Ing Groep Nv

Good morning, this is Saskia welcoming you to ING's fourth quarter 2023 conference call. Before handing this conference call over to Steven 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 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 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, Stephen. Over to you.

Thank you very much, Saskia. Good morning and welcome to our results call for the fourth quarter. I hope you're all well and had a good start of the year. And as usual, I'm joined by our CRO Liliana Chortan and our CFO, Taneet Putrakul. In today's presentation, I would like to highlight our exceptional results in 2023, discuss the developments that we saw in the fourth quarter, and share our outlook for 2024. And as always, there will be room for questions at the end of the call. First, I will start with explaining how we were impacted by the developments in the world around us on slide two. Most notably, we live in a world with increasing geopolitical tensions and conflicts in many countries, resulting in the loss of many lives. And we're upset and concerned by the devastating impacts that these conflicts are having and the threat that they pose to international stability and security. And these tensions also have an ongoing effect on the global economy and have led to heightened economic uncertainty and increased pressure on supply chains. At the same time, inflation remained elevated for most of 2023 and only came down towards the end of the year. To tackle this inflation, central bankers around the world have increased policy rates at an unprecedented speed. And now, with inflation at a much lower level, the market expects rates to come down during 2024. Despite all these uncertainties, economies have proven to be resilient, and the IMF is forecasting the global economy to grow slightly in 2024. We've also witnessed political and regulatory uncertainty in 2023. Several government elections have already had a surprising outcome, and other important elections are coming up in 2024. On the regulatory side, we've seen increased volatility following the collapses of Silicon Valley Bank and Credit Suisse. and in the aftermath, the European banking sector has proven its strength. Lastly, we see a continued and accelerating transition to a more sustainable economy, also reinforced by a promising outcome of COP28, and giving our strong ESG focus the transition offers significant opportunities for ING, and we look forward to continuing this front-runner role. Then we go to slide three. We have shown exceptional results in this challenging environment, and more importantly, we are well positioned to deliver value through the cycle. Through our continued investments in our digital capabilities and our focus on offering a superior customer experience, we are able to grow our retail bank across our countries. Our well-diversified wholesale bank is highly regarded by our clients who appreciate our global reach, local knowledge, and strong sector expertise. Our pioneering role in sustainability and our ESG focus positions us well to capture growth opportunities. The bank is built on healthy fundamentals with a highly insured retail funding base, a senior well-diversified and mostly collateralized loan portfolio, resulting in the lowest risk cost in our Eurozone peer group. Finally, our capital position is strong, with ample buffer to our target ratio, And all this has resulted in an excellent track record of delivering value to all our stakeholders and market-leading returns, and we are confident that we will continue to do so. In slide four, which is where we highlight ING's outstanding results for 23, we have achieved significant growth in primary customers. At the end of 23, 40% of our total customer base had an active payment account with recurring income and at least one other product, meaning that over 15.3 million customers have chosen us as their primary bank. This growth in primary customers is reflecting the appreciation of our products and services, which is also highlighted by market-leading net promoter scores in both retail and wholesale banking. On sustainability, We are increasingly integrating climate into our decision making and business processes, and we're progressing well with introducing sustainable alternatives for key products in most of our retail banking markets. In wholesale banking, the volume mobilized to help our clients transition to more sustainable business models grew to 115 billion in 23, or 14% higher compared to 22. Our balance sheet remained strong, with over 64% funded by customer deposits. The strong asset quality is reflected in lower risk costs, which came in at only 8 basis points over customer lending this year, well below our through-the-cycle average of around 25 basis points. Our return on equity was 14.8%, despite still operating at a high 14.7% CT1 ratio. Our capital ratio strengthened again, while we distributed almost 6.5 billion euro to shareholders in 2023. In the next section, starting on slide 6, I will highlight the major developments driving our results in 2023, also on the context of a longer period. Looking closer at our total income in the past six years, I would like to emphasize a few developments on slide 6. What clearly stands out is that ING benefits from a positive rate environment and that is particularly visible in a strong increase of the liability NII and this has had a significant impact on total income which is now roughly 25% higher than in the 2018-2021 period which was still impacted by negative rates. This increase was somewhat offset by subdued loan demand which has impacted our lending NII. and we do see first signs of low-demand recovering, which bodes well for future income growth. Another important development in 2023 was