ING Groep NV (ING) 2021 Q2 法說會逐字稿

Good afternoon, this is Patricia Krooshof-Naughten welcoming you to ING's second quarter 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 development in our business, expectations for our future financial performance and any statements 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 statements 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 all of you on the call, and thanks for joining in this second credit update call this year. My name is Geert Wijnhoven, and I'm together with Mark Milders.

Today, we'll take you through some of the key highlights in terms of our strategy, our second quarter results, asset quality as well as our capital and liquidity position and our issuance plan for the remainder of this year. By the end of this call, we will take your questions.

Before we get started, on our website you can find our credit update slides that we will use during this call.

With that, let me hand over to Mark, who will take the beginning of this presentation.

Thank you, Geert. Hi, everyone. Let me also extend a thank you for joining us today. I will briefly take you through some of the highlights of the second quarter results. Clearly, also, we'll be available after this short intro for Q&A on any items that you may want to address.

So just going through our quarterly results, top to bottom.

The NII was resilient. It was supported by actually very robust mortgage lending growth even at higher levels than pre-COVID as we see across our jurisdictions that mortgage lending and people buying homes continues and actually almost unhindered by the COVID situation. Actually, COVID probably being a driver as well for some of the movements, from people wanting to move from a small apartment to more the countryside now that they can work from home.

The other thing, which was beneficial, was the negative charging. As you know, we have been introducing negative charging in some of our jurisdictions and also lowering thresholds that has brought in NII, which is dampening the effect of the negative impact that we see from the negative rates environment and the flat curve. This has on the replication of our liability income a negative impact already since 2016, which we counter usually by loan growth, amongst others. But as lending demand during the COVID era was slightly sluggish, we have experienced a slightly more negative drag from rates than before and we have been introducing negative interest rate charging. That has helped.

Then we had EUR 83 million of TLTRO III benefit. If you look at margins, they were slightly down numerically -- or mathematically, I should say, at 136 basis points. This is primarily driven by the fact that we booked a quite substantial benefit on TLTRO in the first quarter and you have a higher average balance sheet, so that's the nominator and denominator impacting that.

If you look at margins in the Street, so what the clients get, we are very pleased to see that almost everywhere, the front book margins are slightly up versus the back book. And that is a positive and part of our pricing discipline.

Fee growth arguably was the star of the quarter, growing more than 18% year-on-year even despite the fact that we still face subdued lending demand in business lending and in Wholesale Banking as well as domestic payments still being below pre-COVID and very much the interchange fees, which you normally get from international travel when people start using their credit cards, that is -- there is some of it, but it's still compared to pre-COVID at a significant lower level.

So even without that, the fees are growing well, both introducing packages -- package fees increases as well as a very successful push to -- from both a push and a pull into the investment product area where our digital model, so the ease of opening an account digitally without having to go to a branch, which were largely closed in many areas but you could do it digitally with ING, has led to quite a substantial inflow of new customers and a lot of new accounts opened. Increase in assets under management as well as higher trading fees, although this quarter had less volatility than the previous quarter, which, if you look at the German numbers, you can see that, from the very, very high peak of Q1, that has come slightly down.

Moving to operating expenses. Excluding regulatory costs and some incidental items, both year-on-year and Q-on-Q were down. The incidental items that we mentioned is that related to cost -- announced cost programs such as closing of branches in the Netherlands. There was another portion of that, which landed in this quarter as it did in the previous. We also saw that we had -- we took a small impairment of EUR 22 million in the corporate line on some IT-related items.

Overall, on the regulatory costs, one other thing, which we flagged on the call as well -- sorry, on the operating cost as well, is that a recent court ruling, which is known in the market as the Danske ruling, which relates to VAT, we have flagged to the market that we expect that we will have a -- and we will grow into this as countries implement the ruling on this of EUR 125 million extra cost, which over time we will need to absorb some way.

Risk costs are negative this quarter. Quite a bit of releases especially given the very high -- or higher improved macroeconomic indicators. It appears that, luckily for all of us, when we were -- a year ago, when we were taking these provisions and we had no clue whether the shape of the recovery would be V-shaped or W-shaped or whatever letter, is that we can now see that it's been more of a pause button for the economy and we see quite strong recovery, which has also led to the models in accountancy of recovery and led to a release of the overlays. And more importantly to mention is that we saw very limited additions and still continued to operate our business on a very low Stage 3 ratio.

