ING Groep's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: ING Groep (ING)

ING Groep NV (NYSE:ING)

Q4 2013 Earnings Conference Call

February 12, 2014 03:00 AM ET

Executives

Ralph Hamers – Chairman and CEO

Wilfred Nagel – Chief Risk Officer

Patrick Flynn – CFO

Delfin Rueda – CFO, ING Insurance

Analysts

David Lock – Deutsche Bank

Ashik Musaddi – JP Morgan

David Andrich – Morgan Stanley

Marco Kisic – Nomura

Anton Kryachok – UBS

William Hawkins – KBW

Benoit Petrarque – Kepler Cheuvreux

Francois Boissin – Exane

Matthias de Wit – KBC

Kiri Vijayarajah – Barclays

Anke Reingen – RBC

Marcus Rivaldi – Morgan Stanley

Omar Fall – Jefferies

Farquhar Murray – Autonomous Research

Steven Haywood – HSBC

Operator

Good morning. This is Mark welcoming you to ING’s Fourth Quarter 2013 Conference Call. Before handing this conference over to Ralph Hamers, 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 business, expectations for our future financial performance and any statement not involving historical fact.

Actual results may differ materially from those projected in our forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained on our public filings, including our most recent Annual Report on the Form 20-F filed with the United States Securities and Exchange Commission, and our earnings press release as posted in our website today. Furthermore, nothing in today’s comments constitutes an offer to sell or solicitation of an offer to buy any securities.

Good morning, Ralph, over to you.

Ralph Hamers

Thank you very much. Good morning. Welcome everyone, to ING’s fourth quarter 2013 results conference call. I will take you through today’s presentation, and then Patrick Flynn, our CFO; and Wilfred Nagel, our CRO here with me from the Executive Board. We also have Delfin Rueda, and Doug Caldwell, CFO and CRO of ING Insurance here with us to answer any questions specifically on ING Insurance.

In the fourth quarter, ING continued to make strong progress on the restructuring, advancing further into our end phase of our transformation. At the same time, we have been able to deliver a good set of quarterly results. ING Group posted an underlying net profit of €405 million, driven by another solid quarter result from the ING Bank and improving operating results of ING Insurance.

Since the last results call, in the third quarter back in November, ING made further progress on the divestment of the insurance units and the divestment of the Insurance Asia is now resolved. And sales of the two stakes in SulAmérica are closed as well. Our remaining stake in SulAmérica is now 10%.

And on the ING Insurance side, for the European and Japanese operations, we are on track in our preparations for the intended base case IPO 2014. And we have some major steps there that we will go through today.

So, let me go a little bit there with you in more detail on the capital improvement of ING Insurance.

In the fourth quarter, ING Group converted €1 billion of ING Insurance debt into equity resulting into a reduction of the gross debt of ING Insurance to €3.9 billion. Furthermore, the cash proceeds from the sale of ING Insurance Asia being used to recapitalize and analyze first by injecting the capital of €600 million into NN Life, increasing its regulatory solvency ratio to 221% at the end of the fourth quarter 2013.

And in the first quarter of this year, ING Insurance provided a subordinate loan over another €600 million to NN Life. As a consequence to pro forma regulatory solvency ratio of NN Life is now at 234%. This by the way also includes the pension deal that we have announced earlier.

Following the strong improvement of the solvency ratio of NN Life and I’m now on slide 5, we can say that currently all operating entities of the insurance company are adequately capitalized.

In addition, on whole company level we have a cash buffer now of €0.8 billion and as alluded to already a gross debt position of €3.9 billion. And so, we feel, both our adequate however on the fixed cost charge we feel that we’re not at the desired level yet. But all-in-all our intention is to make sure that ING Insurance will be appropriately capitalized at the moment of IPO.

Now turning to the double leverage on the group level, the core debts increased slightly to €5 billion in the fourth quarter. And that is because the proceeds from the sales of ING U.S. VA, basically and SulAmérica were offset by the conversion. You already have mentioned conversion of the €1 billion debt from ING Insurance into equity.

The residual double leverage of the group now at €5 billion is covered by the market value of our remaining stake in ING U.S., the remaining stake in SulAmérica as well as by the value of the ING Insurance company now that is – that we should be able to bring to the market later this year, as far as double leverage.

Then on January, 9 of this year, we announced an agreement to make the Dutch Defined Benefit Pension financially in the payments. And we’re very pleased with these agreements as it means that ING Group we released from all financial obligations on Defined Benefit Pension Plan, including indexation and funding, and what was also very really necessary in order to prepare the insurance for the IPO to get rid of the cross-guarantee between the bank and insurance.

The risks and upfront cost to disagreements and the impact of that is 20 basis points on the bank’s fully loaded core Tier 1 ratio. And a 3% point decrease on the Insurance IGD ratio. But it does takeaway volatility in both equity and P&L for which capital is normally intended to be the buffer. So, we have changed a bit of buffer but we have reduced the volatility as well.

Now, let’s go into the results of ING Group. ING Group, underlying net results showed a strong improvement in over 2013 compared to 2012 with a result and that result increasing 22% to €3.255 billion.

For the fourth quarter, the group posted a net underlying result of €405 million that was for the fourth quarter of 2012 but down from the third quarter of 2013 we announced one-off charges in ING Insurance.

If we then look to the bank specifically, the bank had a very solid fourth quarter underlying result. And that was basically due to further increase in the interest margin 245 basis points despite some seasonal lower activity in financial markets. But also the result of the unwinding of the IABF supported the quarter results that came out at €99 million but that was partially offset by the additional provision of €76 million that we took to accelerate some of the cost savings in the Dutch Bank.

Risk costs for the fourth quarter were slightly up from the third quarter of 2013, but were down from the fourth in 2012, but they remained at elevated level, amidst the weak economic environment.

Then, we’ll take a closer look at the development of the net interest margin set the net interest margin has increased further 245 basis points. The underlying result interest result has grown by 2.8% to €2.946 billion a year ago. And that was really due to higher volumes and an, improved margins on terms and profit.

The net interest margin increased 245 basis points and that includes a minus 5 basis points of cost in the bank treasury that is in that net interest margin. And those negative 5 basis points in bank treasury have been built up over the last years by replacing the short term funding with long term funding for existing loans that will be – and this result we will isolate going forward and transfer to the corporate line as of the first quarter 2014.

