ING Groep - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good morning. This is Laura welcoming you to ING's 1Q2025 Conference Call. Before handing this conference over to Steven van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our businesses, 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 statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 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 morning, Steven.

Over to you.

Steven van Rijswijk (CEO)

Thank you very much, Laura. Good morning and welcome to our Results Call for the First Quarter of 2025. I hope you're all well, and thank you for joining us. As usual, I'm joined by our CRO, Ljiljana Čortan, and our CFO, Tanate Phutrakul, and we had a good start to 2025. Today, I will show you how the strength of our franchise enabled continued commercial growth during the first quarter, as evidenced by exceptional growth in deposits and higher mortgage volumes. I will also explain how our strategy and strong business fundamentals enable us to navigate the current geopolitical and macroeconomic uncertainty. As a leading European bank, we're well positioned to support the European economy and capture growth opportunities as we remain confident on our outlook.

Later in the presentation, Tanate will walk you through the quarterly financials, including the financial impact from the progress we're making on our strategic priorities. At the end of the call, we will be happy to take your questions. Now, let's move to slide two. This slide gives more details on our strong growth trajectory in the first quarter. Our relentless focus on providing superior value for our customers has again proven to be a key differentiator. The total number of private individual customers increased to more than 40 million, and the number of customers choosing us as their primary bank grew as well. We also recorded significant growth in our loan book. Net core lending in retail banking grew by EUR 8.6 billion, which was primarily driven by mortgages, while we also captured growth in business lending and consumer lending.

In wholesale banking, we saw a modest decline in lending, mainly due to seasonal volatility in working capital solutions, but also as a result of consistent capital optimization. On the liability side, we saw exceptional growth driven by a strong inflow in retail Germany after a promotional campaign. Net core deposit growth in wholesale banking reflected higher short-term client balances in our cash pooling business. This commercial growth also resulted in a significant increase in fee income, which was 10% higher than the first quarter of last year. We continue to support clients in their sustainability transitions, with the volume of sustainable finance mobilized rising 23% from the first quarter of last year to EUR 30 billion. I am proud to say that ING is the first global systematically important bank to have climate targets validated by the Science Based Targets initiative.

Slide three summarizes how our strategy and strong fundamentals enable us to navigate the current turmoil. Let me start by saying that the introduction of tariffs and the current macroeconomic uncertainty have led to lower growth forecasts worldwide. However, we remain confident in our ability to grow in line with our targets, as our diversified presence allows us to capture opportunities in different geographies and across various sectors. Most of our lending growth is driven by residential mortgages, which is less sensitive to changes in the economic outlook. As one of the largest and most diversified wholesale banks, we're also well positioned to support the economy and benefit from the investment plans across Europe. On asset quality, although the potential longer-term indirect impacts from the tariffs are not yet clear, we are confident that our prudent risk management framework will also prove itself going forward.

Around 65% of our portfolio is fully or partially secured. We have a large and growing residential mortgage book with historically low risk costs. In our main markets, house prices remain high and unemployment rates remain low, as illustrated on the next slide. In wholesale, we have further increased the portion of our exposure to investment-grade clients. Our funding and liquidity position remains very strong. As you know, around 70% of our balance sheet is funded by granular retail deposits, and we maintain strong funding and liquidity positions in all currencies. Lastly, on interest rates, they have again been volatile over the past weeks. We have proven our ability to manage our margins by taking disciplined repricing actions, and we can confirm our outlook for the liability margin for the 2025-2027 period. We move to slide four.

Here you can see how market dynamics and our position as a leading European mortgage bank enable us to achieve continuous growth. The outlook for mortgages is positive, and we expect the market to continue growing. Mortgage demand in some of our markets, such as the Netherlands, has already recovered after a temporary dip when interest rates went up sharply. In other countries, such as Germany, we still expect a further recovery. In addition to this increased demand, volume growth is also supported by a sustained increase in house prices across most markets. At ING, we have been able to strengthen our mortgage offering and significantly increase our market share in those growing markets.

In the Netherlands, for example, our market share in new production is currently 17% versus 10% a few years ago, supported by our strategy, which focuses on digitalization and flexible operations to facilitate new production. Default rates in our mortgage portfolio remain very strong, mostly driven by the constant low unemployment rates in our largest markets. The average loan-to-value in our mortgage book is 56%, with a low stage-three ratio below 1%. On the next slide, I will show that we see growth opportunities in wholesale banking as well. Because we are one of the most geographically diversified banks in Europe, with leading positions in lending across many markets, we are really well positioned to support the investment initiatives. We have strong expertise in key focus sectors such as infrastructure and TMT, and we have adopted a more proactive stance on defense-related funding.

In this sector, we, of course, have an ESR policy to make sure that what we finance is responsible, but within that context, we're open to finance defense initiatives to safeguard European security. The amount there is picking up, and we see this reflected in our pipeline as well. While we do see growth opportunity in Europe, we will also remain focused on optimizing our capital usage in wholesale bank, as we have shown over the last few quarters. On slide six, we highlight that our robust capital position and strong results have allowed us to consistently distribute cash and deliver value to shareholders. Our CET1 ratio came in at 13.6% at the end of the first quarter, and this includes the impact of the implementation of Basel IV and the 20% stake in Van Lanschot Kempen.

