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ING Groep N.V. (NYSE:ING)

Q4 2010 Earnings Call

February 16, 2011 10:00 AM ET

Executives

Jan Hommen – Chairman and CEO

Matt Rider – CFO, Insurance Company

Patrick Flynn – CFO

Koos Timmermans – Chief Risk Officer

Analysts

Spencer Horgan – Deutsche Bank Securities

Farooq Hanif – Morgan Stanley

Andrew Coombs – Citigroup

Johnny Vo – Goldman Sachs & Co

Christopher Hitchings – Keefe Bruyette & Woods Limited

Francois Boissin – Exane BNP Paribas

Farquhar Murray – Autonomous Research

Thomas Nagtegaal – RBS

William Elderkin – Societe Generale

Nick Holmes – Nomura International Plc

Michael Van Wegen – Bank of America Merrill Lynch Intl.

Jan Willem Weidema – ABN AMRO

Hans Pluijgers – CA Cheuvreux

Marcus Malvaldi [ph]

Lemer Salah – SNS Securities

Frederico Salina [ph]

Tony Silverman – Standard & Poor’s Equity Research

Manish Bakhda – Citigroup

Operator

Good morning. This is Sarah [ph] welcoming you to ING’s Q4 2010 conference call. Before handing this conference call over to Jan Hommen, Chief Executive Officer of ING Group; Patrick Flynn, Chief Financial Officer; and Koos Timmermans, Chief Risk Officer, let me first say that any forward looking statements in today’s comments are subject to a number of current views, assumptions and variables including interest rates, foreign exchange rates, inflation rates, fluctuations in securities markets including equity markets and underlying economic conditions and changes. These are set out in greater detail in our public filing which we urge you to read. The realization of forward-looking statements can be materially altered by unexpected movement in, on any or all of these other variables.

Good morning Jan, Patrick and Koos. Jan, over to you.

Jan Hommen

Thank you very much. Welcome everyone to the Q4 ING results conference call. I’m happy to report that ING is continuing to make good progress as we prepare the bank and the insurance companies for their future as standalone companies. The bank boasted another strong quarter and the insurance company is showing a solid improvement in operating profits. Although, on an underlying basis, results were impacted by the measures we announced last quarter to address the US insurance book and variable annuity block. The good news is that markets improved in Q4 and the total impact of the VA measures we announced last quarter was lower than we originally anticipated.

I will talk you through the presentation now and afterwards Koos Timmermans, Patrick Flynn and also Matt Rider, our CFO of the insurance company are here with me and we are all able to answer your questions.

Let me go to slide two. ING Group reported an underlying profit of EUR644 million, which was up from EUR90 million a year ago. The bank had another strong quarter with underlying profit of EUR1.5 billion before tax. Operating results in insurance increased to EUR438 million compared to EUR303 million in Q1 last year, underlying results impacted by the announcement we made already last quarter on the call that has an impact of EUR975 million before tax.

Operational separation of the bank and the insurer was complete and the two companies are now operating individually as of January 1st 2011. The separation now enters phase number two. As we are now working through legal and operational separation within the insurance organization.

The focus for 2011 will be to prepare the insurance company for two IPOs and then all at the same time that we want to work towards the repurchase of the remaining outstanding core Tier 1 securities from the Dutch State.

On slide three you can see that the bank had another strong quarter, certainly, compared to Q4 last year and almost on par with Q3. Insurance company operating profits improved significantly from a year ago mainly because of investment spread as cash balances were reinvested. Underlying result as I mentioned earlier impacted by the DAC write-down on the US closed block.

For the group that had an impact that the underlying profits was EUR644 million compared to Q4 that was significantly up last year but down compared to the (inaudible) of this year and that was due entirely to the DAC write-down.

Net profits were EUR433 million. We had special items impacting on that of about EUR229 million primarily as a result of the separation process we are in and some restructuring programs.

Page four, you see the full year results and you can see that the bank really had a good year. In fact earnings are now up to levels that were pre-crisis. Insurance operating profit improved in 2010. An underlying result for the group was EUR3.9 billion, up fourfold compared to last year with a net profit of EUR3.2 billion compared to a loss of EUR935 million.

On slide five you see that we compared with the ambition we issued last year that we’re making good progress. Strong income generation by the bank. Healthy margins and lower market impact really had a significant impact on our numbers and excluding market impacts income rose by 7.4%. Gross income ratio is stable at 54.2% as we exclude the impact of markets risk costs are trending towards the more normalized levels. Return on equity if we calculate that based on the 7.5% we assumed when we made our plan for the ambition 2013 of 17.6 and if we calculate that based on IFRS equity, then the return is 13.1.

The same for insurance. Good progress on the ambition. Healthy growth in the general account. Investment margins were up to 93 basis points compared with 83, that’s on a four quarter trailing trend line. Administrative expense slightly down despite some accrual adjustments we made last year to our bonus deferral which benefited the numbers in Q4 in 2009.

Sales growth continues to exceed our target, which was 10%. We were up 17.3% but we are maintaining very straight pricing disciplines. And the return on equity is still lagging our objectives but it was mainly impacted by the DAC write-down.

We look at our separation process in slide number seven. The operational separation is completed now as of January 1st 2011 so we are working together on an arm’s length basis where we share infrastructure and where we do activities together. The separation costs were EUR85 million after tax and the focus for the year 2011 is to make the interim solutions more permanent mainly related to IT. We expect that we will spend this year, about EUR200 million after tax and all together there and that we will focus also internally within insurance on separating the US operations from the other activities and to make sure that we align our investment management activities correctly with our two IPO structure.

We will align the insurance structure to the new IPO. That means that we will take a look at our legal structure in the first half of 2011 and we also will be looking at getting our regulatory approval process in place so that we can do IPOs by the time that we are ready for that. Investment management will continue to operate across all the regions to ensure that we have our customers really provide with continuity with terms of product distribution and investment expertise.

Looking in particular at the bank, you see on the left side that the commercial results of the bank rose compared to Q4 last year but declined somewhat compared with Q3 reflecting the seasonality and financial markets also combined with some higher expenses here. Risk cost increased slightly in Q4 after three quarters of decline. However, the market impact also included a gain on the sale of the stake and full bond, which was about EUR189 million which was reported in the corporate line. And the underlying result before tax was up strongly compared with Q4 due to lower market impacts and almost at the same level as Q3.

The net interest margin on slide number ten rose 247 basis points. That is 6 basis points higher than both Q3 of 2010 and Q4 of 2009 and we expect the net interest margin to remain stable at around 140 basis points for the quarters to come.

Margins in particular benefit from structured finance where we saw continued increase. Margins for mortgages and savings remained healthy in all businesses. But we see a little bit more competition for a number of areas, in particular the mid-corporate and the insurance market and especially here in Netherlands. While at the same time we see the demand for loans is still subdued in those areas.

On the right hand you see also the interest results held up well and they rose by 11.6% mainly driven by client balances and higher interest margins.

