ING Groep NV (ING) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ING third-quarter 2007 results conference call on the 7th of November 2007. Throughout today's recorded 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 hand the conference over to Ms. [Gemma Backs]. Please go ahead, madam.

This is Gemma Backs for ING Group, welcoming you to ING's third-quarter 2007 results conference call.

Before turning this over to John Hele, CFO of ING Group, let me first say that any forward-looking statements in today's comments are subject to a number of variables. They include interest rates, foreign exchange rates, inflation rates, movements in securities markets including equity markets and underlying economic health and changes. Realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables.

That said, good afternoon, John. Over to you.

Good afternoon, and welcome to our afternoon analyst call. We covered through the key points this morning -- really, the structural resilience of our company and our portfolio to the current weather and credit climate, as well as the strong commercial momentum we have throughout the group.

We would like to take this opportunity to highlight a couple of key points before we open it up for questions. First of all, I would like to tell you that I'm here today with Koos Timmermans, our Chief Risk Officer; Tom McInerney, our Board Member in charge of Insurance Americas; and Dick Harryvan, our Board Member in charge of ING Direct.

So the first key point I would like to just reiterate -- to put all the US subprime, Alt-A and CDOs into perspective -- is that, first and foremost, ING is a long-term investor. We are an investor in asset-backed securities, and we have selected and been highly selective in picking out highly-rated bonds and securities that we would like to hold.

To contrast this, we are not a manufacturer of subprime bonds or CDOs. So we don't have, really, any exposure to the subordinated tranches. When you are a manufacturer of these, you often keep the equity tranches and sell the highly-rated tranches to people like us. That's the structure of our portfolio, and that does explain a fundamental difference between us and some other people.

The second key point we've had questions on is how do we value all of these. We apply IFRS, which is consistent in its valuing to US GAAP and how you value these types of securities.

There are three levels. There's level one, which is where you have market prices; level two, where you may not have an exact market price for that particular security, but you use existing market prices to interpolate between those to get a value, and that's still a market price; level three is where you do not have comparable bonds or comparable securities to get a value, and you have to mark to model.

So if you look at as of September 30th, between our level one, level two and level three, we valued over EUR600 billion of assets, from trading assets to derivatives to financial assets and available for sale. In total, of all that EUR611 billion, in fact, only EUR4 billion was level three, which is a marked to model, less than 1% of our financial assets. In the available-for-sale category, only EUR700 million was level three categories. The vast majority, almost EUR500 billion of that EUR611 billion is level one. So the vast majority are level one; there's a piece, the EUR120 million, which are level two, which are also market prices, but they have to be interpolated between them; and then also the very tiny amount in level three.

I'd like to turn it over to Koos to give some perspectives on our portfolio in terms of our trading losses and our size and how it relates to some indices out there.

Thanks, John. If we look at trading losses, one of the things which might be said is like how are the revaluations in perspective to the market and the ABX. I want to give you just one example.

If I look at one of our trading books, there, for instance in a small proprietary trading book, we were sitting on assets, and then we are talking about lower-rated tranches, subprime CDOs. On these type of portfolios -- but then again, the notional amount is only something like EUR80 million. There is where you post losses as well. So in these portfolios, we do recognize that prices are going down, and there, for instance, we took a EUR10 million hit over the third quarter. But then again, we only have EUR80 million of this stuff.

So in general, we are sitting on the higher-quality portfolio. That's what you both see in the marked to markets, and you also see that on the impairments.

If I turn to our subprime portfolio, it is relatively small; it's in line with the US insurers, and it's also, if you look at the price movements, it's more or less in line with what's happening there as well. It's outperforming the ABX.

Now, why is that? There's a few reasons why there is outperformance. The first is our portfolio contains much less floating rates, and that has two effects.

Effect number one -- the floating rate origination, there was more lowering of credit standards in the floating rates, so these ones have been going down relatively hard. Second part is, of course, the interest rates have been going down as well, so revaluation positive aspects are not in floating rates, and they are in the fixed rates.

The second point is there is AAA and there is AAA. You have some AAA with a more front-end cash flow pattern, and you have some AAA with a more back-end cash flow pattern, and especially this last one is what is represented in the ABX.

