ING Groep NV (ING) 2018 Q3 法說會逐字稿

Welcome, and thank you for joining the ING Third Quarter 2018 Results Call. I'm happy to give the floor to the CEO of ING, Ralph Hamers. Go ahead, sir.

Okay. Thank you, operator. Well, warm welcome. Thank you, for joining us.

We'll give you an update of the developments, our financial results for the third quarter of 2018. With me are Koos Timmermans, our CFO, and Steven Rijswijk, our CRO.

As you all know, the third quarter for us was deeply marked by settlement with the Dutch justice department and it's sincerely regretful that there is short-comings in the execution of polices to prevent financial economic crime that were identified at ING in the Netherlands. Yes, we take this very seriously. We accept full responsibility for this. Not meeting standards for securing the integrity of the financial system is just unacceptable.

We didn't wait for the fine to come out to start our enhancement process. We are enhancing our customer due diligence files where necessary. For the last year-and-a-half already that program is running. We're also working on various structure improvements on our compliance policies in terms of the policies, the tooling, the monitoring and the governance as well.

Now despite this serious setback in this quarter on the other side we can be proud of the hard work of our colleagues, dealing with clients on one side, answering them, but on the other side also dealing with clients that result in continued commercial momentum, and that is what we have shown as well in the third quarter. We saw growth in primary customers by 200,000 to 12.2 million.

We saw a continuation of the growth on the lending side. Net core lending was well diversified and grew by EUR 6.8 billion. Customers have their confidence is us and did deposit EUR 3.4 billion with us. All of that leading to an underlying pretax result of EUR 2.1 billion for the quarter which is a 6.5% improvement against a year ago.

Now, as I said this result, the financial result reflects continued business growth and resilient margins. Margins are well-managed. It's also a low-risk cost environment and a strong expense control. And you can actually see expenses going down for us the last quarter.

The net result was of course impacted by the EUR 775 million settlement agreement that we have with the Dutch authorities and therefore came out as EUR 776 million.

The underlying return on equity was 10.7% which is actually up. And the capital position remains strong, which was also very good, at a level of 14%.

[For underlying], financially -- financially and commercially we see a very solid quarter, but regrettably it is a quarter which has 2 different sides. With that very short introduction we are happy to take your questions.

(Operator Instructions) Our first question is from [Mr. Rubin Eck], The Telegraph.

Could you share some more light on the division's financial market which is a bleeder at the moment? Could you tell what's happening there? And also a more forward-looking statement?

Yes, so the -- more forward-looking statement, we never do. And there is -- thanks -- thanks for the question.

Well, you can always try.

Yes, yes, yes, yes. But okay, so let's look at financial markets. So the business that we do in financial markets as ING is one that is concentrating in the foreign exchange area, how do you kind of help your clients hatch foreign exchange exposure, how do you -- how do you help your clients hatch interest rate exposure. And then we have a business in what we call GSF. I mean, those are kind of the big -- I mean, there is more businesses but these are the big contributors to the financials markets business. Now, within the financial markets business we see already for quite some quarters that given the -- there is a lot of kind of volatility in the stock markets and there is quite some foreign exchange volatility in some markets, overall there is not a lot of volatility, specifically not in the [rate] market. And therefore you don't see a lot of demand from customers for hedges. And that actually makes that volumes of business -- the volume of business coming through to financial markets activities is -- are lower than it used to be 1, 2 years ago. So 2 years ago, I think. And that basically gives a result that is below our hurdles. Now if you look at financial markets and what we do beyond the way we qualify it and report it within Wholesale Banking but also the activities that we do for mid corporates in financial markets. The return of that franchise on an annualized basis is between 3% and 4% which still makes it a bleeder because it's not making a hurdle of 10%. But it's not like it is a loss-generating business. It is a profitable business. But for the amount of capital that you need to hold for these activities, we're not making the right returns. So there is couple of ways to go about this. First one is you restructure, and that's what we did. So we centralized most of our training activities in London. As you know, from Amsterdam and Brussels into London. And with that you try to work on the cost side. You continue to work on the cost side by further standardizing the systems, which is what we have been doing over the last couple of years and we will continue to do so as well. But you can't solve this only on the cost side. So you will also have to look at the income side and at the return side. And for that, either you stop real businesses or you wait for better times to come, times in which there is client demand for hedges, and they will come back. But at this moment, you're right, I mean, the division is not performing well enough in order to make the return hurdles on the capital that we have to allocate to that business. So yes, it is one that we -- that is in our focus to improve.

