NN Group’s focus is on service to customers, generating capital, growing profitability and improving efficiency. Its strategy is about offering appealing and easy-to-understand products and services, multi-access distribution and efficient and effective operations in the 18 countries in which it is active.
In 2013, the net result of ING Group decreased by EUR 929 million to EUR 3,232 million. The net result was positively impacted by the above-mentioned increases in underlying result before tax of ING Bank and operating result of NN Group as well as by EUR 550 million improved non-operating results of NN Group’s ongoing business. These positive impacts were more than offset by EUR 575 million one-off charges restoring the reserve adequacy of Japan Closed Block VA to the 50% confidence level and the EUR 1.5 billion decrease of net result from “Divestments, discontinued operations and special items”. The EUR 1.5 billion decrease can be broken down as follows: • In 2012, gains on the divestments amounted to EUR 1,612 million, while in 2013 the result on the divestment of ING’s life insurance units in Hong Kong, Macau and Thailand was more than offset by the loss on the sale of ING Life Korea.
Contributions (Deposit Guarantee Scheme) and bank levies On 1 February 2013, the Dutch State nationalised SNS REAAL, the fourth-largest systemically important bank in the Netherlands. The nationalisation, carried out under the Netherlands’ 2012 law on bank intervention, resulted in shareholders subordinated debt (up to EUR 1 billion) holders being bailed-in. To reduce the amount of taxpayer money needed for the nationalisation, the government imposed a one-time levy of EUR 1 billion on Dutch banks as a contribution to the SNS nationalisation. This levy will need to be paid by the banks in 2014. To avoid a disproportionate financial burden for banks and in view of the ability of banks to lend to the economy, the introduction of the ex-ante Deposit Guarantee Scheme (“DGS”) was postponed to 1 July 2015. A number of countries in which ING operates have bank taxes in place. In 2013 the total amount of such taxes paid by ING amounted to approximately EUR 200 million. This included EUR 149 million of Dutch banking tax and approximately EUR 50 million of banking taxes in six other EU countries.
European and local efforts to improve customer protection In 2013, the European Commission (EC) continued its legislative efforts to improve consumer protection in financial services, particularly for mortgages, investment products and bank accounts. In addition to EU legislative proposals, various local initiatives to increase consumer protection took place. In the Netherlands, a general duty of care for financial services providers was introduced in the Financial Supervision Act on 1 January 2014. In addition, various regulators attempted to strengthen consumer protection by publishing regulations, guidance and best practices. The Financial Markets Authority (“AFM”) continued its efforts to enhance client centricity within banks in the Netherlands. The AFM is also investigating whether some of the consumer protection instruments should be extended to small business clients of banks.
Bank-specific • Frontrunner position in digital solutions give the Bank an edge in innovation.
ING reached several milestones that demonstrate clear progress on its Restructuring Plan to fully separate its banking and insurance and investment management activities. Most marked were the successful IPO of the US insurance business, further divestments of Asian insurance and investment management businesses and the announcement of the agreement with the EC on revised, quicker timelines for the European and Japanese Insurance divestments.
Japan, the conclusion was that a standalone sale of this business was not feasible so it will be included in the NN Group IPO. The base case scenario for NN Group is to become a standalone business through an IPO in 2014. The timing will depend on market conditions, readiness and performance. To be ready for an IPO NN Group needs to be capitalised in line with its peers. Another key requirement is that NN Group has access to the debt markets on a standalone basis with its own ratings, whereas financial entanglements with ING Group entities need to be at arm’s length.
BANK At the Bank, ING announced its new IT strategy “Creating value for our customers through six strategic pillars – the power of IT.” The strategy is aimed at meeting customer needs such as reliability, security and customer centricity by being agile, efficient and working collaboratively.
The IT department remains committed to further embedding an agile way of working throughout its whole organisation as a core principle in the way it works, because ING’s aim is to respond swiftly and efficiently to changing customer demands. Also, IT will continue to further automate IT processes, where possible. This results in products and services coming to market faster and at lower IT cost.
BUSINESS DEVELOPMENTS It was a year of continued challenges for ING Bank and for the banking industry as a whole. The external environment remained challenging, which was felt by the Bank in the form of continued high risk costs and weak demand for lending; however, net inflow of funds entrusted, mainly retail, remained solid. Towards the end of 2013 the European economy showed some signs of improvement but it remains vulnerable. Despite the difficult conditions, ING Bank produced a solid result in 2013.
