Thanks all for coming. Another very interesting session in this conference. Very eventful, as always. Thank you, Bettina. Thank you for coming. Must be very, very busy time, and thank you very much for switching agendas and joining us today. Really appreciate to welcome you as the new CEO. Congratulations for-
Thank you very much.
the appointment, and I'm very glad to be the first one to interview you-
Mm-hmm
from the, and I guess people here for the first time to see you as in this new role. I think everyone has the same topic in mind, and I think there's no point dragging that and start with this. Andrea Orcel was sitting here yesterday at your place. I'm sure you had all the summaries, but he's talking about 21% stake as an investment. He's already here to help Commerzbank unlock the value. So instead of bombarding you with questions, I will let you basically comment what you can say at this stage, and then I can follow up.
Okay, great. Thank you very much. Yeah, indeed, very interesting times, but, I'm very grateful for the opportunity. So I mean, clearly, the events of the last two weeks were kind of a surprise for us, so we've got to deal with it, but we do, and I think for us it's very clear what we have to do now, and there are three things, actually. One is, and that's the most important part, we have a base case, and that's the implementation of our Strategy 2027. We just did an update of the strategy during the summer. We discussed it with our supervisory board the last three days, and we also updated, you might have seen that, this morning the numbers because we did some adjustments, which will lead nicely to a higher return on tangible equity until 2027. So we rather focus now to see 12% in 2027.
It was a 54% cost-income ratio, and it will also lead to more capital return. Because besides revenue and cost efficiency measures, we also thoroughly looked through our RWA development, and given also our very strong starting position this year, it will lead to very high payout ratios, above 90% in the coming years. So that's the first step. The second thing is, clearly, given the events of the last two weeks, we will stay very open-minded, and whatever we get on the table as options, improvement potential, and stuff like that, combination considerations, we will thoroughly evaluate, and see whether we can create value for our stakeholders. And that's clear, for sure, and there is no doubt about that.
And the third one is something which we also now need to do, as in our new management setup, is to think about what can we do beyond 2027 to unlock, to use this word, even more value. But the focus at the moment is clearly on one and two, but in parallel, we also will pursue three.
Thank you, Bettina. I mean, you've been very vocal and straight away when the information about the higher stake from UniCredit was public, that you were defending a standalone or independent status of Commerzbank. What I think we want to understand today is, are you opposed or engaged in potential consolidation?
I mean, we are engaged in any topic and any combination which creates value for our stakeholders, and specifically for our shareholders, that's for sure, so the only thing what we said is that we need to put stability in the situation, because you need to imagine that, I mean, our whole ecosystem is only working with the thing that we have clients and staff also contributing to the system, and when we have a lot of instability and insecurity, specifically on the staff side, that's not helpful, so we really need to make sure that people work on the strategy, that they do what they are supposed to do, and then in parallel, we clearly will evaluate any option.
As a new CEO, the question actually from the investors we get a lot in the last two days is, are you, Bettina, will be working for shareholders? Or actually you will be working for or considering a lot what you hear from government, unions. As you mentioned, stability, by that I guess you believe, you know, impacts of any consolidation on resources. What's your priority? What's your mindset now?
You know, I think there is no contradiction. There is no either/or, not at all, because at the very end, we only exist with all three stakeholder groups in parallel. When we create value for our shareholders, that will also create value for our clients, because we have more money to invest to develop a better value proposition. And it also means that we can do more for our staff, because we can pay better, we have better working environment, et c. So I think creating value is nothing against the other two stakeholder groups, rather the contrary. But we have to keep in mind that we also do things which are also then beneficial, for example, for our clients, and not scaring them away, to say it like that.
There were a few reports that some other large German banks would help to build a strategy to basically defend independence of Commerz. Some others were talking about potential poison pills that you do to derail any bid, talking about Poland or. Can you comment on that?
Yeah. I mean, there's a lot talking about, oh, they have now a defense team, et cetera, and I think you all know defense team just means that, we have a team which, is defending the interest of our three stakeholder groups: investors, clients, and, staff, nothing else. And, I can only also reiterate what I've said already in bilateral meetings, we will not do any stupid things. Our main objective is to protect the value and the business model, and the franchise of Commerzbank, and that's what we do. And any idea of now doing some crazy acquisitions or fast sell downs, et cetera, not with us. We won't do that. It's really... Yeah, we have a value, and we want to increase the value and not destroy the value.
Very clear. Now, if I want a little bit discussion and see, for example, where Orcel is coming from. We've been talking about consolidation in Europe. I will not even say cross-border, because this is not a cross-border M&A. This is a in-market, in Germany M&A, because between two, in a fragmented market. So Europe needs these larger banks, needs solid banks that can, you know, be more profitable, more solid, and fund better the economy. So, I'm not sure how you can comment already on the rationale of such a deal, but from the EU integration perspective and from actually the strength of both parts, what do you think?
I think we have to evaluate the options. It's pretty clear that if you're putting two franchise together in a country, that you have cost synergies. And if you migrate systems, there are cost synergies. You have, however, to evaluate how fast you can do that, how much it's distracting you from other things, how much it costs, the execution risks and stuff like that. And that's something which you usually do, and sometimes it makes sense, sometimes it doesn't make sense, and that is something we need to find out jointly. And same is true for the clients. Is there overlap of clients, can create revenue synergies? Are there negative synergies and things like that.
That is a work to be done, and then we can also evaluate what option is better. Is a fast and quick and secure execution, or is there a higher value proposition, but with probably also a slightly higher execution risk? That is something we need to jointly then analyze.
Clear. So from here, you sound more open to discussions and to contemplate potential something and, you know, see how can cooperation be go further. Now, in terms of stake, you've been actually calling government to pause government's stake sale. What's the status on that? Is there any... I mean, we hear a lot of different messages from governments. In Germany, there's some political instability as well. So what's your take on this?
