Ing Groep Nv

The second quarter 2020 conference call. Before handing this conference call over to Stephen from RiseRite, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future development 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 Security 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, Stephen. Over to you.

Thank you very much. Good morning everyone and welcome to our second quarter 2020 results call. I hope you are healthy and well. I'm happy to take you through today's presentation in my new role as CEO. I'm joined by Sorry, I am joined by our CFO and interim CRO, Taneet Putrakul, as well as Karshaan Walters, currently responsible for the day-to-day risk activities. At the end of the presentation, we will, as always, have time to take your questions. With COVID-19 affecting many, also the second quarter was far from standard. We continue to support our customers, employees, and society during this time. At the same time, as countering financial and economic crime remains a priority, we continue our efforts to increase the effectiveness of our KYC activities. However, the current operating environment reinforces our belief that we are on the right strategic path, with our digital model being a clear strength in continuing operations and uninterrupted service. Pre-provision results prove resilient, as we keep focus on pricing discipline. We also saw some of the negative valuation adjustments from last quarter reversing, as financial markets somewhat normalized again. Combined with cost control, this largely countered the margin pressure on customer deposits and goodwill impairments. Over to risk costs. Under IFRS 9, we took substantial collective provisioning in stage one and stage two to reflect worsened macroeconomic indicators. When these remain unchanged, we believe that we have already taken the majority of provisioning for this year, and for the second half of 2020, we expect the risk cost to be below the level recorded in the first half year. The CET ratio improved from 14 to 15%. This ratio was supported by lower RWA due to several management actions and CRR amendments. Regulatory capital also increased. I'll come back to this later in the presentation. We are confident that we are well positioned to face headwinds with a strong capital position, a strong funding base and a low Stage 3 ratio. Also this quarter, we provided support to our employees, customers and society. Currently, around 75% of our staff continues to work from home and we have started with a phased return to office, ensuring that our people can work safely and in line with local requirements. We help both our private and business customers with payment holidays. So far, we have granted payment holidays on 18 billion of credit outstandings, representing 2.5% of our loan book. This is mainly in mortgages and business lending. And all this amount, the payment holidays on 1.3 billion have already expired, and on these loans, we are not seeing a meaningful increase of risk costs. After initial peak in March and April, new requests have come down and as we are already seeing payment holidays starting to expire. We wouldn't expect this amount to show a large increase going forward. We've also extended approximately 250 million in loans to SMEs and mid-corporate customers under government guarantee schemes and provided 5.4 billion of liquidity to larger corporate customers with part of the liquidity drawings having reversed versus the peak at the end of March. We use different ways to monitor the credit risk profile of our clients. Aside from individual credit assessments, we also use our early warning system to identify potential signs of an increased credit risk for an individual customer. And through personal contact, we stay updated on how our clients are doing. And if needed, we are involved early on. Now moving to slide four. In the previous quarter we saw very high loan growth and that was mainly driven by protective drawings in wholesale banking. This quarter part of these drawings have come back while also investment plans are on hold and that has reduced the demand. In retail we saw continued demand for mortgages while in consumer lending demand was subdued and also in business lending There was less demand driven by liquidity provided through government support packages and less need for working capital or investment loans. That resulted in negative loan growth. In fees, the strong trend of the last quarter continued in investment products. Daily banking fees were affected by the lockdowns, with lower payment fees reflecting lower commercial activity and limited travel expenses. We managed to partially offset this effect with the increased payment package fees in the Benelux as well as in Germany. Our conservative approach to syndicated transactions, so in wholesale banking, resulted in lower lending fees over there and lower oil prices affected trade finance. Now, despite these COVID-19 effects, fee income over the first half year was almost 9% higher than the first half of 2019. So we're on track with our fee growth ambitions. Loan loss provisioning, that was impacted by worsened macroeconomic indicators. And as a result, we saw an increase in stage one and stage two provisioning. I'll come back to that later. Now let's look at slide five. This slide shows that despite all the challenges posed by the current market environment, we keep on growing our primary customer base. And as we also saw last quarter, especially Germany benefited from the digital experience we offer to our customers. Furthermore, we managed to grow our top-line income both year-on-year and quarter-on-quarter. And while there is some positive impact from more volatile items, when you look at our NII, our net interest income, we managed to keep that stable as also guided despite negative interest rate environment in the Eurozone. Year-on-year, there is some support from tiering, Nevertheless, the pressure on liability income is still significant and even increased this quarter with core rate reductions in the non-eurozone countries. Our discipline, and that's important with lending margins and charging negative rates, are examples of how we are managing the pressure. It's also important to note that the benefit that we could get from TLTRO3 will come as of the third quarter, as our main participation in this scheme only came at the end of the second quarter. Then onto the next slide, slide six. I want to underline the message that our digital and agile abilities are great assets under current circumstances. Digital banking is a safe choice for customers while ensuring business continuity in a rapid changing world. Our digital mobile first strategy, in my view, is a right strategy and under my leadership, we will continue with this. And as you can see in the top graphs on this page, we continue to help our customers making the shift from using assisted channels, being branches and call centers, to mobile banking at a very high pace. With lockdown measures in place, our customers have quickly adopted remote channels for advisory products, such as video calls for mortgages or investment advice, And this is visible in the further reduction of assisted channel usage and further acceleration of the share of the mobile-only customers, and that came in at 41%. And if you take that further, the share of mobile interactions increased to 87%, with the number of interactions again increasing if you look at it on an annualized basis. And last but not least, on the right-hand bottom side, if you look at that graph again on an annualized basis, It shows that we improved our conversion rate to sales since the end of 2019, with an increasing number of mobile sales per thousand customers. Slide seven. We continue to work on improved digital experience for our customers, including further steps in Unite, as we are improving the digital experience also for our Belgian customers. This quarter, we took important steps in Belgium towards digital harmonization. We launched OneWeb. the new digital banking channel, and we started to welcome more private individual customers to one app, which is based on the app also available in Germany and the Netherlands. To remind you, many United milestones already have been realized. We implemented an agile service model, reduced the number of branches, migrated all record bank customers and decommissioned systems. Now, centralization of the core banking systems, and we've said that before, will not happen. However, with the technological changes and benefits that we currently have and that we initiated after we had started Unite in 2016, we will be able to harmonize our digital customer proposition much faster, for example, through the use of APIs. a large part of the planned cost savings has already been realized. And although the technical execution of Unite differs from what we planned back in 16, we are certain that we can improve and further improve efficiency. Now with that, let me take you through the second quarter results starting on slide nine. In the second quarter, income increased both year on year and quarter on quarter. Compared to a year ago, we saw higher treasury income and we disciplined our lending margins combined with positive valuation adjustments. This offset the continued pressure on the customer deposit margins and also the lower income from foreign currency ratio hedging, reflecting lower interest rate differentials as the core deposit rates, not only in Eurozone but also in non-Eurozone countries, were significantly reduced. As a reminder, 2019 second quarter also included a 79 million one-off gain. So the overall income was 6 million higher year on year, and without that one-off gain, even more. Sequentially, income improved by 160 million. This mainly reflects the reversal of last year's, last quarter's negative valuation adjustments, despite special liability income and lower fees, after an exceptionally high fee income in the first quarter of this year. Pre-provision result, and that excludes both volatile items and regulatory costs, was resilient. Income, excluding volatile items, was slightly lower, and pressure on liability income remained. For the record high previous quarter, fees were lower. Costs were lower year on year, despite the CLA-related increases. and the previous quarter benefited from a significantly higher VAT refund, if you exclude this item, the quarterly operating costs excluding the volatile items and goodwill impairments also went down. So both year on year and quarter on quarter. Then going to page 10, onto NII. Net interest income excluding financial markets was slightly lower year on year, reflecting the effect of the negative rate environment on customer deposits, as well as lower income on foreign currency ratio hedging. This quarter, we saw several core rate reductions in the non-Eurozone countries, with a substantial inflow of deposits, especially in the Eurozone countries, reflecting reduced spending in these uncertain times and holiday allowances received. Versus the previous quarter, NII excluding FM was 1.8% lower. NII on mortgages improved, however, margin pressure on customer deposits did continue. And overall, we continue to see that effect of pricing discipline as we benefit from negative rates that we charge on deposits. First, the second quarter of last year, we benefit from deposit tiering, which came into effect at the end of 2019, and again, The benefit that we get from TLTRO3 will be pronounced as of the third quarter of this year, as the main uptake of the TLTRO scheme was at the end of June of this year. Our net interest margin decreased by 7 basis points this quarter to 144 basis points. And that was mainly driven by a higher average balance sheet reflecting high deposit inflow our TRO 3 participation, and the customers elevated average drawing on revolving credit facilities in wholesale banking. And as I told you, it came down towards the end of this quarter, but the first two months, April and May, the drawings in revolving credit facilities were still relatively high. The generally low margin on these facilities did impact the margin on non-mortgage lending as well as income on liabilities. And as mentioned before, while NIM is an important metric for the market, We know that NIM can be impacted by volatile items, as you can see this quarter, and so we believe it is also good to look at the overall net interest income development. If you then look at page 11, slide 11, we turn to core lending developments. If you look at retail, starting with challenge and growth markets, we continue to grow there in mortgages, especially strong growth of mortgages in Germany. with some lower demand for consumer lending products, kept overall net core lending flat for other challenges and growth markets. Then retail Benelux, they saw a small decline, mainly due to the lower demand in business lending, and that reflects a combination of liquidity provided through the government packages, as well as the impact of lower commercial activity, and that in turn has an impact of reduced demand for working capital. And wholesale banking, there we saw a decrease of $5.6 billion, driven mainly by repayment of the last quarter, of last quarter's increased utilization of the revolving credit facilities that was in lending that came down this quarter, and daily banking and trade finance, we did see a decline reflecting lower demand of receivables finance and working capital solutions, as well as, of course, the impact of the lower oil prices in trade and commodity finance. In the second quarter, therefore, net core lending was down by $7 billion, And on the other hand, net customer deposits increased by close to 21 billion. And that was driven by retail banking, reflecting reduced spending due to the COVID-19 pandemic and the holiday allowances received. Now we go to fees on page 12. We managed to grow fee income by 12 million year on year, and that's a 1.7% increase, In retail banking, that's especially good. Fees were 5% higher, driven by investment product fees, and those were up almost 28% year-on-year, as we continue to see a high number of trades benefiting from market volatility. In daily banking, fees were lower, and that was due to fewer payment transactions, but we already see an increasing of the payment transactions getting close to the pre-COVID levels, following the relaxation of the lockdown measures. Lower fees in wholesale banking were mainly