ING Groep - Earnings Call - Q2 2011

Transcript

Speaker 1

Okay, good morning. I hope you can all hear me. Not very well? Is the sound okay? Yes, it's coming on. Okay, good morning. For the second quarter ING earnings, we reported an underlying profit of €1.528 billion in the second quarter. That was up 19.7% from a year earlier. The bank, solid in performance, at €1.3 billion. Results were benefiting from healthy interest margins, from better client balances, from lower risk costs, and also an improvement in expenses when you compare that with the first quarter and Q4 of last year. Bank results were negatively impacted by charges we took on impairment charges on Greek debt. There were €187 million in the second quarter. Insurance, good performance, good, better performance as well, a significant improvement compared with last year. Operating results were better by 83%, ended up at €690 million, with a pre-tax result of €673 million.

Also here, we took a charge, an impairment charge for the Greek bond exposures we have, sovereign debt exposure of €123 million. The total charge we took on Greek debt exposure was €310 million for the whole group. The ratios we maintained were strong, even after repaying the €3 billion to the Dutch state, we ended up with a core Tier 1 ratio of 9.4%. If you would calculate what the impact would be of selling ING Direct US, plus the real estate business, RIME, plus car lease, all these things were happening in the second half of this year, then on a pro forma basis, the core Tier 1 ratio at this moment would have been 10.7%. Also, the insurance company, a strong solvency ratio, up to 252%, which I think is a very respectable number.

When you look at the, maybe a little bit of background, where we are in the economic picture that we see. On the left side, on the top, you see consumer confidence. On the one hand, helped by the labor market, which got a little bit better. We saw a slight increase in consumer confidence, but the increase was really marginal. We see also here the negative effect of higher commodity prices, fiscal tightening, and the debt crisis in the eurozone is also dampening confidence here. I think when you take it a little bit further, I believe the latest update is that the sentiment has turned more negative. The purchasing managers' index, always a good index on what's happening in the business community, is a very timely indicator for that part of the economy, but dropped, both in the U.S.

as well as in Europe, but still above the 50% level, which means that the economy is still growing. The indexes for equity markets in the U.S. and the eurozone were all moving in the wrong direction. In the eurozone, more than in the U.S. The markets in Europe are more volatile, the equity markets, on the downside than they are in the U.S. Of course, important for the financial sector is the development of interest rates. You see here that the yield curve, the difference between the long-term and the short-term rates, really has flattened in this period, both in the U.S. as well as in the eurozone. In the eurozone, it even decreased at a lower pace than the long-term, which was the same in the U.S. All in all, I think it's an environment that is indicating that the situation is rather uncertain.

Our performance, here you see the results spread out for the group, the bank, and the insurance company. On the left side, the bank, in the middle, insurance, and then the group. I have already mentioned the numbers. I'm not going to repeat it, but I think you can see that, a good performance, and if you add back in the impact of the Greek impairment charges, the numbers are even better than that. Looking at the exposures in Southern Europe, European sovereigns, what you see here is basically our exposure as of June 30. You see here that we have taken already the charge, the impairment charge for Greece, already in these numbers. When we started the quarter, we were at $1.4 billion. We got a reduction of $200 million, so $1.2 billion.

Then we took a charge for $300 million, both in the bank, together, $187 million in the bank and $123 million in the insurance company. That's reflected in the gray numbers, the $0.4 billion and the $0.3 billion. The reval is still what is left in the revaluation reserve on the bonds that are beyond the maturity date of 2020. They still have some valuation because the bonds before 2020, we have impaired in Greece to market value. The market value as of June 30 is the level that we wrote them down to. Looking at the ambitions that we set in 2009 for the bank, we had a clear ambition program. I think we're making very good progress relative to that ambition. In fact, we have already reached the level of underlying income that we had set for 2013 already now. We're not there yet with the cost-to-income ratio.

