ING Groep NV (ING) 2009 Q1 法說會逐字稿

Good morning. Welcome to ING's first quarter 2009 conference call. Before handing this conference call over to Jan Hommen, Chief Executive Officer of ING Group, Patrick Flynn, Chief Financial Officer and Koos Timmermans, Chief Risk Officer, 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 conditions and changes. The realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables.

Good morning Jan, Patrick and Koos; Jan, over to you.

Thank you very much and welcome everyone. I'm here with Koos Timmermans, our Chief Risk Officer, Patrick Flynn, our new CFO who joined us at the end of April, and I'm also here with Tom McInerney, our Head of our US Insurance activities, America Insurance activities, and Dick Harryvan who runs our ING Direct business.

Let me start with the first slide and then let me take you through the presentation and then Koos will later pick up from me and explain the numbers in more detail.

First, I'd like to take you through the progress we are making on the cost containment, on the de-risking and the de-leveraging initiatives that we have announced in January. And then I'll walk you through some of the changes in the corporate governance structure, which are intended to increase our focus on the business and will bring us really and let us work back to our basics. And then we'll take a look at the highlights for Q1 where the loss narrowed substantially from Q4 to EUR305 million on an underlying basis.

All business lines improved compared to Q4 and all three Bank business lines reported a profit in Q1 despite higher risk costs. Insurance continued to post losses as a result of volatile markets that we still saw in the first quarter of 2009.

I move to slide three and you will remember the change program that we introduced in January and I promised that we would update you every quarter on the progress we are making. The first priority is to reduce cost, to reduce risk and de-leverage to strengthen ING as we'd never get through the ongoing crisis. And we have made significant progress on this front, as you will see in the coming slides.

The second phase that I outlined at that time -- at the Investor Conference Day on April 9, was to focus on fewer businesses as we seek to simplify the Group and to focus on markets where we have leadership positions. We have said we plan to exit 10 to 15 businesses in this process. However, divestments will be pursued prudently as market conditions permit. We will have no fire sales and this is not an easy market to sell our businesses in.

In the meantime, and this is phase three, we are strengthening the organization to reinforce the accountability, simplify the governance and reduce complexity. And today we have announced the change to the governance structure of the Group that's an important step in realizing these goals.

Slide number four you see our cost reductions and they are really tracking so that we can realize our EUR1 billion or probably even more by the end of this year. Operating expenses in Q1 were reduced by EUR231 million excluding foreign exchange. And in total operating expense were down 3.5% compared to Q1 last year, and 13.3% compared to Q4, despite higher impairments on real estate development projects and higher deposit insurance premiums that we had to pay, and despite also higher acquisitions of CitiStreet and Interhyp that we did last year.

Slide number five is showing the people reduction we have accomplished so far. We are head of our plan in reducing our workforce. Of the 7,000 job cuts that we announced, 5,380 have been completed by the end of Q1. These are cuts that come on top of the headcount reduction that we already announced earlier from the merger of the Postbank and ING Bank in the Netherlands. That project led to a reduction of 578 full time equivalents in Q1. There was also a significant reduction of third party staff in the first quarter as well.

Now let's move to slide number six, the de-risking measures are on track. We're making good progress. Direct equity exposure has been reduced from over EUR13 billion a year ago to just EUR5 billion now. Of that total, half represents strategic stakes at the Banking business, including Koopman Bank and Bank of Beijing where the market values have increased in Q1.

The equity exposure of the Insurance business is down to EUR2.6 billion. We have also taken important steps to reduce the portfolio of asset backed securities that we hold available for sale in order to reduce the volatility in our IFRS equity going forward. And most importantly of course, was the Alt-A transaction with the Dutch state, which led to a deconsolidation of 80% of our Alt-A portfolio.

We also reclassified assets, largely asset-based securities in January, which reduced the available for sale portfolio by about EUR13 billion. This brought the portfolio of asset-backed securities held available for sale to EUR35 billion from EUR72 billion at year end.

We have taken steps to further tighten the loan underwriting given the worsening economic climate, and in the US we are de-risking and re-pricing our variable annuity products. In Japan we have decided to stop selling SPVAs, which will be phased out by the end of July. But we will continue to sell our COLI, our Corporate Owned Life Insurance activities in Japan.

And then we have a number of other measures, reducing exposure to financial institutions, reducing the investment portfolio at ING Direct over time, and shifting to more own originated assets and measures to mitigate the risk rated asset growth. And Koos will give you more details when he explains the details a little bit later.

On slide number seven you see the balance sheet reductions are progressing ahead of schedule. Our plan was to reduce 10% of our balance sheet by the end of Q3 last year and we have already reduced and achieved a reduction of 7%, bringing the total assets for the Bank now below the EUR1 trillion level.

The next slide is showing the changes we are making to the governance structure. We have decided to create separate Management Boards for Bank and Insurance. The Group's Executive Board will consist of three members, myself, Koos and Patrick, and the three of us will also serve as the CEO, COO and CFO of the Banking and the Insurance Boards.

Within the Banking board the business line responsibilities will remain the same, Eli Leenaars for Retail, Dick Harryvan for ING Direct and Eric Boyer for the Commercial Bank.

In Insurance Hans van der Noordaa will take over responsibility for Europe. In addition to his current responsibilities for Asia, and Jacques de Vaucleroy will become the Head of a new Global Asset Management business line, while Tom McInerney will maintain responsibility for the Americas.

We have a few benefits related to this structure. It creates a single management team for each business with clear accountability. One Bank, one management team and one balance sheet and it achieves -- this result creating an additional layer of management. The CEO, the CFO and the COO will continue to maintain the overview of the Group as a whole and will participate on all three Boards.

But most importantly, it is freeing up the business people and the Board to really focus more their time on the business activities. So this is an important step for us in our back to basics program.

Slide number nine, it's a slide that you have seen before; I will be brief. We are focusing on fewer businesses with a simplified business model where we are going closer to the customer with fewer and simpler products and there's more efficient processes.

Let's look at the Q1 results now.

Okay, --.

The market environment in Q1 remained quite challenging, as you can see on slide number 10, where we have a number of indicators that project the economic environment we had in Q1. We see that economic growth is slowing. The stock markets continue to decline. They have seen a rebound in April and May. Interest rates are lower and credit spreads have remained at elevated levels.

Slide number 11 you see the financial results and despite this challenging environment, the loss that we reported narrowed substantially compared to Q4. At the bottom of the slide you see the underlying net loss narrowed from EUR3.7 billion in Q4 to EUR305 million in Q1.

The total market impact on results declined from EUR5 billion negative in Q4 to EUR1.7 billion negative; still a substantial amount that are stemming from impairments, negative revaluations on assets and other market impacts, although substantially less than it was before.

And at the same time you see that our loan loss provisions are increasing at the Banking business as the financial crisis is now moving to the real economy.

Slide number 12 you see the build-up of the results in both the Bank and the Insurance business. The Bank had a profit of just under EUR700 million despite loan losses of EUR772 million loan loss provisions. And Insurance was impacted by the adverse market conditions, particularly as it's related to DAC.

On slide number 13 you see that our Commercial performance continued to be resilient where we had net client production of EUR11.2 billion and growth was mainly by strong inflow of savings at ING Direct, notably in the US and Germany, and Retail Banking had a strong inflow, particularly in Belgium. Our mortgage and our lending business has slowed in the current economic environment, although we continue to show growth in our bending, be it at a very modest rate.

Wholesale Banking, which is reflecting lower Corporate Bank balances and a small decline on lending and ensures for small outflows in the Americas and in Europe while, at the same time, they saw an increase in balances in Asia Pacific.

Looking at our capital on slide 14, you see that our ratios continue to be on target. Core Tier 1 improved to 7.5% and Tier 1 improved to 9.7%. Debt equity for Insurance increased to 9.6%, but remained within the limit of 15% and the debt equity of the Group was unchanged at 13.5%.

And let me now hand over to Koos, who will give you more details on our financials.

Okay, turning to the Bank; and now we're on page 15, Jan explained the measures taken reduce risk and cost. And if you look at it, the Group overall had a net loss of EUR793 million. The Bank returned a profit. Market conditions there remain challenging, but actually, if you look at it, income recovered almost to the level of first quarter of '08, lower impairments, improved interest results and strong Financial Markets results.

If you look at cost cutting on the Banking side it's on track. It's down almost 3% versus Q1 '08 and down 12% from Q4. Loan loss provision is on the rise given the economic slowdown; 108 basis point of credit risk weighted assets.

The improvement in underlying results can be more clearly seen on slide 16, and on slide 16, we normally focus more Q1 versus Q1, but the environment has changed so dramatically that it's better to focus for this time on Q4.

