ING Groep NV (ING) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for holding. This is Yvonne welcoming you to ING's Q2 2012 conference call.

Before handing this conference 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 constitute an offer to sell or solicitation of any offer to buy any securities.

So good morning, Jan, and over to you.

Okay. Thank you and welcome everyone to ING's second quarter 2012 results conference call. ING posted solid second quarter results, particularly when we look at the weakening economic environment we are currently in. I will talk you through the presentation and then Patrick Flynn, Wilfred Nagel and Matt Rider are here with me, and we are all available to answer your questions.

Page two, ING is maintaining strong momentum on restructuring, including the sales process we have for Asia and the preparations we are having for our US and European Insurance and IM organization. The Bank is making good progress on balance sheet integration and we accelerated de-risking efforts given the deterioration we were seeing in the Eurozone in Q2. We posted, the Group posted an underlying net profit of EUR1,045m in Q2. That excludes the results from Insurance Asia, which is now reflected in results from discontinued operations.

The Bank posted a robust results despite losses from proactive de-risking. We saw pressure on the net interest margin and we also saw the risk costs were elevated, but we had an underlying profit in the Bank before tax of EUR995m. And then Insurance operating results compared to Q1 went up to EUR304m. Underlying results before tax were EUR229m and that include the hedging gains we made in the US for hedging exposure, interest and equity exposure on our VA block, also included the negative change that we saw in the provision for separate account pension contract that we have in the Benelux.

If we go to page three you see that we have made good progress and continue to make good progress on our restructuring program as required by the European Commission. The sales process for insurance and investment management in Asia is on track. In the US, as I said earlier, good progress on the preparations for our IPO and for Insurance Europe we have stepped up our efforts to now prepare for the base case of an IPO.

We had discussions with the European Commission on adjustments to the restructuring plan. We held them together with the Dutch State and we will resume these discussions after the summer recess. In the meantime in order to safeguard the legal rights ING has filed an appeal with the European General Court against the European decision of May 11 which reinstated the 2009 restructuring plan. As I said earlier many, many times, we remain committed to repay the Dutch State as soon as possible, including paying another tranche this year, but at the same time we need to maintain strong capital ratios given the uncertain economic outlook that we are facing.

Page four, you see the divestment process of Insurance in Asia. That is really on track. The businesses are now classified as held for sale and discontinued operations in our accounts.

Insurance Asia had another good quarter. Performance was driven by strong sales in Japan and better mortality results in Korea while expenses were kept flat. That excludes EUR180m goodwill write-off in our investment management activities in Korea. The increase in the book value compared with December 2011 is mainly due to bond revaluations, foreign exchange changes and also the net results that were added to the equity value. We have received interest for all units and divestment may take place probably through multiple transactions. Negotiations are ongoing and we cannot predict at this moment the outcome with respect to the divestments of the operations that we have for sale.

Page five, the US is making good progress towards the planned IPO. In June the US completed a key milestone by publishing consolidated US GAAP financials for the first time. In addition, through July US has replaced EUR1.85b of internal funding and commercial paper that was guaranteed by ING-V with external debt, that way improving its standalone funding and its liquidity. The ultimate timing of an IPO is yet to be determined and of course will depend on market circumstances as well.

As announced on August 2, that is slide six, ING is reviewing strategic options for ING Direct Canada and ING Direct UK. It is important to note that the other ING Direct units are not affected by this. We see ING Direct as a key pillar of our strategy, with strong deposit-gathering ability, with innovation and distribution, excellent operational performance and customer centricity, so key for our operations going forward. And ING is integrating its balance sheet of ING Direct with the rest of the ING Bank to improve efficiency and to optimize the returns under Basel III.

Slide seven, ING Bank has made real good progress, further progress on balance sheet optimization in the second quarter. The size of the balance sheet was reduced to EUR900b, in line with our target for 2015. We also cut our CD and CP issuance after a strong inflow of short-term funding in the first quarter, and consequently reduced cash and balances to the central banks by about EUR30b, which anyway are low-returning assets anyway. Retail client deposits were up by EUR4b and customer lending increased without growing the total balance sheet. Also I think our balance sheet reduction has a favorable impact on future taxes we will have to pay in the Netherlands.

Slide eight, you see the balance sheet integration initiatives. They have delivered EUR31b since the beginning of 2011. Another EUR3b is still in the pipeline for the remainder of this year and further potential now is being investigated. And you see some examples on the right side of things we have done, moving assets throughout the deposits, and the funding capabilities were in good shape and we had excess funding capability.

On slide nine you see our Spanish exposure. Given the weakening macroeconomic climate in Europe, we have taken proactive steps to de-risk, in particular reducing its exposure to Spain by about EUR6.2b in the four months that ended in July. That includes a reduction of EUR2.6b in the lending book and a decrease of EUR4.1b in debt securities, mainly as a result of sales of covered bonds and RMBSs. The Spanish funding mismatch, defined as having Spanish assets outstanding minus local funding, has been reduced from EUR27.5b at the end of 2010 to EUR12.3b by the end of July 2012.

I'd go to slide 11. On slide 11 you can see that ING Bank reported robust second quarter results despite losses from de-risking, pressure we saw on the net interest margin and elevated risk costs, and had an underlying profit before tax of EUR995m. Insurance operating results were better and improved to EUR304m. Underlying results before tax were EUR229m and they included a gain, a hedging gain, on our US VA Block and a negative change in the provisions for separate account pension contracts in the Benelux. And ING Group posted an underlying net profit of EUR1.045b in a challenging environment.