Third element is yes, the ABX is something which is used by the market right now to quickly price and to quickly hedge yourself and to hedge your exposures, which means that the price movements there are more erratic than in the underlying cash bonds, because John already alluded to the pricing we get for our subprime portfolio. We get pricing quotes from brokers, so that part -- it's not a level three type of portfolio. We get broker quotes, and indeed there is a difference at the moment between the cash bonds and the ABX indexes.

Fourth element -- yes, we do from time to time hedge also against the subprime portfolio by, for instance, shorting some of the ABXs. So that's another effect which we take in total into consideration there.

Moving from the subprime to the Alt-A portfolio, let's just take one step back. I think five years ago, we said that we don't want to build a balance sheet of EUR50 billion in ING Direct containing only GSEs, so the government-sponsored entities. We want to diversify a little bit away from that as well, but nevertheless to maintain the highest-quality portfolio.

So what we were looking at is alternative providers of mortgages for us. We didn't want to go into wholesale credit; we wanted to keep a high-standard, well-diversified portfolio, which brought us to this Alt-A and which brought us to the highest standard of Alt-A, and that is reflected in the higher FICO scores and in the lower loan-to-values.

I think what I did this morning, I told something about the credit enhancement. It is both if the underlying pool size is larger than the note that gives you enhancement. If the underlying interest payment on the mortgages are larger than the interest payment on the note, that gives you credit enhancement. Then you have, of course, the tranching of the credit that gives you enhancement as well. If you sum all of this up, then you have an 11% of credit enhancement.

Now, let's have look at our underlying portfolio. If you do see that you have delinquencies, late payments of interest rates in the underlying mortgages in the order of 2.3%, if that would lead to defaults, then that could result in a 1.2% default in the underlying pool. But we have more than 11% of credit enhancement there, so we would have a very, very long way to go before you start to hit the first impairment in that portfolio.

I think that is the basis for the fact that it's a AAA portfolio. That's also the basis for the fact that both Moody's and S&P did not hit any of those securities with a downgrade.

So that's, in a nutshell, the things I want to tell about the subprime and the Alt-A before turning back to you and questions.

Thank you very much. With those opening comments this afternoon, we would be pleased to take your questions.

(OPERATOR INSTRUCTIONS). Marc Thiele.

Marc Thiele from UBS. I have one question, and that's related to the split you have provided with the different levels of how you look at the pricing. If we go to level three and look at what you marked to model, the EUR4 billion that you've mentioned, can you provide us with a split of what is really in there? Presumably, not all the subprime and not all the CDO exposure and Alt-A is in there; there may be something else in there. It will be very helpful to get a split of what this consists of.

Sure. Koos, do you want to go with it?

Maybe what I can do is -- if you look at level three, the split which I have for you is more related to the trading assets, which is the EUR0.9 billion. If I zoom in more towards the other assets, the available for sale part, that is EUR0.7 billion. That part is not the subprime part, because for the subprime we use as a basis, we use broker quotes. So, in general, that is not in that element of the portfolio.

Then the other parts, which are in the level three, it's more in the nontrading derivatives or some of the investments which are for risk of the policyholders. So we do have some miscellaneous in that category, but actually that is not so much geared towards the Alt-A or the subprime portfolios.

The largest category, if you break it up to the EUR611 billion, is almost EUR300 billion. EUR294 billion is securities as available for sale, and that's the EUR700 million. That's the EUR0.7 billion that's level three. That's out of a total of almost EUR300 billion of securities that are valued in our balance sheet. So a very small amount.

Just to get that right, within the EUR4 billion, can you give us the number the other way around. How much subprime, Alt-A and CDO is within the EUR4 billion? Is it EUR1 billion? Is it EUR2 billion?

It will be none of the subprime. The subprime is all market priced, and I don't believe there's much Alt-A, because that's all mainly level two, as interpolated between. So it would be more esoteric investments that we might have, derivatives and other things like that, that are held available for sale.

(multiple speakers) CDO portfolio is in it.

Yes.

Bruno Paulson.

It's Bruno Paulson from Sanford Bernstein. I've got a few questions. Firstly, once again, on the whole subprime issue, I fully understand this is only marking to market and why you might be different from the ABX. What I find difficult to understand is how the marked to market is not substantially different at the end of October or today from the end of September, given the crash in the ABX indices since then. Even if you are not exactly the same, surely, given -- there should have been quite a substantial change.

