Auditor’s report 265 Proposed appropriation of result 266 2.4 Additional information
“ We want to be a company that takes its responsibilities towards society seriously, is easier to deal with for customers, motivational for employees and predictable for shareholders.”
The restructuring measures, including steps already taken as part of our Back to Basics programme, are expected to result in a pro forma balance sheet reduction of around EUR 600 billion by 2013, approximately the equivalent of 45% of the balance sheet at 30 September 2008. This will be achieved through divestments mentioned above and further deleveraging of the bank balance sheet. Including estimated organic growth, it is expected that by the end of 2013 our balance sheet will be approximately 30% smaller than at 30 September 2008. The proceeds from divesting the insurance operations will be used to eliminate double leverage and further repay the Dutch State.
In order to finance the repayment of the core Tier 1 securities and to mitigate the EUR 1.3 billion pre-tax capital impact of the additional payments for the IABF, ING launched a EUR 7.5 billion rights issue. ING aims to finance any further repayments of core Tier 1 securities from internal resources, including proceeds from the divestment of the insurance operations.
Other debt securities –174 –809 0 –255 –174 –554 Impairments / fair value changes debt securities –1,963 –3,399 –1,548 –2,294 –415 –1,105 Equity securities impairments –302 –1,454 –49 –331 –253 –1,123 Capital gains on equity securities 426 754 24 30 402 724 Hedges on direct equity exposure –312 482 0 0 –312 482 Hedges on indirect equity exposure –417 –49 0 0 –417 -49 DAC unlocking –351 –1,094 0 0 –351 –1,094 Equity related impact –957 –1,361 –25 –302 –932 –1,059 Real Estate revaluations / impairments –2,156 –1,173 –1,687 –732 –469 –441
ING remains strongly committed to ensuring a high quality operational and financial performance in its insurance businesses in order to create an optimal base for a bright future. We expect the demand for mutual funds, pensions and insurance products to grow significantly in the near future, in particular for guaranteed products and capital protection. We will therefore strive for cost leadership, a superior customer experience, and above benchmark investment performance.
Being a responsible financial services provider and a good corporate citizen 1.2 Report of the Executive Board
(in EUR million) 2,524 2,295 Customer satisfaction index (3) 69.1% 69.6% Economic value (in EUR million) Total assets 1,163,643 1,331,663 Shareholders’ equity 33,863 17,334 Total income 47,765 66,291 Result before tax –1,525 –1,487 Net result –935 –729 Personnel expenses: salaries 5,076 5,885 Personnel expenses: other 2,262 2,879 Employee engagement index (4) 71% 83% diversity Percentage of women in the international management council 12.8% 11.8% ING Chances for Children Number of children provided with access to education 107,575 111,409 Green energy KWH (in thousands) of electricity purchased by ING that is derived from renewable resources 330,582 344,448 dow Jones Sustainability Index 75 71 FtSE4Good Index Included Included
A dj us te d eq ui ty be gi nn in g of p er io d
N et p ro ce ed s rig ht is su e
ING Insurance’s debt/equity ratio improved by more than 400 basis points. ING also completed the sale of its 51% stake in ING Australia, the wealth management and insurance joint venture in Australia and New Zealand, to joint venture partner ANZ Bank, for EUR 1.1 billion in cash generating a profit of EUR 337 million for ING and reducing ING Insurance’s debt/equity ratio by 365 basis points. Other business sales included ING’s Annuity and Mortgage businesses in Chile to Corp Group Vida Chile, ING’s Russian non-state pension fund and the Argentine annuity business.
ING announced the sale of its Asian Private Banking business to Oversea-Chinese Banking Corporation (OCBC Bank) for approximately EUR 1 billion, generating a profit of approximately EUR 300 million. The deal was closed on 29 January 2010. The sale of ING’s Swiss Private Banking business to Julius Baer for approximately EUR 344 million (CHF 520 million) was also announced, generating a profit of approximately EUR 70 million. This transaction was completed on 14 January 2010.
