ING Groep NV (ING) 2009 Q3 法說會逐字稿

Good morning. This is Sala welcoming you to ING's Accelerating the Journey Back to Basics conference call.

Before handing this conference call over to Jan Hommen, Chief Executive Officer of ING Groep, 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 current views, assumptions and variables, including interest rates, foreign exchange rates, inflation rates, movements in securities markets, including equity markets, and underlying economic conditions and changes. These are set out in greater detail in our public filings, which we would urge you to read.

The realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables.

Also, in connection with the rights offer we announced this morning, please note that the full information regarding that offering will be contained in a prospective and registration documents we have on file, and will be filing as we move forward with the ASM in The Netherlands, and the SEC in the US. You should refer to those documents as they become available in connection with the offering.

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

Thank you very much, and welcome -- a warm welcome to all on the conference call. I'm going to make a presentation based on the slides. If you want to follow the presentation, you can hook up with the website and then you can follow our presentation slide by slide.

I go to the first slide, it's number two here, and let me comment on each slide, and then after that Patrick will quickly go through the results, and Koos will have a few comments on the risk position, and then we can deal with your questions.

Two weeks ago, we announced that we had a plan to separate the Bank and the Insurance Company, and today, I would like to explain why we think that this is the right decision and why this is the right time. We see a great future for both of our businesses.

First, we will work to improve the commercial performance of both the Bank, as well as the Insurance Company, so that we can create two companies and maximize the value for both of them. And then we will work carefully towards the separation and deal with the Insurance Company in various ways that we have outlined before, taking into account the interests of all our stakeholders and balance the interests of all our stakeholders here.

When I go to slide three, you see there the why is this the best way forward? We see that the financial industry is changing. There's more demand for simplicity and transparency. There is an increased need for efficiency and for cost leadership because we see increased competition and we see more commodotized products.

In this context, the need for simplicity outweighs the benefit of the bancassurance model that we have maintained for some time. And we think that separation now will allow both the Bank and the Insurance Company to really focus on improving their operating results and create excellence in all the operating activities that they have. Plus, we believe that we will be much more agile and much more quick to respond to the needs of our customers.

And when we look at the interests for shareholders, we believe that the split is a clear investment case. It will improve the visibility and the predictability of our earnings. And we believe strongly that as a result, the conglomerate discount that we have seen will gradually disappear and will unlock shareholder value.

And also, this was -- when we looked at the discussions we had with the European Commission, this strategic decision, which was our decision, was really the best way forward to deal with the European Commission. And this way, we can keep as well the Bank as well as the Insurance Company together which, if we had not done that, would have meant divestments we had to make and concessions that would have left both a weaker bank and a weaker insurance company.

The only thing that you can say is that as a result of the European Commission, the decision was made earlier than we might otherwise have made it and there is a time limit. But we don't think that the time limit really is that constraining to us.

What we have, we have a strong bank, a good franchise; it is an efficient and a leading Internet bank, which we believe is the future of banking, and we have a good insurance company with strong growth prospects in the developing markets, and the leading Retirement Services business in the US.

And when I go to slide number five, you see the footprint of our European operation in -- for the Bank. And we are not just a Benelux bank. We are much more than a Benelux bank. We have a very strong footprint in Western and Central and Eastern Europe, plus we are the world's leading direct bank with an unparalleled experience and expertise in Internet banking and direct marketing, and very innovative in our distribution concepts.

Our customer service and our customer quality is the highest of most other banks in the countries in which we compete. An example is the Retail Bank in Germany, where we are the number three bank, but the number one bank voted, I think, three years in a row for customer satisfaction.

We are the only commercial bank in The Netherlands that has its own international network, which is very critical for our international customers, both in this country here, and in this region here, as well as in the regions in which we operate as well, because they use the international network for doing their businesses here in Europe.

We have good positions in growth markets in Central Europe, like Poland and Romania, but also in Turkey. And we have opportunities for further growth in North America and Asia, in particular Canada, Australia, India, China and Thailand. So it is not just a European bank. It is a European, predominantly European bank, but there is a lot of opportunities for future growth.

When you look at slide number six, you see that there is still is sufficient scale even for a midsize European bank by total assets. And if you look at our deposits, we really have a very large deposit base and it makes us an extremely strong retail franchise.

Slide number seven; the strategic advantages that we have going forward I think are pretty clear, because in the industry, we see a change of lower appetite for risk. Probably there will be a need for more capital and more liquidity requirements. And we believe that products will become commoditized. They'll become more simple and more transparent.

And in order to succeed in that environment, your cost base is absolutely key for success, plus the brand position, and we have a good brand, one of the strongest financial brands in the world, and we have a solid balance sheet. So I think we have the situation that we can be successful going forward.

We have the lowest cost in The Netherlands per customer in Europe, and ING has the lowest cost per customer in The Netherlands. We are driven by efficiency of Internet distribution. We have an Internet [core] strategy in The Netherlands and Belgium, and then, of course, ING Direct has a very low operating expense base relative to assets in the industry. And not to forget our liquidity position relative to loan deposits I think is a strong one. So all overall, I think a good position; a strong position to go forward with, even in a competitive marketplace.

On page number eight, you see that the ING Bank has a number of very successful operations, and that is reflected in our commercial result that has been growing by about 7% over the last few years. And actually, when you look at the results of 2009, the first nine months are even better than the full year 2008. So this is, I think, encouraging news, and also an option that we have to further improve our operational excellence in the Bank operations. So that I think bodes well for our future and the plans that we have and the ambition that we have for 2013.

And that is the slide number nine. You see what the ambition is. Very simple; we like to grow our top line buy 5%. We like to strive for an income -- cost income ratio of 50%, and we'd like to go to a return on equity of about between 13% and 15%. And let me explain in the next few slides how we are going to accomplish that, or think to accomplish that.

In slide number 10, you see what we are going to do with our balance sheet. We're going to grow our balance sheet, if we take the base 2008 by about 5%. And then, when you take the pro forma number that we have once we have completed the separations of EUR760 billion, excluding divestments, then you would see that that is roughly EUR190 billion balance sheet growth until the end of 2013. And that's mainly in mortgages and loans and in savings.

We then calculate an interest margin, and a relative conservative one of about 100 basis points. And that would generate roughly EUR1.9 billion of additional income. Currently we have an interest margin of 140 basis points in Q3, and more like 130 basis points year-to-date. So that's a rather conservative estimate that we have taken in order to calculate the additional income.

When you look at savings we have started since 2008, we have seen that competition for deposit has normalized in the Netherlands. And we see further improvements ahead. If the yield curve would move upwards, we will be able to invest these savings at a higher margin. And we expect an improvement of about 25 basis points on the current EUR300 billion of savings. And that would boost our income by about EUR800 million from 2009 to 2013.

And then on the lending part, we believe we have seen a loan book repricing. All-in-all we expect going forwards, that we will have a positive impact of about EUR500 million of loan repricing for the period 2009, 2013. So this would bring the ambition level of 5% annual growth in income. And year-to-date, if we exclude the market impact, we have seen about a EUR700 million increase in income so far.

But that is slide 10, when you go to slide 11 we're going to show how we are going to reduce our cost income ratio to 50%.

Now we have already reduced our cost base in 2009 significantly. And cost savings are still coming through, in particular from the Retail Banking transformation that we are doing in the Netherlands and in Belgium.

Then we have the One Bank efficiency program that Eric Boyer and his team has been working on. We're going, for instance, to do centralized purchasing and procurement. That will take a EUR4 billion procurements organization, that is spending about EUR4 billion, with estimated savings in this period of about EUR350 million. I can say from experience in others, that is a fairly minor type of savings program. This is done then on top of all the savings that we have done so far.

We're looking at decommissioning a number of IT applications. We're looking at setting up lower data centers, and we are reviewing our processes and back offices to see how we can deal with support functions, and how we can grow to excellency as well. So cost we expect will grow by about 2% per annum to support the organic business growth, which then is in total about EUR800 million for the period 2009 and 2013.

Then we have earmarked a number of investments. We expect that we need to spend EUR250 million for investments in commercial operations and Internet platforms to further improve the quality of service that we will provide to our customers. So that explains the cost income ratio trend go down to 50%.

