Active dialogue In 2011, the financial sector was once again a very regular topic of debate. Criticism was directed largely at the complexity of banks and their role in society. A fundamental review of the financial system and the banks’ business model is the main focus. We are seeking a dialogue with our stakeholders and are open to their views about our role as a financial institution. We have already carried out major changes, including simplifying our business model, products and services and in the area of remuneration. These fundamental changes take time, but we remain committed to them.
OUR MISSION ING’s mission is to set the standard in helping our customers manage their financial future. We aim to deliver financial products and services in the way our customers want them delivered: with exemplary service, convenience and at competitive prices.
Staff expenses and operating expenses Banking operations 9,889 9,659 9,665 10,122 9,970
In the course of the continued streamlining of our business portfolio we also announced other major divestments. ING Real Estate Investment Management was sold to the US-based CBRE Group and to Clarion Partners management in partnership with Lightyear Capital LLC in two separate transactions for a combined price of approximately USD 1 billion. These transactions fit our strategic objectives of reducing exposure to real estate, simplifying the structure of the company and further strengthening our capital base.
A key factor in developing the updated banking strategy which was presented in January 2012 has been the changing regulatory 18 ING Group Annual Report 2011
Our stakeholder engagement strategy is aimed at ensuring ING’s ability to be a trusted financial services adviser for all its stakeholders. Stakeholder engagement is integrated across business units and corporate staff departments and the various activities are aligned with the company’s business strategy.
The underlying return on equity, based on a 10% core Tier 1 ratio, dropped to 12.0% from 14.8% in 2010, due to the decline in results. In 2011, total risk-weighted assets increased by 2.0% to EUR 179 billion at year-end, mainly outside the Benelux.
Strategy Retail NL’s strategy is linked to ING Bank’s overall strategy to build a leading retail and commercial bank. Its ambition is to be the customer’s preferred bank, something that will be realised through operational excellence, customer centricity and becoming a top employer.
** Underlying after tax return divided by average equity based on 10% core Tier 1 ratio.
The underlying return on equity, based on a 10% core Tier 1 ratio, decreased slightly to 11.2% from 11.6% in 2010, due to the decline in results, partly offset by lower average risk-weighted assets supported by positive risk migration. At year-end 2011, however, risk-weighted assets were 3.5% higher than in 2010, due to the implementation of Capital Requirements Directive III in December 2011.
• Further optimise our balance sheet structure and increase the efficiency and effectiveness of our operations.
The investment margin of EUR 76 million was flat compared with EUR 77 million in 2010. Fees and premium-based revenues declined 8.6% compared with 2010. This decline was driven by regulatory changes affecting pension funds in Poland and Hungary. In addition the decline reflects a reallocation of health insurance premiums in Greece to the technical margin.
Employee Benefits business grows Insurance US also offers group life, disability and medical stop-loss insurance as well as voluntary benefits insurance products through its Employee Benefits business. These are provided through benefits brokers and consultants to companies and organisations looking to provide their employees with high quality benefits. Voluntary benefits products include Universal Life, Whole Life, Critical Illness, as well as Accident and Disability insurance products.
The exposures on the Southern European countries, and more specifically the restructuring and impairment of Greek government bonds, were a topic of frequent debate during the year. Cost development within ING, as well as management actions concerned, were discussed several times during the year.
APPRECIATION FOR THE EXECUTIVE BOARD AND ING EMPLOYEES The Supervisory Board would like to thank the members of the Executive Board and the Management Boards for their continued commitment to ING in 2011. During 2011 decisive steps were taken in executing the EC restructuring agreement. The Supervisory Board would also like to thank the over 97,000 employees of ING who have continued to serve customers with their best efforts and made a large contribution to ING’s results in the past year.
ADDITIONAL INFORMATION For more information, see the section on Corporate governance (pages 61–72) and the Remuneration report (pages 80–87), which are deemed to be incorporated by reference here.
SHAREHOLDER PARTICIPATION AND POSITION OF ING TRUST OFFICE (STICHTING ING AANDELEN) During the years 2008–2011, participation of shareholders, excluding the ING Trust Office, and depositary-receipt holders in annual General Meetings consistently increased from 38.7% to 47.1%. Only the extraordinary General Meeting of 25 November 2009 showed a deviation from this trend with a markedly lower turnout of 31.1%.
