Risk factors 247 RAROC performance 254 Additional Pillar 3 information for ING Bank only 255 Financial glossary 275 General information 281 1.1 Who we are
ING aims to deliver its financial products and services in the way its customers want them delivered: with exemplary service, convenience and at competitive prices. This is reflected in our mission statement: to set the standard in helping our customers manage their financial future.
OUR StakehOldeRS ING conducts business on the basis of clearly defined business principles. In all our activities, we carefully weigh the interests of our various stakeholders: customers, employees, communities and shareholders. ING strives to be a good corporate citizen.
The sharp market deterioration resulted in significant impairments and negative revaluations across most asset classes, eroding our profit in 2008, resulting in our first ever annual loss. Our commercial performance remained satisfactory. That said, our results in 2008 are clearly disappointing for our customers, shareholders, employees and management alike.
Ordinary shares – authorised 1,080 720 – issued 495 534 Preference shares – authorised 360 – issued 19 Cumulative preference shares
Key points > Confronting the crisis head-on > Prioritising customers, capital, risk and costs > Delivering an easier customer experience > Focus on banking, investments, life insurance and retirement services
The current environment also forces us to reassess in what businesses and geographies ING has a strong market position that is sustainable for the long term. We aim to avoid asset growth in pressurised sectors and continue our efforts to deleverage our balance sheet and to reduce the volatility and complexity of our portfolio. We will make a number of selective divestments outside the core of our franchise to free up capital and simplify the organisation. We will do so in a disciplined manner. In February 2009, we sold our interest in ING Canada, the largest provider of property & casualty insurance products and services in Canada.
The underlying risk-adjusted return on capital (RAROC) after tax fell to 2.6% from 22.3% in 2007, reflecting the impact of the market turmoil and a 31.6% increase in average Economic Capital due to methodology changes.
AVAILABLE FINANCIAL RESOURCES AND ECONOMIC CAPITAL Increasingly ING looks at Available Financial Resources (AFR) and Economic Capital (EC) employed when managing capital. These concepts come from our internal risk management models. EC is a measure for the totality of risks run in the company over a one-year time horizon and with a AA confidence interval of 99.95%. AFR equals market value of assets minus market value of liabilities, excluding hybrids issued by ING Group which are counted as capital. At ING Bank the proxy for AFR is Tier-1 capital with certain adjustments, in the absence of a full market value balance sheet for ING Bank. AFR should exceed EC for both ING Bank and ING Insurance. EC for ING Group is defined as EC ING Bank plus EC ING Insurance minus the diversification benefit. The diversification is partially due to opposite interest rate positions in ING Bank and Insurance and is prudently estimated at 15%. AFR ING Group equals AFR ING Bank plus AFR ING Insurance minus core debt ING Group. The target is that ING Group AFR should be at least 120% of ING Group EC. It is policy that any buffer should be able to be deployed with maximum flexibility and therefore be kept centrally. Free surplus is defined as the difference between AFR and EC.
The transaction can be summarised as follows: a bank sells a pool of mortgages to a Special Purpose Vehicle (SPV). The SPV issues secured notes in two tranches, one subordinated tranche and one senior tranche, the latter rated AAA by the rating agencies. The bank buys both tranches, but can now use the AAA-rated tranche as collateral in the money market for secured borrowings. With the securitisation, illiquid assets have thus become to a large extent liquid. The Basel II RWAs of the bank remain unchanged. During 2008, ING Bank created a number of these securitisations through which in total approximately EUR 70 billion of AAA-rated notes were created. Own-originated mortgages in the Netherlands were used as the underlying assets. Apart from the structuring and administration costs these securitisations are P&L neutral.
Pre-tax P&L impact impairments, fair value changes and trading losses in EUR million 2008 2007
Equity securities (available-for-sale) Another component of the available-for-sale investment portfolio is equity securities. At 31 December ING had in this caption direct equity exposure of EUR 5.8 billion (public) and EUR 0.4 billion (private). This contains EUR 1.9 billion strategic banking stakes, mainly in Bank of Beijing and Kookmin Bank. ING Insurance has the remaining EUR 3.9 billion balance sheet exposure which is partially hedged against further market losses. In addition a temporary hedging programme was put in place to reduce earnings volatility from potential negative DAC unlocking. ING generally decides to impair a listed equity security based on two broad guidelines: when the market value is below 75% of the cost price or when the market price of the security is below the cost price for longer than six months. EUR 1,707 million of pre-tax impairments on the above mentioned direct public equity exposures were recorded in 2008.
