ING Groep NV (ING) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the conference call of ING Group's full year result 2005, on Thursday the 16th of February 2006. Throughout today's presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Ms. Jemma Backs. Please go ahead, Madame.

This is Jemma Backs for ING Group welcoming you to ING's conference call on the figures for the full year 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 U.S. 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.

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

Welcome to this conference call and of course in particular welcome to Tom. I would like to congratulate him as before but nevertheless also here in this conference call with his new appointment to the executive board. Congratulations, Tom. Let's simply continue as we did. That is the best way to go forward. I am looking forward to continue these conference calls in your new capacity.

Just by way of a very brief introduction ladies and gentlemen, we had an excellent year in 2005. Our strategy is delivering value, net profit went up by 25.3% to a record high level of EUR7.2 billion which leads to an earnings per share of EUR3.31. Underlying our profit increased at double digits also and our profit before tax 19.4% up of which insurance 11.5, and banking 27.2. It was not only the bottom line that increased double digits, also the top line growth was in double-digit figures. Underlying our life premium went up by 12.5% and bank revenues went up by 11.4% so strong top line growth. Efficiency ratios all improved. Cost income ratio in the bank, the cost versus premium and cost versus asset management in the insurance business both declined. We had strong value creation, embedded value was up to 22.9% to a level of 27.6 billion. The value of new business also a record high of 805 million up 27%.

Our internal rate of returns improved to 13.2 and risk-adjusted return on economic capital and underlying basis went up to almost 19%. And as you have seen we proposed a dividend increase of 10% to a level of EUR1.80 per share. Finally to look forward to 2006 you know we don't give any quantitative profit forecast any longer now for 1 and 1/2 years, but just to give you an idea how we look at the business in 2006 the interest rate environment though remains challenging we have flat yield curves in the United States, flat yield curves in the United Kingdom and moderate yield curves, shape of the yield curve in the euro zone.

Also interest rates are in the euro zone on a relatively low level which is relatively speaking detrimental to an insurance company. Risk costs and loan life claims are historically low and what we expect is they return gradually to more normal levels. Disclosed in our press release that expected loss of our existing portfolio, of our present portfolio in 2005 is now between 25 and 30 basis points and that is down from what we previously disclosed. That is to say we said this was going down but having the 2005 figures we calculated expected loss on the basis of 25 to 30 basis points. And again we expect to return gradually to that level.

Our tax rate was low also only 15.5% in 2005, of course due to some one-off tax releases. We expect that our effective tax rates for 2006 and probably 2007 will be in the range of between 20 and 25% and that is a little bit on the low side compared to our long-term expected tax rate. As far as the business is concerned we are confident in the growth of the underlying businesses. We have three growth engines in ING -- ING Direct, the life insurance in the developing markets, in particular Asia-Pacific and Central and Eastern Europe. And our retirement businesses and we are confident in the growth of those underlying businesses. We are also confident -- and that is my final remark -- in the ability to continue to create value for our shareholders. Having said that by this short introduction I would like to open the floor and Tom and I will try to answer all of your questions. Thank you.

(OPERATOR INSTRUCTIONS) Nick Holmes.

Nick Holmes, with Lehman. I had a few questions on the banking side please. First question is could you give us a bit more color on why you are continuing to see net loan loss reserve leases in the wholesale banking in Belgium and the rest of the world units, and how sustainable do you think these are?

Then moving on to ING Direct; wanted to ask two questions. The first is in the States are you aiming to grow both deposits and profits this year and do you think that the flattening yield curve is going to make it difficult to do both?

Secondly, ING Direct at the moment is 7% of your group's pretax profit. Is there a level that you would want to cap this at because of the interest rate risks that this business has? Thank you very much.

Thank you, Nick. First of all the loan loss provision in the releases and you asked me for a forward-looking statement and I always say in the disclaimer that any forward-looking statement is useless because we are not allowed to give those sort of things, but nevertheless if you talk about the market and everything that is going on, why do we have net releases. First of all traditionally we have a relatively conservative provisioning policy, that is one.

