ING Groep N.V. (NYSE:ING) Q4 2016 Earnings Conference Call February 2, 2017 3:00 AM ET
Ralph Hamers - Chief Executive Officer
Patrick Flynn - Chief Financial Officer
Wilfred Nagel - Chief Risk Officer
Tarik El Mejjad - Bank of America
Daniel Do-Thoi - J.P. Morgan
Bruce Hamilton - Morgan Stanley
Benoit Petrarque - Kepler Cheuvreux
Benjamin Goy - Deutsche Bank
Kiri Vijayarajah - Barclays
Anke Reingen - RBC
JP Lambert - KBW
Cor Kluis - ABN Amro
Pawel Dziedzic - Goldman Sachs
Alicia Chung - Exane
Nick Davey - Redburn
Stefan Nedialkov - Citigroup
Anton Kryachok - UBS
Alex Koagne - Natixis
Robin van den Broek - Mediobanca
Patrick Lee - Santander
Brad Houston - Kempen
Good morning. This is Saskia welcoming you to the ING’s Fourth Quarter 2016 Conference Call.
Before handing this conference call over to Ralph Hamers, Chief Executive Officer of ING Group, let me first say that today’s comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement.
A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission. And our earnings press release as posted on our website today. Furthermore, nothing in today’s comments constitutes an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Ralph, over to you.
I hope everybody hears me. We have some technical problems here. But let’s start nevertheless, meanwhile trying to get some more mikes here around the table.
Now welcome to ING’s fourth quarter 2016 results conference call. Thank you for joining us today. I’ll talk you through today’s presentation. Patrick Flynn is here, our CFO: Wilfred Nagel, our CRO is here from the executive board in order to help me answer some as well that you have later as well.
So let’s go through the presentation Slide 2. ING Bank posted a record underlying net profit nearly EUR5 billion which is an 18% increase on 2015. We have maintained a very good momentum in primary customer growth which continuous to lead to a strong financial results aided by continued decline in loan loss provisioning.
And as announced during our recent Investor Day, we have booked a EUR1.1 billion restructuring charge in Q4 with the acceleration of Think Forward and as taken below the line as a special item.
Our Group CET1, a capital position ended the year at a robust 14.2%. And even with our strengthen capital base, we delivered a return on equity above 10% at the Group.
We’re proposing a full year cash dividend of EUR0.66 in line with our progressive dividend policy. Those are the key points. Let’s go into some of the details.
Slide 3. As you can see on this slide, we continue to attract many new clients. In 2016, we added another 1.4 customers. And a growth proportion of these customers are considered the primary client. And we aim to continue to strength as we are now targeting 14 million primary customers by 2020. Now this year alone, we have extended an additional EUR35 billion of loans and received EUR28 billion of customer deposits. Both increasing by roughly 6% year-on-year.
And as you know; our compass and Net Promoter Score remains one of our most important KPIs in the business and forward-looking KPIs to the continuants of our commercial growth. In the fourth quarter, we were once again ranked number one in seven out of the 13 retail markets in which we’re active.
So all of these commercial results lead to a good and strong financial result, which we’ll see on Slide 4. The underlying net result for the bank was nearly 5 billion which represents a 16% compound annual increase since 2013, despite the headwinds we are facing from the low rate environment.
And even though the full loaded back CET1 ratio has increased by 4 percentage point this year, we further increased the bank’s return on equity to 11.6%.
The underlying income excluding CVA/DVA improved by 7.4% in 2016, I am on Slide 5 now, with an increase visible in all income line items. With that core lending growth of nearly EUR35 billion during the year, we’ve been able to growth net interest income by 5.2% compared to 2015.
However, it’s not just the NII that drives results, we also substantial progress in the fee and commission income line, particularly in our challenges and growth market.
On the expense side, as you can see, we’ve managed to keep underlying expenses stable this year. Existing cost savings programs has funded the growth initiatives that we have in both the challenges in growth markets as well as in the industry lending activities within the wholesale bank. In combination with a strong income line, this was led to a 1.7 percentage point reduction of the cost income ratio to 54.2% acting closer to our 50% to 52% target range for 2020.
In addition to that we had low risk cost supporting the underlying results. Risk cost came in at 31 basis points for 2016 and that’s well below our through-the-cycle average of 40 to 45 basis points. A good development on all accounts there.
And turning to capital, the Group CET1 ended up at 14.2% which is up 70 basis points quarter-on-quarter and up 150 basis points compared to the end of last year. That’s comfortably above the current 11.75% fully loaded requirement by 2019 excluding Pillar 2 Guidance.
For 2016, we proposed a full year cash dividend of EUR0.66 per share. This means that we will have a EUR0.42 final dividend since we already paid a EUR0.24 interim dividend in August 2016. The full year dividend is payable in May 2017. After the AGM, after accounting for this dividend payment, there is a total of EUR2.1 billion of interim profits that flowing back to the Group capital. And that explains much of the quarter-on-quarter increase in the CET1 of the Group.
Now at summary, if we compare all of this against the financial targets of 2020, the Group CET1 ratio 14.2% and the leverage ratio 4.8% are well ahead of regulatory requirements. We made a good progress in our cost efficiency this year. And we are certainly confident that we can reach the 50% to 52% target range by 2020. We’ve been saying over the past few months that given the regulatory uncertainty that we think it’s prudent to wait for further clarity before we announce a Group return on equity target and given the factors that it’s not more clarity yet from Basel, we will not be able to give more clarity around the Group return equity target for the moment. Nonetheless, we achieved a strong underlying Group return on equity of 10.1% and we continue our progress of dividend policy.
So this actually sums up the full year results. So we have healthy growth, we have an improvement capital, we have a healthy return on equity and we have an attractive dividend. That’s basically the summary.
Now let’s dive deeper now into how we’re progressing for the future. I am turning to the transformation programs now, Slide 9. You will recognize this picture, it’s the recent Investor Day this where we used this picture. We announced four different transformation programs. We started to see the tangible success facilities programs with the project team now being established for the Model Bank in Spain. Germany has introduced a multibank feature in its daily banking app, which is a very important stuff. They only opened up for third parties. As part of our philosophy, we believe in that, creating open platforms. We’ve remained confidence about execution of these transformation programs for sure including the 900 million of annual savings they will deliver by 2021.
As we had indicated fourth months ago, we took a 1.1 billion pretax restructuring charge in the fourth quarter. That’s booked us by special item below the line.
You also know that innovation is very important for our future which is next page. Innovation, the way we can summarize is really about the three Cs. The C of Customer Experience because that’s what the real focus is about, that’s what’s causing this success, that’s what’s causing the growth of 1.4 million customers also last year. It’s a culture that you need to be innovative. And as to connection that you need with different ecosystems that you need in order to be innovative. And that’s what you see.
So in this sprit, we have developed innovations over the last year, so, as Payconiq in Belgium which is more or less becoming the standard now in Belgium; Instant Lending in Romania. So many of the examples that you see here you recognize because we have talked to you about these in the past.
Now I said we can only innovative we have the right culture. We’re building our ING Direct heritage here. We have our own innovation program PACE as we call it. And we have an annual innovation Boot Camp. All of those just stimulated our employee - to stimulate our employees to constantly think about creating a better product in a better service for our customers.
And then the connection part, as I said it’s all about our own ecosystems, so how do you make sure you get the right people in to talk to each other, how do they open up, how do they connect, how to they basically motivate each other. But these connections are not limited to what you do inside. You have to open up in order to get also the good ideas from the outside. I mean we don’t have a monopoly and good ideas. And therefore we have partnerships with more than 70 FinTechs now aimed at improving the customer’s experience. In all the way, we work with FinTechs. It tends to be a little bit different from many of the order of our colleague banks that is that we’re doubt investing in them because of the upside in the FinTech itself. We are investing in them because they can truly improve what we’re trying to do towards out clients. And that’s the different philosophy.
