ING Groep NV (ING) 2009 Q2 法說會逐字稿

Good morning. This is [Yemma] welcoming you to the ING's second quarter 2009 conference call. Before handing this conference call over to Jan Hommen, Chief Executive Officer of ING, 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, movement in the 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. Good morning, everyone. I'm here with Koos and Patrick, and we will make a short presentation on the results, and then we will open it up for questions.

ING returned to a profit in the second quarter, and we are ahead of schedule of our Back to Basics program. I think those are the main messages that I would say when you look at slide number two of our presentation. We'll get into the details a little bit later.

On page three, you see the return to profitability in Q2, EUR229 million, and you see how we have fared compared with the last three quarters. So for the first time since three quarters, we are making again a profitable result.

Underlying result of EUR299 million, and after taking charges for cost reductions and net profits, the net profit to our shareholders is EUR71 million.

On page number four, you see our Commercial results, and then we do that before taking market and risk costs, and you see that we had a significant increase in our Commercial results on a pre-tax basis, reflecting, I think, much better markets in financial markets, but also the success of our Back to Basics program and our cost reductions here.

The Commercial result is driven by a sharp increase in interest, and we also could benefit from re-pricing of loans in our commercial markets and in our savings products.

The insurance achieved a commercial result of EUR500 million, and that's significantly higher than it did in the previous quarters, and here also cost containment and higher assets under management have driven the results.

On slide number five, you see a repeat of our Back to Basics strategy, and I must say, it's progressing well, as you will see in the next couple of slides.

Slide number six, you see the cost reductions. We have had so far cost reductions of EUR525 million. We are ahead of schedule, and we believe based on the checks that we have done and the update of our program, that we will book a EUR1.3 billion cost reduction at the end of this year.

Insurance is way ahead of their cost reductions. They have really taken a very strong action here, mainly in the US and in the Bank, most of the cost reductions will come in the second half of this year.

When you look at slide number seven, you see that the reductions in employees is also ahead of plan. It's never nice to have to let go people, but it had to be part of our cost reduction program. We are now at 8,200 people. A lot of them were sales related type people in places like India and Latin America that were basically agents, but they had a connection with our Company here. That is the main reason for the increase.

The next page, on page number eight, you see the deleveraging of our balance sheet. There was an important item in our plan to reduce our balance sheet by EUR110 billion, but we have resulted -- our actions have resulted in a reduction of EUR164 billion, clearly ahead of schedule, and it has been done partly by some netting, but also mainly in a decline in loans and advances in our balance sheet.

On page number nine, you see the -- what does it mean if you look at the deleveraging on the asset leverage of the balance sheet? It's a number that has become popular during the crisis, and you see a significant reduction here. We are now below 30%, and I think that's a good number to be in. If we would calculate on US GAAP, then the number would even be lower, because then we would have, I think, more like a 26% number here.

Our policy has been to be very careful in our management, and that's why we had a number of hedges on our investment portfolio and shares mainly for the insurance company. That has resulted in a significant loss of hedges but, at the same time, the share position has increased, the share market has increased, and you see that reflected, together with a coming in of spreads on fixed income positions, that has driven a significant increase in our equity position of about EUR2.9 billion, so that's where the offset is on our hedging cost.

When you look at our capital ratios on page 11, all well within targets, 7.3% for Core Tier 1, 9.4% for Tier 1, I think good ratios and also the others I think are good ratios. The insurance went up a little bit more because we were putting more capital in certain areas than the dividends that were streamed back up to the Company, but all in all, I think numbers that are solid and are good numbers.

Page number 12, you see divestments. We have sold a few activities so far. You see them listed here; Canada, our pension fund in Russia and Argentina. Relatively small, but in total, they have generated EUR1.5 billion of our capital increase, that came from the sale mainly in Canada.

We are very careful with our sales program, because so far, we are seeing markets being very thin, and we are not willing to sell at any price and sell assets at higher sale prices. So we are being careful, and I think it has been the right strategy, because we are beginning to see markets picking up a little bit and prices getting a little bit better.

Our Back to Basics strategy, also an example here of our insurance company in the Netherlands, who is consolidating basically three different businesses in the Netherlands, with the benefit of about EUR100 million that will be reached over time in 2012, another example of what is happening in our Back to Basics program.

Let me now hand it over to Patrick, who will give a detailed presentation on the results.

Good morning, everybody. As Jan has said, ING has returned to profit in the second quarter, booking a EUR229 million profit as compared to a EUR305 million loss, and I'd like to take you through some of the key movements, particularly the market impact movements that have underpinned that result.

The first point I'd like to make is, looking at the top of this slide is that we've recorded an underlying result before market impacts of EUR2.3 billion, and that's a significant improvement on the preceding quarters of 16%, so the underlying result is up, and up strongly.

Going through the market impacts that take that down to the underlying result, the first one we see is impairments. Now this is primarily impairments on debt securities Alt-A, and this has increased as compared to the first quarter in line with weakness in the US housing market and a rise in delinquencies.

The equity-related impact of EUR580 million is, as Jan referred to, reflects the cost of hedging our capital as we take a prudent and careful view of managing our equity results. Here, this breaks into two key pieces. One is in respect to the US, indirect equity hedges of EUR346 million negative, and that's partly offset by DAC, and we will come back to that a little later.

The other piece, direct equity exposure of EUR417 million loss, reflects the impact of hedging direct equities, and is somewhat offset by gains, unrealized gains, in our equity account.

The next slide is Real Estate. In this line, we see the impact of impairments, primarily on Commercial Real Estate in the US. The Commercial Real Estate market still is weak. There's limited funding, so we are reflecting here an increase in the required yields on our Commercial Real Estate portfolio.

One point to draw out here which I think is important, one of the key elements here is our Canadian Summit portfolio, where we have a significant minority stake, and of that EUR686 million charge, EUR100 million of it is taken off in the third party line beneath, so the net exposure is EUR100 million lower at the bottom line.

The loan loss provisions are up to EUR852 million as compared to EUR770 million (sic - see Presentation) in the preceding quarter, and Koos will later give you a more full explanation of the drivers behind that.

Moving to the next page, we see here a breakdown of the results between the various components of the Bank, Retail, ING Direct and Commercial. Retail Banking is up strongly, as you can see, with a profit of EUR426 million, and this is driven by the success in reducing costs, which Jan referred to a little earlier, and also lower loan loss provisions in the Retail segment.

ING Direct records a loss. Notwithstanding significant underling cost reductions of 15%, the result was dragged down by the Alt-A impairments I referred to a little earlier.

On Commercial Banking, I'd like to turn to the following slide because I think this more clearly illustrates the story in Commercial Banking. Commercial Banking is where ING has the majority of its Real Estate portfolio. And you can see on the right hand column here, we have taken significant impairments and write-downs on fair value of our Real Estate portfolio.

On the other side, we see the underlying Commercial Banking performance. So this has been a success story for ING. We recorded a profit of EUR432 million in the second quarter, which is down from the EUR696 million in the first quarter.

The key point to make is the reason for the reduction is higher loan loss provisions, but the revenues have held up very well. Revenues are only down 6%, and this follows a quite spectacular first quarter for ING, and I think generally for the market. So revenues are holding up, which is a positive here.

The other key point I'd like to draw out is the cost/income ratio in this business at 37% is somewhere we would aim to continue with; a very strong result.

Going forward to the next page, interest margins; interest margins rose to 1.3%. It's up 26 basis points. That follows a number of management actions, ING Direct and in Commercial, to improve our margins. It is also benefit from the balance sheet reduction.

On the right hand side, it's quite a busy slide here, what it shows -- the key points to take out of this are that whilst the ECB rate has fallen, and our particular Netherlands savings rates have not tracked down in line with ECB, they are tracking closer to the two year average swap rate, which more closely reflects the value of funds.

