Earnings Call: Q2 2012

Aug 8, 2012

Good morning, ladies and gentlemen. Thank you for holding. This is Yvonne welcoming you to ING's Q2 2012 Conference Call. Before handing this conference over to Jan Hollmann, Chief Executive Officer of ING Group, let me first say that today's comments may include forward looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement 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 filed with 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 any offer to buy any securities. Good morning, Jan, and over to you. Okay. Thank you, and welcome everyone to ING's Q2 2012 results conference call. ING posted a solid second quarter results, particularly when we look at the weakening economic environment we are currently in. I will talk you through the presentation and then Patrick Flynn, Wilfred Nagel and Matt Ryder are here with me and we are all available to answer your questions. Page 2. ING is maintaining strong momentum on restructuring, including the sales process we have for Asia and the preparations we are having for our U. S. And European Insurance and I'm organization. The bank is making good progress on balance sheet integration and we accelerated the seeing in the Eurozone in Q2. We posted the group posted an underlying net profit of €1,045,000,000 in Q2. That excludes the results from Insurance Asia, which is now reflected and results from discontinued operations. The bank posted a robust results despite losses from proactive derisking. We saw pressure on the net interest margin and we also saw that risk costs were elevated. But we had an underlying profit in the bank before tax of €995,000,000 euros And then insurance operating results compared to Q1 went up to 304,000,000 euros Underlying results before tax were €229,000,000 and that include the hedging gains we made in the U. S. For hedging exposure, interest and equity exposure on our VA block, also included the negative change that we saw in the provision for a separate account pension contract that we have in the Benelux. Now we go to Page 3 and you see that we have made good progress and continue to make good progress on our restructuring program as required by the European Commission. The sales process for Insurance and Investment Management in Asia is on track. In the U. S, as I said earlier, good progress on the preparations for our IPO. And for Insurance Europe, we have stepped up our efforts to now prepare for the base case of an IPO. We had discussions with the European Commission on adjustments to the restructuring plan. We held them together with the Dutch state and we will resume these discussions after the summer recess. In the meantime, in order to safeguard the legal rights, ING has filed an appeal with the European General Court against the European decision of May 11, which reinstated the 2,009 restructuring plan. As I said earlier, many, many times, we remain committed to repay the debt state as soon as possible, including paying another fines this year. But at the same time, we need to maintain strong capital ratios given the uncertain economic outlook that we are facing. Page 4, you see the divestment process of insurance in Asia that is really on track. The businesses are now classified as held for sale and discontinued operations in our accounts. Insurance Asia had another good quarter. Performance was driven by strong sales in Japan and better mortality results in Korea, while expenses were kept flat. That excludes €180,000,000 goodwill write off in our investment management activities in Korea. The increase in the book value compared with December 2011 is mainly due to bond revaluations, foreign exchange changes and also the net results that were added to the equity value. We have received interest for all units and divestment may take place probably through multiple transactions. Negotiations are ongoing and we cannot predict at this moment the outcome with respect to the divestments of the operations that we have for sale. Page 5. The U. S. Is making good progress towards a planned IPO. In June, the U. S. Completed a key milestone by publishing consolidated U. S. GAAP financials for the first time. In addition, through July, U. S. Has replaced €1,850,000,000 of internal funding and commercial paper that was guaranteed by INGV with external debt that way improving its standalone funding and its liquidity. The ultimate timing of an IPO has yet to be determined and of course will depend on market circumstances as well. As announced on August 2, that is Slide 6, ING is reviewing strategic options for ING Direct Canada and ING Direct U. K. It is important to note that the other ING Direct units are not affected by this. We see ING Direct as a key pillar of our strategy with strong deposit gathering ability, with innovation and distribution, excellent operational performance and customer centricity, so key for our operations going forward. And ING is integrating its balance sheet of ING Direct with the rest of the ING Bank to improve efficiency and to optimize the returns under Basel III. Slide 7. ING Bank has made real good progress further progress on balance sheet optimization in the second quarter. The size of the balance sheet was reduced to $900,000,000,000 in line with our target for 2015. We also cut our CD and CP issuance after a strong inflow of short term funding in the Q1 and consequently reduced cash and balances with central banks by about €30,000,000,000 which anyway are low returning assets anyway. Retail client deposits were up by €4,000,000,000 and customer lending increased without growing the total balance sheet. Also I think our balance sheet reduction has a favorable impact on future taxes we will have to pay in the Netherlands. Slide 8, you see the balance sheet integration initiatives. They have delivered €31,000,000,000 since the beginning of 2011. Another €3,000,000,000 is still in the pipeline for the remainder of this year and further potential now is being investigated. And you see some examples on the right side of things we have done, moving assets to where the deposits and the funding capabilities were in good shape and where we had excess funding capability. On slide 9, you see our Spanish exposure. Given the weakening macroeconomic climate in Europe, we have taken proactive steps to derisk, and particularly reducing its exposure to Spain by about $6,200,000,000 in the 4 months that ended in July. That includes a reduction of $2,600,000,000 in the lending book and a decrease of $4,100,000,000 dollars in debt securities, mainly as a result of sales of covered bonds and RMBS. The Spanish funding mismatch defined as having Spanish assets outstanding minus local funding has been reduced from $27,500,000 at the end of 2010 to $12,300,000,000 by the end of July 2012. Go to slide 11. On slide 11, you can see that ING Bank reported robust second quarter results despite losses from derisking, pressure we saw on the net interest margin and elevated risk cost and had an underlying profit before