RISK MANAGEMENt SUPPORtS thE BUSINESS Risk Management benefits ING and its shareholders directly by providing more efficient capitalisation and lower costs of risk and funding. The cost of capital is reduced by working closely with rating agencies and regulators to align capital requirements to risks. Risk Management helps business units to lower funding costs, make use of the latest risk management tools and skills, and lower strategic risk, allowing them to focus on their core expertise with the goal of making ING’s businesses more competitive in their markets.
functional approach within business lines to ensure systematic and consistent implementation of the Group-wide ORM framework, policies and minimum standards.
The underlying cost/income ratio improved to 70.9% from 85.3% in 2008, driven by higher income, excluding impairments and fair value changes the cost/income ratio was 54.4% in 2009.
In Belgium, too, ING is shifting to a business model based on ‘direct when possible, advice when needed’. Traditional branches are being transformed into scaled-down outlets with self-service cash functions and online banking access. By the end of 2009, 262 of such outlets were opened. Alongside these scaled-down outlets are a further 242 full-service branches. Like in the Netherlands, the service offering has been further complemented by access to specialists.
The past year saw encouraging growth in retail deposits due in part to innovative product launches and product enhancements coupled with aggressive marketing campaigns.
CONClUSION ANd AMBItIONS Retail Banking showed a solid performance throughout the financial crisis. The customer remained at the heart of the retail banking strategy and efforts were taken to improve customer services and processes, make banking easier and regain trust.
ING Belgium also saw an increase in customer deposits thanks both to innovation and its diversified product offering. Core products have been successfully redesigned and online products launched.
The addition to the provision for loan losses increased to EUR 765 million from EUR 283 million in 2008, mainly driven by an increase in the US reflecting higher delinquencies in the residential mortgage market. In 2009, the addition was 124 basis points of average credit-risk-weighted assets versus 63 basis points in 2008.
The underlying risk-adjusted return on capital (RAROC) after tax improved to –1.0% from –18.2% in 2008, due to lower impairments on the investment portfolio and improved interest margins. Average economic capital rose 22% to EUR 4.2 billion, reflecting the higher-risk environment.
ING Direct lowered client savings rates in all countries following central bank rate reductions, while maintaining attractive rates for customers given local market competition.
These transactions included underwriting EUR 2.05 billion in a EUR 19 billion Jumbo Syndicated Loan to finance Gas Natural’s acquisition of Union Fenosa in May 2009. ING played a leading role in the mid-term financing (of debt structuring) of the Vandemoortele Group in Belgium in June. The following month ING also acted as sole financial adviser for Vopak in a EUR 110 million preference shares transaction, marking the first large corporate preference shares issuance for a listed company in the Netherlands since 2004.
OPERAtING ExPENSES dEClINE Commercial Banking continued to be vigilant toward costs without impairing growth opportunities, in line with Back to Basics. Operating expenses fell in 2009 compared with 2008 due to cost-containment initiatives and a reduction in headcount of 1,562 which exceeded the expected reduction of 1,400 FTEs. In addition, the number of external staff declined by 401 FTEs. That said, the market turmoil also resulted in additional risk costs, as well as impairments on development projects at ING Real Estate.
Insurance Europe launched several new products in 2009, including professional liability insurance for freelance professionals from Nationale-Nederlanden, a surviving dependants plan from RVS in the Netherlands, a pension with restricted guarantees in Greece, and a family accidental package product in Poland.
CONClUSIONS ANd AMBItIONS Insurance Europe’s broad geographical footprint, a good balance between mature and growth markets, coupled with its ability to contain expenses, increase efficiency and standardise products and operations, will help it continue to grow the business.
ING continued to transform its business away from non-life businesses to further focus on retirement services and savings activities. Non-core businesses in Chile and Argentina were divested. The businesses in the region continued to develop wealth management strategies with a core focus on mandatory and voluntary retirement savings plans.
