Ing Groep Nv

Hi, good morning. Shall we start?

Okay, sir. Just a sec now. Good morning. This is Patricia Cross of Noctum welcoming you to IMG's first quarter 2022 conference call. Before handing this conference call over to Steven Van Rijswijk, Chief Executive Officer of IMG Group, 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 statement not involving 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 filing. 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, Steven. Over to you.

Thank you very much, operator. Good morning and welcome to our first quarter 2022 results call. I hope you're all well. I'm joined by our CFO, Tanay Putrakul, and our CRO, Liliana Chortan. And I'm pleased to take you through today's presentation. After that, we will take your questions. For the first time in two years, I started this presentation by saying that from a COVID perspective, circumstances seem to be normalizing, which is positive. However, challenges remain with the invasion of Ukraine, which is adversely affecting people, including our colleagues, as well as already high energy prices and disruptive supply chains. Under these circumstances, we help colleagues to safely relocate and manage the risk of our risk-related exposure. At the same time, we focus on our strategic priorities by financing the green transition and improving our digital channels. And we continue to deliver value. This was reflected in a higher pre-provision profit, driven by resilient NII, higher fees and lower costs, as well as a healthy return for our shareholders, with a final cash dividend of 41 cents and a 1.25 billion additional distribution announced today. On NII, after years of counter-reliability pressure, with the current yield curve we have reached the point that this pressure is turning into a tailwind. Mortgage loans continued to grow, while in wholesale banking we saw repayments of short-term TLTRO facilities. On fees, we recorded a strong 9% year-on-year growth, mainly visible in daily banking and lending. Investment products remained at a high level. Costs were lower both year-on-year and quarter-on-quarter, despite inflation. Risk costs were elevated at €987 million. mainly in stage 2, driven by actions we took on our Russian portfolio, comprising 84% of risk costs. We have reduced that exposure over the past two months by almost 1 billion. The stage 3 ratio was lower at 1.4%, and we remain confident on the quality of our loan book. The C to 1 ratio declined to 14.9%, mainly driven by RWA growth, primarily for Russia-related exposure, and Dutch mortgages. And before we go to the quarter's figures, I will spend some time on our pre-provision profit and highlight our efforts to finance a green transition and to improve our mobile channel. Our pre-provision profit was up 14% year-on-year and 9% quarter-on-quarter. A strong start to 2022 and I'm particularly happy that all key P&L lines contributed. NII excluding TLTRO, was up on both comparable quarters, which is a meaningful signal in the context of the liability pressure of the past years. With the yield curve normalizing, we can reinvest our replicating portfolio in more positive yields. And as we always said, the effect will come in over time. However, over 2021, we had approximately 600 million drag from negative rates. That drag has now disappeared. excluding TLTRO, we expect NII to be up in 2022. At the same time, ECB has not yet increased rates, so for now negative interest rate charging remains in place, with the current contribution of 300 million for the full year. With inflation higher for longer, the ECB looks set to start normalizing monetary policy in the summer. The timing is difficult to predict, but we expect the ECB to have ended net asset purchases and negative deposit rates before year-end. In non-Eurozone countries, central bank rates have already gone up, most notably in Poland, and we again see the benefit of geographical diversification. The fast increase of rates impacted lending margins this quarter, as client rates generally track higher funding rates with some delay. Also, with low rates, NII was supported by a high level of prepayment penalty income, which tend to return to more normal levels when interest rates go up. Going forward, the yield curve development will be supportive of NII growth. On fees, we had a strong 9% growth year on year, and also on the current higher fee level, we maintain our ambition of 5% to 10% annual growth. Operating costs were 2% lower year on year, and 4% lower quarter-on-quarter, despite inflationary pressure, which was mainly visible in salaries in some other countries. Although higher inflation seems to continue, we maintain our commitment to keep costs at least flat. One of our strategic priorities is to finance the transition to a low-carbon society, and additional steps taken are shown on slide four. This transition is a necessity, and for us it is also a business opportunity. In power generation, we have been focusing on a transition since 2015, where we shifted away from fossil fuels and towards renewable energy. Our efforts are visible in the growth of the portfolio, doubling over the past five years, while fossil fuels almost halved. Going forward, we aim for faster growth of new renewable energy loans to a 50% higher level by 2025, At the same time, we will not finance new dedicated oil and gas fields. Also in retail, we have taken steps to help customers become greener with the launch of a green mortgage in the Netherlands. I'm proud that our expertise is recognized also by our clients, such as Vodafone Ziggo, whom we supported in their sustainability-linked bond as a debut one, and also by external organizations with two green transactions receiving awards in their respective categories. On slide 5, we focus on another strategic priority, which is our digital journey. The importance of the mobile channel continues to increase, and it is positive as expanding our mobile offering both improves customer experience and reduces cost to serve. And this slide demonstrates that approach to digitalization with a focus on more incremental projects with higher execution certainty rather than large multi-year projects. The examples show expanded digital capabilities for our customers, which help the top line as our customers take up more services. And at the same time, we invest in digitalizing processes to both improve efficiency and customer experience by a higher first-time ride and shorter time to yes. As a proven example, two quarters ago I mentioned digitalizing the Dutch mortgage process, where we reduced our time to yes, and as the process became more efficient, it also allows us to handle higher volumes when needed. A similar story we have on our investment offering in Germany, starting some years ago when we launched a fully digital process to open investment accounts. This resulted in continued high growth, with the number of new investment accounts opened in the first quarter at 121,000, of which one-third customers are new to ING. And I'm happy we also received recognition from our customers, with good MPS scores and this quarter being named Best of Preferred Bank in Germany and Poland. As part of our digitalization strategy, we selected 60 main processes for which we will maximize the end-to-end digitalization. And we will elaborate on this during our investor day on June 13, which I hope you will join in person here in Amsterdam or otherwise virtually. And let me now take you through our first quarter results starting on slide seven. Year-on-year NII excluding TLTRO benefit was up 1.6%, benefiting from higher results in Treasury and financial markets and higher lending volumes. We saw some pressure on lending margins, reflecting a delay in tracking higher funding rates. NII went up 1.3% quarter-on-quarter, again supported by Treasury and financial markets, while we saw the pressure on liabilities starting to turn into a tailwind, partly offset by a lower level of prepayment penalty income on mortgages. Our net interest margin was stable at 130 basis points as the higher NLI was offset by a higher average balance sheet. Slide 8 shows net core lending growth. In retail, mortgages were again the primary driver of growth, but also some growth in business lending. Mortgage demand was strong in Germany, but also Australia and Spain. In wholesale banking, loan growth was affected by repayments on TLTRO, eligible deals, mainly on short-term facilities in financial markets. When we look at the pipeline, we see size demand is there, so we're positive on loan growth in wholesale banking. However, given a higher level of microeconomic uncertainty for 2022, we expect this