ING Groep - Earnings Call - Q2 2025

Transcript

Operator (participant)

Good morning. This is Saskia welcoming you to ING's second quarter 2025 conference call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking 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)

Great. Thank you very much. Good morning, everybody. Welcome to our results call for the second quarter of 2025. I hope that 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. This second quarter started with sharp market volatility as well as macroeconomic and geopolitical uncertainty. In that context, we are pleased with our strong results, which we will discuss in today's presentation. We have continued to successfully execute on our strategy. I will start with sharing some highlights of the progress that we're making on the priorities that we set on our Capital Markets Day just over a year ago. Thereafter, Tanate will walk you through the quarterly financials. As always, we will be happy to take your questions at the end of the call. Now, let's move to slide two.

This slide illustrates our continued strong growth trajectory in the second quarter. We grew the mobile primary customer base by more than 300,000 customers, which underscores the strength of our offering. With growth of more than 1.1 million mobile primary customers in the last 12 months, we are doing well compared to the target that we set at Capital Markets Day. We also recorded significant growth in our loan book. Net core lending in retail banking grew by a record of €11.3 billion, which was again mainly driven by mortgages, while we also support our clients with additional business lending and consumer lending. In wholesale banking, net core lending growth was GBP 4 billion as we financed more working capital and increased our short-term trade-related financing. The amount for long-term corporate loans has remained subdued in the current uncertain macroeconomic environment.

Net core deposit growth was over GBP 6 billion, also driven by retail banking, which benefited from the seasonality of holiday allowances. In wholesale banking, we continued attracting deposits in payments and cash management and money markets, but this was more than offset by lower short-term client balances in our cash pooling business. With 7% annualized growth in customer balances in the first half of the year, we are well on track to reach our target of 4% per annum. On the P&L side, our focus on further diversifying our income streams is yielding solid, structural changes to income composition. Fee income increased by 11% versus the first half of 2024 and now makes up almost 20% of our total income. We are confident that we can grow at the higher end of our 5%-10% range this year and confirm our GBP 5 billion fee income target for 2027.

Our four-quarter rolling average ROE was 12.7%, and also there, we have improved our outlook for the full year. We continue to support clients in their sustainability transitions, and with the volume of sustainable finance mobilized, rising 19% from the first half of last year to GBP 68 billion. Now we go to the next slides, where I will give more insight on customer growth. On slide three, we show that we have significantly increased the pace of customer acquisition in the last few years, which is clear evidence of the appreciation of our products and services. Over the past 12 months, our customer base has expanded by almost 1.2 million customers, and we are currently serving more than 40 million private individuals globally. Customer acquisition is a key driver of future value, as it also leads to a growing mobile primary customer base.

Cross-selling products and converting customers to mobile primary customers is most successful in the first year after onboarding, a period which we call the honeymoon phase. However, also after this honeymoon phase, our customers continue to buy more products from us and choose us as their primary bank. On the next page, I will explain why we focus on increasing our mobile primary customer base. Now we move to slide four, and there you see on the left-hand side of the slide, you see that the number of primary and mobile primary customers is increasing. At the end of the second quarter, more than 41% of all of our customers chose ING as their primary bank. These mobile primary customers buy more products, show lower attrition, and generate higher revenues.

We see significant upside to further increase conversion rates, especially in countries with a relatively low conversion rate such as Germany and Spain. This also drives our focus on broadening our product foundations. The second quarter growth in customers also resulted in further growth in customer balances, and as we show on slide five, average customer lending balances have increased significantly, especially in the last 12 months. This growth was fully driven by retail banking and mortgages in particular, which is in line with our strategy to allocate more capital towards this business line. Average customer deposits have also risen considerably since 2024 due to good momentum in both retail and wholesale banking. This growth in volume has helped offset the margin pressure on NRI in recent quarters and will be a key driver for value going forward.

On slide six, we recap how our strategic execution has also enabled us to consistently deliver value for our shareholders. We have distributed cash dividends in line with our distribution policy and have been executing share buybacks for a number of years now. In total, we have distributed close to GBP 30 billion since 2021, including the announced interim dividend over the first half of 2025, which will be paid on the 11th of August. As a result of these distributions, we have consistently delivered a yield of more than 15% in the last few quarters. This is significant, but even more impressive given the increase in our share price over the same period. Going forward, we remain committed to generating a healthy shareholder return, and we will update the market with our third quarter 2025 results. Now we go to slide eight. We go to the outlook for 2025.

Before going to the usual outlook and target slide, I would like to give more details on the expected development of commercial NII going forward. In the third quarter of this year, we expect commercial NII to be roughly stable, driven by the continued impact of the stronger euro and increase thereafter. Overall, we forecast commercial NII in the second half of 2025 to be higher than the first half, and the increase is expected to be driven by continued volume growth as margins are expected to remain stable for the remainder of this year before gradually increasing in 2026 and 2027. I move to slide nine, where we show our updated outlook for 2025. I would like to reiterate that we are confident in our ability to continue progressing on our targets, supported by the strong results in the first half of the year.

