ING Groep NV (ING) 2010 Q1 法說會逐字稿

Good morning. This is Kev, welcoming you to ING's first quarter 2010 conference call.

Before handing you 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, movement in securities markets, including equity markets, and underlying economic condition and changes. These are set out in greater detail in our public findings, which we could urge you to read.

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

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

Thank you very much. Welcome everyone on the telephone and also on the webcast. I'm happy to report that we made a good start of the year. Of course, markets started to stabilize, or improve a little bit, in the first quarter, and impairments and negative market impacts have diminished significantly from previous quarters.

However, our first quarter results also show the strengths of our franchises. And we are seeing early progress on the performance improvement programs that we have set out for the Insurance Company, as well as for the Bank.

Volumes are up in Banking; loan loss provisions are trending down; and Insurance sales have gained momentum in the first quarter; margins are stable quarter-on-quarter; and efficiency has continued to improve on both sides of the business. So, I think an encouraging start for the first quarter of the new year.

When I look at slide number two, I would -- well, you can read it yourself but I will make a few comments. Underlying profit of just over EUR1 billion, that compares to a loss of EUR236 million in the year before; Bank underlying profit, almost EUR1.3 billion compared to EUR769 million a year ago; and importantly, total income of the Bank now is at levels that we have seen pre the crisis.

Insurance had an underlying profit of EUR269 million. That compares to a loss of EUR954 million a year ago. And you can see here that non-operating items declined and operating profit for Life and Investments increased by [30%]. So, also here you see that the plans, the performance improvement plans, are beginning to get hold.

Shareholders' equity was up by EUR4.4 billion, and shareholders' equity is now EUR10.10 on a per share basis.

And the return on equity on annualized basis was up to 11.3%, compared to 3.3% a year ago.

So, all-in-all, a significant improvement on previous quarters and, as I said earlier, a good start for the year 2010.

Slide number three; here you see the improvements in underlying net results compared with previous quarters. And you clearly can see here, as a result, also that impairments and other market-related impacts have diminished.

But the volumes at the Bank and the margins have continued to improve; expenses are under tight control; and loan loss provisions have declined, from both the first quarter as well as from the fourth quarter last year. And Insurance has benefitted from improved investment margins and cost containments, which drove a 30% increase in operating profit from Life and IM.

Importantly, this improvement was very broad-based. It was almost all segments within the Bank and the Insurer showing higher results than a year ago.

On page four, slide four, you see on the top left the commercial performance for Banking and on the right the operating result for Insurance, both excluding market impacts. Both sides of the Company are showing improving trends and real operating performance. And I can stress that again to say that this is reflecting the strengths of our franchise in both of our businesses.

In the middle part, you see the negative market impacts and risk costs for the Bank, both showing an improving trend as markets have stabilized and/or improved in the first quarter.

And finally, the underlying result, you see more volatility from quarter-to-quarter, but a clear improving trend from both the Bank and the Insurance company.

On page number five, you see expenses for the quarter. Again, here, on expenses, the reported numbers show a little increase. But compared with Q4, but it's a bit distorted by the fact that we had accruals for certain benefit programs that we moved into the year 2010. So, Q4 took all the benefit, and the subsequent quarters, and Q1 in particular, got a little bit of a negative impact on that.

On the Bank side, operating expense also include impairments on real estate and the DSB provision, which is shown in orange, last year in Q4. On a like-for-like basis, if we compare that, operating expenses were down 1.8% for the Bank and 1.9% for the Insurance company, if we compare that with last year.

Slide number six; you see that we are making good progress compared to the ambition that we have set for 2010. This slide shows the Bank. Our targets are a top line growth of 5%; well, we did very well this quarter.

Our cost-to-income ratio, we wanted to see that turning down to 50%. It was 57%. But if you eliminate the impact of impairments and market volatility, then it's down to 53%.

Risk costs have been trending down to 59% -- 59 basis points; our target is 40 basis points to 45 basis points.

And you see that return on equity has gone up to 14.9%. There is an objective of somewhere between 13% and 15%.

So, all-in-all, I would say we are approaching our objectives and ambitions. And the ambitions, I don't think, are really that aggressive, as many of you have felt earlier.

Page number seven; you see the Insurance company. Management set out performance improvement plans; they were shown at the Investor Day last month. It's still early days, but we are seeing really encouraging improvements in Q1.

Investment margin in Life and Investment Management was up by 10.4%, driven by growth in the general account and also asset prices were higher.

Spreads increased slightly from Q4 to 84 basis points but are still significantly lower than in Q1 last year. And that is, of course, reflecting the derisking that we have taken during the year 2009.

Efficiency has improved. The ratio of administrative expense relative to operating income declined to 43.5%; of course, still higher than the 35% objective, but we are moving in the right direction here.

Sales of Life Insurance was up by 14%. And then, when we measure that, we exclude the closed books in the US, as well as in Japan.

Return on equity, whilst still low, improved to 3%. And there's clearly -- that we need to do some work here, but I'm very encouraged by the fact that we have the improvements in Q1.

Slide number eight; you see shareholders' equity up by EUR4.4 billion. It was up because of revaluations, partly by foreign exchange, and, of course, by the net profit that we booked. And equity now is almost double what it was a year ago.

Page nine; the capital ratios all are better. Debt equity is at 11.8%; Core Tier 1 at 8.4%; Tier 1 at 10.9%; the FICO ratio is at 162%; and the Insurance Solvency at 261%. All-in-all, I would say again here, good improvements.

Next slide, return on equity; that's up to 11.3%, and our share -- earnings per share at EUR0.35. You see the trend line, and I think I'm very encouraged by the trend line here.

Now let's summarize. Good first quarter results, and we're making good progress on our priorities for 2010; performance is improving both for the Bank and the Insurance company; and we are approaching and being on our way to our long-term objectives that we have set for 2013.

This year will be very important that we maintain our vigilance because markets still are volatile. And, yes, we have seen an improvement in the economy but it's quite fragile, as you could see in the last couple of weeks, with the concerns we have had about sovereign risk.

