ING Groep NV (ING) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ING Group full year results 2004 conference call on Thursday, the 17th of February 2005. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Ms. Jemma Bachs (ph). Please go ahead, madam.

Good morning, good afternoon to everyone. This is Jemma Bachs for ING Group welcoming you to ING's conference call on the figures for the full year 2004. Before turning this over to Cees Maas, Chief Financial Officer and vice chairman to the Executive Board in Amsterdam, and Tom McInerney, Chairman and CEO of ING's U.S. Financial Services in Atlanta, let me first 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. The realization of forward-looking statements could be materially altered by unexpected movement in any or all of these and other variables.

That said, Cees, back to you.

Thank you, Jemma. Ladies and gentlemen, good morning, good afternoon, wherever you are in the world. Welcome to this conference call. Let me very briefly introduce the results of the 2004 ING figures.

We showed strong results. To summarize, operating profit -- net operating profit went up by 33% last year, earnings per share were 2.53 euro, up 26%, so a strong improvement. Total net profit, and that will be the focus as of on the 1st of January due to the IFRS accounting change, was even up 48% last year. We had healthy top line growth, revenue growth, like for like, up 11%. So high top line growth, double-digit, and high bottom line growth.

You all know that we have announced early last year a divestitures program so spinning off non-performing non-core activities. We have completed that project now, although the project that we have announced last year and some of them to be closed this year have been completed. The proceeds, the net proceeds of this program was again about 75 million in 2004 and about 250 to 300 million still to come in 2005.

We released regulatory capital of about 2 billion, 1.9 billion to be precise, of which 1.5 billion in 2004. With the proceeds for the capital release we reduced the debt equity ratio to a level of 9.9 group level and to a little bit over 13 on the level of ING Insurance. We strengthened our capital ratios, Tier 1 ratio of the Bank, strong 7.71 and of the Insurance company 210% of EU regulatory required, which makes us one of the strongest capitalized insurance companies of our size in the world. Indeed, we got the recognition for that by Standard & Poor's that have improved at year end our outlook for our rating from neutral to positive and from negative on the Insurance side to neutral, with a special recognition of strengthening the capital base and lowering the leverage.

Before I finish, I want to remind you to the fact that we have announced an increase in the dividend, the dividend per share, as we are going to propose to the general shareholders meeting of 1.07 euro total dividend for 2004 and that is up 10.3% compared to the dividend in 2003. At least as important is that we have changed to full cash dividend as of the final dividend in 2004. So the final dividend of 58 cents will be paid fully in cash. And with that, we have changed our dividend policy and you all know that we have an optional dividend shareholder exchange for stockholders who wanted stock and cash if they wanted the cash and now to the cash in order to avoid any further dilution.

Going forward we will not look at the payout ratio any longer. In the past, we had a fixed payout ratio around 44% of our earnings. The focus of our dividend going forward is that we intend to pay dividends in relation to the longer-term underlying development of profit. We consider consistency in our dividend more important than focusing on fixed payout, also in the light of the upcoming introduction of IFRS, which will lead to more volatility in reported net profit and, in particular, of non-cash components.

As far as 2005 is concerned, you know we do not give a quantitative outlook any longer for our expected earnings. What I would like to say is that we have good foundations in the company for profitable growth, in particular our operations of ING Direct in the 8 countries and the 5 currency zones in which we operate continues to grow strongly. We have strong operations, life insurance businesses in the developing market, in particular Asia, Central and Eastern Europe. You've also seen that our life insurance business in the United States did very well and showed a strong growth, in particular in the retirement services.

And with that, I come to the third strong component of capital (ph) growth and that is our pension business throughout the world, not only in the Netherlands where we are large pension players, but also in Central and Eastern Europe and also, for example, as I just mentioned, in the United States. Those at least three structural elements should bring us top line growth going -- looking forward today and for the longer term.

Having said that, I would like to turn to you all and I'm ready to answer, together with Tom McInerney and Bob Crispin to answer all your questions. Thank you.

Thank you, sir. (OPERATOR INSTRUCTIONS)

The first question comes from Mr. Nick Holmes with Lehman Brothers. Please state your name, company name, followed by your question.

Yes, hi. Nick Holmes with Lehman. I have three questions. The first one is, is the rise in the banking cost income ratio in Q4 mainly due to seasonal factors, as you would describe them, and if so, why don't you accrue these costs more evenly throughout the year? Then second question is on ING Direct. Do you think that ING Direct can continue to grow its earnings this year in '05 when yield curves are flattening and how worried are you about the UK where the yield curve is inverted?

And then third question is really to Tom on the U.S. life business and I have sort couple of sub-questions. First is are you reducing crediting rates on your retirement services policies at the beginning of this year as you did last year and which, of course, causes profit margins to increase significantly. And secondly, can you update us on your sales of GMWB products? What proportion of variable annuity sales have GMWB and do you see this growing as you press forward?

Okay, thank you, Nick. Appreciate your questions. First of all, the cost in Q4 as usual, I can be very frank and honest here, some of those costs were a surprise for us also, to be honest. We had accounted for a normal increase in cost level in the fourth quarter. There's always a seasonal effect, as you know if you look at the figures. And not only in our company, but in every company, in particular when business units at the end realize that their bottom line target is met and more than met, which they did this year and there's no surprise, of course. Then they are inclined to spend a little bit more, to take a little more cost on the books for 2004, which probably should be or could be accrued February '05.