Let's go to the Bank, slide 13. Gross results before risk costs were up by 5.9% compared to the year ago and declined by only 2% from the first quarter, supported by a strong cost control. Underlying result before tax was EUR995m. That is down about 13.1% year on year and 11% lower than the first quarter of this year, and that reflects mainly higher risk costs. The risk costs increased mainly in commercial banking, in particular in real estate finance due to the further deterioration in the commercial property market.

If you look at page 14, during the second quarter de-risking efforts were accelerated amid the ongoing euro crisis. Total bond sales amounted to EUR2.1b at a loss of EUR178m. The sales were largely related to Spain. If we clean up the numbers for these and other market impacts to make them more comparable, the gross results went down by 7.3% compared to the second quarter and 10.7% from the first quarter. The latter can largely be attributed to seasonally lower financial market income.

Page 15, underlying interest result held up well, declining 3.3% from a year ago and almost the same from the previous quarter. Net interest margin had a sharper decline, down 226 basis points, but mainly due to balance sheet extension. Although the balance sheet was reduced again to EUR900b at quarter-end, the average balance sheet, which is the basis for the calculation of NIM, was up slightly compared to Q1 due to higher commercial paper and CD, and cash that we maintained with the central banks.

And margins on lending have been solid despite higher funding costs. You can see that on the right top of the slide. And margins on savings are under some pressure despite reduction of client rates in many countries, and they reflect the impact of lower interest rates and de-risking.

Slide 16, you saw that cost control across the Bank has supported the decline in underlying operating expense both sequentially and year on year for the second quarter consecutive. Compared to the first quarter 2012 expenses declined by 3.6%. Decrease was mainly due to lower performance-related personnel expense, also stemming from the new Dutch collective labor agreement that was announced in June of this year, and also we had a reimbursement in the Belgium deposit guarantee scheme.

Page 17, risk cost. Further deterioration in the macro environment had a clear impact on the risk costs, which have increased by 22% from the first quarter and almost 78% from the second quarter last year. The increase was driven by industry lending and commercial banking, primarily within the commercial real estate, and higher addition to Dutch mortgages reflecting lower house prices in the Netherlands. We expect going forward that risk costs will remain elevated reflecting the weakening of the economic climate.

Page 18, non-performing loans, expressed as a percentage of total loans and amounts due from banks, increased slightly from 2.3 -- to 2.3% from 2.1% at the end of March. The increase was mainly driven, as I mentioned earlier, by real estate finance, also the lease run-off portfolio and the mid-corporate/SME segment in the Netherlands.

Page 19, increase in risk costs largely due to real estate finance, which was up by EUR75m, and mainly in the Netherlands, UK and Australia. The NPL ratio for real estate finance increased from 5.7% to 7.3% and NPL ratio in Spain remained flat but at a relatively high level of 18%. As we said, we expect given the deteriorating commercial real estate market that risk cost will remain elevated. Nevertheless, the overall quality of the REF portfolio remains relatively good. The real estate financing policy is based on cash-flow-generating prime real estate. As an example, construction is only 2% of the total portfolio and at least 70% is pre-sold and/or pre-rented.

The non-performing loan ratio for Dutch mortgages remained stable at a low 1.2% despite decline in the house prices of 12% since 2008. The main reason for the low NPL ratio is the relatively low unemployment rate in the Netherlands, which is the second-lowest rate in Europe. Risk cost increased in the second quarter mainly as a result of the lower house prices. Given the weak economic environment, we expect unemployment to go up and house prices continue to decline, and as a result we expect some increase in our risk costs on Dutch mortgages this year but no dramatic changes.

And on September 12 there will be elections here in the Netherlands. Most political parties would like to change the tax deductibility for both new and existing mortgages. We are supporting that, but it's important that it is being done in conjunction with reported tax reform and liberalization of the rental market.

Page 21, overall quality of the loan book in Spain has remained relatively good despite the weak economic environment. Total risk cost on the Spanish lending book declined from EUR43m in Q1 to EUR33m in Q2. NPL ratio increased slightly to 6.4%. NPL ratio on Spanish mortgages was stable at a very low 0.7%. And the corporate portfolio of EUR6.5b is very well-diversified and relatively well-provisioned. But in the corporate portfolio the real estate finance portfolio of EUR2.7b has a relatively high NPL ratio of 18%. However, risk costs have been manageable so far. It's important to note that construction accounts for only EUR42m or 1.6% of our REF portfolio. Again here we expect that risk costs will continue to remain elevated.

The Core Tier 1 ratio of the Bank increased to 11.1%. Risk-weighted assets increased by EUR3.8b basically driven by foreign exchange. Impact of credit migration was limited to EUR1b and especially you see here the effect of the de-risking measures that we have taken; that's why the numbers are low. And market risk-weighted assets rose reflecting volatility in financial markets.

Let's look at the impact of Basel III on the Core Tier 1 ratio. We think it's quite manageable. We are maintaining a pro forma ratio of a Core Tier 1 of 10%. On a like-for-like basis the impact on risk-weighted assets is little changed from what we have disclosed during our investor day in January. However, when you express it in basis points, the higher impact, which is 115 basis points in 2013, reflects the lower base of risk-weighted assets following the sale of ING Direct in the US. We expect that our actions will reduce Basel III risk-weighted assets by about EUR15b, of which EUR3b so far has already been achieved.

