ING Groep NV (ING) 2019 Q1 法說會逐字稿

Welcome and thank you for joining the ING First Quarter 2019 Results Call. I'm happy to give the floor to the CEO of ING, Ralph Hamers.

Yes. Thank you, operator. A warm welcome to all of you. Thank you for joining the call this morning. We'll give you an update on the developments and financial results. I'll give you an intro, and then we'll have plenty of time for Q&A. With me are Tanate Phutrakul, our CFO; and Steven van Rijswijk, our CRO.

So looking at the first quarter 2018 -- 2019, it's proven in our strategy delivery while we were hard on improving our processes. We continue to improve the way we manage nonfinancial risk, an important element is that our global Know Your Customer enhancements program is an important element of that in managing nonfinancial risk.

We currently have our 2,500 FTEs working on KYC across the bank in all client segments and all business units. We've rolled out an adverse media screening tool. We have begun assessing behavioral risk as well, and all these efforts are aimed to further embed nonfinancial risk structurally throughout ING.

Same time, we're able to continue and innovate to improve banking experience for our customers. Examples of that are the improvements of payments of mortgages. We announced in the Netherlands, Belgium and France further groundbreaking developments in the use of distributed ledger technology also for our wholesale banking businesses. We also kept our efforts to empower clients in transitioning to a lower carbon society by taking part in 12 sustainable bond transactions and 16 sustainable loan transactions, so really playing an important role there.

Commercially, we saw a positive start of the year as well. We saw good commercial momentum in the number of primary customers growing by 150,000 to reach 12.6 million. And for the first time, we had over 1 billion digital interactions with our customers in the quarter so up more than 25%.

On the back of the commercial developments, we saw net core lending increase by EUR 8.7 billion. In the first quarter our net customer deposits coming in at EUR 4.8 billion, and that resulted in the pretax result of over EUR 1.6 billion and a net result a little lower EUR 1.1 billion.

So basically, you see the underlying continued business growth. You see resilient margins, a solid fee income, a good cost control putting down in the mix delivers these results. Compared to the first quarter last year, they were still -- was affected by the higher risk cost, which were extremely low in 2018. And now they are higher this quarter but still low in view of the over-the-cycle average that one can expect in risk cost.

The underlying return on equity was strong at 11% at a 4-quarter rolling average. And CET1 ratios or our capital ratio has increased from 14.5% to 14.7% so very, very robust there as well.

So underlying, commercially and financially, a very solid quarter. And with that, happy to take questions.

(Operator Instructions) We have a question from Ruben Eg, De Telegraaf.

Could you shed some more light about the billion Internet contacts you have? Could you shed some more light in where you see that growth? I mean there are countries where you are only digital. Can you share something about the older countries?

Yes, sure. So Ruben, there's a combination of 2 things here. So on one side, you see that the number of customers that bank with us mobile only is growing very fast. So 2 years ago, that was around 12% of our customers were mobile-only customers. Now...

Four years ago?

Two years ago.

Oh, 2 years ago. Yes.

And now we are at 26% of our customers are mobile only. At the same time, you see the assisted channels decreasing in number of contacts as well. So the assisted channels would be branches, call centers, et cetera. So you see a very rapid move towards mobile only and beyond that, desktop banking, everything that is digital, a rapid move, a rapid increase in the percentage of the total interactions.

And then clearly, you see, because of that as well, the number of interactions increasing because basically the behavior of customers on the mobile is different from the behavior of customers on a desktop or the behavior of customers on the branch. I mean checking in your current account, people now, I don't know, once a day, for example. And on the desktop, they would do it once a week, and in a branch, they would not -- never do it and just wait for the paper statement to arrive, right? So clearly, moving digital leads to more interactions itself, and that is what you see here. But having much more interactions gives you quite some opportunity to get to Know Your Customer better. And that's the light I can shed.

Could you also make the other connection in the growth of fee incomes? Or is that another reason?