I mean, what we wanted to have is stability to really evaluate our options, because the last thing which we want is any destruction, any harm to our bank, to Commerzbank, and the core value is there. This is why, given that the whole how it happened was kind of a surprise, we thought it's better that we all sort out before anybody does the next step. I think that it was the reasoning. What the government now is doing, we will need to ask the government.
They had a very clear statement out last Friday, so that one is the one which is valid for us at the moment, and besides that, I can only repeat myself. We have a banked one, and we are on a very, very good track. 2024 seems to generate again record results. We definitely will use the strength to further improve because we are also very well aware of the fact that there is still a lot of improvement potential within the bank. If we can get even better by other things, we will consider that.
Last question, I promise this, and then we move into the standard operations. Are you in discussions now with UniCredit's management?
Actually, we will have a meeting tomorrow, first meeting, and we'll see. I think it's more-
Is this other hidden stake somewhere?
No. I mean, it's a good starting point. He is now, or the UniCredit is now, a shareholder, an investor, and it's very normal that you exchange views.
Thank you. What I will do is that before we move further, remaining twenty minutes, twenty-five minutes to operation, I will open the question to the floor because I'm sure there are some questions on this topic, then we move on to... Any questions? Actually, not surprisingly. I think I asked all the-
That's so good in answering the question.
Yeah, it's very clear. That's perfect. Okay, well, if you change your mind, just... Great. So, I mean, I was on stage, unfortunately, at eight, so I didn't see your press release.
Yes.
But you put press release after your supervisory board-
Yeah
meeting yesterday. And you've alluded to it as one of the three points about your targets and so on. Can you go through this again, and then we take it from there?
Yeah. I mean, what we, and it's a normal process. Everybody, I think, is doing it. We had our strategic alignment process over the summer, which normally results in November in a new multi-year plan, and we discuss the strategic adjustments and updates traditionally in our September meeting with the supervisory board, which happened to be the last three days. We now, I mean, the Strategy 2027 is clearly articulated in our strategy paper back in 2020, in November last year. But now we have done some alignments on the revenue side with respect to further growth, specifically in some of our international locations, and it's also all related around asset management.
We now have fully consolidated Aquila, and we see basically revenues unfolding there. And we also have on the cost side, given that we have a lot of cost upside, to say it like that, due to inflation and also salary increases and investments, we have implemented a number of cost reduction measures, be it on procurement, be it on sourcing, and also some digitization AI initiatives, which will help us to become more efficient. And then very importantly, we had a very conservative, I would say, RWA development plan towards 2027.
We viewed that over the summer, and we have now come up, I think, with a plan which still fits our growth ambitions, but probably took out some of the buffers we had in there. That really makes a difference, specifically because we have a different starting point. We had, end of July, 14.8% CET1 ratio. We also target that minimum for the end of the year. If you then imagine that we wanna have a target capital ratio by 2027 of 13.5%, this gives you a lot of capital return potential in the coming years.
Plus, given the increased and improved profitability which we see until 2027, also the RoTE, as said before, will be better. We thought it would be 11% by 2027. Now we target 12%. We're very confident in achieving that. Execution risk is limited, and most importantly, it's not a hockey stick event. It will be a continuous improvement from now, 2024 to 2027. So year- on- year, an improved and partly even accelerated profitabilization.
Thank you. I mean, the interest rate sharp hike has been very significant boost to your revenues. And now with the normalization of rates, how are you confident to deliver even higher RoTE target twelve? And what's the level of terminal rates you'd be comfortable with to reach this target?
Yeah. So what we have now as a plan is something that the interest rate environment will be between 2% and 3%, and also on long term, it has come down quite significantly, and we have taken that one into account. But also, given what we now see in 2024, specifically on the net commission income side, we have an even better starting point for the years to come. So we also increased our growth aspiration for the net commission income, which was 4% year- on- year. It's now above 5%, because we really see that we have set the foundation for further growth in this area.
And on the other side, we're still confident, despite the very different interest rate environment, in comparison to last November, or when we did the plans. We still believe that the EUR 8.4 billion for 2027 are achievable, on the NII side.
Still on NII, the deposit beta in Germany has been lower than expected, yet you go for expensive deposits lately. What's the rationale for that? And is there a franchise issue in terms of deposits or faster growth, you see?
I think one should not focus too much on the deposit beta, because it's always a function of clearly interest rate level, but then also volumes. We have much higher volumes than we originally planned. We will also end the year with much higher deposit volumes, which also creates some benefits for next year. As long as you stay away from ECB interest rates, you create profitable business, you create growth, and therefore it's just a pure yeah deposit strategy we drive here.
On the replication portfolio, you've done a lot of work to reposition it and obviously capping a bit the sensitivity on the way up and then benefiting on the way down. How is that being instrumental into your resilience on NII?
Yeah. I mean, it clearly helps. Specifically on the private client side, it is clearly something which will help the trajectory for the years to come. We always said that, given that there's an expected significant decrease on average interest rate level between 2024 and 2025, that you would see a little dip in NII for 2025, but that will then turn around for the years to come, and the replication portfolio clearly plays an important part in it.
Volume is another big component there. I mean, Germany has been struggling a bit lately, and the outlook looks challenging. I mean, how are you confident that actually this is a market that will deliver growth? I mean, there's. I'll just extend a bit my question maybe bit wider. I mean, how structural issues you see in the German economy versus something that can be fixed?
Yeah... so to start with the latter one, at the moment, we have not seen structural issues. We always talked about single cases, and that has not changed over the last two, three months. I mean, we have been always a little bit more conservative with respect to the German economy for this year. We never thought that we would really see a big increase in GDP for this year, so we kept we're cautious in all our planning, so we are not also now taken by surprise that we probably see another year of zero growth. I mean, we are worried because apparently second year without growth is not a good one.
