Earnings Call: Q4 2012

Feb 13, 2013

Good morning. This is Cornelia welcoming you to the INC's Q4 2012 Conference Call. Before handing this conference call over to Jan Holman, Chief Executive Officer of IMG 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 statements not involving historical facts. 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 20F of 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, Jan. Over to you. Okay. Thank you. Welcome everyone to the ING 4th 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 us 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 Delfin Rueda and Caldwell, respectively CFO and CRO of Insurance Eurasia are here with us and Ewout Steenberg, CFO of the insurance company U. S. Is on the call. So we're all available to answer your questions. Slide number 2. Results held up well came in at €2,600,000,000 underlying net profit, which is down 5.2% from 2011. 4th quarter results were impacted by the Dutch bank tax and various market related items, leading to an underlying profit for the group of EUR 373,000,000. The bank underlying result was EUR 184,000,000 and that had to deal with $188,000,000 negative credit adjustments, dollars 151,000,000 of derisking losses and $175,000,000 of Dutch bank tax. The insurance operating results improved compared to the Q3. They came in at a little less than €300,000,000 as the investment spread strengthened and the underlying result before tax rose to 272,000,000 dollars You see the full year results on slide 3. Net profit for the group was almost 3,900,000,000 including the gains that we had on the sale of ING Direct USA, ING Canada and Insurance Malaysia. Net results also included a €452,000,000 restructuring charge, which will help to drive the 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 4, you see that combined the measures will reduce expenses by about €1,000,000,000 by 2015. Cost initiatives that we announced at the end of 2011 are ahead of schedule for Retail Netherlands. We have already scored €162,000,000 in cost savings so far other than $330,000,000 that we expect to gain. Today, we announced an expansion of the 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 €100,000,000 by 2014 €120,000,000 in total including a further headcount reduction of 1400 FTEs. In Belgium, we are trying to achieve 150,000,000 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 U. S. We sold our stake in Capital One. We announced the sale of Insurance Malaysia, Hong Kong and Thailand, 2 joint ventures and the investment management units in Thailand and Malaysia. We the U. S. Insurance U. S. Filed a registration with the SEC and is 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 Westland Utrecht Bank. We have repaid another choice to the Dutch state, making now the total payment already to a total of more than €10,000,000,000 and we over streamed an additional €1,000,000,000 from the bank to the group in order to reduce the core debt. And 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 1 as well. You can see on slide 6, what this all means for our balance sheet. We reduced the core Tier 1 to €2,250,000,000 The core debt of the group is now down to €7,000,000,000 Proceeds from Malaysia were used to redeem bonds a hybrid of €1,250,000,000 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 Q1 this year. We'll bring in €1,600,000,000 in proceeds. But 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. And of course, we want to make sure that Europe and the U. S. Are well capitalized on a stand alone basis before we do an IPO. Ultimately, the proceeds for selling insurance with €27,000,000,000 of equity should be more than sufficient to cover the €7,000,000,000 remaining leverage in the group. But everything requires time and I think it's important that we take the time to execute as well. On slide 7, you see that the bank is already meeting most of Basel III. And 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 €177,000,000,000 since September 2011 and it's already below the target we have set for 2015, which was €900,000,000,000 of course mainly because we are selling and have sold assets in ING Direct U. S. And ING Direct in Canada, which accounted for €85,000,000,000 of the decline. Customer deposits have increased by €30,000,000,000 a customer lending increase 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 9, you see that we have actively reduced our short term funding, but at the same time growing our customer deposits and long term debt. The professional funding was reduced by €62,000,000,000 and customer deposits grew by €30,000,000,000 Long term funding was increased by €14,000,000,000 and that all I think has added to strengthening the credit profile of ING Bank. In 2012, we issued $33,000,000,000 of debt with a 10 of more than 1 year compared with €18,000,000,000 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 €6,000,000,000 of debt securities as part of our planned derisking program that resulted in €600,000,000 of losses, but it also reduced the risk weighted assets by $7,000,000,000 In addition, we sold $3,500,000,000 of bonds to facilitate the sale of ING Direct U. K. The quality of the portfolio improved substantially and has now a positive revaluation reserve of €1,300,000,000 It is more liquid and it is Basel III compliant. So we have basically completed our derisking of the investment portfolio. And of course, we will continue to monitor that very closely. And should there be a need for action, we will take that. Slide 11, you see that 2012 was heavily impacted by derisking losses and negative credit adjustments for a total of 1,200,000,000 That includes €600,000,000 of losses in derisking from the bond portfolio as we explained in the previous slides, while credit adjustments move from a positive $2.75 to a negative $5.87 in 2012 as spreads were narrowing. On slide 12, operating expense modestly increased by less than €100,000,000 or 0.9 percent despite €200,000,000 of normal cost inflation and again €200,000,000 so €200,000,000 of higher regulatory costs including the Dutch bank tax. So we're able to offset these impacts mainly through the savings program in the Netherlands, which