Ing Groep Nv

Good morning. This is Mark, your operator, welcoming you to the ING's 3Q 2022 conference call. Before handing this conference over to Stephen Van Ressig, Chief Executive Officer of ING 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. Discussion of factors that may cause actual results to differ from those in any forward-looking statements is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our own express 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, operator. Good morning, and welcome to our third quarter 22 results call. I hope you're all well. As usual, I'm joined by our CEO tonight, would recall, NSC RO Liliana Chortan. And I'm pleased to take you through today's presentation. After that, we will take your questions. It has become a recurring theme that we operate in a challenging environment and also recurring is that we perform well under these circumstances and with our strong positioning and strategy. And I'm confident that we will continue to do so. That confidence applies to a successful execution of our strategy as well as delivering healthy financial results. I'm proud to see our people making an effort every day to create a superior experience for our customers and to support a transition to a more sustainable society. The results of these efforts were again visible this quarter, in more primary customers, a leading MPS position in more countries, as well as more sustainable deals, and volumes mobilized. On our financial results, the accelerating NRI momentum is a clear tailwind, while fee income provided proved to be resilient. Expenses were well contained, despite the increasing inflationary pressure from indexation, and contained investments to realize our strategy. Loan growth continued, with good growth in wholesale banking and a slightly slower pace in retail. Risk costs reflect our prudent approach of taking management actions to incorporate the uncertainty posed by the economic environment, and we continue to operate with a low Stage 3 ratio and with confidence in the quality of our loan book. Finally, our capital position remains strong, which allows us to take another step in returning capital to our shareholders, as we announced today a distribution of €1.5 billion. Separately, although not a third-quarter event, I would like to address the ECB decision to change the TLTRO program. As a result of changed conditions, we have had to unwind our TLTRO-related derivative position. The impact of this action adjusted for TLTRO benefit until November 23, 2022, will lead to a negative impact on pre-tax profits of around €315 million in the fourth quarter. Now before we go into the quarterly figures, I will spend some time on our strategic priorities, our outlook in the current environment, and the return of capital. Slide 3 clearly shows how the world around us has continued to change since our investor update in June. fueled by growing geopolitical instability and high energy prices. Interest rates are forecast to remain at a much higher level, while inflationary expectations for 2022 and 2023 have increased significantly before being expected to taper off in 2024. Not surprisingly, this impacts the GDP outlook, which now includes a recession, although the expected economic contraction is still relatively modest. Overall, the impact of the energy shock is questioned by two main factors. First, labour markets have been tight following the pandemic. Employers can be reluctant to lay off workers, while those losing their jobs can quickly find a new one. And overall, this lowers the risk of high unemployment. Secondly, while consumer confidence has been impacted, governments have been quick to offer large support packages in this cost-of-living crisis. and to help both customers and companies cope with the high energy prices. Although bankruptcies can be expected to go up from the low level seen during the pandemic, the impact of difficult external conditions on corporate sentiment is still relatively mild. For the near term, uncertainty remains high, and it is hard to predict how things will evolve. We will manage through these times, but we will also keep our eye on the longer term, on executing our strategy, which brings me to the next slide. Slide 4 shows a selection of actions we have taken and the results for our two strategic priorities, a superior customer experience and sustainability. In our retail, we introduced new products and solutions with a focus on digital only, mobile first, to offer that superior experience that we strive for. For example, with a new account in Spain, co-created with customers and offering instant digital onboarding. On the business side, we co-created an app that can be used in stores for easy access to contactless payments to be piloted by a large retail chain in the Netherlands. The hard work of our people in improving the experience for our customers has yielded good results. The share of customers using only mobile went up by 4 percentage points, now reaching 57%. In 7 out of our 10 retail countries, we had a leading MPS position, a step towards our ambition to have the highest MPS score in all 10 retail countries. This supported further growth of our primary customer base, because we added 139,000 primary customers this quarter, bringing the total at 14.4 million. On sustainability, in retail we introduced the Eco Mortgage in two more countries, Germany and Italy, supporting our customers' transition to more sustainable homes, we will continue to expand our green product offering in line with our targets to have a green alternative for all our key retail products by 2025. In September, we published our 2022 climate report. We have now updated the intermediate 2030 targets for the sectors covered by Terra. And in wholesale banking, our college efforts on financing the transition have paid off, with both volume mobilized and the number of sustainability deals growing compared to last year. As we continue to focus on executing our long-term strategy, our near-term financial results are affected by the changing world around us. To start with the rate environment of slide five, that shows the positive developments for ING. And we have mentioned before, we will benefit from high interest rates with the benefit coming in over time as our replicating