Now on slide number 12 you see the ambition that we have in 2013 for risk costs. We will see that this cost will trend with about -- a risk weighted asset growth of about 5% per annum. We have successfully done, and I think under the leadership of Koos -- Koos Timmermans, successfully done a lot of mitigation of further migration on a year-to-date basis.

And after rebasing for divestments, we can see that our risk weighted assets will grow by about 5% to 6% per annum, which is in line with our balance sheet growth. And then we expect that the cost trend to between 40 and 45 basis points on average credit risk weighted assets over the cycle. And that, I think is in line with what we have told you earlier.

When you look at 2013 what does it mean when we calculate the return on equity? Well, that means that we believe that our return on equity will be in the range of 13% to 15%; could be a little bit higher, could be a little bit less, but then saying that's the range that we are looking at. And we believe it is well achievable. If you look at how we have performed and how parts of the Bank are performing, we believe that is certainly do-able.

For the full year 2008 the return on equity was 2.8%. But it was heavily impacted by some negative market developments on impairments and revaluations. And when we exclude these negative market impacts, then the return on equity would have been 12.5%.

Yes, risk weighted assets impacts would represent about a 3% burden on return on equity. And we estimate that we will make an extra profit from here to 2013 compared with 2008 that will increase the return on equity by about 5% to 6%; so all-in-all, an ambition to go to about a 15% ambition level for 2013.

Now let's move to the Insurance Company. Also Insurance, we believe has a very promising future here. On slide 15 you can see that we have in many, many areas where we operate in leading positions in the market. And especially a leading position in provider of life and retirement related-type products, both in mature and in growth markets as well.

On slide number 16, you see that we have strong position in the high margin growth markets relative to the global Life Insurance peers. We have about 42% of our insurance sales is coming from markets with high growth. And you can see that in the slide on the right side of this picture. And that compares quite favorable with the global peers that we have.

On the right side then you see the value creation from insurance sales year-to-date. That's about 70% of the value of new business coming from our growth markets. And that points to a greater contribution to our income and our results in the future from these markets. And these markets are really hot. They're doing quite well. And we see that reflected in our numbers as well.

Then on slide number 17 we look for what are the benefits and the savings that we can create following the crisis? Now, we are expecting that the growth in asset balance will outpace the rate of growth that we experienced in the previous years, because people will save more for retirement. That is a trend, in particular in the US, but we see that also in other parts of the world.

And ING Insurance believes that over the longer-term that we will be able to grow our top line and our value of new business by about 10% per annum.

Slide number 18; how is the capital allocation? Well, about one-third of the insurance book capital is invested in growth markets. The equity invested in subsidiaries did increase from EUR22 billion at the end of the second quarter now to EUR24 billion at the end of Q3.

And as we explained on October 27, all hybrid and debt leverage is held at the Insurance Holding Company and, therefore, the subsidiary companies are debt free. And you can see what these are by the various regions as well.

On slide number 19 we show you the embedded value. And here you clearly see that embedded value exceeds the book value as we calculate that in the IFRS. These are numbers at year-end 2008. We don't have them for the year-to-date so far. But we will have them at the end of the year and then we will present them to you. We also have made a comparison with the IFRS equity at the end of Q3. So this indicates that we should expect to receive proceeds on the sale of insurance that certainly will create shareholder value.

On page 20 you have -- we show you now a margin breakdown of the Insurance business. And you can see here that they were positively impacted by higher assets under management and by cost cutting. The operational result for Insurance gives this very more insight in the earnings capacity that we have as an insurance company.

What do you see? Well you see clearly that administrative expense are improving and that the cost reduction exercises we have implemented are really working. That fees on assets under management have started to increase again compared to Q2 where markets have improved.

And you also see that the investment margin in Q3 is under pressure if you compare that verse Q2. But in Q2 you get most of your dividend income and dividend payments, so that's, I think, a very logical explanation. Plus we have de-risked operation quite a lot in 2009.

In slide number 21 you see that we have EUR400 billion. And some EUR230 billion is third party assets at the end of June 2009. They are equally divided over Retail and Institutional clients. And some EUR45 billion is for risk of the policyholders. We are planning, as we have told you earlier, to make the Investment Management company a separate profit center in ING and we'll start reporting earnings as of January 1, 2010.

I go to slide 23. What do we do moving forward? Now we have our goals for 2009 basically all achieved in -- already now. Our Back to Basics program has been quite successful in every aspect. We have delivered on all the elements that we have started some special programs, and I think we must be pretty happy with the diligent performance that we have shown here. And I think that bodes well for going forward.

Now on slide 24 you see how we are planning to go forward. This is the next phase of our Back to Basics program. We believe that we will need about 12 months to disentangle the Bank and the Insurance organization; could be more, could be less, but that's the planning at this moment. I must say we're going to take our time to that, because we want to do that right; one time, the first time right.

At the same time we're going to make sure that both the Insurance Company and the Bank are going to perform to their best performance levels. So for the next six to eight quarters, I would say this is the main objective that we have. Really look at performance, the Bank has already taken some steps in a special project. And also the Insurance Company recently has started a special project to really help the Company to a better operating performance. And I must say I have high expectations of that as well.

We will start the sales process only after we have accomplished that, and then considering all the options we have. That could be IPO. That could be trade sales; could be spin; could be anything. I think at this moment I would not leave any option off the table.

But it's very important that we create the retained earnings during this process, and that will help us repaying all or at least partly repaying maybe the core Tier 1 securities. And the proceeds from Insurance will then fund the remainder that we need to have in order to repay the Dutch State, and also to deal with the -- any type of investments we might make going forward.

We believe that the proceeds, slide number 25, from the Insurance by itself should be sufficient to repay the Dutch State and to eliminate the double leverage, as you can see on the slide here. I'll let you study that, and if you have any questions we can come back on that the later.

Let me hand it over to Patrick who will quickly deal with the results of Q3; Patrick?

Good morning everybody. I'll take you through the results, albeit you will have seen these substantially on October 26, so I will not dwell in great detail on these slides. Suffice to say on slide 27 where we show the P&L, you saw this on October 26, there's no real surprise here.

Our net result is EUR499 million which compares to EUR71 million in the preceding quarter; underlying net result of EUR778 million compares to EUR229 million in the preceding quarter. These are substantially higher, and this is entirely in line with the results we showed you on 26th.

I just do want to emphasize a couple of points. The Q3 results do not include the settlement cost -- the EC settlement cost in respect of Alt-A, the EUR1.3 billion that was mentioned earlier and in addition the provision for DSB. These are items which will -- are yet to come, they're not in the Q3 results.

Moving on to slide 28; again the Commercial result, this slide you'll have seen on October 26. So I'll briefly go through it again. Key points to make here is that the Bank Commercial result is up EUR2 billion, increasing from EUR1.8 billion, which is the driver of the overall EUR2.4 billion Commercial results which increased from EUR2.3 billion.

We have had a strong interest income result in the Bank, commission income is higher and cost reductions are coming through. These are driving the Bank numbers higher.

On the Insurance side, it's slightly lower, EUR346 million as compared to EUR501 million in the second quarter. As Jan has mentioned on slide 20, when we talked about the operating performance, the reasons for the reduction are seasonal. In respect of receipt of dividends it's more a Q2 phenomenon, and also the impact of de-risking our book, which has led to somewhat lower investment income.

Moving on to slide 29, this describes the difference between the underlying result of the Bank before and after risk costs -- market impacts, I should say. Now there's two key things I want to draw your attention to here.

Impairment is a big number, EUR664 million, and was actually higher than the preceding quarter. This is -- 90% of this relates to Alt-A impairments in ING Direct USA. And I suppose the key point that I'd like to draw out here is that, at this juncture, at this point in the cycle, the remaining amount left that can be incurred is EUR300 million. The remaining negative mark-to-market that can be impaired at current market levels is less than the charge we have taken.

Second point to draw out here, revaluation of real estate and impairments, EUR423 million; this is broadly split 50/50 between impairments and further fair value write-down on our investment portfolio.

Another -- the other big number on the page, loan loss provisions of EUR662 million, which is down from the preceding quarter. It represents 87 basis points of credit weighted risk assets and Koos will give you more detail on the evaluation of our bad debt charges in a couple of minutes.

Moving forward to slide 30, here we see the underlying performance of the three different divisions of the Bank, Retailing Banking is up with a combination of improved margins, lower costs and better margin on interest rates.

ING Direct is a loss, this is driven almost exclusively by the large EUR580 million impairment on Alt-A I referred to in the preceding slide.

