the retail bank in the Netherlands and Belgium as well as the commercial bank. Total plan is €800,000,000 by 2015, already realized €280,000,000 dollars So 560,000,000 still to be achieved. And also we are looking at further optimizing our overhead expense and that reflects the fact that we have reduced in a number of areas the size of the bank. More to come, I would say, of that in the next quarters. Risk costs elevated in the second quarter and reflecting the weak macroeconomic environment. Cost increased by €55,000,000 to €616,000,000 dollars Additional provisioning for a restructured CMBS and higher risk cost in general lending and in our transaction services, which rose from a very low level of €5,000,000 in Q1. Risk costs for Dutch mortgages and real estate finance were flat compared to Q1, while risk costs for business lending in the Netherlands were down. We expect that risk costs will stay elevated in line with the weak economic environment we still see. Slide 18, you see the NPL, slight increase to 2.8% compared to 2.6% in Q1, largely due to one particular file and real estate finance file in Spain that was subsequently sold in July of 2013. On a pro form a basis, the NPL increased modestly to 2.7%. Lower credit outstandings, slightly higher NPLs, if you compare that with Q1 2013 and the NPLs for business lending in the Netherlands for real estate finance and lease runoff remained relatively high in this quarter as well. Mortgages, a slight increase, but remained modest at 1.6%. Over time, when you look at our provisions and you compare them with the write offs, you see that we are fairly conservative in our taking provisions. Net additions, the loan loss provisions have structurally outweighed the write offs, resulting in a higher stock of provisions. Coverage ratio was 36.4%. Please note that it is very difficult to compare NPL ratios between banks because of differences in business model and provisioning and the write off policies, but also definitions. Our coverage ratio reflect the fact that our loan book is well collateralized. Approximately 80% of the total loan portfolio is asset based, such as mortgages, real estate finance, lease and structured finance. Risk costs in the Netherlands business business lending in the Netherlands were down compared to Q1. But given the weak economic environment, risk costs are expected to remain elevated at around the levels we have seen in recent quarters. Risk cost in real estate finance, relatively stable compared with the last few quarters at about $112,000,000 dollars are expected to remain also at these levels for the coming quarters. The ratio rose to 10.4 percent. I already mentioned that was mainly due to one Spanish file that we subsequently sold in Q3 July. On a pro form a basis, the NPL for real estate finance is 8.8%. And for the Netherlands, real estate finance NPL ratio slightly rose to 6.6%. Dutch mortgages. Risk costs remained stable at 81,000,000 euros The ratio increased marginally to 1.6%. We are classifying non performance if you are 90 days in arrears and only returns to performing after complete repayment of the total overdue. The more commonly used percentage of just 90 plus days arrears, if we calculate that, then it remains stable at a relatively low 0.9%. But given the weak housing market and the broader Dutch economy, loan loss provisions on the mortgage portfolio are expected to remain at around this level for the coming quarters. Next Slide 23, you see the loan to values. House prices have declined by about 18% since the peak in June 2008, leading to an average loan to value of about 91%. Loan to values do not include additional collateral that we build via savings or investment or life insurance mortgages. So while around 52% of our portfolio is interest only, most of these are not pure interest only mortgages in that sense that they are combined with other types of mortgages. Therefore, 80% of mortgages are accumulating additional covers for at least partial payments. As far as the 20% pure interest only mortgages is concerned, the percentage of mortgages with an LTV above 100 is relatively small. And furthermore, people do have savings that are not attached to the mortgage. Let's move to the insurance company. Results from Eurasia improved significantly compared to last year and also the Q1 this year. Operating result up 26% compared to a year ago, clearly reflecting the expense reductions from the transformation program that we announced last year, an improvement in our Non Life business as well as lower funding expense. Compared to the previous quarter, operating result more than tripled, supported by the same factors as I mentioned earlier, as well as a seasonally higher dividend income always in the Q2. In the Netherlands, in particular, we get these dividend payments coming in. Slide 26, you see that the income was flat compared to Q2 last year, but up strongly as you compare that with the Q1 this year, mainly driven by investment margin that was impacted by seasonally higher dividends. Good news also on the expense side on Slide 27. Expenses declined by 3.1% compared to last year and 5.4% if you compare that with this year, Q1. And you clearly see here the impact of the transformation program and good cost control all over Europe. We will continue to optimize our cost structure further and additional cost savings also here are being investigated. And then quickly to the U. S. Ongoing Insurance and Investment Management business, we call it a strong second quarter. We saw improved operating results and we saw continued strength in net flows. Underlying results from the closed block continue to reflect market volatility as hedges are focused on protecting our regulatory and rating