Financial and regulatory environment 12 Strategy 16 Capital management 21 Risk management 23 Information technology 25
Report of the Supervisory Board 58 Corporate governance 62 Report of ING Trust Office 74 Report of ING Continuity Foundation 77 Conformity statement 78
A new brand for our insurance and investment management businesses was announced in October: NN. NN Investment Partners will be the future name for Investment Management. Nationale-Nederlanden Bank in the Netherlands significantly expanded its operations and raised its profile after some parts of WestlandUtrecht Bank had been integrated with Nationale-Nederlanden Bank. Furthermore, we reached an agreement with the Dutch State about the settlement of the Alt-A facility – which we completed in February 2014 – and we are also well on our way to repaying the core Tier 1 securities in full.
It offers retirement services, insurance, investments and banking to retail, SME, corporate and institutional customers.
how to make it more resilient and how to improve its ability to service the economy. Taking into account the Committee’s recommendations, the Dutch government released a vision document on the Dutch banking industry in August 2013. The main features of this vision are the need for a higher leverage ratio of at least 4% in EU negotiations; a reduction in the maximum loan-tovalue (i.e. mortgage loan to house value) to 100% in 2018, and 80% in the longer term; and further support, in principle, for a more co-ordinated EU approach towards regulating the industry.
Based on these Business Principles are the five ING “Customer Golden Rules” which form a key component in our approach towards customer suitability for our banking and insurance operations. ING has been using the Customer Golden Rules since 2009 and made them an integral part of our Product Approval and Review Process (“PARP”). Through this process, ING attempts to make sure that all newly developed and existing products and services meet the set requirements for doing business.
Hong Kong, Macau and Thailand. • ING’s investment management business in Taiwan. • ING’s 49% stake in Korean insurance venture KB Life Insurance
FINANCIAL DEVELOPMENTS Retail Banking’s underlying result before tax rose 32.6% to EUR 2,603 million in 2013 from EUR 1,963 million in 2012, mainly due to higher interest results following improved margins on lending and savings, and the absence of de-risking losses on the investment portfolio, which were prominent in 2012. This was in part offset by higher expenses and increased risk costs.
ING Bank Slaski published its first corporate social responsibility (CSR) report – ING The Art of Responsibility – a follow-up to the CSR strategy it adopted in May 2012. It describes how the bank achieves its business objectives by building sustainable, transparent and ethical relationships with customers, employees, business partners, investors and vendors.
CONCLUSIONS AND AMBITIONS The majority of the closed-block SPVA portfolio is projected to run off relatively quickly. The focus is on prudently managing risks via hedging to release capital, as well as on cost and efficiency management.
The application of the Corporate Governance Code by ING is described in the publication “ING’s implementation of the Dutch Corporate Governance Code”, dated April 2010, on the website of ING Group (www.ing.com), which is to be read in conjunction with this section and is deemed to be incorporated into this section. An update of the aforementioned publication is forthcoming.
The Board of ING Trust Office currently comprises six members who are independent from ING Group. No Executive Board member or former Executive Board member, Supervisory Board member or former Supervisory Board member, ING Group employee or former ING Group employee or permanent advisor or former permanent advisor to ING Group is on the Board of ING Trust Office. The Board of ING Trust Office appoints its own members, without any requirement for approval by ING Group.
VOTING INSTRUCTIONS OF HOLDERS OF DEPOSITARY RECEIPTS TO ING TRUST OFFICE Holders of depositary receipts not attending a General Meeting are entitled to give binding instructions to ING Trust Office, concerning ING Trust Office’s exercise of the voting rights attached 67ING Group Annual Report 2013 1 W h o w e are 2 R
In connection with the issuance of the Securities to the Dutch State and the IABF, ING Group and the Dutch State agreed that the Dutch State could recommend candidates for appointment to the Supervisory Board in such a way that upon appointment of all recommended candidates by the General Meeting, the Supervisory Board would comprise two State Nominees among its members. The Dutch State could recommend a Supervisory Board member already in office.
