Good morning. This is Cornelia welcoming you to ING's Q4 2012 conference call. Before handing this conference call over to Jan Hommen, 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 future financial performances, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release, as posted on our website today. Nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Jan, over to you.
Okay. Thank you. Welcome everyone to ING fourth quarter 2012 results conference call. 2012 was a transformational year. We worked hard to restructure the group further and preparing bank and insurance for independent futures. Results held up well for the year, despite the sovereign debt crisis in Europe and a weak economy, which we endured during all of 2012. I will now talk you through the presentation. Patrick Flynn and Wilfred Nagel are here with me from the Executive Board. Also, Delphine Roveda and Doug Caldwell, respectively CFO and CRO of Insurance Europe Asia are here with us, and Ewout Steenbergen, CFO of the Insurance Company U.S., is on the call. We're all available to answer your questions. Slide number two. Results held up well, came in at EUR 2.6 billion underlying net profit, which is down 5.2% from 2011.
Fourth quarter results were impacted by the Dutch bank tax and various market-related items, leading to an underlying profit for the group of EUR 373 million. The bank underlying result was EUR 184 million. It had to deal with EUR 188 million negative credit adjustments, EUR 151 million of de-risking losses, and EUR 175 million of Dutch bank tax. The insurance operating result improved compared to the third quarter. They came in at a little less than EUR 300 million, as the investment spread strengthened and the underlying result before tax rose to EUR 272 million. You see the full year results on slide three. Net profit for the group was almost EUR 3.9 billion, including the gains that we had on the sale of ING Direct USA, ING Canada, and Insurance Malaysia. Net results also included a EUR 452 million restructuring charge, which will help to drive future performance.
We announced today an expansion of a change program in the Retail Netherlands, as well as a new program in Belgium. These come on top of the initiatives that we announced last quarter in Commercial Banking and in Insurance Europe, as we invest in operational excellence and we make sure that we have process improvements so that we can serve our customers better. At the same time, we are adjusting our cost base as necessary by the tough economic environment. On slide four, you see that combined measures will reduce expenses by about EUR 1 billion by 2015. Cost initiatives that we announced at the end of 2011 are ahead of schedule for Retail Netherlands. We have already scored EUR 162 million in cost savings so far, out of the EUR 330 million that we expect to gain.
Today, we announced an expansion of that program, basically because we need to meet the rapidly changing needs that our customers are showing in the way that they use quickly to mobile banking. In the Netherlands, we aim to realize cost savings of an additional EUR 100 million by 2014 and EUR 120 million in total, including a further headcount reduction of 1,400 FTEs. In Belgium, we are trying to achieve EUR 150 million savings by 2015, reducing headcount by roughly 1,000 full-time equivalents through natural attrition. I will come back on these programs a little bit later in the presentation. Good progress was made on the restructuring program that we have agreed with the EC. We divested the U.S., ING Direct USA. We sold our stake in Capital One. We announced the sale of Insurance Malaysia, Hong Kong, and Thailand, two joint ventures and the investment management units in Thailand and Malaysia.
The U.S. Insurance U.S. filed a registration with the SEC, and it's making good progress for later this year, for preparation for an IPO. We reached an agreement with the European Commission last year, including an extended deadline and a solution for the WestlandUtrecht Bank. We paid another tranche to the Dutch state, making now the total payment already to a total of more than EUR 10 billion. We upstreamed an additional EUR 1 billion from the bank to the group in order to reduce the core debt. At the same time, we continue to work on the process in Korea and Japan and continue to work hard on making sure we do the IPO in the U.S. and getting ready in Europe for one as well. You can see on slide six what this all means for our balance sheet.
We reduced the Core Tier 1 to EUR 2.25 billion. The core debt of the group is now down to EUR 7 billion. Proceeds from Malaysia were used to redeem a bond, a hybrid, a EUR 1.25 billion in insurance that we called in December. We had to do that to make sure that we can divest the insurance company going forward later. Hong Kong and Thailand is expected to close in the first quarter of this year. They'll bring in EUR 1.6 billion in proceeds. We will wait until we have a complete picture, including the sale of the remaining Asian businesses, and until we have a solution for the Japanese VA business, before we will decide how much we can upstream to the group to further reduce the double leverage here.
Of course, we want to make sure that Europe and the U.S. are well capitalized on a standalone basis before we do an IPO. Ultimately, the proceeds for selling insurance with EUR 27 billion of equity should be more than sufficient to cover the EUR 7 billion remaining leverage in the group. Everything requires time, and I think it's important that we take the time to execute as well. On slide seven, you see that the bank is already meeting most of Basel III. As we had agreed last year on the investor day, the priorities were that we would transition quickly to Basel III, that we would limit our balance sheet growth and RWA growth, that we would execute a balance sheet optimization program, further simplify our business, and take a prudent approach to capital and funding, given the unstable market conditions.
I think we have delivered on all these objectives and priorities, and we are basically meeting Basel III requirements today. The Core Tier 1 ratio is at 10.4% on a fully loaded basis, exceeding the target that we have set for ourselves of 10%. The LCR is above 100%, and the Basel leverage ratio has reached a maximum here of 25%. The balance sheet optimization is on track. We have reduced our balance sheet by EUR 137 billion since September 2011, and it's already below the target we have set for 2015, which was EUR 900 billion. Of course, mainly because we are selling and have sold assets in ING Direct USA and ING Direct Canada, which accounted for EUR 85 billion of the decline. Customer deposits have increased by EUR 30 billion.
