Ing Groep Nv

Good morning, this is Marion, welcoming you to ING's 2Q2023 conference call. Today's conference is being recorded. Before handing this conference call over to Stephen van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving a historical fact, Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20S, filed with the United States Secretaries 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 on an offer to buy any securities. Good morning, Steven, over to you.

Good morning and welcome to our second quarter 23 results call. I hope you're all well. As usual, I'm joined by our CRO Liliana Chortan and our CFO Tene Puterkool. And I'm pleased to take you through today's presentation. After that, we will take your questions. The second quarter was another strong quarter for ING, and we delivered good results, especially in an environment characterized by ongoing macroeconomic and geopolitical challenges. Our continued focus on our offering of a superior customer experience resulted in good organic growth. We added 227,000 primary customers, with many customers in Germany, the Netherlands, and Spain selecting ING as a primary bank. The share of mobile-only customers increased further, and 60% of our retail customers only do business with us through their mobile RMA channel. In Holster Banking, the volume mobilized to help our clients transition to more sustainable business models reached $47 billion in the first half of 2023, a growth of 17% compared with the first six months of 2022. We continue to benefit from the positive rate environment, and our total income grew by 23% year-on-year, mainly driven by high interest income and liabilities. Our four-quarter rolling average return on equity increased to 11.7%, and we have achieved this while operating on a very healthy C to 1 ratio of 14.9%. On August 14th, we will pay an interim cash dividend over the first half of 2023 amounting to 35 cents per share, which brings our total year-to-date distribution to shareholders to around 4.5 billion euro. And before moving to the financial results in more detail, I will spend some time on the progress we're making in execution of our strategy and related targets. Then on slide three, our purpose and strategic priorities are shown. The first priority is to deliver a superior experience which remains one of the most important reasons for customers to choose and promote ING as their primary bank. And as a result, it is one of the key drivers for customer growth. And to enable this growth, we continue to invest in our scalable tech and operations foundations and focus on offering a seamless digital experience. In the first half of this year, we have increased the straight-through processing of retail customer journeys to 69%. And this means that 69% of our key customer journeys is handled without manual intervention, which is getting closer to our 2025 target of over 75%. Another highlight this quarter is that in the Netherlands, 63% of our new clients were digitally onboarded, up from 52% at the end of last year. Our second strategic pillar is sustainability, where an important aim is to support our clients in their transition to more sustainable business models As our people are essential to putting sustainability into action, we organized our first Global Sustainability Week in June. And colleagues from around the world participated in more than 80 online and in-person sessions to share knowledge, inspire each other, and exchange views on how to make a difference both in and outside their work. We also expanded our project offering to help clients make energy-efficient renovations in Belgium, we launched a new eco-renovation loan to support business banking clients in making their real estate more sustainable. Now we are moving to slide four, which shows our strength in a positive rate environment. The graph shows our total income since 2018, and it's clear that our continued focus on income diversification and our ability to capture loan growth through the cycle has paid off, as we were able to offset the pressure from the lower rates and keep our income stable. Now that the interest rates have turned positive, the strength of our business model are highlighted. We have an attractive funding structure with over 60% of our balance sheet funded by sticky customer deposits. We have a proven ability to grow the number of clients and attract additional deposits. And this was again clearly evidenced this quarter through our successful promotional campaigns. which result in significant inflow of deposits in Germany, our largest market in terms of number of clients, and thirdly, through our diversification, which can capture long growth through the cycle. And this was evidenced again this quarter with 2.7 billion growth in mortgages, despite the fact that the number of transactions in the market was down significantly. And these positive impacts are already visible in the P&L, with income being structurally higher than in previous years. And going forward, we expect continued tailwinds from these higher rates, given the structure of our replicating portfolio. Around 55% of the €480 billion replicating portfolio is reinvested longer than one year and will continue to reprice at higher rates in the coming years. Lastly, a return of loan demand and asset margins are a catalyst for future income growth, and we expect to be able to further grow fee income. Slide 5 shows our financial targets for 2025 and our performance in the first half of this year. On fee growth and daily banking, we see further room to increase or introduce fees. In investment products, the continued growth of accounts is a strong base for fee growth when market confidence improves, and further support will come from growth of lending fees when overall demand recovers. Higher fees and continued focus on income diversification will support total income growth, though for 2023, the main driver will continue to be liability NII. And while there are some uncertainties, such as further central bank rate increases, deposit tracking, and customer behavior, the tailwind from our replicating portfolio on liabilities will continue. This income growth will support an improvement of our cost-income ratio, which has already declined to just over 54% on a four-quarter rolling basis. Our costs are well controlled, despite the pressure from high inflation, and we also continue to invest in our strategy enablers and in marketing, which will support commercial growth and bring cost benefits in the longer term. On our C to 1 ratio, we intend to move to our target of around 12.5% in roughly equal steps through our 50% payout of resilient net profit, combined with additional distributions. The next step will reflect the strong capital generation and we will update the market with a disclosure of our third quarter 23 results. Good to highlight here is that the Dutch central bank reduced the systematic risk buffer requirements for RNG from two and a half to 2%, while at the same time increasing the Dutch counter cyclical buffer from one to 2%. And as a result of these adjustments, our fully loaded SHREP requirement decreased by roughly 32 basis points to 10.7%. And as a result, we will not adjust our CET1 target. Despite risk costs below our through-the-cycle average and no identifiable trends in provisioning, we remain vigilant as cost of living and doing business rises for our customers. Driven by all these factors, we have confidence we will reach our targeted 12% return on equity. Then on to the second quarter results, starting on slide seven, which shows the