ING Vysya Bank introduced an iPhone-based mobile app to extend its reach into remote cities and rural areas. ING Bank Slaski was the first bank in Poland, and one of the first in the world, to offer contactless ATM technology, increasing the number of contactless ATMs. Using best practices from around the ING world, ING Turkey 29ING Group Annual Report 2013 1 W h o w e are 2 R
TOP EMPLOYER Remaining a top employer is a key priority at ING Bank. Having motivated employees is essential for success because they build lasting relationships with customers.
CONCLUSIONS AND AMBITIONS ING Bank made good progress during the year towards its Ambition 2015 targets, despite the difficult banking market and economic conditions. The underlying net profit of ING Bank improved to EUR 3.2 billion in 2013. This was due to a strengthening of the interest margin, good cost control, and supported by the absence of de-risking losses in 2013 and less volatility from CVA/DVA impacts. The funding profile of the bank improved, which enabled us to continue to support our customers, although demand for assets remained subdued.
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Operating expenses increased 6.0% compared with 2012, due to higher personnel expenses reflecting an increase in headcount and increased expenses for the deposit guarantee scheme, in line with the growth of the business. The cost/income ratio improved to 51.1% from 56.1% in 2012. The additions to the provision for loan losses slightly declined in 2013 to EUR 82 million (or 37 basis points of average risk-weighted assets), from EUR 83 million (or 38 basis points of average risk-weighted assets) in 2012.
Operational excellence ING-DiBa continued to focus on improving its product and service efficiency to help customers manage their finances. For example, in 2013 ING-DiBa Germany launched a new internet banking site that is easier to use with all types of device – computer, smartphone or tablet. ING-DiBa Austria also launched a new website, along with online and mobile banking tools, to improve service and delivery.
Customer centricity We continued to put our customers first by having simple products and services that best meet their needs at fair pricing and focusing on digital channels.
The Energy, Transport and Infrastructure Group (ETIG) specialises in capital-intensive industry sectors such as oil and gas, mining, offshore services, shipping, utilities and power, and infrastructure. ETIG performed well in 2013. The structured metals and energy finance business has continued to develop business in CEE and in Latin America. The utilities and power team continued to do business in North America and worked on renewable projects in Europe. Container finance remained a market with reasonable opportunities, although in shipping markets supply continues to exceed demand. Our approach to the shipping market has been cautious for many years and the loan book is performing within expectations.
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In October, future plans were announced to rebrand the insurance and investment management activities in Europe and Japan as NN. This new identity links the company’s heritage and Dutch roots with the requirements of an international forward-looking brand.
Netherlands Life’s aim is help its customers make the right decisions about their financial future, by providing effective and easy-tounderstand products. In 2013, the individual life insurance market continued to go through major change. In response to this, Netherlands Life is lowering costs by streamlining its processes and systems. In pensions it is well positioned to capture more opportunities in the growing Defined Contribution market. In all its businesses, Netherlands Life is committed to improving the customer experience.
Administrative expenses were EUR 106 million in 2013, a 18.5% decrease compared with EUR 130 million in 2012, due to the depreciation of the Japanese yen against the euro. Excluding currency effects, administrative expenses remained broadly stable, increasing by 1.0% compared to 2012.
The Bank expanded service capacity in its direct channels, set up a web-care team to communicate with customers through social media and introduced www.adviseur.nn.nl, a portal for intermediaries, so they can better service their customers.
The successive quarterly results and figures of 2013 were reviewed and discussed in May, August and November, respectively. The Annual Accounts and the SOX 404 sign-off were approved in March. In April an extra Supervisory Board meeting was organised to discuss and approve a mandate to launch the initial public offering of ING U.S. An update on the divestment of the ING insurance and investment management businesses was also presented.
In the second half of 2013, the Supervisory Board discussed the future composition of the Supervisory Board several times and specifically the formation and start of a future independent Supervisory Board for NN Group. A special Insurance Europe Committee was set up given the IPO process for NN Group and to commence the search for candidates for the future NN Group Supervisory Board.
As part of the aforementioned transactions, certain arrangements with respect to corporate governance and remuneration were agreed with the Dutch State. These arrangements had to remain in place as long as the IABF continued.
to the ordinary shares. ING Trust Office will follow such instructions for such number of ordinary shares equal to the number of depositary receipts for shares held by the relevant holder of depositary receipts.
Proxy voting forms for shareholders and voting instruction forms for holders of depositary receipts are made available on the website of ING Group (www.ing.com). The submission of these forms is subject to additional conditions specified on such forms.
ING Group indemnifies the members of the Supervisory Board against direct financial losses in connection with claims from third parties as far as permitted by law on the conditions laid down in an indemnity statement. ING Group has also taken out a liability insurance for the members of the Supervisory Board.