With the acquisition of this financial stake, we have further increased the capital allocation towards retail banking in line with our strategy. Today, we announced another share buyback of EUR 2 billion, and including this amount, we have distributed over EUR 28 billion to shareholders since 2021, and we are committed to providing an attractive shareholder return going forward. Our CET1 ratio target is unchanged at 12.5%, but we steer to end this year at a slightly higher level as we take the prevailing macroeconomic and geopolitical uncertainty into account in line with our distribution policy. We now steer on a CET1 ratio between 12.8% and 13.0% by the end of 2025. We will update the market on next steps with our third quarter results this year, as per our normal rhythm. That is about distributions, I mean.

On to slide seven, I would like to emphasize again that we remain confident in our ability to execute on our strategy, even in these more volatile markets, and this is also reflected in our strong performance in the first quarter. We therefore reconfirm our outlook for 2025, including the refinement of our C21 targets and reiterate our targets for 2027. Now I will hand over to Tanate, who will take you through the results of the first quarter in more detail, starting on slide nine. Tanate, over to you.

Tanate Phutrakul (CFO)

Thank you, Stephen. I would like to start on slide nine, where we show the development of our total income, which increased significantly compared to the previous quarter. Commercial NII was resilient and was supported by an exceptional growth in deposits and a continued growth of our mortgage portfolio. Fee income increased significantly and grew by 10% compared to last year. We're confident that most of this growth is structural, and I'll explain why in a few minutes. Lastly, all other income, which is a combination of other NII, investment income, and other income, was supported by strong client activity in financial markets and good results in treasury. Now let's move to slide ten, where we show the growth in customer balances. What is clearly visible in this slide is that our commercial growth has continued in the first quarter of this year.

Our net core lending grew by EUR 6.8 billion, which was again mostly driven by strong performance in the residential mortgage market. As Steven already explained, we have been able to further increase our market share in a growing market situation, which resulted in EUR 6 billion of growth in mortgages. We were also able to grow in consumer lending and business lending. In wholesale banking, we saw seasonal volatility in balances for working capital solutions, and we continue our efforts to optimize capital usage. On the liability side, we saw core deposits increase by almost EUR 23 billion in the first quarter due to strong performance in both retail and wholesale banking. This strong growth underscores our ability to attract deposits. In retail, growth was particularly coming from Germany, mainly driven by a successful promotional campaign.

In the wholesale segment, the growth mainly reflected higher client balances of our cash pooling business, which can be volatile. On slide 11, you can see our commercial NII was resilient. Liability NII increased as strong growth in customer balances, and our repricing action compensated for lower ECB deposit facility rates. It also included a structural shift from other NII to liability NII. On lending, NII was broadly stable. However, the growth in balances was offset by lower margin, which is driven by a continued mixed shift towards mortgages, which have a higher ROE but a lower margin. It also reflects the impact of having too few days in the quarter. On commercial net interest margin, which is based on commercial NII, was stable quarter on quarter.

Turning to slide 12, fee income growth year on year was again almost double-digit, mostly driven by structural revenue drivers, or as we call it, alpha. Growth in retail banking was driven by strong performance in investment products, as well as higher daily banking fees. The strong performance in investment products was driven by a further growth in active investment product customer, an increase in asset under management, and much higher customer trading activities. Daily banking fees rose on the back of strong customer growth and an updated pricing for payment packages. In addition, retail banking grew its fee income from insurance products and also from lending, but that was more than offset by lower fee from lending in wholesale banking.

Given the strong performance across the bank, we remain confident that we can grow our fee income by the 5-10% this year and reaching our EUR 5 billion goal target in 2027. On slide 13, we show the development of all other income. Financial markets had a strong quarter as it benefited from increased client activity and favorable market conditions. Treasury has a good quarter as well, with income up on both comparable quarters, mainly driven by strong results from FX ratio hedging. We also receive an interim dividend from our stake in Bank of Beijing. On slide 14, our operating expenses, excluding regulatory costs and incidental items, increased by just over 6% in the first three months of the year.

This is in line with our guidance, and we still expect these expenses to end up in line with our outlook for the full year 2025, or between EUR 12.5 billion and EUR 12.7 billion. This increase was mainly driven by the impact of inflationary pressure and our continued investment in business growth, particularly in customer acquisition, developing products for new customer segments, and in building and scaling our tech platform. Operational efficiencies compensated for a part of these increases as we continue to digitize our services and infrastructure to further increase our operational leverage. We have, for example, used generative AI to improve the customer proposition in contact centers and in our know-your-customer processes, which has also resulted in lower expenses.

On the risk-cost side, on the next slide, slide 15, total risk-cost was EUR 313 million this quarter, or 18 basis points of average customer lending, which is below our through-the-cycle average. Net addition to stage three provision amounted to EUR 215 million and were mainly related to collective provisioning in the consumer and business lending portfolio. Individual stage three cost decrease, reflecting lower new inflows and low provision in wholesale banking, driven by repayments and recoveries. Stage one and stage two risk-costs were EUR 98 million, mainly reflecting an update of the macroeconomic forecast, model updates, and some risk migration. We remain confident in the quality of our loan book. This is also reflected in a decrease in stage two and stage three ratio.

