ING Groep NV (ING) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. This is Eve welcoming you to the ING's Q2 2010 conference call. Before handing this conference over to Mr. Jan Hommen, Chief Executive Officer in ING Group, Patrick Flynn, Chief Financial Officer, and Koos Timmermans, Chief Risk Officer, let me first say that any forward-looking statements in today's comments are subject to a number of 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 or unexpected movements by any or all of these and other variables.

Good morning, gentlemen. Mr. Hommen, please go ahead.

Okay, good morning and welcome everyone to the conference call. I'm here with Koos Timmermans, our Chief Risk Officer and Patrick Flynn, our Chief Financial Officer, also Tom McInerney and Matt Rider from the Insurance Management Boards. And I will do the presentation, and then we will collectively do the answering of your questions.

If you look at slide number two, the summary slide, I'm happy to report that ING has continued to build earnings momentum in the second quarter and, as you can see, in particular, of course, at the Banking business. Our shareholders' equity went up to EUR41.6 billion, which is EUR11 per share.

Bank made strong progress; they posted a result of EUR1.6 billion before tax. And on the Insurance side, operating results were stable. Underlying result was impacted by our US DAC unlocking, but new sales were strong, up 22% if you eliminate the closed book in Japan and the US, a signal of strength of our franchise.

When you look at slide number three, you see the earnings momentum is gathering pace. Another strong quarter by the Bank, even better than seasonally high Q1. Insurance operating performance I think was acceptable, given the low risk appetite we have in the current low interest environment. Underlying results were impacted by EUR521 million negative DAC unlocking, created the negative EUR115 million for Insurance underlying.

Slide four shows the negative impact on impairments and Real Estate revaluations and they continue to diminish. Real Estate revaluations have stabilized, as you can see on the top of slide four. Impairments on Real Estate development projects were lower than in the first quarter. However, I must say that ongoing evaluations of projects still may lead to some more impairments in the second half of this year as we continue to look for downscaling some of our projects, and maybe even some discontinuation of our projects.

On the top right, debt securities, that includes EUR148 million loss related to a significant reduction of our exposure in Greek and Portuguese sovereign bonds. And the results on equity include a EUR86 million gain related to the sale of a small equity piece we had in a bank in India.

Slide number five shows you the progress we are making in the Bank, relative to our ambition 2013. Strong income in a seasonally good half-year, helped by less market impacts, of course. Risk costs they are trending down to a more normalized level. Cost income ratio, that is approaching the 50% target we have set for 2013, now at 52.7%, and a return on equity of 16.8% based on 7.5% core Tier 1. If we calculate it based on IFRS equity, still at an attractive 13%.

Looking at the Insurance operations on page six, we see that our performance, compared with the objectives we have set when we announced our targets in April, are beginning to get a little better, but we need to make more progress here. And this will be the focus of our management team going forwards.

Investment spread continue to be under pressure, mainly as we have not restarted yet our re-risking, and long-term interest rates are, of course, very low. If you take that all together, I think we must say that the business is performing well. Sales were up substantially, way ahead of our target of 10%. Expenses as a percent of income were flat, and we're generating positive return on equity, although it's still below where we want it to be and below where it was before the crisis hit.

The next slide you see are shareholders' equity. We increased it by EUR3.4 billion to EUR41.6 billion. You see also the breakdown, foreign exchange EUR2.4 billion and net profit EUR1.1 billion were the main drivers. Tangible book value is still in our book higher than EUR10, so we're selling at a big discount relative to our tangible book.

Capital ratios all better; all the ratios improved in Q2, also Insurance. The Bank improved to 8.6% and Insurance Solvency to 267%.

When you look at slide nine, our operational separation process is tracking well. We're completely on schedule, and we have made good progress this year in identifying the issues and designing solutions for the issues. We're now getting to the point that we are implementing them. So far we have spent EUR30 million. We expect for the whole year that it could be anywhere between EUR110 million and EUR150 million, but it will depend on how much will be final and how much will be temporary solutions that will be implemented. We want to take a low cost approach as much as we can, and we will be together for some time, so we will take our time to find real long-term solutions, but we want to do it with as low cost a budget as we can.

When you look at slide number 10, the Net Promoter Score. This is another project that we are working on internally, and it's a very important tool for us to gain feedback from our customers immediately after we have done a transaction with them. It's a very rigorous process that we score and where we can measure the satisfaction of our customers. We have rolled out it so far to 16 businesses, but it will be rolled out to 36 businesses by the middle of next year. It's a very important project to support our customers' [bias] and our customers' centricity that we want to promote in all our businesses.

