ING Groep NV (ING) 2013 Q3 法說會逐字稿

Good morning. This is Yvonne, welcoming you to ING's Q3 2013 conference call.

Before handing this conference over to Ralph Hamers, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business; expectations for our future financial performance; and any statement not involving a historical fact.

Actual results may differ materially from those projected in our forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on form 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 of an offer to buy any securities.

Good morning, Ralph. Over to you.

Welcome, everyone, to ING's third quarter 2013 results conference call. I'm Ralph Hamers, CEO of ING Group. I'll take you through today's presentation. And here with me are Patrick Flynn, our CFO; and Wilfred Nagel, our CRO; and the Executive Board. We also have Delfin Rueda, the CFO of the insurance company, and Doug Caldwell, the CRO of the insurance company, to answer questions about the insurance side.

Let's go to page 2. We had a very strong third quarter. ING continued to make strong progress on the restructuring, advancing further into the end phase of our transformation. At the same time, what is good is that our businesses have delivered a good set of quarterly results.

ING Group posted an underlying net profit of EUR891 million, driven by another solid quarter on the bank side, and improved operating performance on the insurance side.

If we then go to slide 3, I would like to start by giving you an update on the major events that have happened over the last few weeks on the restructuring side, because we have greatly advanced in our restructuring story.

Mid-October, we sold another 15% of ING US, and the remaining stake now is 57%. With that, we're almost reaching the debt line of 2014 of reaching 50% stake in that, so we're close to that already, whereas we have more than a year to go.

As you also can see in the graph, the residual double leverage of the Group remains effectively covered by the current value of the remaining stakes in both the US, as well as SulAmerica.

Also, last week we announced the agreement with the Dutch State on unwinding the IABF. Today we will pay another EUR1.1 billion as part of the core Tier 1 security support that we received in the past, and this means that we have only two more payments left on that state support program.

Last, but not least, we have taken another big step in the EC restructuring, reaching a new agreement with the European Commission, as a result of which ING Life Japan will be divested as part of ING Insurance.

I'll go in a little bit more detail in all of these events. So, first, on the state support arrangements, page 4, we have recently announced, and achieved, two major milestones with the Dutch State. Last week, we reached an agreement on the IABF; basically, unwinding the transaction that we have established in 2009, reducing ING's risk on Alt-A.

The unwinding will free up EUR2 billion of risk-weighted assets related to the counter-guarantee that we currently have in place. That release of risk-weighted assets will add another 10 basis points to ING Bank's core Tier 1 ratio.

Following the repayment of the core Tier 1 securities today, including premium, we have paid more than EUR11 billion now to the Dutch State. The remaining EUR2.2 billion will be paid in two tranches; the first one scheduled in March 2014, and the final one in May 2015.

So much on state support; then we move over to the other milestone that we reached with the European Commission, basically, including Japan as part of the IPO, the base case IPO of ING Insurance. With that new agreement, the total restructuring of ING Group will now have to be completed two years earlier, by the end of 2016. However, the agreement to divest more than 50% of ING Insurance by end of 2015 remains unchanged. So, we continue our preparations for base case IPO, and those preparations are on track.

With the sale of ING Life Korea, as announced a couple of months ago, these changes mean that we have effectively completed all the restructuring requirements for our Asian insurance businesses.

To go a little bit deeper into the Japan life business, basically, ING Life Japan has two businesses, and I'm now on slide 6; one business is Japan life, and the other one is the closed block VA business.

On Japan life, that's a COLI business, a [company] owned life insurance business, in which we are market leader with a 20% market share of the Japanese life markets, its focus on -- it's a focused business model, catering to SMEs and affluent customers through independent agencies and bancassurance partners.

As can be seen in this graph, the operating result of ING Life has continued to increase over the last couple of years. This will be a very significant contributor to ING Insurance earnings and cash flows, so that is a very positive signal.

Beyond that, you also see here that our life business in Japan is well capitalized.

If we then dive deeper into the closed block characteristics, that is the next slide, this closed block is expected to release significant amounts of capital over time. The vast majority of this portfolio consists of accumulation benefit products, and they will run off quickly, and free of capital, over the next four years.

The Japanese VA guarantees are already reinsured to ING Re internally, and we manage them and hedge them on a market-consistent basis.

Then, in order to further improve transparency around this VA portfolio, in the new reporting segmentation, as announced today, Japan VA will be reported as a separate segment. That will trigger a P&L charge of approximately EUR600 million in Q4 of this year.

With that, we will restore the reserve adequacy in the Japanese VA business to the 50% confidence level, and that will be reflected in the full write-down of the DAC.

In addition, ING Insurance is considering and studying a move towards fair-value accounting on the reserves for the death benefits. This would be a further improvement in the alignment of the book value of the reserves with their market value and the accounting for the related hedges that we have in place.

If this move towards fair-value is implemented then this would result a pre-tax charge through equity of approximately EUR0.4 billion, to be taken in the first quarter next year.

What is important to know is that these changes will not impact the regulatory capital of ING Life Japan, nor the economic capital of ING Re.

If we then look at the pro forma debt on the insurance side, we see that if we adjust the pro forma balance sheet for the announced sales of China Merchant, the ING Bank of Beijing life business, IIM in Korea, and the sale of ING Life in Korea, you see this picture appearing. This also reflects a negative EUR1 billion pre-tax impact of the Japanese VA measures, as I just explained.

So the pro forma IFRS equity on ING Insurance will then be EUR13.7 billion; and the debt, net of the cash, will fall to EUR3 billion. As a result of all of this, the pro forma financial leverage ratio of ING Insurance is 22.5%.

If we then take a closer look at the capital ratios, the solvency ratios on the insurance side, we see that they are impacted by several one-offs. First, on solvency, the solvency of NN Life is decreasing from 230% to 183% in the third quarter. This is mainly due to the move to the DNB swap curve, which we decided to following the downgrade of France by Fitch.

NN Life solvency would have been stable in the third quarter of 2013 versus the second quarter if the second quarter of 2013 would also have been based on DNB swap.

Then, on the IGD ratio, the IGD ratio for ING Insurance is down versus last quarter. That reflects the impact on the NN Life solvency ratio, as well as the recognized loss on the sale of ING Life Korea.