(inaudible) knows that as a -- the trading activities have to go back from the U.K. to the EU which would mean more cost because of reinvestments you had to do to bring everything to London and then bringing it back would be (inaudible). You have any comments on that? And can you also shed some light in where you are in thinking what to do to stop certain activities or just to sit back and wait it out?

Yes, no, so we're -- so I can't allude as to what we're doing. Really we're looking at all different options. We're in the middle of that process to review. And you will hear at the moment that has any kind of major impact. For sure, we will then, if that happens -- if that happens we will -- you will hear so. Now on the other discussion, which is basically the discussion that all banks have with the SSM as to the location of some of the risk-taking and the risk management activities in financial markets and showing that some of that if it is related to the EU 27 business that is located on the continent. That is certainly a discussion that we're having. It's something that we won't comment on because we never comment on discussions that we have with our regulator. But the -- this will not kind of have a material impact on the business case that was underlying centralization in London. So it's not going to really hamper that business case centralization in London. And with the move to London business case risk factors is still valid.

Okay. So you're staying in London. There is no question that you would leave.

We are centralized in London, so I mean the question is just is there specific activities that you need to bring on to the continent, but that will not hamper, that will not kind of influence the business case so much that you wouldn't want to be in London, no.

The next question is from [Mr. Kune Hasan], [The Follox Grunt].

I was wondering, because you're saying that expenses have been going down during the last 3 months, but at the same time I would expect that the costs of these measures against -- to -- because of the settlement, for example, the extra monitoring and the personnel expenses in Amsterdam, I would expect these costs to rise. How -- how can you -- would you explain how it comes that the costs still are getting lower?

I mean there is -- on the cost that we report on is a lump sum of cost of ING across the globe. And we're active in 42 countries, as you know. So if cost go up in one market doesn't mean that overall our costs go up. Or if costs go down in one market our overall costs go down, so that's one. Secondly, the improvement program, the enhancement program around KYC and monitoring client activity, monitoring, that's not something new. I mean we didn't start at the moment the settlement came out. I mean shortcomings were very evident. And we did the investigation together with the prosecutor and therefore we started that enhancement program already early 2017. So clearly we are investing in this area of compliance. We are -- increase the number of people active in compliance. And just to give you an idea in the numbers, we have increased that from 150 in 2010 -- 2010 to 450 as we speak. And globally, from 600 in 2010 to now 1,800 globally. So it's not kind of there is -- that there is going to be a sudden cost peak and cost increase. But yes, compliance and making sure that we do play a role as a gatekeeper seriously and that we do play it well is costing. But at the same time, as you know, we are transforming. We have heavy investments on the digital side. And that is also reducing cost. So the sum of the 2 may still lead to an overall decrease which is happening in this quarter. But having said that, the actual penalty or the actual fine is taken out of the profit this quarter. I mean, it is not reported on the cost line, it's reported as a special item. But it hurts and it's supposed to hurt.

Yes, yes, but during the next quarters we won't see extra continued cost rising?

Well, as I said, you will see some cost categories going down and the cost of running a program like this, and you can certainly expect to be at high level and sometimes increase because this is an important role to fulfill and it needs investment going forward as well.

Yes, yes. One final question on this. The earlier goal of the reorganization of decreasing 7,000 jobs worldwide and 2,300 in the Netherlands, has this changed because of these, for example, extra compliance personnel?

