(5) Targets have been set to raise adequate funds between 2005-2015 to facilitate access to education by one million children through our partnership with UNICEF. At year-end, more than 780,000 children had access to education. We are well on track to meet our target.
After the final payment, ING will have paid EUR 13.5 billion to the State, with a total annualised overall return for the State of 12.5%. However, ING has the option to accelerate repayments if possible and prudent under the prevailing economic circumstances. Repayments are conditional upon the approval of DNB, the Dutch central bank. The ultimate annualised overall return for the State will depend on when repayments are made (i.e. it will be higher if the repayment is accelerated) but under the envisaged timetable it would 19ING Group Annual Report 2012 1 W h o w e are 2 R
ING IN SOCIETY ING’s business is centred on people and trust. Only by acting with professionalism and integrity can we maintain our stakeholders’ confidence and preserve the company’s reputation. At the heart of our values are the ING Business Principles, which are the global standard for the behaviour expected of every employee.
With its function as a financial intermediary ING plays an important role in society. We are continuously developing our products according to our customers’ changing demands and ensure that they comply with our proper values and principles, for example via sales suitability programmes.
ING’s customer-centric focus has proved a success with 10 countries achieving first or second place in Net Promoter Scores (NPS) compared to competitors. ING also received many awards for customer centricity and innovation.
In 2012, ING launched several initiatives and apps designed to make banking easier, more transparent and at low cost.
In the last quarter of 2012, ING Bank Netherlands launched the CS ING SRI Index Fund, which aims to provide investors with a return linked to the ING Socially Responsible Investments Index. Since its introduction in 2008, the ING Socially Responsible Investments Index has outperformed the MSCI World Index and the Dow Jones Sustainability World Index. The Fund’s launch was successful, reporting assets under management of almost EUR 15 million at year-end after just two months. The Fund is well positioned for further growth.
In 2012, Commercial Banking’s total underlying income decreased by 1.2% to EUR 4,963 million, primarily driven by Financial Markets, partly offset by increases in Bank Treasury, Real Estate & Other. Income from the core lending businesses held up well as lower volumes were offset by higher margins. Net production in lending was a negative amount of EUR 11.3 billion, reflecting maturities and low demand for credit, while funds entrusted reported a net outflow of EUR 5.4 billion. Underlying operating expenses decreased by 3.6% to EUR 2,436 million, mainly due to lower impairments on real estate development projects as well as lower performance-related staff costs. The underlying cost/income ratio was 49.1%, a slight improvement on 50.3% in 2011.
The underlying return on equity, based on a 10% core Tier 1 ratio, dropped to 8.6% from 11.2% in 2011 due to the decline in results, partly offset by slightly lower average risk-weighted assets. At year-end 2012, however, risk-weighted assets were 14.8% lower than a year ago, mainly due to lower volumes, de-risking and the restructuring of the emerging markets activities in Financial Markets.
FM believes the regulatory environment will continue to be challenging under Basel III, with further new rules expected to affect all financial markets participants, along with the implementation of rules that have already been agreed. These regulatory developments will lead to a continual re-assessment of individual business lines and activities, particularly with regard to their capital requirements and subsequent return on equity and in due course may lead to further product or geographical re-alignment.
Insurance overview 1 W h o w e are 2 R
In October an extra Supervisory Board meeting was organised to discuss the consensus that had been reached with the EC on amendments to the 2009 Restructuring Plan which could be the basis for a new decision by the EC. The Supervisory Board supported the proposed agreement with the EC.
A specific committee was set up to prepare for a CEO succession, if and when appropriate. An executive search firm was involved in this process. The committee reported its views to the Nomination Committee and the Supervisory Board in November 2012, as well as in January and February of 2013. The Supervisory Board agreed to propose to the 2013 General Meeting the appointment of Ralph Hamers, presently CEO of ING Belgium to the Executive Board as from the 2013 AGM on 13 May. Ralph Hamers will succeed Jan Hommen as CEO from 1 October 2013.