The pro forma IGD ratio including the impact of the announced Insurance Asia sales, and the EUR1 billion pre-tax impact of the VA accounting measures for Japan, would be 216%.

And the final targets of ING Insurance will have to be finalized, and we aim to provide you with more clarity on these capital targets in the first quarter of 2014.

So much on restructuring, and all the progress we are making there; let's take a look at the results. ING Group posted a net result of EUR891 million. That's up 5% to 6% year on year, and slightly down on the first quarter or from the second quarter this year.

The net profit came in lower at EUR100 million, EUR101 million to be exact. That's as a result of the EUR950 million loss taken on the sale of ING Life Korea.

But the important thing is that the underlying net results are holding up, and actually improving year on year.

If we then take a look at the bank, the bank posted another solid quarter. The gross result of the bank was stable versus last year, but it's down from the last quarter. That is mainly caused by lower results on the bank treasury side and financial markets, partly caused by the decline in CVA/DVA impacts.

Risk costs were down, both year on year, as well from the second quarter this year, but they remained elevated amid the weak economic environment in Europe.

Then, looking at the net interest margin, the net interest result remained relatively stable, despite lower lending volumes. The margin improved to 144 basis points, but that's mainly driven by a lower average balance sheet.

The savings margins increased further in the third quarter of this year, reflecting the lowering of declined savings rates in several countries that we put.

The lending margins, however, were also slightly down from last quarter. That is due to increased competition, and, actually, lower demand in the market.

The NIM is expected to remain at around these levels in the coming quarters.

Then, the lending assets, as mentioned already, they were significantly down in the third quarter. That is mainly due to the sales and the transfers of assets, as well as from currency impacts.

We have particularly reduced our Dutch mortgage exposure on the bank side, but that is mainly due to a transfer of a part of the portfolio, EUR4.9 billion, to NN Bank, which we did as part also of the restructuring. But in addition to that, we placed an RMBS for EUR2.2 billion. Also, we reduced our real estate finance exposures through selling certain files in the US, and the UK.

I think what's important to note for you is that we saw an increase in lending [assets] in the areas where we can realize growth; very much in Formosa, in Germany, the rest of the world, and structured finance.

Then, going to the operating expenses, they were roughly stable year on year. That, basically, shows to you the impact of the cost savings initiatives; but also, the partial transfer of the staff of WestlandUtrecht, which we transferred to ING Insurance and to NN Bank, as we call it; and lower impairments on the real estate development portfolio. So, those were decreasing the cost.

The increases in cost were very much related to higher pension cost, and we took some additional restructuring cost above the line this time. In certain of these cost savings initiatives we see an acceleration, and, therefore, we take some additional restructuring costs there, but above the line.

Versus the second quarter of this year, expenses rose 1.4%. That is caused mainly by the restructuring costs that I just referred to in those cost savings initiatives.

The status of these restructuring programs, in general, are on track; actually, they're a little bit ahead of the plan. The cost savings reached so far are at EUR352 million, and with the savings of EUR488 million still to be achieved by 2015.

I don't think it needs mentioning that we follow these programs closely because we ensure to deliver these results. They're important for a continuing efficient bank, going forward.

On the risk costs then, they decreased year on year, as well as vis a vis last quarter. They decreased EUR64 million to EUR552 million. These reductions are generally in general lending, retail international, and real estate finance. I mentioned to you the files that we have sold in that portfolio. And some of this was offset by higher additions in structured finance, basically, one specific file.

Then we go over to the NPL ratio. Also, there we see a slight decrease to 2.7%, down from 2.8% last quarter, basically down to a lower number of non-performing loans, decreasing by EUR0.5 billion in total; lower NPLs in real estate; and lower NPLs in structured finance.

If we then turn to the Netherlands, and focus a little bit on the Netherlands, because I know you're interested in that as well. The risk costs in retail banking Netherlands were up year on year, and slightly down from last quarter. But there remained an elevated level, and that basically reflects the weak economic environment that we still see in the Netherlands.

The NPL ratio for business lending has increased from 6.4% to 7% in this quarter. That was primarily due to an increase in the sectors of transportation, business services, and retail non-food.

On the other side, the NPL ratio for Dutch mortgages rose from 1.6% to 1.8%. But that was mainly due to a decrease in the mortgages outstanding as a result of the transfers I mentioned earlier; the portfolio that we moved from ING to NN Bank; as well as the RMBS that we placed.

Risk costs for business lending and mortgage portfolio are expected to remain elevated, basically at this level, certainly not improve for the next couple of quarters, given the continued weakness in the broader Dutch economy, although we do see early signs of a bottoming out in the housing market. We see some positive signals in consumer confidence; there, we want to be very cautious on this one.

Then, on real estate finance specifically, the risk costs for real estate finance were EUR83 million. They were down both year on year, and also on last quarter. That was driven by higher releases as a result of the asset sales that I already mentioned in the US, and the UK. The additions, however, remained elevated and were concentrated in the Netherlands and Spain.

The NPL ratio declined to 9.9%.

And the risk costs are -- also in this segment, we expect it to remain elevated.

Then we take a look at the capital position of the bank, I'm now on slide 21. The bank's core Tier 1 ratio increased from 11.8% to 12.4% in the last quarter. That is driven by continued solid profitability, and a decrease in risk-weighted assets.

If we correct for the payment to the Dutch State today, as well as the unwinding of the IABF, then you see that the payment that we're making today will decrease the core Tier 1 by 0.4%. However, the unwinding will increase it by 0.1%. The net effect is a decrease of 0.3%, but that will still get us to a pro forma healthy 12.1% core Tier 1 ratio on a Basel 2.5 basis.

Now, if we then correct for the first tranche of the phase-in effect then we would get to a pro forma CRD IV core Tier 1 of 11%.

If we would correct for the full Basel III on a fully loaded basis, the core Tier 1 would get to 10.4%; still higher than our ambition that we have communicated to you, to remain at, or around, and above 10%.

So, basically, we see that the bank is already meeting the CRD IV requirements, and that we are delivering on the priorities that we have communicated to you at the Investor Day two years' ago.

We're accelerating transition to Basel III. We're limiting the balance sheet and risk-weighted asset growth. We are successfully executing the balance sheet optimization. We are simplifying our business portfolio. And we take a very prudent approach to capital and funding, given the unstable market conditions that we still see.