Second, we all have work-out departments where you try to recuperate provisions for loan losses as good as we can. Third, there are a lot of those companies who are in U.S. terms for example in Chapter 11 where they can get out of that or where they get into difficult situations, circumstances and given the relatively good performance of most of the companies. So if they get back into profitability they accumulate liquidity and they are able to repay their provisioned loans.

Generally speaking the credit environment is still relatively benign. Liquidity is high in the corporate sector so the -- for example Belgium -- traditionally in Belgium it doesn't deviate that much from the rest of the world. Traditionally we have the difference between net and gross, loan loss provision is about 20, 22 basis points. So if you have low gross provisions and very low gross provisions because of the benign credit risk environment then you have net releases. That is because the releases are not that much dependent on the credit environment -- it is a workout and that is your conservative provisioning before. Do expect that to continue. As I said the difference between gross and net loan loss provision is remarkably stable so if you expect a gradual return to more normalized levels then you will still see releases but not from a net basis. Basically the explanation, the additions to loan loss provisions nuance are relatively so low that you see net releases.

In that case can I just interrupt and just ask also in retrospect looking historically, because you don't give us the split between the releases and the new provisions, is it correct to say that the releases are reasonably constant then, there is no sharp increase in releases in 2005?

If I say a start in 2002, 3,4,5 relatively speaking it is quite stable. Yes, on average as I say but do just the top of my heart, talk about Belgium 22 basis, overall it is probably 25 basis points releases and the variation around that is relatively low 21, 31, 23, 29 so that is 25 on average over the last four years and I call that stable. Yes, so that is true.

Then ING Direct you want to grow in deposits given the flat yield curve, this is a trade-off. We have to make choices here and we do so far. On the one hand you could argue that in the flat yield curve environment of today it could be smart, it could look smart to slow down the marketing costs and to slow down the net inflow of clients and indeed that is a way to do it. There is another way of looking at it and that it is fairly difficult for the competition to step into this market given the flat yield curve. Very different from ING Direct; you already a large client base not only in the Americas but also in other parts of the world which gives you a diversification so we can afford to make a little bit less profit than others who will step in today. And if they step in only in the U.S. or only in local competition. That could be an argument. Not to slow down the inflow of clients but to continue, in order to continue to build up your client base and accept a little bit lower profit. We are managing this very carefully.

In the fourth quarter we have not slowed down the number of clients, we did not decide to do so. So the number of clients in the fourth quarter in the United States was the same in ING Direct as it was in the third quarter. And roughly speaking was as well in the second order. It is a trade-off that we carefully look at but so far we feel that given the profit level overall in ING Direct -- and of course also in ING -- let's be very clear on that. ING is relatively speaking so profitable that we can afford not to get nervous from a flat yield -- temporary by definition -- temporary flat yield curve. In fact two of our important countries being the U.S. and the United Kingdom today in ING Direct.

The U.S. 7% -- what was the question?

Yes, my question was ING Direct is now 7% group pretax profit. Would you want to cap ING Direct at some level because of the interest rate risks that might be there? Perhaps you wouldn't agree with that. Would you be happy to see it become any amount of the group profit?

No, we don't look at that partially, so to speak, we look at the risk profile of ING Direct as a whole. We have developed by the way, so-called risk dashboard, which gives the earnings at risk and the capital at risk and the special events for ING Group as a whole. looking at credit risk, market risk, insurance risk, operational risk and the parameters are of course a shock in the interest rate, a shock in the equity market, shock in real estate prices, shock on the credit market, shock in catastrophe on the insurance risk and so on. And there we have defined a risk appetite and that is the overall event that could take place but that is what we take into account. And that is how we define whether we want to grow further in the business or not, whether we want to focus on more on diversification or correlation or concentration. So it is too simple to say it is now 7% of profits of ING Direct and that is about it because we're sensitive to interest rates. Interest rates and yield curves are not flat everywhere; they are flat in the United States, they are flat in the UK. They're not going up everywhere. They have gone up over a period of two years roughly speaking by and large in the United States. They have not gone up in the euro zone other than very recently by about 25 basis points so that is an element of diversification that we take into account. We do not look only at interest rate risk, we look at the overall risk profile of ING Group. It is too simple to say it is 7% now, this is it.