Looking at costs on page eleven, on a reported basis the cost increase was 1.4% compared with the year ago. But if we exclude currency and a number of exceptional items, then expenses were up 9.2%. We had some special items in here. We had a new deposit guarantee system in Belgium and we had higher marketing expense at the end of the year in support of the brands. Some special campaigns we had and we had increased expenses for stuff also external stuff in particular related to IT projects that we are undertaking to replace all infrastructure as well as building new activities. On a full year basis, adjusted expenses are up 3.1% and I can assure you that we will be very vigilant on cost control in the year 2011.

Risk costs continue to trend down in 2010. But in Q4 we saw a small increase. A small increase to 51 basis points on average risk rated assets. And there was many visible in the retail banking driven by model changes on the mortgage portfolio. For the coming year we see risk cost as a percent of risk rated assets to be slightly below the level of 2010.

The next slide you see the non-performing loans, the slight increase to 2.2% and the increase in risk cost was mainly driven by the model adjustments we made on the Dutch Mortgage portfolio which still has an MPL that remains stable at about 1%.

On page 14 you see the results of the retail banks, well retail banks had underlying result before tax increase compared to last year’s Q1 but had a decline basically due to higher expense and higher risk costs.

Looking at the commercial bank, you see here that the commercial bank excluding real estate had a strong increase in results compared with last year, up about 39%. And you see also that it impacted by mainly structured finance doing very well and core (inaudible) activities compensated by lower results which is normal seasonally in financial markets. And good news also on our real estate division that turned positive and made a contribution of EUR80 million that helped by stabilize the property prices.

And when you look at our real estate exposure (inaudible) a decrease from EUR3.3 billion to EUR2 billion at the end of Q4 and largely explained by the sale we did in Summit in Q4.

Yesterday you saw that we announced that we have reached an agreement to sell the majority of our real estate investment management business for EUR1 billion US dollars and that we have sold another EUR100 million of equity interest in our (inaudible). All together that will be delivering a gain of approximately EUR500 million by the time that we close this transaction. Investments and real estate development projects continue to decline. They were EUR2.3 billion in Q4 last year and now they are EUR1.8 billion. So we continue to work on reducing our exposure in the real estate area.

Core tier-one up significantly to 9.6%, a strong generation of profit of course that contributed EUR4.4 billion and the remainder as a result of a reduction of risk rated assets. Very important because this will allow us to continue our discussions with the Dutch states on how we can at least begin with a repayment of the remaining outstandings that we have with the Dutch states and at the same time I think we will continue to look at maintaining a strong capital position in particular with respect to the upcoming regulatory changes that we expect in the (inaudible).

Moving to insurance. Operating results held up well in Q4 and has improved significantly compared with a year ago. Mainly as a result of investment margin and higher fees due to new sales and the growth that we had in essence of the managements. Underlying result before tax, as noted before, impacted heavily by the EUR975 million write off of our DAC accounts and the US (inaudible) business.

Investment spreads up to 93 basis points and if you look at it stand alone in Q4, even to 97 basis points, I think our investment management people have really made a good contribution to our earnings here and I believe that that is all I can say at this slide here.

Looking at the next one, slide 21, we see that operating results improved as a result of higher fees and premium based revenues. They were up by 15.2% compared with a year ago primarily due from Asia, ING IM and Latin America.

The next slides are the administrative expense that the year on year increase in expense is largely due to on one hand to the depreciation of the Euro and on the other hand the accrual adjustments we made in Q4 last year when we deferred a substantial portion of the bonus payments. So the comparison with Q4 last year is a little disadvantageous at this moment. But at constant currencies and excluding these adjustments the Administrative expense were up .5%.

Operating results are resilient in most businesses and as you can see on slide 23. The lower year-over-year results in the central and eastern Europe area can be explained by releases of provisions we made in Q4 last year and the financial institution tax that we saw in Hungary in Q4 of this year. And the year-over-year decline in IM is mainly as a result of the accrual adjustments that were made in Q4 of last year.

Sales continued to do strong and they generate profitable sales as well. While we are maintaining the hurdle rates for margins and returns. As measured in (inaudible) there were (inaudible) this quarter by almost EUR1.2 billion, in particular strong in the US which were driven by retirement services and individual life sales. Also Asia had a decline which was due to seasonality but still the sales in Japan were doing strong.

Slide 25 you see the impact of the DAC write down on the US close block. I don’t think I need to explain that, that’s quite explanatory by itself.

On slide 26 you see that the accounting has been brought in line with our US peers. The VA block is now reported as a separate business line and that triggered by itself the DAC write down of EUR975 million in Q4. In addition we had moved towards fair value accounting on reserves for the guarantee minimum pension benefits as of the first of January. And the impact on equity related to the accounting change was significantly less than the estimate we made earlier because of markets that were moving in the right direction and interest rates that went up. So the charge now is only EUR700 million compared to an earlier indication of EUR1 billion to EUR1.3 billion.

The benefits of taking these measures are really important for us. The DAC balance has been significantly reduced which is bringing the K-factor to less than 50%, the reserve has been strengthened with a substantial buffer on top of the 50% confidence level and then also we have now hatched approximately 45% of the interest rate risk and all of this I think will have a big impact on the volatility of earnings going forward and will have a positive impact on our run rates on an operating basis.

When you look at our capital position in insurance, we continue to do, I think, very well at 255 for insurance and regulatory capital in the US at 432. I think all respectable numbers. What we did do in this quarter was we swapped EUR1.5 billion of hybrids for equity. So you see that coming back in the debt equity ratio in the group but it lowered the interest expense for the group going forward by about EUR200 million a year. I’m sorry, not for the group. It will reduce the interest expense for insurance by EUR200 million.

Looking at the balance sheets you can see that insurance equity now is at EUR20 billion at January 1st this year. And a total equity of the insurance subsidiaries is EUR31 billion on an un-leveraged basis. And that’s important when if you calculate the return on equity for a business line, then normally I think people will assume the leverage of about 25% to 35% if you want to make that comparable with what other peers are doing.

So let me wrap up the presentation. Solid results for ING. Good strong recovery on the banking side, good progress shown by insurance on an operating performance. Charges taken on the US close block will help to reduce volatility and will ease the concern that the market has on our business and I believe that the focus for 2011 will continue to prepare the insurance company for two IPOs and at the same time to work towards reduction of the outstanding securities with the United States.

And let’s now open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Spencer Hogan. Please go ahead with your question.

Spencer Horgan – Deutsche Bank Securities

Yeah, good morning everyone. Two balance sheet questions please. The first one is if we look at the core tier-one ratio in the bank, obviously that’s improved quite nicely to 9.6 in the quarter. But have you sort of updated your views to what the right number for that is prospectively in terms of the target capital strength of the bank? And maybe you could just update us as to what the pro forma Basel III number might be on spot implementation.

And then the second one is, in terms of the debt for equity swap in insurance, I mean obviously I understand that’s effectively just shuffling debt around the group but could you just sort of expand a bit on why you’ve done that? Thank you very much.

