ING Groep NV (ING) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ING Full Year 2003 Results Conference Call on the twentieth of February, 2004. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Bill Holding (ph). Please go ahead, sir.

Good morning. This is Bill Holding for ING welcoming you to ING's conference call on their figures for the full year 2003. Hosting the call will be Cees Maas, CFO and Member of the Executive Board in Amsterdam; Tom McInerney, CEO, U.S. Financial Services in Atlanta; and Herman Farsa, Director of Investor Relations in Amsterdam.

Before turning this over to Cees, let me say that any forward-looking statements in today's comments are subject to a number of variables, including interest rates, foreign exchange rates, inflation rates, movements in securities markets including equity markets, and underlying economic health and changes markets. The realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables.

Having said that let me turn this over to Cees Maas. Good morning, Cees.

Good morning, Bill. Thank you for your kind words of introduction, and good morning and good afternoon to everybody in the world. Before giving a very short introduction on our annual figures and results, two simple remarks up front.

First of all, upon the request of many, ING will host a conference call to discuss embedded value issues. The conference call will be given by John Hale (ph), our new General Manager, Corporate Insurance Risk Management, and by Herman Farsa, our Director of Investor Relations. The date will be Tuesday, the twenty-fourth of February, 3:30 p.m. Amsterdam time, So 2:30 p.m. U.K. time, and 9:30 a.m. Eastern U.S. time. The details will be on our Web site - the numbers for the - how to call in, et cetera. But I would like to announce it today So there will be a special session on embedded value issues. It doesn't mean that I and that we here are not going to answer any question on embedded value, but in particular as far as policy issues are concerned, of course, and probably all the real technical questions can be addressed in full detail at this special conference call on embedded value.

The second point I would like to make before is that the conference call on - that we traditionally have in London on the Wednesday after this traditional Friday, So on the twenty - will be on the twenty-fifth of February will be live Web cast. So, for those of you who want to follow our London analyst meeting can hook in on our Web site.

Having said that, just a few words of introduction as far as the 2003 results are concerned. As you have all seen, ING showed a strong performance in 2003. Despite all the challenging and still challenging worldwide economic circumstances, we were able to post a firm 18% growth in operating net profit. And of course, as you know, this growth was strongly supported by the recovery of our equity markets and improving economic conditions in Some of the areas in which we operate - of course, in particular - in the developing markets in particular in Asia and in the United States, of course, also.

Second point I would like to make is that this growth in net earnings was strongly supported by the higher banking net profit. This was the main driver for profit growth. The result of that was higher interest rate result and significantly lower loan loss provision and a very strong cost control program.

Operating profit from banking operations increased by 73%, up to a level of 1.5 billion. Our interest income was up 6.1%. And as you have seen from the figures, ING Direct contributed heavily to that. Results were EUR151 million in 2003 compared to a loss of 48 million in 2002, So a swing in profit before taxes of 199 million. The loan loss provisions in the banking operations were 22% lower and ended at 1,125 billion, which was 46 basis points of our credit risk weighted assets, and the trend, as you have seen, is downward.

Profit from our insurance operations showed minor decrease, and that was due in part to the decline, of course, in most of the currencies compared to the euro. But the real underlying reason was the low interest rate environment and the low dividend yield that we had on the asset side of the balance sheet, and this all despite improving equity markets. As you have seen our U.S. operations did well despite the heavy - the environment of strong competition out there. Operating net profit from insurance declined by 1.2% to a level of 2.5 billion.

The - our operations in the emerging markets in the developing world did well, in particular in Asia, both in profit and in premium income. There was a strong top line and bottom line growth, as you have seen. The loan loss provision (inaudible) of losses on the insurance side were strongly improving, and that for the year as a whole at a level of 15 basis points, strongly down from the year before.

As you have seen, also, there was a strong increase in our net earnings in the non-life business. As you know, we have large operations in four countries in the world, and there was an over 70 - close to 80% increase in non-life insurance operations.

ING's capital position, an important priority for ING in 2003 and going forward, improved significantly as a result of the measures that we have announced a year ago and which we have executed all and it strengthened the capital base and it reduces our debt position. The capital coverage ratio for our insurance position increased from 169% to 180% at year end and today I can report to you that the capital coverage ratio for the insurance business is 185% of EU regulatory required capital. The key loan ratio of the bank improved from 731 end of 2002 to 759 end of 2003, which is a strong improvement, also. And important for us is the debt equity ratio of ING Group, and this improved strongly from 19.9% last year to 14.4% at the end of 2004. So, the vulnerability for ING for changes and volatility in equity markets has strongly decreased.

Finally, the outlook for 2004, as we have said and as you could have read, we are cautiously optimistic about the outlook for 2004. In the year ahead, ING will continue to leverage its existing strength in both mature and developing markets; however, the Executive Board considers it premature at this stage to make a profit forecast for 2004.

Having said that by way of introduction, the floor is yours and I will be willing to answer all the questions you have. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

The first question comes from Mr. Nicholas Watkins (ph). Please state your company name followed by your question, sir.

Good afternoon. It's Nicholas Watkins from UBS. I have a question on the U.S. insurance activities. In particular looking at the detailed information you've given us on the composite spread and also the structure of the assets in the U.S. but a heavy weighting towards mortgage-backed or mortgage-related securities. And obviously, there was a drop in prepayment income. Can you just explain to us in a bit more detail Some of the limiting factors behind why you were not able to more aggressively manage crediting rates?

Nick, this is Tom. On crediting rates, if you look at the overall mix of liabilities in the composite, 25% of those are multiyear guarantees, So those you can't adjust. Those were - the crediting rates were set and they have three to ten-year terms. About 25% is annual reset annuity type business, and that, on the annual anniversary dates, we can take crediting rates down and we are doing that. And you saw that certainly in the fourth quarter the five basis points is mostly those annual reset. But keep in mind that that 25% of liabilities have anniversaries spread throughout the year, So roughly there's a little bit of backend loading in the second half versus the first half. But basically you take that 25% and add they have their anniversary dates spread throughout the year, and So as they come up for renewal, we are taking those crediting rates down significantly.

