ING Groep NV (ING) 2005 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the ING quarterly results 2005 conference call on the 12th of May 2005. [OPERATOR INSTRUCTIONS]. I will now hand the conference over to Ms. Jena Baks (ph). Please go ahead, Madame.

This is Jena Baks for ING Group welcoming you to ING's conference call on the figures for the first quarter results of 2005. 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 US 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. Realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables.

With that said, good morning and good afternoon to you, Cees and good morning to you Tom. Cees, over to you.

Thank you Jena. Ladies and gentlemen, good morning, good afternoon. Also on behalf of Tom, welcome to the conference call. I would like to start very briefly with a short – an introduction. Most of you have probably had ample time to read our press release or documentation. Some of you probably have heard already the conference call the conference call this morning for the Germans. So I can be doubly (ph) brief.

Let me start by saying that our first quarter results showed a strong start this year with all the business lines contributing to the strong growth. Our net profit, if you've seen that headline, was up 72% to 1.9 billion euro. Of course, this was impacted by our divestments that we have announced last year. Some of them have closed in the first quarter. Our divestments had a positive impact of 390 million in this year. But without that impact, our organic net profit growth or underlying went up by 44% and before tax by 29%. So, apart from the divestments and currency impacts, the growth in the first quarter was also strong.

Insurance profit before tax, (indiscernible), and divestments was up 45% and our bank profit before divestments was over 18.3%. You will not be surprised that the growth in both insurance and banking was caused by the three growth drivers that we have in ING.

First, ING Direct profit went up by over 60% – 62%. We added one million new customers in the first quarter 2005. At the end of March we had 12.5 million clients. Those one million new clients added 15 billion euro funds entrusted to a level now in our internet savings bank in the eight countries in which we operate of 161 billion euro. So quite an achievement.

The second growth driver, our emerging markets profit went up by 26% in the first quarter. The value of the New Life business in emerging markets went up by 36%, so also a strong contributor to the growth in our first quarter.

The third growth driver is our pension and retirement service. So strong growth in assets and value of the new business across the region. Just to give you an example, Our US Retirement Services profit went up by 19% in the first quarter.

Expenses – just a single word because many of you know that in fourth quarter expenses were up sharply. We indicated at that time that it was that of non-recurring. Indeed, expenses in the first quarter 2005 were almost 400 million lower than in the fourth quarter 2004. So, indeed expenses are down compared to the final quarter in last year.

As you have seen, we have announced an initiative to reduce the annual expenses in Nationale-Nederlanden, our insurance company in the Netherlands, by 235 million euro over a period of three years. So the level of the cost in the end of 2007 will be 235 million lower than the cost level at the end of 2004. That is the meaning of this message, which is a reduction of about 20% in cost. And at the same time we intend to reduce at the Company the number of people employed at around the same percentage – around 1,000 people out of a workforce of 6,200 in the course of those three years.

Finally, as you know – no – one, but last. The impact of IFRS on the first quarter numbers was limited. The impact on total earnings in the first quarter was only 90 million, which is rather limited on a total level of profit of 1.9 billion. The impact on our equity was limited also and had a negative impact of 300 million at the end of March, if we would not have applied IFRS. So here also a limited impact on equity.

Finally, you know we do not give any profit forecast for ING as a whole any more. What we have said in the press release is that we are confident about the year ahead, although circumstances have deteriorated. And circumstances deteriorated means that the market in which we operate – financial markets have deteriorated since the end of March. Stock markets went down a little bit. They yield curve has flattened a little bit. GDP growth in Europe has not picked up yet and is still sluggish. So this is the financial environment in which we have to operate for the remaining part of the year.

Having said that, I would like to turn – to open the floor for questions. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Nick Holmes. Please state your company name followed by your question.

Lehman. (technical difficulty) in Nationale-Nederlanden will not undo the good work that you have been doing in improving broker service and lead to similar problems that you experienced three years ago when you introduced your new computer system.

Sorry, Nick. Can I interrupt you? We missed the first part of your question. So please, can you start from the beginning?

