ING Groep NV (ING) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ING Groen second quarter results 2006 conference call on the tenth of August 2006. To start today's presentation, all participants will be in the listen-only mode. After the presentation there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to [Jenna Bechs]. Please go ahead, madam.

Good afternoon, this is Jenna Bechs on behalf of ING Groep welcoming you to ING's second quarter results 2006 conference call. Before handing this over to Cees Maas, Vice Chairman of the Executive Board and CFO of ING Groep, and Tom McInerney, member of the Executive Board responsible for Insurance Americas, 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, Jenna. Good morning, good afternoon, good evening, probably, wherever you are in the world, and also on behalf of Tom McInerney and also behalf of John Hill, Deputy CFO, who is present here, and Jonathan Atack, in charge of Industrial Relations. They are all likely very familiar to you. Let me give you a very brief instruction, and then of course we will open for questions and answers from our side.

As you have seen, ING had a very strong second quarter. Our results confirmed positive trends we've seen over recent quarters and provided as evidence that our focus on growth, execution, and value creation has paid off. We have rebased earnings. We've done that through a combination of strong growth and proved endurance. As you've seen, underlying profit, net profit, after tax went up by 39% to a new record 2.2 billion, 23 billion in one quarter. Net profit went up 30% to 2,014 million. First half underlying net profit went up 33% to EUR4 billion, and that is almost as much as we earned after tax in the full year 2003. So only three years before. Our three key growth engines continued strong performance, and GRX profit was up 54% to EUR296 million. The profit in our insurance Asian Pacific was up 40%, 257 million, excluding the loss we made in Taiwan in 2005 second quarter. Our retirement services annuities business boosted the U.S. value of the new business to an increase of 37%.

As you know, we focus on value creation and pricing discipline, and that has led to a healthy returns. Increased attention to product pricing reflects risks and guarantees. On the bank side, more sophisticated risk management in preparation for [Basil] 2. On the insurance side, moving towards market consistent pricing. And this higher focus on risk management has led to an even small release overall in our lowermost provisions. And so far we do not see any deterioration in our credit risk environment.

We have allocated more capital to the business with growth potentials and with high returns. Return figures increased very well. From the banking increased to almost 22% from almost 19% in the first half of the year. Internal rate of return of the new life business rose to almost 14%, 30.9, from a little bit over 12.5% in the first year, and the value of the new business went up by 19% in the second quarter.

Focus on execution leads us to improved efficiency. Our expenses are under control. Cost income ratio at the bank improved from 67.1% to 62.3%, which is also compared to what appears a very strong decrease. Looking forward, ING is well positioned to capture growth opportunities going forward, and we are confident in our ability to continue to create value for our shareholders. Interest margins are expected to remain under pressure at our banking operations. However, our life insurance and wealth benefits business generally benefit from a number of increases in interest rates. Economic fundamentals remain sound, and we see no sign, as I said, of deterioration in our credit portfolio, so the risk costs are expected to remain well below historical levels in the second half of this year. Nevertheless, we will maintain our focus on efficiency and improving the execution of the business fundamentals by continuing our efforts to strengthen compliance and controls.

And having said that, the floor is open to you. Thank you.

Thank you. Ladies and gentlemen, at this time we will question-and answer session. [Operator Instructions]. The first question comes from the line of Mr. Matthew Pickering. [Operator Instructions].

It's Matt Pickering from Institutional Capital. A case in time, thank you very much for hosting this call for U.S. investors. And a couple of just random questions which I hope to try to group logically. I guess most important in my mind gets to the expense investment done in the U.S. life business. The presentation and the press materials speak to investment behind distribution and customer servicing, but in light of kind of the market trends we're seeing, I was hoping that Tom might be able to elaborate a bit more about what kind of payback ING, America's expense on that investment, because it was rather significant on a quarter-over-quarter basis.

Secondly, I was hoping to talk in the European insurance business, the non-life division continues to show excellent sustainability of technical profits during 2006, and I wanted to just ask Cees if he had any guidance in terms of if there was anything exceptional driving that, or whether that just reflected the current benign pricing situation, which seems rather unique. I know like, for example, and Germany, obviously, new business pricing is getting a little bit more competitive.