tax of €995,000,000 dollars Insurance operating results were better and improved to $304,000,000 Underlying results before tax were $229,000,000 and they included a gain hedging gain on our U. S. VA block and a negative change in the provision for separate account pension contracts in the Benelux. NetRNG Group posted an underlying net profit of $1,045,000,000 in a challenging environment. Now let's go to the bank. Slide 13. Gross results before risk costs were up by 5.9% compared to a year ago and declined by only 2% from the Q1 supported by strong cost control. Underlying result before tax was €995,000,000 that is down about 13.1% year on year and 11% lower than the Q1 of this year and that reflects mainly higher risk costs. Risk costs increased mainly in Commercial Banking, in particular in Real Estate Finance due to the further deterioration in the commercial property markets. If you look at Page 14. During the Q2, derisking efforts were accelerated amid the ongoing euro crisis. Total bond sales amounted to $2,100,000,000 at a loss of 178,000,000 dollars The sales were largely related to Spain. If we clean up the numbers for these and other market impacts to make them more comparable, The gross results went down by 7.3% compared to the 2nd quarter and 10.7% from the 1st quarter. The latter can largely be attributed to seasonally lower financial market income. Page 15. Underlying interest result held a bell, declining 3.3% from a year ago and almost the same from the previous quarter. Net interest margin had a sharper decline down to 126 basis points, but mainly due to balance sheet extension. Although the balance sheet was reduced again to €900,000,000,000 at quarter end, the average balance sheet, which is the basis for the calculation of NIM, was up slightly compared to Q1 due to higher commercial paper and CD and cash that we maintained with central banks. Margins on lending have been solid despite higher funding costs. You can see that on the right top of the slide. And margins on savings are under some pressure despite reduction of client rates in many countries and they reflect the impact of low interest rates and derisking. Slide 16. You saw that cost control across the bank has supported the decline in underlying operating expense both sequentially and year on year for the Q2 consecutive. Compared to the Q1 2012, expenses declined by 3.6%. Decrease was mainly due to lower performance related personnel expense, also stemming from the new Dutch collective labor agreement that was announced in June of this year. And also we had a reimbursement in the Belgium deposit guarantee scheme. Page 17 risk costs. Further deterioration in the macro environment had a clear impact on the risk costs, which have increased by 22% from the Q1 and almost 78% from the Q2 last year. The increase was driven by industry lending and commercial banking, primarily within the commercial real estate and higher addition to Dutch mortgages, reflecting lower house prices in the Netherlands. We expect going forward the risk costs will remain elevated reflecting the weakening of the economic climate. Page 18. Non performing loans expressed as a percentage of total loans and amounts due from banks increased slightly from 2.3% to 2.3% from 2.1% at the end of March. The increase was mainly driven as I mentioned earlier, by Real Estate Finance, also the lease runoff portfolio and the mid corporate SME segment in the Netherlands. Page 19. Increase in risk cost, largely due to Real Estate Finance, which was up by €75,000,000 mainly in the Netherlands, U. K. And Australia. The NPL ratio for Real Estate Finance increased from 5.7% to 7.3%. And NPL ratio in Spain remained flat, but at a relatively high level of 18%. As we said, we expect given the deteriorating commercial real estate market, the risk cost will remain elevated. Nevertheless, the overall quality of the REV portfolio remains relatively good. The real estate financing policy is based on cash flow generating prime real estate. As an example, construction is only 2% of the total portfolio and at least 70% is pre sold and or pre rented. The non performing loan ratio for Dutch mortgages remained stable at a low 1.2% despite decline in house prices of 12% since 2,008. The main reason for the low NPL ratio is the relatively low unemployment rate in the Netherlands, which is the 2nd lowest rate in Europe. Risk costs increased in the Q2, mainly as a result of the lower house prices. Given the weak economic environment, we expect unemployment to go up and house prices continue to decline. And as a result, we expect some increase in our risk cost on Dutch mortgages this year, but no dramatic changes. And on September 12, there will be elections here in the Netherlands. Most political parties would like to change the tax deductibility for both new and existing mortgages. We are supporting that, but it's important that it is being done in conjunction with a broader tax reform and liberalization of the rental markets. Page 21. Overall quality of the loan book in Spain has remained relatively good despite the weak economic environment. Total risk costs on the Spanish lending book declined from $43,000,000 in Q1 to $33,000,000 in Q2. NPL ratio increased slightly to 6.4. NPL ratio on Spanish mortgages was stable at a very low 0.7 percent. And the corporate portfolio of $6,500,000,000 is very well diversified and relatively well provisioned. Within the corporate portfolio, the real estate finance portfolio of $2,700,000,000 has a relatively high NPL ratio of 18%. However, risk costs have been manageable so far. It's important to note that construction accounts for only $42,000,000 or 1.6 percent of our Rev portfolio. Again here, we expect that risk costs will continue to remain elevated. The core Tier one ratio in the bank increased to 11.1%. Risk weighted assets increased by €3,800,000,000 basically driven by foreign exchange. Impact of credit migration was limited to €1,000,000,000 And especially you see here the effect of the derisking measures that we have taken. That's why the numbers are low. And market risk weighted assets rose reflecting volatility in financial markets. Let's look at the impact of Basel III on the core Tier 1 ratio. We think it's quite manageable and we are maintaining a pro form a ratio of a quarterly 1 of 10%. On a like for like basis, the impact on risk weighted assets is little changed from what we have disclosed during our Investor Day in January. However, when you express it in basis points, the higher impact, which is 115 basis points in 2013 reflects the lower base of risk weighted assets following the sale of ING Direct in the U. S. We expect that our actions will reduce Basel's re risk weighted assets by about $15,000,000,000 of which $3,000,000,000 so far has already been achieved. The approval of IRS of IAS 19R will change the timing of the Basel III impact that is related to pension assets. Under this accounting provision, the new the pension corridor, which has served as a buffer