LIQUIDITY RISK MANAGEMENT AT ING In the volatile markets of 2008 liquidity management was a key issue. A number of liquidity problems have appeared in the market due to US subprime concerns, including challenges rolling over short-term asset-backed commercial paper in the secondary market, increased credit spreads and shorter terms. ING’s approach to liquidity management requires a surplus of liquid assets, liquidity contingency plans and close monitoring of market conditions. ING enjoys a favourable funding base with customer deposits providing 61% of total funding. Retail and corporate deposits are relatively stable sources of funding.
CONTINUING UNCERTAINTIES As the financial crisis has not yet run its course, ING still faces a number of uncertainties. It is expected that economic conditions will weaken further. Some of the main uncertainties are: The development of the global real estate market: • As mentioned above, the S&P Case-Shiller Index showed a 18.6% decline in US housing prices over 2008. The global real estate market is expected to further deteriorate into 2009 and is expected to negatively affect ING’s Real Estate portfolio. Equity markets: • As mentioned above, global stock markets fell significantly over 2008, impacting the value of ING’s investment portfolio. As the outlook for the stock markets remains uncertain, and can further reduce the value of the portfolio, ING is both actively reducing its exposure and hedging equity positions. Impact of credit migration: • Loan loss provisions and impairments will stay at elevated levels. A marked deterioration in the mortgage market outlook is reflected in default curves which are predicted to be higher for an extended period of time. In the current market, ING anticipates additional downgrades in securities as well as internal ratings on corporate customers, leading to further increases in credit risk weighted assets. The deteriorating global economy is expected to keep loan loss provisions going forward at elevated levels.
metrics since it was used as a tool to inform the Executive Board of the impact of potential risk-mitigating actions on the Group-wide risk profile. A full disclosure of the Earnings and Capital at Risk Dashboard, as well as other stress testing, and ING’s Economic Capital is included in the Risk section of the Annual Accounts.
Extraterritorial regulations ING continuously reviews US laws and regulations which have an extraterritorial effect on ING’s businesses. As an NYSE-listed company and because of ING’s regulated activities in the US, ING must comply with some key pieces of US legislation. To ensure compliance, the Executive Board approved a plan of action requiring ING’s legal and compliance officers at all levels to inform the managers of the businesses of these laws, to help business management assess if there are any gaps in business practices (gap analysis), and to incorporate the relevant laws in the business compliance charts.
A PARTNER TO THE BUSINESS The turmoil in the financial markets has underscored the need for sound risk management, especially in times of difficulty. Risk Management will continue to work closely with the business lines to support their strategic decisions, to help them identify and execute commercial opportunities, and to monitor asset, capital, liquidity and funding requirements. ING will manage its assets and risk profile in line with its risk appetite. Risk management has evolved significantly at ING and now serves as a true partner to the various businesses, helping them generate value and reduce risk.
Central and Rest of Europe* 24% 2,487 * Bulgaria, the Czech Republic, Greece, Hungary, Poland, Romania, Russia, the Slovak Republic, Spain and Turkey.
COUNTRY DEVELOPMENTS Underlying profit before tax in the Netherlands decreased by 83.2% to EUR 242 million, due mainly to negative revaluations and impairments on real estate and private equity investments in 2008 and the upstream of EUR 5.0 billion to the Corporate Line Insurance in 2007.
Premium income decreased by 1.1% to EUR 21,887 million, but rose 6.9%, excluding currency effects. In the US, premiums increased by 8.4%, excluding currency impact, as sales of retirement services, variable and fixed annuities and insurance were higher than 2007 levels. Premium income in Canada decreased 4.2% to EUR 2,671 million, but increased by 1.7% excluding currency impact, reflecting rate increases in personal lines but a lower number of new insured risks. Premiums in Latin America decreased 20.6%, excluding currency effects, reflecting the sale of the Chile health insurance business in the first quarter of 2008, which was partly offset by higher annuity sales.
Late in the year, ING US announced a realignment of its US Wealth Management business, segmenting Retirement Services and Annuities into two distinct business units. Under the new structure, the US business is organised into four divisions: Retirement Services, Annuities, Insurance, and Investments. The new structure provides better focus on ING’s diverse customer base and distribution partners. The structure is also intended to put ING in the best possible position to capture the maximum upside sales potential when the US economy recovers.