Sometimes there is, what I say nowis very difficult because it's very cautious because when my auditor would be present he'd say that's not allowed, well, that's not allowed indeed. But it doesn't mean it doesn't happen. We know in all organizations. And we just had an hour ago in the meeting with out top 200 managers and we, again stressed and underlined that there should be discipline in this because there's all of a sudden increasing cost. This, of course, is more desirable. But it's good news is we're all human beings working in the organization. So yes, there is a standard seasonal pattern and that seasonal pattern is a little bit higher if your bottom line is better than expected. That is one.

Second, there are other seasonal costs also. For example, marketing cost. What we see is after having returned from holiday, there are a lot of marketing cost in retail, in banking and insurance in the September and October month and early November because, as we all know, we don't look until (ph) June the retail sales but we look for savings. And in the December month there's not a month in there for saving and more for spending so that means normally speaking, in October and November the marketing costs are relatively high in almost all areas.

Then we have a lot of one-off costs, so IT related expenses due to external personnel. A large extent caused by catch-up and accruals, to be honest, and that also is a matter of discipline in the organization. Standard deviation always is if your earnings are higher than sort of to say expected budget, you have a catch-up and accrual of bonuses. Bonuses are normally accrued in one year's budget over the 4 quarters. But if at the end of year your earnings are higher than budgeted, you have a catch-up of accruals, which is a cost base. This is mainly done in wholesale area for that.

We had in the fourth quarter and particular in Belgium we had but not only in Belgium. Elsewhere also we had some litigation cases. We had them small but nevertheless explains at least the cost increase in Belgium, a small (inaudible) that we needed some provisions for, not big, but if you look at the details then it is that. We had some additional restructuring cost in wholesale, in the wholesale business in the fourth quarter. So all in all, just all sort of details, mostly one-off. We calculated carefully the underlying cost in banking and insurance and also in the fourth quarter it was up so no decrease in underlying cost base in the fourth quarter. But unfortunately, due to one-offs, due to seasonal pattern, it was a very disappointing result as far as cost is concerned.

The good news is that cost (inaudible) still went down by 1%. The good news is also that the quarterly results on every quarter were higher in 2004 than in any quarter in 2003. But you pinpoint on the right issue, high cost, too high cost in the fourth quarter. But the underlying is still okay.

And your question on ING Direct, the 2005 top line growth potential, and in particular in the UK with the flat yield curve. Let me put it this way, the top line growth of ING Direct so the fact where the clients come in or stay but let's say come in and deposit new money, is not dependent on the yield curve. That it still depends, as it always did, on the competitive rate that you offer the client in the market. And if we offer the client a competitive rate compared to the best credible alternative, then it doesn't matter whether the long-term rate is lower or whether the long-term rate is the same as the shorter rate. That has nothing to do with it. The shape of the yield curve, whether it's flat or not is irrelevant for the growth in profit in ING Direct. And of course, if it's clear already a flat yield curve, your growth and earnings is lower than if you have a steep yield curve, that is by definition the case.

Speaking on that, yes, it is certainly true that of course the growth in earnings is being decelerated if short term rates are going up, like in the United Kingdom, like happened in the United Kingdom over the last -- during the last year. What we do is -- what we have done, we haven't followed the increase at the same tempo (ph) as the increase itself. Whether we are able to do that depends, of course, also on the competition. If the competition doesn't follow the increase quickly, then we don't have to do that either. If the competition does it, then of course, in fact we should be slightly ahead of them in doing so. So that's one.

The good news on the UK is that yes, the margin is pretty small there. The good news is because of the average amount of deposits of savings per client, which is almost triple that of the average in the rest of the United Kingdom, the total cost base of our UK operation is around 20 basis points. And the average in ING Direct is about 60 basis points. So that makes it for us still possible to be competitive and even ahead of budget even as far as the bottom line is concerned.

So the third question, I'm happy to turn to Tom. Tom?

Could I just ask very quickly in the UK, which is the main cause of the increase in the loss in the UK in Q4. The inversion of the yield curve then , rather than the expense base. Would that be correct?

No, in the UK also we catch that in marketing cost in the fourth quarter. Let me look at that. I don't have split up here over the UK cost in revenues. But it's not only solely due to the inverse yield curve in the UK. Tom?

Thanks, Cees. Good afternoon. In terms of first, on the retirement services crediting rates and just to remind everybody, the retirement services is about 47% of the composite fixed assets. We did reduce crediting rates on 1/01/05, although not as much as we did last year, but clearly that will have an impact on the overall crediting rates in the composite.

And your second question on the withdrawal benefit, we are seeing steady growth in that. And in the fourth quarter of '04, the withdrawal benefit was about 10.5% of the variable annuity sales and that's up from a little under 10% in the third quarter of '04.

And do you see it as an increasingly popular product, do you think, going forward?

I think, Nick, it is we try to have a mix of products on the annuity side so we have a full array of products with various benefits. We certainly are seeing a lot of sales with the living benefit, but certainly do see the withdrawal benefit is popular and we do -- we would expect that to continue to be an important product in the marketplace and that we would see continued sales growth there going forward.

The next question comes from Mr. Rob Proctor from Morgan Stanley. Please state your name, company name, followed by your question.