to be below our 3% to 4% growth ambition. Net customer deposits growth was minus 700 million. In retail, it came down by 7 billion, mainly due to an outflow in Germany following the introduction of negative rates per November 21. Holster Banking recorded a seasonal inflow of $6.3 billion. Then turning to fees on page 9. Year-on-year fee income grew by 9%, with growth in both retail and wholesale. Retail fees were up 6%, with an impressive 26% increase in daily banking fees. And this reflected growth in primary customers, the increase in payment package fees, and a recovery of the level of domestic payment transactions back to pre-COVID levels, while international payment transactions still have room to grow. In investment products, fees were lower, although still at a consistent high level, as the year-ago quarter was a record quarter in terms of brokerage trades. In wholesale banking, fees were 17% higher, with lending as the main driver, reflecting a higher number of syndication deals. Sequentially, retail fees were 1% higher driven by investment products. In wholesale banking, fees also up 1%, mainly reflecting higher fees in lending, offset by a lower level in financial markets and corporate finance, following a peak in the previous quarter. Slide 10 shows expenses. Excluding regulatory costs and incidental items, operating expenses came down. Year-on-year, these costs were 2.1% lower, mainly reflecting lower FTE and lower IT costs, which more than absorbed higher salary costs driven by CLA increases and indexation. Quarter-on-quarter costs were 4.2% lower, that's lower marketing and performance-related expenses, while costs in the fourth quarter tend to be seasonally higher. Regular regulatory costs were up, Year on year, this mainly reflected a higher contribution to the European Single Resolution Fund. Quarter on quarter, the increase is explained by the full payment of the annual contributions to the SRF and Belgian DES in the first quarter of each year. This also applies to the annual Belgian bank tax, while the fourth quarter included the annual Dutch bank tax. There were no incidental cost items this quarter, and I'm pleased with the development of operating costs, also as we see some effects of measures taken so far. At the same time, we also need to look forward, and we will invest in areas where we can get the best return. Then on to risk costs, which were 987 million, or 62 basis points of average customer lending. This level is mainly driven by 834 million or 52 basis points of provisioning in wholesale banking related to Russia. It was predominantly in stage two for rating migration following the sovereign grant grades for stage migration as we have transferred clients to Watchlist and for a management overlay. In stage three, the Russia-related inflow was limited to 71 million as the book generally remained performing. Furthermore, We booked 178 million, reflecting updated macroeconomic indicators, and released 124 million in sector overlays, which were taken in previous quarter for vulnerable sectors during the pandemic. Aside from these movements, risk costs were limited. In Rita Benelux, risk costs included a release following the expiration of payment holidays, while in challenging and growth countries, risk costs reflected collective provisioning, mainly in Germany, Poland, and Spain. In wholesale banking, stage 3 risk costs included limited additions to both new and existing files. Finally, stage 2 ratio was up, reflecting the aforementioned additions, while the stage 3 ratio went down to 1.4%. And regarding potential spillovers of the situation in Ukraine, we see eurozone economic growth impacted and expect inflationary effects to stay longer. While we don't expect a recession, a stagflation scenario is a possibility. We're closely monitoring our loan book and engaged with our clients. However, so far, we have not observed a meaningful impact on credit risk. Slide 12 provides some details on our Russian-related exposure as of 30 April. Since the end of February, we have reduced our Russian exposure by 900 million and continue to bring this down. Of this amount, 1.3 billion is onshore, with 200 million covered by European parent guarantees, and part of the remaining exposure is central bank deposits. Our local capital is 100 million, and we have no internal guarantees outstanding. 4.5 billion was offshore, with 1.2 billion covered by ECA and CPRI, which is the outstanding amount. Undrawn committed facilities are 700 million, and notional hedge exposure is 600 million, which is related to client business. Our financial markets colleagues did a good job over the past two months reducing the amount, and we work to reduce this further. As mentioned, we've taken 800 million loan loss provisions, which reflect capital impact from expected losses, while RWA impact reflects unexpected losses. RWA on our Russian exposure has tripled in the first quarter, reaching 13.3 billion. So at 12.5%, this is equivalent to a 1.7 billion capital impact. So combined with the risk cost, this amounts to 2.5 billion of potential impact already included in CET1 capital. And our focus remains on reducing Russian exposure. We don't do new business with Russian companies, and a material part of our Russian exposure is short-term. Regarding sanctioned entities, please note repayments for ING are allowed and are being received. The next slide shows that our CT1 ratio came in lower at 14.9%. The decline was driven by higher RWA, which were up by 21.8 billion, including 1 billion FX. This was primarily due to 19 billion of higher credit RWA, excluding FX, which included 7.3 billion for the risk weight-for on Dutch mortgages introduced by the central bank, and 9 billion added for Russian exposure. Furthermore, market risk-weighted assets were up, driven by market volatility, while lower operational RWA reflected the update of our AMA model. CT1 capital was 100 million higher, mainly due to the inclusion of 50% of net profit for the quarter. With net profit being equal to resilient net profit, the other 50% was reserved for future distribution in line with our policy. On our distribution plans, the final 21 dividend was approved at our AGM22, and will be paid out on the 9th of May. And in line to converge our CET1 ratio ambition, we will distribute an additional 1.25 billion, and this amount has been rise-sized to reflect increased macroeconomic uncertainties. This additional distribution consists of a cash component and a share buyback, with the split derived from Dutch withholding tax requirements. Based on this, 23.2 cents per share will be paid out on May 18th, and the share buyback for the remaining amount will start on the 12th of May. The additional distribution will bring our CT1 ratio pro forma to 14.5%, and I'm pleased we take this additional step in returning capital to our shareholders and to optimize our capital. As you can see on slide 14, CT1 ratio remains well ahead of our ambition. On ROE, we saw some impact this quarter from the elevated risk costs. However, with the continued growth of customers, loans, and fees, as well as focus on cost and capital optimization, we maintain our ambition to provide an attractive total return. Cost income remains an important input for ROE, and we continue to work on our ambition of 50 to 52%. Then to wrap it up with the highlights of the quarter. This quarter presents a new challenge with the invasion of Ukraine and I'm actually very proud of how we deal with this. We're focused on our people and we manage the risk of Russia exposure while we keep the focus on our strategic priorities including financing the green transition and improving the digital channel. And last but not least, we continue to deliver strong performance financially. This was reflected in a higher pre-provision profit driven by resilient NII, higher fees and lower costs, as well as a healthy return for our shareholders. Risk costs were elevated at 987 million, mainly in stage two. The stage three ratio was lower at 1.4% and we remain confident of the quality of our loan book. The C to 1 ratio declined to 14.9%, with 50% of the first quarter resilient net profit reserved for future distribution. The main driver was RWA growth, primarily for the Russia exposure and Dutch mortgages. And finally, on capital distribution, we will pay a 41 cents final cash dividend and a 1.25 billion euro additional distribution as announced today. With that, we will go 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. So please press star 1 for your questions or remarks. Go ahead. Our first question is from Mr. Robin from the Brook of Navy, Obonka. Go ahead. Your line is open.