And then finally, at least for this first round, and maybe if I can get back in later, but on the banking side, Cees, you had commented that you expected that interest margins to remain at the low levels. From the release, you indicate under your calculations that interest margin at about 100 basis points, which is down 12 bips quarter-on-quarter. That's a huge quarter-on-quarter move. And while you seem to have managed it quite well, I was hoping that you could kind of break that down between wholesale and retail and by any kind of product color you can elaborate on. Thank you.

Thank you, Matt. Tom, will you take the first one?

Yes, the first one on expenses. I would say first of all, Matt, that the expenses aren't routable for a quarter because they're variable depending on what we're doing on strategic spend. We've done quite a bit of spend on our IT investments and systems, our life and retirement businesses, also continuing to build the brand. We did in our business launch, particularly retirement services, annuity, invest to expand distribution in the customer service that goes with that. So those are the areas I would say generally we would think for the year that we would be generally in line with our expectations for expenses. So they were up in the second quarter for a number of those reasons, and it's certainly something we will focus on going forward.

So Tom, when I look at the $42 million year-over-year increase in dollars, in your supplement for operating expenses, is that roughly half and half non-comp/comp? Or is it least one of these things where you're just trying to continue to solidify your market share in retirement services, and so these are wholesalers and salespeople who, while they have a certain base salary, the majority of their compensation expense will be success-driven?

That's right. I think it varies. It's both the distribution, and so we would certainly expect to continue with the sales as well as the support that goes there. And I would also point out that, if you look at 2005, the expenses varied by quarter, so with the second quarter being the lowest quarter, and I think that's because we did do some additional brand and advertising spend in the first and second quarter. That won't be repeated every quarter.

Okay. Tom, thank you.

Okay, then let me start with the question on banking. Yes, it's quite a drop, but we have one technical adjustment to make. We have a weak classification of 66 million due to IRS refinements from interest results to trading. So that shows up in the trading results. Now I have this morning a question of why is the trading results so high in the second quarter, it's almost 400, and that's pretty high, I guess, but it's for 66 million. We shuffle from interest result to trading result. But as a consequence, trading result is not. We would correct for that for the reclassification, not only for this quarter but also, say, in the first quarter. Then the comparable interest rate margin goes down from 109 basis points to 103 basis points. That's a drop of six. It's still a lot, but it's not the 12 that you mentioned by Tom.

Why the interest margin in the Netherlands dropped? Because of the margin pressure in mortgages. The production of mortgage was good, profits in mortgage was good, but it was the margin pressure, current accounts, all high-yield assets rolling off, so that gives some pressure on the margin. That might vanish gradually, of course. And furthermore, we had an unfavorable impact of flattening of the yield curve. European rates, short-term rates went up, and long-term rates a little, but the yield sort of flattened.

On the wholesale side, there was still a hugely credit in the market, so a low credit spread as you can see, or formulated differently as it did, I think, last quarter also. It was a highly clarity in the market. There is a low demand for credit, and it means that also banks are all chasing for the same credit, and of course that means pressure on margins.

And of course, a very important one, ING Direct is relatively growing, and ING Direct has a margin of their own, 90 basis points, coming down also from 93 to 90. But apart from the decrease out there, it is in a lower margin than the rest of the bank. It's in the relative portion as those business liabilities are growing in the bank, you see an overall increase in the margin. Will that continue? Well, at least I don't expect an improvement in the margin for the second half of the year going forward.

The good news is that it looks, that in the Americas, the shorter margin increases have come to a halt. That is less clear for the European, for the Euro area, so there is some uncertainty out there, but certainly there will be pressure and continued pressure all over our banking margin because of the growth of ING Direct. As such, it is a technical issue, and we don't care. We are happy with the development of ING Direct, but the margin is below the limitation basis points in the business model. But on the plus side, they're below the 60 basis points in the cost base. So the fact that ING Direct is growing faster than the rest of the bank is not of concern. On the contrary, we are happy with that, that leads to a technical decrease in the interest margin is again. It's more arithmetics than something else. So that's the interest margin.

Then your question on the non-life business. the Yes, we had good results in the non-life business in the [inaudible], for example, and in particular in loss of income. So disability insurance in quarter, in fire, all lower claims ratios, predominantly, of course due to favorable results from previous underwriting years. We also had favorable claims in health and motor in Belgium, and we had a little bit higher results here in fire and miscellaneous. But also lower claims ratios. Is that going to, the competition has no impact on the principal lower claims ratios, and that only depends on the [inaudible] that you're underwriting, so I don't, there's no reason to assume that such is due to competition pressure. That will disappear in the course of the remaining part of the year, but actually, as we all know, non-life generally speaking is a highly competitive business, and there will certainly be some pressure on pricing. But again, normally that takes place at the beginning of the new year, so I don't expect major changes there. There are always unforeseen circumstances, and the weather, and all those sort of things and big accidents, that's all.