Commercial banking, I'd like to take you forward to slide 31 where we can look at Commercial Banking in a little bit more clarity. Commercial Banking includes our Wholesale Banking business and also ING Real Estate.

When we're looking at Commercial Banking, that's the box on the top left, excluding Real Estate, we see that the results of Commercial Banking are an increase in profitability to EUR577 million as compared to EUR432 million. This is driven by lower bad debt, but also our revenue levels are holding up very well. And we've only dropped some 8% as compared the preceding quarter. So we have still maintained strong revenue lines in our Wholesale Banking operation.

And the other point I want to draw out here is on the box in the bottom left, the cost income ratio at 39%. Jan mentioned the ambition for the overall Bank to get to a 50% cost income ratio. Well, we can see that some of our -- one of our business at least is clearly a poster boy for this ambition and is well below the 50% today.

Moving forward to slide 32, interest margin, this has improved 9 basis points to 140 as compared to the preceding quarter, and we're seeing improvements ING Direct and also in Retail Banking.

Moving on to Insurance, slide 33; this slide explains why Insurance results before market impacts tie out to Insurance results -- underlying Insurance results excluding the market impacts. There are a number of market impacts here which drive the higher result.

A couple of points I'd like to draw out. In respect of equity hedges, which is a big negative EUR366 million, in particular in Europe the EUR232 million cost will substantially reduce as these hedges are running off. It's also a positive to see some sign of improvement in private equity markets, where we recorded a gain on one of our private equity investments.

Moving forward to slide 34, here we show our Insurance businesses in the regions. And all of these have increased on the back of the cost discipline we referred to earlier, and some sales improvements. [Clearly] -- and these are more clearly identified on the subsequent page, page 35 where we show APE and VNB.

Sales are improving, in aggregate they were up in Q3. They've turned the corner from the very low period of first quarter albeit they still remain lower than a year ago, but the trend is clearly improving. The small decrease in Europe is primarily due to technical reassessment of assumptions in our VNB.

That concludes the finance presentation. I'd like to hand you over to my colleague Koos, who will take you through the risk slides.

Okay page 37, if we look at loan loss provisioning, on loan loss provisioning what you see in the third quarter is 87 basis points. Noteworthy is that it's a growth of 112 minus releases of 25. And this is something which is normal if you're progressing through a crisis, that you start to see your releases kicking in.

Where has the decline come from? The decline comes from the structured finance and the general lending in Commercial Banking portfolio. Expectation going forward, yes, we are progressing through a crisis. Nevertheless, we expect to be around the levels of the first three quarters; that is still the outlook going forward. It's too early to say whether we have turned the corner on that side.

We go to slide 38, if we go to the mortgage portfolio, which is a big chunk of our total loan portfolio, there what you see is the following.

Overall, if you look at NPLs, then you see that the NPLs did not change. The only part where you did see a change is in the US portfolio, where it moved from 4.1% to 4.3%, and that is, basically, the US portfolio. If you compare it with prime ARMs, it is a low number. Nevertheless, that is the part which is still increasing a bit.

If we go to page 39, then we look at the credit migration aspect, what you see is from Q2 to Q3, you've seen that our risk-weighted assets have gone down. Now, why did it go down? You have, on the one hand you have credit migration. And credit migration added risk-weighted assets EUR5 billion. Nevertheless, actions have been taken to reduce the risk-weighted assets overall. So you could say -- and the number of assets are stated there on the right-hand side. But you could say we have kept the RWAs in check.

Just one thing on the bottom part; what you see is, for instance, what we call the double-edge sword. The moment you have credit migration, it triggers two things; higher loan loss provisions and at the same time it triggers risk-weighted assets; hence, our importance which we gave to managing this credit risk migration.

I think if you go to page 40, then we look at the Alt-A portfolio. On the Alt-A portfolio the news there -- the bad news is the delinquencies, because the delinquencies have moved up from 20% to 24%, so that is an ongoing deterioration. What you do see is market value of the portfolio is moving up a little bit.

Important things to note on this is if you look at the actual cash losses, EUR8 million, so very low still, that also means that the credit enhancement on this portfolio is still unused. But if you look at the estimated credit losses for the quarter, in Q3 they are EUR239 million. And that led to impairments of EUR580 million, pre-tax.

Now, where does this bring us on the Alt-A? First thing to note is that the after-tax revaluation reserve left is EUR0.4 billion. So what do I want to say with this? What I want to say is that, overall, the portfolio is almost brought down to a market value.

So where does that lead us to? If you look at this collectively over the quarters then you have seen that the cumulative credit losses on this portfolio, they are approximately $680 million, which is over EUR400 million, whereas at the same time the total cumulative impairments on this portfolio are somewhere over EUR1.2 billion. So that is the status of the Alt-A portfolio. So, written-down to a larger extent.

If I go to page 41, on page 41 you see our movements in the revaluation reserve. And what you see in the revaluation reserve is where it was for the debt securities, minus EUR7.9 billion in Q2; you see it moving to minus EUR2.8 now; so a significant progression in the reval reserve, which, of course, has to do with the contraction of credit spreads. And you see that basically in all sectors, also in the ABSs.

So, the fact that the revaluation reserve moves up such a lot, you see that back on page 42 in basically the progression of our IFRS equity. And what you see happening there is that the reval reserve, so the middle bar, the blue plus, plus EUR5.1 billion, contributes a lot to our progress of shareholders' equity, which moved from EUR22 billion to EUR26 billion. So the fact that shareholders' equity moves up a lot, of course, has its implications, for instance, the leverage ratio, which improve with that.

Moving forward to page 43, if you look at the Tier 1 ratio of the Bank, you see that the Tier 1 ratio has improved. So despite the fact that we are shrinking our balance sheet, we don't do that with a margin erosion, because overall what you see is a 7.6% Tier 1 ratio, Core Tier 1 ratio.

Group debt equity, a slight improvement on the Group debt equity ratio; also, you see improvement on the Insurance debt equity ratio; so, overall, capital situation improving.

So that's, in a short version, the risk story.

Thank you, Koos. Let me conclude this short presentation and say that we believe we have made the right choices here, the right strategic choices, and that we have made them at the right time. This is the right time to separate Insurance and the Banking business.

We see a good future for both of them. They're strong companies. They have good market positions, a good capital position. They have growth opportunities, both, and they have a strong foundation in some mature markets.

We, first, would like to continue to work on improving the performance of those operations, and we have, I think, some good plans to do so. And then we will carefully work towards the completion of the separation. And we will do that, I think, protecting the interests of all our stakeholders and balancing the interests of these stakeholders, I think, very carefully as well.

So, that is our plan. Let me now deal with your questions.

Thank you, sir. (Operator Instructions). Our first question comes from Spencer Horgan. Please go ahead.

Thanks very much. Good morning everyone, three things, I think. The first question is, and I apologize if this is way too premature, but have you had much expressions of interest on the Insurance side of things so far? And if you have, depending on how those conversations have gone, have you changed or altered in any way your view of the preferred exit route? And I hear your comment about it taking a year to separate them, but I'd just be interested in any flavor on that one.

And then just two numbers questions. The first one, on slide 32 you gave the sensitivity, I think, to a parallel shift in the yield curve in terms of the Bank net interest margin. Can you give us a flavor on how you see what happens if the yield curve twists?

And then the last thing is, obviously, you've given us some new information in terms of the Insurance operating profit, and we obviously need to look through it. But I guess if we look at the trends, you can see operating profit tends to average around GBP500 million or GBP600 million a quarter. Is that a run rate you'd be happy with perspectively, or could it be a little bit higher? Thank you very much.

Okay. I will take the first question, Koos the second one, and then Tom will -- Tom McInerney, our leader in Insurance, will take the third question.

Yes, we have had a lot of interest expressed already. But I must say we are not really actively engaging in discussions. This is not the time. We have a lot of work to do. We -- I think, we have a good plan ahead of us. We want to take our time. We want to do it right. And I believe, as the market's recovering, this is not a time to, let's say, be extremely quick. Diligence is important here. And doing it right the first time is important. So that's, I think, our leading management philosophy.

Yes, there could be some different type of exits. That depends on how well we do our performance. If we perform very well, I think the exit options may shift. And that's why we would like to keep open what exit options that we have. But in principle, I think you always -- in a situation like this, you start working on an IPO because that is the normal trend that you have and the normal path that you follow. And then all the options that can follow can be evaluated against that particular option.