Thank you very much. Thanks.

Nick Byrne.

Nick Byrne, of JPMorgan. I just have one quick question. On the call this morning the CEO was talking about the value that can be unlocked in the real estate portfolio. I just wondered if you could remind us of the size of the portfolio and the current yield on the portfolio in terms of a rental yield perhaps? And how that breaks down broadly between commercial and retail.

Then as a follow-up on that I just wonder if you can remind me under IFRS how frequently you need to actually revalue the real estate portfolio? Thanks.

The last one is the easiest one. No doubt there are others listening to this conference call so we have to value the real estate portfolio on a quarterly basis. Every quarter we have to value the total portfolio and the valuation is going through the P&L. In practice that means that we do three months, the first three quarters on the basis of internal rating, ratings evaluations. And we are constantly improving this internal valuation process and at year-end we do the last quarter plus the full year on the basis of external rating. In the past it was very different; we had to value the portfolio 20% of the portfolio per year, but now under IFRS we have to do it on a quarterly basis which we have done over the past year.

The first question is more complicated in the sense of I know of course what the overall size of the portfolio is. The size of the portfolio at year-end was 70 billion. That includes finance, real estate finance of about 20 billion so that means that our investment portfolio is about 47 and our development portfolio is about 2.5. We have -- so that is about it.

On the geographic spread of the 70 billion we have about 21 in the Netherlands, 16 in other Europe; and other Europe you should read that as the United Kingdom, Spain, Portugal -- those are the concentration, a little bit now in Sweden with the acquisition of our Coop deal. Americas, 26, Asia 1.3 and Australia 4.5. So that is the geographic spread. On the [uve] I must say I don't have the numbers here with me, but let me not guess what the yield is. Let me not do that. I can give that to you later on.

Kimon Kalamboussis.

Kimon Kalamboussis, at HSBC. Two question if I may. First, on diversification and risk, you mention the risk dashboard. When will this be available to analysts, please? And how do you think diversification may impact the capital position of the group? I think another insurance competitor points to a 15% diversification benefit.

The second question also on capital, I would like to understand why a share buyback is not under consideration given the record profit of the group, please? Thanks.

Okay. Thank you. First of all the risk dashboard when will we disclose this. Not in 2006 certainly not, and I don't expect in the beginning of 2007, probably later. Why? We have this risk dashboard now available for three quarters internally for ourselves, discussed in the board. Very valuable but the figures -- the model is of course not 100% stable and I have always said for years and years now that we only disclose things if I have a series. And a series is at least two, so I need at least two years experience with a new model and a new days before we disclose them. In fact before we really know ourselves what the background of all of these things are. But it is a serious tool, very valuable, we discussed it with our supervisory board already so it is a very serious tool. On top of that the timing doesn't run at this moment not completely parallel with the normal figures so I don't still have the fourth-quarter risk dashboard available; it comes in a month or so. And so we have to speed it up first in order to make it fully usable. We will certainly disclose it and gradually we will inform you roughly what type of analysis we make out of that. But it will take some time before we fully disclose it.

Diversification, it is an interesting question. You referred to the 15%. We take it now on the basis of conservative approach and on the basis of regulators and rating agencies feel acceptable that diversification between bank and group on that level of about 10% is acceptable. But again on that level, you have elements and components in the calculation of risk which by far more than 10% of course. It goes up sometimes to 90 or to 100 sometimes on different elements and components. But on the diversification on the top-level between bank and insurance (inaudible) holding, we consider that is 10%. That is why we want to limit our debt-to-equity ratio to that same in the group, to that same 10%. This is recognized also by our rating agencies by Standard & Poor's and Moody's in order to maintain AA rated company we have agreed that we would limit this implied diversification effect to 10%. And therefore that equity ratio -- that is also the reason that the rating of our group is the same as the rating of our subs, of course is the lowest one of the two. So the lowest one of the rating is -AA in the insurance company and the rating in the holding is also -AA. Again given the fact that the limit, the debt equity ratio to assume the diversification of 10. I agree by the way that it could easily be more. We still calculating and modeling and so on and so forth, but I agree that 10% is on the moderate conservative side.