for unrealized actuarial gains and losses, will disappear as of the 1st January 2013. And any difference will be taken through equity as of that date. And that will bring forward part of the Basel III impact related to pensions and the remaining pension assets will be deducted from capital gradually from 2014 through 2018. So the fully loaded Basel III impact does not change as a result of all this. Last slide for the bank is the funding position. We have a favorable funding mix. There's more than 60% coming from retail and corporate deposits. Retail franchise consistently attracts retail deposits. Inflow again was strong €4,200,000,000 this quarter. Liquidity reserves of €191,000,000,000 exceed total wholesale funding. So we can able we are able to withstand significant retail stress on top of full wholesale liability runoff. And our Basel III liquidity coverage ratio was above 100%, which is the required minimum. So that altogether, I think, shows that paying attention to our balance sheet, our funding, our capital and liquidity and leverage has really paid off. Now let's go to the insurance company. Page 26. You see that results have improved from Q1 on both underlying and operating basis, reflecting the fact that seasonally we had higher investment margin and positive results on regulatory capital hedges in our U. S. Closed block VA business. Compared to the Q2 of 2011, results were lower in part because of non recurring items in the prior year as well as also continuing pressure on our non life results. The investment spread remains resilient. The margin was €475,000,000 that was up 9.5% from Q1. It is down compared to Q2 by 2.1%, but that included last year €28,000,000 of favorable non recurring items. Increase from the previous quarter was driven by seasonally higher dividends in the Benelux. We saw a growth in the general account assets and also lower average crediting rates in the United States. Investment spread improved to 133 basis points from 119 in the Q2 last year and declined slightly from the 134 basis points in Q1 this year. Investment spread is expected to decline gradually in 2012 and that will mainly reflect the ongoing derisking of our investment portfolio in the Benelux. Fees and premium based revenues fell slightly compared to last year, reflecting lower results in our U. S. Closed block VA business and on higher hedging and reserve cost and lower assets under management. Technical margin declined from the Q2 as the prior year included a €70,000,000 nonrecurring gain, while this quarter we had some problems in the U. S. With poor mortality results. Page 29. The administrative expense were flat compared to prior year if we exclude the foreign exchange effects. And that reflects again also here in insurance strong cost control throughout the organization. The ratio of administrative expense to operating income compared to last year deteriorated, but that reflected strong operating income. If we take a closer look at our business areas, we see that the operating results in Life in Europe improved from the Q1. That was mainly due to seasonally higher investment income in the Benelux. Operating results declined from the Q2 last year, but that included a very large $98,000,000 gain on non recurring items, while this quarter we continue to see lower non life results in the Netherlands. Underlying results reflect a €241,000,000 change in the provision, a negative change in the provision for several account pension contracts in the Benelux and also includes losses from further derisking and equity impairments. Despite the macroeconomic challenges and regulatory changes in Hungary and Poland, our insurance business in Central and Eastern Europe showed an increase in new sales compared to the Q2 mainly in the Czech Republic and in Turkey. In the U. S, we benefited from positive net flows and a strong investment margin in retirement, while insurance results reflected lower technical margin and individual life. Underlying result was dampened by a $73,000,000 loss on the sale of alternative assets, which was done to reduce capital requirements and to lower the volatility in our earnings. Sales were up 1.1% as higher sales of full service retirements, individual life and employee benefits were offset by intentionally lower sales in the fixed annuities and stable value reflecting disciplined pricing in the current low rate environment. Last slide on the insurance is the closed block. The U. S. Closed block VA hedge program is designed to make sure that we protect our regulatory capital across a broad range of equity market scenarios. And the top table shows that the hedges are quite effective. Unfortunately, due to differences between accounting and the accounting for IFRS and regulatory accounting that leads to IFRS P and L volatility. Earnings sensitivities have changed somewhat over the quarter, primarily reflecting a slight decrease in the reserve adequacy. That is now at the 59% confidence level, so we have updated sensitivities for Q3 as you can see in the slides. So let me wrap up. We are maintaining strong momentum on restructuring, including our sales process in Asia that is on track, good preparation for IPO in the U. S. And in Europe. The bank is making good progress on balance sheet integration and we have accelerated our de risking efforts. The group has posted an underlying profit of 1,045,000,000 dollars excluding the results from Insurance Asia, which is reflected in results from discontinued operations. The bank had pretax results of €995,000,000 and insurance had pretax operating results of €304,000,000 With that, we are ready for taking your questions. Thank you, The first question is from Spencer Horgan from Deutsche Bank. Please go ahead. Thank you very much. Good morning. Two questions on the insurance side, please. The first one is you've sort of suggested quite strongly early on that Asia could come in multiple transactions and often obviously nothing certain at this point. But I was wondering if you could give us your feeling at least for how confident you'd be that you can achieve a 100% exit of Asia on that basis. And then the second question is on Slide 5, you talk about this transfer of $500,000,000 into SLDI. Could you firstly just expand a little bit on why that's happened and what's gone on there? And secondly, more broadly, is there a risk that further transfers may be needed as Bermuda heads towards equivalents under the solvencyt regime? Thank you very much. Okay. The first question, Spencer, good morning. Asia, yes, I think we are tracking our process quite well. We're very pleased so far with what we have seen also on bids. As I said, we it's most likely that we will have to do multiple transactions to complete the sale. And they will have timing consequences. So not all the transactions will have let's say will take place at the same time. But I believe ultimately, we will have the we will sell 100% of all the assets in Asia. With respect to the SLDI, Patrick? Yes. Good morning, Spencer. Yes, the