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Executives

Jan H. M. Hommen - Chairman of the Executive Board, Chief Executive Officer, Chief Executive Officer of ING Bank, Chief Executive Officer of ING Insurance, Member Management Board Insurance and Member of Management Board Banking

Wilfred F. Nagel - Chief Risk Officer, Member of Executive Board, Member of the Management Board Banking and Member of the Management Board -Insurance

Patrick G. Flynn - Chief Financial Officer, Member of Executive Board, Chief Financial Officer of ING Bank, Chief Financial Officer of ING Insurance and Member Management Board Insurance

Matthew J. Rider - Chief Administrative Officer of Insurance/Im Eurasia

Analysts

Michael van Wegen - BofA Merrill Lynch, Research Division

Jan Willem Weidema - ABN AMRO Bank N.V., Research Division

Andrew P. Coombs - Citigroup Inc, Research Division

Francesca Tondi - Morgan Stanley, Research Division

Francois Boissin - Exane BNP Paribas, Research Division

Michael Igor Huttner - JP Morgan Chase & Co, Research Division

Gordon Aitken - RBC Capital Markets, LLC, Research Division

Marcus Rivaldi - Morgan Stanley, Research Division

David T. Andrich - Morgan Stanley, Research Division

Manish Bakhda

ING Groep NV (ING) Q3 2012 Earnings Call November 7, 2012 3:00 AM ET

Operator

Good morning, ladies and gentlemen. This is Yvonne, welcoming you to ING's Q3 2012 Conference Call. Before handing this conference over to Mr. Jan Hommen, Chief Executive Officer of ING Groep, 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 any forward-looking statement. A discussion of factors that may cause actual results to differ from those in our forward-looking statement is contained in our public filings, including our most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation to buy, to offer any securities.

Good morning, Jan, over to you.

Jan H. M. Hommen

Thank you very much, and welcome, everyone to our Third Quarter 2012 Results Conference Call.

We posted solid third quarter results, particularly seen against the backdrop of the weakening economic environment. I will talk you through the presentation now. And then we have Patrick Flynn, Wilfred Nagel and Matt Rider here with me, and we all will be available to answer your questions. Unfortunately, this will be the last time that Matt Rider is present at this call. He will step down, and he will return to the United States to join his family and look at other opportunities outside of ING. First, before we start the call, I'd like to take the opportunity to thank Matt for his many use of dedicated service to ING and to the Insurance, as well as the Investment Management operations. Matt, thank you very much.

During the third quarter, I'm on Slide 2, we continue to deliver our restructuring plan, amidst a challenging operating environment. The group posted an underlying net profits of EUR 719 million. The Bank underlying profits before tax increased to EUR 1,021,000,000, supported EUR 323 million gain on the sale of Capital One, which largely offset the EUR 258 million of de-risking losses and the EUR 173 million negative credit adjustments.

Insurance operating results declined to EUR 238 million, primarily driven by lower investment margin and lower nonlife results. Underlying results before tax were EUR 44 million, which includes negative results on hedges in place to protect our regulatory capital, mainly in the Benelux and in the U.S.

We have continued, on Slide 3, to make good progress on the European Commission restructuring program. We have announced the first 3 sales of our Asian Insurance units, and our U.S. organization is preparing to file a registration statement with the SEC. At the same time, together with the Dutch State, we have made good progress in our constructive dialogue with the European Commission about revisions to the restructuring plan.

Slide 4. In October, we reached agreements on the sale of Insurance unit in Hong Kong, Macau and Thailand and the Insurance operations in Malaysia, and also, our 33.3% stake in China Merchants Funds. The process for the remaining businesses is ongoing and further announcements will be made if and when appropriate. Proceeds will be used to reduce the double leverage, while at the same time maintaining the current leverage ratios in the Insurance holding companies. It's, at this moment, premature to look at this on a deal-by-deal basis. We will assess the potential dividend upswing once we see all of the Asian deals completed.

Slide 5. We continue to discuss various options for ING Life Japan, including the Closed Block VA business. The closing of sales of our other Asian Insurance units may trigger a charge to strengthen reserves for the Japanese Closed Block VA under our reserve adequacy policy. ING measures reserve adequacy at a business line level, where excess reserves and other Asian business units currently offset a shortfall related to the Japanese Closed Block VA. The reserve inadequacy for the Japanese Insurance business, including the VA guarantees reinsured to ING Re is approximately minus EUR 0.5 billion at the 50% confidence level, and that includes approximately a EUR 1.1 negative billion for the Closed Block VA, which again is offset by about EUR 0.6 billion plus for the corporate-owned Life Insurance business.

The nature and timing of any P&L charge from such reserve inadequacy will depend on the closing of other divestments in Asia, as well as on various options currently under investigation for ING Life Japan. We will make further announcements when we can make them and when appropriate.

Slide 6. In the U.S., I must say I'm very pleased with the progress that our management team has made as they work towards an IPO. ING U.S. is preparing to file a registration statement for the SEC in connection with the planned IPO. And upon filing and upon the SEC review and company S-1 amendments will occur over the following 3 to 4 months. This means that we expect that somewhere in 2013, we plan to be ready to execute the first tranche of the IPO, with timing being dependent on market conditions.

