ING Groep NV (ING) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the conference call of ING Greece third quarter 2005 results on Thursday the 10th of November 2005, at 16:00 Central European Time. (Operator Instructions). I would now like to turn the conference over to Mrs. Jemma Backs (ph). Please go ahead madam.

This is Jemma Backs for ING Group welcoming you to ING's conference call on the figures for the third 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, 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 movements in any or all of these and other variables.

That said, good afternoon Cees and Tom. Cees, over to you.

Thank you Jemma for this nice introduction and welcome all of you also on behalf of Tom. Let me briefly introduce the results, more introduction is this time probably not necessary because as you have seen the results and the net profit for the first 9 months were excellent, an increase of 23.5% to EUR5.3 billion in the first 9 months. And as we have said in our press release, the drivers of this profit increase were our growth engines, our 3 growth engines that we have in ING.

First of all, ING Direct with strong profit growth in the third quarter. The profit was up 41% in the third quarter compared to second quarter. As we were able to improve our interest margin we were able to lower the rates in 4 countries and we were -- lag behind in the United States by the increase in official rates are there.

The second growth drivers is our life insurance business in developing markets in Asia Pacific and Central Europe. Specifically the value of the new life insurance business increased by 34% in the first 9 months, driven by Asia.

ANd the third strong growth drivers is - are the retirement services and the pension businesses. Here we had a strong growth of retirement services in the United States, strong growth in premium and in profit as well and also central Europe showed a strong increase.

The result was a strong increase also in value creation, return on economic capital in the banking side increased to 22.8% after tax and our internal rate of return of the insurance operations improved to well over the hurdle for ING Group as a whole to 12.8%.

So, those results ladies and gentlemen confirm our focus on execution and growth, customer and the control and the growth engines, as I've just said, have done the work. But not only the 3 growth elements did very well, also the business in mature markets gave a strong contribution to growth and retail banking in the Netherlands was up 13.5% profit and the profit in Belgium was -- even more than doubled driven by strong growth in mortgages and savings in Belgium as well as in the Netherlands.

Also wholesale banking increased by, the profit increased by 14.1% due to continue low risk costs and higher income as well. But also our US profits, and I refer to retirement services all that is one of the elements that our profit in the United States businesses increased by 35.5% and Canada was up 35%. So also the mature markets gave a strong contribution to the profit increase.

We continue to focus on controlling underlying expenses. As you know, we have announced new measures in our operations and IP in streamlining, in sourcing. Our staff - this leads of course, to a one time cost but combined with the measures that we have announced already in July, these measures are expected to reduce and including by the way, the efficiency program in our Dutch Life Insurance operations, National Midland (ph). The combined measures of expected to reduce our annual expenses by more than 460 million in the coming years.

Finally, the remaining of this year -- we remain positive about the results for the remaining of this year. The strong underlying results underpinned by favorable market conditions are contributing to that. The low credit losses both in banking - bank lending and in fixed income invested are assumed to return to more normal levels, however, and it's now the half of November, we have not seen, at this moment any deterioration in the credit environment. So, so far, so good. But looking beyond 2005, we expect a gradual return to more normalized levels.

Interest margin remain to be under pressure due to high liquidity in the corporate sector as well as in the private sector, where the propensity to save is high and therefore all the banks and all the financial institution compete about the same in Europe. ING feels well positioned with its strong and balanced portfolio of businesses and with its strong growth elements in our, in our organization.

With this introduction I'd like to give the floor to you and I'm open to all your questions and I'd like from - Tom and I would like to answer them as good as we can. Thank you.

Thank you. (Operator Instructions). The first question comes from the line of Mr. Camon Calumbusis (ph). Please state your name, company, followed by your question.

Good afternoon this is Camon Calumbusis from HSBC. I have 2 questions if I may. First, you seemed to mention growth for next year and taking, being more aggressive on volumes and I wonder if you could give - be a little bit more specific on opportunities available please.

And the second question is on ING direct, I wonder what the - what is the impact on outflows but also to inflows of recent rate cuts. And also in France, I think you launched a life product in September. I think you are targeting to sort of to raise 20,000 clients in next year and I wonder how this launch went and if you have any cross selling ratios there please. Thanks.