continued strong development of NII. And liability NII was even higher than the shown headline number as accounting impacts shifted some NII from treasury and financial markets to other income. And the increase in liability NII reflected further rate increases and continued deposit inflow, which was only partly offset by an increase of the core rates in some of our retail markets. The positive impact was also clearly visible in wholesale banking, with our payments and cash management business benefiting from higher interest rates. In lending NII, we saw year-on-year pressure on mortgage margins due to the rising interest rates, as client rates generally track higher funding costs with a delay, while also income from prepayment penalties was negligible. Sequentially, this effect diminished and lending margins have stabilized. As mentioned year-on-year, we saw the impact of a temporary shift of NII to other income, as Treasury benefited from favorable market opportunities through money markets and FX transactions. And for financial markets, rising rates and increased business led to higher funding costs. And accounting-wise, this resulted in a reduction in net interest income, while other income rose significantly. Our net interest margin for the quarter decreased by 3 basis points to 156 basis points, fully driven by the increase of the balance sheet total, which more than offset higher NII. Slide 8 shows net core lending growth. In retail, mortgages continue to grow, mainly in Australia, the Netherlands, and Germany, despite the fact that mortgage transactions in Germany and the Netherlands dropped significantly. In wholesale banking, Loan growth was visible in lending. This was more than offset by lower utilization in working capital solutions and lower volumes in trading commodity finance, reflecting a decrease in commodity prices and lower economic activity. Going forward, with still heightened macroeconomic uncertainty, we expect loan demand to remain subdued. We benefited from our diversified business model as we grew net customer deposits with 17 billion euro, primarily reflecting the success of our promotional campaigns in Germany, where we had $16 billion of deposit inflows. Roughly two-thirds of this inflow came from existing customers. Wholesale banking recorded a small outflow. Then we turn to fees on page 9, which showed growth year-on-year driven by increased deal flow in wholesale banking lending and global capital markets in retail banking, The growth of primary customers and the increase in payment package fees was offset by lower fees year on year for investment products, which continues to be affected by less trading activity. However, the opening of new investment accounts continued and assets under management increased, which will result in higher fees when market activity recovers, as we will grow from a higher base. Sequentially, fees were up. also reflecting an increase in fees in wholesale banking, driven by lending, local capital markets, and corporate finance. Fee income for retail banking was stable. Now we move to slide 10. Excluding regulatory costs and incidental items, operating expenses were up 6.9% year on year. This was mostly due to the effect of high inflation rates on staff expenses, reflecting indexation and CLA increases across most of our markets. We also continue to invest in growing our business, including higher marketing expenses, and these factors were partly offset by positive effects and the exits from the retail markets in France and the Philippines. Quarter on quarter, expenses excluding regulatory costs and incidental items decreased with half a percent despite higher staff expenses. Last quarter had included 44 million of legal provisions and restructuring costs, while these amounted to 22 million euro in the second quarter. Regulatory costs were down year on year, as the second quarter last year had included a 92 million contribution to the institutional protection scheme in Poland. Our contribution to DGS funds has decreased as well. The quarter-on-quarter decrease in regulatory costs reflects the full payment of several annual contributions that we took in the first quarter of this year. Then risk costs in the next slide, that's slide 11, which were 98 million this quarter, or six basis points of average customer lending below our through-the-cycle average of 25 basis points. This included a €39 million increase of management overlays, mainly reflecting the current inflation and interest environment, as well as some regular model updates. The total stock of management overlays amounts to €560 million at the end of the second quarter 2023. In wholesale banking, risk costs included a few individual files. And this was, however, more than offset by a further release of our Russia-related provisions as we continue reducing our Russia-related exposure. Total offshore exposure with regards to Russia amounted to 1.7 billion euro at the end of the second quarter. Total risk costs in wholesale amounted to minus 15 million, minus one five. In retail banking, there were limited additions to risk costs in Poland, Spain, and Belgium. In stage three, We saw modest inflow with no clear trends identifiable, and the Stage 3 outstanding declined slightly this quarter, while the Stage 3 ratio remained low at 1.4%. The lower Stage 2 ratio mainly reflected sales and repayments, including a further reduction of our offshore Russia-related exposure. And all in all, a very benign quarter in risk costs, and although cost of living and doing business rises for our customers, we remain confident in the quality of our loan book. Then slide 12, that shows our CET1 ratio, which increased to a very strong 14.9%. CET1 capital was nearly 500 million lower, as the distribution of 1.5 billion was largely offset by the addition of 50% of the resilient net profit for a quarter. Furthermore, risk-weighted assets were 4.5 billion lower, including 200 million of FX impacts. Credit risk-weighted assets decreased by 5.6 billion, mostly driven by model updates, an improved profile of the loan book, as well as disciplined capital management and wholesale banking. On distribution plans, we will pay an interim cash dividend of 35 cents per ordinary share over the first half of 2023 on August 14th. And we will update the market on our future distribution plans with our third quarter of 23 results. And as mentioned before, the next steps to converge to our CT1 ratio target of 12.5% by 2025 will reflect the strong capital generation. To wrap up with the highlights, a strong second quarter in which we delivered an excellent set of results. Execution of our strategic priorities delivered strong growth of primary customers and we increased our volumes, mobilized to finance the transition to more sustainable business models. The financial results in the first half of the year clearly demonstrated our business model and strength position as well to benefit from the positive rate environment. Total income increased with growth across all segments and expenses remained under control. Our capital position remains very strong, and we are well positioned to continue providing a very attractive return to our shareholders. Going forward, I'm confident that we will continue to deliver robust financial results while successfully executing our strategy. And with that, we move to Q&A.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question from the queue, please press star 2 to cancel. Again, please press star 1 to ask a question over the phone. We'll take the first question from John Peace from Credit Suisse.