Also Slide 7, good progress was made by our team in the U.S. to become a stand-alone company. Capitalization has improved with the estimated RBC ratio at 516%, compared to a target of 425%. And note, however, that the RBC ratio excludes our offshore reinsurer SLDI, and that SLDI is still supported in part by a USD 1.5 billion contingent capital level of credit with ING Bank. And that was put in place, as you probably remember, last year. We will continue our efforts to achieve a 25% debt-to-capital ratio and to redeem the EUR 1.5 billion contingent capital letter of credit. The 25% is more or less a number that people expect for IPO companies. Given the various capitalization targets, we cannot rule out that part of the IPO may be needed to support the capitalization of Insurance U.S. and replace the contingent capital facility.

Slide #8, Insurance Europe. We have stepped up our efforts to prepare the business for the best case of an IPO. And as part of this preparation, we have appointed Delfin Rueda as CEO; and Dorothy van Vredenburch, who will handle Communication HR and our transformation process as new members of the management board, Insurance EurAsia, as of the 1st of November of this year. We also announced that Insurance Europe is accelerating its transformation program to sharpen the strategic focus of its business unit at Nationale-Nederlanden. And the strategic actions include that we are launching a new defined contribution pension solution business, that we are helping customers transition from defined benefits to defined contribution pensions, that we are accelerating retail Life strategy through the introduction of new products and that we are increasing the focus on service and efficiency of cost and capital in and existing Closed Book Life, strengthening the position in the SME market by rationalizing our product offering and focusing on various specific segments.

Slide 10. In addition to the transformation at Nationale-Nederlanden, Insurance Europe will also delayer the support functions to reduce overlap and streamline the organization. Combined, these programs will result in a reduction of around 1,350 FTEs in 2013 and '14. A restructuring provision of approximately EUR 150 million, after tax, will be booked in the fourth quarter of this year. And then additionally, IT investments of about EUR 75 million, aftertax, will be made over the coming 2 years to improve processes and systems. These costs will be booked as special items over time. Cost savings generated by these measures are expected to reach a run rate of EUR 200 million by the end of 2014.

Slide 11. ING Bank continues to deliver on its strategic priorities. We did sell our equity stake in Capital One. We announced the divestments of ING Direct Canada and the U.K. as part of sharpening our strategic focus. We also accelerated de-risking, selling EUR 4.9 billion of European debt securities, and thereby, releasing EUR 6 billion of risk-weighted assets in the first 9 months of this year.

In October, we sold another EUR 3.5 billion additional debt securities, releasing another EUR 1 billion of risk-weighted assets. Furthermore, we are making clear progress in our cost initiatives in retail banking Netherlands, which is ahead of plan. And finally, we achieved another EUR 5.2 billion of balance sheet integration initiatives in the third quarter. And that brings the total to EUR 33 billion since the beginning of 2011.

Slide 12. Following a strategic review at Commercial Bank earlier this year, we decided to accelerate the implementation of strategic adaptations, including the run-off of certain leasing units, the rightsizing of the equity businesses and operational improvements in several units, including our PCM business, our payments and cash management business. These measures are expected to result in a reduction of about 1,000 FTEs over the next 3 years, for which we will take an after-tax provision of about EUR 150 million in the fourth quarter of 2012. Cost savings are expected to reach an annual run rate of about EUR 260 million in 2015. The review is ongoing and may lead to further changes in the future.

Let's now turn to the results for the third quarter on Slide 14. On Slide 14, you can see that the Bank posted a solid quarter, up both year-on-year and sequentially. In Insurance, we kept hedges in place to protect our regulatory capital. However, losses on these hedges continue to affect, of course, our results. As a result, net underlying profit of the group at EUR 719 million and quite some challenging environments.

Let's go to the Bank on Slide 16. The Bank posted solid third quarter results as the gain on the sale of our equity stake in Capital One largely offset the losses from de-risking and the negative impact from credit valuation and debt valuation adjustments. Risk costs increased slightly from the second quarter. Underlying result before tax rose to EUR 1,021,000,000, which is up 16.3%, compared to the same quarter last year and 2.6% higher than the second quarter of this year. Underlying interest margin, on a sequential basis, improved to 1.33 percentage points.

On Page 17. During the third quarter, we had de-risking efforts, in particular, in the Eurozone area. Total bond sales amounted to EUR 2.4 billion, for which we took a loss of EUR 258 million. Sales were focused on the Spanish-covered bonds, Spanish and Irish RMBSs and European CMBS. We cleaned up the numbers for these and other market impacts to make them more comparable. The gross results went up by 12.2% versus the third quarter last year and up 2.8% if you compare that with the second quarter this year.

Interest results was up by 2.2% from a year ago and 3.6% sequentially, primarily due to strong results in financial markets. The margin rose to 1.33% from 1.26% in the second quarter and mainly by higher interest results, as well as lower average balance sheet level during the second quarter -- during the third quarter.

Margins on savings are under some pressure, despite reductions from -- of client rates in many countries, reflecting the impact of lower interest rates and the de-risking. Margins on lending improved in the third quarter, supported by moderate volume growth in mortgages, and of course by repricing of loans that came due.

Operating expense, we continue to put high priority on cost containment. Operating expense increased marginally by 0.5% from the previous year, strong cost control that was able to offset the annual salary increases effectively has higher bank levies and onetime additional tax on employee salaries and negative currency effects. Compared to the second quarter of 2012, that included a EUR 38 million reimbursement from the old deposit guarantee scheme in Belgium and we had lower performance-related expenses. If you eliminate that, expenses rose by 3.9%. The underlying cost-income ratio was 58.7 or 56.9 when you include the market impacts and the CVA/DVA adjustments. We believe that Q4 expense will be impacted by a new Dutch tax of about EUR 175 million.