Yes, good morning, everybody. Thank you for taking my questions. The first one is around the Russian exposure and the actions you're taking this quarter. I mean, in your introductionary comments and in your slides, you mentioned basically a cover within the CO2-to-1 ratio of 2.5 billion. And you also emphasized the faith you have in your track record on your risk framework. I'm just wondering, to what extent do you think this $2.5 billion should cover basically the future? Is that base case? Is that worst case? Can you talk a little bit through your thinking here? Is this done for you, or do you see big risk of additional provisions to be taken down the road? That's question one. The second question is more about NII. Good to see that replication in Q1 has already become a tailwind. But since Q1 average swap curves, obviously that has gone up quite a bit more. So I was just wondering if you could give a little bit of guidance on what kind of tailwinds we should expect here, because I think this could be high teams millions of quarterly tailwinds for your NII trajectory, which is quite substantial. Thank you.

Thank you very much, Robin. And I will give the first question to Liliana and the second question to Tenet.

Thank you for your question. Yes, correctly, we have had the elevated risk costs with respect to the Russian situation of 834 million, as you noticed. And in trying to show to you how much we feel confident and adequate with current provisioning and impact on capital, we have summed this impact of the LLPs of 834 million with the additional impact that we have experienced through inflated RWAs which have resulted in additional 1.7 capital set aside for this cost. So these two are summing up to the 2.5 billion that you are saying. So first on the risk cost, as you've seen, only 70 million out of these risk costs refer to the really defaulted exposure. The rest, stage two, which is following our very prudent risk management framework, our governance and processes in place, is actually reflecting the downgrade of the Russian-related exposure rate, and as well certain watch listing of the clients taking a prudent approach. On top of that, you have seen that we have in the 60 day, we're able to actually manage down our exposure by additional billion. So all actions are showing that currently we feel that our best estimate is adequately provisioned and adequately capital impacted.

And then, Robin, on our NII, if you look at our Q4 disclosure, you can work it out that basically we had a reduction because of replication of somewhere around 600 million euros in 2021. And as Stephen has said, that depression or that contraction has stopped in Q1. And now what we see is that this tailwind will continue into the future. And you're right that as long-term rates continue to rise, that the replication benefit gets bigger. But I think what is a big... impetus in terms of NII is when the ECB discount rate gets to move, right? Because we do barbell replication, which means that a considerable part of our replication sits in the three-month bucket. So if the ECB, as anticipated, would move the rates in July, that would accelerate the tailwind that we have today.

So just to come back on that second part. So I think in the past, the market at least had the perception that a rate hike from the ECB would initially be a headwind for NAI. But I think now you're saying you basically shortened your duration and that's no longer the case.

Well, I don't think we ever say that rising rates is bad for banks. In fact, it's the opposite. We think rising rates coming out of negative rates is actually positive for financial companies and positive for ING in particular, given our big retail deposit base. And I think rising rates from the ECB will be indeed more beneficial to us.

But also the part from negative to zero, basically, I think that's the more doubtful part of the sensitivity. And can you quantify that by any chance?

Well, we'll give you a bit more detail on Investor Day, but what we can say now is that, as we mentioned, the 600 million compression we saw last year has disappeared, and that we expect, actually, this year, that excluding the TLTRO impact, that our NII will be positive this year.

Okay, thank you very much. Our next question is from Mr. Stace on the dial call for City. Go ahead, your line is open.

Yeah, hi, guys. Good morning. It's Stefan from Citi. I have a couple of questions. On NII, just to confirm, the guidance of UP in 22 excluding TOJRO, that includes two rate rises by the ECB, and also if you can confirm what lending margin assumptions you have in that guidance. I feel like one of the messages that you've been trying to get across in the presentation is that lending margins are under pressure at the moment because yields are not tracking the increase in funding costs are you basically saying that you expect repricing to become stronger for the rest of the year so that's my first question on nai what rate assumptions and what lending margin assumptions you have the second question is on russia um it seems that you're effectively silently writing down the exposure to Russia, both onshore and offshore. You have around 2.5 billion of combined P&L and capital impact. So you're not exiting Russia, unlike some of your other peers. What's the strategic thinking here? You're appeasing shareholders by taking a large provision, but you're keeping the optionality for the future. Is that the thinking? And if I may A super quick third one on fees. Can you quantify the contribution of partnerships to fees at the moment from partners like AXA, Scalable Capital, et cetera? Thank you.