driven by our conservative approach towards the syndicated lending markets. For the quarter, quarter and quarter fees were down by 7.7% after very high fees in the first quarter, which was elevated also by the successful first quarter campaign in Belgium, and typically the first quarter in Belgium is a very good fee quarter. In addition, lending fees in wholesale banking were lower, quarter-on-quarter after a very strong start of the syndicated loan markets, and then we contracted our appetite, and therefore it came down, and the same was the case due to daily banking, as therefore the activities in daily banking in the trade and commodity finance went down as well. Then the slide 13, results in financial markets, very strong for the quarter. Client income up 64 million, mainly due to rates and global capital markets. Sequentially, client income rose by 73 million, reflecting good income in rates and credit trading, which in the first quarter experienced losses due to market volatility. Evaluation adjustments had a positive impact of 87 million this quarter. This was driven by markets normalizing again after the volatility were observed towards the end of the previous quarter, and this led to a reversal of the negative valuation adjustments. So both effects contributed to the good results for financial markets this quarter. Then we go to the cost side of things. So slide 14. Expenses excluding KYC and regulatory costs, as well as the 310 million goodwill impairment that we announced last week, were down by 44 million year on year. With a solid focus on cost control and lower performance-related expenses, we were able to absorb CLA-related salary increases. Even when we exclude a provision that we took in the second quarter of 2019 for a restructuring in Germany, costs of this quarter were still lower than last year. KYC related costs were comparable to the previous quarter. As we work on becoming more effective and make progress on our file enhancements, these costs are expected to plateau in 2020 with an expected run rate of around 600 million for this year. And regulatory costs obviously were seasonally lower in the second quarter, up by 40 million compared to last year, but that was due to a catch-up on contributions that we had to do for the single resolution fund. As our income stays resilient, but demand is currently impacted, you can expect me and Tenaid to take a real serious look at our cost base. Some investments will continue, but there is a need to have and nice to have, and we will certainly look at these projects to see whether we need to impact these or not. Then we go to slide 15. that shows elevated provisions in all stages. And stage one may feel a bit counterintuitive, so here we go to the technical explanation of life. If you look at credit outstanding in stage one, that represents performing loans. And on these loans, credit risk in of itself is not increased. Yet, if you look at this quarter under IFRS 9, our accounting regulation, we need to take a 255 million provision for these loans. And that effect is caused by the macroeconomic indicators and that they deteriorated compared to the first quarter. And for stage one, you therefore only look at macroeconomic indicators for 12 months. And in the 12 months, what we do see is a sharp downturn, but not so much an upturn and the recovery comes subdued and recovery in the 12th period is more limited. And as close to 90% of our exposures is stage one, Therefore, this impact and effect applies to the majority of our book. Then you go to stage two provisions, and these were higher as well. Again, we have deteriorating circumstances in the second quarter, and therefore also there they reflect collective provisioning based on worsening macroeconomic indicators. Now, a smaller part of the book, but a a broader impact because there you do not look at a one-year loss, but you look at the lifetime loss of the loan. However, because you also look at the lifetime macroeconomic forecast, therefore you see some recovery in years two and three, and that then positively impacts the risk costs and provisions. We also had some individual files in higher risk sectors that we moved to the watch list, and we have applied some rating downgrades. And then stage three, you can expect that. We saw that for already weakened companies, the COVID-19 pandemic is clearly not helping. So we saw a deterioration of existing stage three files on which we took additional provisions. And compared to previous quarters as well, we also moved a number of new larger files to stage three. And this also included a sizable suspected external fraud case, on which there were quite some reports in the press over the past couple of weeks. If we move to slide 16, that shows a total picture of risk costs, which in the second quarter of this year came in at 1.33 billion, or 85 basis points over average customer lending. As I explained to you on the previous slide, this was largely driven by elevated provisioning in stage one and two, including 421 million collective provisioning allocated to the segments, And also in that number, we took a management provision for payment holidays. Aside from stages one and two, in retail Benelux, there were higher risk costs, mainly driven by some larger additions for individual files and mid-corporates. And in retail challenger and growth markets, higher risk costs predominantly came from collective stage three provisioning that was mainly visible in Poland, Spain, and Turkey. Also banking, say three risk costs remained elevated, reflecting additions for larger individual clients, both existing and new files, mainly in Germany, in the Americas, in Asia, and in the Netherlands. And it also included this sizable provision I just mentioned on the expected or suspected fraud case. As we moved more exposures to the watch list, Stage 2 outstandings went up, mainly in wholesale banking, and that resulted in a higher Stage 2 ratio of 7.0%. But to be clear, as Stage 2 is not necessarily awaiting room for default, it implies at this point in time, risk cost is monitored more closely on individual files, but not necessarily at this exposure is expected to default. When the risk cost or the credit risk is no longer deemed increased, then we move it back to Stage 1. And the strength of our book is also exemplified by the stage three ratio of our group, that's 1.6%. Now, of course, that ratio is always looked at by a nominator and a denominator. So if you exclude TLTRO3 from the credit outstandings, stage three ratio was up slightly, although still low at 1.8%. And I think that exemplifies the strength of our book. And to continue on that book or risk management, slide 17 depicts our book. And again, and I've said and highlighted that also in the previous quarters, I feel very confident with our risk management framework and the quality of our book. We've taken lessons learned from the previous financial crisis, resulting in a very well diversified loan book with caps on single exposures, caps on sectors, caps on countries. We have a conservative risk appetite with a focus on senior structures, collateralized structures. and our confidence is underscored by our strong track record through the cycle with historical risk costs as a percentage of pre-provisioned profits well below that of our Eurozone peers. This slide provides this overview of our loan book and highlights some of the sectors in business lending and wholesale banking which are most directly impacted by the pandemic. As you can see, and again, I told you that also in May, The size of the individual books is limited, and Stage 3 ratios are generally low. So let me now focus on a few of the sectors on which we typically receive questions. So oil and gas, $4.5 billion directly exposed to oil price risk, covering reserve-based lending and offshore business. Main focus here is on the $1.4 billion U.S. book in reserve-based lending, because it operates in a relatively high cost-based environment. And this quarter, we also saw some deterioration in our offshore drilling portfolio, but that's small because that book is only half a billion. Hospitality and leisure sectors, we've always had a restricted portfolio and we've been very selective. Then if you look at aviation, and I repeat myself from May, but the exposure is limited. Also here we've been selective and even under the current market circumstances, exposure in stage three is basically non-existent. As you know, we feel we're ahead of the curve by capping certain businesses, as we did with, for example, our leveraged finance book. We closely monitor the development of this portfolio. We follow a strict policy, including only senior debts. We have a max leverage. We have a max 25 million take and hold, and there are no single underwritings allowed. Overall, and that, of course, you have seen in the fees for wholesale banking, we are less active in the underwriting market. as uncertainty remains high, and that's a conscious choice. Clearly, current market circumstances will have an impact on our customers, and we are closely monitoring how our book develops, but with the risk framework in place, with the many experienced good risk colleagues, we remain confident on asset quality. Then on to our capital. Slide 18, here you can see how our common equity one ratio developed, which was up by 1%, reaching a very healthy 15%. On the capital side, so on the capital number, we had a 1.4 billion positive impact. So in addition to adding our full net profit, capital was up by 600 million, reflecting the adoption of the transitional IFRS 9 arrangement, where the shortfall became a surplus. Also, the goodwill impairment we took had a positive impact on the capital because we took it away from our profit, our P&L, which we already had in regulatory capital, so we could take it out here of capital to avoid double counting. The common equity tier one ratio was also supported by lower RWA rates, and we'll come back on that on the next slide to give you more detail on that. Now with this 15%, we are well above our currency T1 ambition of around 13.5%, increasing our buffer versus MDA level to 4.5%. And as mentioned before, we will come with an update on our capital plan with the third quarter results. As far as stands on dividends, we want to provide our shareholders with an attractive return. However, for now, and we have delayed further dividend payments until after the 1st of January 2021, which is in line with the ECB's recommendation, the dividend reserve over 2019 does remain outside of regulatory capital. I realize some banks add it back to capital. And if we would do that, but we do not intend to do that, but just for comparison purposes, if we would add this reserve back, our pro forma common equity one ratio would stand at 15.5%. Now, going to slide 19, some more details on the RWA development. RWAs were lower by 13 billion this quarter, mainly driven by approximately 12 billion of lower credit risk-related assets. And that was mainly a result of management actions, including 8 billion due to the adoption of the standardized approach for sovereign exposures, away from ARRB, and 3.5 billion from implementing a cash flow based maturity approach rather than a legal maturity approach. Again, we become a bit technical here. We also benefited from several CRR, i.e. regulatory amendments, while lower lending volumes further reduced RWA. And so I point again at the 7 billion lower core lending for the quarter. We did also record a 6.6 billion RWA increase reflecting expected trim impact following an update at the end of July that the ECB made in which they intend to resume decisions on trim investigations. And overall, with the definition of default impact absorbed, with the trim impact largely known and absorbed, we do feel very comfortable with our current capital position, including absorbing potential future RWA impacts. As you can see on slide 20, both the common equity one ratio and leverage ratio remain ahead of our ambitions. On ROE, it's clear it's below our ambition, but we very much intend to continue to provide an attractive total return to our shareholders. And as mentioned also in previous quarters, our cost-income ratio was impacted by factors such as the negative rate environment and regulatory costs, as this quarter's goodwill impairment affected that metric. To reiterate what we said before, cost income is not how we run our business, but it remains an important input for ROE. And hence, we continue to have our ambition to reach a 50 to 52% cost income ratio as we further digitize. This quarter, most segments show reduction of operating expenses. Costs will continue to have the focus of the organization and in particular of Tenate and myself. As for our dividends, following the ECB recommendation, we have suspended dividend payments until at least the 1st of January 2021. The 1.75 billion that we reserved last year for the final dividend payment over 2019 is kept outside of regulatory capital, and we are keen to provide our shareholders with an attractive return. So, to wrap it up, We continue efforts to help our customers, our employees and society to deal with the effects of COVID-19. At the same time, countering financial and economic crime remains a priority as before. The current environment reinforces our belief that we are on the right strategic path with our digital model. We've seen it through the crisis with digital use uptake and uptake. and with our digital model enabling us to continue to grow primary customers and keeping them stable, sorry, keeping NNI stable. Loan demand was affected by COVID-19, still strong in mortgages growth, however reduced demand, mainly from our business customers. Pre-provision results, very resilient, supported by focus on pricing discipline, good fee income and cost control, And when the current macroeconomic indicators remain unchanged, we believe we have already taken the majority of provisioning for this year. And for the second half of the year, we expect risk costs to be below the level recorded in January to June. The CET ratio, strong, 15%. And we will come, therefore, with an updated capital plan at our third quarter results. We remain very confident that we are well positioned to face headwinds with a stable income base, with growing fee income, a strong capital position, a strong funding base, as well as a low Stage 3 ratio. Thank you very much. I will now open the call for questions.