Risk costs. The weak economic and business fundamentals continue to contribute to elevated levels of risk cost in the third quarter. Although the net addition to the provision for loan losses rose only by 2.6% to EUR 555 million, it increased 59.5% if you compare that year-on-year. The modest increase compared to the second quarter was mainly attributable to the MidCorporate and SME segments in the Benelux and provisioning for a CMBS position in ING Direct. ING expects risk cost to remain elevated, reflecting the weakening of the economic climate.

Nonperforming loans, Slide 21. Ratio remained stable at 2.3%. Ratios in MidCorps and SMEs and real estate and finance and leasing, that is the run-off, continue to be relatively high. And we saw that again in previous quarters. Our loan-loss provision for real estate finance declined to EUR 102 million from EUR 120 million in the previous quarter. NPL ratio for REF increased to 8%, compared to 7.3% at the end of June, which is mainly driven by the Netherlands, and to a lesser extent, by the U.K.

Nonperforming loans in our EUR 2.7 billion real estate finance portfolio in Spain remains high at 19%, and risk costs on this portfolio increased to EUR 51 million in this quarter, reflecting lower real estate valuations following our regular appraisal of collateral. Given the deteriorating commercial real estate in Europe, we expect the risk cost for REF will remain elevated.

Risk cost for Dutch mortgages declined to EUR 44 million from EUR 53 million in the previous quarter and that included a model update at WestlandUtrecht Bank. NPL for the Dutch mortgage portfolio increased slightly, but has remained relatively low, at 1.3%, supported by again, a relatively low unemployment rate in the Netherlands. As house prices are expected to decline further and unemployment to increase, we expect risk cost for the Dutch mortgage market to remain elevated.

Last Monday, a new government was installed in the Netherlands. Their plans to -- for the coming years include housing market reform, among which, a gradual decline in the tax deductibility for new and existing mortgages and also reform of the rental markets.

Slide 24. Given the further weakening of the Spanish economy in the third quarter, we continue to proactively de-risk our exposure to Spain to reduce our concentration and to mitigate risk-weighted assets migration. The Bank's total exposure to Spain was reduced by EUR 1.8 billion, including EUR 0.2 billion in the lending book and EUR 1.8 billion in the debt securities portfolio, mainly as a result of sales of covered bonds and RMBS. The Spanish funding mismatch, defined as the Spanish assets outstanding minus the local funding, has reduced from EUR 13.8 billion at the end of Q2 to below EUR 10 billion at the end of this quarter. Spanish covered bonds will be further reduced as our portfolio is maturing.

Slide 25. The core Tier 1 ratio increased from 11.1% to 12.1%, and that was, of course, supported by the gain that we made on the sale of our Cap [ph] One stake as strong reduction in RWAs, following de-risking and the sale of the stake of Capital One.

If we were to include the sale of ING Direct Canada and ING Direct U.K., the pro forma core Tier 1 ratio is at, I think, a very robust 12.6%. The new accounting on pensions will come into effect on January 1, as far as we know, and that will require immediate recognition of actuarial gains on losses through the equity accounts. Based on the numbers of September 30, this would have an impact of about 50 basis points negative on the bank core Tier 1 ratio. The deduction was already included in the fully loaded Basel III pension impact.

On Page 26. You see the timing of the CRD IV implementation, and the final form of it are still very uncertain. In the consultative Paper that we got from the DNB, Dutch National Bank, it indicates that the revaluation reserve for debt securities will be phased in rather than applied immediately. As a result of these changes and the introduction of IAS 19 on pensions, the impact on Basel III is estimated to be a negative 140 basis points when we will introduce it. And later, then it will be phased in on a plus of 20 basis points. The impact excludes our deferred tax assets, which are expected to be used prior to Basel III implementation and retained earnings after September 30 of this year, so Q4 is not included yet.

Furthermore, management actions are expected to reduce our risk-weighted assets by at least an EUR 18 billion, of which EUR 8 billion has already been achieved so far.

Now let's turn to Insurance, Slide 28. Results from Insurance declined as de-risking measures and low interest rate environment put pressure on the investment margin. Also, our nonlife results continue to be impacted by high visibility claims. Together, they reduced the operating result for Insurance by 39.3% compared to the year ago. Underlying results continue to be impacted by losses on hedges that we maintain in order to focus on protecting our regulatory capital amidst these very volatile financial markets.

Investment margin declined compared with the last quarter, reflecting the impact of de-risking in the Benelux, as well as exceptionally high dividends that were baked in Q3 of last year. The investment margin also declined from the second quarter, mainly reflecting seasonality. Q4 -- the fourth quarter running average investment spreads was 130 basis points, which is down from 133 basis points in the last quarter, again, reflecting de-risking and the low interest rate environment.

Technical margin fees and premium-based revenues totaled EUR 784 million, which was down 2%, excluding foreign exchange. It was up 0.3% if you compare that with the second quarter this year. In the U.S., higher fees and premium based revenues from the ongoing businesses were more than offset by higher hedge costs and lower fees on the Closed Block VA. Technical margin improved to EUR 122 million, compared with EUR 100 million a year ago, reflecting both improvements in the U.S., as well as the Benelux.

We continue to be very tight on expenses. They did increase slightly from the previous year, reflecting investments for growth in Investment Management in Central and Eastern Europe. And while expenditures remain flat in the Benelux and Insurance U.S. reflecting, as I said, very strict cost control, ratio was 46 -- 47.6%. As mentioned earlier, Insurance Europe is accelerating its transformation program, which is expected to generate cost savings of approximately EUR 200 million by the end of 2014.