Thank you.

The next question comes from the line of Mr. [Mark Cathcart]. [Operator Instructions].

I'm Cathcart from Deutsche Bank. I think you've got about 2 billion of excess capital. I think it's somewhere around those levels. I just wondered, how long are you happy to sit on that level of excess capital, and if the IG shopping trolley is still well at home?

Second question, isn't ING Direct causing us a bit of a tail from momentum from Q2 vs. Q1 in terms of inflows and also the number of customers? I wondered if you'd comment on that.

And third, I just wondered if you could give us snippets of what the growth profile is in the States on a going-forward basis? Obviously, we're seeing some delightful numbers coming through from the pension business, but I just wondered more generally, what are the growth dynamics of that business moving forward from today? Thank you.

As usual, challenging questions. On the 2 billion excess capital, let me first of all say that provided that is right which you say, then I prefer to have 2 billion excess capital than a shortage of 2 billion of capital, so I have to explain something which is not that bad. Provided it is right, let me first of all say that I don't know how you calculated the excess capital. I don't see--sorry?

It was a comment that was made at the Q1 conference. It's a number that the company actually gave themselves.

Well, then let me redo that calculation. The way we calculate it is the difference between economic capital and available financial resources. That's how it is. We have said, roughly speaking, that on the insurance side, we have roughly 12 billion excess of capital, no more than that, which is in the safe buffer. You need to have some excess capital. You don't say you're going to sit on it, like you sit on your hands, and you need that buffer for model uncertainties. Model fluctuations.

Again, it would be bad if we would have a shortage there of capital, because then you're sure that you'd use your available financial resources more risky than your assumed AA rating profile. On the banking side, it's a little bit more difficult to calculate, but we expect that the service will be the same, to maybe a little bit higher quality of service. I have announced, well I thought of it this morning, but I think I just said the same last time, that we are moving to more framework [inaudible] toward a minute and calibrated model of calculating our economic capital. On the Basil 2 it's required to have high data quality, which we have. But most of all, the assets and liabilities, we have no portfolio. We have data that comply with Basil 2, but we don't have them, and then you have to use market data, so we're going to have to do what is called KMV, or MK&V data. MK&V is a company that provides worldwide market data. If we apply them, that will lead to an increase in economic capital, we don't know yet, I mentioned. I may have mentioned that before as well. An amount of probably 4 billion or 5 billion on economic capital. There was some question this morning, where will we get that capital from? To be honest, that's not necessary for us to hold economic capital, only it just makes no cash, it's just a calculation. But you can read from all the documents that we have that our economic capital under the present calculation is about 16 billion, and our capital is about 20 billion. So we have an excess, on the basis of the old data, of about 5 billion. On the basis of the new data, we expect that the economic capital will come closer to, and probably a billion lower than our equities and our available financial resources. So that is the reason that we say that we roughly have 1 billion to 2.5 billion in excess capital, which we need. This is a fair buffer that you need in the calculation of your economic capital.

Let me add that another, let me phrase it in another way. We have in Tier I capital of around 7.3, 7.32, to be precise, and we are an approved AA rated company. Two weeks ago we were upgraded by Fitch from AA- to full AA rating. There aren't that many full AA rated banks in the world, but from all the AA rated banks, I am sure, I think, I'm going to check it all, but I think we are the lowest, we have the lowest Tier I ratio of all. Nevertheless, we are, we have been upgraded recently, and we have a stable level. The reason is, indeed, that we have a buffer of about 1 billion to 1.5 billion between the economic capital and between the available financial resources. And that means that we are using our capital just the way we have formulated we want to be an AA rated company. But you need a small buffer. So this buffer is not something that we can reduce or that we can give back to the shell, because that was basically, I think, the upshot of your question.