Matt Rider

Okay, prospectively. Yeah I think if you look at the pro forma Basel III results, I mean that is something we will give later. Again, we will update at the end of the first quarter. It will be a little bit lower as it was as we indicated 70 basis points before but that all has to do with the reevaluation reserve. That is the biggest driving factor behind there because please note that reevaluation reserve, if negative, would be a deductible from your core tier one in the future. Somewhere that Basel, over time, I think will disappear if we move more to IFRS 9. But overall I would say it’s a slightly lower number than the 70 base point where you've seen before. And if you look at the core tier one ration then what we have given is, you know, internally we work at the moment we say like we want to be in line with (inaudible) and we feel comfortable if that number is above the 8% at the moment so that it is clearly what we are working on but we have not made that number definite and that will become more definite once the Basel III numbers are more clarified.

Spencer Horgan – Deutsche Bank Securities

Okay, but it is fair to say, broadly, the Bank is somewhat better capitalized than it needs to be at the moment?

Matt Rider

I think we do feel comfortable with the capital position.

Matt Rider

Debt equity swap, Matt.

Matt Rider

Yeah, maybe I’ll take the debt equity swap. I think a couple reasons for this. First of all it basically mitigates the impact of the DAC write off that we saw in Q4 together with the impact of moving to market value that we’ll see in Q1, that EUR700 million number.

The other thing is that it basically reduces financial leverage in the insurance companies which is very important rating agencies and it reduces the fixed charge coverage ratio which is also important. And it also basically reduces the entanglements that we’re going to, that we have with the overall group.

Spencer Horgan – Deutsche Bank Securities

Okay thanks.

Operator

Thank you. Our next question comes from Farooq Hanif. Please go ahead with your question.

Farooq Hanif – Morgan Stanley

Good morning everybody. Two areas I’d like to explore. Firstly, I just want to understand your point about the run-rate in insurance earnings. You seem to be positive about that, given the cleanup. So, firstly, with the write-off of DAC NVAs, and with this reduced K-factor, can you explain the expense line going forward? And also the Investment margin has gone up. You’ve got a target of increasing it further. Can you explain how quickly you get there given the current yield curve? And the second question area is just on the risk-weighted assets. You had a pretty big reduction, which has been good for your core Tier 1 capital ratio generation. I was just wondering what further you have to do, because you seem to be talking about repaying the Dutch State this year. I was wondering what your plans were for the risk-weighted assets. Thanks.

Matt Rider

Yeah, so maybe I’ll take the first one. On the insurance run-rate I think you’ve seen some very good improvement over the course of the year. if you recall from the investor day last April, on the investment margin in particular, I think at that point we were sitting at something like 83 basis points and now we’re up to 93 with a target of 105. So I think we’re making probably a little bit faster progress than we had anticipated on that line so that’s a good thing.

With respect to the DAC write offs, obviously there’s going to be less DAC to amortize going forward. I think we’ll be able to give a little more description when we rework the financials to take into account all these changes. But I think you’ll see some modest positive operating results coming through the VA business. I think we leave it there.

Matt Rider

Yeah, on the RWA Farooq, yes you’ve seen some declines. What you can see is that in effect we have now almost 90% covered with the Basel II internal model so that means that has an implication for the RWAs. Can we go much further there in declining it, I don’t think so. What you will see over the next year is the Basel II ½ implementation which will, so you expect a little bit of upwards effects rather than downwards effects on this. I mean we’re not talking about large numbers but in the end I don’t expect a lot of further decreases coming through this year and in fact you will see a slight upward effect.

Farooq Hanif – Morgan Stanley

Just on that point, the other driver is obviously growth in your balances. You seem to be saying that there are areas where there’s some pretty good demand, particularly in the commercial Bank. Do you think underlying balances are going to grow by the 4% to 5% long-term rate?

Matt Rider

If you look at the total amount, what you’ve seen is an indecent amount of increases in our mortgages, commercial banking relatively more than some segments like the structured finance have increased a lot and overall we expect that volume growth around 5% which is a bit in line with our long term guidance.

Farooq Hanif – Morgan Stanley

Okay, thanks very much.

Operator

Thank you. Our next question comes from Andrew Coombs. Please proceed with your question.

Andrew Coombs – Citigroup

Good morning. I have three questions please. Firstly, can you just elaborate on your aim to repay the majority of the remaining State capital aid this year? So what you’re thinking in terms of timeframe there; how will you go about it i.e., in one go, or multiple repayments. And also, your thoughts on the repayment premium of 50% and any ability to negotiate there.

My second question is just on the net interest margin. It obviously has increased again to 147 basis points. Just your thoughts in terms of how sustainable you believe that could be, or whether it could revert back to 140 basis points, or even below during 2011.

And finally with regards to costs. Can you just please give us some idea of how much of the cost increase in the Netherlands, and also in ING Direct, refers to seasonal marketing campaigns, and probably won’t recur in the first quarter of 2011? Thank you.

Matt Rider

Okay, let me take the first one related to the repayment of the Dutch State. We had made a deal originally with the Dutch State that we could repay at a discount and once we had done that, we heard from the European commission or the state also heard from the European commission that they would not agree with that and that it would mean that we had additional restructuring requirements because it would count as state support again.

That has given us some idea on what to do next with the repayment of the Dutch State. We are at this moment, if you repay at this moment, then I think the only thing we can do is repay with the 50% premium. On the other hand we still have a court case that is still open. We have not heard anything yet what it could do. A lot of the issues in the court case is specifically this topic and yeah, we need to wait what the answer will be before we can see whether we will either win or not win this case. I have no indications at this moment when the resolution of this case will be.

They still need to have hearings; oral hearings which we thought were scheduled for sometime this year. This anticipation was that we would get an answer this year. But in the meantime we still would like to pay back the Dutch government and we are in discussions with them how can we do this and what amount can we afford to pay. Also looking at the requirements that we have of the Basel III upcoming requirements. So at the same time we'd like to do it in a smart way.

Patrick Flynn

Perhaps I’ll give you a few minutes just to run through the drivers and interest margin so you can get a sense of where it might go to going forward. As Jan said it’s been robust at about 140 basis points throughout the year and the drivers behind that, the positive drivers have been we’ve seen some good mortgage growth in the Netherlands, approximately EUR1.5 billion of production in Q4. We’ve also seen an improvement to the margin as a number of our customers have retained mortgages and the duration has lengthened which has enabled us to fund at extended duration, lower rates which has been a positive. ING direct as well, we’ve seen good volume growth throughout. The margins there are stable. There was a one-time increase of approximately EUR21 million from the technical accounting change but eliminating that it’s pretty stable.

A strong part in supporting margin is our structured finance business but we’ve seen good margins and good production both in trade and export finance. Financial markets, I think, as we mentioned before, it’s up in Q4 two basis points but it’s inherently a volatile number. And in fact the aggregate for financial markets both net interest income and other income was down, which you normally see as a seasonal effect. So I wouldn’t rely on the financial markets as an indicator of the future’s inherently volatile. SME’s volume of the unsaid is low, demand is low in this area and there’s some pressure on margins as a consequence. If you talk about the investment book, EUR144 billion, average duration is short and there could be some pressure in margins in this low interest rate as these are replaced.