Yeah, thanks, Stephen. I'll take the question on NRI and fees. And the question on Russia, I will... actually. So on NII, first question was, does this already assume the rate hikes of the ECB? Answer is no. So we basically say that already with the current improved yield curves that we see, the negative drag has completely gone. NII excluding TLTRO this year will be up compared, we expect it to be up compared to the last year. In that light, with regards to lending margins, what we have seen is that the prices to the street were up actually across the board in many countries, but also our cost of funding dropped. went up and typically you see that the cost of funding you it takes time to fully price in the cost of funding into the street price as well so that's what we have said with that so it takes time for that cost of funding to fully materialize in the market price still arguably there's still a lot of liquidity in the market. So that also means that we don't necessarily expect a big increase in margins at this point in time, at least not on the lending margins to our clients, but on the liability income we have actually turned the corner and that's actually benefiting the NII going forward. On Russia, well, Look, first of all, we want to keep the people safe, which is what we do also in Russia, by the way. And we are making sure that we fulfill all the sanctions. With regards to the book, what we want to do is to make sure that we actually... get repaid so we have said we don't do new business with russian clients and it basically means that we are continuing to decrease our exposure gradually winding down our exposure you've already seen in the first two months our exposure came down with a billion Part of our remaining exposure is short-term facilities and part of it is more project finance, which is supported by ECA and CPRI insurance. And this is the way for us to actually gradually wound down the book and decrease our exposure in the interest of all our stakeholders, including our shareholders and our savers. And regarding fees, I mean, like we said, but I will not dwell on the many elements that we have or pillars we have to grow fees. We also work with partnerships, either directly or indirectly. We haven't split it out separately, but the fees of the partnerships such as Oxfam Scalable are relatively small, but they also help in the overall, let's say, client experience that clients have with us, which will help NPS and which will in turn also help the quantity and therefore the quality of their interactions with us and therefore also the business they do with us. So yes, fee business of partnerships is still relatively small, but it also helps the overall experience they have in doing business with us and that also helps our fee business overall.

Okay, thank you, Stephen.

Next question is from Mr. Kiri Vijay Arya, HSBC. Go ahead, please.

Yes, good morning, everyone. A couple of questions from my side. When I look at the Art of Wave and the ratings migration there, it looks like you've actually had positive ratings migration if you exclude what you've done for the Russia exposure. So I wonder if you could talk a little bit about which portfolios outside of Russia have driven that kind of positive ratings migration and really what the risk that reverses in the next few quarters, just given what we're seeing in the macro. And then just coming back to the fees, you know, the growth this quarter is obviously heavily skewed towards the wholesale bank. But, you know, focusing on just the retail fees, do you think you can replicate the same kind of double-digit momentum you posted last year. And in your mind, you know, which of the retail markets where you think you're still sort of punching below your weight in terms of particularly kind of investment product penetration, just sort of more of a forward-looking commentary there on retail fees would be helpful. Thank you.

I will take the question on fees, and Liliana will take the question on RWA. Okay. With regards to fees, like we said, I'm confident that we can continue to grow also this year our fees by 5% to 10% per annum. And why am I confident about that is different things. First of all, we continue to grow our primary clients and the level of interaction with them. That's point one. Point two is that in many of the markets we are competing with, let's say, local champions or local banks who increasingly feel pressure to increase fees on the back of difficult market circumstances. We have seen it, by the way, lately in the Netherlands where ABN AMRO increased their payment package fees with 50%. And we see that in other markets as well. And three, in a number of markets, we're still actually relatively low in terms of our fee potential, also in terms of the interaction we have with our clients. And even though, and I proudly always say every quarter, okay, and now we have 2 million brokerage accounts in Germany, And this quarter we have 2.1 million brokerage accounts in Germany, and that's all fantastic. But if I look, and that goes for all the markets, compared to the total number of clients we have, let's take Germany. We have 9 million customers in Germany, with only 2 million who have brokerage accounts, and that ratio for some markets is even worse. So it also means that we have still quite some way to go to deal with this, leaving alone... what we do charge for payments, what we do with insurance. We come from an environment or ING as a business model, whereby fees as the old ING direct model was relatively benign compared to activities that we did. And we're gradually catching up, but we're not there yet at all of where we are supposed to be to, let's say, grab, quote unquote, our fair market share, if you will, compared to the site that we have as an organization.

And on the RWA, yes, you're correct. In total, we do see increase in inflation of RWA based primarily, as we say, on the credit risk side due to introduction of the risk weights for the Dutch residential mortgages. And on the other side, 9 billion, as Stephen mentioned, for the increased density for the Russian portfolio. If we would actually neglect these two points, we would see on the rest of portfolio and specifically on the wholesale banking side, a decrease. This comes from two sources. One is definitely on the volume side. We have seen in certain industries, for example, REF, some small increases in the portfolio, which absolutely contribute to the decrease of RWA. But as well in the other parts of the wholesale banking portfolio, we do see reduced RWA based on improved structure, both in terms of the rating of clients, but as well in terms of the products and maturities. So, in total, on the wholesale banking side, when isolating Russia, the improvements are positive.

Great, thanks. Thank you.

The following question is from Mr. Volnov, Petrarca of Kepler Chevrolet. Go ahead, your line is open.

Yes, good morning. So here are my questions. So first one is on the spatial distribution. I was trying to understand how you came with this 1.25 billion. I mean, it's roughly 35-40 bps impact. So, you know, is such a level a kind of natural level for you given the macro uncertainties? And is that the level you can repeat in the current macro also in the coming years? So just wanted to ask about kind of the, you know, you determine the appropriate size of the spatial. Second one is actually on cost, very strong, you know, down 2% clean, you know, we have to think about costs going forward and the cost trajectory for the remaining of the year. And also, given the current inflationary pressure, will you be able to maintain costs flat? Can we expect a bit more restructuring going forward? Anything special there, please? And then just a final one will be on the front book margins in the Netherlands on the mortgages, which seems to go the right direction. I think you mentioned some pressure in Q1, but that was probably a timing issue. We see very strong repricing on mortgages as we speak. So it seems that the funding cost is going to the client clearly there. So could you update us on front book versus back book currently? Thank you.