In the 57, is included also the impairments for Greece. If you eliminate the market impact, it gets to 54.3%. Our long-term ratio, and our long-term target continues to be the 50% level. We want to go to that level. We believe we need to be there in order to be competitive in the marketplace. Risk cost normalized. We're lower in this quarter than last year, a little bit higher than the first quarter. Basically, we anticipate that the remainder of this year will show that they will be, on average, lower than the average for last year. Then return on equity. If you take the numbers that we projected to, in the ambition level in 2009, we had taken 7.5% as a Q1 ratio. Today, we are already at 10%, huh, mind you.

We are now seeing, if we had taken that level, our return on equity would be 18.6%. If you just take it based on as equity is right now, it is 12.7% in the first half of this year. Same for insurance. Continued good progress also on the ambition plan that we presented in 2010. The investment margin objective is that it will go to 105 basis points, 105 basis points. Today, it's at 99. You see that the administrative expense ratio is down to 38.9. The target is 35. That is still the target. Sales were not exactly meeting sales, but in many areas, we are. You don't see it. For instance, in the U.S., we had relatively low sales, but it isn't a product that has very low margins.

The product with the higher margins in life and in pension services really did well and had gross levels higher than 10%. You need to look at the composition here a bit. Return on equity, it's getting to levels that we have set as targets. If you want to do an IPO, we need to be in the range of the, in about the 10% level. Not exactly set the targets for that one, but we're getting to levels where IPO becomes a possibility. Looking at the Q1 ratio for the bank, if we start December, it started with 9.6%. We had the payback to the states. We paid the government $3 billion. That goes against the ratio. We had income that added back to the, or to the, to the Q1, 0.7%. We ended up at 9.4.

You can see the impact if we had already, at this moment, been able to complete the transactions in the bank that we have set for the second half of this year. You can see that we have been quite busy in our restructuring program that was mandated by the European Commission, and that we have really streamlined our portfolio of businesses quite a lot. You see that we divested in the insurance area and the preparations for two IPO, but that we have divested now a Latin American business. We divested U.S. ING Direct. We sold that to Capital One, and we are working on divesting Westland Utrecht and exploring different types of options for that. Also, you can see what we have done before in 2009, 2010, and in 2011. It's quite a list of activities that we have undertaken, and still a few to close.

The real estate business partly has closed. We have closed the Clarion business, Clarion Partners, and the Clarion Investment, Securities Investments that have closed already. We still need to close the remainder; that will happen sometime in the third quarter, fourth quarter. We expect car lease will have to close in the second half, and also ING Direct U.S. Our separation, this is a slide that I don't have in this one. Does it? No, but I can talk to it. You see here the organization changes that we have announced today. We have Eric Wijhe, our Vice Chairman of the bank, is retiring, effective October 1. Koos Timmermans, you see Koos sitting here, Chief Risk Officer, will become Vice Chairman of the bank.

Koos will, in particular, be focusing on the new regulatory environment and how can we strategically and operationally put ourselves with the strongest balance sheet possible in that area. That is, I think, one of the main challenges that we will have going forward in a more and more complex regulatory environment. Then Wilfred Nagel will replace Koos as Chief Risk Officer. He can already be active in the Management Board for the bank as well as for the insurance company. In the meantime, until we have shareholder approval, of course, he will attend all the meetings, but officially then Patrick, Patrick Flynn, will have responsibility for the risk at group levels, which, you know, are not really that significant. Most of the risk areas are in bank and in insurance activities. When I look at the separation process, that is really on track. Yeah, we missed this one. Okay.

Really on track. We have basically done what we needed to do to separate bank and insurance. Those activities last year that were temporary solutions are now being made permanent. We hope that for a big, significant part, it will all be done by the end of the year. There will be some activities still next year, but most of that will be completed this year. We expect that that will cost another $200 million this year. So far, we have spent $50 million or $51 million. Of course, we need to get ready for IPOs. That will have some expense as well. So far, we have spent $10 million, but we could spend something like $50 million in that order of magnitude. Now let's go to the bank. You see here the numbers for the bank. Again, I don't want to dwell on them.