Three important points on this slide, and that is, first, if you look at third line from the bottom, the underlying net result recovered from losses over EUR1 billion to a profit of EUR519 million. And the most important drivers of that are the fifth line from the top, and that is the significant reduction of impairment versus Q4, notably in the Alt-A after the transaction with the Dutch State; and in the middle, you see the increase in the loan loss provisions to EUR772 million, where you actually see that the financial crisis is more moving to the real economy. And within the Bank, the improvement overall has been driven by the Wholesale Bank and that is what we can see on slide 17.

And on slide 17, you see all three business lines showing an upward trend, led by the Wholesale Banking part. And on the right hand side, Wholesale, strong improvement to EUR506 million driven by Financial Markets.

Actually, in Financial Markets, it is predominately the customer driven business rather than the proprietary where we made this money, and there's been an increased capital markets debt capital market activity.

If you look at the Retail Banking side, it's up versus quarter Q4 and that's in part an improvement on operating expenses, but still significantly down as compared to a year earlier. Margin pressure on savings in the Netherlands due to competition plays a big role. Loan loss provisioning up and that is mainly in the SME section.

If we look in the middle, ING Direct, a strong improvement from Q4 there, where we had the significant impairments on the Alt-A and operating expenses down almost 10%. Commercial activity in ING Direct was also strong in Q1.

Let's look at slide 18. If you look at slide 18, we see the customer inflows overall on the Bank. They improved to EUR11.3 billion net inflow of savings in Q1 and that reversed the trend of outflows from Q4. The increase was led by ING Direct, plus EUR11 [million, mainly] in the US and Germany. And if you look at the Netherlands, we had the strong competition for savings. Competitors they are paying over inter-bank rate to get in savings and we have to maintain discipline in pricing and that's why the growth is more in ING Direct than in the other parts.

If you look at margins, and now we're on the next page, page 19, interest margins, they remain stable at the 1.17% rate. It's a slight flattening of interest margins due to the savings competition in the Netherlands. If you look at ING Direct, it's up versus Q4 as Central Bank, they cut their interest rates and we followed, particularly in the US. Euro zone countries, we are not able to follow rates down as much, and that is due to the competition there.

If we move to the loan losses, look at the net addition of loan losses, the 108 basis points, it's on the rise. There is a lagging impact. The crisis, it's now from financial more moving to the real economy. And the increase is driven by SME lending in Retail, deterioration of the US housing market in ING Direct and then we have real estate finance and structured finance in the Wholesale.

If we turn to the Insurance business, so we're at slide 21. There again, you see an improvement versus Q4. However, the Insurance Company is still loss making, EUR824 million. That's due to impairments, revaluations and the DAC unlocking in the US.

VNB is down by about a half and that is due to lower sales of unit linked and is also -- it's an active decision in a sense that we want to re-price and de-risk our VAs in US and Japan. So to help to understand the movement behind those results, let's go to page 22.

On page 22, let's focus again on a comparison with Q4. Towards the top you see that the impairment, they continue to be painful but substantially less than in Q4. In the middle you see that the DAC unlocking is the other significant number there, mainly in the US. And if you look at other market impacts, and that is the minus EUR488 million which you see, these come from the Insurance, primarily from a few factors.

One is we have our so-called separate account shortfall in the Netherlands, so that's the Group Pension business, EUR164 million, and we have EUR195 million of Japan hedging and accounting volatility there. So those are the biggest contributors to the other factor.

If we move to page 23, Insurance, what you see in the middle is a widening loss in the Insurance Americas, minus EUR510 million. That is for EUR550 million explained by the DAC unlocking. Credit losses improved versus Q4. If you look at operating expenses, they're at minus 20% excluding FX and the acquisition of CitiStreet.

We move to the left. There you see Europe, loss narrowed to EUR75 million. We have the severed account shortfall in the Netherlands and we have the revaluations of real estate, so those are the negative factors. Positive, however is the operating expenses, minus 17% from Q4.

We move to the right hand side, Asia, there is a loss driven by the hedge volatility in Japan. Expenses are down by 20%.

Now let's go back to the DAC unlocking on slide 24. First, we look at the equity related DAC unlocking. The rule of thumb is there that the S&P 500 minus 10% from the 2.25% assumption per quarter, means EUR100 million DAC. On Q1, we had the S&P at minus 11% and the DAC unlocking was about half rule of thumb due to equity hedges. So this quarter, more significant impact came from the other DAC unlocking and that is on page 25.

We look at page 25, the other DAC, it reflects mainly changes in the value of the guaranteed benefit cost and these are driven by interest rates, equity volatility and guarantees moving into the money. In Q1, we see guarantees moving further into the money and that contributed most of the impact in Q1.

If we look at the commercial activity, and that is on page 26, on page 26, we see the sales, they continued to the client. There's less demand for investment linked products in Q1; notably, the decline in VA sales in the US and in Japan, and we de-risked and re-priced products. So partially it's active, but partially it is also a market demand for investment product which is lower.

VNB declined 57% due to lower sales, higher hedging cost and particularly again the VAs and in the US and in Japan.

If we move to page 27, as we announced in April, we are taking measures to reduce the risk in our VA business and, going forward, we will reposition the business to focus on lower risk rollover products.

New products are being developed for launch in 2010, which will use only index funds, so that reduces your tracking error. And it will offer a reduced guarantee and will pay lower commissions over the life of the product instead of large up front commissions. And in the meantime, we're also taking steps to reduce risk in the in-force book and the current products.

And for the in-force, we are temporarily fetching hedging fee income and we have fully hedged the equity funds.

Index funds, they have increased to 25% of the mix from 9%, so that means less tracking error on that side. And for the current products, adjustments were made to the products in January and again in May. And those adjustments, they had to do with the withdrawal benefit rollup that was reduced to 6%, rider changes have been increased, commissions they have been reduced and interest rate hedging has been put in place. And for income benefit products, the payout interest rates were reduced to 1%.

We now move to the Risk section and on the risk section, again overall, and that's on page 28, we see an improvement versus Q4. However, the Insurance Company is still loss making. Impairments we'll discuss revaluations and DAC unlocking in the US.

I'm sorry, let me move from that basically to page 29, and then let's first zoom in, focus on the asset class, the ABSs. Now first, on page 29, what you see is with the ABSs, you see a significant downward move from EUR72 billion to EUR39 billion.

First, that has to do with the fact that we have changed our Alt-A portfolio and we now have a State receivable, so that's a real risk transfer. But secondly, what we also did is we did reclassifications. So, in essence, we had to reclassify part of our ABS portfolio to loans and receivables, so that means we are holding it to maturity and it means that we have less of the effects of changing market prices on our IFRS equity.

A third element is, in general, you could say all asset classes are basically down in terms of actual exposure, except for US agency, RMBSs. That is something which we had increased over the quarter. One of the things to note there is if I look at the CDOs, we excluded synthetic CDOs, and not because they have disappeared, but they have -- basically they are moved mark-to-market. And actually if you look at the fair value loss in Q1 on this, that was EUR39 million, so a small amount.

We did have maturing bonds in the portfolio, EUR2 billion over the Q1 and the negative revaluations, the marks there were lower than in the previous quarters.

If we then move to the Alt-A portfolio, in the Alt-A portfolio, you see an IFRS pre-tax impairment at the bottom line of EUR178 million. In essence, you also see no cash losses still on the bonds and that is the Alt-A RMBSs they have not missed a coupon or repayment and the losses they are still allocated to the junior tranches.

At the same time, future estimated credit losses on the newly impaired RMBSs, they will be -- that is still an amount triggering EUR128 million impairment and, on top of that, we have to re-impair securities because that is something which is required with IFRS and marks on Alt-A going down for EUR50 million and that gives us the total of the EUR178 million.

Total credit losses, which we would have impaired if we were on US GAAP, would have been EUR88 million, so that is on the Alt-A portfolio.

If we move to the direct equity exposure, on direct equity, the insurance equity portfolio, EUR2.6 billion and we have out of the money put options for that portfolio and that is a bit more put options than the cash value of this portfolio, but it also serves a bit as a proxy hedge on our private equity portfolio.

Then next to that, we have our hedge position on the fee income and that is on the DAC related part. That should be seen separately from the cash equity hedges, which we have on the insurance side.

If I move to the Bank, on the banking side, what we have seen is a slight increase and that has to do with the value of the stake of Bank of Beijing that has moved up.

Then let's move to the balance sheet reduction. If you look at balance sheet reduction that is on slide 32, there is actually quite a few things to be noted there. On the first is overall, you see that your total asset is going down and that is what you see moving to the EUR979 billion. Then that is to do with basically predominately the non-lending asset, so that is the first movement what you see.