And the negative interest on this book is already included in our overall interest result. So basically we have been able during the years to absorb those costs and put it in the pricing towards our clients whether on the asset side or the liability side. And because over the years the NIM has improved including this negative cost of improving our funding structure. And then, and we expect going forward that the NIM will stay around the 145 basis points for the next foreseeable quarters.

If we then take a closer look at the development of the net lending assets, net lending increased in both retail and commercial banking. But in the fourth quarter, they were down mainly due to sales and transfers of assets and currency impact. But the underlying development in as mentioned in retail and commercial banking is positive.

The net lending in retail banking increased €1.6 billion on the back of a higher net lending in Belgium, Germany and rest of the world. And that was offset by a lower net lending in the Netherlands. And on the commercial bank side, we see that the net lending has increased by €400 million driven by higher net lending and circuit finance and trade finance services.

So the total lending book decreasing but that is not necessarily caused by the underlying development but very much by asset transfers and sales as well as foreign exchange developments.

Let me take a closer look at the operating expenses. The underlying operating expenses have risen marginally year-on-year to €2.351 billion. And that was mainly due to higher pension cost and additional restructuring cost. And that was offset by ongoing cost savings as well as the partial transfer of the WestlandUtrecht staff to ING Insurance. And the lower annual charge for the Dutch Bank tax.

For the full year 2013, expenses have been remained more or less flat from 2011. And despite the introduction of the bank tax already in 2011, and the higher pension cost. So, basically you see that the transformation program that we have announced, that is really helping us to keep costs flat over those years with increased pension cost and increased bank taxes and increased regulatory cost. And therefore it’s important that we continue on this transformation program and keep following it.

And therefore we turn to slide 14. And those restructuring plans are on track. In the fourth quarter we took another €76 million of additional restructuring cost for the retail Netherlands. These additional restructuring cost relate to an extension of previously announced cost savings programs already.

So earlier on we announced a first reduction of 2,700, later on we added another 1,400 and now we’re adding another 300 for the restructuring of the bank in the Netherlands. And these additional 300 FTEs will in the end save €30 million of additional cost – of cost by 2015.

Also in Belgium, we are looking at a further reduction of FTEs as part of the transformation program in Belgium by another 115 FTEs and that will lead to future saving of €10 million. All these cost savings in addition to the previously announced cost saving initiatives are expected to reduce our expenses by €880 million by 2015. And of this amount, already €458 million have been achieved.

And I think it goes without saying that we will continue to focus on possibilities for further cost savings in order to become more efficient, improve our services but also change with the rapid change in behavior of our customers.

Then we’ll take a closer look at risk costs, the risk costs and the banks might have increased slightly towards the third quarter to €560 million and as many driven by Retail Belgium, General Lending and Business Lending in the Netherlands. And that is offset by lower additions in Structured Finance and Real-estate finance.

So, third quarter of fourth quarter we see a slight increase over 2013 and we see a slight decrease.

Let’s focus on some of these risk categories in more detail, we turn to slide 16 then for you. The NPL ratio has increased marginally to 2.8% in the fourth quarter of 2013 mainly due a lower amount of credit out-standings. And the amount of NPL has increased by €200 million mainly due to high NPLs and Business Lending in Netherlands, Dutch Mortgages and General Lending.

Then if we look at the development of the provisions and the write-offs, and we feel that our loan book remains well characterized and provisions. The net additions to loan provisions have structurally out-weighted the write-offs resulting in a higher stock of provisions. And therefore basically the coverage ratio has further increased to 38.6% in the fourth quarter.

If we then further focus and zoom on the risk cost development for retail banking in the Netherlands, these risk costs have remained at an elevated level. And that is basically reflecting the weak economic environment that we see in the Netherlands.

And for the same reason we also see that the NPL ratio for both Business Lending and the Dutch Mortgages have increased further in the fourth quarter and the risk weighted assets have increased as well in the fourth quarter. And that is largely as a result of lower cure and recovery rates. And that’s also reflecting the recovery rates and that’s also reflecting the economic environment in which we are active in the Netherlands. The average risk weight for Dutch Mortgages, have increased from 15% to 19%.

We do see signs of improvement in the Dutch economy, this improvement is still fragile. And therefore the risk goals are expected to remain at this elevated level in the coming quarters.

Then if we take a closer look at the risk costs in the real-estate finance area, the risk costs for real-estate finance increased further to €71 million. And the non-performing loans have risen a little bit by €22 million. And I think for all of us here in the other side, it’s important to note that the risk cost in the fourth results of the Dutch National Banks, the Central Banks we view on our commercial real-estate portfolio.

Then we take a closer look at the capital position of the bank. The capital position remains strong at the core Tier 1 ratio of 11.7% despite the dividend upstream to facilitate the Dutch payment and despite the increased risk weighted assets. And basically these two are compensated by a solid profitability and the capital generating capability of the bank.

The pro forma core Tier 1 ratio if done on a fully loaded basis is 10%. And our capital position with the bank, knowing that the repayment of the Dutch State are one-off and more structural issues for us. We feel that with the organic capital generating of roughly 30 basis points per quarter we have a strong capital generating bank in order to ensure our capital position.

Although our Core Tier 1 will be negatively impacted also in the first quarter by the result of the pension agreements and the next payments to the Dutch State. It’s really those capital generating capabilities that will support the capital development of ING Bank throughout 2014.

Then if we take an overall look as to this year, the four requirements besides our strong capital position, we also meet the other CRD IV requirements, our core Tier ratio is above 100%, above Basel III leverage ratio with a minimum of 3% is certainly met with 3.9% leverage ratio as by the end of December last year.

So far the bank, let’s turn to the insurance company then. The fourth quarter operating result for the ongoing business of insurance improved to €215 million and that was 20% from a year ago, excluding currency effects.

And the improvement was mainly driven by higher operating result in Netherlands Life because of higher investment result and cost that were well maintained. As well as low funding cost in total in corporate expenses that were lower.

The fourth quarter result before tax was a negative €428 million and that’s primarily reflecting the one-off accounting charges to restore the reserve adequacy of the Japan closed book VA to the 50% confidence level as we already indicated to you within the Q3 call.

