Ing Groep Nv

Welcome you to ING's second quarter 2021 conference call. Before handing this conference call over to Stevenson Rysway, Chief Executive Officer of ING Groups, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance, and any statements not involving an escargot effect. Actual results may differ considerably from those projected in any forward-looking statement. A discretionary factor that may cause actual results to differ from those in any forward-looking statement is contained in our subject matter, including our most recent annual report on Form 20F 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, Steven. Over to you.

Good morning and welcome to the second quarter 2021 results call. I hope you're all in good health. I'm happy to take you through today's presentation, joined by our CFO, Tanev Putrakul, and CRO, Liliana Chortan. Thereafter, we will take your questions. Key messages. Another quarter of COVID-19 has passed and we see positive signs of vaccinations and economies reopening. However, also the effects of the Delta variant with infections spiking again. Overall, we are moving back to normality, but we're not there yet. We have taken steps on climate change. The situation is not where the world needs it to be and the pressure to transition to a low-carbon economy continues to grow. We continue by financing the transition. We have been doing that by our Terra approach and have upped our ambitions by joining the Net Zero Banking Alliance. If you look at the results and the current circumstances, I am pleased that we show such a stable financial performance. As I said last quarter, looking at the results, you wouldn't think we are in a crisis. And I'm proud of all the hard work by the colleagues, realizing another record quarter in fees, growing our mortgage book, managing the pressure on nai while keeping expenses under control risk calls for a minus 91 million we have released part of the buffer build up in 2020 reflecting an improvement of microeconomic indicators the quality of the loan book remains strong with very limited risk costs for individual files and a lower stage 3 ratio of 1.5 percent overall for 2021 we expect risk costs to be below our through-the-cycle average of around 25 basis points. CETA1 was higher at 15.7, with 50% of the second quarter resilient net profit reserved for future distribution. This brings the total amount reserved for this outside of capital to just over 4 billion, of which we distribute 3.6 billion after September. Now, before we go into this quarter's figures, let me spend some time on a few topics I want to highlight, being a contribution on green transition, our strong performance on fee income, and our distribution plan. The first topic is the transition to a low-carbon economy on slide three. As I mentioned, when it comes to fighting climate change, the sense of urgency and the need to accelerate is clear. Extreme weather is becoming more and more frequent, stakeholders see the need for more action and speed, and the urgency is also clear with policymakers. We fully subscribe to the sense of urgency and have been supporting our clients' transitional efforts for several years by being a pioneer with steering our Terra book or Terra approach and offering innovative sustainable products to our clients. This support has translated into a growing number of sustainability deals with an acceleration visible over the first six months, as we are now already close to full year 2020. This includes a growing number of green bond underwritings for which we have received recognition as ING was named most impressive investment bank for financial institutions on socially responsible investment by Global Capital Magazine. And I'm happy to say that we are accelerating our efforts and have joined the Net Zero Banking Alliance. For two of our terror sectors, we are already on the right pathway. For the other seven sectors, some gaps exist. and we will determine which actions are needed to align the pathway for each sector with the net zero ambition. I believe banks play a pivotal role by financing the transition. However, I also call upon businesses to take actions and upon policymakers to set regulations that are clear on what is green and not. These regulations need to reflect that the transition takes time, and I find it key that also transitional efforts get recognized. that credit is also given to what is not yet green but is moving in the right direction. I see this as a potential weakness in how the green asset ratio is currently proposed. On the other hand, the intentions of the European Commission's revised sustainable finance strategy to incorporate certain positional activities in a taxonomy are encouraging. Slide 4 shows the development of our fee income with an 11% CAGR over the past two years. even with the effects of a lockdown. Investment product fees stand out, with a CAGR of 27%, reflecting growth of accounts, asset management and trades, and this was driven by a growing appetite to invest, an appealing investment proposition, and an elevated number of trades, partly due to the market volatility under COVID-19. Especially in Germany, we benefited from our digital proposition and growth in the number of accounts. In the second quarter, The number of trades was less elevated, resulting in lower related fees. However, with the right number of accounts and assets under management, we have a strong foundation for a structurally higher level of investment fees. Another important contributor were daily banking fees, with a CAGR of 10%. Main drivers were the introduction of new fees in character and growth markets, and the annual increase of package fees in the Benelux. Overall, I'm pleased with the strong performance of our fee business, keeping in mind that this reflects that especially international payments are still at lower levels, with upside potential as we return to more normal circumstances. The same applies to lending fees, which reflects still subdued demand from business clients. And we see further progress for fee income on new property propositions, for increased charging of the cost of operating accounts, and for fees on daily banking packages. Overall, our track record shows we are able to deliver on our 5% to 10% growth ambition, and that ambition stays in place. Now let me now move to slide five. I trust I have your full attention for this, and you're familiar with our distribution policy. As the ECB has announced that they will lift the ban on distribution after September, I am pleased that we can now execute on the policy. And starting with a payout of 48 euro cents on October 12th, or 1.8%. 