ING Groep NV (ING) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank for holding. Good morning, this is Yvonne welcoming you to ING's Q2 2011 conference call. Before handing this conference over to Mr. Jan Hommen, Chief Executive Officer of ING Group, let me first say that any forward-looking statement in today's comments are subject to a number of current views, assumptions and variables, including interest rates, foreign exchange rates and inflation rates, movements in security markets, including equity markets, and underlying economic conditions and changes. These are set out in greater detail in our public filings, which we would urge you to read. The realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables. Good morning. Jan. Please go ahead.

Thank you very much. Welcome, everyone, to the ING second-quarter results call. First of all I understand there were some problems with the website this morning, but in the meantime they have been fixed. So we apologize if you had trouble getting access, but it should be okay now.

I'm happy to report that the Bank posted another solid quarter and that the Insurance company showed significant result improvements as initiatives that we introduced last year continue to gain traction. We also made great strides in restructuring the Group. We paid EUR3b to the State in May, announced that we were selling ING Direct US for $9b and ING Car Lease for EUR700m. And also we announced the sale of our Latin American Life Pension and Investment Management business for EUR2.7b.

I will talk you through the presentation now. And afterwards Koos Timmermans, Patrick Flynn and Matt Rider are here with me and we are all available to answer your questions.

ING Group reported an underlying net profit of EUR1.528b in the second quarter, up 19.7% from a year earlier and up 4.4% from the previous quarter. Results from the Bank posted a solid underlying result before tax of EUR1.3b. And the Bank results benefited from healthy interest margin; we had higher client balances; we had lower risk cost; and we have an improvement in the expenses versus the first quarter.

Bank results were negatively impacted by EUR187m as a result of impairment of Greek government bonds, which largely explain the lower results if you compare Q2 last year with Q2 this -- with the first half this year.

The underlying results of Insurance company showed significant improvement compared with a year ago and also compared with the first quarter of this year. Operating results we up by 82.5% to EUR690m. And the pre-tax result increased to EUR673m, despite EUR123m impairment on the Greek government bonds.

And we also maintained strong capital ratios even after repaying the Dutch State the EUR3b in May. Core tier 1 at the Bank was 9.4%, and including the announced divestment of ING Direct US and Car Lease and REIM the pro-forma core tier 1 would have been 10.7%. The insurance solvency ratio improved to 252% at the end of the second quarter.

On slide number 3 you can see that ING Bank second-quarter results were very solid, down from a year ago, but due entirely to the Greek bond impairment and a EUR86m gain of the sale of an equity stake we had in India last year in the second quarter.

Insurance showed a strong increase as performance improvement initiatives are gaining traction. The operating result of EUR690m was ahead by 83% from the second quarter a year ago and 35% from the previous quarter and were driven by higher investments and by technical margins. Underlying result of EUR673m included the impairment of EUR123m on Greek government bonds.

For the Group, that left an underlying net profit of EUR1.528b, and that was up 19.7%, and net profit after tax of EUR1.507b, which included a negative EUR22m from divestments and discontinued operations and special items. If I add to that the after-tax impairment on Greek bonds of EUR231m, then the net results would have been EUR1.738b, so a significant number.

On slide 4 you see the exposure to Southern European sovereigns. Impacted negatively by the impairments we took on Greek government bonds. We have taken impairment on the exposure of bonds that we have maturing before 2020. And this means that we still need to impair the market value under IFRS rules, which had a negative impact on the results of EUR187m for the Bank and EUR123m for the Insurance company. So the impairment was done back to market value.

Slide 5, you see that we -- when we compare the ambition that was set in 2009 with the ambition we have for 2013, we're making very good progress. We are ahead so far on underlying income. We are doing, I think, relatively well on the cost/income ratio, although it went up. But if you eliminate the market impacts it is down to 54.3% in the first half of this year. Our target still is and we maintain our long-term target to be 50%.

We see that the underlying risk costs were at the normalized level of 44 basis points in the first half of this year. And you see that the return on equity improved significantly on an IFRS basis 12.7%. And if you look at it based on the original core tier 1 of 7.5% at the time that we made the plan, it would have been 18.6%. So a very good performance, I would say, here.

Insurance, clear progress on the ambition that we have set for 2013. Investment margin, investment spreads went up to 99 basis points. Expenses, administrative expenses came down to 38.9%. A little bit of help here from one-time events, but still a good improvement. Our sales were -- is the one lagging and we're paying a lot of attention to sales. But I must say compared with the first half last year, more -- a little bit better than the first half last year, or more or less at the same level. And then the return on equity, and I'm very pleased with that one, that we are getting into territories that are, I think, quite respectable, 8.4%.

And on page 7 you see the core tier 1 development. Then we start at December 31 with 9.6%. You know that we paid the State EUR3b. We generated capital for 0.7%, so we ended up at 9.4%. And if we include the divestments we have already announced and the impact of that on our capital, then we would have shown 10.7% not including yet the addition that we expect for earnings during the second half of this year.

Page 8 shows the sale of our Latin American insurance and IM businesses to GrupoSura for EUR2.7b. Not included in the transaction is our ownership, 36% ownership in the Brazilian insurance company SulAmerica. But any way you look at it, I think we did quite well; we got a good price for this. And at the same time we found, I believe, a very good buyer for the business who has -- with the addition that they have already I think a very good position in Latin America to be one of the premier insurance and pension management companies in the region.