agency capital rather than mitigating the earnings volatility we see in our IFRS statements. So all in all, I think we have seen good progress on our restructuring and IPO successfully done for the U. S. Operations, double leverage, strongly reduced ratios for the bank, all already Basel III effective. ING Group, an underlying profit of 9 $42,000,000 good performance by all three segments. And with that, I think we can open it up for questions now. Thank you. In the interest of time, we kindly ask that each analyst to limit your number of questions to The first question is from Farooq Hanif from Citigroup. Please go ahead. Good morning, everybody. Thank you for taking my question. Just two quite simple questions on the Japanese insurances. Firstly, could you just update us on what the drivers are of the accounting related hedging results in Japanese business, so equities, for example, interest rate levels, just sensitivities around that? And secondly, could you give us the Japanese GAAP book value for the insurance operations in the Q2? Thank you. Yes. The loss in Japan follows our process of hedging, but is a closed book. We aim to hedge the full economic risk. Hedges are primarily based on the primary metrics of interest rates, equities and FX. The results of the hedges are mark to market through P and L and the rising equity markets gave an increase in underlying funds. The reserves on the guaranteed block, which will make up approximately 20% are not mark to market. So 80% of the reserves are mark to market, 20% is not. Hence, we have an asymmetric accounting position where we have 100% of the hedges mark to market, but only 80% of the reserves. The impact of this loss does help improve the reserve inadequacy. That was a net in Japan of €300,000,000 that's down to €100,000,000 now. That's a positive. Approximately €80,000,000 of the loss is unrealized and reflects implied volatility and basis risk, and this could reverse in coming quarters. The Valkusti number again. The book value that we know now? €400,000,000 Could you possibly just repeat the reserve adequacy number that you gave for Jack? Yes. The net reserve adequacy number in Japan, which is the combination of the positive on the COLI and the negative on VA, improved from a negative $300,000,000 to a negative $100,000,000 So it's close to breakeven. The next question is from Michael Van Vigen from Bank of America. It's Mike Vigen, Bank of America Merrill Lynch. Two questions. First one is on the interesting disclosure that you provide on your Dutch mortgage portfolio. And you show that for the pure interest only, only 11% of the book has an LTV above 100%. Now if I were to guess for your entire mortgage book in line with the market, I would expect that to be above 30%. So I was just wondering which part of the buckets then has a above average, if you like, percentage of LTVs above 100%. And if that is in the bucket with savings, investment and life insurance mortgages. Could you perhaps indicate how that LTV compares with the assets that are built up against it? So how the net position looks like? So that's question number 1. Question number 2 is on the Investor Day that you talked about, the 19th September, you talk about the discussion will be high level. Is it fair to expect you will provide us with an update at that stage of capital requirements for the European or Eurasia Insurance Business, leverage targets and financial targets in terms of earnings and returns? Or is that too early to expect? Thank you. Bert, you answer the first. Yes. Thanks, Jan. In simple answer to your first question, are you sure about the 11%? Yes, we are. The overall book is about 35%, over 100% loan to value. What is important to keep in mind here is that you're not talking about clients, you're talking about loan parts, so to speak. The average client in our mortgage book has 2.34 loan parts. So if you look at the 20% interest only, that is a group of people who truly only have an interest only loan, but the rest are mixes. So it becomes very difficult to answer the other part of your question, which is where exactly does it sit, because you can't identify simply individual clients. It's all related to these loan parts. Dealing with the what type of meeting will there be in September, A fairly high level, what we would like to do is introduce you to the team, the management team. It's a new team. You haven't really met them. We like to give you what the plan is and how we want to secure the plan to be ready for an IPO next year. And of course, we will disclose whatever we can disclose at that point in time. But this is a process. And I think progressively, we will disclose more as the knowledge, for instance, over what will happen with capital requirements in Europe, then that becomes more clear. But the intention is to be as open as we can, to be as forthcoming as we can and to help you understanding the business we have and what the plan is to bring it to market. Perfect. Thank you. If I may follow-up on the first question perhaps, is it fair to assume, Wilfred, that the biggest chunk of the mortgages with an LTV above 100% sits in the either the hybrid form or in the savings investment and life insurance mortgages? Or is that not necessarily fair to assume? Well, it is actually spread across a whole number of products and product types. There's not a specific category that really has a lot more than the average above 100%. It's just a mix of all the remaining types of products in the book that you find pretty much as often above 100% as below. Thank you. The next question is from Asik Musaddi from JPMorgan. Please go ahead. Yes. Hi. Thanks for taking my question. Three questions I have. First is like NPA, you mentioned in