About just under 50% of those liabilities are related to our retirement service businesses. We can bring those rates down. Typically what we do because a lot of that business has a January 1 anniversary, 1/1/04 and in prior years January 1 is when we take those down. So, about half of the liability composite we were not able to take the rates down in the fourth quarter, but we will be able to in the first quarter and have reduced rates significantly as of 1/1/04. And So you'll see that in the composite in the first quarter. So that's how the liabilities work.

OK, thanks. And just as a follow-up, could I maybe just ask a follow-up question ...

Go ahead.

... whether the majority of the prepayment problems, if you like, have been passed now and whether the earned rate that you saw in Q4 '03 is a base that we can build from?

Tom

Well, certainly the level of prepayment has slowed, although I think you appreciate, Nick (ph), there is Somewhat of a lag So that those roll into the earned rate. On the structured residential mortgage-backeds, the yields in the fourth quarter were around 350. We would say over the long run, you know, we would expect those to be six - six-and-a-half, but certainly in this environment, there obviously has been Some pressure on those. So, that's what I'd say in terms of the earned rate related to the mortgage-backs.

Thanks very much indeed.

We thank you. Next question, please?

The next question comes from Mr. Duncan Russell. Please state your company name followed by your question, sir.

Hi, it's Duncan Russell from Fox-Pitt. The first question is, again, on the earned and the accruting rate. Just following on from the last question, does those entities you were talking about throughout access management do they refer to? Is it just the fixed annuity and the retirement services all? Is there anything else there? And what did you take the crediting rate on the retirement services down from and to in the first of January this year?

In the - the first part of your question I think was what's in that composite? And that would be our fixed annuity business, the fixed side of our retirement service business, and our fixed bucket in our variable annuity ...

Actually ...

In terms of ...

Actually Sort of the total amount in U.S. dollars million. So, the percentages you're referring to - the 25% - 25% of 50%, what is the dollar million sum you're talking about there?

It's about - it's over - it's about 40 billion.

OK.

In terms of the crediting rates, we did take those down significantly. I really because So many of those retirement service deals are very competitively bid, I, you know - I would not want to Sort of get into specifics on the exact reduction because there's a lot of competitive information in there that I would really rather not get into. But I will say we did take them down significantly.

OK, and then on the 25% annual reset, how much of that reset's in the second half of '03 and how much is going to reset in the first half of '04?

Basically on that 25%, it's roughly about 60% is in the second half, So 40% in the first half. There's a little bit of backend loading.

So on 60%, you've already adjusted the crediting rate in the second half of '03?

In the second half, as I said, 60% - six, zero ...

Yes.

... we have as those anniversaries have come up. That's right.

OK, and then the second question is actually on the pension fund defined benefit - pension fund. Can you just provide the funded factors of that pension fund at the end of 2003 and the unrecognized gain or loss you carry on your balance sheet?

Is that - you mean the pension funds for - I mean the pension liabilities for ING as a whole, as a group?

Yes, that's right, So that figures at the end of 2002 I think it was 2.9 funded status and minus 170 on the balance sheet.

That's in the energy (ph) of 2.9 billion.

Yes.

OK, thank you.

The next question comes from Mr. Matt Pickering. Please state your company name followed by your question.

Hi, it's Matt Pickering from Institutional Capital. I'd like to go back to the U.S. for a second and I guess specifically look at the pre-tax operating profit run rate that division has been experiencing in USFS I believe - yes, over the last couple quarters. It's been roughly in the low-two hundreds, and I was hoping that, Tom, you might be able to just give Some qualitative guidance on, given what you're doing in the competitive marketplace, where that is in relation to what you would view as a normalized environment. And then on that point, I was hoping you could also comment about whether the sequential sales momentum we've seen in the variable annuity lines has continued into the first quarter 2004.

And then for Cees, I was hoping you might be able to add a little color behind the improvement in profitability sequentially in the Dutch life business in the fourth quarter relative to the third quarter. Thank you very much.

Well, Matt, you know, let me take both of your questions. In terms of obviously I don't want to get into forward-looking statements, So let me comment on 2003. And I'll focus my comments on Some of the bigger businesses - the life, the annuity, and the retirement services. You know, I'd say in 2003 on the life side, we were pleased with the pickup in sales.

It was a very good year for our universal life business, which was up 21.5% year-over-year. We have launched several new products on the universal life or more general account type product and are quite pleased with the performance there. It was a tough year for us and for the industry variable life, and So we were more in line with the industry. So, you know, I would say we're pleased overall. We - now that we're done with our integration in the U.S., we're much more focused on new product development, and I think we've got a number of new products in the pipeline on the life side going forward.

From the life earnings perspective, which is the other part of your question, they were down year-over-year, but the fourth quarter was a little better than the third quarter. Down year-over-year because of where we are on interest rates and spreads that impact the life businesses, as well.

On the annuity side, let me first talk about fixed annuities. Clearly there from a sales perspective, they're down 66% year-over-year, but our focus there is really in this environment, we think it's tough to get the required returns. And So we are sticking to our pricing discipline. I think you'll notice that in the fourth quarter versus the third quarter, we were up about 15%. So, there's Some momentum in the fixed annuity business, but those - our sales will obviously be impacted by the overall level of interest rates.

And we've talked about the earnings issues in the fourth quarter. You know, the drop was related primarily to the drop in spreads. We also in looking at the spreads, one of the things that we do - we think it's the right thing to do - not all competitors do it - is we did look at our DAC assumption, So in the fourth quarter we did reduce or amortize more quickly the DAC, and that had about a USD6 million impact on our earnings.

On the - turning to the variable annuity side - their sales we're quite pleased with the pickup in momentum year-over-year. Sales were up 13.5% roughly. And if you look at the fourth quarter over the third quarter, we had a nice pickup - over 40%. So, I think we were pleased with the sales overall for the year and certainly pleased with the momentum pickup in the fourth quarter. From an earnings perspective, obviously, with a recovery in the markets, that's helped on our fees overall as well as Some positive DAC unlocking.