Yes. Sorry about that. The first question is, how can you reassure us that your cost reduction plan in Nationale-Nederlanden will not undo the good work that you have been doing in improving broker service and lead to similar problems that you experienced three years ago when you introduced your new computer system?

Second question is, can you tell us more about the size of the private equity portfolio that produced the unusually high gains in Dutch insurance and what you would expect as a normal level of gains?

Third question is, you seem to be taking some market share in US variable annuities. Could you tell how much this is due to your new GMWB product? Or is for other reasons?

Fourth and final question is, you have very strong growth in Japanese variable annuities. Could you tell us whether you see this continuing or whether the market is now becoming more competitive with more limited growth opportunities? Thank you.

Thank you Nick. These questions– I could hear you loud and clear. The first question on how sure are we that these cost reductions will not affect in a negative way the broker service. I must say that the cost reductions – the cost reduction, first of all, is a net figure. It includes any investment also. Investments over the three years is about 75 million euro. We start to invest in improving systems, in improvement in IT in order to the service to the client – to the broker and to the ultimate client. We want to – the reason for this investment is that we today, roughly speaking, we are in client satisfaction about in the middle of the market, about average. But we all know that if you are the largest life insurance company in the market, and the second largest non-life insurance company, to have an average client satisfaction is not enough in the longer term. We have to be in the top quartile, at least, in terms of client satisfaction. That is what we are investing in. So the time in which a client receives an application form, the time in which the client receives his policy, the time in which the client receives – gets answers to questions – that has to improve. That means automation. So that means digitalization of policy, digitalization of application forms and so on and so forth.

Therefore we need to invest. And that's what we are doing. But at the end, if you have more automated systems and less hand work to do, that leads to a lower number of people and finally to a lower cost level. That is the character of our restructuring and the character of our reduction of cost. So the risk that the broker service would be affected negatively is, in my opinion, very remote. And it should be the contrary. The customer service level – broker plus client – should go up. That is the purpose of this reduction. And of course, the aim also is that the overall cost level is going down in order to be competitive and to stay competitive in the market. So that is the first part of your question – the first question.

The second one – sorry.

Could I just ask, is there a danger though, that staff morale will suffer because the headcount is being reduced? Or will it be just natural wastages (ph)? As staff retire, they won't be replaced?

Sorry. Can you repeat the question. I missed it. I apologize.

Sorry. Is there a danger that staff morale might suffer in Nationale-Nederlanden as has happened, I think, before. To prevent this happening will there just be natural non-replacement of staff as they retire?

Is there a danger? Of course, there is always a danger. By definition if you announce a 20% reduction in the workforce over three years time, while we've never had such a program in place in the Netherlands, then of course, there is a danger that it leads to a negative impact on the morale. At the same time, as we all know – we work in organizations. The first ones to realize that something has to be done, and that this is not a situation that can be continued, is the workforce itself on the work floor. So I feel, I think that the sense of urgency is well recognized at the working floor and with the workforce, among the unions, with the Workers' Council. We have all consulted with them. So that risk – there is not – there is a full recognition of the necessity of such a measure.

What we have done in order to make it acceptable for those people who have to leave is that we have what we call a social plan. We've had that already for years. But that gets into force now. We have established a mobility center. Those two plans will be the following. We give every – first of all, there is natural attrition, of course. Second, for those who have to – who are forced to leave, we try to accommodate them by finding a job for them inside ING and, if necessary outside ING. That period that we help them to find a new job can last for a maximum of 18 months. I don't say that no one will leave the Company within 18 months because we hope that and we expect that we can find jobs for many people inside and outside. But if we have not found someone – not found a job for someone within after 18 months, we do not exclude, of course, that those people have to be fired and have to leave the Company in a forced way. But we are fully confident that the way we help these people find new jobs will be sufficient in order for them to keep the morale up given the recognition of the employees that something has to happen here. So that is what we did. We have, as I said, full cooperation of the workforce and of the trade unions and the Workers' Council.