If we take a closer look at our business areas, we see that Insurance Benelux posted lower operating results, as the impact of de-risking and higher dividends in both comparable quarters led to a decline in the investment margin. And nonlife results continue to be impacted by the higher disability claims in the Netherlands. Underlying results including market-related impacts remain volatile, as Insurance Benelux continues to focus on hedging to protect regulatory capital that leads to volatility in our P&L. Underlying profit for the quarter declined significantly from a year ago but it did improve compared to the second quarter. Lower sales in the Benelux compared to the same quarter last year were offset by a 13.3% higher sales in our Eastern European and Central European businesses, driven, in particular, by increased sale in life and pensions.

Insurance U.S. had a strong third quarter, operating results of EUR 195 million. That was 14.1% better than the same quarter last year and 12% better than the second quarter. The increase over both quarters reflect improved results in the requirement solution -- retirement solutions business.

Underlying results before tax increased strongly to EUR 398 million, and that was supported by gains on the sale of securities and positive DAC unlocking, following model refinements and assumption updates.

Sales were flat, as higher retirement sales were offset intentionally by lower annuity and individual Life sales. Results from the U.S. Closed Block VA continue to reflect the volatility as the hedge program is focused on protecting regulatory capital rather than mitigating earnings volatility. The underlying result declined to a negative EUR 348 million, reflecting the hedge losses, net of reserve changes and EUR 104 million charge related to lapse assumption refinements. Reserve adequacy has improved to the 74% confidence level. As a result, reserves are projected to remain adequate even in a 25% down shock scenario. While the focus on capital protection continues to cause IFRS P&L volatility, earnings sensitivities, at least, are now more symmetric.

Insurance Asia posted another strong result in the third quarter despite the sales process for these businesses. Operating result increased from a higher investment income, which rose on strong channel account asset growth, as well as the -- we saw improved mortality results in Korea. Sales declined from last year. That was mainly in Japan because of tax law changes that was affecting our COLI cancer product sales, but increased from the previous quarter, driven by growth in Malaysia and Hong Kong, as well as in Japan from product diversification.

So let me wrap it up quickly. We continue to deliver on our restructuring program. We announced already 3 sales of our Asian Insurance units and the process for the remaining businesses is ongoing. U.S. is preparing to file a registration statement with the SEC and Insurance Europe is accelerating the transformation program to sharpen strategic focus of business units at Nationale-Nederlanden. The Bank had a good quarter, but the Commercial Banking franchise has decided to accelerate the implementation of a number of strategic adaptations that will lead to cost savings of about EUR 260 million by the year 2015. The group had a net underlying profit of EUR 719 million. And as I said, a very strong or very solid quarter for the Bank with results both year-on-year and sequentially, and underlying results before tax at Insurance declined primarily due to negative results on hedges that we used to protect our regulatory capital.

And with that, I think we are ready to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Michael van Wegen from the Bank of Merrill Lynch.

Michael van Wegen - BofA Merrill Lynch, Research Division

Mike van Wegen from Bank of America Merrill Lynch. Two questions, please. First of all, you made comments in the press release that you're making good progress with your discussions with the European Commission. If I remember well, at the beginning of the year, you indicated your ambition to repay, at least, part of that state support before year end. I don't think there's any news on that today. Would you -- should we conclude from that, that you're comfortable or hopeful that you might reach an agreement with the European Commission before year end and want to wait therefore with an actual announcement? Or how should we interpret that? The second question is you touched upon the changes in the Dutch tax legislation for mortgages. What's your opinion on the impact on the housing market this will have and the potential losses for mortgages? I know that you've said risk cost will remain elevated.

Jan H. M. Hommen

Yes. Michael, we have made good progress in our discussions together with the Dutch State with the European Commission. And good progress really means that -- it means good progress, but we don't have anything to report at this moment. As soon as we have and as soon as the European Commission has, I think we will do so. Our payment intention with the Dutch State continues. We would like to pay them back as soon as possible, but we also need to be mindful of the ability to do so and the consequences of a full repayment. So I have said indeed, earlier this year and I will continue that again, that we like to make an, at least, a part repayment this year to the Dutch State. But I think it's better to wait for the final arrangement that we hope to make with the European Commission before making any further comments. On the mortgages in the Netherlands and the tax consequences, the changes in the tax law, they are not really that significant. They are over time -- they are declining from ability to deduct 52% in a number of years, almost 20 years down to 38%, so that's a very gradual decline. I think more important, this government has taken, I think, a very concrete steps to deal with the housing markets in a wholesome way, not just looking at homes that you can buy, but also the rental market. And it's too early to say what the implications will be. It hangs too much together with what will happen with the total economy, but I think in general, these are good steps forward. I don't know, Wilfred, anything to add?

Wilfred F. Nagel

Well, maybe just add a bit of color to it. If you look at the measures that have been contemplated or introduced, as Jan was saying, the deductibility itself will probably not have a lot of impact. What has a bit more impact is The fact that new loans will have to amortize in order to qualify for tax deductions, so that will gradually reduce affordability a bit. At the same time, of course, the house is most affected by debt are also coming down in price. So net-net, whether the affordability is really that much effective remains to be seen. Maybe the bigger impact on this will come from the increased health insurance premiums that will reduce spendable income and have an indirect impact on the housing market and ability of people to service their loans.

Operator

The next question is from Jan Willem Weidema from ABN Amro.

Jan Willem Weidema - ABN AMRO Bank N.V., Research Division

For Basel III guidance, if I remember correctly, your old guidance was an impact of 80 basis points, now fully phased at 120 basis points. Can you take me through the difference there between the old and the new guidance? And secondly, can you comment on the impact of de-risking of the NIM going forward? And finally, on your U.S. RBC ratio, can you comment on the impact of the dampener for low rates, and how big is the benefit? And do you expect that to come down in the coming quarters, if rates stay where they are?