When you look at page 9 you see that the -- here you see the strong capital generation of the Bank that we used to pay the Dutch State. And we aim to do that sometime in May next year, in May 2012. And then we, if you assume that the proceeds of the Latin American operations will stay within insurance, then the transaction will reduce the leverage in the Insurance holding company by EUR2.8b. And that's an important milestone when we prepare for two IPOs, one in the US and one for our Asian insurance companies. And then the proceeds from the IPOs we will use to pay back the double leverage that we have in the Group.

Our separation process is on track. We call that our readiness program, that is really on track. We are basically at where we should be. There's no delays, no hiccups, no major hiccups at least. We have spent so far this year EUR51m in the first half. We did EUR31m in the second quarter. And we expect that the total will be about EUR200m for the year.

Also we have started preparing for IPO. We have already made some expense, but these are non [regret] expense that we have made so far, and that's about EUR10m. We expect that could run up to EUR50m. It has to do with, let's say, preparing US GAAP statements and things like that.

We also announced today some major announcements in the management Board. Announced that Eric Boyer, our Vice Chairman of the Bank, will be retiring October 1. Koos Timmermans, our Chief Risk Officer, will become the Vice-Chairman of the Bank. And Wilfred Nagel will become the Chief Risk Officer and will take Koos's position in the various Boards and the Management Board Bank and Insurance Company. Until Wilfred has been confirmed by the shareholders, which we expect in the Annual Meeting next year, Patrick Flynn at the holding company level will be responsible for the Group risk activities. But of course Wilfred will be the Chief Risk Officer and be in all the meetings.

And I'm very happy with these nominations. Eric had been looking at retiring already for some time. We had been convincing him not to do it until now. But the time has come for Eric. And he has been a great performer in ING and we thank him tremendously for what he has done for ING.

Let's go to the Bank. You see at the performance of the Bank that the underlying pre-tax result of EUR1.3b, including EUR187m of impairments for Greek bonds. And our loan losses, we added EUR370m or 47 basis points in the quarter, really at normalized levels. We anticipate, going forward, that the losses will be lower than the average for last year.

Interest margin still healthy at 142 basis points. Interest results were at EUR3.35b. The margin development you can see in the lower side of the slide. And you can see also that I think we did quite well in holding up our interest margin. We see a little bit of slippage here, in particular in the retail business in the Netherlands and Belgium, but we got some positive contribution from our Direct activities and in International.

Also good performance on lending and on funds entrusted to the Bank. And we increased our lending activities in our mortgage business, both in the Netherlands as well as in ING direct. Not only the Netherlands, also Belgium we picked up more activities in our mortgage -- in the mortgage markets.

Expenses at the client, if you compare them with the fourth quarter, in fact we had two consecutive quarters of decline. The income -- the cost/income ratio went up slightly. But at 54.6%, that is excluding market-related volatility, I think still okay. And, as I said earlier, we continue to strive for the 50% in the longer run.

Also I must say that given the circumstances, the economic environment and the financial markets as they are, we are very vigilant on costs. In fact we will be stepping that up. We have taken in the past significant reductions. I cannot exclude them, but at this moment we have nothing to announce here. But we will be extremely careful on hiring. In fact we will be looking at every vacancy we have very carefully. And at the same time we will continue to look at how can we be very stingy with project approvals and purchasing activities to make sure that if the economy turns the wrong way that we are well prepared for that.

You see our risk costs; they were 47 basis points. And, as I said earlier, we expect that going forward they will be at level of the -- a little bit below the average of last year.

On page 18, slide 18, you see our non-performing loans. That remains stable at 2.1%. As the risk costs were EUR38m higher here than the first quarter, and that was mainly driven by the mid corporate and the SME segments and retail Benelux and the ING Real Estate Finance activities. And the latter one was mainly due by two cases, specific files we had in the Netherlands and in Australia.

And on the right hand of the slide you can see that the Bank's non-performing loans as a percent remains stable at 2.1%. And the areas that showed an improvement, except for Real Estate Finance and Leasing and Factoring, they showed a slight increase.

Looking at slide 19 you see our funding. We have been very active lately in our long-term funding. The remaining exposure that we have in 2011 is quite manageable. And what we have done here, we have really, I think, made the funding part of our balance sheet stronger by having more long-term debt. And that really has helped our liquidity position as well.

Let me now turn to insurance. A strong improvement in results in the second quarter. Operating results of EUR690m. Non-operating result was a negative EUR17m and that included EUR123m impairments on the Greek government bonds and also EUR109m impact related to changes of provision for guarantees on several account pension contracts in the Netherlands. And they were offset by positive revaluations and by hedging gains.

On page 22, you see the investment spread that increased to 99 basis points. The investment margin went up to EUR476m, and that was mainly attributable to reinvestments into fixed-income securities in the Netherlands and the US, and also because we had lower swap rate expenses in the US, as well as higher dividends on equity securities and a EUR28m of non-recurring items in the Netherlands.

And if you compare that with last year, then the investment spread now is at 99 basis points compared to 79 a year ago, so a significant improvement compared with a year ago. Also you should include the fact that LatAm was not included in these numbers any longer because they are reported as discontinued operation, and that has reduced the spread by about 3 basis points.

Technical margin was strong. Fees and premium-based revenues grew by 3.6%; that was primarily driven by increased in the closed block VA and the ING Investment Management. Technical margin was EUR260m, that is about 53% higher than Q2 of last year. And that result benefited from an early surrender of a contract of a large fund in the Netherlands that had an impact of about EUR70m.

Administrative expenses, they were under tight control. And you can see that reflected in the graph on the right side, as well as also on the left side. They declined, administrative expense, as a percent of total operating income, to 38%. And that was resulting largely from an increased operating income.