A second move what you see is that the component, which does not re-value via the revaluation reserve has gone up, because that is the part loans and advances, the EUR617 billion.

Now, is that all because we made more loans? No, there is the part in there, which is the Alt-A facility and there's the part in there, which is the reclassification; so that means we make the balance sheet less vulnerable to revaluation changes. But, at the same time, if you look at it more from a liquidity perspective and a loan to deposit perspective, then I would focus on the lending section, the EUR580 billion, which brings me to page 33.

And on page 33, you actually see the funding mix and the loan to deposit ratio. What you see there is in essence that the funding mix not a lot of things have changed there. The loan to deposit ratio slightly improved to 1.09. And what we are doing there is we are basically looking at the funding mix of the deposits of EUR531 billion and we compare it to EUR580 billion loan portfolio.

If we move from that to an insight in the negative revaluations for our portfolio on page 34, what you see there is the total movement in the negative revaluations EUR11.8 billion negative. The biggest mark comes from the ABSs, minus EUR7.1 billion.

And what we also note there is if you look at the more contractual average maturity of these, by no change in credit spread or no change in interest rate, you would have a pull-to-par effect on this by around EUR2 billion per year. But okay, that is the assumption then; no changes interest rate, no changes on credit spread.

If we move to page 35, let's look at the asset leverage of the Bank. What you see there is the following. We see the shareholders' equity of the Bank and we made an adjustment. The adjustment which we made is we said, like, well, if we look at the debt securities on the banking balance sheet and if we would give them the same treatment, so added to shareholders' equity, where on the asset side we take the negative marks on the investments out. If we do that like-for-like, so asset side is negative for reval reserve, but on the liability side it's positive, then you end up with a pro forma shareholders' equity of 33 and if you compare that to a total balance sheet size, then you end up on an asset leverage of 30.

Simple thing, I'm not still not a fan of a simple cap of the asset leverage, because there are quite some disadvantages. One is comparisons are difficult, we talk about US GAAP and the allowance there for derivatives netting; second is you don't take well all the off balance sheet exposures into consideration in this measure. Nevertheless, we wanted to share this leverage with you.

If we now move from this to the loan portfolio, then what you see is the originated loans, the NPLs, they remain relatively stable. Let's first look at the mortgages. Overall on the mortgage side, non-performing loans, you only see a marginal deterioration over the whole portfolio.

I think the biggest component what you see is the United States and there, you see that the NPLs they have moved up by 1%. It is still an out-performance versus the US industry if you compare it with the prime floaters. Nevertheless, that is where you have seen an uptick.

If I look at the commercial loans, we have EUR220 billion of commercial loans and that is basically corporate, mid corporate, SME. It does exclude counterparty and Government. If you look at that element, then you see some upticks in general and that is especially on the structured finance side, but you also see it on the real estate finance side.

If we then zoom in on the loan loss provision, and that is on page 27, on page 27, you see the net additions there, and actually what you see is it's a broader deterioration and it is reflecting the economics. And it's especially more in the structured finance, US mortgages, Private Banking and the Netherlands business lending, so those are the biggest contributors to the loan losses.

If we then move to the risk weighted assets; we look at risk weighted assets, one thing is we did see an impact of rating migration over the quarter. Nevertheless, overall, our risk weighted assets declined. So there have been quite some balancing effects there.

The first thing is we had a positive risk weighted asset migration. And positive, I mean it's going up and that is because of securitizations, US mortgages and structured finance, so that increased our risk weighted assets. Then we had our facility with the State and that decreased our risk weighted assets. Then we had our balance sheet reductions, what Jan was also talking about. That has a negative effect on risk weighted assets and then we had foreign exchange which has a positive one. Overall, over the quarter it has been a decline in risk weighted assets on our side.

Now I think if we look back a bit at what happened over the -- in the current crisis if you look at 2008, in 2008, we have seen a lot of movements in the Financial Markets. And if you look at those movements in the Financial Markets, I don't need to remind the equity markets and the real estates going down and those credit spreads going up and house prices going down. It had -- for us, it had its major effect in '08 on both the impairments and the revaluations through the P&L, and it also had its effect on the revaluations in debt securities.

Overall, as what you witness in our results, you see that the market effects are getting a bit lower right now, but we are now more turning towards the real economy, and that is why we looked more specifically at our loan book and we made a scenario where we said, well, where can risk cost or how could it move? And what we did is the following.

We made a scenario there. We said; let us assume that markets, unemployment, property prices and levels of default are going to deteriorate as of January 1 this year. And so the example here is unemployment as of January 1 this year in Europe is going up by 5%, property prices as compared to January 1 in Europe going down. Also, we look at -- then we have translated this into levels of default.

So we said, like, well, we normally measure default levels over '08, and that is what we model. And then we said, like, well, if you have these unemployment and property prices moving, what will be the effect on defaults?

Then what we did is we said, like, well, we take a two year scenario, so we'll look at this for two years at the loan books and then we're going to be, like, well, what would be the additions in long lost provisioning, what we would model if such a scenario happens? And by the way, I only gave you three inputs, so the unemployment properties and corporate PDs but of course, we also looked at elements like emerging markets, counterparty risk. So we tested the whole lot of what goes via accrual.

What happens actually is the following. If these inputs -- if that happens, so that is the scenario, then what you see is basically an average. You see your total losses moving to 154 basis points of average credit risk weighted assets in 2010. So what did we do? We projected two years of losses. We divided it by the average credit risk weighted assets. And then we divided by two, so that you have a comparable annual number.

So again, a few things to be said about this, this is not the expectation which I have, but this is if the market would move those factors, which you see on the left-hand side, would be the deterioration as from January 1. Then over two years time this is what I would expect to happen on the long losses.

So what does it say? So again, it's not an expectation. It's a sensitivity. And again what do you have to do with this? You have to relate this to your anticipated commercial results, because that would inevitably be, your first buffer to catch up those losses; so this is where I want to leave it with regards to the stress test on our loan portfolio.

And if I hand back to you, Jan?

Thank you Koos. I would say that this is sufficient for the presentation at this point in time. Let's see what type of questions that you have and we will try to answer your questions.

Thank you sir. (Operator Instructions). The first question comes from Marc Thiele from UBS. Please go ahead with your question.

Good morning. I have three questions. The first thing is; can you help us a bit regarding your equity market exposure? Can you give us a bit of explanation how these EUR5 billion will move in line with the main indices? And does the color structure provide you to participate in the upside, quarter to date and for this result, and any hedging losses that we need to think about in terms of the P&L?

The second question is regarding the separate account provisions in the Netherlands, the [EUR164 million], is there a certain interest rate level or equity market level that we need to think about, when these things could actually reverse into the other direction? Or is there a risk that there could be further provisioning? And can you give us a guideline, what sort of levels we should be thinking of on a macroeconomic basis?

My third question is more of a sense check, looking at your page 12 earnings, if we look at the Bank and include the loan loss provisions it produced EUR1.1 billion in the first quarter? If we then look at the Insurance business, these EUR300 million to EUR400 million, let's say the Group produces EUR1.4 billion to EUR1.5 billion in terms of the run rate. But you're indicating there will be further cost reductions, but equally there will be more de-risking in terms of the Bank's balance sheet.

Do we need to think of additional factors impacting the earnings outlook going forward? Or would you disagree looking at EUR1.6 billion to EUR1.7 billion as a quarterly underlying pretax run rate?

Okay, thanks Marc. Koos will you take the first?

Yes, maybe I'd like to split it in two things; first, is we look at the equity cash part, then we look at fee income, and then we look at specifically debt.

If you look at the equity cash part, on the banking side, what I explained, it's basically negative, because those are stakes and those are -- basically it's the Koopman and it's the Bank of Beijing. And we would not hedge that. And there is -- if market moves up, clearly you have a benefit there.

If I look at the equity cash side on the insurance, then you can say it's hedged. What we do is we hedge it with puts, but we also hedge it with collars to finance some of the puts.

So to give you the precise sensitivity is a difficult one, because it's not linear. In the end -- and there is one other factor which plays a role; that if you look at our portfolio, the cash side is non-financials, and we hedge it with indexes. And the indexes are the financials as well. So that means that there is not a precise tracking between the two. So it's very difficult to give a precise sensitivity in one benchmark, on the equity hedges.

If we move to the US businesses, in the US businesses there is few factors playing role. There is a hedging of a benefit, and the equity component, and there is a hedging of the fee income. And on the fee income from time-to-time we put hedges in place, and we do have hedges in place right now.