Members of the Supervisory Board may be suspended or dismissed at any time by a majority resolution of the General Meeting. A resolution to suspend or dismiss members of the Supervisory Board that has not been brought forward by the Supervisory Board may only be adopted by the General Meeting by an absolute majority of the votes cast, which majority represents more than one-third of the issued share capital.
After being appointed to the Supervisory Board, a former member of the Executive Board may also be appointed to one of the Supervisory Board’s committees. However, appointment to the position of chairman of a committee is only possible if the individual in question resigned from the Executive Board at least four years prior to such appointment.
Increased emphasis on long-term value creation The remuneration policy for the Executive Board combines the short and long-term variable components into one structure. This structure intends to support both long-term value creation and short-term company objectives. The emphasis on long-term performance indicators within the variable component of the compensation package is increased by means of deferral, a reasonableness test and claw back mechanisms.
The Executive Board members are not allowed to sell depositary receipts obtained within a period of five years from the grant date. They are only allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested performance-share award. Depositary receipts obtained from exercised stock options may only be sold within a period of five years from the grant date of the options to pay tax over the exercised award.
(2) Jeroen van der Veer has been chairman of the Supervisory Board since May 2011. From October 2009 until May 2011 he was vice-chairman of the Supervisory Board.
Consolidated balance sheet 90 Consolidated profit and loss account 91 Consolidated statement of comprehensive income 93 Consolidated statement of cash flows 94 Consolidated statement of changes in equity 96 Accounting policies for the consolidated annual accounts 98 Notes to the consolidated annual accounts 117 Risk management 213 Capital management 279 5 Parent company annual accounts
Risk factors 298 Financial glossary 317 General information 324 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Earnings per share 49 Basic earnings per ordinary share 1.12 0.63 –0.60 Diluted earnings per ordinary share 1.12 0.63 –0.60
Unrealised revaluations after taxation 1,138 1,138 1 1,139 Realised gains/losses transferred to profit and loss 723 723 723 Changes in cash flow hedge reserve 1,124 1,124 1,124 Transfer to insurance liabilities/DAC –2,004 –2,004 –2,004 Exchange rate differences –153 –153 –3 –156 Other revaluations –2 –2 Total amount recognised directly in equity 828 828 –4 824
Deferred acquisition costs –105 –190 1,146 Insurance and investment contracts 546 148 1,369 Impact before tax –651 –338 –223 Tax effect 118 78 Shareholders’ equity –651 –220 –145
Notes to the consolidated annual accounts of ING Group continued 122 ING Group Annual Report 2011
Most recent appraisal in 2011 93 Most recent appraisal in 2010 7
Cumulative preference shares Pursuant to the Articles of Association of ING Groep N.V. the authorised cumulative preference share capital consists of 4.5 billion cumulative preference shares, of which none have been issued. The par value of these cumulative preference shares is EUR 0.24.
As of 31 December 2011, ING Group had unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 8,178 million (2010: EUR 6,518 million).
• ING Bank issued a 5 year USD 2 billion fixed rate government guaranteed senior unsecured bond in March 2009. The issue was priced at a fixed coupon of 3.90%, 145 basis points over USD mid-swaps.
Notes to the consolidated annual accounts of ING Group continued 144 ING Group Annual Report 2011
Prior year provisions – payments to contract holders –7,709 –5,185 – interest accrual 39 81 – valuation changes investments –55 24
No funds have been entrusted to the Group by customers on terms other than those prevailing in the normal course of business. As at 31 December 2011, Customer deposits and other funds on deposit included liabilities with regard to securities sold in repurchase transactions amounting to EUR 5,730 million (2010: EUR 5,272 million).
Opening balance 17,364 15,310 Expected return on plan assets 877 886 Employer’s contribution 623 631 Participants contributions 15 2 Benefits paid –627 –625 Actuarial gains and losses 1,746 1,085 Changes in the composition of the group and other changes 7 –19 Exchange rate differences 72 94 Closing balance 20,077 17,364
Coupon interest due on financial liabilities 6,799 1,088 4,185 10,651 41,831 64,554
Reference is made to Note 30 ‘Companies acquired and companies disposed’ for more details on the disposal of the Latin American pensions, life insurance and investment management operations.
ING Group receives market-rate fees for structuring, asset managing and distributing CDO-securities to investors. The total amount of these fees is not significant.
Clarion Partners In June 2011 ING announced the completion of the sale of the private market real estate investment manager of its US operations, Clarion Partners, to Clarion Partners management in partnership with Lightyear Capital LLC for USD 100 million. The sale resulted in a net gain on divestment of EUR 39 million. Clarion Partners was previously included in the segment ING Real Estate.