Customer lending increased primarily in retail banking, although the growth has been quite moderate given the weak economic environment and the reluctance of businesses to invest. On slide nine, you see that we have actively reduced our short-term funding, while at the same time growing our customer deposits and long-term debt. Professional funding was reduced by EUR 62 billion, and customer deposits grew by EUR 30 billion. Long-term funding was increased by EUR 14 billion, and that all, I think, has added to strengthening the credit profile of ING Bank. In 2012, we issued EUR 33 billion of debt with a tenor of more than one year, compared with EUR 18 billion of long-term debt that matured in 2012. Slide 10. We have been transforming the bank securities portfolio into a liquidity book, and that's part of our overall strategy to optimize the balance sheet.
We sold EUR 6 billion of debt securities as part of our planned de-risking program. That resulted in EUR 600 million of losses, but it also reduced the risk-rated assets by EUR 7 billion. In addition, we sold EUR 3.5 billion of bonds to facilitate the sale of ING Direct UK. The quality of the portfolio improved substantially and has now a positive revaluation reserve of EUR 1.3 billion. It is more liquid, and it is Basel III compliant. We have basically completed our de-risking of the investment portfolio, and of course, we will continue to monitor that very closely. Should there be a need for action, we will take that. Slide 11, you see that 2012 was heavily impacted by de-risking losses and negative credit adjustments for a total of EUR 1.2 billion. That includes EUR 600 million of losses in de-risking from the bond portfolio, as we explained in the previous slide.
While credit adjustments moved from a positive EUR 275 to a negative EUR 587 in 2012, as spreads were narrowing. On slide 12. Operating expense modestly increased by less than EUR 0.1 billion or 0.9%, despite EUR 0.2 billion of normal cost inflation and again, EUR 0.2 billion, so EUR 200 million, of higher regulatory cost, including the Dutch bank tax. We're able to offset these impacts mainly through the savings program in the Netherlands, which has delivered EUR 162 million in cost savings so far. Market impacts were also lower, reflecting impairments on real estate developments. Going forward, the plan is to keep the expense level stable. Between now and 2015, we aim to offset the impact of inflation and higher regulatory costs by structural cost savings of about EUR 900 million.
Benelux Retail Banking has already pushed forward on operational excellence and mobile banking that will result in EUR 400 million of additional cost savings in 2015. Commercial Bank review is expected to result in additional EUR 300 million of cost savings. Procurement initiatives that are underway, we expect that we can get another EUR 200 million per year. It's important to note that the Dutch government has decided to impose a one-time levy of EUR 1 billion to all the banks that helped to cover the cost of the recent nationalization of SNS, of which the share of ING will be between EUR 300 million and EUR 350 million. We talk about cost-saving initiatives, but we are striving mainly to simplify the way we work, to streamline the IT and the processes we operate to adapt the business model to the way customers want to do business with us.
That means we are embracing new technologies by customers even faster than we anticipated. We saw in the Netherlands that the internet is already the leading channel, representing more than 60% of sales. Mobile traffic increased from 9 million visit per month to 25 million per month over the course of only one year. That means that we have to make significant investments in IT to handle the increased traffic and to continue to improve the functionality and the experience that the customer is getting. It also means that we need fewer employees that are needed in call centers and in back-office functions to process these transactions. To give an example on IT, an ING Bank has decommissioned already 568 applications out of 1,800 since 2007, and we expect that total IT applications will be cut in half by the end of this year.
These are far-reaching improvements in the way that we work, it also means more convenient service to our customers. In Retail Netherlands, we have shown a strong reduction in operating expense over the past five years, starting with the merger of ING Bank and Postbank. As I mentioned earlier, the cost savings program announced in 2011, which is expected to deliver EUR 330 million in cost reductions in 2014, is ahead of schedule. Already realized EUR 162 million, the headcount has been reduced by more than 1,800 out of the 2,700 we had planned. Retail Netherlands is now expanding that program, including further streamlining IT and integrating a mobile banking offering, that's backed by another EUR 100 million of investments in IT. The second phase is now expected to result in additional cost savings of EUR 100 million per year by 2015.
That is bringing the total to EUR 430 million. Additional headcount reduction is 1,400 FTEs, of which 400 are external. We will create 250 new front-office jobs in order to better serve our customers. In Belgium, slide 16, ING Belgium is accelerating its strategic projects, further aligning products and services with the new mobile banking reality there as well, because customers have embraced the new technologies much quicker than we had anticipated. The change will result in a reduction of FTEs by 1,000 by the end of 2015. We expect that we can do that fully by natural attrition. That will create cost savings of about EUR 150 million at the same time. Let's go to Q4 results. Well, you see that on slide 18, that the group was EUR 373, the bank was EUR 184, and insurance came in at EUR 296, and an underlying result before tax of EUR 272.
On slide 20 you see the adjusted gross results. If you make all the adjustments of special items that happened in Q4 this year with Q4 last year, then you see that gross adjusted results were down by 2.2% year-over-year. On slide 21, you see what happened to credit adjustments at the commercial bank. These are relatively sizable numbers. In Q4, the results were impacted by EUR 50 million from negative debt valuations, so DVA. That has the result of tightening the spreads of our own structured notes. That was coupled with EUR 81 million of credit value adjustments on derivatives that we sell to clients. Normally they move in opposite direction. They loosely offset each other, but this time they did not. Slide 22, you see our net interest margin held up well at 133 basis points.
