Both the bank and the insurance businesses are on track. In January 2012, ING Bank updated its strategy and financial ambitions around three pillars: customer centricity, operational excellence and balance sheet optimisation. ING Bank wants to be the preferred bank of customers, the bank that customers recommend to others. To achieve this and as part of strengthening our customer-centric culture we are therefore converging to one model: easy and fair, and at low cost. In 2012, we have made progress towards operational excellence by improving our service and streamlining our organisation and systems. And we aim to optimise our balance sheet to enhance returns and to allow us to continue to support our customers and grow our loan portfolio without growing the balance sheet. We realise that having engaged and motivated employees is key to making our strategy a success. Therefore being a top employer is also a key priority for ING.
We will also continue to evolve our various ING Direct units into more mature full-service banking models. These initiatives in Europe, coupled with our positions outside Europe, should give the Bank attractive growth potential in the long term. ING will build on its global presence and international network and capitalise on its leadership position in gathering savings, multi-channel distribution, simple propositions and marketing.
Regulation and supervision ING supports the overall majority of international, European and national regulatory reforms taking place in the financial sector. However, ING is concerned about their cumulative impact, the uncertainty when and in what form they will be implemented, and how they will affect our role in financing the real economy.
(3) Our absolute carbon emissions decreased by 7% from 225 to 209 kilotonnes. However, due to divestments and restructuring of our organisation, the total number of employees decreased, resulting in a relative increase of carbon emissions per FTE.
PROFIT RETENTION AND DISTRIBUTION POLICY ING Group’s profit retention and distribution policy is determined by internal and external capital requirements and profitable business opportunities on the one hand and the capital providers’ dividend expectations on the other. ING Group’s internal needs are determined by statutory solvency requirements and capital ratios, in excess of which ING Group needs to maintain healthy buffers. An important determinant are the credit ratings which are of high importance to ING Group, because they directly affect the company’s financing costs and hence profitability. For their part, the capital providers expect a dividend which reflects ING Group’s financial results and is relatively predictable.
ING favours the use of a designated bail-in liability class where the bail-in capital consists of subordinated instruments that may be written-down or converted in a resolution scenario with clear triggers attached to it. Banks should build up a sufficiently large layer of bail-inable debt that should be clearly defined, so that its position within the hierarchy of debt commitments in a bank’s balance sheet is clear, and investors understand the eventual treatment in the event of resolution.
Furthermore, in the course of 2012, DNB has requested the largest Dutch banks to prepare and submit information on the basis of which they will be able to develop a Resolution Plan. ING is diligently working towards providing this information and meeting the deadlines provided by DNB.
COMFRAME On 2 July 2012, the International Association of Insurance Supervisors released a working draft on the Comframe ‘Insurance core principles’. Comframe, short for ‘Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs)’, has three main objectives: (i) develop methods of operating group-wide supervision of IAIGs, (ii) establish a comprehensive framework for supervisors to address group-wide activities and risks, and (iii) foster global convergence. The working draft received harsh criticism from supervisors and industry alike for being too detailed and too prescriptive. The IAIS will open Comframe up for a second round of consultation in 2013. Finalisation is not expected until 2018.
Towards the end of 2012, ING announced a Restructuring Plan for its European insurance/investment management operations. This involves the acceleration of a transformation programme at NationaleNederlanden to sharpen its strategic focus and improve processes and systems. These measures, together with reorganising support functions, are expected to further improve the efficiency of the businesses and to result in annual savings of approximately EUR 200 million by the end of 2014. Unfortunately, these initiatives will result in a reduction in the workforce of 1,350 full-time equivalents (FTEs) in 2013-2014. This reduction will be carried out with the utmost care. For further explanation on how ING is building stronger banking and insurance/investment management businesses see the ‘Banking overview’ and ‘Insurance overview’ sections of this Annual Report.
Important inputs to the capital planning and management process are provided by stress testing that is being performed on a regular basis. These stress tests focus on topical issues and the sensitivity of the Group’s capital position to certain risks. These analyses provide input that help to steer strategic direction. Setting policies for recovery planning and resolution are a natural extension of ING’s capital management policies and follow ING’s risk management framework seamlessly.