So, no preferred route yet, but I think we follow the normal path of action in a situation like this.

Koos, would you like to take two?

Yes. If you look at question two, so what does a yield curve twist do? I can't give you the answer straightaway. I can give you some statistics. And that is that normally, if interest rates go up with a parallel shift by 1%, then what you see is an increase.

Well, the first year you see a slight deterioration, because you have to move your savings rate up and the repricing of your assets, so the reinvestment is taking slower. But over three years, you are making a profit by it.

But if you assume the following situation, we invest our savings money, on average, in two years. So normally, if you have a twist of a yield curve, so the very short end moves up, then you make less money on your savings. But at the same time, what happens then is that you will have less pre-payments on your mortgages, because with a flat yield curve, there is less inclination to repay a pre-pay mortgages, which is a benefit. So I cannot give you, overall, a net-net number on that, because that's a bit too complicated to do on the top of my head.

And then the third question will be for Tom. I think if you want to follow his answer, take slide 20, and then I think it's a good indication of the answer that Tom will be giving; Tom?

Okay, just referring to page 20, the first thing I would say is that's only the life insurance margin. So it excludes the operating earnings for the non-life and also the corporate account.

And looking at that, there are -- so you can see the operating earnings. Obviously, in the light blue the fees for assets under management, obviously, as markets improve, we would expect that number to come up, and recognize that we don't have to increase expenses to cover those higher fees. Those are just fees on assets under management.

The other -- on investment margins, obviously, they have been affected by impairments. Again, as markets improve and impairments reduce over time, you should see that growth.

And finally, we spend a lot of time and effort on managing the administrative expenses. So you can see, third quarter '08 to third quarter '09 down 10%, and we would expect to continue the focus on expenses. Hopefully, that gives you some sensitivity around our operating income today and where it could go in --

Yes. So, basic message is it should be on the up?

Okay, interesting conclusion there.

Thanks.

Thanks. We can deal with the next question.

Thank you. Our next question comes from Farooq Hanif. Please go ahead with your question.

Good morning. I hope you can hear me clearly. I've got a few questions. Number one; in the US business, which I think you're indicating is about EUR10 billion of the EUR24 billion book value, what would you say is the split between -- roughly speaking, between retirement services, closed annuity book, and then other life? That's question one.

Question two; just going back to Spencer's question on twist and yield curve, on slide 10 you assumed, I think I heard correctly, 100 basis points net interest margin versus 140 currently for the balance sheet growth. Is that right? And would that 100 basis points basically reflect yield curve situation in mid-2008? That's question number two.

And the last question actually I have is that you've given us 13% to 15% indication on ROE for the Bank, what would you say is the kind of ROE you think you're going for in Insurance? And what would you say is ROE, for example, in Asia, versus ROE in Benelux, versus ROE in the US? So if you could give some sort of split there as well.

Sorry, lots of questions. But if you could answer them, that would be very helpful. Thank you.

Okay, let me deal with the twisted yield curve question and the basis points. Yes, that's 100 basis points that we have assumed and in 2008 we had a higher basis points. It was about 115, I think, in 2008. Koos, is that correct?

Well, I need to get the 2008 specific. I'll come back on that one.

Okay. And then the Insurance questions, Tom?

So, on the first one, on the equity split, we don't -- not to comment specifically on the pieces, but it is spread fairly evenly over the businesses between retirement services, life and then on the annuity side, it's split between variable and fixed. That would be on the equity.

And the other -- what was your other question, just so I have it right?

ROE target ambition or view for the Insurance business, plus also some sort of regional split of where the ROEs are higher and where they're lower, and some sort of numbers there, if possible.

Yes, well, I think a good way to look at that is where we break-out the IRRs by the different regions. It's in the package. I think that's slide 16. And so, basically, the ROEs are a different order of magnitude, but I think the relativity between higher in the emerging markets and the development markets, I think it gives you a good indication of relative.

I would say where we've been averaging is -- and where you'd expect overall funded weight would be similar to where the ambition for the Bank is.

Maybe if -- right, so you're saying around about 13%?

In the range for the Bank it was 13% to 15%, so I'd say it's in that range.

Okay. And going back on the 100 basis point net interest margin, when you used 100 basis points, Koos, is that -- where you just basically allowing for a twist scenario?

Maybe, Farooq, the following is the case. If you look at 100 basis points, in the past that was sort of a run rate on the total interest rate margin which we were making. What you have seen is, clearly, a benefit right now because credit repricing is very good. So you're repricing a loan portfolio and that is why we are currently at 140.

Nevertheless, we need to make the following conservative assumption with the 100 basis points. And that is that credit spreads will, over time, slightly deteriorate. Nevertheless, they will still look relatively good.

Also, you have to take into account that our cost of funding, if you look at us as a Bank, is still one of the cheapest rate around in the industry. So our assumption of 100, which is sort of a historic rate, despite the fact that you might have a yield curve flattening, I still feel that that's a relatively conservative assumption to be made.

Overall, what you could say is if interest rates go up, and at the same time if interest rates flatten, it has two effects. On the one hand, a very steep yield curve is favorable for the savings money. On the other hand, if what we have right now, and that is a steep yield curve but based on very low rates, that gives you no chance to price your savings money, on our side, favorably.

So in other words, if you have short-term rates at around 5%, it's easier to pay your customer 4% than if you're short-term interest rates are where they are right now. And so, overall, you could say there is two effects. If interest rates go up and you have a flattening, a flattening is bad news, but interest rates go up, allow you to price a little bit less aggressive. And so you take that factor into account.

Then you take into account that the overall, savings or credit spread margins, which we had over the years '05, '07, were too negative. Right now we had an extremely rich year. But we do expect credit spreads to stay a bit elevated, as compared to the '06, '07 levels. And that together gives us the point that we think 100 basis points on the additional assets is a reasonable target for us to make.

Basically, you're quite happy that even in a bear case scenario, this -- that your forecasts are quite solid on net interest margin?

If you have a bear case then you have something different, because then my loan loss provisioning is going to be higher, but my credit spread is going to be higher, and I will have a more positive yield curve. And so it's a difficult one to -- there are offsetting factors in it. My assumption is credit spreads will be a bit lower. But at the same time, that is offset by your provisioning because it will improve.

At the same time, you could argue interest rates will go up and you will have a flattening. The flattening is not good, but interest rates going up gives you the chance to price a little bit less competitive on savings. So it's all those factors together.

I know that is a complicated one to give an exact calculation. But, overall, you find, like going back to the historic 100 basis points on the incremental assets, is a reasonable assumption forward.

Okay, thank you very much. It's very clear, thank you.

Thank you. Our next question comes from Duncan Russell. Please go ahead.

Good morning. First question is I was wondering if Tom could provide us with the net amount at risk in the variable annuity business in the US as of the end of the third quarter, the unhedged bit, please. And also, if possible, the statutory reserves on the variable annuity product in the US as of the third quarter, if possible.

And then a second question was, in terms of the options for splitting up the Bank and the Insurance group, is there anything that prevents you from repaying down the double leverage through retained earnings over the next four years, before paying back the Government?

Is there anything within the EU agreement which stops you from doing that, because obviously -- and then if you do repay the double leverage with retained earnings, is there then anything which stops you just from spinning off the Insurance business to shareholders of ING Group rather than IPO-ing it so, therefore, letting the ING shareholders decide the fair value of the Insurance operations, rather than letting external parties? Thank you.

Okay, Tom, you do the first one.

Yes, the first one, Duncan, I don't have the net amount at risk and the unhedged position handy. We'll look at those and get back to you.

On the statutory reserves, overall for the US our reserve adequacy on an overall basis is adequate at both the 50% and 90%.

The second question, Duncan, the reason that we want to pay attention first to making sure that we have excellence in our operations and that operations are performing well is exactly because we believe it creates more options for us.

And if we can deal with the retainings would be sufficient to pay down the debt. And I think you have different options available to us including the one that you mentioned, a spin is then a possibility as well. But we're looking ahead now for a very long time. I cannot -- I can only say that we would like to preserve as many options as we have for as long as we can. And that way, we hope to create more value for our shareholders. But at the same time, also it's an easier execution program that we are then embarking on with lower risk.