The Bank and the Insurance company are separating, as you know, and we are well on track to accomplish that by the end of the year. We have really taken inventory of all the issues. We're now in the design phase, and we think we will be done by the end of this year.

And let me now hand over to Patrick, who will go more into the numbers. Patrick.

Good morning. Thank you, Jan. ING's had a strong first quarter. The total net result is a profit of EUR1.3 billion, which compares to a loss of EUR793 million the same quarter of last year; it's a turnaround of EUR2 billion.

Underlying net result of EUR1 billion, which is before the profit and disposal of our Private Banking in Asia and Switzerland, compared to a EUR236 million loss in the same quarter of last year.

Underlying result before tax of both Bank and Insurance is up, with the Bank recording a profit of just under EUR1.3 billion and Insurance of EUR269 million.

Moving forward to the Bank, on slide 15, as I said, the underlying result before tax of just under EUR1.3 billion, EUR1,278 million, is the highest we've seen in the previous five quarters; 66% higher than the first quarter of 2009.

That was achieved on the back of underlying income up 11% and staff expenses, when you exclude impairments, actually down 2%. In addition, loan loss provisions of EUR497 million, the lowest we've seen in the past five quarters, declined across all business lines.

Moving forward to underlying income on slide 16, as I said earlier, these levels are high, back to pre-crisis levels, driven by lower impairments, strong margins, and some volume growth.

Margins, slide 17, a key driver of performance, remain high at 142 basis points. And, indeed, we've seen an increase in the margin in ING Direct to 118 basis points; we were at 98 basis points. However, we do expect interest margins to decline over time to the long-term average we quoted at 120 basis points.

Volume growth in the Bank, slide 18; as compared to the previous quarter, in Retail, we've seen some growth in mortgages and retail deposits. But on the Commercial side, demand is more muted; there's limited growth there.

Costs; slide 19; excluding impairments, which have reduced, operating expenses declined 1.8%, in line with our Back to Basics program.

On the right-hand side, you can see the cost-to-income ratio on a headline basis, which includes impairments, is highly volatile. The red line below, which excludes impairments, which is closer to the managed number, is more stable and is at 53.5%, which, as Jan said, compares well with our longer term target of 50%. Clearly, we have still some work to do to achieve that; that is a target for 2013.

Retail Banking, on slide 20; Retail Banking's underlying pre-tax profits have tripled to EUR867 million, which is on the back of good margins, a reduction in costs; risk costs down 16.5%; cost-to-income ratio has improved to 56.2% from 71.6%.

In addition, as you can see on the right-hand side, the mix of profit is more evenly balanced, with a better balance between ING Direct, the Netherlands, and Belgium.

Moving forward to slide 21 on the segmental results, you will see that all our segments are in profit, and all are reporting higher results than the same quarter last year.

The Commercial Bank, slide 22, reported a profit excluding real estate of EUR683 million, which is down 2.7% from the same quarter last year. But you will recall, the first quarter of 2009 was in the depths of the crisis when spreads were at their widest.

On the right-hand side, you can see the composition of our Commercial Banking results. And here, the red box shows the relative contribution of financial markets. And what we are seeing is that this is reducing, it's down to 32% of the totals compared to 53%, and we're seeing a stronger contribution from other business lines, notably Structured Finance and General Lending.

As I said, this excludes real estate. And Koos will give you some further insights on development of real estate portfolios a little later on.

Moving forward to Insurance, this is a busy slide. But as we said in the Investor Day, we will be using this margin report as the key to explain the performance of our Insurance business.

Two lines here highlighted in red. Underlying performance, EUR269 million, which I mentioned at the beginning compares to a loss of EUR954 million in the preceding quarter.

Perhaps more important is the operating result, which is before the impact of these volatile items. At EUR415 million, that's an improvement of 63% as compared with the same results last year. And that was achieved by income up 10.5% to EUR1.7 billion and strong cost control, with admin expenses showing a modest 2% growth.

One point to note here, in response to the reserve inadequacy we highlighted in the fourth quarter, we are no longer writing up DAC balances when markets improve in respect of the closed blocked VA business. This has led to a strengthening of reserves of approximately EUR100 million pre-tax, and the same impact in results. In other words, results would have been approximately EUR100 million higher had this change not [been effected]. Again, Koos will give you further insight into that element later on.

So, how did the income levels increase in Insurance? If we turn to slide 25, investment margin is up 10.4% to EUR329 million. This increase was achieved on the back of an increase in spreads and the growth in volumes in the general account. The spread increase is partly attributable to investing cash assets in fixed income securities achieving higher yield, particularly in the Benelux.

And as Jan has mentioned, the decline in spreads you can see in the graph on the right, is attributable to derisking, particularly in the US.

Fees and premium based revenues, in aggregate up 11% to EUR1.2 billion. We show two components here. The top line, loading on premiums, is up to EUR670 million; in line with growth in sales on premiums. Fees and assets under management are up 22%, even though the cost of guarantees increased somewhat due to lower interest rates.

Moving forward to slide 27, on admin expenses, if we exclude the impact of the accrual adjustment in respect to the deferral of variable comp awarded fourth quarter, or changed in the fourth quarter, our expenses are actually down 1.9% quarter-on-quarter.

And on the right-hand side, you can see, as Jan said, that the key metric we flagged on the Investor Day is we are seeking to achieve admin expenses-to-operating income ratio of 35% by 2013. And at 43.4%, this is trending in the right direction.

Segmental results on slide 28; with the exception of the US, all the segments are showing profits higher than the first quarter of 2009.

I mentioned on the first page, when I talked about the margin result, this is slide 29, that we would be -- excludes the impact of non-operating items, though it's worth spending a minute just explaining what they are.

In the first quarter on impairments, we've taken a charge of, in aggregate, EUR200 million. This is primarily due to a EUR75 million realized loss on selling CMBS as we sought to reduce our exposure, and EUR108 million impairment of subprime RMBS and CMBS.