Okay, I will do the question on front book and costs, and tonight we'll talk about the distribution. First of all, on the front book, yeah, I mean, typically you see that in the quarter where you produce, so you go to the markets to offer, that then is delayed with a quarter before you can typically price in the full funding costs. So that you will expect as funding costs continue, then also margins will be impacted. Of course, it's a competitive dynamic, but that's what we typically have seen in the past. But one thing to note is that if that happens, also when you then look at prepayments, we're also benefiting always from prepayment income, whereby people pay a penalty for prepaying part of their mortgage. But when the interest rate goes up, that part of your income will decrease. So yes, the margin will restore itself, but that is excluding the prepayment income, which will likely decrease when margins go up, which is logical. When we talk about costs, I mean, yes, we have now seen, well, first of all, we are strict in costs, very focused on making sure that we can deliver what we need to deliver with the applicable FTE amount number. But secondly, we've also taken a number of decisions in the past year or year and a half, and those decisions are now gradually filtering through. So we're gradually benefiting from that. Not all the benefit is in For example, we are transferring our clients in France to Societe Generale. So still we have a retail operation, and only gradually during the year that operation will be wound down. So those benefits are still for a part to come in. That's why I said even with all the inflation going on, all the markets, we cannot ignore that. We are confident that we can remain our costs at least flat. compared to 21 operating costs in 2022 as well. And going forward, we then need to look at what additional measures do we need to take. Obviously, we also need to invest. And if inflation stays the way it is currently, yeah, that is a challenge for all of us. But we're also, in the meantime, digitalizing our processes which both have a benefit for our customers but also for our cost to serve, and we keep on focusing on that trajectory as well to keep our costs under control, as I've done over the past almost two years now.

And Benoit, on capital, clearly we go through the normal capital management analysis to come with the 1.25. We look at the outlook on earnings and how we can generate capital, and clearly the tailwind on NII helps support that. We look, of course, at the Russian exposure, what the worst case could be, a stress test scenario. And based on a combination of that, as well as any potential regulatory capital coming our way, and that's how we derive the 1.25, which is right size from where our thinking was at the end of February prior to the war. That's how we have done that. And, of course, we have been having constructive discussions with the ECB to arrive at this number, which they approved for us.

Thanks, Manohar.

Our next question is from Mr. Rahul Sinha of JP Morgan. Go ahead. Your line is open.

Hi. Good morning. A couple of follow-ups from my side. I guess the first one is just your thinking around the mix of distributions between dividends and share buybacks going forward. You know, just given what you flagged to us on the Dutch withholding tax, and how that has led to, obviously, the mix of dividend and share buybacks. How should we think about the mix, maybe for other years, when we think about how you would look to approach further capital distributions? That's the first question. The second one, I guess, a little bit more broad-based. I'm wondering what you think the impact of stagflation would be on the bank. I'm sure you're running internal scenarios, particularly from stress testing perspective. How do you think ING will behave in a sort of stagflationary environment in your core economies? Thank you.

Thank you, Rahul. First, Tineet, I think, on share buyback, and then Liliana on stagflation.

Well, on the share buyback, I think it's a uniqueness of Dutch tax requirement that we need a certain minimum cash payments for share buyback to be exempted from withholding tax. And that's why we have that particular split that we talked about in this quarter, 870 against a 380 payment. We have also said in our policy that the majority of our cash or capital distribution will be in cash so we stick with that guidance that the majority will be in cash but having said that of course looking at the share price if it's discounted from book value substantially then we will be focusing more on share buyback but this is the guidance we can give for the time being

On the stagflation, yes, we deem the threat, if not already reality, of stagflation as present in our economies. This means the lower growth than expected is definitely being built in our base case and clearly higher inflation for longer. With that respect, we have already on the assumptions for the loan growth, I would say, downsize it to the lower range of the 3% to 4% loan growth yearly. We do, however, benefit, I would say, from the strong risk management framework that we have in place, which means as well strict origination criteria and, I would say, significant buffers when assessing the credit repayment capability specifically on the retail side. And definitely the structure of our book currently, which is a very low percentage of the unsecured consumer lending and as well not significant part of the small businesses in the economy, would help us on top of a very good starting point and low risk on our books and low NP ratio and coverage, to manage this going forward. Clearly it remains the challenge for all of us and we are following the situation and assessing the scenarios and making sure that we are adequately provisioned.

Thank you. If I could just stop on that. What do you think of the impact on the cost of risk relative to the through the cycle guidance that you've given if we were to get into this sort of economic scenario?

Well, it's difficult to say. We definitely keep our, I would say, through the cycle look for the years to come. It might be different from year to year, but through the cycle, I believe we're going to be there. We have significantly, as I say, already provisioned part of the portfolio through stage two provisions and also through still some existing overlays from COVID time and also from the mortgage book you will remember from the last quarter. So we do believe there is plenty of opportunities in our book to manage this with no significant volatility in cost of risk other than 25 bps.

Thank you very much.

Next question is for Mr. John Peace of Credit Suisse. Go ahead, your line is open.

Yeah, thank you. If I could just follow on from Ralph's question. Some of your peers have said that a low stage three losses means that 2022 can still be below the through the cycle rate. And I just wondered if ex-Russia, you would share that view as you see things today. And then a question on capital return. If Russia visibility improves, would you contemplate any additional returns later this year? Or are we done now until next year's results. And also, you said that the 1.25 billion figure was right-sized from your expectations at the end of February. I guess since then, you've booked a 2.5 billion in capital for Russia. Did that mean that a normal level of capital return would have exceeded 3 billion? Is that where we should have our expectations for next year? Thank you.

Okay, thank you very much, John. Regarding the first question, would an excluding Russia be below 25 base points? Like we said, we don't give guidance for a year. We give guidance through the cycle. What Liliana also said and what we typically do is that what you have seen through the cycle is that our cost of risk of all the European banks in the Eurozone have been the lowest throughout the last 12 years on average. And what we have done also the last quarter, on the wake of higher inflation on the back of disrupted supply chains, is already take overlays for mortgages and part of the wholesale banking book in risk costs. Now, that, of course, is helping us now that inflation is really coming or persisting. So that also means that we still have a buffer based on corona. We build off buffers based on inflation. So that's helping the rest of the book and Indeed. but then looking at the first quarter if you look at the remaining risk cost outside of russia the total risk costs were 987 million russia was about 85 percent of that so it basically shows that for this quarter we do not see current big problems looming otherwise we would have taken the cost

Then on capital, it's not a simple mathematics that because Russia costs us 2.5 billion euros, we would have paid more from that perspective in capital returns. I think we just take a comprehensive view. What is our earning ability going forward? We look at stress testing. We look at issues like stagflation and what the economies will bring. And then we'll form our view at any given point in time about that convergence to the 12.5%. As for, are we going to announce any future plans on capital return this year? Well, the future is the future. We don't comment on any actions we may take in the coming period.

Thank you.

Our next question is from Mr. Johan Eslund of UBS. Go ahead, your line is open.

