ING Groep NV (ING) 2013 Q2 法說會逐字稿

Good morning. This is Yvonne welcoming you to ING's Q2 2013 conference call.

Before handing this conference call over to Jan Hommen, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations of our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in our forward-looking statements. A discussions of factors that may cause actual results to differ from those in the forward-looking statement, is contained in our public filings, inducing our most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission, and our earnings press release as posted on our website today.

Furthermore, nothing in today's comments constitutes an offer to sell of a solicitation of an offer to buy any securities.

Good morning Jan. Over to you.

Okay. Good morning everyone and welcome to the ING conference call for the second quarter. With me here, Patrick Flynn, our CFO, and Wilfred Nagel, our Chief Risk Officer. Also here is Delfin Rueda and Doug Caldwell from our Insurance activities, Delfin the CFO and Doug the CRO, in case there are some specific questions.

Let me quickly go to the presentation and go to slide number two. You see that we have made steady progress on our restructuring. US IPO successfully launched. Double leverage reduced significantly to EUR4.4b. And the relevant parts of the Westland Utrecht Bank we have transferred to Nationale-Nederlanden, and that way making them ready when the IPO for Europe is done to be divested.

ING Group underlying net profit of EUR942m driven by good performance in all three segments. The Bank reported another strong quarter, pre-tax result of EUR1.147b, supported by an improvement in our net income --- or net interest margin to 142 basis points and good cost control. Operating result in Insurance EurAsia, substantial improvement supported by expense reductions and that you can see here that the transformation process that we have announced last year is really beginning to bear fruit. Also our non-Life business had good results. Insurance US, solid performance again driven by higher fees and premium-based revenues and reflecting the inflow on retirement and the IIM business.

Slide number three, you see that reflected one more time. On the left side you see the restructuring activities that we completed and on the right side you see the program that we have to pay back to Dutch stake, another payment coming due in November and then quickly thereafter one in March. And we are still very active in making sure that our IPO for Europe can be done next year together with the sale process of ING Life Korea and Japan.

Slide number four, you see the Group double leverage has been reduced to EUR4.4b. If you take our stake in the US and you take our stake in SulAmerica, they're basically in market value sufficient to cover the outstanding double leverage and that gives us flexibility to deal with the IPO for the European unit, should we have in mind different type of alternatives.

Slide number five, you see here that we have decided to transfer ING US out of ING Insurance. It will go to the Group, the Group Holding Company. And that way we clear the way to use ING Insurance as the IPO vehicle for the EurAsian Insurance business, and also allowing for a very clean and easy separation between Bank and Insurance companies. The transfer of the US will be done as a dividend upstream to the Group and we plan to do that before the end of this year. It will not have an impact on ING Group capital and future proceeds from the sale of our remaining stakes in ING US and SulAmerica will be used to redeem the double leverage at the ING Group.

We are planning to provide an update on the preparation for the IPO of the Insurance EurAsia activities on September 19. We probably will hold that in London. It's a way to introduce our management team and to show what the plans are at a fairly high level. So you probably will get an invitation from our IR organization for that meeting.

Slide number six, Insurance debt is further reduced. You see the pro forma consolidated balance sheet of ING Insurance without the US and then you see that ING Insurance has a debt of EUR4.7b at the end of Q2. That will be reduced to EUR4.3b when we use the proceeds of activities that are on sale, China Merchant Fund, ING Bank of Beijing life business, the Korean Investment Management business, and also the full redemption of inter-company debt from the US. And then the sale process for ING Life Korea, Japan and the rest of ING Management in Asia are ongoing, and also the proceeds here can be used to further reduce the debt.

Target capital and leverage ratios for the to-be-IPOed company are under discussion and will be announced in due course when we have more visibility, in particular on the capital regime that will be available here in Europe.

Slide seven, you see here that we have transferred the -- completed the merger of the commercial operations of Westland Utrecht Bank with Nationale-Nederlanden. That was done on July 1 and that will pave the way to divest these operations as part of the Insurance European IPO. We transferred EUR3.9b of mortgages, EUR3.7b of retail savings to Nationale-Nederlanden Bank, and in addition the Group provided the capital injection of EUR300m, for which the Bank has made a dividend to the Group.

On slide eight you see the strong capital position that the Bank has despite the dividends that we paid to the Group. The ratio declined from 12.3% at a core Tier 1 to 11.8% following the EUR1.8b to the Group. EUR1.5b was used to reduce the double leverage and EUR0.3b was used to provide capital to Nationale-Nederlanden Bank on July 1. The pro forma CRD IV core Tier 1 ratio at implementation date is 10.7% and, if you look at it on a fully-loaded basis, it is 10.2%, still exceeding the ambition we have for 2015 of at least to have 10% core Tier 1 ratio.

Now let's look at the ambition we have for 2015, slide number nine. We basically have achieved most of what we set to be done, certainly on the balance sheet. We have increased the leverage ratio, strengthened the funding profile and we are meeting our Basel III targets at this point. The cost/income ratio in the first half was 54.7% and are moving towards the target of 50% to 53%. In the quarter we had 54.3%. So based on ongoing cost-saving programs that are on track to reduce the annual expense by about EUR800m by 2015, ING Bank will further optimize its cost structure and therefore additional cost savings are being investigated.