Okay first of all Michel Tilmant's remark on growth for next year. that referred to the fact that we have increased our internal rate of return of our - in all the 3 regions in life insurance where we operate and they all need the hurdle now and Michel has said, "Look, once we have met the hurdle we've been wired having increased all our internal rate of returns to the hurdle because we have said to the organization and the organization has delivered part of our execution program. We go for return and not for volume." So, we have to - so if you sell product in the total product package then you should meet the hurdle, that is the target and if you lose a little bit of market share, bad luck, we go for profitable growth.

The organization has done and delivered in the first 9 months so far. Now, we come to the point where we have to ask ourselves, do we continue with that message? Do we go, do we want to go beyond that hurdle of 12% overall for the group and you know that it is around 10 to 11, so around 11 in the United States and around a little bit above 10 because the long term rate is a little bit lower here in the Netherlands, but we more than that achieved it in 14 and in the emerging markets. They all have achieved that and going further it is probably the time to relax that requirement a little bit and say, "Okay, if you can keep these levels of internal return, then probably we should turn it a little bit more into volume." That was the idea behind it and as long as the business managers feel comfortable I think you can keep the returns that they have achieved today then they certainly should go for volume. That was the idea behind it.

The second question on ING Direct, among the outflows, we have lowered the rate in July in Germany. We have kept the rate stable in Spain, we lowered the rate in France in July from 305 to 275. We have lowered the rate in Italy by 10 basis points. We have kept the rates in Australia and Canada stable -- of course, there was no reason for that and we have lowered the rates in United Kingdom in August.

What was the consequence of that? First of all we, as we do in all the countries we pre-announce a rate decrease in ING Direct. This in some countries like in Germany it's obligatory that you first announce and then lower and then I think it differs per country sometimes it's a week before. But in United Kingdom, where it's not mandatory to announce that well in advance, we announce it 3 weeks in advance. Why? From a point of view of customer care, we feel that if we have an advertising campaign and inducing the clients to come in and put their money say at a rate of 5% and it's the day thereafter we lower it to 4.75, we don't feel that we've given the client a fair and honest picture for what we could make on this account.

So therefore we announced in early July that we would lower the rate in the United Kingdom, for example with 25 basis points. And as a consequence of which, we stopped our marketing and we re-started the marketing in August.

The consequence - and we've always said, that the good news of ING Direct is as long as you spend money on marketing that you have an inflow of clients and the moment that you stop marketing then the inflow of clients almost stops. That's the bad news. The good news also is that once you stop marketing there is no outflow of clients. So this experience we had this experience also now, of course when you lower rates then there is always some outflow of clients.

So we saw in the countries where we lowered the rates, some outflow of clients the days after we announced and the days after we stopped the marketing. Then it stabilized and we saw some additional outflow, the date, or the day that we lowered the rates actually. We regained - we restated with the marketing and the inflow returned.

So overall, we had no outflow in any of the countries where we lowered the rates, not in any country, by the way, in the third quarter of this year. So that's, on the outflow and on the impact. This proves by the way the fact that for us, ING Direct is not so much an interest rate or a yield game to play.

We can live under all and we can perform under all circumstances - the yield curve. Of course, I mean no doubt about it. if the yield curve is steeper, then we make more money than the yield curve is flat. But it doesn't mean that the business model will be violated if you have changes in the yield curve or changes in the slope of the yield curve as we have always said and we are happy that it could show such a good or record high profit in the third quarter of this year.

On your question on France, I think it is too early to say and I don't have the data here to give you a precise answer on that. But I don't think that even the data are available as I would ask it on France because it's too early after the introduction of this new product. Thank you.

Thank you so much.

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

Good afternoon, it's Duncan Russell from Fox-Pitt, Kelton. 2 questions. The first one is on ING Direct. The net interest margin was I think 115 basis points in the third quarter. Historically it's ranged between about 105 and 130. I think you in past you said that about 125 is what you target but could you just confirm that or give a bit of discussion on the long term net interest margin for ING Direct?

And then the second question is, on your US Life operations, just wondering how do you see that US Life market from a consolidation point of view? Would ING be a player if the market continues to consolidate or even would ING consider access taken? Thanks.

First of all in the margins of ING Direct. The interest margin excluding ING Card in the third quarter was 87 basis points. In the third quarter. So almost 100 and, I don't know, 115 that you refer to. That's my first - it was 77 in the second quarter, but 91 in the first quarter, the interest my - excluding ING Card. The (inaudible - accent) ratio by the way dropped to 62.5% from 67.6 in the second quarter. But apart from that.