The approval of IAS 19R will change the timing of the Basel III impact that is related to pension assets. Under this accounting provision, the new -- the pension corridor, which has served as a buffer for unrealized actuarial gains and losses will disappear as of January 1, 2013 and any difference will be taken through equity as of that date. And that will bring forward part of the Basel III impact related to pensions and the remaining pension assets will be deducted from capital gradually from 2014 through 2018. So the fully-loaded Basel III impact, there's no change as a result of all this.

Last slide for the Bank is the funding position. We have a favorable funding mix, with more than 60% coming from retail and corporate deposits. Retail franchise consistently attracts retail deposits. Inflow again was strong, EUR4.2b this quarter. Liquidity reserves of EUR191b exceed total wholesale funding, so we are able to withstand significant retail stress on top of full wholesale liability run-off. And our Basel III liquidity coverage ratio was above 100%, which is the required minimum. So that all together I think shows that paying attention to our balance sheet, our, funding, our capital and liquidity, and leverage has really paid off.

Let's go to the Insurance company, page 26. You see that results have improved from Q1 on both underlying and operating basis, reflecting the fact that seasonally we had higher investment margin and a positive results on regulatory capital hedges in our US Closed Block VA business. Compared to the second quarter of 2011 results were lower in part because of non-recurring items in the prior year as well as also continuing pressure on our non-life results.

The investment spread remains resilient. The margin was EUR475m. It was up 9.5% from Q1. It is down compared to Q2 by 2.1%, but that included last year EUR28m of favorable non-recurring items. Increase from the previous quarter was driven by seasonally higher dividends in the Benelux. We saw a growth in the general account assets and also lower average crediting rates in the United States. The investment spread improved to 133 basis points from 119 in the second quarter last year and declined slightly from the 134 basis points in Q1 this year. Investment spread is expected to decline gradually in 2012 and that will mainly reflect the ongoing de-risking of our investment portfolio in the Benelux.

Fees and premium-based revenues fell slightly compared to last year reflecting lower results in our US Closed Block VA business and on higher hedging and reserve costs and lower assets under management. Technical margin declined from the second quarter as the prior year included a EUR70m non-recurring gain while this quarter we had some problems in the US with poor mortality results.

Page 29, the administrative expense were flat compared to prior year if we exclude the foreign exchange effects. And that reflects again also here in insurance strong cost control throughout the organization. The ratio of administrative expense to operating income compared to last year deteriorated, but that reflected strong operating income.

If we take a closer look at our business areas we see that the operating results in life in Europe improved in the first quarter. That was mainly due to seasonally higher investment income in the Benelux. Operating results declined from the second quarter last year, but that included a very large EUR98m gain on non-recurring items while this quarter we continued to see lower non-life results in the Netherlands.

Underlying results reflect a EUR241m change in the provision, negative change in the provision, for separate account pension contracts in the Benelux, and also includes losses from further de-risking and equity impairments. Despite the macroeconomic challenges and regulatory changes in Hungary and Poland, our insurance business in Central and Eastern Europe showed an increase in new sales compared to the second quarter, mainly in the Czech Republic and in Turkey.

In the US we benefited from positive net flows and a strong investment margin in retirement while Insurance results reflected lower technical margin in individual life. Underlying result was dampened by a EUR73m loss on the sale of alternative assets, which was done to reduce capital requirements and to lower the volatility in our earnings. Sales were up 1.1% as higher sales of full service retirement, individual life and employee benefits were offset by [eventually] lower sales in the fixed annuities, and stable value, reflecting disciplined pricing in the current low-rate environment.

Last slide on the Insurance is the Closed Block. The US Closed Block VA hedge program is designed to make sure that we protect our regulatory capital across a broad range of equity market scenarios. And the top table shows that the hedges are quite effective. Unfortunately, due to difference between accounting and the -- accounting for IFRS and regulatory accounting, that leads to IFRS P&L volatility. Earnings sensitivities have changed somewhat over the quarter, primarily reflecting a slight decrease in the reserve adequacy. That is now at the 59% confidence level. So we have updated sensitivities for Q3, as you can see in the slide.

So let me wrap up. We are maintaining strong momentum on restructuring, including our sales process in Asia, that is on track, a good preparation for IPO in the US and Europe. The Bank is making good progress on balance sheet integration and we have accelerated our de-risking efforts. The Group has posted an underlying profit of EUR1,045m, excluding the results from Insurance Asia, which is reflected in results from discontinued operations. The Bank had pre-tax results of EUR995 and Insurance had pre-tax operating results of EUR304m.

With that we are ready for taking your questions.

Thank you, sir. (Operator Instructions). The first question is from Spencer Horgan from Deutsche Bank. Please go ahead.

Thank you very much. Good morning. Two questions on the Insurance side please. The first one is you've sort of suggested quite strongly early on that Asia could come in multiple transactions and obviously nothing certain at this point. But I was wondering if you could give us your feeling at least to how confident you'd be that you can achieve a 100% exit of Asia on that basis.

And then the second question is, on slide five you talk about this transfer of $500m into SLDI. Could you firstly just expand a little bit on why that's happened and what's gone on there?

And secondly, more broadly, is there a risk that further transfers may be needed as Bermuda heads towards equivalence under the Solvency II regime? Thank you very much.

Okay. The first question -- Spencer, good morning. Asia, yes, I think we are tracking our process quite well. We're very pleased so far with what we have seen, also on bids. As I said, we -- it's most likely that we will have to do multiple transactions to complete the sale and they will have timing consequences. So all the transactions will have, let's say, will take place at the same time. But I believe ultimately we will have the -- we will sell 100% of all the assets in Asia.