INDEPENDENCE Annually, the members of the Supervisory Board are requested to assess whether the criteria of dependence set out in the Corporate Governance Code do not apply to them and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board, with the exception of Luc Vandewalle, are to be regarded as independent on 31 December 2012. Luc Vandewalle is not to be considered independent because of his former position at ING Belgium. Members of the Supervisory Board to whom the independence criteria of the Corporate Governance Code do not apply, and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
We have audited ING Groep N.V.’s internal control over financial reporting as of 31 December 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of the Executive Board on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
The remuneration policy for the Executive Board was adopted by the annual General Meeting (AGM) on 27 April 2010, adjustments to the remuneration policy in line with new regulatory developments were adopted by the AGM on 9 May 2011. In addition, the Remuneration report provides information on the remuneration paid in 2012. ING realises that remuneration in the financial sector continued to be a topic of heated debate, also in 2012. Therefore ING already implemented a new policy in 2010 with an increased emphasis on, among others, creating a moderate and balanced compensation mix, long-term value creation and non-financial targets.
Members of the Executive Board will be required to pay a contribution to their pension premium in line with the contributions under ING’s Collective Labour Agreement (CLA) in the Netherlands.
sPECIAL EMPLOYMENT CONDITIONs Special employment conditions, such as commitments made to secure the recruitment of new executives, may be used in exceptional circumstances subject to strict control by the Supervisory Board.
base salary has remained unchanged and no variable remuneration has been granted since 2010. This puts the total direct compensation of the Executive Board in the lowest decile of the relevant benchmark and creates a significant gap between ING, the market and its peers in Europe. In the longer term this is not a tenable situation for ING and its market positioning. The Supervisory Board will continue to monitor the Executive Board’s total direct
Addition to loan loss provisions 5 2,125 1,670 1,751 Intangible amortisation and other impairments 45 281 369 1,060
Net result from continuing and discontinued operations 2,810 2,810 106 2,916
BASIS OF PRESENTATION ING Group applies International Financial Reporting Standards as adopted by the European Union ‘IFRS-EU’. In the annual accounts the term ‘IFRS-EU’ is used to refer to International Financial Reporting Standards as adopted by the EU, including the decisions ING Group made with regard to the options available under IFRS-EU.
Amounts held at central banks 13,847 26,481 Cash and bank balances 3,671 3,974 Short term deposits insurance operations 139 739
Greece Government bonds available-for-sale 255 –940 1,195 Italy Government bonds available-for-sale 2,033 –443 2,476 Government bonds at amortised cost (loans) 97 97 Financial institutions available-for-sale 632 –62 694 Financial institutions at amortised cost (held-to-maturity) 30 30 28 Financial institutions at amortised cost (loans) 131 131 Ireland Government bonds available-for-sale 43 –10 53 Financial institutions available-for-sale 59 –1 60 Financial institutions at amortised cost (held-to-maturity) 34 34 35 Financial institutions at amortised cost (loans) 122 122 Portugal Government bonds available-for-sale 533 –299 832 Financial institutions available-for-sale 125 –32 157 Spain Government bonds available-for-sale 1,190 –203 1,393 Government bonds at amortised cost (held-to-maturity) 170 170 170 Financial institutions available-for-sale 258 –35 293 Financial institutions at amortised cost (loans) 85 –1 86 Cyprus Government bonds available-for-sale 12 –7 19
The cost or the purchase price amounted to EUR 1,806 million (2011: EUR 1,868 million). Cost or the purchase price less accumulated depreciation and impairments would have been EUR 953 million (2011: EUR 1,036 million) had property in own use been valued at cost instead of at fair value.
In 2011, ‘Changes in the composition and other changes’ includes the transfers of certain insurance contracts outside ING.