Margins on lending were better. We are very strict and formal on our pricing and repricing in the commercial bank. Savings margins continue to be under pressure. That reflect the impact of low interest rates, and also the fact that we have de-risked our portfolio of securities. Total interest result declined by almost 6% from a year ago and almost 4% sequentially, mainly as a result of financial markets. The fact that we have higher liquidity costs. We have lengthened our funding profile. That we had lower returns on the bond portfolio because of de-risking and lower interest rates. Expenses. They look like a significant increase in expenses if you look at the cost income ratio, but expenses were kept flat compared with a year ago, except for the EUR 175 million charge in Dutch bank tax.
Cost income at 63.4%, if we exclude the market impact and the Dutch bank tax and CVA adjustments. I mentioned already that we have a number of programs that will bring EUR 840 million of cost savings for the bank by 2015, of which we have already secured EUR 162 so far. Risk costs were up by EUR 34 million compared to Q3. They reflect the fact that we still see a very weak macroeconomic environment. The increase of EUR 34 million was mainly in structured finance. Concentrated in a relatively small unit, the acquisition finance book. Risk cost of real estate finance was stable. We expect that we will see elevated risk given the economic climate we are in. NPL increased slightly to 2.5% from 2.3% in the previous quarter. Again, here, mainly driven by Midcorps, by SMEs, by real estate finance, and by leasing.
The same people as before. Loan book is well collateralized, and provisions have historically exceeded our write-offs. The proportion of releases to the write-offs over the past 12 years has been about 40% releases, demonstrating a prudent level of provisioning and a significant cure rate. Coverage ratio, as defined as the stock of provisions divided by non-performing loans, was 37%. Please note that these ratios are difficult to compare between banks because you see differences in business model in the way that we provision write-off policies and definitions. Our coverage ratio reflects the fact that the loan book is well collateralized. Approximately 80% of the total loan portfolio is asset-based lending, such as mortgages, real estate finance, lease, and structured finance. The risk cost of real estate remained stable compared to the previous quarter at EUR 103 million.
Actual losses in the portfolio remained low and the non-performing loan ratio decreased to 7.6% in the third quarter. The Dutch real estate portfolio is well diversified. 50% of the total is in the Netherlands. The overall quality of the portfolio is holding up relatively well, despite the challenging conditions of the commercial real estate market. You can see from the top, the book is well diversified. We have almost no exposure to construction finance. The average loan-to-value has increased modestly to 73%, to be calculated quite conservatively. All values were updated with the second quarter 2012 by ING indexation and based on external indexes and internal observations. We also do back tests to compare with actual sales prices on recent customer transactions. I think we feel comfortable that we have here a conservative approach to our risk in the portfolio.
Looking at the Dutch mortgages, the risk costs have increased in recent years, and that's mainly driven by decline in home prices. Write-offs have increased modestly. It's a bit higher foreclosures. The number of foreclosures are still quite low. The NPL in the mortgage portfolio is now at 1.4, but that's supported still by relatively low unemployment rates in the Netherlands. I think I mentioned already the Core Tier 1, 11.9% at the end of Q4, including the repayment that we made to the Dutch state and the upstreaming to the holding company of EUR 1 billion. There was an accounting change for pensions effective January 1. That is 60 basis points. That will reduce the ratio to 11.3.
On the next page, you see if we fully comply immediately Basel III, that will decline to 10.4%, still ahead of the target we have, which is the 10%. In addition, we have a number of management actions going that we expect to reduce the risk-weighted assets by at least another EUR 18 billion, of which EUR 11 billion was achieved so far. Bringing the pro forma level to 10.6. You look at insurance on page 33. Operating results up by 25%, almost EUR 300 million. A much better investment margin. Compared year-over-year on operating results, they were down by 15%, but the U.S. had last year a significant one-time gain by release of a pension provision. The first quarter results improved before tax to EUR 272 million, reflecting lower market-related type of impacts. Investment margin was better. The rolling four-quarter average was at 135.
Investment performance increased to EUR 447 million. There's also included in here a release of a provision for discretionary profit sharing to policyholders in the Netherlands. We saw that our assets under management, in particular in the retirement services, were growing, resulting in higher fees. Slide 35, you see that fees and premium-based revenues were up as to EUR 786 million, up almost 6% compared with a year ago, mainly due to the U.S., driven by improvements in the equity markets, better inflow in retirement, and higher fees in investment management. Technical margin was EUR 118 million, and it was equal to last year. We saw a decline in the Benelux, but it was offset by improvements in the U.S. Administrative expense, I think well under control, except when you compare with last year, there was this one-time EUR 45 million non-recurring pension release in the U.S.
Eliminating that, expenses were down by 2%, reflecting that we continued to pay good attention to cost control. Looking at Europe, results were better. Operating results, better investment margin here as well, and also lower expense. Underlying results continued to be impacted by negative non-operating expense, which reflect the volatile markets, also reflecting de-risking and the fact that we are hedging to protect our regulatory capital here. The Benelux had lower sales compared to the fourth quarter of last year, but they were offset by higher sales in our Central and Eastern European units. The good results in the U.S., Slide 38. Operating results a little bit down, but he explained that already. There's the one-time charge. Otherwise, they would have been up by 15%. A good performance, strong CMO revaluations, where private equity returns were a little bit negative last year.