On the other hand, on the liability side, it’s been positive. In the Netherlands we reduced rates in September which it benefited the interest margin. However, we’re seeing some of our peers pushing rates up so there’s some emerging pressure there. Also in ING direct in Spain and in France there is stronger pressure around interest rates applied by competitors.

That said, if you look in the round at those pressure points, we have still managed to increase the interest margin to 147 and that’s primarily driven by the two strong points which stand out which are mortgages and our structured finance business. Therefore the average we’ve seen for the full year of 140 is a solid number and we think we can continue at about this level in the coming quarters.

In terms of the cost increase, the seasonal impact, we did invest in marketing just under EUR40 million in Q4, you can call it a discretionary increase. We also are investing in the business. We’ve invested in a variety of IT related investments to include the internet platform, call centers and ATMs which again are broadly about the same level of EUR40 million.

Jan Hommen

I think you will see us being very vigilant on costs in 2011. We have already taken a few steps but not all the IT activities can be done in one year. Despite the improvement that that could create so we’ll be very vigilant in making sure that our course stay in line and that we continue to work towards our objectives which are 50% gross income ratio for the bank long term and 35% for the insurance company.

Andrew Coombs – Citigroup

Thank you very much.

Operator

Thank you. Our next question comes from Johnny Vo. Please go ahead with your question.

Johnny Vo – Goldman Sachs & Co

Good morning. Just again on the cost side as well you’re targeting this cost income of 50%. Clearly, you’re saying that the net interest margin is probably higher than is sustainable at the moment. Just in terms of the costs then, are we going to see a step change in the costs? Obviously, the Belgian increase in costs there in terms of the deposit scheme is going to cost you more. So how are you going to get possibly to the 50% cost income ratio? That’s question number one. Number two is just on the risk costs of 51 bps. You’re saying that going forward, it’s going to be lower than that. Is that a function of the risk-weighted assets moving up, or actually the absolute level of risk costs going down? Thanks.

Patrick Flynn

Yeah, I mean on costs if you look at there was an increase in Q4 but if you look at the cost income ratio for the full year excluding market effect it’s 54%. So, you know, it’s flat and the target is 2013. So we are maintaining our drive to get that 54% down to 50% in that time period.

Johnny Vo – Goldman Sachs & Co

Okay.

Matt Rider

And with regards to the risk cost, well mathematically you are right that you have both the effects. I think overall what we expect of it is that the risk cost level will, that the overall amount of risk cost will go down slightly. I think that if you look at the update which we had in Q4, a number of them were sort of one-off calculations of LGD adjustments and some other areas. But overall the trend is still a bit down and that is why we set our overall risk cost number in terms of monetary amounts, we expect that to be at around, or slightly below, the level of what we had last year and therefore if your RWAs will move up a little bit. I mean both effects contribute to a lower risk-cost number.

Johnny Vo – Goldman Sachs & Co

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Christopher Hitchings. Please go ahead with your question.

Christopher Hitchings – Keefe Bruyette & Woods Limited

Good morning. So many questions, so little time. Can I focus on the interest rate hedges that you’ve got in place on the VA business and what impact they may have going forward given that interest rates are going up i.e., what did they have in the fourth quarter and what might they have – effect they have then? And I’m looking really at the sources of the- as it were, the ongoing profit in the Closed VA book.

I’m also looking at these model improvements, model updates on your mortgage book. Can you give us some handle behind what is going on there? Are these ongoing, etc.? And also, should we be worried about the rise in non-performing loans in real estate, particularly given that your LLCs there seem to have gone down?

Also just a technical thing; when you have sold REIM, will it be that component of profits that will disappear from your P&L account going forward or are there other impacts? Thanks.

Matt Rider

Yeah, good morning Chris. On the interest rate hedges, just a recap of that. what we had announced last quarter was that we would move the VA or a part of the VA business, the Guaranteed Minimum Withdrawal benefits more into line with US peers and to put it more on a market value approach. So during basically the last several weeks of 2010 we put on a little bit, about EUR3.7 billion notional of interest rate hedges. Now we actually ended up doing this at a very good time because the interest rates had already increased so we actually made some small profit I think on the transactions; something like EUR20 million for Q4. So at this point for that block of business, we’ve locked out about 45% of the exposure to fluctuations and interest rates. So the idea is that as interest rates go up, if they do go up, then we will benefit for about 55% of the block. If they go down then we’re ahead about 45%. So all in all I think that worked out exceptionally well and we managed to catch the market at a very good time to put those hedges on the books.

Christopher Hitchings – Keefe Bruyette & Woods Limited

Okay, thanks.

Matt Rider

Chris, maybe on the model update, on the mortgages. What you see is past experience in recoveries in cases of defaults. You used them in updating your model so therefore you get an LGD or loss given default increase and that is the factors that could cause the risk cost in the Netherlands to go up. In fact you could argue, does it mean we have more default, the answer is no. In fact what you find is our total amount has gone down. The only thing, the effect is here, then you know, your costs are going up. So maybe a slightly confusing answer but in the end it’s more past experience driving through in multiples, nevertheless and PLs down there.

If you then move to the real estate part, on the real estate side you see that we have a little bit more MPLs. I give you a bit of background on those non-performing loans and that is that all of them are related to government breeches. So we’re not talking about arrears or non-paying. I mean we have a relatively prudent approach in terms of putting loans in non-performing.

And in respect to real estate and its impact in the bank, the profit that we will no longer have is approximately EUR45 million per quarter.

Christopher Hitchings – Keefe Bruyette & Woods Limited

EUR45 million per quarter. Okay thank you. Thanks very much.

Operator

Thank you. Our next question comes from Francois Boissin. Please go ahead with your question.

Francois Boissin – Exane BNP Paribas

Yes, good morning gentleman. Two or three questions, actually. The first one is on the total capital to be released through the sale of ING Real Estate Investment Management. You mentioned EUR500 million net capital gain. What is the amount of risk-weighted assets decrease here? And, therefore, what’s the overall amount of capital released thanks to the transaction?

Second question on Westland Utrecht. I just wanted to know where you were on that, what you plan to do with it, can we expect something in 2011? And maybe just finally on ING Direct, the margin; you mentioned trends in Spain and France. What about Germany, the US and the UK, please?

Koos Timmermans

Yeah, if you look at the capital relief, please note that the biggest gain comes from the fact that you sell the company at a higher than book value. That gives it a capital relief in terms of capital relief from lower assets, that is not so much the case because we are selling an investment management company and yes we have a little bit of lower achieved capital but it’s relatively small amount in terms of RWA releases.

Jan Hommen

On the Westland Utrecht we have completed the separation. That was right on time as we had agreed with the European commission. We are in a selling process now and cannot tell you much about that process. It’s not very active in making sure that we find the buyers and the interested people that could be purchasers of these assets. But nothing to report yet on where we stand on that.

Patrick Flynn

On ING Direct we think margins should be roughly stable on mortgages as I referred to earlier.

