ING Groep NV (ING) 2011 Q4 法說會逐字稿

Thank you for holding, ladies and gentlemen. Good morning. This is Carol welcoming you to the ING Q4 2011 conference call.

Before handing this conference call over to Jan Hommen, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement.

A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities.

Good morning, Jan. Over to you, sir.

Good morning. Thank you. Welcome, everyone, to the ING 2011 results conference.

The fourth quarter was a challenging period. We had very volatile markets. We saw a deepening of the crisis in Europe. And in this uncertain environment, our first priorities were to protect our capital and to make sure that we further de-risk the organization. The impact of hedging and de-risking and further impairments on our Greek government bonds took a toll on the results of Q4. Nonetheless, we were able to end the year with underlying profit of EUR3,675m, which was up 15% compared to 2010.

I plan to talk to you through the presentation. At the end, we have Mike Smith, our CEO of the US Annuity Business here. He will give you some more detail on the assumption update that we preannounced in December. And then afterwards, Patrick Flynn, our CFO; Wilfred Nagel, our CRO; and Matt Rider, the CFO of the Insurance EurAsia Business, are here together with us, and we are available to answer your questions.

So let's begin this slide number two. The underlying profit, up 15% from a year earlier. But Q4 we had a loss of EUR516m, which reflected the lower results of the Bank and the loss at Insurance. As I said earlier, the uncertain environment, we felt our first priority had to be protect capital and to further de-risk the -- reduce the risk of the organization. And I think that's where we have paid our -- given our highest priority to.

The result of the Bank in Q4, underlying pre-tax, came in at EUR793m, and that included impairment charges of EUR300m and EUR109m losses related to de-risking our positions.

Insurance had a loss of EUR1,348m in Q4, mainly driven by the charge of EUR1.1b that we took in US Closed Block VA business. Also we had losses on hedges, hedges that were there to protect our capital position, in particular regulatory capital. Plus we had impairments as well as some gains as a result of de-risking exercises. When I take it all together, then I see that operating result in Insurance increased by 20.4% from a year earlier to EUR478m, and that was also supported by higher investment spreads and very strong cost control.

On slide number three, you see that the 2011 pre-tax result on the Bank was down from last year, but it was entirely due to impairments on Greek government bonds and losses related to de-risking. By the way, 2010 included some gains on the sale of two Asian equity stakes. Excluding these items, the full-year pre-tax result was slightly higher even than last year.

The pre-tax result of Insurance improved this year compared to last year, and that was despite the impairments we took on Greek government bonds and the charge of the US Closed Block VA assumption changes. Operating result improved by 41.5%, showing the results of the plans that we initiated in 2009 to further improve our performance. As a Group, we had an underlying profit -- net profit of EUR3,675m, and on a net basis we even had a net basis of EUR5,766m, which was double what it was last year.

Slide number four we have specifically put in to help you with your analysis of the numbers, because there's a lot of noise in the numbers. I think this makes it easier for you to compare. And you can see quickly here the actions that we have taken to de-risk the balance sheet, the priority we have given to protecting our capital with hedging, and the impairments we have taken on the Greek government bonds. And there were a number of other one-offs, of course notably the VA Block that we were announcing. So, if you compare all this, then you see that the Group underlying result before tax declined by 8% compared with the previous quarter -- with the quarter in 2010.

Slide number five. We took the charges of EUR199m on impairments of Greek government bonds, so we have written them now down by almost 80%. And you can see that we further reduced our exposure to countries like Greece, Italy, Ireland, Portugal and Spain by EUR1.8b in Q4.

Slide number six, capital ratio. The Core Tier 1 remained stable at 9.6%, even though we had an increase of risk-weighted assets of about EUR10b as a result of the introduction of Basel 2.5. Solvency I ratio for insurance and RBC ratio for the US remained stable as well in Q4, despite the climb that we saw on interest rates and the market volatility that we witnessed in Q4. So that shows that the capital protection hedges that we put on in order to protect our regulatory capital really were effective.

On page seven, you see the summary of the progress we have made on the restructuring with the EC. We had hoped that we could have known today the result of the decision by the Fed on ING Direct, but we understand it will be coming now on Monday, February 13. We completed the LatAm. We have done a lot of work on legal separation and capital planning. We paid the state another EUR3b in 2011, so we have made now the total payment EUR9b, including EUR2b of interest and premium. We have done additional divestments in the Bank, in our real estate investment management and car lease.

And as we announced in January, the market conditions for doing IPO at this moment are not that supportive, so we have decided to explore different options for our Asian business and our ING investment management businesses in Asia as well. So we will continue to work on preparing for a standalone future of a European Insurance and IM business, including possibly an IPO. And we continue to prepare our US insurance business for an IPO.

Slide number eight. The divestments that we announced last year, together with the liability management transaction that we completed in December, have also strengthened our capital position in the Bank and helped reduce the leverage in the Insurance organization. Our next priority is to reduce the leverage in the Group and to repay the Dutch State.

We want to repay the state as quickly as we can, and so we will certainly try to repay at least part of that in May of this year. That depends on market circumstances, of course, and we need to get approval by the DMB, but I hope that that's possible. And ideally, we'd like to complete the repayment of the state this year, but with ongoing volatility in the euro zone and these increasing requirements of regulatory capital, I think we need to be careful that we are not jumping further than we can. So we will take a cautious approach, as I've said earlier, to our capital position, but we remain highly committed to repay them as quickly as possible.

On page number nine, you see that the liability management action, along with the closing of the sale of our Latin American Insurance business, has helped to reduce the debt at both the Group and the Insurance business. Core debt decreased by EUR0.5b, and the majority of the proceeds of liability management have been realized within the Group. The financial debt in ING Insurance declined, and we applied basically the proceeds of the sale of Latin America to do that, partially offset by some injections, predominantly in our Dutch insurance entities, of capital to offset some negative impacts of volatility.