Okay. So there is no predetermined agreement with the EU about paying the Dutch Government before paying down double leverage?

No, there is no predetermined agreements, no.

Okay, thank you.

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

Yes, hi. It's Nick Holmes at Nomura. Coming back on the net interest margin, which is obviously very high at the moment at 140 bps and it's obviously also benefitting from one-offs like the steep yield curve. We've had a number of questions which look at sensitivities here. But a simpler question is can you give us an idea of what you think is the sustainable level of net interest margin?

And then I also had a question for Tom on the US business, but perhaps if you want to answer the net interest margin question first. Thank you.

Okay, Koos?

Yes, I think, Nick, overall, it's a difficult thing to mention, because normally if we did not have this credit crisis, then I would say like, well, you move to something like 100 basis points, which is an historical average.

At the same time, where I'm a bit more positive on is the following. And that is that if you look at our Bank, then you find, like, overall we have a great access to savings money and at the same time a relatively minimal usage of long-term and short-term funding, so the liability side looks pretty much okay. So that means, overall, we are able to price assets competitively.

At the same time, I also know there is a lot of banks who still have less access to funding, which means that, overall, you could conclude that we will be able to price competitively. We will be able -- we have a good margin, based of the liability side. So I would say, like, if it was 100 bps in the past, probably it looks more sustainable to see it around 120 basis points.

Nevertheless, it is something, I mean you really have to see how this crisis crystallizes out, and the sooner the ECB starts to, for instance, drive up funding access for banks, that will have an upward shift on credit spread, which is beneficial for us. So -- but I would say 120 bps looks a normal one.

Okay. That's very interesting and structurally with the business, ING Direct has exerted a negative pressure on the net interest margin historically and would you expect that to continue as ING Direct grows?

I think overall if you look at ING Direct what we are doing right now is we are trying to normalize its investment income. So rather than buying a big pool or AA type of credit, senior bonds, we are trying to integrate balance sheet and also try to make sure that they originate mortgages.

So we want more loans in the portfolio. So, overall I would say, like, also for ING Direct you expect margins to go up. I can give only one caveat, Nick, but that counts for the industry as a whole, and that is the question on what will happen with liquidity requirements, for instance, if you look at the FSA and other ones. That is a thing I don't have in hand, because look at it simply, if you need more liquidity, liquidity has a cost. And that part is an uncertain one.

Overall, we have already with our Dutch Central Bank, we have consolidated liquidity guidelines and we are fulfilling that. And in so far as an FSA outnumbers that, or if there are different changes, that is the caveat I have.

Okay. Thank you very much for that. Can I move on to just one more question which is for Tom, which is, looking at variable annuities there's been a small positive new business value in Q3 for the first time for a very long time. And I just wondered, Tom, whether you could give us a bit more color about what it is that is actually going on with your products at the moment.

So, Nick, as you know we've filed new products; new lower risk, lower cost variable annuity and fixed and indexed annuities. Those are with the state insurance departments and we would expect approval for a launch in the first quarter. At the same time we continue with modest sales of the existing product. And because the markets have improved somewhat there is modest positive VNB, because the IRR on the business is slightly higher than the weighted average cost of capital.

Okay. That's very clear. Thank you very much.

Thank you, our next question comes from Jaap Meijer, please go ahead with your question.

Hi. I noticed on page 51 you showed the new Bank, the pro forma core Tier 1. And compared to the previous one you deduct EUR2 billion from core Tier 1, because of the insurance subsidiaries. I just wondered why this is.

And am I right in saying that core Tier 1 will actually be looking stronger than expected after disposal of the insurance arm, i.e. EUR2 billion more?

Other questions are maybe you could shed some light on the net interest margin in Belgium and the Commercial Bank, because they were slightly weakish in the third quarter.

And I also noted there's quite a nice improvement from -- in the combined ratio to, I think, 102% from very high levels though, in the second and the first quarter [too]. Thanks.

Okay, Jaap, maybe on page 51, if you look at what we do over there on that page, it's we say we basically collapse the Group into the Bank and if you do it that way, then indeed you get the support of the core Tier 1 securities. So that's a plus, but at the same time you have to deduct the full Insurance Company from the capital of the then Bank, which is there, and that goes first from your base capital and then it goes for a residual piece from your Tier 1 capital. So that it what you see on that page and that is why you have the minus EUR2 billion deduction of the Insurance subs.

But that's the revision of EUR2 billon, because previously it was I think EUR11 billion and EUR11.3 billion from this capital and Tier 1 was as reported. But you add EUR2 billion deduction compared to the pro forma numbers you gave before. So my question is am I right assuming if you sell insurance that your core Tier 1 would actually be even EUR32.9 billion instead of the EUR30.9 billion?

I think the one thing what you have to see is there is more equity in the Insurance sub. And that is -- if you look at that, so that is basically the explanation as compared to what you have seen before. All right?

All right.

EUR2 billion more; yes, EUR2 billion.

Yes, EUR2 billion, that's it.

Okay, what the other question was on the -- if you look at the Commercial Bank, the volumes Netherlands, you were talking about Netherlands and on Belgium I think?

Belgium and the Commercial Bank. The NIM was slightly down in the third quarter.

Yes, I think overall what you've seen is a slight deterioration on the volumes in the Commercial Bank, minus 2, but the income overall plus 10, excluding the Financial Markets business.

So there's nothing -- well, the trend uptrend in the net interest margin should continue, I think. This is just a blip in the usual thing the Wholesale Bank basically?

Well, there is a bit. Of course, there is repricing I think. So again what you have then is you have savings money. Savings money is invested. And what you see is overall, you get a bit of lower repricing right now of the reinvestment yields of your savings money. So it's you cannot, like, it's part of a trends or something is going on, because if I look at first Q '08, we were at 1.29%. Now it's 1.35%.

Actually what you try to do with savings money is to keep -- to maintain a constant or a slight increase in margin. And the way how you do it is by sometimes investing a bit shorter, and sometimes investing a bit longer. But what you see right now is you have a run off of high yield investments replaced by lower yields, so that has a downward pressure. But at the same you also pay a bit less for your savings money.

And on the combined ratio, it's improving nicely. You think it's improving further going forward to lets say 100%?

The combined ratio we would expect -- because of the focus on expenses, we would expect it to continue to be better than 100%.

Right, thank you.

Thank you our next question comes from Mark Thiele, please go ahead with your question.

Good morning, Marc Thiele from UBS. Three questions please. First question is on slide 21 where you present the split in terms of the third party assets under management. Does that include some unit linked? And how much of that?

And then the other question is following-up from that is, can you give us some indication how the profitability looks like? I know you want to give us more detail next year, but may be you could give us a feeling for how the margins look like, or what average fees you generate on these assets?

My second question is then on slide 12. It's difficult to read, it looks like a EUR40 billion or EUR50 billion reduction in risk weighted assets. How much of that corresponds to the sale of IT Direct USA? Or can you give us the amount of capital that is in that subsidiary.

And my third question is going back to slide 10, you gave us some detail of what you expect volume effect and the margin for savings. Can you give us a bit of color on what you forecast in terms of the margins in the loan bucket there?

In respect of the investment management business I'm afraid your really going have to wait till the first quarter, because we are putting that out now as we speak, so we don't have a split of the investment management business at this point. So that really is going to be a Q1 event I'm afraid before we can pull that out.

And there's no unit linked in here is there --

I'll have to come back --

Because it says here there's a general account and then it says third party. I'm just curious if there's any unit linked in there to avoid double [counting].

Right, so if you look at page 21 so the insurance general account would be of obviously fixed income. On a third party side, third party institutional that would be both fixed and equity management for third party.

On the Retail side, a reasonable amount of that 32% would be where we're investing say on variable annuities where our investment group is actually managing the assets. So there clearly are variable annuity and unit linked investments in that third party retail percentage.

And do you have a number for that?

I don't have it broken down in detail.

Right okay.

It may be on the question of the page 12, on page 12 you talk about the divestments, that's the grey bar. We are talking here about approximately EUR34 billion of RWA divestment. I don't have the precise breakdown like what these value are, or what is other ones in there. But ING Direct US is included in that total envelope of EUR34 billion.

You're third question Marc, had to do with slide number 10 and then the savings on the current accounts, that EUR800 million. We have calculated here an improvement of about 25 basis points on the current 300 billion of savings, so that has an impact of about EUR800 million on income.