The previous quarter also includes EUR 173 million of net favorable DAC unlocking. Sales were up almost 19% and 21% compared to Q3. That was mainly because of retirement sales, a little bit offset by lower sales in our life business. The VA block also had improved results. Underlying result came in at EUR 236 million. That reflects gains we made on the hedges as equity markets declined in this quarter. That creates a gain on the portfolio of hedges. Reserve adequacy improved to the 72% confidence level, and that means that even if we have a 25% downward shock, we still have reserves that are adequate. The focus continues to be on capital protection to make sure that we have positive IFRS P&L, and the positive variance to be expected in the sensitivities in the quarter was driven by market outperformance of the underlying funds.
The final slide on the U.S., progressing on their capital position. Capitalization improved again this quarter. RBC ratio at 531. The U.S. would like to have a debt to capital ratio of 25%, and also like to redeem the special contingent capital letter of credit that it has from the ING Bank before it goes into an IPO. Last week, they did a very successful capital market transaction, issued USD 1 billion of debt at very attractive spreads. We're quite pleased with the performance of the U.S. and the improved capital structure that they have been able to accomplish. As a summary, results held up well. Underlying net profit for the group at EUR 2.6 billion. At the same time, we took significant action to de-risk and restructure, de-risk our balance sheets, and to make sure that our businesses are prepared for the new future.
With that, I would like to open it up for questions.
Thank you, sir. If any participants would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel your request, please press the star followed by the two. Questions will be pulled in the order they are received. There will be a short pause while participants register for a question. In the interest of time, we kindly ask each analyst to limit your number of questions to two. First question comes from Michael van Wegen from BAM. Please go ahead.
Morning, guys. Mike van Wegen from Bank of America Merrill Lynch. First question would be on the earnings outlook for the Benelux Retail Bank. Can you talk us through how you see a net interest income developing there for forward into put in place in Q1? That's question one. The second question, on the disposal program, can you talk us through, first of all, Japan, what alternatives you are considering? B, you're talking with the U.S. IPO now about timing-wise later this year. I think previously you've said that you potentially should be ready from Q2 onwards. Is there a change there in language, or how should we look at that? Thank you.
The latter one is pretty simple. We have not changed our timing for the U.S. IPO. We are preparing them as quickly as we can, and you can see that in the way that they are progressing on their capital structure, but also on the filings they have done on the S-1. That's language that I say, later this year is later than today. We will do it when markets are ready, basically, for us. Japan, we're working diligently on alternatives in Japan. We have a number, but I don't think we are at this moment at liberty to discuss them. Only can say that it requires a lot of discussion with local regulators in Japan. We've been working on two or three different alternatives, but we are not ready yet to come forward with it.
On the Benelux Retail, Patrick, you want to do net income?
Yeah. I think you asked about the interest margin in the Benelux. If you look at the interest margin overall, as Jan mentioned, it held up pretty well at 133 basis points. It declined in aggregate by 115 basis points, partly in financial markets, and also due to the lengthening of the funding profile, which comes with an additional cost that was offset by a reduction in the balance sheet. The themes we've seen before pertained again in Q4. We've seen a mild strengthening in commercial banking margins, where we continue to apply discipline. That discipline applies across the total bank and Netherlands as well, and Benelux as well. The weakness has been on the deposit side, where the declining interest rates have hurt margins and deposits.
That said, in January and February of this year, we've cut deposit rates in the Netherlands by twice by 10 basis points and in Germany by 25. The outlook for the net interest margin overall, and that will also apply in Benelux, is to stabilize by virtue of the reduction in pressure we see on deposits and the ability to reduce them. Longer term, we remain committed to the longer-term targets of 140, 145, which we will aim to achieve by continued focus on discipline and loan pricing. We also need a little bit of help from growth in the economy to add some volume on the lending side to interest margin.
First, for you the loan loss.
Yeah. We've been saying for a while that we expected risk cost to remain at elevated levels. Indeed, Q4 showed that as well. Your question being specifically about the Benelux business, if you look at what went on in Q4, developments that we expect to continue is softness in the business lending, the SME mid-corporate book, the real estate finance book. Also, we expect that the mortgage portfolio in the Netherlands, as you've seen, the NPLs showed another mild uptick, but it does keep going up. We also see potential for indeed continued elevated risk cost there. That's the outlook.
Thank you.
The next question comes from Farooq Hanif from Citi. Please go ahead, sir.
You can hear me. Just 2 questions on the insurance business, if I can, please. Firstly, just want to understand the improvement in investment margin that you had because of the release of the discretionary profit-sharing reserve in Q4. Is this something that could happen every fourth quarter, or should we just assume that your underlying guidance over investment margin declining in Benelux will continue from here? Could you please explain that? Second question is just on the RBC ratio in the U.S. Apologies if you've already answered this in your literature, but what would happen to the 531% ratio if you didn't have that letter of credit? Does it affect it? Also, presumably, the debt that you've been able to raise recently in the U.S., presumably that doesn't count towards the RBC ratio. Could you confirm that? Thanks.
I will just deal with the U.S. one first. The difference between the 531 and the 425 is about a billion and a half dollars, which conveniently is somewhat similar to where the CCLOC is. It's a little bit more complex than that because the CCLOC supports the offshore entity, which is measured on a CTE95 overall aggregate basis. What we've been saying is that our target is a minimum of 425 RBC. We want to upstream capital to the holding company with a view to distributing it. Ideally, we would like to redeem the CCLOC, which if we did, would need to be replaced in cash. The final part of the question?
The other one.
The debt issuance is debt, is not capital.
Okay.
It's part of the funding profile and will contribute to the overall funding, and sits within the maximum 25% leverage ratio that applies in the U.S.