Core Tier 1, I said, stands at 10.4% fully loaded; LCR is above 100%; and the Basel III leverage ratio is well above the 3%, which is the minimum CRD IV target. Basically, conclusion is ING is simpler, stronger, and well positioned to service our customers and improve the business, going forward.

Then we move to the insurance side. The operating result improved strongly year on year, supported by higher investment margins, tight cost control, and improved non-life results. The decrease versus last quarter was mainly due to seasonally high dividend income in the second quarter. We see that every second quarter; we see an increase in investment income there.

ING Insurance is considering to refine the market interest rate exemption for the separate account, pension business. If this would be implemented this would result in a one-off P&L charge of EUR160 million pre-tax in the fourth quarter of 2013.

If we then look more specifically to income and costs on the insurance side, we see that the income was up year on year; slightly down from last quarter. But, again, that was driven by the investment margin coming in a little lower, given the high seasonal effect of the dividend income in the second quarter. But you see income stabilizing there.

Then, on slide 26, you see that the administrative expenses are down. I think this is an important one to note for all of you, is that the impact of the transformation program, as announced last year, is really shown here.

So, we see the administrative expenses declining by 3.8% year on year. This transformation program is eating up, basically, the cost increases from the transfer of people from WestlandUtrecht to NN Bank, as well as also, on the insurance side, higher pension cost.

Excluding the transfer from WestlandUtrecht to NN Bank, and excluding some currency effects, the administrative expenses would be down 6.3% versus last year, and 4% versus the second quarter. Basically, that's clear evidence that the transformation plan is paying off.

I come to, basically, a wrap up. I think, around this table, we are all extremely proud of the financial and strategic progress that we are making and that we have achieved this quarter.

We have delivered solid underlying results for both the bank and the insurance, and over the last two or three weeks we have been able to announce strong progress on our restructuring targets.

And with that conclusion, I would like to open the call for questions.

Thank you, sir. (Operator Instructions). Andrew Coombs, Citi.

I'll ask my two questions. There's one on Japan, and then one on the loan loss provisions. Firstly, on Japan, looking at the EUR0.6 billion and EUR0.4 billion charge, that's on an IFRS basis, so I just wanted to double check what the change, or what any impact, if any, would be on the local GAAP account; and if you could provide an update on the latest equity figure under the local GAAP account in Japan. I think it was EUR500 million, as I recall, last time I checked.

Secondly, on the loan loss provisions, I'm just trying to reconcile the points you make on both page 20, and page 29. With regards to the NPLs, you've continued to see an increase, particularly in business lending in the Netherlands. But, at the same time, if I look at your outlook commentary on loan loss provisions, you do talk about signs of stabilization and positive signals in terms of consumer confidence.

You talk about elevated provisions in the near term, but perhaps you could give us a bit more visibility on when you think loan loss provisions might start to recover in that segment. Thank you.

Okay, I will give the question on Japan to Patrick Flynn, the CFO.

Yes, the two adjustments are in IFRS only. They have no impact on regulatory capital locally, or local GAAP results. I don't have the local GAAP number to hand, but we can get it for you later.

Thank you.

Then we turn to Wilfred on the risk cost, on the loan loss provisions.

Yes, provisioning is always a bit of a lumpy business. If you look at the provisions in this quarter, they are down somewhat, but that is driven by a couple of relatively significant individual releases.

Indeed, in terms of the guidance, what we have said for a while, if we expect provisions to stay at these elevated levels you do see a slight drop in NPLs across the global book. But there are individual portfolios including, for example, the one that you mentioned in the Netherlands, where we're still seeing upticks. And we think that trend is not about to end.

So, in answer to your question on that particular book, when do we expect loan loss provisions to come down, well, that's hard to predict, but I would say that won't be until well into 2014.

Right, thank you.

Farquhar Murray, Autonomous Research.

Just two questions, if I may. Firstly, on net interest income, the core retail businesses were actually very strong this quarter. But there seemed to be a step down quarter on quarter in retail rest of the world, which went to about EUR412 million, from memory, versus a EUR460 million average over the previous quarters. I just wondered if you can give us some color on what happened there, and how we should think about that going forward.

Then secondly, on ING Insurance, you've provided the pro forma IGD ratio. I just wondered whether you'd come around to having a think about what the interest coverage is on that business as yet. Obviously, that partly depends on how you allocate debt, etc., but I just wondered if you might have that number now. Thanks.

On the net interest margin piece, a piece of that is -- there's a number of pieces in there that are some of them non-recurring. Part of it is due to the volatility we saw in interest rates in Turkey, and another piece is FX as well. So, there's a number -- it's difficult to isolate it to one individual point.

In net, should we think that the interest rate move from Turkey was a negative and was probably predominant within that mix, or -- and as a one-off? Should we think that the Turkish interest rate move was a negative, and was probably the predominant effect there, and probably is non-recurring? Is that a fair way of looking at it or --?

I think the FX is probably the biggest single impact.

Okay, thanks very much.

Delfin? Delfin Rueda is here with us.

Yes, on the IGD, your question was about the interest cover. The interest cover is around 6 times at this point of time; and with the inclusion of ING Life Japan, that will improve slightly.

Okay, brilliant. Thanks very much.

David Andrich, Morgan Stanley.

Two quick questions on my side. First of all, I was just wondering, in terms of the Benelux investment portfolio, if you've started to take any action in terms of re-risking it.

And second, on the non-life insurance business, just wondering, do we see this -- how do you think of the results this quarter? Do we see this as being a fairly stable result, or is there room for further improvement as further price increases come through on the individual disability side? Thanks.

Okay, Delfin?

So, on the question on re-investment, as we have indicated in the past, we are gradually, but very prudently, analyzing the different possibilities of doing some re-risking. That is, of course, linked to our overall total target capital discussions. And, as we have mentioned in the past, the fate of increased interest margin will only be perceived later in 2014.

Okay, thank you.

Kiri Vijayarajah, Barclays.

Just a couple questions on slide 15. If I exclude the various sales and transfers, I wonder what's the underlying picture in terms of your market share development in the Netherlands?

And I guess, more importantly, looking forward out to 2014, what's your appetite to start re-growing your loan book there, please?