In spite of difficult market circumstances, ING Bank managed to improve its capital position in 2012 both through profit generation, risk reduction and the successful divestments of ING Direct USA, ING Direct Canada and ING Bank’s 9.7% stake in Capital One. ING also announced the divestment of ING Direct UK, which had a neutral effect on ING Bank’s capital position when it was closed in the first quarter of 2013. Over the coming years the guiding principles for ING’s capital management will be to focus on cash capital generation, sustainable profits and financial flexibility. These objectives will help it deal with the scheduled repayment to the Dutch State of the core Tier 1 securities and with other challenges, such as achieving ING’s strategic and financial ambitions, a potentially deteriorating economic environment and increasing regulatory requirements. ING is confident that its capital position provides an adequate buffer to cope with financial market challenges, new regulations and adverse economic conditions.
The RSB’s priorities for 2012 were business and customer intelligence, savings, consumer lending and social media. The RSB established an international Social Media Expert Team, which delivered guidelines, recommendations and standards to provide all retail business units with tools and know-how to claim a frontrunner position in the use of social media in their markets. These will be further rolled out across the Retail organisation in 2013.
The mortgage market share declined by 0.9% with full-year net production at EUR 1.8 billion (2011: EUR 3.6 billion). Retail NL expects risk costs for Dutch mortgages to remain high due to the decrease in housing prices and a further expected increase in unemployment. The non-performing loans ratio increased slightly to 1.4% of total mortgage loans, though that is still relatively low. Furthermore, risk costs in relation to loans for commercial property development in the mid-corporate sector have increased.
Operational excellence In 2012, we prepared for further growth and took a number of operational measures to facilitate this growth and provide reliable online banking services. During the year the Bank experienced a number of operational system disruptions due to several technical issues (database memory capacity) and human errors (wrongly executed changes), which limited customer access to Mijn ING, the mobile app and iDEAL. We have improved access to these systems by taking a number of measures, including technological improvements and reducing the interdependencies between the various applications. Thus we try to ensure smooth customer access to our services.
The Bank has almost finished turning its smaller traditional branches into ‘proximity’ outlets with self-service cash facilities and online banking access. At year-end, 492 branches out of a total of 518 branches had been converted into proximity branches.
Two good examples of exchanging best practices and copying successful formulas within the Retail Banking organisation were the launch of ING Mobile, the mobile app for iPhone and iPad, and giving customers who open a current account (‘ING Orange Account’), automatic access to an ING Orange Savings account. Both ideas were copied from ING Direct France.
In Belgium, expanding the ‘direct if possible, advice when needed’ model will remain the Bank’s major objective. Its goal is to significantly increase the online product and services range over the next few years.
The operating result of Insurance/IM decreased by 34% to EUR 1,095 million from EUR 1,658 million in 2011, mostly driven by higher administrative expenses and Deferred Acquisition Cost (DAC) amortisation, which was largely attributable to the US Insurance business. Life administrative expenses increased by 9% from EUR 2,319 million in 2011 to EUR 2,529 million in 2012 due to a non-recurring reduction in pension plan liabilities in the previous year, and higher DAC amortisation following higher operating income in the US.
In the Netherlands, Nationale-Nederlanden’s 10-year bank distribution contract with ING Bank, signed in 2011, continued to deliver encouraging results. In Belgium, a long-term exclusive bancassurance distribution agreement with ING Bank was signed in 2012. In Luxembourg, where most of our insurance is distributed through banks, ING Life Luxembourg expanded its distribution network by appointing more banks, brokers and asset managers as intermediaries.
The operating result increased by 5.4%, as higher investment margins and fees and premium-based revenues were partially offset by a lower technical margin and higher administrative expenses.
In 2009, ING decided to cease selling variable annuity policies with living benefits in the US. Since then, ING has taken decisive action to reduce risk, and protect regulatory reserves and rating agency capital. These actions have included reducing deferred acquisition costs, strengthening reserves, expanding hedging programmes to protect regulatory reserves, and increasing transparency by reporting US Closed Block Variable Annuity (VA) as a separate business alongside the ING’s Insurance US business.