Moving to capital. CET1 at 15.7%. This exclude EUR 4 billion, which we have reserved for distribution. TRIM has now fully been absorbed. We have roughly 30 basis points left going forward of our regulator RWA inflation.

We also announced that the waiting time for our shareholders is over. We have suspended their dividends, and with the no longer extending the restrictions of the ECB, we can now pay what was due after September 3, which will be a EUR 0.48 per share payment in October and an additional distribution of EUR 1.7 billion, which will be either in the form of cash or a buyback, which will be decided earlier once we have -- which are subject to getting necessary and relevant approvals.

I will stop there and leave the rest for your Q&A for items I may not have covered, and hand over back to Geert.

Thanks, Mark. Please turn to Slide 16. This is an evolution of quarter-on-quarter RWA development. Slightly lower than at the end of Q1. As you can see, the biggest impact came from models, EUR 45.2 billion, positive indeed, just like Mark said, it's the final TRIM impact is now absorbed for 80% almost offset by improved collateral profile of our loan book. But overall, thanks to some releases in market and operational risk-weighted assets, the RWA number was a bit lower than the previous quarter.

Quickly to Slide 17, of which I think Mark touched upon most of it already. It's important to understand that just north of EUR 4 billion is reserved profits outside of CET1 capital and that reflects close to 130 basis points of CET1. However, it's not reported as such. And also last Friday, we announced the call of our last legacy Tier 1 securities. Those are our ancient retail perpetuals that were issued a long time ago. We will call them as per the end of September and this will have a pro forma impact of roughly 30 basis points to our Tier 1 ratio.

I'll flip to Page 19. It's a reflection of our distribution plans for this year and beyond. Very pleased with the ECB announcement on July 23 to lift the dividend ban. And we can now execute that policy by paying the EUR 0.48, which is part of the interim of this year and EUR 0.27 that was originally reserved for 2020, but not yet paid. So that will be paid in full. And then the additional distribution of the 2019 profit in the form of cash or share buyback, and in that latter case, we are seeking the relevant approvals from the ECB. Over time, we will converge to our CET1 ambition of 12.5%, roughly 200 basis points over MDA. But as long as the exit from the COVID-19 pandemic and the government support programs and measures are not clear, we will maintain a prudent buffer during our gliding path towards that 12.5%.

Taking you to Slide 22. It's a new slide to the deck. We have received our preliminary MREL requirements from the SRB. They are preliminary because in Poland, BRRD2 has not yet been adopted. We expect this to come into effect by the end of this month by which the preliminary part will disappear and we will be having intermediate MREL requirements per the 1st of Jan next year as well as final requirements per Jan 2024. And as you can see, both from an MREL perspective as well as from a TLAC perspective, the RWA-based requirement is the most binding one for ING, but both from an intermediate as well as an end state requirement, ING is already meeting the requirement today.

Now what will be interesting going forward, next to all the other volatile items, will be the dynamics between the additional capital returns and the holdco issuance. As mentioned before, we have 500 basis points over MDA, 300 over our management buffer. That reflects roughly EUR 10 billion. By the time we would repay that, this needs to be clearly replaced by holdco issuance on top of, like I said, other additional volatile items that we are always trying to manage.

Taking you to Slide 24. That's the remaining debt issuance plans for this year. We've said before that we believe that our holdco issuance range would be between EUR 6 billion and EUR 8 billion. We're adjusting that downwards to EUR 5 billion to EUR 7 billion on the back of RWA developments so far this year, and of course, the increased CET1 buffer. So we have issued EUR 4.3 billion year-to-date. So we expect a small amount to be printed for the remainder of this year in holdco.

For AT1 and Tier 2, obviously, we strive towards the optimization of our capital structure. And in the end state, our capitalization objective is to fully apply the capital relief that is provided by this Article 104a that allows us to use AT1 and Tier 2 to partly fill our P2R instead of solely CET1 capital.

However, today, in light of our access CET1, we might be managing this in the intermediate state differently, trying to balance our capital ratios and the carry of our liability instruments.

As mentioned before, we will call our retail perps, which has an impact of 30 basis points. And also, given our participation in the TLTRO III and the increase in our originated funds entrusted of our clients, we foresee no issuance in bank senior for the remainder of this year. What you see is bank senior in the form of structured notes that are sold through our wholesale financial markets franchise.

We might see some covered bond issuance from our subs like we priced today a covered bond for our ING Bank (Australia) Limited at very favorable terms, considering the summer period at this site, and it was in green format -- sorry, no, the covered bond wasn't in green format, but we will potentially issue covered bonds from our subs for the remainder of this year in green format.