Moving forward to insurance on the following page, the picture here is of a profit in all our regions. We returned to profit in Europe, Americas, and Asia Pacific. And the drivers -- the commonality of drivers across this region in that cost reductions, which was referred to earlier, is coming through to the bottom line.

Another key effect that we're seeing is that the equity market uptick, particularly in the US, is helping us improve our fees and client balances in the US. In Europe, we see improvements in our technical margin. And in Asia, this business is doing well, and we have not suffered the volatility in our VA business in Japan that dragged down the results in the first quarter.

Moving forward to VNB and APE, what we see here is that -- two things. One, there's been an improvement in VNB as compared to the first quarter across all our business lines, albeit it is significantly lower than it was a year or so ago.

The impacts that I'd like to draw out here are that Asia is going to -- is bearing part of the impact of our decision to exit single premium variable annuities, and the US, we've a combination of factors here. We are seeing the impact of weaker customer demand, particularly for single premium products in the -- as the market is still yet to stabilize. And also, it reflects management actions to de-risk and deleverage our SPVA business in the US.

And I'd like to hand over to Koos now, who will take you through the risk presentation.

Okay, thank you. Good morning to you all. Let's first start on page 23 with the loan loss provisions. If you look at the loan loss provisions, then you see that this quarter the net loan loss provision as a basis point for credit risk-weighted assets is 118 bps, and the expectation is therefore this year that it will stay around these elevated levels.

If we take one step back and we look over a cycle, then we always say over a cycle we expect loan losses to be around 40 basis points/45 basis points. Do remember that over the last years, we have run with a period of loan losses more around zero, and we are running now at loan losses a little over twice the amount, and we expect that to continue for the next two quarters.

If you -- if we move to where do these loan losses come from, page 24, then you see that the contributions are from many different industries. so there is not one thing particularly sticking out. And if you have to mention something sticking out, then it would be that the leveraged finance component, the EUR136 million, that's a relatively small portfolio where we have taken some provisions on. And the other one is the US own-originated mortgages, which is a relatively small portfolio where we have taken a provision [unsizeably]. But for the rest, it's a more even contribution.

If we then start to move from the components of loan losses to the mortgages, then we are on page 25. And on page 25, you see that actually the non-performing loans just only gradually edged up from 1.2% to 1.3%.

Now, where is that? Basically, that increase is in the US, where we moved from 3.7% non-performing to 4.1%. And, again, I do like to note that if you compare that with prime ARMs which are moving to 13.7%, the portfolio is reasonably holding up, but nevertheless, suffering with the US mortgage market.

The other thing to note on this page is, if you actually look at the largest portfolios, that is Netherlands and Germany, there you see that non-performing loans have not moved an inch.

If we then zoom in on the Commercial side, Commercial is on page 26, you see the Bank's commercial loans. What you have there is basically the larger sized corporate, mid-sized, and SMEs as well.

What you see on this is that non-performing loans increased there in this loan book, and that was driven by Structured Finance and Real Estate Finance. And at the same time, also because the NPLs went up, the stock of provisions on this total portfolio moved up from EUR1.7 billion to EUR2.2 billion.

If we then move to adequacy of provisioning, then we are on page 27. And on page 27 what you can see is that the cover ratio of non-performing loans is around 33% at the moment, and in order to understand that, we have given a breakdown on the right hand side as well, where you see the provision cover ratios.

What you see clearly there is that in the Benelux mortgages, you have a relatively low cover, but that has to do with the high value of the collaterals in this portfolio. And the same applies, in fact, to Structured Finance, Real Estate Finance, and Leasing, which is a collateralized lending type of business. So there, your provision covers are lower.

And where it is higher, you see that in areas, for instance, as other retail lending, where you have your mid-core financing, which is not necessarily done on a collateralized basis, and there your provisions are higher.

But all in all, the mix is that you end up with a 33% of NPL provisioning. And what we see already happening now a bit is that the provisions which you took early on in the crisis, you start to see a little bit of the releases back. And that was on a few pages before.

If we move from the provisions to the risk-weighted assets, what you've seen overall is that risk-weighted assets on the Bank did not grow a lot. And there are pluses and there are minuses. If I start with the minuses, then you see that credit risk migration still plays a role. We had EUR11 billion of credit risk migration in this portfolio, and at the same time, we did take management actions. And the management actions, they were basically trying to keep [the] balance sheet down, trying not to invest too much in bonds.

Also, the management actions taken were more specific, and that is we finalized our treatment on the Alt-A portfolio. And, in fact, there's -- and the good news there is that we have now come to a resolution that it is more a loan treatment which is applicable to this portfolio. At the same time, that is at a sacrifice, and the sacrifice is that we had to take an RWA hit of EUR1.8 billion this quarter.

So net-net, you could say, if you look at this page, that our risk-weighted assets did not go up tremendously; at the same time, that a few factors have stabilized. But, at the same time, credit migration is still an ongoing issue.

Then, if we move to page 29 and we move to the Alt-A portfolio, let me say a few things about this. On the one hand, what you see in July, you see prices of Alt-A recovering, so that is the market, but what we do with our impairments, that is more linked to the real economy.

Now the real economy in Q1 was minus 5% in the US, with a significant rise in unemployment. Unemployed in March 2010 means delinquency in May -- of March 2009 means delinquent in May 2009. So your delinquencies, they have gone up from 17% to 20%, and that is the driver for our impairment process.

Now if you look at the impairment process then you see that EUR51 million of estimated credit losses have resulted net-net plus re-impairments in EUR323 million of impairments, and I think we all know what the treatment there is.

Overall, so what you see is basically, although market prices tend to improve, right now you still have the lagging effect of the bad quarter one which you had in the US. One thing what is noteworthy is that the portfolio had quite a significant amount of pre-payments so far this year.

If we then move from the Alt-A portfolio, we move to our total revaluation reserve. The negative revaluation reserve on page 30 was minus EUR11.8 billion last quarter, and it moved to minus EUR7.9 billion this quarter.

Now we already stated that overall, a pull-to-par effect has a large role in this, but this was not a pull-to-par effect. This basically has to do with credit spreads coming in significantly. Nevertheless, what you can say is, with a minus EUR7.9 billion revalue reserve, you do expect over time that it will crystallize out so that pull-to-par effect of EUR1.6 billion per year is still in there. But we benefitted overall significantly from credit spreads contracting.

If we then move to the equity portfolio, page 31, we have direct equities, and we have a more indirect equity exposure. Let's first move to direct equities, so that is more in the European insurance and on the banking side.

What we have there is direct equities and results, or gains are basically realized in equity. At the same time, the hedges, and what are hedges? Those are the index options, put options, the hedges lost in value over the last quarter. So you have overall unrealized gain -- an unrealized gain in equity, and you have a loss in your P&L.

If we move to the indirect equity exposure, that has more to do with the capital requirements in the US, local capital requirements. There we had put hedges in place which gave us a negative result of EUR346 million, which was partially offset by the DAC. And if I give an overall outlook, then in Europe you could say hedges should play a little bit less a role in the future, because at current market levels, those put options are more out of the money, so their results to increases/decreases is less at the moment.

And if you look at the US, in the US you can see that the statutory capital requirements at a higher S&P level are less volatile so, therefore, I need less hedges in the US going forward.

If we move from the equity side to our shareholders' equity at page 32, then on the net basis, there you can see that we had a 15% increase in our shareholders' equity in one quarter, and the components of where it came from is clearly outlined there.

And there, I'd like to leave it and hand over back to Jan.

Thank you, Koos. That concludes the formal part of the presentation. And I would say let us now open it up for Q&A.