Then [inaudible]. Did it reduce momentum in the second quarter? No, I don't think so. We had an outflow of friends who trusted, particularly in Spain. Explain that, there was a market scandal in Spain. There were two mutual funds and the companies who started to invest in old stamps, 5.5 billion, friends had trusted to the mutual funds, and they made it sort of a pyramid scheme, so it paid out high returns which they promised in 10% to 15% on these stamps. But if you put it in a pyramid scheme, you end up with nothing, of course. So it collapsed at a certain moment in time, a decade, and that gave them, the most confident people in Spain lost confidence in what they thought loan bank regulated entities. And since we market ourselves around the world, by the way, as ING Direct, we're always ING Direct Bank, wrongly showed they also thought that ING Direct would be one of those entities. Not regulated. Through marketing and information and communication, we were able to redress that. Nevertheless, we lost in the second quarter EUR1.5 billion in our Spanish ING Direct operations of about the global, I think, 13 billion, or it must have been 14.5 billion or 13.

The good news is that in the meantime, as we speak, we regained about 600 million, so about 400 million in July, and up until today, about another 150 million to 200 million increase in funds entrusted. So that market perception, the loan marker perception, and it's been [inaudible] over.

In also, loss of money, but very little. But that's okay. On balance we did in the United States and Australia. That was due to the ending of some special actions that we did. They stopped it in second quarter, it ended. And to be honest, the reason for that is that there is increased competition between the United States and Citibank and a little bit HSPC, who were starting to compete with us. That's why we launched in the first quarter the special promotional actions. But what we did to compensate for that, we focused in the second quarter more on the production of new mortgages. Less marketing costs are involved there, and we were able to catch up. You know our total target is to have a 40% to [inaudible] of total funds invested of savings money, which in itself originated mortgages. We are now at 30%, but it was a good time to focus more in this quarter on the increase of the mortgages. For the rest of them, the number of clients, like in the United Kingdom, it was all, the growth was good and healthy, and I would certainly not repeat what you say that ING Direct is losing units. Thank you.

Special was on the growth on the [inaudible]. Generally, I think the view of the industry and the market is that the retirement services, annuity asset management type business lines can grow in the 10% to 15% range over time. I would say for us and our competitors, you will find quarter to quarter that that's lumpy, because there are some quarters where you have some mid or large sale that you do. In fact, in our second quarter, we did have two large sales that we were very pleased with, so that will have some impact. On the life side, I think the life insurance industry overall, the traditional life insurance, businesses are growing more in the GDP type growth rate. We have, of course, in the second quarter, did not have a good sales quarter for individual life.

We have been challenged because of the AG-38, which some of you may not be aware, is the reserve requirements in the U.S. That has had a significant impact on product pricing, so we've been conservative on how to react to that. We do have some new products, universal life products, coming out in the second half of the year. In addition, we did launch a term strategy at the end of last year and into this year that's gotten off to a little bit of a slow start, but we're now in with some of the major banks in terms of programs, so we'd expect that to ramp up over time. If you look at applications on a monthly basis, each month this year we've started to see a trend. That will take some time to get some real sales momentum out of them.

Okay, thank you.

The next question comes from the line of Mr. Nick Holmes. [Operator Instructions].

Hi, it's Nick Holmes from Lehman. I've got three questions, please. The first one is on the bank, the loan loss releases in wholesale banking, which is still very large in Q2. And I wondered, could you update us on this area and your expectations going forward? Second question is, can you update us on what's happened in Korea, where the new business value fell really quite sharply in Q2? And then the third and final question is with the recent credits rating downgrade of Scottish Ree, how are you managing your credit exposure to this entity? Thanks very much.

Thank you. The first, the loan loss releases in the wholesale business. Yes, the loan losses, well first of all, the loan losses are low, as you know. The releases were in the wholesale banking in the second half--let me check this. In the second quarter, were 66 million, and they were 63 million in the first quarter. The high releases were healthy. That means we have a healthy portfolio, that we have provisioned adequately, and before I rest, I would say conservatively, we will not allow any more high risk. This releases come from the pre-high risk period, of course, although in the significant individual provisioning, there is not much of a change in high risk compared to what before.

If I look at the distribution of all those, the difference is not that big. The Netherlands wholesale was about half of those releases, and last year it ended the first quarter at about 25%. Belgium roughly the same. Germany had a higher release in the first quarter, about 20 million, down at about three to date, this is all by a new portfolio, and it depends of course sometimes on the company, and then you go to smaller amounts in the rest of the world. So that includes the Roman office, the New York office, Sao Paulo office, and all others are the same first quarter, minus 39, and in the second quarter, minus 25.