On the other market impacts, it's reduced from EUR829 million to zero. This is where we record the impact of DAC unlocking, Japan SPVA hedging results, and the [NN] separate account. These effects, while not individually zero, did net to zero in the first quarter, and have -- across all three lines, are lower than previously.

Moving forward to sales, on slide 30; sales increased 15.2% if you exclude the closed blocks in the US and Japan, which was attributed to increased sales in the Benelux, Asia, and Lat Am. In Asia, we did benefit from the seasonally high COLI sales as the corporate tax year-end approached.

So, in summary, before I just hand over to Koos, ING's had a strong first quarter, with an underlying net profit of EUR1 billion. Most of our ratios have moved in the right direction but we do remain vigilant, particularly in light of the recent market volatility.

And now I'll hand you over to Koos, who will take you through the risk section.

Okay, good morning. I'd like to take you to, first, slide 32. If we take a step back and look at the whole picture, then what you have seen is over the last year we have shortened our balance sheet significantly without sacrificing P&L or margins. We have, basically, doubled our equity, and that is what you see back in an improvement of the leverage ratio.

But what we have also done is, apart from the Core Tier 1 ratio, we have made our balance sheet more shock-absorbing also by reclassifications on the accounting side so that we are less susceptible to changes in impairments and everything else.

Also, underlying, what you see is that the loan book it starts to stabilize; so, lower risk cost. We see actually the first positive developments of the RWAs. I think over the last year we kept it in check, but what you see now is actually a small improvement.

At the same time, what you see is that our ABS revaluation reserve, that starts to become smaller and smaller in the negative territory. Nevertheless, does it mean like we are already on the risk side; the answer is no. We have to stay vigilant on various aspects. And we still do some measures of more precision surgery, which is at the moment happening, for instance, in the real estate development part, which is happening in the CMBSs, and the reserve adequacy.

So, but as it was in the news, let's first go to the sovereign debt portfolio of ING. And overall, what you see on page 33 is that we have a government bond portfolio of EUR91 billion. Now, that government bond portfolio, it has a revaluation reserve, which is positive on March 31.

And after all the movements with Greece and all the other countries, you still see that it's positive. Because inherently, there is a hedging there because you have the bonds and you have the other currencies, where you have a positive gain at a time when it deteriorates in Greece. And if it reverses, then you see it differently. But overall, the price movements on the whole portfolio were not that significant for us.

But let's now move to the Bank, and we see the Bank on page 35. What you see there is, first, the RWAs. It's interesting to note the following; the RWAs it stayed stable. Now, what you see there is actually on the loan book, although the PDs, in technical terms the probabilities of default, are still slightly higher, we have seen loss given defaults going down. And you have some loans which come out of restructuring, which also get a better rating. Therefore, our rating migration contributed this time.

We still see small upward adjustment on the prime. But net-net, the loan book was positive in terms of RWA production.

You see EUR7 billion on foreign exchange there. And there, you can just ignore it because we hold some capital in dollars as well. So, the foreign exchange move is basically irrelevant.

So, let's move to the loan book, to the NPLs. What you see on the loan book is actually the following; total NPLs, 2.1%, so more or less stable; we see actually a positive development in mortgages US because there it stabilized; at the same time, we have seen some increases in the leasing and in the real estate finance part, and that is more particularly in the areas of Spain and in the Netherlands.

Overall, we had a lot lower risk cost because we have seen that in US mortgages; we've seen that in Structured Finance; but we also see that in the Benelux in the mid-corps area. So, those were the big contributors to a fall in our total risk cost.

Also, what we have seen is, if we look at the watch list, where we already saw that our corporate side watch list was already declining a little bit, we see that right now also on the mid-corps and the other segments. So, it's not a spectacular drop, but overall the watch list -- so, that is the room before you enter doctor, the waiting room, that is basically getting slightly smaller.

What we see there as well is, if we draw conclusions from this, that based on the current state of the economy, and assuming no big relapse due to governments or other things, then you could say that our risk cost guidance for the next three quarters is more somewhere between what we had this quarter and the last -- the second half of last year, whereas the previous time, I told it's more second half of last year is the guidance. But we see it now more somewhere in between.

If we look at risk cost over time, and then we are on page 37, what you see is actually there that gradual and modest trend downwards. But we also -- I have to tell you one other small technical thing; long-term, the average for us is 40 basis points to 45 basis points, but what I've given here is it's over RWAs instead of CRWAs. And the reason that we do it is we want to align it with the other ones.

Does it mean a change? Does it mean higher guidance? The answer is no. In essence, the following is the case. The denominator, the amount there, it stays the same. And the reason that it stays the same is that our RWAs to [ORM] and trading, they have now been included. But at the same time, the CRWAs per unit of loan produced are basically forecasted to be lower.

So, net-net, denominator stays the same and, therefore, the amount of risk cost projected stays the same. This all ignores, of course, all the Basel III and all the other measures coming because that is still unknown. So, overall, that guidance stays the same.

So, let's now turn from loans to securities, and now we're on page 38. On page 38, what you see is the ABS portfolio, and you see a decline in the revaluation reserve. And, again, that is still something ongoing because if you look at Alt-A, and if you look at it in April, prices already moved from [61%] to [64%].

So, market prices of Alt-A are improving. Nevertheless, what you still see is delinquencies. And that is what you see on the top right-hand side of the portfolio; they were still increasing.

Revaluation reserve on the Alt-A portfolio in total end of first quarter was minus EUR26 million, which comprises of some bonds which have a positive revaluation reserve, and that's for EUR96 million, and some for EUR122 million have a negative reval reserve.

What we had in this quarter is impairments EUR52 million over an expected credit loss of EUR20 million. So, overall, those amounts are getting smaller.

Let's now turn to Real Estate development. On the Real Estate development side, well, let's first -- before we talk about Real Estate development, if we talk about REIM and the investment portfolios, in general, what you see there is you see that there is a stabilization in terms of revaluations.