Hopefully also the interest rate cuts, which we now have seen, will also help to stimulate economy in Germany and in Europe. I think what is specifically important is that also the sentiment among our corporates will improve. For that one, we probably need to have also some kind of political stability. To be seen how this develops over the next year, but we feel very well prepared for the coming years. We have very well-diversified loan portfolio, and that is definitely helpful in years like that. We will continue to see single cases as everybody else, but we stick to our guidance.
We feel very comfortable with our LLP guidance, and we think that cost of risk is normalized 25 basis points is something we can definitely see, and for the time being, for this year, cost of risk has been even significantly lower than that.
Back on growth, if you can put some numbers on what you see in terms of volume of lending growth in the different segments, I would say, in the next year or so?
Yeah. I mean, we've always said that on corporate clients we would foresee something around 3% growth. And that is something which we see, and we are confident to achieve that. On the private client side, we actually rather thought that we would see a decrease. That's no longer the case, because also because of the interest rate cuts. Clearly, that has a positive effect, and we see that the mortgage activity has come back, not to the levels which we have seen a couple of years ago, but to a decent level, so that most likely we will not see really the decrease which we assumed. And then we have seen that.
We have been pleasantly surprised also by our net commission income, and we always targeted a 4% year- on -year for this year. We think we will be slightly higher than that.
So going to the Mittelstand, I mean, that's part that everyone wants, and thinks this is the fastest growing. I mean, if you look at geopolitical risk and, you know, U.S. elections coming with potential tensions with China and Europe getting behind, you know, the U.S. position, I mean, everyone talks about Germany potentially being the most impacted and as a second level, this Mittelstand. I mean, in your internal reviews and scenarios, do you see that as a risk to your strategy or?
No. I mean, the Mittelstand is our DNA. This is also why we think also Commerzbank has a place because it is very important to understand the clients, to be at the side of the clients also in difficult times. That's our task, and that's also how we do the planning, how we do the portfolio, and I think that is also part of the reason why there is now this heated debate about all the things which we have seen in the last weeks because we think we have an important place here. We finance 30% of the export of German corporates, and that's important.
Maybe you can touch a word on your fee business. I mean, this is instrumental part of setting the pressure from NII, which will happen for you. What can you say there in terms of levers you can pull to smooth a bit the NII normalization?
I mean, we have put in place a number of levers, really a bundle of levers, on the private client side, corporate client side, and mBank, and they were very different. If you take the private client side, so one side, Comdirect, where we also invest a lot in new client generation, and then more transactions, more NCI, side like that. On the private client side, we have the retail banking, where the whole securities savings plans are very good lever to get the people in the direction of investments.
You all know, Germany is not known for being super open for investments, or the investment culture can be definitely further developed, and the securities savings plans are a very good means for that, and besides that, they are also helping us to set a basis for the coming years with respect to net commission income, and then clearly on the private clients, the whole asset management, wealth management is very important topic for us, and by the recent acquisitions, we see that this value proposition really pays off, and to also state clearly, we will not do crazy acquisitions, but bolt-on acquisitions are part of our strategy and will be part of our strategy, and we continue to look at that.
Thank you, so looking at your operating leverage or jaws in the next few years, despite all discussed in terms of potential resilience of the top line, I mean, revenues will be challenged, while you guided for mid-single digit cost growth, given the salary evaluations and ongoing investments. How much headroom you have to grow cost less than mid-single digit to protect a bit the operating jaws and actually deliver on the ROE expansion?
Yeah. I mean, you have always short-term measures on which you can implement, and we are willing to implement if necessary. At the moment, we are in a cost-income ratio steering, which helps us also with respect to the investments. But clearly, if we see that cost-income ratio is not developing as planned, then we will also the cost base on a very short-term basis, and to just also deliver against our targets, but our clear target is to grow, to invest, to further enhance our value proposition, and I think at the moment we are on a very good path, and that also improves our efficiency.
And there are a number of measures ongoing to further also increase the efficiency in the bank. I said it before, sourcing is a big topic for us. But also going to low-cost locations is part of the thing. Still also, internalization of external staff is still an ongoing topic. And then, we have all the efficiency measures driven by AI, where we have several use cases now started on the sales support, in operations, on KYC, which also will be really important and crucial to ensure continuous improvement over the coming years.
How do you see the salary negotiations evolve in Germany in general? I mean, one of the tough markets when the inflation-
Yeah.
where unions was asking for headline inflation. I mean, in some countries still, these debates are difficult. How is it evolving in Germany? And given the situation you're living, it's probably even tougher to negotiate, right?
First of all, we now have an agreement, which gives us kind of planning stability to-
To which, how many years?
For the next two and a half years, it's set. It's pretty clear that salary increases put pressure on the cost basis, and therefore, this continuous improvement is an important part of what we do. Because we need to balance out cost increases. But cost increases come also from regulatory initiatives, come from investments and stuff like that. It's not only salary increases alone. Yeah, we stay very cost conscious, to say it like that.
Maybe we can switch to your Polish operations. It's again a good market. It's a quality bank there, a quality franchise you have there. Are the government interventions, Swiss franc, mortgage issues behind you, or there's still some tail there on?
Yeah, it would be great if so, but I mean, we try to get it behind us as quickly as possible. So I mean, you have seen already some bookings. In the first half, there will be further bookings in the second half. And we've also can imagine that 2025 will be still a year where we talk about it. But given really our push on settlements and the also continued progress on that, we think that we should get behind this topic after 2025.
Thank you. And, quick word on your, direct Russia exposure. I mean, you've been running it down. Do you still see running it down with no losses? What's the trend there?