I think that's a very good observation because, on the surface, when you first thought about it, you'd think we would be affected. There was EUR30 billion or EUR35 billion of securities downgraded by the rating agencies in the month, and we were affected a very small amount -- I think only EUR70 million -- you know, that affected our whole portfolio. So we just did not have that section of securities that were severely affected in the month.

Maybe to add to that, the nonmaterial EUR70 million on the portfolio -- it is an amount, but at the same time, on the overall investment portfolio [of us], both at the general account level of the US and at a group level, is not material.

Moving away from the matters of subprime, in the US there was questions this morning about the growth in the retirement services area. It was pointed out that the targeted bits, the 401(k) and the variable annuities, were -- which I think were about 86 billion -- were growing fast, but then it was the healthcare, government and other which worked with the -- I think it's now 32 billion. When we are thinking about how fast to grow that line, is there a difference in the margin between the two parts?

Also on the (multiple speakers).

I would refer you to page, I think it's nine, of the statistical supplement, where, again, based on a lot of feedback from all of you, we have now split out the VNB --

Great. Yes, I've seen it. That's fine, yes. So there's no spread on the other half, right? Okay, that's clear enough. Okay.

That's pretty much why, for example, we don't play at all in the large 401(k) side, because the margins there are even lower than in the (multiple speakers).

Right. Yes, that's on a new business basis. I understand the logic of concentrating. But when I'm trying to think of the growth in the IFRS number, is the sort of spread half as much?

I would say, in terms of earnings, we don't disclose the earnings based on the various sections. But well greater than 50% of the earnings come from the 401(k) and the education business.

Also, while we're on the US, I was wondering -- there was reference to the fixed annuity earnings dropping, and indeed they were down to 32 million as against the sort of 60 million-odd run rate over the last couple of years. Equally, there was quite a sharp drop in investment management, down to under 20; I forget, 30 to 40. Can you'd let me know what happened in those two bits?

Yes. In the asset management or investment management, most of that is lower. We had quite a bit of private equity and alternative asset gains in the portfolios that were in the investment management or asset management area. So we had less gains in the third quarter versus previous quarters. In terms of fixed annuities, it's a combination of that, that we did have, again, lower alternative investment in private equity gains, and then there were some -- as you know, we, unlike most of our competitors, we look at our DAC on a quarterly basis, and there was some locking of DAC related to our equity indexed annuities. So that was in the third quarter, as well, for fixed annuities.

The final area I would like to talk about is the Dutch life earnings. The first question is I'm trying to work out why they surprised me. One thing is the EUR9 billion mortgage portfolio which was switched over in the last quarter. I'm wondering how much earnings went with that, which might be partly why I was in the wrong place.

Secondly, can you confirm you've still got about EUR2 billion of private equity, when one is thinking about the earnings on that going forward?

Thirdly, the real estate seems to have dropped in the Dutch life business, seems to have dropped from about EUR3 billion to EUR1 billion. Can you explain what's happened there?

Finally, what kind of trend default rate makes sense to think about on the debt portfolio of the Dutch business?

First, the impact of the net earnings that have moved over with the mortgage portfolio that moved to the banks -- that's a call it EUR10 million on average a quarter. That's the net impact of that. I think you also asked --

You said that's net of tax. Would there be a larger impact on the investment earning line and something balancing it below?

Oh, well, in Q3 that would be after tax. It was income of EUR16 million and expenses of EUR3 million for gross of about EUR13 million. I rounded down.

But that's income -- that's all -- so the revenue line, the investment earnings line, would have only dropped by -- I'm trying to work out why (multiple speakers).

Yes, my puzzlement is that, as well as the earnings on the things like private equity and so on having dropped, the top line seemed to have dropped. Was it the interest result or whatever seemed or the interest income seemed to have dropped quite a bit as well. Just trying to find (multiple speakers).

The direct investment income?

Yes.

Well, it changes, of course. In second quarter, you get the big dividend bump.