Turning to sustainability, and I’d like to remind you how important that is to ING. And I think you know the annual result is a good moment to kind of give you an update. And fourth quarter we’ve seen further growth of our financing of sustainable projects and as well as social and environmental outperformers. And that portfolio of sustainable transitions finance as we call it, the STF has increased with 34 billion now.
In November, we launched the Sustainable Finance Collective Asia and that’s a first-of-its-kind, it’s a funding initiative in the region where we basically group different parties together, look at different business models and see how we together can support the development of this new circular models, climb a neutral models and help each other.
At the same time in our Real Estate Finance Netherlands activity, we decided that we will only offer new financing to Green Office buildings going forward.
And as you’ve probably already read and seen in the different newspapers, we also get strong external recognition for our sustainability policies, been a sustainability and responsible investments magazine Corporate Knights ranked us as the 5th most sustainable company in the world even how we are really proud of that. And naturally we’re also proud and specifically all of our colleagues were very proud, have been recognized as the global bank of the year 2016 by The Banker magazine.
Let’s look into more detail now; if it comes to the segments for 2016 as a whole, turning to Slide 13 for reference, this is reminder of what we said during our Investor Day. At top left you see the recipe that we repeated there. So this is the recipe that has been around since we launched Think Forward three years ago, and which we expect the market leaders not to growth income but to really become more and more efficient, which allows the growth markets to grow fast, grow income and then they will be allowed to grow on their cost side.
And for the Wholesale Bank, we do expect income growth. However, we do expect the Wholesale Bank the more or less manage on the flat cost base across the business.
Now from the right hand side you see the result. So we continue to see rapid income growth in our challenges and growth markets as we are becoming the primary bank for more and more customer. And we grow fee income on the back on that which you will see later today as well. And we are improving the cross buy.
On the Wholesale Bank, we are continuing to growth our portfolio particularly in Industry Lending, while we hope to call us flat and that’s through the implementation of our efficiency programs. But in the Benelux, you see that the top line growth remains challenging as a persistency lower rate environment is causing margin pressure. And therefore you know in order to drive the rest of future, we have to ensure that we become more digital, have better client services and with that also become more efficient.
Let’s take a closer look at the challenge there in the Benelux. We see here over the years, lack of that revenue growth. In the Netherlands, this is largely caused by lower volumes. In Belgium, although we see reasonable lending growth is a pressure on savings in current accounts as are to legal floor in terms of our savings already. And you see that in this picture you see the difference here between the Netherlands and Belgium coming through on the margin pressure.
So the volume increases in Belgium help us to offset some of the pressure. In Holland, we are keeping the margin being able to manage the margin, but we see decrease of volume.
So therefore the focus across Benelux is mainly in cost efficiency, how we do adopt our model to a new more digital way that our customers can do their banking.
Other program that we announced to intended to further align the digital in Belgium platforms in order to deliver a much better customer experience in a much more efficient way. Unfortunately, this also involves the headcount reductions as announced for the rationalization of the Belgium branch network. And you know at this moment, we continue to work constructively on these proposals with relevant stakeholders. So there is a good debate there, a constructive debate with different stakeholders for these transformation programs.
And turning to the retail side of challenges and growths now, you see the strong business performance on Slide 15. It’s evident in all of these numbers. The NII for the segment has grown annually by 9% since 2013 versus the strong 8% growth for the fee income. We still expect to see income will grow faster than NII in the coming years as we offer more and more products with increasing the mobile and digital platforms. At the same time, while we have selectively invested in business growth in countries in Germany and had to absorb higher regulatory cost. We’ve managed to improve the cost income ratio. So it’s a real good story.
At the same time, our growth is with a prudent risk approach as you can see in the development of the risk cost. So then the growth is not coming in by becoming you know by moving away from our risk acceptance criteria. We keep the same risk acceptance criteria, but we get the clients in on the back of the superior experience ready and that’s how it works.
Now if you look at the C&G. In total, so this is the picture, including Wholesale Banking, you can clearly see that the Think Forward strategy is delivering results. We see customers growing. We see primary customers growing. We see lending growth. We see assets under management growing. But the headcount remains flat. This is efficiency at work. This is how you growing a digital platform. It’s fully scalable. You can growth it. You can keep your headcounts flat. And we actually think we can improve from here, that’s why we launched the Model Bank as well.
Now also from a balance sheet perspective, you see that we have been able to further optimize use of our balance sheet in these countries by growing customer lending on one side and including the Wholesale Bank and we have been able to develop that lending faster than the growth in our customer deposit. And that’s has improved to loan to deposit ratios through the ratio as well.
We’ve also seen acceleration in consumer finance and much of that is coming from the rollout of the instant lending capability in various countries.
The investment products are making good progress as well with asset under management up by 11% year-on-year. We invest - we continue to invest in our digital investment advisory capabilities for example through our through the form of robo-advice as well.
Now all of these improvements have driven a 23% increase in pretax result for the region to 2.7 billion.
Turning to Wholesale Banking, we benefited from a well-diversified business portfolio so that we can tap into profitable growth in different countries and industries.
Underlying income growth in consistently higher than operating growth and as it is resulting the positive jaws that we see in Wholesale Bank. And that therefore leads to a further improvement of the cost income ratio to 45.3% in 2016. And as well below the 50 to 52 target range for the Group as a whole.
As the macroeconomic environment continuous to improve, we have seen a further reduction in risk cost, also in Wholesale Banking with provision being low at 368 million or 24 basis points over the - over average risk weighted assets in 2016. So good picture here as well from a growth perspective, from an expense perspective, efficiency perspective and a risk cost perspective.
That’s the year, so let’s make it deep dive into the fourth quarter results. We turn into Slide 19 here. We posted a strong fourth quarter underlying result before tax of nearly ERU2 billion, which confirms a good business momentum. We see it continuing, while we continue to grow our customer lending. The net interest margin was down by 3 basis points quarter-on-quarter. Most of that is due to financial markets but also due to there not being any savings rates adjustments in our domestic markets in the fourth quarter. You may remember that most of the adjustments were in the third quarter and in the fourth quarter not adjusting them slowly but surely you get a bit more pressure on those margins. Lending margins however were slightly up in the quarter.
Then looking at the lending growth and how it is - how you can decompose it, Slide 20. The lending growth continues. It’s good growth again in the fourth quarter. That’s supporting the 6.5% increase year-on-year. Geographically, the lending growth comes from all regions with the exception of the Netherlands, where we see a modest decline in volumes. At this quarter, we saw the strongest contribution from Industry Lending and working capital solutions within the Wholesale Bank as well as from the mortgage book and retail challengers in growth markets.
I have to mention that the Industry Lending growth was flattered a little by higher oil and commodity prices, retrain in commodity finance, but we’ve been updating you on that effect every quarter anyway, so and now you actually see it’s actually supports a bit of the growth, but only a bit. So the underlying volumes keep coming through. It’s a good signal there as well.
Moving to expenses, for the quarter, you see that the expense base remains flat to the extent we can control it ourselves. So quarter-on-quarter, we see that the underlying operating expenses remained flat, but the overall expense base remains impacted by regulatory cost.
Most of these costs as you can see here that the regulatory costs are more skewed towards the first quarter unless it - to a lesser extent the fourth quarter of each year. This is a picture but over the last five quarters, you’ve seen that we’ve been able to more or less manage stable operational expenses for quarter and then the volatility of the regulatory costs coming in.
Then the risk environment, picture continues to improve steadily here. The NPL ratio for the Bank as a whole came down slightly versus the third quarter. It’s now at 2.1%. In absolute terms, risk costs were a modest EUR138 million for the quarter. Only 18 basis points over average risk weighted assets. We take closer look, in the fourth quarter, we benefited from a provision lease and the German mortgage portfolio and also some releases in the Wholesale Banking book in Ukraine and Spain. This retail again recorded lower risk costs as well as business lending is now starting to turn a corner. And a strong housing market conditions lower the NPL radios of the mortgage book in the Netherlands.