Yeah, I mean, the next exposure is very limited, as we speak. I think, for us, it's really the question of the operations there. We said that before. It might be that at a certain point in time, that the Russian operations, which are anyhow in hibernation mode, are no longer really in our balance sheet, that we have to book it out, because we close it or we sell it. And then, there is an impact on our capital and PNL. But specifically on capital, we always said that the impact will be very limited. It's really something around 10-15 basis points we see. So it could have a one-time effect also on our PNL.
Nothing really, which keeps us sleepless.
You alluded to solid asset quality with low cost of risk. I mean, there've been some uptick in cost of risk in Q2. I mean, you said specific cases, but do you see any pockets of asset quality concerns?
No, not at the moment. And as said, it's really... I mean, it sounds crazy, but it is, there were single cases, and that's normal. We will also have normal cases, or single cases, in the future. I think what people need to get used again to it is that we're just back on the default levels, which we have seen pre-COVID.
And that means if you're financing a large parts of German economy, you will always also be part of that. There is no way out, and that's basically one of the rules of the banks. But it's not that it's getting into a dimension where we start to get worried. Plus, I mean, what we currently do is also we have the top-level adjustment, and we move, as we have done in the second quarter, some parts of the top-level adjustment. Instead of just releasing it, we also have done some collective staging and things like that, which is also kind of buffering, but now in the models.
I'm just checking again if there's any question in the room. Yes, there's one here.
I'm not seeing anything.
Yes. Yeah, it's very bright. Don't really know.
Carlo Marchio from Bank of America. You mentioned earlier that Germany continues to be in a low-growth environment. Can you give us some color on your corporate loan book in terms of the industry sectors you're exposed to, and in particular, do you see any risks from your exposure to the auto industry?
Yeah, I mean, the auto industry, if you follow up on our analyst presentations, et cetera, we always show the exposures to the industries where we're a little bit more worried than the other ones. I mean, auto exposure is clearly something which we closely follow up on. But given the diversification of our loan portfolio, it's basically just one part. So, we have not really one sector who's really shining out as where we have a deep focus on it. It's really a well-diversified loan portfolio. So, but definitely, we have a close look on specifically that sector in the moment, also, given recent news and stuff like that.
Any more?
So we have time to talk about capital and distribution. So your RoTE upgraded 12%. I think it's fair to say that a big part to achieve that would be to normalize your CET1 ratio, which is now 14.8% in Q2 first half.
Yeah.
When will you be ready to accelerate running down that excess capital? Were you planning to start a share buyback soon, increase payouts?
Yeah.
M&A, all the above?
M&A only, smart bolt-on acquisitions whenever they fit to our value proposition. Because we really stay away from things where we have intensive integration work, system integrations, et cetera, because that is really hindering us in our growth and speed, but besides that, it's very clear what we do for this year. We have announced that, and we will not change, very importantly, our plans, so we have asked for the first tranche of EUR 600 million with the regulatory authorities. We expect to get approval in October, which means that we will, right after that, start with a share buyback in the size of EUR 600 million, and nothing will be changed on that.
And then with the third quarter result presentation, we will ask for the second tranche, which will probably be around EUR 400 million, because we have this target of EUR 1.6 billion out there, capital return for this year, and we clearly also want to have reserve a part for dividend payment, so around EUR 600 million. And then we take it to the next step. If you look in this little presentation, we made it very clear what we think is our targeted payout ratio for the years to come, and after now this consequent increase from 30%-50%, now to 70%-80%, will depend on where we end with this year.
Larger than 90%, for the years to come, you really show the... You can really see the potential, and we can all do the math. If you have a net income of more than EUR 3 billion, and you have a capital return of more, or payout of more than 90%, and then you put that in perspective to our current market capitalization, it is a very, very good deal, actually. I think it's also important to know that current price levels, we have seen, people tend to forget that already in June, July, with our standalone strategy. So we think there is lots of upside potential also in our share price development, also in our current base case.
I mean, Commerzbank has changed a lot. I mean, I remember when I started my career, I mean, the average ROEs were really, very low. I mean, it improves, it's more efficient, it's more focused, yet multiples didn't expand much. What do you think really needs... I mean, is your strategy or ROE targets and distribution not yet completely found credible by the markets, and then you're not rewarded? Or what do you think your multiples could be rerated on?
I mean, you have to say we come a long way. If you look on when I took over in 2020, the CFO position, and you look on the target prices back then, and now look on the target prices which we have now, have been-
Yeah
quite some improvement, and I think it's really dependent on our progress. I mean, we have now consequently delivered what we promised, and I think also 2024 we will do so, and that will clearly help, hopefully everybody to see that the numbers we lay out and which we present are the numbers you can trust that we will execute and deliver them, and we can also see that at least the difference between what we say and what the analyst consensus is becoming also smaller and smaller for also the years to come, and I think that will further improve, the better our delivery is, and that's our objective.
Thank you very much, Bettina. Thank you for your time and availability.
Thank you very much.
Thank you.
Hey, everyone. Thank you very much for joining us tonight.
Happy to be here.
You've been very loyal to our conference, and thank you for that.
Yeah.
So, we start this session maybe with a bit of top down, and we had the budget presented yesterday, last week, sorry, in Netherlands.
Yes
... and maybe you can tell us a bit on what are the key points on different tax subjects?
Yes, well, maybe I start with some of those not familiar with the Netherlands. I think the country is one of the most fiscally strong countries in Europe. I think the debt to GDP is below 50%, so that gives you a bit of a context. I think what I see of the budget, we don't comment on the politics of it, of course, but the financial aspects of it.