During 2008, ING continued to pursue its strategy in the region: acquiring customers most critical to its focus on investments, life insurance and retirement services; determining which products were best aligned against these customers; and investing resources accordingly.
COUNTRY DEVELOPMENTS In Australia and New Zealand, underlying result before tax decreased 41.4%, or EUR 89 million to EUR 126 million in 2008 from EUR 215 million in 2007. This was driven by reduced fee income due to a decline in assets under management and lower investment earnings. New sales in life risk products and favourable in-force retention drove life premium income up by 6.2%, or EUR 17 million to EUR 292 million in 2008 from EUR 275 million in 2007. Operating expenses decreased 5.0%, but were up 1.6% excluding currency effects. The increase was driven by a higher in-force base, investment in select business transformation projects and restructuring costs.
Brand awareness Brand awareness in the region has risen as a result of the global advertising campaign and sponsorship activation of the Shanghai, Tokyo, Melbourne and Singapore Formula 1 Grands Prix, as well as Insurance Asia/Pacific’s sponsorships of the national and league competitions under the purview of the Asian Football Confederation. This sponsorship agreement was extended for an additional four years. Together with local advertising and sponsorships, brand awareness increased throughout the region.
Poland showed strong volume growth across all products. ING Bank Slaski opened 34 franchise outlets bringing the total number of branches to 439. The number of customers grew by 340,000, to a total of 2.6 million. Savings and deposits increased strongly in the first three quarters thanks to successful campaigns, but the fourth quarter was extremely competitive. ING gave preference to margin, relinquishing some of the earlier volume gains. ING Bank Slaski is an important distributor of ING investment funds in Poland, but the decline in equity markets resulted in lower sales of mutual funds and lower fees on assets under management.
In 2008, ING Direct continued to invest in building the business and expanding its product offering, with investment costs amounting to EUR 331 million. Given the current priorities of preserving ING’s capital position and the worsening economic outlook, ING Direct is strictly managing its risks, capital and expense base.
In the United Kingdom, ING Direct repositioned itself away from more price-sensitive customers and it also tracked the Bank of England rates more closely. It took several management, pricing and marketing actions in 2008, which resulted in ING Direct UK reaching break-even in the fourth quarter. In October, ING Direct UK acquired retail deposits from two British subsidiaries of Icelandic banks Kaupthing Edge and Heritable Bank.
ING Real Estate Investment Management Fee income was much lower and there were substantial unrealised losses on the investment portfolio. Despite this there were significant net inflows into funds and a number of new mandates were won. During the year the focus of Real Estate Investment Management remained on ensuring client relationship management was maintained to the highest standard whilst at the same time ensuring a switch from growing the business to sustaining the performance of the business. Cost containment measures were implemented to ensure the cost base reflected the new reality of the market.
Key points > Signing up to the UN Principles for Responsible
In all our business activities, ING strives for the highest ethical standards. ING Investment Management, for example, signed up to the UN Principles for Responsible Investment (PRI) on 1 September 2008. Launched in 2006 by the UN Secretary General, the PRI are a set of global best-practices for responsible investing. The PRI is a partnership with the UN Global Compact and the Finance Initiative of the UN Environmental Programme, both of which ING is a member. These principles are designed to help investors consider the environmental, social and governance issues in investment decision-making and ownership practices. With regard to project financing, Wholesale Banking has subscribed to the Equator Principles since 2003. These ensure that socio-environmental risks form an essential part in our overall risk analysis of the projects we finance.
Employee engagement Our employees are key to the company’s success. The ING Business Principles form the basis for their behaviour and guide their conduct towards customers as well as among each other. In 2008, we continued to focus strongly on embedding responsible behaviour in our employees’ day-to-day activities. That is why corporate responsibility became an even more important element of the general staff education programmes and our leadership development curriculum in 2008. We also engage employees in sustainability by involving them in community development programmes, such as ING Chances for Children and initiatives promoting a cleaner environment.
CompoSition of the exeCutive Board The 2008 annual General Meeting reappointed Eric Boyer de la Giroday and Eli Leenaars for a new four-year term. John Hele, the chief financial officer announced his resignation as an Executive Board member for family reasons as of 31 March 2009. On 26 January 2009, Michel Tilmant stepped down from the Executive Board to take effect at once. Michel Tilmant will be an adviser to the company until his retirement from ING on 1 August 2009. The Supervisory Board decided that Jan Hommen will be appointed as CEO of ING Group, upon his appointment as a member of the Executive Board by the annual General Meeting in April 2009. Eric Boyer, member of the Executive Board since 2004, will be acting CEO until Jan Hommen can formally take over after the General Meeting. During that meeting Patrick Flynn will be proposed as the successor to John Hele as CFO of ING Group. Further information on the members of the Executive Board is provided on pages 61-62.