Now to wrap it all up, I think we can all be proud of this underlying result for the Bank which is the evidence that we’re on the right track and that the Think Forward strategy is effective. And that you know decision to accelerate the Think Forward strategy focusing on customer experiencing - experience and through that get into growth in. That is the best recipe also to whether some of the headwinds that we’ve seen.
Same time these headwinds will not go, so we’ll have to keep a close eye on it, whether it is on the low rates, whether it is on a regulatory cost, whether it is on client chance behavior. So we do think that investing in digital capabilities making sure that we create one scalable banking platform. That is the best way for the customers to stay a step ahead but also for the Bank to stay a step ahead.
And with that, I open the call to questions.
Thank you, sir. [Operator Instructions] We take our first question today from Tarik El Mejjad from Bank of America. Please go ahead.
Tarik El Mejjad
Hi, good morning, everyone. Just a couple of questions please. First of all on the dividend policy, I mean your proposed dividend of EUR0.66 came one - I mean slightly short from the EUR0.67 consensus number. I mean in Slide 7, you said that this is reflecting regulatory uncertainty and growth opportunities. So for regulatory uncertainty, we know we are fully waiting for that I mean first of all do you have any comments on that because it’s getting a bit confusing few messages out there and what you think would be the expected outcome?
But my main point is on the growth opportunities, are you shifting gear towards potentially higher volume growth in the 3%, 4% that you bring I think before if you see an opportunity there or you restraining to that but just expecting RWA basically less positive immigration and RWA to start to grow perhaps faster than the 2016 level? Actually I would limit to this question. Thank you.
Okay, I’ll give an answer from the second part of your question are I’ll refer to Patrick for the first part. So, on the growth that we pursue, so from the beginning, when we launched the strategy, we indicated we thought we could grow 3% to 4%. And for growth you do need capital. We have a very good capital position, but also from beginning we have said while we need capital and a capital generation with back with its resources. The first one is in order to make sure that we improve our capital buffers. Second one is in order to make sure that we can continue to grow. And the third one is to make sure that we can pay a dividend over time. And when we came out with a policy, we said it was going to be a progressive dividend of them.
Now that means that if you see for example growth opportunities that fit your risk profile, you can pursue them and in some quarters, we grow a little bit faster than all the quarters, but you need capital for that. What we will not pursue is this growth opportunities that don’t fit our risk profile. So do we expect to stay at this level of growth in our lending book? I don’t know, it really depends on the opportunities whether they fit our growth profile and - our risk profile that is truly important.
So that’s one component growth and the capita that you need for that. Then you have the component of dividends and a couple you need for that. And then your last part is you know the capital that you need for improving your buffers. And there is some uncertainty remaining there. And I’ll give the word to Patrick for that.
Good morning, Tarik. Yeah, watching it as you are, we don’t have much more insights than anybody else. I think what you see is that the most recent perhaps close to final proposals from the Basel Committee is still would result in increases in capital requirements from most European banks above the threshold of 10%, above the new significant increased thresholds. And there was no agreement in early January. There are several thought of voices across a number of countries who are saying that they will not accept increases in excess of that minimum threshold. But it remains to be seen whether under the pressure and I’m sure it’s a very big pressure to reach an overall consensus agreement. That line is held. We just don’t know yet and we are waiting to see the outcome as you are.
Tarik El Mejjad
Okay and thank you very much.
Thank you. We now move on to our next question from Daniel Do-Thoi from J.P. Morgan. Please go ahead.
Hi, I have just two questions. The first one is on net interest margin, second one on provisions. On the first one, the underlying 152 basis points this year, I guess that develops I mean better than you had thought just a few months back a pickup from Markets Days when I believe you guided for a stable and then which at the time implied about 150 or so. I mean given the developments and also given the rise and that we’ve seen at the end of last year is 115 basis points still the right level or should - or do you think you can deliver sort of in line with the second half of this?
And then secondly on provisions, last quarter you guided for the full year to be down 15, you’ve done sort of 1 billion for the full year 30 basis points of risk weighted assets. Just wondering what your thoughts are going into next year and whether that kind of level at around 1 billion is sustainable? Thank you.
Okay. In terms of NIM, I think the interest margin is sort of coming very much in line with we thought it might and how we sort of tried to guide at the Investor Day, so nothing really changed there. If you exclude financial markets which can be variable quarter-on-quarter, we said we think we can keep it in and around the 150 mark maybe a little bit above 150, maybe a little bit below high 140’s, low 150s I think what we said. And you know that’s what’s happened.
Again we said that we should pertain for most of 2017 because the actions have been taking including the asset mix growing in healthy margins again we continue to do in the fourth quarter. And also there’s still some scope to manage deposit rates in line with the low rate environment. So the combination of all those three things gives us the ability to manage NIM hopefully the stable level in and around the 150 mark or I mean the best part of this year that’s we said in October, it still remains the case. And I think Q4 is entirely consistent with the - what we’ve guided on 3 October.
Yeah, on provisions, you know traditionally at the beginning of the year, we do give some indication of what our thinking is. And if we look at the environment today, the range of possible outcomes is probably widening somewhat because of all the uncertainties out there. And before sharing the thoughts, because that is really what we do here, I’d also like to make clear that internally we do not budget risk cost as such. Risk cost in the end is the product of economic events and our ability to mitigate the impact from ING. And that mitigation comes from two things, one is the quality of the origination that we do and second is our ability to deal with difficult situations into workouts et cetera. And if we were to budget for these numbers then it would become a matter of managing to a number and that’s exactly where we don’t want to go. We do our best under the circumstances, but we want to be influenced by some budget concept of risk costs.
Having said all that and if we look at the trends and Ralph ready in his presentation alluded to that, we still see in a large part of the book potential for some more positive migration and that will help us going into 2017. At the same time, the potential for release is going to be a bit less simply because we don’t have a big backlog of large restructuring spending anymore. I mean if you look at Q4, we had a very significant recovery in the Ukraine as an example and there will be some more but not to the extent that we saw it in 2016. There are also some portfolios that we’ve discussed on these calls for a few quarters now that may create some additional risk cost adjustments in here shipping, the drilling sides of our oil and gas book Turkey is an uncertainty.
So on balance based on the current trends, I think our current idea around risk cost 2017 is somewhere around 16 potentially a little bit higher than that also reflecting the portfolio growth that Ralph was talking about.
Fair enough, that’s clear. Just on net interest income and on margins, does the rise in long term rates and not at all affect the way that you think about net interest margin beyond 2017? I mean I know there’s lot of hedging but.
Beyond 2017, we’ll need to get there to understand what it would look like when we’re there first. Secondly, I mean we do have seen an increase in the long end of the curve; it will be very modest 50 odd basis points. They are actually that’s good. And we would prefer a positive review occur significantly higher than this today. This direction every efficient, but we do not take out wide interest rate risk in our business. Our loans and deposits are not funded into our Treasury. And hence that enables us in a falling interest rate scenario which we’ve seen for several years to manage our margins in the stable manner.
Hence the earlier question, we’ve have been doing that. That it means that when rates fall, the impact is slow and we used to try and mitigate as I said equally on the upside, the positive impact of rising rates will take quite some time to manifest and they would need I think to be significantly higher than they currently are something meaningful.
Okay. So significantly higher than the 50 basis points, so that - than we’ve seen so far before we see any kind of - we should expect any kind of change to your NIM guidance?
Yeah, unsustained for a long time knowing, we…
Our deposits our tranche, they rollover every quarter, it’s not all of gone, we spread this out over time, so the Treasury buys them in each quarter, replicates and put in this quarter, loans are originated and bought in and see the margin fixed overtime. So it’s only when you come to renewal that the impact of the higher rate might be seen on deposit. So this would need to be prolonged sustained increase in rates over prolonged period or to start to become manifest on the overall stock.
