Ing Groep Nv

I'm Patricia Krothoff, welcoming you to ING's third quarter 2020 conference call. Before handing this conference call over to Steven Van Rijswijk, 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 any historical facts. 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 20F, filed with the United States Securities and Exchange Commission. And our earnings press release, as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Stephen. Over to you.

Thank you, Patricia, and good morning, everyone, and welcome to our third quarter 2020 results call. I hope you're all in good health, and I'm happy to take you through today's presentation. I'm joined by our CFO and interim CRO, Tanev Putrakul, as well as Karsten Wolters, 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. The third quarter of 2020 was another quarter marked by the COVID-19 pandemic and we continue to support our customers, employees and society during this time. We also continue our efforts to increase the effectiveness of our KYC activities and are pleased that these efforts were recognized in Italy and we can again welcome new customers. There are a couple of key points I want to make today. Our digital model continues to be a clear strength. as we added another 213,000 primary customers, and the number of mobile interactions continued to grow. It also supported us to deliver a strong performance this quarter, with pricing discipline, solid fees and cost control, resulting in a resilient pre-provisioned profit, excluding volatile items. Risk costs were markedly lower than last quarter, despite taking a 552 million management overlay to reflect remaining uncertainty and delay in potential credit losses. As the external environment remains challenging, we keep our focus on managing the company through these times and are taking steps to maintain our strong performance. Our margin discipline and risk appetite remain unchanged while we take steps to focus our activities. At this point, we are announcing adjustments in two areas. In wholesale banking, with a focus on our core clients and where we need to be to service them. And secondly, in the challenger and growth markets, we focus on how to best fulfill our ambition of scalability and being end-to-end digital with more certainty of execution. The CET1 ratio improves from 15% flat to 15.3%. This excludes the 1.8 billion dividend reserve for 2019 and also excludes this quarter's net profit. This quarter's profit has been fully reserved for future distribution, reflecting our new distribution policy. With this policy, we are moving to a payout ratio of 50% of resilient net profit. We have adjusted our long-term CET1 ambition from around 30.5% to around 12.5%, reflecting lower capital requirements and more visibility on regulatory RWA impact. This implies a management buffer of around 200 basis points. As long as high uncertainty due to COVID-19 pandemic remains, we will manage CDP1 above the 12.5% and gradually we'll move it to the 12.5%. I'll come back to our capital ambition and adjusted distribution policy later in this presentation. Slide three, shows that also in the current environment, we keep growing our primary customer base, benefiting from the digital experience we offer to our customers. On an annualized basis, the number of mobile interactions is further increasing to an 87% in total interactions. And this underscores my belief that our digital mobile first strategy is the right strategy and our ambition to keep transforming into a data-driven digital bank remains firm. Having said that, with the current external environment, we do feel the need to refocus some of our activities. In wholesale banking, we increase the focus on core clients and simplify our network by closing the offices in South America and some offices in Asia. Core clients will continue to be served from regional hubs in New York, Singapore, and Hong Kong. In our general and growth markets, the focus has resulted in the decision to significantly reduce the scope of our MEGI program, a program that was launched to provide a standardized customer experience and integrate the product offering in four of our challenger countries. Effectively, the reduced scope means we stop the complex and costly cross-border integration of systems and products. And these actions will have an impact on our employees with a reduction of around 1,000 employees by year-end 2021 for which a redundancy provision will be taken in the next quarter. Going forward, we will continue to take a critical look at our activities and our cost base while we keep the focus on our strategic priorities. As you can clearly see, we do this bite size because I want to have execution certainty. Now onto the next slide. DECA driven digital leadership to offer our customers a differentiating experience remains a strategic priority. It is about scalability on the one hand and end-to-end digitalization on the other. And we do this by a number of points. The first point, by rolling out a first-class customer engagement layer using and combining mobile app components. This results in a continued expansion of the customer base with access to our improved digital channels. And all of our retail customers in the Netherlands and Germany are using the one app, one web channels. And in Belgium, almost all our private customers have been onboarded. When this is completed, we will have achieved almost all milestones and 80% of the cost savings of our Unite program. Two, when you look at the middle layer of the slide, that's the purple layer, we will roll out global products and services in insurance, in investment products, and in consumer lending. And on the right side of that middle layer, you see the local products