New sales, slide 25, of EUR944m, that was about 14% lower, but 6% of that had to do with this currency effect from the second quarter of 2010, and mainly as a result of lower sales in the Benelux and in the US. In the Benelux and in the US and Asia Pacific, the fact that sales were down had to do with seasonal effects. Traditionally the first quarter is the high quarter. But also in Hungary and in Poland, pension sales were negatively impacted by some regulatory changes that were made by the governments.

When you look at solvency, our solvency ratio strengthened; it went up to 252% at the end of June. And there was 8 points of which was driven by the decrease in the goodwill due to the classification of Latin America pension and life insurance assets and the liabilities as held for sale. Now the remaining improvement was related to retained earnings.

And the expected net transactions result of approximately EUR1b of the sale of the Latin American business will again increase the solvency ratio by an addition 12 percentage points at the closing. And then we have the risk-based capital ratio further improved to 493%, and that was largely driven by market-related impacts.

I think that is what I had to say as formal presentation. And now we open it up for questions. And again Koos, Patrick and Matt will be here to help me with the questions.

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

Great. Thank you. Good morning. Duncan Russell from JPMorgan. The first question is on Latin America disposal. You've obviously retained the proceeds within the Insurance business. Are you at the leverage ratio you want now for the Insurance business? And does that mean that any subsequent disposal of SulAmerica, should it occur, would definitely get upstream to the holding company?

Could you also then give us the economic capital impact of the Latin American disposal?

And then finally on Latin America, I'm just interested as to why that was taken out from the underlying earnings, whereas ING Direct was not taken out from the underlying earnings. Particularly given that you -- that ING shareholders retain the ING Latin American earnings until point of disposal but don't retain ING Direct, it just doesn't seem very consistent. So if you could just given us an insight into the accounting decision there, please.

And then our second question is on the balance sheet for the Bank and your strategy of integrating the ING Direct balance sheet into the overall Bank Europe balance sheet. How will that be impacted, do you think, by this whole too-big-to-fail and [C-Fee] debate? Will that lead to you requiring an extra premium by regulators due to the fact your balance sheet will now be integrated versus not integrating it? And would that change your decision-making, your thinking on that front? That's it. Thank you.

Thank you, Duncan. On the leverage ratio, I would say we -- in LatAm -- in the Insurance company, in the holding company we're a little bit too high at this moment. We'd like to bring that down to have a little bit more flexibility. But in principle I would say anything we do is Group-related. We have, as far as I'm concerned, we have the ability to take it back to the Group. And it's only normal decision-making and economic decision-making and rational decision-making that will determine where we take these cash flows when we need them.

But our leverage ratio today is a little bit too high. I think we'd like to bring that down. We'd like to bring it down to levels that are more related to markets so that by the time when we do an IPO, we don't have a problem with that.

With respect to the underlying earnings and not why we have that with ING Direct, Patrick, would you like to do that?

Sure. Yes, Duncan, this, I'm afraid, it does seem, I can understand your point, it does appear perhaps a little inconsistent, but we're just simply applying IFRS. And there's a nuance. Discontinued operations is where you have an entire segment which you're disposing, which is the case in respect of Latin America, whereas held for sale is where there is a part of business within a segment. So ING Direct US is part of -- does not constitute all of ING Direct, of course. So that piece goes into held for sale on the balance sheet but is not separated in the P&L, whereas Latin America is an entire segment so it's excluded in P&L and balance sheet.

Okay. Matt, the economic capital impact.

Yes. We don't have the economic capital numbers in front of us, but we can get those.

Okay. And then your question, Duncan, on the second one. Koos, you want to deal with that one?

Yes. Duncan, on the [C-Fee] part, I know the criteria on the [C-Fee], which has to with size, interconnectiveness, cross-jurisdictional activity. I think overall you could argue that if we try to integrate the balance sheet it will basically make sure that the size of the balance sheet doesn't get bigger. So I would say overall [C-Fee] would not be a showstopper for balance sheet integration. In fact I see it actually supporting it.

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

Good morning, everybody. Just a few questions. Firstly could you update the Basel II to Basel III reconciliation of the pro-forma core tier 1 ratio? I'm guessing it probably hasn't changed that much, but if could just give us an idea.

And secondly, when you look at the insurance ROE of 8.4% adjusted, if you add back the Greek impairment, I'm not sure if that's included or not, but you're basically within spitting distance of you 10% ROE already. I was just wondering, when you look at the margins trends, the technical margin and the costs, is there anything that's one-off that will bring that ROE back down or are you actually going to be hitting that early?

And the related question on the Bank. Could you just give us a comment on the margin trends there because it looks like everything's very stable ex Greek impairment? So any change to the message in NIM, in loan loss revision, the commission? Is there anything that we need to take into account? Thanks.

You take the first one.

Yes, Farooq, although we don't want to disclose every quarter a spot implementation of Basel III, which is something which is going to be implemented over 2009. I think the biggest -- 2019, sorry. Yes, I didn't want to rush things. It's -- overall what you can see is, if I would make the sums yourself, then you say that the revaluation reserve of ING on the bond side improved by approximately EUR200m. That is probably the biggest driver of difference.

Okay, Matt, the 8.4%.

Yes, the 8.4% in the second quarter was exceptionally strong. I think a couple of important points about the quarter though. So normally the second quarter is when we get the majority of our dividends on public equities. So those are reflected in the figures. And you see that bit of seasonality in our figures, although it's reasonably small. I think the dividend number over the prior quarter last year was about EUR10m, something on that order.