FINANCIAl dEvElOPMENtS Gross premium income declined by 25.2% or EUR 2,169 million to EUR 6,422 million in 2009 from EUR 8,591 million in 2008. The decrease was mainly due to the 40.8% lower premium income recorded in Japan, which resulted from the cessation of the Single Variable Annuity Product (SPVA) business as of 31 July 2009. Excluding the discontinued SPVA business in Japan, premium income fell by 7.8%, due to the drop in new sales in South Korea on an overall weaker demand for investment-linked products in 2009, partly offset by higher premium income from robust new business growth in Malaysia, Hong Kong and Thailand.
South Korea remains a key profitable ING stronghold in Asia but difficult market circumstances led to a drop in sales in 2009. Decisive action was taken to increase sales productivity through the tied agents channel. For instance, ING Life Korea launched a new, simplified commission system in July linking compensation more closely to production and rewarding persistency. ING also sees significant potential for growing its KB Life franchise, ING’s joint venture with Kookmin Bank, South Korea’s largest bank.
ING IM continued its solid performance in the institutional segment, winning several major mandates. In contrast to 2008, the retail side of the business picked up in the second half of 2009 with improved assets under management and fee income. By the end of the year, the investment management business delivered investment performance with 48% of ranked third-party assets outperforming their peer median on a three-year basis. Morningstar awarded three stars or higher to 74% of ING’s ranked mutual funds in Europe and the Americas.
CONClUSIONS ANd AMBItIONS ING IM is committed to delivering top-tier investment performance in each of its three regions. Investment management provides ING with solid growth opportunities both through affiliated ING channels and through retail and institutional third-party business. ING Investment Management has a significant global presence through its broad offerings of a diversified mix of products with solid performance in all three regions.
ING IM Europe’s business developed well, especially the pension fund business in Central Europe. The industry as a whole and IM Europe witnessed a major move by investors to Money Markets in the first half of the year. In the second half of the year, rerisking enabled ING IM to develop its institutional mandate business further. Additionally, the number of distributors of ING IM’s Luxembourg domiciled funds rose, thereby giving a boost to the business’ expansion beyond Europe’s borders.
hR AlIGNEd WIth NEW StRAtEGIC dIRECtION The strategic decisions in 2009 were accompanied by major organisational changes and impact on people, which placed even greater emphasis on Group and divisional Human Resources (HR), and ING’s overall people agenda. All areas of HR were called upon to support the organisation through the challenging circumstances and the reduction of the workforce, which was implemented as part of the Back to Basics programme. HR played a significant role in managing the restructuring process with diligence, care and thoughtfulness for our people as we reduced our workforce to 107,000 worldwide and completed a number of divestments.
In the second half of 2009 the Supervisory Board continued to discuss the strategy of ING, taking into account the discussions with the European Commission (EC) on the Restructuring Plan for ING. As a logical next step in the Back to Basics strategy, the Supervisory Board agreed to move towards a complete separation of the banking and insurance operations over the next four years through a divestment of all insurance operations (including the investment management activities).
ANNUAl ACCOUNtS ANd dIvIdENd The Executive Board has prepared the annual accounts and discussed these with the Supervisory Board. The annual accounts will be submitted for adoption at the 2010 General Meeting as part of the Annual Report. For 2009 no interim dividend has been paid. ING has announced that it will not pay a final dividend in May 2010 for the year 2009.
In view of the foregoing, the Executive Board and the Supervisory Board are of the opinion that abolishing the depositary-receipt structure cannot be justified at this moment. There will be a natural moment to evaluate ING Group’s governance in its entirety as soon as the current restructuring and the forthcoming divestments are completed. The depositary-receipt structure will form part of that evaluation.
Members of the Executive 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 Executive Board that has not been brought forward by the Supervisory Board may only be adopted by the General Meeting by a majority of the votes cast which majority represents more than one-third of the issued share capital.