87 billion, reflecting the 21 euro cent interim over 21 and 27 euro cents for the remaining amount originally reserved for 2020. After September 30th, we will make an additional distribution of 1.74 billion. The exact form is to be decided. This will be in the form of cash and or share buyback. In the latter case, it will be subject to relevant approvals. Going forward, We will over time converse to our C2O ambition. As long as the exit from the pandemic and government support is unclear, we will remain a prudent buffer. Now let me take you through the second quarter results as of slide seven. In the second quarter, total income year on year was supported by strong fee growth. NII included 83 million TLTRO. However, pressure was visible, mainly reflecting lower liability margins. Other income was lower, as the year-ago quarter included several positive valuation adjustments as markets rebounded from the negative impact of market volatility that we saw last year in March. This was partly offset by the 72 million receivable related to the insolvency of a financial institution in the Netherlands a number of years ago. And sequentially, fee income remained at the same high level, while lower NII was primarily driven by lower TLTRO. Onto NRI in slide 18. In previous quarters, we addressed that we see continued pressure on NRI from low interest rates, which as well as the pandemic, which affect the levers that we generally use to counter it. We want to reiterate that swap rates have improved. However, they remain below the five-year rolling average, and we invest in maturities which can range from overnight to over 10 years. And as an example, we could say that we invest 20% of our replicating portfolio every year, so improvement will only come in over time. And we, of course, will benefit from a more steepening yield curve. NII excluding the TLTRO benefit was lower year-on-year, primarily due to discontinued negative interest rate environments, while deposit inflows have been substantial. Lending margins were slightly higher, however, at lower average lending volumes, year-on-year we also saw negative impact from FX currency translation. Compared to the previous quarter, NI excluding TLTRO was slightly lower, impacted by the aforementioned pressure on the liability margins, which was partially offset by higher average lending volumes at higher margins. Now, this higher volume might sound counterintuitive as net core lending decreased this quarter. However, this reflects that the majority of the loan growth in the first quarter came in in March and was therefore not fully reflected of average customer lending for that quarter. Our net interest margin obviously decreased by 10 basis points to 136. This was mainly driven by lower TLTRO benefits, representing six basis points, and the remaining four basis points were due to an increase in the average balance sheet and the liability margin I mentioned earlier. Slide 9 shows net core lending, strong growth in mortgages. Demands for mortgages continue to be strong, especially in Germany, Poland, and Spain. This was the primary driver of net core lending growth in retail, with some growth also visible in consumer and business lending. In wholesale banking, we saw a high level of repayments on term loans and short-term lending in financial markets, resulting in an overall decrease. And net customer deposits was 4.9 billion growth, driven by 7.3 billion of higher savings in retail, and a 2.5 decrease in wholesale banking. And I've repeatedly said that negative loan growth is not structural, and that we expect loan growth to return when uncertainty subsides. There is still, of course, a delta variant, and uncertainty is still there, which means that there might be a delay of return to loan demand, but when the demand returns, with a geographical and poor diversification, we are well positioned to support our customers and capture growth. Now back to fees on page 10. Year-on-year income grew by 18% with growth both in retail and wholesale. retail fees were up 20%, with an impressive 46% growth in daily banking, and this reflects the increase in payment package fees and the recovery of domestic payment transactions, while international payment transactions remained subdued. In wholesale banking, fees were 14% higher year-on-year, as we saw some growth in lending-related fees, including in trade and commodity finance, while also payment fees increased. Sequentially, Retail fees were slightly lower, mainly reflecting a lower number of trades in investment products after a record high in the first quarter. Higher fees involved for banking, primarily reflected daily banking and corporate finance activity. On slide 11, it shows the expenses, which this quarter included 39 million of incidental items, reflecting an IT impairment and some provisions related to measures we announced for retail in the Netherlands. Excluding these regulatory costs and incidentals, operating expenses were under control. Despite the effects from CLA increases, both year-on-year and quarter-on-quarter expenses were lower. Year-on-year, we further absorbed higher IT expenses and some litigation provisions, while quarter-on-quarter we had a slightly higher VAT refund. Regulatory costs were lower quarter-on-quarter, reflecting a seasonally high first quarter. Year-on-year, the increase mainly reflected additional DGS contributions