Thank you, sir. (Operator Instructions). First question comes from Duncan Russell. Please state your company name, followed by your question.

Good morning. It's Duncan Russell from JP Morgan. First question is on the Real Estate revaluation and the Summit portfolio. Just on that, my numbers, I had the Summit portfolio being worth about EUR1.7 billion at the end of 2008, and had -- sorry, EUR1.7 billion at the end of 2008, and rental income growth of about EUR147 million. So the yield on that portfolio last year looked to be about 8.4%. The occupancy rate was about 90%, so just a bit surprised at the extent of the revaluation downwards there, and if you could comment on that. And in particular, I'm just wondering whether you're teeing that portfolio up for a disposal.

Second question was on the Bank net interest margin. Historically, a couple of years ago, ING stood about EUR450 million from the yield curve, and obviously over the last couple of years that's been zero. I'm just wondering what the yield curve result is in the first half of this year, and where that's going.

And then third one is on the comment on the front page about the additional strategic options. It's quite an interesting comment, and I was just wondering, well, two things there really. Why so soon after a major strategic review do you see [new] additional strategic options? How has that emerged?

And secondly, you explicitly talk about an ambition to repay the Dutch State, but that doesn't really make sense until your share price is above [EUR15]. So just wondering why you've put that in there as well. Thank you.

Okay. I think Real Estate, Patrick?

Hi, Duncan. Yes, on Summit, the Canadian portfolio, as I said earlier, the yield -- the market is quite illiquid, and hence we're seeing an increase in yields. We had a full external valuation done at the end of the quarter. And as yields are rising, we've taken approximately EUR200 million of the EUR600 odd million fair value reduction in respect of Summit.

The occupancy rates are still quite strong, as you say, but this is an illiquid market. And as absent -- significant volumes of transactions, yields are -- required yields are ticking higher.

Yes, just on that, obviously, in the ING Real Estate annual report 2008, the yield was 8.4%, so you've just taken a 25% revaluation downwards on that portfolio, so it just seems slightly strange, and I'm just wondering what the motivation was.

Sorry, well, in terms of motivation, well, we have to value this based on external market valuations. We account for this in a fair value, and as a consequence we are -- you're driven by what's happening in the market. The market, as I say, is illiquid and prices are depressed for Commercial Real Estate, and hence the [quad] yields are ticking-up, and that's what we're seeing coming through on the valuation.

Okay, I'll take that one afterwards. It's not just ticking up, it's gone up quite a lot, but we'll go after that, if you want.

Okay. The yields -- the EUR450 million in the yield curve, (inaudible)?

I don't have the number for the yield curve result per se, but what I'd like to draw out is, as I mentioned earlier, our Commercial Banking result is up very strongly. It's primarily up in financial markets. The vast book of that is driven by client-driven results. We'll come back to you on the element that's pure yield curve play. But I think the key message here is that we have a strong customer-driven franchise, which is what's behind the strong revenues.

Okay.

Okay. The strategic question, Duncan, as you can see, we have been quite successful with our Back to Basics program. That's basically complete. We have overshot all our targets. And we are now, I think, in a situation that we currently review what additional options do we have which is helping us with the transformation.

What we want is ultimately a company that has a strong portfolio, very focused portfolio, that has strong business models underlying the portfolio with strong operating performance, and with, let's say, durable type of results. And so we continue to look for ways to do so; also in mind that we do have an obligation to pay down the Dutch State.

And what we would like to do, based also on the invitation we have had from the European Commission, is put our strategic options that we have, and they were going already more forward than the one that has to do with basic -- Back to Basics lately in our discussion that will follow with the European Commission. And so that, I think, is our plan, and that's why we have announced this in our news release today.

Okay, thank you.

Does that answer your question, sir? Mr. Russell?

Yes, thank you.

The next question comes from Spencer Horgan. Please state your company name, followed by your question.

Thank you very much. Good morning. It's Spencer Horgan from Deutsche Bank. Just following on from Duncan's question, you have, as you say, flagged this in the press release that the negotiations with the -- between the Dutch State and the European Commission are about to start. What exactly are you putting to them in terms of restructuring? Have you got any concerns about how those negotiations are going to go? And are you entering that in a confident mood or a nervous mood?

And second question, I guess, is if we look at the Tier 1 ratio in the Bank, which has come down a little bit in the quarter but is still perfectly fine, but can you maybe come back to the broader question of where you see capital targets for the Bank overall? Because, obviously, we used to have a capital target that was substantially lower than probably it needs to be these days. So could you just highlight what sort of level you want to keep that Tier 1 ratio above? Thank you very much.

With respect to the -- your first question, related to the negotiations between the State and the European Commission, we have been, and we will be, working closely with them to endorse discussions that will follow, and I think they are scheduled to start relatively soon.

What we do want to do is we do want to take the strategic analysis we have and the strategy that we have for this Company in our restructuring so that it is consistent with the objectives and the long term objectives that we have as a company. And I think we have lined up with the Dutch state, we have had very constructive discussions, so that the discussions that will follow with the European Commission are basically done between the Dutch State and us, and us supporting them in a significant way. They are the responsible party because they have made the State support available, and they have to defend themselves to the Commission.

You can look at the letter that they wrote on July 22, to see a little bit more about what the Commission has in mind with respect to what type of program they would like to see from us. But we are going into these discussions, I think, basically, with our own strategy, with our strategy going forward, maybe a strategy that I think is taking the next phase and the next step, but that's where we were anyhow because of the success we have had in our Back to Basics strategy.

I assume the next phase, as you call it, still envisages ING being a combined banking and insurance group? Is that fair to assume?

Well, we will see. I think we -- I think it's too early to make any comments at this point in time as to what the result will be. I would say this is something that all the financial institutions that have had support are going through, and I think we will have to do exactly the same. And I cannot be specific at this point, because I don't know. The outcome is uncertain what that will be. But from our standpoint, we want to make it consistent with the strategy that we have.

Okay, thanks.

The next question comes from Chris Hitchings. Please state your company name followed by your question.

Hi, it's Chris Hitchings here from KBW. Just really looking again on the strategic issue, are we to assume that the timetable envisaged in the original Dutch state notes plan, i.e., three years, is now just hopelessly optimistic and that you're going to need to have sorted this out long before then? And again, when you talk about strategic options, does that involve capital options as well?

Well, we're going into these discussions. I think all we have done is notify you that these discussions are coming up. We need to be very careful, because we are not in a position now to pre-empt any discussions that are going on. But I can tell you this. As far as I'm concerned, we will look very carefully in executing our strategy in the sense that we have a very interesting, viable company, with a solid set of businesses and a portfolio, focused portfolio of businesses with strong underlying business models and strong operating performance. And I think that's the objective that we have to discuss with the Commission.

Okay. Thank you.

The next question comes from Farooq Hanif. Please state your company name followed by your question.

Hi, everybody. This is Farooq from Morgan Stanley speaking; a slightly different tack. Just looking at your loan losses in the Retail, that just looks much more positive, and Wholesale, obviously, has been worse. Can you just talk about whether this is a trend that you're seeing going forward, that really actually your Retail Bank might have a slightly more stable outlook now, but in Wholesale, you still have some clearing up to do? It would be good to get a comment on that.

And secondly, could you talk about what exactly is the reason for the release being up? Is that just inherent conservatism back in 4Q and 1Q which has now proved to be not as bad? That's question area number one.

Question area number two is on your capital position. We used to get this economic capital measure, which was one way of us looking at you on a Group basis, plus or minus the diversification benefit. Can you just talk about, either quantitatively or qualitatively, what's happened in 2Q on that basis? Have you seen the markets improving and yields going up? Has that been net positive or can you talk about on an economic capital basis where you think your surplus is on a Group basis? Thank you.