Of course
... I think it meets the European fiscal requirements of no more than 3% deficit, so that is a good thing. I think the tone in the message is much more business-friendly. The tone is much more continuation of policies, for example, around sustainability, which is very much something that we look towards ourselves as our core strategy. Specifically for the bank, I look at three things. I think the first thing is that we do a lot of share buybacks in the past and hope to do so in the future, and that there was some discussion in the previous draft of the plans to actually introduce a withholding tax on share buyback. That has disappeared from the current proposal.
We also see that there's no more addition to bank taxes for the industry, although we still lobby against the whole concept of bank taxes. And then the last, I think there were kind of more stringent requirements for expatriates working in the Netherlands. That seems to have gone away. So overall, I'm actually quite positive.
Thank you. So you presented your three years plan back in mid-June this year?
Yes.
So it's very fresh. Your plan is focused on RoTE of 14% by 2027, with combination of resilient NII, high fee growth, good cost control, and most importantly-
Yes
... normalizing your RoTE towards 12.5%. I think I know it's too early to ask you for progress, but actually, we'll go in detail through all these elements. But can you take us through the kind of trajectory-
Yeah
... you see the next three years, and what are actually the first drivers of profitability, and what is actually,
Yeah
... more the end of the plan?
So taking from the top down, we have roughly 40 million customers as ING, of which 14 million are what we call mobile primary customers, people who are really treat us as a true house bank, and that deal with us digitally as an institution. And what we see, and we set out our ambition, is that we would grow this number by roughly a million customer per year, right? And if you look at the first half of the year, we're on track to achieve a million new customer this year. So the first is to grow the franchise through client acquisition. That's the first. The second thing that we have said is that we believe that given our franchise, given the outlook on the current economic situation, we can grow our client balances by roughly 4% per annum. That's the second.
And if you look at the first half year, we grew our lending by around 4%, and we grew our deposits because of promotions and other things by almost 9%. So again, it's early days, as you say, but we are also tracking our plans to do that. Okay? The third is that we have given a strategic guidance that we want to be much more fee intense than we were before. We ended the year in 2023 with around EUR 3.6 billion of fees. We want to grow that by 10%-11% this year to EUR 4 billion, and we have a target to get to EUR 5 billion through the course of 2027, right? And if you look at our fee target - fee performance for the first two quarters, it's been roughly EUR 1 billion, so we're on track to achieve that. Okay?
You have discussed the scalability of our franchise in terms of, you know, costs. We are on track to meet those targets as well. Overall, I think I'm pretty happy where things stand. It's a long way to go to twenty twenty-seven, but I think overall, the metrics looks pleasing to me, given the first two quarters of performance.
Great. Let's take it then, topic by topic. Growth, I think in your CMD, your Capital Market Day, one of the points you emphasized, and you reiterated as the first point of your summary was growth, growing primary customers. And this look kind of cornerstones of your plan. And the growth expectations you have are quite actually optimistic or quite high when you look at the GDP growth expectations in Europe. So what are the areas where you see you have this edge and differentiate element that you can actually grow faster than the economy in Europe? And which are and you can go in detail into the divisions, household, corporate, and geography.
Yes. Thanks for that. I think the best evidence of why we are confident about doing it is because we've done it before, right? That the economic growth in the Eurozone has been benign, but we've been able to grow at roughly twice the level of GDP growth in the market. So it's not something that we have done. I think I'm trying to remember back to the presentation of our capital markets day, but we had forecasted GDP growth in the Eurozone around 1.6%, and we think 4% balance growth is there. If you want to watch how we perform, it's exactly that primary client acquisition growth, right? With our seamless customer experience, we think we can attract a million customer per year, right?
That's a key indicator whether we can grow volumes or not. We don't price competitively. We have ten retail markets, so we price where we can get the right return, so we expect that to evolve over time. I think what we see in terms of volume, I would say I'm quite optimistic about mortgage volume, right? We had this trough at the end of 2022 and the whole of 2023, where mortgage production virtually stopped because of the hike in rates. That has resumed. And to give you an example, our Dutch business, the market share, new acquisition has increased to almost, say, 16%-17% as of the second quarter, so strong. And you could say, "Are we buying market share with that?" And the answer is no, right?
We have done a lot of work in optimizing how we work with our brokers, and our time to yes, this is the time that we can reply to our customer on whether we would approve that loan, has come down to 24 hours, right? After we receive the request, within 24 hours, generally, we can give an answer back if it is a yes or a no, but time to yes is most generally yes.
Thank you. I mean, you've alluded to the profitability of that growth.
Yes.
That's the question mark, and often, I mean, setting a target of growth, I mean, without knowing basically the dynamics of the market in terms of how, you know, how expensive that growth will be, is the question mark. So maybe we can then start to dig into the margins and so on, starting with the retail business in the Eurozone. For your main countries, so Netherlands, Belgium, Germany, what are the dynamics there in terms of net interest income?
Yes.
It would be interesting to go as well. I'll follow-up questions on the technicalities for each of the-
Yeah
... geographies.
I think if you look at the main product on the retail side, I would say the margin on origination in the Netherlands is quite healthy, and we don't see sign of compression, right? As rates come down, we were able to actually widen the acquisition margin. Okay? The margin in Germany, I think, has been tight and remains a little bit tight, I would say. And the area where we see margin as being the tightest is actually Belgium, right? That historically, banks in Belgium have made more money on liability than on assets, and we see that competition for clients on the mortgages has remained very tight there.
Okay, but in terms of volume growth in these different regions, do you still see Belgium as the fastest growing within the three? Followed by Germany, the Netherlands, or how do you rank?
No, I think the fastest growth that we see is Germany, right? Coming back to the first point, it's really the number of primary mobile customers, where Germany, in the first half of the year, grew by 150,000 new customers. We're confident we target to grow at around 300,000 customers in Germany, so we're halfway there, right? So we do see client acquisition in Germany very strong, in Spain very strong, in Poland very strong, right? Whereas market share in Belgium and the Netherlands are more solidified because of the quite concentrated banking markets with four or three major banks in those markets.
Thank you. Now, looking at the technicalities of the NII, I think one of the main swing factor, I would say, in the next two years is the way your replication portfolio-
Yeah
... behaves. Can you take us through the mechanism of your replication portfolio-
Yeah
In terms of next six months, twelve, and then after twelve months, and then we review where actually is NII trough?
Yes. So first, maybe to understand ING Group, we have a balance sheet of roughly EUR 1 trillion, right? That's the size of the balance sheet, and of that, around EUR 670 billion is using the customer deposits, right? And that, if you ask me, is the cornerstone of why I feel confident in terms of the solidity of the balance sheet of ING, because we have this extremely granular retail deposits, which backs up the whole balance sheet of the bank. And the average ticket size of that granular deposits is around EUR 15,000, so it's highly granular, spread across 40 million customers. So that's a solid foundation. Now, what we do is that we replicate the savings based on customer behavior, right? And based on that, we have roughly half of our retail Eurozone deposits, around EUR 480 billion, which are invested short term, and about half long term. Okay?
And as rate starts to decline, you would see the short end of that replication starts to come down, okay? But it's also compensated by the fact that the long end, so the longer term than one-year replication, actually has tailwind, because we're replicating from investments that run off, which are sometimes at 0%. Even today, at 2, 2.5%, it's still accretive, so the two balances out each other. But as you move towards 2025 and 2026, that replicated income will come down, right? So if nothing changes, then you would expect NII of ING Group would come down with that.
But that's not the case, because we also pay customers for deposits, right, deposit pricing, and that has peaked during the course of the last, I would say, three to six months, given the market has already anticipated that rates have reached its highest point. And so, if you ask me how we will transition, at what level do we transition, it really depends on two things: How fast the whole industry starts to bring deposit costs down overall, and the second, what's the volume growth that could compensate for some of that increases?
But to cut to the chase, if you are modeling ING's financial performance, I think we gave a guidance that we expect that our liability margin across these numbers that I talked about would be above a hundred and ten basis points for 2024, and that we can manage our liability margin between a 100 and 110 going forward to 2027.
So is it fair to summarize what you said? Is it fair to assume that actually your NII will probably soften a bit with the trough in Q2, first half next year, before going back up again?
I would say I'm not sure where the trough would be, but the transition will happen sometime during 2025. If you look at the forward curve the way it is and the level of competition the way it is, yes, there's a transition, and then as the deposit pricing comes down to a different level, then you see an accretion again.
So I know you can't comment on deposit pricing for competitive reasons-
Yeah
... but more interested in the dynamics in each of the three countries.
I mean, Netherlands, you know, you are, it's led by non-listed large banks, one large bank, and then, one half-owned by government. So is that reflect a bit in your competition? And, it was definitely on the way up-
Yes
... on the way down. How this is?
I really don't think the fact that one is government-owned, the other one is not listed, has anything to do with the competition in the market at all. I think if there's a market which I think prices incredibly, you know, disciplined in pricing, it's the Netherlands, right, in terms of pricing. And what we have seen is quite high deposit beta on the way up, and let's see what it happens on the way down, right? Let's put it that way. I think the competition in Belgium would be normally quite benign, but we have a unique situation happening this month with the state bond.
For those of you who are maybe not familiar with the story, the government decided to take up 24 billion EUR in terms of an issuance of a short-term bond, and that money comes back now, during this period in September. At ING, we decided to do a promotion to try to capture part of that. Deposits actually in Belgium are typically quite inert, and that the flows between banks are relatively benign, but I think this gave us an opportunity, and that's why we did a pretty aggressive promotion for deposits in Belgium for the last six to eight weeks.
So I was about to ask you on this, because definitely you came first with the 3.81%-
Yes
Product for one year. Which actually was followed by the other banks, except BNP.
Yes.
This is all public in the websites.
Yeah.
You know what I mean? The other banks are being a bit puzzled by this move.
Yes.
They can defend it because they have off-balance sheet products in Belgium, so they can always get deposits, try to transfer them into off-balance sheet, get fees. But for you, where you are less present on that front, what was the rationale to go too strong? Especially you didn't lose as much deposits last year versus-
Yes.
You lost less than your market share.
Yes.
So what's the rationale to go after these deposits in that way?
First of all, if you look at the structure of the balance sheet of ING Belgium, we have a higher loan-to-deposit ratio than our competitor, right? It's something that we want to readdress, first point. The second point, this, I think, is a unique opportunity not to be sustained because there's EUR 25 billion of flows coming back in, then people have to make a choice, and we know exactly the timing of when the money would come in.
Mm-hmm.
So for us, we have worked out that we could pre-hedge some of that interest rate risk. We have worked out also that, given our previous campaigns, we could actually get a payback of between 12 months to 18 months with the rise cross-sell, and so that's the rationale for it, right? It is. I don't think that we want to start a deposit war in Belgium, but it was an opportunity that we thought we could actually create a material amount of deposits for Belgium, given this unique situation.
I understand. Although now it's created the fact that actually in one year's time, there will be discussion again how these products will be rolled over, at what price, where, when rates will be already adjusted quite a bit-
Yes
... at the ECB level. So, this uncertainty on competition and deposit funding will remain in Belgium now for an-
Yes
Extended period, I guess?
Let's see when we announce our Q3, along with other Belgian banks who got the lion's share of this. But I think to give a perspective, you know, the amount of money involved is not a cliff like we saw with the Belgian state.