Yes, hi. It's Rob Proctor from Morgan Stanley, good afternoon. A couple of questions, if I may. Firstly, can I come back to the costs, particularly in the bank, which you've already discussed, Cees, but you went through rather quickly. I, too, was disappointed by costs in the fourth quarter. What I don't really have still a great feel for after your response to the last question is how much numerically would you consider to be one-off in nature in Q4? I'm looking particularly at slide 34 of your presentation, where you appear to have -- you appear to identify what part is one-off. I just wonder if you can actually give us that number? And how should we think about costs or the cost income ratio in the bank going forward just in terms of putting numbers together? Do you have any new cost reduction initiatives, for example, that you might want to talk about? There doesn't seem to be any mention of such anywhere in these results. So really, just a better feel of that That's my first question.

Second question, I hope there's quite a simple explanation for it, but I don't really understand why, from the embedded value disclosure, why the pension deficit went up in 2004 versus 2003. Perhaps you can just explain what's going on there.

And thirdly, if I may as well, also from the embedded value disclosure, you appear to be allocating a lot more required capital to the Asian operations. Am I right in that assumption and again, can you just elaborate on what's going on there?

Thank you, Rob, thank you. Well, the costs that you refer to are page 34. For those of you who don't have that present, yes you see a very big bar in the first the fourth quarter and it goes up to over 2 billion, 2.3 billion roughly speaking, which is roughly the same as in Q3 as in Q4 last year. And you see a very small dark blue stripe and you say how much is that? That's your question I assume. Roughly speaking, say between 75 and 100 million (ph) is the one-off there. But they were strictly one-off. There were other costs, which are so to say which are underlying in terms of seasonal costs, which you don't take into account. These are the real one-offs so to say, different from what you could argue as being underlying, so seasonal. If you ask for the blue line, between 75 and 100.

Then the pension deficit, why did it go up. That is because of the -- at year end the interest rate dropped and if interest rates would drop, then your pension liabilities are going up by definition because the value of your assets is -- your long term yield is going down so that means that...

Wouldn't you have a corresponding move on the asset side of the pension scheme in that situation?

Yes, but that depends, of course, on what I should call the mismatch. If your liabilities have a longer duration than your assets, well then, your -- is going up. Didn't go up dramatically, but it went up a little bit. And in particular in the last quarter, as you know. so that's the reason and that's the only reason. We were a little bit down in overall headcount, so that helped a little bit, but only a very little bit. And the main reason was the decline in interest rates in the last quarter.

Then the interesting question, the embedded value, required capital in the Asian operations. Here are the same or not so much the decrease -- well, the decrease, but in particular the low interest rate environment in these operations, and in particular the volatility in the interest rates in our Asian operations. At least we talked about this before, countries like Taiwan and those sort of countries which have a very low interest rate environment compared to, say the interest rate level of 3, 4 years ago. That volatility is therefore so high and therefore unexpected losses are potentially high. As a consequence of this, required capital is high in the embedded valuecalculation. That's the only reason.

It looks like you had based a massive reallocation of required capital away from the other country units into the Asian business. Can you say what the duration mismatch is? Can you give the asset and liability duration there?

Of whether the Asian operation versus the European operation...

...the Asian operation.

No, I don't have that summarized and weighted, so to speak, over the different - and it varies country-by-country. Let's be very honest, depends also on the maturity of the operations. The first policy you sell, as I always say, you have a huge mismatch, as you can understand, because you get the money in cash and it's a duration of zero and then the first policy you sell has a high one. So those companies who are on a startup have a very higher -- a bigger mismatch than before. But you know that again, John (ph) (inaudible) our insurance risk manager is giving a conference call tomorrow in London, especially on embedded value. I'm afraid he doesn't give you this answer, but probably more than...

Maybe we can go into more detail on his call. So just can I come back quickly to this cost question. If I look at the cost income ratio in the bank in the fourth quarter, and I've not stepped out one-offs so I accept this is not an underlying number, but the headline number is 78.1%. I just wonder, what do you think is an acceptable cost income ratio for the bank?

Acceptable. You know that we have a target of going down at least 1% per year, which we achieved. To be honest, I was very happy with the first quarter results, which have a 65 to start with. I started to get not unhappy when we were second quarter was 67. And then in the third quarter I became relatively unhappy when we were at 68.9. In the third quarter we were too high. So say I would have been more happier when it would be at 67 and not 100% sure that we are underlying at that level if we take the fourth quarter into account. But I think it should go there in 2005, in my opinion. And, of course, what we all see in the first quarter, they'll go down substantially. That's almost a definition of the seasonal effect. But again, seasonally it's probably what we'll end up doing in the course of the year.

So we should be looking for, say, a 1 point reduction year on year, '05 versus '04?

If I take all the one-offs out and not only in Q4, but I take all the one-offs out in terms of cost in 2004, then I come down to a 76% cost income ratio. Now I know that -- oh, 67. Sorry. If I take all the one-offs out in terms of cost, then I come to a 76% cost income ratio -- 67%, excuse me. I apologize. That doesn't mean that automatically next year we are at 67. We have always one-offs, but at the same time, with further improvement across.

