ING Groep NV (ING) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, this is Yvonne welcoming you to ING's Q3 2012 conference call.

Before handing this conference over to Mr. 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 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 our forward-looking statement is contained in our public filings including our most recent annual report on Form 20F 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 to buy or to offer any securities.

Good morning, Jan, over to you.

Thank you very much. Welcome, everyone, to our third quarter 2012 results conference call.

We posted solid third quarter results, particularly seen against the backdrop of the weakening economic environment. I will talk you through the presentation now. And then we have Patrick Flynn, Wilfred Nagel and Matt Rider here with me, and we all will be available to answer your questions.

Unfortunately, this will be the last time that Matt Rider is present at this call. He will step down and he will return to the United States to join his family and look at other opportunities outside of ING. First, before we start the call, I'd like to take the opportunity to thank Matt for his many years of dedicated service to ING, and to the insurance as well as the investment management operations. Matt, thank you very much.

During the third quarter, I'm on slide 2, we continued to deliver our restructuring plan amid a challenging operating environment. The Group posted an underlying profit of EUR719 million. The Bank's underlying profits before tax increased to EUR1.021 billion, supported by EUR323 million gain on the sale of Capital One, which largely offset the EUR258 million of de-risking losses and the EUR173 million negative credit adjustments.

Insurance operating results declined to EUR238 million, primarily driven by lower investment margin and lower Non-Life result. Underlying result before tax was EUR44 million, which includes negative results on hedges in place to protect our regulatory capital, mainly in the Benelux and in the US.

We have continued, on slide 3, to make good progress on the European Commission restructuring program. We have announced the first three sales of our Asian Insurance units. And our US organization is preparing to file a registration statement with the SEC. At the same time, together with the Dutch State, we have made good progress in our constructive dialog with the European Commission about revisions to the restructuring plan.

Slide 4, in October, we reached agreement on the sale of insurance units in Hong Kong, Macau and Thailand, and the insurance operations in Malaysia; and also our 33.3% stake in China Merchants Fund. The process for the remaining businesses is ongoing and further announcement will be made if and when appropriate.

Proceeds will be used to reduce the double leverage, while at the same time maintaining the current leverage ratios in the Insurance holding companies. It's, at this moment, premature to look at this on a deal-by-deal basis. We will assess the potential dividend upswing once we see all of the Asian deals completed.

Slide 5, we continue to discuss various options for ING Life Japan, including the closed block VA business. The closing of sales of our other Asian Insurance units may trigger a charge to strengthen reserves for the Japanese closed block VA under our reserve adequacy policy.

ING measures reserve adequacy at a business-line level, where excess reserves and other Asian business units currently offset a shortfall related to the Japanese closed block VA. The reserve inadequacy for the Japanese Insurance business, including the VA guarantees we insured to ING Re, is approximately minus EUR0.5 billion at the 50% confidence level. And that includes approximately negative EUR1.1 billion for the closed block VA, which again is offset by about EUR0.6 billion plus for the corporate-owned Life Insurance business.

The nature and timing of any P&L charge from such reserve inadequacy will depend on the closing of other divestments in Asia, as well as on various options currently under investigation for ING Life Japan. We will make further announcements when we can make them when appropriate.

Slide 6, in the US, I must say I'm very with the progress that our management team has made, as they work towards an IPO.

ING US is preparing to file a registration statement with the SEC in connection with the planned IPO. And upon filing, and upon the SEC review and Company S-1 amendments will occur the following three to four months. This means that we expect that somewhere in 2013, we plan to be ready to execute the first tranche of the IPO, with timing being dependent on market conditions.

Also, slide 7, good progress was made by our team in the US become a standalone Company. Capitalization has improved with the estimated RBC ratio at 516%, compared to a target of 425%. Note, however, that the RBC ratio excludes our offshore reinsurer SLDI, and that SLDI is still supported, in part, by a $1.5 billion contingent capital letter of credit with ING Bank, and that was put in place, as you probably remember, last year.

We will continue efforts to achieve a 25% debt-to-capital ratio and to redeem the $1.5 billion contingent capital letter of credit. The 25% is more or less a number that people expect for IPO companies.

Given the various capitalization targets, we cannot rule out that part of the IPO may be needed to support the capitalization of Insurance US and replace the contingent capital facility.

Slide number 8, Insurance Europe. We have stepped up our efforts to prepare the business for the base case of an IPO. And as part of this preparation, we have appointed Delfin Rueda as CFO and Dorothee van Vredenburch, who will handle Communications, HR and our transformation process, as new Members of the Management Board Insurance EurAsia as of November 1 of this year.

We also announced that Insurance Europe is accelerating its transformation program to sharpen the strategic focus of its business unit at Nationale-Nederlanden. And the strategic actions include that we are launching a new defined contribution pension solution business; that we are helping customers transition from defined benefit to defined contribution pensions; that we are accelerating retail life strategy through the introduction of new products; and that we are increasing the focusing on service and efficiency of cost and capital and existing in closed block Life; strengthening the position in the SME markets by rationalizing our product offering and focusing on very specific segments.