I already mentioned most of them. The addition to loan loss provisions is $370 million, a little bit higher than Q1, mainly in the area of SME and retail in the Benelux, but also some significant files we included in our real estate in Australia and the Netherlands. As we indicated, we expect that the remainder of the year will be more or less below the level that we had for the average for last year. Interest margins held up well, stayed at 142 basis points. Good numbers, and ING Direct even increased the interest margin. Our total balance sheet is about $940 billion for the bank, and you can see at the bottom the development of the interest margin in various components. I must say we're very pleased with the way that margins have held up so far. Also, pleased with production. We did more mortgages.

We did more lending in Q2. That is reflected in the mortgages and the corporate lending on the left side. We also took in more money. Our customers put more money with us, and we're very grateful for that, of course. More money in the Netherlands, more money in Belgium, but also in our ING Direct operations. Expenses declined. They declined compared to Q1 and Q4. If you relate them to the income level, the cost-to-income ratio went up. If I eliminate, let's say, the Greek impairment charges, they are at 54.6%. As I said earlier, we still want to maintain our target for 50% at the end, going forward. Risk cost at 47 basis points. You can see the development on this slide. Again, already mentioned that, so we don't want to dwell on that too long. Also, non-performing loans, stable at 2.1%.

The two files that we, the two areas that I mentioned earlier, the SME segment in retail, Benelux, and the real estate in mainly Australia and in the Netherlands were the main reasons for the increase in real estate. Plus, we had some areas in, let's say, leasing and financing, leasing and factoring, that went up as well. All the others declined. Quickly to insurance. Very happy here with the continued performance increase that we see here, even though some of that was a little bit exaggerated by some one-offs, but the trend line is very positive. The underlying result before tax at €673 million, I think, is a very good number. Included in these numbers are the impairments for Greek bonds of €123 million.

We also had a special charge in the Netherlands for €109 million in what we call the separate account, a number of pension contracts that sometimes create high volatility, which is quite difficult to hedge and to manage. Looking at our investment spread, went up to 99 basis points. That is a four-quarter rolling number. If you look at it in the quarter, went even up to 122 basis points, but it got a one-time kicker. If you eliminate that in the quarter, the number would have been 115. I think we continue to look for 105 as the objective that we have set for this part of our business. Also, worth noting that the Latin American deconsolidation, they're no longer now consolidated.

They are now included as a one-line item in discontinued operations that had an impact of about 3 basis points decline in the investment spread as we calculated here. The next slide is the cost-to-income ratio already mentioned. The next one is the new sales. You see that sales, I mentioned that earlier, is down as you compare that with a year ago, but you need to be really careful. In some areas like Eastern Europe, it's very easily explainable. Poland and Hungary had new regulations, in particular for pensions, pension management that curtailed our sales and the assets under management. If you look at other areas like the U.S., it doesn't look like we increased sales, but the decline was mainly in product areas with relatively low margins. Not too unhappy, but this is an area that has our special attention.

When I look at the solvency, solvency is good in our European activities, 252. If you look at regulatory capital in the U.S., it's even at almost a 500 level. Financing-wise and capital-wise, I think we're well positioned in insurance, which we have to, because once you go to the market and want to do an IPO, it's really necessary that you have the capital base to support yourself. That is what I think we have to say, and we're very happy now to take your questions.

Speaker 0

Thank you. Is it working? Yes.

Speaker 2

Yeah. Sorry.

Speaker 0

Good morning. I have two questions. The first one is, could you elaborate a little bit more about divesting Westland Utrecht Bank? What are the options and the chances?

Speaker 1

Yeah. Westland Utrecht is, at this moment, the way markets are, not an easy divestment. We have tried to, and have dealt with a number of potential candidates, but quite candidly, that potential was, and the number was not very high. We had more potentials than at the end, we had really people being very serious and interested in it. We're now looking at alternatives. I cannot give you more detail than say we are looking at alternative ways to deal with that.

Speaker 0

Can you say what kind of alternative?