Okay, I think the market share in the Netherlands is relatively stable overall. On the mortgage side, we tend to be up from last year, and growing into it, stable around 15%, 16% currently on the Company side. And the lending side for our two companies, it is around 23% in total, 23.5%; up from 22% last year. On the saving side, if we take the total, both consumers, as well as corporates, so basically on the funding side of things, we have a market share of around 28.6%.

And appetite to grow into it, I think that clearly we have a -- we are a large bank in this country. We have to service our clients, but we will be very cautious as to the risk that we take on the books, vis a vis the current economic situation, as well as the outlook there.

We do see positive signs of consumer confidence. We see the house prices, basically, bottoming. We see more volume coming back into that market, but we will -- we don't expect a -- we expect a modest recovery. Also, we will play along with that modesty and see where we can initiate and support further growth, but cautiously.

Okay, thanks very much. Understood.

Ashik Musaddi, JPMorgan.

A couple of questions; one on your cost savings for the banking. Can you give us some color around how much will be the cost savings on a look-through basis, i.e., net of pensions and restructuring cost? Is this restructuring cost just a one-off, or are there more restructuring costs to come in your underlying numbers in the future? That's the first one.

Second, there's a lot of things going on, on real estate finance and structured finance portfolio on loan loss provisions. Can you give us some color on what's one-off, and what's recurring; i.e., it looks like on real estate finance a one-off there is some release, whereas on structured finance there's one-off additions? So, can you give us some color on that? It would be great. Thanks.

May we first move to Patrick?

Yes, in terms of costs, the approach is very similar to what we've had in the past. What we're aiming to do is make structural reductions in our cost base, but, unfortunately, there are additional regulatory costs that are coming at us. We're trying to make sure that at a minimum we keep our cost base flat, so absorbing these regulatory changes.

What you see is that we've programs announced. Like we said before, we will do more. There is more we can do. There is an additional charge of EUR56 million that's shown in the slides for improvements that are above, or at least half of which are above, and beyond the programs we currently announced, so we are looking to do more than the programs we've previously announced.

Then, on the loan loss provision and real estate finance, Wilfred?

Yes, you're right, there is lumpiness, both in the releases that we're seeing in REF, as well as what we see in additions in structured finance. So, comparing to earlier quarters, there always have been releases on the REF portfolio, as well as gross additions; difference is that this quarter we have probably around EUR30 million more in terms of release than normally.

And if you looked at structured finance, then I'd say we've got between EUR50 million and EUR60 million additional provision that is slightly more than we would normally expect. If you correct for that lumpiness, you get an idea of where this is, and you will see that we're roughly trending at the same levels as in the past quarters.

All right, thanks.

William Hawkins, KBW.

Two questions, please. The insurance investment margin, the EUR175 million, that seems quite resilient on a quarterly sequential basis because you were about EUR190 million in the second quarter, and that included well over EUR50 million of dividends.

I appreciate there's the benefit from WestlandUtrecht Bank, but to the extent that sequentially that's still a good EUR20 million, or EUR30 million, increase on the second quarter, is all of this just quarterly noise? Or is it the benefit of rising rates? Or to what extent should I say it's something sustainable, rather than something just volatile?

Then secondly, I'm just interested to understand a little bit on your understanding of the outlook for the operating profit for the Japanese VA business after you've made these VA changes; and also, the emergence of capital. Any guidance you can give on that? I appreciate the announcement today has only just come, but presumably you've already done a lot of work in the background on that. Thank you.

Okay, Delfin?

Yes, thank you William. Two questions on the insurance investment margin. Indeed, there is, as you know, the impact of the increased interest margin coming from the net interest margin coming from NN Bank. Following today's announcement, when we present the new segmentation for the next quarter that's going to be, as you know, taken out.

In addition to that there is, in comparison to the previous quarter last year, a lower allocation to profit sharing with our policyholders.

In addition to that, of course, there is a gradual small improvement in terms of the amount of investment rebates to our customers as the guarantees in our pension funds gradually, slowly decrease.

So, that are the three elements that are impacting the interest margin this quarter.

In relationship to your second question on operating profit, the outlook, I will not provide any view in terms of the outlook at this point. But I think that the slides in the presentation show that Japan Life business is providing a good, sustainable, and strong operating result.

In addition to that, for the closed book VA, this is something that, obviously, as the book runs off will generate some capital releases.

Okay. Thanks.

Omar Fall, Jefferies.

You're remaining very cautious on the outlook for Dutch loan losses, which is totally understandable. However, again, the macro trends in the last two months have shown a fairly sharp improvement across a pretty broad range of measures, like the PMI increasing at a record; lower bankruptcies; more stable house prices; etc. Are you saying that, despite that, you haven't seen any of that reflected in the rate of NPL adds, or any other asset quality metrics, since the end of Q3? That's the first question.

Secondly, just a small one on the net interest margin, please. What's the contribution of financial markets to the NIM? Would it be possible in the future just to get that number a bit more consistently, as you used to do in the past? Thanks a lot.

Okay, for the first question we turn to Wilfred.

Yes, on economic developments in the Netherlands, it is, indeed, and Ralph has also highlighted, that the case that we are seeing some early signs of a coming recovery. But PMI index improvement doesn't directly translate into GDP.

What we are seeing at this point is more a slowing down of the deterioration than a real improvement. So that's one observation. It's good news, but it doesn't translate at all into the NPL rates at this point. That's also because, typically, these movements come later in the cycle, and, certainly, somewhat the bigger asset classes are late cycle anyway.

So, as we said before, we do note these potential improvements, and we do expect them to gradually trickle through into the numbers, but, again, not until we're well into 2014.

Understood. I guess, I would have just been surprised not to see some improvement on the SME lending side given that, that is a shorter duration book and much more geared to the immediate economic cycle, but I understand your caution.

Well, maybe to specifically comment on that. What we are seeing is that, at least in the SME books in the Netherlands, the NPL rates don't go up any more; at least, they didn't in this particular quarter, which may, again, be just quarterly noise, if you like.

Where we do see an uptick still in NPLs is in the mid-corporate segment; that is also part of business lending. If you combine the two then we're still seeing an increase in both NPLs and risk cost.

Understood.

On the NIM, the impact of FM was zero; that's why we didn't give it. But we can look to include it, going forward.

Thank you.

Francesca Tondi, Morgan Stanley.