Francois Boissin – Exane BNP Paribas

And how about country specifics, i.e., Germany and US, and particularly where you have big exposures?

Patrick Flynn

I’m sorry, could you repeat the question? I couldn’t hear you.

Francois Boissin – Exane BNP Paribas

In terms of what’s happening in Germany and the US where you have big exposures, basically, do you see stable margins both on loans and deposits, or could you give maybe just a bit more color on that?

Patrick Flynn

Yeah, in terms of the US, there was an uptake in Q4 in the margin the US will be as they stand up with an accounting one-off effect. So you know margins will be relatively stable from where they currently are. And broadly the same in Germany.

Francois Boissin – Exane BNP Paribas

Great.

Operator

Thank you. Our next question comes from Farquhar Murray. Please go ahead with your question.

Farquhar Murray – Autonomous Research

Good morning gentlemen. Two questions, if I may. Firstly, just on the interest margin, I wondered if you could give an update of the sensitivity of that to 100 basis point increase in the yield curve. I think previously, you’d guided to 7 basis points on that kind of metric. And additionally, what are your expectations for and positioning for ECB rate rises? And is any of that captured in the 140 basis points guidance you’ve given for the next coming quarters?

And then secondly, just on the RWA development, I wondered if you could actually break down the EUR10 billion change q-on-q just between the model changes, underlying growth, and the exchange rate component which we know is EUR3 billion. Thanks.

Koos Timmermans

Okay Farquhar, on the interest rate sensitivity, indeed we have given initially some guidance there on how interest sensitive are we and indeed you are talking about five to seven basis points of NIM margin per 100 basis point. Now if we look at a forward curve then we are expecting less than 100 basis point increase for this year. So yeah, this is all sort of part of our median term plan. And in terms of what our guidance which we are giving because in general what we are doing is we try to make sure that we invest our savings money where interest rates, our cost of money will go up but we make sure that our investments are short enough that we do get additional yield out of re-pricing as well.

Farquhar Murray – Autonomous Research

Okay, so there is a little bit of ECB movement built into that 140 basis points?

Koos Timmermans

Yeah.

Farquhar Murray – Autonomous Research

And on the RWA?

Matt Rider

If you look at the EUR10 billion in total what you have is volume growth that is one part EUR5 billion, foreign exchange EUR3 billion and then we have some model changes approximately a little over EUR10 billion so that’s the negative number. And then we have others and that is risk migration divestment minus six so that gives you sort of the complete mix.

Farquhar Murray – Autonomous Research

Okay. And just on the model changes, how comfortable are you that those are captured within the 70 basis points transition to Basel III that you’ve got, or that you’ve just given?

Matt Rider

If you talk about the 70 basis point Basel III so conversion from Basel II to Basel III we initially guided 70 basis points and again there the thing you have to realize as well is revaluation reserve. A negative revaluation reserve that will have an effect on that. So that makes that 70 basis point deduction a bit more than it was in the past. And again, that is a little bit the sort of the moving part and there’s a few other ones but this is the bigger moving part there which plays a role but that is not yet in the capital numbers under Basel II but under Basel III that will be the case.

Farquhar Murray – Autonomous Research

Thanks very much indeed.

Operator

Thank you. Our next question comes from Thomas Nagtegaal. Please proceed with your question.

Thomas Nagtegaal – RBS

Good morning gentlemen. I’ve got two questions. First of all, could you give a bit more details on your expense guidance for the bank? And when you say low single digit increase, is it over staff and other costs? Or is it over total expenses which included about EUR40 million in property development impairments in 2010? So if you take those out, the underlying guidance would be significantly higher than low single digit. And second, I’ve noticed there is a sharp up-tick in the DAC and trail commissions’ line on the insurance side. How much of that is recurring and how much of that is one-off? Thanks.

Patrick Flynn

In respect to the cost increase, the low single digit is operating expenses. So it excludes, we’re not assuming there’s any marketing impacts in there.

Thomas Nagtegaal – RBS

Okay. So the property development impairments are excluded from that?

Patrick Flynn

Yep.

Thomas Nagtegaal – RBS

Okay, clear.

Matt Rider

Yeah, on the DAC and trail commissions, yeah this is a bit of a funny number but because the amortization patterns on DAC in particular vary between whether it’s an investment type of product versus whether it’s a traditional insurance type of product. But in broad terms what you’re seeing is that the DAC and the trail commissions are up, again, in broad terms, relative to the amount of operating income that we’re getting in. Yeah, I think we’ll be able to provide a bit more guidance on that one in future calls.

Thomas Nagtegaal – RBS

Okay, thank you.

Operator

Thank you. Our next question comes from William Elderkin. Please go ahead with your question.

William Elderkin – Societe Generale

Hey everybody. It’s William Elderkin from Societe Gen. I’ve got three questions, please. First of all, is the insurance company capital structure where you want it to be on a standalone basis, both in respect of the mix of debt and equity and also in terms of overall capital adequacy from a commercial perspective?

Secondly, in terms of your comments on the Latin American insurance business, can I take it that you’ve had material expressions of interest from trade buyers and so on, and that could be a route that we see you going down?

And then finally, in terms of the payment/repayment of the government capital, would it be fair to see that process as de-linked and separate from the sale and divestment of the Insurance operations?

Matt Rider

Yeah, I think importantly on the insurance company capital structure, you know, as we go for two IPOs, remember the way that we portray the financial leverage is really held at a group level so we know that we will need to do some restructuring between a holding company and the United States for a US IPO and a holding company for Asia and an IPO. I think from a commercial standpoint, the most important companies where capital really matters with respect to rating agencies and so on were well capitalized and no problem on that extent. But I think there will be some certain capital restructuring in particularly this year.

Jan Hommen

What we have said in the past is that we are pursuing other strategic options. That means that in addition to looking at does it fit the IPO in the US or in Asia, that we’re also looking at other options as well. And you are correct, we have had numerous expressions of interest for this type of business.

With respect to the repayment of the government, we are looking at that separate from the insurance IPO. We would like to repay this year a significant amount if we could, if we can make an agreement with the Dutch government. And then I believe that the IPO, the work that needs to be done and the preparation that we need. Plus the timing will be much better to look for an IPO or either two of them, sometime next year more so than this year.

William Elderkin – Societe Generale

Okay, thank you.

Operator

Thank you. Our next question comes from Nick Holmes. Please proceed with your question.

Nick Holmes – Nomura International Plc

Hello there. A couple of questions, please, on the US Variable Annuity book. The first one is, can you tell us what the confidence level above 50% is? You say that it’s significant, but just wondered what it is. And then also, why don’t you take it to the 90% confidence level, which is, I think, the level that you apply for the rest of your reserves? And then also, if you were to do that, what would it cost?

And then the second question is just a general question. What sort of appetite are you seeing for the low cost variable annuities that you’re starting to sell? Is it a product basically that you think is going to be successful? Thanks.