Going forward, the priorities I think are very clear. Next to the operational separation, we're taking time out to work on the divestment options. The base case remains two IPOs. Several factors will play a role in determining this. Of course, Solvency 2 is important and, most important for me, how we can improve the performance. And we continue to focus, of course, on improving performance and further optimize the composition of the Insurance portfolio.

Going to the Bank, slide 13, you see that on the left side commercial result of the Bank; that excludes market impacts and risks costs. That has continued to trend upwards, driven by higher volumes. And together with a small positive market impact and lower risk costs, results in strong profits before tax of EUR1.6 billion in this quarter.

On page 14 you see the interest margin, a decrease by 6 basis points compared to Q1, and it was mainly as a result of financial markets. But margins on core lending and deposits were largely stable, and in the second quarter the decline in margin we were able to offset by higher volume growth. As a result we could score a higher interest result at EUR3.2 billion.

The volumes increased across the Bank; that is on page 15. You see that residential mortgages picked up EUR6.1 billion. We increased our lending to small and medium corporates at EUR2.4 billion. Retail markets entrusted us more funds; it's a good sign that customers are saying the trust is coming back. And also, more funds were entrusted to the Commercial Bank by our corporate customers.

Cost income ratio on page 16, better again at 52.6%; it's approaching the 50% target. And if you eliminate charges for impairments, then it would have been 51.8%. So clearly an improvement, but here we need to remain vigilant on costs because we can see some headwinds coming in the next few quarters with annual wage increases that are part of collective labor agreements in some countries.

On page 17 you see that risk costs are coming down. We added EUR465 million or 55 basis points to our loan loss provisions in the second quarter. And for the coming quarters we see it moving more or less at the same level as we have seen in the first half of this year.

Our non-performing loans were relatively stable, slightly driven by two specific files for which we have now an adequate provision. We became more optimistic in reviewing our loan book during the second quarter as the watchlist and the NPL stabilized, and releases from previous quarters remain still significant.

You see the improvement of the Retail Bank on slide number 19. Results before tax more than tripled, and also were better than they were in Q1, driven by a higher interest result and lower impairments. Another good quarter in the Netherlands, also ING Direct continued to show a strong improvement. And in Belgium we saw that margins depressed, mainly as a result of higher charges for deposit guarantee schemes in Belgium.

The Commercial Bank, on page 20, continue to do well. If you exclude Real Estate, performance was up 30% compared with the year ago, especially because of a sharp decline in risk costs. Even compared with Q1, results declined, but that was mainly because of our seasonal impact always on financial markets. And Real Estate narrowed their loss to only EUR4 million to see a stabilization of real estate markets.

The stress test we comfortably met. We ended up as a Tier 1 ratio after the stress of 8.8% and we're comfortably, I think, in the middle here. One element that stands out is our risk-weighted assets, the increase in risk-weighted assets. And that is due to the fact that we have, I think, a quite conservative methodology in how we assess our internal approach when we look at the movements in loss given defaults and in defaults. And Koos, of course, can tell us more about that in the Q&A.

A significant reduction was accomplished in our Greek and Portuguese exposure. The Bank reduced it from EUR1.9 billion Greek to EUR0.8 billion, and Portugal from EUR1.4 billion to EUR0.8 billion as well. So a significant reduction and we took some charges for that.

On page 23 you see that the Bank is still very well funded in all aspects, loan to deposits at 1.0, an excess position of liquidity, a good favorable funding mix. And I think the long-term funding for this year, if we look at what we needed to re-fund because the maturities has all been done so far. And we are not in the ECB facilities; on the contrary, we are providing funds to official authorities.

The impact of Basel III; we're happy to say that the changes that Basel III has introduced, we welcome. We welcome the adaptations that we have seen and they are beneficial to ING, in particular to ING Direct as customer funding is rewarded and mortgages require less funding here. And today, we meet the requirements on capital and leverage, and the liquidity we would meet for about 90%. So we still have some time and there still are some open issues here for further discussion with the Basel authorities.

If you look at page 25, we generated significant core Tier 1 capital in the first half; we generated EUR2.8 billion. Of course very important, because that's the basis for us to repay the Dutch State.

Now flipping to Insurance on page 27. I must say, overall, we see the performance, and given the low interest rate environment and our current investment policy, as quite satisfactory. The issue I have is in the US where lower equity markets had a negative impact on our closed block of VA business, and that triggers in EUR521 million negative DAC unlocking. And I must say that we will focus our management attention on further improving our Insurance operations, going forward.