Slide 16 shows the development of our quarter one ratio, which is increasing slightly from the levels of year-end 2024, as higher risk-weight was more than offset by strong capital generation. The impact of Basel IV and other model updates on our risk-weighted assets was a EUR -1.4 billion, so that's an improvement on capital. If we exclude this impact and the impact from foreign exchange movements, credit risk-weight increased by EUR 5.2 billion, mainly driven by volume growth in retail banking. Operational risk-weight remained flat, while market risk-weight increased by EUR 1.3 billion, again excluding the impact of Basel IV and other model updates. Today, we announced a next share buyback program of EUR 2 billion, which will have a pro forma impact of 59 basis points on our quarter one. Now, Steven, I'd like now Steven would like to wrap up before going into Q&A.

Steven van Rijswijk (CEO)

Thanks, Tanate. I would like to recap a few key messages before going into the Q&A. First of all, we have had a very strong start of the year with outstanding commercial growth, resilient commercial NII, and strong fee growth, which has allowed us to announce the next share buyback program. Furthermore, our strategy and strong fundamentals enable us to navigate the current geopolitical and macroeconomic uncertainty. As one of the leading European banks, we're well positioned to support the economy and capture growth opportunities, and we are therefore confident in our ability to execute on our strategy going forward and reconfirm our 2025 outlook and 2027 targets. With that, I would like to open the floor for Q&A.

Operator (participant)

Thank you.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. In the interest of time, we kindly ask each analyst to limit herself to two questions only. Thank you. We will now take our first question from Benoit Patchard of Kepler Cheuvreux. Your line is open. Please go ahead.

Benoit Patchard (Research Analyst)

Yes, good morning. I've got two questions. The first one is on the liability and lending margin, and the second one is on the share buyback. Maybe starting with the liability margin, I guess the 101 basis points posted into one is a strong achievement versus expectations. What is your view on liability margin for the rest of the year? I think in the previous quarter, you put a comment that it could drop temporarily below the 100 basis points mark. I'm just wondering if this is still something you expect. I do not see any similar comments in the Q1 presentation. On lending margin, also again, could you maybe give us a bit of a kind of update on the guidance, which was at 130 basis points before, and also clarify the impact of daycounts specifically in the first quarter?

If you continue to expect the mixed effect to be negative in the coming quarters on lending margin. Maybe just briefly on buyback, it was just to get a bit of a view, or you got to the 12.8%-13%, where what have been the considerations taken on board to get to that level? Thank you very much.

Steven van Rijswijk (CEO)

All right. Thank you very much, Benoit. Tanate will take the questions on liability and lending margins, and let me answer you the question on the share buyback. Look, we have a target of around 12.5%. Clearly, the world now knows quite some volatility and macroeconomic uncertainty, given the tariffs and all the discussions that are going on. In that setting, we have said we want to be prudent. In that mist or fog, if you want to call it that way, we are targeting for 2025, 12.8% -13%, but our longer-term target remains 12.5%.

Tanate Phutrakul (CFO)

Benoit, to answer your question on liability NII first, I think our expectation is that our net interest margin on liability will remain at roughly similar levels in Q2. Okay? What we have seen in Q1 in terms of our optimism is that the volume growth has been strong.

As you know, in a number of markets, we have had significant rate cuts, including the Netherlands, and we have seen no reduction in terms of balances based on those rate cuts, which means that if we had to take further rate cuts, we're confident in the resilience of our liability franchise.

Benoit Patchard (Research Analyst)

Okay?

Tanate Phutrakul (CFO)

In terms of lending margin, yes, the lending margin is coming down a little bit in Q2. I think it's driven by three impacts. First is the daycount impact, which has an impact of approximately one and a half basis points. The lending mix has changed, particularly strong growth in terms of mortgages, and the mix in terms of wholesale banking has also changed. Those are the second. The third is that the funding of the mortgage book has lengthened somewhat in light of interest rate movements.

That is something on lending margin. I think guidance for the rest of the year, we don't give that guidance on lending margin. I give you the components of what's moving the margin during the course of Q1.

Benoit Patchard (Research Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. We will now move on to our next question from Giulia Aurora Miotto of Morgan Stanley. Your line is open. Please go ahead.

Giulia Aurora Miotto (Equity Analyst)

Yes. Hi, good morning. Thank you for taking my questions. The first one is a quick follow-up. The 12.8%-13%, just to reassure the market, did that involve any ECB request? If the situation normalizes, do you plan to go back to 12.5%? Secondly, to stay on the capital topic, during the quarter, you have taken a stake in Van Lanschot, and there have been headlines around potential M&A activity in Spain and Italy. Can you please comment on whether you are indeed looking at something in Spain and Italy, and whether you would consider buying something which is sort of an old-school bank with branches, even if you are mostly digital in these countries? Thank you.