Okay. So the 50 base odd basis points rise, so far thus it’s maintained should not materially change your view on net interest margin?
Okay. It’s clear. Thank you.
That’s clear. Thank you.
Thank you. We now move on to our next question from Bruce Hamilton of Morgan Stanley. Please go ahead.
Yes. Good morning, guys. Thanks to the answer so far. Just going back to the dividend question, capital build, I mean clearly that the regulatory input is one of the key ones and there’s still quite a lot of fog out there but I mean are you expecting that we will get clarity by say the end of March or does that feel quite an aggressive time scale?
And then secondly on a separate point, in terms your robo-advice offering, is that in partnership with a FinTech company or is that your end product. And can you talk a little bit more about is it sort of a model now growth mixture of model which depending on inputs people give on risk will throw out what investments they should make or how does that offering works obviously it’s kind of interesting?
The first one, we were as you know promised that there would be a definitive answer on this at end of 2016, by the end of 2016. It’s still January 2017 and we didn’t get it. We see into early January, there wasn’t answer. Yeah, we would hope to that we get clarity in March but is there any guarantee, we would like it obviously to the better, but again it’s not in our control. So I just don’t know when they’re going to reach conclusion.
Okay. On robo-advice, actually it’s both. So we have launched a different concepts to do in asset management. For example we launched in a couple of countries what we call My Money Coach and allows people to kind of make a short term and longer term financial picture of their own situation and generates advice as to how to going to invest across different categories on one side. And then the investment itself is behind it is sometimes driven, sometimes just a fund. But we also give recommendations on what peers would have done in their situation, so you get some kind of an Amazon approach like what are people in your situation, with your financial situation, with your future plans have selected this and this and this for just and this reason. So it’s kind of - that’s one way we do it in our own product called My Money Coach.
On the other side through robo-advice through algorithms, we are working with different FinTechs there just to get a sense for how some of these really work. So more successful in orders as you know and we’re working very closely with one particular in FinTech on this one as well in Germany and that’s really fully algorithm driven. But we’re looking at this taking very overview as to all the possibilities and all the angles that you have to take also by the way from a duty of care perspective which is this something that you really have to keep in mind if it comes to investment advice or investment algorithms. Thank You.
That’s helpful, thank You.
Thank You. We move on to our next question from Benoit Petrarque of Kepler Cheuvreux. Please go ahead.
Yes, good morning. Thanks for taking my questions. First one will be the dividend per share, so EUR0.01 increase this year clearly constrained by Basel IV and Basel III but although we have to think about the EPS growth going forwards. I’m asking because cost also is expect EUR0.70 next year in 2017, it’s EUR0.04 increase versus just EUR0.01 increase we have seen now. So you know is there kind of a relationship ultimately with earnings growth or when do you see kind of EUR0.01 kind of increase per year kind of the normal run rate going forward. Could you just get us a bit on or the EPS will grow going forward?
And then the second question will be on commercial margins clearly the risk cost outlook has been improving substantially recently. Do you expect any type of margin pressure or do you expect commercial margins in your different segments to remain at current levels? Thank you.
Thank you, Benoit. Well on the DPS growth, I mean the policy that we really stand which saying that we aim to pay progress different over time. At this time when we launched this policy, we also indicated that we expect the DPS growth is slower than the EPS growth. So that’s the relationship there is going to be slower. Whether it’s going to be EUR0.01 now and it’s going to be again EUR0.01 next year? Really depends on the situation at time. How do we look at service capital? How do we look at the growth opportunities because you don’t want to run into a stop and go, it was stop and go scenario for your own growth either. So you always have to make sure that you prefers are level to support growth going forward vis-à-vis a handsome dividend we paid and the progression there.
Now if we would ever come in the situation of true surplus capital that we would want to think of onetime distribution to shareholders as I said moment of time then including this in some kind of a dividend trajectory at that point.
Then on your commercial margins, we don’t see the margin pressure coming in at this moment in time across the board in the Wholesale Bank specifically in Industry Lending business honestly, and we’ve seen that in all of the different kind of activities. There is only a couple of banks that played is that understand this business. And the parties that you deal with are very professional. They know they have to pay for the risk as well. So that’s where you generally see that margins are holding up. But even in the other commercial banking products at this moment in time, the margins are holding up. Across the board or mortgages, we see some pressure now coming through in Belgium on the mortgage business. And in Belgium, we also see most of the pressure coming through on the savings side.
So I think Belgium is a particular market where you see pressure on both sides of balance sheet in terms of margin pressure. Margins on the savings side generally in our activities can still be managed. But you still have some room to go before we hit a commercial or legal floor in the countries in which we’re active, but again besides Belgium where we have already reached the legal floor. So that’s a little bit see they a kind of the two were around to rule on margins.
Great, thank you so much.
Thank you. Benjamin Goy from Deutsche Bank has our next question. Please go ahead.
Yes. Good morning. Benjamin Goy from Deutsche Bank. Two questions please. First on loan growth, maybe you can specify a bit how you think in the near term so let’s say 2017 about your through-the-cycle loan growth guidance considering we actually have a good momentum can say it’s slightly improving even European loan growth, so be interested in your thoughts here?
And then secondly on the cost - regulatory costs were lower again in 2016, is that a one-off or could have help you also in the next year say 2017 or maybe even longer than that?
Thank you, Benjamin. On loan growth, the - basically what we have said, the 3% to 4% is still were we kind of guide. This year was particularly interesting for loan growth because of the sectors in which we’re active and the countries in which we’re active clearly in the back of commercial growth the number of clients. We will continue to see loan growth on the back of the investments that we do and in the wholesale bank we will continue to see some loan growth. But there’s two parts to it is that you have to take into account.
The first one is that we don’t want to loosen our risk acceptance criteria in order to get more growth in. And the second one is the loan growth has to make the returns on ever increasing capital requirements. So those are two filters that we continue to use consistently. And by the way you have seen that you see that actually we have been improving our return on equity but even with higher buffers, we do see an improved return on equity. But it’s the discipline that we apply in pursuing loan growth that should protect us from future problems and therefore we’re not going to go overboard if we see the opportunity. We’ll still stick with the return on equity requirement and the risk acceptance criteria there.
Now again you know the 3% to 4% is not a target, it’s a guidance. Some quarters it will be higher, some quarters it would be lower, but that’s where we see it. On regulatory cost, actually our regulatory costs have increased, but they’re lower than what we had expected in the beginning of the year, but have increased by just over EUR200 million to EUR845 million for the year.
But short of the expectation that is true and that is because when we know and understand these schemes whether they are deposit guarantee systems or whether they are bank systems, the moment we understand them better, we also know how to manage them better a little bit. And as I said you know in some cases we have been able to change a funded requirement into a unfunded payment obligation. And where we can do so, we will continue to do so.
Okay. Thank you.
Thank you. We move on to our next question from Kiri Vijayarajah from Barclays. Please go ahead.
Yes. Good morning, gentlemen, just a couple of questions on Belgium. You showed on Slide 14, the margin and net interest margin in Belgium underperforming particularly the Netherlands, so really just what’s your outlook there. We’ve seen the worst Belgian margin pressure there. And I wonder if you could comment on customer satisfaction or customer retention date of that how is Belgium, the customer base in Belgium been fairing after the announcements you made at the Investor Day. So any comments you can make and how the franchisees is fairing would be helpful? Thanks
They then performing the comparison between the Netherlands and Belgium are the two different countries. If you look at the Belgium situation, we’re not sure; we’ve seen the worst of the margin pressure in Belgium. All banks have reached more less the legal floor on the liability side, so there is not a lot of room to manage the margin on the on the saving side. And there’s quite some competition in the market on the lending side with pressure on the margins there.