and services which we will continue to build in a modular way. And that's also end-to-end digitalization locally. The complex and costly cross-border integration of local systems and products under the MEGI program will therefore be discontinued. And the third point is that our digitalization journey is enabled by the foundation that we've built over the years. And you see that at the bottom part. And this foundation allows us to use and reuse building blocks throughout ING worldwide and can be applied in the development of local products and services, as well as to the rollout of cross-border platform initiatives, such as the collaboration and cooperation with AXA on insurance products. As a digital leader, we continue to move towards an efficient, easy customer platform that caters for our own and third-party products and services. On slide 5, you can see that over the years we have been able to grow our NII in a low-rate environment. Please note, 2020 is annualized and is not guidance. As you know, we have five levers we apply to support and grow NII. One, loan growth. Two, margin discipline. Three, charging on accounts to counter negative rate environments. Four, our diversification in non-neurozone countries. And five, changing of the asset mix. On loan growth, I want to say that we are not willing to compromise on lending standards and on margins. However, we benefit from our geographical diversification and we see loan demand already improving in the U.S. and in Asia. In Europe, demands remain subdued. However, we continue to be committed to support our customers and the wider community. On deposits, we are increasing the charging of negative rates in the Eurozone, and in non-Eurozone countries, we have lowered deposit rates to counter the effect of significant local central bank rate reductions. We aim to change the lending mix to areas with higher margins, also within risk appetite. As you can see, we are successful and growing our fee base by increasing daily banking fees and introducing behavior fees. As you will see later in this presentation, we have managed to keep the pressure on NRI Limited, while we have not yet included the conditional benefits from TLTRO3 and have absorbed significant negative EVIX impacts in the third quarter of 2020. Please note, we remain confident that we will meet the TLTRO threshold. In light of the current environment, wherein rates have gone more negative and we see low demand for corporate lending, we expect continued pressure on NRI in the coming quarters. And this means that we will need to build on our good momentum on fees and apply strong focus and discipline on costs, which I said already in the previous quarter. Turning to slide 6. As mentioned, we retain the same risk appetite and focus on a high-quality loan book proven also by a strong track record, with low risk costs for the cycle compared to our Eurozone peers. Looking at the numbers for this quarter, these came in well below the second quarter, despite taking in 552 million management overlay. This overlay reflects increasing uncertainty with the second wave of COVID-19 coming in and a delay in potential credit losses as support from governments and payment holidays phases out. This overlay consists of two parts. The first part of the overlay offsets the effect of a 380 million release that would come by reflecting the updated macroeconomic indicators in our models. And like I said last quarter, that would mean that a bad quarter will roll off and a good quarter will come on, but we've offset that impact. The second part of the overlay was furthermore applied to increase provisions for loans that are still subject to a payment for a day. The total amount of loans on which payment holidays were granted remained limited to almost 20 billion, or around 2.6% of our loan book. With almost 6 billion already expired, we have around 14 billion remaining, of which the large majority will expire either by the end of this year or in the first quarter of next year. And while we don't see a significant deterioration of the risk for loans with expired payment holidays, we have conservatively taken taking additional provisions, also reflecting business customers in sectors which we consider higher risk under COVID-19 and the uncertainty the second wave and structured lockdown measures may bring. Slide 7 provides an overview of what we've done to strengthen our management of compliance risk, which continues to be a top priority. We have taken steps to implement one global approach to how we manage our Know Your Customer activities. And this list is obviously not complete, but shows some major areas where we have taken steps. And I would like to highlight the rollout of some global tools for adverse media screening and pre-transaction screening, several digital solutions that we've developed to improve the effectiveness and efficiency of our KRC activities, such as machine learning to detect when transactions are being broken up in small parts in an attempt to avoid raising alerts, and we call that smurfing, And last but not least, and I'm actually proud of that, we also were the first in the sector to put a team in place with people with a psychology degree that are purely focusing on ensuring the most effective behavior and getting groups to work well together with learnings from these assessments, these behavioral risk assessments, then to be applied across the entire organization. Because in the end, it's not only about governance and processes, but also about behavior. That will make us much more effective. As we said before, as a bank, we have a responsibility to manage our compliance risks. At the same time, in order to maximize our effectiveness as a gatekeeper, close