Now, going to the Bank, page 11. Return in the Bank came in at 10%, return on equity. It's a bit at the bottom of the range of our ambition for 2015, but still within the range. And that was despite lower income, which was impacted by the impairments we took in Greece and the losses from de-risking our balance sheet positions, but also included in 2010 for the comparison, EUR275m of capital gain. So when you eliminate that, you see that our numbers this quarter were basically in line with last year.

Decline in income has led us to increase our cost/income ratio to 59.6%. But if you exclude the market impacts, it was down to 55.4%. And our ambition, to repeat it again, is to be at 53% to 50% by 2015.

Loan losses were flat for the year at 52% -- 52 basis points, but elevated compared to the normalized level of 40 to 45 basis points.

On page 12, again you see a comparison to make it easy. What happens, when you compare Q4 this year with last year, with all the noises that were there, and then you see that the underlying decline in income was only 5.8% compared with last year.

Page number 13, main element here is the addition to loan loss provisions. That increased to EUR530m, and it was mainly due to SME and mid-corp portfolio in the Benelux. Underlying result for the Bank came at EUR793m for Q4.

Page 14, the net interest margin increased by 5 basis points, basically as a result of financial markets. You may remember that in Q3 as well, because of financial markets that had declined, so it came back up by 5 basis points. We see a bit of pressure in the Benelux in particular on the savings margins. Also in ING Direct we see some pressure. But we also see that especially the commercial bank was able to make some adjustments in pricing. And I must say, in general, our pricing discipline I think is pretty solid here, and that reflects the net interest margin.

Page 15, we collected a lot of funds in Q4, EUR8.1b, spread in EUR5.6b in retail and EUR2.6b in commercial bank. Well, that's very positive. Net production in residential mortgages was EUR3.9b in Q4 and the net production to SME and mid-corporates was about EUR0.8b or EUR800m. I must say that demand for credit remains subdued in the economic uncertainty that we see in the markets in which we operate.

Page 16, expenses. They were up 1.2% compared with a year ago, which is what we had indicated in our guidance, low single-digit increase. Again here, I think our cost control is pretty solid. Operating expenses declined 2.8% in Q4 compared with the same period a year ago. And compared with the third quarter, there was an increase of 2.4%, but that basically had to do with higher marketing expense and some goodwill impairments we took on some software. Cost/income ratio increased to 58.2% if I eliminate the market impacts, also I think as a result of the lower income that we noticed.

Page 17. Here you see that the weakening economic environment, and with the crisis shifting to the real economy, that it's becoming evident that we will have higher risk costs. In the quarter there were EUR530m; that is equal to 65 basis points on the average risk-weighted assets. If we exclude ING Direct US, then the net addition would have been only 61 basis points in Q4. We expect that going forward they will be at an elevated level, basically at around these levels in the next quarters.

Page 18, non-performing loans, they remain stable at 2%. We saw an increase in risk costs in the SME and mid-markets in the Benelux, and we had some specific files in general lending, and some in the Dutch mortgage portfolio, but very minor. You can see that the Bank non-performing loans as a percentage was stable at 2% and our real estate showed a relative strong decline, but it was offset by slightly higher NPL ratios for SME, structured finance and general lending. Our watch exposure was a little bit elevated compared to the third quarter, but not alarmingly so.

Page 19. You see here that de-risking our balance sheet has really taken hold. We have reduced our investments to EUR114m (sic - see presentation) at the end of the year; that was EUR126b last year. And you also see the decline was mainly due to the reduction of ABS securities, some financial institution bonds, and we were selling the Southern European government bonds. Real estate in the Bank declined to EUR2.9b; that used to be EUR4b at the end of last year.

The quality of the balance sheet, page 20, has improved. You see that -- which was part of the objectives that we had and that was explained during the Investor Relations Day that we had in January. This will be a gradual evolution, but we saw a slight reduction in the overall balance sheet due to lower trading assets and the amount due to banks.

The change of the banking external reporting, that's page 21, a few comments here. We have made some adjustments in our reporting lines. and going forward, we will report separately our retail business, our commercial banking business and the corporate line. We will add Germany as a country in our reporting, because that is becoming more important in our strategic thinking. And the commercial bank will be more aligned WITH the management structure that we have today. And we will make of course restated historical numbers available before we will announce the quarterly results.

Now let's go to Insurance. Good progress, I must say, towards the Ambition 2013 objectives. Underlying result clearly impacted by the US VA charge, but the operating trend is quite positive. Investment margin improved. And the administrative expenses were tightly controlled and came in at 39.8% in 2011. Return on equity is positive, but as you can see, we still have some work to do in order to get it to double-digit levels.

Operating result, page 24, of Insurance improved year on year, rising by 20.4% to EUR478m. Higher investment margin, lower interest cost in the corporate line and lower expense. A decline from the third quarter mainly reflects that we had lower fees and premium-based revenues and modestly higher administrative expense.

Then, looking at page 25, you see that the investment margin increased 15.5% to EUR440m compared with Q4 last year. The rolling four-quarter average investment spread is now at 106 basis points. You may remember that the target was 105 basis points, so we have beaten the target. However, standalone, you see that there was a decline to 102 basis points, and that was the impact of de-risking measures that we took basically in the Benelux. So we continue to expect that the investment spread will gradually decline in 2012.

On page 26, you see the fees and the revenues slightly down compared to the same quarter last year. You see that we had higher hedging reserve cost than the US Closed Block. And the impact of the pension from regulatory changes in Poland and Hungary came through. Technical margin was better by EUR35m, and that mainly had to do with morbidity and mortality results in Japan and Korea.

Then, page 27, expenses were 4.9% lower than a year earlier. So, again here, very good cost control. Compared to the previous quarter, they were up by 2.5%, but it was mainly due to foreign exchange rates. And the ratio came in at 41.8%. That's an improvement versus the fourth quarter of last year, when it was 43.4%.

We expect a little bit of upward pressure in 2012, because we are working on many, many different projects. One of them is Solvency II. And some of the synergies of the separation may come through, but we will be very tight on our cost control, as you can expect from us.