book gets reinvested against higher rates and also depending on the speed of pass-through. During our investor update, we gave you an estimate based on the sensitivity of our retail eurozone book with an illustrative instant 50% pass-through scenario, which already gave insights in the potential upside. As we've seen the curve steepening since then, the upside has gone up. The updated sensitivities includes an illustrative gradual pass-through scenario to reflect the increased asymmetry with the replicating results in an environment with such rapidly rising interest rates. The sensitivity analysis clearly shows the increased NII tailwind for the coming years. And already now, after years of downward pressure from negative rates, the boost in liability and I is visible in our results. Then onto slide six, first on how the outside world affects our cost base and the impact of the increasing inflation rates actually doesn't need much explanation. We've talked about it before that impacts our staff costs, this quarter mainly through indexation. As an example, The legally required bi-monthly indexation in Belgium has so far driven a staff cost there by more than 7%, and that's a number you can't fool yourself anymore, with all the good actions taken in Belgium to restructure the service model and change the footprint. Next to indexation in several countries, we announced voluntary compensation to help our people cope with the rising energy prices, and these one-off amounts will be booked in the coming quarters. As mentioned previously, We also continue to invest in our long-term performance and digitalizing customer journeys and also marketing campaigns to ensure we keep increasing the number of primary customers as the base of future success. And going forward, we steer to keep cost growth below the inflation rate. Then onto cost quality. Why I'm addressing the topic here is because we generally see thematic concerns from the outside world increasing as the economic environment becomes more challenging. And I want to emphasize that we don't always share these concerns. We are confident on our asset quality and our conviction is underpinned by our solid risk management framework and proven by our strong track record. And to highlight some characteristics of our loan book that support our confidence, our retail lending is primarily mortgages with only a small consumer lending book. and we operate at low LTVs, though our main focus is on affordability of the loan. To illustrate, our largest mortgage book is in the Netherlands, where 94% of the book has an LTV below 75%, and in general, home ownership is concentrated on high income groups, higher income groups, and the same group which is more likely to have savings and less likely to be affected by layoffs. During the global financial crisis, we did not have material losses in this book, and with a better risk profile now, we have no reason to believe it will be different in the current situation. On loan book to companies, the majority is to large companies with a focus on investment grades. These companies are not immune to economic challenges. However, they generally do have larger buffers to withstand economic headwinds. Then moving to slide seven. So over the past years, we have built a strong track record of delivering attractive yield to our shareholders. Going forward, R&D continues to be a good investment case with consistent strategy execution, income growth, well-maintained expenses and strong asset quality, and combined with a strong capital position, we are in a position to return capital to our shareholders. And I'm pleased that today we have announced another step in converging to our targeted C to 1 ratio of around 12.5% with a 1.5 billion distribution. And we aim to execute as much as possible in 2022 via a share buyback with any remainder to be distributed in cash on January 16th, 2023. So now let me take you through our second quarter results starting on slide nine. Our pre-provision profit was up almost 90% year-on-year and 9% quarter-on-quarter. I'm happy we realized another very good quarter in today's markets. And as mentioned in NII, we see the impact from the improved yield curve. The drag on the liability margins from negative rates in the past years turned into an increasing tailwind. And we also continue to benefit from higher rates in non-eurozone countries. On lending NRI, the picture was slightly different, as client rates generally track higher funding rates with some delay, and prepayment penalty income continued to level off to more normal levels, although quarter on quarter, we see that effect is bottoming out. Looking at the other P&L lines, fees in daily banking continued to grow, while uncertainty impacted fees on investment products and lending. Overall, with 4% fee growth realized year-to-date, we continue to target an average of 5-10% annual growth. Operating expenses reflected inflationary pressure, mainly in staff costs. Overall, with measures taken to control expenses, we contained the upward pressure and kept cost growth well below inflation rates. We did see some volatile items this quarter, including the previously announced expected impact from the Polish moratorium. In Belgium, we had an exceptional minus 288 million hedge accounting impact, with the mirroring positive impact to be recognized over the coming years. And we also added 75 million to the compensation for customers on certain Dutch consumer credit products. Then we move to slide 10. Year-on-year, NI was up 8.5%, excluding the expected impact from the Polish moratorium. mainly due to the accelerated recovery of liability margins I mentioned earlier, combined with the higher VIX ratio hedging results. We continue to see some pressure on lending margins in the third quarter, reflecting a delay in tracking higher funding rates and lower prepayment levels on mortgages, although we see this bottoming out. Quarter and quarter, NI was up 6.1%, excluding the Polish moratorium, again, supported by improved liability margins, offsetting some remaining pressure on mortgage margins due to the reasons I just cited. Excluding the Polish moratorium, our net interest margin for the quarter was up at 142 basis points, mainly reflecting the higher NII on liabilities. Slide 11, that