Slide 10, you see that we are on track to reach our 10% to 13% ROE target for 2015. That's the ambition. The ROE in the first half was 9.3% and the absence of CVA/DVA and a normalization of risk costs would lift the ROE above the 10%. And then of course we have further repricing and we have the ability to grow our balance sheet a little more -- we have room for that -- so the range of 10% to 13% is comfortably I would say within vision.

Looking at the results of Q2, I go rather quick. You see the Group result, net result, underlying at EUR942m, and good performance by all contributing units, both the Bank, the Insurance US and Insurance Europe.

The Bank, on slide 13, another strong quarter supported by an increase in the net interest margin to 142 basis points and also again cost savings are bearing fruit here as well. Risk costs remain elevated and that is reflecting the weak economic environment we see, continue to see in Europe.

Net interest margin improved, 142 bps, driven mainly by higher results while the average balance sheet remained more or less stable for Q2. Savings margins were better and that offset the low interest environment that we have seen for some time. Lending margins were up from Q2 2012 and that reflects the repricing and the very, very diligent pricing that I think we have always tried to do. And the margin was stable compared to Q1. We expect that the NIM will continue to remain around these levels in the coming quarters.

Cost reductions, slide number 15. We have I think reduced our costs significantly despite the fact that we have higher pension expense. You may remember that we had an increase -- a lowering of the discount rate that had an impact on our pension expense, but we have fully offset that by the cost savings we have initiated. Expenses were down compared to Q1. Cost/income ratio at 54.3% and I think our employment was down by about 4%.

As I said, cost savings are on track. You see here our plans for the Bank, both the retail bank in the Netherlands and Belgium as well as the commercial bank. Total plan is EUR800m (sic - see presentation "EUR840m") by 2015. Already realized EUR280m so EUR560m still to be achieved. And also we are looking at further optimizing our overhead expense and that reflects the fact that we have reduced in a number of areas the size of the Bank. More to come, I would say, of that in the next quarters.

Risk costs elevated in the second quarter and reflecting the weak macroeconomic environment. Costs increased by EUR55m to EUR616m. Additional provisioning for a restructured CMBS and higher a risk cost in general lending and in transaction services, which rose from a very low level of EUR5m in Q1. Risk costs for Dutch mortgages and real estate finance were flat compared to Q1 while risk costs for business lending in the Netherlands were down. We expect that risk costs will stay elevated, in line with the weak economic environment we still see.

Slide 18, you see the NPL, a slight increase to 2.8% compared to 2.6% in Q1, largely due to one particular file, a real estate finance file in Spain that was subsequently sold in July of 2013. On a pro forma basis the NPL increased modestly to 2.7%. Lower credit outstandings and slightly higher NPLs, if you compare that with Q1 2013, and the NPLs for business lending in the Netherlands for real estate finance and lease run-off remained relatively high in this quarter as well. Mortgages, a slight increase, but has remained modest at 1.6%.

Over time when you look at our provisions and you compare them with the write-offs you see that we are fairly conservative in our taking provisions. Net additions to loan-loss provisions have substantially outweighed the write-offs, resulting in a higher stock of provisions. Coverage ratio was 36.4%. Please note that it is very difficult to compare NPL ratios between banks because of differences in business model in provisioning and the write-off policies, but also definitions. Our coverage ratio reflects the fact that our loan book is well collateralized. Approximately 80% of the total loan portfolio is asset based, such as mortgages, real estate finance, lease and structured finance.

Risk costs in the Netherlands, business lending in the Netherlands were down compared to Q1, but given the weak economic environment risk costs are expected to remain elevated at around the levels we have seen in recent quarters.

Risk costs in real estate finance relatively stable compared with the last few quarters, at about EUR112m are expected to remain also at these levels for the coming quarters. The ratio rose to 10.4%. I already mentioned that it was mainly due to one Spanish file that we subsequently sold in Q3 in July. On a pro forma basis the NPL for real estate finance is 8.8% and for the Netherlands real estate finance NPL ratio rose to 6.6%.

Dutch mortgages, risk costs remain stable at EUR81m. The ratio increased marginally to 1.6%. We are classifying non-performance if you are 90 days in arrears and only returns to performing after complete repayment of the total overdue. The more commonly used percentage of just 90-plus days arrears, if we calculate that then it remains stable at a relatively low 0.9%. But given the weak housing market and the broader Dutch economy, loan-loss provisions on the mortgage portfolio are expected to remain at around these levels for the coming quarters.

Next slide, 23, you see the loan-to-values. House prices have declined by about 18% since the peak in June 2008 leading to an average loan-to-value of about 91%. Loan-to-values do not include additional collateral that we build via savings or investment or life insurance mortgages. So while around 52% of our portfolio is interest-only, most of these are not pure interest-only mortgages in that sense that they are combined with other types of mortgages. Therefore, 80% of mortgages are accumulating additional covers for at least partial payment. As far as the 20% pure interest-only mortgages is concerned, the percentage of mortgages with an LTV above 100% is relatively small and, furthermore, people do have savings that are not attached to the mortgage.

Let's move to the Insurance company. Results from EurAsia improved significantly compared to last year and also the first quarter this year. Operating result up 26% compared to a year ago, clearly reflecting the expense reductions from the transformation program that we announced last year, an improvement in our non-life business as well as lower funding expense. Compared to the previous quarter operating result more than tripled, supported by the same factors as I mentioned earlier as well as a seasonally higher dividend income always in the second quarter. In the Netherlands in particular we get these dividend payments coming in.