Then slide 28, and some explanation of the results. Starting with the operating result, you see the charges we have taken for the Closed Block, the losses on the hedges for protecting regulatory capital, a gain from the de-risking, the change in provision for the guarantees on the separate account pension contracts that was net of hedging, and we had some non-operating items due to market volatility, all leaving us with an underlying pre-tax result of a negative EUR1.3b.

Now, with that, I would say let me hand it over to Mike Smith, who will have a few comments on the remaining slides. And then we will take it back and we will deal with your questions. Mike?

Thank you, Jan. Given the significant impact of the US VA assumption changes in 4Q, we wanted to recap the actions that have been taken in the Closed Block. So, on slide 30, just a brief recap of what we did in the fourth quarter with the assumption change.

We conducted a comprehensive review of the assumptions, lapse, annuitization, utilization of withdrawal benefits and mortality, and that resulted in a charge of EUR1.1b. The experience that we used to evaluate our assumptions included both pre- and post-crisis experience, and we've set our assumptions to be reflective of that experience. We think that this puts us in line and is largely -- and largely reflects the great volatility that we've seen over the last four or five years.

Now, going forward, policyholder behavior is influenced by a lot of factors, and that makes it very difficult to predict ultimately whether the assumptions will prove accurate. In any event, we think that the changes we've made indicate that ING has made a big step forward. So while this charge was unfortunately necessary as part of our normal assumption review, I'd emphasize, and we'll talk in the next slide about, all the actions we have taken to strengthen the Closed Block VA balance sheet.

So, on slide 31, as you can see on this slide, after we stopped writing this business effective with the decision in 2009, we've set out and completed a number of measures over the past two years to address this block. We've increased the transparency by reporting this block as a separate line of business. We adopted fair value accounting for the guaranteed minimum withdrawal benefits. And we significantly increased the hedging for interest rates. And most recently, as I just mentioned on the previous slide, we updated assumptions in the fourth quarter as another large step.

Largely as the result of these numerous measures, results -- reserves have more than tripled since 2009, as you can see on this slide, and the DAC balance has been fully written down, overall significantly strengthening the US VA Closed Block balance sheet.

So, on slide 32, two things to talk about here on this slide. The first is a disclosure we've added to give you greater detail on the nature of the US VA Block. We've split out account value and IFRS reserves by benefit type, and we've provided the net amount at risk, EUR4.5b, for living benefits.

The definition of NAR is shown in some detail on the bottom of the slide, but an easy way to think about this is that it's the present value of the income streams that would be paid to policyholders if they all immediately utilize their benefits, less the account values. You can think of the account values as the funds that would first be used to offset the payment of those benefits. In other words, it's a simplistic way to look at exposure.

The second point is to give a little more detail on the goals of our hedging program. As you can see from the slide, interest rate hedging is aligned with the sensitivity of the base IFRS reserves. We don't hedge interest risk for GMIB or GMDB, as reserves are insensitive to interest rate movements. We do fully hedge on the GMWB, withdrawal benefits, and on some of the small block of other living benefits.

Equity market risk is hedged for all benefits, although the hedging is not aligned with base IFRS reserves for the IBs and death benefits. This is because IFRS reserves use SOP 03-1, and they are relatively insensitive to equity market changes. We focus our hedging instead on protecting against changes in the economic value of claims.

We also place an overriding priority on the protection of regulatory capital, which does not use IFRS accounting rules. This means that on occasion, and as is the case now, we will put additional hedge positions in place to ensure regulatory capital is protected from changes in markets.

That priority on capital, on slide 33, has an impact on our IFRS earnings sensitivities. The table illustrates estimated earnings sensitivities to market movements during the first quarter of 2012. Equity hedge results will cause IFRS earnings volatility, as the primary focus is, as I mentioned, on protecting capital.

In addition, there will be charges -- there may be charges to restore reserves to the 50% confidence level in down equity market scenarios, or if interest rates rise. Reserve adequacy will improve in rising equity scenarios, but this will generally not result in an immediate earnings impact.

Earnings sensitivities may change significantly in future quarters, based on changes in equity markets and interest rate levels over time. This will occur if a significant reserve adequacy buffer is developed in future quarters, as a result of increasing equity markets or decreasing interest rates. We will update these sensitivities as market conditions evolve.

And now I'll turn it back to Jan for some closing comments.

Thank you, Mike. Okay. So let's wrap it up.

Q4 was challenging. We saw very volatile markets and we saw a deepening of the sovereign crisis in Europe. The environment being uncertain, our first priority was to protect our capital and to further reduce our risk positions. The impact of hedging, de-risking and further impairments of Greek bonds took a toll on Q4 results. But nonetheless, we ended the year with an underlying profit of EUR3,675m, which was up 15% compared with 2010.

And let's now deal with your questions.

Thank you. (Operator Instructions). The first question comes from Mr. Tarik El Mejjad from Nomura. Please go ahead, sir.

Hi, good morning. Thank you for the call. I have two questions. The first one is regarding the asset quality weakening. First of all, I would like to understand where is that coming from exactly? You mentioned SMEs, mid-corp, but that differs a lot from the guidance you gave recently in the Investor Day. So, if I understand well, midterm, that means 2012, guidance is more 60 basis points loan loss charge, and goes to 40, 45 later on? Is that correct? When you say coming quarters, how many quarters of that?

And second question, can you give us please an update on the disposals? You reiterated that it's ongoing and you're still looking at different options. There were a lot of press reports about Asia, but we haven't heard anything about Europe, US. Can you update us, please, on that?

And finally, on WestlandUtrecht as well, if there's any progress on that. Thank you very much.

Wilfred, you take the first one?

Yes. On asset quality in the areas where we see weakness, I believe that what we're seeing is in line with what we said during the Investor Day, which is indeed that mid-corp and SME in the Benelux is one area.