The point on the overall interest margin, the business model of ING direct says that the interest margin for ING Direct as a whole should be 100 basis points. That is the business model. The business model says that the cost base of ING Direct as a whole should be maximum of 50 basis points or total assets. The facts today are that cost base is down to 40 basis points, down from 44 by the way last quarter to 40 now. And that the interest margin as a whole over the first 3 quarters was, I think, 85 basis points, an average over the 3 quarters and 87 the last quarter. So we're a little bit behind. And that's my first remark.

My second remark is of course that a business model does not assume such a flat rate as we have today. The business model normally assumes an overall yield curve of between, say 1.5 and 2% so be on the conservative side what we'd normally could expect 250 basis point interest margin. But we assume a lower one.

But this is roughly what the facts are. We feel comfortable with that, we are 10 basis points lower in cost base and today, given the difficult environment in the yield curve, we are 13 basis points behind the desired, and 15 or whatever you want to call it, behind the desired level.

Overall, ING Direct is ahead of its budget, ahead of its plan, ahead of its business - long term business plan in terms of profitability, in terms of client and in terms of funds entrusted.

I have to say one more word on the other side of the balance sheet, the mortgages. There is a different mix of course in the mortgages than the original business plan shows. As you've also seen, not in every country there is, we have - not in every, sorry - not in every currency zone we have a mortgage development. The one that we don't have one yet is in the sterling zone and that influences of course, also the overall interest margin because while at the same time and you've seen that in the third quarter. You spend, in the third quarter relatively speaking more money on marketing the mortgages than we did the previous quarters and of course if you stop marketing for the saving side then you can spend a little bit more mortgages, and it paid off in the third quarter.

The overall inflow of funds entrusted were 6.3 billion, which was relatively low, normally we have an inflow of say, somewhere around 10 billion, generally speaking, although September is always low due to holidays. But we have an inflow of 10 and this time we had 6.3 because of all the changes in interest rates. But the inflow of mortgages was 5.2. So that is almost - that is more than 80% of the savings, this time the new savings in one, in the third quarter could be invested in originated mortgages which we were very happy with.

Then, the US life market. Let me turn to Tom but let me, first of all, from my point of view, because Tom will probably say how he sees the consolidation in the life market in the US but I consolidation say from my point of view that if it's going to happen, the consolidation, not just in acquisition here or there, but the real consolidation in ING will certainly play a role there. But if it's going to happen and when, probably Tom knows all about it. Tom?

Thank you Cees and thanks for your question Duncan. I would say we feel we're very well positioned in the US today -- got one of the strongest mixes of business, 70%, retirement services and asset accumulation and 30% life insurance. So we think we're in a very strong position. Don't see a need for us to do much in the way of mergers and acquisitions. The areas that are most attractive in the US, all the market participants are saying are retirement services and annuities, we're already strong there. So any acquisitions would be quite expensive.

So we're a top player today in retirement services, annuity life, really top 5 in all those areas. We have the scale we need, just good opportunities for organic growth. While there is some consolidation in the marketplace, we don't see it accelerating to a large degree and unless that should happen, we think we're well positioned how we are today. Obviously as Cees said, to the extent that there were major consolidation moves and we felt we were losing our top position in retirement services, annuities and life, we - we would clearly want to look at that and react to that. But at this point, like our positioning today, we're strong in the most attractive markets and feel pretty good about our ability to grow the business organically.

Okay great. And can I just ask, coming back to ING Direct. How did You calculate that margin because I'm clearly calculating it wrong. I did it by dividing the interest result by the funds in the management. But the 85 basis points. How did you get that?

Sorry, we calculated the blanket as we, I think we always do, but maybe I'm missing something here in the technique. But at the average interest result divided by the average balance sheet and then you have the margin. But you have the total balance sheet of ING Direct

Okay, okay. I'll have to play around. Thanks.

But maybe you have with you, if that's not clear, if your calculations are different then probably you should call our investor relations department tonight or tomorrow and see whether there was a difference (inaudible - accent) will probably have to do it, but this is the way I think we do it, straight - pretty straight forward.

Okay.

But you were, you were by the way, pretty well informed about ING Direct so - because I read your report and I thought you would be almost a specialist in ING Direct.

No, not yet. Thanks.