reallocation simply follows the update on reserve outages we took last year. So we're basically upstreaming capital from the operating companies to the holding company and pushing some down to SLDI. This was planned and I think we even flagged it following the reserve adequacy update at the end of last year. Okay. But do you think there's any possible further need to put more money into SLDI as the move towards the Solvency II basis? Or do you think it's adequately capitalized? I believe Bermuda is doing Solvency II. Sorry? At the moment, we think this is the adequate level of capital in SOEI. We don't envisage any further changes. Okay, great. Thanks. Thank you. The next question is from Farooq Hanif from Morgan Stanley. Please go ahead with your question. Good morning, everybody. I just had a few questions again on the insurance side. Firstly, could you tell us if you're seeing any further deterioration in policyholder behavior in variable annuities? I mean, one of your peers in the U. S. Has seen additional problems in its GMIB book relating to partial withdrawal experience. So just when will you update us on that? And what are you seeing? Related to that, do you have any data on the living benefit reserving to net amount at risk? I believe that was about 70% last time you updated us. Has that changed because net amount of risk has gone up or down? If you could tell us that. Next question is the €1,000,000,000 of book value that you have in internal reinsurance of the Japanese VA book. What happens to that book value in the sales process? Does that have forgive my slightly stupid question, but does that is that sort of included in addition to the 6 $400,000,000 tangible equity that somebody will have to pay for? How will that work in the transaction? And lastly, could you make a quick comment on investment margins elsewhere outside of Benelux? Just the pressure from low yields. Thank you. Okay. In terms of the last assumption update, that's something we do annually. We typically do that in Q3. And we will conduct that study and communicate on that once it's done. So there's not really much I can say about that at this point or give updates before then. In terms of net amounted risk, we haven't given them this quarter. There were some in the U. S. Filing Q1, but I suggest if you want to they were on a U. S. GAAP basis, I suggest if you want to look at those perhaps you talk to our Investor Relations team who can take you through that. And in terms of ING Re, yes, it's difficult to say how this will pan out. It depends on what type of transaction works, what type of transaction. So it's premier to really comment. But yes, if there's a total sale, this could be in part of the overall equity involved. But we can't be specific until we know the details of that transaction. On that point, could there be a situation where you sell Japan, but you continue to reinsure it from ING? I can't comment yet on how the transaction Jan has already mentioned, it could be in a number of blocks, but really can't comment further as to how that might be structured. Okay. And you come back to investment margins. Just I mean I would have thought we'd expect pressure elsewhere not just in the balance given the value of the environment. What are you doing to offset that? And what do you see as guidance? I think, well, this is Matt. At least for the Benelux, we saw the investment margin at about 111 basis points. I think we had given prior guidance that we would expect to see that come down for the full year something like 10 basis points to 15 basis points from the 114 that we had for the full year 2011. And we would still expect to see that, in fact, likely at the upper end of that range as we've continued to de risk. In the U. S. Businesses, clearly reinvestment at lower rates is going to put pressure on margins. But what we've seen is more action on the crediting rate side being able to reduce creditor rates. So you see that at about 169 basis points for the quarter. Do you think you can continue to maintain decent margin in the U. S. Because you've got more ability to reduce crediting rates? Sorry, we didn't quite hear your question. But yes, I mean, I think this is going to come down to a certain extent given the low interest rate environment, but we're doing what we can again on the credited rate side to be able to maintain those margins. Okay. Thank you very much. Thank you. The next question is from Farquhar Murray from Autonomous. Please go ahead. Good morning, gentlemen. Just two questions, if I may. Firstly, on asset quality and commercial real estate. I just wondered if you could give a breakdown of the €120,000,000 of loan losses there and also actually a breakdown of the NPL rate of 7.3% by the key geographies, if possible. Uptick in loan losses in that business? Is it particularly is it coming from refinancing limits or businesses hitting refinancing? Secondly, in terms of the Spanish funding mismatch, I mean, you've made quite substantial progress there, reducing it by about EUR 7,300,000,000 since 1Q. Presumably that included some quick wins. I just wondered what is a realistic ability to work that down in the coming quarters and what might be an aspirational target there? Thanks. Yes. On the asset quality and the breakdown of the risk cost, obviously, if you look at the book and you look at where the biggest chunks are, that sort of is also reflected in the cost that we're taking. But just to give you a quick rundown, there's about €50,000,000 in the Netherlands. There's about €27,000,000 in the UK. There's €36,000,000 in Australia and about €18,000,000 in Spain. So that gives you pretty much what's there. Yes. The dynamics of these markets are not all the same. But indeed you see in quite a few markets that the ability of companies to refinance debt that comes due is limited. And that puts pressure on the asset values as well. There are also some specific issues in each of these files that are not really market driven. The mismatch in Spain, well, that is a combination of a number of actions. 1 is bringing down the overall asset exposure that we have in Spain. 