Basically, what you're saying is, don't really need a lot more capital in the U.S. because you'll still be above target if you repay today, but you're just waiting for the right time. Is that what you're saying?
Yeah. Jan mentioned, when you IPO companies in need of adequate capital, you might need a buffer as well. Like we said last time around, it's nearly there, but maybe not quite there.
Yeah. That's a discussion we will have to have with the investment banks by the time we go to market. I think it's a little premature now, but we'll see what comes out of that one. Your question on the discretionary release is the following. We make accruals for that during the year, but at the end of the year, the management has the ability to decide whether to pay that, yes or no. This time, the discretionary decision was that we don't pay that given the overall results of the Benelux organization.
It could happen again.
It could happen, and it could not happen. Yeah. I cannot give you a better answer.
All right. Thank you.
That's why it is discretionary.
Okay. Thank you very much.
Next question comes from Farquhar Murray from Autonomous. Please go ahead.
Good morning, gentlemen. Just one question from me. With regards to the U.S. IPO, more recently, we've seen some variable annuity block transactions with suggestions there's possibly more to come. Could such a transaction be an option for ING U.S., or realistically, given the IPO timetable, would it have to go with the VA book in the first tranche, presumably? In particular, actually, could I also ask how separable is the legacy business in terms of legal entities? Thanks.
I would say in principle, we are looking at all the options that are there, including selling the VA book separately, but also including it in the IPO. Nothing will be excluded, but our base case continues to be the IPO. I did not get the question on the legacy.
The legacy question was actually just in regards to legal entities, i.e., is the variable annuity book within a separate legal entity and therefore immediately separable?
Yeah. It's in the offshore Cayman business. I think it'd be premature to talk about this until we would know what or if any buyback structure might entail, if there was to be one.
Okay. Thanks much.
The next question comes from Francesca Tondi from Morgan Stanley. Please go ahead.
Hi. Good morning. Just a couple of questions going back to the Netherlands and the asset quality. I know you've given a bit of that guidance of still mild deteriorations going into 2013. You've provided very helpfully a stress test last year. Do you have an update on the mortgages, for example, on increase in unemployment, decline in house prices, which seems to be faster right now, what your loss expectation would be in that scenario? If you can give us just a couple of data, what is now your LTV for your mortgage book in the Netherlands on the mortgage on the retail side, if you can give us an update. Overall, what is your updated reserve coverage? You said 37%. On a comparable basis, how was that the last quarter, and how you're expecting that to trend. Thank you.
To start with your question on the stress test. The portfolio is fairly stable. It hasn't really changed in either composition or size since we did this last. There is not really any significant development there. We're still very comfortable that we're adequately provisioned for the book as it stands. Your question with regard to the cover ratio, it's hovering around 38%, between 37% and 38% already for a while. That is a reflection of a very prudent provisioning process where we make the best estimate of expected losses on the NPLs. I don't see a particular trend there. We do this assessment every quarter for the larger chunks in the portfolio on a case-by-case basis. This is the outcome of our best assessment.
For the LTV of your retail mortgage book in the Netherlands, if you could give us an update.
Yes, sorry, I missed that one. The last quarter number was 89% for the Dutch mortgages, and that was up 1% from the 88% it was in Q3.
Do you have the percentage of your mortgage book that has an LTV already above 100%? If you could disclose that.
That's not a number we track or disclose.
Okay. Thank you very much. Just going back for a second to your stress test. If I remember correctly, I've got a slide here, please correct me if I'm not right. You were stress testing with effectively a 15% reduction in house prices. Oh, sorry, 25% reduction in house pricing and 10% unemployment as a peak. The unemployment probably still seems quite high. Do you think a 25% reduction in house pricing, given what we have seen already in the last few quarters of 2012, is still sufficiently conservative?
Yes, we think it is. If you look at it from the peak, we're already down 16, certainly our house view is that we will continue to see some declines in the next two years, but not to the level that the stress test suggests. Looking at unemployment, again, it is trending up, but nowhere near the levels that were taken into account in that stress test. We think overall we're well within the range that that test was considering.
Next question comes from William Hawkins from KBW. Please go ahead.
Hi. Thank you very much. First of all, just following on again, your comments about the strong standalone balance sheets for the U.S. and Europe that you made on slide six. I wondered if you're thinking that there's any further action that may need to be taken in Europe with regards to total capital, or the mix between capital and debt. Secondly, to the extent that the strategic review of commercial banking is ongoing, is there anything that you're sort of thinking additionally to what you told us back in the third quarter? Again, you're referring to future potential changes in the future, or is the basic picture you gave us at the end of September still what stands there? Thank you.
Yeah, the commercial banking review, I think is ongoing. I don't anticipate, let's say, significant adjustments here. We have basically done what we wanted to do already and announced it last time. With respect to the balance sheets, by the time you go to market and by the time you split up your business, you need more capital. If you have capital at one level, it's more efficient to have it in one place than if you have it at three, four different places. You always will have regulatory questions related to capital. The only thing we wanted to make sure is that we say, keep that into your minds when you look at our numbers. Plus, in particular in Europe, we have no idea which way Solvency will go.
We had a Solvency II regime that was worked on for some time. That's off the table today. There is an uncertainty what the capital requirements will be and the capital frame will be that companies will have to live by.
Very clear. Thank you.
The next question comes from Michael Huttner from JPMorgan. Please go ahead.