Matt Rider

Yeah so in respect to the reserve adequacy level, let’s think about it in terms of where we will be as of January 1, right. So we have a number as of December 31st but we also make our equity adjustments as of the 1st of January. So as of the 1st of January it would put us about EUR1.1 billion over the 50th percentile level and I think it works out to be about 73%. Something like that on a confidence level basis.

Now why don’t we go to 90%, because I think as we disclosed last time, we really want to run the US business as the US business and that 90 percentile just simply does not exist in a US GAAP or a US competitor situation. So we don’t disclose the number and we don’t intend to.

Nick Holmes – Nomura International Plc

Okay, fair enough.

Matt Rider

Oh and then the appetite for low cost VA, I would say right now it’s very limited.

Nick Holmes – Nomura International Plc

Do you see that changing? Do you see consumer demand for these lower cost variable annuities becoming greater and your product approach actually starting to work?

Matt Rider

Potentially but I think right now other competitors in the US have continued with the more traditional rich featured high commission products and those sort of overtake the low cost versions that we’re attempting to sell.

Nick Holmes – Nomura International Plc

Okay, and that doesn’t bother you; your strategy isn’t predicated upon VA expansion?

Matt Rider

No, not material at all because we would intend to grow the US business really largely based on a retirement services basis where we have a terrific franchise and also the life insurance business is fantastic. So those would be the two cores where we would expect to grow there.

Nick Holmes – Nomura International Plc

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Michael Van Wegen. Please go ahead with your question.

Michael Van Wegen – Bank of America Merrill Lynch Intl.

Yes, good morning. Mike Van Wegen for Bank of America Merrill Lynch. Three questions please. First of all on the capital position within the insurance business, can you update us on your AFR over EC ratio for the end of 2010? And secondly could you just confirm whether there has been any capital been injected in the US business. And finally going back to the cost management within the bank, could you indicate to us what has been the impact from, let’s say, restructuring within the bank PNL, so without the special items and how much of the cost savings that you have been targeted are realized today and how much is still to come? Thank you.

Matt Rider

Let me take the AFREC information. So what we will do, we didn’t have it in any of the disclosure that we’ve done for this earnings release but we will publish AFR and EC figures in our annual accounts. But just to give a bit of a preview of those figures. We will give the numbers separately for the Eurasia businesses including Latin America and the US. So the AFREC numbers I’m about to give are for the total insurance businesses excluding the US. Going forward we will run the US as a US insurance company and more focus on RBC ratios which is traditional for the US.

So for AFREC for non-US businesses, we have a total AFR of EUR19.7 billion and an EC of EUR10.4 billion. But what we will intend to do is we will increase the EC by about EUR1.5 billion in order to bring us more in to line with where we think the solvency two is going. Similarly, on the UC number, we changed that from a 99.95 percentile confidence level to a 99.5% confidence level. Again, this is more to align ourselves with solvency two. When you work the math out for those businesses excluding the US, you come to an AFREC number of 166%. But there will be more disclosure on that in the annual accounts.

For the US businesses, again, we tend to manage that on an RBC basis. We’ve seen on a preliminary basis some increases in the RBC ration up to about 432% and if there were any capital movements, they were de minimus in Q4.

Matt Rider

Could you repeat the question?

Michael Van Wegen – Bank of America Merrill Lynch Intl.

Yeah on the cost basis for the bank, could you update us, or help clarify to what extent the operating expenses in 2010 will be impacted by restructuring charges in that line rather than in special items? And secondly, how much of your targeted cost savings have already been achieved and, therefore, in the 2010 numbers, and how much can we see going forward?

Patrick Flynn

In respect of restructuring charges or special license, yeah we will have special license coming forward in 2011 and the biggest components there are likely to include the separation cost that Jan eluded to earlier.

Michael Van Wegen – Bank of America Merrill Lynch Intl.

They’re outside the Bank P&L, they’re in the special item. I mean outside the special items, are there any restructuring charges booked within the Bank for 2010 which will disappear? And how much of the cost savings that you target have already been achieved today, and how much do you expect going forward?

Patrick Flynn

There’s a number of one-off special restructuring charges in special license in 2010 which will not necessarily recur.

Jan Hommen

I think the question is what did we realize already? Is that your question?

Michael Van Wegen – Bank of America Merrill Lynch Intl.

Yes. How much of your cost savings that you target have you achieved so far? And how much do you expect going forward?

Jan Hommen

I think we have realized about 2% of what we, 2% reduction in our cost numbers relate to reduction of cost that we have included in 2010. And we still have plans for further cost reductions. I don’t think we have ever disclosed exactly what these plans are but they still are significant opportunities in IT and purchasing and still in a number of other areas where we can significantly reduce our costs. So our plans are there but I don’t think we have officially mentioned them so far, but they are. But you can be assured we are still working on a number of them.

Michael Van Wegen – Bank of America Merrill Lynch Intl

Thank you.

Operator

Thank you. Our next question comes from Jan Willem Weidema. Please go ahead with your question.

Jan Willem Weidema – ABN AMRO

Good morning. Jan Willem Weidema AMRO. I have a question on the comment you just made on economic capital. The increase of EUR1.5 billion at the insurer. How are you going to realize that? That’s related to the remaining hybrids in ING Insurance, and do you expect more conversion there? That is the first question?

Secondly, can you say anything about the longevity impact on the Dutch insurance operations? And finally, how comfortable are you with the 5% CAGR for the Bank’s underlying income, given that you guide for similar 5% volume growth but lower interest margins?

Matt Rider

So I think that the transaction has already been done in December so it’s accomplished and reflected in the balance sheet that you see.

Jan Willem Weidema – ABN AMRO

Okay, and do you expect more to come there?

Matt Rider

No. Sorry, I apologize. I missed your question on longevity.

Jan Willem Weidema – ABN AMRO

Yes, could you comment on what the impact of the impact of the life expectancy has been on your Insurance results?

Matt Rider

Yeah, so there’s no P&L impact. It does have an impact on the test of reserve adequacy but that was baked into our capital planning for the year so it has no P&L impact.

Jan Willem Weidema – ABN AMRO

And what has been the impact on shareholders’ equity then?

Matt Rider

No impact on shareholders equity either.

Koos Timmermans

Yeah if you talk about it, the 5% CAGR showed that it’s the underlying volume growth. I mean you know given the fact that we guided our margin will stay approximately where they are right now. I mean then the question is, by definition, then you expect a bit, a positive number on your underlying income.

Jan Willem Weidema – ABN AMRO

Sorry, let me just look at the slides, because on slide 5 you said you still targeted a CAGR of 5% in your underlying income. But if you expect volumes to be up and you expect some pressure on your net interest margin, can you guide us for how you expect to still come to the 5% CAGR in underlying income?

Koos Timmermans

Yeah, I think there’s another element there that you need to take into consideration that your commission income as well. And I think overall what we have given with that, it’s the long term guidance there where we said like we have that volume increase and please note that when we, two years ago, gave that long term guidance within our net interest margin was even lower then it was right now because we are still at this level of 140 basis points and I think what we just mentioned as well is that our total interest margin is still something which we feel like, you know, it can stay at these levels where it is right now approximately. We have some further balance sheet optimization what we can still do so that is to try to compress that further with lower income type of business and we have our fee business so we feel comfortable with it.