Slide 10. In addition to the transformation at Nationale-Nederlanden, Insurance Europe will also delay the support functions to reduce overlap and streamline the organization. Combined, these programs will result in a reduction of around 1,350 FTEs in 2013 and '14. A restructuring provision of approximately EUR150 million after tax will be booked in the fourth quarter of this year.

And then additionally, IT investments of about EUR75 million, after tax, will be made over the coming two years to improve processes and systems. These costs will be booked as special items over time.

Cost savings generated by these measures are expected to reach a run rate of EUR200 million by the end of 2014.

Slide 11. ING Bank continues to deliver on its strategic priorities. We did sell our equity stake in Capital One. We announced the divestments of ING Direct Canada and the UK as part of sharpening our strategic focus. We also accelerated de-risking, selling EUR4.9 billion of European debt securities and thereby releasing EUR6 billion of risk-weighted assets in the first nine months of this year. In October, we sold another EUR3.5 billion additional debt securities, releasing another EUR1 billion of risk-weighted assets.

Furthermore, we are making clear progress in our cost initiatives at Retail Bank in Netherlands, which is ahead of plan. And finally, we achieved another EUR5.2 billion of balance sheet integration initiatives in the third quarter. That brings the total to EUR33 billion since the beginning of 2011.

Slide 12. Following a strategic review at Commercial Bank earlier this year, we decided to accelerate the implementation of strategic adaptations, including the run-off of certain leasing units, the right-sizing of the Equity businesses and operational improvements in several units, including our PCM business, our Payments and Cash Management business. These measures are expected to result in a reduction of about 1,000 FTEs over the next three years, for which we will take an after-tax provision of about EUR150 million in the fourth quarter of 2012.

Cost savings are expected to reach an annual run rate of about EUR260 million in 2015. The review is ongoing and may lead to further changes in the future.

Let's now turn to the results for the third quarter on slide 14. On slide 14, you can see that the Bank posted a solid quarter, up both year on year and sequentially.

At Insurance, we kept hedges in place to protect our regulatory capital. However, losses on these hedges continue to affect, of course, our result. As a result, net underlying profit of the Group at EUR719 million in quite some challenging environments.

Let's go to the Bank on slide 16. The Bank posted solid third quarter results as the gain on the sale of our equity stake in Capital One largely offset the losses from de-risking and the negative impact from credit valuation and debt valuation adjustments.

Risk costs increased slightly from the second quarter. Underlying result before tax rose to EUR1.021 billion which is up 16.3% compared to the same quarter last year and 2.6% higher than the second quarter of this year. Underlying interest margin, on a sequential basis, improved to 1.33 percentage points.

On page 17, during the third quarter, we had de-risking efforts, in particular, in the eurozone area. Total bond sales amounted to EUR2.4 billion, for which we took a loss of EUR258 million. Sales were focused on the Spanish covered bonds, Spanish and Irish RMBSs and European CMBS. And we cleaned up the numbers for these and other market impacts to make them more comparable, the gross result went up by 12.2% versus the third quarter last year, and up 2.8% if you compare that with the second quarter this year.

Interest result was up by 2.2% from a year ago and 3.6% sequentially, primarily due to strong results in Financial Markets. The margin rose to 1.33% from 1.26% in the second quarter, mainly by higher interest result, as well as lower average balance sheet level during the second quarter -- during the third quarter.

Margins on savings are under some pressure, despite reductions for -- of client rates in many countries, reflecting the impact of low interest rates and the de-risking. Margins on lending improved in the third quarter, supported by moderate volume growth in mortgages, and of course, by re-pricing of loans that came due.

Operating expense, we continue to put high priority on cost containment. Operating expense increased marginally by 0.5% from the previous year. Strong cost control that was able to offset the annual salary increases, effectively had higher bank levies, and one-time additional tax on employee salaries and negative currency effects.

Compared to the second quarter 2012, that included EUR38 million reimbursement from the old deposit guarantee scheme in Belgium. And we had lower performance-related expenses. If you eliminate that, expenses rose by 3.9%.

The underlying cost-income ratio was 58.7% or 56.9% when you include the market impacts and the CVA/DVA adjustments. We believe that Q4 expense will be impacted by a new Dutch tax of about EUR175 million.

Risk costs; the weak economic and business fundamentals continue to contribute to elevated levels of risk cost in the third quarter. Although the net addition to the provision for loan losses rose only by 2.6%, to EUR555 million, it increased 59.5% if you compare it year on year. The modest increase compared with the second quarter, was mainly attributable to the mid-corporate and SME segments in the Benelux, and provisioning for CMBS position in ING Direct. ING expect risk loss to remain elevated, reflecting the weakening of the economic climate.

Non-performing loans, slide 21, ratio remains stable at 2.3%. Ratios in mid-corps and SMEs, and real estate finance and leasing, that is the run-off, continue to be relatively high, and we saw that again in previous quarters.

Loan loss provision for real estate finance declined to EUR102 million, from EUR120 million in the previous quarter. NPL ratio for REF increased to 8% compared to 7.3% at the end of June, which is mainly driven by the Netherlands and, to a lesser extent, by the UK.