Then you asked me about the size of the portfolio – of the equity portfolio, so Faqholm (ph). Let me first say something about the size of the profits. It's about 80 million that we've made on these private equity gains. Normally speaking, if I look, the private equity gains were made at Faqholm. That is a private venture capital, a private equity business in the Netherlands for Nationale-Nederlanden. It's un-leveraged business. The size of the portfolio is about 350 million euro. At least that was the case before IFRS. I have to check now what it is after revaluation – what the revaluation was at that level. I have to check. I know it was 350 million before. So somewhere between 350 and 400 or 450. The average gain, if I look over the last couple of years per year, was about 75, 80 million. So the profit that we made in this first quarter was roughly what we have made generally over the years on average – sometimes higher, sometimes lower. What I am saying now is not the message that we are not going to make any profit any more over the next three quarters. The only thing when I say it – it is volatile by definition, the private equity gain that you make. We cannot steer it because – this was mainly because of two participations that were sold were triggered by outside parties. So an investment in a company was taken over by someone else. We offered, of course, our stake. So not triggered by ourselves, but we made a nice profit. I think last year also, the profit in this company was about 80 million. By the way, this is a good investment. Part of the investment in insurance companies are – you don't own the investment. If you invest in (indiscernible) only, then (indiscernible) is not an option. You invest in equities also a small amount in private equities. We had this company already for long – already since the merger, we had both on the banking side and on the insurance side, a stake in this company called Faqholm. We owned it for 100%, I think, since 1992 or 1993. So it's a long – the company is there for long.

Then Tom, the question on the variable annuities.

Good afternoon, Nick. I would say we have been pleased with the momentum in our variable annuity sales. If you go back and look at our statistical supplement, going back for eight or nine quarters, we've had a nice trend in momentum on sales in VAs. So it's certainly not one quarter. It's been over some number of quarters. Specifically in terms of your question on the withdrawal benefit, we have been seeing that steadily increasing. In the first quarter of '05 it was about 10.5% of our sales of VAs. We do think we're picking up market share. We think we will probably pick up first quarter market share in the 30 or 40 basis point range. What is driving that? I think we have a good overall product lineup – the withdrawal benefit, but also other benefits, a good product set. And we've been consistently over the last couple of years expanding our wholesale distribution. So we're seeing good pickup across-the-board in the different channels.

Could you tell us what the percentage of VA that are WB using the last quarter, like Q1 '05? Because the 10.5% was Q1 '04.

The 10.4% was first quarter of '05. I think for all of '04, it was about 7.5%.

It was about 7.5, yes. Thank you.

Thank you----

No, no, no, sorry, ma'am. I have a question to answer on the Japanese variable annuities business. First of all, before looking forward because I just gave a (indiscernible) disclaimer that it doesn't mean very much (indiscernible). But I'll say a few words about it, of course. If I look to the development, yes a strong growth in premium. Why? Because we have – we originally started by selling this through one broker, Nomura. We've disclosed that before. We have broadened our distribution base to a few big ones like Majuro (ph), like USJ (ph). So we are really expanding distribution and very successfully so in the first quarter. So you might expect, indeed of course, the growth compared to last year was spectacular. You cannot expect such growth rates. But speaking about the activity, yes you might expect substantially higher activity in this area than last year.

Competition. Competition is there. But so far not as fierce as one could expect. Of course, if lasts longer on this level, then you might expect the competition will jump in. But the main and the most important reason is that we have enhanced our distribution, and therefore – without really changing prices. So this is reason for our higher level of sales.

Thank you very much.

Thank you. Karl Marx.

I think that's me, Mark Cathcarte (ph) from Deutsche Bank. I've got a couple of questions. The first one is on expenses within the Benelux banking business. If we sift out all of the exceptionals, you say that your expenses are back onto where they should be in Q1. But they seem to be up quite sharply versus Q1 the previous year. I just wondered in the retail side, if you could tell us what's going on there?

Secondly, on ING Direct, could you indicate what your plan is in terms of mortgages as a percentage of total assets, where you'd like this business to be. And how on earth do you hope the control the growth in the business to get there, bearing in mind that people decide to put deposits down with you, dependant on what the interest rate is. Is there a chance at some stage, you may drop the interest rate to equalize the balance sheet? And I guess in relation to ING Direct, have you worked out or could you indicate to us if there was a further flattening of the yield curve by say 25 bps across-the-board, what would your profits be looking like today? Thank you.