Slide 26 you see that the income was flat compared to Q2 last year, but up strongly if you compare that with the first quarter this year, mainly driven by investment margin that was impacted by seasonally higher dividends.

Good news also on the expense side, slide 27. Expenses declined by 3.1% compared to last year and 5.4% if you compare that with this year Q1. And you clearly see here the impact of the transformation program and good cost control all over Europe. We will continue to optimize our cost structure further and additional cost savings also here are being investigated.

Turning quickly to the US, ongoing Insurance and Investment Management business reported a strong second quarter. We saw improved operating results and we showed continued strengths in net flows. Underlying result from the closed block continued to reflect market volatility as hedges are focused on protecting our regulatory and rating agency capital rather than mitigating the earnings volatility we see in our IFRS statements.

So, all in all, I think we have seen good progress on our restructuring; an IPO successfully done for the US operations; a double leverage strongly reduced; ratios for the Bank already Basel III effective; ING Group, an underlying profit of EUR942m; good performance by all three segments.

And with that I think we can open it up for questions now.

Thank you. In the interests of time we kindly ask that each analyst limits your numbers of questions to two. (Operator Instructions). Your questions will be polled in the order they are received. There will be a short pause while we register for questions. The first question is from Farooq Hanif from Citigroup. Please go ahead.

Good morning everybody. Thank you for taking my question. Just two quite simple questions on the Japanese insurance business. Firstly, could you just update us on what the drivers are of the accounting-related hedging results in the Japanese business, so equities for example, interest rate level, just specificities around that?

And secondly, could you give us the Japanese GAAP book value for the insurance operations in the second quarter? Thank you.

Yes, the loss in Japan follows our process of hedging what is a closed book. We aim to hedge the full economic risk, hedge the primary base and the primary metrics for interest rates, equities and FX. The results of the hedges are mark-to-market through P&L and the rising equity markets gave an increase in underlying performance. The reserves on the guaranteed black book, which make up approximately 20%, are not mark-to-market. So 80% of the reserves are mark-to-market; 20% is not. Hence we have an asymmetric accounting position where we have 100% of the hedges mark-to-market, but only 80% of the reserves.

The impact of this loss still help improve the reserve inadequacy. That was a net in Japan of EUR300m. It's down to EUR100m now. That's a positive. Approximately EUR80m of the loss is unrealized and reflects implied volatility and basis risk, and this could reverse in coming quarters.

The adequacy number again?

The book value, do we know that?

EUR400m.

Could you possibly just repeat the reserve adequacy number that you gave for the Japanese?

The net reserve adequacy number in Japan, which is the combination of the positive on the COLI and the negative on VA, improved from a negative EUR300m to a negative EUR100m. So it's close to breakeven.

Okay. That's great. Thank you very much.

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

Yes, morning guys. It's Mike van Wegen from Bank of America Merrill Lynch. Two questions. First one is on the interesting disclosure that you provide on your Dutch mortgage portfolio. You show that for the pure interest-only only 11% of the book has an LTV above 100%. Now if I were to guess for your entire mortgage book in line with the market I would expect that to be above 30%. So I was just wondering which part of the buckets then has an above average, if you like, percentage of LTVs above 100%.

And if that is in the bucket with, yes, or sorry, with savings, investment and life insurance mortgages, could you perhaps indicate how that LTV compares with the assets that are built up against it, so how the net position looks like? So that's question number one.

Question number two is on the Investor Day that you talked about, September 19, you talk about the discussion will be high level. Is it fair to expect you will provide us with an update at that stage of capital requirements for the year, being EurAsia Insurance business, leverage targets and financial targets in terms of earnings and returns, or is that too early to expect? Thank you.

Perhaps you answer the first?

Yes, thanks Jan. In simple answer to your first question, are you sure about the 11%, yes we are. The overall book is about 35% over 100% loan-to-value. What is important to keep in mind here is that you're not talking about clients; you're talking about loan parts, so to speak. The average client in our mortgage book has 2.34 loan parts. So if you look at the 20% interest-only, that is a group of people who truly only have an interest-only loan, but the rest are mixes. So it becomes very difficult to answer the other part of your question, which is where exactly does it sit, because you can't identify simply individual clients; it's all related to these loan parts.

Question dealing with the what type of meeting will that be in September, fairly high level, what we would like to do is introduce you to the team, the management team. It's a new team. You haven't really met them. We'd like to give you what the plan is and how we want to secure the plan to be ready for an IPO next year. And of course we will disclose whatever we can disclose at that point in time, but this is a process and I think progressively we will disclose more as the knowledge, for instance, over what will happen with capital requirements in Europe, when that becomes more clear. But the intention is to be as open as we can, to be as forthcoming as we can, and to help you understanding the business we have and what the plan is to bring it to market.

Alright. Thank you. If I may follow up on the first question perhaps, is it fair to assume, however, that the biggest chunk of the mortgages with an LTV above 100% sits in the, either the hybrid form or in the savings, investment and life insurance mortgages, or is that not necessarily fair to assume?

It is actually spread across a whole number of products and product types. There's not a specific category that really has a lot more than the average above 100%. It's just a mix of all the remaining types of products in the book that you find pretty much as often above 100% as below.