You see on page 28 the DAC unlocking, and that accounted for the negative market impact in Q2. The DAC balance of the closed block of the VA business declined by EUR946 million, and it remains at EUR1.8 billion.

On page 29 you see how we really prioritize and the preservation of our regulatory capital, and what we do to protect the reserve adequacy and make sure that we make improvements there.

That's how we are managing the closed block, to prioritize the regulatory capital preservation, and to improve the reserve adequacy. You saw that the RBC ratio in the US increased to 393% in the second quarter, and that despite a 12% decline in the S&P. The reserve adequacy declined by EUR200 million, and that was broadly a stable EURIBOR terms.

There was a negative impact on earnings because of the negative DAC unlocking in the second quarter that we saw on the previous slide. And if you look at the volatility and rising equity markets, we expect that the hedge losses will only partially be offset by IFRS reserve decreases. And that will result in some P&L losses in our markets. But at the same time, reserve adequacy will improve as a consequence of our policy not to [write-up] the DAC.

While this quarterly earnings volatility is quite unfortunate, I believe that our policy will help to both protect regulatory capital and will address the reserve adequacy that we have for our block of closed business of US VA business over time.

When we look at slide 30 you see the other activities in Insurance, and most businesses show a stable operating performance, compared to Q1 of this year. The Benelux benefit is from seasonally high dividend income and some one-off cost releases of EUR25 million.

The US and Investment Management have a decline in operating results, and that's mainly triggered by higher expense as a result of projects that will help us going forward, and some compensation accrual as well.

On page 31 you see new sales. Happy to report that they were up 22% from last year, if we exclude foreign exchange and the closed blocks in the US and Japan. So I think we have a strong business, and I think it's important to mention that this was particularly reached in Asia and in the US markets.

On page 32 you see our general account assets. They have increased significantly, while we have taken a very prudent investment allocation in the current market environment, and we have not started to re-risk as yet. We reduced our Greek Government bonds and US CMBS and we invested more in high quality corporate bonds, which was increased by EUR10 billion year-to-date. And at quarter end, our investment portfolio has a positive revaluation reserve of EUR2.1 billion after tax.

Page 33, you see the spreads; they were stable. Technical margin was declined, mainly for reasons of mortality claims in the US. We believe that the technical margin will be more in the range of EUR200 million, more or less stable over time. And here the investment income at 83 basis points. Of course, we have a very low risk investment policy, and I think you see the results here. Over time we would think that we can increase that to about 105 basis points.

Administrative expense, excluding foreign exchange, up 4%. And you see that the increase was largely due, if we look at foreign exchange, by about -- the biggest portion of that had to do with foreign exchange. If you eliminate that they were about 4%.

Most of them had to do with special projects that we had, in particular launching a new platform in Latin America and investments in the Investment Management business. We see, and expect, administrative expense to stabilize in the second half and gradually decline in the coming years.

That, I would say, brings me to the end. Let me wrap up and say earnings momentum gained strength in the second quarter, and we made good progress in almost all areas. And I thank you for your attention and give the floor to you, and we will try to answer your questions now.

Thank you, sir. (Operator Instructions) There will be a short pause while participants register for a question. The first question is from Spencer Horgan. Please go ahead, sir.

Thank you very much. Good morning. Two things please. First one is, you briefly touched on the net interest margin for the Group as a whole, but I guess it's a little bit difficult for us to extract what's going on in each of your key markets. I don't know if you could briefly touch on what's going on by major division within the Bank.

And then the second question is, on the Insurance side obviously you've had quite a big increase in the book value this quarter, presumably a lot of which was caused by yields falling. And I guess actually, if you look on an economic basis, that's probably more negative than positive. So I wondered if you could give us at least a flavor of where the Insurance business looks on the economic capital model, i.e. the AFR EC type model. Thank you very much.

Okay, I think Patrick, you will do the interest margin, and then Matt, you will do the increase in book value.

Our interest was relatively stable; in fact it increased slightly for our core Commercial businesses. The decline overall was driven by financial markets, which can be volatile and seasonal. We are expecting over the longer term, though, is our interest margin (inaudible - technical difficulty).

This is Matt Rider. Maybe I'll take the economic value. We made a decision to not disclose the AFR or EC information directly by quarter. The information is generally available at year-ends, for a large part because we see actually quite a lot of volatility in those figures quarter-by-quarter. But if you go back to the sensitivities that we provided at the investor day on April 19, that'll get you in the right range.

Okay, thanks. Just on the net interest margin, are there any particularly notable trends in any particular markets, or that's just generally how it's moving?