Repurchase of shares ING Group may repurchase shares outstanding and depositary receipts for such shares. Although the power to repurchase shares and depositary receipts is vested in the Executive Board subject to Supervisory Board approval, prior authorisation from the General Meeting is required for these repurchases. Under Dutch law, this authorisation lapses after 18 months. Each year, the General Meeting is asked to approve the Executive Board’s authority to repurchase shares.
When repurchasing shares the Executive Board is to observe the price ranges prescribed in the authorisation. For the ordinary shares and depositary receipts, the authorisation currently in force stipulates a minimum price of one eurocent and a maximum price equal to the highest stock price on the Euronext Amsterdam by NYSE Euronext on the date of the repurchase contract or the preceding day on which this stock market is open.
Dick H. Harryvan (Born 1953, Dutch nationality, male; appointed in 2006, term expires in 2010) Dick Harryvan graduated from the Erasmus University Rotterdam with a master’s degree in Business Economics, majoring in finance. He joined ING as a management trainee at Nationale-Nederlanden in 1979. Before his appointment to the Executive Board in 2006, he held various management positions in the United States, Canada and the Netherlands, where he was chief financial officer/ chief risk officer and member of the Global Management Team of ING Direct until his appointment to the Board. Dick Harryvan is also CEO of ING Direct.
Jacques M. de Vaucleroy (Born 1961, Belgian nationality, male; appointed in 2006, term expires in 2010) Jacques de Vaucleroy graduated from Louvain University with a degree in Law. He also has a master’s degree in Business Law from the Free University of Brussels, Belgium. In 1986 he joined Bank Brussels Lambert, which was acquired by ING in 1998. Before his appointment to the Executive Board in 2006, he was Group president ING Retail at US Financial Services. Jacques de Vaucleroy
Function of the Supervisory Board The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events in the company and its business, as well as to provide advice to the Executive Board. In line with Dutch company law, the Tabaksblat Code and the Articles of Association, the Supervisory Board Charter requires all Supervisory Board members, including the State Nominees, to act in accordance with the interests of ING and the business connected with it, taking into account the relevant interests of all the stakeholders of ING, to perform their duties without mandate and independent of any interest in the business of ING, and to refrain from supporting one interest without regard to the other interests involved.
Holders of depositary receipts in the Netherlands, the United Kingdom and the United States are able to vote by proxy. For the 2008 annual General Meeting of ING Group votes were cast for 38,69% of the total number of issued ordinary shares (excluding the voting rights on the former preference shares). ING Trust Office voted for the remaining shares.
According to its Articles of Association ING Trust Office has to vote in the interest of all holders of depositary receipts, including the majority of holders of depositary receipts that has not given voting instructions, while taking into account the interests of ING Group itself, the enterprises carried on by ING Group and companies associated with it in a group and all other stakeholders in ING Group. By doing so ING Trust Office promotes the execution of voting rights in a transparent way and prevents at the same time that a minority of shareholders and holders of depositary receipts could use a chance majority of votes to the disadvantage of those investors not present or not represented.
A profile and an overview of additional relevant offices held by the members of the Board can be found on the website of ING Trust Office (www.ingtrustoffice.com).
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.
This section sets out the remuneration for the Executive Board and the Supervisory Board. The remuneration policy was adopted by the annual General Meeting on 27 April 2004. In 2006, the Executive Board pension scheme was revised in alignment with the approved amendment to the remuneration policy. The revised Executive Board pension scheme is further described on page 79. There were no changes to this policy in 2008 and therefore, the approval of the 2006 annual General Meeting still applies for 2008. This section starts with the general policy for senior management remuneration, followed by the Executive Board compensation for 2008 and the compensation structure for 2009. In addition, information is included on loans and advances to the Executive Board and Supervisory Board members as well as ING depositary receipts for shares held by members of both Boards.