Thank you. Just one question on my side, please. Back to net interest income. When we think about the ECB hiking from minus 50 to zero, how much would you expect to lose on the negative deposit charging going back to zero? What's the total benefit that you've had across both retail and wholesale, please?

Okay. Thank you. So I look currently the total amount of negative interest rate charging that we do is on an annual basis, 300 million euro. And yeah, I mean, typically the banks follow market rates. So at some point that's then the amount that we will lose as well.

Perfect. Thank you. Thanks.

Our following question is from Miss Yulia Miyoto of Morgan Stanley. Go ahead, your line is open.

Yes, hi, good morning. I have a question on the rundown of the Russian book. So it decreased basically 2 billion in, sorry, 1 billion in two months. Is that a normal rundown or can you share some light on the maturity of this book? Because it seems, you know, was there any other proactive action or is this just the normal rundown? run rate of decline. So that's my first question. And then secondly, just to follow up on the question that was just asked around the negative rate charging. So is 300 million only for the retail bank or is 300 million the group level NII that you are making on charging negative rates? So basically, is there something more in the wholesale bank? Thank you.

Okay. So on NIR, I give the floor to Tineit, and on Russia, I give the floor to Liliana.

So maybe starting with Russia and the rundown question. Yes, this is the normal, I would say, rundown of our portfolio based on the maturities. As you might know, our exposure is partially short-term, partially long-term. On the long-term side, we are involved in several project and asset-based financing where we are as well credit insured for the good part of the portfolio. So what we are currently running down is the short part of the book, and we will continue to do that. Clearly, the good relationship with the clients and long-standing relationship with the clients helps out in that respect, which was obvious in the last 60 days when we were able to, in a regular way, manage down the portfolio by almost a billion.

Then, Julia, the question on negative rates charging, the 300 million that Stephen referred to is mostly retail-related benefits. And from the wholesale bank, we are neutrally geared towards negative rates. As negative rates disappear, we don't expect to lose revenue. In fact, we should benefit from that, actually, in terms of PCM business.

Okay, thanks. And sorry, going back to the rank rate of decline, any comment on by when basically you should be done with, I don't know, half of the book or, you know, any more granularity? Because it seems like you have a large shorter part, but you also have a long one. So I don't know if you can give, let's say, by your end, you're going to be done with half of the book or something like that. Is there any comment you can make?

Yeah. Yeah, thanks, Julia. So this is an emerging market. So what do you do with the emerging market? Either if it's unsecured, it's short. When it's secured, also supported by ECA and CPRI, by projects, it's longer. So we don't give those figures, as you can imagine. But the short part is short. And it basically means that of that part which is significant, the lion's share would run off this year.

Thanks.

Next quarter, Julia.

Our next question is from Mr. Omar Fall of Barclays. Go ahead, your line is open.

Hi, good morning.

Could you just discuss loan growth specifically in wholesale, please? Even outside of FM, there wasn't any, and presumably that's not just Russia-related loans. So what's the outlook here, especially, you know, previously you'd said a resumption of corporate lending was a key driver for you over the next couple of years. Then secondly, thanks for the helpful guidance for this year on NII. But, you know, the only place there's been actual meaningful sequential increase in NII is basically Poland, given, you know, the policy rate rises there. So what would be most helpful is to finally get some actual sensitivities like your peers are giving, you know, over a longer timeframe because these effects of higher rates are exponential in future years. So would it be possible to get this at some point, you know, even if it's at your investor? Then finally, sorry, a cheeky third, but could you give us a sense of the value or scope of the impact of lower prepayment fees in the Netherlands, given the drop there is quite large in NIA? Thanks.

Thank you very much. Omar, on the loan growth, if you look at the loan growth for wholesale banking and when we saw... Well, first of all, let me give you a few pointers. So if you look at the fees in wholesale banking, the growth there comes from syndicated markets. And that is because the syndicated markets have returned after corona. So what we do see is positive is... larger underwriting syndicated deals which come with fees which are in general more attractive for banks as well so that's the positive so we do see pipelines that are good and they continue to be good and so i think this quarter and that will that will continue a little bit. So that's one. Two, on real estate finance, that came down a little bit, also on the back of due to corona, less need for a number of certain uses of buildings. And we're actually focused on that. Where do we have multi-use of buildings and where not? And we stay focused on that end as well. So those are two effects that came in the first quarter. Corona repayments, sorry, corona repayments, the repayments of TLTRO-related facilities will continue in 2022 at a lower rate. So it means that for wholesale banking, we do expect loan growth, but at a lower pace than the 3% to 4% that we initially indicated. With regards to NII, on the sensitivity, I mean, clearly you mentioned Poland, but I can also mention Romania, I can mention Australia. So there are many non-eurozone markets where the rates already moved and where the central banks already moved rates. That is for us a positive. We are looking forward to the announcements that the ECB is going to make, but there's every day so much news about it that we will just wait and see what it will be. But already now, even with that rate not being there, and short-term rates being positive is also positive for us, but with the current rate curve, the 600 million negative drag last year has evaporated and that means that we are already now even before the ecb has done anything are positive on the nri turning positive this year but we will give you more nri sensitivity information during investor day as a matter of fact Tenate will do that, which is good. And then on the number of lower prepayment penalties, yeah, we don't give that. So what we would say to guide you with is that we would expect the margins excluding prepayment penalties to move to a normalized level once the funding rates get fully filtered through in our in the market rates that's what we have seen in the past and we have no reason to believe why it would be different this time around but yeah that depends and we don't give particular input on the prepayment penalties but that gives a slightly pressure on the total ni in the netherlands because that was of course a significant part over the past number of quarters

That's very helpful, especially that we'll hear more on the sensitivities at the university. Thank you.

That was the most important part. I should have said it in the first place. Move on.

Next question is from Benjamin Goy of Deutsche Bank. Go ahead. Your line is open. Mr. Goy, are you there?

Yeah. Thank you for taking my question. Just one major one left. I mean, you gave guidance on your wholesale banking loan growth, but just wondering about the mortgage book from here with higher mortgage rates. I mean, in some markets, they moved up a lot year to date, Germany two and a half times. So how do you expect this impact your origination and ultimately loan growth in mortgages?

Thank you.