We have already grown the number of mobile primary customers by almost 500,000 this year and are well on track to reach our annual growth target of a million in 2025. Fee income growth is expected to come in at the higher end of our 5%-10% range, which helps to offset pressure from FX on our commercial NII. As a result, we confirm our outlook for total income and expect it to be roughly stable compared to 2024. Proven expense management remains a priority, and we're taking proactive measures to ensure we continue to operate efficiently while also selectively investing for growth. As such, we now forecast total expenses to end up at the lower end of the range we gave earlier, including incidental items recorded in the first half of 2025. The outlook for CET1 ratio remains unchanged for the year at 12.8%-13%.

Considering our improved outlook for fees and expenses, we've also increased our outlook for ROE this year, which we now believe will be around 12.5%. I will hand over to Tanate, who will take you through the second quarter financial results in more detail, starting on slide 11. Tanate.

Tanate Phutrakul (CFO)

Thank you, Steven. I would like to start on slide 11, where we show the development of our total income, which increased further compared to the previous quarter. Commercial NII was supported by the repricing of customer deposits and continued volume growth, which almost fully compensated for the impact of the lower ECB deposit facility rate and a stronger euro, which Steven alluded to earlier. On a sequential basis, the appreciation of the euro had a GBP 37 million negative impact on the commercial NII. Fee income increased significantly and grew by 12% year on year. Most of this growth is structural, which is also why we expect our expectations for the full year have increased.

Lastly, our other income, which is a combination of other income, investment income, and other income, was supported by good results in financial markets, treasury, and higher income related to our stake in Van Lanschott Kempen Bank. Now let's discuss slide 12, where we show continued growth in customer balances. We recorded another quarter of strong commercial momentum, particularly with our retail banking business. Net core lending rose by GBP 15.4 billion, driven by record growth in retail, which grew by over GBP 11 billion. We continued to do well in mortgages, grew the loan book in most of our markets in the second quarter. We also saw an increase in business lending portfolio, notably in Belgium, the Netherlands, and Poland. Wholesale banking also grew net core lending, driven by working capital solutions and short-term trade finance-related financing. Demand for long-term corporate loans has remained subdued due to the ongoing economic uncertainty.

On liabilities, we saw core deposits increase by more than GBP 6 billion this quarter due to a strong performance in retail banking, which benefited from the payment holidays allowances. In wholesale, growth in PCM and money market was more than offset by lower short-term balances in our cash pooling business. On slide 13, you can see how commercial NII was resilient. Liability NII was affected by the pressure from lower ECB deposit rate and the full quarter impact of the successful promotional campaign in Germany launched in the first quarter. These effects were almost fully compensated by repricing of customer deposits and strong volume growth. I'd like to note that the liability margin would have been stable without the impact of the German savings campaign. Lending NII was impacted by the appreciation of the euro relative to other currencies, but still grew versus the previous quarter, supported by volume growth.

The lending margin continued to be affected by the mix shift towards a more profitable retail business, with significant growth in mortgages, which have a lower lending margin but a higher ROE. I will give more insights on this in the next slide. The progress on our strategy to allocate more capital towards more profitable retail banking business is visible on this slide 14. At the time of our capital markets day, the distribution of capital between the two business lines is roughly equal, 50/50. We set the target to change this to 55 retail and 45 wholesale by the end of 2027. By the end of the second quarter, the share of capital allocated to retail has already exceeded 53%, reflecting strong growth momentum in retail banking and the focus on capital optimization in the wholesale bank.

The ROE of retail lending is higher than in wholesale lending, as despite lower lending margin, the relative RWA consumption and risk costs are lower. As such, faster growth in retail banking has a positive impact on the group return on equity by the dampening impact on the overall lending margin. In the second quarter, the impact of this shift was roughly two basis points. Turning to slide 15. Fee growth year on year was again double-digit, driven by structural revenue driver, or what we call alpha. Wholesale banking fee came in at GBP 360 million, a quarterly record for our franchise, driven by strong fee income in lending, daily banking, and trade finance. Growth in retail banking was fueled by a continued increase in mobile primary customer, which also resulted in higher daily banking fees.

Investment products had also a strong quarter, reflecting growth in the number of investment accounts, increase in assets under management, and higher customer trading activity. In addition, retail banking expanded its fee income from insurance products by 8%. Total fee from insurance products now amounts to almost GBP 70 million this quarter. Given the strong performance across the bank, we're confident we can grow our fee income at the high end of the 5%-10% range this year and reach our GBP 5 billion target in 2027. Slide 16, we show the development of all other income. Income in financial markets is mostly driven by client activity. We continue supporting our clients in turbulent times, and this is evident in the results. Treasury has again a strong quarter, with income on both comparable quarter, mainly driven by results from our FX ratio hedging.

We benefited from positive revaluation of derivatives for the forward purchase contract for our stake in Van Lanschott Kempen. Following the regulatory approval received last week, we now hold a 20.3% stake in this bank. Next, slide 17. Our expenses, excluding regulatory costs and incidental items, rose 4.5% year on year, but were stable compared to the previous quarter. The year-on-year increase was largely attributable to wage inflation, continued investment in business growth, mainly in customer acquisition, in enhancing and scaling our tech platform, and developing product for new customer segments. In Spain, for example, we have launched a dedicated digital bank account to support customers between age 14 and 17 with a tailor-made experience in the existing ING app. Operating efficiencies compensated for part of the cost increase, and we continue to digitize our services and infrastructure to further increase operating leverage.