No, above the -- yes, the income from debt securities and loans dropped quite a lot. So certainly which -- I understand the dividend line, which dropped from about EUR150 million to EUR50 million. But the line above it is the income from debt securities and loans, which seems to be down EUR60 million year on year. That was why I was asking (multiple speakers).

I'd have to come back to you on that. We'll get someone to follow up with you on that.

In terms of the balances, how to work your models, the real estate asset value in NN is about EUR5 billion, and the private equity is just under EUR1 billion. If you want to think about what is the more normalized level, I think the guidance we gave this morning was more like the numbers that we see this quarter, and we show that in our quarterly report, realized gains and fair value changes on investments. It's not just real estate and private equity; it's other bonds and other assets we may have in there. That has been running, if you look at the statistical supplement in other areas, when we were doing quite well in these sectors, EUR200 million, call it, a quarter. It's EUR83 million to EUR100 million more level now.

Ivo Dierick.

Ivo Dierick from Dexia Asset Management. I have some questions on the two IPOs. One on Sul, which is planned, I suppose. Can you give me an idea of the expected value and the stake you will keep? And elaborate a little bit on the rationale for the IPO.

Then secondly, on the Bank of Beijing one, would you consider a sale of this participation? I understand something is for the long term but as you'll only have 20% and probably will never have majority, and given the fact that the value these days on the market is reflecting probably the profits or the value for the next 30 years, would you consider a sale [and try to] take your profits?

(multiple speakers) Bank of Beijing, and then turn it over to Tom to talk about Sul America. He was just in Brazil, I think, for the Grand Prix. But in terms of Bank of Beijing, we bought it at 19.9%. We have been diluted down to 16%. We made a solid gain. We do have a lock-up for a period of time, the rules of the stock exchange. We hope to, over time, maybe buy in the market, if we can, to get our position back up again. We like them. We've worked well with them. We are very happy with our investment on it. So that's where it stands right now, and we'll just have to wait and see how things progress going forward on that.

Tom, do you want to talk about (multiple speakers)?

Yes, Sul America, very successful IPO. Basically, Sul America -- before the IPO, we had a 49% economic interest and the family, obviously 51%. We did -- the shares that were in the offering represented 24%, so our ownership moves down from 49% to 37%. The proceeds from the IPO were used or will be used to reduce debt, because there was debt higher than what we were comfortable with, or the Sul America and we were comfortable with, and also to make investments in the business. Based on the IPO value, the total Company had a value in euros of about EUR1 billion, and our share in there rounds to about EUR400 million.

And the IPO was done for reducing debt?

Yes, the primary reason was to improve the balance sheet, reduce debt. But also, some of the proceeds will be used for further investments in the business, to grow the business.

But you could have done that yourself. You didn't need the market for that.

Well, I think, as you probably know, the Brazilian IPO market is quite attractive. So we found it a good opportunity to do an IPO to get capital on an efficient, effective basis.

Manish Bakhda.

Manish Bakhda, Barclays Capital. Just one question, I guess. Looking at the slides 43 onwards, I note there are a number of new investments in subprime, [EUR139 million] in RMBS, AAA and also EUR1.5 billion in Alt-A AAA. I really wanted to understand, is this a trend we can expect in the coming quarters? Is the new exposures as good as your existing exposures?

What we have done is, so far, on the ING Direct side -- let's start there -- is we are the investor in the very high-quality end of the Alt-A. At this moment also, if you look at it from a fundamental credit perspective, given the buffers, we have seen no reason to start to deviate our investment portfolio. If we look at it on the ING, the IIM side, there we purchased initially -- we bought some more of the subprime for our annual -- for our general account. But those are small, opportunistic type of deals on the order of EUR100 million, EUR150 million, which we from time to time do, just like we also do, from time to time, some ABX hedging.

If you ask like, is this the time that we are going to sort of double our portfolio, no. But at the same time, yes, we do do, every now and then, some purchase because yes, there are prices there which, every now and then, look attractive.

What I would add is, for the US general account, the US ALCO asset liability group, we did look at this, obviously because we knew if we made any investments we'd get questions from you guys as to why we are doing it. But there were very attractive spreads compared to other opportunities, and so, while there were some on the ALCO that would have liked to have done more, I think we wanted to be conservative and cautious. But they were done at what we think is a quite attractive pricing.