collaboration with other banks, supervisors, and also law enforcement agencies is key. We need to be able to share transactional data to receive more feedback on suspicious alert reports and to have a common approach across countries on KYC-related regulation and supervision to become more effective as a society. We are pleased to see an increasing awareness on this topic with action plans presented by the Dutch government and by the European Commission. We are part of initiatives to collaborate with other banks on transaction monitoring in the Netherlands and Belgium. And although these are complex matters which will take time to realize, things are moving in the right direction. Now, let me take you to the third quarter results, starting on slide nine. In the third quarter of this year, income was lower both year-over-year and quarter-in-quarter, largely due to an impairment on our equity stake in TNB, mainly reflecting the deteriorated macro environment in Thailand. Excluding this impairment, lower income compared to the previous year was mainly driven by pressure on liability margins and lower results on foreign currency ratio hedging, reflecting lower interest rate differentials as local central bank rates in non-eurozone countries were significantly reduced. And actually that is the largest part of the decrease comes from these foreign currency ratio hedging differentials. Sequentially, excluding the impairment of TMB, income was 155 million lower. And this reflects the lower client activity in financial markets compared to the previous quarter and lower income in the corporate line. Again, including the lower results on foreign exchange ratio hedging, partially compensated by the annual dividends received from Bank of Beijing. Pre-provision results excluding boy photo items and regulatory costs was resilient. Next to the revenue differences I just talked about, The change compared to the third quarter of last year claimed from a VAT refund we received in that quarter, as well as CLA increases that came in in this quarter in loan costs. Compared to the previous quarter, the result next to the revenues was also impacted by slightly higher costs driven by redundancy and legal provisions. If you would take those legal provisions and redundancy costs out, the operational costs this quarter were lower than last quarter. Onto NII on slide 10. As mentioned earlier in the presentation, we have seen some pressure on NII from the current market conditions, which affected the levers we generally use to counter the impact from the low rate environment. NII excluding financial markets was lower year-on-year, reflecting the continued pressure on liability margins, while the positive inflows this year were substantial. We kept lending margins stable, however lending volumes declined, reflecting the currently lower demand, especially in wholesale banking. The impact from FX was significant this quarter. Interest results on foreign currency ratio hedging was significantly lower, driven by local central bank rate reductions in non-eurozone countries, while also the devaluation of some foreign currencies had a substantial negative impact. Compared to the previous quarter, NII excluding financial markets was 2.9% lower. Overall lending margins improved, however, pressure came in from the aforementioned reasons. To emphasize, we continue to focus on pricing discipline, which will benefit us in the future, and we may increase the benefits from negative rates charged on deposits. In addition, we did not book the conditional benefits from TLTRO3 yet, however, we remain confident we will meet the threshold. Our net interest margin decreased by 6 basis points this quarter to 138 basis points. This was mainly driven by a higher average balance sheet reflecting our TL303 participation and that was partly offset by lower average customer lending. The overall lending margin improved. However, pressure on liability margins continued and NII in the corporate line was lower. As stated previously, While NIM is an important metric for the market, we note that NIM can be impacted by volatile items as we've seen this quarter, so we believe it is better to look at overall NRI development and guidance. Turn to net core lending. As mentioned, loan demand dropped this quarter, especially in the corporate segment. In the current environment, we're observing that companies delay investments and need less working capital, while also demand has been met through direct governmental support schemes. We do see some divergence in circumstances between Northern and Southern Europe. In Northern Europe, governments have provided more direct support through tax deferrals and wage support, also reflected in generally low additional uptake of government guaranteed bank loans. Meanwhile, in Southern Europe, bank lending is the main support channel for companies. Specifically for Netherlands, our largest market, companies were able to adjust their cost base by reducing the number of temporary workers especially in sectors such as hospitality and tourism. In this context, overall for the third quarter, net core lending was down by 6.9 billion. In retail, net core lending grew by 1.1 billion, driven by mortgages, with growth mainly visible in Germany. In wholesale banking, low demand was visible with 8 billion reduction in net core lending, and that was mainly driven by further repayments of the COVID-related increased utilization of revolving credit facilities and lending, i.e. the emergency lending that people took, as well as some repayments on term loans. In daily banking and trade, the decline mainly reflects the impact of low oil prices in trading commodity finance, NFX. Net customer deposits increased by 3.4 billion. This