Thank you, sir. We're starting the question and answer session now. If you have a question or remark, please press star 1 now on your telephone. Star 1 for questions or remarks. In the interest of time, please, we kindly ask each analyst to limit yourself to two questions only. Our first question is from Mr. Stephan Nadal of Citi. Go ahead, please, sir.

Good morning, guys. It's Stephan from Citi. Stephen, welcome to your new role at ING. I have a couple of questions. The first one is on the outlook for pre-provisioned profits and post-provisioned profits. You seem to be guiding to stable NII for the rest of the year. There was a small miss in the quarter. How should we think about the evolution for the rest of the year in terms of help from TO, TRO, and others? Then fee is obviously very strong and cost relatively under control. Does this mean we should be looking at an improving pre-provision profit into the second half of the year? On the post-provision profit basis, cost of risk, you guys seem to be guiding to second half being less than the first half. Back of the envelope calculations basically point to around $3.4 billion, which is in line with consensus. Would you agree or disagree with that? Thank you.

Thank you very much, Stefan. I will take the cost on the risk guidance, and then I will give the outlook for the pre-provision profits to Tenaid, also in light of your question on TLTRO. If you look at the risk cost, there is a significant part of our risk cost that came from macroeconomic indicators. And as we said in the first quarter of the year, We then took a very much a process approach and said, okay, what is now the consensus that we have in the first quarter of what we use with off-road economics of the then outlook that we then had for the economies for the first year and also for the next three years. And that consensus still was quite benign because some reports already were negative. Some reports were still flat and hence on average, the GDP impact or impact on house prices or unemployment was relatively limited. And we took then 200 million plus an additional 40 million for one of the portfolios. Now, what we now do is again go back to the process and we look then at what are the macroeconomic indicators for the end of June. And there you see a big deterioration. You see a forecast for Eurozone minus 8%, for some countries even minus 10 or minus 12%, with then a recovery, a gradual recovery in 2021, 2022. And we need to bridge that delta in our risk costs. So both in stage one and in stage two, you see then a significant uptick in our risk costs with over 400 million, and we included in that an additional management overlay for potential risk costs that we get in our payment holidays. Also what you see is actually migration of clients who because of these macroeconomic indicators get higher probability of default allocated and therefore get higher ratings and again therefore you see higher risk costs as well. So it's an additional effect. So the lion's share, the large lion's share of what you see in stage one and stage two are these macroeconomic impacts. Therefore, you look almost already at about 550 million. Now, if these macroeconomic indicators stay as they are, then the next quarters, we will not see that anymore. and therefore we are quite confident that our risk costs will go down for the second half of the year. Now, I've given you now some pointers, but obviously I cannot give forward-looking statements as to the provisions to make, so I cannot comment on the consensus, but I trust that with these pointers I give you a good view of how we look at it. Now, Tenet, can you go to the pre-provision profit?