Jan H. M. Hommen

Patrick will do that.

Patrick G. Flynn

In respect of the Basel III impact, if I recall last quarter, we said the impact was, I think, around 160 in aggregate, of which half of it came immediately and half of it was phased in. What we're showing now is the overall impact is slightly bigger, it's about 170. Although the timing of the impact has changed, principally, because of IAS 19, which will accelerate some of this into immediate impact, so the 50 basis points from the pension comes in immediately. Also, as Jan mentioned, the Dutch regulator has indicated that the mark-to-market on bonds will be phased in rather than immediate, and that defers some of the benefits later. So yes, what we're seeing broadly, in aggregate, the same overall impact 160, 170, but some further acceleration of the impact because of IAS 19. And by the way, we're not even sure that Basel III will come in, in Q1 next year because we haven't seen CRD IV ratified yet. And the other impact, RBC, yes, there's been some benefit from unrealized gains due to low rates.

Operator

The next question is from Andrew Coombs from Citigroup.

Andrew P. Coombs - Citigroup Inc, Research Division

I have 3 questions, in fact. The first question relates to Slides 10 and 12, the 2 cost-save initiatives announced. Perhaps you could also provide thoughts on what the revenue attrition associated with those cost saves might be? That's the first question. Second question on Slide 21, you detailed the NPL increase in real estate, but perhaps you could shed some color on the increase in corporate and in leasing there? And if you could also provide how -- or give an example of how the coverage ratios have changed in each of those buckets? That would also be appreciated. And then the final question's on de-risking. You've done EUR 5 billion of reduction year-to-date, you had a loss of EUR 475 million. You mentioned October is another 3.5 billion reduction with a loss of EUR 119 million. I'm just interested to know your thoughts on how much more derisking you're planning to do. How much of that is probably to be achieved by active sales, or whether that's more likely to come through natural amortization from here?

Matthew J. Rider

So just referring to the Nationale-Nederlanden and the Dutch expense savings programs, we would not anticipate any impact on revenues. These are purely expense saves with some investment required to be able to get there.

Jan H. M. Hommen

And the same, I think, for the commercial bank. There is some impact on revenues, but they are completely outweighed by the big benefits we are seeing on the expense side. Wilfred, do you understand?

Wilfred F. Nagel

Yes, I understand the question was you see the NPL numbers for real estate, but can we add some color on corporate and leasing beyond that, is that correct?

Andrew P. Coombs - Citigroup Inc, Research Division

That's correct, please.

Wilfred F. Nagel

Okay. And if you look at the Commercial Banking portfolio overall, the NPLs were up slightly from 4.3% previous quarter to 4.5% this quarter. And digging a little bit into those numbers, the general corporate lending went up from 3.9% -- sorry, to 3.9% from 3.6%; and leasing to 7.8% from 6.8%. REF, you've seen the Structured Finance number actually came down a bit from 2.4% to 2.2%. And in terms of the risk cost, the corporate lending book risk cost was down from 105 to 65; leasing went from 35 to 29, and the structured finance risk cost went from 55 to 40. The coverage ratios, generally stable. If you look at Commercial book overall, it's around 40% and the general lending book went up a bit in cover from 50 to 52. The Structured Finance came down slightly from 53 to 47, and the rest was pretty much stable.

Andrew P. Coombs - Citigroup Inc, Research Division

And then just on the de-risking?

Wilfred F. Nagel

Yes. And specifically, I guess the question would be on Spain. And we have said all along that this was a large book that, in terms of quality, is definitely not a major concern. But it's just large in a difficult economic environment. So we've actively managed it. And as and when we see opportunities to do so at attractive prices, we will continue to do that. But at the same time, I think you referred to that, and there is a natural run-off in the book that is quite substantial. It would be about EUR 2.6 billion next year on the schedule as a loan and another EUR 2.5 billion the year thereafter. So it will continue to come down, but we may, if we see opportunities, actively manage it further.

Jan H. M. Hommen

But I think it's fair to say that the biggest derisking exercises that we have done are basically behind us. From time to time, when we see an opportunity, I think we'll take advantage of it. But the big stuff, I think, is basically done.

Wilfred F. Nagel

Yes, I think the concentration for now is more on RWA migration and not so much on risk mitigation.

Operator

The next question is from Francesca Tondi from Morgan Stanley.

Francesca Tondi - Morgan Stanley, Research Division

Couple of questions also on my side. Looking, not just on your net interest margin, but your net interest income progression. You seem to be having positive trends in most of the parts of the business. Could you expand a little bit more on where that progression is coming, especially in the Retail Benelux -- in Belgium, sorry, where it actually sees quite a bit of an improvement versus the Netherlands, which you see some decline, some improvement in the Commercial Banking business. I don't see a significant improvement on the lending or increase in the lending, so if you could expand on the reason for the increase. Going back for a moment to your Spanish de-risking, interested in your comments -- the large part has been done. I see, however, that actually credit spreads are still contracting. I was a bit surprised that actually what you did in third quarter seemed to be less in the second quarter with bigger charges. Can you just expand a little bit on what are the trends that you're seeing there and why you think that the big part has been done? Would it not be making sense to accelerate a little bit more? And yes, that's pretty much it.