But there were hardly any additions. These portfolios was a stable addition because you always, you don't have these large contracts. So this shows a relatively stable release going forward. It's, of course, I didn't like this, this can't continue. Release is always a little bit difficult to predict overall. As I remember correctly, retail plus wholesale but before the high-risk period we had a net release of about 25 or 26 basis points. Rather stable, not of course, for year of releases. And we have very little additions, yes, then it shows up. This is roughly how we deal with the wholesale releases.

But again, the inflow of wholesale provisions is very low. We don't see any big names here. And so that is one of the reasons that we said that we don't see any deterioration of the credit environment. Also in the retail portfolio, including the small and medium sized enterprises that we have in the Netherlands and in Belgium, we do not see deterioration of the credit quality. Contrary to what some of our peers are experiencing, apparently, we have been able to create a better quality portfolio than some of our peers. And that's the only thing I can say looking forward.

Again, can I--sorry, just add to that. Are you able in any way to sort of give us a feel as to whether there's an old book of loans that is likely to run off over the next, well, if you could give us an indication of the period which might lead to a reduction in these releases? Because, as you say yourself, they are not probably sustainable.

Certainly, it's difficult to say how the book will run off, because it mostly relates to the specific provisions and not--you have to see the significant specific provisions. And there's hardly a change in the IV&R, and in the insignificant provisions, but it is the insignificant ones. But that's always difficult because it depends on the work out, it depends sometimes--I won't mention names--but sometimes it depends on the companies who merge or companies who sell down, share the parts of their activities, and they get the proceeds of and use to refinance the company, and then there is no reason for us to have this provision anymore, so there's a release. So this release is not always controlled by ourselves. Sometimes it is, but sometimes it isn't.

Sometimes these companies are taken over by private equity firms and they are refinanced, and we are out of it. So this is very difficult to predict. I only can say that on the retail side, we expect no major changes. You know that on the retail side, you had this quarter, the retail bank profit line was 20 basis points along this provision, which was double what we had in the first quarter. The reason is that we had a sort of recalibration of our models to make it more clear. You have loans that are past due for a long period of time, say, five years, the provision level of that is, say, 90% to 95%, not 100% because there's always some recuperation. We decided in the retail bank to provision for 100% of this type of loans and that gave them a sort of a catch-up and a runoff increase in the retail portfolio, simply they could afford it. But it's the underlying level that remains the same of about ten days for the retail portfolio. That's the only thing I'd say on ING Direct. Also, we expect no deterioration compared to the present level. So that's all I can say and you'll have to do it with that. I'm very sorry.

Thank you.

But Korea, what happened? We experienced a squeeze in the new product pricing there, and the value of the business decreased by 14.7%. And it wasn't developed. The basis was under pressure there to shift to unit link products which contribute also by definition less value per annualized premium equivalent. Furthermore, it was negatively influenced by generally lower margins on the new business. After a repricing exercise that took effect of the first of April, following new local regulation effected the local regulated forces to reprice. This is a general phenomenon that you see that could, profits are so high that in a lot of countries they regulate and force you to reprice your products. And of course that affected the volume of the business.

What was the nature of the repricing? The regulator forced us to--required us, sorry about this, impolite. Required us to reprice using more mortality charges and acquisition expense loadings and that's basically the reason of our pressure in Korea.

Great. Thank you. And then the final question was just on Quarter 3.

And the status re will they reinsure that individual life business in 2004. That was through a reinsurance transaction, so ultimately ING is liable for those life liabilities. When we did the deal in 2004, we had questions about Scottish Ree Credit, so what we did is we structured the transaction with very strong, Red 114 trust and other trust. For those of you who don't know what a Red 114 trust, it's covered by New York statute as a very strong trust. And they are, at the Bank of New York and other places. So we think that structure is quite strong, and then their assets have been fully dedicated to those liabilities over time, so that the most significant issue is how will the liabilities perform over time? We monitor that on an ongoing basis, and the business is performing as expected. We'll be clearly going forward, we'll be focusing both on Scottish Ree as well as those liabilities. In addition, I think they are considering strategic alternatives, and certainly we would be supportive of that if that's the ultimate way that plays out. But basically, the deal was structured with very strong trust for all the assets to support the liabilities given that we had some questions about Scottish Ree's credit since they were rated A- at the time.

Okay. Thank you very much.

The next question comes from the line of Mr. Trevor Kelsey. [Operator Instructions].