But there's also two one-off things that are in our figures, and these are in the operating result margins. And the first is about a EUR70m basically surrender charge that we took in respect of a partial surrender of a pension contract in the Netherlands. And then the investment margin is, I think, boosted up by about EUR28m on some one-off things, and again the Group pension contracts. These are all, I think, pretty well laid out in the quarterly report when you have more time to go through it. Those are the important ones.

But having said that, the results are actually quite good. So we see frankly improving trends in all the margins, other than those one-offs even. Expense is under control. So these are very solid results.

Okay. Looking forward to the trends and margins for the Bank?

Yes. Interest margins for the Bank. Yes, we said we indicated that we thought it would come down gradually from 147 Q4, 144 first quarter, and it's come down 2 basis points, broadly in line with what we said. So the guidance is the same; we think that we would expect a continued gradual decline. We're seeing a little bit more pressure in terms of the margin on the deposit side, as Jan mentioned earlier.

In the Netherlands we increased rates in June by between 10 and 20 basis points. ING direct has increased rates following the ECB rate rises, which were late in the quarter so you won't have the full effect of that in the quarter. On the other hand, we still have good production, as you've seen in the production numbers which, on mortgages, albeit that'll help the quantum not necessarily the margin, because the margin is neutral. But also specialized structured finance continues to have good production at healthy margins, which can mitigate somewhat the impact on the deposit side. So all in all, the guidance stays the same and we still expect margins to hold up above previous pre-crisis levels.

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

Morning, gentlemen. Just three questions, if I may. Starting with banking regulation. I just wondered if you could give us a run through of your understanding of the Dutch proposals regarding ring fencing, and in particular any funding implications you might envisage from that.

Turning to the Insurance disposals, I wondered whether you could just update us on your thoughts around ING Insurance Belgium. I think you'd always flagged that one as slightly more difficult piece of the IPO plan.

And then finally just on VA hedging. Could you just update us where you are on that, in particular how much of the book is un-hedged? I think part of it actually was still un-hedged. Thanks.

So maybe, Farquhar, if you talk about ring fencing, are you talking about the new Dutch regulation liquidity measures?

Yes, that.

Yes. There you could say that what we have seen over the past is that the Dutch, the liquidity measures, we already work with liquidity measures since 1996. So in that sense it's not new. What you have is slight changes in definitions and that is something where we had to adjust to. But for the rest, it is not something entirely new for us. So no, and that is something, yes, which you just take into your normal operations to comply to the new regulations there.

Okay. On Belgium, yes, there was some news today that I did not really fully understood. A lot of the newspapers had an article on issues in Belgium related to our insurance operations there. Nothing has changed. We have a European Commission directive that says that we have to sell our insurance operations, and that hasn't changed. And we also have to divest our operations of Westland Utrecht here in the Netherlands.

So these two things are still on the table. We're working on them. And I have no further update on that. So I cannot really relate to the article that I saw in one of the newspapers.

Matt, on the hedging.

Yes. With respect to the hedging in the VA in the US, no real change since the last quarter. We remain hedged on all the for-equity exposure on all the guaranteed benefits. And I think we ended up at the quarter something like 47% interest rate hedge, which is very similar to where we were in 1Q.

Thank you. The next question is from William Elderkin. Please go ahead, sir.

Hi. Good morning, everybody. It's William Elderkin from SocGen. First of all, just a follow-up from Duncan's question. I didn't quite get the answer. For the Insurance business pro-forma for the Latin America disposal, is that capital structure now where you want it to be? And will any further gains you may take in the Insurance business be distributable to the Holding Co.? I'm sorry, I didn't follow the answer you gave to that.

Secondly, there's a headline I think related to your press call earlier saying that you won't try and adjust the European Commission restructuring plan. If that's a correct representation of what you said, I just wondered how we should think about that in terms of your outstanding appeal with the European Commission later this year.

And finally just a detail question. Within the leasing profitability of the Bank, how much is attributable to the car lease business which has been sold?

Okay. On the LatAm, in principle all the things that we do, all the sales that we do are basically the cash that has been generated is basically always cash for the Group. But when we decide it's not, it is for a reason. And that's why we explained we believe that the debt level and the leverage in our holding company for Insurance is a little bit too high when we compare that with normal participants in the market and we'd like to bring that down. And that's all we are doing. And then I simply cannot answer it any way else. Cash for me is always a corporate asset.

With respect to the European restructuring, yes, we have an appeal running in the European courts. There have been hearings in the Court, but we don't expect that the Court will decide anything before, let's say, six, seven months. And I cannot give any further information on that; we are waiting the decision by the Court.

And the last one, Patrick.

Could you clarify your question in respect of Car Lease? Was that the -- in respect of the impact in margin going forward or the contribution to capital on the sale?

Within the overall leasing profit you report for the second quarter, how much is attributable to the business that is up for sale or has been sold totally?

The profit element is about EUR56m for Car Lease for the half year.

Brilliant. Can I just come back on one point? You said pro-forma for the Latin American disposal and the retention of those gains within the Insurance business, does that leave the Insurance company capital structure where you want it to be?

We can only determine that at the time you go to an IPO, and I think that's the time that we determine that. I would think, at this moment, my answer would be yes. We will be well capitalized with what we are doing today.

Great. Thank you.

Thank you. The next question is from Hans Pluijgers. Please go ahead.

Yes. Good morning, gentlemen. Two questions from my side. First of all, again on the [C-Fee] surcharge. You have got already some feeling how the discussions with the regulators are going, if at all? Any indication which level you should work with in future respect to your [quarterly] one or [CAT1] on the Basel III? Have you got any feeling on which direction we should think?