level is comparable to previous years. However, in the third quarter, this was composed of higher savings in retail, reflecting continued uncertainty. In wholesale banking, we saw a net outflow, also reflecting repayments of protected drawings in the first quarter, which had been placed as deposits. As mentioned, the negative net loan growth is a shift in demand, which we don't consider structural, and we expect loan growth to return when uncertainty subsides. And with our geographical diversification, we will be able to benefit as demand picks up, with the first positive signs visible in Asia and the US. Now, on to fees. Year-year income fee income was higher when adjusted for the reclassification of financial markets last year, with impact from COVID-19 visible in how different product categories developed. If you look at retail banking, fees were 5.5% higher, again driven by investment product fees, with a continued higher number of trades to benefit from market volatility. In daily banking, fees were lower year-on-year, although payment transactions increased following the relaxation of lockdown measures, but these have not yet returned to normal levels yet. The increase of daily banking packages in the first quarter of this year has absorbed part of this impact, and the full benefit of the action that we took should become visible when transaction levels return to normal. Lower fees in wholesale banking were mainly driven by lower demand, lower TCF volumes and less activity in financial markets. Sequentially, fees were 1.5% higher. Retail grew by 4.1% as some recovery in the number of domestic payment transactions was visible in daily banking. Fees on investment products were at a slightly lower but still high level. In wholesale banking, lending fees were higher due to the closing of several syndicated deals for the quarter. Overall fees in wholesale banking were down, reflecting less activity in financial markets. Year-to-date fees grew by 5%, so this meets our ambition level and under the current external circumstances I find this a great achievement as it shows how well we adapted and have been able to diversify our income streams. Moving to the next slide. Expenses this quarter include a $114 million impairment on capitalized software driven by the changed scope of our MAGI program. Excluding KYC and regulatory costs, as well as dis-impairment, expenses were up by 25 million year-on-year, or 1.1% as this quarter includes CLA increases, while the third quarter last year included a significant VAT refund. Quarter on quarter, most segments reported lower operating expenses. Overall expenses, excluding KYC, regulatory costs and impairments, were 20 million higher, but this includes 37 million in provisions. KYC-related costs were comparable to the previous quarter. As we work to become more effective and make progress on our fire enhancement, these costs are expected to plateau in 2020, we said it before, but now somewhat below the initially expected run rate of 600 million for the year. Regulatory costs were slightly up year-on-year and lower sequentially, which included a catch-up on contributions to the Single Resolution Fund. As stated earlier in the presentation, with a challenging external environment, we've taken steps to refocus our activities with adjustments in wholesale banking and to the MEGRI program, reflecting a reduction of around 1,000 FTEs by the end of 2021. Going forward, we will continue to monitor developments and I will continue to critically review our activities and expenses and act when needed, while making sure that we're able to execute. Slide 16 shows the risk-cost split per business line, which in the third quarter came in at 469 million, or 30 basis points on average customer lending, and is well below the elevated level of the previous quarter. As explained on slide 6, this includes a 552 million management overlay, primarily in stage 1 and 2, consisting of two parts. And this was applied to compensate for a $380 million release driven by updated macroeconomic indicators and, the second part, an increase in provisioning for payment holidays. The resulting $172 million impact on risk costs, i.e. minus $380 plus $552, was allocated to the segments with $105 million in retail Benelux, $53 million in retail CNG, and 14 million in wholesale banking. Aside from the allocation of the management overlay, in retail Benelux, risk costs mainly reflected some additions to individual files amid corporates. In retail challenger and growth markets, risk costs predominantly reflected higher collective Stage 3 provisioning, mainly visible in Australia, Romania, Germany and Poland. In wholesale banking, Stage 3 risk costs were significantly lower than the previous quarter, with some additions to existing Stage 3 files with while new inflow of new clients was limited. The Stage 2 ratio was slightly higher, at 7.6%, as we conservatively moved more exposures to Watchlist. To reiterate, Stage 2 is not a waiting room for default. It implies that credit risk on individual exposure is monitored more closely, not that this exposure is expected to default. When credit risk is no longer deemed decreased, the exposure moves back to Stage 1. The stage 3 ratio for a group was slightly higher at 1.7%, but still low I would argue, and when excluding TLT03 from credit outstandings, the stage 3 ratio was stable at 1.8%. The next slide shows our CET1 ratio development, which was up by 0.3%, reaching a very healthy 15.3%. CET1 capital was 0.4 billion lower, mainly driven by negative and fixed impact from the devaluation of the US dollar and the Turkish lira, while net profit for the quarter was not added to capital as it was fully reserved for future distribution. The