2 is increasing the local funding that we attract. And both are actions that we believe we can continue. And certainly in terms of reducing our asset exposure, there is a natural runoff in the book there that is quite substantial. For example, if you take the Sedgula portfolio, the average maturity there is about 2.8 years. The lending book also has a natural runoff. And we have, as you've seen, taken specific opportunities to further derisk by selling securities. As and when opportunities arise, we will continue to do that, but at the right prices, obviously, because we do believe that this book is of good quality. Just as a follow-up on that, what was the par mark on the covered bond book and the RMBS book in Spain? Sorry, I didn't quite catch. Just as a quick follow-up, if you could. Do you have the palm archive, how much the pricing was on the covered bond book? I think you'd indicated about 90 6% of par at 1Q. I just wondered if you have enough data around that please? I think we sold on average at about 97 or so in the cellular book. And the average market prices that we're seeing at the moment are around 94 or so. Okay, great. Thanks so much. Thank you. The next question comes from Michael Huttner from JPMorgan. Please go ahead. Good morning. Thanks a lot. A couple of questions. So the net inflows, the €4,100,000,000 in deposits, I just wondered where you could say where exactly they came from. And then as a follow-up to the derisking in Spain. So you've reduced the assets in Spain by €4,700,000,000 in Q1. That cost €156,000,000 in terms of divesting costs, that's 3.3%. In July, you reduced another €1,500,000,000 which cost €78,000,000 €5,000,000,000 which cost €78,000,000 so that's 5.2%. So is this accelerating? And what sort of I mean, it looks I mean, obviously, you would have done the low hanging fruit first and gets a bit harder and a bit more expensive. Can you get a feel for how much more expensive it could get? Are we going to be looking at like a 7% ratio for the rest of the book or something like that? And then the this is a little bit funny question. So in Asia, if I remember a year and a half ago, I guess, or something, you're going to sell the hold of Asia sorry, the hold of insurance, I think. And then it was becomes the hold of Asia. And now it's country by country or even business by business, I don't know. Is there a chance in Europe that you could adopt the same approach? The or is kind of preparing for ITO a first step to clearing the books and then effectively inviting everybody to have a look and then you can start the process of piecemeal as well? Thank you. Yes. I think the calculation you make on Spain is a calculation that I don't think you can make because this is impacted by what's available at what point in time and not necessarily I think is this reflecting a trend. So I think we need to see going forward what the price levels are. And as Wilfred indicated earlier, we're not going to do it at any price. We will be we will do it at the appropriate price. And when we think that the risk elimination that we get relative to the price we pay is a reasonable one. With respect to Asia, yes, we like to do a full sale, but we were not against doing a partial sale or let's say a sale of pieces, because in the end that can create also attractive value. And that doesn't mean that we will do exactly that in Europe. In fact, in Asia, we had not considered an IPO. In Asia, it was either a sale to a strategic partner in full or in parts. In Europe, we are saying we are doing an IPO and that means we have IPO as the base case. We will have of course to work with the company to make sure we have the performance that can stand the IPO, but at the same time we need to watch how markets will develop. But that's the work that we are doing. It's certainly not a representation that in Europe we will do what has happening in Asia. That will our plan is to do an IPO. Thank you. The next question is from Michael Van Vagen from Bank of America Merrill Lynch. Please go ahead. Yes, good morning. Mike Fischbeck of America Merrill Lynch. Just wanted to get back to the point that you made earlier about selling ING Direct Canada potentially and the U. K. Actually. Can you talk us through the impact from such a potential deal for the restructuring of your insurance businesses? I mean strategically I can understand why you want to get rid of these 2 banking operations. But the proceeds together with potential proceeds from your Capital One stake must have an impact on repaying holding company debt and therefore the flexibility that you get on the restructuring from your insurance assets? Any insight there would be great one. Thanks. Yes. Michael, we are doing this for I think strategic reasons. But at the same time, we have of course an eye on our balance sheet and the flexibility that we create by doing this. We have not determined exactly what will happen. First of all, we need to do the sale. That is not done yet. After that, I think we can discuss what will happen with the proceeds. But clearly flexibility is an important element in this. Okay. But would you be willing to use those proceeds to reduce the holding company debt? Because in the past, you've always stated that the bank effectively repays the state and holding company that would be funded through insurance disposals. Are you willing to potentially change that mix a little bit? Well, I think as you know money is fungible at the end. So you can use it for multiple purposes. And I think that's still the case. So it creates flexibility in our planning going forward. And I think that's not important to us. Okay. Thank you very much. Thank you. The next question is from Francesca Tondi from Morgan Stanley. Please go ahead. A few questions on the bank, again, if I may. Margins, how would you see margin net interest margin developing over the next few quarters also in light of the further reduction on Euribor, possible rate cast by the ECB? And if you could possibly comment, you clearly are one of the bank with the longest with the biggest liquidity pool at the ECB. There have been a lot of talks of potentially even looking at excess reserves in a negative rate. If those were to happen, what impact would they have? How would you react in terms of your liquidity management? That will be helpful. Back on asset quality and provisions, again, I know you've been asked about the commercial real estate, especially in the Netherlands. But if you could just give us a bit more color of what is happening there. And you continue to talk of elevated provisions. Should we take that actually provisions will likely continue to increase in the following quarters? I think if you could comment on that, it would be helpful. Thank you. In respect to interest margins, yes, the overall interest margin in euro terms did come down in the second quarter by about 3%. In basis points terms, it looks higher from 132% to 126%. But that's due to, as Jan mentioned, the continued growth in the balance sheet, something we corrected at the end of the quarter. And you'll see the benefit of that lower balance sheet in subsequent quarters. Going more closely to your question, what we've seen in terms of under the hood a bit is that our commercial margin excluding volatile elements like Financial Markets and Corporate Line was stable actually slightly up. And under the hood there a bit, you see that the loan margins improved a bit and deposit margins dropped a little bit. And now we are reducing deposit margins sorry, deposits rates paid. We've reduced them in the Netherlands by 20 basis points. They've come down initially in France and they continue to come down. Germany reduced by 25 basis points in Q3. The dynamic though is that whilst we are reducing the amount paid, which is positive for margin on deposits, You're also seeing a decline in interest rates. And then element 2 