Steven van Rijswijk (CEO)

All right. Thank you, Julia, for your questions. No, let me confirm that the 12.8%-13% is our own decision. It has nothing to do with the ECB. This has not been discussed with the ECB as such. We have just taken that own decision based on what we see. Nothing more, nothing less. The goal remains 12.5%, and everybody knows that, including the ECB. You start with Van Lanschot, but the question is about, are you looking at acquisitions? And where are you going to look at acquisitions, I believe? Would you buy an old-school bank? We are very pleased with our autonomous strategy, where we also, during Capital Markets Day, said that we want to diversify more, diversify within existing segments in Gen Z or mass affluent, for example, whereby we want to provide more specific propositions to our existing customer base.

Diversification in terms of deeper product capabilities in wholesale banking and financial markets and transaction services in the markets in which we're active. Diversification in terms of filling in the blanks, if you will, in, for example, business banking, consumer lending, private banking, wealth management in markets where we are active but don't have these activities as yet. We have these activities, for example, in Belgium and the Netherlands, but not all of them, and Poland, but not all of them in Germany and Spain and Italy and other markets. That's what we're doing, and we're good at it.

At the same time, if we can accelerate that growth, if it is a skill or a product that we do not have, or if it can increase our domestic market position because retail is still largely a local skill game given the compartmentalization of regulation in Europe, we will look at it, and we are looking at it in all of the markets in which we're active. It has to also fulfill our strict M&A and ROE criteria that we have, and that's how we will look at it. When there is something to tell you about it, we will, but there's currently nothing to comment about any specific opportunity.

Giulia Aurora Miotto (Equity Analyst)

Thank you.

Thank you. We will now take our next question from Hari of KBW. Your line is open. Please go ahead.

Hari Sivakumaran (VP and Associate Analyst)

Hi, there. If I ask on slide 23, and I appreciate you're quite consistent here in giving the quarter-end forward curve, but just given that rates have been quite volatile, if we roll forward a month, I would guess that the kind of the EUR 9 billion in 2025 would move towards EUR 8 billion. I'm just wondering, with a steeper yield curve, is that kind of EUR 10 billion number in 2027? Is that a little more sticky? My second question is on the wholesale business. I can see the RWAs are coming down, and that's kind of in line with the strategy. I was a bit surprised that the FDEs are increasing. It's up 5% this quarter and up 11% year on year. Any color on that would be helpful.

Steven van Rijswijk (CEO)

Thank you very much, Hari. I will give the question on page 23 to Tanate. When it comes to the FDE in wholesale banking, yeah, that has to do with more fee business. We are broadening our capabilities in financial markets, which, by the way, had a very good quarter. We are putting salespeople more on the ground to be able to diversify better. That is why we continue to invest there as well. That is why you see the FDEs going up. We have scalability in our operations. When we reach more scalability, we can also invest more in either our sales capabilities, our product capabilities, or our tech platforms.

Tanate Phutrakul (CFO)

Hi, Hari. On page 23, as you see, we're consistent in providing this every quarter to show the impact. I think what we have done also during the course of the last six months is been extending the duration of the replication so that instead of 50/50 duration, we have now gone to 55/45, which should help stabilize a bit the replication results in 2026 and 2027. We also are demonstrating quite a strong engine in terms of liability growth in the first quarter. We expect that trend to continue into the rest of the year. Lastly, of course, we manage for margin, right? You can see that we have taken significant rate action in the first quarter of this year with a full-year impact of EUR 1 billion, and that our room in terms of cutting rates remains in place.

For every 10 basis points cut, it means EUR 400 million additional revenue. Those are some of the components to describe a bit what's happening and our levers that we could pull in terms of stabilizing our replicated revenue.

Hari Sivakumaran (VP and Associate Analyst)

Thank you.

Operator (participant)

Thank you. We'll now take our next question from Farquhar Murray of Autonomous. Your line is open. Please go ahead.

Farquhar Murray (Senior Analyst)

Good morning. Just two questions, if I may. Firstly, I mean, deposit volumes are clearly running better than the 4%. You seem to expect that to continue to a degree. And replication dynamics are better. I just wondered why you perhaps maybe are not edging NRI guidance a bit better. On the other hand, I presume the 130 basis points on lending margins are probably a little bit stretching given the dynamics you outlined earlier. Secondly, on the CET1 targeting for full year 2025, I mean, it is early in the year. The tariffs discussion could frankly settle out as quickly as it flared up. In those circumstances, would you revert back to the 12.5% CET1 target for this year-end, or when realistically might you do that? Thanks.

Steven van Rijswijk (CEO)

On the CET1 target, look, there is quite a bit of uncertainty. We want to at least remain consistent. There is this concern right now. For 2025, we stick to that target. Depending on how things will be, we are going to move back to the 12.5%.

Tanate Phutrakul (CFO)

On liability margin and the volume outperformance in Q1, I emphasize it's only Q1. In fact, it's early in the year. We are much more optimistic and confident in maintaining our net interest margin on liability, but no change in guidance for now.

Farquhar Murray (Senior Analyst)

Thanks very much.

Operator (participant)

Thank you. We will now move on to our next question from Tarik El Mejjad of Bank of America. Your line is open. Please go ahead.