Most of them at this moment are more linear, so futures, and over time we are replacing that a bit more by non-linear transactions as well. So doing a bit more puts. But then what you do, is you trade in upside, for basically paying a fixed fee. And I don't know, Tom, if there's anything you want to share on this? Okay so that's it on the equity side.

Yes, and the separate account?

If you look at the separate account, the shortfall of the separate account over this quarter, what you've seen is, well, liabilities moving. Basically that was the negative part. And if you see what did we make on it? We compensated it partially with swaps. We compensated it partially with equity derivatives. And then we have swaptions as well.

And what you've seen is implied volatilities are not moving up, so you have a bit of a negative mark on the swaptions side as well. So overall, that creates your account shortfall, which we have on this portfolio. It's a difficult one to hedge perfectly well. So equity prices played a roll, implied volatility as well as interest rates.

Okay your final question that was the results going forward; that's always a tricky subject, because our policy is not to comment on forward looking numbers here. Let me help you a little bit though.

The first quarter normally is a bit better than the -- let's say, the first two quarters are normally a bit better than the quarters in the second half. So I -- that's the only guidance I can give you. I think at this moment I would prefer not to go any further.

Yes. Yes, I didn't expect you to give us a precise number. I was just thinking, was there anything in addition that we need to think about that has, that you think has influenced a result significantly? And would there be any other future items, other than the cost reductions and de-risking play into the numbers that we need to think of?

No, I would say no, expect to say that our results in Financial Markets this quarter, of course, were very, very solid. And it all depends on how the trading markets will develop in the future, whether we can maintain them. Other than that, we don't want to give any comments.

That's super, excellent. Thank you very much.

Thank you.

Thank you the next question comes from Spencer Horgan from Deutsche Bank, please go ahead.

Yes thank you, good morning; three things please. First one is -- well, actually the first two are coming back to things you've previously talked about. The first one is the separate account provisions in the Netherlands. I was just wondering is there any sensitivity you can give us on that going forward for various market movements.

Second point is, coming back to what you just mentioned, which is the Financial Markets bit within the Wholesale Bank, which is obviously exceptionally strong in the first quarter. Could you give us a little bit more color on where that's coming from? And in particular, how we should think about that in the coming quarters?

And then the third thing is I just wanted to check, have you disclosed anywhere the split of the assets which you've reclassified from available for sale into the loans and receiverables, because I'd quite like to keep track of the total asset exposure. And obviously, just because they've been reclassified doesn't mean they're not still there. Thank you very much.

Okay, well let me first start with the Financial Markets, and to give some color there on what happened. If you look at the Financial Market business overall it's a very positive result. You could -- and then you have to think what is it? Because we had increased volatility, and volatility in that sense helps in Financial Markets because there was increased activity.

There is a structural component in that as well. And since there are -- there is less players in the market around these days, we are getting more frequent calls to do business. So what you see is overall ballpark. We say, like, 70% of the results are more related to client related business. And 30% is just good -- the good position taking which has happened.

So, and again client related business it has to do with debt capital market business. Where we create a nice fee income, it has to do with derivative business. You get better bid out spreads as well. So overall, I think Financial Markets, I would say it's a 70%, 30% type of client profit attribution. So we hope that there is a good component in there. Is that guaranteed money in the Bank forever? No, because that depends on how loyal customers are in the long run.

If I look at the separate account provision, I think the difficulty with giving one fixed set of sensitivities is that it doesn't work, because they fluctuate; because some of these elements, they are sort of -- they have an implication on each other. Let me just give a simple example. If interest rates are going down and equities at the same time are going down, that has a different effect. And if interest rates are going up then equities are going down, because there is a various amount of guarantees written in this type of business; so one set of metrics is not easy to give on a non-linear portfolio.

I think if you look at the reclassified assets, we gave that in the Q4 presentation. I think what we actually told there is that we have the ABS portfolio. It was EUR13 billion. But there is also predominantly one part which is the corporate bonds, which were reclassified as well. But we can come back with the precise breakdown, but it was in the Q4 presentation.

Yes, I guess what I was wondering was, is if you could give the split of assets as we move forward through the coming quarters. But I guess it hasn't moved too much from the fourth quarter for [the] quarter.

No, so I think overall what you see is minus EUR0.7 billion in re-vals in Q1 on this portfolio. And again, just to be precise it was the non-US RMBS prime [8.7], the UK non-conforming [0.5], CMBS is [1] and other ABS is [3] and corporate bonds [9].

Okay, perfect, thank you very much.

Thank you the next question comes from Thomas Nagtegaal from RBS, please go ahead.

Good morning, I've got two questions basically; first one on your non-performing loans and your coverage ratio. Non-performing loans increased by 36% in Q1, what do you expect for the remainder of the year if the economic conditions do not improve? And are you comfortable with your coverage ratio of 29%? And do you expect it to stay this level, or don't you have to increase it further down the cycle?

Secondly on real estate, in the presentation you showed that you have EUR15.5 billion direct real estate exposure. EUR6.2 billion is not valued through the P&L, but amortized costs. In the past you indicated that about EUR1.5 billion was in Insurance portfolio. What is the remainder and how much impairment have you taken on this portfolio in the last three quarters? Thank you.

Okay if we talk about the NPLs, and the expectations, I think if you see the economy not deteriorating, but staying precisely where it is right now, although it's hypothetically then we still expect elevated risk, of course, to happen over this quarter, or over this year. So we have elevated risk cost levels at 108 right now, and we would expect that to continue.

And why is that the case? It is not all asset classes giving you difficulties at the same time. And what we already mentioned before, you first expect that more in the leverage business or in some of the more real estate businesses. Also, we have a deterioration in the US mortgage portfolio right now. And some of the other asset classes have just a more longer trailing effect. So not all of these come at the same time, but more elevated levels, like it is right now, that is what we would expect if the economy doesn't change.

If you look at the coverage ratio at 29%, for me the coverage ratio doesn't tell too much, because that just depends. If we have mortgages which are non-performing then you have a relatively high coverage. So that means that you have a relatively high NPL, because the mortgage is defaulting. But at the same time your coverage ratio, or your collateral is higher, therefore, you need less coverage. So if you expect more delinquencies in your corporate portfolio unsecured, then you need a higher coverage ratio; with mortgages you need less.

If I then talk about the real estate part, I recognize the EUR15.5 billion total real estate exposure. I also recognize the EUR6.2 billion, which doesn't go via the P&L. But then if we have the EUR9.3 billion left, basically, we have split it up between the Bank and the Insurance. The Bank has EUR4 billion and the Insurance has EUR6 billion. So I don't know precisely where the EUR1.5 billion comes from.

No, it was in a -- I think the presentation of Q4, when you stated that you had a small portfolio of amortized costs as well. And my question is more, what's exactly left in the EUR6.2 billion which is not revalued through the P&L? And how much impairment have you taken on portfolio in the last three quarters?

If you look at the part which does not get revalued through the P&L there is a part of it which is real estate development business. And on the development we have taken some impairment, and I think the total was EUR22 million? Yes, EUR22 million.

Then there is a part which is our own buildings, which are at cost, and as long as they are trading -- or trading valued at above this level you don't need to impair it. And then there is a little bit miscellaneous.

Okay, thank you. A little bit of expansion on the coverage ratio question. Have you already assumed a decline in collateral values going forward in your NPL provisioning assumptions?

Yes, because if you actually look at, for instance, your increased provisioning for say, for example, Dutch mortgages, that is not driven so much by poor performance, but it's more because you index your house prices. And therefore you're basically -- you're LGDs are moving up.

Okay thank you very much.

Thank you the next question comes from Frank Stoffel from Merrill Lynch, please go ahead.

Yes good morning, it's Frank Stoffel from Merrill Lynch. Just three questions please. I guess under Basel II -- Basel II is quite punitive with regards to a downward migration of ABS Securities. Of the remaining ABS that are sitting on your Bank balance sheet, in the first quarter, or in the second quarter, have you repackaged them or tried to move them to the Insurance balance sheet? Or in any way changed the treatment of these to avoid the negative impact of the rating downward migration on your risk weighted assets?

Second question, on your reclassified EUR13 billion of ABS, and by reclassifying them have you avoided any impairments or cash losses on these investments in the first quarter?

And lastly, in particular from the US, I'm hearing that the conditions you are offering at ING Direct in the US, are very aggressive and really at the top end of your peers. Could you please comment on that? Thank you.

I think let me take the first two questions already on the ABSs and Basel II. If you look at the securitization rules, indeed, they're particularly harsh on B. Now where would that be, where would that first and foremost be of relevance? That was on the Alt-A portfolio, and this was one of the driving forces to do the transaction with the State, that we don't have this large migration risk any more on our portfolio. So that has helped.