Non-performing loans in our EUR2.7 billion real estate finance portfolio in Spain remained high at 19%. And risk cost on this portfolio increased to EUR51 million in this quarter, reflecting lower real estate valuations following our regular appraisal of collateral. Given that the deteriorating commercial real estate market in Europe, we expect the risk cost for REF will remain elevated.

Risk cost for Dutch mortgages declined to EUR44 million from EUR53 million in the previous quarter, and that included a model update at WestlandUtrecht Bank. NPL for the Dutch mortgage portfolio increased slightly, but has remained relatively low at 1.3%, supported by, again, a relatively low unemployment rate in the Netherlands. As house prices are expected to decline further, and unemployment to increase, we expect risk cost for the Dutch mortgage market to remain elevated.

Last Monday, a new government was installed in the Netherlands. Their plans to -- for the coming years include housing market reform, among which a gradual decline in the tax deductibility for new and existing mortgages, and also reform of the rental markets.

Slide 24; given the further weakening of the Spanish economy in the third quarter, we continue to proactively de-risk our exposure to Spain, to reduce our concentration, and to mitigate risk-weighted assets' migration. The Bank's total exposure to Spain was reduced by EUR1.8 billion, including EUR0.2 billion in the lending book and EUR1.8 billion in the debt securities portfolio, mainly as a result of sales of covered bonds and RMBS.

The Spanish funding mismatch, defined as the Spanish assets outstanding minus local funding, has reduced from EUR13.8 billion at the end of Q2, to below EUR10 billion at the end of this quarter. Spanish covered bonds will be further reduced as our portfolio is maturing.

Slide 25, the core Tier 1 ratio increased from 11.1% to 12.1%. And that was, of course, supported by the gain that we made on the sale of our Cap One stake and strong reduction in RWAs, following de-risking and the sale of the stake of Capital One. If we would include the sale of ING Direct Canada and ING Direct UK, the pro forma core Tier 1 ratio is at, I think, a very robust 12.6% (sic - see slide 25 "12.1%").

The new accounting on pensions will come into effect on January 1, as far as we know, and that will require immediate recognition of actuarial gains and losses through the equity account. Based on the numbers of September 30, this would have an impact of about 50 basis points negative on the Bank's core Tier 1 ratio. That deduction was already included in the fully loaded Basel III pension impact.

On page 26, you see the timing of the CRD IV implementation and the final form of it is still very uncertain. In the consultant's paper that we got from the DNB, our Dutch National Bank, it indicates that the revaluation reserve for debt securities will be phased in rather than applied immediately.

As a result of these changes and the introduction of IAS 19 on pensions, the impact on Basel III is estimated to be a negative 140 basis points, when we will introduce it, and later when it will be phased in, on a plus of 20 basis points.

The impact excludes our deferred tax assets, which are expected to be used prior to Basel III implementation, and retained earnings after September 30 of this year; so Q4 is not included yet. Furthermore, management actions are expected to reduced our risk-weighted assets by at least EUR18 billion, of which EUR8 billion has already been achieved so far.

Now, let's turn to Insurance, slide 28. Results from Insurance declined, as de-risking measures and low interest environment put pressure on the investment margin. Also, our Non-Life results continue to be impacted by high disability claims. Together they reduced the operating result for Insurance by 39.3% compared with a year ago.

Underlying results continue to be impacted by losses on hedges that we maintain, in order to focus on protecting our regulatory capital amidst these very volatile financial markets.

Investment margin declined compared with the last quarter, reflecting the impact of de-risking in the Benelux, as well as exceptionally high dividends that were paid in Q3 of last year. The investment margin also declined from the second quarter, mainly reflecting seasonality.

Q4 rolling -- the four-quarter rolling average investment spread was 130 basis points, which is down from 133 basis points in the last quarter, again reflecting de-risking and the low interest rate environment. Technical margin, fees and premium-based revenues totaled EUR784 million, which was down 2%, excluding foreign exchange. It was up 0.3% if you compare it with the second quarter this year.

In the US, higher fees and premium-based revenues from the ongoing businesses were more than offset by higher hedge costs and lower fees on the closed block VA. Technical margin improved to EUR122 million compared with EUR100 million a year ago, reflecting both improvements in the US, as well as the Benelux.

We continue to be very tight on expenses; they did increase slightly from the previous year, reflecting investments for growth in investment management in Central and Eastern Europe. And while expenses remain flat in the Benelux and Insurance US, reflecting, as I said, very strict cost control, ratio was 46. -- 47.6%.

As mentioned earlier, Insurance Europe is accelerating its transformation program, which is expected to generate cost savings of approximately EUR200 million by the end of 2014.

If we take a closer look at our business areas, we see that Insurance Benelux posted lower operating results, as the impact of de-risking and higher dividends in those comparable quarters led to a decline in the investment margin. And Non-Life results continue to be impacted by the higher disability claims in the Netherlands.