Tarik El Mejjad (Financial Analyst)

Hi, good morning, everyone. Just two questions for me as well. On the margins first, can you explain a bit the deposit growth strategy you have in Germany? This campaign targets what type of deposits, and what's your plan for the rest of the year on this? Still on the margins, you mentioned before, Tanate, that your replication portfolio was purely to replicate deposit behaviors, and you're not playing with duration or mix. Now you've shifted from 40/50 to 50/50 and now 55/45. How is that? I mean, are you still willing to actually pull that lever even further if the rates pressure intensifies to maintain your liability margin around 100-110?

On the capital return, just to follow up on Farquhar's question on reversing back, I mean, I don't want to be too cynical here, but if, let's say, the situation improved a bit better, this higher capital target is not also a bit to gather or retain some capital for potentially M&A, or is it purely macro-driven kind of uncertainty-driven? Yeah, I'll keep it here. Thank you.

Steven van Rijswijk (CEO)

All right. Thanks, Tarik. I'll take the one on capital and on the deposit strategy. Tanate will talk about the duration. On the deposit strategy, look, I mean, we have a great deal of experience on these customer acquisition campaigns. We've done this for decades. We know fairly well what to do at which point in time and what to expect. Therefore, we've seen that in Germany previously as well, but also in other markets that we deploy these campaigns. These campaigns basically then are aimed either at fresh money that should show an MPV, fresh money of existing customers that would show a positive MPV on a 6- to 12-month basis. If they are linked to new-to-customer banks, then they show a 2- to 3-year payback period.

In the end, the target, of course, is that we make these clients primary customers because then they will do more business with us at higher ROE levels. These campaigns are very targeted, very precise, very data-driven, which means that we continuously monitor what they do, how much money will remain in the bank. We have seen the success of that also in the past couple of years. That is how we go about that. You saw that this quarter, that we had a very successful campaign in Germany. In each market, we continuously look at and discuss where and how we plan these campaigns to get money in and get more customers to work with us because it drives scalability and it drives ROE. Tanate?

Tanate Phutrakul (CFO)

Yes. On duration, you're right. Basically, we manage duration on a basis of maintaining a stable balance sheet, right? That is what is our hedging goal. As interest rates start to decline sharply the last few months, we have also adjusted the duration to the anticipated client behavior situation that we have. As a side effect of that, by increasing the duration, it brings further stability to our income in 2026 and 2027.

Steven van Rijswijk (CEO)

On the third question, I forgot. Tarik, everybody is entitled to their own cynicism, but I can assure you this is only because of macroeconomic circumstances, nothing else.

Tarik El Mejjad (Financial Analyst)

Okay. Thank you very much.

Operator (participant)

Thank you. We'll now take our next question from Benjamin Goy of Deutsche Bank. Your line is open. Please go ahead.

Benjamin Goy (Managing Director and Head of European Financials Research)

Good morning. Two questions from my side. The first on loan growth. You mentioned a healthy pipeline in wholesale banking, but maybe you can speak a bit about how much more specific this has become and how much confidence you have in an improving outlook from here. Secondly, on fund launch short specifically, maybe you can explain again why a minority stake is the right amount of investment. Thank you.

Steven van Rijswijk (CEO)

All right. I think if you look at loan growth in a wholesale bank, look, what we do see is very healthy pipelines. I think that if you look at our wholesale bank, which has a good global diversification, but also a very good diversification in Europe with strong, typically top five lending positions in most of the markets in which we're active in Europe, which is 20 plus, then we can benefit quite a bit from, let's say, the investment push that Europe wants to give in infrastructure and in defense and in technology and also the plan that Germany has. It will always take a while for these plans to come to fruition. The pipeline is healthy. The question will be the conversion. Of course, there is uncertainty. We've seen that industry and consumer confidence parameters are relatively low.

We need to see what the conversion levels are, but we are confident that when they come, we are then a bank that will be able to benefit from it. It is just a matter of time when the uncertainty will lift. That is where we currently are. That will then result in a higher or lower conversion. On fund launch shorts, I mean, like we also said during Capital Markets Day, we want to diversify further, but also want to diversify our capital more towards a retail segment, which has more sustainably higher return levels. That is why we have a capital velocity program in wholesale banking, whereby we increasingly use all kinds of techniques and insurances and secondary sell-downs to reuse the capital more often in wholesale banking and to regrow faster in retail banking.

As part of this, with fund launch shorts, which is also a retail player, we have also moved part of our capital again into the retail banking space, which is exactly what we want to increase the weight of capital from wholesale to retail. This adds to it.

Benjamin Goy (Managing Director and Head of European Financials Research)

Thank you.

Operator (participant)

Thank you. We will now take our next question from [Taylor Lai] of JPMorgan. Your line is open. Please go ahead.

Taylor Lai (Analyst)

Yes. Thank you for taking my questions. My first one is going back to liability margins. I just wanted to understand a little bit with the actions, I mean, with the actions you've taken on deposit rates that lead to a total of EUR 1 billion. Is your target for the full year still EUR 1.3 billion, or do you think, I mean, how much more can you really get just to understand the moving parts within NII given the low rates? My second question is just on sort of cost of risk as a quality. I've seen you've increased your stage one, stage two provisions. If you don't mind just reminding us a little bit your assumptions macro-wise under IFRS 9 accounting. Thank you.

Steven van Rijswijk (CEO)

All right. I'll give the question on liability, the EUR 1.3 billion to Tanate and on stage one, stage two to Ljiljana.

