Ing Groep Nv

Welcome to ING's fourth quarter and full year 2020 conference call. Before handing this conference call over to Steven Van Ryswijk, 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 20F filed with the United States Securities and Exchange Commission, and our earnings prep 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, Steven. Over to you.

Thank you very much, and good morning, everyone, and welcome to our full year 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 tonight, and our new CRO, Liliana Cortan, who joined us as of the 1st of January, and we're happy to have her on board. Welcome, Liliana. At the end of the presentation, we will, as always, have time to take your questions. When we presented our 2019 results a year ago, I don't think anyone expected that the year 2020 would evolve the way it did. 2020 goes into history books due to the COVID-19 pandemic, which presented unprecedented challenges to our employees, customers, and society. And also at ING, we have felt its effects. We continue to support our customers, employees and society during this time, and I'm sure I speak for many of us when I say that with the vaccination programs in the way, we very much look forward to circumstances normalizing again. During 2020, we have taken several actions to further build a sustainable company, and I'm pleased to see an increasing interest and recognition for our strong profile on ESG topics. Our digital model, continues to be a clear advantage as we have added another 578,000 primary customers in 2020 and a number of mobile interactions continue to grow. I'm proud to say this supported us to deliver a strong performance with pricing discipline, good free growth and cost control. The most notable effect of COVID-19 was on lending and deposits. with low lending demand turning historic strong loan growth into a small negative for 2020, while deposit inflow doubled and rates in the euro swap market and non-eurozone countries declined. These factors have put pressure on NRI, which we believe will be alleviated in the normal circumstances. Full-year risk costs were 2.7 billion, or 43 basis points over average customer lending. Around 30% was in stage 1 and 2. driven by IFRS 9 related provisions and management overlays. For 2021, we expect to move close to our through-the-cycle average of around 25 basis points. On asset quality, we have a strong and well-diversified loan book, built through a proven risk management framework, which we did not change under COVID-19. Our strong track record underscores that we are a low NPL bank, also when compared to our Eurozone peers. The CT1 ratio improves from 15.3% to 15.5%, and this almost fully excludes the fourth quarter net profit, as this has been added to the 2.5 billion already reserved for future distributions, in line with our policy. This brings the total amount of reserves for future distributions to 3.3 billion euros. We want to provide our shareholders with a healthy return and will start distribution of this amount with a delayed interim cash dividend over full year 2020 of 12 cents per share in line with the current ECB recommendation. We intend to distribute the remaining amount reserved after September 30th, subject to prevailing ECB recommendations and relevant approvals. Looking forward, when economies recover, we are well positioned to capture growth again as we benefit from our geographical and product diversification. Now let me take you through our full year results starting on slide 4. So when you look at slide 4, here are some highlights of our efforts in 2020 to further build on being a sustainable company. We are pleased to see an increasing interest in the market and that we are recognized for our strong ESG profile. It's an area where we are considered an industry leader, and that's on environmental topics, where we make a difference with our Terra approach, and also the transparency that we provide through our reporting. In 2020, we published our second Terra Update report, which contains targets and progress on our alignment with the Paris Climate Goals in the nine most carbon-intensive sectors. Demand for sustainable finance solutions remained strong in 2020. Aside from the numbers shown on the slide, we supported the issuance of nine social bonds, which included the first COVID-19 link bond in Europe. We further took action to provide support during the pandemic and published our annual human rights update, which included the impact of COVID-19. We revised our remuneration policy, formulated with stakeholder feedback and a strong link between variable pay and sustainable performance. And, We continue our focus on ensuring the right behavior at ING through initiatives such as the assessments of our behavioral risk management team. We are a pioneer in the sector with our own dedicated behavioral risk management team, and in 2020, the team developed Dialogue Starter, and that is a method to further support teams in mitigating behavioral risks. Our strong ESG profile is also reflected in our ESG ratings. In December 2020, CDP confirmed our place on its climate A-list, while MSCI upgraded our rating to AA. Recently, we also received an EEG evaluation from S&P rated us as strong, with a score of 83 out of 100. Slide 5 This slide shows that our focus on a digital, mobile-first customer proposition has benefited us as we saw customers increasingly turning to these channels under COVID-19. The share of mobile-only customers increased in 2020, as did the number of mobile interactions, growing to an 87% share, while also the number of total interactions continued to grow. We also saw this upward trend in our product and services sales, with our digital investment account in Germany, as an example, of how we successfully offer digital and differentiating customer experience. 