Right. And for the repricing of the loans, what have you assumed there?

That the repricing of the loans.

The repricing and wholesale is in Q1 '08 is about 115 basis points. That's compared to 169 in Q2.

There is a total of EUR500 million, you see that on the chart? Marc?

Sorry, yes.

You see that on the chart, there's a EUR500 million increase in repricing?

Yes, I just wonder you said 115 basis points that's what I [caught] on the entire book presumably?

Yes, that's already -- in 2009 of that EUR500 million I think there's already EUR250 million in there. And then we have an impact of cross-selling I think what we are increasing today, that we did not do as much as we are doing today. So the impact of that together will be an increase of EUR500 million.

All right, thank you very much.

Okay.

Thank you our next question comes from Farquhar Murray. Please go ahead with your question.

Hi, morning gentlemen. It's Farquhar from Autonomous here, just two questions if I may. Just starting with the ROE on the Insurance business, if I just crudely sum the Insurance operating results for the last quarters I get about EUR2.4 billion. I presume tax of about 25% on that, I'm looking at about EUR1.8 [billion]. If I compare that to the book equity in the subs of 22 to 24, I'm looking at an ROE of about [8% per annum]. I'm just trying to tally that to the guide that you gave there of 13% to 15%. I just wonder whether that's building in the ambition of cost cutting or whether is post leverage?

And then turning to variable annuities, you've restated the value of new business. I just wondered if you could give us some color around the changes you made there, whether it was specific to a particular type of product set. And also, whether we should anticipate any adjustments to the embedded value number coming from the in-force book as well at the year-end? Thanks.

On the question on the ROE, yes the ROE you're right today. But if you go back to slide 20, looking at obviously we would expect those markets start to improve. And they already have improved our fee income, so that will help the operating earnings as well as the return, also, a continued focus on expense management.

And then on the investment margin, there we have de-risked our products and have a higher weighting than we normally would in Treasuries and risk free. So over time as markets improve we go back to more of a normal allocation within our general account that should also help. So I would -- the range I gave you is what we would expect with improved markets.

Is it before or after leverage?

The ROE is after leverage.

And just in terms of the investment margin is there a normalized expectation you have around that? How far are we from normal at the moment?

In the US portfolio in particular we have a weighting of Treasuries and then short-term cash investments of about EUR13 billion out of a EUR80 billion portfolio. And so that -- normally you would carry more like a couple of billion in those two categories. So I think over time it's probably more in the US. And then we -- also in our portfolio in Europe, we would also expect modest improvement in the investment margins going forward. But a big part of it will be in the US since we did significant de-risking there.

And on VAs?

I didn't get that question?

On the variable annuities, the restatement of the new business value that you've gone through there. I just wonder if you can give some color around it. And also whether we should expect an impact on the in-force book coming through embedded value at the end of the year. Thanks.

Basically starting with January 2008, the capital factors for risk based capital by the rating agencies changed. And therefore, particularly on the in-the-money position, so we therefore went back and restated since 2008 for those changed capital factors. That was the change in the restatement, because we had gone back based on the new capital factors and restated '08 and '09.

Thanks.

Thank you. Our next question comes from Chris Hitchings. Please go ahead with your question.

Hi, thanks very much indeed. I want to focus on just two issues that puzzle me.

Firstly, clearly we're trying to get some handle on what the normal profits of the Insurance business as well as the Bank. You talked -- now, I've got the appendix five on the press release which gives your underlying result excluding markets by quarter.

Now, you said Q3 was below Q1 -- sorry Q2, because of less dividends. Now I can see that being true for the European result, but it's also true quite significantly for the US as well. I'm wondering whether the EUR257 million of Q2 or the EUR201 million of Q3 is more representative of what's going on? Or are there any other funny aspects there? I'm particularly looking at you talked about de-risk, you talked about low interest rates, you talked about -- and clearly I'm just wanting to [tie up with this]. That's question one.

Question two, I'm looking at the variable annuities. I see Q3 has now got the re-emergence of outflows, which is much lower sales. I was surprised to see on I think on an annuity website that your products are still quite competitive. Have you put them there to try and stem that outflow? Or is that an error? Or, are there areas we were trying compete in the VA space? Can you help me on that?

And finally on ING Direct, I'm trying to get a handle as to why how the profits from almost every outside the US have improved so dramatically over the course of the last few quarters, i.e. once impairments are stripped out. What issues are going on there? Thank you.

So Chris hopefully I captured all of your questions. In terms of the profit (inaudible) write-offs from Insurance, looking at page -- if you look at page 61 in the appendix of the presentation it breaks down the margins, so I think that gives you a good picture.

You're right that the dividend income is in the Insurance Europe and that was lower in the third quarter. We would expect improvement overall on the margins in Europe in the fourth quarter.

In Q3 for the US, keep in mind what I said before, we did have a higher Treasury in short-term cash investments that we normally carry, and so again over time we would expect to re-risk there.

In terms of the variable annuity outflow, we continue to -- we have de-risked the product. We've reduced the roll up to 6% and we've gone from a quarterly to an annual ratchet.

We are continuing to sell a very modest amount of that product. We don't want to go completely dark, before we get the new products approved. So we continue to sell at a much reduced level and then we would expect this to start selling the new product -- the new VA product in the -- beginning in the first quarter.

So when I found ING offering a top three roll up rate on annuity website you don't recognize that?

I can't -- I didn't understand your question.

Sorry, we were looking at a website I think it's called annuity direct or something like that which lists the most attractive offerings. And ING seemed to feature well up there with the other aggressive competitors. You don't recognize that?

Well, I wouldn't recognize that, Chris. And I would say that if you look at our relative sales in the third quarter they were well below where we've been and well below competitors. I think we're now -- I think if you look at where the [VAs], I don't know if all of our numbers are out for the third quarter, but in the second quarter we are down to number 10.

So I would say on a relative basis just looking at sales, I would say that we are not nearly as competitive as some of the other players who have decided to continue to sell their traditional VAs. They've de-risked them somewhat, but haven't gone as far as we have.

Yes, because I'm just looking, what ongoing profitability do you expect the new products to have relative to the old ones in terms of IFRS profit?

You know the new product which we're launching has IRRs in the 14% to 15% range.

Okay, so -- okay, thanks very much.

The improvement you refer to in ING Direct arises from similar themes that we've seen in the rest of the Bank, obviously ING Direct as all the Bank -- all the Group is pushing forward with cost reductions, and they are flowing through.

And the costs are down quarter-on-quarter and obviously versus prior year. And that's notwithstanding the fact we have to pay FDIC deposit guarantee costs.

And margins are also improving, so interest rates were reduced in a number of entities in US, France and Canada, for example. So we're seeing some improvement in margin and cost reductions also coming through.

Thank you.

But the business is being managed more for profit than for (inaudible).

Thank you.

thank you. Our next question comes from Tony Silverman. Please go ahead with your question.

I hope you can hear me. I've just got one slightly general question and a couple of numbers questions, if I can.

The first one is that you've given us a lot of building blocks, which would add up to the target 50% cost income ratio in the Bank. And I was just wondering how that plays against the whole momentum of EU policy, which is to try and increase competition, certainly in retail, and how realistic is it? Are you basically taking a view that that momentum of policy will perhaps fail in the markets that you're in?

The second two questions were on slide 40. When you talked about it, I think you mentioned that Alt-A values had -- market values had gone up. I just wondered if you could tell us what they are as a percentage of par at the moment, and how that compares to the end of Q3 and Q2.

And finally, on slide 35, you mention technical adjustments to the value of new business in Europe, which does seem to have gone down reasonably substantially in Q3, and I just wondered if that was -- if you could tell us more about that, or if it's similar to the VA changes that you've already talked about? Thank you.

Okay. I would say on the policies going forward, and in particular in the retail market, we see increased competition. The Dutch market is one of the most competitive markets I think you will see in Europe. We are no price leader here. We are no price leader anywhere. So we are limited by the market itself, and we are really working within -- in the market without being a price leader ourselves. So I don't think we will have that much negative impact from what you are mentioning from the EU.

And is the 50% cost income ratio really consistent with a competitive market?

Yes, we are -- cost income means that we are reducing our cost. We're working at being the most efficient. We -- in fact, we are already, when you look at some slides, one of the lowest cost producer in the Netherlands, and in many ways the lowest cost producer in Europe, so working on lower cost can only be helpful. If margins are set by somebody else then we can then increase our margins.