one of the charts, figure number, Slide number 23, that the house price seems to be reached this trough. So can you just elaborate on that and give us some indication on what you are saying as a company rather than the source NVM, so adjust to your expectations? And does this mean that the NPLs will stabilize for residential mortgage? Second thing, can you give us some color about Japanese insurance following it to Farooq's question? Can you give us some color around the capital? So you have $400,000,000 local GAAP book value for Japanese insurance. And is the ING Re capital over and above that capital? Because if I remember correctly, you put in 600,000,000 capital in INGRE, which is covering Japan in Q1. And INGRE now has 1,600,000,000 capital. So how should we think about Japanese capital? Is it local book value plus ING or is it just local good book value? So some thoughts around that. And third will be, is it possible for you to speed up the U. S. IPO process, I. E. Can you break is it possible to break the lockup, which ends at 20th October? Thank you. To start with the first part of the question about the house prices and what we expect, indeed we're referring to the fact that the NVM have made some positive noise about the most recent development. I think it's too early to really call a trend here. I mean, obviously, a slower drop is good news. The big question is whether that will continue or not. And I think, as I said, it's too early to really come to a conclusion there. We're not very much more optimistic or pessimistic than we were 2 months ago on that front. As to your question on the expectations around the REAs and NPLs, Obviously, those are not directly related to the house prices, more to the GDP developments. And again, we're still expecting overall for 2013 a drop of about 1.4% or so in Dutch GDP. So as an indicator of what's to be expected, we expect to see the trend as we have seen over the past few quarters for now to continue. So what we do see is a slight drop in arrears in the last quarter, which again is good news, but it's a bit too early to really call a trend there. And as we said, the NPLs have actually gone up like they did last quarter, which then led to, as we also said last quarter, if the pace of deterioration in house prices and the NPLs continues at the same speed, then you will see similar additions to the provisions, which is indeed what you saw in Q2. In respect to Japan, I think the question was about the local GAAP results, which is what the number quarter reflects to. If you look at it on a holistic basis, we reinsure the VA risks from our Japanese entity to reinsurance entity here in Europe. And you're correct, there is €1,600,000,000 of capital there. So the aggregate is a sum of both. Okay. With respect to the U. S. IPO, we have a look up until October 26. And of course, anytime you have a break, you need to discuss that with the underwriters and they will have to give permission. But we cannot make any comments on that one. We're very happy with the IPO by the way and the way that it has developed over time. It's also reflecting, I think, the improvements we have made in the insurance company in the U. S. And we are very happy with the stability of the base that we have created. This is really a strong shareholder base that we have and we're very happy with that. Thank you. The next question is from Martin Leithead from Goldman Sachs. Please go ahead. Yes, good morning. My two questions are as follows. The first one is with regarding the net interest margin in the 2nd quarter. Could you provide a number of what would be the net interest margin excluding the financial markets impact? I think historically you provided that number and I think the financial market impact was never as far as I can see, if you could just provide the number what it was. And the second question is with regards to the bank. What sensitivity does the bank have with regards to higher interest rates, both in terms of net interest income and also impact on book value and capital. In Italy, I would like to, if possible, to know how long would it take for higher net interest income to compensate for increase in lower evaluations on the capital side. In terms of Financial Markets, it was 3 bps Financial Markets was negative 3 bps in the overall 4 bps increase. So basically, the clean number would be 145, then if I understand you right? I mean the aggregate went up 4 basis points. There are offsets. So I think the 4 basis points quoted is probably the right number. Okay. The bank sensitivity, I think we need to I don't have the details here on hand. I think you need to go back to our Investor Relations and they can provide you the answer to that one. Okay. Thank you. Thank you. The next question is from William Hawkins from KBW. Please go ahead. Hello. Thank you very much. I'm interested in the Benelux insurance results. The strength of the operating profit in the second quarter, could you clarify for us what you think were either seasonal or just generally one off items, particularly in the investment margin and the non life results? Again, I'm just going to be able to sort of quantify those. And specifically, when you refer to private equity dividends, is that something which could recur in future years? Or was it really just related to the remarking of the private equity book? And then secondly, the €65,000,000 of expense savings that you've realized, how much of that is or what's the split of that between life and non life? And of the life components, does that all drop to the bottom line? Or has there been any element of leakage to sort of profit sharing or whatever with Life policyholders? Thank you. Yes. Okay. Q2 does have is a quarter where you