Then capital, why no share buyback given the capitalization and the profit level of ING? Let me put it this way. We feel that we are adequately capitalized and not overly capitalized. On the bank side we have a tier 1 ratio of 7.2. This looks on the low side if you compare it to our peers. It is not, we are at full AA rated bank so we have the recognition of the fact that the 7.2 is a true reflection of the risk in our balance sheet. We don't feel that we have any room to maneuver there to lower our tier 1 ratio to a lower level and therefore not of any share buyback. The capitalization of the insurance company 259%, we make calculations now of economic capital. Economic capital, the available financial resources should be a little bit higher at least than the economic capital. It is and there is not much room -- there is not enough room there so the difference is not that big that it allows us to go for capital share buyback on top of that. So that is the first part of the answer. The second part of the answer is that we have growth in ING so we have ING Direct. The organic growth we have ING Direct; we have life insurance business in the emerging markets. We have our retirement services business. That growth requires capital. If you combine our dividend policy as we have disclosed that with the growth that we have in ING looking forward, then there is no room for, then we are able to finance the growth and the dividend buyback but we don't have excess capital on top of that to do a share buyback program. We told you that last year and that is the same for this year and if we look at our medium-term planning process, that is the same for the years to come as we see it today.

Thank you very much.

Duncan Russell.

Duncan Russell, Fox-Pitt, Kelton. Could you please just split out the nonrecurring items for fourth-quarter in a bit more detail? So for example the IFRS impact in the fourth quarter could you split that between the bank and the insurance and geographically? Also the release of the disability provision, where did that come within the business? Can you just give a more detailed breakdown on the nonrecurring items, please? Thanks.

Yes, I can. Gains on -- I followed the same order as we have in the presentation on page 19 I think. No, 17.

No, not the divestment gains, the IFRS related items and the disability provision. Where do they come?

Then I go to 19 sorry. Realized gains on bonds which was -- I have a different presentation here. It is -11 in 2005, and it was 55 for the year as a whole. In the insurance side it was -11. The prepayment of penalties is -14. The interest on the preferred shares was I assume I don't have it here but I assume it was zero -- no, it was -27 on the bank side. This is too complicated because I have it much more specified here and it is more consolidated in the booklet on 19. I can give you tomorrow we have a moment, and I can give it to you on the Website also, so for those of you who are interested I can give you that answer tomorrow in our analyst presentation, and have clustered it the say way as it is clustered here.

That is fine. Thank you.

[Steve Considine.]

Steve Considine, DrKW. Two questions, please. First question on provisioning, slide 62 of the additional information shows that the provisions to total loans ratio has fallen from 100 basis points at the start of the year to 73 basis points at the end of the year. I was wondering if you could just comment on how comfortable you are potentially moving into the downswing of the credit cycle, given balance sheet provisioning coverages obviously a lot less than what it was at the start of the year?

Secondly if you could clarify your position on inorganic growth given potential consolidation in the European financial sector. Thanks.

First on the total for visioning are we comparable? The answer is yes. The level of provisioning is lower than it used to be. That is a reflection of two things. First of all, of the change in methodology. We have to apply IFRS now and IFRS gives a more strict rule of determining what the loan loss provision should be for about two-thirds of the loan loss provisioning. The methodology is roughly the same; that is the loan loss provision on specific large loans of significant loans and basically -- here there is a small difference but basically that is the same. We do it the same way as we did it before and therefore there is no level of discomfort because we do as conservative, as good as we did in the past.