Thank you. And then in Germany, another highly competitive market for deposits and assets. Can you describe the dynamics? I mean, you said the highest growth in on the asset side, You've been using brokers and so on to get the customers. Where's the picture on the deposit side?
The deposit market, again, another campaign we did in Germany. We raised roughly around EUR 11 billion in terms of deposits in Q1, and this is a cycle that we have seen. We can pretty much map customer behavior pretty well, right? If as a bank, we've done two deposit campaign, it's obviously because it works. That's why we do it, right? I think that the level of competition I would describe in Germany as being less competitive now than it was six months ago, right? You see that the level of term deposit pricings have declined. The share of savings and current accounts have increased. So I would expect that the German market would be maybe even one of the first to react to the rate cuts that we see happening now.
Thank you. I'll move to your wholesale banking division. This is a division that has been delivering quite average or say, weaker than you would like to returns or return allocated capital. In the CMD, you addressed that with better RWA velocity and so, how do you see that evolve in the next three years? I mean, do you see this better? I mean, you use this word a lot in the CMD of capital diet, and...
Yes.
Do you think this is the main driver for to fix the profitability of division or at some point, the growth will pick up there as well?
Yes. So maybe a bit of historical context, right? That in 2021, the wholesale bank of ING made roughly EUR 5.4 billion, right? That's the level of revenue generation that it has. In 2023, it's up from 5.4 billion to 7 billion, so a pretty big accretion. And if you look at the first two quarter of revenue for ING Group that we disclosed, and you multiply by four, it's a little over 7 billion. So we have increased the level, revenue generation at a pretty good pace. The second thing that I would say is we didn't expand in terms of our expense base to capture that as much as the operating jaws would suggest, because in 2021, our cost income ratio in the wholesale bank was 61%. It's 47% today, right?
And the last is that we had below 10% ROE back in 2021, is now consistently higher than 11%-12%. So it is, it's a franchise that has come a long way, right? And the reason why that franchise has come a long way is this pivot that we have from being relying purely on lending money to much more financial market, transaction services, payment accounts, which have evolved. And another metric that we track internally is the income on risk weight, which was around 360 basis points in 2021. It's now over 450, so that has increased. And the way to get there is really to be able to grow our franchise, increase our impact with our clients, but keep our risk-weighted assets relatively flat or very modest growth.
What we describe internally as a capital diet, right? That is aligned throughout the wholesale bank, that even our bankers in terms of salespeople a re rewarded on income, on risk weight, right? Not just on revenue alone.
Yeah.
They have to make the right returns for us. So that's a bit of the transition that we're having in the wholesale bank. But having said that, we have also said in the Capital Markets Day, given flattish wholesale risk weight, growing retail bank, you would see across the 2027, a reallocation of capital from around 50-50 wholesale retail bank to 55 retail, 45 wholesale bank, where the retail bank makes 20% return and the wholesale bank makes 12%.
No, I absolutely understand. I mean, I think it's essential to work on your, I would say, denominator of your return on equity, CET1 capital. Cost of risk has been very helpful, being very low. But structurally on this business, do you think that you have the scale and the depth in terms of the products where you operate in geographies, or it is something that eventually you will have to work on it as well?
A combination. That's why people say: Do you work more on cost in the wholesale bank, or do you work on revenue? And I say, "We work on both," right? And the revenue targets needs investments, right? It needs investment in some of our foundations, like in our payment capabilities, in our transaction services capabilities, and also in terms of adding sector bankers, right? What I think we tell our clients is that if you come to ING in the wholesale bank, you should value the three major ING difference, which is, do you value our network, particularly strong in Asia and in Central Europe? Do you value the sector banker expertise that we have, right?
Do you value our expertise in sustainability? Those are the three lenses, and if you do, then we love to do business with you, and if you don't, then we can consider what to do with the relationship.
Very clear. Thank you. Moving to costs, if we assume, I mean, revenues, with kind of flattish short term, then growing, NII a bit later in the plan, and then fees growing high single digit or 10%, that makes small, timid growth in revenues. And then costs actually are growing, your targets, low single digits. That makes quite, you know, a thin operating growth in the next few years. So, what actually restrains you from being a bit more punchy on cost savings? Just one remark, for you, I mean, the way you always tackle the cost is you do it first, then you announce it.
Yes.
So is it because, you know, you still work on something that you will announce later and then update and beat your target, or you think really that this is what will happen?
We gave guidance that we expect cost to grow over the next four years at around 3%-4%, right?
Part of that is collective labor agreement, part of that is investment in the platform that we talked about, and part of it is cost savings that we do, right? And we have typically, as a house, we don't announce big plans, and then you have to track it over four or five years. We just say when we do something that you can track about it within the next 12 months, it will happen, and we did that with some restructuring in the past. What I think the big levers in terms of cost efficiency that we see is that we want to remove the friction in our interaction with our customer. That's one.
The second is to lower and optimize the way we do KYC, you know, Know Your Customer processes with our customer, and to deploy generative AI at scale, right? That's, that's one aspect, and with these three levels, we expect that our overall operations costs will actually be flat in that department. That's the first. And the second one, which I am very proud of, is really around our technology platform, right? That we are increasingly able to scale operation. I just visited our operation in Italy, for example, where they need a refresh of the app, right? If you had to develop an app for ING Italy, it would take us years, but we will go live with a new app in the first quarter of next year by using our Dutch platform and then basically deploying it in Italy, right? We have done that in Belgium, we have done that in Luxembourg, we have done that in Germany, and now we're able to deploy our scale on a much more scalable basis given the technology development that we have.
It's interesting you talked about Italy, but in terms of rationalization of your footprint, you exited a few Western European countries and Central Europe on the retail side.
Yes.
Is this exercise now finished? Do you have this criteria of 10% return?
Yes.