Okay, Mark, Thank you. First of all the costs in retail. If you compared it with the first quarter, it's still high. That's true, there are a few elements in it why it is still very special. On a comparable basis, if we take out the acquisitions and divestitures, then operating expenses is still up 11.7%. The reason for that is – but if we take out the consolidation effect and shift between retail and wholesale that has taken place, we have shifted some of the expenses in the Netherlands and Poland to it, then what you couldn't see, which you can't re-calculate, but then the expenses are up to 5.9%, which is still on the high side. In the Netherlands, it's up 6.2%. That has to do partly – and that's a general phenomenon of all our expenses – with what I would call, improved accruals. As you will recall, we have said that even the Executive Board last – the final quarter in 2004 last year was unhappily surprised by the high – at the cost explosion. Partly that was due to accruals. We noticed that throughout the organization, accruals were not done carefully in line with budget. If the organization knew (ph) in advance that the budget would be exceeded and accruals stayed where they are. The hit was taken in the fourth quarter. It has been realized or recognized by the whole organization. Now we see an improved accrual process. For example, what we do better now is accrual – there is a system that in the (indiscernible) if you don't take up your holiday days, then you have to accrue that as a liability. Since we all know that holidays are not picking up that much in the first and the second quarter and that they are being picked up in the summer, in July. If you accrue them adequately now that means if you have a higher expense in the first and the same way in the second quarter, it will be reversed in the third quarter. Those are the things – pickup. That, for example, the 6.2% in Netherlands, 2.8% was related to accruals of provisions for performance-related remuneration, unused holiday, profit sharing and those sort of things. The rest was yearly salary increases, impact of IT, and so on and so forth. Still relatively on the high side. But (indiscernible) retail is growing.

Can I just say, within your budget, you are getting paid bonuses on how you develop your expenses. Is that within your bonus budget? Are you happy with that? I still don't get an idea. You say it's high. But I don't know if, sifting out accruals and IT, if you're happy with it or unhappy with it.

In the Netherlands we are happy with it. Within all the units of expenses are within budget. There is no major business unit who has exceeded its expense budget. I cannot blame people if they get to the top-line income that they are in, as far as expenses are concerned, if they are within budget. So in that respect, yes I am happy.

Then on ING Direct, which percentage of total assets do I expect to be in mortgages? If the ultimate goal of ING Direct would be to say to have around 40% of total funds entrusted to be in originated mortgages. That is the goal as we see it today. I mean, it can change. But as we see it today. Are we on track there? We are catching up rapidly. But we are not there yet – certainly not there yet because of every 100 euro that we get in savings money, we generate about 33 – so one-third, 35 euro on self-originated mortgages, which is below the 40 that we want to have. The reason is that we've been very successful on the funds entrusted. That is one. And second, we do not operate in all the eight or nine countries where we are in mortgages. We have mortgages now in Canada, Spain, Australia, and USA and Italy and Germany. We are not with mortgages in France and not in the United Kingdom. Of course, we are – and of those six countries where we provide mortgages, in particular Australia is big. The USA is big and strongly growing. And Germany is big and strongly growing. So these are the main contributors. We are catching up. The end goal would be around 40%.

The question of 25 basis points, to be honest, I can't answer that question. It is because – for various reasons. First of all, I assume that the 25 basis points is a parallel – I assume that it parallels decrease of the yield curve. Or is it a flattening of the yield curve? If so, is two years, two and a half years? Is it overall? Is it an overnight shift? Do I assume adjustments on the liability side because, as you know, there is no guarantee on the interest that we pay on savings money. There is more commitment that we are competitive in the market. That's what we always are. So this question is very difficult to answer. I only can tell you that margin on ING Direct for the first quarter was 91 basis points. That was a little bit lower than the 100 that we had over the last four quarters. (indiscernible) is lower – it's got a little bit lower. Debt is lower. That is due, of course, to the average yield lower curve in the euro zone and in the US. Although I must say that in the US in improves a little bit now. But in the euro zone the yield curve flattened a little bit. But your question about the 25 basis points, I can't answer.