The Remuneration Committee advises the Supervisory Board, among other things, on the terms and conditions of employment (including remuneration) of the members of the Executive Board and on the policies and general principles on which the terms and conditions of employment of the members of the Executive Board and of senior managers of ING Group and its subsidiaries are based. On 31 December 2013, the members of the Remuneration Committee were: Peter Elverding (chairman), Henk Breukink, Yvonne van Rooy and Jeroen van der Veer.
request the Board in writing, setting out the matters to be considered in detail, to convene a meeting of holders of depositary receipts.
In 2010, ING evaluated the depositary-receipts structure and concluded that it would be premature to change or abolish the depositary-receipts structure in 2010 and that it would be appropriate to reconsider this as part of a re-evaluation of ING Group’s entire governance structure following the current restructuring of ING Group and the completion of the divestments approved by the extraordinary General Meeting in 2009. The outcome of the aforementioned evaluation was discussed in the annual General Meeting of 27 April 2010.
ANNUAL GENERAL MEETING ING GROUP, VOTES CAST AND VOTING BEHAVIOUR ING Trust Office attended the AGM and during this meeting ING Trust Office asked the Executive Board and the Supervisory Board of ING Group various questions. These questions are included in the adopted minutes of the AGM, available on the website of ING Group (www.ing.com).
The Board has appointed Herman Hazewinkel as chairman of the Board, effective 1 June 2014. He will succeed Jan Veraart, who was reappointed on 1 May 2013 and will step down as chairman of the Board as of 1 June 2014. Jolanda Poots-Bijl was appointed as a member of the Board as of 1 January 2014 for a term ending per 1 January 2018.
Benefits Executive Board members continue to be eligible for additional benefits (e.g. the use of company cars, contributions to company savings plans and, if applicable, expatriate allowances) which apply to other comparable employees. Executive Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on comparable terms that apply to most other employees of ING in the Netherlands. In addition, tax and financial planning services are provided to ensure compliance with the relevant legislative requirements.
Furthermore, and in addition to financial indicators, performance is also assessed on non-financial drivers. Non-financial indicators aim at further improving sustainable business practices. Non-financial indicators include customer satisfaction, workforce diversity, stakeholder engagement and sustainable business practices.
Reference is made to Note 45 ‘Taxation’ for the disclosure on the income tax effects on each component of the other comprehensive income.
Notes to the consolidated annual accounts of ING Group continued 105ING Group Annual Report 2013 1 W h o w e are 2 R
Impairments of loans and advances to customers (loan loss provisions) ING Group assesses periodically and at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a financial asset or group of assets is impaired: • The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance of or delays in repayment of the financial asset; • The borrower has failed in the repayment of principal, interest or fees and the payment failure has remained unsolved for a certain period; • The borrower has demonstrated significant financial difficulty, to the extent that it will have a negative impact on the expected future cash flows of the financial asset; • The credit obligation has been restructured for non-commercial reasons. ING Group has granted concessions, for economic or legal reasons relating to the borrower’s financial difficulty, the effect of which is a reduction in the expected future cash flows of the financial asset; and
For other types of flexible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated gross profits. Amortisation is adjusted when estimates of current or future gross profits, to be realised from a group of products, are revised. The estimates and the assumptions are reassessed at the end of each reporting period. Higher/lower expected profits (e.g. reflecting stock market performance or a change in the level of assets under management) may cause a lower/higher balance of DAC due to the catch-up of amortisation in previous and future years. This process is known as DAC unlocking. The impact of the DAC unlocking is recognised in the profit and loss account of the period in which the unlocking occurs..
Notes to the consolidated annual accounts of ING Group continued 119ING Group Annual Report 2013 1 W h o w e are 2 R
Notes to the consolidated annual accounts of ING Group continued 124 ING Group Annual Report 2013
Reference is made to Note 25 ‘Investment income’ for details on Impairments.