Sure. Stefan, as you know, we don't give forward guidance, but let me talk you through some of the components about our NII. If you look at our quarterly results this quarter, you see that we maintain pricing discipline in terms of our repricing of our loan book. We try to also continue with the geographical diversification of our loans to more than non-euro zone. And I think to maintain stable NII, we do count on improving macroeconomic situation where that should come through with increased loan growth in Q3 and Q4. Having said that, we are also taking steps with respect to our liability costs. For example, in a number of our non-eurozone markets, we are looking to take steps or haven't taken steps on reducing the deposit rates offered to our customer. And as you know, we have already gone negative for large private banking customers in either the Netherlands or in Belgium in charging negative rates. And, of course, as you mentioned, we have taken this TLTRO funding outstanding as of the end of Q2. We have taken approximately €60 billion in T-TRO funding, which we benefit if we can keep our loan growth stable or rising. We'll benefit from funding of approximately minus 1%.

Okay. Thank you, guys.

The next question is from Mr. Warnock-Patrack of Kepler-Chigreau. Go ahead, please.

Yes, good morning and welcome, Stephen. Good to have you on board. Now, Stephen, just as a first question, I know you are here just for a couple of weeks now, but do you expect to update us on the strategy? I would not expect a major turnaround, but Any thoughts on the direction you might want to give to the company? And linked to that, obviously, a big thing is the cost focus. We've seen some banks actually lowering costs significantly in the second quarter, and the direction is quite clear there. Could you update us on the pipeline of the cost cuttings and also on the kind of direction for the full year 2020. It was, I think, down 0.4% on the clean basis in Q2. It's good, but, you know, maybe more is needed in front of the pressure the top line is facing. And then the second question is on the asset quality and risk. Obviously, you have quite a small amount of loan under moratoria. I think it's 2.5% of your book. It's $18 billion. Do you have a bit more granularity on that figure, how much is retail and how much is wholesale? And when do you expect those loans to be back to normal? And also, do you have an initial idea of how much could turn maybe problematic on the $18 billion? Is that a small figure or do you have a view on that? Thank you very much.

Yes, thanks very much Benoit, and I tried to dissect your two questions, so I will answer on strategy and the cost of risk, and then Teneit will look at the cost side of things. But let me start with saying on cost that it will be also an important focus of myself, especially in these times. So, yeah, indeed, it has been a couple of weeks in the job. I mean, but in this particular job, that did not be said that I have already been in the board for three years as a chief risk officer, but part of a board management team. So I was part of this strategy, and I will continue this strategy. And, of course, we could make some amendments when we further develop But I'm behind this strategy, and I also do think, and we've seen it in the crisis, that digital banking and mobile banking first and 24-7 banking is the way to go. The digital use of our customers went up again dramatically, with 87% of interactions being pure mobile, with 41% of our clients being only on the mobile, and now we're slowly transform our clients from assisted channels such as chat or call center or even branches to digital banking or to mobile banking. We have been closing branches in the Netherlands. We continue to look at our branch footprint. I mean, in some of these branches, there's only two or three customers coming per hour. So, yeah, what can you do? You cannot leave them open. So the digital banking focus, the online banking focus really, really helped. And we've also seen it, for example, in Germany, how there are increasing fees in the brokerage fees that we do online. We do online brokerage, and that helps really in our income and also on our cost side. So that line I will continue, and I will try to accelerate and put an additional focus on even accelerating digital banking going forward to make sure that we go into the direction that we believe sustainably will be the right path for banking. Of course, there is a crisis to manage, and that's on the one hand helping clients and also discussing with clients to what extent we can help them with their loans, and also have a good management, a strict management on the risk-cost side of things to be prudent when it comes to extending loans to our clients, to take appropriate provision levels, and to make sure that we can dissect the winners from the losers. Thirdly, there will be increased cost scrutiny in these times. It's logical. I mean, any CEO in this day and age would look much stricter at the cost, and so that's what I will do as well. And last but not least, but that remains important for the banking industry overall, for society overall, but also for ING, I will also continue to working on AML. That's a key priority. Once that's for ING, before the 1st of July, it will remain an important priority, but also note that we need to do this effectively and efficiently.

And Benoit, just addressing a bit on your cost question, I think clearly if you look at our quarterly results in Q2, we have achieved absolute cost reduction, and this is also absorbing inflation increases as well as heightened increase in spending on compliance and KYC. Now, if you look at what we have guided before with respect to cost, in market leaders, we have guided towards negative cost evolution. And if you look in our Q2, that has been achieved if you take out the goodwill impairment that has happened in Belgium, for example. In the wholesale bank, we have talked to you about the fact that we are flattening the cost growth in the wholesale bank, and that has been our guidance since Q4, and now you can see in Q2, with some positive evolution from that perspective, that cost in the wholesale bank has started to decline. And within the CNG countries, again, we have said that selectively we would like to see cost growth as long as we see positive jaw. Now, in light of the macroeconomic situation and slowing revenue prospects, we will also be taking actions with respect to cost in the CNG world in the coming quarters. And I think overall, we just wanted to say that we will take a balanced view between looking for efficiencies at the current time and investing in our digital future that Steven is talking about. And a number of our programs are under review in terms of looking for that cost efficiency.

I need to come back to the cost of risk and the payment where it is. If you look at the $18 billion, approximately 40% is to households, so retail, 60% is to business clients. The lion's share of the payment holidays is to the northwestern European countries. A bit over $1 billion already expired, and there is no meaningful higher risk cost in these loans. We took some additional provisioning for payment avoidance outstanding. And other than that, we remain to watch it. But currently, we have no deteriorating signals at this point.

Great. Thank you very much.

Our next question is from Julia Aurora Miyoto of Morgan Stanley. Go ahead, please.

Yes, hi. Good morning. Can you hear me?

Yes, very well. Okay, fantastic.

A couple of questions from my side as well. So fees, strong results there. Can you please run us through the main initiatives that make you confident that ING can deliver on the 5% to 10% fee growth? And then secondly, less related to results per se, but the ECB had an M&A consultation last week or recently. Any thoughts on that and could ING be perhaps involved in cross-border M&A, do you think, if, you know, there are some opportunities available? Thank you.

Thank you very much, Julian. I think on fees, I mean, we have clearly strong results. We've seen that the first half year compared to the past half year, we had an over 8% increase. But let me give you also more granularity here. I mean, we increased our brokerage fee business in various countries, but most notably Germany. And there you see that our brokerage fee activity went up here and here with 28%. We increased our payment packages in various countries, amongst others the Netherlands and Belgium, but we only did that at the end of the first quarter, so the impact is only gradually coming. Despite the fact that we had virtually no travel and a significant decrease in payments in this quarter, obviously, we could keep our fees up, and the activity is now coming back again. We have subdued syndicated market loan activities, and when that comes back, those fees will go up as well. We have various initiatives in the insurance space, for example, which are currently growing with our collaboration with AXA, and there the fees are growing as well. And as you can see, historically, we consistently have delivered on our fee ambition of 5% to 10%, so in that sense, I'm confident. And we see that delivering quarter by quarter. If you look at the consultation... Can I just come up on the fee-based?

The increased payment packages, what impact do you expect from that?

I'll give that to Tenet.