CT1 ratio was further supported by 9.9 billion lower RWAs, mainly driven by 10.5 billion of lower credit RWA, primarily due to a VIX impact and lower volumes. We also saw some impacts from positive risk migration, which might feel counterintuitive in these times, and it was primarily driven by a reduction of ascendings with a lower coverage ratio resulting in a lower level of required RWA. Market RWA was down mainly due to lower exposures as markets normalized while operational RWA increased due to technical updates to the AMO model. Turn to our capital update on slide 16. During 2020, we have seen several developments which have contributed to the decision to lower our long-term CO2-1 ratio ambition from currently around 13.5% to around 12.5% going forward. This adjustment is mainly driven by a reduction of capital requirements in the quarter 2020. This was partly driven by the COVID-19 pandemic, and here we can expect buffers to come back, but part is also structural, such as under Article 104A under CRD 5, which was pulled forward. For the CRD 5 lovers amongst you, Article 104A. Also during 2020, we've taken the RWA impact of the definition of default, as well as the majority of the trim exercises, so now we have a better visibility on the remaining expected regulatory RWA inflation. Our long-term around 12.5% emission implies a management buffer of approximately 200 basis points on our current strep requirements, higher than our previous management buffer of 170 basis points, reflecting uncertainty on that part of the capital buffers that may come back. Given the current uncertainty caused by COVID-19, we'll manage the short-term CET run ratio above 12.5% until there's more clarity, and then we will move to the 12.5%. On to slide 17, which shows our distribution policy. As we've always said, we aim to offer our shareholders a sustainable and attractive return. And in March of this year, we suspended our dividend policy following ECB recommendation and did not accrue for dividend in the first half of 2020, while we kept the 1.8 billion dividend reserve for 2019. Our previous progressive dividend policy did not fit with the pro-cyclical impact of IFRS 9, and related volatility. We now announce our new distribution policy, which consists of a payout ratio of 50% of resilient net profit to be paid out in cash or a combination of cash and shareware purchases with the majority in cash. We have reserved this quarter's full net profit for dividends, while the 1.8 billion dividend reserve over 2019 remains reserved for distribution to shareholders when and how to be determined. we will also periodically look at returning structural excess capital. To be clear, any dividends or capital distribution is subject to prevailing ECB recommendation. As you can see on slide 18, both the CET one ratio and leverage ratio remained ahead of our ambitions. Regarding ROE in the current environment, it is below our ambition and we very much intend to continue to provide an attractive total return and we look in that to add businesses through the cycle. we believe our businesses should aim to cover at least our cost of capital. As mentioned in the previous quarters, our cost-income ratio was impacted by factors such as the negative rate environment and regulatory costs. This quarter also impairments affected this metric in both income and costs, but corrected the 3Q20 cost-income ratio was 57.7% on a four-quarter rolling basis, and for the quarter it was 54.8%. To reiterate, cost income is not how we run our business, but it remains an important input for our ROE and we have an ambition to reach 50% to 52% as we further digitalize. We have taken steps to refocus our activities and also going forward, we will critically review expenses and with execution certainty. As for dividends, we have just provided you with an updated distribution plan. To summarize, as a wrap-up, We continue efforts to help our customers, employees and society to deal with the effects of COVID-19. At the same time, countering financial and economic crime remains a priority. The current environment reinforces our belief that we are on the right strategic path with our digital model enabling us to continue to grow primary customers and mobile interactions. Loan demand was affected by COVID-19, but still strong in mortgages. However, we saw reduced demand, mainly from our business customers, compared when the lending went up at the end of the first quarter with the emergency drawings. Pre-provision results proved resilient, supported by focus on pricing discipline and cost control. Risk was sharply decreased, especially in stage three, while we further increased collective provisioning in stage one and two to reflect remaining uncertainty and a delay in potential credit losses. With increasing uncertainty, we keep focus on margins and asset quality and we also take a critical look at our activities, leading to some adjustments in the organization. The CET1 ratio was strong at 15.3%. We announced our capital update with a reduced CET1 ratio ambition of 12.5%, and given the current uncertainty, we will manage our CET1 ratio currently above, but after the uncertainty subsides, around that 12.5%. And finally, we have adjusted our dividend policy to a 50% payout ratio of resilience and profit. Thank you. And I will now open the floor for questions.

Thank you, sir. Ladies and gentlemen, we're starting the question-and-answer session now. If you have a question or remark, please press star 1 now on your telephone. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. Star 1 for questions or remarks. Go ahead, please. Our first question is from Mr. Boisneau. Petrach, Kepler-Chevreau, go ahead, please. Your line is open, sir.