Accrued interest and rents Accrued interest and rents includes EUR 4,541 million (2012: EUR 5,491 million) accrued interest on assets measured at amortised cost under the IAS 39 classification Loans and receivables.
Shareholders’ equity (parent) 45,941 51,777 47,038 Non-voting equity securities 1,500 2,250 3,000
Ordinary shares - Restrictions with respect to dividend and repayment of capital The following equity components cannot be freely distributed: Revaluation reserve, Share of associates reserve (included in Other reserves), Currency translation reserve and the part of the Other reserves that relate to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN.
Debt securities 12,415 11,826 Funds entrusted 536 513 Subordinated liabilities 904 1,060
Change in fair value of real estate investments -11 -22 -5 -50 1 -5 -61 -21
As at 31 December 2013 the share awards consists of 21,993,875 share awards (2012: 43,632,814; 2011: 41,150,790) relating to equitysettled share-based payment arrangements and 3,066,117 share awards (2012: 5,783,818; 2011: 6,872,096) relating to cash-settled share-based payment arrangements.
Treasury bills and other eligible bills included in trading assets 489 79 1,470 Treasury bills and other eligible bills included in available-for-sale investments 85 439 1,140
Total as included in balance sheet: – amounts due to banks –27,257 –38,704 –72,233 – amounts due from banks 43,012 39,053 45,323
The Executive Board of ING Group, the Management Board of ING Bank and the Management Board of NN Group set the performance targets, approve and monitor the budgets prepared by the business lines. Business lines formulate strategic, commercial and financial policy in conformity with the strategy and performance targets set by the Executive Board of ING Group, the Management Board of ING Bank and the Management Board of NN Group.
Commercial Banking Income from wholesale banking activities (a full range of products is offered from cash management to corporate finance), real estate and lease.
Non-operating items –689 –15 –66 13 1 –24 21 –759 179ING Group Annual Report 2013 1 W h o w e are 2 R
Total Assets of the pension fund 16,647 16,552 2,066 1,758 18,713 18,310
– designated as at fair value through profit and loss 2,790 4,760 2,790 4,760 Investments
Fair value hierarchy ING Group has categorised its financial instruments that are either measured in the balance sheet at fair value or of which the fair value is disclosed, into a three level hierarchy based on the priority of the inputs to the valuation. The fair value hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to valuation techniques supported by unobservable inputs. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis. The fair value hierarchy consists of three levels, depending upon whether fair values were determined based on (unadjusted) quoted prices in an active market (Level 1), valuation techniques with observable inputs (Level 2) or valuation techniques that incorporate inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument (Level 3). Financial assets in Level 3 include for example illiquid debt securities, complex OTC and credit derivatives, certain complex loans (for which current market information about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available), private equity instruments and investments in real estate funds.
Joint venture China Merchants Fund In October 2012, ING reached an agreement to sell its 33.3% stake in China Merchants Fund, an investment management joint venture, to its joint venture partners China Merchants Bank Co., Ltd., and China Merchants Securities Co., Ltd. Under the terms agreed, ING received a total cash consideration of EUR 98 million. The transaction realised a net gain of EUR 59 million. The transaction closed on 3 December 2013.
Transactions with ING Bank N.V., NN Group N.V. and ING U.S., Inc. ING Bank N.V. NN Group N.V. ING U.S., Inc.
As at 31 December 2013, the unwinding of the IABF added 10 basis points to ING Bank’s core Tier 1 ratio.
59 OTHER EVENTS ING U.S. IPO of ING U.S. in May 2013 In May 2013, ING sold approximately 65.2 million ordinary shares in the Initial Public Offering (‘IPO’) of ING U.S., Inc., its U.S.-based retirement, investment and insurance business (‘ING U.S.’). Furthermore, on 29 May 2013, the underwriters of the IPO exercised in full their option to purchase approximately 9.8 million additional shares of ING U.S. from ING Group.