Farooq, let me start with -- if I look at the developments on the loan losses, then indeed what you see Retail declining and Wholesale going up. If you ask me, what is it precisely, actually, we even had a picking up in releases, and that comes from the Retail, from the Private Banking section.

The statement I made was that, is that what we have in our loan loss provisioning is a policy to provision, and what you do in terms of when you see a signal that you have to take a loss, you take a decent provision. And normally, once a crisis or once a loan is restructured, then you end up releasing some of the provisions taken, because the restructuring was more positive. And this is just not a signal that from now on that releases are going to dramatically increase, but it's more a signal that the way how we provision is normally a conservative way of doing it. So files released at the beginning of the crisis start to give you some benefit at this moment.

If you look at Retail and Wholesale, in the Retail side in general, you see a decline, and that is in the Private Banking area happening. If you look at the Wholesale side, you see the pickup. But the pickup was in specific cases. It was in the Leveraged and the Structured Finance business where we had this.

Expectations; although it is difficult to give an expectation because we have such a mixed bag of loan loss provision, it comes a little bit out of everything. And overall, we feel more comfortable with saying like it will stay at these elevated levels for the next two quarters. But if you ask me the detailed components of each of them individually, it's a difficult one to make. You do see a bit of a stabilization of your watch list, so the problem files going in. So that is a more early positive green shoot in the portfolio.

Would I be right in saying that you just sound a little bit more positive now than you did three months ago?

Yes, actually, three months ago we already said we expect loan losses not one dramatic peak or so, but it's a bit more elevated over the full year. And you basically get a confirmation of that this quarter. So in that sense, I'm happy with that.

Okay. And on economic capital?

Yes, if you look at the economic capital overall, what you see happening is that your credit spread component of economic capital, yes, that will move up because the market is a bit more risky. At the same time, if I look at the insurance side, with interest rates picking up long term, you see that component gradually taking -- that risk comes down a little bit.

At the same time also, you see that with volatilities going down in the market, so you do expect overall that your economic capital numbers, yes, it starts to have a mitigating effect. So net-net credit up, interest rates down, implied volatility down. and equity risk a little bit down as well. So overall in that sense, on a net-net basis, a shift of components.

And do you care about that number when it comes to making a decision about repaying the Dutch state?

I think the, do I care? I do, because if I only look at regulatory capital numbers, there are certain deficiencies in there. And the deficiencies on regulatory capital numbers have to do with interest rate risk, or does it price options well? So you do need to keep a second eye on your economic capital numbers as well, although I do realize at this moment that the regulatory capital numbers are a more constraining factor at this moment.

Okay. Thank you very much.

The next question comes from Hans Pluijgers. Please state your company name followed by your question.

Good morning. It's Hans Pluijgers from Cheuvreux in Amsterdam. I've got three questions; first of all, on rate migration. On the Q1 numbers, you indicated that for the remainder of the year, you expected some number in line with Q1. But already in Q2, we've seen quite significant impact. What's your forecast or your indications for the second half of this year with respect to rate migration? What do you see there?

Looking at the direct equity hedges, what's your policy going forward with that one, improving equity markets? Will you change your policies, or will you reduce your hedging? Could you say something about that?

And on the Alt-A, you've moved it now to the loan book, as I understand. Does that impact on the impairment policy of the Alt-A portfolio?

If we start on the migration side. We had -- in Q1 and Q2, we had EUR11 billion. We had an offsetting factor in Q1 and we have managed it more down in Q2. Overall, do you expect credit migration to still have an influence? The answer is, yes. There's two drivers; one is house prices, and maybe house prices at the moment are a bit more stabilizing. But the second one is the rating of your clients, and the rating of your clients is still [when] you review files. And that is what you do every year. Rating will still have an impact, so you do still expect modestly to have some RWA migration. That is the system of Basel II. But at the same time, I think what you see in this quarter is that we take compensating measures to make sure that the overall effect is manageable.

But do you expect it to then -- because housing pricing a little bit stabilizing, unemployment rates in the US not going up as fast any more, do you expect some stabilization there, or the numbers coming down somewhat with respect to negative impact?

I think coming down would be a tough one at this moment. At the same time, you do see that clearly with house prices, if it's stabilizing, that has a good effect on us, so then, you expect less increases.

Yes, okay.

Now if I go to the equity hedges, what is our policy? So if you talk about direct equities, we had last year, we had the issue that the balance sheets were weaker. At the same time, we had a highly uncertain market. So, therefore, out of conservatism at that time, we bought [puts] underlying the direct equity exposure.

What you've seen happening is two improvements. You see our capital situation improving. You see it both in direct equity, you see it back in our leverage ratio coming below 30[%]. So on many occasions, you see that the equity position is improving. So that means on the one hand a positive factor that you don't need to hedge everything automatically.

At the same time, what you've also seen is, in the first quarter, you saw those put options, they had a value which gave us a positive derivative result. And in the second quarter, it's offset by a negative. So you could say that underlying those put options, they are now more out of the money. The question is, will I continue to have those put options? Well, we'll look at that individually, but there is some more margin at this moment in the Company to take some more equity risk, because the capital position has a bit improved. So clearly, we will look at that, but at the same time, local capital sensitivity for us is important.

Let me turn for the third question, the impairments and the accounting Methodology, to my colleague, Patrick.

Hans, in respect of Alt-A, the balance at the end of -- and the accounting at the end of the second quarter is the same as the first. The Alt-A still is accounted for as an available for sale. That hasn't changed. The risk transaction with the Dutch state was completed in the middle of the first quarter. So in terms of Alt-A accounting, balance sheet classification and the impairment process, we've not changed that. That's being applied consistently between the end of Q1 and the end of Q2.

Okay. Thank you.

The next question come from Frank Stoffel. Please state your company name followed by your question.

Yes. Good morning. It's Frank Stoffel from Bank of America/Merrill Lynch. Just three quick questions, please. On your core Tier 1 ratio of 7.3%, could you please elaborate on this number whether you're happy with it, in particular against the background of your expectations of continued rising risk-weighted assets and your comment that credit migration will continue in the second half of the year?

Also, on loan loss provisions, if I remember correctly, at your recent investor day, [a comment] suggested that loan loss provisions might actually peak in 2010 and not in 2009. From your previous comments, can we infer that you now expect to peak -- that we actually see the peak this year and we next year could already see a decline in your loan loss provisions?

And on a minor point, obviously, the press is full of speculation on you selling your Private Bank operations in Asia and Switzerland. Could you please just comment or confirm that your Luxembourg operations are considered core? Thank you.

Let me start with the last question first. We're not commenting on rumors. I don't think that that is a practice that is worthwhile. We're not commenting on anything that has been said about this. We have seen it as well, but we have no comment. If we have any comments, it is because we have done things, and not because people say that we are looking at certain things.

Let me now turn to Koos on the core Tier 1. Koos?

Well, let me take first the question on the loan losses. And then hand over to Patrick on that one, because first on the loan losses, what we've said in -- during the investor day was particularly concerning the Retail Mortgages portfolio; because let me first refer to that. With Retail Mortgages in the Netherlands, the driver is unemployment, and people need to be unemployed for a time before you start to see that back with delinquencies, and then it starts to hit provisions.

So the illustration is that parts of your loan portfolio have different times when they start to realize in your provisioning. My expectation is more that in 2009, we still have these high level of loan loss provisions. In 2010, you might get more on the Retail Mortgages. But at the same time, your releases from your provisions which you have taken in 2009 will start to come out there.