326,000 new investment accounts were opened in 2020, contributing to 20% growth in the number of investment accounts and 25% growth in assets under management. And customers appreciated the mobile capabilities offered, with the number of trades via the app almost tripling to 45%. Also worth mentioning is that 20% of those new accounts were opened by customers who were new to ING, demonstrating that our digital offering also attracts new customers in a time of crisis, when people could be more inclined to stick to their main bank. This is further evidenced by the fact that our primary customer base grew by 578,000 customers, reaching 13.9 million at the end of 2020. Now on to slide 6, which shows the clear effect of the pandemic on lending and deposits. In normal circumstances, lending is a growth driver for us, with average loan growth exceeding 5% in previous years, outpacing deposit growth. In 2020, COVID-19 changed that picture. Mortgage demands remained, but demand from businesses dropped, driven by delayed investment plans and less need for working capital. Also in our main markets, governments provide direct liquidity support rather than via the banks. Combined with ECB actions such as TLTRO3 and bond purchase programs, a high availability of liquidity made the repricing normally seen in times of crisis more modest. On deposit, we saw a record inflow, as lockdown restrictions and growing uncertainty resulted in shifts from spending to saving. While we managed to steer part of this to investment products, the overall effect is clearly visible. At the same time, the euro swap rates moved further into negative territory, and in response to COVID-19, central banks in non-eurozone countries cut their rates. The pressure from negative rates is not new, but in the past years we successfully countered this pressure and an eye grew. This became more difficult in the second half of 2020, driven by the factors that I just mentioned. we saw added pressure from EVIX translation, which was partially offset by margin discipline and increased charging of negative rates. Under current circumstances, we expect pressure on NI to continue. However, with global progress on vaccinations, a return to normality comes closer, and with that, also more normalized spending patterns and lending demands. I don't want to speculate on timing, but I'm confident that loan growth will again be an effective lever for us, where we will also benefit from our geographical and product diversification. Finally, the conditional TRO3 benefit is not included. As mentioned before, we first need to be virtually certain again that we will meet the eligible loan target growth, and looking at our pipeline, we're close, but it will be tight, as we're also dependent on repayments and cash flow movements. And while an additional 300 million in NRI is certainly welcome, we maintain our risk appetite and margin discipline to avoid trading a short-term NRI benefit for future risk costs or longer-term deferral loans. On slide 7, you can see that despite the pandemic, we realized strong fee growth in 2020. And this growth was partially driven by investment products with an impressive 31% increase compared to 2019. We saw new account openings increasing, reflecting the success of our digital investment solution in Germany, which I mentioned before, and also marketing campaigns in other countries. A higher number of trades in the volatile markets also helped. A significant part of the fee growth can be considered structural, as assets under management grew strongly. Daily banking fees grew 12% year-on-year, and main drivers here were increased package fees at the beginning of the year, and also the introduction of account fees in Germany. With these measures, we countered the impact of a drop in domestic and international payment transactions, especially in the first half, as lockdown measures and travel restrictions were put into place. Though not yet back at normal levels, we have already seen some recovery of the domestic transactions in the second half of 2020, as spending increasingly shifted to online and lockdown restrictions were temporarily loosened. international transactions remain subdued as federal restrictions stay in place. The development of lending fees reflects the low demand from businesses. Overall, in a challenging year, fees grew by 5%, and we remain our 5% to 10% growth ambition, supported by a 5.5% CAGR over the past five years, and the belief that in the normalized circumstances, daily banking fees will benefit from a normalized level of payment transactions investment products will remain at a higher level while lending fees should increase again in line with loan demand from our business clients. On to slide 8. 