Well, first I have to correct you. We never indicated that we were cutting 7,000 jobs because of the transformation. We said that 7,000 jobs were going to be affected by the transformation. I mean, and the reason why we said it that way is that, and you can check our FTE numbers, that overall our FTE numbers are not really going down and this is IG as a total. That's because we are creating a lot of jobs as well. The jobs that we're creating are in different areas from (inaudible) not only different geographies but also different areas where we are saving jobs because of digitization. For example, digitization leads to a decrease of operational jobs but we do need more data analytical skills and people in that area. Now so the 7,000 that we announced at that moment, that is what we are still performing on. As to the jobs that will be affected, we are currently, in terms of the reductions, for example, then if it comes to those areas where this will lead to a reduction. In Belgium for the last 2 years this has led to a real decrease of internal FTEs, as we would call that, over 1,150 people as an example of that 7,000 that are affected. But again it's not like (inaudible), yes.

(Operator Instructions) We have another question coming through from Mr. Rubin Eck, The Telegraph.

Could you –- could you take us with what has happened in the last quarter in the Dutch business? How did customers react on all the news which came out of ING? I see, for example, that EUR 2 million of the customer deposits have decreased. Could you tell us more about how this went?

So clearly we have talked to customers and we have also looked social media, Rubin. And clients -- and people have indicated that they weren't happy with the situation at ING and some have certainly also closed their accounts. Now you have a pretty large market share. We have more than 8 million customers as we call them, in the Netherlands. The number of customers on quarter-to-quarter is pretty volatile in itself. But if you look at the underlying development of the primary customers in the Netherlands, we actually see a continuation of an increase if you take it as a trend over the last 3 quarters. And with primary customers, as you know, those are the customers that see us as their primary bank. In terms of the specificity of the savings going down in the third quarter, it's quite a normal seasonal pattern because the third quarter is the holiday quarter, so people do use the money that they get in June, January as a holiday payment or May and June. They consume it in July and August. So as you see some of this going down is more a seasonality effect than anything else.

One other question about the capital ratios. You do see that core Tier 1 is just a bit above your goals, also the leverage ratio is a little bit above that. How come this is going down? And in what ways are you comfortable with how it's looking at the moment?

Yes, if you look at the core Tier 1 in this quarter, it went down by 0.1%. And that is basically because we are accruing the remaining profit which was somewhat lower of course after the settlement. But we are accruing that for the dividend. So normally, and that is what we always do, we accrue for the dividend in the first 3 quarters of the year, and then the final quarter is more used for either balance sheet strengthening or for using extra money for the dividend. So this quarter the profit is basically reserved for that. So that doesn't add in the equity. On the other end, what also happened is if you look at foreign exchange and then you look at Turkey but you can also look at the U.S. and if you look at equity stake, so for instance, Bank of Beijing, those 2 led to a slightly more downward pressure on the total core Tier 1 ratio. So overall, we are still 0.5% above our ambition level, which is I would say it's a considerable amount, it's EUR 1.5 billion more than what you normally need or EUR 1.6 billion even. Now the issue is, what we have said is we are looking at this capital more longer-term and we just have to make sure that we will continue at this post Basel IV 13.5 level. And that is what we are doing and that's what we are accumulating money for. If you look at the leverage ratio then you see something else. In the leverage ratio what plays a role of course is both your total amount of equity but also your balance sheet size. And for instance, if we have more old money with, for instance, [BMGS], so that is our bank where we deliver cash pooling services for our clients. If they have higher balances then under the new rules this is also part of the leverage ratio. And that plays a role. And that's why, for instance, per quarter it might fluctuate because these -- yes, you have these amount in there as well.

(inaudible), Rubin. I mean, sort of 13.5 is our ambition. We managed -- we want to manage it around 13.5. Doesn't mean that we would kind of -- that we wouldn't allow it to go below, because in the end the regulatory minimum is 11.8, right. So the regulatory minimum is 11.8. And we basically want to steer away and stay away from that level. That's why we have said, well, we want to manage it around 13.5. So we're well beyond the 13.5 as to where we want to be.

Okay, yes. And because the loan book is growing and the risk for that makes your capital ratio go lower because you want to use the money for dividend payout.

Well, in the first 3 quarters that's how we reserve our profits. In the fourth quarter you will then see a surplus of profit then going to the capital and then you see it going up again, yes.

Next question is from Mr. Kune Hasan, The Follox Grunt.

I have another question on Turkey. This summer there was a lot of noise about the potential problems and losses over there. Now it seems at least in your numbers that this may have been a bit exaggerated. What do you think about it? And do you think that we have seen the main -- the main crisis over there already or can it become worse?