So if you ask me like do you go back completely, but this is long term to normalized levels of 40 basis points/45 base points, the expectation is, no. But at the same time, no, I don't expect a clear peak in 2010. It's more elevated levels in '09, and then in '10, you'll get some releases, but you'll get some more out of the Retail portfolio potentially.

Okay. Thank you.

In respect of the core Tier 1, our core Tier 1 ratio at 7.3% down a little bit from the 7.5% at the end of the first quarter, yes, of course, we're comfortable with that number. What's dragging it down is a bit is credit rating migration. But one of the key -- as we said before, there are things we can do to try and mitigate that. And one of the key pieces which has been driving rating migration, namely on Alt-A, the regulatory treatment on that means that we will no longer see any further credit rating migration in respect of that part of the portfolio. And we're looking at other areas, where rating migration might occur, and investigating how we can try and address dealing with that.

The next question comes from Jaap Meijer. Please state your company name followed by your question.

Good morning. Jaap Meijer at Evolution. There is a possibility to reclassify assets that are in AFS category by the end of the year at amortized cost or at fair value. Would you be actively using this? And I think have you actually already done some calculation on this, and could this lead to a strong recovery of AFS reserves relating to your bond investments? There's more questions to follow up though.

I think the majority of that reclassification we did in the first quarter. There's a limited amount further that can be done. And I think that's -- we've done as much -- or the majority of what we will do in that space was done in the first quarter. So I don't see that there'll be a -- this has got a big potential to improve.

But by year end, you could actually abolish completely the AFS category for all bond investments, and you could value it at amortized cost, after proper impairments, or taking it at full fair value. So that could actually be unlocking some of the negative revaluation reserves, I guess. You don't agree?

Sorry, you're referring to the exposure draft, NIS 39?

Exactly.

Yes. Clearly, we're looking at that. It's quite early days to assess it. We are trying to study what it does mean for our Alt-A portfolio. Clearly, it's an interesting move. We have to understand this more thoroughly and engage with our peers as well to get a more complete view of what this means for us.

So it's a bit early to conclude on whether this is going to give a material result for ING or, indeed, whether we would adopt it early or not. But I think the fact that this is coming out, is a positive move. And as we study it further and get -- market consensus emerges on what this means for the banking industry, we will update you. But at this point, it's just too early to be conclusive on what it may mean.

Yes. I was slightly surprised --

(Multiple speakers) the exposure draft and the full standard actually doesn't come 'til fourth quarter.

Okay. Yes, that's right. I was slightly surprised to see such high markdowns in the [Retail] Estate portfolio, because global markets -- well, the funds have actually recuperated all losses in Q1. So is this your take of, let's say, this is it, or could we seem more negative re-evaluations on Real Estate in the coming quarters?

I think the Commercial Real Estate market is still subdued. I think there were some comments with the FED concerned about this globally. So this market is still subdued, and equity markets may have risen, but this hasn't filtered through to Commercial Real Estate at this point.

In respect of our Summit portfolio where we took the majority of the fair value reduction, this is a Canadian portfolio. It's close to the Detroit region, and has suffered somewhat from the auto industry problems. So I think this is going to be an area where it will take some time before we see a rebound in this market.

Right. And just some questions about the transaction on the liquid asset protection scheme. You value -- or the Dutch state values the Alt-A portfolio at 90%, but there's some disputes, I think, within the EU Commission about this. And also, the management fee is being disputed.

Is there any risk that this may be changed? :Let's say you have to revalue it from 90% to 80% of PAR. And technically, how would this affect risk-weighted assets? Would you then have to increase the 240% risk-weighted assets weighting for this, or would this not hurt your Tier 1 at all? Thanks.

Okay. If you look at the illiquid asset backup facility, indeed, we concluded that transaction in the first quarter. It's up for review with the European Community. But what was explicitly mentioned at the time is that the heart of the transaction, and that is the swap, so that is the exchange of the bonds for the funding, that part would not be touched. Still, it is still under review with the European Community, so there could be changes on, for instance, the subsequent cash flows of management fees or guarantee fees. But I don't know that. That outcome is unclear.

If you look at the treatment of the Alt-A portfolio, the big effect is not so much on this 240%. I think the discussion with the European Community is more on all the review of the individual pricings, and they want to look at that rather than the swap itself. So I would say, talking about an unwind of that, or something like that, that does not make any sense at the moment.

Yes, that's clear, but I was just wondering that maybe if you would, let's say, would agree upon a lower evaluation of the Alt-A portfolio which is a bit closer to the market value, which is around 60% I think, of course, that would hit your AFS reserves, and could this then technically also hit your Tier 1, I'm wondering.

No, I don't think so, because as I said, the exchange of the Alt-A versus the funding, that was something what was agreed not to disagree on any more. So why would then a lower price have any impact or a higher price? That does not play a big role there. And by the way, I continue to say that the [90] is not a good comparison against the market price because there's a net present value of subsequent cash flows which makes that 90 is not a good price to look at it, because we will continue to pay over time.

By the way, what you do see is that our prepayments are increasing significantly, and that is something which is favorable for us.

Okay. Would it be possible --? We've seen that with KBC that you are prevented from paying coupons on hybrids because of the EU.

I don't think we want to speculate on anything that comes out of the EU discussion. We simply don't know, so I think we would speculate, and that's not what we should do at this point in time.

Fair enough. Thank you.

Thank you.

Next questions come from James Garner. Please state your company name, followed by your question.

Morning, it's James Garner from HSBC. Most of my questions have been answered; just one quick question remaining. Can you provide an update on the adequacy of your standalone US annuity and Japanese life reserves, which I believe were below 50% confidence level at the year end? I think the US then was inadequate by about EUR0.6 billion.

Why don't I take that, James? It's Tom McInerney. I think overall for the US, we are -- or for the Americas, we're adequate at the 50% and 90%.

In the Annuity business itself, there's been an improvement at the 50%. I think at the 90 percentile, we're still around where we were, but overall, looking at the Americas, which is the ultimate test, we're adequate overall.

Thanks.

Next question comes from Nick Holmes. Please state your company name, followed by your question.

Yes, hi. It's Nick Holmes at Nomura. First question on US Life. Could you tell us when the EUR5 billion equity hedge will run off, and if you're still intending, Tom, to change your DAC accounting from mark-to-market to mean reversion?

And then second question, just looking at your bank bad debts, your provision cover ratio has started to rise. It's up to 33% from 29%. Do you think this trend will continue, and do you think the level of 40% to 50%, which you had a few years ago, is something that you will return to over the medium term? Thank you.

So, Nick, let me take -- this is Tom again. Let me take the first two questions. We put what we call the capital hedge on -- and it's EUR5 billion as of the end of the second quarter --we put it on to predict RBC capital, or statutory capital. At the end of the first quarter, given where markets had gone, we were actually below our long term target of 325%.

As a result of the improvements in the markets, we expect we're still finishing up the final calculations, we expect the RBC ratio to be somewhere between 370% and 380%, so obviously, that takes pressure off the statutory capital and, as a result, we're still working with Koos and Patrick on what should we do to realign. But I think you should expect that it's likely, given where markets are, that we will in the additional room we have on statutory capital look to take those down somewhat, although, clearly, you never know where the markets are going. We want to be more conservative from a de-risking perspective, so I think we'll be cautious on that, but I think you'd expect it to be down.

We continue to look at the mean reversion. As you know, most of our competitors do assume a mean reversion, so on average, they're probably assuming the equity markets recover 15% for the next five years and then go to long term assumptions with is 9%.

We look at that. There are pluses and minuses to do that. I think at this point, it's still under consideration, and we haven't made an explicit decision to change it from where we are today.

Oh, okay, because I think at the last conference call, you were thinking more decisively about moving to mean reversion. So it sounds as though you're moving away from that. Is that right?