Yeah. So I think that for now, the only thing we see is less prepayments. So in that sense, less movements of people prepay and then move to another bank or the same bank. But the loan growth in the first quarter was good. And we still see that, of course, it depends on a number of elements. On the one hand, we have, of course, the impact on the ability of people to pay in terms of the increased energy price and inflation and the likes. On the other hand, we see that in the Netherlands there is, but in other markets as well, there is still a shortage of houses. That goes for the Netherlands, but it also goes for our second biggest market being Germany. There is still quite a lot of supply missing. So what we've seen over the past couple of quarters is that we booked a record mortgage growth in Germany as well. And we don't see that demand decreasing in the short term. So we're positive about continued low growth in retail.

Thank you.

Our next question is for Mr. Farquhar Murray, autonomous. Go ahead, please.

Your line is open. Morning, all. Just two questions, if I may. Firstly, just coming back to the capital update and specifically the kind of question around how the 1.25 billion was arrived at, should we think of the pro forma 14.5% CET1 level as a kind of near-term threshold, perhaps to year-end? And then secondly, just coming back to Russia, in answer to Julia's question, you gave a bit of a sense of how the exposure will develop. Can I ask if the RWA would develop in a similar manner? And on a subsidiary point, the 4.5 billion of market RWA we saw in the quarter, how would that have developed given the markets we've had since? And could we expect some of that to reverse? Thanks.

Good questions, and that's not my forte with short answers. So on capital, should we look at the pro forma 14.5% as our target level for the end of the year? No. We have guided that we want to move gradually towards 12.5% in the next couple of years. On Russia, On the market risk, WA, was that because of high volatility? Yes. Will that, if the volatility drops away, will that reverse? Also yes. Sorry, did I miss a question?

And the actual credit component as well in Russia, will it develop in line with the exposure? No.

Yes, I mean, look, we have seen currently a decrease of our exposure with approximately a billion. I've just said to Julie, I believe, that we have a sort of a barbell in our exposure, short-term unsecured, long-term secured. And the short-term exposure, if that exposure gets repaid back, we also see some write-backs or term banks in our RWA. because that happens when we reduce the exposure.

All right, perfect. Thanks, Raj.

Our next question is from Mr. Tariq Al-Nishad of Bank of America. Go ahead, your line is open.

Hi, good morning. Just a quick question again on dividend. So just to clarify, the 50% payout for the ordering dividend, so the finish is on resilient earnings. Should we assume that the Russian Stage 2 provisions should be included or adjusted for? And then on the capture return, I mean, you just said again, like in Q4, that you would like to convert to a 12.5% within the next two years. We understand it's important for your ROE. I mean, that makes it really a very big catch-up to do in the next two years. So, I mean, now, if you believe the 14.5% already captures the, maybe not the... should we in the next few quarters I think someone asked a question but really you want to understand already what's the discussion are you just being refrained by the ECE or is it your own consciousness thank you um

On the dividend, does the risk cost on Russia, is that excluded or not from resilient profit? No, it's part of our normal procedure. So, yeah, if we have higher risk costs, then also the resilient profit goes down. That's the way it works. Regarding capital distribution, yeah, you mentioned the word two years twice. I didn't say two years, I said a couple of years. And I give the floor on the further answer to Ned.

Yes, a couple of years means a range of periods. So we will converge over time. And I think in the capital return, our conversations with the ECB has been very constructive. And it's really very much based on our own capital management, looking at the geopolitical situation, looking at capital generation, that will determine ultimately the pace at which we get to 12.5%. So you can imagine that given where we are today, the clarity of the future, it's a little bit more foggy than it was in February. That's why we right-sized the capital returns based on what we see now. But certainly not being constrained by the ECB, it's more how we see the geopolitical and credit risk as we stand today.

Sorry, I didn't understand the comment about two years. Two years is is next two years. So I don't understand what, because you have six and a half billion excess now.

So what's the... We are saying we will converge to 12 and a half over the coming years. Maybe a couple of years means it's over that number of years. It doesn't mean two years precisely. Okay, thank you.

Our next question is from Anke Reinser of RBC. Go ahead, your line is open.

Yeah, thank you for taking my question. The first is just coming back to Russia. The 800 million of provisions, can they sort of be used against onshore as well as offshore, or is there some accounting so it's partly just onshore? And just on the sanctions exposure, the 3.3 billion and your comments, Implying no additional exposures, I guess, would suggest that the 2.5 billion capital is largely against that exposure. And I mean, how confident are you that, I mean, the amount could go up with more sanctions and the repayments are received? Is that short term as well or is it more long term? And just in terms of how fast this number can be coming down. And then one last question. You briefly mentioned potential regulatory headwinds in your capital path consideration. Is there something on the horizon other than Basel IV in the rest of the year we should be aware of? Thank you.

Okay, I'll take the question on the regulatory headwinds and the repayments, and then Liliana will take the question on provisions onshore or offshore. On the regulatory headwinds, no, we don't see that. We have had, I've said before, Basel IV includes all the trim missions and Basel IV and the output and the input. So there are different moves, but in the end it all comes down to the same Basel IV direction of the ECB. There is no further programs in that regard. We do see now and again, based either on volatility or based on model updates, you see spikes up or you see spikes down. But that is usual, so we don't have anything else currently to report on that. Then about repayments. I mean, are we confident? I mean, you mentioned there are also sanctions and sanctions could increase. That's true. It does not mean that people who are sanctions cannot repay. It means we cannot do further business, which we are not intending to do in any case. with Russian companies so we do get repayments and we are allowed to receive repayments also from sanctioned entities so as long as companies are performing we get repaid and again I point to the 834 million risk cost the lion's share except for about 70 million is with companies who are still performing but with whom we see an increased risk because of a rating decrease of Russia overall, and then our models and policies prescribe that we then also decrease the ratings of those companies and therefore move them to stage two, but they're still performing. And it also is the case with, let's say, our short-term exposure that we see over the next couple of quarters. By and large, except for the 71 million we have seen, our Russian clients are performing and means that we also expect them to repay also in the next quarters. Liliana.

Yes, on the total risk cost for Russia, 834 million, approximately a bit less, around 200 million refers to the onshore exposure. The rest refers to the offshore exposure.

Thank you very much. And our next question comes from Guillaume Tiberkins of BNP Paribas XM. Go ahead, your line is open.