So if you would take the number of interactions that we as a bank have as a starting point for different business models being a digital player or a platform, and clearly, just like people check in on the news site a couple of times a day, you have an opportunity to engage with your customer with the one who checks in. That's what we as a bank have as well. So in our moves towards becoming more and more a platform, meaning that we want to be more and more active in the total value chain of how a customer engages in specific products and specific services, it does lead to the opportunity to offer third-party products, peer products as well. So it does play into our strategy to become the go-to platform for financial services. Absolutely.

Yes. Is there in the growth fee income something you could say about what is -- what you have achieved via third party -- parties like AXA and [end] insurance or so?

Well, I don't have that at hand here, but clearly, the opportunity to offer third-party products by virtue of being the check-in app as we are, for example, in Holland, we're the #10 app in terms of daily usage of the average use person and the #1 through 9 are either Facebook or Google products. So after Google and Facebook products, there's ING. So once you have that and they check in with you, then basically, you can build a relationship on a more frequent basis. And if you want to build incredible relationship as a platform, you got to be open because if -- in that relationship, you only limit yourself through your products and your own services, it is not very -- you don't develop incredible platform offering. So you got to be open. And being open means that you do offer third-party services and products, and that does improve your fee income going forward.

One follow-up question if I may. Could you share some more background about growth countries where you also have the need for assist? You see that in Spain and Germany. And could you share something about why that could help you in your loan book and how easy or difficult it is building a branch office next to your digital -- I mean, your apps?

Yes. So if you look at where we are a challenger bank, that's where we are predominantly digital bank. Then, we have in Spain, we have like 26 branches. And they look at situations where people need advice, for example, in mortgages, although the percentage of mortgages that we actually sell digitally in Spain is rapidly growing even with those physical outlets. The same in Italy. We have like 16 branches. In Germany, we don't have branches, but we have our own mortgage broker, Interhyp. And Interhyp is growing very fast and -- but they also sell products of our peers or they also sell Deutsche Bank mortgages or any other bank mortgages. So from that perspective, there is always a function that a branch will have also in a digital world because there is moment in life that either a consumer or a small company would need some kind of advice. And that advice you can either through physical location, you can do it through a call center, you can do it through a web call. So that's on 1 side where we see with 26 branches in Spain, we cover like 85% of the economy.

Now we have -- in the C&G markets, we also have activities in, for example, Poland and Romania and Turkey where we have branches, hundreds of them, and where we're basically also changing the function of those branches because, honestly, I think even in these markets, the digital pickup is even more rapid than many other countries that we see on the Western European side. And therefore, you see the role of these branches changing as well, so in Poland and Romania and in Turkey.

Well, why do they change there?

Because basically people -- like in Holland, you see that people interact with their bank more digitally, so therefore, the function of the branch moves away from being a transactional channel to an advisory channel.

Our next question is from Mr. Adam Clark, Dow Jones.

Just have a couple of questions. One, any comments about the prospects of consolidation among European banks? Obviously, you've been mentioned in reports about potential approach for Commerzbank, and I wonder if you could talk about that more generally. And secondly, prospect for your joint venture bank in China with the Bank of Beijing. Would you talk a little bit about just what your financial targets are there? And maybe the differences where in Europe you're kind of the digital leader, but in China you're [up against] very big technology giants in Tencent and Alibaba and so the differences there?

Thanks. Well, on European banking consolidation, I think that as a Pan-European bank, probably the most Pan-European bank there is with bunch of activities in different European markets, specifically also Eurozone markets. We are supportive of the Banking Union. And the Banking Union is a -- is basically a condition in order to build a more integrated Europe. And I think the first 2 steps to create that Banking Union have been taking, which is a single supervisory mechanism as well as a single resolution board supported with a single resolution fund. In order to finance the Banking Union, you need to have somehow a European deposit guarantee system in order to make sure that size, the supervision and the resolution with the bail-in concepts that depositors are made whole if banks fail.