Yes, I would say it's still under consideration, and we just haven't decided because there are pluses and minuses to it. So at this point, we haven't made a change. It's still under review.

Okay. Thank you.

On the provision coverage ratio, does the trend continue from 29% to 33%? I mean, again, to answer it, you have to look at the components and the components of the provisioning is a mixed bag of something of more collateralized provision, so on either Real Estate or on leasing, or on structured finance, or it is on more uncollateralized business, and then you talk about SME. That is really driving it. So 29% to 33% is more coincidental, like which part of the portfolio did it.

If you want the big picture, and that is like do we go back to the 40% to 50% provision cover ratios, there I have to answer that our loan portfolio has significant changes as compared to previous cycles. I mean, what are the significant changes? There's way more mortgages in there, and if you look at the non-mortgage part, there the collateralized type of lending is way higher than it was in the past, which is the Real Estate Finance, the Lease and the more Structured Finance business. So I think it is difficult to draw that conclusion because of the different components of the portfolio.

Okay, thank you very much.

Next question comes from Jackie Ineke. Please state your company name, followed by your question.

Hello, this is Jackie Ineke in Fixed Income Research at Morgan Stanley. I just have a quick question on liability management. We've seen many groups improving their core Tier 1 by buying back Tier 1 debt securities well below par. The ING's trading in the [EUR50 millions], so buyback of your Tier 1s could make a lot of sense. I was just wondering if this has been considered yet, or if there's any regulatory objections to such an operation. Thank you.

Of course, we consider always all types of opportunities that we might have to improve ourselves. We have not made any conclusive decision on this topic here.

And there'd be no regulatory objections to such an operation?

At this time, none that we know, no.

Great. Thank you.

The next question comes from Benoit Petrarque. Please state your company name, followed by your question.

Good morning. Benoit Petrarque from Kepler in Amsterdam. Three short questions; first one on one of your core business, which is the Retail in the Netherlands. You commented that the saving market was still pretty competitive in Q2. What do you see or what do you expect for the next quarter [positioning]? We will see improvement, but what do you see?

Second question on the Real Estate. You had a EUR110 million impairment on the project development. Can you remember what is your overall exposure on project financing?

And last question on the equity hedge on the US life. [I'm presuming] that it will make sense to keep this hedge until you have -- so long you have not repaid the state, but do you have agreement with the Dutch state relating to this equity hedge on the US capital? Thank you.

Let me deal with the latter question with respect to the Dutch government. They are not interfering in any way with our business or with our policies. They are ours. They are -- we may inform them from time to time how things are going, but we have never had any instructions from them, nor I don't think are they planning to give us any instructions.

The Retail business, Koos, do you want to do that or --? Okay, you take the Real Estate. Now let me take the Retail business in the Netherlands. We are seeing that the market is quite competitive, and has been, because the European market, when you look at the Netherlands and Belgium, it's one of the most competitive markets you can be in.

We have seen that savings rates have come down, but only slowly and, of course, it's very important to us that rates would be coming down because our margins on Real Estate and our margins on Retail basically have not improved in Q2.

And on the project development?

Yes, Koos.

Okay, if you look at our project development, there what you see is some impairments have been taken. And what you see in our project development is that it's, on total, it's a portfolio where we have an exposure of development projects of EUR2.7 billion, and then you will have some properties which we will at a certain moment sell, so they are finalized. So EUR2.7 billion is the total projects, and EUR0.5 billion is things which are finalized and completed projects.

Now if you look at that portfolio overall, it is a division between offices, Retail, Residential and Industrial, and that has -- but predominately it is the Retail that's the biggest factor, and Offices and Residential are second. Also if you look at it in terms of the geographical distribution, then you can say like the biggest one by far is the Netherlands, so taking up 40% of it. So that's in a nutshell what our development exposure is.

And the impairment is coming from the Netherlands or other countries?

I don't have the precise breakdown of where the EUR110 million comes from or -- in that. Let me hand over to Patrick who has it.

The EUR110 million, the piece in the Netherlands is quite small. It's approximately 10% of that total we have in the Netherlands. Spain was a similar number. It's -- about 12% or 15% of the overall was in Spain.

All right. Thanks.

Next question comes from Ryan Palacek. Please state your company name followed by your question.

Hello, it's Ryan Palacek from Kempen & Co. I have a question concerning the change of treatment on the Alt-A portfolio, where it's now treated as a bond portfolio for solvency purposes. I'm wondering whose approval was needed for that step, and whose approval might that still be subject to, and to what extent is that subject to approval from Brussels.

I'm wondering what the impact would have been on your solvency ratios if that had not been changed.

And finally, I'm wondering what the current rating distribution is of the Alt-A portfolio. Thanks.

If you look at the treatment of our Alt-A portfolio, well, first is, effectively, a large part of the Alt-A portfolio has been sold, so the part remaining on our balance sheet, that is where we are talking about the treatment. What has been decided there is that we have a look through treatment, so it is not a capital release because, in fact, our capital increased over this quarter due to that, but it is done on the basis that you look at the underlyings rather than at the securitization rules.

And that is also because the economic ownership of Alt-A, again, we have 80% is sold effectively to the state, and 20% is ours, but as you'll remember, that is off each individual bond and that is why you have a specific treatment negotiated here. And that is something which is not subject to the EU because the EU is not a regulator, and the EU is something different.

And then is it possible to say whose permission was needed for that?

Well, of course, I mean, we talk about regulatory capital; we talk about that with our own regulator.

Okay.

Then what was your other question?

Oh, and then, furthermore, I was wondering what would have been the impact on solvency ratios had that treatment not been changed, and I was wondering what the current rating distribution is of the Alt-A portfolio.

In fact, our capital would have gone up, or sorry, our risk-weighted assets would have gone up, so the treatment in this quarter in that sense is not favorable for us because it led to EUR1.8 billion additional risk-weighted assets. So you could say it is a bit higher than what it was as compared to the old treatment, but it is stabilized.

Okay, thanks. And as to the rating distribution?

If you look at the rating distribution of our Alt-A portfolio, then it is -- overall, there is 59% of it is still at AAA level of the US Alt-A portfolio, and we have AA 5.5%, and then you have different components. I think the one with the lower rating is BB at 6% and B at 12%, so those are the higher ones standing out; but overall, still 60% around is AAA.

Okay, thanks. Is there anything you can say about the slower downgrades on this paper that occurred early July?

I know that the amount of downgrades in -- well, actually I only know it over the second quarter, because first quarter, we saw a massive amount of downgrades, and in the second quarter, rating migration was a lot less. But at the same time, because it's EUR1.2 billion only in the second quarter was downgraded, and at the same time, the watch list, that still remains high. So the watch list is approximately the same. The amount of downgrades decreased significantly as compared to the first quarter. So that's in a nutshell the development.

Okay. Thank you very much.

Next questions come from Marcus Rivaldi. Please state your company name, followed by your question.

Good morning, everybody. It's Marcus Rivaldi here from Morgan Stanley Fixed Income. Just a quick question -- a couple of questions actually regarding dividend flows into the insurance operations. You talk about payments out of insurance operations in Europe and Asia, and then talk about dividends going back into subsidiary operations during the course of the quarter outweighing those. Could you talk about whether that's a timing effect, that effectively money's coming out of some subs and going back into the same subs, or is money coming out of some subsidiary operations and going into other subsidiary operations?

Hi there, Marcus.

Hi.

In respect of dividends, yes, we've had a total up-streaming of EUR800 million. Our policy is to maximize -- in line with most companies, maximize dividends, up-streaming to the center where we manage capital, to the extent that there are subsidiaries who do require additional regulatory capital and we will look to meet that. So the dividends of EUR800 million is a broad range. It comes from a variety of our subsidiaries, the biggest ones being perhaps in the Netherlands, and that supports standard practice in supporting our capital management process.

