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.