And why is that happening? In general, the [cat] rates, they are stabilizing at around 7%. And at the same time, the occupancies are still hedging a little bit lower, but not too much; I think that went down by a percent. So, overall, you discount a little bit lower cash flows with the same cat rate, but that leads to far less revaluations.

But turning now to red, on the red side, what you see is over the last year we had a [EUR3.1 billion] portfolio. But what we took already last year is EUR600 million of impairments, and we sold [EUR300] million. This quarter, we had EUR151 million impairments. The expectation is that the amounts will gradually start to edge off in this year because we are still looking at all these projects with a lot of scrutiny.

If we then move to the Insurance company, and then we are on page 31, on the Insurance company, you see -- page 41, sorry. What you see on the Insurance company is in general, the general account it moved up by EUR10 billion; contributed largely to foreign exchange, as well as revaluations.

We still did some derisking, and that is with CMBSs, and I'll come back to that. And on the US Insurance side, the focus for investments at the moment is more on the corporate credit side.

If you look at public equities, we hold some public equities. In general, one-third of it is hedged. You benefit a bit in the hedge because you do that with [stock] 50 indexes, including financials. And our portfolio doesn't contain financials, which have a bit of a higher [data]. So, that's, in a nutshell, the developments on the general account.

Turning to CBMSs, what you see in the US, you've seen price increases from 77% to 84%, which meant that we saw that as an opportunity to sell some of the CMBS portfolio.

Remaining is basically 44% AAA credit enhancement 21%, and [debt surface] capacity ratio constant at 1.6%. Nevertheless, the price improvements will be used for some more active portfolio management. At least, we have the opportunity to do that. So, on the CMBSs, some changes happening over time.

Then, if we turn to the reserve adequacy on page 43, just to step back there on this part, we have a reserve adequacy, and the reserve adequacy is a net number; it's net of DAC. Now, not writing the DAC up helps, basically in this case, to reserve adequacy so what is happening there is the following.

If we take it into a sensitivity, we normally assume a 2.25% growth of the equity market per quarter. If you have now a quarter that you have a 15% equity growth, then typically what you see happening is that your reserve adequacy it will move up, and it will move up by EUR0.6 billion, and your DAC will stay unchanged. So, that's basically profits will not be taken and it will be added to the reserve, so it strengthens.

At the same time, if a market moves down 15% from that 2.25%, you would see your DAC basically go down by EUR450 million and your reserve would move up. But DAC and reserves at the same time moving up and down means then that your reserve adequacy doesn't change.

So, overall, positive markets will strengthen your reserve adequacy; negative markets will not do anything. That is basically the change which has been made, and, therefore, you now have the sensitivities of the DAC as well.

So, those are, in a nutshell, the risk management things done. So, working on the Real Estate development side; working on the CMBS side; working on the Vas. But overall, you're looking at a bit a better situation in terms of balance sheet, and a lot of things have been stabilized, both in terms of balance sheet, as well as in terms of the loan portfolio.

And then, I hand back to you, Jan.

Thank you, Koos. Well, to summarize, I think was a good quarter; a good start to the year, with encouraging numbers. Performance improved both at the Bank as well as at the Insurance company. And we're approaching our longer term ambitions; not everywhere yet, but I think we're making good progress towards those ambitions.

We will continue to work hard this -- the rest of this year to make sure that we stay vigilant. The markets are still quite volatile, as we have seen recently.

The attention is still on further improving the operating results at the Bank and at the Insurance company, and to be ready by the end of this year; there's the full separation of Bank and Insurance organization.

And with that, I think we are happy to take your questions.

Thank you, sir. (Operator Instructions). The first question comes from Duncan Russell. Please go ahead.

Great, good morning. Two questions, please. First question is I'm just wondering if you could update us on the European Commission and the Dutch government with respect to the Dutch government capital and the restructuring program, etc., particularly in light of the recent developments in Europe and the extent of the bailouts we're seeing now across the whole of Europe.

Does that change? Or are you aware of that changing either the view of the EC or the Dutch government with respect to your particular capital injection a while back? That's the first question.

The second question is just on the US Life sales. Could you just provide a bit of color, please, on the sales in the retirement business in the US? Thank you.

Okay, Duncan, good morning. The first question on the European Commission, we have seen that European Commission has filed an answer with the European Court on the appeal that we have made against -- and remember, we have appealed the amount of State support as calculated; we have appealed some of the price regulations we are subjected to; and the proportionality of the total package.

We are getting ready to make a reply to that reply, that we have to file, I think, some time in the next -- in June. And then, we will wait what the European Court will do with respect to probably getting oral testimony from parties sometime later this year, or sometime next year. That's all we know at this moment.

The European Court has decided not to give us an accelerated procedure. But we are now in a, let's say, priority procedure with the full three topics still on the docket. More than that, I cannot tell you because we don't really know more than that.

With respect to does this change the position, the recent situation, and the need for restructuring maybe, we don't know. We have not had any -- this is all quite fresh. We have not had any further discussions on the topic so I cannot give you an answer there.

Koos -- Tom, would you like to deal with the US Life?

Yes. I think, Duncan, you asked a question on the retirement service sales in the first quarter. The full service plans, so that's what we're providing, asset management and record keeping, were up just under 5%. So, some improvement there.

And the large end is more lumpy, and they're -- the quarter was flat to where we've been. So, no big sales, but good sales in the full service plans.

Are you doing as well as the market, Tom, or better, worse?

Yes. If you look at the two segments that we really focus on, which would be the [K2-12] and the [401-k] full service plans, we have maintained market share in the fourth quarter and continue in the first quarter. The full numbers aren't out, but we think we're still where we were in terms of market share in our respective ranking of one in K2-12 and two in corporate plans.

Okay. Thank you.

Thank you. The next question comes from Johnny Vo. Please go ahead.

(technical difficulty) Bank, obviously you're building up capital nicely in the Bank with a Core Tier 1 of 8.4%. Can you talk about that excess relative to your target and what you're likely to do with that capital?