The draft agenda of the annual General Meeting was discussed and approved, including the proposal to amend the Articles of Association of ING Groep N.V. and the publication on the application of the Dutch Banking Code and the Dutch Insurers’ Code.
New legislation on the accountancy profession (Wet op het accountantsberoep) came into force as of 1 January 2013 and prohibits certain services to be conducted by an external audit firm and introduces compulsory audit firm rotation, not later than 1 January 2016. In the 2013 annual General Meeting it will be proposed to extend the appointment of Ernst & Young as auditor of the financial statements of ING Group by two more years, i.e. for the financial years 2014 and 2015. We will start a tender procedure with the objective to change our external audit firm as of the financial year 2016.
– The appeal with the General Court of the European Union against specific elements of the European Commission’s decision regarding ING’s restructuring plan.
The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2012 and previous years.
Deferred acquisition costs 10 4,549 10,204 Assets held for sale 11 68,472 62,483
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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 (other comprehensive income) 828 828 –4 824
LOAN LOSS PROVISIONS Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) and is based on the management’s evaluation of the risk in the portfolio, current economic conditions, loss experience in recent years and credit, industry, geographical and concentration trends. Changes in such judgements and analyses may lead to changes in the loan loss provisions over time.
Transaction costs on initial recognition are expensed as incurred. Interest income from debt securities and loans and receivables classified as at fair value through profit and loss is recognised in Interest income banking operations and Investment income in the profit and loss account, using the effective interest method.
Reinsurance contracts Reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of technical provisions are accounted for in the same way as the original contracts for which the reinsurance was concluded. If the reinsurers are unable to meet their obligations, the Group remains liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectable.
Equity securities 13 45 Debt securities 2,682 2,967 Loans and receivables 1,169 1,000
Debt securities by type and balance sheet lines – Available-for-sale investments and Assets at amortised cost (total)
o n so lid ated an n u al acco u n ts 5 Paren t co m p an y an n u al acco u n ts 6 O th er in fo rm atio n 7 A
Included in Amounts due from banks 133 76 Included in Loans and advances to customers 16,263 17,364
In 2011, ‘Changes in the composition of the group’ relates for EUR 565 million to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Most recent appraisal in the current year 63 54 Most recent appraisal one year ago 11 13 Most recent appraisal two years ago 13 10 Most recent appraisal three years ago 8 15 Most recent appraisal four years ago 5 8
Retail Banking Netherlands 1 1 Retail Banking Belgium 50 50 Retail Banking Germany 349 349 Retail Banking Central Europe 764 739 Retail Banking International – Other 48 Commercial Banking 24 15 Insurance Benelux 25 Insurance Central & Rest of Europe 114 112 Insurance Asia/Pacific – South Korea 192 Insurance Asia/Pacific – Rest of Asia 44 ING Investment Management 220
Notes to the consolidated annual accounts of ING Group continued 138 ING Group Annual Report 2012
Notes to the consolidated annual accounts of ING Group continued 140 ING Group Annual Report 2012
More than 1 year but less than 2 years 10,681 6,914 More than 2 years but less than 3 years 11,194 10,347 More than 3 years but less than 4 years 8,955 5,943 More than 4 years but less than 5 years 7,189 7,541 More than 5 years 29,191 20,655 Total fixed rate debt securities 107,696 103,708
Opening balance 13,198 11,974 Changes in the composition of the group –187
Exchange rate differences –176 380 Other changes 240 702 Closing balance 12,628 13,198
Deferred taxes are recognised on all temporary differences under the liability method using tax rates applicable in the jurisdictions in which the Group is liable to taxation.
Changes in the composition of the group –3 –3 –118 –12 –121 –15
In December 2005, Interadvies N.V., at the time a subsidiary of ING Bank N.V. (together ‘ING’) sold Arenda Holding B.V. and five subsidiaries (together ‘Arenda’) to Amodo Europe N.V. (‘Amodo’). In November 2006, Amodo instituted legal proceedings against ING. Amodo claimed that ING informed them incorrectly with respect to the current and future financial status of Arenda at the time of the sale. This claim was rejected by the Court on 1 September 2010 but Amodo lodged an appeal against that Court decision. On 6 November 2012, the Court of Appeal partly awarded the claim of Amodo in an interlocutory judgement. In the interlocutory judgement, the Court of Appeal also instructed both ING and Amodo to submit a calculation of the damages involved to the Court of Appeal. Based on both calculations the Court of Appeal will make a final judgement. ING has the possibility to appeal against the legal grounds on which the final judgement is based. At this moment it is not practicable to provide an estimate of the (potential) financial effect of this proceeding.