is derisking, which reduces the value of funds or the earnings you have, which you attribute to your deposits. So that sort of mutes a bit the impact of the reduced deposit prices. Going forward, provided interest rates stabilize a bit, we would expect that on the interest margin side, particularly on deposits, there should be some stabilization because the cuts in deposits rates to customers, we think can offset the lower market rates and derisking impact. I mean, the positive bit overall for margins though is that on our loan side, we are holding margins, in fact slightly increasing them against a much higher cost of funding, which is a real positive. It's something that is core to our achieving our longer term ambition of 140 to 140 5 basis points. We talked about it in the Investor Day, the ability to reprice on the loan side, and we're seeing evidence that we're able to do that, albeit low demand is a little bit muted. So what does that all mean? I think it means outlook for the core business is stable in euro terms. In basis point terms, it should improve a bit because the balance sheet reduction will reverse the impact of 4 basis points in Q1 and 1 basis point in Q2 of negative impact on the margin due to balance sheet expansion. So in basis point terms, it should improve. In the euro terms, stable is the best we can judge it for now. And in a lower Euribor from here would put a little bit more pressure on margins? Yes. As I said, yes, if interest rate is lower that may reduce the earnings we get on over time in terms of applicator portfolio, but also could stimulate further deposits reduction. But we'll have to see. And if the ECB were moved to negative rates on the reserve, how would you think about your excess liquidity? Well, no, as you saw what we did in the balance sheet, we reduced the balance sheet significantly in the quarter We reduced the amounts placed with ECB. We are, as you say, a provider of funding to the ECB. They've cut the rate to 0, so you get nothing for us. And that's part of the reason we reduced our overall placements. We got our balance sheet now at the €900,000,000,000 level, is where we targeted it at the Investor Day. And we will actively manage it going forward. If you were to kind of keep rebalancing your liquidity, where would you away from the ECB, where would you rebalance it to? And what kind of assets, if I may ask? Obviously, if you're earning nothing on deposits with ECB, you try to minimize that. Yes. Is it other CP papers, other cities or I think we constantly evaluate what we will do with the best thing that we can do is make sure that we keep our balance sheet as healthy as we can. And if you don't get anything for putting your money someplace, you may as well put it in your own company and use it to your own benefit. So and at the same time, as you can see, we haven't significantly improved our own liquidity by having done what we did. So I think we'll manage this quite carefully. If it gets to negative, yes, there's no incentive to put a lot of money with the ECB. And you see that in our balance sheet today. Thank you. And I have a last point on asset quality and provisions. Going back to your question on commercial real estate in the Netherlands. Your question was what's going on there. Well, in the Q1, we saw a bit of turmoil effectively caused by what was basically a CMBS structure being unwound in the portfolio being without creating a lot of coverage of developments in the real estate market in the Netherlands. But what we saw creeping up. We continue to see very difficult refinancings. A lot of banks have withdrawn from that market. But that's not a new development. We signaled that before. We also gradually see the weighted average lease expiry terms coming down a bit. Having said that, our de risking of that portfolio continues. You can see the exposure slowly coming down. We didn't have any write offs in the Q2. So there's other than a number of things that we already have on the books and have identified as problems and that we're working our way through. There are no big new developments there. Your question on provisions and whether what you're seeing now is a trend. As we've said and as both Jan and Patrick have said, we expect provisions to stay at elevated levels. They're very closely connected to the macroeconomic trends in the main markets that we're in and those are not positive. So we can definitely count on seeing levels like these. And we're not expecting a reduction anytime soon. Thank you. Thank you. The next question is from Francois Bossert from BNP Paribas. Please go ahead. Yes, good morning gentlemen. Two remaining questions please. The first one is on ING Direct. Could you maybe just specify what's the main rationale behind putting the U. K. And Canada for sale? Is it that you would be able to achieve a high price? Or do you feel that you need more flexibility to deleverage? And why basically didn't you include Australia within the process? And second question regards the disposal of Asian insurance. Could you just comment on the evolution of the process for Investment Management businesses? And is it basically following the same calendar as insurance operations? Or is this completely separate? Thank you. Yes. The reason for selling ING Direct in the U. K. And Canada is these are good businesses. And we always do an evaluation from time to time on our portfolio. And you need to be looking at not just what is nice, but also can you strategically do with your business what needs to be done going forward, not only this year, but let's say 3 to 5 years ahead. And then you need to make choices. Are you putting your capital here or are you putting it someplace else? And we only have so much capital available, so we need to make choices where we are investing that limited capital that we have. And I think when you do a rational analysis, this came out. We have also divested our ING Direct business in North America. So fully, I think it's a withdrawal from North America that we are accomplishing now. And then what we will do with the proceeds, I think will depend at the time when we get that. We will include that in our overall picture. We'll look at it from a corporate perspective where we can best make the proceeds work. And I think the same applies to our Asian operations. When the proceeds will be used where we see the best fit on a corporate basis and where we may have to do certain things related to making sure that the business going forward has the capital structure and has the capability to do what it needs to be done. Okay. And the rationale for keeping Australia in terms of what you see attractive in terms of underlying business there? I think our Australian business is doing well. We like our Australian business. As I said earlier, we cannot maintain them all. So we have made some choices, some rational choices where we can continue to invest them or not. And we think our exposure to Australia is also a reflection of an indirect exposure to the Asian