Julia, the fee packages that we announced in the Netherlands and Belgium, we announced a fee increase of approximately 10 to 15% in these two markets, but these packages normally are increased on an annual basis, so we take decisions if we would increase fees somewhere around October, and it has an impact in the beginning of the subsequent year.

Thanks. Claire? Then on the M&A consultation, I mean, our strategy has been clear, which is we first and foremost focus on organic growth. If we look at acquisitions, we focus on certain skill sets or certain products that we do not have that can broaden and deepen the service delivery to our clients. And then we would look at in-market consolidation because basically that gives cost synergies. Clearly, the current landscape as we currently see it in Europe limits the ability for cross-border synergies on both capital and liquidity, given the compartmentalization of that in the various countries, and therefore we find it difficult to see benefits for cross-border M&A at this point in time.

Thank you.

Next question is from Benjamin Goy, Deutsche Bank. Go ahead, please.

Good morning. Two questions, please, from my side. I want to follow up on the fees. And you also, I think, repriced in Germany, for example, your payment packages. Just wondered how the experience was and whether we can expect, so to say, more pricing power in your challenger markets as well, where you have historically been a price leader. And then secondly, I think there was a headline that you will review your dividend policy, which probably is no big surprise. But I was just wondering whether this is part of a broader review, and it might also include share buybacks considering you are trading well below book value. Thank you.

Let me do the question on dividends, and then Nate will answer the question on fees. I mean, based on the announcements by the ECB earlier this year, we basically delayed our dividend policy, and therefore we said we need to resume a dividend policy later in the year. And that's what we will do in the third quarter. We also said that already in the first quarter that we would resume our dividend policy in the third quarter or announce what our dividend policy would be going forward. So that is and how we will then do it and also depending on what we are allowed to pay, we will come back with our dividend policy and a structure in which we would pay dividends. But one thing is clear, and it is that we want to pay dividends to our shareholders. And hence, we also made a reservation for the second half of the year 2019 dividend that we could not pay. And we will do that new dividend policy as part of the total capital planning review, including the management buffer that we currently have of 4.5% over our MDA level. Tenet?

Then, Benjamin, just to reiterate the point on fee income, as Stephen has mentioned, we do annual reviews on daily banking packages. We make sure that we try to take steps to sustain our investment product fees and third-party fees, as mentioned, on our joint venture with AXA. Now, to address your question specifically on a category of fees that we call behavior fees, whereby, for example, in Germany, we say that we would start charging payment package fees of approximately five euros per month unless you actually bring your salary accounts to ING. In those instances, and this is just an example for Germany, Probably about a third of our customers actually who were not primary customer decided to become primary customer. So start bringing regular income into their account. So they go from non-primary to become primary. A certain proportion of our client, about a third as well, decided not to be primary customer but agreed to pay the five euros per month in fees, and the remainder have decided to leave ING as a client. So I think overall we are quite happy with this evolution.

Thank you.

The following question is from Mr. Johan Elfman of UBS. Go ahead, please.

Thank you. Just coming back to some comments you made in terms of growth ambitions, and I guess should we expect any change in terms of where you would like to focus on growth? You talked about the challenges in growth markets, but if we look back over the last two years, you clearly put the brakes on a bit in wholesale, et cetera. Is it a continuation of that strategy? Is it an acceleration of that strategy, or how should we think about –

Yeah, thanks, Johan. I presume that's the question that you have. So, I mean, we will have a continuation of that strategy. So we already a couple of years ago said that we saw some risks creeping into the wholesale banking books. I mean, structures were deteriorating. We're becoming looser. The amounts were getting bigger. We saw in some sectors that the risk was not really priced in. And hence, we started to put caps on books, we started to put caps on leverage book, we started to put caps on real estate finance book, we started to run off some of the books to the extent we could in the oil and gas and drilling sectors. And yeah, that we will continue. And obviously, and we've also seen it in the previous crisis, at some point in time, there was a reversal, then the structure become tighter again, then the pricing goes up again. and then we can again grow that. But for now, we will keep quite strict in the wholesale banking side, especially when there's a lot of volatility. We need to be prudent there, and that's what we will continue to do. And at the same point in time, we've said we want to diversify our loan book. We want to diversify our business, and hence we are doing that in different geographies, amongst others CNG, amongst others in consumer lending, And that's what we have been doing over the past couple of years, and that's what we will continue. Now, I see while I'm talking that Johan's connection was lost. That's why he didn't hear it, but I hope all of you heard it. So I suggest we move to the next analyst, and when he returns, he may have a second question.

Thank you, sir. The next person is Tariq Al-Mujad, Bank of America. Go ahead, please.

Hi, good morning. A couple of quick questions, please. First, on the NII, could you give us an indication of how the behavior of retail and corporate customers in terms of deposits and how the $21 billion significant increase in deposits in Q2 could reverse in the next month? And same question on capital. Thank you for giving us a breakdown already quite significant in terms of capital and RWA evolution. But my question is on the CRR 2.5. What did you take in there in terms of semi-supporting factor and the rest of the small components? And on Basel IV, so is it fair to think that once you take the divisional default, the $10 billion you booked in Q1, and then now the whole $13 billion trim, That's the majority, I guess, for RWA inflation related to Basel IV. I think there's still only like 20 or 30 basis points to go, and you'll be fully loaded Basel IV. Is that correct? Thank you.

Let me take the questions on capital and RWA, and then we will also discuss the deposits. If you look at the capital benefit we had from the CRR 2.5 regulation, it was approximately 25 basis points benefit. So the lion's share came from management actions, but 25 basis points came from the new regulation. If you look at RWA, I think you make a valid point. I think that DOD was a significant impact. We had with the large corporate model and the 13 billion you mentioned, you remember that well, because we reversed 6.6 of that, but now we put it in again. Then most of the trim missions we've had are letters, if you will. There are then one or two letters to come, but these are on relatively small books, so the impact there from an overall point of view will be benign. And then the last step would be the Basel IV outcome, and whether it then comes 2022, 3, or even later is unclear. But we expect the impact of the eventual Basel IV to be limited, and hence we are very confident with our current capital level, with the most and the large majority of the impact already having taken that. Tenet, on the customer deposits issue, If I may, just on the visibility. Sorry, Tariq, did you say something?

Yeah, sorry, just on the CR 2.5 before I move to deposits. So the 25 bits, that takes into account the software and the SME, so nothing, and IFRS 9, you took it, I saw that in the capital bit.

Yeah, it takes into account the SME, it does not take into, the SME support factor, if you will, it does not take into account software.

Tariq, the software, the RTSs are still being debated. We expect that to be issued during the course of Q3 and would be applicable in Q4, and we've given some estimate that we think will benefit anywhere from 10 to 12 to 15 basis points from the software.

Okay, thank you. Our next question is from Johan Eflum, UBS. Go ahead, please, sir.

Thank you, Sarah. I was cut off from my line, cut off before, but you don't need to repeat it. I think I got most of it. Just a second question in terms of the TLTRO impact. How should we expect that to be accounted for, you know, given the growth dynamics we're seeing? You know, will you book it on a recurring basis and then adjust at the end, or will you wait until the end to book the benefit, et cetera?

Yeah, thanks, Johan. By the way, say hi to Rolf for me when you speak to him. So, yeah, so the first question we already answered, but on the second question on the TLTRO, I will give it to Tenet.

I think in the TLTRO, there's really three component parts that you need to think about. Clearly, first, the magnitude of the TLTRO, we mentioned that we have taken approximately 60 billion of that funding. The second is the confidence level that we have with respect to maintaining at least zero growth in the portfolio. And currently, we do expect that we can actually encourage loan growth to basically be more than zero. And then the third point is, of course, as long as we can deploy into the relevant amount, the margin will be attractive. And if we can't deploy, we can still place the money, for example, with the ECB and have a margin on this funding of approximately 50 basis points. That's how it would be done. From an accounting treatment, I guess it really depends on the level of confidence that we would have with respect to loan growth, and we'll inform you in subsequent quarters on that. Thank you.