2020 expenses included $673 million in volatile items, including goodwill impairments taken in the second quarter, as well as provisions and impairments related to the review of activities and measures that we announced so far on wholesale banking, on MAGI, and on the branch networks in our retail countries. Excluding these volatile items, operating expenses were only slightly higher compared to 2019, as our focus on costs almost fully offset contractual salary increases. We continue to review our activities, resulting in the additional measure of reducing our branch network in Belgium, and we are also looking at network optimization in challenger and growth countries. As I said last quarter, The nose of the cost plane needs to come down, and we're not stopping here. However, carefully reviewing the business takes time. We're taking a diligent approach, and we will announce further measures in due course. Slide 9 shows the risk-cost development, with full-year 2020 risk costs coming in at 2.7 billion. Approximately 30% of this is stage 1 and stage 2 provisioning, reflecting on the one hand the workings of IFRS 9, especially in the second quarter when macroeconomic model updates resulted in significant provisioning. In the second half, the improved macroeconomic outlook resulted in releases, which we have largely compensated with management overlays to reflect remaining uncertainty, and we prepared for a possible delay in expected credit losses, which could materialize when the direct government support in our markets roll off. At 43 basis points, we are above are through the cycle average of around 25 basis points, which is a trend we have also seen at our Eurozone peers. In line with our track record, we remain well below the average of these peers. The total amount of loans on which payment holidays were granted remained limited to 19.4 billion, or 2.6% of our loan book. We received only a small number of extension requests, and 93% of these payment holidays have already expired. While so far we don't see a significant deterioration of the risk for loans with expired payment holidays, during 2020, we have conservatively taken additional provisions mainly related to business clients and sectors which we consider higher risk under COVID-19. As mentioned, for 2021, we expect to move close to our through the cycle average of around 25 basis points. If you look at slide 10, that reinforces our strong track records on managing asset quality. Both on average risk costs and stage 3, we are historically well below our Eurozone peers, which is a result of the solid risk management framework we have had in place for a long time. It has been built using our extensive experience and applying lessons we learned during times of crises, such as limiting concentration risk by applying exposure caps. And within these caps, our policy framework sets the standard for our risk appetite. In the current crisis, we benefit from applying this framework with limited and well-structured exposures to inspectors at higher risk under COVID-19. While the current crisis is unprecedented, we are confident on asset quality with a diversified, senior, and well-collaborated loan book, and with our current prudent provisioning process. I want to emphasize this as we often get questions on asset quality And I'm not saying that nothing ever goes wrong, as taking risk is part of banking, but we take calculated risk in line with our risk appetite. And I believe that in the industry, ING is considered to be a bank with good lending standards, and I believe our track record does underscore that. Now, on RE on slide 11. In 2020, the RE was impacted by several factors, such as some sizable incidents, and incentive costs, and COVID-19-related effects on income and provisioning with a CET1 ratio well above our ambition level. We look at RE through the cycle. I've said it many times before. And the lower level in 2020 doesn't mean we let go of our 10% to 12% vision, nor at all. We believe that going forward, our results will be supported by the return of loan growth, further charging for actual accounts costs, and continued discipline on controllable expenses while provisioning levels will normalize. At the same time, we intend to over time reduce the equity level as we take management actions to control RWA, risk-related assets, and intend to bring the CET1 ratio more in line with our ambition level. As for timing, we can control it for parts of these factors, but it also depends on when we will be able to move on from the pandemic and return to normal circumstances. And for CET1 reduction, we need to take into account prevailing ECB recommendations However, our intentions should be clear, which I think they are. As you can see on slide 12, both CET1 ratio and leverage ratio are ahead of our ambitions. Regarding ROE, as I addressed on slide 11, in the current environment it is below our ambition, but with the supporting factors I mentioned, we maintain our ambition and very much intend to continue to provide an attractive total return through the cycle. Our cost-to-income ratio was impacted by factors such as the negative rate environment and