With respect to the SLDI, Patrick?

Yes, good morning Spencer. Yes, the reallocation simply follows the update on reserve adequacy we took last year. So we're basically upstreaming capital from the operating companies to the holding company and pushing some down to SLDI. This was planned and I think we even flagged it following the reserve adequacy update at the end of last year.

Okay. But do you think there's any possible further need to put more money into SLDI as Bermuda moves towards a Solvency II basis or do you think it's adequately capitalized?

I don't believe Bermuda's doing Solvency II.

Sorry?

At the moment we think this is the adequate level of capital in SLDI. We don't envisage any further changes.

Okay, great. Thanks.

Thank you. The next question is from Farooq Hanif from Morgan Stanley. Please go ahead with your question.

Good morning everybody. I just had a few questions again on the Insurance side. Firstly, could you tell us if you're seeing any further deterioration in policyholder behavior in variable annuities? I mean, one of your peers in the US has seen additional problems on its GMIB book relating to partial withdrawal experience. So just when will you update us on that and what are you seeing?

Related to that, do you have any data on the living benefit reserving to net amount at risk? I believe that was about 70% last time you updated us. Has that changed because net amount at risk has gone up or down, if you could tell us that?

Next question is, the EUR1b of book value that you have in internal reinsurance of the Japanese VA book, what happens to that book value in the sales process? Does that have, forgive my slightly stupid question, but does that -- is that included in addition to the EUR6.4b of tangible equity that somebody will have to pay for? How will that work in the transaction?

And lastly, could you make a quick comment on investment margins elsewhere outside of Benelux, just the pressure from low yields? Thank you.

Okay. In terms of lapse assumption update, that's something we do annually. We typically do that in Q3. And we will conduct that study and communicate on that once it's done so there's not really much I can say about that at this point or give update before then.

In terms of net amount of risk, we haven't given them this quarter. There were some in the US filing at Q1 but I suggest if you want to -- they're on a US GAAP basis. I suggest if you want to look at those perhaps you might talk to our Investor Relations team who can take you through that.

Okay, then in terms of ING re, yes, it's difficult to say how this will pan out. It depends on what type of --- how the transaction works, what type of transaction. So it's premature to really comment. But, yes, if there's a total sale this could be part of the overall equity involved. But we can't be specific until we know the details of a transaction.

On that point, could that be a situation where you sell Japan but you need to reinsure it from ING?

I can't comment yet on how the transaction -- Jan has already mentioned it could be in a number of blocks, but I really can't comment further as to how that might be structured.

Okay. And any comment on investment margins? Just I would have thought we'd expect pressure elsewhere, not just in the Benelux given the low-yield environment. What are doing to offset that and what would you see as guidance?

This is Matt. For, at least for the Benelux we saw the investment margin at about 111 basis points. I think we had given prior guidance that we would expect to see that come down for the full year something like 10 to 15 basis points from 114 that we had for the full-year 2011. And we would still expect to see that, in fact likely at the upper end of that range as we've continued to de-risk. In the US businesses clearly reinvestment at lower rates is going to put pressure on margins, but what we've seen is more action on the crediting rate side, being able to reduce credited rates, so you see that at about 169 basis points for the quarter.

But you think you can continue to maintain a decent margin in the US because you've got more ability to reduce crediting rates?

Sorry, we didn't quite hear your question. But yes, I think this is going to come down to a certain extent given the low interest rate environment. But we're doing what we can again on the credited rate side to be able to maintain those margins.

Okay. Thank you very much.

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

Morning gentlemen. Just two questions if I may. Firstly on asset quality and commercial real estate, I just wondered if you could give a breakdown of the EUR120m of loan losses there and also actually a breakdown of the NPL rate of 7.3% by the key geographies if possible?

And also could you just give a bit of color around that in terms of what your expectations are there and what specifically is driving the up-tick in loan losses in that business? Is it particularly -- is it coming from refinancing limits or businesses hitting refinancing?

Secondly, in terms of the Spanish funding mismatch, you've made quite substantial progress there, reducing it by about EUR7.3b since 1Q. Presumably that included some quick wins. I just wondered what is a realistic ability to work that down in the coming quarters and what might be an aspirational target there. Thanks.

Yes, on the asset quality and the breakdown of the risk cost, obviously if you look at the book and you look at where the biggest chunks are, that is also reflected in the risk costs that we're taking. But just to give you a quick rundown, there's about EUR50m in the Netherlands, there's about EUR27m in the UK, there's EUR36m in Australia and about EUR18m in Spain. So that gives you pretty much what's there.

Yes, the dynamics of these markets are not all the same, but indeed you see in quite a few markets that the ability of companies to refinance debt that comes due is limited and that puts pressure on the asset values as well. There are also some specific issues in each of these files that are not really market-driven.

The mismatch in Spain, that is a combination of a number of actions. One is bringing down the overall asset exposure that we have in Spain. Two is increasing the local funding that we attract. Both are actions that we believe we can continue. And certainly in terms of reducing our asset exposure there is a natural run-off in the book there that is quite substantial. For example, if you take cedula portfolio, the average maturity there is about 2.8 years. The lending book also has a natural run-off. And we have, as you've seen, taken specific opportunities to further de-risk by selling securities. As and when opportunities arise we will continue to do that, but at the right prices obviously because we do believe that this book is of good quality.