Number two is can you just generically talk about the fungibility of capital in the Insurance business? Clearly, you have excess in the Bank; what about in the Insurance and the movement of that capital in the Insurance business?

And just finally, in terms of the Insurance business as well, just on your closed books, can you talk about any deviation of policyholder behavior relative to your assumptions in those blocks, please? Thanks.

First question, the capital, yes, we have -- I think we're nicely building up capital in the Bank. We are at 8.4%. Our target is about 7.5%, which means that we are building excess capital. We probably will at some point move that to the holding company to have more flexibility with that capital; be in a position to either pay down debt or to use that for other purposes.

As you know, we still have to repay the Dutch government, and also, therefore, we need to build up some additional capital.

Fungibility capital in the Insurance company, Matt or Tom?

Yes, let me take that one, Johnny. So, if you look at the capital ratios in Insurance in the US, the RBC ratio was up in the first quarter. I think we ended the quarter at about 390% versus about 360% in the fourth quarter last year, and the overall Solvency ratio on an EU Solvency I basis was 261%.

In terms of the closed book, no changes in terms of LAVs or other assumptions.

Okay, brilliant. Thanks.

Thank you. The next question comes from Spencer Horgan. Please go ahead.

Yes, thank you very much. Firstly, could I just follow-up on that last question? Because I guess what Johnny was getting at is that there's potentially EUR3 billion-odd of capital that you could at least upstream to the holding company from the Bank if you were to take the Tier 1 down to target. But it's not quite clear what capital level you actually think is appropriate on the Insurance side. Is 261% about right, do you think? Maybe you could answer that by reference to the economic capital position of the Insurance business at the end of the quarter.

And then the second thing was, on the net interest margin, which, as you've said before, you expect to normalize to about 120 basis points over time, could you give us an update on what you think the timeframe for that potential normalization is? And, in particular, is marginal new business, if I can call it that, already being written on a 120 basis point margin? Thanks very much.

Yes, I think, Spencer, in terms of the Insurance capital ratios, we're clearly focused on trying to keep our capital ratios in line with where the competitors are. So, you can see, as I talked about in the US, the RBC ratio went up, and overall it went up. I think you're seeing that with competitors in general, just building some of the capital positions given where we are in the cycle.

So, our main issue there is to have capital ratios at AA/AA minus standards, [not] looking to be in line with our competitors; they are also increasing.

Okay, on the net interest margin, Patrick, would you like to take that one?

Yes. Spencer, as you look at the graph, you can see that the interest margin in aggregate is reaching a peak. I think we've talked about re-pricing and how that's been favorable. But margins are tightening as competition comes back so we think it's broadly as high as it's likely to go.

It was at 1.40% the last quarter, 1.41%, and over time it will trend down to the 1.20%, but we can't give you a precise quarter-by-quarter analysis on that.

By the way, maybe by the time that we see a decline, we also see that loan demand at this time is quite weak so maybe we can get an offset. Maybe the margin will get a little bit lower, but it might be offset by more demand for loans. So, that, I think, is going to play well when the market continues to recover.

Okay, thanks.

Thank you. The next question comes from Jan Willem Weidema. Please go ahead.

Good morning. Jan Willem Weidema at Fortis Bank Nederland. Three questions from my end. Can you say something about the development of risk also, and how you expect that to develop for the remainder of the year?

Basically, it's same for the Netherlands -- for the NPL, sorry, and especially for the Netherlands, where you see an increase there, and what you expect there with regard to a lag there in unemployment rates, and how that affects NPLs.

And thirdly, how and where are you expecting to scale down your real estate development pipeline?

Jan Willem, if you look at risk cost, indeed, first quarter was below EUR500 million. Last time, I gave a guidance which was more on average the second half of '09.

I think going forward, during the next quarters we see it somewhere in between. So, lower than the second half of '09, the average, but maybe a little bit higher than what we have right now. And, again, being more refined than this is difficult because it can always be, on the positive side, influenced by a release, or, on the negative side, with one addition. So, trending down again as compared to the guidance which I gave the last time.

If you look at the NPLs, basically, we see the NPLs -- at the moment, we have seen it kind of stabilized. And given the fact that the watch list is not growing, normally we should assume that NPLs don't necessarily overall increase. Now, you could have certain segments where at a quarter it goes up or down but, then again, that is more driven by incidents.

If you look at the Netherlands NPLs, yes, that is more driven by the mortgages, and the mortgages are more linked to unemployment. And at the moment, yes, you don't have the indicators that you should expect a large increase on that side. And, again, very much related to the unemployment numbers what we see.

If you go to the development side, the scale down, what we are doing is it's not exiting something like country-by-country. What we are looking at, we are more looking at it project-by-project. And on some of these projects, if we have -- if we foresee that the further development will be difficult, then the question becomes do you write down your accrued cost, or do you sell something? Do you sell a land position, or do you continue to develop?

And this is the way how you look at it, project-by-project. And there, some of these projects, yes, you say, well, we don't build any more because building without tenants does not make a lot of sense. So, therefore, we have a bit of scrutiny.

Okay. Thank you very much.

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

Yes, good morning. Benoit Petrarque from Kepler in Amsterdam. Three questions, please. The first one is on the operating expenses of the Bank. I think you are EUR2.4 billion. What do you expect; do you think Q1 is a normalized run rate for the rest of the year.

And linked to this question actually, if you [have] cost-to-income ratio of 50%, if we assume interest margin will normalize to 100 bps, in my opinion you still need to realize quite some effort in terms of cost cutting. So, do you see some potential room for further cost reduction on the Bank side? And if yes, how much, obviously?

Then, on the US, I see some outflow of client balances, it's [EUR1.3 billion] outflow, annual basis it's EUR5 billion roughly, so can you chat a bit on that one?

And I also see outflows at EUR5.4 billion outflows in the asset management unit, so I will be interested to know more about that one.