And the change in the market interest rate assumption to further align the accounting and the hedging for the separate account, pension business in Netherlands Life.

The sales and this is a very good sign as well. The sales grew 10.6% at constant ethics at quarter-on-quarter so third quarter 2013 to fourth quarter 2013. And that was reflecting highest sales in both Netherlands Life and Insurance Europe and partially offset by extremely lower sales in Japan Life.

Now, if you focus then on Netherlands Life, specifically the results that we have changed the insurance segmentation and it’s much more aligned with the operational business units. And therefore we now see that the operating result is much more reflecting the ongoing businesses.

The operating results from Netherlands Life, if we take a closer look at that has risen 23.2% from a year ago to €186 million. And that is, as indicated is mainly driven by higher investment income and lower administrative expenses.

And the operating result for the other segments was impacted by seasonality and specifically in property casualty in the business in the Netherlands with the heavy storms in October. That result has gone down. And some one-off items like restructuring cost in Europe and Spain and Hungary and IT project costs in management.

Then, if you take a closer look at the administrative expenses of the insurance company, the total fourth quarter administrative expense for the ongoing business, were €462 million. And that was down 0.6% from a year ago. And that may not be – so that’s only slightly down. However, this is despite higher pension cost and higher expenses at the NN Bank.

So, basically when you take the higher pension cost out and the NN Bank expenses, because of the transfer of WestlandUtrecht, you see that the underlying administrative expenses that we manage as part of the transformation program that is really – that we’re really on track with that program.

And maybe if you look at the Q3 numbers there, you see a very low number. But that was caused by a VAT return and release of holiday provision. But I think it’s important to note it in this picture that the underlying administrative expenses are really going down. And that is because of a successful implementation of the restructuring program, now reaching €138 million savings so far.

Then looking forward for the insurance, so the ING Insurance continues to focus on improving its capital generation and also the earnings throughout the different business segments.

In the Netherlands, the focus continues to be of cost reductions and as said we’re on track with the transformation program. I think that’s a very important element there. In the Non-Life business in the Netherlands, management actions are being taken to improve the profitability and we have been able to demonstrate that by the improved performance on the disability and the accident side of the business in 2013.

For Insurance Europe, Japan Life, in fact the management basically focuses to produce earnings and we see them as cash generators going forward as well and the Japan Closed Block VA is expected to run off relatively quickly as shown that in the Q3 call releasing a capital over time in the foreseeable couple of years.

In order to, to wrap it up, so that we can start to answer some of the questions that may still be out there. And we’re proud of the financial and the strategic progress that we have achieved this quarter. And the thing is clear that we have delivered solid in-line results this quarter both on the bank side as well as on the insurance side. And we are working on the final steps of our restructuring plan.

And with that, I would like to kind of finalize the presentation and give the floor to you for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first two questions come from David Lock from Deutsche Bank. Please go ahead.

David Lock – Deutsche Bank

Good morning everyone. A couple of questions from me. The first one is on your risk weighted assets increase in the fourth quarter, which cost about 50 basis points on capital. I just wanted, is this a one-time change that is kind of come through this quarter or is this something that we should expect going forward as your models adjust to the economic environment?

And then, secondly on asset balances, when I look at the balance sheet at the end of the quarter at 788 that’s obviously a lot lower than the average net out reflecting from the transfers that occurred at the end of the quarter, about NIM guidance going forward for the coming quarters being flat. And clearly the balance sheet being a lot lower. How should we think about NNI as a result going forward or was it just a blip and should we see asset balances increase? Thank you.

Ralph Hamers

I think for the risk weighted assets question, we turn to Wilfred.

Wilfred Nagel

Yes, the question on what happened in Q4 and should we expect more of this, the regular process of updating our models. And obviously with the economic trend out there which Ralph also talked about, these models continue to show the deterioration in the economic environment. And that is reflected in provisioning and risk weights.

Now, normally these updates are spread fairly evenly over the year and we have in Q4 a little bit of an unfortunate bunching up of a number of these which led to a bigger change than we would normally see.

And one time or more to come, well, it’s never a one-off in the sense that this is a continuous process. But what happened in Q4 is certainly not an indication of what we expect for the next few quarters.

David Lock – Deutsche Bank

Okay, and then on the assets?

Wilfred Nagel

Yes, if you look at the balance sheet there is indeed a big decrease in the balance sheet. However, it’s not all in cost of lending, in fact a number of these items are turned off, concluded the exit of the IABF.

The deals part of that reduction is close to about €6 billion is the WestlandUtrecht transfer to insurance which is 5 RMBS as well. And FX mix of components of it also. And I think Ralph also mentioned and highlighted in his slide that there is commercial growth in lending. But yes, the primary thing we need to focus on in terms of NIM for the future.

Ralph Hamers

Yes. And you should also realize that we actively reduced the portfolio both in the real-estate finance and lease so that you can expect a further decrease there when we get to the targeted levels.

David Lock – Deutsche Bank

Thank you.

Operator

Thank you. And the next two questions come from Ashik Musaddi from JPMorgan. Please go ahead.

Ashik Musaddi – JP Morgan

Thank you and good morning everyone. So, first question is on your name, basically now you reported for 145 basis points in fourth quarter and this is what you’re guiding as well.

But as I look at slide number 11, it shows that there is a 2 percentage point, 2 basis points in negative impact from financial market i.e., you are underlying NIM as a bit more better than 145, so it’s around 147. So, what is stopping you to give a higher guidance than 145 at the moment is it because you look at this from a long-term perspective. Is that the reason? So, that’s the first question.

And secondly, can you just give us some color on your cost, so the guidance you’re giving now is €8.7 billion in 2015 expected cost for bank. If I remember correctly, earlier you gave it around €8.8 billion to €8.9 billion so this is some improvement. Is it mainly because of lower balance sheet but still your cost to income still doesn’t look like going towards 53% which you’re targeting? So, how should we think about your cost to income? That would be great. Thank you.

Ralph Hamers

Okay. On the cost guidance, I think we’ve always said that we will keep the cost flat until 2015. And so, basically that’s where we are focusing on. We see increased cost coming from bank taxes in several areas, regulatory cost. And we will continue to seek further compensating transformation programs and cost cuts in order to at least offset that or further improve.