And secondly, on the investment spreads, a good development already in Q2. How do you see development with the investment spreads going forward? Do you see, from the current level, without, of course, exceptions of further clear improvement, do you take additional measures there to further improve the investment spread? I know you have a target of slightly above 100 basis points, but could you give us some more feeling on what you're doing at the moment?

Yes, Hans. On the [C-Fee] one, ING, at the moment we have a 7% minimum requirement. And on top of that there will be the [C-Fee] bucket. We expect ourselves to be in one of the more lower buckets; and that is also what we have seen in some of the researches and some of the lists. But we don't have the final answer and that is what we are awaiting. So again, anticipation one of the lower buckets.

With respect to the investment spread, I think we've been pleased at the pace with which it's grown. But certainly in an uncertain market environment you want to be a little bit careful to re-risk too quickly. So we're at 99 basis points now. We've given our guidance at 105 basis points. I think removing Latin America actually reduced it by a couple of basis points. At this point, we're not changing our guidance, but we want to be cautious about this.

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

Good morning, gentlemen. Thomas Nagtegaal, RBS. I have two questions remaining. First of all, could you say something about the margin of volume outlook for structured finance, clearly the star performer of your Commercial Banking franchise? And do you expect new volumes and margins to remain at the same level for the remainder of the year?

Second, regarding the investment income in the Benelux, which is extremely strong, did the -- was the margin uptick realized during the quarter or at the beginning? Do you expect some further uptick during Q3? And could you explain exactly what you did in terms of reinvestments? Thanks.

In respect of structured finance, the margins have held up well. There have been limited changes. They're broadly stable as compared to the prior quarter. We made a good production. We are seeing some more competition, so it's focusing on trying to -- which is normal, given what you see as a very healthy market and performance by ING. So we're focusing on margin preservation. Volumes are relatively stable.

Yes. And the investment margin in the Benelux, a couple of key things. I think, first of all, we already had called out about EUR28m of one-off things related to interest credit, more so than investment income. And also we have seasonally high dividends in the quarter, and that's a change that we have seen from last year. We actually see actually higher dividends out of our holdings there, so that's a positive result.

Whether they occur at the beginning or the end of the quarter is not so meaningful. For the balance of it, if you just -- if you look at the core investment margin over the prior quarter, it's just simply due to reinvestment of cash and longer-term securities and a little bit of credit re-risking.

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

Yes. Good morning. Benoit Petrarque from Kepler. A few questions. On the funding, I was wondering here what has been the average funding maturity of your issues this year, and where you're going to be next year as well? What can we expect in terms of duration of your funding on the Banking side?

Second question is on the Retail Benelux, which is a bit disappointing in terms of level of loan-loss provision. So can you dig a bit into the outlook there in terms of SMEs and also pure Retail? And do you have actually a split of the loan loss in the Benelux between what is SME/mid-corporate versus pure Retail?

And then finally, we see long-term rates coming down sharply in the US and Europe. So could you just update us on the MCEV there, on those businesses? And also on the reinvestment spread, what do we -- where do you think we are going to end up end of 2011 on the -- at the margin, please? Thanks.

Yes. Maybe so on the, Benoit, on the funding side. On average what we have been doing is issuing this year more in the five-year range. I think if you go back to the presentation, page 19, what we try to establish is not so much that I have a target in terms of issuing five-year if you want to create more or less equal buckets of refinancing. So, in that sense, you try to get more 2015, '16, '17, '18 buckets filled right now rather than the earlier buckets. But again, that also has to do with what the markets are prepared to give. But overall a bit longer maturities is what we have done.

Yes. I think what you see on the Retail loan-loss side is, to be honest, we had in the first quarter, and that is what I mentioned at that time, when loan losses were -- made a steep drop, then we really had, on the SME side, we had actually just a fantastic quarter without any incidents at all. Now it's a little bit more turning back to normality, because on the SME side you will still see some loan losses happening there. So it's more a return to normality in terms of levels. So, in that sense, not something that it's a steep increase; it's a bit back to normality. And you see a little bit of an increase in Belgium and you see a little bit of a decrease in the Netherlands.

Yes. On the effective lower interest rates, I think, first of all, we provide some earning sensitivities on interest rate movements within the quarterly report, so you can go back and look at those.

With respect to MCEV movements, I think you know that don't publish MCEV. But I think good to go back and look at the annual accounts, where we do give the available financial resources, which is a decent proxy for it. And there you can see some of the interest rate sensitivities in that disclosure.

In respect of interest margin, we don't really go into that level of detail in terms of what we disclose, so I'm afraid I can't give you that level of granularity. What I can say, in terms of the market, the mid-corporate still remains demand somewhat muted.

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

Good morning. Jan Willem Weidema, ABN AMRO. A few questions. Firstly on the sequence of the Insurance IPOs, when will you take the decision on which business to IPO first and when will you inform the market?

Secondly, on the EC court case, do you still expect a possibility that you will settle with the EC before the Court comes to a verdict? Those are my questions.

Yes. Jan Willem, with respect to the timing and the sequence, we cannot give you any more guidance than that we will be watching this very carefully. We're watching the market carefully. The only thing we can do is we need to make sure that we are ready, and that's what we are working on. We are ready with respect to what needs to be done performance-wise; that we are ready with respect to the separation, the preparation that needs to be done; that we have everything in place to be a standalone company on both sides of the ocean, and in the US as well as here, for Asia. And that's what we are working on. So whoever is first will be determined by the market and whoever is ready.

With respect to the European court case and are we talking with the European Commission, no, we are not talking except for regular updates and discussions on specific topics. But we are not negotiating in any way. I think we want to hear what the Court has to say. We're eager to hear that, of course.