has delivered €162,000,000 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 levels stable. Between now and 2015, we aim to offset the impact of inflation and higher regulatory costs are structural cost savings of about €900,000,000 Benelux Retail Banking has already pushed forward on operational excellence in mobile banking that will result in €400,000,000 of additional cost savings in 20 15. Commercial bank review is expected to result in additional €300,000,000 of cost savings. Procurement initiatives that are underway, we expect that we can get another $200,000,000 per year. And it's important to note that the Dutch government has decided to impose a one time levy of €1,000,000,000 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 €300,000,000 €350,000,000 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 with that the business model with 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 9,000,000 visits per month to 25,000,000 per month over the course of only 1 year. And 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. Give an example, on IT, already 568 applications out of 1800 since 2007 and we expect the 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 and it also means more convenient service to our customers. In Retail Netherlands, we have shown a strong reduction in operating expense over the past 5 years, starting with the merger of ING Bank and Postbank. And as I mentioned earlier, the cost savings program announced in 2011, which is expected to deliver $330,000,000 in cost reductions in 2014 is ahead of schedule. Already realized 162,000,000 and the headcount has been reduced by more than 1800 out of the 2,700 we had planned. Retail Netherlands is now expanding that program including further streamlining IT and integrating our mobile banking offering and that's backed by another €100,000,000 of investments in IT. The second phase is now expected to result in additional cost savings of €100,000,000 dollars per year by 2015 that is bringing the total to €430,000,000 Additional headcount reduction is 1400 FT feet feet feet feet feet feet feet feet feet feet feet feet feet Es, of which 400 are external. And we will create 250 new front office jobs in order to better serve our customers. Then 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 and we expect that we can do that fully by natural attrition. And that will create cost savings of about €150,000,000 at the same time. Let's go to Q4 results. Well, you see that on slide 18 that the group was 373,000,000 the bank was 184,000,000 and insurance came in at 296,000,000 and an underlying result before tax of $272,000,000 On slide 20, you see the adjusted gross results. And if you make all the adjustments of special items that happened in Q4 this year, it was 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 €50,000,000 from negative debt valuations, so DVA. And that has the result of tightening the spreads to our own structured notes. That was coupled with €81,000,000 of credit value adjustments on derivatives that we sell to clients. Normally, they move in opposite direction and then 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 and 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 had 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 and we have lengthened our funding profile and that we had lower returns on the bond portfolio because of derisking and lower interest rates. Expenses, they look like a significant increase in expenses if you look at the costincome ratio, but expenses were kept flat compared to a year ago except for the €175,000,000 charge in bank tax. Cost income at $63,400,000 if we exclude the market impact in the Dutch bank tax and CVA adjustments. And I mentioned already that we have a number of programs that will bring €840,000,000 of cost savings for the bank by 2015, of which we have already secured $162,000,000 so far. Risk costs were up by €34,000,000 compared to Q3 and they reflect the fact that we still see a very weak macroeconomic environment. The increase of €34,000,000 was mainly in structured finance and concentrated in a relatively small unit the acquisition finance book. Risk cost of real estate finance was stable and 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 Med Corps, by SMEs, by real estate finance and by leasing to the same people as before. Loan book is well collateralized and provisions have historically exceeded our write offs. The proportion of releases where 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%. And please note that these ratios are difficult to compare between banks because you see differences in business model in a 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 103,000,000 euros Actual losses in the portfolio remained low and the non performing loan ratio decreased to 7.6 percent in the Q3. 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 well, relatively well despite the challenging conditions of the commercial real estate market. The as 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%. So we calculate that quite conservatively. And all values were updated with the Q2 2012 by ING indexation and based on external indexes and internal observations. We also do backtest compared with actual sales prices on recent customer transactions. And I think we feel comfortable that we have here a conservative approach to our risk in the portfolio. Looking at the Dutch mortgages, 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, but the number of foreclosures are still quite low. And the more the NPL in the mortgage portfolio is now at 1.4, but that's supported still by relatively low unemployment rate 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 States and the upstreaming to the holding company of €1,000,000,000 There was an accounting change for pensions effective January 1. That is 60 basis points. So that will reduce the rate to the ratio to 11.3. But then 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, where we expect to reduce the risk weighted assets by at least another $18,000,000,000 of which $11,000,000,000 was achieved so far, so bringing the pro form a level to $10,600,000,000 When you look at insurance