To give you a bit more flavor of where that's happening, in terms of product types, we see some weakness in leasing and real estate finance. And if you were to look at sectors, the main ones where we see it are transportation and logistics and construction. On the other hand, we did see some declines in risk cost in structured finance and also, for example, in ING Direct in Germany.

On your question with regard to where we see this going, well, it's very early in the year. It's a very uncertain, as Jan said earlier, economic environment. So it's very hard to give any concrete guidance at this point. I think the best we can say is we expect elevated levels for some time to come.

Thank you, sir. Your next question comes from (multiple speakers).

Okay. No, no. Let me deal with question number two and question number three. Disposal program, yes, you may not have heard much, but we made that announcement only a few weeks ago, that we were going to deal with our Asian insurance and investment management businesses in a separate way. We were reviewing new options and different options. We are in the midst of doing that. We have formed teams to look at all the various things that need to be done when we do this. We will make sure that we can separate the business completely. That's the team working on. Not very difficult, I must say; that's relatively simple.

And in the meantime, we continue to work on redeveloping our plans for Europe. We're very busy with that one. That is a very important exercise in the next few months. And we continue to work on our IPO program for our US business.

In the meantime, we did sell ING Direct in the US. We're waiting for final approval by the Federal Reserve. We had expected that yesterday, but it will come in hopefully some time next week. The plan is that I have a meeting on Monday, February 13.

We have sold our LatAm business, we have sold car lease, we have sold real estate investment management. I think we have been quite busy in our disposal program. So, lots of things going on there.

WestlandUtrecht, we are in discussions with the European Commission, and we expect -- well, we have discussions there. I cannot say what we can expect. They are ongoing. We have presented some alternatives, but it wasn't possible to sell it to a third party. So there are discussions going on with the Commission, but I don't have a final answer here yet.

Thank you.

Your next question comes from Mr. Andrew Coombs from Citigroup. Please go ahead.

Good morning. I've got two questions; one is just a follow-up there on the previous. With regard to the loan loss provisions on the banking book, if I look at page 18, roughly speaking, about EUR70m of the increase is due to general lending, another EUR70m due to the SMEs, another EUR30m due to the retail mortgages. And with all of those, you've mentioned that the NPLs have also ticked up, on that chart on the right-hand side. So I'm just interested to know, is the increase in provisions purely a reflection of the increase in NPLs or -- and your coverage ratio has remained stable, or has there been a big shift or adjustment in the coverage ratio on those NPLs as well, please?

And then my second question is with regard to your outlook statement on the insurance investment margin. You said that your rolling average is at 106, but you expect that to continue to decline as you continue to de-risk. Given that your target is 105 basis points, should we actually be thinking about a lower target going forward, or is it a case of you see that margin perhaps dipping below 100 but then improving again in the long term?

Yes. On the loan loss provisioning, there's a bit of seasonality there, but generally speaking, indeed the provisioning follows the general NPL experience. In terms of coverage ratios, the provisions as a percentage of the total deposits outstanding have gone up a little bit. So there's a bit of improvement in coverage as well.

With respect to the investment margin, you'll see later on as you go into the detail, we are telegraphing a reduction in the investment spread of something between 10 and 15 basis points for the Benelux going forward. So that's on a general account asset balance of about EUR64b. So we'll see that come in over the course of 2012.

As far as setting a new ambition level for all of insurance, I think as we go on we'll be setting separate ambition levels for the US and the various businesses. But a big consequence of the de-risking, particularly in the Benelux, is going to be reflected in the investment spread in 2012. And we -- that's in the detail in the quarterly report.

Thank you.

And by the time that we have -- when we come forward with our update on what we are going to do with Europe, I think we will include also an update on the investment spread that we anticipate at that time.

Right. Thank you.

Thank you. Your next question comes from Farquhar Murray. Please state your company, followed by your question.

Hi. Morning, gentlemen. It's Farq from Autonomous Research here. Just two questions, if I may. Firstly, with regard to the EU court case, I just wondered whether you had any indications on when we might see a decision there.

And then secondly, you've very helpfully given us some extra disclosure on the closed variable annuity book, including the SOP 03-01 reserve on the GMIB book of EUR1b. Can I just ask what the interest rate assumptions are behind that EUR1b reserve? Thanks.

Okay. The first one is a pretty easy answer. We have been notified that the court will decide and make its decision known on March 2, so that we know for a fact. We don't know the outcome yet.

And Mike, you want to give the second question?

Sure. The interest rate that we used to calculate the GMIB is consistent with all of the other IFRS reserving and/or DAC amortization assumptions we make regarding long-term interest rates. That's based on a long-term expectation that we review on a regular basis. At this time, we're not disclosing the actual assumption, but we feel very comfortable that it's a conservative view given the long-term overall interest rate expectation.

Okay. Thanks very much.

Thank you. Your next question comes from Farooq Hanif. Please state your company, followed by your question.

Good morning. This is Farooq Hanif from Morgan Stanley. I've got some questions on the insurance business, if that's okay, and also one request. The request is, you've been very helpful in giving us sensitivities on equity markets for the VA business; I was wondering if you'd be able to provide interest rate sensitivities for VAs but also the Group, and also equities for the Group, because obviously a lot of your hedging loss this quarter was from the Benelux as well. So, I'd just be interested if we could get that information as a request.

But on my questions, firstly, if you sell -- if you dispose bits of the insurance business now, let's say in Asia, for example, do you have to use the proceeds of that to de-lever at the insurance level, or can you actually take the proceeds and pay them up to the holding? So, are there any covenants that stop you? And what would your intentions be anyway, in terms of where you would use leverage? That is question number one.

Question number two is when you look at the slide 32, where you show living benefits IFRS reserve against living benefits net amount of risk, is it useful to actually compare those two numbers? So, for example, if you added another EUR1.5b to your reserving, would that be the same as saying that you're assuming that everybody, basically almost immediately, takes up their option? Could you please comment on that, please?