25 DERIVATIVES AND HEDGE ACCOUNTING Use of derivatives and hedge accounting As described in the ‘Risk management’ section, ING Group uses derivatives (principally interest rate swaps and cross currency interest rate swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of economic hedging is to enter into positions with an opposite risk profile to an identified exposure to reduce that exposure. The impact of ING Group’s hedging activities is to optimise the overall cost to the Group of accessing debt capital markets and to mitigate the market risk which would otherwise arise from structural imbalances in the duration and other profiles of its assets and liabilities. In addition, hedging activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock in the interest margin in relation to interest bearing assets and the related funding.
Operating cash flow 3,181 2,038 1,239 Investing cash flow –3,022 –2,156 –2,138 Financing cash flow –142 –200 1,406 Net cash flow 17 –318 507
Amounts recognised in the profit and loss account during the year 232 –850 96 –522
Expenditure from non-life underwriting Reinsurance and retrocession premiums 40 39 61
As at 31 December 2012, total unrecognised compensation costs related to stock options amounted to EUR 3 million (2011: EUR 24 million; 2010: EUR 65 million). These costs are expected to be recognised over a weighted average period of 0.2 years (2011: 1.1 years; 2010: 1.9 years). Cash received from stock option exercises for the year ended 31 December 2012 was EUR 8 million (2011: EUR 4 million; 2010: EUR 3 million).
Special items –246 –12 –80 620 281 * Analysed as a part of operating expenses.
Market & other impacts –530 –1 29 –274 –776 Underlying result before tax –91 170 928 –379 200 –516 311
(1) Assets and liabilities from discontinued operations (2012: Asia and 2010: Latin America) are included in the segment in which it was originally included.
Impact of low interest rate environment Interest rates in the Eurozone but also in the other main home countries decreased from already low levels to unprecedented low levels. Central bank rates are still at very low levels, thereby negatively impacting the short term money market rates, and also long term rates decreased to very low levels last year. The on-going Eurozone crisis in combination with doubts on the growth potential of the world economy were the main reasons for this development.
However, the current situation of low interest rates levels is there since the eruption of the financial crisis. Therefore interest rates are on a low level for more than 4 years now. A sustained low interest rate environment can put ING Bank’s interest income under pressure. New client assets are produced at lower rates, which impacts the average yield in the credit portfolio, but also implies lower prepayment rates and thus lengthening of the portfolio duration. This results in lower yielding assets that reprice more slowly. On the other side of the balance sheet savings coupons do not reflect the low interest rate environment fully. Due to high liquidity spreads as a consequence of the crisis and strong competition in the savings market savings coupons only marginally track lower interest rates. On balance these factors may put ING Bank’s interest rate margin under pressure. This situation will endure until structural economic recovery, which will lead to an environment with interest rate increases. As there is much uncertainty when this period of recovery will emerge, ING Bank closely monitors markets in order to be positioned adequately in anticipation of either a prolonged period of a low interest rates or a potential increase of short term and long term interest rates.
BUSINESS MODEL AND RISK PROFILE Business Model ING Bank is a large European Retail Bank with a strong world-class Commercial Banking franchise operating an extensive network with presence in over 40 countries. Next to the operations in its historic markets of the Benelux, ING has developed a strong (internet) banking franchise in a number of European countries and in Asia and Australia.
Credit Risk capital and measurement Credit Risk capital Regulatory Capital (RC) is a law based prudent measure defined by regulators and serves as the minimum amount of Tier 1, Tier 2 and supplementary capital required to absorb for unexpected losses. RC is the minimum amount of capital (based on 99.90% confidence level) that ING Bank must hold from a regulatory perspective as a cushion to be able to survive large unexpected losses.
To ensure data integrity, GRID is reconciled on a weekly basis to over 17 external databases. Internally, GRID feeds data to 108 databases and additionally reconciles data for 122 systems.
ING Bank consolidated risk data warehouse (Vortex) Vortex was built based on the credit risk requirements, which means it thinks, calculates and reports based on this concept. Vortex has three main functions and three main purposes. The three main functions of Vortex; • Credit Risk Data Warehouse covering close to 100% of ING Bank credit risk exposure; • Calculation Engine: Vortex calculates country risk, large exposure, exceptions, average limit/ Outstanding, provisions, economic capital and regulatory capital; • Provide reports at a transactional, organisational, counterparty, department or ING Bank entity level.