get dividends. It is a recurring feature every year. So we look at the margin both on a spot, but more on a 4 quarter rolling basis to take into account that this is a recurring income stream. So yes, you would expect dividends. So I think it was €56,000,000 in total in the quarter. You'd expect dividends every Q2. And Parqom, yes, we'll see. It's there, so it will be in effect going forward. In respect of the one off effects, Non Life you asked about, yes, the Non Life results improved from a loss to 40 plus profit in the quarter, which is a big increase. We have a number of programs to improve pricing, readjust policy covers And this will lead to it expected to lead to improved profitability. But over time, I think we've seen a couple of positive reserve impacts, which boosted the result in the Q2. Overall, this business is on a trajectory to improve, but we had a couple of positives in reserving in Q2. And the cost savings, the €65,000,000 expense savings are basically in life, not too much in non life. Most of it is in life. And there is no leakage to the this is all down to the bottom line. Great stuff. Thanks, Charles. Thank you. The next question is from Francois Boursin from BNP Paribas. Please go ahead. Yes, thank you very much. Good morning, everybody. Two questions, please. The first one really is on the sales dynamics that you're seeing in the Benelux and in CE. Could you I think sales were up quite nicely in CE. Can you maybe just comment on the outlook you're seeing there in terms of pensions, namely in Poland? As there are talks about nationalizing the Pillar 2 pension system. And the second question is, can you please clarify what would drive your decision to do an IPO for Insurance Europe rather than a spin off, as you mentioned earlier in the call that you might explore other opportunities for Insurance Europe? Thank you. Okay. Sales in the Benelux and then CRE Insurance. Benelux and Life was down, but CRE was up. Pension outlook in Poland, yes, that's a complex one. The government has made, let's say, there are rumors that the government will come with proposals, but they are not official yet, where they offer 3 options to people participating in the plan. And depending on the option that they take, it can have an impact on the on our pension business. Now fortunately, yes, we do have a pension business in Poland, but our Life business is much bigger there. What drives the decision By the way, on Poland, we expect, of course, we have an extensive lobby going on from the industry, also from the political side in Poland. We have no answers yet, and we don't expect them until sometime next month. IPO or spin, well, that's a matter of, let's say, a luxury question. That will be decided at a time when that will take place. Of course, we are keeping all the options open here, but it will depend on a number of factors that we cannot control completely today. But we keep our mind open to all these opportunities here. A follow-up question on Poland. Can you just quantify the, let's say, the amount of recurring profit that you make from the pensions business in Poland? Yes. On an annualized basis, it's about $40,000,000 pretax. Thank you very much. Thank you. The next question is from David Andriy from Morgan Stanley. Please go ahead. Hi, good morning. My first question, I was just wondering if maybe you could give a bit more color on the potential cost cutting of both in the bank and the insurance that you see going forward in addition to what's already been announced? And my second question, I was just wondering the increase in the loan loss provisions for the general lending and transaction services, what's driving that? And do you expect it to kind of stay at this level going forward? Thank you. Okay. The cost cutting, well, these are ongoing activities where if you reduce the size because you have done divestments, I think you need to make sure that your overhead costs are declining with your divestments as well. And that is an exercise that we have and are doing at this point in time, mainly at the bank. We only flag it because it could have an impact on what you see coming in the next two quarters. The same in insurance. People are always looking for opportunities to continue to drive our costs down. And it is more related to improving our processes and improving the way we work and as a result, work with lower cost. I think that's always the basis for our cost cutting. Otherwise, it is simply a cost cut and they come back a little bit later if you're not careful. So it's improving the way we work. And as a result, you get better processes that help our customers and also create lower expenses going forward. Thanks. And then Wilfred? Yes. On the general lending provisions, it's important to keep in mind that this is a portfolio with relatively large clients, and the absolute levels of provisioning that we're seeing there are fairly low, particularly last quarter. So a few individual files can make a big difference on that number, and that is exactly what happened this quarter. So it's quite difficult to say whether this will continue or not. It's certainly not something that we see as a trend. But could there be another quarter with a few like these? Definitely. But there's nothing particularly on the horizon that leads us to have more concern about this than 3 months ago. Okay. So that can be quite a volatile number than quarter to quarter? Yes. I think that's a fair expectation. Okay. Thank you. Thank you. The next question comes from Anton Kraytjuk from UBS. Please go ahead. Thank you very much for taking the questions. Just two questions on the bank, please. Firstly, how long do you think it might take you to get to the targeted balance sheet size of €870,000,000,000 from the current levels? And secondly, could you perhaps give us a sense what would be the impact on the bank's net interest margin from asset transfers to NN Bank? Thank you. Yes. We are a little bit below our target balance sheet level. I mean, that think reflects the difficult economic circumstances we have. Loan production remains good, remains healthy. We had I think, in retail about SEK6 1,000,000,000 production this quarter, SEK6 1,000,000,000 last quarter. But we also are seeing loans growth. We're also seeing some repayments as well. Typically, that's good for margin because these are smaller older files that run off. The commercial bank gross production provision of facilities was strong again, so the machine is working. But you also see that some of our customers are not necessarily fully drawing down and some of them are taking out their facilities in the bond markets. So I think we're open for business. We're moving forward, but we need to see, I think, an increase in economic activity. I mean, the transfer to NN Bank, I think it's about 1 basis point impact, Negative, obviously. Did you get the answer? Yes. Good. Thank you. The next question is from David Lock from Deutsche Bank. Please go ahead. Good morning. I've got two questions. Just a follow-up on the costs. You flagged the additional cost savings are being investigated. I just wondered, when you've called out cost saving programs in the past, you've said it's because you wanted to use the savings for reinvestment because of inflation and regulatory costs. Is that the same with this one? Or is this really we're talking about a real reduction in cost base going forward? And my second question is just on margin in the bank. I just wondered if you could give a bit of color on the mix drivers of the better NIM result, whether it was asset or liability driven and whether it was a particular product such as structured finance, which has seen a structural change in margin? Yes. I think on cost, the most important thing I think to keep in mind on cost is always that you want to provide a service to your customers that is superior. And by redesigning your services and your processes, you can often do that and at the same time reduce your costs. That is the premise. Now we have also done that because in the past we have seen regulatory costs going up. The number of reports we are producing these days is significantly higher than in the past. And at the same time, we have seen bank taxes that have increased. In many ways, we are paying bank taxes twice, because we paid it in one country, but also another country on the same balance sheet. And we're clearly trying to overcome that by eliminating this double taxation, but it has had an impact. These cost reductions, we believe, are not necessary to offset these regulatory because they are there already. This will be bottom line cost impacts that will improve our position simply and our earnings, of course. And then, Nym? On the interest margin, it is up CHF 142,000,000 from CHF 138,000,000. It reflects a 3% or CHF90,000,000 increase in the interest results. This one this quarter, it primarily relates to savings and the deposit side rather than the loan side of the balance sheet. What you see is the full impact in Q2 of the rate cuts in Q1 that happened in the Netherlands, Belgium and Germany. And also part of the impact of the rate cuts in Q2, Netherlands, 10, Belgium, 20, Australia, 25, easily, 20 bps. The loan volumes are moderate loan growth, and we continue to focus on repricing and only lending at the levels where we feel we're getting the right return. In the outlook, I think a bit is keep it more or less at this level. Notwithstanding the strong improvement in deposit margins, we still face some headwind on the deposit side because of the low interest rate environment. Okay. Thanks very much. Thank you. The next question is from Kiri Vijayaraj from Barclays. Please go ahead. Yes, good morning. I've got a question on Slide 10, the ROE target improvement you've targeted for the bank. And specifically on the loan growth element, the 1.2 percentage points you've got there. I'm just trying to understand where that's going to come from because presumably you need more capital to support the extra volume growth. And are you moving up the risk curve to make that loan growth ROE accretive? Thanks. Sorry, could you repeat the question? On Slide 10, you've got the ROE improvement you're targeting for the bank. And I'm focusing on that 1.2 percentage points you've got from loan growth. And I guess my question is driven by the fact that for the incremental loans you put on, you need to hold more capital. And why you think it's actually going to be ROE accretive? And does that mean you're writing higher margin, higher risk loans for that to be ROE accretive? Yes. I mean, we clearly have a focus to try and keep the mortgage level at where it is and try and grow commercial lending. And we have target ROE levels, which are clearly within our target range. So yes, we would look to try and grow our balance sheet at lending, which self capitalizes as quickly as we can. I think in addition to this, we this slide, I think, is also showing that we do have a balance sheet where we can have a little bit more growth, where we can do that on a relatively short maturity level and pick up some additional interest income. We're not going to increase our book if we have a problem with our capital. I think our capital comes first. We always will maintain a strong capital position, and that will drive whether we can take on additional business or not. But at this moment, extent And we have done a lot in that extent already. I think we have improved our balance sheet by