Patrick G. Flynn

Yes. With respect to the interest margin, yes, you're right, not only did the -- in basis points term, we have a nice uptick to 133, part of which due to balance sheet reduction, but also the interest earnings, as you say, did increase. It's up EUR 107 million. About half of that is in Commercial Banking in financial markets. Whilst that can be volatile in terms of the composition of financial markets, income, I think, it's important to point out that the revenues there have been pretty solid, over EUR 300 million both quarters. You don't necessarily see that in the bottom line, because of the volatile CVA/DVA. But financial markets has held up pretty well. In terms of the core businesses, what we're seeing is a small increase overall. And in interest margins, both in Belgium and the Netherlands, you refer to them with the interest cost being produced by about 20 basis points, the amounts we pay on savings, which is a positive. However, that didn't offset fully the impact of lower interest rates. So the net earning's reflecting slightly negative in terms of the core savings piece. In terms of lending, the margin improved. Again, marginally, a small increase, but that was on the back of repricing on the higher cost of funds, which is a positive and demonstrates, again, further commitment to maintain discipline in pricing. So what do we think in terms of the outlook? Going forward, I think it should hold up reasonably well at these levels. We'd expect that the impact of the price reductions should offset when you see the full effect of that more in the fourth quarter, should offset broadly the impact of the lower interest rate environment. That's in the near term. And obviously, going forward, we still believe that the -- we will migrate towards a longer term 140, 145 basis points target, as we said at the Investor Day, supported by balance sheet optimization, which we have more to do on, and gradual repricing of the loan book.

Francesca Tondi - Morgan Stanley, Research Division

And then just looking also the benefits on the -- in the finance division, how do you look at trends on your hedges, because clearly, you're rolling over time at a lower yield's clearly how the drag is set. So positive this quarter versus what you see this trend going forward on that side?

Patrick G. Flynn

In the hedges, typically, in the Bank, are what you will call accrual accounted, the key thing there is that the margin on new business on the hedges reflect -- roll into the cost of funds. And what we're trying to do, we've done it in retail mortgages as well as commercial, you are looking to execute on our strategic ambitions, which involve reflecting the higher cost of credit. So it's more about repricing the cost to the customer. The hedging is wrapped into the cost of funds. So you're not necessarily going to see that in terms of separate impact.

Francesca Tondi - Morgan Stanley, Research Division

Okay. But do you think that net-net, then you'll be able to more than offset the negative roll-off of the hedges, and therefore, seeing that as positive then, trending towards your -- so are we troughing margin is what I'm saying here?

Patrick G. Flynn

Yes. I think the issue which may be negative is that there's a lot of maybe lower volumes as prices go up.

Francesca Tondi - Morgan Stanley, Research Division

Okay. And since you touched upon your, effectively, the reorganization of the balance sheet, if you wouldn't mind just give us a quick update on that.

Patrick G. Flynn

Yes, the -- what our -- ambition is to -- we have, as I mentioned earlier, EUR 11 billion of retail inflow. It's on the back [indiscernible] sorry, deposit inflow, half of which is retail, half of which is commercial. Core strength is the ability to generate deposits. What we aim to do is to continue to migrate our lending capacity to areas where we have deposit generation. So it is about moving Commercial Banking origination capability to Belgium and into Germany where there are strengths.

Francesca Tondi - Morgan Stanley, Research Division

And what is the update on this quarter for what you've managed to do so far?

Patrick G. Flynn

I mean, I think we've given that in aggregate. It's not something that we're going to give for -- quarter-by-quarter.

Francesca Tondi - Morgan Stanley, Research Division

Okay, that's fine. My last question, if you don't mind, about the Spanish deleveraging. Why is it that the biggest chunk is down?

Jan H. M. Hommen

Yes, on that. If you look back over the past quarters, second quarter, for us, was mainly about reducing the absolute volume of the exposures and the mismatch. Third quarter was more about risk mitigation. As I said earlier, what we're now looking really is more the risk migration risk than anything else and to control that. Your comment about credit spreads and improvement in pricing, I mean, looking a little bit beyond the weekly volatility there, the overall price is currently, in October, are pretty much where they were in June, so there's not a massive change. And to us, that signals that yes, there is volatility, but there's not really a big trend at the moment. The other observation is that we do have a serious and sizable client franchise in Spain. And the objective is to gradually reduce our investment books there and replace them with originated assets. And the current run-off of the investment book supports that nicely.

Operator

The next question is from Francois Boissin from Exane BNP Paribas.

Francois Boissin - Exane BNP Paribas, Research Division

A few questions, please. The first one on the Japanese VA book. Basically, could you just walk through -- walk us through the various scenarios, interested the potential hit that it could take according to your, let's say, disposals. And second question is on risk-weighted assets migration in Spain, you mentioned this risk. Can you maybe quantify the additional risk-weighted assets that we could see in the coming quarters in Spain? And then finally, about the competitive landscape in Netherlands, could you maybe just give some color about competitors' behavior in terms of pricing and if you're able, basically, to reprice loans as in line with your expectation or do you face hurdles?

Matthew J. Rider

Just with respect to the Japan VA book, I think we disclosed in this quarter that we do have a reserve inadequacy of about EUR 500 million for the totality of Japan COLI plus the VA that is reinsured with ING Re. That is composed of this EUR 1.1 billion inadequacy for the VA block, and that's compensated by a EUR 600 million adequacy or surplus, if you will, at the corporate owned life insurance business. We disclose it in this way because actually, the consequences of when things get reported as losses crystallized are very, very much dependent on the timing of the closing of the various transactions in part that we've already announced and in part that we will be announcing. So it's a little bit early to talk about overall impacts because we need to know the timing of those transactions, the amount of those transactions, and actually, the ultimate resolution to what we do with the sale of the overall Japan business.