Yes. Yes, okay.

Okay?

Yes.

Maybe on Alt-A, what we have on page 40, what we see is the total market value of Alt-A was in the second quarter was at 57.4%, and right now it is -- or third quarter it is at 58.9%, and I think as per the end of October, it moved up a little bit again. So, you know, small improvements on that side from a market value perspective.

Okay. And finally on the value of new business, change of assumptions in Europe.

Yes, in Europe we increased the discount rates, so that raised the cost of capital, and therefore lowered the VNB.

What was that change, if you can say?

I don't have the number, but it was an increase to reflect the higher risk premiums in the equity market.

Right. I mean, the value of new business seems to have fallen quite sharply. I just wondered if there was anything else going on in Europe then that might be worth talking about.

I think that most of the reason was the increase in the discount rate.

Okay.

Okay.

Thank you. Our next question comes from the name of Benoit Petrarque. Please go ahead with your question.

Benoit, your line is now open.

The analyst has gone who asked the question. The analyst that wanted to ask the question has gone.

Thank you. Appears to be -- his line appears to be mute, so we'll go with the next question from Johnny Vo. Please go ahead with your question.

Yes. Hi, guys. It's Johnny from Goldman Sachs. Just a couple of quick questions. Obviously, risk weighted assets have obviously been inflated recently as a result of credit migration and obviously issues in the economy. But as the economy improves, how does this factor into your RWA growth estimates, or lack of, going forward?

And then the second question just relates to the structure going forward. If you do move to a bank holding company, do you actually have to pay down the double leverage, or can that holding company leverage actually sit on the balance sheet of the Bank? Thanks.

Johnny, if you look at the RWAs, indeed what you see is that on an existing port folio, especially with regards to ABSs, we have seen positive credit migration, and that is somewhere for banks in between the 5% and the 10% on an existing portfolio. Somewhere in the future, if you would have a reverse trend, you expect that back, although we don't have that in our projections.

So we assume that if there is any headwind in our RWA, so in other words, if we get also -- sorry; if there is any tailwind in RWAs, because, you know, it's going to be lower, then we think that will be offset by regulatory increases or other things going forward.

So we see that a bit as a worse, because our base case scenario is that regulators will sort of reduce pro-cyclicality and get increased capital requirements by the time that you have a positive offset on this side. So we're not calculating ourselves rich on this element.

Okay.

On double leverage, Johnny, I think you're right. In a bank debt just blends into the overall portfolio.

So you wouldn't actually have to pay down the double leverage with the proceeds from of some of the insurance sales?

Yes, the double leverage is not earmarked into specific bonds. As they mature, they could be refinanced, in the normal course of events.

I think your answer is correct. Johnny, your assumption, but we still need to get the approval by the Dutch National Bank that we can do so. But I think in principle, the question that you said the answer is, yes, that's a correct question.

Okay, brilliant. Thanks very much.

Thank you.

Thank you. Our next question comes from Stephan Kalb. Please go ahead with your question.

Sorry, our next question comes from [Jan Willem Wiedemar]. Please go ahead with your question.

Sorry. Our next question come from Farooq Hanif. Please go ahead with your question.

Hi, there. Can you hear me?

We can hear you, Farooq. Go ahead.

Perfect, two follow-up questions. Number one, if we look at the ROE currently of the Insurance Company post leverage, would you recognize a number, just taking Q3, of around about 11% post leverage? So the 8% going up to 11%, does that sound right? That's question number one.

Question number two is, the embedded value split you give on slide 19, now clearly, that's going to be very different I'm guessing at the end of the year, because you're going to move to an MCEV-like basis, I think. And also, you've had disposals, or you're going to have disposals.

Could you -- I know you probably can't answer about the level of the EV because you're still calculating that, but do you think the split of the embedded value as shown is actually reflective? So could Asia be bigger in the new regime? Thank you.

Patrick will answer your question.

I'll deal with the ROE one first off. I think the point on the leverage and insurance is that the 22%, the assets, that generates the income, and that is -- the ROE then is calculated over the shareholders' equity, the 15%, i.e. the lower number. So I think you're right, the ROE mentioned earlier of 8% is too low.

Would that 11% annualized in Q3 sound about right, or not or?

In broad terms.

Okay. And that's what you're obviously trying to get up to, 13% at least?

Yes. I think one of your colleagues mentioned earlier 1.8%. If you put 1.8% over 15% you're getting into the lower teens. You're right, yes.

Okay. And in terms of the embedded value breakdown. Obviously, you can't tell us what the level of EV is going to be under your new calculations, but just the split. You've had -- you've sold Taiwan, you've made other disposals. Methodology change will obviously favor some regions over another. Can you give some broad idea of whether the -- you still have that kind of split on page 19?

Well, it kind of will be -- we'll adjust for same store, but in general, the embedded value of the three emerging markets will go up as a percentage over time due to their higher growth.

But in terms of the actual methodology, you're not commenting?

Yes, we really haven't finished that yet, so I'd say we'll get back to you on that in the future.

Okay, thank you very much.

Thank you. Our next question comes from Benoit Petrarque. Please go ahead with your question.

Good morning. Benoit Petrarque from Kepler in Amsterdam. The first question is on the market risk weighted assets. The Basel Committee said in September that market risk weighted asset and market risk requirement will be multiplied by 2 in the next two to three years. How is it going to impact your total risk weighted assets, please? First question.

Second question is on the CMBS portfolio, which is mainly located in the US insurance and ING Direct US. Are you comfortable with the 80% market value you are reporting end of Q3? The reason why I'm asking that is I'm not sure that you could actually sell those businesses, including the CMBS, for 80% of par.

And last question is on the ROE figure for the Bank. What will be then the ROE figure if you have [a] flat income over the year, so you just forget about higher margins and shift in -- and steeper yield curve? Thanks very much.

Okay. Maybe I'll take the first question on the market risk weighted assets because, indeed, there will be tightened regulation on that part. If you look at it overall, on market risk, if you look at Q3, we have in total, if you look at the amount of capital needed for that, it is EUR644 million, which is approximately EUR8 billion of RWA.

So for us, given the fact that it's a relative small part of the portfolio, I would say this is a manageable number, which we can sort of catch up with in our normal course of business. So although, yes, it's a higher number, it is not something very disturbing for us.

If you look at the CMBS portfolio, on the CMBS is the following is the case. Overall, what you see is on the underlying part in the portfolio, you still see debt service capacity ratios in and around 1.5 times, which is a slight deterioration as compared to the past. So indeed, what you see is the underlying economics a bit less, so a bit deteriorating.

The issue with the CMBS is it is actually more on the fact that the refinancing gives difficulties. And there what you have seen is in the US there have been support programs for the CMBS portfolio, because the large refinancing need is recognized in the industry as one of the bigger problems. And you could say the US support programs for CMBSs have made that the fair value's increased from 74% to 79%.

So overall, underlying, you could still say there is a deterioration of the debt service capacity ratio. Nevertheless, what you see is the support programs help a bit to address the refinancing issue for the moment.

If you look at credit ratings, 70% of the portfolio is still AAA. Credit enhancement is still robust. What can you expect over the future? Well, overall, if you take a portfolio as an average, it looks very good. Of course, you look a bit at some of the more junior tranches '06, '07 that is where we pay a bit more attention to, because there you could have some more risk in a portfolio. But overall, I'm happy with the portfolio as it is.

But the 80% reflects accounting fair value. Do you think a potential buyer of the Insurance business will be likely to pay 80% of par? Or do you think it will be a bit lower than that?

I think you know at the moment what the market price is. The question is, and that is a little bit what you see overall with your debt portfolio, we have seen credit spreads shrinking a lot. That is why our negative reval reserve basically moved from minus EUR7.9 billion to minus EUR2.8 billion. That is also a little bit why for some of these parts you could say, like, we are not in a hurry to divest, because a lot of the portfolios are pretty healthy and you'll have a pool to par effect. And that is why we are not pressing a sale button as of today because there is some value in this portfolio.

All right. And on the ROE figure?

In respect of your comments on the Bank, on slide 10 we do give a breakdown of where the revenue side will come from in terms of growth and margin improvement. So, if you wish to take a -- discount the growth, which we believe is there, and likely to happen, particularly over the next four years coming from a very low base, you can compute it.