Thanks very much for the presentation, details so far. I'm following up on a couple of points. Looking at the net interest margin, if you could tell us a little bit more. On the one hand, how do you see commercial margin trending, especially in Benelux?

But also, how are you looking at your still large liquidity buffers? Are you looking at taking them down, especially if you're looking at to potentially either another rate cut, or rates going into negative territory? If you could just discuss a little bit around that it would be very helpful.

The second question is on asset quality. You've really given us a lot of details, so just a very couple of points, quickly. Do you see potential for further sales, especially in real estate finance? I know you've done UK and US, still large portfolio. What about elsewhere in Europe? Do you feel comfortable with the valuation?

Also, looking at the AQR, how comfortable you are that the details we have so far, for example, on NPLs definition, how close are they to what you have in your NPLs? Thank you very much.

Okay, let me take the first question on the commercial margins. Well, basically, in the part of Europe where we are active there is -- clearly, we have sufficient liquidity buffers, and we're ready to lend, but we don't see a lot of demand.

On the corporate site, we see corporates moving into markets directly, often through bond issues, where we can support, and we will do so. But given the fact that there is not a lot of demand and there is sufficient liquidity in the market, we -- you can expect a bit of pressure on margins from that perspective.

Having said that, we have always managed our pricing in a very strict way. We have our specific hurdles on the basis of which we price, and, therefore, for the coming quarters we expect the total net interest margin to stay around this level.

Thank you. And then, you still had relatively large liquidity buffers; at the treasury level you've taken some of them down. Do you have a further reduction to do, or you are where you were hoping to be?

Maybe in terms of impact on interest margins, yes, we have a comfortable liquidity position. Yes, we're meeting the CRD requirements. Obviously, we look to try and optimize in that space as well.

Maybe in terms of interest margin in the Benelux, it did improve, notwithstanding the fact that we moved mortgages across to the NN, as we were required to do, which obviously is a drag because you're taking [things] out. That was compensated a bit by further reduction interest savings account in the Netherlands, in Holland, of 20 basis points.

So, in terms of margin, we've managed to compensate in the Netherlands from the negative effect of the asset transfer, and the weak-ish loan demand by reducing deposit levels.

And, yes, we'll try and -- we are looking to optimize in terms of our financing costs. We've a very strong loan-to-deposit ratio. We've seen good inflow of retail funding, which puts us in a stronger position in terms of the outlook for future long-term debt issuance needs.

Yes. Then on that, how will you look at the further reduction interest rates by the ECB, even just taking the ECB -- the rates into negative territory [real] rates? What would you think of that?

Obviously, we look at this in the round. We look at our position relative to our peers, we look at our position with respect to our customers, and you take a blended a rounded view of how the market is developing.

I think one of the positive points is our deposit rates, on average, in Holland are still healthy; they're 150 basis points, 1.5%. So, there's plenty of room there.

Let's move to the questions on NPL, [Wilfred].

I think we're now at question number seven. I have noted three things that you wanted to talk about, NPL definition; AQR evaluations; and real estate finance sales. Let me take it in that order.

The NPL definition that's come out from EBA, obviously, we have noted. We struggle a bit with the fact that it doesn't completely gel with the Basel definitions, which doesn't make it easier. But, in any case, this definition is substantially less conservative than our own.

I can give you two examples. One is in our situation we do not only take everything that is more than 90 days overdue, but also everything that has been over 90 days is on the way back to normal, or even is normal. We don't take those out of the NPL bucket until they're six-month performing.

And secondly, the EBA definition, in a situation where we lend to a group, states that we need to take the whole group into NPL once we cross 20% of the total exposure being in default. Whereas, under our own metrics that is at the first [euro] of default of anything outstanding to the group.

Just to give you an indication of what the differences roughly are, if you take our own NPL definition on the Dutch mortgages, we look at 1.8%. If you were to take the EBA definition, that would be more like 1.1%.

Then you asked about valuations in AQR. There's, obviously, a number of things going on. There is a DNB AQR on commercial real estate here in the Netherlands; there's also the ECB AQR coming later in the year, and into next year.

Our view is that with regard, in particular, to commercial real estate finance, which I guess is the background to your question, what we have done over the past few years is, first of all, manage the book down substantially by about EUR10 billion, from EUR36 billion to about EUR26 billion at the moment.

Secondly, we have increased our risk, where it's quite substantially over that period, from about 20% to currently about 53%. And against that smaller book, the stock of provisions has also gone up over that period.

So, on the whole, we feel fairly comfortable with the buffer of capital and provisions that we hold against this book, and we don't expect any major issues there.

And then on real estate finance sales, there's obviously a lot more activity in the markets in general than there was a year ago. We have taken advantage of that in the US, and in the UK to some extent. There's also a bit more activity in the markets closer to home; not yet at price levels that we, and our clients, find exciting.

I would point out that we're not holding large portfolios of distressed real estate as owners here. Most of our clients are still performing. Most of the assets that we hold are still producing income; in fact, all of them are. So, it's not something that we do without the consent of our clients, and usually the initiative of our clients.

But, again, where we see opportunities, and our clients want to benefit from those, we support them.

Michael van Wegen, Bank of America Merrill Lynch.

Two things. First of all, on your net interest income, can you indicate, for the treasury unit, you saw a big negative impact in Q3, to what extent that recovers when you start essentially use the funding that we [seeing] strong growth in Q3?

And to what extent does the liability management give you a benefit going forward, as well, in your NII by having lower funding costs? So, that's question number one.

Question number two is on the European, or Euro/Asia IPO. Now that you have announced that Japan will be part of this entity, I guess you've taken a big hurdle, and the consultation on Solvency 1.5 is also out there. That, to me, suggests that you, by now, should probably have a fairly good idea of what this business will look like, and where you want to get it to. When can we expect an update on targets in terms of solvency leverage ratios, and, I guess, returns? Thank you.

In terms of the outlook for treasury, a couple of answers to this one, and first is this is something we probably do owe you an update on, a more granular analysis. We are looking at it in the context of our current planning process, and we're aiming to give a more fuller analysis of this after we've completed that, so you're going to have to bear with us a bit.

I think the full story in this we will, or the projections for the future, at least, give you next quarter when we've completed our MTP process.