Thank you. The next question is from Lemer Salah. Please go ahead.

Good morning, everybody. Lemer Salah from SNS Securities. A couple of questions from my side. First of all, a follow-up question with regard to the IPOs. Well, you mention -- you have mentioned often that it depends on the environmental developments. Can you highlight which factors are crucial for you to come up with an IPO? That's my first question.

Secondly, can you elaborate on the disentanglement of ING investment and how this process is evolving at this moment?

And my final question regards what can ING do beyond disposal of the Insurance unit and Westland Utrecht Bank to reduce complexity even further and sharpen its focus? Thank you.

Okay. I did not really catch the environmental issue related to the IPO. Did you relate to the weather or so, or --?

No. I mean the market, market-wise.

Okay. Yes. No, I think, yes, the market, of course the market has to be ready to accept an IPO. And we also want to do that at a price that we think is acceptable to our shareholders. And I don't think at this level that we can say that we are very satisfied with the way the market is today. And I don't get the impression that they are ready for an IPO right now. So we have some time.

We don't need to worry about that. We have time until 2013, so the same time as your [friends] here in this project. But it doesn't mean that we are sitting here waiting. No, we are sitting here preparing ourselves, to be sure we are ready when the market is ready for us.

I'll take the last question. I did not hear the second one. But disposals, further disposals on complexity, yes, I think what we have done is we have really de-complexed the organization quite a lot already. If you look at the slides, there are some couple of slides that we have to show what we have done in a very short time, I think it is just incredible what has happened here. And we continue with the work that we are doing, and certainly the work that Koos will be doing in his new capacity as Vice Chairman of the Bank, where we are looking at new opportunities related to new regulation and how can we then structure our balance sheet in the best possible way relative to our strategic positions. And operationally I think that will be very important.

But we have done, I think, a lot of work on making our organization simpler, more compact. I think we have a lot more focus. So I don't see, at this moment, a big need to really say -- yes, we have additional things on the agenda. But we're working our normal schedule that we have outlined for you, and I think that's what we are staying with.

What's the second one?

Well perhaps I can rephrase my second question. Can you update us with regard to the Investment Management unit and how this process of disentanglement or even other possibilities are evolving at this moment?

Matt?

Yes. We had actually taken most of the disentanglement steps back in 2009 when we announced that we would really try to make this a standalone Investment Management organization. So it's always been part of Insurance. And since 2010 we reported it separately. We have arm's-length pricing agreements already in place, so that goes along quite well, and not a lot of change. The only thing that's happening right now is since we go with the two IPO scenario, we have to take the additional step of getting the organizations right in the US and right in Eurasia, but that goes along, I think, quite smoothly.

Thank you. The next question is from Matthias DeWit. Please go ahead.

Yes. Good morning. Matthias DeWit from Petercam. A few questions from my part. First of all, on the insurance capitalization, you remain cautious despite the retention of [the later] proceeds and the recent debt-to-equity swap. I wondered whether you see any regulatory pressure from Solvency II or in the US to further strengthen the capital base going forward prior to those IPOs, because you haven't provided a lot of details in this respect.

Then second, on ING Direct. How confident are you on getting regulatory approval in the US following NCRC's attempt to block the transaction?

And then the last question is on the NPLs of the real estate segment. We see them creeping up a bit quarter after quarter. We also see some worrying signs in several countries. Could you maybe comment what's happening in your book and where you see the NPLs of this segment going forward? Thank you.

By the time that we would go to market with our Insurance companies, of course, and certainly in the meantime as well, we will have discussions with our regulators to make sure that they are comfortable. And certainly, if you have many countries involved, there are also many regulators that we will have to satisfy. So that is a process we will be engaged in. And that's one of the things we need to do. And that's why it takes time and preparation time to get all the approvals really well lined up. So that will take some time.

With respect to ING Direct and the NCRC, yes, I think that's an issue that you need to discuss more with Capital One. They are in control of getting all the approvals. I think I'm not in a position to really comment on that.

With respect, Koos, with the real estate?

Yes. Maybe on the real estate side, a few comments. The first is if you looked at Q1, it was exceptionally low. If you look at Q2, it picked up a bit again due to some larger files. Overall, what I stated the trend is, is that we see a gradual decline of our overall loan losses to the levels below the average of last year, and that is what you see happening.

But the market share of real estate in there will pick up because that is a type of lending which just has a longer cycle than some of the other parts. And if you take then, by and large, the other part, which is that we have a EUR34b portfolio and you see EUR110m there, which is not a significant part, evidencing that you have a portfolio in great difficulty. I would say, on the contrary, it's holding up well. And overall, if you look at real estate, it's modestly declining in terms of overall exposure. So those are my remarks with regard to the real estate in the total perspective. So, in that sense, no, not to get too excited too much about it.

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

Yes. Good morning. Just on the stake in SulAmerica, Mr. Hommen. Can you give us an update? Is it still reasonable to assume you will dispose of it in the coming months, say before year end, despite the recent volatility? And what's your view now on that? Thank you.

Okay. Good morning. Yes, the disposal of Latin America is with the GrupoSura. And we are working together with them very hard to make sure that we can get it done as quickly as possible. But it will take some time, because we need to get approvals here as well, local approvals in the various countries we operate in. Our plan is to do it before the end of the year, and I think that it is also that the plan is that [Sura] is looking at it.

The other question you asked was related to Brazil, I think. Yes, there we -- I cannot give you any further comments. We -- it was not included in the transaction we have done with Latin America, with GrupoSura. And we will at some point come back to you with an update on where we stand on that one. But at this moment I have nothing to add.