I suggest I stop talking now and open the floor to questions in case you might have them. So operator, back to you.

(Operator Instructions) We have a question from Mr. Lee Street of Citigroup.

Can you just clarify the point you said about capital return and capital distribution and the holding company issuance. Effectively, so I'll just be thinking that you're going to keep running at around the same level of -- as your MREL. Therefore, to the extent you're reducing your CET1, that you're just going to effectively issuing holdco to keep that constant, and therefore, to think about your issuance needs going ahead, you need to think about capital return plus effectively whatever you've got coming out to maturity or other you're coming within one year of its final maturity. Is that all correct?

What I meant to say is that the current excess CET1 is part of our MREL buffer. And by the time we start to return the excess CET1 that we hold over our MDA plus our buffer, we need to clearly replace this with other instruments, which will be partly small AT1, partly small Tier 2. But the majority of that will clearly be funded with -- or will be replaced by holdco issuance.

Now if you would consider that the 300 basis points in excess over our buffer reflect roughly EUR 10 billion or EUR 9.9 billion and if we would hypothetically repay that in the coming 2 or 3 years, then we would have to replace that immediately with holdco issuance in order to keep on meeting our MREL requirements. That is on top of our normal maturity schedule, that is on top of our normal volume growth and that's on top of our normal loan book behavior. That's what I meant to say.

(Operator Instructions) We have a question coming through from Mr. Luis Garrido of Bank of America.

Just a quick question on if you could provide a bit of color on the glide path to your 12.5% CET1 ratio. Obviously, you're likely to remain prudent and only return the excess capital over time. But can you give us a couple of pointers to what needs to happen before you distribute all of the excess capital?

Yes. Thank you very much, Luis, for your question. So the thing is that we've had a bit of a delay in distribution, right? So we first need to get out the door what was already due. It depends a little bit, as I said, we need necessary approvals if we were to consider a buyback and if we would launch that. There are some material rules about how to perform a buyback. You're limited because you're actually trading in your own shares. You're limited to the maximum amount you can buy back on a single day. That's by law, limited to a percentage of your average trading volume, which automatically puts a break in how fast you can do that. That will take then some time before you can complete. Even if it's EUR 1.7 billion, that will take a fair bit of amount of time. If you can do a dividend, I mean, that's different. You could do that in day 1. But that's now just talking about what was due.

If you think about the glide path to 12.5%, I -- it's beyond the realm of likelihood that we would do a big bang. So it will be over time. If it's in the form of a specials, the -- and if it's a buyback, then you have the same restriction I just mentioned. So that takes time and it also means that it's cumulative, so you can't do sequential buybacks. It's just -- there's a maximum number of -- that you can do on a given day. So that prolongs it over time.

The other fact is, as we've stated, it's all looking better. The vaccination's going well. But let's be honest, crystal clear, it is not. We've got the Delta variant. We have in Northern Europe to consider how will governments exit the fiscal support they have been giving to the business community, what implications will that have for their solvency and survivability and how will banks need to step in or step up or not in that. So there will be, as you say, a prudency buffer.

So don't expect that it will go very fast for 2 reasons. One is technical if it's a buyback. Second, if it would be a dividend, there are still several things to consider out there that will make us cautious. But on the other hand, clearly, if you don't have a good alternative use to invest it, either in growth, which we expect to return in Wholesale Bank, but it doesn't consume that much, or you spend capital on regulatory requirements. But as I've said, what is known to us now in terms of RWA inflation, that's limited, what is left only 30 bps. And then you have -- you generate -- we generate roughly between 150 and 170 bps of capital through net profit every year. So the very simple math then tells you that for several years, we will have to return more than 100% anyway to get us in the direction of 12.5%. So we're not providing yet dates and days on it. But it will be over time and it will certainly not be in one calendar year or in two.

If I could just a follow-up just on that, the uncertainty is really just on the timing of the return and not on the eventual level. I mean is there anything that could get you to change that 12.5% ambition if, for instance, macro deteriorates beyond any expectation. Could that change the level of the targets and not just the timing of the distribution?

Yes. So that's approaching it from a different side, but it's a good question. I think what you can see is that we take a lot of care in calculating and coming up of what is an appropriate management buffer. And that's what we do. We have our capital planning. We have our scenarios. We have our medium-term planning. And the 1-in-10 and the risk scenarios and that's where you base your management buffer over MDA over.