COMMITTEES OF THE SUPERVISORY BOARD On 31 December 2013, the Supervisory Board had five standing committees: the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee. Furthermore, a temporarily committee, the Insurance Europe Committee was established on 1 October 2013. This Committee assists the Supervisory Board with the performance of its duties in relation to the preparation and execution of the initial public offering process and/or spin-off of (part of) NN Group.
CONFORMITY STATEMENT PURSUANT TO SECTION 5:25C PARAGRAPH 2(C) OF THE DUTCH FINANCIAL SUPERVISION ACT (WET OP HET FINANCIEEL TOEZICHT).
variable component can be increased from target to maximum, not exceeding 100% of base salary at the time of allocation.
In addition, the remuneration policy provides for a balanced mix between fixed and variable remuneration. Variable remuneration may not exceed 100% of fixed salary at the time of allocation. Fixed compensation (i.e. the base salary levels) is determined in line with the relevant market environment as an integral part of total direct compensation, and will be reviewed from time to time by the Supervisory Board. The policy provides for an at target variable remuneration of 40% in cash and 40% in stock (in total 80%) of base salary if performance criteria are met. If performance criteria (as predetermined by the Supervisory Board) are exceeded, the
2013 REMUNERATION EXECUTIVE BOARD 2013 Executive Board base salary The base salary of all Executive Board members was set at the time of the introduction of the remuneration policy in 2010. The base salary of the Executive Board has not been raised since 2010 as the Executive Board decided voluntarily not to accept a base salary increase until ING has repaid outstanding core Tier 1 securities from the Dutch State along with the restrictions put in force by the new Dutch legislation in 2012. As a consequence the base salary level remained also in 2013 at the 2010 level.
Moreover, in light of the Capital Requirements Directive III, compensation packages related to control functions (such as risk management functions) are structured such that they provide for a reduced emphasis on variable remuneration. To ensure the autonomy of the individual, financial performance metrics are dependent on objectives determined at the divisional level (i.e. not at the level of the relevant business). In addition, performance assessments are not only determined by business management, but also by the functional line.
Segment reporting 42 Segments 171 43 Information on geographical areas 182
References relate to the notes starting on page 98. These form an integral part of the consolidated annual accounts.
Earnings per share from continuing operations 37 Basic earnings per ordinary share from continuing operations 0.65 0.62 0.91 Diluted earnings per ordinary share from continuing operations 0.65 0.62 0.91
CRITICAL ACCOUNTING POLICIES ING Group has identified the accounting policies that are most critical to its business operations and to the understanding of its results. These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to insurance provisions, deferred acquisition costs and value of business acquired, loan loss provisions, the determination of the fair values of real estate and financial assets and liabilities, impairments and employee benefits. In each case, the determination of these items is fundamental to the financial condition and results of operations, and requires management to make complex judgements based on information and financial data that may change in future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce significantly different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated financial statements and the information below under ‘Principles of valuation and determination of results’.
The actuarial assumptions may differ significantly from the actual results due to changes in market conditions, economic and mortality trends, and other assumptions. Any changes in these assumptions could have a significant impact on the net defined benefit asset/ liabilities and future pension costs. Reference is made to Note 44 ‘Pension and other post-employment benefits’ for the weighted averages of basic actuarial assumptions in connection with pension and other post-employment benefits.
Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset, and the net amount reported, in the balance sheet when the Group has a current legally enforceable right to set off the recognised amounts and intends to either settle on a net basis or to realise the asset and settle the liability
If, for any business unit, it is determined, using a best estimate (50%) confidence level, that a shortfall exists, and there are no offsetting amounts within other business units in the same segment (Business Line), the shortfall is recognised immediately in the profit and loss account.
The defined benefit obligation is calculated by internal and external actuaries through actuarial models and calculations using the projected unit credit method. This method considers expected future payments required to settle the obligation resulting from employee service in the current and prior periods, discounted using a high quality corporate bond rate. Inherent in these actuarial models are assumptions including discount rates, rates of increase in future salary and benefit levels, mortality rates, trend rates in health care costs, consumer price index and the expected level of indexation. The assumptions are based on available market data as well as management expectations and are updated regularly. The actuarial assumptions may differ significantly from the actual results due to changes in market conditions, economic and mortality trends, and other assumptions. Any changes in these assumptions could have a significant impact on the defined benefit plan obligation and future pension costs.
The revaluation reserve on debt securities included EUR 7,977 million (before tax) related to Government bonds. This amount comprised EUR 255 million negative revaluation reserve for Government bonds from Greece, Italy, Ireland, Portugal, Spain and Cyprus, which was more than offset by EUR 8,232 million positive revaluation reserves for Government bonds from other countries.