Thank you. The next question is from Francois Boissin. Please go ahead.

Yes. Good morning. This is Francois Boissin from Exane BNP Paribas. Coming back to your Insurance operations, could you give a bit more detail on the EUR111m positive impact that you saw on alternative assets and [CMOs]? And the follow-up question on that is when -- in what timeframe do you see a 10%-plus return on equity for Insurance operations?

Second question is on the sales. At Insurance it seems that you are quite behind your long-term target there. Could you give us a bit of comment on how you see things going forward?

And the last question on Insurance in Belgium. Why not include in an IPO? Could you give us some background on the choice to actually sell it separately? Thanks.

So let me take the first couple of these. I think the EUR111m gain that you saw in the US was roughly split 50/50 by alternative assets like private equities, and also a gain on the result of a portfolio, CMO securities that are mark-to-market. And effectively that one is, even though interest rates are down and normally we would expect to see gains in this as people end up not refinancing their mortgages, the issue in the US now is that you've got home prices that are significantly below mortgage -- where mortgage balances are, so you don't see refinancing. And that's what's driving that. But it's about 50/50 with the private equity and that [CMO-B] asset class.

As to the 10%, are we -- we've said that, I think in the April 2010 Investor Day, that we would shoot for something north of 10% by 2013. We have not revised that estimate. We would expect to keep it in that same area.

With respect to sales, it's actually quite a mixed bag in the quarter, because even though sales are, I think, a little bit down from the year-ago quarter, what you're seeing is different things in different regions. You're seeing, for example, in Asia, where you have sales that include Japan as basically flat to last year. But if you exclude the COLI sales in Japan that we had in the second quarter of last year, I think the rest of the APE was up something like 14%. So the region was actually quite good.

Similar thing that's going on for the US business, where you had overall, again, 12.5% decline excluding currencies, but you had stable [value] sales, which are actually quite low margin. They were down 58%, whereas the sales of the core retirement services businesses were up 17% and life insurance was up 32%. So it's actually quite a mixed bag. And I guess the bottom line is that we're getting -- even though the top-line sales number is down, we're actually getting the sales in the areas that we want them.

Yes. With respect to Belgium, we have to separate the Insurance operations in Belgium from the Bank. And if bancassurance has worked anywhere, it has in Belgium. You'll see that the Bank really is the channel that has integrated insurance in the operations of the Bank. So it is quite a cumbersome process to separate them. And then they need to find a place where they have a home as well with someone who wants to sell these products. And I think we are evaluating all the options that we have to see how that can be done. But we have basically very strict orders what we need to do. We simply cannot renege on that. This is a requirement that we have as a result of the European Commission and we need to execute that.

Thank you. The next question is from William Hawkins. Please go ahead, sir.

Thank you. I just have some questions of detail about your Southern European sovereign slide. Can I confirm, the impairment that you've done on Greece, have you impaired that to the market price at the end of June or to some other reference period -- reference date? And what will be the sensitivity now to future market price movements up or down?

Secondly, the EUR123m for the Insurance business, is that net of any sharing of losses with the policyholder, or has the shareholder taken the whole whack? And can you explain to me the logic of whatever the answer is?

And then finally, can I just confirm that basically we're seeing the full picture here of your sovereign exposure, and that you haven't, for example, only shown us AFS and ignored held-to-maturity or loans or whatever? And specifically on that point, is there any synthetic exposure from CDS underwriting in the Bank or the insurer that may not be captured in this slide?

Okay. I'll answer that. We've taken the impairment for bonds maturing up to 2020. We've taken that to market value, which is standard IFRS accounting. That is an impact which is higher than what may be the ultimate 21% targeted cost from the [IAF] agreement. So the mark-to-market is at June 30, which is the date at which we took the -- the accounting closed the book and took the impairment charge. So standard vanilla IFRS accounting.

Going forward, it does mean that if the market prices were to drop below the level of June 30, you could have a further hit to P&L. On the other hand, which is hopefully more likely, is when the IAF agreement is started to be executed and Banks have signed, insurers have signed up, start to exchange their bonds under the four options that are provided, you will see hopefully the prices tightening towards the price implied by the exchange, which could result in a positive. We have no synthetics. There are no trading book or held-to-maturities, so this is it, which is -- we've disclosed the full amount.

On the EUR123m impairment that we took in Greece, that is a -- it is a gross number, and there is a very small amount of it that would be subject to discretionary policyholder profit sharing, but it is a very small amount. So basically our liabilities are in euros.

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

Good morning, everybody. Just a quick question, please, again on progress with regards to the Insurance IPOs. Where are you in terms of legal restructuring of the insurance entities ahead of the IPO? And I guess the key question I have is whether -- the Insurance holding company, whether you've decided whether that Insurance company will ultimately stay within ING and the operations underneath it go, or it goes as part of one of the IPOs.

Okay. Well, that's one of the topics that we are working on at this moment. Legal restructuring is one of the first things that you do, and then you have -- once you have determined how you do that, you need to do the capital planning around that. And then by the time that you have done that and all the other things are in place, you're ready for, when the market is ready, to go to market. Now we are in the process of all doing that. We are looking at how do we structure the holding company. Is it with or without? That is still one of the topics to be evaluated further. And once we have that all figured out and decided, then we can communicate that back to you.

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

Back to the European Commission. It's not clear to me what you're hoping to get now from the European Commission. So could you just outline what you would like to see happening from your arbitration with the European Commission, and what you would like to change about your agreement? And could you be as clear on that as possible?