And we’re in a constant process there. So, we have these programs that you know but beyond those programs we are constantly in a very cost aware if not cost cutting mode in order to ensure that keep under control and at least a flat for the foreseeable future.

Because you should realize that in total, our business is more on the bank. And we have actively reducing cost but we’re also active in some more growth markets where some of the costs are growing. And that total picture will lead to an expectation of cost to be flat for the next years.

Then, on the NIM, Patrick?

Patrick Flynn

Yes, on the NIM, 145 basis points up one. The end results more importantly was up and that was in the back of our higher margin particularly on the retail lending and savings which more than offset the two – saving the mortgage in general are expected to be resilient.

In the Netherlands we reduced client rates another 10 basis points in January ‘14. And the impact of the Belgium 10-bps cut in the fourth quarter didn’t still come through fully.

Specific to your point about financial markets, it can be volatile. Overall, it’s a solid earnings profile but the composition between what’s mark-to-market and what interest vary quarter-on-quarter. So, we prefer to focus on the more predictable and commercial banking piece. And then as I say reduced fee is the potential for slight up-tick in that as we go forward.

Ashik Musaddi – JP Morgan

Okay. Thank you. Thanks a lot. That’s fair.

Operator

Thank you. (Operator Instructions). The next two questions comes from David Andrich from Morgan Stanley. Please go ahead.

David Andrich – Morgan Stanley

Hi, good morning. Thank you for taking my questions, just a follow-up question on the increase in the RWAs. I was wondering how we interpret this as any kind of signal in terms of change in market conditions or kind of higher capital requirements coming from the DNB or anything like that, I just wanted just a follow-up on that?

And then, second one, in terms of the retail Belgium business I saw larger quarter-over-quarter increase in the loan loss provisions. And I was just wondering if you could just give a bit more color behind that? Thank you.

Ralph Hamers

David, I’ll ask Wilfred to answer you.

Wilfred Nagel

Yes. So, on the RWA and as we said, I mean, this is a continuous process. It just so happened that we had a couple of things bunch up in Q4. If you were to include for example what happened in Q3, you see a much smaller change in RWA because over the second half in total it was only about €4 billion.

And so, should you read anything particular in this? I don’t think so. It is a reflection of a trend, economically that we’re still deteriorating in 2013. By definition, these numbers always lag by one or more quarters, depending on the frequency with which we update.

And but we do signs of the economy bottoming out at least in parts of Europe. Unfortunately that’s not quite the case in Holland yet, but in some of the other markets it is. So, personally I would say that in the next update are going to be at least a lot less impact – lot less impact for them than this particular one.

And then on Belgium, and actually both the trend in risk weights as well as in provisioning there is driven by exactly the same thing which is this same model update. And if you look at the underlying there, and the comparison I realize is not fully valid but I think it’s an interesting indicator.

If you look at the actual write-offs in Belgium against that same portfolio that’s been very stable at about €10 million to €11 million a quarter for the past six or seven quarters, so it’s not as if we’re seeing an underlying trend there either.

David Andrich – Morgan Stanley

Okay. Great. Thank you very much.

Operator

Thank you. And our next question comes from Marco Kisic from Nomura. Please go ahead.

Marco Kisic – Nomura

Good morning. I have two questions. My first question is on asset quality. Can you give us a bit more color on the AQR turned out by the Dutch regulator, as in what did they focus on and what type of definitions did they give us as part of their review?

And the second question is on asset lending, we have seen some increase in fees, particularly in Belgium and rest of the world and some in structural finance and transaction services. Can you give again, here some color over the nature of these increases and your strategies, growth strategies in this segment going forward? Thank you.

Ralph Hamers

Wilfred is going to answer the AQR question.

Wilfred Nagel

So, to start the IFRS definitions, what the initial process was that they looked at about €40 billion in assets in total income producing real-estate. Based on their quick scan of that they assumed in about €24 billion in more detail and that was a very thorough review assisted by a number of outside experts in the real-estates here, which led to an assessment down to in the video files for a number of these portfolios.

And of course, in that process, you would find that the judgment on individual files here and they’re different from ours both positively as well as negatively. But on the whole, and you see the impact as Ralph indicated of our interaction with DNB reflected in the numbers completely in Q4.

Ralph Hamers

Okay. And then on the asset lending in general, well, I think you know our strategy, where we’re active as a domestic bank. Basically wherever there is demand on the retail side, SME side, mid-corporate side. With the prudence that we take we support those clients and those economies. So those economies are growing then you will see that our assets will also further grow and in some cases maybe a little bit faster as well, where we do grow market share.

On top of that we do see a much more demands coming in different areas as well, which is the sign of the economy picking up produces being confident and more investment loans being requested and particularly also in the areas of trade. So we do expect so further asset growth in the coming quarters.

Although we also see that in some areas like in the Netherlands, we see the portfolio going down because of prepayments and repayments of mortgages.

Marco Kisic – Nomura

Okay, thank you.

Operator

Thank you. And the next question comes from Anton Kryachok from the company UBS. Please go ahead.

Anton Kryachok – UBS

Thank you very much for taking the questions. I have two questions please on the revenue line. Firstly, it’s time to understand your guidance on name a little bit better. During the call, you have talked about the potential to increase lending margins in the commercial banking. You have also outlined some deposit re-pricing work that you have done recently.

And of course there is 2 basis points negative effect on net interest margin from the financial markets. So I was wondering why your outlook on some names specifically for flat 145 basis points going forward given that you have a number of tailwinds behind you?

And the second question is, on funding and NNI. A lot of terming out work that you have done from your funding profile was dealt during 2011 and 2012, when the cost of funding was much higher than we are seeing right now in the markets. Do you see any potential tailwinds from refinancing of those expensive funding sources at a cheaper price now? Thank you.

Ralph Hamers

Okay. Anton, on the NIM I will give you some more details. On the funding profile, Patrick will talk about that. Yes, so we – over the last couple of quarters, we have seen the potential to increase the lending margin in CB. However, we feel that we’re quite there. I don’t think there is a lot of possibility to further re-price on that side.