I think it conforms more or less to the average. We're seeing some improvements in ING Direct still. But I want to caution that we do expect (inaudible - technical difficulty) will be 120 basis points.

As I said earlier, the core Commercial businesses, this is the Netherlands, Belgium and ING Direct, the interest margin there is still reasonably robust for the time being.

Okay, thanks.

Thank you. The next question is from Johnny Vo. Please go ahead, sir.

Good morning. Just a couple of quick questions. Just in regard to ING Direct, how sustainable is this number? Number one.

And since you've adjusted the deposit rates in the US, has there been any impact on volumes?

In terms of the Group margins being impacted by the financial markets, can you give more color about the financial markets margin decrease of that 5 bps.

And finally, just in terms of the debt to equity at the Holding Company, which has stayed relatively stable. Is that a policy, or are you likely to reduce that further, or are you just going to wait until you sell Insurance assets to reduce that completely? Thanks.

Okay, Patrick.

Well if I go to financial markets first. The financial markets, there's a couple of factors there you need to bear in mind. One, it can be seasonal, and two, it's inherently volatile given the nature of how the business operates.

The IFRS accounting can give you -- even though the overall aggregate result can be the same quarter-on-quarter, depending on the products used, be it a swap or a future, you can have different elements of that. Overall earnings are reported in interest margin and in other income. So that can be inherently volatile.

But what we are seeing is that, as this crisis has declined, customer bid offer spreads are also declining. So there is a degree of downward pressure on the overall result.

As regards ING Direct, no, our volumes are holding up. The reduction in the rates was primarily in the last quarter. We haven't reduced rates significantly in ING Direct in the US this quarter. So margin is holding up reasonably well, as are our volumes.

Okay, brilliant.

And then the debt/equity ratio. I think what we are doing is we have strengthened the capital ratios in the Bank. We have had little, at this moment, movements between the Bank and the Holding Company, or the Insurance and the Holding Company.

We are looking at, of course, first of all to improve the operating performance. That will generate earnings cash flow and capital. And that will give us the ability, I think, to create flexibility in going forward. And then gradually, over time, I think you will see our debt come down in the Holding Company as well.

Okay, thank you very much.

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

Morning, gentlemen. Just two questions from me. Firstly just starting with the CEBS test. You did see about the third highest growth in risk-weighted assets, and you've given a little bit of color around where that comes from. I just wondered if you could give maybe a bit more detail around which books particularly drove the growth you saw under the CEBS test.

And then secondly on just the US legacy variable annuity book, I just wondered if you have any color on utilization behavior on that book, and whether you've seen any changes there. Thanks.

On the stress test, Farquhar, two elements explain that best. Number one is, we are working with the highest percentage of internal models in the banking industry. Where you find in general that people are having 50% of their assets based on internal models, we are at 85%.

Second explanatory variable is that, in the stress test you have a four-notches downgrade in securitizations, which would mean that your risk-weighted assets in the securitization rules would go up.

By the way, the stress test assumes no management interference, and of course, if you would have assets with a 1,250% risk-weight you would simply sell them and release capital.

With respect to the US VA experience, I think you're aware that we generally do our experience updates in the third quarter for both the US and the Japan VA books.

I can say for the US, thought, that our experience so far with respect to take-ups -- and I think you're referring to activating guaranteed benefits -- the actual experience is very, very limited at this point.

And has that changed at all?

As I said, it's just very limited.

Okay.

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

Good morning. I've got an Insurance question and a Bank question. First, on Insurance the slide 29, which looks at your VA earnings and reserve sensitivity to markets. On the reserving side, that's pretty much, I guess, in line with what you've been saying in the past. But I just wanted to understand the earnings sensitivity going forward. Because that could actually be construed as quite negative; you making a loss either if markets go up or down beyond your central assumption.

I was just wondering, if markets go up, surely that sensitivity won't remain negative on the way up; there'll be some convexity. Could you just explain that with regard to equity markets.

Secondly, if markets go down is there a limit to how much DAC you can ultimately write down? Is the sensitivity basically continuing forever, or is there a limit?

And third question on that is, if yields go up, how does that affect both reserving and earnings?

And then very quickly on the Banking side, your very strong core Tier 1 creation. Could you talk about how much of that is exceptional in the quarter and what would you expect, if you make similar margins and similar provisioning, would you expect to generate that level, or is there a slightly lower normalized level? Thank you.

Maybe I'll do the Insurance bit first. Maybe just, first of all, to answer your question a little bit more generally. I don't know if we're at this moment prepared to get into second order effects and convexity around this.