You said there was EUR 7 billion more risk-weighted asset reduction to come. Can you say how much revenue will decline as a result of that? Presumably, the revenue decline we're seeing is coming because you're reducing your balance sheet. EUR 11 billion seems to equate to about EUR 200 million, and I wonder if EUR 7 billion will then equate to EUR 150 million. I don't know if that makes sense. Then asking William Hawkins' question again, the shareholders' equity in insurance is EUR 27.3 billion. It was EUR 25 billion in September. What's the actual requirement to run this business? Is it 27? Is it 30? Is it 20? I know you kind of hedged. You said you don't know, but you certainly have a better idea than I do. Is there a number we can have here? Thank you.
In respect of the RWA reductions, part of that can be simply non-P&L sensitive, such as netting and balance sheet optimization. Some of it could be run off. We've already said we are going to prioritize our leasing business, and some of them will also be run off, and I think that's already wrapped into the guidance we've already given you. Within that framework, we still fundamentally believe we will achieve our 10%-15% ROE in 2015, so it has no bearing on achieving those targets. Yeah. Capital requirements in Europe is Solvency II. We don't know what it is, but clearly there is a Solvency I ratio there. Yeah, we currently obviously meet the requirements on Solvency I in each of the entities we're in.
A number would be really helpful if you have one. Oh, never mind.
I think the NN Solvency ratio gets published later in the year. All the market publish at the same time, we'll give it to you at that point.
Thank you.
Next question comes from Andrew Coombs from Citigroup. Please go ahead.
Good morning. I have two questions relating to the bank, please. Firstly, I wanted to refer to slide 13, your revised cost target for 2015 of EUR 8.8 billion. That's broadly in line with the EUR 8.9 billion target that you outlined at the January 2012 Investor Day, and that's despite an extra EUR 0.4 billion of cost savings. I was just interested to know, part of that seems to be a higher starting point, but also the procurement initiative has declined from EUR 0.5 billion to EUR 0.2 billion. Just interested to know what the moving parts are there on the cost side. Second question, just pertaining to asset quality. It'd be very useful if you could please provide the coverage ratios for the eight buckets that you identify on slide 25, and if you could also just highlight any significant moves that there were during the quarter.
I know you said at group level it had been broadly stable. Thanks.
In respect to the costs, first of all, the EUR 500 million we announced previously was procurement and other. Part of the other is what we've announced both in Q3 and Q4. We will continue to manage costs diligently.
In terms of the starting point, I think what we said at the investor day that we would try to absorb the impact of regulatory changes in inflation. What we've got now with the EUR 880 million additional cost saves that Jan referred to in the slide by 2015 is to actually bring it slightly below that. We're aiming to reduce costs a little more in light of the weakness in revenues that we've seen. It's the smaller business as well, due to the divestments. We still believe that we can achieve the 10%-15% ROE. You also need to remember that the income is depressed. Yes, it's depressed, but look in the bank, look at some of the reasons. In 2012, we had EUR 600 million costs due to a de-risking exercise. That program is finished, that cost program will not recur.
Not to say we will not be vigilant on de-risking. CVA/DVA was a whopping EUR 600 million in for 2012. There's been some big one-off impacts there that have brought revenues artificially lower, non-recurringly low, is maybe a better way to put it. Interest margin, as I said before, we still believe we can get it to 140, 145. I won't repeat that. The balance sheet, we said we'd keep it around EUR 900. It's actually below that. As Jan mentioned, we're ticking the box on Basel III fully loaded. We're ticking the box on LCR. We're ticking the box on leverage ratio. We don't have to do extra to achieve those. The cost income ratio is high, 63%. As we mentioned, largely because of that, we are tackling that with these initiatives that have been announced of EUR 880 million by 2015.
Finally, the risk costs, which were another part of the program, they are elevated today, average for the year of EUR 73. The target in a normalized basis is EUR 40/EUR 45. When you add all that up, we still believe that the 10%-15% ROE by 2015 is achievable.
Thank you. On the coverage ratio?
Taking the main buckets from slide 25 that you refer to, residential mortgages is around 20%, stable from last quarter. Corporate loans 51%, slightly down from previous quarter. Leasing 31%, the run-off book 24%, real estate finance 35%. SME Mid Corp 42%, structured finance 38%.
They are all broadly unchanged quarter-on-quarter; is that correct?
There's small variations in most of them. There is an uptick in real estate finance. That's the biggest move from 28 to the 35 I mentioned.
Great. Thanks very much.
Next question comes from François Boussel from Exane BNP Paribas. Please go ahead.
Yes, good morning, gentlemen. Two questions, please. The first one on the insurance. I just wondered whether the 132 basis points investment spread on a four-quarter rolling average was sustainable, and basically just wanted to understand what drove the improvement there and what the outlook would be for the coming quarters. The second question is on the bank. If you look at the pre-tax underlying profits, adjusted for one-offs, you get to about EUR 700 million this quarter. I just wanted to know if you see this as a kind of representative level for what we can expect in 2013.
A couple of things. On the 132 basis points, that included the benefit we had the one time in the discretionary release in the Netherlands. You should eliminate that. I think in general, we have seen positive development in the U.S. where we saw more assets under management, equity markets being up. That had an impact on the fees, so that was a plus. On the other hand, I think you will see a bit of a decline in the Netherlands, and that will certainly offset that. I would think that this might go a little bit lower going forward. On the bank side, Patrick?
Yeah. I think you rightly added up the impact of the de-risking, the impact of the CVA/DVA, and the bank tax, which hit in the fourth quarter. That's not the only thing. You also got to remember that this is seasonally a very low quarter. If you look back over our results for a number of years, you'll see fourth quarter is the lowest. Typically, financial markets starts high, and it has a cadence throughout the year. We expect that pattern to sustain. Q4 is typically a low quarter. I would not say that's representative of the full year.