So that first step is basically blocking 2 out of the 3 benefits that one can have in European banking consolidation, that being capital efficiency as one benefit and liquidity efficiency as the second benefit, so remains at this moment in time the benefit of cost efficiencies. Now those cost efficiencies, you can reap if you are able to build cross-border banks or, if you're not, that is limited to local cost synergies. So given where we are, most of the bank consolidation, if it will happen, will be concentrated on taking cost out of the system per country. So that's the way we think about European banking consolidation. So if the Banking Union is not finalized and not a lot of like big cross-border mergers will happen unless there is interesting cost benefits to be reaped in the different markets in which people -- in which these banks are active.

Now in China, we are on the back of the experience that we have in the Philippines. We're looking at how we can build a regulated digital bank. So a couple of years ago, the Chinese banking regulator came to us with a request to look at how would we be able to build a digital bank in a Chinese context because most of the players, the ones that you mentioned, at that moment, were offering a lot of financial services outside the regulated sphere. And since then, we have been working with them and with our principal strategic partner in China being Bank of Beijing in which we hold 13% as a shareholder. We have been looking at how we could build a venture like that if at all. And we're currently in the process of looking at how we can do that.

And then can you talk about -- I mean I was under the impression that a certain amount of the investment size had already been decided. If you could talk about how many customers, et cetera, you could imagine having for purely digital bank, et cetera, and what kind of profits you can make compared to European digital banking.

We -- that is not there yet honestly. So what we're looking at here is, for example, we -- what we're really testing here is whether you can set up digital banks rapidly using whatever we have as a leading digital bank as ING already. So we refer to what we're doing in the Philippines, and basically in the Philippines, we have looked at what different digital components do we have in order to set up a mobile bank only. And we were able, within 10 months, to launch a mobile bank in the Philippines using codes that we have in different places in ING. So basically, what we're testing here is, can you replicate on the back of what you already have or can you just use, simply use code that you developed in one country easily in another country? And that is what we do through what we call touch point architecture, which means that if we develop, for example, an account opening process for our bank in Spain or the Model Bank, then how do we make that code reusable anywhere else. And that is what we're testing in some markets just to see how quickly we can do that. And at the moment, that looks to be really successful. And that itself shows you that you can build cross-border scalability in banking without any kind of further structuring.

Sure. And just on the consolidation point, can you talk at all about whether you did approach Commerzbank or how you see Commerzbank?

We don't comment on market rumors there.

Our next question is for Mr. Ruben Munsterman, Bloomberg News.

I would like to [gauche] a bit how important the digital strategy is for ING. So, so far, the digital strategy is quite successful in getting new customers and growing. But I wonder, is it not the whole world digital yet? So there are some markets where people still go to branches and all of that. Is it possible that, in the meantime, ING would open branches to get some customers which aren't digital yet?

Clearly, we are known for our digital approach, and our digital approach delivers 2 different things. So one thing it delivers in a market like in the Netherlands, where we are, or Belgium, it delivers the opportunity to improve customer experience at lower cost. It's just better customer experience, and you increase your efficiency. And that's what you see happening in the Netherlands and Belgium. On the back of the investments we've made, we actually see the cost going down. That's what digital does on top of, indeed, in markets like Netherlands and Belgium where we also have physical presence.

Now in many other markets, we're a digital player and we're growing on the back of our success of being a digital player. And that is not just because you are digital. It also because if you want to be successful digitally, you need to have the discipline with keeping your products very simple and keeping the number of products very limited as well. And so just being digital because of the technology that you use is not a successful business model. So it has to come with a culture of keeping things simple and limited in what you offer. And in these markets, often this is what we offer and this is what we stand for. And we're certainly not then interested in increasing further complexity from that perspective just to get the additional customer. Now clearly in building up a primary relationship and being able to deliver cross-buy that even in a market like in Spain, where we are predominantly digital and we have 3.5 million customers, if offering mortgages needs to be accompanied with having 26 locations where we have our advisers, we don't mind having those 26 locations.

That's clear. And is it possible that you would take over a large rival in order to get more market share even though that large arrival has physical branches? Or would you rule that out?

Well, we have indicated where we look at nonorganic growth before. So our Think Forward strategy we launched 5, 6 years ago is predominant organic growth strategy, and every quarter, every year, we're showing that we've got something going here. We've got something special here. And if it comes to M&A, we are looking at a couple of situations. The first one being that in building our bank we have always indicated that if you want to build a diverse asset side of the balance sheet, we need to grow in our capabilities if it comes to consumer lending, SME lending. And for that, if that would need to be accompanied with buying a small portfolio or team that has the right skills to do that for us, we would be open to do so.

Second area where we would be open to do -- to consider M&A, which is actually an area in which we're very active, is everything that has to do with technology that we can use in order to improve our services, technology that we can use in order to offer different services to our customers like our acquisition of Payvision or Makelaarsland that we did in Holland where we're not only offering digital services there but also heading a little bit further away from principal banking and being closer to principal needs, the primary needs of our customers rather than the secondary needs that we as a bank fulfill. And then these are elementary -- these are steps in building a platform. So yes, we do M&A there.

Third area is an area where, basically, if -- while we're growing and while we're successful is in markets in which we are, active consolidation happens, we'll have to kind of take a look at how the consolidation like that would affect our own prospects. And we have engaged in M&A in India on the back of that with our merger of ING with Kotak Mahindra Bank when consolidation started to happen in Indian banking landscape. We're currently looking at a team-up with another bank in Thailand for that purpose as well.

And is there a reason why ING doesn't comment on market rumors? Is there a legal reason? Or how should I view that? There's always a reason for doing something I guess or not.

Yes. So it's our policy to not comment on market rumors and so...

And why is that policy?

Because markets can spread any rumor and we don't want to comment on things that we don't want to comment on.

All right. And one other topic. What's the latest status on ING's financial markets office in London? Is there any more clarity on that, if ING needs to relocate any of that staff back to the continental or not?

So actually, what you see in our financial results specifically also in this quarter is that because of moving to London and centralizing our trading activities in London, we have been able to decrease our cost. That's the important signal right there. So 2 years ago, when we basically decided that we wanted to move to 1 location to base our trading activities, our financial market activities and we have 3 locations, right, at the moment, Amsterdam, Brussels and London, we basically picked London because of the talent pool. Now clearly -- and now you refer to Brexit and the potential consequences for having specific activities situated physically in London. Yes, we are in discussions with our prime supervisor being the SSM as to which activities they would want to see in a Brexit scenario more on -- located on the continent rather than in the city. But that will not have a major effect on the number of people that we have based in London.

(Operator Instructions) We have a question from Mr. Marcel De Boer, Financieele Dagblad.

I have 2 questions. Could you please elaborate a little bit more on the loan loss provisions? They rose to EUR 207 million. Can you tell me why and then what sectors? And the second question is about the interest rate swap issue. Did you completely finalize that issue? And could you tell me how high the costs were for you?

And so Marcel, I will kind of start with your second question and then Steven will come back to you on the first one. So the AFM framework that you're referring to, which banks agreed to adhere to in terms of timing and milestones to be reached -- to reach out to clients and offer reimbursements of these costs to our clients, we have fully adhered to those time lines of AFM. And all of our clients has received that offer by the end of 2018.

So then with regards to risk cost. I mean, indeed, they are higher than they were in the first quarter of last year, albeit they were lower than the fourth quarter of last year when the risk costs were EUR 242 million and this quarter EUR 207 million. The biggest -- the reason for difference compared to the first quarter of last year is that last year we had releases in 2 portfolios mainly. One is in the Netherlands based on a risk migration to mobile. So when house prices rise, that has an impact on loan loss provisioning basically because of house prices rise, loan to value of your mortgages goes down. And then the risk cost that you take from a portfolio basis go down. And so that leads to releases.