The last business, retirement services, which is our biggest business in the U.S. at this point, a very strong year for the retirement services. We're - both in sales and in earnings, we're emphasizing on the sales side our two best markets - highest margins are K through 12 education and our small corporate. We're doing quite well there. Year-over-year sales were up in total - between the accumulation and the stable value, up over 35% to 9 billion and they were up about 16% in the fourth quarter. So, we're pleased with that and obviously with a recovery in the markets and higher fees, the earnings in retirement services for the year were up about 50%.

So, I'd say that '03, you know, with Some issues particularly around spreads and low interest rates, but overall we feel good about the business. As I said earlier, we finished the integration and So - in our - in all the businesses, but particularly our core businesses, we are now more focused on getting new products out. We've refreshed our products or are in the process of doing that in each of our businesses, and So I think we have Some good, strong new products that will be refreshed launched in '04.

So, obviously there are a lot - from an earnings perspective and getting to your run rate, the other thing I'd point is in the fourth quarter, we did have a number of one-time expenses related to reorganization. We did this outSourcing. We also reduced the number of legal entities particularly on the annuity side, So that EUR41 million or USD45 million had an impact. So (inaudible).

OK, Tom, before Cees answers this question, I just want to make sure I understand, then, the 1 million pre-tax profit that the fixed annuity business generated in the fourth quarter was after a USD6 million DAC assumption change. So, in other words, the underlying fixed annuity profitability was USD7 million in 4Q?

Well, just to compare the third quarter to the fourth quarter, about 16 million the drop was related to lower yields, and that was principally on the structured residential mortgage-backeds, 6 million was in DAC unlocking, there were 5 million higher expenses with 3 million of that 5 million what I would call more one-time reorg legal entity type.

OK, So, 3 million of the 5 million is part of the 41 million that hit the whole USFS or actually the whole US life business.

Correct.

OK. OK. Thank you very much. Cees, on the Dutch side?

On the Dutch side, in the fourth quarter in particular, there were a few one-offs. The release of the - in the results - the release of the catastrophe provision was to launch part in the Netherlands. That one-off we had compared to the previous quarter and compared to the fourth quarter in 2004, we had a higher realized capital gains on real estate, which was in the Netherlands to a large extent, also. Those are the one-offs.

Of course, on the negative side, we were hit by the lower interest rate compared to Q4 2002 not compared to Q3 2003, of course. We had a little bit better result in Moveer (ph), the insurance company for the dentists and doctors and those Sort of (inaudible) claim results. Our non-life business did a little bit better compared to the Q3 2004 and to - and to the previous quarter of 2002. So, those were all the good ones we had.

We improved our pricing in the last quarter in the single premium policies, and believe me or not but there was no shortfall in the volume of premiums. So, that was the good news. So, here also, although it was a small effect in the fourth quarter, but premium level remained the same as in the third quarter and while we improved our pricing. So, that is, relatively speaking, the good news.

Operating expenses were relatively higher because of the additional expenses we took in the end to resolve the backlog. So the Dutch life business (inaudible) was lower than the previous quarter. But the other ones, at least from a structural point of view and that's roughly what will happen in the fourth quarter.

And Cees, you had highlighted the 88 million pre-tax catastrophe provision release, which I assume was taken in the non-life Dutch business. How does that correspond to the fall in the balance sheet of ING Insurance in the general insurance provisions? There's a pretty significant drop during the year.

Well, first of all, the release in the catastrophe provision was not taken in the - at least not 100% in the non-life business was 50/50 taken in life and non-life roughly speaking. The reason for that is that although the origination - the original idea behind the catastrophe provision was for non-life, we have - the build-up of the provision was always charged 50% for the life result and 50% for non-life. So, there - and we have non-life catastrophe, also. As you can imagine, big fires or earthquakes or what have you that can damage the life business also. Because of the build-up of the provision 50/50 life versus non-life, the release was 50/50 life/non-life also. That's why I explained that the life business to some extent was favored in the one-off (ph) in the fourth quarter and in the Netherlands, also.

And your question on the balance sheet, I didn't get it quite well.

Just - and I don't want to take up too much time here, but the consolidated balance sheet has a line item for general insurance preserves, and that fell significantly to December '02. It's on Page 31 of the release. It fell from 2197 to 1665 - a decrease of 24%, and given the level of activity ...

Sure, sure, sure. I understand now. This was almost completely or if not in full due to currency - ...

Yes.

... to the appreciation of the euro versus all the other currencies - the dollar and all the others where we operate. Mexico for example (inaudible).

OK, gentlemen, thank you for your time. Thank you.

The next question comes from Mr. Mark Kaaskard (ph). Please state your company name followed by your question.

Hey, guys - Deutsche Bank, Mark Kaaskard. Got three questions. First one, is I just wondered if you could say what your policy is going to be moving forward on real estate gains because I think it was higher than the market you'd been anticipating for in the fourth quarter.

The second - in relation to your stock dividend policy, now that your double leverage seems to have come down to the targeted level that you gave us back in April, which is 4.5 billion, I wondered if we should expect a cash dividend on a going-forward basis.

And the third question was in relation to your Varvac (ph) target on the bank. Over the past year, you've reduced the actual economic capital, but you've kept the Varvac target the same at 18.5%. So, does that mean you're expecting less stated profits on a going-forward basis? And if we actually use capital required by the rating agencies for an A-rated bank as opposed to economic capital, then on our calculation, you're actually only targeting 9% returns on the bank and net of tax. I wondered if you could comment why your targets on the bank were so low.

Mark, thank you. First, the policy on the real estate going forward starting with the statement that the actual realized capital gains on the real estate was higher than the market had expected, to be honest, it was higher than we had budgeted for, also, thanks to an excellent job our real estate people did. As you probably will recall, we have said in order to improve the capital position of the bank, of the insurance company, and of the ING Group as a whole, that we have sold a billion additional real estate and we had intended not to make any capital gains on that because through just the selection of the real estate elements that we wanted to sell, we thought not to make any additional real estate. And we made more on that. We made a profit on that. And So that brought the whole realization of capital gains in real estate a bit higher than we had originally foreseen, also. Can't say that's bad news. I consider it good news. So, that's one.