Jan Willem Weidema – ABN AMRO

Okay, thank you very much.

Operator

Thank you. Our next question comes from Hans Pluijgers. Please go ahead with your question.

Hans Pluijgers – CA Cheuvreux

Yes, good morning gentlemen. Two questions, if I may. You already gave some update or indication on the US business respect to Solvency II to bring it in line. That’s why you take some measures. Could you give some indication what do you expect to the impact of Solvency II on the capital base for the other insurance operation, so the Eurasia, Lat-Am operations?

And secondly, a more detailed question; there were some model changes in the loan loss provisions and that had an impact. You gave some number of the EUR21 million for the US. Could you give an indication what the impact on the model change in the Dutch and German mortgage book on the loan loss provisions?

Matt Rider

So maybe on the first one. On the, if I understand your question well. Its alignment of US with solvency two but we’re not doing that, we’re actually trying to align it more with US based principals so lets a bit take that one off the table and that will be in line with our risk disclosure and so on in the annual accounts. So we don’t really consider the US to be a part of Solvency II going forward.

With respect to Solvency II impact on Eurasian businesses, we’re satisfied with our ongoing results but we’re not disclosing any specific information on it.

Koos Timmermans

Yeah and I think if you look at the loan losses, there were a few elements in deed. If you look at the US it is more the interest accrual on modified loans which are part of the interest rate line rather than a deduction from you loan losses and they you are talking about, you know, it’s somewhere, it’s a run-off correction of something like EUR50 million and if you talk about the German and in the Dutch portfolio where we updated our loss given default with some of the experiences then you’re also talking about low teens types of numbers or EUR20 million so it is, you know, net I think it is a bit more illustration that you have to update your model from time to time but if you correct for these then you still see an underlying trend which is actually slightly moving down.

Hans Pluijgers – CA Cheuvreux

Thanks.

Operator

Thank you. Your next question comes from Marcus Malvalidi. Please proceed with your question.

Marcus Malvalidi

Good morning everybody. A couple of questions, please. It’s relating more to slide 28 of the presentation. You were talking about reducing debt leverage, or debt within the insurance business going forward for rating agency purposes, and yet I see the core debt figure at January 1st is up to EUR7 billion versus I think it was around EUR3 billion on the same slide you posted last year. Secondly, could you explain, or give a bit a color, please, about the book value increases for Asia Pacific and Benelux over the same period? And then finally, just on legal restructuring, your group structure maybe at a very high level seems to be well set up for the two IPO and separate maybe Lat-Am disposal already, so could you just give some flavor about what legal restructuring needs to be done, and when you’d give the full detail of that as well, please?

Patrick Flynn

I think the core debt at the group level is unchanged from the last time we disclosed.

Marcus Malvalidi

I’m just looking at the insurance, ING Insurance section of that presentation. The debt is at EUR7 billion versus EUR3 billion on the disclosure at December 31st 2009.

Matt Rider

Maybe I’ll take this one. Going forward we look at the total amount of financial leverage in the insurance companies and we see that our definition of core debt had some shortcomings. So what we do is we more align with the way that rating agencies are looking at our total financial leverage. So this is information that you can get right off the balance sheet basically. The core debt involved quite a lot of calculations so this was I think a better figure to use. Going forward on the capital structure I think the increases that you saw in the Benelux in particular for IFRS equity largely related to declines and interest rates over the period and I think you can say about the same thing for Asia Pacific.

Marcus Malvalidi

Thanks.

Operator

Thank you. Our next question comes from Lemer Salah. Please go ahead with your question.

Lemer Salah – SNS Securities

Good morning gentlemen. Lemer Salah from SNS Securities. I have two questions left. My first question is regards to IPO. You have mentioned previously that you need like eight months for conducting an IPO. Why are you still planning to conduct your IPO in 2012? That’s my first question. My question is regards the Eastern Europe issues. As you have noticed, there are a lot of stuff going on like bank imposing bank taxes and centralization of pension asset management towards the government. What are your success ratio or chances of ING in Eastern Europe? Thank you very much.

Lemer Salah – SNS Securities

My second question regards the Eastern Europe issues. As you have noticed there is a lot of stuff going on, like bank imposing bank taxes and centralization of pension asset management’s towards the government. What is the success ratio or chances of ING in Eastern Europe? Thank you very much.

Jan Hommen

Okay. With respect to the IPO, if the markets would be very attractive in 2011 and if we can accelerate our program we would certainly take a look at doing it in 2011. But I’ve given you a more likely scenario. With all the things that we have to do it is more likely that it will happen in 2012, and that’s why I think by doing the Dutch government first, or ideally to do most of that first, we also create additional flexibility in the way that we can execute the IPOs.

With respect to Eastern Europe, Matt, is that?

Matt Rider

I apologize, I missed the question.

Lemer Salah – SNS Securities

Well, I can repeat the question for you. What are the chances of ING in Eastern Europe taking into account that bank taxes are imposed in Eastern Europe, for example Hungary, Poland; and going forward that other countries will conduct similar actions? And also the centralization of pension wealth.

Matt Rider

Yeah, I think it may be a tale of two cities here. I think clearly we’re facing challenges in the regulatory environment in Hungary and Poland, but by the same token the question is to what extent will normal people want more access to more private pension funds? So a bit we lose out on the mandatory side, but there is at least a glimmer of hope that we could capitalize on the opportunity for more funds.

Jan Hommen

Yeah, maybe to add on the bank side if you follow our Eastern European activities there, in essence what we are doing is collecting savings, supplying mortgages and supplying money to the economy. We’re not into a very speculative or financial markets type of business over there so somewhere we feel that despite the fact that you get a locational bank tax that it does not change your structural plans to move forward in these markets. So no, we are still quite, quite positive about that.

Lemer Salah – SNS Securities

Thanks.

Operator

Thank you. Our next question comes from Frederico Salina. Please go ahead with your question.

Frederico Salina

Yes, good morning. Two things on the insurance side. A), I was wondering if you plan to carry out re-risking of the insurance market in the coming months. And number two, can you give us the sensitivity of the buyable annuity book to (inaudible) markets like you used to previously? Thanks.

Matt Rider

So on the first one I think what you’ve seen in the overall insurance book is the increase in the investment margin that we have is partly in due to some moderate re-risking. We really want to take this slowly. You saw that we made some good progress from the overall investment margin, moving from 83 basis points to 93. Our overall target by 2013 is 105. So in this one I think we want to do this in very much of a moderated approach.

With respect to earnings sensitivities on the BA business, I think what you’re going to see is basically not a lot of impact relative to equity market movements within a band of about plus or minus 5%. What you will see, though, is as you get into more extremes, and let’s say plus or minus 10%, you’ll see probably like a negative EUR50 million sort of sensitivity around that number. The reason, when equity markets go up we still have some hedge asymmetry; when equity markets go down we lose out on fees. So what you’ll see is within a 5% range, not a lot of impact; once you get out into the extremes, let’s say about EUR50 million.