Just as a follow-up on that, what was the par mark on the covered bond book and the RMBS book in Spain?

Sorry. I didn't quite catch --

Just as a quick follow-up if you could, do you have the par mark, i.e. how much the pricing was on the covered bond book? I think you'd indicated about 96% at par at 1Q. I just wondered if you had an update around that please.

I think we sold on average at about 97% or so in the cedula book. The average market prices that we're seeing at the moment are around 94 or so.

Okay, brilliant. Thanks much.

Thank you. The next question comes from Michael Huttner from JP Morgan. Please go ahead.

Hi. Thanks a lot. A couple of questions. Firstly, net inflows, the EUR4.1b in deposits, I just wondered where, if you could say, where exactly they came from?

And then as a follow-up to the de-risking in Spain, so you've reduced the assets in Spain by EUR4.7b in Q1. That cost EUR156m in terms of de-risking costs; that's 2.3%. In July you de-risked another EUR1.5b which cost EUR78m so that's 5.2%. So is this accelerating? And what sort of -- it looks -- obviously you would have done the low-hanging fruit first and it gets a bit harder and a bit more expensive. Can we get a feel for how much more expensive it could get? Are we going to be looking at like a 7% ratio for the rest of the book or something like that?

And then, this is a little bit a funny question, so in Asia if I remember a year and a half ago I guess or something, you were going to sell the whole of Asia -- I'm sorry, the whole of Insurance I think, and then it becomes the whole of Asia, and now it's country by country or even business by business, I don't know. Is there a chance in Europe that you could adopt the same approach or is preparing for an IPO first step to cleaning the books and then effectively inviting everybody to have a look, and then you can start the process of piecemeal as well? Thank you.

Yes, I think the calculation you make on Spain is a calculation that I don't think you can make because this is impacted by what's available at what point in time and not necessarily I think is this reflecting a trend. So I think we need to see going forward what the price levels. And as Wilfred indicated earlier, we're not going to do it at any price. We will be -- we will do that at the appropriate price and when we think that the risk elimination that we get relative to the price we pay is a reasonable one.

With respect to Asia, yes, we like to do a full sale, but we're not against doing a partial sale or let's say a sale of pieces because in the end that can create also attractive value. And that doesn't mean that we will do exactly that in Europe. In fact in Asia we had not considered an IPO. In Asia it was either a sale to a strategic partner in full or in parts.

In Europe we are saying we are doing an IPO and that means we have IPO as the base case. We will have of course to work with the company to make sure we have the performance that can stand the IPO, but at the same time, we need to watch how markets will develop. But that's the work that we are doing. It's certainly not a representation that in Europe we will do what is happening in Asia, that we'll -- our plan is to do an IPO.

Thank you. The next question is from Michael van Wegen from Bank of America - Merrill Lynch. Please go ahead.

Yes, morning. Michael van Wegen, Bank of America - Merrill Lynch. I just wanted to get back to the point that you made earlier about selling ING Direct Canada potentially and the UK actually. Can you talk us through the impact from such a potential deal for the restructuring of your Insurance businesses? Strategically, I can understand why you want to get rid of these two banking operations, but the proceeds together with potential proceeds from your Capital One stake must have an impact on repaying holding company debt, and therefore the flexibility that you get on the restructuring from your insurance assets. Any insight there would be great. Thanks.

Yes, Michael, we are doing this for I think strategic reasons, but at the same time we have of course an eye on our balance sheet and the flexibility that we create by doing this. We have not determined exactly what will happen. First of all we need to do the sale. That is not done yet. After that I think we can discuss what will happen with the proceeds, but clearly flexibility is an important element in this.

Okay. But would you be willing to use those proceeds to reduce the holding company debt because in the past you've always stated that the Bank effectively repays the state and the holding company debt would be funded through insurance disposals. Are you willing to potentially change that mix a little bit?

I think, as you know, money is fungible at the end so you can use it for multiple purposes and I think that's still the case. So it creates flexibility in our planning going forward and I think that's not unimportant to us.

Okay. Thank you very much.

Thank you. The next question is from Francesca Tondi from Morgan Stanley. Please go ahead.

A few questions on the Bank again, if I may. Margins, how would you see margin, net interest margin, developing over the next few quarters also in light of the further reduction on EURIBOR and possible rate cuts by the ECB?

And if you could possibly comment, you clearly are one of the banks with the longest, with the biggest liquidity pool at the ECB. There's been a lot of talks of potentially even looking out in a, excess reserve, in a negative rate. If those were to happen what impact would they have? How would you react in terms of your liquidity management? That will be helpful.

Back on asset quality and provisions, again I know you've been asked about the commercial real estate especially in the Netherlands, but if you could just give us a bit more color of what is happening there. And you continue to talk of elevated provisions. Should we take that actually provisions will likely continue to increase in the following quarters? I think if you could comment on that it would be helpful. Thank you.

In respect of interest margins, yes, the overall interest margin in euro terms did come down in the second quarter by about 3%. In basis points terms it looks higher from 132 to 126, but that's due to, as Jan mentioned, the continued growth in the balance sheet, something we corrected at the end of the quarter. And you'll see the benefit of that lower balance sheet in subsequent quarters.

Going more closely to your question, what we've seen in terms of under the hood a bit, is that our commercial margin excluding volatile elements like financial markets and corporate line was stable, actually slightly up. And under the hood there a bit you see that the loan margins improved a bit and deposit margins dropped a little bit. Now, we are reducing deposit margins -- sorry deposit rates paid. We've reduced them in the Netherlands by 20 basis points. They've come down in Italy and France and they continue to come down. Germany reduced by 25 basis points in Q3.