Eric Boyer de la Giroday Number of options 0 87,066 87,138 Number of performance shares 0 20,632 18,230 Fair market value of long-term incentive (2) 0 1,003 1,143
Eli Leenaars Number of options 0 64,967 65,021 Number of performance shares 0 15,396 13,603 Fair market value of long-term incentive (2) 0 748 853
Policy for 2009 With regard to the remuneration policy for 2009, the Supervisory Board continues to build upon the remuneration policy initiated in 2003. In January 2009, ING and the Dutch State reached an agreement on an Illiquid Assets Back-up Facility (‘Back-up Facility’). Under the terms of this agreement members of the Executive Board will not receive any bonuses until a reviewed remuneration policy has been completed. The remuneration policy will, among other things, include objectives relating to corporate and social responsibility.
Changes in the composition of the group 1,034 1,034 Dividends (1) –2,681 –2,681 –35 –2,716 Purchase/sale of treasury shares –520 –520 –520 Exercise of warrants and options 5 5 5
In 2008, deferred taxes for the year with regard to unrealised revaluations amounted to EUR 5,381 million (2007: EUR 1,451 million). For details on deferred tax see Note 21 ‘Other liabilities’.
The following new and revised standards and interpretations were issued by the IASB, which become effective for ING Group as of 2009 (unless otherwise indicated): Amendment to IFRS 1 ‘First-time adoption of IFRS’ (effective as of 2010)• Amendment to IFRS 2 ‘Share-based Payments’ – ‘Vesting Conditions and Cancellations’• IFRS 3 ‘Business Combinations’ (revised) and IAS 27 ‘Consolidated and Separate Financial Statements’ (amended) (effective as of 2010)• IFRS 8 ‘Operating Segments’• IAS 1 ‘Presentation of Financial Statements’• IAS 23 ‘Borrowing Costs’• Amendments to IAS 32 ‘Financial Instruments: Presentation’ and IAS 1 ‘Presentation of Financial Statements’ – ‘Puttable Financial • Instruments and Obligations Arising on Liquidation’ Amendments to IFRS 1 ‘First-time Adoption of IFRS’ and IAS 27 ‘Consolidated and Separate Financial Statements’ – Determining • the cost of an Investment in the Separate Financial Statements’ Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ – ‘Eligible Hedged Items’ (effective as of 2010)• IFRIC 13 ‘Customer Loyalty Programmes’• IFRIC 15 ‘Agreements for the Construction of Real Estate’• IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’• 2008 Annual Improvements to IFRS• IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ (effective as of 2010)• IFRIC 18 ‘Transfers of Assets from Customers’ (effective as of 2010)• Amendment to IFRS 7 ‘Improving Disclosures about Financial Instruments’• Amendments to IFRIC 9 and IAS 39 – ‘Embedded Derivatives’.•
Impairment reviews with respect to goodwill and intangible assets are performed at least annually, and more frequently if events indicate that an impairment may have occurred. Goodwill is tested for impairment by comparing the book value (including goodwill) to the best estimate of the fair value of the reporting unit to which the goodwill has been allocated. A reporting unit is the lowest level at which goodwill is monitored. Intangible assets are tested for impairment by comparing its book value with the best estimate of its recoverable amount.
OTHER LIABILITIES Employee benefits – pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans.
All interest income and expenses from trading positions and non-trading derivatives are classified as interest income and interest expenses in the profit and loss account. Changes in the ‘clean fair value’ are included in Valuation results on non-trading derivatives.
The change in the fair value of the loans and receivables included in Investments for risk of policyholders attributable to changes in the credit risk of the financial assets during 2008 was nil (2007: nil) and nil (2007: nil) on a cumulative basis.
Following the amendments to IAS 39 and IFRS 7, ‘Reclassification of Financial Assets’ ING Group reclassified certain financial assets from Available-for-sale investments to Loans and advances. During the fourth quarter of 2008 ING Group identified assets, eligible under the amendments, for which, it now has an intent to hold for the foreseeable future. At the reclassifications dates the fair value of the reclassified assets amounted to EUR 1,594 million. As a result of the reclassification, the presentation is better aligned with the nature of the portfolios.
ING Retail Property Partnership Southern Europe 21 73 1,218 879 6 67 ING REI Investment DOF BV 4 71 2,679 383 197 212
Cancelled –4,904 –183,158,017 Share-based payments –22 –201 –462 –1,250,394 –6,751,515 –15,722,126 Other –107
Except for the 9% 2008 perpetual of EUR 10 million (a private placement), these loans have been subsequently provided as subordinated loans by ING Groep N.V. to ING Verzekeringen N.V. and ING Bank N.V. under the same conditions as the original bonds as follows: Subordinated loans provided by ING Groep N.V. to ING Bank N.V. and ING Verzekeringen N.V.