Ljiljana Čortan (Chief Risk Officer)

Let me start. Thank you very much for the question. You've seen the asset quality in the first quarter has improved when it comes to all of the indicators. What we are specifically proud of is that the stage three ratio has decreased and specifically provisions for stage three have decreased specifically on the individual side. You're right. Stage two combined also with stage one amounts to EUR 98 million this quarter. It's the impact of several parts. First is correct, the macroeconomic forecast. When we do the macroeconomic forecast, we use the external unbiased scenarios and we update our models regularly in order to make sure that they are objective and that they are following the latest, I would say, outlooks. That's one. Secondly, you've seen in the first quarter differently than previously that there has not been significant overlays decrease.

That means that the risk cost as shown is in stage one and stage two are the real risk costs coming from the, as I say, macroeconomics, risk migration, and some model also changes. However, normalized, we do see the situation still below through the cycle.

Tanate Phutrakul (CFO)

Just on liability margin again, I think you go back to page 23 that shows the replication impact. I think a couple of points to add there. One is that the savings rate cuts that we have taken year to date, May 6, results in EUR 1 billion, but we did not explain further that in fact the term deposit rate cuts also has a positive impact on top of that EUR 1 billion. That is the first point to make. The second is that, as you know, in a number of markets, we are not the best pricer in terms of deposit costs.

Yet by our rate actions, our deposit volume continues to be stable or increasing. That gives us confidence. That is because of the granular levels of our retail deposits, which average around EUR 15,000 per person. The last point is that our blended cost of eurozone deposits for savings and term deposits is 143 basis points at the end of Q1. We do have room for further rate action if required. Every 10 basis point reduction means EUR 400 million annualized impact.

Taylor Lai (Analyst)

Great.

Operator (participant)

Thank you. We'll take our next question from Matthew Clark of Mediobanca. Your line is open. Please go ahead.

Matthew Clark (Managing Director and Senior Equity Analyst)

Hi. I have some questions on the replicating portfolio, please. Firstly, just to understand, you said that the shift from 50% to 55% invested over one year happened over the last six months. Can you be a bit more? Was it genuinely a gradual implementation? Because I wasn't aware in prior commentary that you'd said that it was moving. What duration have you or what maturity instruments have you been buying at in order to make that shift? What's the overall updated duration of the replicating portfolio overall now? I think it used to be 2.4, you guided, but presumably that's moved up as a result of this shift. Some commentary there, please.

Steven van Rijswijk (CEO)

All right. I give the questions to Tanate.

Tanate Phutrakul (CFO)

Yes. The shift to 55 is happening gradually over time. That is shifting with the forward curve coming down, right? The replication stretches over time. It has been gradual, not happening in one fell swoop over six months, okay? In terms of the maturity instrument that we use, it is a combination of using swaps to extend the duration and, of course, using our investment portfolio as a hedge. The average duration is about 2.4 years still, roughly, a bit higher.

Matthew Clark (Managing Director and Senior Equity Analyst)

Sorry. Can you just elaborate how you kind of moved, shifted out of the liquidity into the duration part by 5 percentage points, but it does not impact the average duration? I mean, it implies you have been buying at or around that kind of two-year maturity level.

Is that the right way to think about it?

Tanate Phutrakul (CFO)

Yes. I suppose in a way, we do what we would call barbell hedging. We have a significant part of our replication in the three-month bucket and then over one year, anywhere from over one year to 10-15 years, right? It is a barbell strategy. I think if you want to follow us, and by the way, we do the calculations for you on page 23 anyway, the average duration on the part which is more than one year is around four years, something like that. If you look at the curve around four years, you should get a sense of how accretive that is. As always, we reaffirm and we'll keep updating page 23 every quarter.

Matthew Clark (Managing Director and Senior Equity Analyst)

Okay. You were not selling 364 days and buying 367-day instruments in order to shift that?

Tanate Phutrakul (CFO)

No. No. No. We're not doing that.

Okay. Thank you.

Operator (participant)

Thank you. Our next question comes from Kiri Vijayarajah of HSBC. Your line is open. Please go ahead.

Kiri Vijayarajah (European Banks Analyst and Director)

Yes. Good morning, everyone. A couple of questions, if I may. On fees and the 24% growth in the insurance part of the fees, could we just have a bit more color? Which geographies, which partnerships, which specific products are driving that growth? Secondly, actually still on fees, the retail brokerage activity, the data looks pretty strong through April with all the market volatility. I guess we've seen that movie before. Does it feel like there's some sustainability there, or should we think of the kind of recent April as more of a blip in terms of retail brokerage and maybe some weakening as we go into the summer on that side of things? Two questions on fees, please.

Steven van Rijswijk (CEO)

All right. First of all, I think that on fees, what we want to do is to continuously increase the alpha. That also means that in the past couple of years, we have put in substantial efforts to not only have daily banking, but also to grow our investment product business and our insurance business. I am sure we are going to add a few more in the next couple of years. When it is the case, I will tell you something about that. One of them was insurance because that is good annuity income for our existing customer base. We have in all the retail markets contracts with providers. There are different providers that we work with. There are different structures we work with depending on the market.