Going forward, as you know, we still have 1 billion after-tax unrealized capital gains in the balance sheet. It is clear that going - so that's my first observation. The second observation is that there will always be, generally speaking, some realized capital gains in the P&L. As you know, we do not only have real estate investment business, but also a development - real estate development activities, and development is - always creates realized capital gains. You develop a business, you create value, the value shows up in the revaluation reserve in the balance sheet, and at the moment that you sell the real estate, which is, of course, the purpose because you are a developer, then you realize the capital gains.

It is difficult to say on what level that will be. It's clear that they'll not be, going forward, on the level that we have seen in 2003 and 2002. I can't tell you at this moment what a normalized level would be - again, certainly lower than it is today. It will gradually going down to - gradually - that means in one, two, or three years - to a normalized level, whatever that level will be. But it will certainly be lower unless I assume, which we don't, which it's up to everybody to assume a strong increase in real estate prices, again, which I do not assume. That's the only thing I can tell you today on the realization of unrealized capital gains on real estate portfolio.

As far as stock dividend is concerned, I am very pleased with the question. And first, we'd like to get to return to our normal dividend policy as quickly as we can. That is to say, and I said it before, that once we stop with optional dividend of which the cash component is being fully financed by selling the stocks in the market we will return to optional dividend. If the shareholder chooses the cash, we give them the cash, and that means cash out of the company. So, the dilution will be only for that part where the shareholder directly chooses for cash. That is the - at least the step - Sorry, the stock - that is at least the policy that we are aiming at once we change the existing policy in fully diluted stock dividend.

The question when it will happen, let me be clear on it that the capitalization on the bank side is adequate. 7.95 billion (ph) is more than the target that we have, and it is a 2:1 ratio of at least 7.3. So, here we are very comfortable. And on the insurance side, the 180% of EU regulatory required capital on - at year-end and 185% today is adequate also. So, from that point of view, we could say we stop with the existing dividend policy and return to normal optimal dividend. However, the debt-equity ratio of ING Group N.V. is still on the high side. That is to say we want to have the debt-equity ratio of Somewhere between 10 and 15, preferably close to 10. And since it was 14.4 at year-end, we consider that is too high.

And you know, the purpose of all that is that if there will be an event in the market, particularly in the stock markets, stock prices drop by 40%, the real estate prices by 30, we want to still maintain our rating, which means that we will - should not go over a debt-equity ratio of 20% maximum. In order to have that such scenario, we feel that the debt-equity ratio should go down to about, say, closer to 10 than to 15 as it is today. When that will be - will happen is, of course, for everybody, including myself, impossible to say. It depends on the development on the - on the stock markets. That depends, of course, also on the development of the profit of ING, so on how long we can and we will retain our earnings.

But, believe me, I want to get rid of it, so I want to return to that normal dividend policy - optional dividend policy as quickly as my shareholders want to - want me to return to that. Whether that will be already in 2004 - 2005, I don't know. That is something that I don't know. If I knew it, I would tell you immediately.

Then the RAROC, the RAROC target has always been set at 18.5 on the assumption that the tax rate would be 35%. The reason that we have always set a gross target is that we manage the business on a (inaudible) before tax basis. But to be honest, our real target for ING Group and (inaudible) for the bank entity was always 12% after-tax. The existing today RAROC is 13.1. If I apply the effective tax rate with the bank to the RAROC before tax - the 17.2 - or 17.6, then the after-tax rate will be 13 (inaudible) than would (ph) be, which is higher than the target which is fine. This is - it's a good performance.

You are right in saying if return on equity go - if the risk-adjusted return on capital is going down. And that is, by the way, not so much because our total equity is going down, but that's because the economic level is going down because, for example, we have an improvement in economic capital as far as operational risk is concerned. And that is because our operational risk management has improved strongly. We set up a couple of years ago a complete operational risk management structure throughout the Group of incident reporting, et cetera.

And first of all, we have a much better insight in the operational risk and we manage operational risk better. So the factors that influence economic capital have been lowered, and that's why we have a lower economic capital. That doesn't mean that I expect that my return is going down without saying that I'm going to increase my required return on economic capital. What I could do also is using more of my economic capital and lowering the gap between existing capital and economic capital. That's a possibility, also. Thank you.

The next question comes from Mr. Andrew Ritchie (ph). Please state your company name followed by your question.

Hi. It's Andrew Ritchie from Citigroup. A couple of fairly short questions - first of all, could you give us an update on the underlying asset quality position in the fourth quarter and your feeling for the outlook at the bank given, obviously, the headlines seem to be impacted by I think you identified a (inaudible) charge.

Secondly, could you give us a bit more detail on what went on with the increase in expenses at the bank? Particularly detail on that Software writedown.

And thirdly, on the new business profit, obviously we'll speak about this next week, how much of the very strong second half new business profit in the Netherlands was down to change of assumptions between the allocation of costs?

First of all, the underlying asset quality of the bank - I - as you have seen, the loan loss provisions on the bank in the fourth quarter were 270 million, which was up 30 million compared to the third quarter of - in 2003. I have said yesterday at the press conference that we have taken a provision on one of our 50/50 joint ventures called Anna B. Heller (ph), and it was already known before that there were Some difficulties out there and we have changed management. We've put out our own ING people now in the top of management. We have cleaned the books. And we have taken another - an additional loan loss provision.

I have said that if I would not have taken that provision, then my loan loss provision would have come down compared to the third quarter, which gives roughly an indication of the size of that loan loss provision. On top of that, I've said that we have taken, included in the figures, a provision for Parmalot (ph). I'm not disclosing what our exposure is. We never do that. I'm not disclosing even more what my provision is. There is Someone working on the restructuring of Parmalot and it would be not very wise to do it. But it (inaudible) significantly high because as I said, without the provision for Anna B. Heller (ph), my loan losses would even have gone down in the fourth quarter including Parmalot.