Underlying results, including market-related impacts, remain volatile, as Insurance Benelux continues to focus on hedging, to protect regulatory capital that leads to volatility in our P&L. Underlying profit for the quarter declined significantly from a year ago, but it did improve compared to the second quarter.

Lower sales in the Benelux, compared to the same quarter last year, were offset by 13.3% higher sales in our Eastern European and Central European businesses, driven in particular by increased sale in Life and Pensions.

Insurance US had a strong third quarter, operating results of EUR195 million, that was 14.1% better than the same quarter last year and 12% better than the second quarter. The increase over both quarters reflects improved results in the requirement -- Retirement Solutions business.

Underlying result before tax increased strongly to EUR398 million, and it was supported by gains on the sale of securities and positive debt unlocking, following model refinements and assumption updates.

Sales were flat as higher retirement sales were offset intentionally by lower annuity and individual Life sales.

Results from the US closed block VA continued to reflect the volatility as the hedge program is focused on protecting regulatory capital, rather than mitigating earnings volatility. The underlying result declined to a negative EUR348 million, reflecting the hedge losses net of reserve changes, and EUR104 million charge related to lapse assumption refinements.

Reserve adequacy has improved to 74% confidence level. As a result, reserves are projected to remain adequate even in a 25% down shock scenario. While the focus on capital protection continues to cause IFRS P&L volatility, earnings sensitivities at least are now more symmetric.

Insurance Asia posted another strong result in the third quarter, despite the sales process for these businesses. Operating result increased from a higher investment income, which rose on strong general account asset growth, as well as we saw improved mortality results in Korea.

Sales declined from last year, that was mainly in Japan, because of tax law changes, that was affecting our COLI cancer product sales, but increased from the previous quarter driven by growth in Malaysia and Hong Kong, as well as in Japan from products diversification.

So let me wrap it up quickly. We continue to deliver on our restructuring program. We announced already three sales of our Asian insurance units, and the process for the remaining businesses is ongoing. US is preparing to file a registration statement with the SEC. And Insurance Europe is accelerating the transformation program to sharpen strategic focus of business units at Nationale-Nederlanden

The Bank had a good quarter, but the Commercial Banking franchise has decided to accelerate the implementation of a number of strategic adaptations, that will lead to cost savings of about EUR260 million by the year 2015.

The Group had a net underlying profit of EUR719 million. As I said, a very strong or very solid quarter for the Bank with results both year on year and sequentially. And underlying results before tax and insurance declined, primarily due to negative results on hedges that we use to protect our regulatory capital.

And with that I think we are ready to answer your questions.

(Operator Instructions) Michael Van Wegen, Bank of America Merrill Lynch.

Two questions please. First of all, you made comments in the press release that you're making good progress with your discussions with the European Commission, if I remember well at the beginning of the year you indicated your ambition to repay at least part of the State support before year end; I don't think there is any news on that today. Would you -- should we conclude from that that you're comfortable or hopeful that you might reach an agreement with the European Commission before year end and want to wait, therefore, with an actual announcement, or how should we interpret that?

The second question is you touched upon the changes in the Dutch tax legislation for mortgages, what's your opinion on the impact on the housing market this will have and the potential losses for mortgages? I know that you've said risk cost rule will remain elevated. Thank you.

Michael, good morning. We have made good progress in our discussions together with the Dutch State, with the European Commission. And good progress really means that -- it means good progress. But we don't have anything to report at this moment. As soon as we have, and as soon as the European Commission has, I think we will do so.

Our payment intention with the Dutch State continues; we would like to pay them back as soon as possible. But we also need to be mindful of the ability to do so and the consequences of a full repayment. So I have said, indeed, earlier this year, and I will continue that again, that we like to make at least a part repayment this year to the Dutch State, but I think it's better to wait for the final arrangement that we hope to make with the European Commission before making any further comments.

On the mortgages in the Netherlands and the tax consequences, the changes in the tax law, they are not really that significant, they are over time. They are declining from an ability to deduct 52% in a number of years, almost 20 years down to 38%, so that's a very gradual decline.

I think, more important, this Government has taken, I think, very concrete steps to deal with the housing market in a wholesome way, not just looking at homes that you can buy, but also the rental markets. And it's too early to say what the implications will be; it hangs too much together with what will happen with the total economy, but I think in general these are good steps forwards.

Don't know, Wilf, has anything to add?

Well maybe just to add a bit of color to it, if you look at the measures that are being contemplated or introduced, as Jan was saying, the deducibility itself will probably not have a lot of impact. What has a bit more impact is the fact that new loans will have to amortize in order to qualify for tax deduction. So that will gradually reduce affordability a bit.

At the same time, of course, the houses most affected by that are also coming down in price, so net/net whether the affordability is really that much affected remains to be seen. Maybe the bigger impact on this will come from the increased health insurance premiums that will reduce spendable income, and have an indirect impact on the housing market in the ability of people to service their loans.

Perfect thank you very much.

Jan Willem Weidema, ABM Amro Bank.

For your Basel III guidance, if I remember correctly, your old guidance was an impact of 80 basis points, now fully-phased in 120 basis points. Can you take me through the difference there between the old and the new guidance?