Our next question is from Mr. Kiri Vijay Arya of HSBC. Go ahead, please.

Yes. Good morning, everyone. So you alluded a couple of times to pricing discipline and you talked about fee packages, deposit repricing. But I'm curious to what extent you've been repricing on the loan side. And is it more than just saying no to loans from just a risk perspective in the wholesale bank? So just some color on where you've sort of demonstrated pricing discipline, if you like, on the lending side. And then just a quick follow-up on the capital management actions you've done this quarter on the RWAs. Just, you know, to what extent did that flow through onto the Basel IV ratio, or were those levers more skewed towards really improving the Basel III ratio, you know, the $11.5 billion of RWA mitigation you've done this quarter?

Thank you. Yeah, thank you very much, Kiri. First, on the repricing on the loan side, I mean... On the one hand, it's just a matter of discipline to not price loans whereby there is too much pricing pressure to make an adequate return. For example, you see that in countries like Belgium, whereby if there is sometimes pricing pressure on the mortgage book, then we will not go along and the mortgage book decreases a little bit, but we will stick to pricing discipline to go for return, not for size. Now, if you now look overall on the book, you see that on mortgages, our lending margins on the overall book went up. On business lending, so mid-corporate and SME, it went down a little bit. And wholesale banking, it stayed approximately flat. But why it doesn't stay flat, because on the one hand, we increase our discipline in pricing for these project loans, but what you do see is that there are less projects and less project loans and less trade finance. There is a heightened demand in our recurring credit facilities and our corporate facilities, and these typically go at lower rates. So on average, therefore, the wholesale banking margin stays flat. So it's a move from one sub-book to the other. Now, then to the management actions on RWA, to extend as a front load the Basel IV implications. Yeah, it does in that sense, since we are, if you look at the Basel IV regulation, largely... hit, if you will, by the input factors and less by the output factors. And that's why we have said that the lion's share of what Basel IV will do, and the trim missions are actually a prelude to, in that sense, Basel IV, that because of our dependency on the input factors rather than the output factors, the lion's share over 80%, and I think now it's more than 90% at this point in time, of Basel impact will come as a result of trim missions and remodeling and DOD. So in that sense, the answer is yes.

Great, thanks.

Our next question is from Anke Reiner on RBC. Go ahead, please.

Yeah, thank you for taking my question. The first one is on loan goals. A number of banks have talked about the recovery in demand in June, and some also mentioned July. So I just wonder what you have seen in terms of demand coming back. And then secondly, on your update on capital with Q3 results, I'm a bit confused as in what you can actually say given the ECB is unlikely to have commented by that point. Is it about potentially reallocating capital within the group, capital return? And should we also expect this to be part of a broader review of your targets having taken over your role now? Thank you very much.

Thank you very much. I mean, on loan demand coming back. Yes, it's early days, but we see it coming back a little bit. I mean, the same goes for payments. Payments were cut down in April and May. Points of sales were down in April and May. ATM withdrawals were down in April and May. ATM withdrawals are still a bit down. As we clearly see, we go to a less cash society, not necessarily cashless society, but less cash society. But the payments we see coming back, and if you see payments coming back, you can also expect loan growth to come back. By the way, there is good demand in the mortgage market. That has continued. It's a matter of pricing whether we will take it or not. But when the economic activity recovers, you can also expect that working capital levels will increase. And in that extent, the loan demand is expected to come back a little bit. It's early days and also depends, of course, on how the lockdown will progress. Yeah, in terms of capital plan, the ECB has given advice not to pay dividends in 2020, but it does not preclude us to have a dividend policy. And so basically, we adjourned our dividend policy until the third quarter of this year. And so we are going to come back to you with our new capital plan and in that new capital plan we also will state to you our dividend policy going forward, whether changing or not. And, of course, in that, we also will say something about buybacks because we do not exclude buybacks to some extent. But, again, that's just a general statement. It's not illogical to look at buybacks at the below book valuation.

Thank you. And would you also review your ROE targets at that point, or is that for a later point?

We have, at this point in time, no intention to change our ROE targets.

Okay. Okay, thank you very much.

Our next question is from Daphne Song, Redburn Europe Limited. Go ahead, please. Ms. Song, please unmute your line. Ms. Daphne Song, can you hear us? We'll go further to the next question. Ms. Daphne Sound, can you hear us?

Hi. Welcome to the role. I've got two questions. Hi, can you hear me?

Yes, we can hear you. Yes.

Hi, Daphne. Hi. Hi. Welcome to the role. I've got a couple, if I may. First, on NII, you stick to your NII guidance, which is very effective. one, if I'm correct.

You mentioned that you expect... Sorry, you seem to be very far from the microphone, so we have trouble hearing you. Can you get a bit closer to the mic, please?

Yes, sure. Hi, is it now better?

It's much better, thank you.

Okay, thank you. I'll repeat my question. First one on NII. To meet your NII target year-on-year. It cannot imply that you will need a higher NII in H2 versus H1. You mentioned earlier that you expect loan to improve in the second half, but I'm just wondering how about your margin? I appreciate you've got some, you have already given some comment earlier. But you mentioned pricing discipline and telcho, which offset your liability drag. So is it fair to say that the H2 mean should improve from the current low level of 144 bits? You previously guided 140 bits for H1 and high 140 bits in H1 and you're kind of just below So what's the outlook on H2, please, and on telco tree, how much more room you could increase from the current $60 billion level taken in June? And my second question on cost, where do you see cost going in H2 and beyond? Your previous remark about taking a serious look into the cost is very encouraging. Are you looking to achieving net cost reduction in H2? in 2020 or from 2021 onwards, given that the growth of opportunity in the near term is quite limited? Thank you.

Thank you very much, Daphne. These are all good questions on the P&L side, so I will give the floor to Tenaid. So it's NIM, it's TLTRO, it's COST. Go ahead, Tenaid.

uh daphne i think if you look at our nim evolution during the course of q2 you can see that it is declining from 151 to 144 but that's really driven by the balance sheet extension that you have seen in q2 right partly because of the revolving credit facility that were taken by our wholesale bank which comes with a margin which is approximately 50% less than a normal blended portfolio of loans we extend in the wholesale bank, and also the extension of our balance sheet by increased funding to the central bank because of taking up the TLTRO3. But if you adjust for that on a pro forma basis, our net interest margin is approximately 148. So we do see a drop, but not as dramatic as perhaps the number would indicate. And I think looking forward about how we would expect things to evolve, again, I reiterate, it's really depending on to a degree on maintaining, and we will, maintaining price discipline. We will take actions also with respect to lowering deposit rates in our non-eurozone markets. already announced plans to charge negative rates to, for example, private banking-type customers in Netherlands and mid-corps in Belgium. And I think with those actions, together with TLTRO, we hope that we can maintain that stable NII going over the next few quarters. Having said that, you asked about T-TRO plans of $60 billion. Currently, we are happy with our liquidity position, and we don't have any current plans to increase that for the time being. Now, respect to cost, again, we are taking steps with respect to cost. You can see that our cost evolution is good in the second quarter of the year with absolute cost declines in all of our major divisions, and we will continue to look at that, whether it's in our channels, branches, other types of channels given the digitization that we have seen. But again, we will balance that with investment in our digital future, so it will be a balance between the two.

Thank you.

Our next question is from Mr. Omar Fahl-Barkley. Go ahead, sir.

Hi. Good morning, all. Thanks for taking my questions. So just to both on cost So on the $44 million decline in underlying costs, you know, extra restructuring charge, can you just give us a sense of the scale of the three elements you mentioned, the cost savings versus bonuses versus CLA increases? I just don't really understand why you haven't seen the very sizable COVID-related savings that your peers are all seeing. in areas like travel, marketing, et cetera. Many of your peers are down almost double digits year on year in their retail businesses, which is very far from you. And then similarly, if you could just update us on the Unite plan and where all that stands. Is it effectively on hold for the foreseeable future as we go through the crisis? I see Belgium seems to be down just 3% in terms of costs on an underlying basis. I know that it affects both Belgium and Netherlands, but an update on that would be helpful. Thank you.