We are however seeing that over the last couple of quarters, the NIM has improved more or so, on the deposit re-pricing, there is a decrease in deposit prices. And we have decreased those also in the fourth quarter. And some of that effect is not fully in the result. But overall, we feel that the NIM will stay around at the current level, and maybe a little bit increasing from this level.

Then I’ll turn it to Patrick for the funding profile.

Patrick Flynn

Yes. In terms of the funding profile, the cost of that we – we’ve mentioned before that included within our strong interest margin of 145, we’ve incorporated and had the cost of the debt assurance which you refer. Partly to help – exclusively help transparency, we’re going to isolate that and put it in the corporate line.

So in the debt we issued in the crisis to extend the profile of our funding to accelerate which we did ourselves towards being compliant with Basel III emerging regulatory requirements was expensive. That cost which is worth 5 bps in total is we’re going to isolate, put into the corporate line.

In terms, the impact going forward, it will take some time to run off. I think it may increase very slightly in ‘14 before it starts to run-off. Initially the run-off is gradual and then thereafter it starts running quickly. So I don’t see immediately a big pick-up of benefit from lower funding cost.

Our funding profile is very good there and on deposits 104, and the acceleration in senior debt funding which we undertook is down, we don’t need to roll that. So, yes, the treasury book will take a little bit of time to run off.

Anton Kryachok – UBS

Thank you very much. That’s very clear.

Operator

Thank you. And the next question comes from William Hawkins from the company KBW. Please go ahead.

William Hawkins – KBW

Hello, thank you very much. My first question is on the fixed charge cover for insurance. You flagged that that was an issue that may still need addressing. Can you tell us what the fixed charge cover was and what you like it to be and what actions you may be able to take to improve that or is it just an issue of trying to get the earnings to improve?

And then secondly, I’m sorry, just back on the risk weighted assets in the Netherlands in particular. What kinds of scenarios can you imagine that would lead to a further increase in the required risk weighting, so before at 19% now why shouldn’t it go to 25% or is that an unimaginable scenario? Thank you.

Ralph Hamers

William, I think for the first question we turn to Patrick.

Patrick Flynn

Yes. In terms of the fixed charge coverage ratio, a little bit more work to do there. The number was about 4 at the end of the quarter, that’s excluding the impact to Japan VA specializations and divestments. The outlook for that would be influenced by obviously earnings, which we’re focusing very hard to improve and the final debt structure including the €1 billion conversion.

I think it’s important to note that the debt structure to date is floating rates and going forward it’s more likely to be fixed. And so, some work to do to improve the fixed charge coverage ratio something we’re going to focus on between now and the IPO and we will update you at the point of the IPO and how we see this.

Ralph Hamers

And then for the risk weighted assets we turn to Wilfred.

Wilfred Nagel

Yes, the question was why wouldn’t they go to 25% or more, and well, would it move again, it would if the market really continues to deteriorate. That’s not as Ralph was indicating earlier really what we’re seeing. And we do expect a slight further decline of house prices into 2014 but very likely are bottoming out. So, looking at the outside world, it’s not so likely that we’ll see something dramatic happen to this risk weight.

And the second point I’d make is that if you look at the history of our risk cost versus write-offs on this book, we’re still showing the same trend where the net stock of provisions keeps going up, in other words, we keep adding more than we’re actually using. The third observation is that’s also reflected in the fact that we’re not seeing extra losses profile that we liquidate.

In fact those losses are very stable as is the number of foreclosures, which keeps running at about 420 or so per quarter like a straight line. So, we’re not seeing anything in the economic reality around this book that causes us great concerns here. And while more points this whole debate about risk weights is very exciting.

The reality of the book has been throughout this crisis that the risk cost has been well within the operational profitability on the book itself. And that ratio is actually improving as we speak because the profitability is going up and we don’t really see the risk cost going anywhere from here.

William Hawkins – KBW

Thank you.

Operator

Thank you. And the next question comes from Benoit Petrarque from the company Kepler. Please go ahead.

Benoit Petrarque – Kepler Cheuvreux

Yes, good morning, it’s Benoit Petrarque from Kepler Cheuvreux. Yes, two questions from my side. First one is on the capital, 10% core Tier 1 ratio fully loaded. Now if I strip out the remains stat report and pension it’s 9%. Well, obviously you will build up capital in ‘14 about 120 bps your models are some risk weight assets grow.

But let’s say you might end up at 10% in ‘14, will that be a good level for you, i.e. do you build from the top of that? And do you consider to use some of the cash proceed from the IPO to actually recapitalize the bank after the IPO? That’s the first question.

And number two is also on capital. You’re about 60 bps of positive evaluation reserves taken in the 10%, are you considering to send (inaudible) there, I think the Belgium regulator has been implementing on that negatively? So what is your view on the stock of evaluation reserves including in your ratio? Thanks.

Ralph Hamers

Benoit, I don’t recognize your number of 9%. The fully loaded core Tier 1 at the end of the year is 10%. I think that’s a solid number. And if you look at where it is come from, that’s on the back of a bank which is paid out nearly 100% of its €3 billion profits in the course of the previous year which is 1%. And still ends up at the end of the year at 10% fully loaded.

Yes, we have safe repayments to pay at the end of the quarter which is about 40 bps and 20 bps of the pension deal. But, if thinking about capital, what’s important is to think about whether any of the proceeded draft is due to structural or temporary events, if we’re structured we would certainly be taking mitigating measures. But temporarily we take a different view.

So the bank has demonstrated a consistent pattern of strong capital generation in the past. And I think that’s likely to continue. So I am confident with this capital generation capability that during ‘14, the core Tier 1 ratio above 10%.

Now, in terms of this debate around excluding mark-to-markets, yes, we were aware that there is some discussion around that there is some discussion under a number of other pieces within Basel III. We’ll watch of that emergence.

Benoit Petrarque – Kepler Cheuvreux

Okay. Thanks.

Operator

Thank you. And the next question comes from Francois Boissin from the company Exane. Please go ahead.

Francois Boissin – Exane

Yes, good morning everyone. Just two questions on the insurance please. First one is, can you give a bit more details on the amount of capital backing the Japanese Closed Block VA and at which pace this capital should be released? That’s the first question.