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In November 2012, ING Insurance restructured the IABF to effectively delink ING Insurance US from the IABF as another step towards a planned IPO of ING Insurance US. ING Insurance US transferred its Dutch State receivable of approximately EUR 1.1 billion (USD 1.4 billion) to ING Bank, and at the same time transferred legal title to 80% of the Alt-A portfolio to ING Bank. The securities are now held in an ING Bank custody account for the benefit of the Dutch State (the portion for which the investment risk has been transferred to the Dutch State). Following the restructuring, ING Insurance US continues to own 20% of the Alt-A portfolio (the portion for which the economic ownership and investment risk remains for the risk of ING), but will going forward have the right to sell these securities, subject to a right of first refusal granted to ING Bank. ING has committed to the Dutch State that it will not sell these securities to non-ING parties without the prior written consent of the Dutch state. The provisions of the IABF are otherwise unchanged.
Changes in the composition of the group and other changes includes the decrease of the Level 3 assets in relation to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’. Furthermore Changes in the composition of the group and other changes includes the increase of the Level 3 assets in relation to shares in real estate investment funds; this increase includes mainly the reclassification of associates to investments available-for-sale as disclosed in Note 6 ‘Investments in associates’, as well as the reclassification of equity securities in certain real estate companies into Level 3.
US Subprime RMBS 748 8 756 US Alt-A RMBS 454 3 457
In 2012, the decrease in total average assets, partly attributable to the disposal of ING Direct USA and ING Direct Canada, led to a decrease of EUR 610 million in the interest result. In addition a decrease of 10 basis points of the interest margin led to a decrease in the interest result of EUR 956 million.
Change in fair value of real estate investments –11 –21 –50 –48 2 –51 –59 –19 –101
In 2010, Other includes EUR –24 million related to the sale of certain associates. The remainder includes result on disposal of certain real estate funds and other disposals that are individually not significant.
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The effective tax rate in 2011 was lower than the weighted average statutory tax rate. This is mainly caused by exempt income, which was only partly offset by non-deductible expenses and write-offs of deferred tax assets.
Insurance investments 303 217ING Group Annual Report 2012 1 W h o w e are 2 R
CDS exposures in banking book (2) 0 0 0 0 –390 –390
Step 3. Cascade into statements per risk type and per business The Bank Risk Appetite is translated per risk type, which is further cascaded down through the organisation to the lowest level needed. The risk appetite statements are then translated into dedicated underlying risk limits which are used for day-to-day monitoring and management of ING Bank’s risks.
The overall credit risk appetite framework allows ING Bank to manage the portfolio and avoid undesired concentrations of credit risk. CRM is supported by dedicated credit risk information systems and internal credit risk measurement methodologies for all types of counterparties. CRM creates consistency throughout the credit risk organisation by providing common credit risk policies, methodologies, and tools across the ING Bank. Credit risk managers use these tools and processes to manage credit risk within ING Bank.
For OTC derivatives and Repo Like transactions, risk weights are based on internal methodology
Under these exposure class definitions, it is possible for a private individual to be included under both residential mortgages and retail other. For other types of counterparties or issuers, there is no potential overlap.
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ING Bank matches trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called ‘compensation’. Subsequently, ING Bank reduces the amount by any legal netting that may be permitted under various types of Master Agreements, such as ISDAs, GMRAs, GMSLAs, etc. Lastly, the amount is further reduced by any collateral that is held by ING Bank under CSAs or other similar agreements.
Contingency funding plans address both temporary and long-term liquidity disruptions, triggered by either a general market event or an ING Bank specific event.
Risk profile The AMA capital for the fourth quarter of 2012 amounts EUR 2,836 million. This equals the reported AMA capital of last year because of an imposed capital floor of EUR 2,836 million.