Japan Life, representing COLI business, and the Japan Closed Block VA, are reported separately to reflect the distinct nature of these two Japanese businesses. Under ING’s existing accounting policies, the net insurance liability of any business line must be adequate at the 50% confidence level. The Japan Closed Block VA business had a reserve inadequacy at the 50% confidence level in October 2013. This inadequacy used to be offset by surplus adequacies in other businesses in the same business line that the Japan Closed Block VA business used to be part off. The separate reporting of the Japan Closed Block VA business line therefore triggered a charge of EUR 575 million before tax to restore the reserve inadequacy. This charge resulted in a write-off of all deferred acquisition costs (DAC) related to the Japan Closed Block VA business of EUR 1,405 million partly compensated by a release of the Life insurance provision related to unearned revenues of EUR 867 million, and an increase in the life insurance provisions for the remaining amount.
The exact impact of low interest rates differs per entity and per product. In the IFRS-EU P&L accounts, lower interest rates will gradually reduce investment income. In most cases there is no direct impact on life insurance provisions as, to a large extent, these provisions are based on fixed interest rates. However, lower interest has an impact on the outcome of the reserve adequacy test (RAT) and indirectly may impact the provisions held. Lower interest rates have a direct impact on metrics that are market value based, such as the market value of the liabilities (MVL) and the available financial resources (AFR). Furthermore in the Netherlands regulatory required provisions and capital are market value based. In the near future Solvency II requirements will also be market value based.
• Money market risk: arises when ING Bank places short-term deposits with a counterparty in order to manage excess liquidity. As such, money market deposits tend to be short-term in nature. In the event of a counterparty default, ING Bank may lose the deposit placed. Money market risk is measured as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
The table below provides the ING Bank’s portfolio broken down per NAICS Industry code. The Business Lending portfolio comprises for 16.5% of the Industry type Real Estate. This cannot be completely compared with ING Bank’s Real Estate Finance portfolio as the scope and definition are differently determined.
Governance The management of interest rate risk follows the interest rate risk in the banking book framework as approved by ALCO Bank. This framework describes roles and responsibilities, risk metrics, and policies and procedures related to interest rate risk management are defined. Furthermore, on an overall level, a risk appetite for interest rate risk is set, which is translated into limits for interest rate risk metrics.
Risk classes 1 (AAA) –4 –135 –4 –124 2–4 (AA) –66 –74 –38 –65 5–7 (A) –58 –105 –42 –247 8–10 (BBB) –28 –48 23 –68 11–13 (BB) –26 –37 –40 –25 14–16 (B) –17 –9 –12 –4 17–22 (CCC and Problem Grade) –42 –3 –47 –2 Not rated –2 0 –1 –16 Total –243 –411 –161 –551
Liquidity risk transfer and pricing Funds Transfer Pricing (FTP) is an internal measurement and allocation system that assigns a profit contribution to funds raised, lent, or invested. FTP is used within ING to transfer interest rate risk, basis risk and liquidity risk positions from commercial units to Bank Treasury. The FTP framework enables local ALCOs to set their local FTP levels and manage these risks for all internal transfers at local level. This means that these risks are transferred from the business to a separate Bank Treasury book where they can be monitored and managed more efficiently and effectively. The liquidity costs, benefits and risks are considered in the product pricing, design and offering and in every relevant Product Approval and Review Process (PARP) or deal approval and other related processes for commercial products by the business units.
Risk measurement The table below sets out NN’s economic capital for insurance risk as at 31 December 2013 and 2012, respectively.
Risk measurement Economic capital for equity risk in the general account increased from EUR 1,162 million in 2012 to EUR 1,406 million in 2013. This exposure includes mutual funds with both fixed income and equity underlying positions. On a look-through basis in the overall exposure, the weighting of equities, which requires a higher economic capital than fixed income investments, increased due to stock market developments. Real estate risk
Past due mortgage loans (1–90 days) 185 129 93 2 Non-performing mortgage loans (more than 90 days past due) 37 24 17 1
The decrease in the variable annuity economic capital was due to a weakening JPY over the course of 2013. The increase in economic capital in the group pension business in the Netherlands was mainly due to changes in the hedging position over the course of the year. Considering that the size of the group pension business in the Netherlands is EUR 10.9 billion, the overall risk on this portfolio remains relatively low and well-hedged. The increase in assets under management of the funds underlying the other separate account business resulted in a higher present value of future fee income and therefore higher risk capital related to this future fee income.