The second question is, you mentioned higher investment income in Q4, especially in the Dutch Life business. And can you give a bit more clarity on where this comes from, is this from re-risking or is this from lower crediting rates or a combination of both? Thank you.

Ralph Hamers

Delfin?

Delfin Rueda

Okay. In terms of the amount of regulatory capital back in the Japan VA, maybe just to remind everyone that we are doing the calculations for the capital required based on economic capital. And that is approximately €900 million.

The other question was about the investment income in the Netherlands i.e. the question was in terms of what is so curing in the Netherlands Life is in the one hand when we are gradually converting into some higher rate in assets. We have done that over the last quarter by increasing approximately, I mean €2.9 billion of mortgages that has been invested. So that will enhance the deals going forward.

When you compare the investment margin with the fourth quarter, you have to be careful as in the fourth quarter of last year, there was lease operating provision of €51 million and that basically distorted the comparison.

Francois Boissin – Exane

Thank you. Just a follow-up on the capital banking, the VA Blocks you mentioned €900 million economic capital. What would be the pace of release of that capital if everything goes according to your plan?

Delfin Rueda

We have I mean, how the capital will be basically in the short-term might be based on the reality of – based on hedging. But we have to take into account that over the next five years, the majority more than 90% of the book will mature. So, what will be the capital release quarter-per-quarter is uncertain. But over the next five years it will be the majority of it.

Francois Boissin – Exane

Thank you very much.

Operator

Thank you. And the next question comes from Matthias de Wit from the KBC. Please go ahead.

Matthias de Wit – KBC

Yes, good morning. Two questions please from my side. First, on the solvency of NN Life, can you provide a bit more color on the 15 percentage points sequential increase in IDG. What part has retained earnings and what part this market impacts and how should we think about the cash flow generation of NN Life going forward?

And then secondly, also on the insurance business on the Dutch Non-Life, the combined ratio is ahead of the 100% level. But what would be a normalized level going forward if you would exclude the visibility issues and the exceptionally bad weather we’ve seen in the fourth quarter? Thanks.

Ralph Hamers

Matthias, I’ll ask Delfin to go into those.

Delfin Rueda

So, two questions, Matthias. The first one, is about the increase in solvency during the quarter. I mean, do doubt that NN Life has improved very significantly by approximately 50 percentage points on a pro forma basis. So, at the end of 2013, the solvency 1 ratio was 221% from 183% at the end of September.

The main drivers for this increase are obviously the €600 million capital injection that was performed in the quarter and also favorable markets that allotment as well as some internally generated capital.

Matthias de Wit – KBC

Yes, the little part, how big is it, in the 16 percentage point please?

Delfin Rueda

It will be around €90 million or so operationally generated capital.

Matthias de Wit – KBC

Okay, thanks.

Delfin Rueda

In terms of the combined ratio, certainly the fourth quarter has been influenced as it is disclosed in the quarterly report by some increases related to storms, very significant storms in the quarter and also some large claims for fire.

In terms of normalized level, obviously the intention is to bring the combined ratio below 100% in the short term. And that is being driven by the (inaudible). During the last quarter we have seen the significant improvement on the group visibility business. Fortunately in the quarter, there was deterioration in property and casualty driven by fire, some deterioration in motor and also some deterioration in the individual visibility book.

Matthias de Wit – KBC

Okay. Thanks.

Operator

Thank you. And the next question comes from Francesca (inaudible) from the company Morgan Stanley. Please go ahead.

Unidentified Analyst

Good morning, all and thanks very much for all your explanations so far. Two questions from my side as well. Just going back from, I meant to the question of increasing risk weight and the impact of capital. Just to clarify, if just some economic deterioration, to what extent there is any impact from the review of the DNB if you could they like, kind of comment on that just specifically?

And just if it’s just economic deterioration the 50 bps kind of erosion from the increased weighting, and why do you feel so confident that in Q1 it will be lower than that, was there any reason why that was actively, there was more of a keep in Q4. Just want to be comfortable that we’re not going to see a similar impact under the capital may drop marginally again in Q1?

And the second point on that interest income, helpful comments on the margin. But if I’m looking at your assets being low, it’s still not entirely clear to me. If net interest income in the bank is this one level in Q4 level from which you can build in the course of 2014? And so, I can actually hope for some growth in the asset driving some growth in NNI. Could you actually make a comment on that? Thank you very much.

Ralph Hamers

Okay. Now Francesca, for the first question we turn to Wilfred.

Unidentified Analyst

Thank you.

Wilfred Nagel

Yes. So, if I understand your question, well there are two parts of it, one is what was the impact of the DNB as the quality review, and the second is, are we confident that we won’t use similar drop in Q1 right?

Unidentified Analyst

Correct.

Wilfred Nagel

Okay. On DNB as a quality review, as we mentioned, the results of that review are in the results as you’re looking at. And actually if you look at risk weighted assets purely for the commercial real-estate book, they went down slightly. So I think that answers your question on that topic.

And as for Q1, I mean, obviously there will be a number of moving parts in Q1, not just around model update but also for example the impact of Basel III because parts of the safety and impact there will show up in Q1.

But if the question is particularly with regard to model updates as I mentioned earlier, it was a bit of an unfortunate bunch up in Q4 that led to this increase in RWA. And we currently don’t expect something like that for Q1.

Unidentified Analyst

Okay, that’s very clear. And the Central Bank is only focused on commercial real-estate?

Wilfred Nagel

Yes, they did.

Unidentified Analyst

Okay. And is there a more focus elsewhere to come in Q1 or pretty much is done at this stage?

Wilfred Nagel

With regard to DNB it’s done, with regard to ECB obviously there is a new process which is kicking off as we speak.

Unidentified Analyst

Great, thank you. And on the NNI?

Ralph Hamers

Yes, so, on NNI, Francesca, yes, so basically what you’ve seen in terms of the reduction on the balance sheet on the asset side in Q4 as Patrick has explained. A lot of that was related a non-client assets like the return of the IABF and some of the trading assets big impact on the foreign exchange evaluation and lower prices on central banks.

But basically we see the growth on the client asset now picking up again. So, basically we expect that where the assets will start growing now again, it will actually be remunerating assets. And therefore that will have an effect on interest income.