The dynamic though is that whilst we are reducing the amount paid, which is positive for margin on deposits. You're also seeing a decline in interest rates. And an element too is de-risking, which reduces the value of funds or the earnings you have which you attribute to your deposits. So that mutes a bit the impact of the reduced deposit prices.

Going forward provided interest rates stabilize a bit we would expect that on the interest margin side. Particularly on deposits there should be some stabilization because the cuts in deposit rates to customers I think can offset the lower market rates and de-risking impact. The positive bit overall for margins though is that on our loan side we're holding margins, in fact slightly increasing them, against a much higher cost of funding, which is a real positive. It's something that is core to our achieving our longer term ambition of 140 to 145 basis points we talked about at the investor day, the ability to re-price on the loan side. And we're seeing evidence that we're able to do that, albeit loan demand is a little bit muted.

So what does that all mean? I think it means outlook for the core business is stable in euro terms. In basis point terms it should improve a bit because the balance sheet reduction will reverse the impact, the 4 basis points in Q1 and 1 basis point in Q2 of negative impact on the margin due to balance sheet expansion. So in basis point terms it should improve, in the euro terms stable, is the best we can judge it for now.

And lower EURIBOR from here would put a little bit more pressure on margins?

Yes. As I said, yes, if interest rates lowered that may reduce the earnings we get over time in terms of (inaudible).

Yes.

But also could stimulate further deposits reduction. But we'll have to see.

And if the ECB would move to negative rates on the reserves, how would you think about your excess liquidity?

As you saw what we did in the balance sheet, we reduced the balance sheet significantly in the quarter and we reduced the amounts placed with the ECB. We are, as you say, a provider of funding to the ECB. They've cut the rate to zero so you get nothing for it and that's part of the reason we reduced our overall placements. We got our balance sheet now at the EUR900b level, which is where we targeted it at the investor day and we will actively manage it going forward.

And if you were to kind of keep rebalancing your liquidity, where would you -- away from the ECB, where would you rebalance it to, in what kind of assets, if I may ask?

Obviously if you're earning nothing on deposits with ECB you try to minimize that.

Yes. Is it other, CB papers, other CDs or --

I think we constantly evaluate what we will do with -- the best thing that we can do is make sure that we keep our balance sheet as healthy as we can. And if you don't get anything for putting your money some place, you may as well put it in your own company and use it to your own benefit. And at the same time, as you can see, we have significantly improved our own liquidity by having done what we did. So I think we'll manage this quite carefully. If it gets to negative, yes, there is no incentive to put a lot of money with the ECB. And you see that on our balance sheet today.

Thank you. And I had a last point on asset quality and provisions.

Then going back to your question on commercial real estate in the Netherlands, your question was what's going on there? In the first quarter we saw a bit of turmoil effectively caused by what was basically a CMBS structure being unwound in a portfolio being sold and that creating a lot of coverage of developments in the real estate market in the Netherlands. But what we saw subsequently was frankly not a lot of activity. We're seeing vacancies in the Netherlands creeping up. We're continuing to see very difficult refinancings; a lot of banks have withdrawn from that market. But that's not a new development; we've signaled that before. We also gradually see the weighted average lease expiry terms coming down a bit.

Having said that, our de-risking of that portfolio continues. You can see the exposure slowly coming down. We didn't have any write-offs in the second quarter. So there's -- other than a number of things that we already had on the books and had identified as problems and that we're working our way through, there are no big new developments there.

Your question on provisions and whether what you're seeing now is a trend. As we've said and as both Jan and Patrick have said, we expect provisions to stay at elevated levels. They're very closely connected to the macroeconomic trends in the main markets that we're in and those are not positive. So we can definitely count on seeing levels like these and we're not expecting a reduction any time soon.

Thank you.

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

Yes, good morning gentlemen. Two remaining questions please. The first one is on ING Direct and could you maybe just specify what's the main rationale behind putting the UK and Canada for sale? Is it that you would be able to achieve a high price or do you feel that you need more flexibility to deleverage? And why basically didn't you include Australia within the process?

Second question regards the disposal of Asian Insurance. Can you just comment on the evolution of the process for investment management businesses? And is it basically following the same calendar as Insurance operations or is this completely separate? Thank you.

Yes, the reasons for selling ING Direct in the UK and Canada is -- these are good businesses. We always do an evaluation from time to time on our portfolio and you need to be looking at not just what is nice, but also can you strategically do with your business what needs to be done going forward, not only this year, but I would say three to five years ahead. And then you need to make choices. Are you putting your capital here or are you putting it someplace else? And we only have so much capital available so we need to make choices where we are investing that limited capital that we have. And I think when you do a rational analysis this came out.

We have also divested our ING Direct business in North America. So fully I think it's a withdrawal from North America that we are accomplishing now.

And then what we will do with the proceeds I think will depend at the time when we get that. We will include that in our overall picture. We'll look at it from a corporate perspective, where we can best make the proceeds work. And I think the same applies to our Asian operations, when the proceeds will be used where we see the best fit on a corporate basis and where we may have to do certain things related to making sure that the business going forward has the capital structure and has the capability to do what needs to be done.

Okay. And the rational for keeping Australia in terms of what you see attractive in terms of underlying business there.