Pursuant to the agreements concerning the transactions with the Dutch State mentioned above, certain resolutions of the Supervisory Board are subject to the condition that no State Nominee voted against the proposal. These rights became effective as from the 2009 annual General Meeting. These resolutions relate to the following matters: a. the issue or acquisition of its own shares by ING Group, other than related to the Securities issue (including, for the avoidance of doubt, for the purpose of conversion or financing of a repurchase of Securities) as part of regular hedging operations or in connection with employment schemes; b. the cooperation by ING Group in the issue of depositary receipts for shares; c. the application for listing on or removal from the price list of any stock exchange of the securities referred to in a. or b.; d. the entry into or termination of lasting cooperation between ING Group or a dependent company and another legal entity or partnership or as general partner in a limited partnership or general partnership where such cooperation or termination thereof has material significance for ING Group, i.e. amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; e. the acquisition by ING Group or a dependent company of a participating interest in the capital of another company amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto or a material increase or decrease in the magnitude of such a participating interest; f. investments involving an amount equal to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; Verzekeringen N.V., but remained an adviser to the Management Board of this company until 1 January 2010 to ensure a smooth transition.
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Supervisory Board and ING’s wide range of activities, that such individuals may become members of the Supervisory Board of ING Group. There is, however, a restriction in that only one in every five other members of the Supervisory Board may be a former member of the Executive Board. In addition, this member must wait at least one year after resigning from the Executive Board before becoming eligible for appointment to the Supervisory Board. Former members of the Executive Board are not eligible for appointment to the position of chairman of the Supervisory Board.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, ING Verzekeringen N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements and in monitoring the independence and performance of ING’s internal and external auditors. On 31 December 2009, the members of the Audit Committee were: Jackson Tai (chairman), Tineke Bahlmann, Henk Breukink, Piet Hoogendoorn, Godfried van der Lugt and Jeroen van der Veer.
REPORt OF thE ExECUtIvE BOARd ON INtERNAl CONtROl OvER FINANCIAl REPORtING The Executive Board is responsible for establishing and maintaining adequate internal control over financial reporting. ING’s internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of 31 December 2009, based on the COSO criteria.
PROPOSEd NEW REMUNERAtION POlICy FOR thE ExECUtIvE BOARd The remuneration of the Executive Board will consist of a combination of fixed compensation (base salary) and variable compensation (together ‘total direct compensation’), pension arrangements and benefits as described below.
The allocation of variable compensation will be conditional on the achievement of a number of performance objectives. The shortterm component, at maximum 50% of total variable compensation, is paid in cash the year following the performance year. The other 50% of the total variable compensation will be deferred. This long-term component is allocated in stock in order to ensure alignment of the Executive Board’s interests with the interests of shareholders. It also intends to serve the objective of retaining the members of the Executive Board for a longer period of time. The value of the stock award will be determined such that total variable compensation at the time of grant stays within the 100% limit.
Members of the Executive Board working on a non-Dutch employment contract, will be offered pensions in line with local practices.
Comparison of maximum 2010 remuneration with median of the peer group in EUR ING 2010 Market median ING compared to market median
As a consequence of the Back to Basics strategy and the organisational simplification resulting from it, certain Board members no longer serve on the Executive Board of ING Groep N.V.
Information on the options outstanding and the movements during the financial year of options held by the members of the Executive Board as at 31 december 2009 (1)
Pension costs of former members of the Executive Board who are not included in the above table amounted to nil in 2009 and 2008, and to EUR 1,386 thousand in 2007.
loans and advances to the individual members of the Executive Board Amount outstanding 31 December
Godfried van der Lugt 24,142 Jeroen van der Veer (2) 99,469
Deferred acquisition costs 10 11,398 11,843 Assets held for sale 11 5,024 15,312
SEGMENt REPORtING An operating segment is a distinguishable component of the Group engaged in providing products or services that is subject to risks and returns that are different from those of other operating segments. A geographical area is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
The fair value of credit derivatives included in non-trading derivatives and held to mitigate exposure to credit risk was EUR 60 million (2008: nil), and the change in their fair value in the period was EUR –121 million (2008: nil).