Investment contracts for risk of company 9,804 9,520 9,804 9,520 Investment contracts for risk of policyholders 11,281 14,132 11,281 14,132 Total provisions for investment contracts 21,085 23,652 21,085 23,652
Debt securities 9,963 10,902 Funds entrusted 1,972 756 Subordinated liabilities 1,733 1,876
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 2008 was EUR 230 million (2007: EUR 20 million). 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).
– designated as at fair value through profit and loss 573 833 2,429 5,935 4,239 14,009
Latin American Pension business of Santander Oyak Bank Sharebuilder Corporation Total
In April 2007, ING acquired 100% of AZL, an independent Dutch provider of pension fund management services, for EUR 65 million.
Belgian Broker & employee benefits ING Trust ING Regio B.V. Total
In November 2006, the issue of amongst others, the costs charged by the insurance industry to customers in respect 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. 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 ING’s Dutch insurance subsidiaries will offer compensation to policy holders 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. Although the agreement is not binding for policyholders, ING believes a significant step was set towards resolving the issue.
Receivables on ING Verzekeringen N.V. and ING Bank N.V. mainly include long term funding. Liabilities to ING Bank N.V. mainly include short term deposits.
Amounts due to banks The fair values of payables to banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates for payables to banks with similar characteristics.
Interest expense on debt securities 4,109 3,648 3,173 Interest expense on subordinated loans 1,784 1,167 1,132 Interest on trading liabilities 44,093 29,383 18,821 Interest on non-trading derivatives 7,391 6,115 5,159 Other interest expense 4,142 3,766 3,027 Interest expense banking operations 85,969 67,773 49,978
The accounting policies of the business segments are the same as those described under Accounting policies for the consolidated balance sheet and profit and loss account. Transfer prices for inter-segment transactions are set at arm’s length. Corporate expenses are allocated to business lines based on time spent by head office personnel, the relative number of staff, or on the basis of income and/or assets of the segment. With regard to investments in equity securities, a fixed return of 3% is allocated to the insurance business lines. The differences between the actual dividend income, capital gains and impairments and the allocated return are included in Other.
Segment result before taxation 651 –590 –213 609 1,420 –1,155 –2,209 –1,487 –1,487
Segment result before taxation –392 801 1,694 –2,209 202 –250 150 –1,483 –1,487
Impact of financial crisis Impact on pressurised asset classes As a result of the deteriorating market conditions throughout 2008 ING Group incurred negative revaluations on its investment portfolio, which impacted shareholders’ equity. Furthermore, ING Group incurred impairments, fair value changes and trading losses, which impacted its profit and loss account (P&L). The table below shows the exposures and negative revaluations and losses taken on US sub-prime and US Alt-A residential mortgage backed securities (RMBS), Collateralised Debt Obligations (CDOs) and Collateralised Loan Obligations (CLOs) during 2008.
Looking back at 2008, ING undershot its expected earnings by more than the Earnings-at-Risk number. The reason for this is twofold. First, the market events that we have seen in the second half of the year clearly surpassed the ‘1 in 10’ confidence level, hence resulting in higher losses.
Neither past due nor impaired 817,069 750,049 Past due but not impaired (1-90 days) (1) 7,224 5,416
Development of trading market risks The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon. The overnight VaR is presented for the ING Wholesale Banking trading portfolio which was risk managed by CMRM Trading during 2007 and 2008. Several banking books are governed by the trading risk process and are therefore excluded from the non-trading risk table and included in the trading risk graph and table below.
The average exposure over 2008 was substantially higher than 2007 (average VaR 2008: EUR 53 million and average VaR 2007: EUR 34 million). This increase is to a large extent related to the increase of volatility in the different financial markets, as well as the changes in the correlation between different markets and products. As a result, the consolidated trading VaR exceeded the EUR 60 million limit in the fourth quarter. ALCO Bank approved a temporary increase of the limit to 66 million to accommodate the changed market circumstances and a gradual reduction of the exposure. The consolidated trading VaR peaked at a level of EUR 72 million on October 24th. The management of CMRM and Wholesale Banking/Financial Markets have taken further actions to bring back the exposure within the limit. As the VaR decreased during the last two months of the year, the limit was reduced to its original level of EUR 60 million per mid December.