I think our Australian business is doing well. We like our Australian business. As I said earlier, we cannot maintain them all. So we have made some choices, some rational choices, where we can continue to invest or not. And we think our exposure to Australia is also a reflection of an indirect exposure to the Asian market and that I think is important in evaluating the reason to maintain our position in Australia.

Okay. And regarding the Asian disposal processes?

Yes, the timing for Asia's sale is quite -- I think what you will see is that some units will go quicker than others because they are more complex and they will need more time. Joint ventures take more time. So there will be a number of announcements being made if we go the route of multiple sales. But I would expect that certain things will go relatively quick.

Okay. And may I just ask in terms of investment management, do you plan to sell the investment management business as a whole or do you plan to sell it by geography as well?

We're looking at both options. I cannot say which way it will go. It depends on the appetite the bidders will have.

Okay. Thank you very much.

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

Yes, good morning. Hans Pluijgers, Cheuvreux. Three questions, if I may. First of all you talked for real estate a loan-loss provision going forward, but could you also discuss more on the corporate loan book there? You saw that the loan book from loans increased from 2.6% to 3.6% quarter over quarter. So what do you see there? I understand that the increase in loan operations mainly had to do with one big offer, but what's the underlying trend there? Could you give some color there?

Secondly, on the Korean goodwill write down. Could you give some feeling why you did that write down? Yes, could you give some color there?

And secondly, with respect to the impact from reduction in the balance sheet on the tax position in the Netherlands, positive for tax in the long run, could you give some feeling what you're meaning there or what you see, let's say, more in numbers going forward?

I'll answer the technical one. In respect of the Korea impairment, this is somewhat -- this is technical. It's a consequence of IFRS 5 requirements. As is quite clear, we're at quite an advanced stage in the process and as a consequence of that we're required to report these businesses discontinued operations under IFRS so they don't appear underlying, separate line in the balance sheet and P&L. A follow-on consequence for that is that you have to ensure where the estimated proceeds are less than book then you are required to review and impair goodwill. So this occurred in IM Korea only and as a consequence, as I say, the goodwill in IM Korea only was impaired. It's a technical IFRS requirement.

Yes, I think your question was, we've talked about the real estate risk costs, but you wanted to know a bit more about the general corporate portfolio. If you look at commercial lending overall, the NPLs were up from 3.9% to 4.3%. And that again reflects just the macroeconomic situation. If you look at the various components, the corporate lending book indeed was up from 2.6% to 3.6%. That includes SME and mid corporates, which indeed is a segment that is having a tough time, also in our core markets here in the Netherlands. You may have seen from the press that bankruptcies in the Netherlands went up quite sharply in the first half and of course we're seeing that reflected in our loan books as well.

The other part of commercial lending where we see up-ticks apart from real estate finance is mainly in leasing where also the NPLs are up from about 6.3% to 6.8%. On the other hand, the instructed finance in our industry lending businesses, the NPL levels are relatively stable. And generally speaking what we see, the larger corporate performance is doing well and it is really in the mid corp and SME books where we see the pressure.

The question on tax to do with the -- there will be a new bank tax in the Netherlands and it will be levied on your total lending -- I'm sorry on the borrowing that you have done. So there is an incentive to make sure that where you can, that you reduce your borrowings.

Thank you.

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

Good morning. A couple of questions on my side. The first one on ING Direct UK. Do you expect a positive contribution to producing earnings for 2012? And if you can give out the number for the first half, that's the first question.

Then on your Tier 1, it's already at 10%, which I think is a bit higher than what you were expecting at the investor day. Is it conceivable that you might repay this debt sooner rather than later based on this? What's going to be the trigger here? Thanks.

Okay. On ING Direct UK I don't think we give forecasts what will happen in the quarters to come.

On Core Tier 1, yes, I think we have a good Core Tier 1, 11.1%. But, as you can see, where you comply with Basel III you need to have a good Core Tier 1 because the requirement if you want to maintain a 10% Core Tier 1, there will be some additional requirements related to pension adjustments that are being made effective January 1. A good Core Tier 1 is also important for us to be able to repay the Dutch state and, as I said, we like to do that as quickly as possible. We are discussing with the Dutch state and with the European Commission on a program that will be resumed after the vacation time and then if possible we like to repay at least a portion certainly this year.

Okay. Thank you.

Thank you. The next question is from Anke Reingen from Royal Bank of Canada. Please go ahead with your question.

Yes, good morning. It's Anke from RBC here. I had two questions on the Bank please. Firstly on asset quality, I was wondering on the commercial real estate if you can give us some data on the coverage of NPLs and how this has changed versus Q1.

And then you keep on saying you expect loan-loss charges to remain at elevated levels, but given the trends in NPLs should they not actually increase in the coming quarters?

Then on the capital slide, thanks for the update. I just wondered what would the 9.4% be if you take the DTA and the pension into account as well. Thank you.

Can you repeat the last question because we did not get that?

On your capital slide, the 9.4% Core Tier 1 ratio pro forma. You say that's ex the -- or this basically assumes the DTA will be assumed and also I would assume it's pre the pension coming in from January 1, 2013, where a number of other banks have basically included this in their pro forma guidance as well. So I just wonder what the 9.4% would be pro forma for the DTA and the pension.

Yes, on the real estate finance book we talked about the asset quality and the NPL levels. Maybe just a quick rundown on those. In the Netherlands we're looking at 5.9%. In the US we're looking at 8%. Spain, as we've discussed is around 18%. UK is also at that level. And Australia is slightly above 20%.