We have reestablished a so-called Cost Containment Committee. Michel Tilmant has decided to chair it himself in order to give it the maximum weight because we felt total cost development were not what we in the Board here had in mind. So therefore, I say that I expect indeed the 67% could be achieved. On top of that, we have introduced for the Top 200, we in the Board, our compensation target is for -- a short-term compensation target is for, roughly speaking let me say 225%, dependent on the achievement of our cost target in actual terms. So we set at the beginning of the year an absolute cost level target. If we don't achieve that in our short term, cash bonus is going down rapidly.

...publish what that is?

Of course not because I'm not going to publish my cost budget. But be assured that a containment for 2004 is rather low, to use an English understatement. So the same applies to our general management council for the Top 200. The (inaudible) doesn't count today or in 2004 for 25% but only for 10% and we have decided to increase that for the management council the Top 200 and to bring that up to a heavier weight relatively speaking. That's simple absolute started. So yes, it is a serious issue.

The next question comes from Mr. Mark Cathcart, Deutsche Bank. Please state your name, company name, followed by your question.

Yes, it's Mark Cathcart from Deutsche Bank. Just wondered, the ING shopping list used to be legendary in length. Now you've got a debt equity ratio down sub 20%, it's up 10%. Is that now coming out to play again, particularly perhaps in the U.S? That's my first question. Second question, was Cees happy with his bonus this year. The third question is in relation to the reinsurance release that we keep getting. Is that going to continue through '05? And the final question is in relation to cost overruns on the life side. I think it stood above 70 million, roughly in line with where it was in '03. Are those cost overruns likely to continue through '05 and how quickly are they likely to come down?

Thank you, Mark. First of all, congratulations because I looked at the list of all the analysts who predicted our earnings for 2004 and, to be honest, you were the nearest of all. So congratulations for that.

The shopping list. You have a good memory. Four or 5 years ago I think we had that name for the desirable list of acquisitions. Does that come back? The answer is no. We have said explicitly that we do not exclude -- although the divestiture program is done and we do not exclude smaller add-on (inaudible) acquisitions, as well as smaller divestitures. I mean, the world is changing all the time, markets are changing, product market combinations are changing, so we are constantly look at desirability of our activities within the group. If we don't have enough scale in a certain market that we could either do a (inaudible) acquisition or we can sell the activity and that remains to be done. We consider that as a normal course of business and as our normal cost. But there will not be a new shopping list and there will neither be a new divestiture list.

And the question, am I happy with my bonus? The bad news indeed is that this component of expenses was, as I said, in English understatement, rather low. The two other components were bottom line net profit. That was good. I'm happy with it. And the other one was return on equity and, to be honest, I'm even more happy with it. So that was 70% of my bonus, the 30% was individual performance, and I'm more than happy with that either. So I can't be unhappy and on top of that you never know if my supervisory board will hear this, so yes I'm happy with my bonus.

Reinsurance, I think I have to turn to Tom for the question on reinsurance. That was your question, no? Did I miss the question? Then the cost overrun, is that yours? Mark, can you please repeat your reinsurance question? I was so impressed with your question on bonuses that I missed it.

(inaudible - microphone inaccessible)

I see, sorry. Then the third question, I know it now. Your question on the release of money out of the old insurance contracts, that was the question. As we said before, we do not exclude that there will be some component in it for 2005, but probably not to the level of 2004. But these were long-term contracts, as you know, but the amounts in 2003 and 2005 will probably not be repeated in 2005. And the last question on the cost overruns, the 50 million, I didn't recognize.

When you have your, when you say your EV data you have this item which is cost overruns. And I think it was about 70 million. I just wondered if that's something which (audio gap).

(inaudible) case I would say if he's asking about the cost overruns in the U.S., we have made great progress and we have the cost overrun in euros down below ?20 million. It was significant several years ago, so we continue to make significant progress, at least on the U.S. piece that I'm referring to.

Just one other question. Could you tell us very kindly, please, what your Q1 exceptional pre-tax and post-tax items are, please?

First of all, Q1 is -- not finished yet. We're only halfway down in Q1 now. You mean in '05?

Yeah, in '05 then.

Oh, '05. Well, first of all, '05 is not finished yet and second, it's always difficult to predict exceptional items for a quarter. On top of that you have...

(inaudible question -- audio interruption)

No, it's difficult to say because I don't know, to be honest. We have not -- there are a few one-offs that are known which we have disclosed. There's the 250, roughly speaking, but there might be a little bit more, of the results of our divestiture program. But it is not sure whether it will be a first quarter or first half year issue because we haven't closed the transaction and you can only recognize capital gains against profit if the transaction is closed. We don't know whether we can close some of these transactions before the 31st of March or not. That is difficult -- simply difficult to predict. The only thing, first half year, it will be around 250, a little plus. And these are the only ones known so far. And the other ones we have disclosed.

The next question comes from Mr. Andrew Ritchie from Citigroup. Please state your name, your company name, followed by your question.

Good afternoon. It's Andrew Ritchie from Citigroup. A couple of questions, mostly on the bank. Going back to retail banking and that clearly was quite drastic profit for quarter on quarter. Could you just go into a bit more detail exactly what happened in Belgium? And secondly, in relation to retail banking, can you talk to us a little bit about competitive pressures on revenue in the Benelux generally? I'm thinking here of Belgium and the Netherlands just in thinking about the retail bank going forward.