We have, for example, deployed our one app in six different retail markets and have introduced generative AI-powered chatbots in the Netherlands, in Germany, in Belgium, Romania, and Spain. Incidental expenses also included GBP 85 million for rebalancing of our workforce in wholesale banking, resulting in around 230 redundancies. As a result of our focus on expense management, we have improved our outlook for 2025. We now expect total expenses, including incidental items recorded in the first half of this year, to end up at the lower end of the range we gave earlier. Now on to risk costs on the next slide. Total risk costs were GBP 299 million this quarter, or 17 basis points of average customer lending, which is below our through-the-cycle average and demonstrated the quality of our loan book.

Net addition to stage three provisions amounted to GBP 221 million and were mainly related to collective provisioning in various retail markets. Individual stage three costs decreased, reflecting limited inflow of newly defaulted files. This is also reflecting a further decline of our stage three ratio. Stage one and stage two risk costs were GBP 78 million, including addition to reflect update of the macroeconomic forecast. We remain confident in the quality of our loan book. Slide 19 shows the development of our quarter-to-one ratio, which came down compared to last quarter. The decrease in quarter-to-one capital was fully attributable to the reduction of capital from the ongoing €2 billion share buyback, which is partly offset by the inclusion of €800 million from the quarterly net profit for this quarter. This decrease was partly offset by lower risk-weighted assets. Credit risk-weighted assets, excluding FX impact, increased by GBP 5.2 billion this quarter.

This is mostly driven by volume growth, partly offset by impact of positive model updates and a change in the profile of the loan book. Operational risk-weighted assets remained flat, while market risk-weighted assets decreased by GBP 2.4 billion due to hedging and FX activities. The interim dividend over the first half of 2025 is GBP 0.35 per share and will be paid on the 11th of August, continuing our established track record of providing an attractive return to our shareholders. Now, Steven would like to wrap up today's presentation.

Steven van Rijswijk (CEO)

In refence to that, I would like to recap a few messages before going into Q&A. To start, I would like to say that despite the ongoing geopolitical and macroeconomic turmoil, we have been able to generate continued commercial growth in this quarter. Commercial NII was resilient, and we expect this to grow in the second half of this year. Fees have grown by 12% compared to 2024, and we feel confident we can grow fees at the higher end of our 5%-10% range this year. Costs remained well within our guidance. We are taking proactive measures to ensure we continue to operate efficiently, and our forecast total expenses to end up at the lower end of the GBP 12.5 billion-GBP 12.7 billion range we indicated earlier. All in all, this translates into an improved outlook for profitability in 2025.

We now expect to deliver a healthy return on equity of around 12.5%. With this, I would like to open the floor for Q&A. Operator.

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question on today's call, please signal by pressing star one on your telephone keypad. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. That is star one for your questions today. Our first question comes from Giulia Miotto from Morgan Stanley. Please go ahead.

Giulia Miotto (Executive Director and Equity Research Analyst)

Yes, hi. Good morning. Thank you for taking my questions. I have two. The first one is, perhaps we underestimated the effects of sensitivity that ING has. Would it be possible to have a disclosure around the revenue and cost mix so that we can estimate it going forward, given that the euro dollar is being quite volatile? That would be my first question. Secondly, you mentioned that corporates, the loan demand is still muted, considering that there is uncertainty. Do you see any signs that this can change in the coming quarters, especially in Germany, or not really too early to say? Thank you.

Steven van Rijswijk (CEO)

All right. I will talk about the corporates, and Tanate will talk about the FX sensitivity. What we have seen this quarter was a growth in the wholesale bank of GBP 4 billion, but that was largely working capital solutions and trade-related financing, so short-term receivable type of financing structures. On the longer term, it may be term loans. We saw more syndicated loans than we saw previous quarter, but not the big jumbo deals that we saw previously. Of course, we did offset; there was a limited growth in the term loans, but that was offset by capital velocity that we used to bring that down again. There was a bit of growth in the corporate term loan, but that was still muted. In that sense, it's a bit too early to call whether that will change or not. There is now a trade deal.

Let's see if the signatures will be put on paper. That should then alleviate some concern, but that's for now a bit too early to say.

Tanate Phutrakul (CFO)

Julia, yes, we will consider a bit of our disclosure if this volatility of U.S. dollar will continue. To give you a sense, already with an 8% reduction in the U.S. dollar against the euro in Q2, that has an impact of GBP 37 million in NII and an overall impact of maybe around GBP 60-GBP 70 million on total revenue, right? We do benefit from less cost because of translation results, but it's not so impactful on our ROE, given that risk weight is also coming down.

Giulia Miotto (Executive Director and Equity Research Analyst)

Got it. Thank you. That's very helpful. Do you have the number for the costs? You give the number for revenues. Do you have the number for costs?

Tanate Phutrakul (CFO)

No, we don't. We'll consider it in future disclosure.

Giulia Miotto (Executive Director and Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Up next, we have a question from Benoit Petrarque from Kepler Cheuvreux. Please go ahead. Your line is open.