Just one further question is from your earlier comments. I wanted to just get clarity on something you said about the level two and how much is valued under that basis. I didn't quite get the number. Is it EUR120 million?

Yes, it's EUR120 billion of the EUR611 billion total securities.

The very last question is from the presentation, again, there are three key numbers -- EUR3.1 billion of subprime ABS, EUR1.1 billion of CDO/CLO and roughly EUR27 billion of Alt-A as at the end of September. I presume if those elements were rolled forward to the end of October, the valuations would be pretty similar to that?

Yes, I think that's the statement which we made. We don't have any material changes in the revaluation as per the end of October.

I have an earlier question to Bruno, who was trying to model the Dutch life insurance business. At the end of June, a EUR1.7 billion extra dividend was paid by Nationale-Nederlanden to ING Insurance. So the investment income on that would reflect through in Q3. So again, there was a EUR1.7 billion dividend paid up. It reduced the debt-to-equity ratio at Insurance, so that was a positive impact, but has lower investment income in itself.

Farquhar Murray.

Farquhar Murray from Fox-Pitt Kelton here. Three questions, if I may, just starting with subprime, unfortunately. Merrill's ultimately took [83]% of its write-down on ABS CDOs. I'm just wondering if you could update me on your exposure to ABS CDOs.

If you look at our ABS CDOs, well, basically what we have is we only have AAA tranches of the subprime portfolio. We don't have anything more exotic, in terms of -- and again, that has to do with the fact that we are not an originator or we are only a buyer of the very high-rated tranches.

So are you suggesting it's nil? I thought you had some exposure to it, but I thought it was trivial.

Yes, it's trivial.

Just with regards on subprime and Alt-A, we've obviously got conflicting indicators in terms of people are worried about the 2006 vintage. But actually, obviously, if you have an accelerated principal payment schedule, you actually will have very short-duration structures. Could you give a sense, some indication on the duration of your exposures in subprime MBS and Alt-A MBS, please?

Are you talking about the interest rate duration or the total prepayment? I know, if I look at the total subprime portfolio, the duration of that portfolio is more on the order of three years. That is that part. If I look at our Alt-A portfolio, then we are talking about the hybrid ARMs, it's relatively short because it's the two to five-year hybrid ARMs, what we are buying. Yes, weighted-average life is just -- that's something which is a moving number on a month-by-month basis. It's extended a little bit at this moment, but then again not material. But you have to look at it in that order, that probably a duration there of the portfolio is in the area of two, two and a half years.

Two and a half. Okay, perfect. Then just final thing on the credit exposure side of things. What would be your aggregate exposure to monoline insurers? Because we know that there's a fractional part of the subprime, the Alt-A portfolio, that's got some credit insurance. But I'm just trying to gauge how large it is.

If you look at the monoline insurance exposure, we do have some originated Alt-A mortgages where percentage is higher than 80% LTV. That is something which we are insuring, and there I think if you talk about the total insured amount, it's less than EUR100 million.

Is that all of your exposure to monoline insurers?

No. No, there is other exposure to monoline insurers, and that has to do with both the banking side, where we from time to time use them for credit card receivables or for project financing. So they are different type of exposures on a very different underlying pool. There, I think if you talk about the net exposure, so the net insured amount, I think the counterparty exposures we are looking at are in the order of EUR955 million over the total sector.

Total. Okay, perfect.

That is risk-adjusted, and then again, that's on a very diversified underlying pool.

Can we add the EUR955 million to the EUR100 million and come up with a group level exposure to monoline? Is that fair?

I think, if you take that EUR950 million, that is basically covering the whole lot. So that is bank insurance total (multiple speakers) exposure there.

That is the total? Perfect.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Please continue with any other points you wish to raise.

Well, we would very much like to thank everybody for their attention today. We hope we've clarified throughout the day our strong risk management, which has really given us a structural resilience through these times. We will continue on with our prudent risk management, building our business, growing our business and executing our business, and that is what we are focused on, that's what we're doing, bringing value to our shareholders. We thank you very much for your attention today. Thank you.

Ladies and gentlemen, this concludes the ING third-quarter 2007 results conference call. Thank you for participating. You may now disconnect.