Then for one-third it is the loan loss provisioning on the individual but smaller companies loans, say the retail portfolio in the small to medium-sized enterprises, there we basically do it on an expected loss basis. And on the clustering of the portfolio effectively that is a little bit differently than we did it in the past but effectively it leads to the same outcome. Then we have the third component is the IBNR -- the incurred but not reported, that is now very different methodology. In the past we had a dynamic overall general provision for that and now that component is a little bit more volatile because it depends on for example if you see your consumer loan loss is going up in certain types of portfolios then you have to assume that you have more of those types of loans in your portfolio and that you have to increase your IBNR. That component is a little bit more volatile than the previous one but that only applies to say 15% of your total loan loss provisioning.

So of the overall loan loss provisioning we are about the same as we were before IFRS and we feel comfortable. That it is lower than in the past that is just the reason that we have -- first of all we live in a more benign credit environment but here is your point, but what if it deteriorates. Second, we have an improved quality of the portfolio that applies to our mortgage portfolio, that applies to our wholesale portfolio and to the consumer loan portfolio. We have done both steps for example to improve the portfolio in Poland and in the Netherlands, etc. So I feel comfortable with this level of provisioning.

Your second question what about your organic growth versus consolidation that might take place in Europe? Well, this is a good point. We have said that we are not in like we did last year by the way and like I said before for any large acquisitions. Why not? We don't need it, that is the first argument. We are one of the very few financial institutions that have strong organic growth components in our business and again I repeat ING Direct, our life insurance business in the emerging markets and our retirement pension businesses also in mature markets in the United States and in our home country and Central and Eastern Europe. Therefore we feel that we can grow organically and that it is not necessary to pay a lot of goodwill if you do large acquisitions. Or as we always say we prefer to create our own goodwill instead of paying for goodwill and with the growth that we do in ING Direct in the life business and in the retirement services, we are creating goodwill. And if you buy yourself into those markets then you have to pay for goodwill. Look at the BCRs in Romania and the guarantee banks in Turkey I wish the buyers good luck, it is fine, but they have to pay a lot of goodwill for that. That is what we have always said. Of course that doesn't mean that if the real consolidation starts to take place in Europe that we don't want to play a role in there. Of course but so far it is still on a very moderate level. We see a few cross-border acquisitions and we feel that there is no urgent necessity for us to participate in this rat race of buying and high prices in order to show growth in your business. Thank you.

That is great, thanks.

Pierre-Marie Gerez.

Pierre-Marie Gerez, Exane BNP Paribas. Two questions. First one, to come back on this idea of creating goodwill rather than buying goodwill, you flooded the ING Canada and you also increased the element ING Bank France being flooded on the Polish market and the share price percentage of these two units has been (indiscernible) quite great creating a lot of goodwill. So is there any parallel to make on ING Group of the world to create more goodwill so as maybe to have let's say better share price, to participate to any consolidation movement in Europe as you mention it?

Second question, it is about the Dutch business. You (indiscernible) goodwill on the retail side so can you maybe come back on this (indiscernible) and give us some more focused -- I know that you don't like this word but focus for 2006, is there still room for improvement in 2006 on your retail business? Thank you.

First of all how to create goodwill, let me say this. There is no evidence that IPOing businesses creates goodwill in itself. There is no evidence for that. For company as a whole, sometimes it is of value for the company that has to been IPO'd. Take Canada, yes, the stock price went up sharply but you could also argue that the embedded value was already in that business. That they have positioned themselves to benefit from this environment today in Canada. We are better positioned than the rest. If you look at the claims ratio it is still favorable but the claims ratio of our ING Canadian (indiscernible) life business is substantially better than that of our peers. It has nothing to do with the IPO. This is just the business that we are in and this is just a competitive edge of our Canadian operation.

IPO in itself does not create the goodwill, ask any investment banker and they will sometimes hesitantly but they try to sell you a product, but they will admit that IPOing as such is not creating goodwill. By the way [Slaski] we did not bought back our share to 75% voluntarily, we were forced by the regulator to bring it back to 75%. Otherwise we would certainly not have done it. Our preference would have been to increase it to 100% but it was not allowed.