Operator

Thank you. Our next question comes from Tony Silverman. Please go ahead with your question.

Tony Silverman – Standard & Poor’s Equity Research

Thank you, good morning. It’s Tony Silverman from Standard & Poor’s Equity Research. Just had a couple of questions left, please. In general terms, the IPOs that you’re contemplating, do you contemplate for the insurance IPOs that they in effect will be a complete sale? Or do you contemplate being left with some stake? I’m hoping perhaps you can elaborate on that. And in connection with that, in an answer to an earlier question you mentioned that there may be some further capital restructuring for the insurance companies in Asia and the US. Can you sort of tell us if that would involve less than EUR5 billion going into them or would it be an immaterial amount anyway?

And the second question was around the closed lock again. The markets and other impacts, the narrative – I think it’s on page 34 of the report – refers to EUR150 million charge to do with interest rates going up in Q4. I wonder if you could talk a bit about that. You’ve mentioned a sensitivity to acquisitions in the previous question but the charge for interest rates going up for in respective guarantees seems to be slightly counterintuitive to me. I’d be interested to hear more, thank you.

Jan Hommen

Okay, let me do the first one, the question related to the IPO. Well, let’s first take a look at what the markets are at the time that we do the IPO and then we can decide what exactly our strategy will be. At the end, I think we want to have 100% sale but most of the time you don’t do that in an IPO. You have a more moderate position that you sell first, let’s say 25% to 40%, and then later you come back and purchase additional tranches. But let’s wait until we know exactly what it is, where we are and what markets we are in before we make any predictions here.

The second question will be answered by Matt, eh?

Matt Rider

So first on the capital structure, we’re not really anticipating any injection of capital into these companies; it’s more a restructuring of debt and hybrids, and that’ll begin to take place over the first half of the year. But it mainly has to do with rejiggering a bit debt and hybrids in a US holding company versus a Eurasian holding company, so that’s really what we intend to do.

With respect to the EUR150 million number that you see on page 34 of our quarterly report, it doesn’t relate to the BA close book – it relates to a certain business. It’s basically a separate account pension business within the Netherlands where we have an imperfect hedge on. And what you see with this thing is when there are- The hedge works within a reasonably narrow band of interest rates and equity movements, but when you have particularly big increases in interest rates then you start to see this volatility come through. You’ve actually seen it in prior quarters and it’s described a bit better when you get into the Beneluk [ph] section, so if you- We know that this number is quite volatile but if you look at that figure over the course of the year it ended up being I think positive EUR25 million. But there is some volatility in that number.

Tony Silverman – Standard & Poor’s Equity Research

Great, can we just come back on the restructuring of debt and hybrids that you mentioned? Is that basically substituting equity for those debt and hybrids or something else?

Matt Rider

No. It’s just, again we’re holding certain instruments within the US holding company. We’re holding certain instruments within ING (inaudible), which is the holding company for overall insurance. And there probably needs to be some movement between the two but we’re not talking about additional capital or anything of that nature.

Jan Hommen

And I think we need to be a little careful here because we have not done a complete evaluation analysis yet. I think we will be extremely cautious and careful in how that will be accomplished. So there is still work to be done and still work to come. We can report better I think when we get closer to that than we can at this moment.

Tony Silverman – Standard & Poor’s Equity Research

Thanks very much.

Operator

Thank you. Our next question comes from Manish Bakhda. Please go ahead with your question.

Manish Bakhda – Citigroup

Good morning, Manish Bakhda from Citigroup. My question’s just on CoCo’s, and I noticed back in December there were some comments from ING suggesting that you were looking at developments in the CoCo markets. Just wondering if you had any developments on that, please.

Jan Hommen

Manish, we’re always looking but we are certainly very carefully looking at, you know, I recognize CoCo’s, I recognize high coupons of 9.5% which you see in the market as well. But you do want to be sure like what is it that you get from this? So it’s a market which we are following but at the same time there are no concrete plans yet that we start to issue something like it. I mean you want some more clarification on regulation, you want some more clarification on where does it help you in terms of buffers; and at the same time we still have the old grandfathering and the old hybrids. We are not in a hurry to do something there, but of course if there’s a new market there’s new opportunities, so from that angle we will certainly look at this.

Manish Bakhda – Citigroup

Okay, well thank you very much for that.

Operator

Thank you. Our next question comes from Marcus Malvaldi. Please go ahead with your question.

Marcus Malvaldi

Sorry, I’ve just come back because I think my last question wasn’t- I was cut off before you could answer it. It was about the legal restructuring you’re talking about. Again, your group structure seems to be pretty well set up already for the disposals that you’ve been talking about. Can you just give some color on what you’re actually going to be doing there in terms of restructuring it and when we’ll get the concrete decisions around that?

Jan Hommen

I think it’s very simple. What we plan to do is we need to make sure that if we take the US operations and want to go public with them, that we have properly structured that in our legal structure. And that is the main thing that I think we need to be doing at this moment as part of our redesign of doing two IPOs. That is the main let’s say legal issue that is there. For the Latin American business, whatever we do, we can put it with the US or we can put it with Europe, or we can let’s say have other options – it’s already positioned to do that so there will not be too much work on that side.

Marcus Malvaldi

Thank you.

Operator

Thank you. Our next question comes from Farooq Hanif. Please go ahead with your question.

Farooq Hanif – Morgan Stanley

Hi there, thanks for taking a follow-up question. I just wanted to ask about your capacity to repay the Dutch government this year from internal resources, leaving aside the question of the amount of penalty you may or may not need to pay. Can you comment on that?

Jan Hommen

Not really that much. I can only say that we have an intention to repay at least a significant amount. We also need to be mindful of the higher requirements of Basel III. We need to be mindful that there are other things happening in the world, and of course we are generating income. And all that together I think will determine at some point how much we have available from internally-generated activities; plus we are maybe still planning to do some transactions in the meantime as well, some sales, divestments that can also generate capital funds. So all that together will determine to what extent we have the ability to pay back and the amount we can pay back, but everything is taken into account.

The one thing that we are not counting on and that we are not excluding is that we will go back to the market for more capital. We don’t want to do that. We want to do it with internally-generated funds.

Farooq Hanif – Morgan Stanley

Okay, that’s very clear. Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from Jan Willem Weidema. Please go ahead with your question.

Jan Willem Weidema – ABN AMRO

Yes, everyone, a follow-up question following also what Farooq just asked, what kind of (inaudible) level will be looking at in the bank after you’ve repaid the state the 7.5, which is sort of the old guidance and I think we’ll be looking more towards 8 or higher with a view to B-3?

Jan Hommen

I think we have already answered that earlier. I gave the answer that we would not like to see it go down below the 8% level, and we need to be comfortable as well. So this is a moving number. Over time it might even go higher than that – we don’t know yet. There’s still too many issues we need to determine, but it’s higher than the 7.5%. It’s certainly higher than 8%.

Jan Willem Weidema – ABN AMRO

Okay, thank you.

Jan Hommen

Thank you.

Operator

Thank you.

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