the lack of fee growth, and although we grew by 750,000 primary customers and implemented strategic pricing actions, fee income was stable, growing at 0.3%. And this is mainly explained by limited demand for mortgages and lower trading levels in investment products. The market is expecting demand for mortgages to pick up in 2024, and we are seeing the first signs of that rebound. On the next slide, we provide some more details on the drivers of net interest income. The impact of the sharp increase of interest rates is evident on slide seven, especially when looking at the margin we make on liabilities. The average liability margin in 23 was 119 basis points, compared to a historical level of around 100 basis points in a positive rate environment. And this was driven by the positive impact from reinvesting part of our replicating portfolio at higher rates, which more than offset the increase of the core rates throughout the year. In the fourth quarter, we paid a core rate of around 120 basis points, corresponding to a pass-through of roughly 30%. We also recorded significant growth in our core deposits, which was driven by particularly strong contributions from Germany, Spain and Poland. In lending, we saw a further decrease of the margin compared to 22%, although the margin stabilized over the course of the year at around 130 basis points. Lending NII was noticeably impacted by subdued loan demands, yet we were able to increase our market share in the mortgage market and capture some growth opportunities. The market does expect loan demand to return in 2024, and we do see first signs of this in our books as well. On slide 8, we show the evolution of our fee and commission income, and although growth has been muted in the last two years, fee income has grown at an average rate of over 5% since 2018, and is at a materially higher level than in the past. Looking at the different product categories in detail, there are some differences to notice in the development. Fees from daily banking and retail have nearly doubled since 2018, driven by continued customer growth and pricing actions strategically that we've done in several markets. Going forward, this will have our continued focus. Freestorm lending declined a bit, driven by a lower demand for new loans, mostly visible in retail banking. In Germany, for example, the fee income from Interhub, the largest residential mortgage broker in the country, was down 40% year-on-year, and decreased by more than 50% compared to 2021, the last year not impacted by rapidly increasing rates. And now we do see some signs of recovery, which should support lending fees going forward. Lastly, lower trading activity in the last two years has impacted fees from investment products. As an example, in Germany, the number of investment product accounts increased by more than 20% compared to 2021, while the total number of standard trades decreased by around 35%. So again, there you can see that we're well positioned to benefit from the turnaround. Then we move to slide 9. Operating expenses, including regulatory costs and incidental items, increased by 6.8%. That increase was mostly driven by the effect of high inflation on staff expenses, reflecting indexation and CLA increases across most of our markets. We also continued investing in our business, which benefits all of our stakeholders, and we will continue to do so. And as we indicated during our investor day in 2022, regulatory costs have come down from their peak in 2021 and were roughly 200 million lower than in 2022, partly driven by lower contributions in the deposit guarantee scheme and the single resolution fund. In 2024, regulatory costs will decrease by another 100 million, despite additional bank taxes in various countries. Despite the growth in expenses, we've seen positive jaws, resulting in a 51% cost-to-income ratio in 2023. And going forward, we will continue to be impacted by inflationary pressure, which will partly be offset by efficiencies on the back of our continued focus on operational excellence. More on this in the section with the outlook for 2024. Then we move on to risk costs on the next slide. In 23, our strong asset quality and robust approach to risk management resulted in low provisions for new defaults combined with effective recoveries. In addition, we saw a significant reduction of our Russia exposure, resulting in a release of provisions taken in 2022. Total risk costs in wholesale banking amounted to minus 92 million for the full year, and the total risk costs for the bank amounted to only 520 million, or 8 basis points of average customer lending. All in all, a very benign year in terms of risk costs. We are vigilant as the cost of living and doing business increases for our customers, but we remain confident in the quality of our loan book. Slide 11 shows the development of our C to 1 capital ratio, which strengthened from 14.5% to 14.7%, while we returned 6.4 billion euro to shareholders. The increase in C to 1 ratio was primarily driven by our ability to generate capital, and in addition, RWA's decreased, driven by disciplined capital management and a better overall profile of the loan book. Our fully loaded C to 1 SREP requirements decreased year on year, driven by an announced 50 basis points reduction of the CFE buffer and a lower PILOT2 requirement. And these decreases were only partly offset by higher counter cyclical buffers, which increased by 34 basis points. And as a result, the buffer to both our target ratio and the regulatory requirement increased, positioning as well to continue providing attractive shareholder return. And more on that on the next slide. As already mentioned, we returned €6.4 billion to shareholders in 2023, consisting of almost €3 billion in cash dividends and slightly less