Changes in the composition of the group –54 –296 Transfers to and from Property in own use 58 –38 Transfers to and from Other assets 322 117 Fair value gains/(losses) –713 –400 Disposals –656 –415 Exchange rate differences 251 –402 Closing balance 3,638 4,300
Amortisation and unlocking –120 –298 –342 –173 –120 –157 –582 –628 Impairments –155 –27 –9 –44 –9 –226 Effect of unrealised revaluations in equity –482 555 –482 555 Changes in the composition of the group –11 –730 –94 –3 –62 5 –143 229 –310 –499
Opening balance –1,918 –1,354 –473 Unrealised revaluations after taxation –294 388 500 Realised gains/losses transferred to profit and loss 148 156 –228 Exchange rate differences 56 –1,108 –1,153 Closing balance –2,008 –1,918 –1,354 2.1 Consolidated annual accounts
Total provisions for insurance contracts 224,076 213,908 5,480 5,797 229,556 219,705
Where discounting is used in the calculation of the claims provisions, based on weighted averages, the rate is within the range of 3.0% to 4.0% (2008: 3.0% to 4.0%).
Debt securities 9,396 9,963 Funds entrusted 560 1,972 Subordinated liabilities 1,518 1,733 Other 341
The change in the fair value of financial liabilities designated as at fair value through profit and loss attributable to changes in the credit risk of that liability during 2009 was EUR –191 million (2008: EUR 230 million) and EUR 39 million (2008: EUR 208 million) on a cumulative basis. This change has been determined as the amount of change in fair value of the financial liability that is not attributable to changes in market conditions that gave rise to market risk (i.e. mainly interest rate risk based on yield curves). At 31 December 2009 the fair value of financial liabilities designated at fair value through profit and loss includes EUR 39 million (2008: EUR 230 million) attributable to own credit risk.
Total unused tax losses carried forward 10,073 6,392 Unused tax losses carried forward not recognised as a deferred tax asset –1,779 –638 Unused tax losses carried forward recognised as a deferred tax asset 8,294 5,754
As at 31 December the provision for reorganisation, of which EUR 433 million relates to termination benefits, mainly related to the reorganisation of Postbank, Postkantoren, Nationale Nederlanden, RVS and Insurance Americas.
In July 2009 ING reached an agreement to sell its non-core Annuity and Mortgage businesses in Chile to Corp Group Vida Chile, S.A for EUR 217 million. This sale does not impact ING’s Pension, Life Insurance, and Investment Management businesses in Chile where ING remains committed to developing leadership positions. This sale was completed in November 2009 and resulted in a loss of EUR 23 million. These non-core Annuity and Mortgages businesses were previously included in the segment Insurance Americas.
Loans and advances to customers 6 6 Amounts due from banks 43 43 Financial assets at fair value through profit and loss 78 78 liabilities Insurance and investment contracts 7 7 Customer deposits and other funds on deposit 224 224
In November 2006, the issue of amongst others the transparency of unit-linked products (commonly referred to as ‘beleggingsverzekeringen’) has received attention both in the Dutch public media and from the Dutch regulator for the insurance industry and consumer protection organisations. In mid-November 2008 ING reached an outline agreement with consumer organisations in the Netherlands to resolve a dispute regarding individual unit-linked products sold to customers in the Netherlands by ING’s Dutch insurance subsidiaries. It was agreed that ING’s Dutch insurance subsidiaries would offer compensation to policyholders where individual unit-linked policies have a cost charge in excess of an agreed maximum. The costs of the settlement have been valued at EUR 365 million. ING’s Dutch insurance subsidiaries are in negotiations with the relevant consumer organisations in order to work out the agreement more in detail. Although the agreement is not binding for policyholders, ING believes a significant step was made towards resolving the issue.