And secondly, can you comment on the impact of de-risking of the NIM going forward?

And finally, on your US RBC ratio, can you comment on the impact of the dampener for low rates? And how big is the benefit? And do you expect that to come down in the coming quarters if rates stay where they are?

Patrick will do that.

In respect of the Basel III impact, if I recall, last quarter we said the impact was I think around EUR160 million in aggregate, of which half of it came immediately and half of it was phased in.

What we're showing now is the overall impact is slightly bigger, it's about EUR170 million, although the timing of the impact has changed, principally, because of IAS 19, which will accelerate some of this into immediate impact. So there's 50 basis points from the pension that comes in immediately.

Also, as Jan mentioned, the Dutch regulator has indicated that the mark to market on bonds will be phased in rather than immediate. And that defers some of the benefit later.

So, yes, what we're seeing broadly in aggregate the same overall impact, EUR160 million/EUR170 million but some further acceleration of the impact because of IAS 19. And, by the way, we not even sure that Basel III will come in in Q1 next year, because we haven't seen CRD IV ratified yet.

And the other impact, RBC, here there's been some benefit from unrealized gains due to lower rates.

Andrew Coombs, Citigroup.

I've three questions, in fact. The first question relates to slides 10 and 12, the two cost-save initiatives announced. Perhaps you could also provide thoughts on what the revenue attrition associated with those cost saves might be? That's the first question.

Second question, on slide 21, you've detailed the NPL increase in real estate. But perhaps you could shed some color on the increase in corporate and in leasing there? And if you could also provide how, or give an example of how, the coverage ratios have changed in each of those buckets that would also be appreciated.

And then the final question's on de-risking. You've done EUR5 billion of reduction year to date with a loss of EUR475 million. You mentioned in October, there's another EUR3.5 billion reduction with a loss of EUR119 million. So just interested to know your thoughts on how much more de-risking you're planning to do. How much of that is probably to be achieved by active sales? Or whether that's more likely to come through natural amortization from here?

So just referring to the Nationale-Nederlanden and the Dutch expense savings programs, we would not anticipate any impact on revenues. These are purely expense saves with some investment required to be able to get there.

And the same for the Commercial Bank. There is some impact on revenues. But they are completely outweighed by the big benefits we are seeking on the expense side.

Wilf has anything to say?

Yes, I understand the question was you see the NPL numbers for real estate, but can we have some color on corporate and leasing beyond that, is that correct?

That's correct please.

Okay, if you look at the Commercial Banking portfolio overall, the NPLs were up slightly from 4.3% previous quarter to 4.5% this quarter. And digging a little bit into those numbers, the general corporate lending went up from 3.9% -- sorry, to 3.9% from 3.6%; and leasing to 7.8% from 6.8%. REF, you've seen the structured finance number actually came down a bit from 2.4% to 2.2%.

And in terms of the risk cost, the corporate lending book risk cost was down from EUR105 million to EUR65 million. Leasing went from EUR35 million to EUR29 million. And the structure finance risk cost went from EUR55 million to EUR40 million.

The coverage ratios, generally, stable; if you look at the commercial book overall, its round 40%. The general lending book went up a bit in cover from 50% to 52%. The structured finance came down slightly from 53% to 47%. And the rest was pretty much stable.

And then just on the de-risking?

Yes, specifically I guess the question would be on Spain. We have said all along that this was a large book that, in terms of quality is definitely not a major concern, but it's just large in a difficult economic environment. So we've actively managed it, and as and when we see opportunities to do so at attractive prices, we will continue to do that.

But at the same time, I think you refer to that. There is a natural run-off in the book that is quite substantial; it would be about EUR2.6 billion next year on the [schedulers] alone and another EUR2.5 billion the year thereafter. So it will continue to come down. But we may, if we see opportunities actively manage it further.

But I think it's fair to say that the biggest de-risking exercises that we have done are basically behind us. From time to time and when we see an opportunity, I think we'll take advantage of it. But the big stuff, I think, is basically done.

Yes, I think the concentration, for now, is more on RWA migration and not so much on risk mitigation.

Thanks very much.

Francesca Tondi, Morgan Stanley.

A couple of questions also on my side. Looking not just on your net interest margin but your net interest income progression, you seem to be having positive trends in most of the parts of the business. Could you expand a little bit more on where that progression is coming, especially in retail Benelux and Belgium, which actually sees quite a bit of an improvement versus the Netherlands, which sees some decline, somewhat improvement in the Commercial Banking business. I didn't see a significant improvement on the lending or increase in the lending, so if you could expand on the reason for the increase.

Going back for a moment to your Spanish de-risking, interested in your comment that the large part has been done. I see, however, that actually credit spreads are still contracting. I was a bit surprised that actually what you did in the third quarter seemed to be less than the second quarter with bigger charges. Can you just expand a little bit on what are the trends that you are seeing there? And why you think that the big part has been done? Would it not be making sense to accelerate a little bit more? And, yes, that's pretty much it.

Yes, in respect of the interest margin, yes, you're right. Not only did the, in basis points term, we have a nice up tick to 133 basis points, part of which due to balance sheet reduction.