Benoît Pétrarque (Head of Thematic Banking Research and Benelux Financilas)

Yes, good morning. The first question is actually on commercial NII. I get the reason of the downgrade, which is really coming from the FX rates. I just wanted to talk about the underlying commercial NII trends. If you are satisfied with all the trends you see around replicating income, lending margin, whether this is all in line with plans, so ex-FX impact. The second one is on commercial NII guidance. When you look at the Q4, implicit Q4 guidance, I get to a 2.5%-5% "improvement" in the fourth quarter. I'm just wondering if you could walk us through the moving parts around this improvement in the fourth quarter. Maybe last one to Steven. We've seen an interview in the Dutch Financial Daily a few days ago. I think you referred to the lack of level playing field regarding capital requirements in Europe.

I think you mentioned that moving the head office to the German border will be very efficient from a capital standpoint. I think we discussed that perhaps some time ago. Could you maybe talk about that and are you kind of serious to consider a plan to move the head office to Germany? Thank you.

Steven van Rijswijk (CEO)

Yeah, let me talk about the Gelsenkirchen remark I made in the newspaper, and then Tanate will talk about the NII and the fourth quarter implicit guidance in terms of what you mentioned. I think in that article, I said a few things. First of all, that in Europe, we have still many trade imperfections between countries in and of itself, with our own import tariffs between markets and our own non-harmonized regulation, and that goes for many sectors. We need to work on that in Europe because we need to become more comparative. Talking about the banking sector, you see that there as well. I gave an example, but that was a stylistic example of if I just moved the head office to Gelsenkirchen, which is just across the border from the Netherlands.

With the same activity that we have, given the current regulation, I need to hold less capital, and I will pay less taxes. Yeah, that is strange. I want also in this country, and I'm concerned about the business climate in this country, that a country also needs to have strong banks to also make sure that businesses and households can thrive in good times and in the bad times. You should, as a country, want to have strong banks and not try to chase them away. In that sense, European rules are not harmonized enough. I find it odd that banks from, for example, Germany and France, even if they serve clients here, have to hold less capital. The same goes then for those banks that also have to pay less taxes because we pay taxes over our business abroad in this country, and others then will not.

I think we should also, in this country, think much more about how to make our banks comparative.

Tanate Phutrakul (CFO)

Thank you, Steven. I think if you ask about our commercial NII, what's positive compared to last quarter and what may be more challenging, I think what remains the same is the path of the ECB rate cut, right? The facility rate going to 1.75%, that remains per plan. The steeper forward curve is also what we were expecting then and what we see now. Those are things which remain the same in terms of our outlook. What I think has changed on a positive front is the fact that the volumes have come in higher than planned, both on lending and on deposits. I think that is also quite strong and positive.

Maybe on the challenging side is that the demand for long-term lending in wholesale banking has been more soft, continuing to be soft, and the outlook remains challenging. I think these are the moving parts that I like to cover.

Benoît Pétrarque (Head of Thematic Banking Research and Benelux Financilas)

Thank you. Maybe on the Q4 improvements?

Tanate Phutrakul (CFO)

Yes. I think on the Q4 improvements, the big driver is really volumes and maybe less impact on FX in Q4. At the same time, we never comment on further rate actions, but you can imagine that we will manage our margin at around 100 basis points on liability and rising to 100-110 in Q in 2026.

Benoît Pétrarque (Head of Thematic Banking Research and Benelux Financilas)

Thank you.

Operator (participant)

Thank you. Tarik El Mejjad from Bank of America has our next question. Please go ahead. Your line is open.

Tarik El Mejjad (Co-Head of European Banks Equity Research)

Hi. Good morning, everyone. Just a couple of questions on my side, please, focused on M&A and deposit strategy. Can you give us a bit of an update on what have been your main deposit gathering campaigns in Q2 and those that you probably launched in Q3? On the M&A, is my understanding correct to see that the focus you have at the moment is more into buying deposits and kind of going back to your ING Direct DNA of making much more spread on deposits versus targets of fees, where for the fees you're still mainly focusing on getting more primary clients and cross-selling? Those are my two quick questions. Thank you.

Steven van Rijswijk (CEO)

All right. Talking about the deposit strategy first, we didn't have really big campaigns in the second quarter. We had a big campaign in Germany in the first quarter that led to an increase in deposits with GBP 23 billion in aggregate, of which about GBP 16 billion came from Germany. That campaign is now ending. That means that some of the money that we gained will flow out in the third quarter of this year, which could have an impact on the deposit growth for the third quarter. Also, it coincides with people going on holidays, so they spent more money that they received in the second quarter. That could have an impact. There were no big campaigns going on at the time.

The impact, by the way, of these campaigns is what we see in Germany is similar to what we have seen in previous campaigns, that about two-thirds of the money is sticky and one-third of the money leaves. That is good. With regards to M&A, but also our activities, I think that what we are doing is diversifying our business. On the one hand, we become more specific in the type of services that we offer to existing customers. Not one-size-fits-all, but Gen Z and expats and mass affluent and affluent. We become more specific in targeting those customer segments. That then helps also to get more mobile primary customers in, who do more business with ING, diversified business.

Secondly, we try to fill in the blanks in markets where we are already active, but we're in some markets only active in wholesale banking, so the top end, and private individuals, the low end, if you will. We need to fill it out with SME, self-employed, mid-corporates, private banking, wealth management. We try to broaden the business. That's what you also see reflected in our figures, that we're actually growing. Yes, of course, we grow in lending and deposits. I'm happy with that because we're a good bank and people like to do business with us. I'm particularly proud of the fact that we continue to grow our fee income because that is diversifying our income streams, and that's what we want.

