Ing Groep Nv

Jessica, welcoming you to ING's third quarter 2023 conference call. Before handing this conference call over to Stephen van Rysbeek, 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 20-F 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.

Good morning, Operator. Good morning, everybody, and welcome to our third quarter 23 results call. I hope you're all well, and as usual, I'm joined by our CRO, Liliana Chortan, and our CFO, Tanev Putrakul. And we continue to focus on our strategic priorities, and I'm pleased to take you through today's presentation. And after that, we'll take your questions. The third quarter was again a strong quarter for ING, and we continued to deliver outstanding results. I'm proud to see our people creating a superior customer experience every day, and this is evidenced by further organic growth. We have now more than 15 million primary customers. Since 2016, we have grown our primary customer base with a CAGR of nearly 6%, and are on track to reach our target of 17 million primary customers by 2025. The share of mobile-only customers increased further, and 62% of our retail customers do business with us through their mobile only, our main channel. In wholesale banking, the volume mobilized to help our clients transition to more sustainable business models was $27 billion in the third quarter and reached $74 billion in the first nine months of 2023, which is 15% higher compared with the same period last year. Our income grew 32% year-on-year and is at a structurally higher level now that the rate environment has turned positive. The four-quarter rolling average return on equity increased to 13.8% and we have achieved this while operating on a high CET1 ratio of 15.2%. Assuming a CET1 ratio of 12.5%, our long-term target, our four-quarter rolling return on equity would be more than 16%. Our strong capital position and capital generation allow us to take another step in returning capital to our shareholders. We have announced a share buyback of 2.5 billion euro starting tomorrow, which will bring the total amount of capital we will return to our shareholders to 7 billion this year. And I want to emphasize that we have realized these strong results in a quarter characterized by ongoing macroeconomic challenges. Geopolitical uncertainties persist. and further increased over the last few weeks. Cost of living rises as inflation remained elevated, while the cycle of recent central bank rate hikes appeared to have paused. Before moving to the financial results in more detail, I will spend some time on the progress we're making in the execution of our strategy and related targets. On slide three, our purpose and strategic priorities are shown. The first priority is to deliver a superior customer experience that is personal, easy, relevant, and instant. And this is highly valued by our customers, as evident by our net promoter scores, where we maintained our number one position in five of our ten retail banking markets. One example of how we offer this excellent experience is via digital onboarding. In many markets we now onboard most of our new retail customers via the mobile banking app. Another example is the introduction of a KYC tracker in the mobile app in Poland. An important part of keeping RNG safe and secure is knowing our customers, and this new feature in the mobile app allows retail customers to track easily the status of their onboarding and directly address any requirements, making the process as seamless as possible. Our second strategic pillar is putting sustainability at the heart of what we do. And we have recently published our 23 climate report, which describes progress on our aim to steer our lending portfolio towards global net zero climate goals and highlights our leading role in the banking sector. We also introduced several new sustainable alternatives for retail products in Germany. We added sustainability filters for investments in our app, enabling our customers to identify investments that fit their sustainability preferences. They are already among the top four most used filters in the app. In Romania, we added new purposes to our sustainable personal loans, like solar panels. And then we move to slide four, which shows our achievements in helping our clients in their low-carbon transition. As mentioned, we have recently published our 23 climate report and would like to highlight a few milestones. We are increasingly making climate part of business processes, working on our approach to assessing climate transition plans in scope of our Terra approach and developing tools to support this. We have expanded our oil and gas approach and we're not done yet. Last year, we were the first large global bank to stop providing dedicated finance to new upstream oil and gas fields. This year, we expanded our coverage by restricting dedicated finance to midstream activities, also aiming to reduce the volumes of the traded oil and gas that we finance. We also help set standards to jointly tackle decarbonization, and we have done this for the shipping and steel sectors, and we're now collaborating on a new methodology for the aluminium sector. Our leading role in sustainability also offers opportunities. In the third quarter, we had a leading role in the financing of the first offshore wind farm in Poland, which will produce enough clean energy to power over 1.5 million households. In the Netherlands, we finance the National Heat Fund, which provides loans to private homeowners, homeowners associations and schools, with the aim to make homes and buildings more sustainable. In the Netherlands, almost half of the labelled homes have an energy-efficient label, but much still needs to be done to make homes more sustainable. However, we need to work on this