TMB Public Company Limited (‘TMB’), is a public listed retail bank in Thailand. SulAmérica S.A., is a public listed Insurance company in Brazil. The other associates are mainly real estate investments funds or vehicles operating predominately in Europe.
Share of results In 2013, Share of results of EUR 114 million (2012: EUR 55 million) and impairments of nil (2012: EUR 1 million) are presented in the profit and loss account in Share of result from associates for EUR 114 million (2012: EUR 54 million).
Share premium In 2013, share premium increased with EUR 4 million as a result of issuance of ordinary shares for share-based employee incentive programmes. No changes occurred in the share premium in 2012 and 2011.
Regulatory capital invested 47,116 22,448 69,564 Required minimum regulatory capital 28,767 9,523 38,290 2011 ING Bank NN Group Other Total
ING Bank N.V. 4,744 6,352 NN Group N.V. 2,401 2,424 16 DEBT SECURITIES IN ISSUE Debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on floating interest rate levels, such as certificates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profit and loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows: Debt securities in issue – maturities
‘Effect of changes in other assumptions’ relates mainly to the assumption refinement for the Insurance US Closed Block VA business. This effect has been included as part of Net result from discontinued operations in the Consolidated profit and loss account.
Premiums earned during the year –1,643 –1,715 –40 –40 –1,683 –1,755
NOTES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT 23 INTEREST RESULT BANKING OPERATIONS
Interest income on available-for-sale securities 2,070 2,507 3,463 Interest income on held-to-maturity securities 158 297 400 Interest income on trading portfolio 19,882 24,616 27,480 Interest income on non-trading derivatives (no hedge accounting) 1,175 1,578 1,536 Interest income on non-trading derivatives (hedge accounting) 6,675 6,297 5,652 Other interest income –151 –131 –358 Interest income banking operations 51,394 60,003 64,649
Asset management fees related to the management of investments held for the risk of policyholders of EUR 36 million (2012: EUR 7 million; 2011: EUR 7 million) are included in Commission income. The decrease in asset management fees in 2012 is explained by the sale of ING REIM in 2011.
Basic earnings from discontinued operations 234 1,191 810 3,825.0 3,796.1 3,783.7 0.06 0.31 0.21
Underlying income – Gross premium income 11,292 11,292 – Net interest result - banking operations 11,934 –8 11,926
ADDITIONAL NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS 44 PENSION AND OTHER POST-EMPLOYMENT BENEFITS The disclosures below refer to the position as at balance sheet date. Reference is made to Note 60 ‘Subsequent events’ on the Dutch closed defined benefit plan, which represents approximately 85% (based on 2013 plan assets) of the total defined benefit schemes.
As of the start of the new defined contribution plan on 1 January 2014, the current defined benefit plan has stopped accruing new pension benefits. Accruals built up under the defined benefit plan up to that date will remain valid. The change to the new pension scheme represents a curtailment under IFRS-EU and has resulted in a release of provisions previously taken by ING to cover estimated future liabilities in the existing defined benefit plan that are now no longer required. This release amounted to a one-off after tax gain of EUR 351 million (EUR 468 million before tax). The curtailment was included in the line Staff expenses in 2012. This curtailment related to the defined benefit plan in the Netherlands, which represented approximately 75% of the above defined benefit obligation on 31 December 2012.
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Real estate investments 380 –23 –8 349 Financial assets and liabilities at fair value through profit and loss –727 –366 9 –5 –1,089 Deferred acquisition costs and VOBA 2,731 –147 166 –98 –1,301 1,351
Real estate investments 383 –10 7 380 Financial assets and liabilities at fair value through profit and loss –528 –175 6 –30 –727 Deferred acquisition costs and VOBA 3,111 –272 –194 131 –45 2,731
Changes in Level 3 Financial liabilities 2012 Trading liabilities Non-trading derivatives
Level 3 Financial assets and liabilities Financial assets measured at fair value in the balance sheet as at 31 December 2013 of EUR 303 billion include an amount of EUR 5.7 billion (1.9%) that is classified as Level 3 (31 December 2012: EUR 9.0 billion, being 2.1%). Changes in Level 3 from 31 December 2012 to 31 December 2013 are disclosed above in the table ‘Changes in Level 3 Assets’.
52 OFFSETTING FINANCIAL ASSETS AND LIABILITIES The following tables include information about rights to offset and the related arrangements. The amounts included consist of all recognised financial instruments that are presented net in the balance sheet under the IFRS-EU offsetting requirements (legal right to offset and intention to net settle) and amounts presented gross in the balance sheet but subject to enforceable master netting arrangements or similar arrangement.