We introduced insurance also for business banking in different markets, which in the past we did not have. It started out small a few years ago. Once or twice, I've made remarks about that we have relatively small insurance distribution fees. Now you see it's becoming quite sizable, and we expect this to continue. When we talk about retail brokerage, the first quarter, we had more and higher asset management, and we had more trades, and we had a higher number of people who are trading with us. That is now currently 4.6 million. I said in the capital markets day last year, it was about 4.2 million. Now we moved up to about 11-12%. It's good.

That still means that approximately 88% of our customer base is not trading through ING if they are trading. There is a lot of upside there. We continue to refine our products, improve and centralize our investment engine, improve our reporting, move to additional segments, also not only brokers, but also simple advice and personal advice. There are new brackets in that setting. We are confident in being able to further grow that, and that will support the fee guidance that we have given. We remain very confident on that.

Kiri Vijayarajah (European Banks Analyst and Director)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from Johan Ekblom of UBS. Your line is open. Please go ahead.

Johan Ekblom (Research Analyst)

Thank you. Can you just follow up on two things that we haven't spoken about? One is at the capital market days, we spoke about the use of significant risk transfer trades. Can you just give us an update on where you are, if there is anything, any impact in Q1 or where you are in terms of timelines there? I guess secondly, also just an update on the business banking rollout in Germany, where we are there, would be helpful. Thank you.

Steven van Rijswijk (CEO)

On business banking, I will say something, and I give the SRT question to Tanate. On business banking rollout is going well. We focus on the digital part of business banking. That means self-employed, SME. We also, with that, we have an associate proposition, but also a payment proposition that will go with it. That will, and that is, and therefore we gradually grow step by step, but still in the bigger scheme of things, it remains small. We are confident that we are going to be able to also realize a position in that market because there is a lot of untapped potential, especially on the digital side, where there is no other player really in Germany that rolls it out in a way that we are currently rolling it out.

Tanate Phutrakul (CFO)

We're still planning on doing an SRT trade this year. We're in the process of preparing for that. We expect that trade to happen in the second half of the year. In terms of size, I think we expect, subject to regulatory approval and market conditions, somewhere around a 10 basis point relief on quarter one in the second half of the year.

Johan Ekblom (Research Analyst)

Thank you.

Operator (participant)

Thank you. We will now take our next question from Anke Reingen of RBC. Your line is open. Please go ahead.

Anke Reingen (Banks Analyst)

Yeah. Thank you very much. Just two follow-up questions. The first is on the increase in your temporary increase in your target capital ratio, 12.8% to 13%. The sort of cautious stance that's underpinning this increase, what other business decision has it sort of impacted? Are you looking a bit more cautious on your lending investment spend, or where else does it sort of impact your operations or your thinking? Just in terms of April and the tariffs, given you are very strong in the corporate banking world, I'm just curious about what you're seeing from customers. Maybe a bit more cautious at the beginning of April, but are you seeing more demand for loans or cash balances in the last few days? Thank you very much.

Steven van Rijswijk (CEO)

All right. I'll take the question on customers, and I will give the question on where we are, where are we cautious, how do we look at, let's say, the circumstances on Ileana. If you look at our customers, look, I mean, there's two tails, if you will, or maybe even a few more. On the one hand, we have retail, which is 65% of our lending book. There you see that a significant part of that retail lending book is mortgages. If you then look at mortgages, we are active in markets which have low unemployment rates: Netherlands, Belgium, Germany, Poland, Spain.

You see, actually, in all of those markets, you see good growth on the back of low unemployment, on the back of the market restoring after, let's say, the start of the Ukraine war and the high interest rates that it brought with it, which are then coming down on the back of house shortages. As you see also depicted on one of the slides, we show a number of these developments that are supporting that. That's one. I'm on the retail side. Secondly, on the retail side, you see customer confidence relatively low, but we don't actually see that back in our payment volumes. We are one of the biggest payments providers in Europe. The number of payments that are being done or the volume of those payments remains strong. We can't see it in indicators there.

There is not so much to see on the retail side of things. What we do see in wholesale banking is that you saw the lending demand and the lending growth in wholesale banking was relatively subdued with a small decrease. Companies are a bit uncertain depending on the sector and the import tariffs that are being levied. You maybe see that there was a lot of quick demand in the first quarter in the expectation that these tariffs would come. That demand then goes a bit down at the end of the first quarter and into the second quarter. You see that in terms of production companies or transportation companies, there is a bit more conservatism in terms of investments. That is what we currently see. We do not see a big inflow currently in our restructuring departments.

That not, you see a bit of caution in further growth and investments being made on the wholesale side. Ljiljana?

Ljiljana Čortan (Chief Risk Officer)

Thank you for the question, Anke. I think Steven already gave some flavor to how we think. Maybe to add, we know the tariffs are not good for everyone, and there are clearly no winners in that game. They have several of the consequences. One we've seen in April, which was the spikes in market volatility. During that spikes, I think ING has weathered really strongly through it and with no extra demand for cash or non-honored margin calls or collateral calls. Everything was business as usual. Through our strict monitoring, we're going to ensure that in case of eventual future spikes, we do the same. The other consequence that the tariffs have brought are definitely economic uncertainty.