The Dutch businesses, the retail banking business I assume that you referred to that. Yes, it was strong performance in the retail banking business mainly because of stricter efficiency measures or cost control but certainly also because of topline growth. The mortgage market was very good, the savings market was very good, higher efficiency there. The [Bose] bank now has the highest, the bank with the most users of Internet banking. We have more than 2 million active Internet bank users in the Bose bank so out of 7.5 million clients, 2 million use the payment services Internet only. And that helps of course in the cost base of that bank. Is there room for improvement? Yes, the use of Internet is still going up. The mortgage market in the Netherlands is still increasing. We gained market share last year and over the last two years, we have a market share (indiscernible) about 10% of mortgages up from below 5 a couple of years ago. There is still room for improvement in the retail markets.

In the other part of the home market Belgium, we saw strong improvement also in the profitability of the retail bank largely also because of the topline growth in particular of the savings products. Not only simply did the bond (indiscernible) but also structured Notes which are very popular today in the Belgian market and there is also ample opportunities for further growth.

Thank you.

To come back on the question of Duncan Russell, I have the distribution here of the IFRS impact between bank and insurance. For IFRS impact and maybe it is better to give it now than for those of you who want to hear it let me first give the insurance side, the realized capital gains on bonds was -11 in the fourth-quarter. The fair value changes of the derivatives and investments was plus 68 in the fourth quarter. Prepayment of penalties was -14 in the fourth quarter and other was 68. So a total pretax of 111, a tax of 29 in the fourth quarter and a total net of 82. If I go again along the lines -11, plus 68, -14 and then nothing of course 68 for other, leading to total pretax profit of 111, tax 29, total net 82.

And the bank Q4 -12, realized capital gains on bonds, a value change derivatives interest 41 in Q4, prepayment penalties 35 in Q4, interest in preference shares -27, other is zero, total pretax 37 in Q4, tax 19, [minority] interest -27 for a total net 45. Reading along the numbers again -12, plus 41, plus 35, -27, then zero, total pretax 37, tax 19, third party interest -27, total net 45. That is what it is. Thank you.

Nick Holmes.

Nick Holmes, Lehman. Hi, I just wanted to ask Tom a question in case he is feeling lonely. In U.S. life the component margin fell to 144 bips in Q4; how much of a problem do you think the inverted yield curve will pose this year in preserving this margin? Can you tell us a bit about the competitive environment as regards crediting rates? You think crediting rates could be lowered to absorb lower yields? Thank you.

I was feeling a little lonely not getting any questions but that is okay. On the drop in the margin in the fourth quarter to 44, keep in mind that some of that was a fall in prepayment income. In the third quarter the prepayment income helped the earn rate by 18 basis points, in the fourth quarter it was plus 13 basis points so 5 of the 10 basis point reduction in the earn rate was for that, the rest I think is the 5 basis points is the normal roll of how as bonds roll over. On the crediting rate side you are seeing a modest -- if you look at the page in the statistical supplement -- a modest reduction in the fourth quarter on crediting rates. So the result was the 144 that you mentioned.

Looking at where we are my sense would be that with the long end of the market starting to move up we will clearly likely if that continues, I don't think there will be a lot of room competitively to continue to reduce crediting rates. We obviously look at that each quarter and make decisions so my guess is if in fact you have a rising interest rate environment in '06 I think from a competitive perspective you won't see any of the players probably reducing their crediting rates significantly from where they are. Now of course if interest rates change that could be different but that is something that we look at each quarter and make decisions based on a lot of factors including the overall level of interest rates.

Okay, thank you very much.

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 and no second thoughts, no? Well, then I would like to conclude this conference call. I would like to thank you very much for your attendance and your active participation and I hope to see you next time also on behalf of Tom and his team in the United States. Thank you very much.

Ladies and gentlemen, this concludes the ING Group full year results 2005. Thank you for your participation. You may now disconnect.