Thank you very much, Omar. I'll take the update on Unite, and then Nate will give you an answer on the costs. I think on Unite, so there we have already done the majority of what we needed to do under that program. We integrated record bank in our bank in Belgium. We decreased the number of branches in Belgium by half. We have put all of our active retail customers on the one web environment from Belgium to the same one web environment as the Netherlands. We're currently in the process of putting all the retail clients on the one app environment in Belgium, and today that's approximately 170,000, and that will continue. And by the end of the year or early next year, we will have migrated all those clients. We will then continue also to put our business clients on the one web environment, and we started with that as well. and then what we can then do is that we then will put new offerings so for example what we're currently doing is an insurance offering that we then can put on that same one app and one web environment for both countries in one go so therefore we do not only have a larger number of clients on one IT system and one customer integration layer and one customer experience layer, but we give them a better digital experience by offering solutions on that one platform. And that we will continue going forward, and that will continue beyond the UNITE program. So the lion's share of the UNITE program we will taper off in 2020 and 2021, but the benefit from it, both from a digital experience, a revenue and cost point of view, will then continue to come.

To address your questions on cost evolution, I think the collective labor agreement or wage inflation varies from market to market, but on a blended basis for ING is anywhere between 2.5% and 3%. I think that's addressing part of your question. The second one, we do recognize that some of our peers have been reducing variable compensation, which has resulted in maybe a sharp reduction in their expense line. But I think ING, as you know, are not really big on variable compensation, so that hasn't been a major factor in terms of our cost decline in the second half of the year. And then the third thing which I want to remind you is that we're still in the path of taking steps to improve our KYC environment within ING. And that if you look year on year, the KYC expenses actually went from 98 million to 134 million euros. And to remind you, we've given guidance that during the course of 2020, we expect the total expenses that we will take on KYC to be approximately 600 million euros. And again, within that 600 million euros, approximately half we currently pay either to external consultants or management consultants, and we would expect that going forward we would make efficiencies there as well.

Thank you. Sorry, Stephen, on Unite, so your predecessor used to tell us that there'd be a kind of hockey stick effect with the sizable savings to come, you know, kind of 2021, 2022, as the systems were decommissioned following all the elements of implementation that you've just highlighted, are you basically saying that, you know, that process is still ongoing and that decommissioning process in 2021, 2022 will lead to those or you're basically saying that, you know, everything's kind of in the base of costs from here and, you know, any potential savings from the plan are going to be marginal.

Thanks, Omar. I think that what my predecessor said, that in the beginning of the process, when we started in 2016, we would look at centralization of our core banking systems. And then after some time, in 2018-19, we said, well, basically, on the one hand, it is very difficult to centralize those systems. On the other hand, we also can now make use of APIs to actually draw data and products from our core banking systems into our customer integration and experience layer to in an easier way realize a one-platform environment in a Benelux. So we will continue to decommission systems. Not all systems can be decommissioned, but for some products it's easier to decommission than not. But it is increasingly focused on harmonization, standardization, delivering a better digital experience on the front layer, and that will deliver savings, not necessarily by a big bang in decommissioning the core banking systems.

Got it. Thanks a lot.

Our next question is from Mr. Raul Sina of JP Morgan. Go ahead, please.

Good morning, gentlemen. Thank you for taking my questions. If I could just follow up on a couple of points, please. The first one is slightly detailed. The oil and gas book stage three ratio seems to have picked up materially in the second quarter, now 7.8%, even if I adjust for the trade finance book in Q1. Stephen, I was wondering if you could discuss what you're seeing here, given the recovery in oil prices and how you might be looking to proactively manage the risks in this book. And then related point on frauds, I think we had the discussion in the last quarter as well, whether it was a big fraud in Asia, now you have a big fraud in Europe. I was just wondering what lessons, you know, the group is taking away from what we're seeing in terms of fraud. And then just very quickly, just to follow up on the dividend discussion, I'm not sure if I missed this. I'm gathering that the progressive dividend payout policy of the old obviously is behind us now, and this review that you're flagging at Q3 is to set a sort of new policy. In that context, do you think that there are merits in a sort of U.S. model where bank dividend payout ratios are low, but then they have the flexibility to use buybacks? Is that the sort of direction you should think the sector should be heading towards, given what we've seen in the pandemic? Just some thoughts would be really useful.

Thank you. Yeah, thanks, Raoul. If you look at oil and gas, indeed, taking out, if you look at the stage 3 ratio, that's 7.8%. That is for the bigger oil and gas portfolio, and if we then take out, let's say, the trading part of it, or the non- the non-directly oil price related part of it, largely the 7.8% relates to that $4.5 billion. So if you then do the math, you basically do see, and I refer to what I said in the first quarter, then I said that we moved the entire U.S. oil and gas book to stage two. And that book is around $1.5 billion. Now, if you look at that 7.8% and you do the math, it pretty well resembles that book. So what do you take from that? Yes, that book is a difficult part of the book. But again, and that comes in line with what we said in the previous quarter, it is therefore also that book and not something else. So if you look at the broader oil and gas portfolio that we highlight on that page, there we don't see that many issues. It is really focused on that $4.5 billion. And that's where we see the provision taken. Now, if you look at one of the later pages in the deck, you see one of the bar charts that we took provisions in the natural resources space, that is largely that oil and gas part, including offshore and drilling. That relates to the 7.8% amount. So with a number of the names in Stage 2 and some of the names in Stage 3 continuing to move and taking higher provisions, we do expect that the provisions on oil and gas in the next half year will go down. Then on fraud or the fraud case, Yeah, well, my first comment is people should start befrauding other people. That's step one, of course. But if you look at the ING book, the previous frauds we have seen were focused on the trading commodity finance book. There was one each quarter, one in the fourth quarter last year. Now, what we have done there is that increasingly we look at transactionally secured exposure, so we're looking at our policies, because we do have, I would say, control teams that do checks on the traffic that goes on, the bills of laying that we have, the documentation that there is, so there is all things going on to look at the lineage, if you will, the end-to-end transactional dealings going on between the commodity finance parts. However, over the course of the years, you see that the structures have been weakened to some extent, and we're reintroducing the strict structures, and we call that TCF 1.0. And so we go back to where the market went to, back to TCF 1.0. Then at the same point in time, in that business, we are also experimenting with blockchain, because blockchain... is in terms of an end-to-end payment system, especially for trade, much safer than all the paper floating around on a global basis. So the ability to be fraught is much lower when we can use the blockchain technology. And with some of the players in the TCF space, we are currently experimenting with that. So the fraud in TCF was therefore, we have seen a few of these cases, what we now see in the photo we have this quarter is a complete one-off scenario. Many institutions, many organizations, many accountants, many regulators are hurt by that. It's just a matter of, in that sense, knowing business models and in terms of that sector we have very very little other exposure in the other business in that business sector and actually we decrease it to almost a negligible amount. On dividends I think we have just delayed our dividend policy in light of the measures that were taken by the ECB and the advice that they have given us. We will resume with the dividend policy in the third quarter of this year. Yeah, it could go several directions. And, of course, I noted also the U.S. banks with the lower dividend policy and share buybacks. All options are on the table, and we come back to that in the third quarter. Great. Thank you very much.

Next question is from Mr. Farquhar Murray, autonomous. Go ahead, please, sir.

Morning, gentlemen. Just two questions, if I may. And actually, I'll apologize. The first is a little bit of an echo of Raoul's question there on the dividend. So my question there is, can you just outline what the key considerations are going to be that will feed into that kind of dividend policy revisit? And perhaps maybe just detail from your perspective what the pros and cons of the previous approach are, just so we get a bit of a sense of what you might regard as things that are worth changing. And then secondly, apologies if I missed it, but what is the current fully loaded Basel IV position? And are you suggesting that as of today, basically, Basel III and Basel IV are now essentially the same?