about SEK 57 billion. There's a little bit more room left here in optimizing the capital that we have and the liquidity that we have in various parts in our organization, utilizing that better than we have done so far. So that is how we plan to get a little bit more margin and a little bit more lending in our results. Okay. Thank you. Thank you. The next question is from Omar Fall from Jefferies. Please go ahead. Good morning. Just two questions please. Just looking at the coverage ratio, you saw a 50 basis point decline in retail Benelux. Why was that? Is there a mix effect there between business lending and mortgage NPLs? The second question would be, could you give us the average duration of your deposit base? I ask that because your margin guidance feels a bit conservative because you've got tailwinds from the cuts on deposit rates including more that you could do from what I understand in international retail. You flagged that you're still working on further asset repricing and it feels like the reinvestment income profile on deposits is nearing a floor. So if you could just give us an idea of why we shouldn't see a bit more uplift to that margin. Thank you. Okay. On the first point, the coverage ratio, I mean, that is a ratio that moves around a bit because it really depends on in and outflows, inflows of new NPLs that start with a relatively low provision that gradually goes up, but outflows also because and that was affected particularly in this quarter, because we tend to write off the fully provisioned launch fairly quickly. It's generally a lot quicker than our peers tend to do. And we had significant write offs in Q2, which by the way still run well behind the actual provisioning levels as Jan indicated earlier. But that is mainly what drove this number in the quarter. Great. Thank you. The next question comes from Annik Rheingarten from Royal Bank of Canada. Please go ahead. Yes, yes. Anke from RBC. But I think Omar had like another outstanding question on the net interest margin. But I actually wanted to follow-up on this. On the how much with respect to the benefit from the deposit repricing, how much more what percentage of deposits have already been repriced and how much should still be coming especially for the Netherlands? And if you look at your historic spread, is there potential to reduce the deposit rate in the Netherlands further? And then just lastly, I'm not sure if I missed this, have you given the on Dutch mortgage NPLs, the loan to value ratio? Thank you. Okay. Maybe to start with the Dutch mortgage NPLs and loan to values. The NPLs on Dutch mortgages went up from 1.5% to 1.6%. The loan to value went from 90% to 91%. And as we mentioned, the total that sits above 100% loan to value was pretty much stable at 35%. The 91% loan to value ratio is the same as on NPLs? No. The loan to value on the NPLs sits at around 108%. Okay. Thank you. On deposits, typically when you make a price adjustment, it's to the entire deposit book, particularly. So it's not so much a phase piece in terms of its impact on the price cut. As to future, we have to balance the outlook our competitive position, our peers are doing and the trajectory. So that's something we will only comment on once we've reached a decision or a conclusion. In terms of duration, I mean, it's a bit more complex because it depends on the type of deposit you have, how long it's been with you. So it's we have a complex and sophisticated process to assess the duration. I think the key point though is I can give you a number, but I don't think it's that meaningful, but I think the key point is that for new deposits, we do take some time to assess stickiness of things. The duration of the newer stuff is we typically give it a lower deposit sorry, duration level, which means that the value of funds in a low interest rate you attribute to is low as well. It was part of the reason that some of the new inflow is not give you a huge uplift in deposit margin? Yes. And then repricing our loans, I think what we do on repricing our loans is take an average of about 3 to 4 years. So on average, every year, onethree of your loan book on 25% of your loan book comes to win and you have an ability to reprice that. And I think that's constantly what we do. Also at times when we have to accommodate certain people with repayment schedules, we do a repricing as well. So any opportunity that we have and where it is justified, I think we will take another look at is the pricing correct and do we need to make adjustments here. And we have been extremely disciplined in this whole process in the last 3, 4 years. I should have mentioned there's a 10 basis point cut in deposit rates in July in the Netherlands. Thank you. The next question is from Richard Burden from Credit Suisse. Please go ahead. Hi, good morning. Thanks for taking the question. One of your competitors this morning highlighted an impact on the Dutch IGD in July from the downgrade of France. I was just wondering whether you could just comment on the impact on the Eurasian insurance IGD development over July and whether that impact has affected you as well? Yes. I mean, in terms of the IGD ratio, I think the order of magnitude impact is somewhat similar, somewhere around the 20 basis point level, which is a strong we're over 304. Thanks very much. Thank you. The next question is from Samuel Lopez from Vanguard. Please go ahead. Thank you. My question is about the leverage ratio that you published on page number 9. I was wondering if you could tell us what would be the impact if you use the new proposal by Basel III, the new definition of the total assets? And in relation to this, if we assume that this new proposal is implemented in Europe, what would be