If you then look at the other ABS portfolios, I still need to remember that, and can correct me if I'm wrong, but still it is somewhere like 83% of the portfolio is rated at the AAA level. So this is something which is - you keep it on your radar screen as a concern. But if you ask me like is there something, like do I need to do a trade to immediate [resolve that]? The answer is no. But certainly we would be looking at how can we sort of prevent this migration risk?

If you look at the second question, which is the reclassifications; did reclassifications do anything on the impairments? I think that that is not the case because, well, first and foremost, what we reclassified were assets where there was no reason to look at any impairments at all. So impairments under AFS would have been zero on that, and impairments reclassified is -- it's a bit the same level. So in that sense, no, reclassification did not have an impact there on this portfolio.

So, your cash losses and credit losses in the first quarter would have been identical if you hadn't reclassified the EUR13 billion of ABS?

You're saying it right, yes.

Okay. Thank you.

Okay the third question I think we will ask Dick Harryvan our Leader of ING Direct to comment on. Dick.

In terms of our product conditions in the US, well first of all, if I look at the savings side, the rate is now down to 1.5%, which is very much middle of the pack and allowing us to maintain our savings and savings growth going forward.

As far the mortgages are concerned, we have really tightened up on the underwriting conditions, so on new mortgages the average loan to value is 60%, and the average [fiscal] score is [760]. So it's extremely high credit worthiness of our clients, which does allow us to offer a competitive rate. We are not offering 30 year fixed mortgages, only three, five and seven year [terms].

We have shied away, and greatly reduced exposure, let's say, in new business, from the most volatile States, being California and Florida. So it's very much more in the heartland and East Coast that we are writing business at the moment; so very high quality business, at a competitive rate.

But I'm just a bit surprised about this EUR13 billion of net production. I guess this is related to the US and to Germany. I think this is significantly more than what you have shown over the last quarters, I believe. Is this just down to luck or good marketing, if you say the conditions you're offering were in the middle of the pack?

The EUR13 billion, our total mortgage production in the first --

Savings.

Savings, sorry. In savings EUR11 billion was the production; of which, approximately EUR3 billion in the US and EUR3 billion in Germany. We have been aggressively reducing rates in -- sorry in the US and more recently also in Germany. So we will see an improvement in margin there going forward.

So, all our countries produced positive savings inflows. We see since the beginning of the year actually that in many markets, not in the Dutch market, that savings competition has decreased somewhat as far as the price setting is concerned, because the Central Banks are giving so much liquidity. So that's been good for us.

Okay, okay great. Thank you very much.

Thank you the next question comes from Chris Hitchings from KBW, please go ahead.

Hi thanks very much indeed, Chris Hitchings KBW, a number of issues. Can you explain a little bit more -- you've re-priced and de-risked your Japanese variable annuity policies, for example because of large DAC unlocking exposure on the old book? But if I remember correctly, you completely re-priced the Japanese annuities about a year/18 months ago. Are the problems arising on the new book or the old book? And if they're, as I suspect, on the old book, what's the point and purpose and effect of re-pricing the new? Could you give us some idea more of just what you're doing on, say, the US annuities as well?

And could you also explain -- sorry, this is my second question. The value of new business; clearly, you're talking about this re-pricing of new products. Can you help us as to; are there any other aspects in that change in new business? Are there any aspects of assumptions, economic assumption changes which you've made?

And finally, could you give us some update; we've not mentioned recently at all how the notes from the Dutch State are ever going to be redeemed, although you did mention, I think, at the Analysts' Day, some view that others seem to have got better deals? Can you give us some update on thoughts as to how that might happen and whether you've had any joy from the Dutch Government? Thank you.

Yes, if we maybe start on the Japanese part with the VA business. I think in the VA business on Japan, what we do have is both higher volatilities, lower interest rates, but we are basically exiting the Japanese SPVA business. So in that sense, what is there to say?

In essence we already did a lot of efforts in the past in reducing tracking error, in trying to get more accounting symmetrical, but at the same time, yes, we are taking right now a step further, and say, like, well, that is not something we want to do.

And then maybe Tom can add something on the US part on what we did there in changing our product offering.

Yes, so Chris, the current in-force product, we've done a lot on the, let's say, plus withdrawal benefit. We've reduced the rollup, -- and this is on page 27 of Koos' presentation. We've reduced the rollup. The maximum annual withdrawal, remember, depending on your age you can take out 5%, 4% in the first withdrawal. We reduced all those by 1% across the board.

We had a ratchet in many of the riders that ratchet every quarter. We've changed that to once a year for an annual ratchet. We've also reduced the commissions on the in-force, and we've done more hedging, particularly hedging new business -- [real hedging of new business], so that's all on the in-force.

We are now looking to launch a new set of products which in the US will only have index funds so there'll be no basis for (technical difficultly) to hedge. We will significantly reduce the value of the guarantee, so substantially lower rollups, if any, and less ratchets; maybe no ratchets as well. And then we will lower the commission overall on the new products and pay more of it over time versus up front. So that reduces the debt build up. And obviously we'll do more hedging on all four (inaudible) on the new product.

I just want to continue on the VNB on new business. Obviously, the re-pricing on the variable annuities, if you look at the US statistical supplement where we break out the VNB and the IRR on new business, you'll see a significant part of the decline in VNB was in variable annuity. I think it went from plus 21 or so in the first quarter last year, to minus 13.

And that's because, one, we're selling much less VA, so that increases the expense gap and has a dampening effect on the IRR and the VNB and that's by design, because we're certainly looking to significantly reduce the amount of the old product that we sell. Eventually we'll put that in a closed block, and so the volume has an impact.

And clearly with significantly lower interest rates, it has the effect of reducing the IRR and, therefore, the VNB in effect, because we have negative VNB and the variable annuity business (technical difficulty). So the big driver is in the US on the (technical difficulty) also we put our financial products business in run-off. We had done significant amounts of that business in '06, '07 and the early part of '08. The market's changed and we decided to put that in run-off, so therefore that also has a significant lowering impact on the VNB.

Okay, thanks.

Your question related to the Dutch State; let me put it in perspective. There was a question raised at the Annual Meeting where someone mentioned that all of our competitors had a better deal on the core Tier 1; a better exit deal that we have. And the question was; can you get that as well? Well, of course, we would like always to get a better deal. But we don't have a better deal from the Government than we have currently at this point in time.

With respect to planning to pay that off, of course, if we could we would, but at this moment I don't think we are in a position to do so. But we're constantly evaluating opportunities when they present themselves, but so far they haven't.

Thank you. The next question comes from Benoit Petrarque from Kepler. Please go ahead.

Good morning, Benoit Petrarque from Kepler in Amsterdam. My first question was just on Europe and the commercial book, which you don't disclose much about. Most of the Banks in Europe have signaled that Q4 and Q1 saw a sharp deterioration in assets quality, and I think you have shown that as well on your slide. Could you comment on the recent trend in the middle market and also the large cap segments? By recent trends, I mean what you have seen so far in April and May.

Also relating to this question, what is your current exposure to leverage finance? I remember that ING has been a big player in leverage finance in the past, so could you just remember us what is your total exposure?

The second question is on the double leverage. Can you give us an update where your regulator stands with regard to double leverage? And, yes, looking at your -- the investment program in the US, I will actually wonder whether you will get less diversification benefits from the banking [tranche] model going forward, and whether it will make sense to decrease the leverage forecast.

And the last question is on the Alt-A. If I'm right, the EU Commission approved the Alt-A transaction for the next six months. Is that reasonable to assume that you might have to take the Alt-A on board, in the course of capital decrease to more reasonable levels going forward? Thank you very much.

Yes, I think if you look at asset quality Commercial book, is there anything to be said between end of March and early April? The first thing is I think on loans, you look at the performance and covenant breaches of the larger loans as and when they come. But it's not that you have a statistic, like on the Retail side, where you can follow delinquencies more on a monthly basis. So I don't think there is, as compared to a quarter end, something meaningful to be said. You can see Financial Markets improving, but real economy you cannot spot a trend directly on that one.

If you look at leverage finance business, you indicated that we are a large player on the leverage finance side. In general, what you could say is we are a small player on the leverage finance side, because that is a business where we basically stopped producing already, early in -- was it 2008? Yes; because we have a book, and it's a total of EUR8 billion. And if you look at the EUR8 billion, the biggest part of it is small tickets. And the small tickets we are talking about less than EUR50 million in each of them, so it's an overall portfolio.

And I think we have an overall provisioning on that specific part of somewhere in the order of EUR200 million, but there is no growth in that portfolio; and yes, in general you see some deterioration, and therefore you see the provisioning of that part moving upwards.