32 JOINt vENtURES Joint ventures are included proportionally in the consolidated financial statements as follows: Most significant joint ventures
33 RElAtEd PARtIES In the normal course of business, ING Group enters into various transactions with related companies. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. Transactions have taken place on an arm’s length basis and include rendering or receiving of services, leases, transfers under finance arrangements and provisions of guarantees or collateral.
Base salary and short-term bonus 1,128 986 Total compensation 1,128 986 loans and advances to key management personnel amounts in thousands of euros Amount outstanding 31 December Average interest rate Repayments
Assets Trading assets –69 –69 Investments for risk of policyholders 2 2 Non-trading derivatives –133 –133 Financial assets designated at fair value through profit and loss –104 14 –90 Available-for-sale investments –1,523 11 –1,512
–1,829 27 –1,802 liabilities Trading liabilities –64 –64 Non-trading derivatives –154 67 –87 Financial liabilities designated at fair value through profit and loss 124 124 Investment contracts (for contracts carried at fair value) 2 2
The impairments on Property held for sale (development projects) are recognised on a large number of Real Estate development projects in Europe, Australia (Waterfront City project) and the US. Circumstances that have led to these impairments are unfavourable economic circumstances in all regions that have resulted into lower expected sales prices, changes in strategy of ING Real Estate Development whereby certain projects are not developed further and operational inefficiencies in a limited number of projects.
Addition/(releases) of provision for reorganisations and relocations 339 136 434 258 8 11 597 144 445 2.1 Consolidated annual accounts
Special items in 2007 relate to the restructuring of Oyak Bank and the combining of ING Bank and Postbank.
In addition, the Finance and Risk Committee (F&RC) is a platform for the CRO and the CFO, along with their respective direct reports, to discuss and decide on issues that relate to both the finance and risk domains. After the Back to Basics initiative was launched in April 2009, the Finance & Risk Committee was split into a F&RC Bank and F&RC Insurance, in line with the strategy to manage the Bank and Insurance separately. At least on a quarterly basis there is also a F&RC Group meeting, covering specific Group issues.
Bank-Insurance diversification for CaR increased from 12% to 18%. Main driver is the increase in off-setting positions for interest rate risk.
Consolidated vaR trading books: ING Commercial Bank Minimum Maximum Average Year-end
Most important interest rate and credit spread sensitivities trading books (year end 2009) in EUR thousands 2009 2008
Risk classes 1 (AAA) –18 –145 –20 –40 2-4 (AA) –18 –34 –19 –115 11-13 (BB) –12 –20 –37 –54 17-22 (CCC and Problem Grade) –47 –11 –21 –2 No rating 15 –16 –19 –28 Total –2 –292 –193 –448 (1) BPV (or basis point value) refers to profit and loss account sensitivity per 1bp increase in the credit spread.
Basis Point Value (BPV) The Basis Point Value (BPV) figures below represent the value impact to the banking books resulting from a change in interest rates of 1 basis point. The BPV figures represent the directional position under a small upward shift in interest rates and do not capture the convexity resulting from the optionality in mortgages under larger interest rate movements.
Real Estate Exposure banking books not revalued through P&l 2008 Residential Office Retail Industrial Other Total
The second category can be divided on the one hand in minority stakes in Real Estate assets that are revalued through equity and on the other hand stakes in funds managed by ING and direct Real Estate revalued through P&L. Only for the last category Real Estate price shocks will have a direct impact on reported net profit.
The crisis in the financial markets has led to a further slowdown of the world economy in general. These global economic factors also had negative consequences for the value of Real Estate assets.