Francois Boissin - Exane BNP Paribas, Research Division

Okay. Maybe just to follow up, a question on that. What are the sensitivities here? I mean what could cause the inadequacy to rise, and what could, basically, ease these -- this shortfall?

Matthew J. Rider

The inadequacies are the inadequacies, so the point is, when the stuff ultimately gets reflected in our financial accounting in the way that we published our results. So the sensitivities are basically the timing of the various transactions, the amount of the proceeds, the gains and losses that we would see on those, that's the sensitivity. I would add also that these are, generally, IFRS impacts. And that from a capital standpoint, we've already had the capitalization correct in ING Re.

Francois Boissin - Exane BNP Paribas, Research Division

Okay. So there's no real market sensitivity here?

Matthew J. Rider

There is market sensitivity, but it has more to do with the impact of, let's say, financial markets and negotiations on the ultimate -- the prices that we get for these assets. As you know, we have announced several of them. There will be several to come, but it has more to do with that than anything else.

Francois Boissin - Exane BNP Paribas, Research Division

So -- and about the risk-weighted assets migration and the competitive landscape?

Jan H. M. Hommen

Yes, we're getting to it.

Wilfred F. Nagel

I mean, I think this is more about -- what we're talking about here is avoiding the potential for this to happen in the future. So what we've done is looked at -- taken preventative action to, particularly, in asset-backed securities space to get ahead of the curve. So it's avoiding things that might come rather than guiding for future increases. We're trying to avoid negative impacts, and I think we've done that reasonably successfully so far.

Jan H. M. Hommen

Okay, on the competitive behavior in the Netherlands, I don't think we can say much, except that we do what we do, and competitors do what they do. We are tight. We are pricing our product as we see based on new capital rules as we need to price them. And I think we're very diligent and very disciplined in our pricing behavior. But what others do is what others do. We just follow the lines of ING.

Operator

The next question is from Michael Huttner from JPMorgan.

Michael Igor Huttner - JP Morgan Chase & Co, Research Division

I had 3 questions. The first one is if I -- just to give a feel for the banking profitability, so EUR 1 billion is reported underlying pretax. You had a target of 10% to 13%, which I think was between EUR 3.3 billion and EUR 4.2 billion net. So assuming the EUR 1 billion annualized of for then [ph] -- net of tax, so about 3, so you got a -- there's a gap there. And I'm just wondering how quickly you can close that gap, and where is it going to come from? Then you talked about the EUR 1.5 billion letter of credit. It wasn't clear to me how this was going to be repaid, is it the U.S. IPO or is the U.S. going to raise hybrid debt on its own, and that would replace it, so it wouldn't necessarily impinge on the IPO proceeds? And the last one is looking at Slide 5, the EUR 1.1 billion book value for ING Re is, for me, a new disclosure. I'm sorry I missed it somewhere before, but what I noticed that it's not on Slide 4. In other words, we still have -- it's gone up because we're in Q3 around, Q2 but about EUR 6 billion, EUR 7 billion in total or EUR 6.9 billion in the tangible book of Asia assets. And then now, we've got this EUR 1.1 billion. Does it take -- should I take that to mean that ING Re is now also to be included in the asset for sale relating to Asia?

Jan H. M. Hommen

Okay. If you look at the Bank, the Bank is making EUR 1 billion before tax and if you relate our numbers, we are making a 10% return on a 10% core Tier 1 ratio as we have defined that. So we're basically in the range that we have said before between 10% and 13% already there. If you compare that on the actual equity that we have today, it's a little bit lower, but I think you need to calculate that over time on what the target ratio will be for our capital. And at this moment, we are maintaining internally a 10% core Tier 1 ratio as a target capital ratio for core Tier 1.

Michael Igor Huttner - JP Morgan Chase & Co, Research Division

And this is core Tier 1 fully loaded?

Jan H. M. Hommen

Yes, it is fully loaded as we have it today, yes. On the EUR 1.5 billion facility that we have with the U.S., all we have done here is we have mentioned to you that there is a facility and a credit facility available that needs to be dealt with. And we are not, at this moment, saying how it will be dealt with. We are going to take a look at that very carefully over time together with the U.S. colleagues. But it could potentially have an impact, and that's what we have been willing to flag today, just to have full disclosure. Patrick, on the multiple bond?

Patrick G. Flynn

In respect to Japan, the capital in Japan, it was disclosed last quarter, albeit I think in the table you're referring to, if I recall correctly, it was a footnote. But it was isolated before, so it hasn't changed in that respect.

Michael Igor Huttner - JP Morgan Chase & Co, Research Division

But should I take it to mean that the ING Re is now for sale, or is it not for sale? I'm puzzled because it appears in 1 table and not the other, and I'm not sure. And clearly, the tables are related to the extent that you -- the VA provision kind of affects all of these things.

Patrick G. Flynn

No, ING Re is not for sale, but it includes reinsured transactions other than out of Japan. Obviously, when we complete all of the Asian transactions, this will -- the element in ING that relates to that will come out in the overall result.

Operator

The next question is from Gordon Aitken from RBC.

Gordon Aitken - RBC Capital Markets, LLC, Research Division

A couple of questions, please. Firstly, insurance sales are down 4.5%. Just talk a bit about how your Insurance businesses are being affected by the knowledge that in 2 year's time, they will be under different ownership. I mean how many percentage points you think that's knocking off the growth? And secondly on the Dutch DB market, just wondering how many schemes you took on in the third quarter, and what's your outlook for this market?