If you talk about double leverage, yes, we have said like, well, we are a Bank and an Insurance company. And although many assets go down together, there is still one specific asset category, or one risk category, which is interest rate. We simply benefit in the Insurance company from interest rates going up and on the Banking side, those mechanics are different. An interest rate moving down has a good effect on us there. So there is an element of netting there, for which we allow ourselves a diversification benefit.

If the difference in size between a Bank and an Insurance company would change, the composition in the Group, then you would have to relook at the diversification benefit, but for this moment, I don't see a reason to change that.

And from a regulatory perspective, I guess you have some chat with your Regulator on a monthly basis on that, yes?

Always we have to apply to the Financial Conglomerate rules, so we have discussions with the Regulators. And yes, they look at your overall Group capital, and they compare that with minimum standards, Bank and Insurance, ignoring a double leverage. And that is something which has always been tested and which is continued to be doing so.

With respect to the Alt-A transaction and the approval by the European Commission, that's correct. They have asked for information, which we have provided and are in the process of providing, so we are beginning discussions with them.

Okay, thank you.

Thank you. The next question comes from Farooq Hanif from Morgan Stanley. Please go ahead.

Good morning everybody, I've got three questions actually. The first question is, when you did your testing, the severe stress test scenario to get to the 154 basis points, you explained that you took an average view over 2009/2010 and divided it by two. Could you talk about what you really expect in terms of the shape of losses in '09 versus 2010? Because clearly, right now you're having US mortgage type of pressures, but next year the longer tail stuff like Corporate losses could be bigger. Could you talk about the shape? That would be very interesting.

Second question is the new VA contracts that you talk about in the US, are they still essentially a WB product, but with far lower guarantees, and lower commissions, and just all the things you describe, so it's still a withdraw benefit product? And are you happy with the notion of losing market share quite considerably? So would you be happy dropping out of the top 10? That's question number two.

And number three, very quickly; of the EUR11 billion or so of RWA going up because of ratings migration, obviously that was netted off by other things, but that EUR11 billion, what severity of ratings migration impact on RWA growth do you expect in Q3, Q4 and over the rest of the year? Thank you.

Let me take the first question on the stress test. If you look at the stress test, what we did [it needed] 154 or 158 on average; if you look at what it did do over the years, I think there is a difference of EUR1 billion in terms of the year one, '09, would be a bit lower, and in year two you would have it a little bit higher. So -- but it's not precisely half/half. I think the year 2010 would be EUR1 billion higher, so there is a bit of an inequality in that part.

Again Farooq, the only thing is I don't want to call this necessarily a stress test; I want to say, like, it's just a scenario with a significant deterioration from where we were on January 1. And it just gives you an indication of sensitivity. So it's not a stress test, but it's also not my expectation. It's just simply a scenario with a deterioration from now, then this number would come out.

Then maybe on the risk weighted assets; risk weighted assets they are driven by two things. One is if you look at house prices going down it's the biggest driver on risk weighted assets on the mortgages side and it is rating migration which does it on the Wholesale side. So really, to see what are the expectations, you could say that the house price declines, as we have witnessed right now, they are part of the risk weighted asset migration on the mortgages side. So that is actualized and if it stops, then, of course, it doesn't increase, but if house prices deteriorate further, then we suffer.

If you look at the Wholesale lending side, that is more PD migration, so in other words, default migration, and as you know how the process in a bank works, you review your Wholesale loans throughout the year so you do expect that when you review all of these loans, that there will be a migration of the PD, so you do expect that to go up a little bit.

And then you have the wild card, which is a bit more the ABSs. And on the ABSs you have limited effects, but that only starts to deteriorate if it moves below the BBB level, and especially when it gets to single B. And as you know, we have a relatively high rated portfolio, so you don't have immediate expectations there over migration, but that is more -- over a long-term that could be an issue, depending on how the economy fairs.

Could I just ask -- before you answer the last question on VAs, could I just ask; what is the amount of ABS and Corporate Bond that you have rated A and BBB right now?

Maybe Tom, you will answer the VA question.

Yes Farooq, when you look forward at the VA market, I think that there are going to be two strategies, and we expect to be at the forefront of competing on lower costs, lower guarantee benefits and then lower risks -- costs for us. And so I think the net effect will be a significant reduction in the ongoing annual fees that we charge to consumers versus the other players who today compete with a higher benefit, although they're reducing those benefits and they charge 350 basis points or more.

So I think our products will be much lower on cost, but they do provide a lower guarantee. I actually think that depending on what consumers think, the lower fees over time on an Index Fund may prove to be as good as competitors.

So, I think, it's to be seen how the competition plays out. We certainly don't believe we're going to fall out over time and it will take a while for the markets to adjust to the new basis of competition, but we would expect a top player.

More importantly though, beyond just the new products, what we've said is we're going to focus our annuity business on the rollover market. There are 76 million baby boomers in the US that are 45 to 63. So there's enormous opportunity in the rollover and we think a low cost, easy to understand, simple annuity to rollover balances will be quite attractive.

We have a significant advantage in the rollover market, because we're a top three player in the US in retirement services, and we're the leading insurance company, other than maybe [TI] Kraft. But the other top players are Fidelity and Vanguard. We have $10 billion of assets rolling over per year on existing. So we would be looking to sell these de-risked, rollover annuities to that $10 billion.

Right now on the -- what I'll call ING legacy, so excluding CitiStreet, we had about $3 billion rolling over and we're getting about 30% of that rollover. On CitiStreet, obviously up until now we have gotten zero of the rollover, but there's about $7 billion of that total $10 billion is from CitiStreet. So if over time we can approach the 30% there, I think you're looking at a significant opportunity, and I think we'll be able to have a significant share because of the rollover opportunity.

In addition, we will also sell the new annuity products in the general market.

If you'd just forgive my ignorance, what do you mean by simple rollover products? Is that an immediate payout annuity?

No, basically what we're talking about would be -- we will have a [spear], or an immediate annuity, and fixed annuities, and fixed index annuities, but on the VA part of that. And we think given the amount of time people are living in retirement these days in the US that many will still want a VA. And so the VA will be that lower risk VA that I've talked about going forward.

Okay, thank you. And do you have an answer on the amount of AAA and BBB?

If we go to the ABS rating breakdown of the Group, then it's 83% is AAA. 9% is AA. And 3% is single A. So that is the highest rating.

Okay, thank you very much.

Thank you. The next question comes from Nick Holmes from Nomura. Please go ahead.

Yes, hello, I have three questions. The first one is just going back to the NPL coverage ratio; just wanted to ask whether the fall to 29% from 42% a year ago, which is pretty big, is really all due to business mix changes like more mortgages, as Koos mentioned, or whether there is anything else that you think is important for us to know about?

Second question is looking at the DAC unlocking; just wondered if you could tell us how much could be written-back if markets improve. Indeed, perhaps you could give us some sort of feel for how much could already have been written back in Q2?

And then the third question is just could you give us an update on your thinking about whether you'll pay an interim dividend. Thanks.

Okay Nick, on the NPL side, indeed, I gave as a factor business mix which plays a big role, because in general -- let's look at two things. One is if we look at lending, then we lend to lower rated institutions or individuals, but based on good collateral, and you do it more unsecured, on higher rated. And that rule has not changed, so that's one.

So that means if we look at provisioning, really if you have a lot more mortgages, where you could say an individual is lower rated, but you have higher collateral, mortgage production is the biggest driver of an NPL coverage ratio. And so that coverage ratio is not lower because of a change in the way we make our reservations, or the way how we make our loan loss provisioning.

Overall -- and you cannot compare the one crisis with the other, overall we have always been relatively conservative in loan loss provisioning within the accounting guidelines which we are given. Hence, the releases we had in the past. Now, I cannot say that that happens in the future. The only thing I want to illustrate is that my coverage ratio is not lower because we changed the policy, because we still do our provisioning exactly the way we did it before.

Okay, thank you.

Yes Nick, on the DAC unlocking, that's obviously a complicated question. But let me give you sort of a shorthand version and there's some complexities around this, because you have to keep in mind that we have 650,000 or so VA contracts outstanding. And therefore, how that all fits together it's not just a mean average.

But as you know, we -- and we've showed on -- Koos showed on pages 24 and 25, the negative DAC unlocking comes from three sources. One is the equity fee income, so that given how far the markets have dropped we project, as you know, wherever the quarter end is, so at the end of the first quarter the SMP was at 798 and we assume from that number that 2.25% quarterly increase. So therefore, we have equity fee unlocking, as you know, because we are now assuming growth off that much lower number.