Is that still holds as a criteria of to retain a? I mean, 10% to an. I mean, admittedly is a low number at 4% rates.
Yes
... for a savings bank.
Yes.
Is this criteria still the case?
Yes, it certainly is. We review all of our portfolio for performance, whether wholesale or retail banking. And, you know, for a big business like ours, maybe we have a couple of franchise which are below that hurdle, but we also look at the potential of that market, right? To give that specific point, we just see the savings market in Italy, one of the largest, I think, from memory, third largest savings market in the Eurozone. So that's why we are very focused on developing our Italian franchise. But that discipline in terms of capital allocation remains at the heart of what we do.
Thank you. A very quick word on asset quality, just to make sure-
Yes
Clear the air there. No, no pockets of concerns on any area, no delayed effects from rate increase?
No, I think if I look at our asset book, about 40% of assets are in mortgages, and the level of risk cost, the loan-to-value, extremely strong. I think the Wholesale Bank, you have volatilities thereabouts. We had a fairly big exposure in 2022 to Russia, and that exposure has been cut by 75%, you know, to around EUR 1.2 billion, and that exposure is highly collateralized with guarantees, with collateral or with provision. So I don't see that. But of course, there will always be volatility in the Wholesale Bank with risk costs from time to time.
Thank you. Is there any question in the room? No? Then I'll carry on. Tonight, I will ask you a question, I mean, to almost risk to sound like a broken record, because I ask you all the time this, and to Steven, as, I mean, you had massive excess capital-
Yes
that you start to run down for the last, now two years and a half.
Yes.
And there's still more to come, and you know, we've been seeing around in Europe lots of banks that's already present in either pan-European or have some fee products that have been using or trying to use some of this capital balances between buyback, high payouts, and be opportunistic on doing bolt-on M&A and so on.
Yes.
I mean, why, why BNP... Sorry.
ING.
There's too many banks this week.
Yeah.
I will try to find a link with BNP.
Yes
So I don't feel like completely silly. So why ING never contemplated, you know, building the fee products again? Because you were one of the bancassurers in the past. And I mean, there were a lot of opportunities. I don't want to list names here, but there were a lot of opportunities and a lot of consideration that you could be involved in and contemplate.
Yes.
Is it structural strategy you have in mind that's... I mean, I'm really interested to hear. Before it was theoretical, but now we see things happening around, right?
Yes. So I think to give maybe the listener a bit of a perspective on how much capital this franchise generate, I think since 2019, we have provided cash distribution to our shareholder to the tune of EUR 24 billion, right? The market cap of ING is around EUR 50 billion-EUR 55 billion, so it's an enormous return. And that in the last two years or three years, we have bought back 20% of our shares, right? So it's a highly capital generative franchise that we have. Within that context, we always look at potential mergers and acquisition opportunity. It's not that we don't look, we look, but we haven't found anything that we find meets the criteria that we have set for ourselves.
And if you look at what those criteria are, it's actually adding capabilities that we don't have, like fee income, for example. If we find a business that is highly fee intensive, we would look at that. We will look at acquisition that gives us scale in a particular market that we are either present or not present in, but give us real scale. And the third, and this is really critically important for us, is that the acquisition must fit in terms of our cultural fit with the target, and it must fit in terms of either have already adopted a digital model or has the potential to become a much more digital model. So that's the case. But I think it's incumbent on a bank our size to look at potential deals, but we just haven't found something that we find appropriate.
But when you say looking for, and the criteria, are you also looking to something transformational? I mean, you mentioned the digital aspects and, the ING Direct, very specific way to do retail, which is difficult to. You have to buy, for example, a bank. But if you take the example of Germany, and I had Bettina just before you on stage, and, you know, ING DiBa, great franchise in Germany. You have brick-and-mortar branches as well in Germany?
No.
You have a mix, no? It's pure digital?
We have almost 11 million customers with no branches at all.
Okay, but you had a hybrid thing. Okay. But I mean, this is an area that could bring scale and transformation. When you are looking, how transformational are you looking for opportunities?
I think those criteria I mentioned apply to even small or big transactions. But I think the other thing that we look towards in terms of measuring the criteria, today, as I mentioned at the beginning of the hour, we acquire around a million customers per year, right? We are in fact doing a merger and acquisition as we speak by acquiring a million customers.
So for a deal to meet that threshold in terms of organic growth, it's a high one, and so you have to trade off between the distraction of a big transformation compared to already doing the steady state organic growth that we're able to achieve. But never say no.
Clear. Then on the buyback, you became very predictable now, which was the objective you had, I guess?
Yes.
EUR 2.5 billion announced in Q1 and Q3 each year. So, if you look at consensus numbers in mind, if I do, you know, announced, mostly not executed, but announced EUR 2.5 billion each year, going to end of 2025, we're still above 12.5%. Is it just a rounding or there is more RWA usage upfront?
I think if you're shareholders of ING, you should be pleased with the challenge we have in terms of share buyback, because it's not that we are not buying back at scale. I mentioned we bought back 20% of the stock of the company already, but the company continues to generate even more capital than we planned for, right? So that's the real the beauty of our business model and the profitability of our franchise. So as you say, we have become quite predictable in Q1 and Q3. We announce our results in a month's time, and then we'll give you an update on any further capital actions then.
And after 2025, the strategy would be to, after growth and 50% payout, to distribute all the excess to say 12.5%?
We think that given the franchise, the product mix, the risk profile that we have today, we think that we can operate on a sustainable basis at around 12.5% capital. Maybe sometimes a little bit higher, given maybe some stresses, geopolitics, other things, but to operate around 12.5% is our target.
Mm-hmm. Perfect. Thank you very much, Tanate. Thank you for your time.
Thank you, Tarik. Thanks.