Okay. Basically, the pace of loan loss provisioning is something that you could see going on in 2013?
Yeah.
Loan loss provisioning. Yeah, I think Wilfred mentioned already that this could stay elevated.
Very much.
Next question comes from David Andres from Morgan Stanley. Please go ahead.
Hi. Good morning. I just had a question on the mortality tables in the Netherlands. I was wondering, in terms of the provision that you guys made 15 years ago, how much of that is left, and how does that compare against what you expect the impact is of this new mortality table? Then just in addition to that, do you have any large contracts coming up for renewal? Thank you.
We have Dirk Stoltz, our CRO in Eurasia. Dirk, can you take that question?
Yes, I think starting at the end in terms of how this develops, I think it's something that we have a portion of the business that comes up every year. I think there's been a trend continuing toward defined contribution plans, which impacts exactly how this will play. There's also been an impact of how these decisions are being made by clients. In terms of exactly how this will develop, we cannot make projections exactly because there's still a lot of pieces that are moving and the way this can play out. In terms of a figure, the best I can do is point you to the NN Life report from a year ago, which showed the reserve at EUR 385 million.
Next question comes from Jan Willem from ABN AMRO. Please go ahead.
Hi, good morning. Jan Willem Weideman, ABN AMRO. First question, Mr. Hommen, on your own position. Have your own thoughts of those of the supervisory board or the Dutch central bank changed following the news surrounding SNS Reaal? That's one. Secondly, are you satisfied with your current maturity profile for funding? Thirdly, are you considering issuing relatively more secured debt for your funding needs in 2013 and 2014, given what's happening to your unsecured debt yields? Finally, the non-life result in Q4 was up quite significantly sequentially. Can you indicate whether that result is sustainable or not? Thank you.
I did not fully understand the question with my position at SNS. I don't think I work there. I work at ING. I don't think that has any bearing. My position is that I have a contract until the annual meeting, and the supervisory board decides on my contract and on my succession, and I think we'll leave it with that. Until they have decided, I have nothing to add. You had a question on the funding. Patrick, you want to do that?
Yeah. I think you asked about funding. Last year, as we said in the slide, we issued EUR 33 billion of debt with a tenure of more than one year, which compared to EUR 18 billion, which is maturing. It significantly exceeded the funding requirement last year. We are a regular player in the program, in the markets. We have diversified our funding profiles from public bonds. We tapped the Japanese yen market. We have a diversified program. We do RMBS as well, and we have done some of that recently this year. I think you can expect us to continue.
Next question comes from Benoit Pétrarque from Kepler. Please go ahead.
Hey, hi. It is on the net interest margin, the first question. Do you think the savings rate decrease you have done in 2013 will be enough to offset the impact of the low interest rate environment in 2013? You have now a large debt security portfolio, which is rather liquid. I guess average yield will come further down in 2013. That is question number one, and maybe you could go to the different operations and tell us where you think you can further decrease the savings rate in 2013. Question number two is on the commercial bank. Yeah, volumes were down sharply in the fourth quarter. I think total loans were actually down 4.5% in just one quarter. Just wondering where it comes from with geographies and what will be the kind of outlook for 2013 on volumes.
Are you going to further decrease your loan book on the commercial bank? Sorry to come back on the funding profile lengthening, are you done now with the lengthening? Are you happy with the current maturity of the debt, or are you going to further work on this issue in 2013? Thank you.
In terms of the net interest margin, the reductions we've seen in Germany, 25 basis points, two sets of 10 in the Netherlands, and there was some in late Q4 as well. We think that should lead to a stabilization of the interest margin. If I go back a quarter, I think that's what we guided to, and it sort of happened a bit. It's come out one basis point different. In the very near term, it should lead to some stabilization.
The commercial bank lending was a bit down, we don't anticipate that will continue. In fact, we anticipate that we will step up our lending. One big item in that lending profile had to do with we were taking deposits away that we had with the central bank, European Central Bank. Funding profile. Patrick, one more time, or Wilfred?
In the funding profile, I think, as I said, we've done a lot. We've got it into a good position. There obviously will be maturities, you'll need to replace them in due course.
Next question comes from Steven Haywood from HSBC. Please go ahead.
Hi there. Good morning. You mentioned in your report that there's no dividends until all remaining Dutch state is repaid, and you meet your regulatory capital requirements. Can you just remind me what these regulatory capital requirements are to meet?
First of all, as long as we are a group and we still have insurance in our portfolio, we also have to look for the requirements in the insurance company, and that's where we have an uncertainty related to what are they exactly, in particular in the Netherlands, where we don't know exactly where Solvency II will end up. Regulatory requirements, more and more you see that before you can pay dividends, regulators will have to give you also approval for that. That is basically a caution that we have given to you, that even if we express that we want to, we also need to make sure that we don't have an issue with our regulators.
Okay, thank you.
Next question comes from Matthias Dierick from Petercam. Please go ahead.
Good morning. Two questions, please. First on Alt-A, there is a Bloomberg headline that the sale of the portfolio could trigger an interesting gain for ING. Could you be a bit more specific here on what the P&L and capital implications could be from any sale at current market prices? Second, to come back on the investment margins in insurance, on the outlook, you mentioned that you would expect a further erosion in spreads. Was this relative to the 130 basis points including the provision release, or would you expect an underlying deterioration from current Q4 level? Thank you.