As you can imagine, this is a relatively complex computation. But I would say that, first of all, importantly we are taking an action here to improve the reserve adequacy, and we are letting some volatility in the earnings come through in up-markets. I think importantly, as you can see from the table, that if you do have up-markets, you're generally improving reserve adequacy by writing down the DAC.

Now you can see that in the table on the previous slide, we had written down DAC very significantly in the second quarter by about EUR950 million. Now there is a DAC balance on this book that is around EUR1.8 billion, so there really is a limit to the extent that this reserve adequacy policy can write down DAC going forward.

On your interest rate question, I would say that in general both the reserves and the DAC are relatively insensitive to interest rate. There are interest rate effects, but they are relatively insensitive.

Just to come back on that, I can understand that you don't want to get into quantitative convexity calculations. But let's say you remove your reserve deficiency at the 50 percentile level. Would that, just qualitatively, would that result in a change in hedging, or a reduction in the negative gearing to up-markets?

With respect to the hedging, I think Jan had actually described this quite well in the slide, that we're geared more toward protecting regulatory capital, and effectively the economic value of the guaranteed benefits as they react to up and down equity markets. So to answer that piece of it, no, there would be no change to the hedging.

Sorry to keep dragging on, but what about volatility? If vol goes down to the sensitivity, would you also --?

This gets a little bit complicated, but actually the hedging program is more reactive to changes in actual volatility in the market. This is very common with Delta hedging programs; we do not use options so much. But changes in implied volatility don't react much on any of these things.

Okay, thanks.

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

One more question we need to answer still.

Farooq, it's Koos. Can I just answer the question on the capital generation part? A few factors play a role. Number one is if you look at the earnings, and I think what we have said is both impairments, they are drying up a little bit as well as your loan loss provisions are more moving towards normalized levels. So those are the positives. Net interest margin's sort of holding up, so that's a positive.

I think what you can say, there's two other factors which play a role in capital generation. One is risk-weighted assets and risk-weighted asset growth. And there you can say that the big migrations we have had, that at the moment show overall -- I mean this year you expect less risk-weighted asset growth purely due to negative credit migration than in the past years.

And then one other factor, which still plays a role, is the revaluation reserve, and the revaluation reserve is something which was strongly negative in the past, and had a pull to par effect. But as you've noted right now, the [near] revaluation reserve is positive, so that pull to par effect will taper off.

And then the other one is, if I look at foreign exchange, as you know what we always do is our capital, if it grows due to foreign exchange, we can sort of ignore it because that will wash away against the growth of the risk-weighted assets.

So overall capital generation, I think there is an element in there is robustness.

So, okay, no. I'll ask the next question offline.

Thank you Mr. Weidema. Please go ahead.

Thank you, Jan Willem Weidema, ABN AMRO. On the Bank of Beijing and Koopman, can you please comment on how they contributed to the 2Q results? And what your long-term strategy is with respect to these holdings as your profile becomes more and more European?

On the Alt-A portfolio, can you comment a bit on losses or gains there, revaluations and the size of the portfolio for the end of 2Q, '10?

And finally, on the Belgian Bank you managed deposit charges. Are those charges recurring or not?

Okay, the impact of the Bank of Beijing and Koopman on the results is quite negligible this quarter. Our long-term strategy is we like our strategic position that we have [as] the Bank of Beijing. And we also like our strategic position we have [as] the Bank Koopman. Those are very important for our longer-term positions. And so that's all I can say about it.

And the other question, Koos?

Yes, on Alt-A, total portfolio [EUR2.9 billion]. No movement, only up due to currency, prices 62.5% versus 61%. If you look at the underlying performance then credit enhancement is still 13.5%. Cumulative losses [EUR4.9 million]. The only thing you've seen increasing is if you look at the pipeline, that went from 28.0% something to 29.3%. Overall loan to value still 73%.

And the only other point is impairments. They have been relatively low on this portfolio. Revaluation reserve positive EUR52 million.

And the question maybe then on the Belgian Bank, the deposit charges there?

Yes, the deposit charge on the Belgian Bank is something that the Belgian authorities have instituted. It was a bit of a surprise, the way it was done. And so it had an impact on our results in Q2. I think the amount was in the neighborhood of EUR6 million or EUR7 million.

Okay, thank you.

Thank you. The next question is from Nick Holmes. Please go ahead, sir.

Hello there. I just had a couple of very quick questions. One is returning to the US VA closed book. I wondered if you could give us an idea of what the reserve deficiency would be at the 90th percentile of confidence, which I think is your normal reserve level.