on page 33, operating results up by 25 percent almost €300,000,000 a much better investment margin Compared year on 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. And then the 4th quarter results improved before tax to €272,000,000 euros reflecting lower market related type of impacts. Investment margin was better. The rolling average 4 months 4 quarter average was at 135. Investment performance increased to €447,000,000 And there's also included in here a release of a provision for this cautionary profit sharing to policyholders in the Netherlands. And 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 to $786,000,000 up almost 6% compared to as 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 €118,000,000 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 €45,000,000 nonrecurring pension release in the U. S. Eliminating debt expenses were down by 2%, so reflecting that we continue 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 continue to be impacted by negative non operating expense, which reflect the volatile markets also reflecting derisking and the fact that we are hedging to protect our regulatory capital here. The Benelux had lower sales compared to the Q4 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 as the one time charge. Otherwise, they would have been up by 15%. Good performance, strong CMO revaluations, where private equity returns were a little bit negative last year. The previous quarter also includes €173,000,000 of net favorable DAC unlocking. Sales were up almost 19% 21% compared to Q3 And 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 €136,000,000 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, that we still have reserves that are adequate. The focus continues to be on capital protection to make sure that we have positive IFRS P and L. And the positive variance to be expected in the sensitivities in the quarter was driven by market outperformance of the underlying funds. And then the final slide on the U. S. Progressing on their capital position. Capitalization improved again this quarter RBC ratio at 5.31%. 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 €1,000,000,000 of debt at very attractive spreads. So we're quite pleased with the performance of the U. S. And the improved capital structure that I have been able to accomplish. So as a summary, results held up well. Underlying net profit for the group at €2,600,000,000 And at the same time, we took significant action to derisk and restructure, derisk our balance sheet and to make sure that our businesses are prepared for the new future. And with that, I would like to open it up for questions. Thank you, 1st question comes from Michael van Wijken from BAM. Please go ahead. Good morning, guys. Mike Feuchtenberg from Bank of Merrill Lynch. First question would be on the earnings outlook for the Benelux Retail Bank. Can you talk about how you see net interest income developing there for that's question 1. The second question on the disposal program, can you talk us through, 1st of all, Japan what alternatives you are considering? And 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. Okay. The last 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-one. So that's language that I think, yes, later this year is later than today, yes? So but we will do it. The 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, that requires a lot of discussion with local regulators in Japan. And we were working on 2 or 3 different alternatives, but we are not ready yet to come forward with it. On the Benelux retail, Patrick you want to do net income? Yes. I think you asked about the interest margin in the Benelux. If you look at the interest margin overall, as Jan mentioned, it's held up pretty well at 133 basis points. It declined in aggregate by 115 percent in 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 reducing production 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. I mean that applies that discipline applies across the total bank and Netherlands as well and Benelux as well. And on the weakness has been on the deposit side, where the declining interest rates 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. So the outlook for the net interest margin overall and 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 $140,000,000 $145,000,000 which we will aim to achieve by continued focus on discipline in loan pricing. But we also need a little bit of help from growth in the economy to add some volume on the lending side to interest margin. That's for you, the Don also? Yes. We've been saying for a while that we expected risk costs to remain at elevated levels and indeed Q4 showed that as well. Looking forward and 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 Corp book, the Real Estate Finance book. And 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. So we also see potential for indeed continued elevated risk costs there. So that's the outlook. Next question comes from Farooq Hanif from Citi. Please go ahead, sir. You can hear me. Just two questions on the insurance business, if I can please. Firstly, just want to understand the improvement in investment margin that you have because of the release of the discretionary profit sharing reserve in Q4. I mean, is this something that could happen every Q4? Or should we just assume that your underlying guidance of 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? And 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. Well, I will just deal with the U. S. One first. The difference between the $531,000,000 and the $425,000,000 is about $1,500,000,000 which conveniently is something 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 CT95 overall aggregate basis. But what we've been saying is that our target is a minimum of RBC. We want to upstream capital to the holding company with a view to distributing it. And ideally, we would like to redeem the CCLOC, which if we did would meant to be replaced in cash. And the final part of the question? The loan? Yes, the debt issuance is debt, it's not capital. So it's part of the funding profile and will contribute to the overall funding and sits within the maximum 25 percent 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? Yes. I mean, you talk about an Jan mentioned, when you IPO companies in need of adequate capital, so you might need a buffer as well. So like we said last time around, it's maybe it's nearly there, but maybe not quite there. Yes. That's the discussion we will have to have with the investment banks by the time we go to market. So I think it's a little premature now, but we'll see what comes out of that one. Your question on the discretionary release has 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. And this time, the discretionary decision was that we don't pay that given the overall results of the Benelux organization. So it could happen again? It could happen and it could not happen. Yes. 