regulatory costs. In 2020, some sizable incidentals also affected this metric on both income and costs. To reiterate, cost-to-income remains an important input for our RE. We have the ambition to reach 50% to 52%, and we have supporting factors on both income and on costs. As for dividends, We announced our updated distribution plan last quarter, and after the fourth quarter results, we will pay a delayed interim dividend over 2020 of 12 cents per share, which is in line with the current ECB recommendations. Later in the presentation, I will discuss our other intentions going forward. Now, let me take you through our fourth quarter results, starting on slide 13, and we'll go through this a bit faster. First of all, to keep your attention, but also to allow some time for Q&A. In the fourth quarter, we had another strong quarter on fees. Total income was lower due to, one, pressure on liability margins, two, lower results on foreign currency ratio hedging, and three, a negative effect from currency translation. Sequentially, both NII and fees were up. Total income was lower, including the impact from an indemnity receivable in Australia, which was offset in the tax line, valuations adjustments in financial markets, and hedge ineffectiveness. Then to NII on slide 15. As mentioned earlier, 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 environments. NII, excluding financial markets, was lower year-on-year, reflecting the continued pressure on liability margins, while deposit inflows this year were substantial. We improved lending margins, however lending volumes declined, reflecting lower demand. Year-on-year, the impact from foreign currency was also visible this quarter, with lower interest results on foreign currency ratio hedging, while also the valuation of some foreign currencies had a substantial negative impact. compared to the previous quarter, NII excluding abnormal stable. Overall lending margins improved, and the interest results on foreign currency ratio hedging slightly recovered, countering continued pressure or liability margins. Our net interest margin increased by three basis points this quarter to 141 basis points, and this mainly reflects higher NII including financial markets, and a lower average balance sheet due to the lower average customer lending. As stated previously, NIM is an important metric for the market, but we note that NIM can be impacted by volatile items, so we believe it is better to look at overall NRI development and guidance. Then turn to core lending on page 16. Overall, we saw a slight decrease this quarter, reflecting low demand from business clients, But in retail, mortgages demand remained strong, especially in Germany. However, with some lower lending to businesses, overall net core lending was down by 200 million in retail. In wholesale banking, net core lending in trade and commodity finance was up, reflecting higher average oil prices. In lending, net core lending decreased due to repayments of term loans, including year-end balance sheet optimization, and that we see every year, as well as further repayments of increased utilization of the revolving credit facilities that we saw in March of last year. And overall, this resulted in a total $900 million decline in net core lending. So $200 million in retail, $700 million in wholesale. Net customer deposits increased by 7.8 billion, a level well above the last quarter of 2019, driven by 8.8 billion in higher savings in retail, while the 1 billion decrease in wholesale banking was more in line with previous years. As mentioned before, the negative loan growth is a shift in demand which we don't consider as structural, and we do expect loan growth to return when uncertainty subsides. And, with our geographical diversification, we will be able to benefit as demand picks up, and positive signs of that are already visible in Asia and in the US. Now, onto fees. Both year-on-year and quarter-on-quarter, fee income was up by 5%, driven by another strong quarter in retail banking. Year-on-year retail fees were up with even 19%. And in investment products, Those fees increased with almost 33%, reflecting the increase in investment accounts and number of trades, while daily banking fees grew with 25%, that results from the level of payment transactions, which continued to recover, and the increase of daily banking package fees that we put in place in the first quarter of 2020. The full benefit of this action should become visible, however, when transaction levels return to normal, which we will hope to be the case in the course of 2021. Lower fees in wholesale banking remain driven by lower demand, lower trade and commodity finance volumes, and less activity for our clients in financial markets. Sequentially, retail grew by almost 8%, driven by the same factors as year-on-year growth, while wholesale banking was slightly higher, and higher payment charges offset a decline in lending fees. On slide 18, we look at our costs. Expenses this quarter included $223 million of incidental costs included in volatile items, mainly reflecting provisions and impairments related to measures we announced for wholesale banking, for magging, and our retail bison work. Excluding these incidental and regulatory