your new return on equity range target? Or would you be able to keep that 10% to 13% unchanged? I mean the leverage ratio we publish is the total balance sheet plus off balance sheet commitments typically committed facilities around 120,000,000,000 and to core Tier 1 equity, we add Tier 1 equity, which adds to a total of SEK37 1,000,000,000. So insofar as we can see, we're compliant with the committee requirements. There may be some further netting, but we haven't taken that into consideration because I think all in all, I think our number is good. I mean, the ROE is based on capital, equity capital. So I don't think it's going to be impacted by leverage. For the new proposal, I mean, some banks are commenting on it. And despite not giving exact numbers or exact impact, at least acknowledging that there will be an increase in the denominator? We're still studying it. As I say, we've included the all our off balance sheet commitments. Our level of netting is very small in terms of derivatives, only about CHF 20,000,000,000. So I don't think we're impacted by that. So it would be minimal impact then if that is implemented, if the new proposal is implemented? Yes, it's more or less the same as what we're reporting. All right. Thank you. Thank you. The next question is from Benoit Petrarque from Kepler Cheuvreux. It's Benoit from Kepler Cheuvreux. Just wanted to check with you what will be kind of the interest rate sensitivity of your core Tier 1 ratio. I think we are we have a Dutch sovereign rate at around 2% now. What will be the impact on the core on Basel III core capital if we get if we say get 100 bps increase in the rate there? And then looking at your mortgage portfolio, I think it's much more relevant to look at vintages, especially the post-two 100 and 5 vintages. So how much of your book roughly has been kind of written between 2,005 and 2,008? And how much risk weighted assets do you have on this specific portfolio? And also if you could talk about LTVs on this specific book? And do you see risk of higher risk weighted assets on, say, Vintages 2,005, 2,008 on Dutch mortgages? The interest rate sensitivity, we see about for every basis points about a €10,000,000 impact more or less, okay? That's quite rough. Patrick, the next one. Well, Fred, mortgages. Yes. And out of the total book, about 45% or so dates to the 2 1,005 to 2,008 vintages? And loan to values on that book as well as the NPLs are comparable with the average on the portfolio. With regard to higher risk weighted assets, well, there's a lot of discussion about risk weights, has been for a while. We have consistently said that we're comfortable with the weightings that we apply. And I think it's important to keep in mind that ING as a whole is very close to 90% on advanced, which is high compared to our peers and that in itself has a lot of impact. You may have picked up on the report by the EBA that came out this week that also commented on this and found actually that one of the most important drivers of the differences that are being observed in risk weights is indeed the advanced tend to report indeed lower risk weights than the ones who are not. And a lot of the differences are then driven by local regulatory changes on the big picture and local interpretation of the rules. So I'm not sure that there is really a clear trend here or a clear sort of universal thinking on the topic that would lead to higher risk weighted assets on our mortgages specifically. One example that we have given in the past and that may still be relevant at least as an idea of what the impact might be is if we were to go to the so called Swedish floor, the impact on our risk weighted assets at this point would be about SEK 7,000,000,000 which is quite a bit less than it was a quarter ago, but that's because our own risk weights have also come up. So the impact of that discussion seems to be gradually becoming smaller than it was. We're not overly concerned about this. Because do you have kind of discussion with your regulator on the way you are kind of assessing the probability of default on the 2,005, 2,008 vintages. Also looking at loss given default, we have seen housing price down mainly since 2,005. So I was wondering how comfortable you are with your PDs and LGDs assumptions, which at the end of the day, the basis for your risk weighted assets? Yes. Well, obviously, all our models, A, have been scrutinized by the regulators in the countries that they apply to, but B, they get updated quarterly for the elements that you just mentioned. So whatever happens out there in the market within a fairly short time frame, that is translated into our models. So we're not nervous about being behind the curve either in methodology or in data. The next question is from Stephen Haywood from HSBC. Just going back to the Japanese business again. Could you tell me what the average duration on the runoff portfolio is there and how much capital this would release to ING over the time it runs off? And also could you answer what you think the consequences would be of not meeting the Asian sale deadline by the end of this year? Thank you. I think in terms of the duration, it's about 5 ish years, substantially runs off by 2019. The next question is from Matthias No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, we didn't answer the question fully. I think the capital release over the runoff periods, yes, depending upon you need to make some assumptions, but could be, yes, in the neighborhood net present value of about, I would say, between €800,000,000 €900,000,000 something like that. Impact of not meeting the deadline for European Commission, we're assuming that we are not we're not assuming that we will not meet the deadline. We're