in Germany following the Greensill insolvency, and this included a 30 million catch-up. Going forward, we expect a quarterly impact of around 10 million until the end of 2024, which could be adjusted depending on the conclusion of this insolvency. Unfortunately, we also see some unexpected costs coming in, such as VAT charges on intercompany services following a recent court ruling for one of our peers. We expect to see the impact from this building up over the coming quarters to around 125 million annually, which we will have to absorb over time. Going forward, we will continue to steer for operating expenses to go down. On the measures announced over the past quarters, it takes time to execute, but I'm, however, very positive on the execution and pleased we found new homes for our retail customers in Austria and the Czech Republic in mutually beneficial transactions. Now then to asset quality on slide 12, the risk calls for minus 91 million or minus six basis points of average customer lending. And this includes a 230 million management overlay, primarily in stages one and two, which partly offsets a 492 million release driven by updated macroeconomic indicators. And this resulted in a net impact of minus 262 million with releases in all business lines. Aside from these releases, in retail Benelux, risk costs mainly came from 109 million collective provision in Belgium, reflecting model updates of which 79 million was in stage 3. And we further saw some collective provisioning for consumer lending in the Netherlands. In retail challenger and growth markets, risk costs further reflected collective provisioning for consumer and business lending, mainly in Poland, Germany and Spain, and also banking, stage three risk costs were low, reflecting very limited additions. Both stage two and stage three ratio were lower, reflecting lower ascendings in both stages. And as I said at the start, Looking at the numbers, you wouldn't think that we are in a crisis, and that certainly applies to risk costs. This is not only specific, and I believe that this reflects the support provided by governments, combined with a positive macroeconomic outlook, which could allow businesses to make a quick rebound. However, uncertainty remains, and for that we still keep in place part of the buffer built up over the past quarters, amounting to around 425 at the end of the second quarter. We do believe things are moving in the right direction and that for 2021 our risk cost will end up below our through the cycle average and that is a change in guidance. The next slide shows that our CET1 ratio increased to 15.7%. I'm at slide 13. The capital was higher with 400 million, which included 700 million or 50% of net profit for this quarter. and the other 50% was reserved for future distribution in line with our policy. This was partly offset by foreign exchange impact, an increased MPE backstop, but also lower benefits from the IFRS 9 transitional arrangements. Our RWA has decreased, mainly driven by market and operational risk-weighted assets. The market risk-weighted assets reflected a lower historical VAR, as the vault our quarter was no longer included in the calculations, and lower operational risk credit assets was due to technical model updates. The credit risk credit assets were up, driven by model impacts, primarily reflecting the final three impacts, so this is it for the trim, and this was partly offset by an overall improved collateral profile of the loan book. Remaining regulatory RWA inflation is very manageable at around 30 basis points. Now, as you can see on slide 14, the CT1 ratio is well ahead of the ambition. On RE, it is below our ambition, but we already have seen an improvement versus the previous quarter to 11.2% for this quarter. With more efficiency on cost and capital and with growth returning, we maintain our ambition and very much intend to continue to provide an attractive total return. And to reiterate, cost income remains an important input for our return on equity. We continue to work on our ambition of 50% to 52%. And as for distribution, we have currently an amount just over €4 billion reserved outside of CT1 Capital, with an announced €0.48 to be paid out in October 2021. To wrap it up, the highlights of the quarter. First of all, we subscribe to the sense of urgency to transition to a low-carbon economy and we contribute to that by financing the transition. We have been doing that by steering our loan book with our Terra approach and we have upped our ambitions by joining the Net Zero Banking Alliance. Looking at our results, these are good. This quarter we managed to realize another record quarter in fees to grow our mortgage book and to manage the pressure on net interest income while we kept expenses under control. Risk costs, they came in at minus 91 million. We have released part of the buffer built up in 2020, reflecting an improvement of macroeconomic indicators, but still maintaining a buffer of around 425 million. The quality of the book is evident, with a lower stage 3 ratio of 1.5%, and for 2021 we expect risk costs to come in below our through-the-cycle average. CD1 ratio was higher at 15.7%, with 50% of the second quarter resilient net profit reserved for future distribution, bringing the total amount reserved outside of C2-1 capital to just over €4 billion. And as the ECB has lifted the restrictions, as you know, on distribution after September, we will pay an amount of €1.87 billion, or €0.48 per share, on October 12th. After September, we intend to make an additional distribution of €1.74 billion, in the form of cash and or a share buyback with a letter subject to relevant approvals. And that concludes the presentation. Now on to our questions.

Thank you, sir. We're starting the question and answer session now. If you have a question or remark, please put 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 or remarks. Go ahead, please. Our first question is from Mr. Benjamin Goy of Deutsche Bank. Go ahead, your line is open.