Now, more about the underlying quality of the position. As you've seen, the overall level is fully six basis points, going down gradually. In the fourth quarter, the total loan loss provisions were 44 basis points, So even lower than the average of the year as a whole, up from 39 in the third quarter. That was, of course, because of the higher incidental ones I had (ph) to do. Nevertheless, I can say that the trend is still downward. We see in the Netherlands, in Belgium, and in Germany a little bit, an increase in the small and medium-sized enterprise loan loss provisions. We see a small increase in mortgage provisionings (inaudible) provisionings. Nevertheless this is all still very low and very moderate, still below long-term expected loss values.

So I see - without, I mean, the (inaudible) results, So I don't know where we will end up. But I see at least an ongoing trend towards more the normal expected loss figures of, say, between 35 and 40 basis points of the portfolio as a whole.

Then (inaudible) the second question was (inaudible) ...

On Software writedown (inaudible) ...

The question of the expenses - yes, the question of the expenses in the fourth quarter. Well, first of all, it was the accelerated depreciation of Software costs particularly in the bank. To give you an example why it happened, first of all, for example, we have a consolidation system changing now in the banking operations we have closed down Some of the branches changing to a (inaudible) office or even complete close it like in Latin America. And it means if part of that project is oversized, So to speak, of that consolidation project, and therefore we took a one-off hit in accelerated amortization cost - one.

Second, bonuses - our wholesale division international did better than expected. Bonus accruals are normal over the course of the year. You have to accelerate bonus accruals in the fourth quarter if you've done better. Marketing costs - both bank as well as ING Direct took extra marketing costs, extra marketing efforts. You don't live in the Netherlands, but if you ever read a Dutch newspaper, there is a special campaign going on for the (inaudible) bank which now started to create an open architecture (ph) for its mutual funds with a massive campaign. ING Direct in the United States, for example, has accelerated their marketing expenses, et cetera.

And we took a small provision in the equity markets. For equity markets, you know that we have announced the - our attempts to sell our Asian equity businesses, and we took a small provision there also. So those were the reasons for the increase in the expense for the banking side.

So you ...

Your last question - Sorry, go ahead.

Now, you're saying underlying. You didn't give us a number for those. If I would just take all those out, what would the expenses have been quarter-on-quarter?

Probably almost flat. If I (inaudible) taken out all these extra expenses, then they would be - then they would be - roughly speaking, they would be flat, So no increase in expenses.

OK.

On the Netherlands, John (ph), probably you can give an answer to that question.

Sure. The - for the six months compared to the full year '03 value of new business in the Netherlands, the majority was due to turnaround of the business versus basic assumption changes for the Netherlands.

OK, thank you.

Sorry, just to follow up on that because you say in the statement you've changed the allocation between in force (ph) and new business on Some expenses. Are you saying that the increase in the second half was not bound to that - none of that contributed?

I didn't say none; I said the majority was the change in the business. Some is for the Netherlands. That - the change between acquisition and maintenance mainly affects the U.S., and I'll be giving Some more details on this on Tuesday.

OK. Thank you.

Thank you.

The next question comes from Mr. Nick Holmes (ph). Please state your company name followed by your question.

Yes, hi. Nick Holmes (ph) at Lehman. I have one main question and two very quick questions. The main question is looking at the U.S. life business, the new business profit margins are still very low. It's around about 3%. I wondered if you could share with us the Sort of profit margin that you would hope to achieve on a normalized basis. And what is the main problem at the moment? Is it volume or is it expenses or is it product mix?

Then two very quick questions - just following up on the dividend, the debt-equity ratio of 10% looks to me to be unachievable for the interim dividend. Would you agree with that and therefore rule out a change for the interim dividend? Then final question - equity exposure - you're still hedging EUR4.4 billion. I wondered when you are planning to give that up.

OK, let me answer the questions - the two simple questions, as you call them, first, and then Tom will answer the U.S. life business.

First, the dividend - you asked me if I exclude the change to Sort of the normal dividend policy from the interim dividend. First of all, I have not excluded anything and I will not exclude anything and I don't say (ph) that I'm going to do it, either. The reason is simple. I heard Some of your colleagues making a calculation today or yesterday saying, "You need 2 billion - isn't it? - in order to get down to the 10%." And that depends. That's the numerator that's in the (ph) difficult (inaudible) actually agree, although a half-year retained earnings is already a billion, So you never know. That's one - that's the numerator.

The denominator, if equity markets improve, then it could - I don't say could easily be done because I don't want to be too bullish on equity markets, which I'm not too bullish (inaudible). So nothing can be excluded. But at the same time, to be very honest there, I'll repeat what I said before. I don't know. And again, if we are able to do it, we return to the normalized dividend, and like my shareholders, I'd like to do that as quickly as possible.

Then, the hedge on our equity portfolio - as I said before, what we've tried to do as smart as possible to keep the downward protection on the Dutch equity portfolio, which is the largest part of our equity portfolio, and try to open up the upward potential. Today I can tell you that we have the value of the puts in place are 4.4 billion and the value of the calls, So the ceiling, is 700 million today. So we've opened up the largest part of the upward potential.

I have to tell you, of course, and you will realize that the higher the AEX index is and the bulk of our hedging is on the AEX, yes, we have 4.4 billion protection, but of course the protection is at the relatively low end. I mean the protection is at a certain level, and of course the hit has to be higher before these puts are getting into the money (ph). But nevertheless, we have that.

Question - when will we stop? Well, at least, we will stop once we return to the normal dividend policy. As long as I feel that I cannot - that an event risk in the equity markets will bring my debt-equity ratio to a level that is unacceptable - say, 20% - then it's better to have the hedge in place. Once I am too (ph) comfortable on the debt-equity ratio, then it's not - no longer necessary to have these hedges in place. I could stop from a capitalization point of view as far as the 185% EU regulatory required. Those hedges are no longer necessary. But again, as long as the debt-equity ratio is at the level where it is today which forces me, So to say, to continue with my dividend policy or not. That's the first point I will have them in place, and after that I will stop. Thank you.