No, I appreciate that. Sorry, it's just that you break it down in broad themes and you talk about Asia and Europe and dividend being up, but then later on, on the capital management section, you talk about EUR1.4 billion going back into operating subsidiaries, and I'm just wondering is that mainly directed at the US, or is it back into some of those?

That EUR1.4 billion was primarily in the US at the very beginning of the quarter, and the dividend up-streams come from a broad range of businesses across ING.

And was that to take that RBC ratio up to that 370%/380% level?

Yes, I think, Marcus, we -- as I said, we were about -- we were a little under 280% at the beginning of the first quarter, so we put the dividends in to get back to the standard of 325%. And then, of course, the second quarter overall, with the equity markets going up, it created more of a cushion, so we're now at the end of June at 370% to 380%.

I appreciate that, and thank you very much for that clarification. And just finally, were there any dividends internally from INGV to Group in the quarter?

No.

Thank you very much.

Thank you.

Next questions come from William Elderkin. Please state your company name, followed by your question.

Good morning, everybody; William Elderkin from Citi. Three questions, please. First of all, can you give us an update of what the Commercial result on what you identify as the ongoing operations with your strategic presentation earlier this year would be over the first half stage? So I'm really looking for the equivalent numbers you gave for the Bank ongoing of EUR4.6 billion I think over '08, and for the Insurance of EUR2.1 billion over '08. What were those numbers over the first half? That's question one.

Question two is the increase in cost saving reductions to EUR1.3 billion or by EUR300 million, how is that distributed as an increase distributed between the Bank and Insurance companies?

And thirdly, on the ING Direct net interest income in the second quarter, inside that number I assume there's a charge for the Alt-A facility with the Dutch government. Can you just tell us what that number or that charge was?

Okay, the first question, I don't think we can answer, William, at this point in time, because we need to go back and recalculate that, it takes a little bit of time, we don't have that here available at this point in time, but I would think that the number would still stand as we have given that. And certainly, with the impact of the Back to Basics program, I would think that the numbers probably would look a little bit better. But we need to recalibrate that, and if you don't mind, we'll do that, but not today at the meeting. Is that okay?

Just as a general sense then as -- excluding the expense reductions you've achieved this year, are those '08 core commercial numbers still a reasonable reference point?

I think they're still reasonable, but my impression would be that if I had to make an adjustment, that would be to the upside.

Okay.

The other question, the EUR1.3 billion, Patrick, do you want to give some comments on the cost reduction?

Yes. We announced in the first quarter that we were seeking to reduce costs as part of our Back to Basics strategy. We're pleased to announce that we're going to raise the bar on that from EUR1 billion to EUR1.3 billion. That reflects progress we've made. We're ahead of target and ahead of plan at this point in reducing headcount, and we see there's further scope to reduce costs in administrative expenses and procured costs, so we're going to push to outperform the EUR1 billion and try and add another EUR300 million. We'll add EUR300 million of cost savings this year.

Sure, so what I was getting at was I think of the original [EUR1 billion, EUR650 million] was in the Bank, balance in the Insurance company. Of the additional EUR300 million, where will that fall between the two business areas?

I think the split would be more or less the same, probably a little bit more on the banking side, because we are looking at, in particular, Purchasing and IT, and I think the highest expense opportunity is there on the banking side. Alt-A, yes.

Yes, on the Alt-A, if you look at the charges, the expectation, and why do I say expectation? The expectation was that it is $600, approximately EUR400 on an annual basis in the first year. Now the charges realized will be a little bit lower because, as I stated in my presentation, repayments are a bit higher than what we expected. But -- so you could say it is, in euro terms, then it's approximately EUR100 million per quarter, but leveling off if the portfolio goes down.

So it's just -- in the ING Direct net interest income we see in the second quarter, can I assume about EUR25 million is netted against that in relation to the Alt-A facility?

No, it's EUR100 million.

It's EUR100 million, sorry. Okay, brilliant. Thank you very much.

Next questions come from Farquhar Murray. Please state your company name, followed by your question.

Hi there. It's Farquhar from Fox-Pitt here. Just two questions, if I may, just on -- starting with the Alt-A transaction. At the time that that was put on, I remember you capitalized the management fees, and I presume that was taken to Tier 1 capital, so I'm just trying to understand if the EU ultimately renegotiated those management fees down, would that have a capitalized negative impact on Tier 1 capital?

And then, secondly, just turning to the interest margins in the Netherlands, I think earlier in the year, the Dutch organization had suggested those should begin to improve towards the end of this year. Just given the suggestions about gradual continued competition, I'm just wondering whether you would repeat those statements now, or does it look like competition's actually being tougher for longer? Ad also, what's driving that? Is it competitors or is the kind of term structure of deposits?

Let me maybe talk about the Alt-A facility which we have concluded. What happened with our capital position there, we effectively sold a part of the portfolio in February. The sale concluded in an uplift of our revaluation reserve that was negative. So that is the part which we have back in our equity; not in our Tier 1, but in our equity.

But management fees, there is no capitalization of management fees or anything happening there, as the transaction was constructed and reflected in our accounts as a sale. And the management fees is more something which we are just paying on an annualized basis.

Okay, so if those got managed downwards, it would have a deferred impact on Tier 1 capital?

In the end, if your interest margin, or if your margins improve, then you will see that back in your Tier 1 capital, because then if everything else stay the same, then you'll have more revenues.

Okay.

In respect of interest margins in The Netherlands, there is a declining trend. It is a very competitive market, but rates have been lowered twice in the quarter by a total of 50 basis points, and I think there's a further reduction in July. So all banks now have lowered their rates, which were unsustainable, in part due to the crisis at the beginning of the year, so we're seeing rates coming back down.

Okay, thanks.

The next question comes from the line of Tony Silverman. Please state your company name followed by your question.

Tony Silverman, Standard and Poor's Equity Research. You've given a total exposure to Real Estate development. I was wondering if you could give us a figure, maybe I've missed it, of total exposure to investment property; loans on -- for investing in property rather than just development. I'm sort of assuming that the impairments are not just from the development exposure.

Okay, if you look at the total portfolio, then we have to look at Real Estate. The investment properties, there we have, on a total basis, we have investment properties, EUR4 billion of basically, roughly banking investment properties, and that is basically seed capital in funds and some [bridge] capitals and it is EUR4.5 billion on the insurance side. So that is really the investment exposure.

And those ones, they don't have any impairments because, actually, these ones are mark-to-market directly in our P&L. So, Patrick, if you want to comment on this?

Yes, the total number I mentioned in respect of Real Estate is EUR686 million. The development projects, which is impairment, is EUR110 million and the Real Estate portfolio, which is fair value, is the remainder of EUR584 million.

Right, thank you very much.

The next question comes from Johnny Vo. Please state your company name followed by your question.

Yes, hi. It's Johnny Vo from Goldman Sachs; just a couple of quick questions. Just in terms of the margins in banking, obviously, they've improved quite substantially. Can you talk about these margins and how sustainable these margins are?

And secondly, can you talk about also some of the contribution coming from trading. and how much of the contribution is coming from trading?

In terms of -- can you give more color in terms of the leverage portfolio and where these losses are going?

And the third thing is just basically the direct Real Estate exposure. I'm just a little bit confused. Is there a sort of one-off in some of this in terms of either the Summit Canadian portfolio or, indeed, the yield move? Can you comment on those? Thanks.