But also the interest earnings, as you say, did increase; it's up EUR107 million. About half of that is in Commercial Banking, in Financial Markets. Whilst that can be volatile in terms of the composition of Financial Markets income, I think it's important to point out that the revenues there have been pretty solid, over EUR300 million both quarters. You don't necessarily see that in the bottom line because of volatile CVA -- DVA. But Financial Markets has held up pretty well.

In terms of the core businesses, what we're seeing is a small increase overall. In interest margins, both in Belgium and the Netherlands, you referred to them, the interest costs have been reduced by about 20 basis points, the amounts we pay on savings, which is a positive. However, that didn't offset fully the impact of lower interest rates. So the net earnings reflecting slightly negative in terms of the core savings piece.

In terms of lending, the margin improved, again, marginally, a small increase. But that was on the back of re-pricing on higher cost of funds, which is a positive and demonstrates again further commitment to maintain discipline in pricing.

So what do we think in terms of outlook? Going forward, I think it should hold up reasonably well at these levels. We would expect that the impact of the price reductions should offset -- and you'll see the full effect of that more in the fourth quarter, should offset, broadly the impact of the lower interest rate environment in terms of the near time.

And obviously, going forward, we still believe that we will migrate towards the longer term 140/145 basis points target. We said at the Investor Day, it's supported by balance sheet optimization, which we have more to do on and gradual re-pricing of the loan book.

And just looking also at the benefits in the finance division, how do you look at the trends on your hedges, because clearly rolling over time at lower yields clearly has a drag effect? So, positive this quarter versus what you see as the trend going forward on that side?

The hedge is typically in the Bank are, what you would call, accrual accounted.

Yes.

The key thing there is that the margin on new business and the hedges roll into the cost of funds. And what we're trying to do, we've done it in Retail mortgages, as well as Commercial, you are looking to and we execute on our strategic ambitions, which involve reflecting the higher cost of credit. So it's more about re-pricing the cost to the customer and the hedging is wrapped into the cost of funds. So you're not actually going to see that in terms of a separate impact.

Okay. But do you think that net/net then you'll be able to offset the negative roll-off of the hedges and, therefore, are seeing that as positive then, trending towards your -- so are we [trusting] margin, is what I'm saying here?

Yes, I think the issue which may be negative is that there's maybe lower volumes as prices go up.

Okay. And since you've touched upon your, effectively, the reorganization of the balance sheet, if you wouldn't mind just giving us a quick update on that.

Yes, the ambition is to -- we have, as I mentioned earlier, EUR11 billion of retail inflow, it's on [the back of] -- sorry, deposit inflow, half of which is Retail, half which is Commercial.

Core strength is the ability to generate deposits. What we aim to do is to continue to migrate our lending capacity to areas where we have deposit generation. So this is about moving Commercial Banking origination capability to Belgium, and into Germany, where there are strengths.

Yes. And what is the update on this quarter, for what you've managed to do so far?

I think we've given that in aggregate. It's not something we would give quarter by quarter.

Okay, that's fine. And then my last question, if you don't mind, about the Spanish deleveraging, and why is it that the biggest chunk is done?

On that, if you look back over the past quarters, second quarter, for us, was mainly about reducing the absolute volume of the exposures and the mismatch. Third quarter was more about risk mitigation. As I said earlier, what we're now looking really is more the risk migration risk than anything else, and to control that.

Your comment about credit spreads and improvement in pricing, looking a little bit beyond the weekly volatility there, the overall prices currently, in October, are pretty much where they were in June. So there's not a massive change. And, to us, that signals that, yes, there is volatility, but there's not really a big trend at the moment.

The other observation is that we do have a serious and sizeable client franchise in Spain. And the objective is to gradually reduce our investment books there and replace them with originated assets. And the current run-off of the investment book supports that nicely.

Okay, I understand. Thank you.

Francois Boissin, Exane BNP Paribas.

A few questions, please; the first one on the Japanese VA book. Basically, could you just walk us through the various scenarios, interest, potential hit that you could take, according to your, let's say, disposals?

Second question is on risk-weighted assets migration in Spain. You mentioned this risk. Can you maybe quantify the additional risk-weighted assets that we could see in the coming quarters in Spain?

And then finally, about the competitive landscape in Netherlands, could you maybe just give some color about competitors' behavior in terms of pricing? And if you are able, basically, to re-price loans in line with your expectations or do you face hurdles? Thank you.

Just with respect to the Japan VA book, I think we disclosed in this quarter that we do have a reserve inadequacy of about EUR500 million for the totality of Japan COLI, plus the VA that is reinsured with ING Re. That is composed of this EUR1.1 billion inadequacy for the VA block, and it's compensated by a EUR600 million adequacy, or surplus if you will, at the corporate-owned Life insurance business.

We disclose it in this way because, actually, the consequences of when things get reported as losses crystallized are very, very much dependent on the timing of the closing of the various transactions, in part that we've already announced, and in part that we will be announcing.