In the past we had not had guaranteed benefit unlocking, because the contracts had not gone so much in the money. But just like for fee income, that's more fees on assets under management. But on the guaranteed benefit cost as the markets go down -- again we never assume a mean reversion. So we are now assuming in the first quarter that the equity market over the long run will grow from 798 at 2.25%.

And so what you're finding on the guaranteed benefits is somewhere out there in 20 years we actually will pay some of those. And so that's -- and as the market goes down more and more payments will be due well out and we do the -- we amortize the DAC according to that.

And then the third area is we assume a set basis point of impairments in our long-term assumptions. Obviously, we've had more impairments in the third and fourth quarters. So the actual and the projected have also resulted in some DAC unlocking. Clearly, if any of those -- so if the equity markets grows more over time from the 798, more than 2.25% per quarter then we'll have the opposite effect and we will have DAC unlocking on the upside.

And the same would be the case in the guaranteed benefits that you -- over time you might assume that what you pay 20 years or 30 years now will be much less if the markets grow faster than the 2.25%; and the same with impairments if impairments improve.

So yes, I think that you should assume again simplistically that there'll be positives there too, additional complications that you have to be aware of. One is that we have -- as Koos said, we have increased the equity hedging on the VA block to protect statutory capital. And therefore, whatever benefit we have in the rising markets and DAC it might be offset to some degree by the short futures situation and the put options that we have in place.

And then you'll recall, Nick, because you've been around for a while, that up until the third quarter 2002 we actually used mean reversion and we suspended that in the third quarter of 2002. A few times over the last five years we looked at going back to mean reversion, but for a variety of reasons we didn't do that. But we are getting to a point where one can argue that the best estimate of 798 plus 2.25% is maybe too conservative.

So we are looking at mean reversion and should we reconsider that. We haven't made any decisions. We'll look at that in the future. But to the extent that we did put mean reversion in that would clearly have a cap on the upside. So that would also impact the future benefits from DAC unlocking. But it is a mirror image.

And also, the last point I'd make is you can only unlock the DAC once. So once you've amortized it, it's gone unless you have significant upside activity down the road.

Tom, thank you for that very full answer. Just coming back to the annuity guaranteed benefit cost. I'm, I suppose, slightly surprised at the size of the charge in Q1. And is that -- does that reflect a change in methodology for accounting?

No, because, well, look when we did -- so the first time we really had a material guaranteed benefit unlock was in the fourth quarter. So what we assumed when we did an unlocking is I think the SMP ended at 903 at 12.31.08, so we used 903 growing at 2.25% for the future. And that resulted in the 346 million unlocking.

But then -- and we actually assumed -- so as part of that assumption, the 903 should have grown to about 916 or so in the first quarter. It didn't. It went down to 798. So now everything goes down 105 points on the SMP and in the future from 798 we assume the 2.25%. So we assuming that the in the money position is more in the money, because we're -- forever we've locked in that 105 point decline from 903 to 798.

So as a result of that, when you look at the value of all of those guaranteed benefit costs since they each year in effect have a lower assumption on where the equity markets are we, therefore, had to do unlocking again in the first quarter.

And (technical difficulty) the further you go down more and more contracts get in the money. So it does have a significant negative effect. Again, that could in the future depending on markets reverses as quickly as we've written it down it may go the other way, depending on a lot of different assumptions.

And then the final thing is in those future guaranteed benefits, in the third quarter I think the swap rate was close to 4% and now it's -- I think in the first quarter it was less than 3%. So that also means the present value or the guaranteed benefit enlarged and that also has an impact on the DAC unlocking.

Okay, thank you very much. Sorry, just one very quick follow-up question there, which is on the hedging. Has anything change there on those products?

We've done more hedging so the notional amount of the hedge has gone from around EUR2 million to EUR5 million. But we did that not so much just to protect the fee income and the guaranteed benefits. That was really more of a -- to protect statutory capital, so that we don't have to put more capital into the US. So that's a change.

In addition, Koos and I and others are looking at instead of hedging by short futures to protect statutory capital to go to put spread and collars. And so it's -- we did a EUR1 billion of that in the fist quarter, switching from short futures to put spread option and we'll probably do more of those going forward.

Okay, thank you very much for that. Maybe -- sorry, but just the last question on the dividend?

Yes, the last question on the dividend, Nick; that's not at this moment on our agenda. We'll take a look at that later in the year when we have a better sight of where our numbers are.

Okay, thank you very much.

Thank you. The next question comes from Tony Silverman from Standard & Poor's Equity Research. Please go ahead.

Yes thank you. I'd just like to come back to the helpful slide 16, which has the Bank profits before market impact. And the narrative then moves on really to talk about the underlying profits, which obviously includes in essence the market impact. But it would be helpful if you could talk about how, particularly, Retail Banking moved at the level before market impacts, because it seems it might have been flat or up?

A second question was if you could just clarify on the conglomerate solvency, which you've mentioned that you are subject to. How that has moved as a coverage ratio in Q1?

And, yes, that's it. I think the question on VAs has been answered, thank you.

Maybe quickly on the Retail side; well first, if we go to page 16, then indeed you see an underlying result and then you get a whole series of impairments. If you actually look at our Retail Banking business, overall, if you look at the commercial results there, before -- the first thing is on the Retail side I don't own a lot of security. So that means impairments on pressurized assets they play hardly any role there.

I think on the Retail side the only thing what plays a role there is my long lost provisioning part; my risk cost. And if you look at the risk cost overall on the Retail side there were EUR330 million over the quarter. So EUR333 million, so that is basically the biggest driver there.

And then, of course, the other part, which play a big role is the drastic cost reduction, which we have done. But the part -- the top line of the Retail was more driven by the fact that initially we had stiff competition there on the savings money and we are adjusting those rates down gradually right now. So that's in a nutshell the Retail part.

The precise question the conglomerates and solvency yes because you are talking about a coverage ratio. If I look at the coverage ratio for conglomerates, yes, we do have a holding company, and in a holding company you have leverage. Nevertheless, there is sort of a test and that is the Financial Conglomerates Act. And that Financial Conglomerates Act just looks at the total amount of equity what you have, and then it looks at how much is it covered. So that is one of the tests, which is more from a regulatory perspective.

If we look at it more from a market perspective, yes, then you more look at do you have enough capital to cover for your internal risks and that is our internal way of looking at it and both of them are adequate.

And do you have a number for that regulatory?

No, I don't have it right now here. But I think it is something that you have to then look at minimum requires consolidated EU and then at the same time you look at your Bank minimum requirements and you relate that to total equity. And I would be for the precise details of that, I would get in contact with Capital Management on it. But that is not something, which is causing a concern for us.

Okay.

Thank you. The next question comes from Farquhar Murray from FPK. Please go ahead.

Hi there, Farquhar here from Fox-Pitt; just three questions if I may. Just starting with the commercial result of EUR2.2 billion, clearly that's a substantial recovery from where it was at the fourth quarter. I'm just wondering if you could just run through the sustainability of that, most particularly obviously on the Financial Markets business. I'd particularly like to know how that's continued in the second quarter and where you see it going longer term.

Second question if I may on the other DAC component. I'm just wondering, clearly the equity market is pretty much back where it started at the start of the year. How much of that number could we see recover in the second quarter?

And then finally just on rating migration. The EUR11 billion of risk weighted asset growth was about 3% growth in the quarter. The IMS discussed a rule of thumb for pro-cyclicality under Basal II about 8% to 10%. You're slightly north of that, but not very much. I just wonder whether that would be a useful rule of thumb for the next couple of quarters going forward. And that's it, thanks.

Maybe let me start with the Financial Markets part. Again, yes, we had outstanding results there and we split that business up. You have ALM results. You have prop results. And you have client related results. All of them were actually pretty good, but at the same time you could say that 70% of the attribution is more to client related.

And that's both if you look at simple things like debt capital market business, that's where we were not a player and now we are. So we are collecting the benefits from this business right now, and that is simply because there are less players in the market left at this moment. So in that sense there is a more structural element in there, which we expect to continue.

Do you expect to continue that forever? The answer is potentially not, because there will be competition again if markets start to improve. But this is not all sort of prop position taking what is in that business; so in that sense a relatively hopeful. Forward looking, we don't make statements on that part.

Other points --

But just how has the second quarter developed so far in terms of activity levels from clients?

Yes, I think on the activity levels of clients I think that is something we will comment on on the next quarter.

Okay.

There was another point on the risk related assets, on the migration. In general if you look at it, what I already alluded to is the mortgage is more driven by house prices and migration is something ahead, which plays a role for more the corporates. But overall that EU rule is not a very strange rule. We look at it in terms of projections as well. The only thing what we have is we do have some levers to sort of cut it down.