Thank you.

Thank you. The next question comes from Mr. Duncan Russell from Fox-Pitt Kelton. Please go ahead, sir, with your question. Mr. Duncan Russell, please go ahead with your question. Thank you. The next question comes from Mr. David Weiderzand (ph) from Shrove (ph).

Yes, (indiscernible) from Stilveen, (ph) Amsterdam. A question on credit quality. Can you elaborate a little bit more on credit quality, especially for wholesale. Maybe you can say something about developments in the coming quarters now. Where do you see it going?

Thank you. This is an important question, but a very difficult one to answer. As I've said, if I look at the overall loan loss provisions, it was zero or slightly negative even. As we have said, the total retail banking provision in the first quarter was low. It was about 21 basis points, which is a little bit lower than average, but not that much. In ING Direct, it was 27 basis points, which is around average, a little bit higher, but not that much. I expect it was about 25 basis points. I don't expect any changes in the retail portfolio. Why should it? The GDP growth is what it is. It doesn't pick up. It doesn’t slow down. So I expect for the next quarters that it won't change that much.

The big trick, of course, is in wholesale banking. Difficult to predict. We had a release there of 21—22 basis points in the first quarter. Is that sustainable? The answer is no. Of course, there is natural end to releases anyhow. If you add a little and the quality of the loan losses portfolio was good, then by definition almost releases will come down at the end.

It's now mid May. Look at the market. You know as much as I know. We have not seen many bankruptcies, at least not bankruptcies going up. We have not seen fallen angels. So, so far, so good. But nobody knows.

What do we expect for the three quarters to come? Maybe overall if I take into account the stable retail portfolio, between 15 and 20 basis points. That is roughly what we expect today for the three quarters to come. Do I hope for better? Of course. This is the first time in my career as a banker that I have seen negative loan loss provisions. I have never seen that before in a quarter. Hopefully I will see it again in the future. But it is, of course, highly unlikely. But the best thing I can say today is that is what I expect. We are not alone. We see in all the wholesale banks that you have net releases. So it is partly due to the favorable credit environment and partly because we are relatively good compared to (inaudible - microphone) also due to our improved credit-risk management systems. But this is the best guesstimate I can give you for the quarters to come.

Okay, thanks.

Thank you. The next question comes from Mr. Duncan Russell from Fox-Pitt Kelton. Please go ahead, sir, with your question. Please Mr. Duncan Russell, please go ahead, sir, with your question.

Thank you. The next question comes from Mr. Simon Kalembosis (ph) from HSBC. Please go ahead, sir, with your question.

Duncan, I couldn't hear you. And the next question is not – there is no question. So----

Thank you. (OPERATOR INSTRUCTIONS) Thank you. Sir, we seem to have no questions at this time. Please continue.

Okay. Are there no further questions?

We have a follow-up question, sir. The next question comes from Mr. Urich Volk (ph) from Capital International. Please go ahead with your question. Thank you. Mr. Volk, Please go ahead with your question.

I do apologize. The next question comes from Mr. Mark Cathcarte. Please go ahead, sir, with your question.

Tom we have no – apparently all the questions do not come through. We don't hear anything. I assume you don't hear anything either.

We don't. No, we don't.

I hope that the whole world hears us now. Apparently there is a technical problem. Neither Duncan, nor Urich, neither Mark Cathcarte could answer any questions. I apologize for that.

I apologize sir. (OPERATOR INSTRUCTIONS) Thank you. Sir, we seem to have no further questions at this time. Please continue.

Okay. I apologize. I hope that those who are still connected can hear me. Apparently there is a technical problem. For those of you who tried to ask a question, we don't hear anything here. So I apologize, but I think the only way to do it, is just cancel the conference call now. If you have any specific questions, please call investors relations. They are going down now – most of the people sitting around the table here, they will go down so that we can answer your questions directly or put you through to the United States if necessary. Again, I apologize for the technical problem. Thank you very much. The conference call is cancelled.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect.