ING Groep NV (ING) 2020 Q2 法說會逐字稿

Good afternoon. This is [Patricia Klosov Norton], welcoming you to ING's Second Quarter 2020 Credit Update Call. Before handing this conference call over to Mark Milders, Head of Investor Relations; and Geert Wijnhoven, Group Treasurer, 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 any forward-looking statements. 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 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today.

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

Good afternoon, Mark and Geert, over to you.

Thank you, operator, and good day to you all on the call. Thanks for joining us for our first credit update call. My name is Geert Wijnhoven, and I'm here together with Mark Milders. In the room, for Q&A, we also have Ewald Walraven who looks after our issuance and investments; and Paul van Slobbe of the IR team.

We all are living through some unprecedented times. Since March, ING has been operating in work-from-home conditions. Luckily, being a digital bank and owing to our strong IT teams, we were able to move quickly to this new normal and have been able to operate normally as a bank. Given that we are unable to go on road shows and meet our investor base, we decided to use this opportunity to introduce a credit update call to connect with our investors and to answer your questions.

In this call, we will take you through some key highlights in terms of our strategy, recent results, asset quality as well as capital position and issuance plans. At the end of the call, we will take your questions.

Before we get started, I would like to point out that the credit update slides to accompany this call are available for download from our website.

With that, let me hand over to Mark.

Thank you very much, Geert. Hi, everyone. Good day to you. I would -- my name is Mark Milders, and I will talk you a little bit to the highlights with our CEO, Steven Van Rijswijk; and our CRO -- CFO, Tanate Phutrakul, mentioned this morning. Again, as Geert said, I think it's -- we really would appreciate also feedback of you after this call, how this has been received. This is our first fixed income call, but as Geert said, good to connect with you, and thank you for the interest today. We've got quite a few people on the call.

Let me briefly take you through the highlights of this quarter, and then I will do the normal run-through as you are familiar with through the P&L, and then I will hand over for the funding and liquidity back to Geert. And after that, we'll be open for Q&A.

Couple of highlights, also as highlighted this morning, ING was able, thanks also to its digital model to maintain stable NII and a resilient pre-provision profit. We actually managed to grow primary customers this quarter. We saw that opening of accounts, we have further digitized, which also helped to keep that up. We were quite pleased with the performance on fees, where the continued high volumes in investment product, especially in Germany, counter reduction of fees of lower spending activity. As you can imagine, during the lockdown, people were unable to spend as much as it did before. We did notice that same with travel, as you can understand, is subdued, we do see that the normal payment, the order -- the payment activity in the streets and retail is normalizing as countries are easing their lockdown measures. The other highlight of this quarter, what we pointed to is that in terms of cost control, if you look at operational expenses, having -- you will have to look through the regulatory cost and the goodwill impairment that we took. But then in most segments, we actually saw a cost reduction with the exception of other challenges in growth markets, where there was a smaller growth in some of the countries, Australia, which also had to do with business growth.

The other standout of this quarter clearly was loan loss provisioning at EUR 1.3 billion that came in with a large driver of that, the effect of the macroeconomic model under IFRS where the macroeconomic outlook and indicators following after March clearly deteriorated, as everyone could have seen. It did provide some effects which were -- might not have well -- being appreciated as such, for instance, in Stage 1, which is actually an IFRS 9 provisioning on your entire performing loan book. So where there's no heightened credit scrutiny. And as this Stage 1 applies to your whole book, any sharp deterioration of macroeconomic indicators has a significant effect, especially because the outlook taken into account for Stage 1 is a 12-month outlook. So in this current case where we are now today, you actually see that the sharp decline cost that Stage 1 for us this quarter was EUR 255 million of provisioning on our performing book.

Stage 2 saw a similar effect also from the macros, but that has a longer horizon that deals with lifetime expected loss in Stage 2. And by that rationale, you would also see the models and the economic indicators used in that model, that you will see part of the recovery already taking into account, which is expected to be a small recovery in '21 and '22.

Then Stage 2 furthermore has, as you can imagine, in this period, also an increase based on stage migration, which is customers that move from Stage 1 to Stage 2 because there, we do see a heightened need for alertness or a credit deterioration but still performing as well.

And finally, the Stage 3, which is the credit-impaired portfolio, that came in at EUR 771 million. It also contained a sizable provision for a suspected external fraud case in Germany, for which has been much written about in the press recently. Some additions to existing files and some new individual files in business lending as well for retail, a collective provisioning also, again, on the macroeconomic outlook, and that's predominantly on mortgage book.

So those are the highlights. Going quickly to -- and we'll cover capital later. Going quickly through our P&L. So NII, slightly down. This was also caused by the fact that at the end of Q1, we saw a lot of protective drawings in Wholesale Banking, where treasurers grew under the revolving credit facilities to keep their liquidity. That was then placed in current accounts on our balance sheet, usually, but I'll come to that later. But those facilities normally carry half of the margin of what you would expect in a term loan. Those facilities [lock-up] repaid for, to a large extent, which actually explains the reduction in loan growth or actually it's a repayment of the peak of the end of the quarter -- last quarter coming back in. And we did, of course, observe less activity in the trade finance because also physical flaws in the world as well as the oil price impacted that part of the business.

Mortgage growth and mortgage demand remained quite healthy. There, we saw growth at a group level. And if you look at the other items supporting NII, the announced negative charging in the Netherlands had a partial impact because we started charging negative rates for the business and private banking clients as of April 1. Retail clients have followed as of July 1.

Then to point out that at the end of the quarter, we drew EUR 55 billion of TLTRO III, bringing our total TLTRO III to EUR 59.5 billion. That did not have a large effect on NII, but it did cause a lengthening of the balance sheet to what I will come to. We did observe continued margin pressure on customer deposits, mostly the replicating portfolio. And as you will have seen from the press release, the inflow this quarter of liabilities was EUR 20 billion, which is a nice bridge to NIM. And NIM, net income -- interest margin moved from 151 to 144 basis points, of which 4 basis points were the denominator effect, where the aforementioned balance sheet lengthening from TLTRO because that happened before the end of the quarter as well as the mentioned higher average drawings on the revolving credit facilities in Wholesale Banking, plus the inflow of liability income led to this lengthening. Other movements seen there was volatile items like Financial Markets. And as mentioned before, the large drawings of the -- average drawings of the revolvers were at lower margins, so that impacted NIM. So if you would normalize that, it would have ended up in the high 140s.

Net fee and commission income, quite strong. If you compare first half year '20 to first half year '19, it was almost 9%, was an 8.7% increase, not only because of increase in payment packages in the Netherlands and Belgium and the introduction of a new fee in Germany, but we also see continued high level of activity in our investment products area, especially in Germany. Also, banking fees were clearly subdued as we took a conscious decision not to be very active in the syndicated loan market given the high uncertainty as well as the reduced activity in trade I mentioned before.

Finally, if you look at the behavior of people during the lockdown, you can appreciate that we also have lower fees from payments as well as international payments due to the reduced travel. On investment income, there's not a lot of movements there, it was EUR 19 million for this quarter, EUR 21 million in the previous and EUR 25 million in the year ago quarter.

Other income was strong, clearly, a reversal of some of the valuation adjustments observed in the first quarter, which were caused by the high volatility end of March, where we had to do some mark-to-market on some of our exposures as well as the volatility impacting valuations on financial instruments and hedge accounting.

And to remind you, the second quarter of '19 included the EUR 79 million receivable, if you want to do the quarter-on-quarter comparison.

Another thing to highlight actually is that the financial market client business, so that's where we support our clients on the interest and money markets and on FX. There we saw a strong recovery and a strong performance, especially also in global capital markets.

Over to expenses. Again, as we announced earlier, we have taken a EUR 310 million impairment on goodwill related to former acquisitions in Belgium and in the wholesale bank. If you exclude those, expenses came in at EUR 2.3 billion, slightly up Q-on-Q, but down year-on-year. If you look at the Q-on-Q, most segments actually did decline. So the business segments declined, and the increase is largely explained by the absence this quarter of a VAT refund, which was recorded in the first quarter of '20.

Year-on-year, the cost decreased as higher KYC expenses and salary increases were more than offset by higher efficiency in wholesale bank and market leaders, Holland and Belgium, and an impact of restructuring provision, which have been recorded in the second quarter of '19.

Regulatory costs were slightly higher. They are seasonal for ING in the first and the fourth quarter. But in the second quarter, we saw some higher than usual, which also had to do with a catch-up in the SRF contribution that we had to make this quarter.

To risk costs, which I've covered, so EUR 1.336 million (sic) [EUR 1.336 billion], annualized 85 basis points of average customer lending, impacted by the aforementioned Stage 1 of EUR 255 million; and Stage 2, EUR 299 million; and Stage 3, EUR 771 million.

In the second quarter of 2020, the impact of the worsened macroeconomic provisioning. So if I look at the total, what had to do with the macro models in Stage 1 and Stage 2 is totaling EUR 421 million. And this includes a management overlay provisioning for increased risk as we see it related to payment holidays granted to our clients. And again, this is reflected in Stage 1 and Stage 2 provisioning.

Effective tax rate was 41.3%, higher than you would normally see, clearly driven by the goodwill impairment, which is nontax deductible, but also new thin capitalization rules for financials in the Netherlands, nondeductibility of interest payments on AT1 and the BEAT regulation in the U.S.

Moving to the CET1 ratio. That came in at 15.0%. We have reinstated EUR 6.6 billion of additional RWA related to the expected TRIM outcome as the ECB has announced recently to recommence TRIM and the implementation of their decisions. So this is taken ahead of any final decision by the ECB. But given the fact that we are very strong on capital, we felt it prudent also to take it at this time. Our buffers above MDA levels increased to 4.5%. And one note is that for 2019, we had a dividend, which we reserved outside of capital, but we follow the recommendations of the regulators to postpone that, which was recently updated to postpone any update -- any payment of dividend until after January 1, 2021.

One small comment, which was also mentioned this morning on the call, with the adoption of TRIM, the EUR 6.6 billion, we also expect that, together with the success of some of the management actions that we have now already have a majority of the expected regulatory inflation in our numbers with more management actions to come. Some of those will only have effect at the date of effectiveness of Basel IV, which to remind you, has not yet been finalized and is now being postponed to 2023 for the input factors.

Over to you, Geert, to cover some more of the capital and funding elements.

Thank you, Mark. We'll dig a bit deeper on certain capital liquidity and funding-related matters. So let's say, more the treasury matters. So please have a look at your Slide 34 of the credit update, where we show the RWA developments over the second quarter.

It were mainly driven by capital management actions in combination with certain capital relief measures as a result of the CRR quick fix and lower volumes, resulting in an overall decrease of EUR 13 billion to a total of EUR 322 billion. The large drop in credit risk-weighted assets can be contributed to capital management actions such as the EUR 8.3 billion relief resulting from the adoption of the standardized approach for sovereign exposures and another EUR 3.5 billion relief resulting from an internal adjustment to align calculating the regulatory maturity contractual cash flows for certain lending products, so-called cash flow-based maturities.

Further benefits from the CRR2.5 amendments are reflected in RWA relief from different support factors, like for SMEs and infrastructure and also the preferential treatment of income-secured loans. This relief was partly offset, as already just mentioned by Mark, with an RWA increase of EUR 6.6 billion, reflecting an update end of July that the ECB does not see further postponements of the deadlines for action imposed in ECB decisions, including TRIM outcomes.

As we have already included the definition of default, and a large part of the TRIM exercise, we believe that further RWA impact is manageable.

Now having discussed the RWA development, that's focused on what this did for our capital ratio, which is on the next slide, 35.

The bar chart shows the development of our CET1 ratio, which improved to 15%, up 100 basis points compared to the last quarter and amply above our ambition level of around 13.5%. This move was mainly driven by the decreased RWA, as previously alluded to as well as capital generation. The EUR 1.4 billion CET1 capital increase reflects the inclusion of EUR 300 million of interim profits and another EUR 900 million in other capital movements like the adoption of extended IFRS 9 transitional arrangement, a reduced effect from the shortfall loan loss provision and a lower deduction of goodwill following the impairment we took this quarter.

ING Group announced in March '20 and that it will suspend any payment of dividends following an industry-wide recommendation of the ECB. In an update by the ECB at the end of July, this recommendation has been extended until the 1st of Jan 2021. Any dividend payment by ING will therefore be delayed until after the 1st of Jan next year.

The 2019 final dividend of roughly EUR 1.75 billion or 54 basis points of common equity Tier 1 capital has not been added back to our CET1 capital and remains reserved for dividend final 2019. This quarter, there was no change on our AT1 position as the 2 April redemptions were already deducted from our first quarter outstandings. After having issued the EUR 1.5 billion of ING Group Tier 2 in May, we now fully benefit from the CET1 relief that was provided by Article 104a under CRD V with an AT1 ratio of 1.9% and a Tier 2 ratio of 2.7% versus the minimum requirements now of 1.83% for AT1 and 2.44% for Tier 2.

Please turn to Slide 36. On this slide, we show an overview of the various capital relief measures, which have resulted in lower capital requirements. The decrease of the systemic risk buffer was 50 basis points and the delayed introduction of a floor on Dutch mortgage loan risk weights by the Dutch Central Bank can be seen as specific to us as a Dutch bank, whereas other relief measures are in line with what you see across all European peers.

Let me take you to Slide #37. In the first quarter of 2020, our fully loaded CET1 requirement has decreased by 148 basis points to 10.51%, and our fully loaded total capital requirement has decreased by 71 basis points to 14.78%. These requirements have not changed in the second quarter. Given the strong increase of our CET1 ratio, we now have a distance to MDA of almost 4.5% for CET1 and 481 basis points for total capital. Clearly, this is quite large for us and provides comfort as the future remains uncertain.

From Slide 37, I turn to Slide 39, which will give information on TLTRO III and second quarter issuance. It shows our long-term debt maturity ladder with a clear spike in 2023, currently, the legal maturity of TLTRO III. This is obviously something that we are very mindful of, and we will clearly take this cliff effect into account in our capital and funding planning.

ING drew down EUR 55 billion under TLTRO in Q2 and has repaid the final EUR 7.7 billion of TLTRO II in this quarter. ING highly appreciates the ECB's efforts to support the economic recovery in the Eurozone in these difficult times. The TLTRO III program is intended to support credit to households and businesses in the face of the current economic crisis and offers attractive terms for banks to participate in order to support their customers. While ING is well capitalized and well-funded to support loan demand, we have prudently increased our position in the program and have now got to an overall TLTRO outstanding of EUR 59.5 billion. The amount drawn will be used to support our customers in the face of the current economic uncertainty. Any surplus amounts that can be used for loans immediately will be stalled at the ECB until loan demand can be honored. Our issuance activity was limited in the second quarter.

As mentioned before, to take full benefit of the Article 104a relief, we have issued EUR 1.5 billion Tier 2 in an 11NC6 format successfully to optimize our maturity profile and avoid double-carry cost in the future. In addition, we have issued a EUR 1 billion green HoldCo bond in 6NC5 format, which was our very first callable senior in dollars, but this will only be reported in Q3 because of the settlement that took place on the 1st of July.

Please turn to Slide #40. Here, we move to issuance plans for 2020 and the current breakdown of instruments in terms of TLAC. Starting off with our current situation. We are amply meeting our current TLAC requirements with a ratio of 26.9% of RWA and 6.9% of leverage exposure. These firms translate to an EUR 11.5 billion TLAC surplus as of the second quarter when compared to -- with the current more restrictive TLAC leverage of 6%.

In Q1, ING received its new group MREL requirement following the 2019 SRB policy. This requirement is set at 10.54% of TLOF, total liability and own funds and based on the balance sheet of year-end 2017, and that translates into a 28.5% of RWA or a current shortfall of EUR 16 billion. Instruments issued out of our resolution entity, ING Group will qualify to meet this requirement. Additionally, externally issued own funds from ING Bank N.V. will continue to qualify. As mentioned earlier, we have a HoldCo resolution strategy, so we will continue to recycle these bank instruments into group to the extent that is required by the regulatory requirements.

In 2021, European banks, including ING, expect to receive a new requirement based on BRRD2, which will be expressed as a percentage of RWA instead of TLOF. And it will also be based on the year-end 2019 balance sheet data. Considering the current balance sheet developments and the capital relief offered in the first half of this year, it could turn out that future RWA-based MREL requirements will end up below the current 28.5% of RWA.

The intermediate target binding by the 1st of Jan 2022 is calculated by applying a linear interpolation of the shortfall. In terms of our issuance guidance for the year, we have revised our HoldCo plans, from initially EUR 5 billion to EUR 7 billion to -- up to just EUR 3 billion given the current COVID-19 pandemic and its impact on our business and the economies in which we operate. This has resulted in excess liquidity as a result of decreased demand for credit, continued inflow of firms entrusted as well as TLTRO III participation.

Now moving on to Tier 2. We currently have a stack of EUR 8.8 billion, fully utilizing the benefit offered by 104a with a Tier 2 ratio of 2.7%. Here, our strategy is to refinance bank Tier 2 instruments with group instruments. One of the 2 public bank Tier 2 instruments is in bullet format and subject to both amortization and the minority interest haircut, making it inefficient towards the group Tier 2 ratio. We targeted this instrument in the liability management exercise activity earlier in the year, where we bought back 50% of the instrument. The other public bank Tier 2 instrument is a callable one, with the first call date coming up in February 2021. And in addition, we have a small EUR 150 million bank Tier 2 private placement issued in 2007, with a first call date of July 2022.

On AT1, similar to Tier 2, we are fully utilizing the benefit offered by Article 104a with an AT1 ratio of 1.9%. The majority of our AT1 stack is CRD IV compliant, with EUR 1 billion of grandfathered instruments remaining. We are planning to continue our replacement strategy for our EUR 1 billion grandfathered instruments, though we have time as this will only lose their Tier 1 recognition on Jan 1, 2022.

We will take the expected EBA opinion on the future treatment of these instruments into account when deciding our future strategy regarding these instruments.

The next call date of a CRD IV-compliant AT1 instrument is only in April 2022 for an amount of $1 billion. We strive towards optimization of our capital structure. Clearly, when executing any transaction, we will look at economics. We are well capitalized, so not in a hurry.

Let me turn to the last slide, which is Slide #43. ING's funding mix remains well diversified, almost 50% consists of retail deposits. In addition, 20% of corporate deposits and another 11% of long-term senior debt, including subordinated debt. This combination creates a stable source of long-term funding. While the first phase of COVID-19 crisis was characterized by significant liquidity outflow and frozen funding markets, at the end of the second quarter, this trend has reversed to a situation of ample liquidity. During the start of the COVID-19 pandemic, customers drew on Wholesale Banking RCFs, up to an amount of EUR 10 billion. The observed drawings at the onset have been partly repaid to a large extent. As per mid second quarter '20, the strong inflow of customer deposits, together with TLTRO III drawings reduced the need for short-term and long-term professional funding issuance.

In the second quarter of 2020, ING's 12-month moving average LCR has increased to 130% from 120% in the previous quarter. The increase was supported by the combination of lower demand for credit, continued inflow of customer deposits as well as TLTRO III participation. You might be surprised about the limited impact TLTRO III had on the LCR, but this can be explained by the fact that a part of TLTRO participation is collateralized by HQLA bonds. So you simply exchange HQLA bonds for cash. It doesn't impact your LCR. Furthermore, the LCR ratio that is shown here is the 12-month average, which makes that the effect of TLTRO on this LCR is also diluted.

Now on that note, I'd like to open the floor for some questions. Operator?

(Operator Instructions) Our first question is from Mr. Lee Street of Citigroup.

A couple for you, please. Just on Stage 2 loans, I was a bit surprised to see that within the wholesale book, they've only gone up from about 5% to just north of 8%, and then the relative size of the increase compared to the size of the wholesale book. I'd have guessed they might have increased more. So just could you talk around why you're not seeing Stage 2 loans got more?

And secondly, just explain to us the triggers that you use for moving something from a Stage 1 to a Stage 2 loan. That'd be question one.

Then second question, can you just give us any thoughts on credit risk migration and how that's likely to impact your risk-weighted assets between now and the year-end?

And then just finally on MREL. You said, obviously, there has to be new communication next year from the SRB. Just what are you expecting in terms of the subordination requirement for that to a give feel or just everything has to be in equity softer and HoldCo senior, is that the way you expect it to work? That would be my 3 questions.

Thank you very much, Lee. And I address question number one to Mark, but I will start by answering your third question.

Under the TLAC term sheet of the FSB, that was defined a couple of years ago. It was clearly defined that you have to uphold the no credit or worse off clause in resolution. So therefore, we do expect that there needs to be this level of subordination under the final MREL requirement that we will get at the beginning of next year. Therefore, any instrument issued from our ING Group entity, being the resolution entity will, in our opinion, qualified and nothing else.

Yes. And Lee, thanks for your question. So on Stage 2 wholesale bank, why it should not necessarily be such a surprise. If you look underlying, there was -- there wasn't actually that much inflow or stage migration. It's something which I think the market structurally is overestimating how quickly you actually have PD migration. It's not something that happens overnight. Clearly, all the measures that have been taken by regulatory but also governments in supporting businesses is also helping there.

What you have seen is that clients that were already in Stage 2 or Stage 3 prior to COVID, so were already struggling before this all came up, almost clearly did not have an easier time because of it. So there, you see a more rapid deterioration, if you like. But on the performing loan, the PD migration is not as rapid as many in the market seem to believe.

And I'd like to put into memory that we are a low NPL bank by reason. If you look at our loan losses over the past 12 years of our pre-provision profits, I think we're the lowest in Europe. Well, actually, I know because we did the exercise, but it's all public information on Bloomberg. So you don't -- just don't see that rapidly in a couple of months. Companies have always are post the global financial crisis, by and large, largely delevered as there might have been asset inflation in the -- prior to the global financial crisis. We do not necessarily observe that asset inflation. And where that asset inflation is taking place, it actually means that there's more equity into those deals because the banks have turned down the willingness to lever up these businesses.

And as you well know, already 2.5 years ago, and we believe to be ahead of the curve, we kept our leverage finance book because we actually were not liking the structures that we were seeing there. So it's still early days, and we -- and there is still a lot of uncertainty how this pandemic will develop. That doesn't mean that we say we won't continue to see stage migration. But given today's economic indicators we're seeing -- with the easing of the lockdowns, we're seeing some return to economic activity that is supported for some. Not all sectors are impacted equally. You can imagine that the hotel business and tourism, in which we actually are very modestly active, have a much harder time than some others.

On your second question, credit migration. We don't make forward-looking statements, so I'm not going to -- I can't tell you what the rest of the year will look like. But I can give you the -- I can give you a little bit the dynamics why you have not seen the credit risk migrations reflected in RWA. And this is something which also is a fact which is overseen, I think, by market participants is an effect where -- and I'll say briefly and then try to explain it simply is where there is actually a swap effect between unexpected loss and expected loss the moment you take a provision. So to try and make it visual, assuming you've got a EUR 100 million loan, that EUR 100 million loan on inception will have a Stage 1 provision on it. Now let's assume that there is a credit deterioration, and it moves into still performing, but let's say it moves into Stage 2, at which stage, you will see that a Stage 2 provision comes onto that file because it's been put on watch list, which actually causes a Stage 1 release to make it simple.

Now a loan at inception, let's take an average Wholesale Banking loan you -- that would carry RWA of, let's say, 40%. Now if you have stage migration, let's assume that, that -- the rating deteriorates and the RWAs associated with that credit now in Stage 2, the EUR 100 million is now EUR 50 million. Then unwanted, but sometimes it happens. The credit really starts to deteriorate, and we move it to Stage 3 and decide on a provision. And let's assume we take a position for 60% of the loan. So we take a EUR 60 million provision on this EUR 100 million loan and then you have swapped unexpected loss RWA into expected loss, you've swapped that into provisioning. You will still have a remainder of RWA calculated on your non-provided part of the loan, so the EUR 40 million. But let's assume that's by then 50% or 60%, you're then talking about maybe EUR 24 million. So effectively, you will see a relief in RWA of EUR 25 million so you will have observed a P&L impact. So that's the expected loss now in provision. Otherwise, you would have a double whammy on capital once through RWA and the other one through P&L.

I hope that's more clear. So that's why, actually, the taking of provisions can have a dampening effect on RWA risk migration.

Our next question is from Ms. [Isabel Aldus of Ampega Asset Management].

But actually, my answers have just all been answered.

Great. Thanks for the questions.

The next question is from Mr. Robert Smalley of UBS Fixed Income.

Greatly appreciate the detail. A few questions. First, could you give us a little update on Dutch consumer coming out of COVID issues? Where is the housing market now? There's been a lot of talk about consumers being very levered in the Netherlands. Where does that stand? Have we seen consumer behavior change at all? That's first question.

Second, could you talk about Turkish exposure, specifically where you feel there are any areas of vulnerability and what support the parent company might give to those operations?

And then thirdly, on capital and funding, you're -- as you point out, you're above the AT1 minimums. And you talked about issuance, greatly appreciated. Are we going to see you come closer to those -- to that 1.5% bucket as opposed to where you are, particularly given the tax issue?

And finally, on funding, you've done primarily euros lately. Are you looking to diversify that, particularly given where dollar-euro is?

Thank you, Robert. And I will start asking Ewald to answer your last question on the currency mix, whether (inaudible) on euro or dollar considering where the arbitrage and most efficient issuance lie. Then I'll take your AT1 minimum, and then Mark will answer your first 2 questions. Ewald?

Yes. Thank you for your question. I think if we take the current currency mix as a starting point, especially in the senior HoldCo, you see that it's largely 50-50 in terms of dollars and euros in the context of 45% or so.

Next to that, we have some other currencies like Japanese yen and Australian dollar. So we expect also in the future that this will be a representation of the current picture in terms of equality. We also may look at other currencies across the capital stack just to tap different investor base. When actually deciding currencies, we clearly very look at the NII impact and therefore, also at the currency base in that sense, what is most favorable while keeping in mind that we want to have this mix maintained as well.

Then on your AT1. Well, given that our P2R is set at 1.75%, taking the full benefit translates to an AT1 requirement of 1.83%, where it used to be 1.5%. And a Tier 2 requirement of 2.44%, where it used to be 2%. Our current ratios are 1.9% and 2.7%. So we are both above these thresholds. And therefore, we can benefit fully from that relief, which you would see back in case dividend payments could be resumed in the future. Now one could argue that creating a small buffer on top of these minimum requirements is desirable. At the moment, we only have a 7 basis points, for instance, on AT1. But as we're carefully watching our carry cost, this is not our biggest priority given our current CET1 surplus of almost 4.5%.

Yes. And Robert, thank you. On the Dutch consumer, not sure what you meant with coming out of COVID issues, but please add if I'm not -- haven't covered it. On the housing market, we continue to see strong demand in the Netherlands for mortgages. On your comment that the consumers are being levered, you should note that the whole pension system in the Netherlands is a different one than people might be familiar with elsewhere and people save through pension funds. And if you look at the regulations that were put in place on new mortgages not being anymore in the form of interest-only, actually, the LTVs have come down to 60%, 65% LTV. Whereby also, if you look at the dynamics of the Dutch market, in particular, is that since the global financial crisis, there has not been as much new building or new locations or availability of housing produced which actually leads to the fact that there is a structural shortage in supply. We do see that at the moment, the housing prices are staying stable. We see a very healthy inflow of mortgage demand still in there. So in change of behavior, no. If I would flag a change of behavior in our Dutch client base, it's arguably less demand, as we said this morning on the call, in the business lending. So small, midsized enterprises, where as you would expect, there is less demand for credit for 2 reasons: one, you see in times of crisis, you see that CFOs and CEOs will delay investment decisions until there's more certainty on the outlook. And secondly, you see a lesser need for working capital as production volumes are turned down. The only clearly observable change in behavior that I already alluded to in the beginning is that there was a lot less pending physical payments, use of ATMs, et cetera. And clearly, as you can see by the inflow of our savings, people by not going to restaurants and what have you not, managed to save a lot more money.

On the Turkish exposure, just to flag for everyone's sake, that we have published also our presentation of this morning, not only the credit update but also the investor and analyst presentation. On Slide 32, we dissect our Turkish exposure. We're quite comfortable with our Turkish operations. We continue to monitor that. We have a retail operation and some wholesale banking operations, as you are aware. We did have a intra-group loan into that franchise, which we have been slowly reducing and which has meanwhile reduced to EUR 1.5 billion at the end of the second quarter from EUR 1.8 billion at 1Q 2020.

In terms of FX exposure, that's very limited. We have -- there is a requirement from the Turkish Government Central Bank -- sorry, to report FX lending. That way we can monitor it, and we have had a long-standing upheld belief in risk, that we only want to give -- provide FX lending when there's FX income. And that causes that you are naturally hedged and you can keep track.

Other than that, most of it is secured. We also have ECA, or export credit agency, secured exposure on Turkey. And recently imposed asset mix ratio, we meet that in Turkey.

(Operator Instructions) The next question is from Mr. Jakub Lichwa of RBC.

A few from me. First, I suppose you are viewed as one of the banks which benefit from excess capital. So obviously, I'm thinking your priority will be paying the dividends when and if allowed, but what about after that? Organic growth, inorganic growth, what kind of MDA level are you comfortable running once you have addressed the Basel IV headwind?

Also, where do you see yourself at steady state issuance? I felt like for now, the rhetoric was that you're refinancing at the senior level, you're refinancing the OpCo instruments, the Tier 2 euro refinancing also, obviously, the OpCo program. So again, if you could actually articulate where you see yourselves on the MREL stack in steady state, that would be helpful.

And maybe finally, one on a few of your legacy bonds. I don't think that the regulators are very keen on having the retail instruments at AT1 level. Are you able to comment at all about any discussions you have with the regulators with respect to the CMS, please?

Thank you, Jakub. So your first question will be answered by Mark. Ewald will take the steady state issuance, and I will take your last question.

Mark?

Yes. Thanks, Jakub. So as Steven and Tanate mentioned this morning and also in the first quarter of '20, we will -- our dividend policy is effectively suspended at the moment, given the rec -- we're following the recommendation of the regulators, which -- and we've also indicated that we will come in at third quarter results. We will come with a new capital plan, which is -- and we will review both the management buffer and the dividend policy, and we will announce that at 3Q.

Sorry, we have got 2 more.

Two more, operator. Two more.

Maybe I'll take the next one on the steady state issuance. So if we go back a bit in time than 2 years ago, roughly, we have received an immediately binding MREL requirement, which was TLOF based. And as Geert already mentioned, that's total liabilities and on funds, which is more of a total balance sheet metric. So we had to ramp up capacity pretty quickly in order to meet these requirements or maintain meeting these requirements. And initially, it was different in terms of managing an issuance based on risk-weighted assets. So we first had to get accustomed to that. Then subsequently, we received a requirement, which was based on group instruments only, however, including a phase-in period. So after the quick ramp-up, we were in a more steady state issuance, which was more in the context of EUR 5 billion to EUR 7 billion on an annual basis, and that is also what we guided for in the -- at the start of the year.

Now due to the change in the environment in terms of the inflow, funds and trusted, lower demand for credit and the COVID pandemic, there is a lower funding need in general. And also given the fact that we have received a phase-in period to meet our MREL requirements, we have reduced our current number of guidance for up to EUR 3 billion in terms of MREL instruments. Now once we are at a steady state, clearly, it will depend on risk-weighted asset volatility or buildup in terms of loan growth. But I would assume that will be in the context again of roughly EUR 7 billion, EUR 8 billion on an annual basis. So that is roughly my expectation. But clearly, things can change over time as this will only be an end state requirement by 2024, the 1st of Jan.

And then lastly, Jakub, on the retail first. Well, we will neatly await the EBA this opinion on the future treatment of grandfathered instruments that is expected later this year, and then we will decide on the future of these instruments. The bonds are yielding close to or at 0%, which clearly makes it interesting to leave them outstanding if they continue to qualify for our Tier 2 or MREL ratio. However, this will, of course, also complicate the ranking in insolvency which, as you know, we ideally keep as clean as possible. Also, they have been sold to retail investors, which could result in an impediment to resolution. So when the EBA opinion is out, we plan to thoroughly evaluate all these factors and make our decision on the future of these legacy instruments.

Our next question is from Mr. Nigel Myer of Commerzbank.

Just a real one around the TLTRO and trying to sort of explore the rationale for a drawdown. You've obviously gone from low drawings to sort of pretty high drawings. But at the same time, we've seen balance sheet lending decrease and customer deposits have been increasing. So really, what was your thinking around that? Is it just a carry trade? Or with wholesale funding requirements also falling, there's a not particularly obvious requirement for funding it? So really, what is your thinking around that at the moment, please?

Thank you. Mark?

So it is meant to -- clearly, as was mentioned, it's welcomed to support funding, to support customer and clients. We actually do see demand coming back. Clearly, the funding cost of the instrument is also attractive. But the absence of demand, I would not subscribe to, given that lockdown measures are easing. We do see demand returning, for which we can use this funding instrument.

And what's your expectation in terms of the margin impact coming through? I mean clearly, end of the quarter, 4 days to 6 days, whatever, after the settlement, a lot of that's sitting on as cash at ECB still. So do you expect that to sort of -- if you keep on running high cash balances there, top line improves but margin declines? Or do you expect that to be translated into strong customer demand?