Also on Wholesale Banking, we have releases on a number of individual files in the first quarter of last year, and so risk cost in Wholesale Banking last year for first quarter were negative. If you look at this quarter, still we see a relatively benign risk cost environment. We also see that our risk costs are reloaded through the cycle average. There is nothing particular to mention in that regards. I mean the risk costs in Belgium were in line with all the previous quarters. In the Netherlands, they are still very low. Indeed, they are in line with the previous quarters, actually, bit little lower than the last quarter, the risk costs this quarter mainly coming from Turkey, Spain and Poland. And Wholesale Banking, the risk costs were largely, what we call, stage 3 risk costs so individual provisioning on a number of clients in various countries.

Okay. Yes. So there is not a sector that is...

There is not a particular sector you can go on that has resulted in these risk costs.

Yes. Okay.

It's trends that we see.

Okay. And then to come back to the swaps, how much were the costs for ING? I understand you had paid EUR 181 million in compensation. Then there is, of course, the execution costs. So how was it -- how high is the total bill?

Well, the EUR 181 million is what we have as a number.

Okay. That's the only one number you have?

Yes.

You have a follow-up question from Mr. Adam Clark, Dow Jones.

Sorry to come back with just one more quick question. But it was about the increase in employees working on KYC and on anti-money laundering efforts. I was wondering that 2,500, do you see that as a peak of employees? Do you hope that, over time, you're going to able to automate some of those processes and begin bringing those numbers down? And will it be elevated cost drag going forward? And what do those costs look like?

Yes. Good question. So the 2,500 FTEs that we currently have working on it, the -- we do see some growth coming there as well in number of FTEs that will be working on this as we kind of get further into our structural enhancement program. On the file enhancement program, so basically, the program has 2 elements. One is file enhancements, which is how do we make sure that with each and every customer we have the right information centrally located that we have readily access to, so we can do a risk assessment on, et cetera, et cetera, et cetera. So there's like 500 people working on that as we speak. That may need a little bit more people, but that's also more kind of a project cost, right? So in the moment you're through file enhancements and then you go back to what we would call, from that perspective, business as usual. And the business as usual will be more kind of a stable cost from there. So the project element of the current 2,500 is 500 FTEs.

Now -- and clearly, in the structural enhancement program itself, we have people working on it, but we're also investing in systems like we indicated that we're connecting adverse -- to media tools in order to do adverse media checking. We'll have to invest in systems to be connected around data and data quality, et cetera, et cetera, et cetera. A lot of those investments we actually do as part of our normal kind of annual investment budget. So it will come from areas where we would kind of want to have invested, which we will now be prioritizing in order to make sure that we have these investments now.

So they may not lead to an increasing cost per se, but they do crowd out other investments because we are prioritizing to invest in the structural enhancement program around KYC and AML in order to ensure that we are a good gatekeeper to the financial system. So 1 element to 500 FTEs and maybe growing there on file enhancements. That is one that will be temporary. The rest will be there for a while until kind of the -- we have this -- kind of a real good system there as well.

We have a follow-up question from Ruben Eg, De Telegraaf.

Two more questions. Could you tell a bit more about the wholesale bank? Do you have more update about financial markets and treasury? The last time you talked that you are looking into that because they were not profitable due to circumstances. The other question is about last week's shareholders' meeting, how you have experienced that day and how you're looking into the follow-up due to the concerns there obviously are between shareholders about steps you're taking in -- well, most likely the KYC and other risk elements?

Perfect. So well, around financial markets -- well, if you look at the financial markets results that we published today, you could separate 2 components. One component is what are we doing in the client area. So if you look at client rates, business, the fixed business and specifically also the credit trading business, that's actually doing very well. And it's one of the stronger quarters over the last couple of quarters. So from that perspective, the financial markets business is doing well. Although if you look at the results today, there is also a negative valuation adjustment coming through that business, which basically makes it a loss generating picture for the first quarter. But the underlying client business that we are growing on the back of our Wholesale Banking strategy, that's actually working out quite well.