Variable annuity risk This is measured by a 1 in 10 impact of the aggregate market risk shocks of the internal model on the variable annuity business
Result for the year 4,161 4,161 Unrealised revaluations –3,476 –3,476 –3,476 Changes in treasury shares 255 255 255 Repurchase premium –375 –375 –375 Transfer to share of associates reserve –293 –293 –293 Transfer to retained earnings 5,766 5,766 –5,766 Employee stock option and share plans –161 –161 –161
Rapidly increasing interest rates may result in: • a decrease in the demand for loans; • an increase in policy loans, and withdrawals from and/or surrenders of life insurance policies and fixed annuity contracts as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash to satisfy these obligations may require us to liquidate fixed maturity investments at a time when market prices for those assets are depressed because of increases in interest rates. This may result in realised investment losses. Regardless of whether we realise an investment loss, these cash payments would result in a decrease in total invested assets, and may decrease our net income. Premature withdrawals may also cause us to accelerate amortisation of deferred policy acquisition costs, which would also reduce our net income; • prepayment losses if prepayment rates are lower than expected or if interest rates increase too rapidly to adjust the accompanying hedges; • higher interest rates to be paid on debt securities that we have issued or may issue on the financial markets from time to time to finance our operations and on savings/other liabilities, which would increase our interest expenses and reduce our results of operations; • a material adverse effect on the value of our investment portfolio by, for example, decreasing the estimated fair values of the fixed income securities within our investment portfolio; • (depending on the position) a significant collateral posting requirement associated with our interest rate hedge programs, which could materially and adversely affect liquidity; and/or • decreased fee income associated with a decline in the value of variable annuity account balances invested in fixed income funds.
ADDITIONAL RISKS RELATING TO OWNERSHIP OF ING SHARES Because we are a Dutch company and because Stichting ING Aandelen holds more than 99.9% of our Ordinary Shares, the rights of our depositary receiptholders may differ from the rights of shareholders in other jurisdictions or companies that do not use a similar trust structure, which could affect your rights as an equity investor. While holders of our bearer depositary receipts are entitled to attend and speak at our General Meeting of Shareholders (‘General Meeting’), voting rights are not attached to the bearer depositary receipts. Stichting ING Aandelen (‘Trust’) holds more than 99.9% of our Ordinary Shares, and exercises the voting rights attached to the Ordinary Shares (for which bearer depositary receipts have been issued). Holders of bearer depositary receipts who attend — in person or by proxy — the General Meeting must obtain and are entitled to voting rights by proxy from the Trust. Holders of bearer depositary receipts and holders of the American Depositary Shares (‘ADSs’) representing the bearer depositary receipts who do not attend the General Meeting may give binding voting instructions to the Trust. The Trust is entitled to vote on any Ordinary Shares underlying the bearer depositary receipts for which the Trust has not granted voting proxies, or voting instructions have not been given to the Trust. In exercising its voting discretion, the Trust is required to be guided primarily by the interests of the holders of bearer depositary receipts, while also taking into account: • our interests, and • the interests of our affiliates.
Reconciliation of non-performing loans disclosures The table below shows the reconciliation of non-performing loans segmented by the lines of businesses used internally by ING Bank. A narrative explanation on these business lines are given in the Risk Management paragraph.
Past Due Loans by economic sector Residential mortgages Other retail Total Total
Financial glossary continued 415ING Group Annual Report 2013 1 W h o w e are 2 R
OUTSTANDINGS Total amount of all drawn portions of a facility and thus the sum of all transactions of a specific facility.