Further coupons are to be paid on 12 May of each year (the coupon date) in cash if dividend on ordinary shares is paid in cash or to be paid in scrip securities in the event of a scrip dividend on ordinary shares. Coupons are only due and payable, on a non-cumulative basis and if a dividend is paid on ordinary shares over the financial year preceding the coupon date, either on an interim or a final dividend basis, provided that ING Groep N.V.’s capital adequacy position is and remains satisfactory both before and immediately after payment in the opinion of the Dutch Central Bank.
Other liabilities The other liabilities are stated at their carrying value which is not materially different from their fair value.
Transfers out of Level 3 –176 –67 –266 –509 Exchange rate differences –1 58 8 65 182 ING Group Annual Report 2011
Other include commission fees of EUR 26 million (2010: EUR 15 million; 2009: EUR 18 million) in respect of underwriting syndication loans.
Change in fair value of assets and liabilities (hedged items) 989 686 1,201 58 66 –226 1,047 752 975 Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading) 504 69 –557 103 93 –57 607 162 –614
The attribution in 2011 includes the premium of EUR 1 billion paid in relation to the repayment of the EUR 2 billion non-voting equity securities. The 2009 amount of EUR 605 million includes the coupon (EUR 259 million) and repayment premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities.
– Total investment and other income 37 9,352 –290 9,099 Total underlying income 15,854 38,065 –350 53,569
Reference is made to Note 25 ‘Discontinued operations’ for information on discontinued operations.
The restated consolidated balance sheets as per 31 December 2009 and 1 January 2009 are as follows: Restated consolidated balance sheets
ING Bank is engaged in selling a broad range of products, from which financial risks arise managed by the Credit and Market Risk departments. Operational (non-financial) risks are managed by the Operational Risk department.
Pre-settlement risk Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Bank has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is the cost of ING Bank replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of credit risk outstanding is generally based on the replacement value (mark-to-market) plus a potential future volatility concept, using a 3–7 year historical time horizon and a 97.5% (1.96 standard deviations) confidence level.
ING BANK MARKET RISK ING Bank Market Risk Management Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates, credit spreads and real estate prices, negatively impact the bank’s earnings, market value or liquidity position. Market risk either arises through positions in trading books or through the banking book positions. The trading positions are held for the purpose of benefiting from short-term price movements, while the banking book positions are intended to be held in the long-term (or until maturity) or for the purpose of hedging other banking book positions.
AMA 2.0 program delivers an ambitious set of improvements in the management of operational risk • Comprehensive, transparent and effective Non-Financial Risk Committee (NFRC) hierarchy at top-of-the-house; • Risk appetite statements for regions and divisions as anchor point for operational risk management; • Key risk indicators for top risks at bank and Regional/ Function level to monitor the ING Bank risk profile; • Set of key risk scenarios as capital model input and to prioritise risk management activities; • Key Control Testing to justify capital levels and set a cost incentive to improve controls; and • Capture of all material internal losses and share main lessons learned to avoid repetition inside the group.
To avoid potential conflicts of interest, it is imperative that the Compliance Officers are impartial and objective when advising business management on Compliance Risk in their business unit, region, country or entity. To facilitate this, a strong functional reporting line to the next higher level Compliance Officer is in place. The functional reporting line has clear accountabilities relating to objective setting, remuneration, performance management and the appointment of new Compliance Risk Management staff as well as obligations to veto and escalate.
3. Scorecard The Compliance Risk Management function works with the Operational Risk Management Scorecard process to evaluate how well the Compliance Risk Management Framework is embedded in each business. Scoring is based on the ability of the business unit to demonstrate that the required policies and procedures are implemented.
Risk not mitigated by diversification is managed through concentration and exposure limits and through reinsurance and/or securitisations: • Tolerance limits for non-life insurance risk are set by line of business for catastrophic events and individual risk; • Tolerance limits for life insurance risk are set per insured life and significant mortality events affecting multiple lives such as pandemics; • Reinsurance is used to manage tolerance levels according to the ING Insurance Eurasia reinsurance credit risk policy. This is mainly done for property & casualty insurance business; • Catastrophic losses resulting from events such as terrorism are considered to be uninsurable. ING participates in industry pools in various countries to mitigate this risk.