And then I'll return to Tom on the U.S. life question.

Thank you.

(inaudible) Nick (ph), Sort of the - when we look at new business pricing, we're really focused on our IRR number. And So we're looking, given where interest rates are today and the overall (inaudible) at 10% IRR on new business for our U.S. businesses. You know, we reported in '03 that the IRR is 9%, So a point less, but pre the currency issues, it was 9.7.

Within in (ph) U.S., why is it below the 10? What's driving it? We - on the volume side, we were in fixed annuity and institutional markets, which is our get business, there, given the current interest rate environment, we're very focused on pricing. And So we did have less volume in fixed annuity than institutional markets in 2003. And particularly, the fixed annuity drop in volume had an impact in the returns.

On the expense side, we have an expense overrun in our life and in our annuity businesses. And on the annuity side, it's driven more by volume, and the life, there are, you know, legacy issues. We're focused on that and we're bringing that expense gap down. And in fact, in 2003 we made Some progress. So on fixed annuity and life, we're below the 10, and I think it's going to be Some time to get to the 10. On the other lines of business, we're generally near or better than our targets.

Which would you say has the highest profit margins in terms of product mix? Is it retirement services products rather than the asset accumulation products - I mean the payout - the payout products rather than the asset accumulation products? Or is it too difficult to generalize?

Well, there's a lot to that. I would say that the retirement service businesses, the reinsurance businesses, and the institutional markets tend to have IRRs that are above the hurdle rate, and variable annuities is pretty close, and then the - and as I said, the life and the fixed are below. Fixed is a volume issue that will remain as long as, you know, we have interest rates where they are. In life, while I think we're making progress, we still have work to do on the expense gap side.

OK, thank you very much.

The next question - ...

Thank you.

... excuse me, the next question comes from Mr. Nicholas Byrne (ph). Please state your company name followed by your question.

Hi, this is Nick Byrne (ph) from J.P. Morgan. I just have a few follow-up questions to the themes that have been explored already. Going back to the slide on composite margins, do you think you can actually give us the explicit number, i.e. the contribution that mortgage prepayment penalties made to the earned rate in each of the quarters in 2003, So we could see how that's developed?

And then the second question on the same theme - you obviously have fluctuation in the gross credit losses. Can you actually give us a feel for what you think or what you budget to be a cross-cycle default rate on your portfolio given the current mix?

And then the third question - again, going back to the issue of the dividend and the Solvency, I recall - I think it was at the London meeting after the nine-months numbers that Cees mentioned that you would not reinstate the cash dividend until the Solvency in the insurance business was above 200%. Now today you're focusing on the debt-equity ratio. But can you just explain what's changed with respect to insurance Solvency target, please?

If I start with the latter question, I can't recall that I said that I would return to full cash dividend if Solvency would be above 200%. And I'm, by the way, 100% sure that I never said that. I said that once we changed the existing dividend policy, we would - we would go back to optional dividend. And I even recall very well that I had a special reason for that - not only that it helps in financing my growing businesses like ING Direct, emerging markets, and pension business, life, (inaudible), and pension businesses, but also I have many that ...

(inaudible) I meant to return to the cash/stock dividend without the cash (inaudible) by stock. I think there was a very clear reference to (inaudible).

OK. OK, because I wanted to add to that that there are many shareholders who really prefer stock dividend for tax reasons in the world individuals in Belgium, for example, but Some institutions prefer that, also. But, OK, apart from that (inaudible) make that point.

I don't think that I've made the point of the 200%, but again, I think that we today feel comfortable with the 185. And again, if the debt-equity ratio improves when stock markets are going up, then my 185 will probably improve to - a little bit also to - I don't know, 190 or whatever it is. But the most important - the restriction of today is the debt-equity ratio. If I apply my old and traditional stress test of the 40% drop in the stock markets and 30% drop in real estate prices, then I, under present circumstances apart from the hedge because we (ph) still have the hedge in place, but apart from the hedge, then I will overshoot. I go back to a debt-equity ratio higher than 20% and that could bring my rating into danger, which I don't like. So that is the real driving force behind it today. That's the only thing that I've said.

The credit losses over the cycle - I think that's probably a question - I don't know if that question is addressed to the (inaudible) of losses of the investment portfolio or to the bank. I can say at the bank that we - today we assume an average of 35-40 basis points. I must say that we have to review that figure one day because the composite - the composition of our credit portfolio is changing, of course, because of the ING Direct operations going fast (ph) not So much in credit risk (inaudible) asset, but there is a change in it. But you can still say that over the cycle on the banking side, it is still around 35 basis points - probably, indeed, today a little bit more the lower end of the margin - between 35 and 40 - than on the higher end.

We see that the credit portfolio in Belgium where (inaudible) traditionally had above 40 basis points expected loan losses is going to be - more to the normal level, also, of 35 basis points. So it will be a little bit lower than (inaudible) of around 35. That is the best guesstimate today, and that's what we take into account in our expected losses in the RAROC calculation. So but we're still not - and that's probably good to say - not at a normalized level. Economic growth in Europe is still very moderate, and therefore it's not a surprise that we're still a little bit above normalized level.

Bob (ph), can you say Something on the normalized level of (inaudible) losses or Tom on the investment portfolio?

Yes, what I'd say, Nick (ph), you know, keep in mind that if you're comparing us to other U.S. companies that under Dutch GAAP on the prepayments we actually put those in the IMR (ph) and they get amortized over time, So it's a different issue for us than others. I don't have the specific percentage in (ph) basis points that you've asked. But I would say for us, prepayment penalty income is not as big of a factor as Some of our competitors because we amortize it over time. They drop it into the earned rate, I think, in the quarters where they get the income.