Tarik El Mejjad (Co-Head of European Banks Equity Research)

Thank you very much.

Operator (participant)

Thank you. Our next question now comes from Chris Hallam from Goldman Sachs. Please go ahead. Your line is open.

Chris Hallam (Managing Director and Head of European Financials Research)

Hi. Morning, everyone. Just a few clarifications, I guess. First of all, what's embedded in the commercial NII guide with regards to savings rates cuts in H2? Is the planning there around the rate, maybe in response to your own planning, or relative to competition, i.e., are you driving to a predetermined liability margin outcome, or are you just paying what needs to be paid relative to peers? Second, on market share, what are you seeing on mortgage market share, particularly given the extra capital you're putting to work there? Do those share trends differ much across your main markets? Thank you.

Steven van Rijswijk (CEO)

I think on the market share in mortgages, clearly, by the way, we price the mortgage to the return. We don't grow for the sake of growing. We grow when we also can make the right return. Over the past year, we have improved our processes and made them more easy and digital, whether it's direct selling or through the brokers. That has meant that in some markets, most notably the Netherlands, we have been increasing the market share of the new production, which now holds around 17%, so it's now stabilizing. That's where we currently are, and we're happy with the growth that we show there.

Tanate Phutrakul (CFO)

Chris, obviously, we can't give any guidance around any further deposit rate action in the future. I think, as you see, we manage commercial NII on margin, and we have been able to manage the liability NII at around 100 basis points this year. That continued to be our guidance, and you can see that despite the rate action we've taken earlier this year, liquidity remains strong and deposit growth remains strong.

Chris Hallam (Managing Director and Head of European Financials Research)

Okay, thank you very much.

Operator (participant)

Thank you. From KBW, we have [Harry] with our next question. Please go ahead.

Hi there. I just wanted to ask on the fee guidance. Appreciate you improved it to the upper end of the 5% to 10%. But you're currently running at kind of 11%. Half-half one versus half-one last year. That's $2.2 billion. Is there anything that's kind of holding you back from going above 10% fee growth this year? My second question is on the wholesale business. I appreciate the slide on the change in the mix of capital consumption. The ROE has sort of been stuck at around 10.5% for the last two quarters. I'm just wondering if there's anything more that can be done to improve that. Thanks.

Steven van Rijswijk (CEO)

Thank you very much. Let me first start with the ROE in the wholesale bank. We have given guidance on 2025 for an ROE combined of 12.5% or around 2027 of 14%, and we're confident on both counts. We also want to make improvements in both businesses. For both, it means we need to diversify more. I just talked about retail, but the same goes for wholesale. We have been investing consistently in transaction services and financial markets to cross-sell next to the big lending engine that we have in wholesale banking to get to higher returns. That's one element. The second element to improve our return there is to improve capital velocity, which means we want to do more with the same capital or with less capital. That's also why you see a shift in capital from wholesale to retail.

We are still embarking on our first SRT, which will come in the second half of this year, and that will also help the return of wholesale banking. That's not only the first. In 2026, we will continue with SRTs and the years thereafter as well. When we talk about fee guidance, yes, indeed, we have very good growth with 12%. We have been able to show average growth of 5%-10% over the last five years. We continue to give that guidance over the period 2024-2027. We are happy with what we're doing. We, of course, want to sustain these levels, but we state now for our guidance of 5%-10%, albeit at the higher end of the 5%-10%, so we become more specific.

Thanks.

Operator (participant)

Thank you. From Barclays, we now have Namita Samtani with our next question. Please go ahead.

Namita Samtani (Director)

Morning. Thanks for taking my questions. Just my first one. I'm just wondering on the liability margin when you guide to 100-110 bps in 2027, when the replicating portfolio becomes the severe tailwind. To me, 110 bps would be the floor. Would you agree with that, or what stops the group from printing above 110 bps liability margin in 2027? Secondly, I just wanted to ask Steven, I just wondered. Related to Tanate's intentions to step down as CFO, in the press release, you write, "After seven years as CFO on the board, it's a logical moment for Tanate to step down." I just wondered why it's a logical time. ING has targets up to 2027, which we're yet to see if they can achieve. I also wondered if you're looking at internal or external candidates for CFO. Thanks very much.

Steven van Rijswijk (CEO)

All right. Thank you very much. By the way, I heard it's your birthday today. Is that correct?

Namita Samtani (Director)

It's my sweet 16.

Steven van Rijswijk (CEO)

Oh, very good. Congratulations in any case.

Namita Samtani (Director)

Thank you.

Steven van Rijswijk (CEO)

Yeah, look, the seven years, logical time to step down. I think what I meant with that, look, this has been a very good period. Tanate and I know each other for a long time. We have been working together since, I believe, the year 2000 when we were both stationed in Asia. I'm very grateful that he has been with me for seven years at the board. Now Tanate is retiring from ING. This was my expression to be grateful. There was not anything particularly meant by seven years or what it should be exactly, but it is a very good time at our board, which I'm very grateful for. Nothing more, nothing less. In terms of candidates, we never disclose who we are, how we are exactly looking for.

Of course, you can be assured that this is a rigorous process, and we have ample time to announce a successor before the AGM of 2026. Tanate, on liability margin.