No, I don't know where Bloomberg gets the gain from. We have indicated that if the government would sell their portfolio today, based on what we know the prices are, that we think that they would make a gain. All that we will do is we will reduce some of the risk-weighted assets we have based on the guarantee that are in a small portion related to this Alt-A, but we have not commented on ING making a gain. The other question? I'll take that. On the investment spreads, it's of course difficult to predict the future. We have indicated that there is some pressure, not only in the Benelux but also in the rest of the countries in Europe. I guess that if you look at the fourth quarter rolling average and you see some decrease from there, that would be a certain indication for you.
Do you mean a decrease from the current reported level, including the provision reversal or excluding?
Excluding. You should adjust-
Okay
for the amount of the profit sharing, the EUR 51 million. There is a trend there.
Okay, thank you.
The next question comes from Anke Reingen from Royal Bank of Canada. Please go ahead.
Good morning. I have two questions, please. The first is on the bank capital. I just wondered, how often do you going to be reviewing the bank's capital for potential to upstream capital to the group? Is this going to be an annual process, or how should we think about it? Do you think the SNS development will have any impact on the supervisory in terms of how residential and commercial mortgages are risk-weighted? Just lastly, sorry, on the cost-income ratio target you had of the 50%-53%, by 2015, clearly in the current revenue environment, it looks probably more challenging. Will you do more on costs, or is the target of 50%-53% basically not set at the moment as long as revenues remain depressed? Thank you.
On capital and upstreaming from the bank, we look at that on a regular basis, but we cannot say that we have a formal process. It is done on a regular, based on capability. Of course, we do that in good consultation with our regulator because they will have to take a look at it as well. Cost income, our targets still are that we want to be at 50%-53% by 2015, and the steps we are taking to reduce another EUR 1 billion of expense that we have announced today is a big step in that direction. Revenues, yeah, I think we also would like to see our revenues increase, if the economy begins to improve, it certainly will have an impact on revenues as well at the same time.
Thank you. Just I had one question, please. On the risk weighting, do you think that your supervisor will take a more conservative approach on risk weightings of mortgages or commercial real estate as a result of developments at SNS, or is there no discussions?
Well, if you talk about residential mortgages, that would be unlikely because they were not at all a major factor or even a factor at all in the whole SNS saga. What was the case was, that comment was made by the Central Bank at the time of the announcement of the nationalization, is that the commercial real estate book of SNS was described as one that was uniquely problematic. Indeed, if you look at public information about that book, it is very different from what most other banks would have on their books at this point. Again, the problem was more underprovisioning and less credit underwriting standards than a specific risk weighting issue. A direct connection between that and an adjustment of risk weightings, we do not quite see.
The next question comes from Line Sala from SNS Securities. Please go ahead.
Two questions from my side. First of all, on slide 13, can you maybe give us a breakdown of the EUR 800 million which you have reserved for the inflation investments? I am just wondering because it seems that investments for the next upcoming years will be quite high, also considering that the IT systems will decline by 50% in 2030. My second question is with regard to the Alt-A portfolio. Let's presume that the Dutch state wants to sell this item. How much capital will be relieved, and what will you do with that capital? Thank you.
What we have done with the EUR 800 inflation is we have looked at, let's say, labor contracts, which are the main reason for inflation. We have looked at normal cost inflation that you see in energy and all type of cost categories, and that's how we have come to this increase of EUR 800 million. That's a 2.5% increase. One of the targets and objectives, of course, is can we make that less? Part of that is by smarter purchasing. You see that we do EUR 200 million reduction in purchasing expense procurement. Maybe there are other ways that we can deal with that as well. It certainly is an item that we will put on the agenda and have on the agenda to constantly watch our exposure to inflation.
Then your question on the Dutch state, when they sell the Alt-A portfolio. Was that a question?
Next. The last question.
There was a question still on the Alt-A. I think if the state is selling the Alt-A, we will be able to release about 2 billion of risk-weighted assets that we have as a guarantee on the portfolio that the Dutch state still has. It's a small guarantee, but it's about 2 billion, maybe a little bit more, 2 billion risk-weighted assets.
Last question comes from Benoît Peloille from Natixis Wealth Management. Please go ahead.
Good morning. I have a question regarding asset quality. Could you please tell us what the level of renegotiated loans? This is an item on which I couldn't see any figure. The last time I was able to see a figure on that was in 2010. It was about EUR 10 billion. If you could give me some color on that and how this has evolved and which type of loans are the most concerned, that would be great.
Yeah. This will come in more detail in the annual report. I think if you are talking about our watch list, which I suspect it is, then we are looking at the fourth quarter as an uptake of about EUR 0.5 billion to EUR 14.9 billion.
Excuse me. Could you repeat the figure, please?
EUR 14.9 billion is the amount on our watch list, which is up about EUR 0.5 billion from a quarter earlier. If that is what you're asking.
What I'm talking about are the loans that have been restructured to avoid the borrower to be in default.
We used to have that in the U.S., but that book is largely gone, and then there is a small amount of it in Spain, but that's about it.
Okay, thanks.
As mentioned, that will come back in the annual report.
Yes, in 2011, it was
I think we lost you. You have to answer your question one more time. You made a comment that we could not pick up. No more questions. Okay, I understand there are no more questions. I would say thank you very much for being on the call and spending an hour with us. I wish you a great day and good luck. Thanks. Bye-bye.
This concludes the ING Groep Q4 Results 2012 conference call. Thank you for participating. You may now disconnect.