Thank you. The next question is from Ashik Musaddi from JP Morgan. Please go ahead.

Yes, hi. Thanks for taking my question. Three questions I have. First is like you mentioned in one of the charts, I forget number, slide number 23, that the house price seems to be reached its trough. So can you just elaborate on that and give us some indication of what you are saying as a Company rather than the source NVM, so adjust for your expectations? And does this mean that the NPLs will stabilize for residential mortgage?

Second thing, can you give us some color about Japanese Insurance, following it to Farooq's question? Can you give us some color around the capital? So you have EUR400m local GAAP book value for Japanese Insurance. And is the ING Re capital over and above that capital because, if I remember correctly, you put in EUR600m capital in ING Re, which is covering Japan in first quarter? And ING Re now has EUR1.6b capital. So how should we think about Japanese capital? Is it local book value plus ING Re or is it just local book value for some parts around that?

And third will be is it possible for you to speed up the US IPO process, i.e. can you break, is it possible to break the lock-up which ends October 28? Thank you.

To start with the first part of the question about the house prices and what we expect, indeed we are referring to the fact that the NVM has made some positive noise about the most recent development. I think it's too early to really call a trend here. Obviously a slower drop is good news. The big question is whether that will continue or not and I think, as I said, it's too early to really come to a conclusion there. We're not very much more optimistic or pessimistic that we were two months ago on that front.

As to your question on the expectations around the arrears and NPLs, obviously those are not directly related to the house prices, more to the GDP developments and again we're still expecting overall for 2013 a drop of about 1.4% or so in Dutch GDP. So as an indicator of what's to be expected, we expect to see the trend as we have seen over the past few quarters for now to continue.

So what we do see is a slight drop in arrears in the last quarter, which again is good news but it's a bit too early to really call a trend there. And, as we said, the NPLs have actually gone up like they did last quarter, which then led to, as we also said last quarter, if the pace of deterioration in house prices and the NPLs continues at the same speed, then you will see similar additions to the provisions, which is indeed what you saw in Q2.

In respect of Japan, I think the question was about the local GAAP result, which is what the number quoted reflects to. But if you look at it on a holistic basis, we reinsure the VA risks from our Japanese entity to reinsurance entity here in Europe. And you are correct, there is EUR1.6b of capital there. So the aggregate is the sum of both.

With respect to the US IPO, we have a lock-up until October '26 and of course any time you have a break you need to discuss that with the underwriters, and they will have to give permission. But we cannot make any comments on that on -- we are very happy with the IPO, by the way, and the way that it has developed over time. It's also reflecting as in the improvements we have made in the insurance company in the US. And we are very happy with the stability of the base that we have created. This is really a strong shareholder base that we have and we are very happy with that.

Thank you. As a reminder, could you please limit the number of questions to two? The next question is from Martin Leitgeb from Goldman Sachs. Please go ahead.

Yes, good morning. My two questions are as follows. The first one is regarding the net interest margin in the second quarter. Could you provide the number? What would be the net interest margin excluding the financial markets' impact? I think historically you provided that number and I think the financial market impact was negative, as far as I can see. If you could just provide the number, what it was.

And the second question is with regards to the Bank. What sensitivity does the Bank have with regards to higher interest rates, both in terms of net interest income and also impact on book value and capital? I really would like to, if possible, to know how long would it take for higher net interest income to compensate for increase in lower devaluations on the capital side.

In terms of financial markets, it was, financial markets was negative 3 bps in the overall 4 bps increase.

So basically the key number would be 145 then, if I understand you right?

In the aggregate it went up 4 basis points. There were offsets. So I think the 4 basis points quoted is probably, is the right number.

Okay.

The Bank sensitivity, I think we need to -- I don't have the details here on hand. I think you need to go back to our Investor Relations and they can provide you the answer to that one.

Okay. Thank you.

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

Hello. Thank you very much. I'm interested in the Benelux insurance result. The strength of the operating profit in the second quarter. Could you clarify for us what you think were either seasonal or just generally one-off items, particularly in the investment margin and the non-life result? Again I'm just interested if you can quantify those.

And specifically when you refer to private equity dividends, is that something which could recur in future years or was it really just related to the re-marking of the private equity book?

And then secondly, the EUR65m of expense savings that you've realized, how much of that is --- or what's the split of that between life and non-life? And of the life component, has that all dropped to the bottom line or has there been any element of leakage to profit sharing or whatever with life policy holders? Thank you.

Yes, okay. Q2 does have -- is the quarter where you get dividends. It is a recurring feature every year. So we look at the margin both for the spot, but more on a four-quarter rolling basis, to take into account that this is a recurring income stream. So, yes, you would expect dividends. So I think it was EUR56m in total in the quarter. You would expect dividends every Q2. (Inaudible), yes, we'll see. It is there so it will be in effect going forward.

In respect of the one-off effects, non-life you asked about, yes, the non-life results improved from a loss to a 40-plus profit in the quarter, which is a big increase. We have a number of programs to improve pricing, readjust the policy covers, and this will lead to, expected to lead to improved profitability, but over time. I think we have seen a couple of positive reserve impacts which boosted the result in the second quarter. Overall this business is on a trajectory to improve, but we had a couple of positives in reserving in Q2.