So it's a little bit early to talk about overall impact, because we need to know the timing of those transactions; the amount of those transactions; and, actually, the ultimate resolution to what we do with the sale of the overall Japan business.

Okay. Maybe just a follow-up question on that; what are the sensitivities here? What could cause the inadequacy to rise? And what could, basically, ease the shortfall?

The inadequacies are the inadequacies. So the point is when the stuff ultimately gets reflected in our financial accounting and the way that we publish our results. So the sensitivities are, basically, the timing of the various transactions; the amount of the proceeds; the gains and losses that we would see on those. That's the sensitivity.

I would add also that these are generally IFRS impacts and that, from a capital standpoint, we've already had the capitalization correct in ING Re.

Okay. So there is no real market sensitivity here?

There is market sensitivity, but it has more to do with the impact of, let's say, financial markets and negotiations on the ultimate -- the prices that we get for these assets.

Right.

As you know, we have announced several of them; there will be several to come. But it has more to do with that than anything else.

Okay, thank you. And about the risk-weighted asset migration and competitive landscape?

Yes, we're getting to it.

I think this is more about, what we're talking about here is avoiding the potential for this to happen in the future. So what we've done is looked at taking preventative action, particularly in asset-backed security space, to get ahead of the curve. So it's avoiding things that might come, rather than guiding for future increases. We're trying to avoid negative impacts, and I think we've done that reasonably successfully so far.

Okay.

On the competitive behavior in the Netherlands, I think we can't say much, except that we do what we do, and competitors do what they do. We are tight. We are pricing our product as we see, based on new capital rules, as we need to price them. And I think we're very diligent and very disciplined in our pricing behavior. But others do as what others do; we just follow the lines of ING.

Okay, thank you very much.

Michael Huttner, JPMorgan.

I had three questions. The first one is if I -- just to get a feel for the Banking profitability, so EUR1 billion is reported underlying pre-tax. You had a target of 10% to 13%, which I think was between EUR3.3 billion and EUR4.2 billion net. So assuming the EUR1 billion annualized of EUR4 billion, then net of tax about EUR3 billion. So you've got -- there's a gap there, and I'm just wondering how quickly you can close that gap? And where's it come from?

Then you talked about the EUR1.5 billion letter of credit. It wasn't clear to me how this is going to be repaid. Is it the US IPO? Or is the US going to raise hybrid debt on its own and that will replace it, so it wouldn't necessarily impinge on the IPO proceeds?

And the last one is, looking at slide 5, the EUR1.1 billion book value for ING Re is, for me, a new disclosure. I'm sure I missed it somewhere before. But what I notice, that it's not on slide 4. In other words, we still have -- it's gone up, because we're in Q3 rather than Q2, but about EUR6 billion/EUR7 billion in total of EUR6.9 billion in tangible book of Asia assets. And then now we've got this EUR1.1 billion, does it take -- should I take that to mean that ING Re is now also to be included in the assets for sale relating to Asia? Thank you very much.

Okay, if you look at the Bank, the Bank is making EUR1 billion before tax. And if you relate our numbers, we are making a 10% return on a 10% core Tier 1 ratio as we have defined that. So, we're basically, in the range that we have said before; between 10% and 13%, already there.

If you compare that on the actual equity that we have today, it's a little bit lower. But I think you need to calculate that over time on what the target ratio will be for our capital. And at this moment, we are maintaining internally a 10% core Tier 1 ratio as our target, capital ratio for core Tier 1.

And this is core Tier 1 fully loaded?

Yes, it is fully loaded, as we have it today, yes.

Okay.

On the EUR1.5 billion facility that we have with the US, all we have done here is we have mentioned to you that there is a facility and a credit facility available that needs to be dealt with. And we are not at this moment saying how it will be dealt with. We are going to take a look at that very carefully over time together with our US colleagues. But it could potentially have an impact and that's what we have been willing to flag today just to have full disclosure.

Patrick, on the (inaudible).

In respect of Japan, the capital in Japan, it was disclosed last quarter, albeit, I think in the table you're referring to, if I recall correctly, it was a footnote. But it was -- it was isolated before so it hasn't changed in that respect.

But should I take it to meant that the ING Re is now for sale or is it not for sale? I'm puzzled because it appears in one table and not in the other and I'm not sure and, clearly, the tables are related to the extent that you, the VA provision affects all of these things?

No, ING V is not for sale, but it includes reinsured transactions other than that of Japan. Obviously, when we complete all of the Asian transactions, this will -- the element in ING that relates to that will come out in the overall result.

Excellent. Okay, thank you very much.

Gordon Aitken, RBC Capital Markets.

A couple of questions, please. Firstly, insurance sales are down 1.4%. Just talk a bit about how your insurance businesses are being affected by the knowledge that in two years' time they will be under different ownership. How many percentage points you think that's knocking off the growth?

And secondly, on the Dutch DB market, just wondering how many schemes you took on in the third quarter, and what's your outlook for this market?

I'll take both of them. In terms of the insurance sales, I think what we're seeing is the -- so your specific question is what impact is the announcement of divestitures having on insurance sales overall.