than €3.5 billion of completed share buybacks. At the end of 2023, half a billion of the latest share buybacks still needed to be completed. And the share buybacks have a structural impact on the earnings and dividends per share, and we have already repurchased more than 14% of shares outstanding since our first buyback in 2021. Given our strong capital position and market leading profitability, we are well positioned to continue providing attractive returns. Then starting from slide 14, we show some key developments in the fourth quarter. And as these are mostly in line with the developments for the full year, which I just presented, I will focus on the highlights only. Total income was again strong and increased compared to last year, driven by higher liability and other income. Compared to the third quarter, our total income decreased, however mostly due to a negative swing in reserves in financial markets and lower investment income, as the previous quarter had included the annual dividend from the Bank of Beijing. The ECB's decision to adjust the remuneration on the minimum reserve requirement to zero basis points had an impact of 69 million on the NRI. The decrease of liability NRI was only limited. The higher cost for retail deposits was almost fully compensated by the positive impact from reinvesting of our replicating portfolio at higher rates. and more details on the development of our margins are shown on slide 15. Net interest income, and I'm now at page 15, excluding the impact of TLTRO, increased slightly year on year. Liability margins and liability NII were still at much higher levels than last year, and this was partly offset by lower NII from treasury and financial markets, reflecting the impact of accounting asymmetry between NII and other incomes. In lending, the margin stabilized after having increased by one basis point for three consecutive quarters. This stable margin combined with higher volumes resulted in a small increase of our lending NII. Our overall net interest margin for the quarter decreased by three basis points to 154 basis points, mostly driven by the lower ECB remuneration. Slide 16 shows the development of our net core lending. In retail, our mortgage portfolio continued to grow despite challenging market circumstances. Growth was mainly visible in Australia and the Netherlands. Other lending grew, driven by the strong commercial performance of business banking in Belgium. In wholesale banking, we saw a small increase in net core lending, although demand was still subdued, and we continued to optimize our capital usage. Going forward, we expect loan demand to pick up, although uncertainties remain. given the heightened geopolitical and macroeconomic uncertainty that I outlined at the beginning of this presentation. We're confident that our business model and geographic diversification positions as well to capture growth opportunities when they arise. And on to liabilities, we saw core deposits decline by 900 million in the fourth quarter, which was fully driven by wholesale banking, reflecting seasonal outflows, mainly related to Bank Mendes Gans. Core deposits in our retail bank increased, although we continue to see some shifts from deposits to asset under management, most notably in Germany. Then slide 17. In the fourth quarter, operating expenses, excluding regulatory costs and incidental items, were up on both comparable quarters, and this increase was mostly due to high inflation, but was also driven by higher marketing expenses and continued investments in our business. Regulatory costs were slightly up year on year, mostly including a higher annual Dutch bank tax, which is always fully recorded in the fourth quarter. And then we go to risk costs on slide 18. Risk costs were 86 million in this quarter, or five basis points of average customer lending. And wholesale banking risk costs were limited, driven by net releases in stages one and two. which included the impact of improved macroeconomic forecasts and further active reduction of our Russia exposure, which came down to 1.3 billion euro at the end of the year. The risk costs in retail banking included a previously announced 21 million addition for Swiss franc indexed mortgages in Poland. Looking at the various stages, our stage 3 ratio was stable, with limited inflows and significant releases due to repayments and recoveries, stage two was up, driven entirely by the implementation of a new methodology for interest-only mortgages in the Netherlands. And good to note that the mortgage portfolio continues to perform very well with low payment arrears. As I mentioned in my introduction, I will share our perspective on the outlook for 2024. And it's good to highlight again that the world around us continues to be uncertain, which limits the visibility on important operating drivers such as interest rates. The cycle of recent central bank rate hikes has paused, and the market expects some rate cuts in 2024. And if this happens, it will have an impact on our liability NII in particular. In the scenario illustrated on this slide, we assume a gradual normalization of liability margins to around 100 basis points at the end of 2024. Meaning, that the average liability margin would be around 10 basis points lower than last year. Given our deposit base, customer deposit base of 625 billion, this would lower the liability NII by around 600 million. The decrease in this scenario would be partly offset by a higher lending NII. As indicated, we do see initial signs of recovery of loan demand across the bank, And if this would indeed materialize into loan growth of 4%, our lending NII would increase by over 200 million, assuming stable margins. As explained on a previous slide, we were remunerated on the ECB minimum reserve requirement until 