You asked about coverage levels. Overall they're stable quarter on quarter at 27%. We have a slight increase in coverage in the Netherlands, 26% to 27%. We have an increase in Spain from 33% to 36% and an increase in Australia to 41% from 25%. So a gradual increase in coverage levels and an up-tick overall on the NPL levels on the portfolio, as we said, from 5.7% to 7.3%.

And I think the provisioning levels we talked about that. Projecting provisions is of course always difficult. It's a bit of a lumpy thing. But overall in the medium term this is very much linked to the macroeconomic development which, as we said, is not positive and we're therefore expecting to continue to see elevated levels.

In respect of the DTAs, we don't conclude them because we believe we'll have used them up with profits. At the IR day I think it was 25. Now it's come down as we're using the profits up. It's down to approximately 18, 20 basis points.

In terms of pensions, it is included, the impact, in the phasing to 14 to 18. I think the point we're making is this can be volatile going forward depending on how market interest rates perform. And it could be that in the future you have some more being accelerated into a spot impact. But we don't -- we can't predict the future so we don't know. The last time we had formal results published on the pension, this would be the number. We'll update it the end of the year when we know more.

Thank you.

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

Thank you very much. Good morning gentlemen. Three questions from my side. First of all, could you elaborate on the NPL definitions in Spain, whether that has changed?

Secondly, on the liquidity of covered bonds in Spain, can you say whether the liquidity has improved or deteriorated in the course of the second quarter?

And my final question is with regard to the pension scheme. You have shifted from a DB to DC and I presume that the IAS 19 impact will be not significant going forward, since it's only applicable for DB pension schemes. Am I right?

Yes, on the NPL definitions there's no change.

You asked about liquidity of the covered bonds in Spain. A lot of that has come from buybacks by the issuers, which has helped us quite a bit in the second quarter. There are no programs or restructurings or anything going on at this moment in the mortgage portfolios underlying them. Of course liquidity of this paper comes and goes a bit with the macro economic developments and the developments politically also around the support for Spain. So it's moving, but we have taken advantage of quite a bit of liquidity in the second quarter and we're pleased with that.

Yes, in respect to the pensions, we announced that for new contributions after January 14 that will move to DC. However the existing block will remain as a DB and that is why we're including it in the impact for Basel III.

Maybe just two follow-up questions. First of all on the covered bonds, so if Spain is downgraded by Moody's I presume that the liquidity will further deteriorate. How would you react on that?

And secondly on the pensions, can you quantify what the total size of the book is which is still on a DB scheme?

On the first question I don't think necessarily that a downgrade will have a big impact on liquidity. That's also not what we have really seen in the first two quarters of the year.

Yes, I think the size of the DB asset is about EUR18b.

Thank you.

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

Hello. Thank you very much. Back on bank asset quality, can you help me understand why the total coverage ratio has fallen very slightly in the second quarter form 39% to 38%? Everything I've heard from you guys has been about coverage ratios going up so I don't know if there's a mix effect or if there's something else going on.

And then can you tell us specifically what's happened to the coverage ratio for Dutch mortgages? And again apologies if it's disclosed somewhere and I've missed it.

Okay, on the first question, indeed it's mainly a mix method. There is not a general reduction or change in our provisioning policy.

And the coverage ratio of Dutch mortgages, off the top of my head that is about 11%. We're digging out the exact number. Yes, it's 11%, I'm getting here.

Mix effect, because again it sounds to me like the areas that are going up in terms of the contribution to NPLs are the areas where the coverage should be higher. So I would have thought the mix effect would be driving up the coverage ratio.

Taking the coverage ratios that you're seeing are heavily influenced by the fact, particularly on the retail books, that there is a lot of IBNR there, which is influenced by model LGDs. And if you look at the write-offs that's ultimately what counts, then we're still seeing levels below what we reserve. So we have an experience of a very long period where in the end our write-offs are always less than what we reserve in terms of provisions. And I think the mix of model-based IBNR reserves and the underlying realities makes it very difficult to compare the two.

Okay. Thank you.

Thank you and today's final question is from Tarik El Mejjad from Nomura. Please go ahead.

Hi. Morning everybody. I have two quick questions. The first one in terms of the divestments of the non-core business, if I can call that like that, I imagine by that the Asian banking entities and also your stake on Capital One. So what is your strategy on that? Are you thinking to leverage that in case you are short in terms of capital?

Secondly in terms of repayment of state aid, I just wanted to know are you envisaging to do this to exercise your conversion option? You still can do it. Is it one of the topics that you are discussing now with the EC and the Dutch state? Thank you.

Okay. Selling stakes in Asia and our position in Cap One, I don't think we are at liberty to discuss that. We will look at them from time to time. We will evaluate our position. I must say certainly with Capital One we're pretty happy with the position we have taken, and when the time is right and things fall into place then I think we'll make a decision on them.

State aid, we are looking at all the options that we have as repaying the Dutch state and that's why we have discussions with the state itself and as well with the European Commission; all that hangs together. And we'll know more after the holidays, after the vacation time when we hopefully will resume our discussions again.

How these discussions are advance? Obviously I'm not looking for details here, but is it something advanced or you are just at the beginning?

No, I cannot give you any details because we are still in negotiation and discussions. So I think it's better to hold off until we can give you the details, but not at this point in time.

Okay. Thank you.

Sir, there are no further questions.

Okay, then I would like to thank you all for participating in the call and wishing you a great day. Thanks. Bye-bye.

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