markets. And that I think is important in evaluating the reason to maintain our position in Australia. Okay. And regarding the Asian disposal processes? Yes. The timing for Asia's sale is quite I think what you will see is that some units will go quicker than others because they are more complex and they will need more time. Joint ventures take more time. So there will be a number of announcements being made if we go the route of multiple sales. But I would expect that certain things will go relatively quick. Okay. And may I just ask in terms of Investment Management, I mean, do you plan to sell the investment management business as a whole? Or do you plan to sell it by geography as well? We're looking at both options. I cannot say which way it will go. It depends on the appetite that that as well have. Okay. Thank you very much. Thank you. The next question is from Hans Plijer from Chevreux. Please go ahead with your question. Yes. Good morning Hans Plijer, Cheuvreux. Three questions, if I may. First of all, you talked about through real estate loan loss provision going forward. But could you also, let's say, discuss more on the corporate loan book there? You saw that the non performing loans increased from 2.6% to 3.6 percent quarter over quarter. So what do you see there? I understand that the increase in loan operations mainly has to do with 1 bigger file, but what's the, let's say, underlying trend there? Could give some color there? Secondly, on the Korean goodwill write down, could you give some freedom why did that write down? Yes, can you give some color there? And secondly, with respect to the impact from reduction in the balance sheet on the tax position in the balance tax could be positive for tax in the long run. Could you give some feeling what you're meaning there or what you see, let's say, more in numbers going forward? I'll answer the technical one. In respect of the I'm Korea impairment, this is somewhat this is technical. It's a consequence of IFRS 5 requirements. As it's quite clear, we're quite at advanced stage in the process. And as a consequence of that, we're required to report these businesses discontinued operations under IFRS. So they don't appear underlying separate line in the balance sheet and P and L. A follow on consequence for that is that you have to ensure where the estimated proceeds are less than book then you are required to review and impair goodwill. So this occurred in IAM Korea only. And as a consequence, as I say, the goodwill in IAM Korea only was impaired, the technical IFRS requirement. Yes. I think your question was we've talked about the real estate risk cost, but you wanted to know a bit more about the general corporate portfolio. If you look at commercial lending overall, the NPLs were up from 3.9% to 4.3% And that again reflects just the macroeconomic situation. If you look at the various components, the corporate lending book indeed was up from 2.6% to 3.6%. That includes SME and mid corporates, which indeed is a segment that is having a tough time also in our core market here in the Netherlands. You may have seen from the press that bankruptcies in the Netherlands went up quite sharply in the first half and of course we're seeing that reflected in our loan books as well. The other part of commercial lending where we see upticks apart from real estate finance is mainly in leasing where also the NPLs are up from about 6.3% to 6.8%. On the other hand, in structured finance and our industry lending businesses, the NPL levels are relatively stable. And generally speaking, what we see the larger corporate performance is doing well and it is really in the midcorp and SME books where we see the pressure. The question on tax had to do with the there will be a new bank tax in the Netherlands and it will be levied on your total lending I'm sorry, on the borrowing that you have done. So there is an incentive to make sure that where you can that you reduce your borrowings. Thank you. Thank you. The next question is from Federico Salimo from MainFirst. Please go ahead. Good morning. A couple of questions on my side. The first one on ING Direct UK, do you expect a positive contribution to operating earnings for 2012? And if you can give out a number for the first half, that's the first question. Then on your Tier 1, it's already a 10%, which I think is a bit higher than what you were expecting at the Investor Day. Is I mean, is it conceivable that you might repay the state sooner rather than later based on this? What's going to be the trigger here? Thanks. Okay. On IG Direct U. K, I don't think we get forecast what the what will happen in the quarters to come. On core Tier 1, yes, I think we have a good core Tier 1, 11.1%. But as you can see, when you comply with Basel III, you need to have a good Core Tier 1 because the requirement, if you want to maintain a 10% Core Tier 1, there will be some additional requirements related to pension adjustments that are being made effective January 1. A good quarterly one is also important for us to be able to repay the Dutch state. And as I said, we like to do that as quickly as possible. We are discussing with the Dutch state and with the European Commission on a program that will be resumed after the vacation time. And then if possible, we like to repay at least a portion certainly this year. Okay. Thank you. Thank you. The next question is from Anke Leingen from Royal Bank of Canada. Please go ahead with your question. Yes, good morning. It's Anke from Mabisi. I had two questions on the bank, please. Firstly, on asset quality. I was wondering on the commercial real estate, if you can give us some data on the coverage of NPLs and how this has changed versus Q1? And then you keep on saying you expect loan loss charges to remain at elevated levels, but given the trends in NPLs, should they not actually increase in the coming quarters? Then on the capital slide, thanks for the update. I just wondered what would the €9,400,000,000 be if you take the DTA and the pension into account as well? Thank you. Can you repeat the last question because we did not get it? On your capital slide, the 9.4% core Tier 1 ratio pro form a, you say that ex the or you would this basically assumes the DTA will be assumed. And also, I would assume it's pre the pension coming up from 1st January 2013, while a number of other banks have basically included this in their pro form a guidance as well. So I just wonder what the EUR 9,400,000,000 would be pro form a for the DTA and the pension? Yes. On the Real Estate Finance book, well, we talked about the asset quality and the NPL levels. Maybe just a quick rundown on those. In the Netherlands, we're looking at 5.9%. In the U. S, we're looking at 8%. Spain, as we've discussed, is around 18%. U. K. Is also at that level. And Australia is slightly above 20%. You asked about coverage levels. Overall, they're stable quarter on quarter at 27%. We have a slight increase in cover rate in the Netherlands 26% to 27%. We have an increase in Spain