It's good question. Steven is going to answer that.

Yes. Thank you. So from a macroeconomic point of view, Turkey is in more difficult periods and that is not over yet, they are in the midst of it. Although I must say that the Turkish Central Bank has put the initial right steps in place actually support the country. At the same point in time, we have already been managing our exposure and the way that we deal with individual clients for the last couple of years. So for example, we have been very strict on focusing on foreign currency lending for clients locally. We only focus on the large clients which have foreign currency income then give them also foreign currency lending otherwise there is a mismatch. That's one. Two, we typically, if you look at retail, so mortgages, that's only a local currency. If you look at small business, that's only in local currency because they largely make also local currency income. The larger company we focus on foreign currency lending. That's one. Two, we have been regularly decreasing our intercompany lending from Amsterdam to Turkey. At the end of last year that was EUR 4.1 billion and that has gone down to EUR 3.4 billion and we continue to bring that gradually down. But we still would like to support our clients in Turkey both foreign, so non-Turkish companies in Turkey doing business there as well as Turkish companies doing business here in Europe. So we need to do it in a balanced way and we need to pay continuous attention. But other than, we are focused on that continuously and have to pay a big compliment to the local team who have been managing that already very well for past 2 years.

One further question. Which of your other more important markets do you see potential problems on this -- on this thing? I read something about Romania. Maybe there is China.

No. So I think, Kune, if we (inaudible) clearly you can have a long discussion about trade war and the effect it will have on the -- on global growth. But there is not a lot of markets apart from the couple of emerging markets that were already hit hard in the summer. Argentina, Brazil, Turkey that were hit hard that we can expect further deterioration or so. In Turkey, as Steven has indicated which is a large market for us, that in comparison it is small for our total book. The book seems to be -- the local seems to be holding up quite well. And that's because of all these things that Steven was indicating. And Europe in general, including Poland and Romania, if there was anything in Europe that spoiled the party is geopolitical risk either coming from Brexit and then more hard Brexit in a way that we don't know how to manage, but honestly we are prepared for that. And geopolitical risk coming from Italy as we know which gives rise to a weakness to euro a little bit. But immediate crisis, no.

Next question is from [Mr. Archie Weinstike], [ABN Financial Group].

I would like to start with a question about the treasury related income in the quarter, which according to some analysts is the main like, yes, higher-than-expected results. Could you explain a little bit what's -- what that is?

Sure. It is not the main part. But indeed there was a bit of headwind on the treasury side. And what you are seeing is roughly speaking we have the [residues] which we use to hedge our currency. For instance, we take deposit in Czech koruna and we convert them to euros. For that we use a swap and that swap has a bit more value. Similarly, U.S. dollars, we do euro-dollar swap to fit into our dollar business. Those swaps are mark-to-market. And in general that gives us a bit more money. And that was in this case, it is around EUR 60 million that you have derivatives not in hedge accounting which are supporting the results. And the other part in there is we have derivatives which we use for hedging and we have hedged items. Now the hedged items, that is for instances mortgages, derivative we use for hedging are valued against a different curve and that it is technically called OIS curve. And that gives also some results. The characterization of all of this is 2 things. One, this can a little bit go up and down. And secondly, over time is always pulls [two part]. So you have a quarter up, you have it a quarter down. And so in that sense it's a bit, yes, unavoidable type of noise in your hedging activities. But it's again, it is relatively a sizeable number, but at the same time I wouldn't say it is sort of the biggest contributor to the results.

Maybe I knew in advance. I shouldn't have gone into that detail, but thank you.

It's okay, no, no…

(inaudible) like it.

Don't worry, don't worry about it. If you go through the results so the income line is, it's a bit of a beat, so basically a bit better than expected on the back of the growth and good margin. So the margins were kept up. The fee income is a bit better than the market expected which shows that we're turning around the model from a savings bank to a full-fledged digital primary bank and we are selling other products now as well which generate some fees. And the fact that the cost decreased. Now on the treasury side as Koos explained, yes, it's certainly a quarter that looks positive. But some of these elements, as he says, is well over time are neutral. So you will see them then also being a little bit more negative in some other quarters. Over time they have zero result because they are there are to hedge some of our books, and in some quarters they give a positive result and in other quarters they may give a less positive or even a negative result.