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 Fakur Hamedra from Autonomous. Please go ahead. Good morning, gentlemen. Just one question for me. With regards to the U. S. IPO, more recently, we've seen some variable annuity block transactions with suggestions as 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 BA 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 block separately, but also including it in the IPO. So nursing will be excluded, but our base case continues to be the IPO. And I did not get the question on the legacy. The legacy question was actually just with regards to legal entities I. E. Is the variable annuity book within a separate legal entity and therefore immediately separable? Yes. I mean it's in the offshore Cayman business. I think it'd be premature to talk about this, but we would know what or if any buyback structure might entail if there was to be one. Okay. Thanks so much. The next question comes from Francesca Toni 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 guidance of still mild deterioration going into 2013. Can you just give us you provided very helpfully a stress test last year. Do you have an update on the mortgages for example on increase in unemployment decline in the house prices which seems to be faster right now? What your loss expectation would be in that scenario? And then 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? And also 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, I mean, the portfolio is fairly stable. It hasn't really changed in either composition or size since we did this last. So there is not really any significant development there. And 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% 38% already for a while. And 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. And this is the outcome of our best assessment. And then 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. And do you have the percentage of your mortgage book that has an LTV already above 100% if you could disclose that? That's not the number we track or disclose. Okay. Thank you very much. And just going back for a second to your stress test. If I remember correctly and I've got a slide here and please correct me if I'm not right. U. S. Stress testing with effectively a 15% reduction in house prices and then which 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. I mean, if you look at it from the peak, we're already down 16%. And certainly, our house view is that we will continue to see some declines in the next 2 years, but not to the level that the stress test suggests. And looking at unemployment, again, it is trending up, but nowhere near the levels that were taken into account in that stress test. So 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 sheet for the U. S. And Europe that you made on slide 6. Thanks for what you said on the U. S. But 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. And then 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 Q3? Again, you're referring to sort of 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. Yes. The commercial banking review, I think is ongoing, but I don't anticipate, let's say, significant adjustments With respect to the balance sheet, yes, 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 in 3, 4 different places. So you always will have regulatory questions related to capital. And 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 and that's off the table today. So there was an uncertainty what the capital requirements will be and the capital frame will be that companies will have to live by. It's very clear. Thank you. The next question comes from Michael Huttner from JPMorgan. Please go ahead. On the you said there was €7,000,000,000 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 in because you're reducing your balance sheet. So €11,000,000,000 seems to equate to about €200,000,000 And I wonder if €7,000,000,000 would then equate to €150,000,000 don't know if that makes sense. And then asking Will Hawkins' question again. So the shareholders' equity in insurance is €27,300,000,000 it was €25,000,000,000 in September. What's the actual requirement to run this business? Is it 27,000,000,000? Is it 30,000,000,000? And I know you kind of hedgedly, you didn't really you said you don't know, but you certainly 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 and L sensitive such as netting and balance sheet optimization. And 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 runoff. 