And I guess one other question just on ING Direct. There's also a very flat yield curve in Australia, but there doesn't seem to be any -- that doesn't really seem to have affected profitability. Just by way of interest, if you could give us some sort of insight from your angle as to how the yield curve is coped with in Australia relative to some of the other operations. And my final question is to do with new business. If I look at your new business that you disclosed a single premium plus annual, on your annualized part, it's declined sequentially every quarter since the beginning of the year. I just wondered why. Is that a seasonal thing? Particularly I noticed the fourth quarter was very weak versus the third quarter. I wonder if you could just talk me through some of the countries and why you'd expect the fourth quarter to be much weaker than every other quarter.

Okay, Andrew, thank you. Retail banking in Belgium, in particular the fourth quarter, yes, I referred to that already. Basically disappointing. Was negative, in fact had a loss in Belgium. Why? Higher ops IT or operations in IT charges due to acceleration of several projects related to that restructuring cost, a few litigation issues. We have a small fraud case in that region. Rather small, but okay, we have it.

There was a change in legislation all of a sudden where we have to take a provision or to reduce our collateral. Very complicated. But the bankruptcy law was changed there all of a sudden in the last quarter, which make it easier for people -- makes it more difficult for people to go bankrupt at the end. And as a -- we knew that, by the way. But as a consequence of which there was a change in the last moment that we have a lot of loans there, loans outstanding, which are collateralized by a guarantor of another individual. The law changed that it would be more difficult to go bankrupt for an individual, but the last change was that the same applied for the guarantor. So the guarantor now also has the same protection as the one who was protected by the new law for bankruptcy.

So our collateral, so the severity, so to speak, had increased because we have to take a provision for that. And that was over in the retail portfolio that was a substantial amount in the Belgium market. So now, of course, because we've now taken care of it, but it is -- this was the case. So these were the reasons for the higher -- the lower results in the fourth quarter, mostly one-off. As I said, even if you take the underlying into account, then it was -- then we made a profit in Belgium. Lower than in normal quarters, but we were still profitable if we took the underlying -- if we took the one-offs out. So that was the good news.

The competition in general in the retail market, I must say the retail market is such in our home markets was not that bad. GDP, although GDP growth is low in the Netherlands and in Belgium, the savings rates are very high. The mortgages, there's sufficient growth. There's competition, certainly so, but there was sufficient mortgage growth, particularly in the Netherlands, to get to still attractive yields. So overall, as I said, the overall retail business, even included Belgium, had a growth of over 10%, which is in a low GDP environment, is not a bad performance if you have double-digit growth. So such the retail of all the banking activities, the retail business, excluding ING Direct of course, was the least performing. So surprise. It was nevertheless very satisfying results so far.

Then ING Direct, the yield curve in Australia, we have two currency zones today where the yield curve is either flat or rather flat. Flat, of course, in United Kingdom, rather flat in Australia. On top of that, we have locally some competition. I think that it is Halifax who tried to compete with us in the same sort of way we do. But okay, that's fine. That happens from time to time. I think the results in Australia were because of that slightly down, but that's in euro and if I look at the results in local currency, they were still an increase in -- let me check, but I look at it carefully, so I know yes, there was still an increase in the quarter. And even the fourth quarter in terms of results was up so there is -- and the second quarter showed a dip, but the third and fourth quarter were up again. So there is nothing to really...

What I was trying to get at, I mean the earnings have been resilient despite the very flat curve. If you'd give us any insight, is it because of mortgage book growing there?

No. The mortgage book is very successful. That's why Australia, despite the yield curve and despite the competition, is quite successful because we -- in fact, we have -- all the mortgage growth is almost 1 to 1 with the funds entrusted in Australia. Today, generally speaking, over the ING Direct, from every 100 euro that we get in in savings money, we generate one-third that for mortgages, self-originated. But in Australia it is almost 1 to 1, at least 1 to 1, to be honest. In fact, we generate more mortgages there than we generate saving accounts. Such it is a profitable business. But simply if I look at Australia in dollar, if I look at the euro appreciated 4% against the Australian dollar in the last year, so that element has to be taken into account also versus local money. So, to be honest, we were not unhappy with the Australian performance in ING Direct.

Then the value of the new business...

I was talking about volume of new business, not value. The volume.

Sorry, I missed it. The volume of the new business there?

I'd just like this for the group as a whole. It was declining in every country sequentially quarter on quarter. Now I appreciate there's some currency noise, a little bit of currency noise, but I wonder if maybe it might be worth talking just about -- the Netherlands I'm assuming was volatile because of group business. The U.S. declined a lot quarter on quarter. Asia was down quarter on quarter despite new distribution agreements. So I'm just curious, is there a seasonality issue there?

To be honest, in the Asian business showed a strong growth. If you look at the fourth quarter, yes, there was a decline, for example in Korea. There was a decline -- well, not a decline but the lower growth in sales, for example, in Korea, lower sales in Japan. Indeed, you have to take currency effects into account. In particular in the fourth quarter the euro appreciated strongly. To give you an idea the U.S. dollar appreciated, the euro appreciated 11% only in the fourth quarter against the euro year-end period. The Mexican peso 8%, the Canadian dollar 5%, so in all these currencies where we operate there was a strong appreciation of the euro in the fourth quarter. So the fourth quarter was special.

The only thing where you're right is the little bit disappointing top line growth in, for example, Poland. For example, in fact, generally speaking, in Central and Eastern Europe, that was okay, but top line growth was not. But in the Asian markets on the life business, generally speaking for the year as a whole, was good.