So yeah, we’re not sure whether we’ve seen the worst honestly, assuming we haven’t. That’s why we feel that we have to improve - we have to improve our efficiency. That goes directly to your second question is, the announcements themselves don’t change the customer satisfaction. If you look at the earlier reactions in the media, they were not pretty. We had expected that. But if you look at the underlying development, whatever it is in the growth in number of customers, if you look at the lending book and the savings book it’s just growing as expected also since October 3rd.
So in terms of the commercial performance, we don’t see any effect there and honestly it shouldn’t because although that message for many of our colleagues what the consequences of the major investments that we’re going to do in that country, we are very committed to our clients in Belgium. That’s why we’re investing so much in Belgium in order to make sure that we can continue to be committed. Basically the clients see that and they stay and stay with us.
Okay. Very clear, thank you.
Thank you. We now move on to a question from Anke Reingen from RBC. Please go ahead.
Yeah. Good morning. Just two follow-up questions. Firstly on the provisions, I just wondered if you could be a bit more specific I mean put it as a very wide range for Q4, 18 basis points in the year ‘31 and I should be maybe be looking more at the nine month level for 2017 at a 35 basis points but any more like well you think you are relative on these different ranges?
And then just on your savings rates, I just wondered obviously you continued to cut in some countries and generally but is it like you think you’ve almost reached a full or the potential for that further cuts has come to an end especially as - especially due to the changed interest rate environment? Thank you very much.
So on provisions, you know the crystal ball that you’re looking for we don’t love to have but we don’t. I think Q4 you should look at as extraordinarily low for a number of reasons. And the better base to think about a projection is as I said before 2016 total keeping in mind that there is quite a bit of uncertainty both in the world political and economic environment. And also of course keeping in mind as always the provisioning is a lumpy business particularly in wholesale, there can always be incidents. So it’s quite difficult to be more precise than I was trying to be in the earlier response.
To the repeat that the underlying trends in the portfolio, we still believe it’s generally one of positive migration, a couple of portfolios, oil and gas, particularly the drilling side, shipping, Turkey, potentially offshore services are books that we would see a bit more pressure in. On balance, we don’t think it’s going to be a million miles away from what we saw in 2016, but it could certainly be a bit different. And again we also need to keep in mind when we look at the absolute number that the loan book is growing and that will also impact the absolute number even if the basis points stay the same. And our longer term guidance remains at the 40% to 45% range.
Okay. In terms of the deposit rates, there were modest cuts in smaller entities in Q4, France and Australia. As Netherlands in Q1 as the small reduction of 5 bps and in Spain also 10. I think the point is that other than in Belgium, we are as a floor in other major markets we still have capacity to manage rates down if as justified. And that links into what I said earlier about being able to maintain a stable margin throughout 2017. So the risk room on the deposit side to act if as I say justified, so now we haven’t hit a floor rather than in Belgium.
Okay. Thank you.
Thank you. We now take our next question from JP Lambert of KBW. Please go ahead.
Yes. Good morning to you. Two questions; the first one, thank you very much for the slide 30 with the breakdown by country, I have a question about France, as you know Orange Bank is going to introduce banking services. So they have 28 million mobile phone customers, they’re targeting 2 million customers. You currently have 1 million. How do you see the impact of a new entrance from a mobile perspective on your business? Is that the read across you have from other geographies where you face such a competition?
Second question is about innovation, something you’ve announced on 31st January is blocked chain experimentation which you run in six business areas in Wholesale. So currently you have a cost income ratio which is fairly low 45, I know these are pilots experimentation but what kind of impact would it have on the cost to income ratio in wholesale? Thank you.
Well, thank you, Jean-Pierre. Well the Orange Bank that will start operating. The - well I mean there is there is more mobile operators around world are initiating banks and banking activities. And we see that as well. It’s good to have competition. That’s what we can say about it. How would it impact out our business specifically? I still think that we have more to gain and to lose if you look at our market position in France and we’re challenge at there.
What we can do which not all of parts can do is that going forward with our mobile bank, we will have a cross border standardized platform as a consequence of which our cost income ratio will be even lower to operate in our digital and mobile banking and we currently do already. As you may remember from the strategy presentation, we think that we can further shift the efficiency curve lower from already what we do in the direct franchises which is already lower in comparison to the branch banks in the markets in which we are active.
So we will push the cost income ratio even lower with our model bank approach. Therefore we will be even more competitive. And yeah if there is one or more - two more additional competitors, I think it will only help us in market in which we are a challenger. So it’s good to see what’s happening there.
On the block change specifically, it all pilots, some of the biggest impacts that we can visit or block chain is to make - is to make a service that we give to our clients faster for sure to block chain because done a lot of the paperwork that for example in the trade process is still needed will become digital. Apart from it becoming faster, it will also be safer because through digital way, we think we can manage the fraud percentage down further. And it can be cheaper because if you if you digitize the manual processes that are still behind some of these activities in the wholesale bank not only in ING, but it’s market practice globally that you can use for the all three, so faster, safer and cheaper.
How will that impact the wholesale bank cost income ratio? It will just add to a further efficiency increase, but as we use most for efficiency increase in Wholesale Bank to also grow the front office in order to support the growth of the lending book, whether you are going to truly see it back in the cost income ratio per se, I can’t say yes, I mean let’s first await the results of these pilots then see whether we can actually come to market standards because I mean there is absolutely no use to have a block chain standard in a wholesale banking area if it’s not open, if it’s not open to third parties, if it doesn’t become a market standard. So before it will really help your cost income ratio, but next become a market standard and then all banks will benefit from it really.
Thank you very much.
Thank you. From ABN Amro we have Cor Kluis with our next question. Please go ahead.
Good morning. Cor Kluis, ABN Amro. I got few questions. First of all about the Netherlands retail, we saw therethe RWA is coming down by EUR3.2 billion quarter-by-quarter, you mentioned this due to a risk migration and mortgages and business lending, but it’s quite a material decline also compared to previous quarters. Could you actually mention what happened specifically this quarter and also update us on the RWA ratings for Dutch mortgages, Belgium mortgages and the German mortgages?
My second question is more related to the regulatory expenses which were 845, you had to release in Germany of course of around EUR50 million, is the future run rate in around EUR800 million, should we think about it for 2017? That were my questions.
In the Netherlands, you got to remember we have the rest of future book which is in runoff which is part of the NII which the natural runoff part of ways which we’ll see this quarter. And you are seeing as prices improving so there’s been some impact as well, positive credit migration small but partly overall frames, it’s helpful. I think the average waking stay the same that are in 12 in the Netherlands. Yeah, you know SME lending continue to decline for us, it’s not something particularly like, I want. But we do see a number of portfolios is high and they are trying to get their risk reward tradeoff right in that place. But SME down as well as mortgages from - by SME.
Yeah, to add to that core, the risk rates on Dutch, Belgium and Germany are 12, 18 and 22. The average weighted is 16. And following on from Patrick’s comment on the business lending book in Netherlands I mean the absolute level of NPLs and risk cost is still not quite where we wanted to be but the trend is positive. That also contributes to the change in risk.
On regulatory cost and well you never know what the new income in governments kind of may pursue. If what we currently know stays and the run rate will not be around 800 million but will actually increase with the volume increase of our activities really. So because some of these or most of these related either to balance sheet size or liability size or the size of your savings portfolio, so one way the other they are volume driven. So that’s the good assumption assuming that you know the programs that are current running on the regulatory side will stay as they are.
Okay, thank you very much.
Thank you. We now move on to a question from Pawel Dziedzic from Goldman Sachs. Please go ahead.
Good morning and thank you for the presentation. One question on financial markets and then follow-up on the regulatory cost. On financial market, it looks like it was a decent quarter but over the years your adjusted and underlying profit because they rolled it. When you look forward to 2017, are you more hopeful that you need you can see some earnings recovery going forward?