In November 2013, the so-called ‘Vereniging Woekerpolis.nl’, an association representing the interests of policyholders, initiated a so-called ‘collective action’, requesting the District Court in Rotterdam to declare that NN’s Dutch insurance subsidiaries sold products in the market, which are defective in various respects (e.g. on transparency regarding cost charges and other product characteristics, and included risks for which the insurer failed to warn, such as considerable stock depreciations, the inability to realise the projected final policy value, unrealistic capital projections due to difference in geometric versus arithmetic returns). ING’s Dutch insurance subsidiaries have rejected these claims and will defend themselves in these proceedings.
ING’s investment management business in Thailand In November 2012, ING reached an agreement to sell its investment management business in Thailand to UOB Asset Management Ltd. ING received a total cash consideration of EUR 10 million for the investment management business in Thailand. The transaction closed on 3 May 2013.
Joint venture ING Vysya Life In January 2013, ING agreed to sell its full interest in ING Vysya Life Insurance Company Ltd. to its joint venture partner Exide Industries Ltd. ING’s exit from the Indian life insurance joint venture is part of the previously announced intended divestment of ING’s Insurance and investment management businesses in Asia. The transaction resulted in a net loss of EUR 15 million which was recognised in 2012. The transaction closed on 22 March 2013.
ING Car Lease In September 2011, ING completed the sale of ING Car Lease to BMW Group fleet management division Alphabet for total proceeds of EUR 696 million and a net transaction result of EUR 347 million. ING Car Lease was previously partly included in both Commercial and Retail Banking.
The 2012 amended Restructuring Plan includes a repayment schedule for the remaining core Tier 1 securities to the Dutch State as described in the above-mentioned section ‘Repayment non-voting equity shares’.
Impact NN Group Since on the insurance side ING is mainly a life insurance company with long-term commitments to its clients, it is exposed to risk from low(er) interest rates. Other risks, such as longevity risk, will further increase this risk.
As ING Bank strives to generate the same high-quality and transparent description of its risk, it immediately embraced the EDTF principles and recommendations and largely implemented them to further fine-tune its practise on risk disclosures. ING Bank is of the opinion that disclosures should be clear, balanced and understandable by external observers, and that risk information is disclosed on a timely basis. The latter not only applies for the Annual Accounts and the risk management paragraph but also for the concurrent publication of the Pillar 3 section.
Compliance risk and main developments 310 business risk Subjects Risk Management Pillar 3
Risk management function The risk management function is embedded in all levels of ING Bank’s organisation. The Chief Risk Officer, who is a MBB member, bears primary overall responsibility for the risk management function. The CRO is responsible for the management and control of risk on a consolidated level to ensure that ING Bank’s risk profile is consistent with its financial resources and the risk appetite. The CRO is also responsible for establishing and maintaining a robust organisational basis for the management of risk throughout the organisation.
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An independent model validation department is one of the cornerstones of ING Bank’s risk model governance. It consists of the process of determining that a model is appropriate for its intended use. It is an on-going process whereby the reliability of the model is verified at different stages during its lifecycle: at conception, before approval, periodically after implementation, and when significant changes are made to the model. The validation process contains a mix of developmental evidence, process verification and outcome analysis. To ensure the independence of MV, this department reports directly to the CRO.
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Liquidity and funding risk have two dimensions: where liquidity focuses on having a sufficient buffer to cope with the short term situation, managing the funding profile ensures long term compliance to both internal and external targets. Managing liquidity and funding risk focuses on both ‘business as usual’ (based on the run-off profile to show the stickiness of deposits combined with the run-off of assets without new production) and a stressed situation. There we define liquidity risk as the time to survive a specific scenario, while for funding risk we focus on the maximum funding gap allowed.
Types of stress tests Within ING Bank, various different types of stress tests are performed. The most comprehensive type of stress tests are the firm-wide scenario analyses, which involve setting scenario assumptions for the relevant macro-economic and market variables in all countries where ING Bank is active. These assumptions are usually complemented by a narrative which provides background for the scenario. Next to firm-wide scenario analyses, ING Bank also executes scenario analyses for a specific country or asset class. Furthermore, sensitivity analyses are performed, which focus on stressing one or more relevant risk drivers; usually without an underlying scenario narrative. The 1-in-10year stress used in the risk appetite framework is an example of a sensitivity analysis. Finally, ING Bank also performs reverse stress tests, which aim to determine the circumstances which would lead to a pre-defined severe adverse outcome.