And if I look at past quarters on loan demand, you've been sort of EUR 5 billion, EUR 10 billion a quarter in previous quarters where you've gone up. So again, the sort of EUR 55 billion, EUR 60 billion is a big number compared to your normal run rate.

Look, it's clear that there will be some crowding out effect independency towards professional markets, be it short term or be it long term. And therefore, it's more a liability cost optimization exercise. But clearly, we will not use the full drawdown to fund long duration assets, not knowing what the successor of any TLTRO III instrument will be. What makes it more difficult is the fact that the current conditions are unclear. So you have a cap, the maximum price that you pay for this is minus 50 basis points and the floor is minus 100 basis points. But you can only reach that full floor in case you provide sufficient credit to the real economy in the EU and only to particular borrowers.

So the ultimate effect of this drawdown can only be determined at the time when the measurement moment is on your credit provision to the real economy. And therefore, it's rather undoable as you don't know what the cost of this funding is at this right moment.

(Operator Instructions) We have a question from [Gene Bardman of Schroders].

A couple of quick ones. Can you just take me through these capital management actions that you have taken to improve your capital position? I mean just the timing around it and then why you've done this at this point in time. Was it driven by some regulatory approval? And secondly, whether these measures are sustainable going forward.

Secondly, on the data on payment, will this -- you mentioned about 2.5% of the loan book is now on payment holidays. Could you again provide a bit more color as to what is the makeup of these loans between mortgages, consumers and SMEs? And what proportion is coming out of your core markets, either Benelux or in Germany? So how much is sitting outside these core markets? And also, when do they come out of these moratorium periods?

And just very quickly on Stage 3 loans, I understand one large exposure coming out of Germany. But other than that, I think there were still some increases in Stage 3 on the corporate side. Correct me if I'm wrong, I think some of it was in Belgium mid-quarter. But is there anything structural going on there? I think I have seen increases in Belgium for a couple of quarters now, but again, happy to be corrected there.

Thank you very much. Mark?

Yes. Thanks very much. On the capital management actions very quickly. Two main ones was -- were -- and thanks for the approvals that we received, it's something where we moved to a different methodology on sovereign exposure, moving from a IRB to standardized approach and that will be structural. And on the -- instead of the contractual regulatory maturity, we move to cash flow-based maturity approach, which also led to a release of RWA and also structural. As always, we look to optimize how we -- that we assigned the right risk-weighted assets to the exposures, and this can be seen as part of those continued activities.

On the payment holidays, so you can look at and it's disclosed at our EBA disclosures on this topic where banks have been disclosing what they are doing. So basically, as we also announced in our press release, we've provided EUR 18.1 billion of payment holidays. That's relatively modest. It's split roughly half-half private individuals or business clients. And on the private individuals, the majorities of mortgages, which is typically a very low NPL portfolio we, as a bank, have an opt-in structure. In some countries, it's a more blanket one, but we tend to avoid payment holidays for interest payments and the majority we do on repayments. We still try as best as we can, either via direct contact or via AI or alert systems, monitor this portfolio. EUR 1.3 billion, as can also be read in the EBA disclosure, has already come out of payment holidays in Germany, some in Poland, Romania and Turkey. There we do not see, as Steven also mentioned on the call this morning, any big migration in terms of risk profile, rather more in line with existing portfolio NPLs. It's early days. As said, somewhere implemented in March, some in April, most of them for 6 months. In the Netherlands in part, they have been extended for some part. So we still need to see what will happen when they come out.

As mentioned earlier by myself, we took an additional overlay within our Stage 2 provisioning for part of the payment holiday, which as you can imagine, some of the sectors or private individuals with -- who are self-employed might be a little bit more exposed or higher risk. But we'll have to see how that works out when the payment holidays. We are not disclosing -- or we don't have a breakdown geographic from what were. But the first indicators, as I said, early days, but it looks like what's coming out of the payment holidays is not materially worse than the portfolio that did not go into payment.

On your Stage 3 question, the reason for the increase is, yes, you are correct, Belgium mid-corporate has had a several quarters where we had to report. There is not a correlation other than 50% of that has been on files that have been provided for before, which links into my comment where you can imagine that existing Stage 3 before the COVID-19 pandemic outbreak. If you are already struggling then, you would have seen a deterioration because companies were already at a higher credit risk. And clearly, the current situation globally would not have helped those companies and actually might have caused a quicker deterioration. So no structural reasons, also not in sector that we observe. But clearly, if you were already in Stage 3, part of those Stage 3 additions are also having to do with additions. Also some new ones, but that's part of the explanation.

We have no further questions, sir. Please continue.

No further questions. That then sort of concludes our call. Thank you, operator, and thank you, everyone, for joining us today.

The Investor Relations team is available for your follow-up questions, just reach out. We will be sending -- or we will be reaching out after the call in the coming days to seek some feedback to make this credit update call even more effective in the future.

For now stay safe and talk to you next time. Goodbye.

This concludes the ING Second Quarter 2020 Credit Update Call. Thank you for participating. You may now disconnect your lines.