ING INSURANCE – lIQUIdIty RISK As with other ING Insurance market risk, liquidity risk falls under the supervision of the ALCO function. Liquidity risk is the risk that ING Insurance or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. ING Insurance monitors structural, tactical and contingency liquidity risk and tests adverse scenarios to measure its resiliency against these risks. The severe economic downturn has caused liquidity risk to increase substantially. To manage these risks, ING Insurance has increased its allocation to liquid assets.
Due to substantial lower earnings, ING is currently reviewing the way to set risk tolerance levels for insurance risks in the future. ING is considering whether these risk limits should be derived from Economic Capital and Available Financial Resources at Risk.
Organisation of Operational Risk Management The General Manager Corporate Operational Risk Management (CORM) reports directly to the CRO and is responsible for managing operational risks and developing and establishing the Operational Risk Framework within ING Group, ING Bank and ING Insurance. The General Manager Corporate ORM also establishes and approves the policies and minimum standards, and assists and supports the Executive Board in managing ING’s operational risks. The ORM function is organised along functional reporting lines. The Business Line operational risk managers report functionally to the General Manager CORM.
IT Risk Governance: IT risk management has become more and more important because of increasing dependency on IT and the increase of IT risk due to amongst others cybercrime. In 2009 the Executive Board has established two Executive IT Risk Steering Committees, one for Banking and one for Insurance, to be able to steer and monitor ING’s IT Risk Management process and results more closely. The operational risk appetite within ING is defined as the acceptable and authorised maximum level of risk, in each of the operational risk areas that must be adhered to in order for ING to achieve its business plan within approved budgets. This risk appetite is monitored quarterly through the Non-Financial Risk Dashboard which reports the key risk exposures.
the Scope of the Compliance Risk Management function The Compliance Risk Management function focuses on managing the risks arising from laws, regulations and standards which are specific to the financial services industry. The Compliance Risk Management function actively educates and supports the business in managing areas including anti-money laundering, preventing terrorist financing, conflicts of interest, proper sales and trading conduct and protection of customer interest.
Compliance risk reporting - Quality Assurance – Challenging Process The embedding of policies in all ING’s Business Units is vital to the effectiveness of ING’s Compliance Risk Management strategy.
To ensure the quality of the policy embedding data, Group Compliance Risk Management has formalised a robust Risk Challenging and verification process. The process is lead by the Chief Compliance Officer and is conducted with members of the Business units and the Group Compliance Reporting and Analytics team.
BIS ratio (Bank) Year-end actual BIS ratio 13.46% 12.78% Regulatory minimum BIS ratio 8.00% 8.00% Target minimum BIS ratio 10.50% 10.80%
Capital coverage ratio (Insurance) Year-end actual Capital coverage ratio 270% 256% Required capital 100% 100% Target ratio 150% 150%
ING Group Annual Report 2009 257 2.2 Parent company annual accounts
A legal reserve is carried at an amount equal to the share in the results of associates since their first inclusion at net asset value less the amount of profit distributions to which rights have accrued in the interim. Profit distributions which can be repatriated to the Netherlands without restriction are likewise deducted from the Share of associates reserve.
Capital requirements for ING’s insurance businesses in a number of jurisdictions, such as the US and the EU, are based on a risk-based capital model. A downgrade of assets in these markets could result in a higher risk weighting which may lead to higher capital requirements.
Adverse publicity and damage to our reputation arising from our failure or perceived failure to comply with legal and regulatory requirements, financial reporting irregularities involving other large and well known companies, increasing regulatory and law enforcement scrutiny of ‘know your customer’ anti-money laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures and anti-terrorist-financing procedures and their effectiveness, regulatory investigations of the mutual fund, banking and insurance industries, and litigation that arises from the failure or perceived failure by us to comply with legal, regulatory and compliance requirements, could result in adverse publicity and reputation harm, lead to increased regulatory supervision, affect our ability to attract and retain customers, maintain access to the capital markets, result in cease and desist orders, suits, enforcement actions, fines and civil and criminal penalties, other disciplinary action or have other material adverse effects on us in ways that are not predictable.