costs, operating expenses were under control as they were lower year-on-year and stable quarter-on-quarter, as we fully absorbed CLA increases and higher IT expenses. Regulatory costs are seasonally high in the fourth quarter, as it includes the full payment of Dutch banking taxes. The year-on-year increase reflects a catch-up on contributions to the Dutch deposit guarantee scheme due to the strong growth of covered deposits in the first half of 2020. As mentioned, also going forward, we will continue to monitor developments, critically review our activities and expenses, and act when and where needed, and as again, I'm focused on bringing the nose of the cost plane down. Slide 19 shows a risk-cost split per business line. Risk costs were 208 million for the quarter, or 14 basis points of average customer lending, and it is well below the elevated levels of the previous quarters, and also below the through-the-cycle average of 25 basis points. And this amount includes a $430 million management overlay, primarily in stage 1 and 2, which was applied to compensate for a $622 million release, driven by updated macroeconomic indicators, resulting in a net impact of minus $209 million, mainly in wholesale banking. Aside from this allocation of the management overlay, Enrico Bandler's risk costs mainly reflected some additions to individual files, In retail challenger and growth markets, risk costs included a 59 million provision for Swiss franc index mortgages in Poland. In wholesale banking, stage 3 risk costs included some additions to existing stage 3 files. The lower stage 2 ratio reflects the improved macroeconomic outlook, and the stage 3 ratio for the group was stable and remained low at 1.7%. The next slide shows our CET1 development, and that was up 0.2%, reaching a very healthy 15.5%. The CET1 capital was half a billion lower, and that includes the implementation of the non-performing exposure backstop. Except for 2 million, net profit for the quarter was not added to CET1 capital as it was reserved for future distribution. And the CT1 ratio was further distributed by lower risk-weighted assets, mainly driven by lower volumes, a shorter duration in the wholesale banking book, and a better loss-given default profile. And that latter effect was driven by both a reduction of outstandings with a lower coverage ratio in wholesale banking and improved house prices in retail. Market risk-weighted assets were up, mainly due to trim impact exposures as markets normalized while operational risk with it has decreased due to technical updates on our AMA model. Now, and I'm sure you have been waiting for that, we turn to our distribution plans on this slide. 21. As announced last quarter, we have moved to a 50% payout ratio of resilient net profit, and we have adjusted our CQ1 emission to around 12.5%. In line with the distribution plan, we have reserved 1.5 billion euro over 2020, adding to the already 1.8 billion originally reserved for the final 2019 dividend, bringing the total amount reserved outside of capital to 3.3 billion. To align with our current ECB recommendations, we will pay 12 cents per share after publication of this quarter results. We intend to distribute the remaining amount reserved after September 30th subject to prevailing ECB recommendations and relevant approvals. And for 2021, we will reserve in line with our distribution policy. And given current ECB recommendations, payment of debt interim dividend will also be delayed until after September 30, 2021. With a CET1 ratio of 15.5%, there is also room for further distribution, and over the coming years, we intend to bring down our CET1 ratio towards our ambition level of 12.5%. To wrap it up, 2020 was a year that brought unprecedented challenges to our employees, to our customers, and to societies, for which we continue to provide support. Fee growth was good, with an impressive contribution from investment products, and despite COVID-19 impact on payments and lending. Full-year 2020 risk costs were above our through-the-cycle average, but well below our peers, and include provisioning for delay in expected losses, while for 2021, we expect to move closer to our three-year cycle average. We're confident on the quality of our well-diversified loan book and the strong risk management framework we have in place. Our track record, and you've seen it on one of the slides, underscores that we are a low NPL bank. The CT1 ratio improved to 15.5%. In line with the current ECB recommendation, we'll start distribution of this amount with the delayed interim cash dividend over full year 2020 of $0.12 per share, we intend to distribute the remaining amount reserved after September 30th, subject to prevailing ECB recommendations and relevant approvals. And looking forward, and I really want to look forward, when economies recover, we are well positioned to capture growth again as we benefit from a geographical and product and service diversification. And with that, I would like to move to 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. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. Star 1 for your questions and remarks. Go ahead, please. Our first question is from Mr. Robin van den Broeck, Radio Banker. Go ahead, sir.