And then on the bank taxes that you just mentioned, you said that politics remained one big uncertainty as to deliver. They are going to be going forward. But you perhaps comment on that a little bit more, do you see risk only the downside of higher bank taxes, it was the case in the past or perhaps you hope that it can be lowered in the future. We now seen a few examples of European countries where authorities and managed to strike a deal with banks of lowering bank taxes and it also seems that bank profitability is much higher on macro-prudential agenda which would support such move? Thank you.
Yeah, Pawel, all financial markets, yeah we are happy with the performance of financial markets in the fourth quarter. We’re specifically happy with the performance of financial markets given the fact that over the last couple of years, it has been transformed really towards a business that is very much focused on client activity and supporting our clients. That’s what we’ve seen in the fourth quarter on the rates basis, on the FX basis, on the equity business, you know good performances there. Now on a return basis and a return equity basis, we still do see room for improvement in our financial markets franchise. And our team is working on improving such.
What we can see is that with improved client focus with a further alignment between the different activities that we have in Wholesale Bank, we actually think we can move the business forward and improve the profits going overtime and returns overtime. And that’s what the transformation of the fresh markets business is and their plan is really aimed at.
On bank levies, it’s - honestly I think it’s a mix picture. We’ve seen Poland is actually coming in with higher bank levies. We’ve seen Belgium coming in last year with higher bank levies. And we see markets like Germany and other markets would decrease bank taxes. So it’s truly a mix picture. I don’t think there is, you can talk of a trends here.
You’re right in terms of saying that you know there is sufficient new laws and new safety valves in order to make sure that there is don’t need to build out but they can be built in and therefore they are less and less reliant on being saved by governments. I fully agree with you. So therefore the reason to have bank levies specifically in the form of bank taxes. That argument has gone, but it doesn’t mean that the bank tax itself will go, just because the augment for levying them has gone.
Thank you, that’s very useful. Can I have just one follow-up on your comments on transformation of financial market units? Should we expect, as the risk weighted asset decline going forward and could the magnitude be similar of the level of decline of risk weighted assets that was recorded in 2016 or perhaps at the run rate that we’ve seen in the fourth quarter? Thank you.
Not necessarily. When I am talking about the transformation, clearly is for the focus on specific products but it’s also about you know centralizing some of the trading activities in one location rather than three, taking out the cost and systems and support functions, further focus and further alignment and client focus, it’s all there. And it actually it steer up the results but not necessarily to further the rate decrease to risk weighted assets. I mean if there is more business to be done, we will do more business at the right return.
That’s very helpful, thank you.
Thank you. We take our next question now from Alicia Chung from Exane. Please go ahead.
Good morning, everyone. Just a couple of quick question from me. First of all, on the subject of rising rates, could you just give us a sense of what the impact would be on NII if the ECB would increase that deposit rates from the current minus 40 bps to say zero? And also on the same think more generally, what would you see as the sensitivity of capital to rising rates? And then if I could just have one more.
Some banks have started to talk about the trim process, have you started this progress and can you give any color as to what this will have ING and a little bit about timing and process? Thanks a lot.
Okay. Like I said earlier, small reductions in - our increases in rates you know are to be welcomed. And as a sign, I would hope that the economies performing better and the stimulus needed is has been lowered. But I can only repeat that you know certainly for 2017, small increase is unlikely to be that visible in our results. We take a long term view and rising our savings, they are invested over multiple years, that’s crunched, lending is much funded initiation. So it’s directionally positive. And I don’t see 40 odd bps having number of impact either you could like now.
In terms of capital, we disclosed in the press release because every quarter the mark-to-market of debt securities and equities, to mark-to-market debt securities that went billion odds from 2 billion and that would be impacted by rising rates where it happened this year. You know next year you have IFRS-9 you know the counties well change, it may just disappear, but be published the number. Within our capital at the moment is 1.2 million of the mark-to-market on forms which obviously subject to be influenced by rising rate.
So on trip, for us that will start in April and it will start on the retail side of our business of our models. And it’s obviously very hard to predict what the outcome or implication or impacts are going to be even prior to the process starting. And if you are thinking in terms of operational cost be tends to do most of these things with in-house people, so unlikely that you see spiking cost because of this exercise, but it does of course mean increased workloads and shifting of priorities from other things to this. So it certainly has operation and implication. I don’t think you are going to see much in the numbers.
Like I said it’s very early to talk about the impact. The only remark I would on that is the actual net impact of whatever change we make in our models is also going to be heavily influenced by what Basel IV exactly does and where the floors and are going to be calibrated, it may well be the outcome of this exercise is going to be blunted quite a bit by what comes out of Basel IV. But again we don’t know where either is going to land, so it’s just speculation to say anything more.
Thank you very much. And just on that last point, do you have a sense of when the trim prices will be finished as well or it’s just sort of just an ongoing.
No. We don’t exactly we do know that the initial assumption has been that this was going to be 1.5 to 2 years exercise.
Okay. Okay, thank you.
Thank you. We now move on to Nick Davey from Redburn for our next question. Please go ahead.
Yes. Good morning, everyone. Two questions please. The first one on volume growth, interesting to hear you mention having an ROE hurdle rates when you conduct new business. Could you let us know a bit more about what ROE hurdle rate you actually target. Maybe just if you could make a couple of other comments around the same theme. I mean if I look at ECB data about where new loan rates are in the most of your core markets particularly on corporate loans now between 1.3% and 1.5%, it’s quite difficult I think without starting loan rates if I think about your funding costs, cost income ratio and your through-the-cycle cost of risk guidance to cut to get to a bottom line margin which gives you a very sensible ROE. So just be interested to hear whether or not have the right way of thinking about these sort of available loan rates that we can see?
The second question and sorry to come back to the net interest margin question and particularly around interest rate sensitivity, but you can tell us a bit of confusion on the side. One really helpful theme, if you’d be happy to elaborate and will be this structural hedge on the deposit side. I realize you’re not in not too willing to give us NIM guidance beyond 2017 but the big variable for us really is to understand quite how big a contribution to net interest income the structural hedge makes and therefore if we can get an idea of the duration of the size of it, we could probably begin to understand better where long bond yields need to be for us to expect NIM compression or expansion, so any more guidance on that would be much appreciated? Thanks.
For quite some time, ING has operated on pricing on cost of capital and hence is no surprise that we’re delivering 11.6% return on equity which is progressive increasing as the slide shows. So the proof of the putting it in the EC, I don’t know why the question about it, delivering it and also point out the group as well as a 10%. So not only is the bank delivering return on equity, because it’s managed to do so. The Group is also delivering it.
The mechanics of that we disclosed in the press release the ROEs by segment to those who subsidiaries are measured on what they have and for the equity for those branches we measure to be imputed from RWAs typically used 12% which is to make a minimum 10% return on the combination of business. On the lending and fees and ancillary service it delivers more than 10 as you can see in the result.
I think you’re confused. I don’t know where you get this point about structure hedge. We don’t have structural hedges, thing that may be so future of U.K. banks, we’ve never talked about that, we don’t have. We simply replicate our deposits to the behavior maturities. It take long term. Once it may be available on demand and stay with us, we do statistical measures linear aggression to measure their stickiness through time and then invest those at the behavior maturity which typically three to four years. Maturity is simple, transient deposit comes in. It’s sold to Treasury at the behavioral rates that back tested and validated. And then Treasury will place that into the market typically when interest rates swaps.
Lending as well if it’s a three or four year loan, you get the three or four year interest rate and credit margin on top. And then the business has to make a margin over the cost of funds that the Treasury provides it. So it’s pretty simple basic ALM process. There’s no structural hedge on top of that.
That’s really helpful. Thank you. As far as the interesting part from our side is that three to four year interest rate swap because presumably if that rolls off and a new interest rate swap is taken up that there is a bit of lost income on that price?
Cost is constant process that happens every quarter because multiple geographies it’s broken up. So it’s not in lump sum. So that’s why over we’re able to address mitigate low rates because it’s a slow process that takes many years to flow through. There is no one time lump sum cliff effect.