On the cost savings, the EUR65m expense savings are basically in life, not too much in non-life. Most of it is in life and there is no leakage to the -- this is all down to the bottom line.

Great stuff. Thanks chaps.

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

Yes, thank you very much. Good morning everybody. Two questions please. The first one really is on the sales dynamics that you are seeing in the Benelux and in CE. Could you -- I think sales were up quite nicely in CE. Can you maybe just comment on the outlook you are seeing there in terms of pensions, mainly in Poland where there are talks about nationalizing the pillar two pension system?

And second question is can you clarify what would drive your decision to do an IPO for Insurance Europe rather than a spin-off, as you mentioned earlier in the call, that you might explore other opportunities for Insurance Europe. Thank you.

Okay. Sales in the Benelux and in the CE insurance, Benelux in life was down, but CE was up.

Pension outlook in Poland, yes, that's a complex one. The government has made -- let's say there are rumors that the government welcomes those proposals, but they are not official yet. There are obviously options to people participating in the plan and depending on the option that they take, it can have an impact on our pension business. Now fortunately, yes, we do have a pension business in Poland, but our life business is much bigger there. What drives the decision -- by the way, on Poland we expect -- of course we have an extensive lobby going on from the industry, also from the political side in Poland. We have no answers yet and we don't expect them until sometime next month.

IPO or spin, that is a matter of, let's say, a luxury question that will be decided at a time when that will take place. Of course we are keeping all the options open here. It will depend on a number of factors that we cannot control completely today, but we keep our mind open to all of these opportunities here.

A follow up question on Poland, can you just quantify the, let's say the amount of recurring profit that you make from the pensions business in Poland?

On an annualized basis it's about EUR40m pre-tax.

Thank you very much.

Thank you. The next question is from David Andrich from Morgan Stanley. Please go ahead.

Hi, good morning. My first question, I was just wondering if maybe you could give a bit more color on the potential cost saving both in the bank and the insurance that you see going forward in addition to what's already been announced.

And my second question, I just wonder, the increase in the loan-loss divisions for the lending and transaction services, what's driving that and do you expect it to stay at this level going forward? Thank you.

Okay. The cost cutting, these are ongoing activities where if you reduce the size because you have done divestments, I think you need to make sure that your overhead costs are declining with your divestments as well. And that is an exercise that we have and are doing at this point in time, mainly in the Bank. We only flag it because it could have an impact on what you see coming in, in the next two quarters. The same in insurance.

People are always looking for opportunities to continue to drive our cost down and it is more related to improving our processes and improving the way we work, and as a result work with lower cost. I think that's always the basis for our cost cutting. Otherwise it is simply cost cut and they come back a little bit later, if you are not careful. So it's improving the way we work and as a result you get better processes that help our customers and also create lower expenses going forward.

Thank you.

And then, Wilfred?

Yes, on the general lending provisions, it's important to keep in mind that this is a portfolio with relatively large clients and the absolute levels of provisioning that we are seeing there are fairly low, particularly last quarter. So a few individual files can make a big difference on that number and that is exactly what happened this quarter. So it's quite difficult to say whether this will continue or not. It's certainly not something that we see as a trend. But could there be another quarter with a few like these? Definitely. But there is nothing particularly on the horizon that leads us to have more concern about this than three months ago.

Okay. So that can be quite a volatile number then quarter to quarter?

Yes, I think that is a fair expectation.

Okay. Thank you.

Thank you. The next question comes from Anton Kryachok from UBS. Please go ahead.

Thank you very much for taking the questions. Just two questions on the Bank please. Firstly, how long do you think it might take you to get to the targeted balance sheet size of EUR870b from the current levels?

And secondly, could you perhaps give us a sense what would be the impact on the bank's net interest margin from asset transfers to NN Bank? Thank you.

Yes. We are looking a bit below our target balance sheet level. That I think reflects the difficult economic circumstances we have. Loan production remains good, remains healthy. We had I think in retail about EUR6b of production this quarter, EUR6b last quarter. But we also are seeing loans -- we are also seeing some repayments as well. Typically that is good for margin because these are smaller -- these are older files that run off. The commercial bank gross production provision facility was strong again, so the machine is working, but you also see that some of our customers are not necessarily fully drawing down, that some of them are taking out their facilities in the bond markets.

So I think we're open for business, we're moving forward, but we need to see an increase in economic activity.

And then the transfer to NN Bank, I think it's about 1 basis point impact.

Negative obviously.

Yes. Did you get the answer?

Yes, thanks for that.

Good.

Thank you. The next question is from David Lock from Deutsche Bank. Please go ahead.

Good morning. I've got two questions. Just to follow up on costs, you've flagged the additional cost savings as being invested. I just wondered, when you've called out cost savings program in the past you've said it's because you wanted to use these savings for reinvestment because of inflation and regulatory costs. Is that the same with this one or is this really we are talking about a real reduction in cost base going forward?

And my second question is just on margin in the Bank. I just wondered if you could a bit of color on the mixed drivers about the NIM result, whether it was asset or liability driven, and whether it was a particular product, such as structured finance, which is seeing a structural change in margin. Thank you very much.

I think on cost, the most important thing I think to keep in mind on cost is always that you want to provide a service to your customers that is superior. And by redesigning your service and your processes you can often do that and at the same time reduce your cost. That is the premise.