together, and specifically call on governments and regulators to guide the transformation more firmly. Then on slide five, we highlight our continued success in the retail banking market in Germany. We have been chosen as the most preferred bank for 17 years in a row by Euromagazine and have continuously maintained our number one position since we started measuring it in 2015. This appreciation of our digital products and services has resulted in a strong growth in the number of primary customers, particularly in the last few years. As of 2023, we once again were able to benefit from the positive rate environment and grow the number of clients further via attractive and profitable savings campaigns. Despite some limited outflow of deposits to competition this quarter, we have grown our deposit base by over 11 billion year to date. And we may expect some further outflows as the savings campaigns have ended. We also saw a continued shift to asset management and the number of investment product accounts continues to increase. And we have also again been able to grow the lending book despite challenging market circumstances with subdued demand. Then we move to slide six. In the third quarter, our strong capital generation and capital discipline have resulted in a further strengthening of our capital position, allowing us to take the next step in converging our CT1 ratio towards our target level. And I'm pleased to say that we will distribute an additional 2.5 billion to a share buyback, which will start tomorrow. Including the buyback, we have already returned approximately $21 billion to shareholders since 2018, and almost $7.23 billion alone, resulting in a 16.2% return year-to-date. The size of the next steps on our path towards our target level by 2025 will depend on profitability and RWA developments going forward. On risk-weighted assets, as indicated before, we have absorbed most of the regulatory RWA inflation and any impact from the implementation of Basel IV is expected to be manageable. As an example of the regulatory impact, there is a new standardized measurement approach for operational risks, which takes into account profitability and which could result in an impact of up to 20 basis points in 2025. Periodical methodology changes and strategies taken regarding the IRB model landscape will continue to have a positive or negative effect on credit risk-weighted assets. Then slide 7 shows our financial targets for 2025. On fee growth, in addition to the strong impact of further primary customer growth, we see room to increase or introduce fees in daily banking. The continued growth of investment product accounts will result in higher fee income when market confidence improves. Further support will come from a growth of lending fees when overall loan demand recovers. Total income grew over 20% year-on-year, significantly higher than what we had guided for in the beginning of the year, mostly driven by the strong recovery of liability margins. Our cost-income ratio decreased to 51.6%, in line with the 25 target. Our costs are well under control, despite the ongoing pressure from elevated inflation levels, and we also continue to invest in our business, which will support commercial growth and brings operational efficiency in the longer term. On a CT1 ratio, we intend to move to our targeted CT1 ratio of around 12.5% by 2025. And as mentioned before, the next steps will reflect a strong capital generation and capital discipline, and we will update the market with a disclosure of the first quarter results of 2024. Despite risk costs coming in below our through-the-cycle average and no identifiable trends in provisioning are there, we remain vigilant as the cost of living and doing business rises for our customers in the current context. Taking all of the above into account, we are confident that we will be able to sustain our 12% return on equity. And to slide 9, there we go to the third quarter results. We show a development of total income in the last five quarters. It's clear that the strong growth is driven by recovery of liability margins, while all other income lines have been stable. The cycle of recent central bank rate hikes appear to have paused, which means that our liability margins may reduce somewhat from current levels. And I will also be impacted by the change in the remuneration on the minimum reserve requirement by the ECB, and has a positive NRI support where Kearney expects interest rates to be higher for longer and margins to stabilize at a structurally higher level than in the past, depending on developments in the competitive landscape for savings. 55% of our replicating portfolio will continue to support our liability income, while our strong and diversified commercial positions in retail and wholesale banking will enable us to capture income growth even more so when loan demand recovers. On to the quarterly development of our net interest income and margins on slide 10. The strong increase of NII year-on-year was driven by normalization of our liability margin, which now stabilized at around 120 basis points. And the acceleration of core rate increases was absorbed by the positive impact from reinvesting part of our replicating portfolio at higher rates. In lending, we saw the overall margin increase for the third consecutive quarter, despite some pressure on mortgage margins due to rising interest rates, as client rates generally track higher funding costs with a delay. Note that the interest income continued to be impacted by accounting asymmetry, which led to lower net interest income in treasury and financial markets, which was offset in other income. Our overall net interest margin for the quarter increased by 1 basis point to 157 basis points. And year on year, the net interest