from 33% to 30 6%. And an increase in Australia to 41% from 25%. So a gradual increase in coverage levels and an uptick overall in the NPL levels on the portfolio as we said from 5.7% to 7.3%. And well, I think the provisioning levels, we talked about that. Projecting provisions is, of course, always difficult. It's a bit of a lumpy thing. But overall, in the medium term, this is very much linked to the macroeconomic development, which, as we said, is not positive and we're therefore expecting to continue to see elevated levels. In respect to the DTAs, we didn't include them because we believe we've used them up with profits. The IR day, I think, was 25,000,000 and now it's come down as we're using the profits up and down to approximately 18, 20 basis points. In terms of pensions, I mean, it is included the impact in the phasing to 2014 to 2018. I think the point we're making is this can be volatile going forward depending on how market interest rates perform. And it could be that in the future you have some of it more being accelerated into a spot impact. But we don't we can't predict the future, so we don't know. The last time we had formal results published on the pension, this would be the number. We will update it at the end of the year when we know more. Thank you. Thank you. The next question is from Lamar Sala from S&S Securities. Please go ahead. Thank you very much. Good morning, gentlemen. Three questions from my side. First of all, could you elaborate on the NPL definitions in Spain, whether that has changed? Secondly, on the liquidity of covered bonds in Spain, can you say whether the liquidity has improved or deteriorated in the course of the second quarter? And my final question is with regard to the pension scheme. You have shifted from a DB to DC and I presume that the IAS 19 impact will be not significant going forward since it's only applicable for DB pension schemes, am I right? Yes. On the NPL definitions, there's no change. You asked about liquidity of the covered bonds in Spain. A lot of that has come from buybacks by the issuers, which has helped us quite a bit in the Q2. There are no programs or restructurings or anything going on at this moment in the mortgage portfolios underlying them. Of course, liquidity of this paper comes and goes a bit with the macroeconomic developments and the developments politically also around the support for Spain. So it's moving. But we have taken advantage of quite a bit of liquidity in the Q2 and we're pleased with that. Yes. In respect to the pensions, we announced that for new contributions after January 14 that will move to DC. However, the existing block will remain as a DB and that is why we're including it in the impact for Baldrige. Just two follow-up questions. First of all, on the covered bonds. So if Spain is downgraded by Moody's, I presume that the liquidity will further deteriorate. How would you react on that? And secondly, on the pensions, can you quantify what the total size of the book is, which is still on a DB scheme? On the first question, I don't think necessarily that a downgrade will have a big impact on liquidity. That's also not what we have really seen in the 1st 2 quarters of the year. Yes. I think the size of the DBS is about EUR 18,000,000,000 Thank you. Thank you. The next question is from William Hawkins from KBW. Please go ahead. Hello. Thank you very much. Back on bank asset quality, can you help me understand why the total coverage ratio has fallen very slightly in the 2nd quarter from 39 percent to 38%. Everything I've heard from you guys has been about coverage ratios going up. So I don't know if there's a mix effect or if there's something else going on. And then can you tell us specifically what's happened to the coverage ratio for Dutch mortgages? And again apologies if it's disclosed somewhere and I've missed it. Okay. On the first question indeed it's mainly a mixed matter. There is not a general reduction or change in our provisioning policy. And the coverage ratio of Dutch mortgages off the top of my head that is about 11%. We're digging out the exact number. Yes, it's 11% I'm getting here. It's effect because again, it sounds to me like the areas that are going up in terms of the contribution to NPLs are the areas where the coverage should be higher. So I would have thought the mix effect would be driving up the coverage ratio. Well, I think in the end the coverage ratios that you're seeing are heavily influenced by the fact particularly on the retail books that there is a lot of IBNR there, which is influenced by model LGDs. And if you look at the write offs that's ultimately what counts. Then we're still seeing levels below what we reserve. So we have an experience of a very long period where in the end our write offs are always less than what we reserve in terms of provisions. And I think the mix of model based IBNR reserves and the underlying realities makes it very difficult to compare the 2. Thank you. Thank you. And today's final question is from Tariq El Ahmadjad from Nomura. Please go ahead. Hi, good morning everybody. I have two quick questions. First one in terms of the divestments of the non core business, if I can call that like that? I mean, I mentioned by that the Asian Banking entities and also your stake on Capital One. So what is your strategy on that? Are you thinking to leverage that in case you are short in terms of capital? Secondly, in terms of repayment of State 8, I just wanted to know, I mean, do you I mean, are you envisaging to do this to utilize your conversion option? You still can do it. Is it one of the topics that you're discussing now with the EC and the Dutch state? Thank you. Okay. Selling stakes in Asia and our position in Cap 1, I don't think we are at liberty to discuss that. We will look at them from time to time. We will evaluate our position. I must say certainly with Capital 1, we're pretty happy with the position we have taken. And when the time is right and things fall into place, then I think we'll make a decision on them. State aid, we are looking at all the options that we have as the repaying the Dutch state. And that's why we have discussions with the state itself and as well as the European Commission. All that hangs together. And we'll know more after the holidays, after the vacation time, when we hopefully will resume our discussions again. How these discussions are advanced? Obviously, I'm not looking for details here. But is it something advanced or you are still just at the beginning? No. I cannot give you any details because we are still in negotiation and discussion. So I think it's better to hold off until we can give you the details, but not at this point in time. Okay. Thank you. Sir, there are no further questions. Okay. Then I would like to thank you all for participating in the call and wishing you a great day. Thanks. Bye bye. Thank you, sir. Thank you, ladies and gentlemen. This does conclude today's presentation. Thank you for participating. You may now disconnect.