But the point I would also make then is that there are other components. Clearly, there's cost reductions as well we're going to do irrespective. And we also believe we're in a strong position in terms of leveraging our good market position to improve margins. Slide 25 gives you the ability -- sorry, slide 10 gives you the ability to disaggregate the computation as you wish.

So just to sum up on the ROE figure what you have done is take the EUR16.5 billion total income, apply cost to income ratio of 50%, I assume risk cost of maybe 40 bps on average, and took a normal tax rate and come to this ROE figure of 14% to 15%, right?

That's about right, with a little bit of growth in RWAs from where we currently are.

Okay. Thank you.

Thank you. Our next question comes from Stephan Kalb. Please go ahead with your question.

Yes, thank you. Two questions please, the first one is on your impairment policy on the Alt-A portfolio. You still have unrealized revaluation losses. Could we expect this to enter the P&L account in the fourth quarter? Or do you expect an increase in the fair values? Or why didn't you clean it up altogether in the third quarter now?

And the same is for real estate. If we would assume that there is no market value change in the fourth quarter, will we see more impairments on real estate?

Second question, the EUR1.3 billion charge in connection to the Alt-A portfolio, the value adjustment, how will that be booked? And will it go through the P&L account?

Okay, the terms of impairment on Alt-A, we go through a process with our auditors to evaluate impairment as we can identify it, based on projections of bond breakages. So that's quite a rigorous process, and you have to operate the impairment based on the evidence of impairment you see at a given point. So you don't have the opportunity any more in accounting to clear it out, as it were.

The key point on Alt-A impairments is that the residual mark-to-market, and remember current accounting requires you to fair value ABS securities, when you identify impairments. So the residual mark-to-market on Alt-A is just under EUR400 million. So if we impaired the entirety of the residual, as at Q4, it would be a EUR400 million charge, which is lower than the EUR580 million we took in the third quarter.

We haven't completed the numbers for the fourth quarter, so I can't tell you what it will be, but it just gives you some dimension of what the residual potential is.

I think you asked in terms of bond pricing, there has been some movements, disaggregation in the portfolio with hybrid and fixed arms improving and all the option arms reducing, so we're beginning to see the market split the two out. And the bulk of the impairment charge we took in the third quarter was in respect of the weaker category of option ARMs.

Real Estate as well, yes again, we go through a process to document and evidence the fair value of our real estate. We will have a full fair value external valuation, particularly of our -- the volatile piece, the Summit Canadian portfolio in the fourth quarter; that's done by external valuers. And when we get that valuation we will critically appraise it and book it accordingly. So we have to follow the process and we don't have a latitude to wash it all out. And we think we're fairly valued as we speak.

And then the charge, the EUR1.3 billion charge for Alt-A?

That will be -- that is a present value of future expected costs, as negotiated, and that would be booked in the fourth quarter as an upfront charge at the pre-tax level with post-tax EUR1 billion. So, you'll see that in the fourth quarter.

So to make clear; it's a one-time charge, but we pay it over time as we go and so the cash impact is lower, but the accounting impact is immediate in Q4?

Thank you.

Thank you. Our next question comes from Andrew Hughes. Please go ahead with your question.

Hello, hi, just a quick question on Real Estate if I may. Just looking at slide 74 and I'm wondering what the EUR14.4 billion would be if it was gross of leverage. Have you got any idea what that would be?

Presumably, the Summit things to which you refer is actually the Canadian business of EUR870 million. And presumably that again is leveraged within there and that's why you've written the value of the investment down by EUR115 million, even though the Canadian commercial property market presumably hasn't moved by that much? Thank you very much.

The EUR14.4 billion is gross of leverage.

Right. And then the EUR8.6 billion is net of leverage, is that the difference?

Maybe to add to that, the EUR14.4 billion is the total portfolio, which contains both investments and that is the EUR8.6 billion, which go directly via P&L. And then there's another part, which is development, or which is real estate in own use, which does not go via P&L. So the distinction EUR14.4 billion and EUR8.6 billion is more a classification of how do we account for it.

What you do see here is exposures and exposures indeed means that if there is leverage in there, or for instance 30%, then it means that the actual cash investment is lower, because we have grossed it up. So you are right in terms of the gross-up, but the reflection EUR14.4 billion, EUR8.6 billion, is more an accounting classification.

Thank you.

Okay, one more?

Thank you. Our final question comes from Hans Pluijgers. Please go ahead with your question.

Yes good morning this is Hans Pluijgers, Cheuvreux. Do you hear me gentlemen?

Yes go ahead please.

I've got four questions. First of all, looking at page 11 in respect to your assumptions on cost savings and increase in costs organically. You're saying 2% going forward over next few years. What are your assumptions behind that with respect to inflation and also increase in FTEs? Is there any increase in FTEs included there?

Then looking to page 18, there you give the breakdown on the equity in the Insurance business. Of course, you didn't want to give a full breakdown, but could you just give some indication on the equity for the Japanese operation? Is that about one-third of the equity for Asia? Could you give some flavor on that?

And then looking at page 20, you are saying big impact -- de-risking had a big impact on your margins -- investment margin in Insurance business, EUR13 billion in short on paper. Is there short-term change respect to the policy to be expected, so that already could see quite a sharp improvement in Q4? What's your policy going forward with respect to the de-risking?

And the last question is on the interest margins. You have given already some outlook for the longer-term what you're looking at. But for the near-term, especially deposit rates still are trending down. Do you still expect a positive impact from that in Q4 and in the first half of next year?

Okay. That's a lot of questions.

Yes.

We'll try to deal with them one-by-one. The first question you asked was the assumptions we have made on our costs and the FTEs. We have not calculated any increase in FTEs for the assumptions. And we have calculated with an increase in our labor costs, our long costs, by about 3% in the Netherlands in 2010. And then going forward there's each year 1% thereafter. And then for the other regions more or less in the same category. So those are the assumptions we have made and we plan to offset, let's say, any type of increases organically with the savings we can get in other areas.

The next question, Patrick?

In respect of -- I think you asked about capital in Japan of the -- it's about EUR600 -- approximately EUR600 million.

Okay, right.

And then in terms of the general account, I think the best page, at least to focus on the US part, is on page four of the US statistical supplement.

So as you can see, there we show the four quarters in '08 and the three quarter in '09. And so the first two quarters of '08 were before the crisis, so the Treasury position was less than -- these are all on dollars billion and the short-term was in the $1.1 billion, $1.2 billion range. If you look at where we are today, the Treasury position is $8 billion and the short-term investments is about $5.5 billion, so you can see a significant increase.

And over time -- as markets improve you would expect us to over time to reduce that Treasury and the short-term cash positions to be more in line with what we've done historically.

So it's more a gradual process than real big steps to be expected --

It's a little bit hard to say that. It would -- we would re-risk as we see market conditions in the future change. So it's really somewhat dependent on how quickly the markets improve as to how we would change the weightings in the general account.

Okay.

Yes I think on the margins, it's a bit difficult one to give a forecast for precisely what will they do in Q4. In Q4 there's always some offsetting factors; either there's a bit lower economic activity, nevertheless, we have still positive re-pricing over loan book. I don't expect any changes in the yield curve. So net net you might get a small increase, but again it's too difficult to forecast that exactly for one quarter.

But you don't [think] to any major impacts from -- on the deposit side because of -- due to term deposits writing-off?

I always like to be a bit conservative. On the end what you see now in the Netherlands is you see that the environment is improving a lot, because we [put] lower rates and I think the competition followed on that part, so that is a beneficial one. But there is a certain point when that stops.

We still like to keep the clients. So it's in that sense, I don't expect a major boost out of that, because that we can lower rates a lot further. We have more brought it now in line with other European countries.

Okay, thanks.

That appears to be the last question of the day. Please conclude with any comments you wish to raise.

Thank you very much for being on the call. We hope we have given you an explanation why we feel that this is the right thing to do; splitting the Company going with a strong Bank and a strong Insurance Company. We will take our time to really implement it well and we will strongly manage our performance for both the Bank and the Insurance Company before we make any steps to go forward in executing the split.

So again, thanks very much for being on the phone and probably we'll see you in the next few weeks when we visit a few countries as well. Bye, bye.

This concludes ING's Accelerating the Journey Back to Basics conference call. Thank you for participating. You may now disconnect your line.