...underlying momentum was still positive in the fourth quarter is what you're saying?

Yes, that's what I'm saying. Although I must say that the decline in countries like Korea and Japan was a little bit bigger than before. But to be honest, the fourth quarter was better than we thought also. So yes, if you look at it quarter to quarter basis.

Cees, I would just add for the U.S., about half of that decline, Andrew, was because of currency; Cees talked about that. The other is '03 I believe includes the individual life reinsurance business and '04 does not. So that also would have an impact. It's a little apples to oranges there. And then we have been focused on value of new business. We've certainly increasing the IRRs (ph). So we really have -- on some volume with not good IRRs, we've given that up. So overall, I think we're pleased with the value of new business and the improvement of the IRR. We want to continue to make progress there and I think the volume issues, at least for the U.S., really were a currency and just some comparisons with and without the individual life reinsurance business.

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

Thank you. This is Matt Pickering from I Cap. I hope you're doing well. I had just three quick questions. You stated at the beginning of your comments that the divestment process was over, yet I would think that there would be still more work you'd want to do in your wholesale banking operation, especially given how intimate Michel was to that over time. And so he kind of knows your competitive position across the board there. So when you say you're finished, I just want to make sure I understand that you're actually finished finished, or whether that just means the nice big headlines we've been able to benefit from over the last year are down, but you're going to still work at the margin.

My second question is on the Dutch life business. You've done a good job talking to shareholders and investors about the restructuring process you have going on there to help improve the cost base effectively of that business relative to the revenue generation that's possible in that market. You haven't really given an update, though, on how that process has been going since September. I wanted to make sure you could talk about that quite briefly.

And then finally, you did a very good job for shareholders of splitting out the currency impact of hedging gains and how that's benefited you at the reported profit line. My understanding is you don't have a hedge in place, at least for the U.S. dollar for '05, but I thought you might be able to comment to not only make sure I am correct on that point, but just comment briefly about your philosophy for currency hedges because it obviously had some impact on why you don't have a hedge in place for this year relative to previous years. Thank you.

Cees Maas. Thanks, Matt. Let me start with the latter one. We've always said -- we said in the past, starting with the middle of 2002, that as we would have a clear view on the direction of the dollar, because that's a major currency to be hedged, and if we would have -- then we would certainly do the hedge, which we did. And we had in the middle of 2002, we had a clear view on the dollar. The dollar in those days was around 90 cents and we hedged expected earnings for the next 2 years, 2003, 2004, for the dollar. Fine. Came out very well. When we have to decide at the end of, say October, November, December in 2004, whether we would go forward with the hedging strategy, the U.S. dollar was around 1.15, 1.20, 1.25. My personal view and our view in the organization is that yes, the dollar could certainly go down further. But of course was a less clear vision on the magnitude than we had before. The lower it is, the more difficult it is to go down substantially, as we all know. So therefore, we decided to be hesitant and reluctant, but not necessarily say we don't do it.

On top of that, we learned from many investors when we had hedge in place, that for many investors, in fact, it is not relevant whether we do it yes or no, some -- little investors say, "I don't care what you do provided that I roughly know how sensitive you are to the dollar. How much of your expected earnings are coming from the U.S. dollar and how much for the euro because I intend to invest for X percent in euro and for Y percent in dollars. So tell me what you are and I take that into account in my investment mix." On top of that, we have realized that we're hedging, but we know that, of course. Hedge really for 1 year, as we see today, we hedged the dollar for 2004 on a level of 91 cents. It brought us a profit of 188 million in 2004. It's starting now in 2005. Yes, we start with a dollar on 1.30 and if you would have hedged it last year then, yes, it would have started at 1.25. By the way, you can be wrong also that we have to bear that in mind.

Let me tell an impression, that if you're right, you get some flowers, but not that many. And if you're wrong, you're certainly being punished for that. It looks as if it's asymmetrical, the appreciation of the success of our hedging policy. So but more in particular, more structurally, we learned from the investor community that, in fact, most of them don't care whether we hedge or not provided that they know how sensitive we are to the dollar and to the euro. So that's what we have decided for 2005 and forward, not to hedge our currency. That's the policy unless we have a very clear view of the direction of one of these currencies and then we let the market know immediately whether we've done that yes or no. So that is our policy.

Then on the divestment process, yes. As a project, as I said, it's over. Again, we said we don't exclude that we should do some things here or there. You refer to the wholesale banking business. But I don't say that the wholesale bank is an issue, that certain things should not happen. Yes, it should. As we said, we took a restructuring provision again in the last quarter of 2004 for 41 million before tax for the wholesale banking business, which was used to streamline the international network further as part of the strategy to focus on core products and core clients. There will be jobs eliminated and we've taken a provision for that in Asia and United Kingdom and in America in the back office IT functions.

So you're right. But it doesn't mean necessarily that we have to spin off certain activities and have to sell certain activities. Of course we (inaudible). So that is roughly what I have to say. The wholesale bank, by the way, did rather well. As I said, the return on economic capital was 12.2% after tax, so that's for our wholesale bank, not bad at all. So we were not unhappy that it was an increase of 50% (inaudible) wholesale banking activities, which is done. But again, restructuring is not a moment, that is a process. And in fact, it will never end. But to say that there is specific new list of divestitures will take place, the answer is no.