And, in general, we're seeing -- actually, we are seeing movements in the sales numbers, but they're not really as a result of the announced divestments. We're seeing actually generally flattish sales in the retirement business in the US. We've seen some reduced sales in the Life Insurance business in the US, as well as in the Annuity business, but those are more management actions and as a consequence of the lower interest rate. So we intentionally sell a little bit less of that.

We see continued pretty good sales within Asia; I think we saw that on one of the other slides. Within the Benelux, I think we're seeing lower sales, again as a consequence of more lower interest rates than anything else on the Life Insurance side, particularly in the Netherlands and in Belgium. But then in CRE, we're seeing sales up 13% over the third quarter last year, of which 10% is Life.

So in those areas we see actually some pretty good sales growth. So kind of a long answer to your short question, we're not seeing a lot of impact as a consequence of the announced divestments.

With respect to the Dutch defined benefit market, that's the one I think we have to come back to you on. I don't know exactly what we've done in the third quarter with respect to new clients.

Thank you.

Marcus Rivaldi, Morgan Stanley.

As per your original EC State [A] decision, EC oversight on hybrid calls seems to fall away on November 18. So my question really is should subordinated bondholders expect this original agreement to hold, or could an extension to this behavioral restriction form part of a new agreement with the EC, and the question really is because there are a clear number of bonds coming to call in December?

And then related to that, what are you planning to do with bonds that were not called during the course of that period of EC oversight. Do you need the capital? Would you just call them? Do you envisage tenders and exchanges?

And then just a final question, please; any comments you can make around the potential for ING involvement in a potential SNS property finance bad bank solution? Thank you.

We are -- as I said earlier, we are making good progress with the European Commission. We are doing that together with the Dutch state. We cannot, at this moment, give you any more information than that and give you more color than that we have made good progress.

Under the arrangements we have, we have to ask the EC for permission to make calls and to do repayments. And I cannot give you any further answer than this on this subject. You will have to wait until you see at the end what decisions are coming out of Europe. And we don't know them today and so we cannot tell you right now.

With respect to the, let's say, participation by SNS -- or by ING in a potential with SNS, I cannot give you any comment. I have absolutely no comment to make on SNS.

Okay. Just come back into the bond thing. I guess the issue of the confusion is that you have an existing agreement, which seems to end on November 18. So should we consider that effectively null and void at this stage?

I cannot help you. I'm sorry, I cannot help you. We have made good progress with the European Commission, but you are basically on your own at this moment. I cannot give you any more help.

Okay. Thank you very much anyway.

David Andrich, Morgan Stanley.

I just had a couple of questions on the Benelux Insurance business. First of all, I was just wondering, in terms of the Non-Life performance, what actions you have taken to address this.

Second of all, if I look at the second quarter result, it was down from 2Q '11 by about 7% from Benelux sales and, particularly, individual life. And in this quarter I see, I think it's down by about 23%. And I was just wondering if this was a trend which you see continuing and/or if it's kind of leveling off?

And then finally, I was just wondering, in terms of the IGD ratio for the Group, as well as I was wondering if you had it broken apart for the Benelux European business as well? Thank you.

I'll take these piece by piece. So first of all, on the Non-Life business, you'll recognize that our Non-Life results were down in the third quarter. We have taken a charge as a consequence, largely of claims in the disability area and we have strengthened the provisions there.

The actions that we take, well, aside from strengthening the reserves, of course, are to increase premiums. We have stopped sales of certain sickness types of products. We have instituted programs to get people back to work more quickly. So this is more of a claims handling type of issue. So I think that we have taken quite some actions just from a pure business standpoint to get that back on track.

So it's a disappointing result, obviously, for the third quarter, but we take some actions, which I think will bring that back into line, all of it, of course, driven by the difficult economic environment here in the Netherlands.

With respect to the sales, what you've seen is declining sales as a consequence, largely of retail sales within the Netherlands and in Belgium. And what you're seeing also is that certain of our products, which had previously been insurance products, are now being transformed into sales of what's called [bunk-spotter] products, and these are not included in the AP figures, but they are included in the figures in the Bank and you'll see that a bit in our disclosure. But clearly, life sales are a bit lagging here.

There's also some seasonality to the numbers. So when you look at comparisons quarter on quarter, they become a little bit difficult.

With respect to the IGD ratio, we don't provide any further breakdowns of that overall. We do provide, at year end, some information on capitalization on some of the bigger businesses, but we don't disclose that on the in-between quarters.

Okay, great. Thank you.

Manish Bakhda, Citigroup.

Just one further question from a debt-holder perspective. I appreciate you can't comment on what's going on with the EC, but given bonds issued out of the Insurance holdco have very specific language around the sale of the insurance businesses, does ING view these calls on these bonds any differently to the other bonds?

I have no better answer than the one I have given you earlier. I cannot comment and you will have to have some patience.

All right. Well, thank you very much.

Thank you. Thank you very much for being on the call. I think that's the final question. If you have any more calls that we did not answer, please direct them to Dorothee and team. They are very capable and very willing to answer your questions. In the meantime, thanks a lot and have a great day.

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