Good afternoon. This is Trevor Kelsey from Avery and Ambrose. I'm interested to go back to some sort of [inaudible] rating, specifically the margin pressure issue raised in the third question. Stepping aside from the population margin itself. Just looking at the absolute numbers, I'm wondering whether there are any sort of moving bits which are missing? Because I have this [inaudible] answer. Taking off the 66 million in the second quarter of net interest results for the bank as a whole still leaves your quarter net interest income down 3.9%, in spite of a 2.0% increase in your risk-rated assets. So I guess my question is, having listened to the answer you've already given, are there any other moving parts that we're missing in that? That's the only question I have.

I have to make that calculation also, Trevor. I missed you, by the way, this morning on our analyst meeting. What were your other priorities today? If I do the same calculation as you do, then I come to the end of the first quarter of 1% decrease in the interest, total on the line interest result, from 2329 end of Q1 down to 2300 in Q2. Is that what you're doing?

That's very much a test. But I just wondered because you've got a 2.0% increase in your risk assets of the period, so in absolute profits, your net interest income is going down.

Yes, it's coming down. But that's partly also due to this is in open constant currency, so the growth in our operations in Canada and the U.S. is negatively contributed there, so I have to check what it would be in constant currency. I don't have it here. But if necessary, then you can get it.

Thank you.

[Operator Instructions]. The next question comes from the line of Mr. Mark Fell. [Operator Instructions].

Hi, good afternoon. It's Mark Fell here from UBS. Two questions. Firstly, regarding PNC insurance, can you give us a number of what the reserve release is that you had in the second quarter and maybe even for the half year? Then secondly, looking at your Slide 11, and the restructuring program where you talk about being on track, can you remind us how much of the restructuring costs you've already booked and how much is still to come, and how much of these annual savings have already appeared in your numbers? At the moment, I'm calculating roughly 240 million by just comparing the second quarter development with the prior year, I get to 60 million for the second quarter. And annualized, I get to 240 million. Maybe you can give us some guidance on that.

Okay, let me on the last slide on the savings. So far, 120 million of the expected restrictions in costs have been used. 109 million in 2005, 3 million in Q1, and 8 million in Q2. The cost savings of these initiatives are expected, as we said before, expected to kick in from 2007 almost and are exactly in 2007 and 2008. And the total annual savings are expected to be 464 and we expect roughly the, and to the bulk of which, we don't have a distribution yet on how much it will be in 2007. I think roughly the 464, roughly speaking, half of it will kick in in 2007. It's mainly the cost reduction measure [inaudible], although I must say we see already reduction in FTEs. The reduction in FTEs is now about 700 out of 1,000 by the end of Q2. That means that it gradually starts to kick in, but after of course we start to cost evolve, so we expect the full savings annually will kick in 2007. Half of it in 2007 and half of it in 2008. And 2008 is when mainly the outsourcing and the streamlining in our operations business end develops. On the PNC, this was the reserve for releases, it was 11 million in the second quarter and 4 million in the first quarter, the non-recurring releases [inaudible].

Okay. Thank you.

The next question comes from the line of Mr. Duncan Russell. [Operator Instructions].

Hello. Duncan Russell from Fox-Pitt Kelton. The first question is, getting back to ING Direct and the Spanish business. I was just wondering if you were a bit surprised by the extent of the drop in the deposits in Spain, which is 10.9% quarter on quarter. And I know you should know the scandal, or the description of that scandal relating to stamps. It doesn't seem obvious why people would automatically assume that ING Direct would be vulnerable, so can you just give a little bit more color on your reaction to that?

And the second question, then, is the, I think it's described as an accounting change in the Netherlands, relating to the guarantees on the, I think new bank policies. And is that the same as the 100 million charge you took in the first quarter, or is it a different product? And what prompted you to put in place this accounting change?

The third question, then, is in the holding company for the insurance division. There was a big swing during the year and it said it's related to derivatives and the equity portfolio. Again, it talks about how you keep equities in the corporate level for the insurance division and then you just downstream and sweep that return to the individual entities. And I was just wondering why you did that. Was it tax reasons or something?

And then, the follow-up question was in the U.S. there's quite a large amount in the variable annuity pack in the quarter, so could you just clarify that, please? Thank you.