Okay, in terms of margins and banking, what we're seeing is that -- we're seeing a widening of margins, particularly in our Commercial Banking business, where we have a strong market presence in the Benelux, and they have widened, and at the moment, they continue to widen. ING has benefited as being the name to go to in this region. So this is strong. It's very favorable market conditions. How long will it continue for? Probably not forever, but it's still there. As I said, the revenues have held up well, only dropping 6% as compared to the first quarter.

In terms of trading, your question on trading, Johnny, the result is driven 90% plus by client revenues, so prop trading is a tiny part. It's not what we really do, so 90% of our result was client-driven business. We're not a prop trading house.

And in respect of Summit, what I can tell you is that this portfolio was externally valued. It is a Commercial Real Estate portfolio near the US border, near Detroit. This is a depressed market. There's not a lot of liquidity. There's not a lot of transactions, and the capitalization rates are going up, so this reflects what is a somewhat weak economic environment. These properties are -- we do value them externally. We use professional external valuers to give us a value, but this valuation process is not -- is difficult because, as I say, there aren't that many external valuations to pursue, albeit, as I say, we do use external valuers to do it for us. So that's what the position is in respect of Summit.

The other point to make on that is whilst EUR250 million is the headline number, remember that EUR100 million of that comes off the bottom line in minority interests.

The other -- another point in respect of Summit is the majority 88% of our Summit portfolio is properties that are income earning. They're built, they're out there, and they're occupied. Occupancy rates are still high. They're comfortably above 90% and reasonably stable. So what you're dealing with here is buildings that are in use, earning rent, yielding, but we have to account for them on a fair value basis. And in a thin market, the fair values are falling.

The underlying economics of the portfolio are still reasonably solid with high occupancy rates, and a very high proportion of the Summit portfolio is, as I say, occupied and yielding.

Okay, thanks.

Maybe, Johnny, it's on the leverage finance portfolio to give you some flavor. I mean, in 2007, we basically stopped being a large underwriter in leverage finance, so we have a total portfolio of something like, in the order of EUR7.7 billion. Now the biggest part of that portfolio are small tickets of residuals which we had after we, basically, distributed the large tickets.

At the same time, there is a small component of this EUR7.7 billion where the last underwriting deals, where we didn't sell the major pieces, and it's exactly on those ones where we have taken, this quarter, where we have taken some provisions.

So in a nutshell, if you want to have the highlights, the biggest component of that portfolio is small tickets, and that is the final leftovers which we wanted to own, and the ones where we have taken the provisions are the last ones, when we stopped this business, where we couldn't distribute any more.

Okay, brilliant. Okay, thank you.

(Operator Instructions). The next question comes from Michael van Wegen. Please go ahead with your question.

Yes, good morning. Michael van Wegen, Soc Gen. First, I guess going back to that leverage finance book, to what extent are you comfortable that in Q1 and Q2 you've now made enough provisions, or should we expect more on that book on the big tickets to follow in H2?

And then two other questions, going to the US on your RBC ratio, the 285% for Q1, I thought that that already included a capital injection of $1.2 billion made in April. So if that is the case, there's hardly been any capital injection on top of that, which means that there would be almost 100% improvement in your RBC ratio in Q2, which I presume to a large extent is the verbal annuity guarantees. But could you indicate how much is VA guarantee, and what are the other drivers there?

And final question, on the timing of your disposals, I understand you can't mention names, but maybe could you give some sort of feel of, given that in April you said it would take three years, given that maybe visibility on the market is slightly improving, do you still think it will take three years, Koos Timmermans or could some of the things happen earlier? And could you maybe talk us through what state you are in general on the things that you've classified as up for disposal? Thank you.

Okay, on the leverage finance part, unfortunately that's a difficult to answer question, like will it continue like this because, indeed, there's only a few larger files in there where we have taken a provision. But then you really have to look individually at these companies, are they holding up their sales or so, because we almost then drill down at an individual issue or level. So there is no overall statistic on a portfolio meaningful for this because as, again, what I said, there is two or three larger files in that portfolio where we have taken a provision. and it depends on these individual companies. So there's not a lot more what I can say. The only thing I want to do is what we provision now is always adequate for what we know now, and if an economy improves, then it will be proven enough. And if an economy deteriorates for these companies, you'll have to take another one, so more I can't say on this.

Yes, on the RBC ratios, so we were below 280%, I believe, and we put capital in at the beginning of the quarter. I think that got us up to a little over 300% for the quarter. Again, the statutory earnings, based on statutory accounting, are a lot different than IFRS and US GAAP, and we had approximately [EUR]700 million of statutory earnings. Most of that was recovery in the equity markets, and so most of that would come from the VA business, given where the benefits are. Some of that would also be in the Retirement Service business. So it was really after the capital got us to over 300% and the recovery in the markets and the positive impact that that had on statutory earnings at [EUR]700 million got us to the -- where we -- we're still finishing the numbers, but we think we'll end up between 370% and 380%, and our target's 325%.

Okay, with respect to the disposal program, Mike, we continue to have an active program, and we are in a number of discussions. But as I said earlier, we cannot comment on discussions because we can only comment on things we have done, and we will do so going forward.

I can confirm, I re-confirm that it will take some time, but within three years, I think it's possible to do what we have outlined to do.

Okay, very clear. Thank you very much.

The last questions come from Thomas Nagtegaal. Please state your company name followed by your question.

Good morning. It's Thomas Nagtegaal from RBS. I've got a couple of additional questions on your NPL coverage ratio. Could you talk a little bit on your assumptions with regards to the developments of your collateral going forward behind those loans? Do you believe your assumptions are conservative in light of the market developments and outlook?

And how sensitive are some of your collateral assumptions, for example, the collateral for Structured Finance lending in light of the market developments? For me, it seems a bit counter-intuitive that you showed large write-downs on your direct Real Estate exposure, for example, while your NPL coverage ratio on the Real Estate lending remained stable in Q2.

Okay, basically, if you start what are the assumptions for valuing collateral and what's driving that, the first thing is, well, given by the fact that our Loan portfolio comprises for half of mortgages, it means house prices are, of course, a big driver. All the other components, if I look at Structured Finance and other things, well, you are basically financing different asset bases. But, clearly, by the sheer size, house prices have the biggest component.

If you ask me like what am I assuming they will go up or down, I don't know. We are just revaluating this on quarterly prices with house price indexes, and that has some impact on how that looks like.

The question are we conservative, conservatism is a difficult thing to precisely state. The only think what I do know is that, so far, we have an unchanged provisioning policy, and the only thing what we do is when we take a provision, 'til so far, that has always led in a later phase to releases. So you don't want to be overly conservative; well, apart from the fact that you can't, but you don't want to be overly conservative because you also want to have the restructuring people work hard to recover a lot. But at the same time, if you ask me like are we aggressive on this, no, we are just doing it precisely as what we always did.

If you look at the area of Real Estate Finance, does it mean that a decline in the Real Estate automatically leads to something in my portfolio and should lower collateral values on the Real Estate Finance have occurred, the few things which are drivers there is, (1) the declines if I look at Real Estate, for instance, what Patrick already alluded to is, for instance, Summit. And you know, I'm not financing Summit, nor a lot of Canadian assets. So geographical component plays a role.

The second part which plays a big role is that if you do Real Estate Finance and, in general, if you look at our portfolio, I think it has a loan to value of something like 69%, or something like it, there is a buffer as well, so you cannot [one-for-one] deduct a 1% decline in the Real Estate value underlying collateral in a 1% more coverage ratio. That doesn't work like that.

Okay, thank you.

There appears to be no further questions, sir. Please go ahead with any points your wish to raise.

Okay, then I would like to thank everyone for being at the call. We may see a lot of you later today in London, or other places. So thanks for being here and good luck with the rest of the day. Bye bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.