If I could, maybe a totally different type of question. There has been some critique maybe that, well that recent problems including the compliance issue, but also in the IT transformance in the Belgium and maybe also more general that, yes, it seems that ING is maybe focusing too much on IT integration and too little on banking. Do you recognize this criticism? And do you -- maybe -- are you maybe changing course as a result?

I don't think that banks have a choice because I do think that banking is digital and the future of banking is digital and therefore IT is, technology is a crucial component going forward even on those elements that you mentioned. Now, the part that you mentioned in terms of the IT risk that was reported on in one of the newspapers, I was completely taken out of context and the way we do manage these transformation programs is that we already before we start these programs we make our own kind of summary of where we expect some of the risk to be because you are going through a major transformation. And we do report it to our people that with the programs that they run and the projects that they deliver on and the money they have to insist that that should really go at those areas where we expect some of these increased risks while going through a transformation. And that's exactly what they're doing. But for example, if you -- for example, if you allude to the compliance issues, I think a large part of compliance issues can only be resolved as to where society expects us to be -- to be -- for them to be resolved through technology because if you have to -- and I'm just taking them in Netherlands, if you have to analyze 4 billion payments per annum and you have to analyze those payments against the activity of a client, then there's no other way than using technology to help you and get to interpretation of some of this. And on the back of that, generate your alerts to the [FIUs]. So even in those areas, yes, I mean, it is people, it is skilled people, it is cultural mindset, it has also quite some technology investment that you need to be -- to do in order to get to that level where I think we need to get it as a gatekeeper and play our gatekeeper role as (inaudible).

Okay, thank you. Maybe finally, if I can, would you give some, maybe some update on the state of play where it comes to the competition, expected competition from big tech companies. Do you still have the same opinion on, yes, where banking is going and on the role that ING can play there?

Yes, banks in general, ING specifically for sure. If you look at the trends in terms of customer behavior, then you see that customers deal with us increasingly digital. And just to give you a couple of numbers, we have 3 billion moments of contact a year with our customers as ING-only, 3 billion interactions with our customers. More than 99% of those interactions are through mobile, whether it's your iPad or your phone and your smartphone, more than 99%. Another number to give you is that out of the 38 million customers that we have, more than 20% have never interacted with us or other than through a tablet or a smartphone. Kind of shows that banking and generally banking is done through tablet and iPhones going forward. Now all these people expect from a bank a service level that they are used to also from the global techs which is a service level that is personal, that is instant, and that's why we are happy to deliver these instant payments in the Netherlands going forward, relevant and seamless. So that is the experience they expect from banks digitally. Then you have 2 kind of source of competition for banks other than banks themselves which is the fintechs which we see more like players in the market that can help us to build our own experience towards our clients, the big techs, the Googles, the Amazons, Facebooks of worlds who are in daily touch with our clients already and can easily extend their services to include banking. We see that. We see that Amazon is active in banking. We see that Apple Pay is increasingly accepted. Although they don't have a banking license, Amazon does have and is looking at payments licensing as well. Alibaba has full-fledged money market management activity, WeChat as well. So for them it's very easy to include banking service in their offering and therefore they are a major competitor and vis-à-vis our clients. Now what we argue is that we are happy with competition, any kind of competition, but that should also be on a level playing field. And some of the regulations that are coming through, like [PEC2] don't create a level of playing field. They're very one-sided regulations where basically we are put at a disadvantage vis-à-vis these large players.

And is there any development there? Or will that remain for the foreseeable future?

Well, I think -- well, I think that we have brought some of this under the attention of the respective politicians and they do see it now. But they see the ultimate (inaudible) platforms and the sheer size they had but also the sheer influence they have over consumers, that that there is something that one way or the other needs to be regulated, if that's what you want to call it. And I do think there is an increasing awareness, there's a need for that. Having said that, it's not in the works. So we see it, but for the moment we'll have to work on open banking and PEC2. And that's, as far as reality that we'll have to work with.