Thank you and good morning. My question relates to the subsidiary in Russia. It has 1.3 billion of exposure and 100 million of equity. If you start incurring losses in that subsidiary, would you consider recapitalizing it, in which case we would worry to lose up to 1.3 billion, or when the capital is gone, it's gone and the subsidiary goes away, including the RWA? And what are the RWA in that subsidiary, please?

So, look, I mean, we are currently talking about going concern. So we're currently looking to get repaid both onshore and offshore. If you look at our capitalization of our bank in Russia, that's currently 100 million. And I never, we don't give comments on whether we will capitalize in the future. If worse comes to worst, if that's gone concern, which basically means you would lose your sub in Russia, that means that we would lose the equity in Russia, which would in this case be 100 million.

So you would not recapitalize it?

I've said that I'm not going to make comments on the future, but if you say, if you would lose your sub at this point in time, what would that mean? It would mean we would lose our equity. That would be 100 million.

Okay. What are the RWA in the subsidiary? Excuse me? What are the RWA in the subsidiary? We don't disclose that.

That would be a release.

And we have a follow-up question from Mr. Stefan Nediakos of Citi. Go ahead. Your line is open.

Hi, guys. A quick follow-up from me. A lot of numbers on NII were flying around, and you did mention you will provide some more details with the investor date, but obviously that's more than a month away. And people need to think about their NII numbers in the meantime. So I would really appreciate it if you can give us some sensitivity to the two potential ECB rate rises, assuming one happens in the summer and one towards the end of the year. What would that mean for your NII? You obviously mentioned the 600 million headwind from from the liability margins is going away this year. And there is a 300 million benefit for negative charging, which is partly offsetting that. So when you put all that together with two BCB rate rises, what does that mean in terms of extra NAI over and above your guidance for 2022?

Yeah, I mean, by the way, I think the assumed rate rises, Stefan, are after the investor day, but I grant you that. We stick to what we have said and I see that you need and i understand that that you want to have more guidance on nii and what it does so we have said quite a number of things first of all although the market has said in the past that that they that so you said that there is no there may not we thought that rng said there was no benefit of rate rises we have said there is a benefit of rate rises We have said the 600 million drag is already out. We have said this year that we'll have a positive impact on NRI. This year will be higher. We said we see benefits in many markets, and we will give you more guidance on NRI sensitivity on the 13th of June. It's five and a half weeks, and then we can talk about it.

Okay, got it. Thank you.

And we have a follow-up question from Benoit Petrat of Kepler. Go ahead, your line is open.

Yes, thank you. Just a short one on Basel IV. Given the risk-free assets moving quite substantially this quarter, what is your pro forma Basel IV CT1 pre-Zelian of Q1? Thank you.

We did not have any further impact on Basel IV in the first quarter.

Okay, so I think the difference was less than 30 bps, right?

I will give this to Liliana, but I guess that you mean the remaining impact to come from Basel IV was 30 bps. Is that what you imply? Yes, yes. It's less. It's almost zero.

Okay, so still zero there. Okay, thank you.

And we have a question from Esther Castro of Banco Sabadell. Go ahead. Your line is open. Well, hi.

Can you hear me?

Can.

Yeah. Can you hear me?

Yes, Esther. We can hear you very well. Thank you.

Oh, sorry. Hi. Good morning. Thank you for taking my question. Just only a follow-up concerning the GDP growth. I mean, the sensitivity. If you could share with us, gentlemen, please, any kind of sensitivity or scenario concerning the new macro, like, for example, for every 1% drop on GDP, which will be the implication on the cost of risk, if, of course, you can share with us. and which are the moving parts in this GDP factor to provision. Thank you so much, and have a great weekend ahead.

Thank you very much, Esther. And look, I mean, GDP is only one of the elements that has an impact. It's GDP, but then the question is what does it do to inflation? What does it do to unemployment? What does it do to energy prices? So there are heaps of elements that link that are not necessarily that you then also would need to know because GDP standalone is a much too simple metric to base the cost of risk on. Otherwise we wouldn't have needed Liliana for this because it's actually quite complicated. So there's more layers behind this and that we do not disclose.

Okay, thank you. Have a great weekend.

And we have a follow-up question from Robin van den Broek of Mediobanker. Go ahead, your line is open.

Yes, sorry to come back into the queue. Could you maybe give a little bit more explanation about the tax implications to do buybacks in the Netherlands? I guess it has to do with how much cash dividends you've paid, but I'm just trying to understand how this will affect your future decisions on capital return cash versus buybacks. And secondly, I was wondering if you could give any disclosure about how much revenue slash P&L will be lost on the back of your unwind of the Russian activities.

Thank you.

Okay, I mean, thank you, Robin. We don't disclose that amount on Russia, but what you do see is, well, you know how big the book is. You typically know what the name is. Then you can make sort of an extrapolation at certain levels what the revenue on an annual basis was with Russian clients. By the way, it's gradually winding down, so part short term, part longer term. But in the meantime, of course, and that's what I said also in the past, if you look at that total exposure, we have a total exposure to clients of around 630 billion. That's customer exposure of around which 5.8 billion is Russia exposure, which is less than a percent. So from an exposure point of view and therefore the growth point of view, We grow much quicker in mortgages and the remaining of the book than that actually the book in Russia is coming down. So the impact of that is limited. So if we can't grow there, we have enough opportunity to grow elsewhere. And regarding tax, I'll leave that to Nate.

I think, Robin, maybe the best thing to do is probably if you can contact our investor relations, we can talk you through it. It's a complex rule involving looking at historical cash payment over seven years. So I think it's better that we reach out to you after this call.

That's fine. Perfect. Have a good day.

Same to you.

We have no further questions. Mr. Van Lankwijk, over to you.

Thank you very much. Then I wish you a great Friday and a great weekend. Thank you again. I'll speak soon.

2022 IMG analyst call. Thank you for your attention. You may now disconnect your line. Hello, Mr. Van Rijswijk.

Hello.

This is Patricia, the operator. I just want to say thank you for the summer working in the afgelopen jaren. Dank je wel.

Oh, you're leaving?

Yes.

Oh, KPN stops with it, that's right. Patricia, thank you very much for working with us. Yes, thank you. Also on behalf of Investor Relations and Mark Milders, and I think also Communication. It's always very pleasant, very professional, very relaxing.