Retail Banking: (re)Modified Loans to Private Individuals ING Bank applies forbearance activities to a limited amount in accordance with the Retail Loan Modification policy. Under this policy, each ING bank business units should have clear criteria to determine a client’s eligibility for a loan modification, procedures to verify client’s presentation and specific approval mandates. Credit Risk Management monitors the performance of clients with modified loans at least on a monthly basis. All modified loans are flagged in the credit risk systems. Clients that are offered a loan modification, and who have accepted such modification, are assigned a specific risk rating and PD.
Bank Treasury manages the strategic interest rate position. The main objective is to maximise the economic value of the book and to generate adequate and stable annual earnings within the risk appetite boundaries set by ALCO Bank.
Governance – FX Translation result ING Bank’s strategy is to protect the target core Tier 1 ratio against FX rate fluctuations, whilst limiting the volatility in the profit and loss account. Protecting the core Tier 1 ratio is achieved by deliberately taking foreign currency positions equal to certain target positions, such that the target core Tier 1 capital and risk-weighted assets are equally sensitive in relative terms to changing FX rates.
ING Bank seeks to meet the standards and expectations of regulatory authorities and other interested parties (e.g. Governments / NGO bodies) through a number of initiatives and activities, including scrutinising account holder information, payment processing and other transactions to support compliance with regulations governing money laundering, economic and trade sanctions, bribery and other corrupt practices.
The table below shows the breakdown of the Economic Capital per risk type. Details can be found in the various risk type sections below.
Overall exposure to insurance risks did not change significantly during 2012. Annual review of actuarial assumptions for Insurance risk is reflected in the numbers presented in the IFRS Earnings sensitivities above.
AFR & EC: Embedded options in the guaranteed separate account pension business in the Netherlands.
Security lending and repo business ING Insurance EurAsia entities can enter into securities transactions. These transactions can take many legal forms. Repurchase and reverse repurchase agreements and securities borrowing and lending agreements are the most common. The amount of marketable securities that ING Insurance EurAsia lent/sold/repoed under these securities transactions at 31 December 2012 was EUR 2.8 billion (2011: EUR 7.8 billion). The corresponding amount of marketable securities held as collateral under these securities transactions at 31 December 2012 was EUR 3.3 billion (2011: EUR 8.4 billion). The reduced volume can be explained by the adoption of a lower maximum (cap) for these securities transactions for the Dutch insurance entities, combined with stricter collateral criteria for security lending, which led to less demand.
ING INSURANCE US Risk management of ING Insurance US includes risk management of the business lines Insurance US, Insurance US Closed Block VA and certain US based operations of ING IM and Corporate Line Insurance. Legally this business is directly or indirectly part of the legal entity ING US, Inc. (‘ING US’). To the extent possible risk management has been organised in line with the anticipated stand-alone future of ING US following an initial public offering (‘IPO’). Until the IPO Group exercises an overview role through the Supervisory Board, the Executive Board and through participation in certain Committees.
RISK GOVERNANCE The risk governance for ING US is based on the ‘three lines of defence’ framework which facilitates the management of risk in line with the risk appetite as defined by the Board of ING U.S., Inc. and ratified by the Supervisory Board. Risk governance is implemented through the multi-tiered structure described below. This structure facilitates communication and provides appropriate forums in which to raise issues, to make decisions and to enforce limits / controls.
 Recommends model policies and guidance to the US Risk Committee.
Issuer or Investment Risk – Risk related to the impact of a credit default or rating migration, plus the risk that a change in general credit spread levels can have on the market value of these instruments.
Risk Classes: ING US portfolio, as % of total outstanding (1)
Mitigation Credit Risk in ING US portfolio is partially mitigated by collateral it has received.