Speaker 1

No, not yet, because there are a number of alternatives that are different. At some point, we may have to go back to the European Commission to discuss that with them. I don't think it would be very smart to discuss that here before we had a chance to do that with them.

Speaker 0

Okay. You hope that the European Commission can help you with this problem, or is that?

Speaker 1

Yeah, we still have to do it. It's a requirement under the mandate. It's a restructuring program that we had from the Commission. One way or the other, we need to deal with that. If you don't do it the way we had in mind, I think at some point we need to go back and discuss that with them, what it is that we will be able to do. That's not so simple.

Speaker 0

No, I understand. Okay. My second question is, the board changes with Wilfred Nagel and Koos Timmermans. Is it in preparation on some next steps, or?

Speaker 1

There is always, everything is always in a long-term setting, but this is the one setting that you look at. There are no guarantees. There are no commitments. This is a one-step event. I think Koos is the right person at this moment to take on the challenges we have in the bank. I must say, Eric Wijhe has done a fantastic job. Koos is very well qualified to take on the job. In particular, the way we see regulations coming, and already have been announced, I think is a very interesting position for him to take that charge.

Speaker 0

Okay. Thank you.

Speaker 2

Hello. Cor de Horte van het Dagblad. Also a question on a follow-up question on Westland Utrecht. As I understand, if I understand correctly, during my holiday, KBC, your Belgium competitor, did get a deal with the European Commission on its divestment program because of the new Basel regulation. Is that what you are aiming at as well?

Speaker 1

I cannot give you any more detail than to say that what we have tried to do is probably not going to work. We are looking at alternatives. Before we can disclose them to you, I think we need to have a discussion with the European Commission. I don't even know what KBC exactly did, so I can't comment on what they did and how that relates to us.

Speaker 2

They managed to get an alternative for their investment divestment program. Could you elaborate a bit more on your quest with Westland Utrecht? There were some candidates here. You talked to them, but did they make any final offer and you refused it, or didn't it even reach that point?

Speaker 1

I think this is a very difficult environment. The Westland Utrecht, an asset sale. At this moment, under new regulatory requirements, Basel III, there are not really that many financial institutions that are willing to just do an asset transaction because they're looking at the funding part as well. That makes it quite difficult for them. It's a difficult sell.

Speaker 2

You said not many, or who? What's at least one?

Speaker 1

I can't tell you. It's a difficult sell is all I can say.

Speaker 2

Okay.

Speaker 1

It's probably not going to work the way that we outlined in the first place, but we're still looking for alternatives, yes.

Speaker 0

In the agreement with the European Commission, you have to fund it for two more years after the sale. Is that correct?

Speaker 1

Yeah, that's correct. Yeah.

Speaker 0

Would that be negotiable to do it longer to help a buyer?

Speaker 1

I cannot give you an answer there. That all depends on the transaction, the way it will evolve. It is still further to be discussed.

Speaker 0

Thank you.

Speaker 2

Here, Gilbert Krager Rogers. In this European court case against the European Commission, what would you really like to see changed in the restructuring plan and the conditions that the European Commission has demanded?

Speaker 1

The court case has to do with three items. One is that we believe the calculation of state support is not correct. In particular, the calculation that when we paid the government early and were able to do that at a discount compared to the 50% premium, we don't think that that discount reduction was additional state support. I think we have the same opinion by the Dutch state and the same opinion by the DNB, who has joined in the proceedings at the European Court. The other two items are related to the restrictions we have in what we can do in markets, plus that we have a criteria for we cannot participate in any acquisitions. In particular, the market criteria we find overly, in fact, redundant and not really that effective. Number three is the whole package.

When we calculate what we had to do compared with what we think others had to do, and the way that the total support was calculated, we feel that, first of all, mistakes were made, and secondly, that the restructuring we had to do was not proportionate to what we had received as state support. We are waiting for an answer on those questions. Until we have that answer, there's nothing I can do.

Speaker 2

If the court would agree that the amount of state support is not as high as the European Commission has judged it to be, you may have to restructure less. I mean, would that open then the possibility to not sell, for instance, Westland Utrecht?