Now the MDA can move, right? And were the MDA level to move because of additional buffers, regulatory buffers or movements that would eat into -- significantly into a management buffer, then you would have to consider. But that's why we've always said that our ambition is around 12.5%. So depending how that moves, we have some flexibility there to operate and to add as we do now. We've informed the market that we would operate for -- on this -- until this COVID situation has clarified and the exit has clarified a little, we would operate with as prudent buffer above even our management ambition of 12.5%. But yes, it could be reconsidered, but it depends more underlying than on our view of the world because that hasn't changed.

(Operator Instructions) We have question coming through from Mr. Vardhman Jain of Schroders Investment Limited.

Yes. A couple of questions from my side. Firstly, on asset quality. Would it be possible if you could just take us through some of the high risk sectors that you outlined on Page 32 in the business lending and Wholesale Banking as to how have they performed over the last, say, 6 months or so? Have you seen any signs of deterioration in there? I know that you mentioned consumer lending, there has been some deterioration on those risk metrics. And to what extent are respective sectors still dependent on government largesse in the countries where they're located? When are we expected to -- or when are you sort of expecting that largesse to return and that the actual sort of reality to kick in?

And secondly, just on the strategic side, I noticed ING has withdrawn from a couple of retail banking markets in the last, I think, 6 months or so, I think Austria and Czech Republic. Could you just explain what the strategy has been, what the thinking as we've got funneled. Back in 2016, you outlined a strategy, which was wanting to become a Pan-European digital banking model, trying to sort of expand your ING first -- ING direct model. So what led to your withdrawal from these countries given it hasn't basically advanced your expansion if I remember correctly? Yes. Those are the 2 questions.

Right. Thank you very much. And for the people to follow the asset quality disclosures on our book, you can see on Slide 32. Just to go over it, I'll leave it to you to decide whether it was serendipity or wisdom. But we have been largely not very exposed to COVID-impacted sectors. So if you peel the onion, 40% of our book is in residential mortgages and strong economies at relatively modest LTVs. So that's not a concern.

Then we are very small in the consumer lending space. In consumer lending, that's -- a very large part is car loans. And of those, also quite substantially in Germany. And I don't want to do cultural profiling, but Germans care about their cars. So that book is quite strong. It was also a book that during COVID hasn't grown very much because people were not going out, not going on holidays. So the need for consumer lending was less except maybe for home improvement loans.

On the business lending, yes, you can figure it out for yourself what are the difficult and we've listed here. Agriculture is holding up well. Nonfood retail was a concern because of the fact that the shops were closed. Now that has largely gone now with the vaccination that the shops are open. There are some concerns still about disrupted supply chains, whether they can get the goods into the stores on time. You see in some commodity prices as China is opening up, you see price hikes. You just have to look at the Asian price index for containers and/or iron ore and stuff like that, you see those going up quite strongly. So it depends a little bit on those what exact part of business bank -- business lending you are in and what for sector you are, but there could be some supply chain so we're not saying that we're -- there's not going to be issues. But what you see now is that there has not really been a liquidity problem for them yet.

Again, I would like to flag that the uncertainty lies in how will governments exit their support programs, which have been, in Northern Europe, largely fiscal by giving tax holidays or supporting businesses on their fixed cost. So that's even sector independent. But then again, if you look at our total exposure to business lending and SME for ING at 12%, that's also fairly modest and also focused on Belgium, Holland -- Poland and a little bit of Romania.

Then on Wholesale Banking leveraged finance, clearly, in any crisis where you have both the supply-and-demand issue and you have a high amount of debt on your balance sheet, that raises some concerns. We do -- we had already capped that book 2.5 years ago both on total exposure, single exposure to a single name. It is a book that carries higher concerns because of the disruptions. We're closely monitoring that. But again, in terms of size, we're not that concerned.

Oil and gas, frankly, where the oil price is now has reverted from an issue. We have also seen some releases in our management overlays that we took when the oil price was below $30 at some point, but that clearly has abated that risk. It doesn't mean that we will -- we still have our reserve-based lending book on runoff. But there, the immediate concerns have drifted.

Aviation. Listen, they've had probably a very rough time, everybody can recognize, but it's picking up again at a very lower level. The good thing with aviation lending is that it's almost never unsecured. And it's also, there, a very small book. And if you look at the Stage 3 ratios that we present here, 1.9%, it's also not many are in trouble. We usually only focus on the national carriers anyway and then very limited.