The second question was the Dutch life business, what is the profit since September. To be honest, in the fourth quarter I don't know. I come back to that question, to that answer, in a minute or so if you don't mind.

Sure, all right. Just to make sure because my line's a little staticy, I'm curious on the progress of the restructuring, not the profit, which I think is what you said, but my line is staticy and I wanted to make sure that we're both clear.

The next question comes Kimon Kalamboussis from HSBC. Please state your name, followed by your company name.

Hi, this is Kimon Kalamboussis from HSBC. On the banking side, additions for bad loan provisioning remain low at 18 basis points. In the past you have mentioned 35 basis points over the credit cycle. Can you guide us on when you expect to return to normalized levels and if you consider reducing your assumptions there, please. And my second question is on M&A. You mentioned a small acquisition and I would like to have an idea a range for what small is, please. Thanks.

Thank you. Well, in the very past we said that loan loss provisions over a cycle were between 35 and 40 basis points, but recently I said that this expected loss number in the bank is coming down due to two reasons. The first one is that we have stronger growth in assets on the retail side than on the wholesale side and over the cycle, the expected losses on the retail side are lower than on the wholesale side. Roughly speaking, in the markets in which we operate including ING Direct, loan loss expected losses are around 25 basis points. So if the relative weight of the retail, including ING Direct, is growing then expected loss are coming down.

Second, we have improved our risk management systems substantially in terms of we have introduced maximum limits for client, sort of reference limit dependent on the rating of the client. We have not only done that, by the way, in the banking arena, but also extended it to the insurance and the asset management environment so that we have less concentration risk there. We have limits for sectors and segments so how much are we exposed in the automobile industry, how much are we exposed in the leisure industry and the utilities and so on and so forth, and have set limits for that and monitor that and control that and decide upon that, at least on a monthly basis and review that on a monthly basis. As a consequence of which we had to change systems because you have common databases for that, which we have in the meantime. So there is a strong improvement in credit risk management, we have improved the functional lines across the world, we have improved risk management organization.

As a consequence of which at year end in 2004, the expected losses are around 30 basis points and we see it coming down, say a little bit over 1 basis point per year in the (inaudible) process today. Whether we will return to that average this year, I don't know. To be honest, I don't expect it. I don't expect that we will go back to the average in 2005, but you never know. If you have 2 big hits, 2 big names, you're exposed and then it might happen. But I don't expect it. But certainly the 18 basis points that we have in 2005 looks rather low. In particular also. because we had a little bit over average releases of previous provisions. And that is because first of all, we have a good workout department, we are provisioning conservatively and so on and so forth. And we had, of course, low growth provisions and the lower your growth provisions, if you have the same releases, then as a percentage, of course it's going up.

In the start of 2005 with IFRS we have to review all our loan loss provisions and those who do not comply with IFRS rules have to be released in capital, so that means that probably that going forward it will lower the releases in the loan loss provision also a little bit. So I expect that if we would have had a normal release pattern of say 45% of the gross loan loss provisions, we would have had about 22 basis points this year. That's all I can say. And I really don't know where we're heading this year. So far so good, in the first 2 months, there were no big events in the market, no big fallen angels, so far so good, I would say.

Then on M&A, what is big, what is small? Wow, that's a very difficult question, of course, to answer and I think I would say a couple of billion. That's certainly big. Small is very small, is less 100 million So it's somewhere between. It's between very small and very big.

Ladies and gentlemen...

Excuse me. I have the question -- the answer for Matt on the life profit in the Netherlands. In Q3 it was 266 million, in Q4 profit life of the Netherlands were 370 million. So it went up. Thank you.

The next question comes from Mr. Paul Goodhind from Bear Stearns. Please state your name, company name, followed by your question.

Hi, Paul Goodhind from Bear Stearns. I have two questions. The first is on better value and there's a clear increased emphasis, if look at your presentation, on embedded value earnings, more so perhaps than there's been in the past. I'm interested in what effect that has on the way you run your life business, in particular whether the mix of business will shift over time as there is greater focus on EV rather than on reported profits. From what I think Tom was saying earlier, that may be happening in the U.S. already given the improvement in the margin that we saw in the fourth quarter. I'm interested in examples of where that's happening, lines that you cut back on because the returns are too low and areas that you're prioritizing to grow because the returns are more attractive. So is there a U.S. or give other examples around the group, I'd be interested on that.

The second question is on ING Direct and back on the UK. Just wanted to check if the UK business is on schedule to achieve your profit objectives. And just remind us when you think it will hit your IRR target for UK and give us a feeling what's the total amount of marketing spending that you're incurring in the UK. I guess there must be quite heavy investments up front for marketing and that probably is driving the earnings lower in the short term. Could you quantify that so we can see what the kind of underlying business is doing, please?

Let me answer the second question first and then return to Tom. ING Direct UK, let me start with the disappointing part of the earnings. I'm not going to give you the marketing expenses; that would be competitively speaking not very wise and smart to give you. The only thing I can say that as far as our bottom line performance is concerned in relation to our expectation, we are still on line with our performance with our original plan and business plan. But I must say the (inaudible) are of course different. We have not expected by definition that we would have a flat yield curve so far. By the way, it hardly ever happens that you have a flat yield curve for longer than 2, 2.5 years in the country and, in particular, not on the level of 4.5, 5%. There is hardly a precedent for it and takes already a while. Of course, it doesn't mean everything, so that means one day there should be an end to this flat yield curve. That is one. So that has negatively impacted the results compared to business plan.