Tanate Phutrakul (CFO)

Yes. More to mundane topics, liability margin for next year. I think, look, it's always a balance when you look at liability margin around competition in the market. Our ambition to grow our volumes and managing margin, right? If we look historically, what we see is that the margin has been around that 100, 110 over the long cycle. That's something that we plan on. Maybe something that I think gives me comfort around that 100 and 110 is that the mix of our deposits has stabilized, right? The current account has now normalized to before the zero rate level. The level of term deposits is coming down. The level of savings is going up. That also bodes well for improving the net interest margin on liability. To summarize, it's a balance between volume and margin.

Namita Samtani (Director)

Thanks very much.

Operator (participant)

Thank you. Our next question now comes from Farquhar Murray from Bernstein Autonomous LLP. Please go ahead. Your line is open.

Farquhar Murray (Senior Analyst)

Morning, all. Just one question for me, really, just a follow-up to a degree on Harry's question earlier on fees. I mean, the upper end of 5%-0% before year 2025 seems a bit more confident than earlier in the year. I just wondered if that is indeed slightly more confident, and also what kind of products or geographies are behind that. More generally, what kind of proof points can you give for your kind of view that that's alpha-driven rather than beta? Thanks.

Steven van Rijswijk (CEO)

All right. Thanks, Farquhar. That shows more confidence than given just the range. Why is there more confidence? We see good mobile primary customer growth. We see the number of, and as a result of it, you also then do more payments. We see a higher % of our customers becoming primary customers. We see a growth in our number of trading accounts. That was last year 4.6 million, it's now 4.9 million. The number of people that trade with us is increasing. We have put in place over the past couple of years insurance products in private individuals and in business banking. Now you see, and I would say insurance is, I would say, sort of a snowball. It rolls down a hill, and step by step by step by step, it becomes a bit bigger.

We saw also the number of the lending deals in wholesale banking increase, the syndicated loans, that all helped. There you see that by broadening our customer base, by broadening the type of service that we provide, we are making this step by step bigger. You see, and therefore we are seeing with these actions that the number of people that do fee business with us is just larger, and it helps us in our confidence.

Farquhar Murray (Senior Analyst)

Just a follow-up. Would you have a magnitude on the insurance revenues now?

Steven van Rijswijk (CEO)

Yes, it is for the first time that we put it in the presentation. It's now GBP 69 million this quarter.

Farquhar Murray (Senior Analyst)

Good stuff.

Steven van Rijswijk (CEO)

We split that out now.

Operator (participant)

Thank you. Up next, we have Benjamin Goy from Deutsche Bank. Please go ahead.

Benjamin Goy (Head of European Financials Research)

Yes. Good morning. Two questions, one follow-up, and one more general question. The first, on the implied increase in the Q4 NRI, I was just wondering, Tinek, you mentioned volume growth is part of the assumption there. Is there any specific that you can share? Is there an uptick expected in long-term corporate lending that you would need to see to get this increase, or, yeah, volumes across the board? Again, the positive. Secondly, your digital business banking is part of the growth area in the retail business. In Germany, you ended the Amazon partnership. I know it's only one partnership and probably don't want to over-inject it, but it never looked promising, and it seemed to be below expectations. Just wondering how successful is the digital business banking in your market without branch-based networks, and how much can you both be driven by that? Thank you.

Steven van Rijswijk (CEO)

All right. I'll answer on the business banking and Tinek on NRI. If you look in general in business banking, business banking consists of three parts: self-employed, SME, and mid-corporates. Self-employed is being done fully digitally, like private individuals. SME is being done mostly digital-first, supported by sales teams who are remote. Mid-corporates, or what you perhaps in Germany would call Mittelstand, or maybe even lower Mittelstand, you would do with a relationship model and with sector knowledge supported by digital. A large part of activities in business banking are digital. In Germany, in particular, we start from the low end because we are already with private individuals. The move towards self-employed and SME is not so difficult to make because we already have a number of these digital services. In the past, we only did that indirectly through a partnership with Amazon, but now we approach these customers directly.

Compared to the significant mortgage and customer lending book and wholesale banking book that we have in Germany, business banking in Germany is relatively small, but it's almost like with insurance, like I just said, it starts small, and then we do it step by step by step. We grow it to diversify our business.

Tanate Phutrakul (CFO)

Benjamin, just on the commercial net interest income development in the fourth quarter, I think we look at a number of factors in giving our scenario. I think we look at volume, right? We have a longer-term planning estimate of 4%, but we're ending up at least the first half year higher at around 7%. That's something that factors in our thinking. We're still planning on another ECB facility rate cut in September of 25 bps, and we will take the necessary rate action to maintain a margin of 1%. Those are the considerations that go into our guidance of our commercial net interest income.

Benjamin Goy (Head of European Financials Research)

Thank you very much.

Operator (participant)

Thank you. From UBS, we now have Johan Ekblom with our next question. Please go ahead.

Johan Ekblom (Research Analyst)

Thank you very much. Maybe if we can come back to NRI and look a bit further ahead into next year. You flagged in the presentation a further headwind from the replicating book, but then I guess there are some tailwinds on the deposit repricing. If I add those up, that's about a GBP 400 million tailwind into next year, and then you plan on 4% volume growth. Are there any other significant drivers than those that we should think about in terms of NRI 2026 versus 2025? I guess that pickup you're flagging for Q4 should really continue throughout all of next year, if I'm not mistaken.