And then secondly, just coming back onto the leverage ratios. Who is giving you the guidance that your leverage is too high? Is it rate agencies? Is it the regulators? Or is it some other participants in the market? I'm just wondering how you get to that conclusion, particularly given the difficulties that are clearly apparent when you try to compare leverage amongst financial groups, both in terms of definition of debt and obviously in the calculation of shareholders' equity. Thank you.

Yes. Duncan, I cannot give you more color on the discussions we have with the European Commission. I have said earlier, we update them. We make sure that we are in touch with them when needed on particular files.

With respect to the court case, the only thing we can do here is wait. We have hope. But we have -- there's no more than that. And of course if we did not believe that we had a case, we would not have filed that to the courts. So all we can do now is wait and see what the ultimate decision will be and then we can determine further what the next steps will be for us.

Leverage. Leverage has to do with how the market sees it. We do comparisons with peers. It's not so simple because, as you know, not everybody is showing very clearly how leverage is working in these companies. The other thing we do is we, of course, we have our discussions with rating agencies and we have our plans with respect to what type of company do you want set in the marketplace and what rating do you want. And all that will determine, at the end, what type of leverage that we put into these companies. And, as I said earlier to another question, we are still working a lot on the legal part, how the framework will be and how exactly it will look like when we go to market.

All that has to be done before we can really be extremely specific on how the leverage at the end will be. But you can be assured, we're working on all these angles. It's laborious work. Sometimes it's a bit frustrating, because you need to have a lot of approvals for local regulators as well for the legal part. But we're doing it as diligent, as quick, but also as well as we can do it.

Thank you. The next question is from Cor Kluis. Please go ahead, sir.

Good morning. Cor Kluis, of Rabobank. I've got a few questions. First of all about ING Direct, especially ING Direct Germany, the pre-tax profit there increased quite something in the second quarter, while the deposits did not rise and mortgages did not rise either. What is going on there? And can you highlight a little bit if this is a normal trend rate or just a model change somewhat there?

Other question about ING Direct. Do you see, especially in the big countries, Spain and Italy, some flight to safety, maybe not on a volume basis but on a net interest margin basis, or especially the last two months?

And third question is about the US Insurance solvency. It's now 493% RBC ratio. It's better than peers. Is it high enough, given the fact that ING has some variable annuity business over there? And maybe you can highlight, in that perspective, a little bit about the reserve and adequacy of the variable annuity business, how that has been developing. That were my questions.

On DiBa, yes, you did note that the deposits had not grown in the quarter. But if you look back you'll see that there's been a significant growth since the beginning of last year, some EUR5b. So the promotional campaign which helped drive that has stopped, which helped a bit on margins. So it's the flow-through of the volume growth in preceding quarters and healthy margins is what's driving it there.

Yes. I think, if you look at the ING Direct part overall, what you can see is that we are keeping our clients and our deposit holders, and we are not paying the top rate in the market. So implicitly what you clearly see, Cor, is that the savers who stay with us, it's either for the service or for the safety. So in that sense we are benefiting for that and we don't have to push on all engines there to pay a very, very high rate.

Yes. And on the US solvency, we're obviously pleased with where it's gone. It's increased to 493% in the operating companies so, with that approaching 500%, it looks very strong again in the operating companies. But, as Jan has kept on saying about capital structure, we want to be really cautious about how we go into this and how we look at capital structures as we do the -- as we prepare for the IPOs.

With respect to the reserve inadequacy, I believe, on the US VA business, in the last quarter we were sufficient at the 50th percentile level, which is really leading for that business. And I think the number was about EUR1.1b. And I think it's come down a little bit to EUR900m, something like that, given the equity market decreases, but still comfortably there.

Thank you. Mr. Hans Pluijgers has a follow-up question. Please go ahead, sir.

Yes. Two follow-up questions. First of all, going back on the [C-Fee] surcharge, I understand you have -- you expect to be in the lower buckets. But with respect to the local regulators, do you expect that they will charge some additional surcharge above those [C-Fee] -- normal [C-Fee] surcharge, because, of course, ING is relatively big for the Dutch economy?

And secondly, coming back on Poland. How do you see developments there with respect to consolidation? And also what are your abilities after you have repaid to the State in May of next year? Are you able -- allowed to make any acquisitions, or is the divestment of the Insurance operations still there and an issue before you're allowed to do anything with respect to acquisitions?

Yes. Maybe on the C-Fee part, I think -- and again, all of this has to be firmly decided, but we tend to look more like a [GC-Fee] than an [LC-Fee]. So in that sense, yes, we will be in any bucket defined by the [GC-Fee]. And that means I don't think we will get a local [C-Fee] buffer on top of that. So it's just a [GC-Fee] where I think we are heading to.

With respect to Poland, yes, there was a consolidation going on and we're watching that, of course, with a great deal of interest. We cannot make acquisitions. ING cannot make acquisitions at this moment. And, of course, once we have repaid the Dutch State, that condition will be liberated, and we can. But first of all is still to repay the Dutch State before we can make acquisitions as ING.

Thank you, sir. The final question is a follow-up question from Mr. Jan Willem Weidema. Please go ahead, sir.

Yes. Thank you. On government bonds, I've been seeing some of your competitors selling huge chunks of Italian bonds. Is there any agreement or steering from the [ABA] or any other organization, to prevent massive flow from banks to the markets?

Yes. I think you mentioned the [ABA], Jan Willem, but the [ABA] is the vehicle which runs the stress test, so I don't think they are the ones. But -- and again, overall, I think there's no sort of government or public instruction like that what I am aware of.

Okay. This seems to be the final question. Thanks, everyone, for participating in the call and for your questions. We hope you all have a very good day. Thanks again. Bye-bye.

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