And just on the investment margin, going back to that, you have given the guidance on Benelux. Is that what we should be assuming for the time being? Should we be just saying, look, there is a 10 to 15 basis point impact and that is it? What is the more overall guidance that you would give on that? Thank you very much.

Okay. The first question, we have no covenants, and the plan at this moment is to use the proceeds to reduce the double leverage of the Group. But we cannot use full, because once you sell the asset in Asia you also lose some diversification benefits, so you will have to also use some of that to reduce the leverage in the holding company in insurance. But the main part of that will be used for reducing the double leverage of the Group.

Mike, you do the second one.

Sure. The question was how do you compare net amount of risk and reserves. And I think it's a reasonable approach to use -- to look at the comparison of the two to try and get an estimate of additional exposure. However, there is a number of important caveats. First, the income benefits as a present value, they are not available as a lump sum to policyholders. Second, utilization is assumed to be instantaneous. There are reasons for -- both contractual and otherwise, to think that that will actually be delayed.

But I think it's -- you can look at net amount at risk versus reserves as one measure. I think you do want to be careful in comparing us to other companies, because the methodologies for income benefit net amount at risks are unclear, and they are certainly not specifically laid out in accounting literature. So you need to look carefully at what disclosure other companies make as to how they do calculate that.

Just to be clear, you are assuming the most conservative. You are assuming that when people can utilize, if there is a money, they will, and there are no lapses. So you are assuming that where contractually possible, it's going to be the better outcome for you?

Actually, that is a good question. Let me clarify. We are actually even a little bit more conservative than that. Even if the policyholder can't utilize it right now, we are assuming that they do. So, for instance, on the income benefit that we sold over the early part of the last decade, there is a 10-year waiting period. And there is a significant amount of those policyholders that are not eligible to elect at this time. However, we assume that they could, right now, today, in order to give a sense of exposure. It's a simplifying assumption to give a reasonable view. Really, in terms of what the exposure is, the reserves are what we focus on as a management tool.

Okay.

And then perhaps the last one on the investment margin. I think the guidance that we have given, the 10 to 15 basis point spread reduction in the Benelux, is a reflection of the actions that we have taken up through the fourth quarter. Obviously, if there is any other actions that we take, these are going to have an impact on the results going forward, including dividends that we might receive on public equity, real estate returns, many other things. But we thought that it was very important that we telegraph that there would be a decline in the margin, just as a consequence of the de-risking that we have done.

So, just to clarify that again, so assuming that you give no other update, what you are not saying is that because you've got a low yield environment generally, that there will be a gradual decline in that margin? What you're saying is there's specific steps that you have taken that have 10 to 15 impact, but apart from that, if -- there's no ongoing impact forever, ad infinitum, if yields remain low? Is that right?

Well, there would be, but it would be small impacts over a very long period.

Very long time. Okay.

Yes, yes.

Okay. Thank you. That is very clear. Thank you.

And in response to your question about interest sensitivities for the overall Group, what we try to do is give sensitivities where we think it's meaningful. We have given more granular ones on the VA and, as Mike says, these will change and you have to watch them very closely. In addition, the insurance business, in the financial review, we do give an overall market risk sensitivity which is there.

On the bank side we don't, because it depends a bit on how customers react and how markets react, as opposed to what happens to outright levels of interest rates. So like I say, we try and do it where we think it's meaningful.

Okay. Thank you very much.

Thank you. Your next question comes from Mr. Richard Burden. Please state your company, followed by your question.

Hi. It's Richard at Credit Suisse. I just wanted to follow up on the loan loss provision trends, in particular get some extra color on the developments in the Dutch retail mortgage books, because that was obviously quite a big step up Q-on-Q, Q4 versus Q3, and it's obviously an area that has come under increased tension of late in terms of the affordability of Dutch properties, etc. Can you just run us through your current thoughts on developments in the Dutch residential housing market, and where we can possibly expect those loan loss provisions to develop over the next couple of quarters?

Yes. Maybe to start off with the facts and the numbers as we see them in Q4. Slight uptick in NPLs; if you compare to the end of the previous year, you are looking at 1.1% as opposed to 1.0%. The arrears, again a slight uptick; slightly above 2% now, where they were slightly below before. So there is a gradual decline, if you like, in the quality of the portfolio.

The portfolio obviously is a significant one, so we are watching it closely. You are right; there is a lot of attention in the press and in analyst reports on the Dutch mortgages. A lot of the attention -- if you think about this portfolio in terms of PD and LGD, a lot of the attention is focused on the LGD side, where the high loan to values and the decline in property prices figure prominently.

First of all, we are not seeing much of an impact of that in our books. You are right; it was a bit of an uptick in provisioning for the mortgages in Q4, but the absolute levels are still very slow. And if you think about it, the LGD discussion is influenced by a number of things. It is true that debt levels are relatively high. It's also true that net financial assets of the Dutch population are high in relation to GDP as well by European standards. So there are offsets there. And we see that also in our portfolio, where quite a number of these mortgages are also linked to secondary collateral, which is quite meaningful.

On top of that, of course, the whole LGD discussion really only bites if the PDs go up. And it's important to keep in mind that, first of all, we don't really see that happening. It's closely correlated with unemployment and divorce rates. Now, divorces rates are, I guess, not very linked to economic development, so the correlation there is low. On the unemployment side, if we look at our own house view, then we do see employment slowly going up over the next two years, so we do our sensitivities based on that.

But we come to the conclusion that if we follow those projections that, yes, we will see a gradual increase in both provisioning levels as well as RWA increases, because of credit migration, but the numbers are not worrisome.

Okay. Thank you.

Thank you. Your next question comes from Jan Willem Weidema. Please state your company, followed by your question.

Good morning. Jan Willem Weidema, ABN AMRO. A few questions on real estate finance. Could you comment on what you have done there to reduce the NPLs?

Secondly, you still have a EUR1.7b or EUR1.8b development portfolio. Could you indicate how much of that is offices?

And finally, could you give some sort of an expected run rate for the loan losses and the other impairments there, as you also are looking to sell your seed capital, which apparently comes at a loss? Those were my questions.