Maybe digging a bit deeper on the volume side, we've seen a couple of quarters of very strong volume growth, and I think you flagged in the past that the strong mortgage growth at a system level in the Netherlands is probably not long-term sustainable at these levels. Maybe if you could give us an update on what you're seeing there. I also noted that there was quite a strong pickup in the Belgian loan book, in particular in the non-mortgage side. Is there anything structurally going on there? You've been losing share in Belgium for a number of years. Is there any chance of a decent turnaround there?

Steven van Rijswijk (CEO)

Right. I'll take the fuel on mortgages. If we look at mortgages in the different markets, we see actually sales volumes that are growing in all of these markets. The reason being that is that there are still shortages on houses. That's what we are seeing. Of course, there was a dip in new mortgages in a number of the countries with the uncertainties coming in as a result of the war and the supply chain challenges that we have seen in 2022 and 2023. That is largely gone. It's gone in the Netherlands, and it's gone in Belgium. If you look at the Dutch housing market, there's a 17% year-to-year increase expected in terms of number of houses sold in this country.

If you look at the Belgium housing market, we also see an increase of about 15% when we talk about building permits in some of the months, and 18% mortgage production year on year up in total compared to the previous year. We're also benefiting from that. Same in Germany, whereby we saw mortgage lending coming down, new mortgage lending quite steeply to about 60% of what was normal over the years 2022 and 2023, and in 2024, gradually recovering, but now really recovering well with a 35% increase in terms of houses sold. In that sense, we're benefiting from that. We have been working on improving our processes over the past years, and therefore that helps us in our mortgage share on new production. In the end, we will only print if we also can make adequate returns. That is on mortgages. Oh, sorry.

Regarding in Belgium, in business banking, there we saw higher balances, but that has to do with a very large client, which can be volatile quarter on quarter.

Tanate Phutrakul (CFO)

In terms of looking to 2026, I think on the lending side, we plan on a recovery in terms of lending margin from 125 for 2025 to between 125-30 in the coming period. That kind of better outlook is driven by the fact that we have seen higher business banking loan growth, right? That is coming in with better margin, higher consumer lending growth, again with better margin, and more return to normalization in terms of corporate lending, which has higher margins. These are driving our expectations for higher lending margin. If you talk about the liability side, I think we give now a bit more details about the impact on replication on page 26 of our presentation, where you do see that based on the curve prevailing in June, there's a GBP 300 million reduction in terms of replicated income.

We have also given a better look into 2026 that without any further rate action on savings, we expect that the $1 billion additional income from savings repricing would go to GBP 1.3 billion, and term deposits would go from GBP 400 million-GBP 800 million. That helps compensate for that additional headwind from replication.

Johan Ekblom (Research Analyst)

Thank you.

Operator (participant)

Thank you. We're now moving on to a question from Matthew Clark from Mediobanca. Please go ahead. Your line is open.

Matthew Clark (Managing Director and Senior Equity Analyst)

Good morning. A few questions again on NRI, I'm afraid. Firstly, in terms of the German deposit campaign, for the first quarter, should we still be expecting an outflow from that to come through in the third quarter? I think the special interest rate period ended during the second quarter, but near the end. Just wondering whether we've seen any of that outflow effect yet, or whether that's still to come. Second question is on commercial NRI in the third quarter, which you're guiding flat. I'm just trying to understand why it can't be more positive. You've got a very positive kind of volume tail even despite the FX, and actually the FX has rebounded quarter to date.

A flat margin guidance effectively for both the lending margin and perhaps even implicit a bit of an improvement in the liability margin guidance in order to meet that full year 100 bps guide. Why can't we see commercial NRI up already in the third quarter? Just the question. Thanks.

Steven van Rijswijk (CEO)

Yeah. Thanks, Matt. On the deposit campaign, yes, we did that campaign indeed. You have seen it rightly that we started in the first quarter and ended early June. There was some outflow, but we will continue to see some outflow in the third quarter. At least we expect that based on also what we have seen in previous campaigns, where typically two-thirds of the money stays and one-third of the money goes. That's why we also said that that may also have an impact in deposit growth in the third quarter, because also in the third quarter, people are typically going on summer holiday, and that means that they spend a bit more money than they do in other quarters. That could be a seasonal effect that we can see in the third, could see in the third quarter. Tinek, NRI?

Tanate Phutrakul (CFO)

Yeah. NRI guidance, I think what you see is not the full impact of foreign exchange impact in Q2. We expect a full impact in Q3. That's why we think that the impact on FX would be more significant in Q3. Hence our guidance on flat commercial NII.

Matthew Clark (Managing Director and Senior Equity Analyst)

Can I just follow up? Your guidance on FX, what FX date is that based on? Is that based on the end of June, or is that based on a 30th of July FX rate?

Tanate Phutrakul (CFO)

That's based on the end of June FX rate.

Matthew Clark (Managing Director and Senior Equity Analyst)

Okay, thank you.

Operator (participant)

Thank you. From RBC Capital Markets, we now have Anke Reingen with our next question. Please go ahead.