Now we have also done that because in the past we have seen regulatory costs going up. The number of reports we are producing these days is significantly higher than in the past. At the same time we have seen bank taxes that have increased. In many ways we are paying bank taxes twice because we paid in the one country, but also another country on the same balance sheet. And we are clearly trying to overcome that by eliminating this double taxation. But it has had an impact. These cost reductions we believe are not necessary to offset this regulatory because they are there already. This will be bottom-line cost impacts that will improve our position simply and our earnings of course.

Yes, on the interest margin, it is up to 142 from 138. It reflects a 3% or EUR90m increase in the interest result. This one, this quarter, it primary relates to the savings on the deposit side rather than the loan side of the balance sheet. What you see is the full impact in Q2 of the rate cuts in Q1 that happened in the Netherlands, Belgium and Germany, and also a part of the impact of the rate cuts in Q2, Netherlands 10 bps, and Belgium 20 bps, Australia 25 bps, Italy 20 bps. And loan volumes are moderate loan growth and we continue to focus on repricing and early lending at the levels where we feel we are getting the right return.

In the outlook I think of it as keep it more or less at these levels. Notwithstanding the strong improvement in deposit margins, we still face some headwind there on the deposit side because of the low interest rate environment.

Okay. Thanks very much.

Thank you. The next question is from Kiri Vijayarajah from Barclays. Please go ahead.

Yes, good morning. I have got a question on slide 10, the ROE target improvement you've targeted for the Bank. And specifically on the loan growth element, the 1.2 percentage points you've got there, I'm just trying to understand where that's going to come from because presumably you need more capital to support the extra volume growth. And are you moving up the risk curve to make that loan growth ROE accretive? Thanks.

Sorry, could you repeat the question?

On slide 10 you've got the ROE improvement you are targeting for the bank and I'm focusing on that 1.2 percentage points you've got from loan growth. And I guess my question is driven by the fact that for the incremental loans you put on you need to hold more capital, and why you think it's actually going to be ROE accretive, and does that mean you're writing higher margin, higher risk loans for that to be ROE accretive?

Yes, we're clearly of a focus to try and keep the mortgage level where it is and try and grow commercial lending. And we have target ROE levels which are clearly within our target range. So, yes, we would love to try and grow our balance sheet at lending which self capitalizes as quickly as we can.

And I think in addition to this, this slide is also showing that we do have a balance sheet where we can have a little bit more growth, where we can do that on a relatively short maturity level and pick up some additional interest income. We're not going to increase our book if we have a problem with our capital. Our capital comes first. We always will maintain a strong capital position and that will drive whether we can take on additional business or not. But at this moment we have room.

Plus we may remember that we had an extensive program of optimizing our balance sheet and we have done a lot in that extent already. I think we have improved our balance sheet by about EUR57b. There's a little bit more room left here. And optimizing the capital that we have and the liquidity that we have in the various spots in our organization, utilizing that better than we have done so far, so that is how we plan to get a little bit more margin and a little bit more lending in our results.

Okay. Thank you.

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

Good morning. Just two questions please. Just looking at the coverage ratio, you saw a 50 basis point decline in retail Benelux. Why was that? Is there a mix effect there between business lending and mortgage NPLs?

The second question would be could you give us the average duration of the -- of your deposit base? I ask that because your margin guidance feels a bit conservative because you've got tailwinds from the cut on deposit rates, including more that you could do from what I understand in international retail. You flagged that you're still working on further asset repricing and it feels like the reinvestment income profile on deposits is nearing a floor. So if you could just give us an idea of why we shouldn't see a bit more uplift to that margin. Thank you.

Okay. On the first point, the coverage ratio, this is a ratio that moves around a bit because it really depends on in and outflows, inflows of new NPLs that start with a relatively low provision that gradually goes up. But outflows also because -- and that was affected particularly in this quarter because we tend to write off the fully provisioned loans fairly quickly, as generally a lot quicker than our peers tend to do. And we had significant write-offs in Q2 which, by the way, still run well behind the actual provisioning levels, as Jan indicated earlier. But that is mainly what drove this number in the quarter.

Great.

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

Yes. I'm from RBC, but I think Omar had asked another outstanding question on the net interest margin. But I actually wanted to follow up on this. On the how much -- with respect to the benefit from the deposit repricing, how much more -- what percentage of deposits have already been repriced, and how much should still be coming especially for the Netherlands?

And if you look at your historic spread, is there potential to reduce the deposit rate in the Netherlands further?

And then just lastly, I'm not sure if I missed this, have you given the, on Dutch mortgage NPLs, the loan to value ratio? Thank you.

Okay. Maybe to start with the Dutch mortgage NPLs and loan-to-values, the NPLs on Dutch mortgages went up from 1.5% to 1.6%. The loan to value went from 90% to 91%. And, as we mentioned, the total that sits above 100% loan-to-value was pretty much stable at 35%.

The 91% loan-to-value ratio is the same as on NPLs?

No. The loan-to-value on the NPLs sits at around 108%.

Okay. Thank you.

On deposits, typically when you make a price adjustment it's to the entire deposit book, particularly where -- so it's not so much a phase piece in terms of its impact on price cut. As to future, we have to balance the outlook, our competitive positions, what peers are doing and the trajectory. So that's something we will only comment on once we have reached a decision or a conclusion.