Most important foreign exchange, interest rate and credit spread positions (year end 2008)
Risk classes 1 (AAA) –20 –40 2-4 (AA) –19 –115 8-10 (BBB) –75 –103 11-13 (BB) –37 –54 14-16 (B) –6 –18 17-22 (CCC and
For the determination of the interest rate sensitivity of savings accounts and current accounts, several methods depending on the focus of the risk analysis have been developed, e.g. historical simulation, Earnings at Risk analysis and valuation models. Pricing strategies, outstanding volumes and the level and shape of the yield curve are taken into account in these models. Based on these analyses, investment rules are determined for the various portfolios.
IT Risk forecasting An IT risk forecasting model is introduced to represent the expected IT risk profile after implementation of defined mitigating actions. Through the model, management can determine if additional mitigation projects are necessary to reduce or to maintain the IT risks at an acceptable level.
Stand alone tool using same data from Central Datawarehouse as VRE
The calculation of operational risk capitals for the units follows five basic principles: Principle 1: If the world gets riskier, the business units need more Economic Capital;• Principle 2: If a business unit’s size increases, so does its capital;• Principle 3: If the business of a business unit is more complex, it needs more capital;• Principle 4: If the level of control of a business unit is higher, it needs less capital;• Principle 5: If the business units’ losses from internal incidents exceed the level of expected loss accounted for in the first four • framework principles, it needs more capital.
Total AFR Bank and Insurance 49,305 54,443 Less Core debt Group (1) 7,170 4,728 Total AFR ING Group 42,135 49,715 (1) Investments in subsidiaries less equity (including core Tier-1 securities) of the Group holding company. This net debt position is provided as equity to ING
(2007: EUR –595 million) for Real Estate for own use. The Dutch banking regulator requires this deduction to be made from Tier-1 capital. This deduction is added back to Tier-2 capital.
Basel II Tier-1 ratio (Bank) Year-end actual Tier-1 ratio 9.32% 7.39% Regulatory minimum Tier-1 ratio 4.00% 4.00% Target Tier-1 ratio 7.20% 7.20%
Parent company profit and loss account of ING Group for the years ended 31 December amounts in millions of euros 2008 2007
Note: The underlying figures exclude divestments and special items. The 2007 figures were restated for the transfer of Mid-corporate clients in the home markets
For credit risk, data included in these tables is related to ING Bank’s core credit risk activities in the areas of: Securities Financing, Derivatives (collectively Pre-Settlement Risk); Money Market activities (including reserve deposits at Central Banks); Lending (both on and off balance sheet); and Investment risks.
APPROACHES APPLIED BY ING BANK On 1 January 2008, ING adopted the AIRB to the majority of its significant portfolios that contain credit risk in accordance with the approvals granted by DNB (Dutch Central Bank), and various local regulators, as required. However, there remains a small portion of the portfolio that is subject to the Standardised Approach (SA). Individually, these portfolios are relatively small, very specialised, or are related to new acquisitions in companies that themselves did not yet follow the AIRB Approach. In some cases, the Standardised Approach is mandated in conjunction with transition restrictions imposed by local regulators.
Credit derivatives used for hedging purposes – credit protection bought 2,019 – credit protection sold Credit derivatives used for trading activities – credit protection bought 50,092 – credit protection sold 45,395
Securitisation in the trading book The exposures involved are mainly synthetic Collateralized Debt Obligations (CDOs) in which the underlying credit exposures are taken on using a credit default swap rather than a vehicle buying physical assets.
RISK-WEIGHTED ASSETS (‘RWA‘ UNDER BASEL I) Assets which are weighted for credit risk according to a formula used by the Dutch central bank (De Nederlandsche Bank), which conforms to the capital adequacy guidelines of the BIS (Bank of International Settlements). On and off-balance-sheet items are weighted for risk, with off-balancesheet items converted to balance-sheet equivalents (using creditconversion factors) before being allocated a risk weight.
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of the reporting enterprise, if the proceeds of the policy: can be used only to pay or fund employee benefits under • a defined benefit plan; and are not available to the reporting enterprise’s own creditors (even in • bankruptcy) and cannot be paid to the reporting enterprise, unless either the proceeds represent surplus assets that are not needed for the policy to meet all the related employee benefit obligations or the proceeds are returned to the reporting enterprise to reimburse it for employee benefits already paid.