Understood, that it’s…
Low rates have passed two and a half years and this is how we’ve been managing it.
That’s really helpful.
From down we’ve been able to trend deposit rates and hold positive margins broadly stable and we continue to do that through 2017.
Understood. Thank you.
Thank you. From Citigroup we have Stefan Nedialkov with our next question. Please go ahead.
Hi guys, good morning. It’s Stefan from Citi. Two questions on my side. In terms of the savings rate in Germany, is there a reason why you are sort of 20, 25 you went 30 bps above competition. Is there a strategic reason that or a competitive reason that you can share with us?
And my second question is on the risk weighted assets again just following up on the better than expected capital in 4Q. In the footnotes to the presentation on Slide 28, you mentioned that 18 basis points positive was driven by regulatory items in CVA/RWA and negative 14 bps was driven by model updates. These on their own are quite large swings to my mind, obviously they do offset each other somewhat, but if you can just give us some color on the 18 bps regulatory item RWA movement and on the 14 bps model updates that will be really good? Thank you.
Hi Stefan, it’s Ralph. Your first question, well the way we look at savings rates particularly in them in a market like a challenging market, yeah we certainly look at competition. We look at the competition may also be challenging the incumbency. We’ve look at round position, challenging the incumbency. We also look at the client relationship. So savings is not necessary - savings is not necessarily a product per se, it’s also a starting point of a relationship that will evolve into a private relationship and therefore will create value overtime. And that’s why we launched in our strategy presentation four months ago this formula, so that you understand a little bit how we go about growing a number of customers, getting them into private relationships, see what the cross buy opportunities these are and manage the product value.
So that’s kind of it has more aspects than just to compare it to the competition. And whether we should match it or be a little bit above. Having said all this paying a little bit more on the competition there and rewarding our customers a little bit better, we are more efficient, we have a lower cost income ratio but far ours is around 40%, the next best comparator is around 70%, the returns are beyond 20%, return actually in the German business is 25%-26%.
So we seem to be able to run a very efficient shop with very strong sticky client relationships and not only purchasing P&L for today but also for tomorrow and that’s the way we built the franchise. For the risk rate assets question, I will turn to Wilfred.
Maybe, Stefan, rather than going into this one item regulatory now let me just give you a quick break down of the deltas in Q4 that might be the easiest way to look at it. So net-net how do we up by 1.6 billion in that there is a currency effect of about 3 billion. So if you take that out then you end up with a minus roughly 1.5 and the composition of that at least in major components are positive migration minus two and a bit and it is the sale of our Kotak shares minus one, then there is one that probably falls in the category you were referring to that is the risk weighting due to the CVA which goes down by 0.6 into the risk weighted assets. Then there was a reduction in operational risk capital by 0.7 of the external or risk database that most banks use.
And then model updates, the other one that you’re referring to a total of 3.1 net and that consists mainly of some adjustments to some of our low default portfolios where for example in project finance, we increased our downturn LGD on Spanish mortgages where we have hardly LED falls, we increased somewhat and there was a reduction in there on some of the models rise where derivatives. Net-net that comes down to one 1.6 that you see, I hope this helps you understand these swings.
Yes, absolutely. Thank you.
Thank you. We move on to Anton Kryachok of UBS for our next question. Please go ahead.
Thank you and good morning. Thank you for the presentation. Just two questions please. The first one on the Dutch mortgage markets lending from banks to Dutch household has been on declining trend for about four or five years now, do you think 2017 will be in the inflection year from the volume growth point of view or do you think that market will keep shrinking this year?
And the second question please, sorry again come back to the topic of interstate sensitivity, but just to summarize particular points that you've made around deposit margins, so your back book is hedged, the front of book is influenced by three to four years rates and if those improve it takes an average three to four years for that to fully price, and so the deposits spread on back book, is that broadly a message on deposit pricing? Thank you.
On the Dutch lending to households will keep shrinking if you’re looking - if you’re looking at our portfolio particular shrinking that's a combination of a couple of things. The first one is that our book is shrinking because we are transferring an old portfolio to - on an annual basis as we have –has been in place for quite some time, and that will continue until that portfolio is being completely transfer. So that's one explanation why our portfolio is shrinking in terms of lending to households in Holland.
The second one is our new production currently is lower than average given the fact that we are a little bit more cautious with pricing the long end of the market, so the end of the departed market goes beyond to ten years, so a little bit more cautious than some of our competitors and therefore our new production is a bit lower than the repayment in overall portfolio.
I was said that I do think that the total housing market is still the trend there are still subject to a drive towards to a lower LGD and that drive will have an effect on the market this will not be a super growth market at least not in our portfolio. So that that's just to explain how our portfolio is developing there. Patrick, do want to add something?
Our approach to asset liability management is pretty standard, it's like seen it first I came across it across 25 years ago so this is no, the thing super sexy here or really sophisticated, it's pretty basic standard ALM, but perhaps if you want to go through it in more detail maybe it might be better to do so with IR after the call.
Okay, thank you. But just might I shorten my question to just one simple sentence. Are we right to assume that it takes three to four years for your savings deposits margins to improve when interest rates rise?
As in the way it works is that this is a continuous process. So it's a combination of new money coming in and the way you prized new money coming in, the book that you already have how you prized that forces the replicating yields for the matched kind of behavioral tenure for that piece of the business, and this is a continuous process through which we adapt the replicating rates to the portfolio and the difference between the replicating rate which is subject to change on the continuous basis.
And the difference between that and the rate that we pay outside both for new money and the existing money that is what determines the margin. So it's a continuous process. So if you see a steeper yields curve not so much a higher rate all together, but if you see a steeper yields curve, you can expect to see that coming back into our margins. If we would not give - that would not translate into a higher rate that we pay to the customers. And so we will manage in all more or less it’s stable margins. As we have done so over the last couple of years going down in terms of rates and you can expect so also from a competition perspective that some of that and also will kind of be that we would need to pay that also to our customers and honestly that should benefit from some of that as well.
Got it, so is the relationship between deposit pricing and reference interest rates?
Thank you so much.
Thank you. We now move on to Alex Koagne from Natixis for our next question. Please go ahead.
Yes, hi everybody. Just two follow question from my side. On Basel IV, assuming there is no agreement, because I guess today there is just too much difference between what should be the flow so I think that we can have an agreement. What does that mean for European banks or what does it mean for you in term of RWA, I mean can we assume that the ECB could just implement some of the Basel IV proposal or not? This is question number one.
Question number two is on the banking union, I guess that's one of your Italian peers that they were able to transfer capital from Germany to Italy. I was just wondering if you consume that you can now move capital easily and what does that mean for you in term of managing your business and you know your margin and so on? Thank you.
Well in terms Basel IV, I mean typically the way it works as the EC have to and trying these things in legislation. There is no agreement and there’s nothing to put on the table for new legislation if it be hard to and this is how that could be put into place. But - and we're speculating here. So you know we have to see you know what comes out of this agreement or proposal or not and whether the EC was endorsed it not. We’ll just have to see what happens.
In terms of capital, I think the ECB who make fungibility of liquidity of capital, some other in their core objectives. They have made progress on this, I think in terms of we see that they are trying certainly to harmonize capital requirements across the various zero land and to this in which we operate so that we do see more consistency between the requirements country on country. I think that’s helpful outcome. I mean it will a task that will take some time to fully get there, and there are still some national legislative barriers and some national discretions that inhibit them in this and that we're pleased with the direction the ECB is taking and actually that they are making progress here, but still a long way to go.
But if I just ask a follow-up question, can you today move some capital from let’s say Germany to Belgium or to Netherland?
We can get dividends up and then we can inject them if need to be.
Okay. Thank you.
Thank you. Robin van den Broek from Mediobanca has our next question. Please go ahead.