Unidentified Analyst

Great. So, we should expect NNI then up from this level?

Ralph Hamers

As I’ve indicated earlier, it’s the 145 where we feel comfortable but we do expect a slight increase from both the asset side but also because of some of the effects on lower savings rate that we have introduced in the fourth quarter and the full effect will be in this year.

Unidentified Analyst

Thank you.

Ralph Hamers

Okay.

Operator

Thank you. And the next question comes from Kiri Vijayarajah from Barclays. Please go ahead.

Kiri Vijayarajah – Barclays

Yes, good morning guys. Just a follow-up on the question there on the shrinkage in the asset base. Have you actually been taking your liquidity buffers down because I think did you not say balances with Central Banks I think went down in the quarter?

And then just also going back to the DNB review, how confident are you that the process there is going to be aligned to the ECB’s AQR. Because I think you said the DNB was using fresh definitions rather than EBA for things like NPL. So, I wondered how confident you are that that DNB process is going to be closely aligned to what’s going to follow-on later this year. Thanks.

Ralph Hamers

Okay. So, the first one Patrick will take and the second one Wilfred will take.

Patrick Flynn

Yes, balance sheet management is a complex element. And one of the complexities of it is that the end of the year, it’s reviewed for the purposes of bank tax. So, we carefully manage our position there to make sure it’s optimized.

Wilfred Nagel

Then for the AQR, so the ECB AQR is also principally going to be based on our IFRS definition, so we don’t see a massive difference between that and what’s happening in – or what was happening in the DNB asset quality review. And what we know of the ECB AQR is that there is going to be somewhere around 16 portfolios or so in ING that are going to be looked at.

The physical information of that is going to come a bit later this week. And the big difference that we see so far is that DNB asked for a lot more data per asset than ECB is almost a factor 10 between the number that, one asked. And the other is going to ask.

So, in terms of operational pressure, it’s going to be a different exercise. And what DNB did with regard to commercial real-estate was they actually and that was done by Blackrock, we under wrote a very large number of loans and that included a full review of around 45,000 properties.

Now, given the work flow is on ECB that may not quite be the case how – in case of the ECB review but again we don’t know yet until we have the final details of what we’re going to be looking at.

Kiri Vijayarajah – Barclays

Okay, brilliant. Thanks guys.

Operator

Thank you. And the next question comes from Anke Reingen from the company RBC. Please go ahead.

Anke Reingen – RBC

Yes, good morning. It’s Anke Reingen from RBC. I have two questions please. First is, before coming back on this risk weighted asset increase, I just wanted to clarify how much of this is a reflection of a worst economic environment and how much of this is like potential pillar to work environment? So, would the Dutch mortgages ever come down from the 19% risk weighting if the economic environment improves. So is this like a standard right now?

And then secondly, on the loan loss charges in Q4, to be honest, I expect it to be bit higher given the seasonality. I just wondered given the only moderate increase, what your outlook is for 2014? Thank you.

Ralph Hamers

Wilfred?

Wilfred Nagel

So, on the RWA increases and these are all by definition updates that look back at the most recently available economic data as well as data underperformance of our book. So, by definition that’s risen by what the economic environment is showing. And that is not going to change which also means that as and when the economic environment improves, we would expect these risk weights to change with that.

Having said that if you look at what happened in Q4 on a few of these portfolios, we adjusted our downturn LGDs. And those downturn LGDs in principle will stay there for a longer period because by definition they reflect a worse situation that we could envision.

And so, are they going to move as quickly up as they move down, probably not. But the concept is that they move with the economic environment and the quality of the book. And then, your question on the loan loss charges, if I understood it correctly is, what was the outlook for 2014, is that what you asked?

Anke Reingen – RBC

Yes, yes. Thank you.

Wilfred Nagel

Okay. That is as always a bit of a science but more an art. What we’re seeing on one hand is there a number of indicators that the economic environment in most of the countries that we operate in is improving. So, that would at least with a reasonable degree of confidence lead us to say in those areas we would expect a decline at some point.

We’ve indicated in the past that there is always a time-lag between an economic development and what shows up in our loan losses, that was the case going into the crisis. It will be the case coming out of the crisis. So I don’t expect this to take off rapidly but we do think that on a number of particularly international activities, i.e. those outside the Netherlands we will see an improvement.

On the other hand, as Ralph has also indicated, we’re not so optimistic in short run about the recovery in the Netherlands. And therefore we expect to continue to see pressure particularly on the business lending books here and potentially also in real-estate finance.

Although I would say that overall globally for real-estate finance we do expect risk also to improve. And the only reason I’m a bit cautious on the Netherlands is, I think we’re over the hump with offices, I mean, that market has continued to deteriorate but at a much lower pace. We’re seeing more interest also from international investors now.

And but on the other hand, I think there is some more pressure going to come on the retail side of the book. And that’s also driven by what we see happening in our regular credit activities where there is a lot of retail in the watch-list and in the restructuring books.

And if you combine all of that, our view at this point is that it is more likely than not that we’ll see a slight decline in risk cost in 2014. I wouldn’t expect that to start very rapidly so we would see most of that probably in the second half of the year.

Anke Reingen – RBC

Okay. Thank you very much.

Operator

Thank you. And the next question comes from Marcus Rivaldi from the company Morgan Stanley. Please go ahead.

Marcus Rivaldi – Morgan Stanley

Good morning, two questions please. First, the debt equity swap with regards to the insurance business. Should we assume that that marks the end now of the restructuring of the capital structure of the insurance business for the IPO or is it more to come there?

And then secondly, obviously you’ve still got a chunk of internally issued group hybrids. Could you talk a little bit please about what you plan to do with that in terms of timing and maybe pre-IPO. And whether you’d be looking to fit the – if you were to externalize them swap them into qualifying regulatory capital? Thank you.

Patrick Flynn

Okay. In respect to the capital structure for insurance what we need to do, we need to do further. There are three factors we look at in determining the right level of capitals for these insurance. The solvency at the operating level, most significant of which is an end, which is from the improved with the cash profit as a whole core, which is another €800 million and is leveraged.

I think we’re in the right spot and on the right range now in the first two, namely the net solvency and the cash buffer. But in terms of leverage as I mentioned earlier and with respect to fixed charge coverage ratio, there is still some work to do.