On the gross credit losses, I would say if you're talking about over a full credit cycle we would expect, given our mix of assets, the gross credit losses to be in the 20-25 basis point range. Obviously we think we're past the high point of the credit cycle in terms of losses in '02, and obviously you're seeing that in the third and fourth quarter that we're at the - Sort of the lower end of the cycle at this point. But over the full credit cycle, we would say 20-25 basis points.

That's very helpful. Thank you.

Thank you.

The next question comes from Mr. Andrew Goodwin (ph). Please state your company name followed by your question.

Hi, it's Andrew Goodwin here of Commerce Bank. Just a couple of quick questions - one, going back to the Dutch life position because if you deduct the release of the catastrophe provision in the fourth quarter result, your Dutch results before any property gains seem to decline quite substantially from the third quarter. And you've seen a fairly consistent declining trend throughout the year and I just wondered what action you were taking to stop this and whether the declining returns on your investment portfolio are likely to see that continuing into 2004.

And then a second question on the new business margins which I think was partially addressed on the Dutch call this morning, but there was quite a significant improvement in the margins in the second half against the first half. And the question was whether this was a seasonal factor or not, and the answer at the time it wasn't a seasonal factor. But if you look back historically, your margins have always been quite a lot higher in the second half than in the first half. And I wondered whether this was Some Sort of trend, and therefore, you know, we shouldn't look at the margins in the second half as being a Sort of sustainable level going forward.

OK, thank you, Andrew (ph). First, on the Dutch life business, let me say why the Dutch life business will be, at least for the time being, less profitable than it was before and in particular why you see the decrease. An important element that we So far haven't mentioned is that in particular the Dutch life business has been affected by the measures to strengthen the capital base - what we've done and (inaudible) in particular the Dutch suffered from that. What we have done is, as you know, we have transferred part of the non-EU real estate portfolio to the bank for just for Solvency and for debt equity reasons. That means that the proceeds of that real estate portfolio - the non-EU, So the U.S. real estate portfolio is not any longer to in the life business and it was allocated to the Dutch life business. That's done during the course of the year, So not only in the last quarter.

We Sold (ph) (inaudible) compared to the end of 2002 an additional one billion of stocks, and there we missed a dividend yield, of course. We issued hybrid capital, So the interest has to be paid there. If you compare it with the mid-2002, we Sold (inaudible) shares. We used that for debt reduction and (inaudible) share were held (ph) (inaudible) business.

We transferred part of the capital - we strengthened the capital base in the United States and we - that was at the expense of the Netherlands. So all these Sort of measures lowered the total proceeds for the life business in the Netherlands by 156 million. And that's - a part of that was in the fourth quarter. But (inaudible) this is more (inaudible) 2003 compared to 2002 as a whole. And that is, again, part of our - the consequence of our - of the strength in the capital base and reallocating the capital. So that's probably - that going forward that effect is a one-off effect, of course, and that should be - that should - in the growth of our business, you should not from now on not see that back in the Dutch life business.

On top of that, as I said, we have increased - we have improved the pricing of the single premiums. That was done in July. We started in July. August and September - we did in three tranches (ph), and as I said, the volume was not down because of that. In the imbedded value figures, we were lagging here one quarter behind to show you how (ph) you have seen only the debt effect only partially back into the imbedded value figures for 2003 and in the - because the last quarter was not included as far as the Dutch life business is concerned.

As far as new business margins, John (ph), could you give an answer to that?

Sure, there was also a question this morning on this regarding our six-month value of new business was reported as 139 - our full-year is 440. So it's a key difference. What's that due to? And, of course, we change assumptions on how we calculated all these. The six-month numbers are reported on 2002 assumptions. We reset all of our assumptions annually, and So the 440 numbers reported on the '03. And So the people were wondering what's that all due to - what's causing that.

So we've just done a quick estimate here that if we were to have recalculated the six-month numbers on an equivalent basis, the number is closer to about 200 million versus the 139, and about half of that difference is due this expense allocation from acquisition to maintenance and that's mainly affecting the U.S. and the other half is we're now including Some health riders (ph) from Asia Pacific and health products that we hadn't in the past, we've now done experience (ph) studies and we're pleased to include those now and they're quite good business.

So the other earlier question on the Netherlands business is these two assumption changes did not impact the Netherlands that much, So the delta (ph) difference between six-months and the full-year is - a lot of it's due to the turning around the individual business in the Netherlands and that was - that is reported on a quarter lag So actually it is continuing improvement as we move forward.

Thank you, John (ph).

Hey, John (ph), this is Tom. What I would add on all those things as you say obviously had an impact on the U.S., too. In addition, in the second half of '03 compared to the first half, we did have, if you look at the sales chart in the (inaudible), we did have a certainly stronger sales in the second half of the year, and So that helped our value of new business by, say, in this EUR20-millionish range. And we also did make further progress on our expense gap, which also helped by about 50 (ph) million. So in addition to those changes in assumptions, we did the sales volume and progress on the expense gap also helped the U.S. in the second half.

Thank you.

Thanks.

Thank you. The next question comes from Mr. Keemon Calamboosas (ph). Please state your company name followed by your question.

Hi. This is Keemon Calamboosas (ph) from HACC (ph). Following up on a previous question on RAROCs and I'm referring to the Slide Number 26 of the presentation, the wholesale banking employs three times more capital than retail and its returns are three times lower than in retail. Would you consider reallocating any capital?

And also would you have a comment on the line named "Other" that has very negative returns and should be probably reallocated to the rest of the business units? Thanks.

Thank you. Well, first of all, traditionally, as you know the return on capital and in particular on economic capital in retail banking business is much higher than on the wholesale business. Of course, one would argue why (inaudible) more retail than in wholesale. First of all, that's what we do. (inaudible) with ING Direct. So going forward, yes, there is - we will allocate the growth in our capital more to the retail business than the wholesale business just because of the growth of ING Direct - that's one.

Second, it is not easy to reallocate your existing economic capital to the retail business. Just to give you an example, we can only have one (inaudible) bank in the Netherlands. It's difficult to establish another one. Would love to, but then it would cover more than the whole population in the Netherlands clients and unfortunately that's not possible. So that's one.