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EC is a non-accounting measure which is inherently subject to dynamic changes and updates as a result of ING Bank’s portfolio mix and general market developments. ING Bank has been and will continue recalibrating the underlying assumptions to its economic capital models, which may have a significant impact on the values of EC going forward.
Engagement CRM, as a Top Employer, finds it is important to engage staff, and link with society. CRM organises annually a strategy project in which a large deal of interaction between (senior) manager and employees takes place. Regular town hall meetings are organised which bring employees and senior management closer. Topics usually include a reflection on the quarterly results of ING but also touch upon HR, ethics, compliance and other subjects. Also, CRM whole heartedly embraces the Winning Performance Culture scan, in which the employee satisfaction is measured and monitored. CRM also promotes support of charity funds like Chances for Children
Single name and sector concentration ING Bank has established the concentration risk framework in order to identify, measure monitor concentrations at country, portfolio and/ or counterparty level. It consists of single name concentration i.e. losses due to the unexpected default of a single counterparty. Sector concentration (systemic risk): substantial increase of the ING Bank risk profile (expressed in increased risk weighted assets) due to the joint deterioration of a group of correlated counterparty/transactions, sensitive to the same external (macro-economic) factor(s) related to their geographic location, exposure class or industry. The LGD of a single name concentration is measured against a maximum LGD amount. Country concentrations are also managed and monitored via the Country Risk Framework. Every country where ING has exposure has a country limit which is reviewed monthly and updated quarterly. When exposure reaches 90% of the limit level, a review process is initiated. The Country Limit is a function of various factors including amount of capital consumption, GDP of the country, internal rating, and amount of funds entrusted generated.
Rating models for retail counterparties are predominantly statistically driven and automated, such that they can be updated on a monthly or bi-monthly basis. Models for SME companies, and larger corporates, institutions and banks are manually updated, and are individually monitored on at least an annual basis.
ING Bank as Originator ING Bank occasionally originated own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes. Securitisations originated by a company may only be considered for balance sheet de-recognition when the requirements for significant credit risk transfer have been fulfilled. However, for a securitisation transaction to be recognised as for RWA reduction, risk transfer alone may be insufficient due to the increasing impact of the maturity mismatch formula. As a consequence, the RWA of the retained tranches for one of the transactions would be higher than the total RWA of the underlying pool before securitisation. In such cases the RWA calculation for the transaction is performed as if it was not securitised. ING Bank had done a very limited number of transactions as Originator. These have all expired, been unwound, or will likely be unwound shortly.
The organisations in GRID include ING Bank’s counterparties and prospects. GRID also contains private individuals, who are in scope when they are Private Banking customers, Ultimate Beneficiary Owners (UBOs), related parties, or cover providers to businesses. GRID also contains ING’s contacts.
As such, other than the arrear driven approach at Retail Banking, Commercial Banking has a much more individual name approach, using Early Warnings indicators to signal probable, upcoming, redemption breaches. As a general rule, in line with the Basel II definition, ING Bank considers all business loans as non-performing if they are 90 days past due.
As mentioned above, it is ING philosophy to be involved at an early stage in a troubled process to help assist clients and ultimately reduce losses for all stakeholders. To signal the increased credit risk profile in these cases, ING distinguishes three marked categories: I. Watch list: If at any time there is a (potential) deterioration in credit risk profile, which requires more than usual attention and/or investigation or monitoring, the account is put on a Watch list. Accounts with a watch list status remain under responsibility of front office but in active co-operation with their respective Credit Risk Management executives. Exceptionally, extraordinary circumstances and not the probability of a financial loss, cause a client to be flagged Watch list. The Watch list process functions well for early warning and there is very little corporate exposure that is transferred to a Restructuring Unit that has not been flagged under Watch list status before such transfer.
The total ING portfolio decreased modestly by 3%, contrary to the limited increase of 6% in the combined non-performing and past due but not impaired categories. Nevertheless, the overall credit risk profile of ING Bank remained fairly stable.
(1) Including loans to ING Group and NN Group. (2) Excluding intercompany positions.
To secure segregation of duties between Front Office and Market Risk Management Product Control, the systems for pricing and price testing are secured in order to prevent unauthorised access.
Main developments in 2013 Internal and external fraud ING Bank continues its strong commitment to preventing any involvement in fraud. In line with its peers, ING Bank is exposed to many types of fraud, from internal fraud, such as the embezzlement of corporate funds, to external fraud whereby clients or others misuse the financial products of ING Bank. To mitigate the staff involvement with fraudulent payments, preventive organisational controls for payment processes have been redefined for implementation by the entities. The controls include key control testing requirements.