Robin van den Broek
Yes, good morning, thank you for taking my question. Most of them have been answered. So I’ll take the liberty to put in more detailed question. Again towards the Netherlands, the residential book is down 2%, other lending is down 3% Q-on-Q, still NII is up, so I was wondering if you could elaborate little bit more on the Dutch margin in Q4 specifically, I saw that the margin for the year is flat, but maybe there are some one off in there or that the margin just improved in the fourth quarter?
And maybe similar question to Belgium where you basically see reverse trends with the book being up and NII being down quite substantially during the quarter and I was wondering if you could comment a little bit on the prepayment penalties that the movement there at Q-on-Q are you seeing rates are going up, do you see that basically the last part of the clients that can still refinance and set more attractive rates are jumping in or you’re seeing basically the prepayment levels are dropping off compared to Q3? Thank you.
So obviously, the margin is a function of the numerator and denominator, so in the lending which just I said already producing SME is not something we virtually want per se, doesn't mean to necessarily lead to a decline. In Dutch, overall book has been fairly stable. Looking at in front of me here it's maybe moved one basis points over the five quarter, so it is pretty stable. And as Ralph mentioned earlier when he did is geographic to the force in the retail space there has been a marginal improvement in mortgage margins in a number of geographies Germany and Netherlands being born. As I mentioned earlier you know deposits still are something that are pressurized by virtue of the low rate environment that again as I mentioned before this is a slow lead through.
You asked about prepayments, the market whether principally happens is in Belgium, is it little bit in Germany, but bulk of what we saw I think it was around EUR3.5 billion or EUR3.7 billion year-to-date - sorry 2016 in Belgium, so that’s spikes in the middle of the year, so it seems to be trailing back off now. So in our interest result, we do have a prepayment fee that’s included in the margin and assuming that runs and terminates after short period. It will grow the margin further. Hence I were so cautious and flagged that the margin for sure in Belgium, because its market is the highest prepayment amongst our family with the new order magnitude of 13 odd million in terms of interest income effect.
Robin van den Broek
I’m sorry. Can you repeat that last part?
13 odd million in the interest income in Belgium that will not recur because of prepayment.
Robin van den Broek
That's for the full year.
Robin van den Broek
That’s Q4. That’s very helpful, thank you.
Thank you. From Santander we move on to Patrick Lee with our next question. Please go ahead.
Hi, good morning, everyone. I just had one follow-up question on your robo-advice that’s what you just mentioned earlier and generally you’re thinking on fee income. Do you primarily see this robo-advices are a cross sell opportunity to your existing prime new customer base or do you see this is an approved attract a new segment of consumer that you are not attracting currently or maybe some extra dose. And I think related to that in terms of the financials if I look at your fee income as a percentage of total and usually is relative to like 14%, 15% of the revenues from commissions. And your commission income growth is usually broadly in line with your NII volume and there is what more or less with consensus has for you for the next few years.
But given these initiatives in robo-advice and other fee income initiatives you have any longer term aspiration in terms of what is the right mix of interest income versus loan interest income for you or can you see fee income growing faster than volume or NII growth because of these initiatives in the next few years? Thanks.
So Patrick, on robo-advice, clearly it’s a cross sell opportunity on one side. And the other side if we have the right product every product can generate new customers as well so what are the savings for those mortgages who wanted to robo-advice here or any other brokerage of service that we also do in a direct way. So new clients come in through different products and once they're in, we try to make them primary customers, because you know that means that they see is their primary bank and hence that normally means they want to do more business with you.
But we do see that given our substantial savings base in most of our channels or markets, but also outside that robo-advice could be real good addition to the product portfolio, and therefore it will really be cross sell, but again you know we will be happy - we will be happy of new clients coming through it as well.
And in terms of the seasonal promotional proportion of total income we actually expect that to increase going forward. As we launched the strategy - the expiration of our strategy four months ago, we showed you what formula, and we also showed you some modern numbers as well as to where we expect things to go. And in the formula we indicated that clearly you know a large part of our clients currently generate interest income for us whether on the savings side or on the mortgage side that's where our bulk of our income is coming from as we speak.
The fee income is low for a couple of reasons. The first reason is we don't believe in charging fees for the sake of charging fees. I think the success of ING is a challenge here in most mortgages, because we want to be very transparent. We - and if there is a fee to be charged it is because we do delivered added value. Now that added value we can deliver by offering different products going forward. What we indicated - but we launch the acceleration of the strategy we indicated that we want to grow on for example the robo-advice side we want to grow on for example the insurance product side in some of the challenger markets as well, and hence we do think that as a portion of total income the fees will increase going forward.
Thank you. We now move on to your question from Brad Houston from Kempen. Please go ahead.
Yes good morning, thank you for taking my questions. First on the follow-up question on core lending growth in the Netherlands especially on business lending, looking at the economic developments in Netherlands so there are very positive, so I was wondering whether you don't see any pickup in business lending at all are going forward maybe in 2017 you may see some of that?
And next question relates to the settlement of the on the interest rate derivatives we've seen some of your peers in the Netherlands raising the number of clients which they will offer a settlement or raising the expectation implementation costs what's your expectation on that area, and there were some press reports on potentially broadening the claim settlement to semi government institutions which could also be regarded as a non-professional investors and I was wondering whether you see that risk as well? Thank you.
Yeah, on the core lending growth I’ll start and maybe will fit in more recite there, so we do see business lending proposed coming in that is increasing. They are approved with the same acceptance criteria it’s a same numbers still around 80% of the requests that are approved. So from that perspective, yes we see the demand that comes in. From a portfolio perspective though we do see company is still repaying their outstanding, and we have write-offs right, just to for you to remember that the NPLs in our core lending book in the Netherlands are still close to 7.5%. So it's not the best book, I mean the core lending book in the business in the Netherlands is one of the worst books actually globally.
So it take some time there before you can really see improvement both in making sure that your best ones are accepted and also the growth, because you know the NPLs cause a caution, and also cause continues write-offs there, so that before you see a uptick in the portfolio perspective it may take some time. Clearly we hope so because more demand should cover that and more demand means there is true economic growth and yeah we're happy to support so. Wilfred, you want to add here?
Yeah, Ralph I think it has something the one bit of color that I would add to it is we shouldn’t forget when looking at these numbers that they do include short shipping book to a very large extent sits in this business lending environment and that does have quite a big negative impact on the on the overall number. The underlying trend for the non-shipping part of this book clearly is more positives than what you see in overall number.
Then on the IR derivative settlement, as you know in comparison to some of our colleague we've been a very modest - we have a modest portfolio of issues here that doesn't mean that every issue should be taken seriously. We do take every issue with our client seriously, so we're taking care of that, but the issue is just not as big for us as it is for some of our colleagues. On the expectation of the provisioning, I think Patrick has an update there.
Yeah, I mean we took provisions in the course of last year, early on in the year which were more than sufficient, but the framework was finalized at the end of the year, and we've done as consistent with that framework and reasons around that not going throughput.
Maybe a short remark on the semi government, I mean the universal market in the press about the situation there is that pretty much almost those clients have been classified as professionals and that is the approach that we will take in their discussion if that arises.
We do have follow-on two more questions but the questions are not coming through at the moment. Okay, so either we don't get the questions or they're not any questions. For the ones who still have questions and we have not been able to answer them at this moment in time, our apologies clearly, our IR team is available to you to also for more detailed questions please take that opportunity.
Just to wrap it up 2016 has been a real good year, customer growth 1.4 million new customers, lending growth EUR35 billion, savings growth EUR29 billion leading to a line results of almost five billion. So you see healthy growth coming through, you see an improvement in capital at 14.2%, CET1 for the Group, see a health return on equity a 11.6% for the bank and 10.2% for the Group, and you see an attractive dividend. So I think we're kind of delivering on our targets and ambitions on all accounts.
Thanks very much for your attention and taking the time to go through these results with us. Again you know if you have more questions, please raise it with IR. Thanks a lot. Have a nice day.
Thank you. That does conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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