– Shocks for structured credit are 50% higher than for corporate and government bonds.
The second category can be divided on the one hand in stakes in real estate assets that are revalued through equity and on the other hand stakes in funds and direct real estate revalued through P&L. Only for the last category will real estate price shocks have a direct impact on reported net profit.
Probability of Default, and the Loss Given Default (stressed by 15%). – Impaired assets are shocked as per the Credit Spread methodology.
Risk Profile ING Insurance EurAsia’s goal is to maintain well diversified investment grade portfolio while avoiding large risk concentrations. ING Insurance EurAsia diversifies and limits the credit portfolio with regard to rating classes, industries and geography. The risk of the traded fixed income portfolio is (mainly) measured through the Spread Risk model as well as the Interest Risk model. The risk of the non-traded fixed income and money market products is (mainly) measured with the Credit Default model. The specific risks are contained through the mandate restrictions, the combined Group issuer and lending concentration limit framework and the separate pre-settlement and money market limit frameworks. Please note that for all of the following tables, the figures exclude all ING intercompany exposures and include volume effects.
Central Governments 48.2% 44.1% Non-Bank Financial Institutions (2) 17.5% 20.4% Commercial Banks 10.5% 10.2% Private Individuals 7.6% 8.1% Real Estate 3.5% 3.2%
Executive Level The Board of ING U.S., Inc. has delegated certain tasks to the Finance and Risk Committee. The primary responsibility of the committee is to align finance and risk decisions that have an impact on internal and/or external reporting.
Reserve adequacy US ERM ensures that the total insurance liabilities of ING US are tested for adequacy taking into account the insurance premium rate levels and the uncertainty of future returns on investments. This is done by evaluating insurance liabilities using current best estimate assumptions and inclusion of a risk margin for prudency. The assumed investment earnings are a combination of the run-off of portfolio yields on existing assets and new money and reinvestment rates. For new money and reinvestments long-term best estimate assumptions are taken into account, although current new money rates are used for the short-term reinvestments.
Commissioners (NAIC) with consideration of the capital requirements deemed appropriate to maintain the ratings level issued to the operating companies by various rating agencies along with additional requirements for the Cayman Islands based subsidiary Security Life of Denver International (SLDI) (more detail is described in the Regulatory Capital section below); and
The largest earnings sensitivity to positive mortality risk arises in Insurance Solutions.
Impaired loans and provisions ING US mainly has bond investments. The amount of impaired loans in its portfolio is very small and limited to commercial mortgage loans.
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Regulatory Capital Sensitivities ING US calculates regulatory capital sensitivities on the Risk-Based Capital model in order to provide insights into how the amount of available capital in excess of regulatory required capital changes with an increase or a decrease in different market risk factors under moderate stress scenarios that correspond approximately with a 1-in-10 year event. Regulatory capital sensitivities are calculated in aggregate for the US domiciled regulated insurance entities, and include the effects of the sensitivities on the capital of SLDI.
Group hybrid capital (1) 2,451 2,617 Insurance hybrid capital (2) 496 1,751 Total hybrids 2,947 4,368
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As rating agencies continue to evaluate the financial services industry, it is possible that rating agencies will heighten the level of scrutiny that they apply to financial institutions, increase the frequency and scope of their credit reviews, request additional information from the companies that they rate and potentially adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. It is possible that the outcome of any such review of us would have additional adverse ratings consequences, which could have a material adverse effect on our results of operations, financial condition and liquidity. We may need to take actions in response to changing standards or capital requirements set by any of the rating agencies which could cause our business and operations to suffer. We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies.
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19 Summarise encumbered and unencumbered assets in a tabular format by balance sheet categories.
RWA as at 31 December 2011 252.7 Book size (1) –5.1 Book quality (2) 3.3 De-risking –3.5 Model updates (3) 0.3 Methodology and policy (4) –3.3 Acquisitions and divestments –32.4 Foreign exchange movements 0.0 Other –2.4 Total movement –43.0 RWA as at 31 December 2012 209.7
The divestments of ING Direct US and ING Direct Canada declined READ by EUR 3.6 billion and EUR 0.6 billion, respectively.