Awareness Promoting Integrity Programme The Promoting Integrity Programme was started in 2010 and is an innovative programme consisting of e-modules on key bank-wide topics and follow-up dialogue sessions in which managers discuss the issues raised with their teams. The programme is sponsored by board members and senior managers and is created to ensure that every employee in every part of ING understands how their actions and behaviour can help earn and retain customer and stakeholder trust. The modules consist of several case studies and real life examples which require staff to think about various aspects of the issue. Each module also starts with an opening statement from a senior manager. The topics covered in 2013 were: • ’Think before you post‘ looking at the use of email and social media. This topic provided a way of ensuring staff were aware of the risks and clear on what they should and should not do, online or when using e-mail. The focus was on staff identifying actions that they can take to protect themselves and ING Bank.
• objective setting. Business planning and priority setting is undertaken through an annual medium term planning (MTP) process, which is integrated with NN’s own risk and solvency assessment (oRsa) process. At the start of the MTP process, NN establishes strategic objectives at a holding level. Those strategic objectives are used to establish and define NN’s risk appetite, which consists of quantitative and qualitative statements defining those risks NN wishes to acquire, to avoid, to retain and/or to remove. The strategic objectives are cascaded through the enterprise and business unit plans and evaluated against the risk appetite. Targets and risk limits for the business units are derived from NN’s overall strategy and risk appetite framework.
• In the third step, NN adds economic capital for operational risks and for business units that are not reflected in the internal model, without recognising any further diversification benefit. The economic capital for operational risk is based on the draft of the standard formula set out in Solvency II. Certain business units do not form part of NN’s internal model. Depending on the type of business, the economic capital for these business units is approximated using commercial capital requirements, the Insurance Group Directive, local regulatory capital requirements or IFRS equity net of intangibles. See ‘-Economic capital for entities outside of NN’s internal model’.
The table below sets out NN’s general account economic capital for credit spread risk.
The credit portfolio is under constant review to ensure troubled assets are identified early and managed properly. With regards to (mortgage) loans, all loans with past due financial obligations of 90 days or more are classified as non-performing loans (NPLs). All loans not classified at initial recognition as being either (1) assets at market value through profit-and-loss, (2) assets held for trading, or (3) assets available-for-sale are measured against amortised cost value and are subject to impairment review. For bonds and other fixed income securities, criteria for impairment include (but are not limited to) expected and actual credit losses resulting from e.g. failure to pay, market information regarding expected and actual credit losses, as well as other evidence that the issuer/borrower will be unable to meet its financial obligations. Material breaches in financial covenants can also trigger the reclassification of a loan as being impaired.
economic capital of other business; nn Bank, iiM units on local required capital levels and other non-modelled
In November 2013, ING repaid EUR 750 million of the Core Tier 1 securities issued in November 2008. ING paid EUR 1.125 billion to the Dutch State, including a EUR 750 million repayment of Core Tier 1 securities and EUR 375 million in premiums and interest.
Transfer to share of associates reserve 119 –119 Employee stock option and share plans 2 4 111 –195 –78 Repayment of non-voting equity securities –750 –750 Repurchase premium –375 –375 Changes in the composition of the group and other 119 119 Impact of ING U.S. –2,526 –2,526 Purchases/sales of treasury shares 378 378
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The interest rate on the Amounts owed to group companies as at 31 December 2013 is 0.262% (2012: 1.282%).
U.S. Sovereign Credit Rating In 2011, Standard & Poor’s Ratings Services (‘S&P’) lowered its long-term sovereign credit rating on the U.S. from AAA to AA+. Although other ratings agencies have not similarly lowered the long-term sovereign credit rating of the U.S., they have put that credit rating on review. Amid the lingering uncertainty over the long-term outlook for the fiscal position and the future economic performance of the U.S. within the global economy and potential future budgetary restrictions in the U.S., as illustrated by the recent budget negotiations and partial shutdown of the U.S. government in October 2013, there continues to be a perceived risk of a future sovereign credit ratings downgrade of the U.S. government, including the rating of U.S. Treasury securities. On 15 October 2013, Fitch Ratings placed the U.S.’s AAA credit rating under ‘rating watch negative’ in response to the crisis, a step that would precede an actual downgrade. It is foreseeable that the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government could also be correspondingly affected by any such downgrade. Instruments of this nature are key assets on the balance sheets of financial institutions and are widely used as collateral by financial institutions to meet their day-to-day cash flows in the short-term debt market. The impact of any further downgrades to the sovereign credit rating of the U.S. government or a default by the U.S. government to satisfy its debt obligations likely would create broader financial turmoil and uncertainty, which would weigh heavily on the global financial system and could consequently result in a significant adverse impact to the Group.