That means the target range for that should be for a single-A rated 4-8, as I mentioned earlier or at the bottom of that 4. So, we do need to – so we have some work to do to improve our fixed charge coverage ratio between now and the point of the IPO.

And as I said, before we will update you, again there are two ways of doing that. Obviously, it’s a ratio, you can prove earnings or you can reduce the interest cost. So we’re going to work on preferably organic capital generation to deal with this. But we will assess where we are before the IPO and make the final call on what if anything further needs to be done with the capital structure towards the IPO.

Marcus Rivaldi – Morgan Stanley

Okay, thank you.

Ralph Hamers

Yes, I mean, over time the debt structure will change such that it will be external hybrids be a steady process.

Marcus Rivaldi – Morgan Stanley

Okay. Thank you very much.

Operator

Thank you. And the next question comes from Omar Fall from the company Jefferies. Please go ahead.

Omar Fall – Jefferies

Good morning. Two small questions please. Firstly, just coming back to the drag on NIM from higher treasury funding costs, and a question from earlier. I didn’t really understand the answer. You think that eventually that 5-basis point drag that you reported will go from negative to flat over time and if so, what period, and more generally why are you still lengthening your maturity so much when your funding profile is already very strong?

And second question, sorry to come back to the higher risk weighting on Dutch mortgages and with everyone having been critical in the past of the low weighting there. It’s maybe harsh to overly penalize you when it gets to a level that’s more in line with European peers.

But anyway, my questions relate to the weighting on corporate loans which is still quite low. I’m surprised that given the ongoing higher NPL build, in business lending and now for example that those haven’t moved almost they have and I’ve missed it? Thanks a lot.

Ralph Hamers

Thanks for the question on NIM, bank cash weight, Omar. And Patrick will give you the answer.

Patrick Flynn

We are not expanding the profile, that work is done. So it’s finished. And part of it was, a small piece of it was in the back-end of ‘13, so there is a slight annualization you need to see in the overall 5-bps. So, a small increase in ‘14 purely because of the annualized effect in 2013. But the debt profile is where we wanted to be, we do not need to extend that debt profile.

This was a lot of our senior debt, so it’s long dated so we’ll take some time to run off. So we see a small increase in ‘14 and then a gradual run-off which I predict five to six years for us to accelerate by the early 2020 it becomes significantly lower. So, this job is done, it’s finished.

Omar Fall – Jefferies

Got it.

Wilfred Nagel

Okay. On the risk weights for business lending, actually the weights have moved quite significantly in the last quarter alone. An example of that in the Netherlands, risk weights moved from 56% to 71% and in Belgium it moved from 26% to 33%. So, I think the models are doing exactly what they’re supposed to be doing. They’re pushing up these risk weights as the environment deteriorates.

And frankly, we think that if we you look at those weights they fairly represent the risk. Again also on these books are provisioning is well ahead of the actual losses continuously. And again, the operational profitability is again ahead of that. So, it is of course something that we need to do carefully and do in a prudent way. But it’s not to see if any of this is eating into our capital to begin with.

Omar Fall – Jefferies

Understood. Thank you very much.

Operator

Thank you. And the next question comes from Farquhar Murray from the company Autonomous Research. Please go ahead.

Farquhar Murray – Autonomous Research

Good morning gentlemen. Just one question if I may, really just a follow-up on Marcus’s question. On the fixed charge covering ING Insurance and how you improve it. And would you consider doing any further debt conversions for your coverage there, probably nearing the IPO or should we really regard that one, is that clear on that front?

And then when you talk about change in the debt structure, presumably this shift from floating fix would actually further reduce the fixed charge or do you actually benefit from that change?

Ralph Hamers

Well, I think losing to fix some closing is obviously adds more cost. As I said, we will make a final determination what we need to do to get the fixed charge coverage ratio into the target range just before IPO. So, we keep our options open in that regard. If there are capital improvements or the debt conversion options are open and we think that final assessment just before the operating IPO.

Farquhar Murray – Autonomous Research

Okay, thanks Ralph.

Operator

Thank you. And the final question comes from Steven Haywood from HSBC. Please go ahead.

Steven Haywood – HSBC

Hi, good morning. You’ve previously mentioned that you had a normalized to the cycle risk cost of about 40 to 45 basis points. I’m wondering if you could tell us what the normalized risk cost would be under a fully loaded Basel III regime here. Also, your combined share in NN, if includes broker business, can you tell us why you exclude the broker business here because calculating it including broker business you had 109% combined ratio? Thanks.

Ralph Hamers

Okay. For the normalized cycle risk cost, 40% to 45% basis points, Wilfred?

Wilfred Nagel

It would be the same as what we have always been guiding. There is no big difference in terms of what the Basel III regulations do here.

Steven Haywood – HSBC

Can I just follow-up on that? So, if your risk weighted assets go up from €280 billion to €300 billion but you still guide, so that means your penetrations will go up as well by 40 to 45 basis points of that?

Ralph Hamers

That’s correct.

Steven Haywood – HSBC

Okay. Thank you.

Delfin Rueda

And Steven, on your question on why we exclude (inaudible) brokers from the calculation of the combination ratio and the under risk, is just because they are completely different business. So, we see our broker that generate margin and receive service fees, so it has no claims. So basically it’s presenting the combined ratio of the insurance business only. However, as the numbers are for the full segment, Netherlands no like they are included but the combined ratio needs to be calculated only on the Insurance business.

Steven Haywood – HSBC

Okay. Thank you.

Operator

Thank you. There seems to be no further questions. Please go ahead with any concluding remarks.

Ralph Hamers

Okay. Well, thank you very much for joining us this morning and asking these questions and showing interest in our result. And just to round off, to summarize, we feel that the results both financially and strategically are rather strong. And we have made a lot of progress on the restructuring of our 2013 and even more so in the end of 2013.

And we’re ready to go into the final stage of restructuring for ING Group with the base case IPO for the Insurance Company fully on track, with the capital plan being put in place. And we’re confident as to where the performance in the next couple of quarters. Thanks very much. And have a nice day.

Operator

Thank you ladies and gentlemen. That does conclude the conference call for today. Thank you for your participation. And you may now disconnect.

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