Having said that, this is an area that all banks continue to look at given the fact that markets don't really support the good return in that business as we speak, and therefore, it will continue to be under our attention to further improvements both on the cost side as well as on what we do there. So we will certainly not cry victory over the improved client-related results that we have in the financial markets area as we speak. And therefore, we're also quite happy to see that the earlier move to centralize these activities is actually showing further cost decrease, which is exactly why we did it.

Around the shareholders' meeting, really, we are in touch with our shareholders on a very regular basis, and we're going on roadshows after these results as well. So we'll certainly be talking to the larger shareholders again. And the feedback that we get is, yes, clearly, they are disappointed on one side given the settlement that we had to enter into in the Netherlands over our role as a gatekeeper to the financial system. On the other side, they are very supportive of the strategy that we started many years ago and motivate us to continue with that while improving the environment of -- around KYC and AML.

Yes. That was still the -- they were clearly disappointed in the settlements you have over a long period also named in your results that there would be a significant impact in what was going on, so significant it was, one could say, and where this disappointment came from what you hear back from your larger shareholders.

Clearly that we were confronted with the serious shortcomings in our processes if it comes to making sure that we are effectively operating in the area of fighting financial economic crime.

So that would be -- going forward, you said you would go on roadshow again, if that's just normal, regular or you have one meeting or...

Yes. So on the quarter, we had our Investor Day 6 weeks ago I think -- 7 weeks ago just before we kind of ended the close period. Now during the close period, we're very reluctant to talk to shareholders on the results of that specific running quarter. And then on the back of each quarterly result, we always go on roadshow to the largest shareholders. So basically, that means we go to London. Then, we go to New York.

Okay. You also have plans maybe to invite them to see what you're doing on KYC improvements, et cetera? Or isn't that not really standard?

Well, I mean we take them through the programs that we run. We had our Investor Day as well where a couple were present, where we have taken them through in more detail last year some of the stuff that we're doing. And they get to talk to many of our leaders there as well. So yes, we're very open around that. So also in our roadshows, when questions are asked, we will just take them through the different pieces of our enhancement program.

Okay. All right. One final question. Is there -- I probably know the answer, but I would ask. Is there any update about the news which came from Italy?

So no specific update there. You're referring to the outcome of the inspection of the supervisor there around the same processes in order to ensure that we are an effective gatekeeper to the financial system. Findings are all covered by the global enhancement program that we were in the midst of implementation also in Italy. But we will just continue there. We are reporting to the supervisor, and that's where we are.

Okay. Any news back on when you could onboard customers again? And there was a message in Italian news that also the public defender would pursue -- start an investigation. Have you heard anything from this person?

No, we have not been approached by them on that.

And the onboarding, is there any date when you could again?

No, we're working -- we have a very close reporting line with the supervisors. We keep them up to date as to how we progress and we'll see how that pans out.

We have no further questions, sir.

Okay. Thank you. Well, thanks, everyone, for joining on this call.

Just to summarize, I think, the quarter, it's a solid quarter. It's a solid quarter with underlying commercial -- continuing commercial growth, 160,000 (sic) [150,000] primary customer relationships coming through, good lending results, good savings results, all basically delivering good financial results as well. We continue to work hard to improve our processes and the management of nonfinancial risks, while we keep concentrating on delivering a differentiating experience to our customers and making sure that they become more and more sustainable. So those are really the 2 things, innovation, sustainability, on top of KYC that will be top of mind for us to make sure that we continue to be successful.

Thanks for it. Clearly here for while you're going through the results you have more questions, you know our media team very well, and they are more than happy to help you. Thanks a lot. Bye-Bye.