We have a follow-up question from Mr. Rubin Eck, Telegraph.

Perhaps bit of a strange question, but how is the board doing? I mean, there is -- you've been in the center of the storm from the beginning of this year. Koos is stepping down, the whole company is looking at you. How is it going?

Well, Rubin, this is -- if you go through this experience and you have to kind of come out with a -- the result of an investigation and a settlement like this, it's painful, it's painful for our clients, it's painful for our colleagues, it's painful for us as leaders as well. And clearly it's in one side kind of makes you extra motivated to ensure that going forward you do it well, and the other aside it's something that you have to cope with for some time as well. And also this is what we're going through, but the whole company is going through it and but we use it for the better. We use it as a motivator to take on compliance as one of those categories that really have become part of our DNA, like bankers have grown up to become good credit decision-makers or how we managed market risk. We really have to get the whole area of knowing your client so early and knowing the activities of your clients so early, has to become part of the DNA of a banker. And that is crucial. And that will take some time. But for that we do have the programs, and I will go through that.

Yes, I'm also asking because a lot of analysts had expected you would do less this quarter than you have done. So was it easy? Or in what way was it difficult to keep your focus also on the business while there are any other stuff [as we call it]?

Well, I think Rubin it's a combination of 2 things. First you do see that, the transformation that we've started already 5 years ago and that we accelerated 2 years ago that is bearing fruit, its bearing fruit in terms of how we deal with our clients, the experience that we offered and that promoter scores that are in which we're #1 in 7 or 13 countries is our leading indicators for our continuous growth on one side. The other side, as I also said, is that focus on compliance, the improvement of the files, investment in activity monitoring and activity monitoring is not something that just started because of settlement itself. It's already started more than 18 months ago. So also there the modus operandi within the organization, we include those activities. And clearly that will be stretched even more as we go and with new technologies coming in. But that's -- that was already there and that will continue so as well. So it's not like from an operational perspective this is now a sudden shock. I mean, as said, 18 months ago, more than 18 months ago we already started in many areas to improve what we were doing.

How is actually the search for a new CEO going?

Yes, so that process has started and we're in the middle of the process. So we can't comment on that any further than that.

Okay. All right. One last thing, I understood next year you're organizing a new Capital Markets Day. What's on the program?

Yes. What's on the program. So this is in March. We saw that was -- it would be good to give an update to our investors. And I'm sure you will be invited as well.

Sure, wonderful.

To the program because we always have a media part of that as well. So we launch the acceleration of our think-forward strategy the end of 2016. This is a program that runs into 2020, '21 on some elements. And we think that giving a heads up to our analysts in early 2019 is a good moment because we're kind of just in the middle of the program and we can actually show some of the results of that transformation coming through if it comes to digitalization, new initiatives that we have taken across with fintechs and on the wholesale banking side as well as on the retail banking side how we deal with our -- how the experience is digitalin different apps. So we'll have a couple of deep dives into programs and a couple of showcases as well for analysts. And you need to have a regular update with your analysts and through them with your shareholders anyway on what your plans are.

Yes. And there also on that day updates to be expected about, for example, capital markets, so the wholesale banking which are of course elements which are under the -- well, under stress at the moment?

Yes. So there will be an update on all of our businesses at that moment, so including that. The things that do well and the things that need improvement will certainly all be addressed there.

(Operator Instructions) There are no further questions coming through. Sir, please continue.

Okay. Thanks all then. I just like to thank you once again for showing your interest in ING and being with us today to go through our third quarter results. As I said in the beginning, clearly this quarter has 2 sides and clearly the quarter itself was overshadowed by -- marked by the settlement that we -- that we have made with the Dutch justice department. The consequence, the number one priority was already and will continue to be the enhancement of our customer due diligence files where necessary, working on structural improvements whether it's on policies and tooling and things I've mentioned before, that's really crucial. On the other side, it's good to see that the commercial momentum is being there, that the transformation program is bearing fruit. We see continued growth in primary customers in many different countries across the globe, continuous growth in lending and deposits, good -- and that combined with good expense controls and that to a good result and a continuous strong capital. Thanks a lot. And if there is any further questions during the day, you know that our media team is always available. Thank you.