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% to 15% ROE in 2015. So it has no bearing on achieving those targets. Yes. Capital requirements in Europe is Solvency II, we don't know what it is, but clearly there is a Solvency I ratio there. And yes, we currently meet obviously meet the requirements on Solvency I and meet to the entities we're in. But a number would be very helpful if you have one. I think the NN policy ratio gets published later in the year, all the market publish at the same time. So 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 and your revised cost target for 2015 of €8,800,000,000 that's broadly in line with the €8,900,000,000 target that you outlined at the January 2012 Investor Day and that's despite an extra €400,000,000 of cost savings. So I was just interested to know, I mean, part of that seems to be a higher starting point. Also the procurement initiative has declined from €500,000,000 to €200,000,000 So just interested to know what the moving parts are there on the cost side? 2nd question just returning to asset quality. It would be very useful if you could please provide the coverage ratios for the 8 buckets that you identified on Slide 25. And if you could also just highlight any significant moves that there were during the quarter? I know you said that group level had been broadly stable. Thanks. In respect to the costs, first of all, the $500,000,000 we announced previously was procurement and other. And then 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 and inflation. What we've got now with the $880,000,000 additional cost saves that Niall referred to in the slide by 2015 is to actually bring it slightly below that. And we're aiming to reduce costs a little more in light of the weakness in revenues that we've seen. So we and it's a smaller business as well due to the divestments. So we still believe that we can achieve the 10% to 15% ROE. You also need to remember that the income is depressed. Yes, it's depressed. But in the bank look at some of the reasons. In 2012, we had $600,000,000 costs due to the derisking exercise. That program is finished. So that cost program will not recur. It's not to say we will not be diligent on derisking. CVA, DVA was a whopping $600,000,000 for 2012. So there's been some big one off impacts there that have brought costs revenues artificially lower, non recurringly lower 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 keep it around 900. It's actually below that. And as Jan mentioned, we're ticking the box on valve 3 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 to income ratio is high 63 percent as we mentioned. But largely because of that, we are tackling that with these initiatives that have been announced of $880,000,000 by 2015. And then finally, the risk costs which were another part of the program they're elevated today average for the year of 73. The target for the in a normalized basis is 40%, 45%. So when you add all that up, we still believe that the 10% to 15% ROE by 15% is achievable. Thank you. And on the coverage ratio? Yes. Taking the main buckets from Slide 25 as you referred to residential mortgages is around 20% stable from last quarter. Corporate loans 51 slightly, slightly down from previous quarter. Leasing, 31, the run off book 24, real estate finance 35, SME Mid Corp 42 and Structures Finance 38. And they were 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 Francois Besson 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 spreads on a 4 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? And the second question is on the bank. If you look at the basically the pre tax underlying profits adjusted for 1 offs you get to about €700,000,000 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. So 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. So I would think that this might go a little bit lower going forward. And then on the bank side Patrick? Yes. I mean I think you also you rightly added up the impact of the derisking, the impact of the CVA, DVA and the bank tax, which are hit in the Q4. But 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 4th quarter is the lowest. Typically, Financial Markets starts low starts high and it has a cadence throughout the year. And we expect that pattern to sustain. So Q4 is typically a low quarter. And so I would not say that's representative of the full year. Okay. And basically the pace of loan loss provisioning is something that you could see going on in 2013? Yes. Glass provisioning. Yes, I think Wilfred mentioned already that this could stay elevated. Very much. Next question comes from David Amrick 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? And then just in addition to that, do you have any large contracts coming up for renewal? Thank you. We have Doug Caldwell, our CRO in the ratio. Doug, 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. So in terms of exactly how this will develop, we're not really cannot make projections exactly because there's still a lot of pieces that are moving and the way this can play out. The in terms of a figure, the best I can do is point you to the Indian Life report from a year ago, which showed the reserve at 385,000,000 Next question comes from Jan Willem from ABN AMRO. Please go ahead. Hi, good morning. Jan van den, ABN AMRO. First question, Mr. Thomas, on your own position, have your own thoughts of those of the Supervisory Boards or the Dutch Central Bank changed following the news surrounding Essenas Real? And that's one. Secondly, are you satisfied with your current maturity profile for funding? Thirdly, are you considering issuing a relatively more secured debt for your funding needs in 2013 2014 given what's happening to your unsecured debt yields? And 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 and SNS. I don't think I work there. I work at ING. So 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 will leave it with that until they have decided I have nothing to add. Then you had a question on the funding. Patrick, you want to do that? Yes. I think you asked about funding. Last year, as we said in the slide, we issued €33,000,000,000 of debt with a tenor of more than 1 year, which compared to €18,000,000,000 which is maturing. So it significantly exceeded the funding requirement last year. We're a regular player in the program in the markets. We have diversified our funding profiles from public bonds. We tapped the Japanese yen market. So we have a diversified program to RMBS as well. We've done some of that recently this year. And I think you can expect us to continue. Next question comes from Benoit Petrarque from Kepler. Please go ahead. Hi. It's 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. So I guess, average yield will come further down in 2013. So that's question number 1. And maybe you could go to the different operations and tell us where you think you can further decrease the savings rate in 2013. And then the question number 2 is on the Commercial Bank. Yes, volumes were down sharply in the 4th quarter. I think total loans were actually down 4.5% in just 1 