Okay. First of all, looking at the recent trend in loan loss provisions but also in NPLs, what is happening there is we had a couple of relatively large files that were restructured, and that is what brought the NPL levels down.

Your second question was the exposure to offices specifically?

Development (inaudible).

Okay. In terms of -- sorry, just -- okay. Offices in development numbers are around 125m exposure. The trend there obviously is one that is also covered quite widely in the media, and that portfolio as a whole is one that we are also closely watching. However, we spent quite a bit of effort and money to de-risk that portfolio, and we are not expecting major jumps in provisioning there.

Okay. Thank you.

Thank you. Your next question comes from Lemer Salah. Please state your company, followed by your question.

Good morning, gentlemen. Lemer Salah from SNS Securities. Three questions from my side. First, can you rank your priority with respect to reducing double leverage and repaying the state aid?

And second, can you perhaps clarify where the double leverage is residing at this moment with respect -- if you separate the banking and the insurance activities?

And my final question is with respect to Benelux insurance activities. You have mentioned earlier, in January, that you are going to prepare for a standalone basis. Is there any chance that WestlandUtrecht Bank will be merged with this unit and sold, or that sits separately? Thanks.

Okay. Well, the priorities for state aid and reducing double leverage are going basically at the same high priority level. We'd like to repay the Dutch state, but at the same time we want to make sure that we have the ability to reduce the double leverage. Because if we need to complete the exercise of separating bank and insurance, and divesting insurance before the end of 2013, it's critical that we do that as well. So, the two go hand in hand. On the one hand, they have the high priority together, but at the same time they have an impact on each other.

With respect to double leverage, at this moment that is about EUR8b, and that is the double leverage that we have at the Group level.

And then your next question deals with the Benelux, standalone, Matt?

Yes, exactly. So, maybe I can rephrase it. Is there any chance that WestlandUtrecht Bank will be merged with insurance activities in Europe, and particularly Benelux, and sold as a bancassurance model?

Okay. Well, that is an interesting idea. The question is we have an alternative that we have presented to the European Commission, and we need to wait for the answer that the European Commission is coming up with. So that -- I cannot give you a firm answer until we hear what they have to say.

Okay. Thank you.

Thank you. Your next question comes from Mr. William Hawkins. Please state your company, followed by your question.

Hello. It's William Hawkins at KBW. I wondered, on slide nine, when you've given us the update of your capital structure, could you perhaps give us a bit more guidance on how the Asia Pacific EUR5.8b breaks down on a country basis? I'm particularly interested in the capital deployed into Japan and South Korea.

And then, secondly, you did make reference to this but, again, can you clarify the increase in the capital in the Benelux region? I heard you say that it's to offset the negative impact of volatility but, again, if you could just expand slightly on why you are injecting more capital into the Netherlands, that would be kind. Thank you.

Okay. In terms of the Asia Pacific and the capital structure, clearly the bulk of the EUR5.8b will be in the bigger two entities, which will be Korea and Japan, but we haven't given a granular breakdown of that.

In terms of the capital injection in the fourth quarter, at the end of the fourth quarter approximately just under EUR700m was injected into the Benelux Dutch insurance company, which is the reason why the EUR1.2b decline is slightly lower than the proceeds that we received on the disposal of LatAm, which was EUR2.6b.

Sorry. Yes, I understood that. I just didn't understand the why.

Maybe I'll take this one. I think for people that know the Dutch regulatory capital environment well, we have a test of adequacy here. So it makes our solvency capital actually quite volatile. This is why you see a lot of P&L impacts through the -- impacts through the P&L of our hedging. But we have had to inject this about EUR680m in the fourth quarter into NN and, again, it's largely a result of credit spreads, interest rate movements and various other things. I think we probably injected a little bit too much in retrospect. And in fact, if you -- it's again a very volatile number. If you look at it more recently, it's actually quite better than where it was at yearend.

Thank you.

Thank you. Your next question comes from Francois Boissin. Please state your company, followed by your question.

Yes, good morning. Francois Boissin from Exane BNP Paribas. Three questions, please. The first one really is on your target ROE of 10% in insurance. Can you give maybe the underlying assumptions in terms of interest rates, long-term interest rates, and annual return in equity markets underlying those assumptions? I mean the target 10%.

The second question relates to ING Direct. I just wanted to understand the EUR80m impact in Q4. What does it relate to?

And in your new reporting, basically, I don't see any ING Direct business. Does it mean that it will be included in other banking business?

And lastly, on the EC appeal on March 2, do you expect a decision on all topics or is it limited to a number of items? Thank you.

Yes. On the underlying assumptions, I think we'd have to go back to the April 2010 Investor Day, when we actually set these targets. But the assumptions would have been basically capital markets as they were at that point in time. Obviously things have changed quite a lot, with interest rates having come down, credit spreads having moved, equity markets have become more volatile and the like. So this is one I think that we do need to revisit in the not too far away future.

Okay. Then we have some questions on ING Direct. You want to do the first one, Patrick?

Yes. The EUR80m or EUR79m in the fourth quarter in ING Direct was capital losses. We take quite an active process to manage the investment portfolio, and try and ensure that where we think credit standing and prices can decline in the future and RWA requirements would go up. If we see that as a potential outcome, we try to sell ahead of the curve. So what we are doing there is active de-risking, active management, active de-risking of the portfolio to protect capital.

And what asset class was it?

I didn't -- could you repeat the question?

What asset class was it in terms of de-risking?

Investments.

Yes, they were investments, ABS securities.

Okay.

Okay. The other question related to reporting. We will report ING Direct going forward as part of our retail business. We are one bank, and we will report it as part of one. But we will make it available in our supplemental disclosure. If you want to look at it separately, it's still there.

And then the court case, yes, we have no idea what the court will decide. That is up to them. The only thing we know is that the verdict will be given on March 2.