And then second question is, just looking at Bank bad debt, there was an improvement in releases in Q2, which I think was the main factor for the overall improvement in bad debt. And I just wondered whether this was something that you expect to continue. Thank you.

With respect to the reserve inadequacy at the 90th percentile level for the US VA block, this is actually a number that we do not disclose. But the high level numbers are that the US, in total, is inadequate at the 90th percentile by EUR1.6 billion. However, it is adequate at the 50th percentile by EUR2.2 billion, and ING Group overall is adequate at the 90th percentile by EUR5.5 billion.

Why do we not disclose the number on reserve adequacy for the US VA block? Well, it's simply because it's not in line with what other US insurers would do. As you know, the reserve adequacy standard that we have at ING is actually very stringent relative, especially, to US insurers. For US insurers you're more concerned about, again, capital conservation and regulatory capital. It's a very different standard in Europe.

Okay. Yes, fair enough.

Okay. With regards to the releases, three remarks. One is it is very difficult to predict releases on a quarter-by-quarter basis because it's file specific and, for instance, good secondary market, debt markets, help you in making more releases. And if there is no secondary debt market then it is a little bit less. So that's number one.

Point two is, overall what you find is, if you are moving a little bit further in your downward cycle and it's generally trending positive, then you see more releases than increases. So yes, you expect a little bit of release increases overall with regards to the level of provisioning.

What we normally try to do is to provision conservative but adequate and not overly. And why is that? If you have too many releases then your credit restructure department becomes too lazy. So in the end, you want to have releases but not too many of them as well.

Okay. Yes. Very fair. Thank you very much.

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

Good morning, gentlemen. Thomas Nagtegaal from RBS. I've one question regarding your direct real estate exposure. Could you give an update on A, your views and strategy on that exposure going forward? And now the sales are stabilizing and even rising again in some markets, do you believe it's a good time to start divesting parts of this exposure in the coming quarters?

Good morning, Thomas. No, we have indicated that we are doing a total review of our Real Estate business. We are in the midst of that. We expect that, before the end of the year, you will get more clarity on what we plan to do. But I cannot be more specific at this moment. The review is still ongoing. But we know, just as well as you do, that markets are stabilizing and they show in lower revaluations and lower impairments.

Okay. Thank you.

Thank you. The next question is from Christopher Hitchings. Please go ahead, sir.

Hi, thank you. I'm just not much left after the previous thing, but really I want to look at this re-risking of the Insurance investment portfolio. I'm trying to get my head round your statement, we haven't started re-risking yet and also the statement, we've reinvested EUR10 billion into corporate bonds, and try and get what you mean, what the returns are and over what scale you will be doing that.

And the second -- actually no, that's it. That's fine, thanks.

Yes, I think, Christopher, we said in April that we would, over time, prudently re-risk the general account in both the Benelux and the US, which have the largest general accounts.

Given what happened in the second quarter, particularly with the southern exposure in Europe as well as a softening of the view by the Fed and others on the economy, we decided to delay re-risking in both markets. And so, therefore, we have a long-term goal of increasing the margin by 20 basis points. We didn't make much progress in the second quarter because we were being cautious.

But that reference to investing EUR10 billion in corporate bonds --

You did see that the general account increased and most of the new investment in the general account, or a significant amount, went into high quality, high grade corporate bonds.

Is that in the US specifically? And is that new money or is that any money being released from sales?

Well it was more in the US, and it would be both new sales and cash flows coming in from new sales as well as reinvestment of bonds and securities that are maturing.

Okay. And how much has -- what do you reckon the running yield on your portfolio is now, compared with what it was when you did the investor day?

Christopher, that's on page 33 of Jan's presentation, so you can see that the general account spread is 83 basis points. So about flat to where it was in the first -- the first quarter it was 84.

Okay, fine. Thank you.

Thank you. The next question is from Federico Salerno. Please go ahead.

Yes, good morning. Just a quick question on the Bank. I was impressed by the resilience of the non-interest income in the second quarter, and I was wondering how sustainable can this be in the coming quarters, especially if markets remain volatile. Thank you.

Well, Federico, there's a couple of factors that are at play there, not just financial markets which, as we mentioned earlier, are volatile. But we also have commissions on sales to our retail customer funds. So the retail piece is more stable and is more reflective of the retail franchise.

As I said already the financial markets piece, what might be referred to as trading income, is inherently more volatile.

Okay. So we should assume it's going to remain at least at the level of the second quarter, even if markets are a bit volatile in essence.

I think the commercial piece is fundamentally stable.

Okay. Thank you.