Matthew J. Rider

I'd take both of them. The -- in terms of the insurance sales, I think what we're seeing is -- so your specific question is what impact is the announcements of divestitures having on Insurance sales overall. And in general, we're seeing actually, we are seeing movements in the sales numbers, but they're not really as a result of the announced divestments. We're seeing actually, generally, flattish sales in the retirement business in the U.S. We've seen some reduced sales in the Life Insurance business in the U.S., as well as in the annuity business. But those are more management actions and as a consequence of the lower interest rate, so we intentionally sell a little bit less of that. We see continued pretty good sales within Asia. I think we saw that on one of the other slides. Within the Benelux, I think we're seeing lower sales, again as a consequence of more lower interest rates than anything else on the life insurance side, particularly in the Netherlands and in Belgium. But then in CRE, we're seeing sales up 13% over the third quarter last year, of which 10% is life. So in those areas, we see actually some pretty good sales growth. So kind of a long answer to your short question, we're not seeing a lot of impact as a consequence of the announced divestments. With respect to the Dutch defined-benefit market, that's the one I think we have to come back to you on. I don't know exactly what we've done in the third quarter with respect to new plans.

Operator

The next question is from Marcus Rivaldi from Morgan Stanley.

Marcus Rivaldi - Morgan Stanley, Research Division

So after you originally see state a decision, EC oversight on hybrid calls seems to fall away on 18th of November. So my question really is should subordinated bondholders expect this original agreement to hold? Or could an extension to this behavior or restriction form part of a new agreement with EC? And the question really is because there are clear number of bonds coming to call in December. And then related to that, what are you planning to do with bonds that were not called during the course of that period of EC oversight? Do you need to capital? Would you just call them? Do you envisage tenders and exchanges? And then just the final comp question, please. Any comments you can make around the potential for ING involvement in a potential SNS property finance bad bank solution?

Jan H. M. Hommen

We are, as I said earlier, we are making good progress with the European Commission. We are doing that together with the Dutch State. We cannot, at this moment, give you any more information than that and give you more color than that we have made good progress. Under the arrangements we have, we have to ask the EC for a permission to make calls and to do repayments. And I cannot give you any further answer than this on this subject. You will have to wait until you see at the end what decisions are coming out of Europe. We don't know them today, so we cannot tell you right now. With respect to the, let's say, participation by SNS or by ING in the potential with SNS, I cannot give you any comment. I have absolutely no comment to make on SNS.

Marcus Rivaldi - Morgan Stanley, Research Division

Okay. Just coming back then to the bond thing. I guess usually the confusion is the fact you have an existing agreement, which seems to end on 18th of November, so should we consider that effectively null and void at this stage?

Jan H. M. Hommen

I cannot help you. I'm sorry I cannot help you. We have made good progress with the European Commission, but you are basically on your own at this moment. I cannot give you any more help.

Operator

The next question is from David Andrich from Morgan Stanley.

David T. Andrich - Morgan Stanley, Research Division

I just had a couple of questions on the Benelux Insurance business. First of all, I was just wondering in terms of the nonlife performance, what actions you have taken to address this? Second of all, if I look at the second quarter results, it was down from second -- 2Q '11 by about 7% from Benelux sales, and particularly, Individual Life. And in this quarter, I see -- I think it's down by about 23%. I was just wondering if this is kind of a trend, which you see continuing and/or if it's kind of leveling off? And then finally, I'm just wondering in terms of IAG ratio for the group, as well as I was wondering if you had it broken apart for the Benelux or European business as well.

Matthew J. Rider

I'll take these piece by piece. So first of all on the nonlife business, you will recognize that our nonlife results were down in the third quarter. We have taken a charge as a consequence largely of claims and disability area, and we have strengthened the provisions there. The actions that we take, well aside from strengthening the reserves, of course, are to increase premiums. We have stopped sales of certain sickness types of products. We've instituted programs to get people back to work more quickly. So this is more of a claims-handling type of, types of issues, so I think that we have taken quite some actions just from a pure business standpoint to get that back on track. So it's a disappointing result, obviously, for the third quarter, but we take some actions, which I think will bring that back into line. All of it, of course, driven by the difficult economic environment here in the Netherlands. With respect to the sales, what you've seen is declining sales as a consequence largely of retail sales within the Netherlands and in Belgium. And what you're seeing also is that certain of our products, which had previously been Insurance products, are now being transformed into sales of what's called, [indiscernible] products, and these are not included in the APE figures, but they are included in the figures of the bank. And you'll see that a bit in our disclosure. But clearly, Life sales are a bit lagging here. There's also some seasonality to the numbers. So when you look at comparisons quarter-on-quarter, they become a little bit difficult. With respect to the IGD ratio, we don't provide any further breakdowns of that overall. We do provide at year end some information on capitalization of some of the bigger business, but we don't disclose that on the in-between quarters.

Operator

The final question is from Manish Bakhda from Citigroup.

Manish Bakhda

Just one further question from a debt-holder perspective. I appreciate you can't comment on what's going on with EC, but given bonds issued out of the short holdco have very specific language around the sale of the Insurance businesses, does ING view these calls on these bonds any differently to the other bonds?

Jan H. M. Hommen

I have no better answer than the one I've given you earlier. I cannot comment, and you will have to have some patience.

Thank you very much for being on the call. I think this is the final question. If you have any more calls that we did not answer, please direct them to Dorothy and her team. They are very capable and very willing to answer your questions. In the meantime, thanks a lot, and have a great day.

Operator

Thank you, sir. Thank you, ladies and gentlemen. This does conclude today's presentation. Thank you for participating. You may now disconnect.

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