In terms of your specific question, yes, the liability management exercise, particularly the hybrid, the 8.5%, $2 billion hybrid, call is positive, although that's a relatively small part of the overall total.

The deterioration quarter on quarter is more to do with one-off effects. The treasury is where we have our whole the cost of the Tier 2 debt that we've -- sorry, the long-term debt that we've issued as well. But the deterioration is more to do with one-off effects, lower mark-to-market gains, and a lower positive [ineffectiveness] result. But, like I said, I think we will aim to give more color on this once we've completed our planning round.

Thank you. And on the Euro/Asia IPO targets?

Yes, Michael, I think you're absolutely right, we have now clarity about the scope of the entity to be listed. We have clarity about the earnings potential and the actions that we're taking in order to manage expenses, and manage the company, going forward.

Solvency 1.5 is more clear now. There is a proposal with -- that has been put forward in order for consultation, but we know what impact that will have. As already mentioned by Ralph before, we will provide more clarity with the year-end results, or in Q1 next year.

Thank you.

Martin Leitgeb, Goldman Sachs.

My two questions are as follows. The first one is I realize you guys had quite a significant step up in mortgage production in retail Germany, coming after two quarters of relatively slow production. I was just wondering whether you could provide a bit of color to that. How did you achieve this growth? And what kind of figure or size do we need to think as a run rate, going forward?

This is particular in context that previously you had very strong deposit grow in Germany, which was not matched by a stronger pick up on the mortgage growth there, and so I'm just trying to see where that is going forward.

The second question is really just to confirm for the European Commission restructuring. Does the announcement today of the -- with regards to Japan, does that change anything with regards to the timeline on price leadership plan, on acquisition plan, and on with regards to calling hybrids? Or do the deadlines, the November 14, and November 15, respectively, remain in place as they are? Thank you.

On German mortgages, yes, we did see a bit of an uptake this quarter, I think, by about EUR1 billion, or so. At the moment, the demand in German is, frankly, more driving our production than anything else. The capacity to do more is there, but, obviously, we want to grow this book in a sensible and very risk-aware way.

If you look at our plans longer term for the book then what is very important to us is that we build a balance sheet that is in more than one respect balanced, and that we differentiate also into more asset categories than just mortgages. So, we are looking at a more broader-based franchise in Germany over the long run. Therefore, mortgage production will continue to be important, but it's not going to be the only driver of balance sheet growth.

And the deal that we have now on basically moving the deadline from 2018 to 2016 does not change anything on the other aspects that you mentioned, if it comes to M&A ban and price leadership.

Okay. Thank you very much.

Anton Kryachok, UBS.

Two questions on bank balance sheet, please. Firstly, on capital, you had a very nice capital build in this quarter, up 60 basis points. In that context, I was wondering whether you have heard from your local regulator on the targeted Basel III fully loaded core Tier 1 ratio that you will be required to have, going forward. And if this strong capital generation continues, would you look at earlier repayment of state aid?

The second question, please, on the balance sheet size of ING Bank. Obviously, apart from meeting the demand from your key markets in terms of lending, what else can you do to actually start growing the total size of the balance sheet of ING Bank to support the NII? Thank you.

Yes, in terms of the ratio, we have said, for some time, that our target is 10%. The regulator is not going to, I think, probably share his views. I think you can see from what we've done in terms of paying dividends -- we paid dividends at the beginning of the year, we just paid one now, and obviously that requires regulatory approval. So, I think there's an implicit message in there on how the regulator views us.

We stick to our stance, as Ralf mentioned in the presentation, that we're looking to be at, or around, 10% Basel III fully loaded. We meet that today.

In terms of balance sheet size and growth, yes, we did give a target for 2015, which would imply a significantly higher balance sheet than we currently have today, but, remember, that was in the context of leading to achieving an ROE of 10% to 13%. We're currently just below 10%.

One thing we're certain, certainly in my mind, that, a, we would reach it; but, b, it would not be the way we originally planned two years ago. So, we'll have to compensate.

We're currently seeing limited loan demand. There's excess cash in the market at the moment. We do have some growth, but it's moderate. A pick up in the global growth would help. But we're still delivering just under 10%, notwithstanding that tough environment, and with loan losses significantly elevated. We're going to focus on NIM, and a very stringent focus on costs, and we will aim to achieve our target ROE.

Thank you. Sorry, just as a follow up on capital, if the capital generation in the next few quarters surprises positively on the back of RWA contraction, let's say, would you look at accelerating the repayments to the Dutch State? Or is it something that you haven't thought about yet?

Yes, we've two more payments to make. There's a schedule, which we set out, because the cash flow's fixed. We don't get a discount for paying early, so we have to balance acceleration costs more.

We're looking at -- obviously, we want to get the state aid repaid as quickly as possible, but we have to balance the accelerated costs with that. And we have to balance the potential uncertainties that are coming next year with the AQR, for example, and see how the economy evolves.

I'd like to look at it after we've repaid the next tranche, and see what the world is like. We have an ambition to exit state aid as fast as is possible, but we will only do that in the context of maintaining strong capital ratios.

Understood. Thank you.

Benoit Petrarque, Kepler.

Couple of questions. First of all, on the Benelux insurance operating earnings, just to come back on the question of the [why nots], just to check the improvement year on year. You mentioned lower profit sharing assumptions and lower interest rebates, could you quantify that, please, for the third quarter?

Linked to that, could you also update us on the kind of operating cash flows you've generated from your EurAsia businesses; and the split per subsidiary would be useful, obviously? Obviously, this is a key question. And you are not talking about cash here, just wondering if you could clarify that.

Then, could you talk a bit on solvency for Nationale-Nederlanden? It's 183%. First of all, could you give us the sensitivity to higher, or lower, interest rates given it has been moving again his quarter?

Also, could you update us on Solvency 1.5? What is the likely outcome for the Dutch life business there?

Just quickly on Japan operating earnings, what will that be for the closed block, roughly? Thanks.

Delfin?

Okay, a lot of questions there. I'm going to ask Doug to help me with the impact on interest rates, and I will try to cover all the remaining.

Starting with the operating cash flows generated by the different business, I start with this one because it's the shortest answer, that, we'll start providing some information about this once we start reporting with our new segmentation.