In terms of duration it's a bit more complex because it depends on the type of deposit you have, how long it has been with you. So it's -- we have a complex, sophisticated process to assess the duration. I think the key point though is -- I can give you a number of earnings without meaningful -- but I think the key point is that for new deposits we do take some time to assess stickiness of things. The duration of the newer stuff is we typically give it a lower deposit -- sorry, duration level, which means that the value of funds and a low interest rates you attribute to is low as well. It was part of the reason that some of the new inflow does not necessarily -- does not give you a huge uplift in deposit margin.

Yes, and then repricing our loans, I think what we do on repricing our loans is take an average of about three to four years. So on average every year one third of your loan book or 25% of your loan book comes to an end and you have an ability to reprice that. And I think that's constantly what we do. Also at times when we have to accommodate certain people as repayment schedules, we do a repricing as well. So any opportunity that we have where it was justified I think we will take another look at is the pricing correct and do we need to make adjustments here. And we have been extremely disciplined in this whole process in the last three, four years.

I should have mentioned, there was a 10 basis point cut in deposit rates in July in the Netherlands.

Thank you.

Thank you. The next question is from Richard Burden from Credit Suisse. Please go ahead.

Hi. Good morning. Thanks for taking the question. One of your competitors this morning highlighted an impact on the Dutch IGD in July from the downgrade of France. I was just wondering whether you could just comment on the impact on the Eurasian Insurance IGD development over July and whether that impact has affected you as well?

Yes, in terms of the IGD ratio I think the order of magnitude impact is somewhat similar to somewhere around the 20 basis point level, which is a stronger over 304%.

Thanks very much.

Thank you. The next question is from Samuel Lopez from Vanguard. Please go ahead.

Thank you. My question is about the leverage ratio that you published on page number nine. I was wondering if you could tell us what would be the impact if you use the new proposal by Basel III, the new definition of the total assets?

And in relation to this, if we assume that this new proposal is implemented in Europe, what would be your new return on equity range target or would you be able to keep that 10% to 13% unchanged?

The leverage ratio we publish is the total balance sheet plus off-balance sheet commitments, typically committed facilities, around EUR120b, and to core Tier 1 equity we add Tier 1 equity, which adds to a total of EUR37b. So as far as we can see we're compliant with the committee requirements. There may be some further netting, but we haven't taken that into consideration, but I think all in all I think our number is good. The ROE is based on capital, equity capital, so I don't think it is going to be impacted by leverage.

On the new proposal some banks are commenting on it and despite not giving exact numbers or exact part, at least acknowledging that there will be an increase on the denominator.

We're still studying it. As I say, we've included our off-balance sheet commitments. Our level of the netting is very small in terms of derivatives, only about EUR20b, so I don't think we're impacted by that.

So it would be minimal impact then if that is implemented, if the new proposal is implemented?

Yes, it's more or less the same as what we're reporting.

Alright. Thank you.

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

Yes, it's Benoit from Kepler Cheuvreux. Good morning. Just wanted to check with you what will be the interest rate sensitivity of your core Tier 1 ratio. I think we are -- we have Dutch run rate at around 2% now. What will be the impact on the core, on Basel III core capital if we get, if we, say, get 100 bps increase in the rate there?

And then looking at your mortgage portfolio, I think it's much more relevant to look at vintages, especially the post 2005 vintages. So how much of your book roughly has been written between 2005 and 2008, and how much risk-weighted assets do you have on this specific portfolio? And also if you could talk about LTVs on this specific book. And do you see risk of higher risk-weighted assets on, say, vintages 2005 to 2008 on Dutch mortgages? Thanks.

The interest rate sensitivity, we see about for every basis point about a EUR10m impact more or less. That's quite rough.

And Patrick, the next one, mortgages?

Yes. Out of the total book about 45% or so dates to the 2005 to 2008 vintages. And loan to values on that book as well as the NPLs are comparable with the average on the portfolio. With regard to a higher risk weighted assets, there is a lot of discussion about risk weights, has been for a while. We have consistently said that we're comfortable with the weightings that we apply and I think it's important to keep in mind that ING as a whole is very close to 90% on advanced, which is high compared to our peers and that in itself has a lot of impact.

You may have picked up on the report by the EBA that came out this week that also commented on this and found that to be one of the most important drivers of the differences that are being observed in risk weights is indeed the fact that banks with advanced, higher percentage of their portfolios on advanced tend to report indeed lower risk weights that the ones who are not. And a lot of the differences are then driven by local regulatory changes on the big picture and local interpretation of the rules. So I'm not sure that there is really a clear trend here or a clear universal thinking on the topic that would lead to higher risk-weighted assets on our mortgages specifically.

One example that we have given in the past and that may still be relevant a least as an idea of what the impact might be is if we were to go to the so-called Swedish floor, the impact on our risk-weighted assets at this point would be about EUR7b, which is quite a bit less than it was a quarter ago. But that's because our own risk weights have also come up so the impact of that discussion seems to be gradually becoming smaller than it was. We're not overly concerned about this.

Because the discussion with your regulator on the way, you are kind of accessing the probability of default on the 2005, 2008 vintages. Also looking at loss given default, we have seen housing price down mainly since 2005. So I was wondering how comfortable you are with your PDs and LGDs assumptions, which at the end of the day are the [baggage] for your risk-weighted assets.