Hospitality and leisure, that was, of course, that bore the brunt of COVID restrictions and lockdowns. We have very limited in those 2 sectors as you can see, only EUR 1.5 billion or 0.2% at our -- of our loan book. But you do see there's an elevated Stage 3 for the obvious reasons, but nothing concerning.

And then commercial real estate, again, very strict policies of the past. Location, location, location. So nonfood retail, we do -- but we do it in the high streets. Doesn't say that they weren't hurt by lockdowns, but the quality of the assets in the location is considered the highest. We stayed far away. I'm sure we may have 1 or 2 in our book, but we stayed away from big shopping malls in the outskirt, et cetera, where you have no alternative usage for the building except as Geert and I sometimes jokingly say, for paintballing and go-karts, but that's not a goal in of itself.

And moving on to your question on strategy, not much has changed. And I want to correct -- or I want to at least say that, that we fully still embrace both our purpose as well as the fact that we believe that the future of banking is mobile and/or digital, whatever label you want to give it. So the digital or the mobile-first strategy is still very much there. We still believe that both our retail clients and business clients want to do their business with the banking in the most convenient way anywhere and on any device. That is the future, we're still there. If I would want to highlight the 2 differences between what we announced in 2016 and today, the one is that in 2016, the whole thinking was a lot more of getting the benefits from centralization of our middleware and the middle layer of our technology as well as our core banks. And that has changed to a model of standardization. And we've had to acknowledge that centralization was too complex, too costly and raised too many regulatory concerns that it would take a lot of money and a lot of time and then some uncertainty how much you could achieve.

And when I talk about standardization is what we've been really pushing forward. It's what we call touch point architecture, whereby we have components of account opening or the several services that we offer and we have, like in a hard franchise structure, the countries are obliged to use those modules. They can make adaptations and add to that for local necessity, what they need locally. But the building framework, the architecture itself is built once. It's in a virtual cover at ING. So if you want to use something, you have to use these TPA components, as we call it, and several methodologies, which are nonnegotiable as you would have in a hard franchise. That helps us in creating the benefits of designing it once and then others can reuse it. And there's also, along with that, it doesn't where it's developed, but it has to be offered to the whole group, and therefore, it has to be coded in a specific way, in a specific methodology, which we call ING Esperanto. So that if something is developed in Poland, we can apply it in Spain.

The other thing is that what has changed is probably the execution of strategy. And there, you clearly see that our new CEO is viewing the business through 4 lenses. And that is a market or a product attractive for ING and our clients. The other one is, is this business or product, within a reasonable time, can it be -- achieve the right profitability or is it already profitable across the cycle? The other one is can we get to scale in a decent amount of time? And the last one is having this product or being in this area or business, does it have a larger benefit than itself? So is it beneficial to the wider of ING. The latter one probably being Wholesale Banking argument where you can think that us being present in Korea is beneficial for our German clients active in that region so we can support them. And then we look at -- in Wholesale Banking, we, namely, look more at profitability on a client basis.

So I think it's nuances on the -- although the -- from centralization to standardization is more fundamental, but it also has higher execution certainty to do with standardization and centralization. And I think on the strategy execution, it's a lot more result-focused that within a decent time frame and meeting the requirement here. So sorry for the long answer, but I wanted to highlight that. So thank you.

That's very clear. Just very quickly, do you think that sort of looking at different markets through those lenses is complete? Or do you think further changes in the footprint are still possible over the coming 12 months or so.

Well, as we've said, we would announce when we have something to announce. And the one thing that is very strong that if we announce something, we want to have execution certainty. But it's -- I think the sell-side has been writing that it's a strategic review or some sort of project. I think it's a continuing way of looking at our businesses through those 4 lenses. And again, we've made announcements in Austria and the Czech Republic, which we have already concluded and we're very pleased that we've been able to find a good home for our clients in both the Czech Republic and Austria. And we've also announced that we would review our business in France. But there, there's no conclusion yet. That will probably be more towards the end of the year. But in Austria, it was a very much liability-driven bank with a -- in a difficult banking market with difficult to build up an asset side. And in the Czech Republic, which is a fantastic banking market, it was also a matter of scope and scale and profitability.

(Operator Instructions) We have no questions coming through, sir.

Yes. Thank you, operator, and thank you, everyone, for joining us today. In case you have any follow-up questions later, the Investor Relations team is available. Just reach out. Otherwise, stay safe, and we'll have an update again at February upcoming. Thanks. Bye-bye.