The positive thing is that the average balances, the average saving amounts per client is way above what we had expected in our business plan. You know on average in ING Direct today it is about 11,000 euro and in the UK -- excluding the UK. Including it, it's about 13,000 in UK overall. But in the UK itself it is around 30,000 euro per client in the United Kingdom. And that, of course, brings down costs substantially in terms of your total revenue base. And although the margins are therefore relatively low today in United Kingdom, given the relatively low cost base compared to the total assets, we still meet the original budget as far as our business plan is concerned. And the original business plan, without being too precise, but you know that we have a traditional horizon that -- and startup should be profitable within 3 to 4 years, which means that at the end of 2006, United Kingdom should be profitable. And within 1 or 2 years time, it should be -- the losses should be paid back and say that in 1 year, 1.5 year, there should be an adequate return on economic capital. That is the business plan for every country and again, as far as the bottom line is concerned, we still comply with the original business plan.

Tom, you're the first question.

Cees, let me take the first question in terms of reference to the U.S., and I would gather that my colleagues around the world are doing similar things. But, Paul, we are really balanced now between focusing on traditional accounting earnings in ROE and value of new business and embedded value profit and IRRs in new business. So it's a balance and all of those metrics are -- I'm judged on delivering on all of those. So what we've done within the business, for example, the retirement -- the U.S. retirement service business is a good IRR and value creation in general, so we're focusing there.

Within retirement services we're in various segments and the kindergarten through 12th grade school teachers is a very high margin business. So we're focused on growing that business. The small end of the corporate 401K market is another very strong value creation area. On the flip side for retirement services, the government, the state and local government market and the larger size cases are not as profitable, the margins are lower, so we're de-emphasizing those to some degree. And that also has an impact on volumes since, Cees, the kindergarten through 12th grade and the small 401K are less lumpy than the big ones. But clearly, a real focus on looking at growing the businesses with higher margins.

On the annuity side, there we've made some progress as well on both value of new business and IRRs. We have repriced our products to increase prices, increase returns and margins. And on the life insurance business, there the key driver for us to improve value of new business is to reduce the expense gap, or the cost overruns. Those were in the 200 million range in 2001 and I think in 2004, as I said, in euros it was less than 20 million euros. But we're making progress. So it's a real focus on looking at those businesses and products where -- that have better returns, margins and IRRs and new business.

Just on the annuities how have you repriced products? In what way have you done that and has that affected your competitive position in the market?

Well, what we've done is we've gone through and we've repositioned the mix of business and looked at the pricing on the various benefits and we have in those benefits looked at increasing what we charge going forward. We've also, on the -- I think we mentioned this at the September symposium, we also tend to have on average the chassis, the variable annuity chassis that we write the benefits on is -- we've improved that to about 140 basis points is the typical base charge on our annuity products. And then we put the benefits on top of that.

Okay, thank you, Tom. I understood from you, operator, there one question left. So please, final question.

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

Good afternoon. It's Duncan Russell from Fox Pitt. Just a very quick question on the U.S. operating expenses. In the U.S. statistical supplement, I saw that the number of full-time employees has fallen from about 10,000 to 9,000 from first quarter '02 to fourth quarter '04, yet the average employee cost has gone up quite substantially. Could you just talk about that? And then secondly, you talk about the expense overruns being cut in the U.S., but the absolute level of operating expenses has remained flat and expenses to average assets has remained flat as well at about 124 basis points. Could you just reconcile that? Thanks.

Well, we have reduced the employee base, Duncan. In terms of cost per employee, what drives that, and this is a phenomena that's occurring throughout the U.S. in all industries, is the benefit cost for health insurance and for pension type costs are going up. And so that's been a big part of that. If you look at we managed to -- expenses to assets under management and expenses to premiums, I think overall on those bases we have made progress on both of those measures. So while you're right, the overall expense base has been fairly constant, we've done that while the assets overall have increased significantly and the sales have increased significantly. So we actually think we're doing a pretty good job on managing expenses. And again, since two-thirds of our expenses go with the employees, the fact that you're reducing employees over time, but that has allowed us to keep the absolute expenses more constant. But we are clearly going to continue to see the cost of benefits, with health insurance in particular as the employee populations age in the U.S., you're seeing a significant increase there. And that's not just affecting ING. It affects all the companies in the U.S.

When do you think we'll see the reported costs fall in the U.S. operation? Not the embedded value, but the...

I'm not sure I understand that questions.

Well, the reported costs remain flat and the cost to assets has remained flat, but you've reduced employees massively and you say you've reduced...

I believe the expenses to assets overall in a number of the businesses are going down. It may make a difference whether you're including the individual life reinsurance business or not in that. But it is something that we are focused on and we would expect to continue to reduce the expense to assets going forward.

Okay, thank you. Well, thank you, ladies and gentlemen. This finalizes the -- there are no more questions left at this time. This finalizes our conference call. Thank you very much for attending and for asking all the questions. And I hope to see you next time. Thank you very much.

Ladies and gentlemen, this concludes the ING full year results 2004 conference call. Thank you for participating. You may now disconnect.