Okay. But does it mean -- is it on the financial treatment of the state capital, is it on the restructuring requirements or is the perimeter -- the entire perimeter that's in your appeal court or --?

Yes, we have filed an appeal on three items, and we expect that they will give us the verdict on all three.

Okay. Thank you very much.

Thank you. Your next question comes from Marcus Rivaldi. Please state your company, followed by your question.

Good morning, everybody. I've got a couple of questions, please. First of all, some clarifications on the comments you have made already on the Asia sale proceeds when you finally get them. First question there is can I just confirm, therefore, that legal advise you've received suggests that change of control language in externally issued bonds from INGV will not be triggered by that Asia sale?

Secondly, I think you also went on to say that you thought even you'd be reducing internal leverage, but that you might also look to reduce leverage at INGV as well, by virtue of lower diversification. Can you give some guidance around that, please?

And then just finally, I see that ING America Insurance Holdings, they have a substantial LOC facility outstanding, which I believe is in part a support of a reinsurance solvency relief deal, supporting the solvency of the US operations. That is coming up for renewal shortly. Could you give us an update on that? And actually that currently, I believe, has a guarantee from INGV. Could you maybe give some indications about what you think about that guarantee, given the separation process ongoing? Thank you.

Okay. The question that was asked, whether there were covenants in upstreaming dividends between INGV and the Group, and the answer was no. There are no covenants in upstreaming dividends from INGV to the Group.

Your question deals with a different one, which is if you sell Asia, are there restrictions and could that result in maybe a call of some of the hybrids outstanding. Right? That is your question now?

Absolutely, and also the senior debt there as well.

Yes. Well, we will very carefully evaluate and take our legal advice very carefully, to see what needs to be done and what we can do. So I cannot give you an answer right now, but we will be extremely cautious and careful and making sure that we comply with all the legal obligations that we have.

The diversification benefit in -- if you sell Asia, then the income producing activities of Asia are no longer supporting the debt at the holding company in INGV, and so you will have to reduce some of that debt in order to deal with the new diversification that you have at that time. And the benefits will be lower, so the result will be that you will have to reduce some of the debt in that holding company, and then the remainder can be used to repay the debt in the Group holding company.

LOC facility?

Yes. The LOCs you're referring to are standalone, and they will be executed in an arm's length basis.

So, just to clarify, when you say standalone, does that mean there will be no guarantee from INGV or any other part of the ING Group going forward?

The terms of those would be the same as you would apply in the market. It's not a capital support. This would be freely entered into. These are normal commercial terms.

Agreed. But at the moment, just to clarify, they currently benefit from a guarantee from INGV. Just thinking ahead to the disposal of the insurance operations in the US, would you look to remove that guarantee?

We will more than likely set the new ones up without that guarantee.

Okay. Thank you very much.

Thank you. Your next question comes from Hans Pluijgers. Please state your company, followed by your question.

Yes. Good morning, gentlemen. Hans Pluijgers, Cheuvreux. Two questions, if I may. First of all, going back on the real estate book, NPLs have come down somewhat. How much currently still are at exposure to the Dutch market with respect to your real estate loan book? Could you give some feeling on that?

And secondly, a detailed question on the Asian operations which are for sale. You get EUR5.8b in equity for Asia Pacific, but of course you still own some other operations which are to be included, so could you give the number for the total equity of the operations which are included in the deal?

Yes. On the real estate finance activities, the total book globally is about EUR33b, and roughly half of that is in the Netherlands. And then about EUR5b of that is offices.

Sorry, could you repeat the second question?

With respect to the [trade show] on Asia, of course you get EUR5.8b as your equity, but do not include all the operations which will be included in the deal. So I estimate about EUR500m additional for the part of [EM] and the Japanese VA book. Is that correct? So in total EUR6.3b bad equity for the operations for sale, is that correct?

You're in the right ballpark with that, yes.

Thanks.

Thank you. Your next question comes from Mr. Tony Silverman. Please state your company, followed by your question.

S&P Capital IQ, Tony Silverman here. I just had two questions, one on the hedging in the Insurance Division, where I think it's a EUR300m or so loss. And it's been explained as to do with, if you like, the difference between regulatory and IFRS. And I was just -- so it's an IFRS charge. And I'm just wondering if there is any sense in which that loss might be earned back in previous -- in subsequent years, sorry, if things just remain as they are, or is it in fact an economic loss as well?

And the second question was just on the financial markets part of the -- in the Bank, which was sort of important to the progression of net interest margin on slide 14. The profits -- the underlying profits of that division have gone up very substantially, and I was wondering if you could talk a bit more about what is in that division and whether -- what sort of performance you might expect from it going forwards. Thank you.

Yes, I'll take the first one. The hedging number that you mentioned, EUR300m, it's about -- I think it's about EUR348m is what we have disclosed. Just to give you an example, the -- EUR182m of that is sitting in the Benelux that is hedging an equity portfolio. So what -- that represented a true loss on the hedges, but what we see is an increase of the value of the securities that we're hedging through equity. So you can't really say it is an economic loss, but there is a positive offset within equity. So that is already kind of back, if you will, within solvency.

For the other bits, yes, depending on what interest rates do, those can come back. Similarly, reductions in credit spreads, those can come back as well.

But if things remain just as they are, then eventually the equity would be disposed and you would get that back, the rest you wouldn't. Is that a fair comment?

I think if things stayed exactly the way they are, interest rates, equity markets and so on, you'd see very little volatility in that line. On the equity comment, let's say if we disposed of all our equities and we got rid of our hedges, it would be a no.

Okay. Thanks. And on the -- what is in the financial markets division now?

Yes. The financial markets results improved significantly in Q4, EUR280m increase. What you are seeing there is, if you recall, last quarter it was down significantly. That was impacted by a big chunk of impairments on Greece, so they are EUR150m lower. And also, we commented last quarter on reserve adjustments, CVA, which we also talked about at the Investor Day. They were a bit lower. So what you are seeing is lower provisioning requirements.