And on the risk-weighted asset side, you said that we had some decrease in the risk-weighted assets coming from LGD improvements. I would expect that a large part of the LGD is linked to the housing price assumptions, and I do not see massive price move in the Netherlands, maybe a small stabilization. So, did you change your housing price development assumption for the Netherlands and the Benelux? If, yes, does that -- is that an explanation for the LGD improvements? Thank you very much.

I think we will have different people answering a number of your questions. Patrick will start with the expense.

Okay, Benoit, on the expenses, when we gave the Investor Day targets, we were targeting a 50% cost-to-income ratio, which would be getting us to a run rate of around 2.1 per quarter. If you ex-out -- if you take out the impact of impairments, which are reducing, we're at 2.2. So we have a bit of work to do to get further down, as we said, but it's not a million miles off.

In respect of the margins, I think you quoted 100 bps. We're targeting a more normalized level of 120 basis points; we're currently at 140. So, we still have a little bit of work to do, but we're getting closer on expenses.

But do you figure you have some room for further cost cutting on the Bank side?

Clearly, we have some further room. Particularly, we want to do, as we said on the Investor Day last year, we want to bring down expenses in Belgium. And there's some projects planned to try and achieve that.

Yes, I think, in addition, we have a number of options in procurement and IT, plus we have the [loan bank] idea that we have, is still giving us some further opportunities to reduce our expense. We have come a long way. But I think we still have opportunities in the loan bank idea to further improve not just our cost structure, also our processes, and our efficiency, and our ability to generate more revenue. So, there's still some work to come here.

On the outflow, Tom?

Take that. So, first, I think you were referring to the -- in the statistical supplement, page 33. So you can see, in terms of retirement plans, there was a modest outflow of about EUR100 million in the quarter. I think quarter-to-quarter that number moves.

Below that, you see the -- in the two closed blocks, the variable annuity and the financial products, both of those are closed blocks in run off mode so there the net outflow was EUR900 million. You would expect that going forward as you run those businesses off.

In terms of assets under management, you refer to the EUR2.9 million net outflow, what we did we sold our Taiwan insurance to Fubon. And we had an agreement to manage that general account for a period of time but then that moved to Fubon, and that was EUR5.5 billion. So, outflow in that, so if you adjust for that, the EUR5.5 billion there, the net outflow of EUR2.9 million would be a net inflow except for that of about EUR2.5 billion.

On the LGDs, you are right that Dutch mortgages play a role there. And every quarter, indexes are --following indexes, we adjust; that is one of the factors contributing to the number. The other ones are, of course, the fact that [files] go from restructuring into normal again or some slight changes in the composition between retail and wholesale. But, indeed, this is one of the explanations.

Thanks. Thank you.

Thank you. The next question comes from William Elderkin. Please go ahead.

Good morning, everybody. I've got two questions, please. First of all, could you outline the overall financial impact to ING if, say, in two years time you had a formal Greek sovereign default or a very substantial restructuring? That's the first question.

And secondly, on the Insurance side, can you give us a sense of how far through the re-risking process you've got in terms of shifting out of excess liquidity and so on?

If we start on the Greek part, it's an interesting question because you say is it done in two years. So then, implicitly, you could say, like, well, does the bond get restructured which have a two-year maturity or not, because we have a total portfolio in Greek of EUR3 billion.

And if you expect, for instance, a 20% haircut and you normally think about EUR600 million, at the same time, that does not necessarily need to be the case because if it happens in two years you have already a roll off of the Greek exposure as well. So, it's difficult to give a direct answer to it. But, overall, I would say it's a manageable number what we see there.

If you talk about the other part, the re-risking on the Insurance side, gradually we have re-risked something in the European segment where we have invested a little bit more than what we've done in the past. But at the same time, if you look at the US portfolio, that is a bit more, what I mentioned, the precision surgery derisking, which we are still doing. Not affecting margins big time but just using opportunistically a good market at the moment.

Could I just follow-up on two things? First of all, on the Greek issue, your answer referred, I think, just to the specific sovereign exposures. Given such a scenario, would there be any other negative implications for wider loan exposures within the Bank, for example?

And secondly, I didn't get a sense from your comments in terms of the re-risking how much more (technical difficulty) incremental earnings we can expect to come through once the asset allocation reaches a target level, if you like.

I find it, in general, a difficult question to answer why are there implications because if I look at total Greek exposure, how wide do you want to look at it? In general, we have our Greek government bond exposure. But the rest, if you look at corporates or financial institutions, it actually is not significant numbers. So, therefore, yes, this is not one of our major issues, to be honest.

If you ask the re-risking part, on the Insurance side -- sorry?

[It was under 20 months].

Yes. So, gradually there will be some re-risking. And I think there are some opportunities; we see it in the corporate bond part. We also like to make sure that we do it a bit Solvency II-proof everything as well. So, yes, there are some opportunities to re-risk, and we will continue to do so over the year, but we do it with a gradual approach.

Thank you very much.

Thank you. The next question comes from Chris Hitchings. Please go ahead.

Hi. Thanks very much indeed. A couple of issues. Just I don't know whether anywhere in the disclosure there's a quantification of the -- on the sales numbers of this Dutch pension recognition. If so, could you help me through what that is and how that works?

Secondly, on the Greek -- on the exposure to [some built] European corporate bonds, which I think we have to call it now, could you tell me how much is cross-border, in the sense that it is bonds held by a unit of yours that's not in the relevant country?

And finally, you talked about how some of the Japanese COLI sales were related to the end of the tax year; can you just [comment] feature of how much of that is in -- how exceptional that is, complication?

And finally, just what is the story behind ING Direct USA's profits? Can you help me with that? Thanks.

Hi, Chris. Yes, in respect of the change in the recognition on premiums, it's a small number; EUR32 million on APE.

Thank you.

Yes, Chris, with regards to the cross-border exposures, I would rather refer to the pillar three disclosure given at the end of the year. And what you've seen then, for instance, is we have given the more significant exposures per country. But I don't think Greece made the cut there, so it's not even on there.

Thank you.