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

Morning. I've got two questions. First on ING Direct; I wonder if you could give us some flavor of geographically where the improvements came Q2 on Q1.

And a second question is also on the Bank. The improvement in the banking results seems mostly in ING Direct and also in the corporate line, which is showing about EUR260 million positive between Q1 and Q2, most of which appears to be in fair value changes within that corporate line for the Bank. I wonder if you could tell us a bit more about what they are. Thanks very much.

Okay. In respect of ING Direct, the improvement in profitability was reasonably broadly based. We'd improvement in DiBa, in Canada and also in Australia, as well as the US, albeit the US was the largest portion of the overall profit increase comparing the second quarter to the first quarter.

And the components of that were, margin was about a half of the increase, although there's a bit of FX in there from the US element. Loan loss provisions were down EUR40 million odd, and impairments also reduced as well.

Your second question, the corporate line. There are a couple of elements in there. We fair value a small portion of our own issued capital, and that swung into positive territory which accounted for part of that fair value increase. And there was also a profit on disposal included in the corporate line as well.

Thanks. I'm actually interested to hear what the profit on disposal related to, if you could --

Yes. It was a small bank stake in India that we --

That was the bank that was [working most] in the numbers. Thanks very much.

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

Good morning. Benoit Petrarque from Kepler in Amsterdam. On the liquidity ratios you said it's above 90%. Could you just give a bit of color on individual ratios, whether they're both below 100% and above 90%? Can you give a bit of detail on that? And what can we expect in terms of actions to improve the liquidity mismatch for ING?

And then the second question is on the trading income. Very strong trading income in Q2, actually improving versus Q1. I was not expecting that, so can you just give a bit of color on the quality of this trading income? Thanks.

If we talk about, Benoit, the liquidity ratios of the Bank above 90%, it is the LCR which is closer to 100% and the NSFR, if I say it right, that is more closer to the 90%. If we talk about what do we think about that, can we increase that? The answer is yes.

The LCR is a ratio which, in the Netherlands, we already have for more than 10 years. The only difference is that own mortgages are allowed, if you repackage them, as eligible collateral for the Dutch LCR ratio, which we already have for long period of time. That is also the reason why our liquidity, according to current standards, is way higher than through the Basel standards.

So what we would be looking at is how to enhance eligibility of our own mortgages because yes, we can post them with the ECB but no, they don't count for Basel at this moment. So this is the direction where we, over time, would look for improvements on that.

And on the liability side, do you look for longer maturities?

I think overall, if you look at the liability side of our portfolio we do have a very robust and a diversified liability side. And if markets allow, we would be issuing long-term debt if the spreads are good for that. But it's not that we have to do some sort of [penagry] capture action in order to restore a balance sheet. That is not how I see it.

So gradual lengthening, yes, that might happen. Please note as well, over time, that our maturity profile of the longer issue debt is relatively long.

Thanks.

Thank you. (Operator Instructions) We have a follow-up question from Benoit. Please go ahead.

Yes, just on the trading income please. We forgot to talk about that.

In respect of our financial markets business, fundamentally the majority of what we do is client related, so it's on the back of client business. So 60% to 80% of the total income level within financial markets is client-flow related. So outright proprietary trading is very limited.

So what you see in terms of the decline is more given by customer dynamics, as I mentioned earlier. Bid offer spreads are declining, which is one of the reasons why the financial markets results were a little lower in the second quarter as compared to the first.

So in Q2 your clients have been relatively more active than in Q1.

I think it's a little lower activity combined with lower bid offer spread. And also typically what you see in the first quarter is a big boost. Fourth quarter's normally quiet and then you get a rebound of activity after Christmas. So there's a seasonality effect there as well.

But there's no moves in the value at risk overall at the Commercial Bank?

No. Nothing significant.

Okay, thanks.

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

Hi, morning. Omar Fall from UBS. Three questions for the Bank, please. You haven't given, or at least I can't see, the usual disclosure on NPL coverage ratios. Can you give some color on how these have progressed in the quarter please?

Secondly, I'm also surprised by the increase in Commercial Banking loan losses, particularly in general lending, given the pretty strong improvement in asset quality there seen at your European wholesale peers. And your NPLs have gone up there as well. So if you could touch on that.

Finally, on the NIM, I couldn't hear the answer to an earlier question, but why are you so cautious on the outlook here when, excluding financial markets impact, it's actually gone up a bit, just 1 basis point. But I don't see why competition should heat up so much when you're seeing ongoing asset deleveraging across your peers in Benelux. Thanks.