Persistency The risk that actual persistency in the future of existing business develops adversely compared to expected persistency of existing business
Past-due obligations ING Insurance Eurasia continually measures its portfolio in terms of payment arrears. Particularly the retail residential portfolios are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. Generally, an obligation is considered ‘past-due’ if a payment of interest or principal is more than one day late. In practice, the first 15 days after an obligation becomes past due are considered to be operational in nature for the retail loans and small businesses. After this period, letters are sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrear still exists after 60 days, the obligation is transferred to one of the departments that deals with these problem loans.
Investments in public bonds, commercial paper, securitisations and other publicly traded securities
Sensitivities The table below presents market risk sensitivity figures before diversification between risks. The stress events are described in the Model Disclosure section above.
DEVELOPMENTS In 2011 Capital Management’s main focus remained to strengthen the capital position of ING Group, ING Bank and ING Insurance. ING’s capital positions are well placed to deal with the uncertain financial environment, increasing regulatory requirements and the ambition to repay the remaining outstanding Core Tier 1 securities. Capital Management started managing towards separate US, Eurasia and Insurance Investments Financial Leverage and Capital Adequacy in 2011. In May ING repaid EUR 2 billion of the Core Tier 1 securities issued in November 2008 at a 50% premium. Nevertheless ING maintained a strong capital position, driven mainly by strong capital generation at ING Bank. ING Bank met the additional capital requirements proposed by the EBA and agreed by the EU Council on 26 October 2011. In December 2011, ING successfully completed a liability management transaction with an average participation of 60%. The net impact of this transaction on ING Group’s consolidated balance sheet was a reduction of EUR 2 billion in hybrid capital and a capital gain of EUR 0.7 billion. On 8 March 2012, in preparation of the planned insurance and investment management divestments, ING Group has announced three separate exchange offers and consent solicitations on a total of three series of senior securities of ING Verzekeringen N.V. with a total nominal value of EUR 2.6 billion. The objective of the transaction is to remove potential ambiguity that the planned divestments may create with regard to these ING Verzekeringen N.V. securities, predominantly with regard to the Change of Control clauses which may be triggered at the time of a substantial asset disposal. The transaction is scheduled to be completed in April 2012. Any difference between the book value of the currently outstanding securities and the fair value of the newly issued securities will be recognised in the profit and loss account upon completion of the exchange. In 2011 ING Bank issued a total of EUR 23 billion long-term funding against EUR 10.7 billion of ING Bank’s (including subsidiaries) longterm debt maturing.
Revaluation reserves fixed income & other –4,626 –3,425 –355 –1,025 –3,669 –2,992 Revaluation reserves excluded from Tier 1 (5) –2,043 –2,212 Insurance hybrid capital (6) 1,726 2,250 Excess hybrid capital (7) –43 –43
Result for the year 2,810 2,810 Unrealised revaluations after taxation –72 –72 –72 Changes in treasury shares 22 22 22 Transfer to share of associates reserve –91 –91 –91 Transfer to retained earnings –1,006 –1,006 1,006 Employee stock option and share plans –57 –57 –57
Opinion with respect to the parent company annual accounts In our opinion, the parent company annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2011 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
Shareholders’ equity and our net result may be significantly impacted by turmoil and volatility in the worldwide financial markets. Negative developments in financial markets and/or economies may have a material adverse impact on shareholders’ equity and net result in future periods, including as a result of the potential consequences listed above. See ‘Turbulence and volatility in the financial markets have adversely affected us, and may continue to do so below’.
Test Achats Decision On 1 March 2011, the European Court of Justice issued its judgment in the widely-followed Test Achats case. The Test Achats decision, in effect, provides that the use of gender as a factor in the pricing of or benefits under life and non-life insurance coverage is incompatible with the principles of equal treatment of men and women under the EU Charter. The Test Achat decision provides for a transition period, however, until 21 December 2012, after which the use of such gender-based factors will no longer be permissible. It is unclear whether this prohibition also applies to existing insurance contracts. While it is too early to assess the impacts of the Test Achats case on ING’s insurance business, it is expected that the industry generally will incur potentially significant compliance-related costs as policy forms, underwriting and pricing criteria, and related systems undergo required modifications. On 22 December 2011, the European Commission issued guidelines to assist the insurance industry in implementing unisex pricing by 21 December 2012 (i.e., the end of the transition period specified in the Test Achats decision). ING is unable at this stage to quantify the extent of any such costs or other impacts on its business, and intends to follow closely the implementation of the Test Achats decision and the guidelines published by the European Commission.
ING PUBLICATIONS • Annual Report, in Dutch and English • Annual Report on Form 20-F, in English