(Operator Instructions) The next question comes from the line of Mr. Matt Pickering. Please state your name, company name, followed by your questions.

Hi, Cees and Tom, it's Matt Pickering calling from ICAP here in Chicago. Cees, I just wanted to just ask -- I haven't had the pleasure of listening to the Dutch conference yet, but -- conference call this morning. But in terms of the strategy going forward, do you and Michel intend or do you feel any need to let out anything more detailed in terms of an operating strategy for the group from 2006 going forward? I mean you did an excellent job at delivering on what you communicated, starting back in the middle of 2004 really. And while I think everyone's quite aware of the growth drivers in ING, I was just curious if you have anything cooking strategy wise that you might be willing to talk about on the call today.

Well, Matt -- and of course you didn't listen in this morning, that would be a little bit too early for you. We didn't say, by the way, anything on the subject you just raised. First of all, in 2006, even if we wanted to say something on facts and figures for 2006, I must say we don't even have them, we -

No, no, no, just like group strategy, yes. I don't care about facts and figures.

No, no, no, no, I know. But on the strategy, so far, the strategy for what is a - the reason that I was saying this is we have not gone back the strategic input for 2006. of our business units and our business leaders yet, how they see the market changing in 2006 and what the opportunity and the chances are but the overall strategy in 2006 will certainly not change. You know that we've repeatedly said that we are well positioned in ING as far as our growth strategy is concerned, in the mature markets we're doing a good job. We're doing, we was very eager on cost cutting and efficiency and on using our capital in a more efficient way as you've probably seen from the numbers, we have reduced the capital at work, the economic capital at work in the wholesale bank and you've increased the capital at work, economic capital in the retail bank and ING direct, its exactly what we have in mind, so with, even without the fact that there would be growth elements we have shifted the capital at work to the more profitable level so that create in itself value, even without growth. And that's what we are doing.

We did the same in the life insurance business. We put more capital in the growth markets than in the -- than in the growth products and in the, not only the market growth products than before. This is the strategy - this is the message that we've given to our leadership in preparing the 2006, 2009 budget and no doubt we did it last year because we said no more major acquisitions. This is the year of execution. We go forward with the growth elements and built in a mature market, we will try to create value by shifting towards more profitable growth, more profitable business so by shifting capital or by reducing costs. So we're working a little bit more efficient with the same business that you do. That is the message that we gave to our leadership.

Okay.

So no major - so real - still focused on execution and growth, that's one element. No major acquisitions. We still, we see and the experience of last year, of this year, sorry - speaking of next year when its still '05 is last year -- confirms that, we've seen people pitching for, banks pitching for BCR for example in Romania, paying amounts of good will, that in our opinion, maybe in theirs, but in our opinion, is unjustifiable high towards the shareholder, you've seen the same for entities pitching for banks in Turkey. So we stick to that philosophy, no major acquisitions because we cannot justify the good will.

And then of course, as the third point, we've always said, and we do not exclude, although that's not opportunistic at this moment that it could be mergers, across boarder mergers, then. But again, first of all and then I almost repeat what Tom is saying, there is no need for it because we are well positioned -- positioned in the market. And second, there are so many impediments and hurdles to overcome in terms of tax, taxes and regulation in culture and corporate governments and language that we don't see any opportunity for that. But that's, but we always had on the longer term, we have not excluded that. That is the strategy of ING and there will be no fundamental change in the year 2006 as we see it at this moment, given the markets, the market that we have today.

Okay. Well, great third quarter and thanks a lot.

(Operator Instructions) Excuse me Mr. Maas. There are no further questions at this time. Please continue with any other points you wish to raise.

If there are no further questions I don't want to keep you off your work for the rest of the day. Either we've overwhelmed you with our results or we are so transparent now, we disclosed so much that the number of questions is rather limited today.

To be honest we had the same in our analyst meeting here in the Netherlands and we predicted it in advance that it would be rather a short and a dull conference call because when the results are good then it's almost a consequence of it that the questions are small.

I think you very much for your participation, nevertheless in this conference call and I hope you, well, to come back to you with the same good results in, for last year. I said, I hope without any forward - making any forward-looking statements to be clear on that.

Thank you very much. And thanks Tom. Also on behalf of Tom thanks.

Ladies and gentlemen, this concludes ING Group's third quarter 2005 results, on Thursday the 10th of November 2005. Thank you for participating. You may now disconnect.