Speaker 1

I can't tell you, and I don't want to speculate on what the court might say. I think we need to first wait for what the court will say before we can take any further next steps. I don't want to speculate on that. We have no impact on the court case, so we need to wait. No, I cannot answer that because why would I say what we would like to do in case something would happen that we don't control? That doesn't make any sense. Let's wait for the answer until we have the next step.

Speaker 0

I have a question with regard to the measures taken against one of your competitors. I was wondering if you're very busy welcoming ABN private banking clients.

Speaker 1

Koos, you know that. You will be the Chief of the bank.

Speaker 2

I still have my own account with ING. I mean, that's the first thing. In general, I think that is something, you know, this is the ABN Roe's issue, and they need to clarify that, yes, customers can leave there free. I mean, you know, in the end, we see just normal competition, and we just like to compete on service and do things better than they do. In that way, we hope to attack their formidable market position. For us, that's a sort of business as usual. You cannot convince a client just based on one action. You got to deliver ongoing. That is what we have to work on.

Speaker 3

A question on this week's markets turbulence around Italian and Spanish government bonds. ING has a considerable position in those countries. Can you rule out that ING would need further state support in the near future?

Speaker 1

I think overall, Cor, if you look at it, yes, we have our positions in terms of Italy and in terms of Spain. Let's pick even the ABA stress test as an example. What you see in there is, let's first take a market which is under stress for two years, and you end up with a certain core Tier 1 ratio. If you would, on top of that, take a sort of a hit because of a restructuring of Spain or Italy—not that I say that is my base case—but if you would see it, then you see that still our capital levels are sufficient. That is where the market has made the calculations on. No, I don't want to connect something in Italy or Spain in terms of bonds, connect that to renewed state issuance. I would see that as way too far.

Speaker 3

In addition to that, it also applies to the covered bonds position of ING Direct in Spain. In May, you said you felt comfortable with the risk for that. Does it still apply, does this opinion still apply?

Speaker 1

I think overall what you see there, if you look at the covered bond position, those are bonds which are basically covered by mortgages, and you have a preferential claim as compared to the deposit holder and as compared to senior debt, rated at, for 83%, at the triple-A level. If you look at the underlying collateralization, then you still see that all these covered bonds, they still have more than 125%, their natural threshold of mortgages backing our lending to those institutions. In that sense, not a lot has changed in the real economy, for making any other statements on the covered bonds.

Speaker 3

One more question from Finnish here, the Finisher of the Dutch Plat then. It's on LTA. I repeat that question every time I'm here. Could you remind us what is the latest state of play? What is the credit, what would the credit loss have been in the last quarter? What is the market value of that position?

Speaker 1

Normally, I always give you an exact answer. At the same time, some things have happened with the LTA, as you know, because part of the portfolio has gone to the buyer of ING Direct US. Meanwhile, we have given a counter guarantee to the state. I think if you look at what happened in the market on the LTA side, a few comments. Overall, you see prices of LTA have edged down a bit. I think they were at 66 in Q1, and right now, they're at 63. This might also have to do something with the fact that we had a seller in the U.S. market, and that was, I think it was the AIH auction process, and that has been stopped for the moment. That is more on the market prices.

If you then look at what is happening with the underlying performance, overall, you still see something that is that the credit enhancement of this portfolio is still somewhere at around 11.3%, pipeline losses. The backlog is still the 31%, and that is approximately at the levels at where it was the previous quarter. I see underlying not a tremendous amount of change. I see the prices, however, so they have basically come down with 2 to 3%.

Speaker 3

Okay. One very last question on payback of state aid. If I remember well, you announced in April that you were trying to pay back in the next 12 months or so the remainder. Given that you did some extra selling of assets, asset sales, what is the latest update on that? Could it be done quicker?