margin increased by almost 30 basis points. Slide 11 shows the development of our net core lending and retail. Mortgages continue to show growth despite challenging market circumstances. Growth was mainly visible in the Netherlands, Germany, and Belgium. In wholesale banking, we saw a small decline in net core lending as demand was still subdued, and we continued optimizing our capital usage. And going forward, with still heightened macroeconomic uncertainty, we expect loan demand to remain subdued. However, our business model and geographic diversification has enabled us to capture growth opportunities through the cycle and enter liabilities. After the significant deposit inflow in the second quarter, we saw core deposits decline by 7 billion this third quarter. This was mainly due to a shift from deposits to assets under management and seasonal impacts, as customers tend to spend more during the summer holidays. In Germany, we had some outflow, reflecting intensified competition, while the decline in Belgium was mainly attributable to customers buying retail bonds issued by the Belgian government in September. We had significant inflows in retail other, mostly in Poland and Australia, and wholesale banking recorded a small outflow. And the slide 12, which showed growth year-on-year driven by retail banking while wholesale banking was seasonally lower, and retail banking fees from investment products increased, particularly in Belgium due to a net inflow of assets under management. Daily banking fees also increased, reflecting higher fees in payment packages and new service fees. Wholesale banking was impacted year-on-year by lower volumes in daily banking, and sequentially the fees were stable quarter-on-quarter. Fees in retail banking grew due to seasonally higher travel fee-related income and lower commissions paid to independent agents in Belgium. Fee income for wholesale banking was lower, mainly due to subdued demand in lending and seasonally lower deal flow in global capital markets and corporate finance. Then slide 13. Excluding regulatory costs and incidental items, operating expenses were up 4.7% 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 continued to invest in growing our business. Quarter-on-quarter expenses, excluding regulatory costs and incidental items, increased 1.3% despite higher staff expenses, so it was relatively limited. Regulatory costs were up slightly the year-on-year, as the third quarter last year had included a lower contribution to the deposit guarantee scheme in Germany. And on a clean basis, our year-to-date cost growth was roughly 7% versus the prior year, which is a good indication of our run rate in 2023. Then we move to risk costs on the next slide, that's slide 14. Risk costs were 183 million this quarter, or 11 basis points of average customer lending, well below our through-the-cycle average of 25 basis points. We still have a stock of management overlays amounting to 486 million. In wholesale banking, risk costs included a number of well-collateralized individual files. This was, however, offset by a further release of Russia-related provisions as we continue reducing our Russia exposure. Total offshore Russia exposure amounted to 1.5 billion euro at the end of the third quarter. and total risk costs in wholesale were 15,015,000. In retail banking, the risk costs were predominantly in Belgium, Germany, Poland and Spain, mainly driven by collective provisions. And although stage 3 increased slightly, at 1.5% it remained low with modest inflow and no clear trends visible. The lower Stage 2 ratio mainly reflected repayments and some individual files moving to Stage 3. And all in all, a very benign quarter in risk costs. We are vigilant as the cost of living and doing business increase for our customers, and we remain confident in the quality of our loan book. Slide 15. It shows our CT1 ratio, which increased further to a very strong 15.2%. CT1 capital increased by nearly 800 million, driven by the inclusion of net profit for the quarter after reserving for dividends. Furthermore, risk-weighted assets were 2.1 billion lower, including 400 million of EVIX impacts. Credit risk-weighted assets decreased by 2.2 billion, mostly driven by an improved profile of the loan book and a thorough decrease of our Russia exposure. The announced share buyback will have an impact of 78 basis points on CET1 ratio, which will be visible in the fourth quarter numbers of this year, including the distribution we offer a 16.2% return to shareholders year-to-date. We will update the market on our capital plans with the disclosure of our first quarter 2024 results. Which brings me to the wrap-up with the highlights for this quarter. A strong third quarter in which we again delivered an excellent set of results. Execution of our strategic priorities delivered strong growth of primary customers and we made significant progress in our aim to help our clients transition to more sustainable business models. Our financial results in the third quarter clearly demonstrate that we are well positioned to continue to benefit from the positive rate environment. Total income increased further and expenses remained under control. Our capital position remains very strong, allowing us to announce a 2.5 billion euro share buyback starting tomorrow. And going forward, I am confident that we will continue to deliver robust financial results while executing successfully on our strategy. Now over to Q&A. Operator.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad, and please ensure your line is unmuted locally, as you'll be advised when to ask your question. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. The first question comes from the line of Julia Miyoto from Morgan Stanley. Please go ahead.