What happens then is the underlying client revenues are coming through and flowing into the bottom line. So the client business had a pretty good quarter, even given that the fourth quarter's seasonally low. So you are seeing lower impairments on the underlying customer revenues flowing into the bottom line.

Okay. Thank you.

Thank you. Your next question comes from Francesca Tondi. Please state your company, followed by your question.

Good morning. Francesca Tondi from Morgan Stanley. (Technical difficulty) question on my side as well, and again on the financial markets, if you don't mind. Can you explain a little bit the volatility we have seen in the net interest income, and especially the recovery in the fourth quarter, and what we should consider that line being going forward?

In terms of looking forward, do you see then provisions, with the understandable deterioration economics in Europe, then trending up further from the quarter -- fourth quarter level? Do you think there is a point that actually they could be going up to the 70 bps level that you showed in 2009, or not as bad?

And if they do trend up, what other lines do you have you can work on to make sure that you at least keep in the Bank with a profitability of a 10%, which is the minimum target that you are giving out? I think that will be quite useful to understand the moving parts.

And then, lastly, any intention on using the ECB figures on LTRO at the end of February, even if it is just for some opportunistic money to take in ALM, if you could update us on your thinking there? Thank you.

Well, in terms of financial markets net interest income, yes, a big part but not all of the increase was attributable to FM in that line. In financial markets, it is inherently volatile and the client driven structure there typically involves one leg which is interest income and another which is a dealing line, which you see in other income. And they do tend to net out to some extent. So if you look at the two, it's much less volatile. It depends on the quarter whether there is a positive in net interest income or a negative in other income or vice versa.

The point is, when you net the two, you are seeing that the revenues held up fairly well in the fourth quarter, as I mentioned already, albeit you don't see the full impact in net interest income. So what we tend to try and do is look at the net interest income, isolating, as we have shown in the slide, the FM piece, and then what you see is that the full commercial side is a lot more stable.

Okay. So effectively you see the commercial side still increasing, and it's just a question of market trends on where you book it, effectively?

Yes, I think that is a reasonable representation of it. Yes.

Thank you. And on cost of risk and profitability going forward?

Yes. On the risk cost, as we said, it's early in the year, so it's difficult to predict exactly where it's going to be, looking at the economic trends. We are expecting to see elevated levels for some time to come. I think Jan will comment in more detail on profitability, but what does typically happen, if you see elevated risk cost for a longer period of time, then spreads tend to react and gradually improve as well, which we would expect to see here over time also.

On that point, you have a small spread improvement in commercial banking in some of the products. Do you see more improvement there also in terms of some of the business lines, trade finance, global finance? Would you see other banks still retracing back and not be in the strong position you are in? Do you think you have more opportunity there for repricing?

That is exactly I think a very important point. We have seen that because of capital becoming more expensive, we have -- told the organization that we have to be extremely careful in our pricing and very disciplined in our pricing. And what we are seeing is that we have been able to reprice a number of our loans. I think in the future you will see more, when that is coming up for repricing. It's an important element.

The other thing is that we see that a number of banks, because they have to comply with new capital requirements, are giving up some parts of businesses. And those are businesses in which we have very strong positions. So that is an opportunity for us to pick up more of the business that is being abandoned by others.

In general, I would say what we are trying to do is be extremely careful on costs. We have further opportunities to reduce our costs. We have programs to become more efficient. We are investing in technology to make sure that our systems that we need to have are state of the art, and at the same time that they are highly efficient and that we can deal with -- with a low-cost provider of services to our customer base.

Further opportunities in purchasing. We have not had a corporate purchasing function. We have installed that just recently. Opportunities like EUR300m, EUR400m are possible. IT gives us further opportunities. So I think on the efficiency side we are very careful, on repricing, and then of course on making sure that we stay in the markets where we can add value and where we have a strong market position and a strong brand. And that all together should give us the ability to -- even in an environment where you have more capital, that you can still make a return of about 10% to 13% on your capital here.

Perfect. Thank you. And any comment on the LTRO for the end of February?

Yes. We did not participate the first time, and we had some reasons for that. We are now evaluating where we are again. We need to evaluate that against a number of factors, and we will do a very careful analysis again. I cannot tell you what the decision will be.

That is fine. Thank you.

(Operator Instructions). Your next question comes from Kiri Vijayarajah. Please state your company, followed by your question.

Yes. Kiri Vijayarajah, Barclays Capital. Just a question on RWAs. If I strip out the Basel 2.5 impact, around EUR6b, I wonder why we didn't see more of a decline in underlying RWAs during the quarter. You say you have done a lot of de-risking this quarter, and I wonder is it because you are seeing RWA inflation in other parts of the book? So, just some clarity on that, please. Thanks.

Well, first of all, the Basel 2 impact, all in all, is around EUR9b. And secondly, there is quite a big impact from currency effects as well. Off the top of my head, that was EUR4b. And then, when it comes to migration, of course, as was mentioned before, we do try and actively manage the book and prevent credit migration, particularly on bonds, to impact the numbers too much.

Okay.

Thank you. Your final question comes from Mr. Hans Pluijgers. Please go ahead, sir.

Yes. Going back on the injection of capital into the Dutch insurance operations, could you give any idea on the solvency -- regulatory solvency level of the Dutch insurance operations, and a little bit, let's say, what kind of level you are looking at as seems logical in these kind of market circumstance for that kind of operation?

Yes. We don't really disclose the regulatory capital levels of any of our subsidiaries. What we try to do is to keep them commercially where they need to be. And we feel that Nationale-Nederlanden, the Dutch company, is capitalized well for its position in the country.

Okay. Thank you.

Thank you. That was your final question. Sir, please continue with any further comments.

Okay. Then I really appreciate you being on the call. Thanks for your questions. I hope that we answered your questions. If you still need anything else, then you know how to find Dorothy and her staff. And in the meantime, I would say have a good day and, again, thanks for being on the call.

That concludes the ING analyst call Q4 results 2011. Thank you for participating. You may now disconnect.