assuming that we will meet the deadline. We're working very hard to accomplish that, and that's the basis of our working plan. Thank you. The next question is from Matthijs de Wit from KBC Securities. Please go ahead. Yes, good morning. I have two questions, please. First, with regard to the Basel III capital position of the bank, you're now guiding for a slightly higher CRD IV impact of 160 basis points compared to 140 basis points previously. I think it's reflecting unrealized gains, which came down a bit. So could you please confirm whether this is the case? And then secondly, on the capital position of the U. S. Insurance company, You reported a drop in RBC. Just wonder whether this is a reflection of the replacement of the contingent capital facility. And so could we is this now completely done? And related to that, how satisfied are you with the current RBC of 454 percent? It's ahead of your target, but still below the level most peers are in the U. S. So is there any need to further strengthen the capital position there either through retained earnings or to retain proceeds from any subsequent offerings? Thanks. On the fully loaded core Tier 1 ratio, there's a slight decrease and that's more to do with the improvement in the small the reduction, I should say, in the mark to market of debt securities, which goes through the fully loaded. For the U. S. Questions, I would recommend you talk to our friends in the U. S. They will have a conference call a little bit later today. And Ewout Steenberg, our CFO, I think will be more than capable to answer the question. I think my answer is no. We don't need it, but maybe you want to hear it from him as well because he is the guy that is responsible for it. Okay, very good. Thanks. Thank you. The next question is from Marko Kitsic from Nomura. Please go ahead. Good morning, everyone. Thanks for your time for the questions. I have a question on asset quality. It was good to see LLP sort of stable in sensitive areas, but NPL was up particularly in a few division. Is this putting downward pressure on call rates ratio? And how comfortable are you with this one? Maybe if you can put this in the context of your expectation of the upcoming asset quality review and EBITA to assess? Thank you. Yes. As you will have seen, the overall coverage ratio is fairly stable. You do see some changes in various sub portfolios. And as I said, as you go more granular, you get into situations where individual movements like writing off fully provisioned loans has quite a bit of impact. But overall, the coverage ratio was stable. If you exclude that one Spanish file that Jan also referred to, it actually went up slightly. We're comfortable with that. The history, as we have said on previous occasions in ING, is that we tend to be conservative with our provisioning, and the ultimate write offs have always been less than what we provisioned. We don't see any trends at this point that suggest that, that would be changing. As to the question about asset quality review, well, I guess in saying that we're comfortable with our capital and our provisioning position, we're saying we're comfortable that we are appropriately managing our books and the accounting for the books. And we don't have any specific concerns about the asset quality review from that perspective. Thank you. Thank you. The final question is from Marcus Rovaldi from Morgan Stanley. Please go ahead. Good morning and thank you for taking my question. Two questions, please, around INGV. First of all, in the event that the sale process of remaining non European assets is not fast enough, would you consider moving, for example, Japan out from INGV just as you've done with ING U. S. To make sure the IPO is a pure play European style IPO? And then secondly, the debt at the moment on the balance sheet, a large part of that clearly is internal. Would you be looking to externalize that in the coming months? Thank you. Yes. You raise good questions. That's why we would like to have a meeting in September where we can update you on what our plans are, including the legal setup, the structure, what will happen with the units that we have, Japan, Korea, things like that I think we will discuss. So if you can hold off, that will be September 'nineteen. In the meantime, I can say that the INGV structure is a structure that we haven't determined yet exactly what will be in there. But your observation that we need to do a refinancing because it's only internal debt, I think, is correct. And we do have plans to do the externalization of the debt. But that will have to be discussed, I think, at a later point. And that's why the invitation to come to the September meeting, and you will be fully updated there. Given that you had to pass on those questions, can I just ask a very quick cheeky follow-up? But why the change in strategy to IPO INGV? I mean, previously, you talked about that being wound down in an orderly fashion. Yes. The INGV has the benefit that we do have a clean separation legally between the bank and the insurance company. So it's a very clean way of bringing this to the marketplace. And I think that was important to us. Plus, the restructuring that we do within this, we can do, I think, in a tax friendly way as well. So that's an important element in this restructuring. There are no further questions, sir. Okay. That ends the call. Thank you very much for being on the call. This is my final month. So next time, my successor, Ralph Heimers, will lead the call, and I can tell you everything is in good hands here. So thank you very much, and good luck. Thank you, sir. Thank you, ladies and gentlemen. This does conclude today's presentation. Thank you for participating. You may now disconnect.