I think that during the quarter the main impact on our cash flows, understood as cash capital, have been mainly the change in the discount rate for our business in NN Life to the move to swap. That has been the main drag in terms of capital that compensate some of the generation of capital coming from the different units; investment management, Europe, and certainly Japan.

If we look at the impact on the Benelux for the operating results in terms of the profit sharing and rebates, together will be approximately [EUR60] million.

Looking at the update on Solvency 1.5, as I mentioned before, there is a proposal that has been put forward for consultation; still the intention to have it implemented as of January 1, 2014.

Just to make clear, the Solvency 1.5 does not change the base of our solvency capital, the so-called Solvency I. It just establish another threshold for the Dutch regulator to determine, or have more limitation, on the possibility of distributing dividends.

At this stage, and subject to the results, I can basically tell you that the impact of this Solvency 1.5 is not limiting on our capacity to distribute dividends.

In relationship to Japan earnings for the VA, I'll try to find an answer for that, while I allow my colleague, Doug, to reply on the sensitive to interest rates.

Sure. On the NN Life, we effectively tried to match very closely on an economic basis, as you know, the UFR and the Dutch curve requirements, this ultimate forward rate. What that basically means is that we're modestly impacted by rising rates.

In a rising rate environment we will lose a little bit of solvency, in a falling rate environment we gain a little bit, but it's fairly modest. On an economic basis, we stay quite reasonably protected for up, or down, rates.

In respect of Japan, the effects of what we're doing in moving to mark-to-market can be summarized in three main things. One, currently, 75% of the books is mark-to-market, and one-quarter of it isn't, it follows SOP 03.

You can get counterintuitive results because we do hedge at a full economic capital basis, and you get catch up P&L effects from the SOP 03 reserves movements. We're going to take that out, because we're going to move the full P&L to mark-to-market, so that should make the results more intuitive.

Also, there is DAC come up on that balance sheet that at some point would have to be written off and amortized. We're taking that upfront, so that will be gone, so that overhang will not be there any more.

Also, we will move the reserve adequacy to a very comfortable position, so there will be no more questions regarding reserve adequacy.

Those three measures, I think, will help stabilize the operating earnings. They will not fully stabilize them because you're still exposed to some Gamma risk, but it takes out three of the factors that can lead to volatility in results.

It will also mean that, and I really want to emphasize this, our Japan VA business, I think almost uniquely, is managed on an economic capital basis, on a market consistent economic capital basis. It's hedged on the same. It's capitalized on that basis, and we've EUR900 million of capital there, which is comfortably in excess of the economic capital requirement. We will, in addition, then move the accounting to full mark-to-market. And more transparent than that, I don't think you can get.

No. Thank you.

(Operator Instructions). David Lock, Deutsche Bank.

I'll be well behaved, and just ask two. First one on cost reductions, just circling back on an earlier question. I wondered if you could give a little bit more color on how costs, future cost reductions, could come through.

Ralph, I know in the past you've mentioned that branch footfall has fallen significantly. I just wondered how long we could expect, perhaps, some of the fixed costs of the branch businesses in Europe to come out.

The second question is more around capital, again. How do you expect your regulator -- I know there's been a question previously on how the regulatory level will turn out. But if we compare where we are today versus where you were when you set that 10% level, it's clear that the European environment is a lot harsher in terms of capital requirements. How do you expect that to roll over the next year, please? If you could give any color.

Okay, I'll take the first one because it's specifically related then to one of the business models that we have, which is the branch model.

Clearly, we see that customer trends are to do more and more direct, and more and more themselves. We're a leader in Internet banking, we're a leading in mobile banking, and, therefore, you see that a lot of the actual transactions being done. They move to the mobile environment, and they move outside of the branch, and that is basically what decreases the traffic to branches in general.

Clearly, and that has been the underlying factor for some of the restructuring problems that we have, as a consequence of that we do decrease the number of branches. But we have to do that in those areas in a very well planned way because we also still have a lot of customers who like that. So, basically, you do that in a phased approach.

You adapt towards, basically, the adaption rate of the consumers taking more products, and doing more transactions through mobile and internet. But advice will still be an important role; will still be important in our model going forward. Basically, what you can expect is that the plans that are out there right now, we continue to implement them as we speak.

Clearly, if there is signals that the adoption of direct channels is even further accelerating, and as a consequence of which the footprint of branches could decrease, and I'm talking about the Benelux more than anywhere else, clearly we would.

On the other side, we also see countries, more emerging countries, where in order to make it -- to complete our business model, going forward, we would even consider opening some branches; for example, in Turkey.

But the one that you asked for, we will play it by ear. We will re-check on customer behavior, and clearly we move in line with that.

On the second one, I'll give the word to Patrick.

Yes, in terms of capital, we think that 10% is a good number, particularly 10% fully loaded. I think we look well enough to peers in that outlook.

The other thing you need to realize is that we operate a Basel III advance model, so the ground on which that is based is moving. In a downturn environment, a weak economic environment, RWAs are going up. So, as we constantly update our models for the current economic date, it generally leads to increasing RWA requirements.

We're maintaining a 10% RWA target on the back of a stronger RWA need, our mortgage RWAs have gone up, our real estate finance RWAs have gone up significantly, as they should do, and as the Basel III models would expect you to do. In that context, I think 10% is still a good number.

Just to be clear, the model change that you referenced there in terms of Basel III, is that completely separate from the other model refinement that you reference on page 22 of your quarterly report?

Well, I wouldn't call it model changes; this is regular model updates. We do this all the time. That's what Basel III requires. We regularly update the models around economic data, and that has lead to significant increase in RWA requirements for real estate finance over the years, and modest increases for mortgages as well. This is just normal practice. Basel III is operating as it should.

Thank you.

Anke Reingen, Royal Bank of Canada.

Two questions, please. The first is on net interest income, and the absolute level. Should we consider Q3 as a trough? Or would you believe that the absolute level would continue to come down as you continue to deleverage, despite relatively good net interest margins?

The second is on costs. You mentioned before that best case costs would stay flat. Is that post the additional steps you mentioned, for which you took the EUR59 million restructuring charge? Also, does the restructuring charge mean that your cost savings target of EUR840 million effectively has gone up? Thank you very much.

On cost savings, the EUR840 million target remains. The additional provision of EUR56 million, approximately half of that will give incremental additional savings, about [EUR15 million], so it's not huge. But the point is we are aiming to do more, and this isn't the end of it.