quarter. Just wondering where it comes from, with geographies and what is it what will be the kind of outlook for 2013 on volumes? Are you going to further decrease your loan book on the commercial bank? And sorry to come back on the funding profile lengthening, but are you done now with the lengthening? I mean, are you happy with the current maturity of the debt? Or are you going to further work on this issue in 2013? Thank you. Yes. In terms of the net interest margin, the reductions we've seen in Germany, 25 basis points, 2 sets of 10 in the Netherlands and there were some in late Q4 as well. We think that should lead to a more 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 1 basis point different. So in the near term, we think that's in the very near term, it should lead to some stabilization. Commercial bank lending was a bit down, but we don't anticipate that that will continue. In fact, we anticipate that we will step up our lending. And 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 both? I mean in the funding profile, yes, I think as I said we've done a lot. We've got it into a good position. There obviously will be maturities, so you'll need to replace them in due course. Next question comes from Stephen 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? That's sorry. 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. And 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 de Ruit 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 and L and capital implications could be from any sale at current market prices? And then second on the 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 again. The other question? On the investment spreads is, 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 4 quarter rolling average and you see some decrease from there that would be a certain indication for you. But do you mean a decrease from the current reported level, including the provision reversal or excluding? Excluding. So you should adjust for the amount of the profit sharing the €51,000,000 and then basically there is a trend there. Okay. Thank you. Our next question comes from Anke Rangan from Royal Bank of Canada. Please go ahead. Yeah. 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 like an annual process? Or how should we think about it? And then do you think the SNS development will have any impact on the supervisory in terms of how residential and commercial mortgages are risk weighted? And then just lastly, sorry, on the cost income ratio target, you had of the 50% to 53%, I mean, by 2015, clearly, in the current revenue environment, it looks probably more challenging. So will you do more on costs? Or is the target of 50% to 53% basically not set at the moment as long as revenues remain depressed? Thank you. Okay. 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. And 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% to 53% by 2015. And the steps we are taking to reduce another €1,000,000,000 of expense that we have announced today is a big step in that direction. Revenues, yes, I think we also would like to see our revenues increase. And 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 weightings. Do you think your supervisor will take a more conservative approach on risk ratings 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 S and S saga. What was the case was and that comment was made by the Central Bank at the 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. And indeed, if you look at public information about that book, it is very different from what most other banks will have on their books at this point. So and again the problem was more under provisioning and less credit underwriting standards than a specific risk weighting issue. So a direct connection between that and an adjustment of risk weightings we do not quite see. The next question comes from Lina Sala from FNS Securities. Please go ahead. Two questions from my side. First of all on slide 13, can you maybe give us a breakdown of the 800,000,000 which you have reserved for the inflationary investments? I'm just wondering because I mean it seems that the investments are the next upcoming years will be quite high also considering that the IT systems will decline by 50% in 2013. And 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 released? And what will you do with that capital? Thank you. Yes. What we have done with the 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 €800,000,000 One of the targets that we have one of the targets we have yes, that's a 2.5% 2% to 2.5% increase. 1 of the targets and objectives, of course, is can we make that less? And part of that is by smarter purchasing. And you see that we do €200,000,000 reduction in purchasing expense procurement. But 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? And then your question on the Dutch state, when they sell the multi portfolio, Was that a question? 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 $2,000,000,000 of risk weighted assets that we have as a guarantee Dutch state still has. It's a small guarantee, but it's about $2,000,000,000 maybe a little bit more $2,000,000,000 risk weighted assets. Next question comes from Benoit Ferrijo from Nataxis Asset Management. Please go ahead. Good morning. I have a question regarding asset quality. So basically, could you please tell us what the level of renegotiated loans? This is an item which on which I couldn't see any figure. And the last time I could I was able to see a figure on that was in 2010. It was about €10,000,000,000 So 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? Yes. 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 4th quarter at an uptick of about €500,000,000 to €14,900,000,000 Excuse me. Could you repeat the figure, please? €14,900,000,000 is the amount on our watch list, which is up about €500,000,000 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. But as mentioned that will come back in the annual report. Yes. But 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. 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 Analyst Q4 results 2012 conference call. Thank you for participating. You may now disconnect.