Anke Reingen (Banks Analyst)

Thank you so much for taking my question. Just very simply, first on the liability margin. Is it as simple as, given the German campaign has finished, that the liability margin should, everything else being equal, go back to the 100 basis points in Q3? I mean, obviously, everything else being equal. On your upgrade to the 2025 ROE, do you think it's, I mean, 2027 is also obviously also some time out, but do you think that the better 2025 trends are leading to structurally better outcome in 2027 as well, or is it more of a timing effect? Some of the measures come in through quicker. Thank you very much.

Steven van Rijswijk (CEO)

Okay. Look, we don't give current new guidance on 2027. We're comfortable about 2025, but we're also very comfortable on 2027. Tinek, on liability margin, how is it developing?

Tanate Phutrakul (CFO)

On a like-for-like basis, with the German campaign ending, our liability margin would be at around 100 basis points, in fact, a little bit better than 100 basis points. Yeah.

Anke Reingen (Banks Analyst)

Thank you.

Operator (participant)

Thank you. We're moving to another question now coming from Juan Pablo Cobble from Santander. Please go ahead. Your line is open.

Juan Pablo Cobble (European Banks and Insurance Equity Analyst)

Yes. Good morning. Thank you for taking my question. First one is regarding expenses. I think if you could give us a bit more detail, you are mentioning that you are doing some initiatives on KYC and contact centers. It could be useful if you could give some color on how much are you spending on this, and if there is any additional room to cut costs there, maybe related to still in expenses regarding the incidental items, and maybe just to have some feeling about future initiatives. What could be the payback, for instance, of the GBP 85 million wholesale banking business initiative? What's the savings that we could expect in the future? My second question is regarding your ROE guidance. I don't know if you could give us also a bit more detail. That upgrade, where does it come?

Because also it's true that equity is coming down, probably because of the FX impact. That upgrade on ROE, what part is coming from actually better net income, and what part is coming from lower equity. Thank you.

Steven van Rijswijk (CEO)

All right. I'll talk about expenses and the initiative that we've taken on wholesale banking, and Tanate talks about ROE. Talking about expenses, we have experienced so far still higher inflation levels that came in in our cost line from previous years. We, of course, are investing for growth. That is in marketing and new products, and that we're partly offsetting by digitalizing our operations further. We're looking currently at various initiatives. These initiatives have to do with KYC. How can we digitalize that? How can we further digitalize our contact center operations with AI, but also with the GenAI chatbots? We look at GenAI in lending. We look also at GenAI in coding. Those are all initiatives that are currently being developed, centrally steered, and step by step, we will integrate them in our operations. As soon as there are outcomes from that, we will let you know.

With regards to the initiative we've taken in wholesale banking, where we did the restructuring in the front office side of wholesale banking, the 230 FTE, for that we took a provision of €85 million. Annualized, the benefit of that will be GBP 40 million, but that will only start to come in in the course of 2026.

Tanate Phutrakul (CFO)

Juan, just in terms of the composition for our updated outlook on return on equity, it's a combination of factors. I think we are more fee-intense in terms of our revenue, which is more ROE accretive, right? This is part of our strategy, even going to 2027. I think we operate at the lower end of our cost guidance. That also improves profitability. A combination of that improved fee intensity and lower cost drives the different guidance on ROE.

Operator (participant)

Thank you. As a brief reminder, that is Star 1 for your questions today. Up next, we have Delphine Lee from JPMorgan. Please go ahead. Your line is open.

Delphine Lee (Equity Research Analyst)

Thank you for taking my questions. Just wanted to go back to NRI to understand a little bit the improvement that you expect in 2026, 2027 on the lending margin. From what you said previously, I think it is basically the result of some improving mix with a better growth in kind of higher margin products. Is there anything else, or if you could just comment a bit? Just to understand a bit like how much pickup we should expect on that. On the liability margin, just to go back to an earlier question on the liability margin in 2027, from what you're saying, you do have more than GBP 1 billion pickup in the replicating income. It feels like you're basically saying the deposit mix is improving, and you're still getting volumes as well.

I'm not so sure why the liability margin could not meaningfully exceed 110 basis points, and the guidance is still unchanged at 100, 110. Thank you.

Steven van Rijswijk (CEO)

Tanate.

Tanate Phutrakul (CFO)

I'm not sure how many different ways I can answer the same questions, but I think really on the lending, it's about resumption of commercial lending growth in the wholesale bank, right? That has been soft the last two quarters. In our outlook for the next couple of years, we expect that to resume to a more normal pace. I think we also expect that consumer loans and business banking loans will take a greater share. That's why our guidance of 125 and 130 basis points. Coming to the liability margin, yes, we have some positive tailwind coming at us, right? The pressure from the facility cuts by the ECBs, according to the forward curve, is coming to an end. The long-term replication is getting there.

At the same time, we think competition will be normalized, which means that we need to balance between margin and volume and deposits, and we think the guidance of 100-110, it's a good number to plan for.

Delphine Lee (Equity Research Analyst)

Thank you very much.

Operator (participant)

Thank you. As there are currently no further questions in the queue, I'd now like to hand the call back over to you, Mr. van Rijswijk, for any additional or closing remarks.

Steven van Rijswijk (CEO)

Thank you very much. Thanks, everybody, for your time and your questions. I know it's a pretty busy time for you as well, given that many companies are coming out with the figures this week. I hope that you deal with that all well, and I hope that you can also enjoy a summer break. Thanks again, and we'll speak in any case in three months' time again. Thank you.

Operator (participant)

Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.