shows net core lending growth. And in retail, mortgages continued to grow, mainly in Germany and the Netherlands, although at a lower pace. reflecting an overall slowdown of demand driven by uncertainty. Lower net core lending and business lending was mainly visible in Belgium. In wholesale banking, loan growth was mainly visible in lending, partly offset by trading and multi-finance, reflecting lower commodity prices. Going forward, with increased macroeconomic uncertainty, we expect loan demand to be subdued. At customer deposit, growth was 10.5 billion, mainly driven by retail, with a continued inflow, especially in Germany. Wholesale banking also records an inflow, mainly visible in our cash management business and financial markets. Then turn to fees on page 12, which show resilience despite growing uncertainty that affected the appetite for both investments and lending. Year-on-year fee income was stable, Daily banking fees continued to grow, this quarter by an impressive 26% compared to a year ago. This reflected growth in primary customers, the increase in payment package fees and new service fees. Lending fees were down slightly, while in investment products fees we continue to see the effect of lower stock markets and less trading activity. Sequentially, we saw the same development with 8% higher daily banking fees, while investment products and lending were lower. driven by uncertainty. Then slide 13, excluding regulatory costs and incidental items, operating expenses were up on both comparable quarters. And as I explained, this is mainly the effect of high inflation rates coming in through salary indexation and CLA increases while we also keep investing for future growth. Regulatory costs were down on both prior periods, Year-on-year, this was due to a lower deposit guarantee scheme contribution in Germany, and quarter-on-quarter, this mainly reflected a one-off contribution in Poland to a new institutional protection scheme in the previous quarter. Incidental items this quarter included a 75 million addition of the interest-on-interest effect for the compensation for consumers on certain Dutch consumer credit products, and 10 million for hyperinflation accounting in Germany. Overall, in light of the current operating environment, and especially when looking at the high inflation rates, I'm pleased with how well operating expenses were contained. Then on to risk costs on the next slide, which were 403 million this quarter, or 25 basis points of average customer lending. We booked 160 million reflecting updated macroeconomic indicators and recorded a net addition of 89 million to management overlays for the potential impact of secondary risk of the current macroeconomic environment. And in total, we build up 520 million in management overlays. Risk costs also include the release of 77 million in stage two, reflecting a further reduction of our risk exposure. The increase in the stage two ratio is mainly the result of a methodology change following IFRS accounting, rather than a deterioration in the risk profile of our loan book. This change impacted primarily investment-grade exposure, with a very small impact on risk costs. The Stage 3 ratio improved to a low 1.3%. Then the next slide that shows CT1 ratio, which remains stable at 14.7%. CT1 capital was half a billion higher, mainly due to the inclusion of net profit for the quarter. RWA were up by 2.7 billion, including 3.1 billion of FX impacts. Credit RWA were up slightly when excluding FX impacts, reflecting some model impacts while the overall profile of our loan book improved. Market RWA were lower, reflecting a decrease in the capital multiplier for trading book positions. Furthermore, higher operational RWA reflected the update of the AMA model. And concerning our distribution plans, today we have announced we will distribute an additional 1.5 billion via a share buyback in 2022. Any amount remaining after the 31st of December 2022 will be paid in cash on January 16th. slide 16 shows our financial targets as we presented them to you during our investor update the C to 1 ratio remains well above our target of around 12.5% also when including the 1.5 billion additional distribution we announced today the cost income ratio remains an important input for our ROE and we continue to work on our ambition of 50 to 52% And this will be supported by the acceleration of liability NII and continued customer growth. We keep our expenses contained and continue to invest in our scalable tech and operation foundation that will enable us to grow at a lower marginal cost. ROE came in at 6.8%, including some exceptional items over the past quarters and based on a high capital position. On the 12.5% C to 1 ratio, the performer ROE was 8.9%. And we maintain our ambition to provide an attractive total return and are well positioned to do so with continued growth of customers and income, focus on managing expenses and asset quality, while we optimize our capital position. To wrap up with the highlights of the quarter. Our people make an effort every day to build a superior experience for our customers and to support the transition to a more sustainable society. We see these efforts positively reflected in primary customer numbers, NPS, as well as sustainable deals and volumes mobilized. Our financial results show that accelerating NRI momentum is a clear tailwind, with fee income has proven to be resilient. Expenses were well contained this quarter, despite the inflationary pressure of indexation in some markets and continued investments to realize our strategy. Our capital position remained strong, which also allowed us to take another step in returning capital to our shareholders, as today we announced a distribution of 1.5 billion. Overall, in a challenging environment, we have delivered another good quarter, and with our positioning and strategy, I am confident that we will continue to deliver healthy financial results, as well as a successful execution of our strategy. And with that, I hand over for questions.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel. In the interest of time, we kindly ask each analyst to limit yourselves to two questions only. Our first question comes from the line of Glea Aurora Mioto of Morgan Stanley. Please go ahead. Your line is open.