Remind me, what was your first question?

It was just the absolute level of net interest income?

Yes, we have a strong capital ratio. We're open for business. We have capacity to lend. We're looking to grow, as Wilfred said, in selected areas; and continuing to grow at the healthy margins we currently have gives us capacity to grow absolute level of interest margin.

So, Q3 could be a trough level in absolute terms?

If you look at the overall net interest margin Q3 versus Q2, I think it's the same number, effectively.

Okay, thanks.

Francois Boissin, BNP Paribas.

Actually, my question relates to Japan. I just wondered if you could give a bit more detail about how, or let's say why, a separate sale was not possible. A bit of element on the rationale here would be useful.

Going forward, what is your base case? Do you still plan to sell the business in the coming quarters, or do you plan to [manage this and one-off?

In particular, I'd like to understand what the risks are to the emergence of capital going forward within the back book. Is this equity risk? How is this managed? In what scenario would capital emergence be significantly different to what you expect? Thank you.

First of all, I have to say, I'm very pleased that we have included Japan COLI and VA in the European IPO. I think this is an excellent outcome for shareholders. Why? Because it brings two businesses with combined capital of over EUR2 billion post the accounting changes into the IPO. It brings a COLI business with over EUR200 million of operating profit, and extremely well capitalized, as you can see in the deck, into the IPO.

It also brings a VA block which is very conservatively managed. As I mentioned earlier, it's hedged and managed on a capital perspective on a market-consistent basis. I think, again, almost uniquely.

So, with a surplus of capital over the required economic capital today, we hedge all the main risks; interest rate, equity, and FX. We also have some vaguer Gamma hedging, but a moderate amount.

The customer behavior has been very stable. We have updated that three years ago and have not needed to make any material changes to that.

Significantly, the block -- 80% of the block runs off, as accumulation benefit will run off. There's no extension risk, it simply runs off. That happens by about 2019; it's gone. The remaining part, which is death benefit, has limited risks in terms of customer extension, but we think quite small in terms of the capital impact.

So, EUR900 million capital should emerge over time. The risks primarily are to gamma. If you have major shocks, as we saw a bit in Q2, you can get some dislocation. I think that's the major outstanding risk; the other ones are pretty well hedged.

Okay. It sounds like it's a nice asset, so any -- why couldn't you find a buyer for that?

The issue there, a bit, was we had buyers for the two different parts. We have a COLI business and a VA business in the same legal entity and part of it reinsured to another legal entity, so the complexities of the legal entity structure inhibited the conclusion of the sale.

Thank you very much.

David Andrich, Morgan Stanley.

Sorry, I really didn't have my second question answered, so I just want to follow up on it. In terms of the non-life business in the Benelux region, particularly in the Netherlands, I just wondering if we should think of this result this quarter as a fairly stable result, or if we could expect further improvement coming through from price increases and underwriting, particularly on the individual disability side.

And just a quick question on the capital restructuring. Can you quantify what the potential improvement is in terms of cost of capital coming from that? Thank you.

Okay, Delfin, non-life, Benelux?

Yes, on non-life, in the third quarter the operating result was EUR24 million. That was EUR18 million better than in the same quarter last year, and this was mainly due to the improvement in the disability and accident general business. Also, the property and casualty business, compared with the same period of last year, stayed more or less flat.

So, the improvement in the results are due to the recovery plan that was already discussed and commented upon in the last quarter on the Group income protection. There were many management actions taken there. There was also more favorable claims experience in the illness protection business, and better results also for individual disability, and that was upset partially by lower results from personal accident and travel.

Overall, I think your question is in terms of the -- if the improvements in non-life are sustainable, and we do believe so. Of course, maybe for this, the fourth quarter, there's been some strong storms in the Netherlands and that might have an impact, as you know, a seasonally on the quarter. But overall, the improvements, particularly in [D&A], are going through.

Sorry, just to follow up on that, but the rate increases are still coming through? I think there's probably still an ongoing process there.

Yes, there has been a re-pricing is D&A, and that has been done. Normally, the majority of our business has a one-year duration. We tend to wait for renewals in order to do these price increases, and this has already been happening as we move along. So, part of -- a significant part of the recovery in the claims ratio is both in improvements in claims handling, but also in price increases.

Okay, thank you.

JanWillem Knoll, ABN AMRO.

One last question from my side. It seems that your tone on lending margins has changed a bit vis a vis previous quarters, and a bit to the negative side, I would say. Can you shed a bit more light on where you expect -- where you see currently most pressure on lending margins, and what is the outlook there? Thank you.

I don't think we intended to give a change in tone on lending margins. We maintain pricing discipline on lending; that's been a constant theme, and remains so.

I think what we're saying is that with a lot of liquidity in the market that the ability to grow significantly has been constrained. It's more about the ability to grow volume whilst maintaining these margins is where the headwind is a bit.

No, fair enough. I refer to slide 14, where you say lending margins was slightly down due to low demand and -- for credit and increased competition. And low amount for credit, the point taken. The thing is I'm interested in the increased competition. Where do you see increased competition; in which segments, in which business lines? It would be helpful. Thanks.

I think this is -- we're trying to read too much into very small changes. Our lending margin is up significantly on the previous year, and down slightly on the previous quarter. The message is we continue to believe our look to sustain healthy margins consistent with generating a 10% return on equity on new business, and the headwind, a bit, is more -- is in volume.

Okay. So, lending margins are expected to remain stable, going forward?

Overall interest margin, we are aiming to keep it stable, going forward.

Okay. Thank you.

Okay, I think that, with that as the last question, we can round up this call. Thank you for the interest that you've taken, having this session with us, and all the questions that you have raised. Clearly, if there's more questions, our team is available the whole day, and the coming period as well, to further explain.

I think to summarize today, and the announcements today, the first one, we've made a lot of progress, and in such a way, with getting the IABF out of the way, as well as getting a clear decision on Japan. Basically, we know the future restructuring is still to be done. There's much more clarity there, and we have made a lot of progress there, so that's good.

And the second core message here is there is that we have strong underlying businesses, both on the bank and the insurance; both doing very well underlying performance, and both being well capitalized.

So, with that, thanks very much. I wish you a good day.

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