The only real alternative, and I don't think that you suggest that, is to stop with wholesale banking. We do not consider that, to make it very clear. Wholesale banking is a profitable business. If you look at that breakdown there and you see that, for example, the Netherlands and Belgium are making high RAROC returns in the 20% and the 30%. So the challenge is not So much in reallocating existing economic capital from wholesale to retail, but to, within the wholesale column, to improve those entities that are under-performing. And that is, as you can see, (inaudible) Germany, which is the BHF (ph) - ING BHF (ph) that we're working on as we have said a number of times. And that is, for example, Asia, and this is partly the equity businesses in Asia, and the - and, as you know, we have announced that we're in the process of selling that in order to improve the economic capital use down (ph) there.

Then, on the other - the - what has been booked out there is on the one hand Some - the result of the funding - the funding cost out there. The - and Some other things like operations and IT. Roughly speaking, the - it is, say, for half is the funding cost and for the other half, (inaudible) all Sort of other things that are in there. Roughly - no, I'm going to say two-third is funding cost and one-third is unallocated (ph) operations and IT cost.

The question was asked this afternoon, also, "Why don't you allocate it to that business?" Well, that's because that we have basically decided in the bank to run that operations and IT business on a centralized level, So shared service centers (inaudible), et cetera. And the best way, then, is to keep the budget on a centralized level, also. If you allocate it over the different business units, you get enormous internal fights of that such a project is more advantageous for other business units than for others. And therefore, we decided not to allocate the non-specific cost out there, and therefore it shows up in the line "Other" (inaudible). Again, the most important one is funding, and that also cost in ING Group N.V. Thank you.

Thanks.

(OPERATOR INSTRUCTIONS) We have a follow-up question from Mr. Matt Pickering (ph). Please go ahead, sir.

Hi, Cees. I wanted to ask two or three quick follow-up questions, the first being the puts that exist in the balance sheet to be able to protect the down side of the Group. Where is that cost booked in the P&L? I kind of assumed it might in the Dutch life business but wanted to kind of understand either its magnitude or at least its location.

To go back to an earlier question by Andrew Ritchie, the exceptional costs in the fourth quarter in the bank - Some of those included marketing costs for ING Direct. What would ING Direct's pre-tax profit have been if you had not decided to ad hoc spend more on marketing in the fourth quarter?

And then I guess finally with the bonuses, trying to understand why they're nonrecurring. You know, bonus accruals are a normal function of a bank's variable compensation. And especially if I look at the trading revenues line in the bank P&L, the fourth quarter income line was extremely poor. It was only EUR15 million in results from financial transactions, which is where I - you know, my understanding is a lot of the proprietary and client-driven trading (inaudible) are booked. What drove these institutional bankers to receive over accruals of their bonus in the fourth quarter that drove up that expense rate? Thank you.

Matt (ph), thank you. Starting with the last question, bonus accruals are normally done on a quarterly basis on the basis of budget. And even if during the first, second, or third quarter you exceed your budget, you continue to accrue the bonuses on your normal budget (ph) basis. That's been done everywhere in the banking industry.

And I agree that the last quarter was probably to Some lines (ph) not the best one (inaudible) in the bonus accrual in the last quarter because the year as a whole exceeded our internal budget. That's the simple - a simple reason for that. And by the way, the results in the financial markets were better than last year, also, So year-on-year compared, the bonuses were a little bit higher than the year before, but the accruals are taking place on a quarterly basis and the basis of budget.

Then, the cost in ING Direct - the additional marketing costs in ING Direct were about roughly speaking 20 million, So then it's up to you to calculate how much the profit before tax would have been for ING Direct.

Then, the puts - the costs of the puts are not charged through the P&L, but are part of the equity base. That's how the calculate - the bookkeeping is being done. And the total cost - I can tell you the total cost of the overall operation So far, So since we started, is about 300 million.

OK, thank you very much.

(inaudible) say - So which means that the value of the equity portfolio would have been 300 million higher today than it would have been if we would not have done any hedging right from the start. That is roughly what you can say. At the same time, I mean that was the premium that we bought ourselves (ph) and we protected against and when the AH (ph) was not 355-356 (ph) as it is today but (inaudible) moment in time 235 as you will recall. That's the premium paid.

OK, thank you very much.

The next question comes from Evo Gasen (ph). Please state your company name followed by your question, sir.

Yes, good afternoon. This is Evo Gasen(inaudible). I've got two questions left, please. First of all, you have stated that the cost at the banking side would have been equal in the fourth quarter versus the third quarter. Does that include or exclude the restructuring provision taken in Q3?

And second question - could you maybe talk a little bit about ING Direct in Spain, as I have think I noticed thus far (inaudible) going down there for the first time. Thank you.

Thank you. The - it is excluding the restructuring provision in the third quarter. That's one.

And second, the Spain ING Direct that was down (inaudible) - oh, yes, that was - oh, yes, yes, yes - that's typically Spain. That was last year the case also if I remember correctly. There is a strong seasonal (inaudible) in Spain as far as savings account is concerned, not only in ING Direct, but apparently the Spaniards take a lot of money out of the saving accounts just before Christmas. And that's - they do that, and they do that in all the Spanish savings banks, and that's including ING Direct. And that's a phenomenon that you - of course, there are always withdrawals from accounts in December during Christmas, but that's the case.

The number of clients, by the way, went up in Spain, So there was still a net inflow of clients in Spain. It is not that all of a sudden we pay less attention to Spain or less marketing in Spain (inaudible) December is always a bad month out there.

OK, thanks very much.

As I've understood, this is the last question. Is there any question left? My operator says that this is the last question.

This was the last question, Mr. Maas.

Thank you (inaudible).

(inaudible) I wish you a very happy weekend. For those that live in different time zones, you still have probably a day to go, but nevertheless, happy weekend. Thank you very, very much for your attendance and your contributions. Thank you.

Ladies and gentlemen, this concludes the ING Full Year 2003 Results Conference Call. Thank you for participating. You may now disconnect.