And I'll take the COLI question. So, the COLI sales, there are tax advantages. The fiscal year in Japan for most companies is March 31, and so there, from -- since they're corporate tax-driven, there tends to be a spike at the end of the fiscal year so you saw that in the first quarter.

We would certainly expect year-over-year okay sales in the second quarter, but they will be below the first quarter because of the year-end effect in the first quarter [March 31, close] (technical difficulty).

Thanks.

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

Morning, gentlemen. It's Farquhar, Autonomous Research. Just two questions, if I may. Firstly, with regards to the risk-weighted asset development, you've essentially seen a negative EUR2 billion of weighting migration, and I'm just wondering whether you'd go as far as saying that you're over-the-hill on that kind of impact. Or, frankly, was the quarter just slightly peculiar and we should continue to expect positive rating migration effects through this year?

And then, turning to the Portugal and Spain topic, just to try and finish this one off [once and for all], can we just get the loan book exposures? I have looked at your pillar three disclosures, but they seem to (technical difficulty). And those are my questions.

If you look at the risk-weighted assets, indeed, we had the EUR2 billion RWA increase, and that comes out of the prime US portfolio. Prime US portfolio in the Bank is very small; I think there's only EUR1 billion left. So, that part, the prime is not going to give the huge amount of RWA increases.

I think on the Alt-A, it has already migrated a lot so, indeed, a bit the ABS-RWA increases are going to level off by the sheer fact that all of them have already migrated. So, in that sense, there is not going to be a big issue about this.

If you look at are we already expecting a lot of positive RWA migration, over time that will come because then LGDs, [MPDs] will start to improve on the loan book, which is a significant one, and that will start to improve. But at the same time, what we have said is also in line with the guidance on the loan loss provisions; it will start to edge off gradually but not something very, very quickly.

If you look at the cross-border exposures, in general, yes, we have exposure on Portugal; we have exposures on Spain and Greece. Spain and Greece are relatively small. Portugal, that's where we are a bit more sizeable; we have a EUR20 billion local balance sheet as well -- sorry, Spain has a relatively sizeable because we have a Spanish operation. And we have basically a liability side in Spain of EUR20 billion as well.

So, overall, yes, we do have a Spanish exposure in terms of, for instance, bonds. We have it in financials; we have it in the [celulas]; and in general with mortgages, backed up with mortgages with LTVs of around 50%. So, high-end, the better quality exposure.

Would you be willing to give any numbers on that now, just an aggregate?

Yes, I don't know what kind of numbers. We can next time give a more broad other breakdown if you want it, but I don't know what type of number you're looking for.

Just a loan book for Spain.

We will give otherwise a more -- I'm sorry?

Okay, that's fine. Cheers.

Sorry, the only thing is on the loan book, yes, really booked as loans, it is a EUR7 billion portfolio of mortgages. And in the Corporate side, it's approximately EUR7 billion as well. And there, you are talking about utilities; you are talking about transportation; and you're talking about the real estate finance part. Those are the predominant asset classes.

Okay, brilliant. Thanks very much indeed.

Thank you. The next question comes from Thomas Nagtegaal. Please go ahead.

Good morning, gentlemen. Thomas Nagtegaal, RBS. I've got two questions. First of all, on page 26 of your presentation, the VA cost of guarantees; in Q1, above long-term interest rates and equity markets were higher, still, the cost of guarantees were higher as well, so what's driving that? Is it policyholder behavior, or anything else?

And a second question on your balance sheet. There seem to be some one-offs and FX effects there; what do you believe would be the annual underlying increase of the balance sheet you have currently in there, given the fact that the leverage ratio's up [for it] as well? And is that a development [rich ratio]? Thank you.

Yes, this is Matt Rider. Maybe I'll talk a little bit about the cost of the VA guarantees. It's actually a combination of a couple of things. We did see lower short-term interest rates in the first quarter, and that's driving part of it. But also, you'll recall that we had some policyholder behavior assumption changes last year which are now working their way through the notional amount so that is causing an increase in the hedge costs.

Okay.

In respect of the balance sheet, (technical difficulty) and FX movements as the dollar strengthened, we hedge obviously -- we hedge our Core Tier 1 ratio, so it's stable for FX but not the total balance sheet.

The leverage ratio moved up 1%, but it's comfortably within our range of 25% to 30%, so we're relaxed about that.

Okay. Thank you.

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

Hi there. Just again on slide 26, I didn't quite understand; what duration of yield curve is more important? I would have thought that it's longer term if you're using swaptions to hedge. And what impact does volatility have on that cost of guarantee? I get the point about policyholder behavior, but I don't understand the yield curve point. That's question number one.

Question number two is, going back to this target of the margin going up -- the investment margin going up in the Insurance business, what level of -- again, what duration of yield do we need to be more interested in -- most interested in when we're looking at the yield curve to give us an idea of what you're investing into?

And then, a similar question on the net interest margin going back to 120 basis points. I know you've talked about this before, but can you remind us again how much of that is just competition and regulation, so external factors, and how much is the shape of the yield curve normalizing to some shape? And which countries and which yields curves are you most sensitive to? Thank you.

So, maybe I'll take the first one again on the hedge costs. I think you'll recall that we hedge interest rates only to a limited extent, so it's more on the short end of the yield curve where we see it working through the hedge costs. Certainly, the value of the guarantees is affected by longer term interest rates. We tend to look at something like a seven year to 10 year interest rate to look at that one.

And Farooq on your question on interest margins, or investment margins in the Insurance portfolio, we said two things at the Investor Day, and we still stay with those, which is that the general account should grow over time at 4%, and that our margin should increase over time as we gradually re-risk from 85 basis points to 105.

In terms of the approximate duration of the liabilities on the Insurance side, it varies quite a bit by country and type of business. But overall, blended in an eight year range is probably a good [sense] for the duration on the liability side.

Sorry, just to go back on that particular point, if we had a steepening of the curve then you would potentially be able to lock-in higher margins?

Right.

In the Bank, we're targeting 120 basis points to arrive over time, that's primarily euro, and it's primarily coming down due to competition.