And one of the things is a little bit more balance sheet integration, because remember we were a relatively large Bank in terms of owning investments. And if you let your investment, so your bond portfolio, run off that serves a bit as a cushion as well. So I recognize if you leave everything alone your rating migration number, but at the same time we do have some counter [veiling] effects. Not as beneficial as what we had in the first quarter with the Alt-A. That was, of course, a big help there. But overall in terms of balance sheet integration we have a lever in our hands.

Okay.

Tom?

Yes, [Farooq], on the other DAC unlocking, again with a caveat that it's complicated analysis and we actually do this on 650,000 contracts. So I'm giving you a rough rule of thumb. So it's a rough rule of thumb; would be if the equity markets move 10% that would have an up or down in the rough range of EUR150 million to EUR200 million on equities. So, keep in mind each quarter we expect up 2.25% and so if it's 10% above that or below then we would have that range that I just talked about.

In addition, you have to look at what's going on with interest rates and so a 100 basis point move in an interest rate again would be about EUR50 million. And that may change as rates go significant -- up or down beyond the 100 basis points.

And also remember, what I said that we do -- we do have a EUR5 billion hedge to hedge capital. We don't have this position, because of IFRS hedging. And EUR4 billion of that is a short future position on the SMP500 and EUR1 billion of that has a put spread collar again on the SMP500; so that, if markets go up, it would have an opposite effect obviously on that hedge.

And then finally, as I said before, we are considering going back to mean reversion. So if we don't, then you don't have to worry about it. But if we do, and depending on which quarter -- mean reversion is just that, you assume things move back to the mean over time, say, for like we look at three years back, five years forward, for example, would be pretty typical.

And so as markets move up, if you have mean reversion on, depending on your quarter you will actually cap in the move in other market up. So at some point it cuts off the benefit. So again not saying we're going to do it or not, but that's another factor to consider.

Thanks for that. Just a point of detail on that EUR150 million to EUR200 million, is that just other DAC guarantee benefit component or are you adding in the fee related hedging?

No, that's the guaranteed benefit unlocking. I think we've told you in the past that on the fee unlocking for every 1% -- so, [it seems] I gave you 10%. Let me just -- for 10% the range would be EUR100 million to EUR130 million.

Okay, so that's on top of that EUR150 million to EUR200 million?

Yes, there's really -- as long as the contracts are in the money there's -- in addition to the equity fee related that you're used to, you have the benefit unlocking, yes.

But as a rule of thumb effectively it is symmetric to up and down?

It's symmetric, but --

Complex.

I'd have to get into all the deltas, because at some point the gamble probably means that it changes. But from where we are today, up to a certain up or down, I think it's right. If you go well beyond that up or down it probably would end up being a different rule of thumb, but -- so that would be my answer.

Great, thanks.

The next question comes from Bruno Paulson from Bernstein. Please go ahead.

Thank you very much. Firstly, on the margins in the bank, with ING Direct we assume a EUR60 million or so headwind next quarter, because of the full effect of the deal with the Dutch Government and Alt-A coming through. And secondly, are there signs of Dutch retail margins improving or is that still as tough as ever?

Second question is what's your economic capital position? Or if you've told us what it is, where is it in the disclosure?

And finally a request, in the last few quarters you've given the commercial result and then the market effects and so on by business unit not just for the Bank and Insurance, that's actually quite helpful for modeling things out. I'm wondering if you could provide that again.

Dick, you want to do the ING?

Bruno, on the Dutch Government deal and the impact on income, so we had two or three months already in the first quarter. So it will be a third more. Its impact is just over EUR100 million per quarter, so it will be more like EUR30 million. I think that kind of pales by, let's say, the impact of rate decreases on our savings product. So let's say, without giving a forward looking statement, it's not necessarily a reduction in interest income.

Yes, that's helpful.

Okay, with the Retail business in The Netherlands we see our margins slowly getting a bit better and we anticipate that the movement will be a little bit more pronounced in the second half than in the second quarter. Economic capital, Koos?

Yes, Bruno on the economic capital, indeed, we did not disclose this quarter our AFR to EC ratio for a number of reasons. But the reason was not a deterioration, because obviously that AFR EC ratio improved to 135%. So it's up. So that mean, like, it's better. The only reason why we didn't do it is we found actually two things of objection.

The one is EC is, of course, quite sensitive to the credit spread, especially on the Insurance side, because it's a very long-term business and you apply an illiquidity spread to policies and that is something, which is a big factor in there. Second part is, yes, we are in this sense a little bit stand-alone that nobody else is doing this.

So a number is volatile, although it has improved, there is an element of subjectivity with this one component which is illiquidity spread, which made us realize probably it's better to show this more on a once a year basis than to monitor this on a quarter-by-quarter basis. But now you have it anyway.

Thank you.

And you'd like to see us helping you with the commercial results. We'll take a look at that and see whether we can help you with that one.

Thank you.

Thank you. The next question comes from Ryan Palacek from Kempen. Please go ahead.

Yes good morning, just a couple of detailed questions. First of all, after the reclassification of the asset-backed securities that we saw in Q1, I'm wondering is it thinkable to see any further deconsolidation of the ABS portfolio or any other further steps to distance it from impacts of -- valuation impacts, but also potentially from ratings migration impacts?

And second question is what do you have for contingencies in the case that the Alt-A deal would not be approved by the European Union?

And finally on the AFR EC question, the 130% was that Group or was that for Insurance? And can you give us some idea as to how it's been moving in Insurance in the last quarter? Thanks.

Let me maybe first talk about the reclassifications. Yes, we did reclassify part of the ABS portfolio. And then you could say, are there further steps there or are we envisaging further steps? Well, one of the things what we are doing right now is the following.

Reclassifications, the primarily the impact it has is on revaluation reserve, because you start to stabilize that. What you see right now is although asset markets are a bit more quiet, a bit more friendly at this moment, that plays one role.

Second is we have seen changes in US GAAP. They affected more the way how you impair so there reclassifications don't play too much of a role, because reclassifications is a revaluation gain. But we are also looking a bit carefully of are there going to be changes on the IFRS accounting standards as well. So that is why I would not exclude further reclassifications, but at the same time, for now we are holding our powder a little bit dry. That is one.

If I look at the other part and that is rating migration, are we doing anything about this because indeed reclassifications don't help you with rating migration; rating migration is a thing on its own, whether you classify it as this or that.

Now on rating migration there are a few things what could help; a sale, buying protection, trying to buy securitized protection. We would be looking at things, but that is more a process which we will -- which we are looking at over the year, because again, I gave you the rating distribution. The portfolio is relatively high rated right now, so I don't want to exclude it at a certain moment. Something could be downgraded, but it's not that all these ABSs are about to become single B at this moment. So over time we are looking at solutions for this but it is not something where we are making a priority that it has to be done before a certain date.

If I look at contingencies for Alt-A, we have a discussion with the EEC and the EEC they have said that the transaction in itself, the exchange for the Alt-A for funding for the State, that component of the transaction has been fully validated.

They are still looking at it and, of course, it's a highly complex transaction and they want to screen the pricing. They've said that potentially we want to be able to look at modifications but not on the core of the transaction itself. So I don't think it's something where we need to make anticipations for right now.

If I look at AFR EC, the number which I gave you, the 135 is a Group number and that is -- sorry, it's the Insurance number, and on the Group it's 154, so now you have it all.

Okay, thank you.

(Operator Instructions). There is a follow-up question from Farooq Hanif from Morgan Stanley. Please go ahead.

Hi there. I just wanted to ask about your RBC ratio in the US. Overall, what was that if you can remind us for 2008? And what have you done so far in the first quarter to have to put capital into the US to keep that ratio up?

Yes Farooq, the RBS ratio, we're still working on that in the first quarter, because the Alt-A deal with the Government right now is -- you probably don't know what line 9 is, but it's basically we are holding more capital than we think we need given that it's a AAA credit. And so if we get the right treatment on that, we'd be at about 313 as of March 31. So we try to keep it at 325, so we're working on some reinsurance and other deals to get it there.

We did put capital into the US. Part of it came from the holding company in the US and part from the Group ING NV of -- we put EUR900 million in as part of that rating.

And sorry, if we put in the full impact of line 9, what would the RBC ratio be?

If we get the credit it's 313. Without the credit, I think, it's 286.

Okay, thank you very much.

(Operator Instructions). Thank you sir. There appear to be no further questions. Please continue with any other points you wish to raise.

Okay, then I would like to thank everybody for being on the call and probably we'll see each other in the very near future in one of these occasions. So thank you very much and good luck.

This concludes ING's first quarter 2009 conference call. Thank you for participating. You may now disconnect.