RISK MANAGEMENt At ING BANK ING has a group risk management function that is embedded at all levels of the organisation and operates through a comprehensive risk governance framework.
Securitisation exposures 1,156 2,321 Equity portfolios in the banking book under the simple risk weight approach 364 194 Other Non-Credit Obligation Assets (ONCOA) 2,132 2,166 Total credit risk 22,790 23,066
PIllAR 3 CREdIt RISK IN PRACtICE The Basel II Accord not only changes the way ING reports its credit risk for regulatory purposes; it also affects the daily operations and practices of all types of risk management at all levels within ING Bank. It has no effect on ING Insurance or Asset Management operations.
types of Credit Risk Modelling Within ING Bank, there are three types of modelling which form the foundation of the PD, EAD and LGD models used throughout the bank.
The risk weighting categories are defined in Basel II and are interpreted by ING as follows: 0% Risk Weighting These assets fall into three categories as described below. In all of these cases, ING has developed credit risk models for the specific portfolios, but has not yet implemented the AIRB approach due to restrictions imposed by local regulators. In most cases, these portfolios are eligible to be converted to the AIRB approach in 2009.
Average lGd by Pd Grade under the advanced IRB approach Central
Exposures securitised 2009 Cut off date Initial Pool Outstandings Credit Events Past due Assets losses
The Operational Risk Capital based on AMA slightly decreased to EUR 3,309 million in 2009, from EUR 3,368 million in 2008, due the reduction of the size of ING Bank relative to the total banking industry.
The Earnings Sensitivity and the Net Present Value at Risk are based on a 1% instantaneous upward shock. In the Risk Management section a detailed description is given on the interest rate risk in the Banking book. For 2009 the scope for Pillar 3 non-trading exposures is in line with the risk paragraph where several banking books are governed by the trading risk process. In the 2008 Pillar 3 figures non-trading exposures are excluded from the trading governance resulting in minor differences with the 2008 numbers from the risk paragraph.
ASSEt ANd lIABIlIty COMMIttEE (AlCO) Manages the balance sheet of ING, especially with regard to strategic non-trading risk. These risks comprise interest rate exposures, equity risk, real estate risk, liquidity, solvency and foreign exchange risk and fluctuations.
dEPOSItARy RECEIPt Depositary receipt for ordinary and preference shares, issued by the ING Trust Office, in exchange for ordinary and preference shares issued by ING Group.
COllAtERAlISEd dEBt OBlIGAtION (CdO) A type of asset-backed security which provides investors exposure to the credit risk of a pool of fixed income assets.
GROSS PREMIUMS WRIttEN Total premiums (whether or not earned) for insurance contracts written or assumed (including deposits for investment contracts with limited or no life contingencies written) during a specific period, without deduction for premiums ceded.
lENdING RISK Lending risk arises when ING Group grants a loan to a customer, or issues guarantees on behalf of a customer. This is the most common risk category, and includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured at the notional amount of the financial obligation that the customer has to repay to ING, excluding any accrued and unpaid interest, or discount/premium amortisations or impairments.
MARKEt RISK Market risk is the risk that movements in market variables, such as interest rates, equity prices, implied volatilities, foreign exchange rates, real estate prices negatively impact the earnings or market value.
IMPAIRMENt lOSS The amount by which the carrying amount of an asset exceeds its recoverable amount.
tOtAl ANd UNdERlyING NEt RESUlt The variance between Total and Underlying net result is caused by divestments and special items.
vARIANCE-COvARIANCE A model to calculate Value at Risk, assuming that changes in risk factors are (jointly) normally distributed and that the change in portfolio value is linearly dependent on all risk factor changes.
This Annual Report contains the Reports of the Executive Board and Supervisory Board as well as the Annual Accounts and Other information for the financial year 2009 in their original language (English).