Here, our clients need a bit more time, and we need a bit more time to understand how it is exactly going to impact the economy and their business models. While we have dissected our wholesale banking portfolio depending on geographies and industry sectors, we have concluded that the direct impact of the tariffs would be limited based on the fact that we are well diversified into the economies that are less affected by the tariffs, as well as that we are well diversified in industry sectors that are under less pressure. That is all confirmed also by strong financial flexibility of our clients. As you know, approximately 84% of our wholesale banking client base is investment grade, and two-thirds of our exposure are fully or partially collateralized. Also, the portion of the clients in our portfolio that have strong exports to the U.S. is limited.

All of that gives us, I would say, current confidence that the direct impact from it will be very limited. However, we have to look into when and how the conflicts are going to be resolved in order to understand longer-term impacts on our clients.

Anke Reingen (Banks Analyst)

Okay. Thank you very much.

Operator (participant)

Thank you. Our next question comes from Namita Samtani of Barclays. Your line is open. Please go ahead.

Namita Samtani (Equity Research Analyst)

Good morning, and thanks for taking my questions. My first question, is there a correlation between the mobile customers only growing 174,000 this quarter and the amount of deposit cuts you've done? I'm just curious, given the 1 million target of mobile customers you have this year and whether you would sacrifice on the mobile customers' target in order to cut deposit rates and defend net interest income. Secondly, I just wanted to make sure the 25 basis points deposit cut in Germany, which takes place on the 7th of May, is that included in the EUR 1 billion deposit cost guidance or not? Thanks very much.

Steven van Rijswijk (CEO)

All right. I'll take the question on customers and Tanate on the 25 basis points cut in Germany. Is there a correlation? No, there is no correlation. If you look at the first quarter, typically it's slow. If you look at the first quarters in many of the previous years, that's also the case. People come out of, let's say, the festive season. Generally, there are less products being sold in terms of new customers. Last year was about 180,000. Now it's about 174,000. That statistical difference is small. We're still well on our way to reach the 1 million for this year.

Tanate Phutrakul (CFO)

Just to confirm, the second rate cut in Germany of 25 basis points is included in the EUR 1 billion.

Namita Samtani (Equity Research Analyst)

Thanks very much.

Operator (participant)

Thank you. Once again, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Kindly be reminded, this is limited to a maximum of two questions only. Thank you. We will now take our next question, a follow-up from Farquhar Murray of Autonomous. Please go ahead.

Farquhar Murray (Senior Analyst)

Morning all. Just two quick follow-ups. Just on the Dutch mortgage market, one Q was notably strong. I just wondered whether you saw any moderation there in the second quarter so far. Also, can you just give an outline on how mortgage pricing on new business compares to the backbook? Secondly, one slightly technical question on the new commercial NII disclosure, which is a really positive improvement, and thanks for that. It included a reallocation shift of EUR 160 million, I think, on full year 2024. I just wondered if you could give the one Q 2025 impact and perhaps how that compared Q1Q. Thanks.

Steven van Rijswijk (CEO)

All right. I give the reallocation question to Tanate. On the Dutch mortgage markets, I think you have two sub-questions. The one is, do you see good commercial momentum continuing also in the second quarter? The answer is yes. We do see continued good momentum also after the first quarter. The margin versus the backbook, I think that the margins are a little bit higher on the client side. The only pressure that you get is, let's say, not from the backbook, but the fact that people are extending their mortgages. Therefore, you partially refinance the backbook, and that gives a bit of pressure. The margins for the new productions are higher.

Tanate Phutrakul (CFO)

Falco, just in terms of commercial NII, I'm glad you like the new way we present our commercial NII. You're right that the reclass is around EUR 160 million because of our cash pooling reclassification. I think EUR 160 million is a good basis for which, if you're doing your spreadsheet for 2025, that's a good number to use.

Farquhar Murray (Senior Analyst)

Okay. Great. Thanks, Anne.

Operator (participant)

Thank you. Our next follow-up question comes from Matthew Clark of Mediobanca. Please go ahead.

Matthew Clark (Managing Director and Senior Equity Analyst)

Hi. Just very simplistically, given commercial NII was up first quarter versus the fourth quarter, given your guiding liability margins flattish for the next quarter, can we draw the conclusion that commercial NII has now troughed and should be drifting up from here? Thanks. That was it.

Steven van Rijswijk (CEO)

Tanate?

Tanate Phutrakul (CFO)

I think, again, I would only describe the moving parts, right? It depends on what the forward curve will do. It depends on our volume growth, lending margin, sorry, lending volume, liability volume, and depends on any further rate action that we do, right? Those are still the moving parts. I think looking at where we see now, we do see stability. We see a stabilization of our commercial NII and our NII liability. We should grow from there.

Matthew Clark (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. There are no further questions in queue. I will now hand it back to Steven van Rijswijk for closing remarks.

Steven van Rijswijk (CEO)

Yeah. Thanks very much, Laura. Again, we had a strong quarter, the first quarter, with good commercial momentum. We are confident about our outlook for 2025 and 2027 with our targets. We continue to go at it. With that, I thank you very much for your time, for your questions. I wish you a very good Friday. I'm looking forward to speaking to you again soon. Thank you.

Operator (participant)

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.