Yes, maybe if we look, Omar, on the coverage ratio, the NPL coverage is still around 36%, so that has not changed. If you look at the increase of the NPLs in the Commercial Banking area, it starts to become very incident-driven if you start to slice and dice it to smaller and smaller portfolios.

What I give you normally is a loan loss provision over a whole portfolio of EUR600 billion. If you talk about the general lending part, that is EUR39 billion out of the EUR600 billion. And as a principle, then what happens is over the quarter if you have one bigger file which becomes non-performing, then it becomes statistically a bigger number.

And so I don't see anything meaningful after this, or any trend after this, because it's just a relatively small portfolio in the overall. And that is why, by definition, you will get a quarter that it is lower and a quarter that is higher. But I cannot derive a conclusion from that.

On the net interest margin, just to be clear. Overall our net interest income actually increased, in part due to volume. The margin decline was in the financial markets area and, in fact, our core commercial piece, which is the vast majority, did increase.

So as I said last time round, ultimately we would expect, over time, for the margin to trend towards our long-term average, but in the short term we don't see it happening. We managed to reduce deposit rates in the first [quarter] and you're seeing some of the benefit of that coming through.

So the immediate outlook, insofar as you can predict it, is still pretty solid on interest margins. But longer term it ultimately will go down. Short term, reasonably stable.

Great. Thank you

Thank you. The next question is from Olivia Frieser. Please go ahead.

Yes. Good morning. Olivia Frieser from BNP Paribas. Apologies if you've already answered this, but looking at your dollar Tier 1 [callover] in December this year, I just wanted, looking at the likelihood of the call, that depends on your repayment of State capital injection and also on the EC approval to call. So what can you tell us on this?

And also where do you stand in terms of your appeal with the EC regarding State aid?

Your line was not very clear, so hopefully we picked up all the questions. I think we have had discussions, but we're not in a position yet to make any type of moves, because we still have an appeal with the European Court for the case that we have with the European Commission. I cannot make any comments on that.

If you look at the core Tier 1 as designed, we do have the ability next year to offer the Dutch State shares. If they don't want that, we will have to make a cash payment. At this moment I cannot say which way it will go, because simply not knowing the situation with the European case it's too difficult to make a forecast here.

Thank you

Thank you. We have a follow-up question from Tony Silverman. Please go ahead, sir.

Thank you. Just on ING Direct again, I noticed that in the United States the value of mortgages has gone up quite significantly just for a quarter from EUR25.9 billion to EUR29.5 billion. Is that getting to where you want it to go? And was that an important part of the profit increase in the US in ING direct? Thanks.

The answer on that is the following. The biggest part is foreign exchange what plays a role there. If you look at our production of underwriting, to be honest, I would like it to increase this way. But, at the same time, it's not so easy because if you look at mortgages we don't want 30-year fixed; we want it to be a bit more hybrid or hybrid arms.

And that is a market which is relatively (inaudible - background noise) and at the moment it's still more dominated by the Fannies and the Freddies. So if we could up production against the current terms and with the current low LTVs I would do it, but production is still relatively benign.

Okay. Thanks very much.

Thank you. The next question is from Marcus Rivaldi. Please go ahead.

Good morning. Sorry, just a quick follow-up question to your answer to Olivia's question just shortly a minute ago. If you have no resolution on the EC legal case around State aid, does that preclude you from calling that [8.439] in December this year?

I cannot make any comments on that because I have no idea what the European case will do in between. So I cannot make any predictions here.

I just wondered, are they two inextricably linked? That's really the question.

Yes, I think they are linked to the extent that if Europe would allow us to do so, then we have the ability to do so. If not then we don't have that. So it's impossible to make a prediction here not knowing which way that will go.

A quick follow up. Is the dispute around State aid, is that absolutely tied in with whether you believe the EC would grant you permission to call bonds if you wanted to. So if you haven't got a resolution on that, does that really mean that it would be unlikely that the EC would be willing to grant you redemption of bonds, even if you wanted to.

No. It has to be with if we have discussions with them and they are permitted, then we can go ahead. So that will be decided on a case-by-case basis. But we cannot make any comments on that at this point in time.

Okay. Appreciate it. Thank you.

Thank you, Mr. Hommen. There are no further questions. Please continue with any closing remarks.

Thank you very much. I would say we appreciate your attendance at the call. Thanks for being here. Thanks for your questions. If there are any further questions I'm sure you will find Dorothy and her team. Otherwise most of you, or a number of you, probably we will see at the road show that will follow.

So thanks again and have a good day.

Thank you, sir. Thank you, ladies and gentlemen. This does conclude today's presentation. Thank you for participating. You may now disconnect.