Thanks. Sorry, Farquhar, can you repeat the second question, please?

Yeah, sorry. So basically, the second question is on Basel IV. I'm just kind of wanting an update on the current fully loaded Basel IV position. and essentially whether you're saying that Basel III reported and Basel IV are now essentially the same.

So on Basel IV, let me put it this way, if the trim missions are behind us, and of course we've now taken an additional step on one of the main trim missions by taking an additional 6.6 billion, But once we are done with the trim machine, so we get two more letters on smaller portfolios, but the impact on that will be limited. But then 90% of the total Basel IV impact we will have had. Then on the Basel IV impact, I just lumped them together. It's a bit apples and oranges, but if you look at DOD trim remaining Basel IV, all of that, then 90% is already behind us. Then on the key considerations, oh yeah, sorry, maybe I should add, that's why I'm hesitating, that Basel IV and part of it, so the remaining 10% is not certain yet, so we have taken all the input factors, But Basel IV is still under discussion. It was first in 2022, then it would be 2023, and currently still under discussion when it will be implemented, so we do not know. But we know the rules that if they were implemented, what the impact would be, and in that sense, the 90% stands. Yeah, key considerations that will feed into our new policy are not different than what I answered to Raoul. Maybe one thing to add there, we're looking into to what extent the new MDA level has structural elements in them, given the new regulations and the relief that has been given by the ECB. And to that extent, that could have an impact on our dividend policy as well and to our capital levels.

All right. Thanks, Rich.

The next question is from Robin van den Broeck, Mediobanker. Go ahead, sir.

Yes, good morning, everybody. Thank you for taking my questions. First one is, I noticed on press that you are putting some pressure on your external FTE providers to take lower wages. I was wondering, given you have a pretty sizable external FTE base, whether that could have an impact in Q3 already. And then maybe a bit more specifically on the TLC road take-up, I think the implied benefit would be $150 million per quarter. Is that what we should expect in Q3 to come through and then that benefit to dissipate a little bit longer term on the back of continued margin pressure? I was just thinking about the shorter-term dynamics there. And on Project Unite, I think in the past you always had the longer-term view to to integrate even more countries on the same platforms. Now, though it's being a little bit different than you anticipated at first hand for Belgium and the Netherlands, this is still going ahead. Are you expecting to still add more countries on that same platform longer term? Or is the country differences, are they too big, basically, to make that happen? Thank you.

Yeah, thanks, Robin. I think on Unite or on Maggie, so let's say that's the Challenger and Growth countries, we have increasingly have focused on building a customer integration layer, so a front-end integration. and we've always called it an intermediate step, so we will continue with harmonization and digitization to offer a better digital experience so new propositions can be put on that one app or one web environment immediately across a number of countries. That does not necessarily mean centralization, so you do not need to centralize all your systems to create the same experience for your clients and put new propositions in one go on an integrated app or web environment. then on TLTRO and lower wages, I give it to Tenet.

Then just maybe to address your question on external staff. First of all, our external staff community is significant and we always treat them with a lot of respect and very similar to our employees. Having said that, we are asking them indeed for temporary cut in tariffs, right, given the COVID situation and slowing down of a number of projects. So it's a combination of tariff cuts and a reduction in absolute number of external staff that we deal with. And in addition, we're looking, of course, at changing mix, right? So how many of these external staff do we deploy in our whole markets in the Netherlands, Belgium, and Germany, and where we deploy them in other lower-cost markets, for example, in Poland or in Manila. So it's a combination of factors, but indeed it is part of the plans to actually get better efficiencies there. In terms of your question on TLTRO benefits, as I mentioned before, we have taken roughly €60 billion, and if we can maintain zero loan growth or better, we benefit at least 50 basis points. But, of course, if we can deploy those funds lending to our customer, then the benefit would be larger.

And I think in the past, on CO2, you were able to book the full rate basically immediately on the back of your growth history. Does that apply now as well, or is it a more conservative approach this time?

I think those conversations are ongoing. The threshold, given that the TLTRO3 is coming with a deeper discount from a funding perspective, I think we would like to give you an update in Q3 based on what we see other institutions doing in discussion with our accountants.

Okay. And I guess on the external FTE base, there's no quantification behind what we could expect there?

No, we don't disclose external FTEs externally, but rest assured we're asking in many of our home markets for these types of arrangements with our external suppliers. Okay.

Cheers, guys. Thanks.

We have another question from Stefan. Go ahead, sir.

Yeah, hi, guys. It's me again. I just wanted to follow up on the digital proposition here. Obviously, over the years, you have been mentioning and emphasizing some partnerships, like the Scalable Capital one in Germany, which I believe is now being extended. You have AXA. You guided to around $1 billion of fees over 10 years. Now you're announcing the Amazon partnership in Germany for small businesses. Are you ready to give us more color in terms of the percentage of fees that are derived from these digital partnerships and the outlook for next year and beyond?

I think that what we can disclose about is that one thing is clear, is that these digital partnerships and the broadening of our services to our clients becomes more important. So we are diversifying away from net interest income. And in that sense, we either do that by developing new services ourselves, such as a brokerage channel, by setting up fintech ventures ourselves, such as Jolt, or by collaborating with external partners. Now we have close to 200 of these fintech partners. We're very pleased in this case that with Amazon we have an exclusive partnership for their seller portal to provide loans to the sellers that come onto their platform. It's again a sign of strength and the way that ING is perceived also by the strong fintechs in the world as a strong digital player. In the past, people asked us, oh, don't you see the fintechs as a threat? But on the one hand, they can be a threat. On the other hand, they're also good in terms of collaborating to further develop businesses. And in that sense, it also helps us in our ambition of the 5% to 10% fee growth per annum. And this is only a testament to that ambition going forward.

And, Stephen, are you able to put a number around that? Like, are we talking about 5% of total fees right now coming from these partnerships, 10% more than that?

It will be a ramp-up. So with AXA, we started last year. With Skateable, we started two years ago. With Amazon, we started the 1st of July. The first loans are in. And this will be a ramp-up and will become a more important part going forward. Okay.

Thank you.

We have no further questions, sir. Please continue.

Okay. Thank you very much. With that, I would do a wrap-up. One second, please. Yep. So thanks very much for the questions. And to summarize, we continue our efforts to help our customers, employees and society to deal with the effects of COVID-19. At the same time, we continue to work on countering financial and economic crime as it remains a priority, not only in my previous role, but also in this role. The current environment reinforces our belief that we're on the right strategic path. We've seen that now also in the COVID-19 crisis with our digital model enabling us to continue to grow primary customers and keep NRI stable. Loan demand was affected by COVID-19, strong hemorrhages still, however reduced demand, mainly coming from business customers. Pre-provision result was very resilient, supported by our focus on pricing discipline, good fee income and cost control. And risk costs were impacted by substantial collective provisioning in Stage 1 and Stage 2 to reflect worsened macroeconomic indicators. But as I said, the lion's share of that had to do with these indicators. And as a result, risk costs came in well above the through-the-cycle average. When these current macroeconomic indicators remain unchanged, we believe that we have taken the majority and the bulk of the provisioning for this year And for the second half of 2020, we expect risk costs to go down compared to the level in the first half. The Common Equity Tier 1 ratio was strong at 15%. If we compare this to banks that have included a dividend for the second half of 2019 in their capital, our pro forma capital would stand at 15.5%, but we do not intend to include that in capital, but we intend to pay it out as a dividend. and we will come up with an updated capital plan and dividend policy in the third quarter results. We remain very confident that we are well positioned to face headwinds. We have a very stable income base. We have growing fee income, strong capital position, solid funding base, as well as a low Stage 3 ratio. And with that, I thank you very much for your attention, for your good questions, for the interaction, and I wish you a very good day. Thank you.

Ladies and gentlemen, this concludes the second quarter 2020 ING analyst call. Thank you for attending. You may now disconnect your lines.