20 September 23, and that benefit will no longer be there in 24. And in that scenario, what is depicted on slide 20, our NII would amount to 15 to 15.5 billion euro in 2024, lower than in 23, but still significantly above the level of 2022. Then over to fees. That's on page 21, which we aim to grow by 5 to 10% in 2024. As indicated before, the development of our fee income in 2022 and in 2023 was impacted by the lack of loan demand and lower trading volumes in investment products. For 2024, we are confident that fee growth will improve from the stable level seen in the last two years. And this is because of a couple of factors on which we'll execute. First of all, in investment products, the trading activity was at a low level in the last two years, In Germany, for example, the total number of standard trades decreased by 35% compared to 2021, despite having 20% more accounts now. And given the continuous growth in the number of clients choosing ING for their investment products, we are well positioned to benefit from higher trading activity and generate higher fees. In addition, we will put more emphasis on growing the asset under management in the affluent and private banking segments. Next, as indicated in the ECB's Euro Area Bank Landing Survey, the market is expecting mortgage volumes to recover this year. And if that happens, we are well positioned to benefit, given our market leading positions in several geographies and via Interhub, the largest residential mortgage provider in Germany. Interhub benefits from higher mortgage volumes. And to illustrate this, the fees we made on mortgages in Germany are almost 60 million lower compared to two years ago, reflecting a decrease in mortgage volumes in Germany, which are down more than 30% over the same time period. Thirdly, our strong primary customer base is the foundation of our leading retail franchise. And here, the implementation of strategic pricing actions to better reflect the costs of having an account have already resulted in a structural growth of daily banking fees. And this is something that we will continue to focus on. And then lastly, loan demand is likely to return in wholesale banking, where our continued focus on capital velocity will guide us in a disciplined, profitable growth. And given all these four levers, we feel very comfortable that fee growth will pick up from the last two years. Then we go over to the outlook outlook on costs in slide 22. We expect total cost growth of around 3%, excluding potential incidental cost items driven by a continued delayed effect from the high inflation levels in 22 and 23, and this will again mostly be impacting staff expenses. In addition, the implementation of the Danske ruling on VAT in the Netherlands will have an impact of 100 million on the costs, while regulatory costs are expected to decrease with a similar amount primarily driven by lower contribution to the single resolution fund. We will also continue to make investments in the business to facilitate both growth and further increase efficiency. For example, investments in marketing will be made to support customer acquisition and commercial growth in selected markets. We will be making investments in the payment infrastructure and in further enhancing the financial markets business. And in line with earlier years, we will also be strengthening the core banking operation in several markets to further improve on delivery of a seamless digital experience for our customers. A large part of the investments will be offset with structural cost savings. Examples of these cost savings are further branch reductions in several markets and efficiency gains in our KYC processes. ING delivered outstanding financial results in 2023, and slide 23 shows our achievements and summarizes our perspective on the outlook for 2024. To recap, 2023 was an exceptional year with strong growth of primary customers, income growing 16%, and a low-cost income ratio of 51%, a further strengthening of our C2-1 ratio, despite announcing €4 billion of share buybacks, and a very healthy return on equity of 14.8%. For 24, we expect total income also to remain strong as we continue to benefit from a normalized interest rate environment. Income may, however, likely come in somewhat below the level of 23, driven by an expected normalization of the liability margin. Given the operating context and the scenarios that I described today, which assumes recoveries on loan demand and trading activities, we reiterate our 5% to 10% growth ambition for fees in 2024. We maintain our focus on cost control and operational efficiency. In 2024, we expect expenses to reflect the elevated inflation levels that we've seen in 2023. We will continue to make selective investments in the business, and together with cost discipline and expected savings from earlier investments, we aim to moderate the growth in total expenses. Our CT1 ratio will continue to converge towards our targets of around 12.5% and we have capacity to continue providing an attractive shareholder return. We will update the market with our next quarterly results. And we aim for a return on equity of 12%. Going forward, I'm confident that we will continue to deliver robust financial results while successfully executing our strategy. We will take a longer term view of our capital markets day in June. By then, a more stable rate outlook should help to provide us all with additional color. And we look forward to discussing this with you in June. And with that, we now move on to Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. In the interest of time, we kindly ask each analyst to limit yourselves to two questions only. So, again, that is star one for your questions today. And first up, we have Farquhar Murray from Autonomous. Please go ahead.