Compliance Risk Management Framework ING US adheres to the ING Group Compliance Framework, which consists of three key components: the Compliance Risk Management process, an Advisory component and the Scorecard. ING US Compliance executes a regular process of identifying, assessing, mitigating, monitoring and reporting compliance risks. The Compliance function works with Operational Risk Management’s annual evaluation process, assessing the implementation of compliance program elements within each business line and across the enterprise.
As of 31 December 2012, US regulatory capital was at USD 7.9 billion producing an RBC ratio of 526%.
(1) Tier 1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares) at nominal value. Group hybrid Tier 1 instruments other than preference shares are provided as hybrid capital to ING Bank or ING Insurance. Hybrid capital securities are perpetual fixed income securities with an embedded call and coupon deferral feature. All hybrids capital securities rank senior to core tier 1 securities and ordinary shares of ING Group and they are structurally subordinated to the senior debt instruments issued by ING Groep N.V. More details on terms and conditions can be found on www.ing.com, investor relations, fixed income information, ING Debt securities, Debt securities ING Groep N.V.
External debt issued by ING Verzekeringen N.V. 694 2,855 External debt issued by US Holding companies 2,307 930 Other net financial debt (3) 2,767 1,686 Total financial debt 5,768 5,471
Result of group companies after taxation 4,098 5,337 Other results after taxation –204 429 Net result 3,894 5,766
Figures for Derivatives and Securities Financing are based on ‘risk weighted amounts’, which generally is equal to the mark-to-market value of the underlying trades plus a (regulatory defined) ‘add-on’ which represents estimated potential future exposure. The amounts are then further modified by an adjustment that is related to the underlying collateral (market) values (after a haircut is applied) and any legal netting or compensation that may be permitted under various master agreement arrangements (such as ISDAs, CSAs, GMLAs).
Credit risk per exposure type and exposure class In line with the EDTF recommendations the table below shows the total READ and RWA for ING Bank by Basel defined exposure types for both the SA and AIRB portfolio per exposure class.
o ard 3 C o rp o rate g o vern an ce 4 C
Exposure after conversion factors * Exposure before risk mitigation Exposure after risk mitigation
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA. * For non-sovereign exposures there is a RPD floor of 3 BPS, hence the RPD in the first three grades might look counterintuitive, due to the mixture of sovereign and non-sovereign exposures.
Additional Pillar 3 information continued 359ING Group Annual Report 2012 1 W h o w e are 2 R
The 29% increase in past due loans in the Dutch mortgage portfolio is due to the deteriorating risk profile of the Residential Mortgage market in the Netherlands. Belgium also saw an increase in past due loans nevertheless the provisions did not increase as significant as in the Netherlands due to the better LTV’s and LGD’s for the Belgium Residential Mortgage portfolio. The declined levels of past due loans in Americas to almost zero is due to the sale of ING Direct US and ING Direct Canada.
DERIVATIVES AND SECURITIES FINANCING As part of its normal securities financing and derivatives trading activities, ING Bank enters into master agreements such as ISDAs, GMRAs, etc. Under the terms contained in sections related to Minimum Threshold Amounts and Minimum Transfer Amounts of Collateral Support Annexes (CSA) or other similar clauses, both ING Bank and it counterparties may agree to pledge additional collateral to each other in the event that either party is downgraded by one of the established rating agencies. ING Bank has determined that under prevailing market conditions, a one notch downgrade would only have a limited effect on the amount of additional collateral that ING Bank would be required to pledge under these agreements. However, the actual amount that ING Bank may be required to pledge in the future may vary based on ING Bank’s portfolio composition of both derivatives and securities pledged in securities financing transactions, market circumstances, the number of downgrade notches as well as the terms and conditions of future CSAs or other similar agreements entered into.
TIER-2 CAPITAL Tier-2 capital, or supplementary capital, consists of mainly subordinated debt meeting the conditions set by the Basel Commission and is a constituent of ING Bank’s capital base. The Basel III accord sets tighter conditions which ING Bank’s current Tier-2 capital instruments do not meet. However these instruments will be grandfathered under the Basel III accord in descending degree over the years 2013-2022.