NN’s book of policies dates back many years, and in some cases several decades. Over time, the regulatory requirements and expectations of various stakeholders, including customers, regulators and the public at large, as well as standards and market practice, have developed and changed, increasing customer protection. As a result policyholders and consumer protection organisations have initiated and may in the future initiate proceedings against NN alleging that products sold in the past fail to meet current requirements and expectations. In any such proceedings, it cannot be excluded that the relevant court, regulator, governmental authority or other decision-making body will apply current norms, requirements, expectations, standards and market practices on laws and regulations to products sold, issued or advised on by NN.
INTRODUCTION This section relates to Pillar 3, market discipline, and as such provides information on several topics. Some of the required information has already been provided elsewhere in the Annual Report, e.g. in the Risk Management section and in the Capital Management paragraph. This section provides additional information, as well as references to the relevant sections. The information relates to ING Bank N.V. and all of its subsidiaries (hereafter ING Bank). There are no significant differences between the scope of consolidation for prudential purposes compared to the accounting scope of consolidation as reported in the annual report in the note ‘Principal subsidiaries’. The information in this section has not been audited by ING Bank’s external auditors.
20 Tabulate assets, liabilities and off-balance sheet commitments by maturity. 208 - 210, 214 - 215 21 Discuss funding strategy, including key sources and any funding concentrations 305 - 308
REGULATORY CAPITAL Capital Adequacy Rules – Basel II Accord The rules on capital adequacy, also referred to as Regulatory Capital (RC), express the regulators’ and legislators’ opinions of how much capital a bank and other regulated credit institutions must retain in relation to the size and the type of risk taking expressed in the form of risk-weighted assets. The most important part of the capital base is the shareholders’ equity. In addition to equity, the institution may issue certain liabilities such as certain hybrid instruments to be included in the capital base. The legal minimum requirement stipulates that the capital base must correspond to at least 8% of the Risk-Weighted Assets (RWA). The Dutch government adopted the Capital Requirements Directive (CRD), the European reflection of the Basel II capital accord in December 2006.
The AIRB and SA approaches are explained in more detail in the Credit Risk Measurement section of the Risk Management paragraph. An analysis on the AIRB and SA portfolios with their accompanying tables is provided in the SA and AIRB Approach sections of Pillar 3.
381ING Group Annual Report 2013 1 W h o w e are 2 R
Unless stated otherwise, the tables in Pillar 3 are focused on credit risk and market risk only and therefore exclude ONCOA, equities, and operational risk.
(1) Implied ratings are Risk Ratings derived from another organisation (usually from the same Legal or Economic One Obligor Group, but not always, for which the appropriate Rating Model has been used) but not directly given.
(1) Report on the pro-cyclicality of capital requirements under the Internal Ratings Based Approach, EBA - 17 December 2013.
Classified as impaired during the year (1) 1,345 3,080 511 4,936 Transferred to not impaired during the period –605 –1,367 –220 –2,192 Amounts written off –756 –652 –201 –1,609 Changes in the composition of the Bank Exchange and other movements (2) –41 –2 –97 –139
Maximum exposure to credit risk The following table present our maximum exposure to Credit Risk in the AIRB portfolio and associated collateral held and other credit enhancements (netting and collateral) that do not qualify for offsetting in our financial statements for the periods specified. The netting credit enhancement component includes the effects of legally enforceable netting agreement as well as the offset of negative mark-tomarkets from derivatives against pledged cash collateral. The collateral credit enhancement component which is referred to as Cover Values mainly includes real estate, guarantees and collateral in the form of cash. ING records collateral value per facility. For the AIRB portfolio those figures are based on original cover values although some business units attempt to update to current market values. This is inherently difficult in volatile markets. Some facilities will have multiple levels of collateral while others have no collateral. The total figures may not reflect the collateral value per facility.
Additional Pillar 3 information continued 406 ING Group Annual Report 2013
RISK-WEIGHTED ASSETS (‘RWA’ UNDER BASEL II) Assets which are weighted for credit and market risk in accordance with the Basel II methodology. The risk-weighted assets are calculated using internal models approved by The Dutch central bank (De Nederlandsche Bank). Regulatory capital requirements for operational risk are calculated without use of risk-weighted assets.
STRESS TESTING Stress testing examines the effect of exceptional but plausible scenarios on the capital position of ING. Stress testing can be initiated internally or by external parties such as the Dutch central bank.
UNIT LINKED A unit linked insurance product functions as a savings product but also offers coverage for specific life events. The policy holder invests in ‘units’ (stock, bonds, or mutual funds) and its return depends on the performance of these units. The insurance company may decide to provide guarantees on the return of the units.