Yes, thank you. First of all, the Spanish business. You wondered why it is possible that if you have a stamp fraud, how it affects ING Direct. First, to be honest, I don't know. I know two things. First of all is that these two companies, these two mutual fund companies, were very old companies. They existed already for 20 to 25 years, well regarded in their names. Only in the last one or two years, they started to do this, and therefore people were relatively mistrustful in these companies. And then, of course, the shock becomes big if they've had all of a sudden that trust is being damaged. That's one reason, that people were unbelieved that those reputable names were damaged so much, and they got the shock of the market.

The second reason is, it's difficult to say, but it's our impression, that some of these, that also ING Direct could probably, that the money was less, it was invested less secure than in traditional banks, was fueled by some in the market. I have to be careful, because it's only my impression, but if you ask me for an explanation, then it was a strong impression that this was one. We were fortunately backed by the Central Bank, because we made it clear that we are a full-fledged bank, a regulated entity, where the deposits are guaranteed [inaudible], and that was all confirmed also in the press by the Spanish Central Bank, which we're very happy with and we're happy to have a very good relationship with. And that's why we were able to restore confidence that we see and strong inflow now again.

We did lose clients, by the way, in Spain, but on the balance in the second quarter the number of clients was even up a little bit. We only lost a few of the--not a few, a lot--of course, on our billing, but in particular, the higher balances. In the particular ones, people noticed that we are part of the depository guarantee scheme, there was no reason to be ING averse. Certainly not below the level of the guarantees. So that's why.

There we no changes in the separate accounts. What we did--well, first of all, let me say it was a real accounting change, and it was discussed and approved by the auditors. We all agree that it better reflects the economics of the economic reality. It is perfectly allowed in the eye of regs and basically what it was, we treated the liabilities, asymmetrical compared to the assets. The liabilities were basically calculated on a discounted cash flow basis, so the future liabilities that we have, in particular when interest rates were, there's a flow, there's a guarantee in it for 4% on those accounts, so that was calculated where our liabilities were. And the essence was basically calculated month to month.

But, as that interest rate goes up, if it falls below four, then you have the guarantee, so the discount cash flow remains at four, and then if interest rate goes up, then you lose on the assets, market to market in the beginning, and your liability doesn't change. If it goes above four, then it makes it even worse, because then you pay out a normal interest rate, but you have a higher loss on the assets volume. In economic terms, you are now able to match your liabilities because your assets are repriced at year end at 4 point whatever, on and off as well. So instead of improvement in those accounts, we show a further deterioration in the accounts because of asymmetric treatment of assets and liabilities. That's what we changed, and we're now basically also calculating assets on a discounted cash flow and [inaudible] so we take the future higher earnings on the assets into account with the higher interest rate, and then the problem basically disappears.

We have done that, we have looked, we stated 2005, and we have restated it through equity, but it's a very small amount, it's a detail that's done nothing because the interest rate didn't change in that year that much. But it was basically we captured the first quarter, so we did as if the accounting change started on the first of January 2006, and so of the 154 million change. In fact, it is an overstatement of half of [inaudible] 72 and going forward, this is just in the numbers, so hat is the reason why we did it.

The holding company of our--no, you asked me about the 100 million in the first quarter. Yes, we reported management and [inaudible] in the first quarter, so yes. As far as the corporate line is concerned in insurance, we have decided, in order to decrease volatility in the insurance business, to hold the equities in the stock investments at the corporate line and to allocate 3% return to the insurance businesses to absorb the volatility there for in the corporate line. That's one, we do that just in order, but in particular when you, well, first of all since high risk makes equity, the holdings volatile. And therefore, it hit the wrong impression on the return of our insurance companies. And second, if there's a sale of the quality equities, forced or unforced for example, the [inaudible] was taken over we made quite a bit of realized capital gains of 100 million but we didn't disclose that. And that would make the result, for example, [inaudible], highly volatile, and would be real, would not be a good reflection of the results of the insurance company. So that's why we put it at the corporate line. So that's basically the reason. I agree, but that's a general remark, that the treatment of the relatives to the overlying assets that you hedge create volatility if you count hedge accounting, but that's the way of life. Normally, in Hungary last year capital gains and acquisition going through the capital balance sheet and you have hedged your position badly or at all, then the volatility of the derivatives is going to be around, and that's one of the consequences of live risk.

As a variable annuity, the derivatives backing the GMIVs has not changed because of the movement in interest rates has a negative market to market, but that gets largely offset by the GAAP SOP reserves. So it doesn't have a significant impact on the results. Obviously, there was some net GAAP on lobbying the annuity line because of a fall-off in the equities markets.