And when you picked that number, is that something that you modeled? Or is it just, look, let's pick a number that we think is reasonable?

Well, it's a combination of looking back over time to see where margins were in the past. And actually, when we went back to the Investor Day, we actually modeled a number a little lower to give ourselves a little bit of cushion. But the 120 basis points is fundamentally where we see where the mix of business will come out at.

We also -- you will recall -- where we're seeing margins going down, and Jan mentioned it, we also predicted, or expect, that we will see economy improving over the period to 2013. And we're looking for an average 5% loan growth as well. And we still believe that there's plenty of capacity for that to happen before 2013.

So, the NII will be a combination of margins coming down from elevated levels, but still reasonably high [to 120 basis points], but backed with higher volumes at those higher levels.

Okay, that's really clear. Thank you.

Thank you. The next question comes from Tony Silverman. Please go ahead.

Yes, it's Tony Silverman, Standard and Poor's Equity Research. I just had two questions, please. Firstly, on the Banking side, the rise in interest margins over previous quarters, I wonder if you could talk a bit about whether that's from funding costs or loan repricing.

And perhaps more importantly, when looking at margins tightening, as you've mentioned, over the next few quarters shall we say, again, if you could talk about whether that's coming from funding costs or loan repricing.

And secondly, the market impacts of zero in Insurance that were mentioned, it was mentioned that was the sum of some larger numbers. I may have missed it, but it would be interesting to hear what some of those larger numbers that netted out were. Thank you.

Yes, on the interest margin, this will gradually decline over time. We've seen the, if you recall, in the crisis, spread [in] the commercial side widened significantly. We repriced, and that helped improve. So, we see competition coming back which will diminish those spreads, and we think they're tightening now.

On the other side, the strengthening of the Retail margin through 2009 was supported by -- on the interest side where some of the distortions, particularly in the Dutch market, have abated over time. So, the widening spreads are a combination of widening loan spreads and improved deposit margins.

You also asked a question on the market impacts for Insurance that netted to zero. So, there are some plusses and minuses, as we said, and you said, that are in the range of EUR50 [million] plus or minus.

So, just to give you some sense, on the positive side was the -- in the Netherlands, the separate account shortfall changes that were positive, and then, there was some DAC unlocking on the US side, including the not writing up the DAC on the variable annuity business. So, those all -- and a number of -- a few other things all netted to zero.

If I can just come back on the profile of the interest margin. So, you're saying it will tighten going forward both due to funding costs, and do you see any change in loan repricing or not?

I think what we're saying is that competition will come back in on the commercial side; we're seeing that already. So, we will not see any widening, perhaps some narrowing, of spreads on the commercial loan side; that will be the primary driver.

Currently, we don't see deposit interest rates going up at the moment, so in the near-term the deposit margin profile should broadly be the same. But it's primarily competition in the commercial loan side which could tighten margins in the near-term -- medium-term.

Okay, thank you.

Thank you. The next question comes from Omar Fall. Please go ahead.

Good morning. I just had four questions on the Bank, if I may. Firstly, can you give some color on why there was such a big decline in operational RWAs in the quarter, please, the EUR5 billion, since that's the biggest positive driver of the RWAs being stable? Are those model changes, or what is that?

Secondly, coming back on Spain, at the end of last year, according to your annual report, it looks like you had something more like EUR50 billion in Spanish loans. So, without putting you on the spot, can you expand a bit more on what is in there ex the EUR7 billion of mortgages and commercial loans, especially as it seems provisions on that have been pretty minimal?

Thirdly, can you update us on where you would stand on some of the liquidity and funding measures being proposed under Basel III, which I guess is a pretty key concern for the sector? So, the net stable funding ratio, for example.

And then, finally, just to help us on net interest margin, if you could maybe just give us a very vague split of across the Group -- sorry, across the Bank, how much of the net NIM comes from the asset side and how much comes from the deposit side; just a very vague split. Thank you.

Yes, first, on the RWAs of operational risk, indeed, it went down. It's a model change. If you look at operational risk capital and you compare that to, for instance, the total risk-weighted assets of most of the financial institutions in Europe, then you find that our operational risk capital was higher as a component than most of the other banks. So, a recalibration of the model happened.

Second point; if you look at the Spanish exposure in our pillar three, what we have seen is -- I don't recall the EUR50 billion; EUR38 billion is something which I do recognize. And there, indeed, we have mortgages; we have commercial loans; we have a bond portfolio, collateralized bond portfolio. So, there's various compositions which are part of this total.

And, again, it is partially serving as an asset base for our Spanish ING Direct unit, and partially it's part of the investment pool of the other countries.

If you look at liquidity and funding overall, we are a bank which has a loan-to-deposit ratio which is very sufficient. At the same time, what we are always keen on is we hope that with the new liquidity measures that eligibility criteria, which are applied in Basel, that they stay wide enough to keep the market enough breathing room there. But for the rest, we are not the primary bottleneck.

But a secondary consequence could be that you have more fight for our savings money, and we like to keep it ourselves.

Yes, that's basically it on the liquidity part, so then we go back to the net interest margin.

On the net interest margin, I think the breakdown that you ask for we don't have available here at this moment, so we cannot answer that question right now.

Fair enough. Thank you.

Thank you. There appear to be no further questions. Please continue with any other points you wish to raise.

Okay. Well then, I think we like to close the meeting and thank you all for attending. To repeat, a good quarter; encouraging progress that we have made in all parts of our businesses.

Performance of both the Bank and the Insurance, I think we're very pleased with so far. But we will continue to be vigilant because we're not out of the woods yet. The markets are still quite volatile, and we want to be sure that we can continue to report good numbers.

Important point for this year is the separation of the Bank and the Insurance company, and that one is on schedule. And we hope to be done by the end of the year completely so that we have the ability then to set the Insurance company in the market whenever markets are attractive and willing to do so.

And let me now say again, thank you again, and have a good day.

Thank you. This concludes the first quarter 2010 results conference call. Thank you for participating. You may now disconnect.