Speaker 1

First of all, the transactions still need to close. They haven't closed yet. The transactions will release capital, so that's the good news. We need to be, I think, also looking at the circumstances. Our plan is to do it sometime in May next year, around that time. That's the plan, and we will watch very carefully what happens in the marketplace and how the economy and financial markets develop. It's the intention still. It hasn't changed. Earlier is not possible because we still need to collect, let's say, the funds, plus a big part of what we plan to do as the Dutch state is coming from earnings internally generated by the bank. That needs to be done as well.

Speaker 3

I see. Paying back would cost about 1.3% or so of core Tier 1?

Speaker 1

Yeah, that's about right. 135 basis points, correct? Yeah, yeah.

Speaker 0

I have one further question on the Greek impairments, if I may, just to make sure that I have it completely right. Maybe you've already mentioned it, but what's the haircut in %?

Speaker 1

Perfect. We compared it to market value, and there's a range of bonds. These are the bonds which mature up to 2020. The price we compared to was the prevailing market price at 30th of June. If you blend it all together, it's about 35%, 36% if you take the impairment charge of €331 million over the nominal of the bonds that were outstanding to 2020, which is about €850 million. It's around, as I say, 35%, 36%.

Speaker 3

Question from a Finnish, here at the Dutch platform. My name is Geert A. Wijnhoven. About the underlying cost-to-income ratio, a target of 50%, is that, does it include financial markets' impacts, or is it,

Speaker 1

No, that is not including financial market impacts. The best comparison is when you look at that chart, you see 54%. That is the comparable with the 50%. If you look at the 54, you have seen some increases there, mainly related to regulatory requirements, also related to a number of people that we have added, and to some pension and employment expense. Pension expense because the mortality rates were adjusted, and that has an impact on your pension expense. That is the, but we, I've also said it's a long-term objective, the 50%. From time to time, we will have some blips. We are not going to stop the investment we need to do in the franchise. We want to do a good job for our customers and provide them with excellent quality services. We will continue to invest in the business in order to do that.

From time to time, you may see that we are not there, but the long-term trend should be to that 50% level.

Speaker 0

You have this sheet about the economic environment still very uncertain. I was just very curious, how do you see the next month, year?

Speaker 1

Next month?

Speaker 0

A year.

Speaker 1

If you look at what is happening today in the U.S. markets, the indications in the U.S. are that the economy is slipping again this quarter. If you look at Europe, the indications here as well are not really that strong. In fact, the optimism that we had in some parts of the economy in Europe has been toned down here as well a little bit. It is maybe not to be expressed in big numbers, but the overall inclination and the overall feeling is rather weakening more than strengthening at this point.

Speaker 2

Hi, Matt from Dutch Bank, Dow Jones. Just to follow up on the issue that's dominating Europe or the world maybe now even, the sovereign debt crisis. There are many uncertainties, and everyone is looking for a solution. There's been a lot of criticism on the bailout package for Greece that was agreed two weeks ago, saying that banks did not tell you that the hit they're taking on their exposure is not big enough and that it doesn't really solve Greece's problems. Now the focus is shifting to Italy and Spain. I would just like to know what, from your position, also being a member of the International Institute of Finance, which has been negotiating parts of this package, what should happen now? What should Eurozone leaders do? What is the responsibility of the financial sector in Europe?

Speaker 1

Yeah, it's a complex question. I think if the answer was very simple, you don't need me to give the answer. I certainly don't want to pretend that I do know the answer. It's rather complex. What you see is that the decision-making process in Europe, if you compare that with how quick markets react, there is a big gap between the two. Markets want quicker decisions, want more clear decisions than I think the political environment in Europe can deliver at this point. That is worrisome because that is not easily fixed. I think markets were also looking for more aggressive undertakings than they have seen. Here, you have to deal with many different countries, but also within the IAF, you have to deal with many different types of financial institutions.

Bringing that all together into one package is not an easy part, but I believe that we have made a serious effort to bring, with the best possible intentions at that time, Greece to a more reasonable position than it had before and with a chance to rebuild the economy again. I think I still believe that is still the case with the package that was delivered. No more? Okay. Thank you very much, and have a great day.