Okay, thank you.

[Operator Instructions]. The next question comes from the line of Mr. Bruno Paulson. [Operator Instructions].

Hi, this is Bruno Paulson from Sanford Bernstein. Fixing on ING Direct in particular, its costs. Two things . I was just wondering if you could split the costs between the operational costs and the marketing costs. That would rather fit bit better. And secondly, one of the main drivers of ING Direct's success profit growth has been steadily falling. Operational costs have turned to the assets. That seems to reverse down at 42 basis points, I think it was 40 last year. In Q1 you claimed that this, the gap was bigger and you claimed it was seasonal. I presume you're running out of seasons now, and I was wondering whether we've now reached the sort of natural floor for the ING costs or if the gains continue to fall as the business continues to grow.

Okay. Thank you. As far as the cost of ING Direct is concerned, first of all, the absolute cost came down in the second quarter, and operational expenses were in the first quarter 424 and operational expenses in the second quarter were 339. Marketing costs were 149 in the first quarter and 130 in the second quarter. So that improved. That's my first remark. My second remark is that the, simply, the growth in mortgages was faster than at savings. That increased cost based in principle because the acquisition cost of a mortgage, or the cost of a mortgage in the first year, is higher than the acquisition cost of a savings account. After that, the operating costs, often mortgage is lower than of a savings account. So the increased emphasis on mortgages increases a little bit the cost base of ING Direct compared to if it's the other way around. So I will [inaudible] and argue that it achieved out of this a permanent shift towards a higher cost base. By the way, on top of that, the business model still allows us to have a cost base of 50 basis points, but I agree. We're happy that we are below, because that same business model also says that we'd like to have a margin of 100 basis points, and we don't. We have 90. But it should not be read as a permanent increase in the cost level. Thank you.

Thanks very much.

The final question comes from the line of Mr. [Farquar Murray]. [Operator Instructions].

Hi. It's Farquar Murray from [inaudible] Harris. Sorry about that. One quick question just on the Basil 2 changes. In terms of the increase in the net capital model, how is that going to affect your thinking given the kind of track it will put on the risk adjusted return? I mean, how much of this is kind of a theoretical exercise versus a kind of genuine change in the way you might think about parts of the business?

To be very honest, and to be as blunt as I can be, it will not change our thinking at all. The reason is that we manage the business on the basis of our own economic capital model, which is from a risk management point of view, superior to the new Basil 2 rules. The new Basil 2 rules are an improvement compared to Basil 1 rules in the sense that it's more risk based than it is under Basil 1 rules. But it's still not as sophisticated in terms of risk-based capital calculation than what we have in our own capital model. For example, diversification is not taken into account. Certain assets are just made of buckets instead of individual assets. So that's bunk. If you refer to the increase of our economic capital, the 5 billion of Basil, the 4 billion or 5 billion or whatever it is, because it's still moving, of the introduction of MK&V, does that influence our behavior? Then I must say not that much because we have taken, the additional capital is already taken into account already, for loan. We know already for two or three years that this is going to happen, and we take it already into account. That's why I explained on the question of Mark Cathcart that we are already taken into account for loan that our present economic capital models show a much lower value and a much bigger GAAP compared to the available financial resources than we already know for long that it should be in what reality is.

So if we change a lot we know where it is in our portfolio so it will reach the Basil 2 research but will not change our business model at all. We're still in the economic capital, and that's it. We realize that the hurdles are, of course, that the hurdles will remain the same, but the performance of the wholesale bank as shown looks lower. They will certainly go down from the over 20% on the return on economic capital we have today, but that's it.

Also today, we know that there are entities in the bank. For example, the retail bank that performs higher than the wholesale bank. But that doesn't mean that we don't like the wholesale bank, so we feel that the wholesale bank is an integral part of our unit as a bank. We are not only liability driven as a retail bank normally is, we are liability driven in the retail bank, and the wholesale bank, generally speaking, is asset driven. But we still feel that the total combination is an adequate combination of banks.

Perfect. That's just what I need.

Excuse me, sir. 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, then that's the case. Then I will say thank you very much, thank you for your attendance, thank you for your participation, and I wish you well, wherever you are. If you have to fly somewhere through the world, I wish you a safe flight. Thank you very much. Good-bye until next time.

Ladies and gentlemen, this concludes the ING Direct second quarter results 2006 conference call. Thank you for participating. You may now disconnect.