Yes. Obviously all on our models, A, have been scrutinized by the regulators in the countries that they apply to, but, B, they get updated quarterly for the elements that you just mentioned. So whatever happens out there in the market, within a fairly short time frame that is translated into our models. So we're not nervous about being behind the curve either in methodology or in data.

Thank you. The next question is from Steven Haywood from HSBC. Please go ahead.

Just going back to the Japanese business again, could you tell me what the average duration on the run-off portfolio is there and how much capital this would release to ING over the time it runs off?

And also could you answer what you think the consequences would be of not meeting the Asia sale deadline by the end of this year? Thank you.

I think in terms of the duration, it's about five-ish years, substantially runs off by 2019.

Thank you. The next question is from --

No. We didn't answer the question fully. The capital release over the run-off periods, they are depending upon, you need to make some assumptions, but could be in the neighborhood net present value of about I would say between EUR800m to EUR900m, something like that.

Impact of not meeting the deadline for European Commission, we are assuming that we are not -- we are not assuming that we will not meet the deadline. We are assuming that we will meet the deadline. We're working hard to accomplish that and that's the basis of our working plan.

Thank you. The next question is from Matthias de Wit from KBC Securities. Please go ahead.

Yes, good morning. I have two questions please. First, with regard to the Basel III capital position of the Bank, you're now guiding for a slightly higher CRD IV impact of 160 basis points compared to 140 basis points previously. I think it's reflecting unrealized gains which came down a bit so could you please confirm that it is the case?

And then secondly on the capital position of the US Insurance company, you reported the drop in RBC. Just wondering whether this is a reflection of the replacement of the contingent capital facility and so could we --- is this now completely done?

And related to that one, how satisfied are you with the current RBC of 454%. It's ahead of your target, but still below the level most peers are in the US. So is there any need to further strengthen the capital position there, either through retained earnings or through retained proceeds from any subsequent offerings? Thanks.

On the fully loaded core Tier 1 ratio, there's a slight decrease and that is more to do with the improvement in the -- it's more of a reduction, I should say, on the mark-to-market of debt securities which goes through the fully loaded.

For the US questions, I would recommend you talk to our friends in the US. They will have a conference call a little bit later today and Ewout Steenbergen, our CFO, I think will be more than capable to answer the question. I think my answer is no, we don't need it, but maybe you want to hear from them as well because he is the guy that is responsible for it.

Okay. Very good. Thanks.

Thank you. The next question is from Marco Kisic from Nomura. Please go ahead.

Good morning everyone. Thanks for your time for the questions. I have a question on asset quality. It was good to see your LLP sort of stable in sensitive areas, but NPL goes up particularly in a few divisions. Is this putting downward pressure on coverage ratio and how comfortable are you with this one?

And maybe if you can put this in the context of your expectation of the upcoming asset quality review and [EDS] process. Thank you.

Yes, as you will have seen, the overall coverage ratio is fairly stable. You do see some changes in various sub-portfolios and, as I said, as you go more granular, you get into situations where individual movements like writing off fully provisioned loans has quite a bit of impact. But overall the coverage ratio was stable. If you exclude that one Spanish file that Jan also referred to, it actually went up slightly. And we're comfortable with that. The history, as we have said on previous occasions, in ING is that we tend to the conservative with our provisioning and the ultimate write-offs have always been less than what we've provisioned. We don't see any trends at this point that suggest that that would be changing.

As to the question about asset quality review, I guess in saying that we are comfortable with our capital and our provisioning position, we're saying we're comfortable that we are appropriately managing our books and the accounting for the books and we don't have any specific concerns about the asset quality review from that perspective.

Thank you.

Thank you. The final question is from Marcus Rivaldi from Morgan Stanley. Please go ahead.

Good morning and thank you for taking my question. Two questions please around ING V. First of all, in the event that the sale process of remaining non-European assets is not fast enough, would you consider moving, for example, Japan out from ING V just as you've done with ING US to make sure the IPO is a pure-play European-style IPO?

And then secondly, the debt at the moment on the balance sheet, a large part of that clearly is internal. Would you be looking to externalize that in the coming months? Thank you.

Yes, you ask good questions. That is why we would like to have a meeting in September where we can update you on what our plans are, including the legal set-up, the structure, what will happen with the units that we have Japan, Korea. Things like that I think we will discuss so, if you can hold off, that will be September 19.

In the meantime I can say that the ING V structure is a structure that we haven't determined yet exactly what will be in there, but your observation that we need to do a refinancing because it's mainly internal debt I think is correct and we do have plans to do the externalization of the debt. But that will have to discussed I think at a later point and that's why the invitation to come to the September meeting and you will be fully updated there.

Given that you had to pass on those questions, can I just ask a very quick cheeky follow up? Why the change in strategy to IPO ING V? Previously you talked about that being wound down in an orderly fashion.

Yes, the ING V has the benefit, as we do have a clean separation legally between the Bank and the Insurance company, so it's a very clean way of bringing this to the marketplace. And I think that that was important to us. Plus the restructuring that we do within this, we can do I think in a tax-friendly way as well so that's an important element in this restructuring.

Okay. Thank you very much.

There are no further questions sir.

Okay. That ends the call. Thank you very much for being on the call. This is my final one so next time my successor, Ralph Hamers, will lead the call and I can tell you everything is in good hands here so thank you very much and good luck.

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